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SF > SEC Filings for SF > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for STIFEL FINANCIAL CORP

Form 10-Q for STIFEL FINANCIAL CORP


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of our company should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, and the accompanying consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q.

Certain statements in this report may be considered forward-looking. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements cover, among other things, statements made about general economic and market conditions, the investment banking industry, our objectives and results, and also may include our belief regarding the effect of various legal proceedings, management expectations, our liquidity and funding sources, counterparty credit risk, or other similar matters. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including those factors discussed below under "External Factors Impacting Our Business" as well as the factors identified under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, as updated in our subsequent reports filed with the SEC. These reports are available at our web site at www.stifel.com and at the SEC web site at www.sec.gov.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events, unless we are obligated to do so under federal securities laws.

Unless otherwise indicated, the terms "we," "us," "our" or "our company" in this report refer to Stifel Financial Corp. and its wholly-owned subsidiaries.

Executive Summary

We operate as a financial services and bank holding company. We have built a diversified business serving private clients, institutional investors, and investment banking clients located across the country. Our principal activities are: (i) private client services, including securities transaction and financial planning services; (ii) institutional equity and fixed income sales, trading and research, and municipal finance; (iii) investment banking services, including mergers and acquisitions, public offerings, and private placements; and (iv) retail and commercial banking, including personal and commercial lending programs.

Our core philosophy is based upon a tradition of trust, understanding, and studied advice. We attract and retain experienced professionals by fostering a culture of entrepreneurial, long-term thinking. We provide our private, institutional and corporate clients quality, personalized service, with the theory that if we place clients' needs first, both our clients and our company will prosper. Our unwavering client and employee focus have earned us a reputation as one of the leading brokerage and investment banking firms off Wall Street. We have grown our business both organically and through opportunistic acquisitions.

We plan to maintain our focus on revenue growth with a continued appreciation for the development of quality client relationships. Within our private client business, our efforts will be focused on recruiting experienced financial advisors with established client relationships. Within our capital markets business, our focus continues to be on providing quality client management and product diversification. In executing our growth strategy, we will continue to seek out opportunities that allow us to take advantage of the consolidation among middle-market firms, whereby allowing us to increase market share in our private client and institutional group businesses.

Stifel Financial Corp. (the "Parent"), through its wholly owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus"), Stifel Bank & Trust ("Stifel Bank"), Stifel Nicolaus Europe Limited ("SNEL"), Century Securities Associates, Inc. ("CSA"), and Stifel Nicolaus Canada, Inc. ("SN Canada"), is principally engaged in retail brokerage; securities trading; investment banking; investment advisory; retail, consumer, and commercial banking; and related financial services. Although we have offices throughout the United States, two Canadian cities, and three European cities, our major geographic area of concentration is the Midwest and Mid-Atlantic regions, with a growing presence in the Northeast, Southeast and Western United States. Our principal customers are individual investors, corporations, municipalities, and institutions.

We plan to maintain our focus on revenue growth with a continued focus on developing quality relationships with our clients. Within our private client business, our efforts will be focused on recruiting experienced financial advisors with established client relationships. Within our institutional group business, our focus continues to be on providing quality client management and product diversification. In executing our growth strategy, we take advantage of the consolidation among middle market firms, which we believe provides us opportunities in our Global Wealth Management and Institutional Group businesses.


Our ability to attract and retain highly skilled and productive employees is critical to the success of our business. Accordingly, compensation and benefits comprise the largest component of our expenses, and our performance is dependent upon our ability to attract, develop and retain highly skilled employees who are motivated and committed to providing the highest quality of service and guidance to our clients.

On November 5, 2012 Stifel Financial Corp. and KBW, Inc. ("KBW") entered into a definitive agreement for our company to acquire 100% of the outstanding shares of KBW common stock. Under the terms of the agreement, which was unanimously approved by the boards of directors of both companies, KBW shareholders will receive $17.50 per share, comprised of $10.00 per share in cash and $7.50 per share in Stifel common stock. Additionally, holders of certain restricted KBW shares, that will continue to vest post closing, will receive $17.50 in Stifel common stock. The purchase price is estimated to be approximately $577.8 million, which includes the outstanding shares and restricted stock awards of KBW. The acquisition is subject to the effectiveness of a registration statement with respect to our company's shares to be issued in the transaction and other customary closing conditions. The acquisition is also subject to the approval of KBW shareholders. The merger is expected to close during the first quarter of 2013.

On October 1, 2011, we acquired Stone & Youngberg LLC ("Stone & Youngberg"), a leading financial services firm specializing in municipal finance and fixed income securities. Stone & Youngberg's comprehensive institutional group expands our public finance, institutional sales and trading and bond underwriting, particularly in the Arizona and California markets, and adds more than 30 financial advisors in four offices to our Private Client Group. The purchase consideration consisted of cash, a portion paid at closing and a portion to be paid over the next three years, and stock based on the value of net assets at closing. In addition, we may be required to pay a contingent earn-out over a five year period after the close based upon revenue goals, as established in the purchase agreement. The public finance, institutional sales and trading, and retail businesses were integrated with Stifel Nicolaus immediately after the acquisition.

Results for the three and nine months ended September 30, 2012

For the three months ended September 30, 2012, our net revenues increased 25.7% to $420.1 million compared to $334.2 million during the comparable period in 2011. Net income increased 69.1% to $37.7 million for the three months ended September 30, 2012 compared to $22.3 million during the comparable period in 2011.

For the nine months ended September 30, 2012, our net revenues increased 12.8% to $1.195 billion compared to $1.060 billion during the comparable period in 2011. Net income increased 72.7% to $98.6 million for the nine months ended September 30, 2012, compared to $57.1 million during the comparable period in 2011.

Our revenue growth was primarily attributable to higher investment banking revenues as a result of strong public finance activity and improved M&A revenues; increased principal transactions revenues as a result of strong fixed income trading volumes and tightening credit spreads; gains recognized on our investment in Knight Capital Group, Inc.; growth in asset management and service fees as a result of an increase in investment advisory revenues; and increased net interest revenues as a result of the growth of net interest-earning assets at Stifel Bank. The increase in revenue growth was offset by a decline in commission revenues.

The results for the nine months ended September 30, 2011 were significantly impacted by estimated costs of settlement and litigation-related expenses associated with the civil lawsuit and related regulatory investigation in connection with the previously disclosed matter involving five Southeastern Wisconsin school districts and merger-related expenses.

External Factors Impacting our Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and mostly unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, the level and shape of various yield curves, the volume and value of trading in securities, and the value of our customers' assets under management. Investor confidence has been dampened by the sovereign debt concerns in Europe, concerns over unemployment levels and recently weaker U.S. economic data, lackluster jobs growth, and the uncertainty with the U.S. budget. These conditions have adversely affected investor and CEO confidence, resulting in significant declines in capital raising activity, as evidenced by the decline in IPOs during 2012 compared to 2011.

Our overall financial results continue to be highly and directly correlated to the direction and activity levels of the United States equity and fixed income markets. At September 30, 2012, the key indicators of the markets' performance, the Dow Jones Industrial Average, the NASDAQ and the S&P 500 closed 10.0%, 19.6% and 14.6% higher than their December 31, 2011 closing prices, respectively.


As a participant in the financial services industry, we are subject to complicated and extensive regulation of our business. The recent economic and political environment has led to legislative and regulatory initiatives, both enacted and proposed, that could substantially intensify the regulation of the financial services industry and may significantly impact us. On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act will have a broad impact on the financial services industry and will impose significant new regulatory and compliance requirements, including the designation of certain financial companies as systemically significant, the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. The expectation is that this new legislation will significantly restructure and increase regulation in the financial services industry, which could increase our cost of doing business, change certain business practices, and alter the competitive landscape.


RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 Compared with Three Months Ended September
30, 2011

The following table presents consolidated financial information for the periods
indicated (in thousands, except percentages):

                                                                            As a Percentage of
                                                                                    Net
                                                                                 Revenues
                                                                               For the Three
                                            For the Three Months Ended         Months Ended
                                                  September 30,                September 30,
                                                                     %
                                            2012         2011      Change   2012          2011
Revenues:
Commissions                              $   127,966   $ 143,243    (10.7 )  30.4 %        42.9 %
Principal transactions                       102,979      76,650     34.4    24.5          22.9
Investment banking                            72,938      37,673     93.6    17.4          11.3
Asset management and service fees             62,881      58,253      7.9    15.0          17.4
Interest                                      27,306      24,161     13.0     6.5           7.2
Other income                                  31,922         540        *     7.6           0.2
Total revenues                               425,992     340,520     25.1   101.4         101.9
Interest expense                               5,912       6,306     (6.2 )   1.4           1.9
Net revenues                                 420,080     334,214     25.7   100.0         100.0

Non-interest expenses:
Compensation and benefits                    267,652     210,573     27.1    63.7          63.0
Occupancy and equipment rental                33,061      30,914      6.9     7.9           9.3
Communication and office supplies             19,976      18,838      6.0     4.7           5.6
Commissions and floor brokerage                8,031       7,400      8.5     1.9           2.2
Other operating expenses                      29,683      27,466      8.1     7.1           8.2
Total non-interest expenses                  358,403     295,191     21.4    85.3          88.3

Income before income taxes                    61,677      39,023     58.1    14.7          11.7
Provision for income taxes                    23,967      16,719     43.4     5.7           5.0
Net income                               $    37,710   $  22,304     69.1     9.0 %         6.7 %

* Percentage not meaningful.


Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

The following table presents consolidated financial information for the periods indicated (in thousands, except percentages):

                                                                              As a Percentage of
                                                                                      Net
                                                                                   Revenues
                                                                              For the Nine Months
                                             For the Nine Months Ended               Ended
                                                   September 30,                 September 30,
                                                                       %
                                            2012          2011       Change   2012          2011
Revenues:
Commissions                              $   378,696   $   437,344    (13.4 )  31.7 %        41.3 %
Principal transactions                       310,776       249,250     24.7    26.0          23.5
Investment banking                           210,739       143,509     46.8    17.6          13.5
Asset management and service fees            189,010       172,914      9.3    15.8          16.3
Interest                                      79,744        64,246     24.1     6.7           6.1
Other income                                  50,634        11,352    346.0     4.3           1.1
Total revenues                             1,219,599     1,078,615     13.1   102.1         101.8
Interest expense                              24,779        18,931     30.9     2.1           1.8
Net revenues                               1,194,820     1,059,684     12.8   100.0         100.0

Non-interest expenses:
Compensation and benefits                    761,730       671,678     13.4    63.8          63.4
Occupancy and equipment rental                96,172        89,962      6.9     8.0           8.5
Communication and office supplies             61,146        56,198      8.8     5.1           5.3
Commissions and floor brokerage               23,390        20,943     11.7     2.0           2.0
Other operating expenses                      87,577       127,321    (31.2 )   7.3          12.0
Total non-interest expenses                1,030,015       966,102      6.6    86.2          91.2

Income before income taxes                   164,805        93,582     76.1    13.8           8.8
Provision for income taxes                    66,186        36,464     81.5     5.5           3.4
Net income                               $    98,619   $    57,118     72.7     8.3 %         5.4 %


NET REVENUES


The following table presents consolidated net revenues for the periods indicated
(in thousands, except percentages):

                                     For the Three Months Ended            For the Nine Months Ended
                                           September 30,                         September 30,
                                                              %                                      %
                                     2012        2011       Change        2012          2011       Change
Net revenues:
Commissions                       $  127,966   $ 143,243     (10.7 )   $   378,696   $   437,344    (13.4 )
Principal transactions               102,979      76,650      34.4         310,776       249,250     24.7
Investment banking:
Capital raising                       45,733      25,254      81.1         141,299        97,301     45.2
Strategic advisory fees               27,205      12,419     119.1          69,440        46,208     50.3
                                      72,938      37,673      93.6         210,739       143,509     46.8
Asset management and service fees     62,881      58,253       7.9         189,010       172,914      9.3
Net interest                          21,394      17,855      19.8          54,965        45,315     21.3
Other income                          31,922         540         *          50,634        11,352    346.0
Total net revenues                $  420,080   $ 334,214      25.7     $ 1,194,820   $ 1,059,684     12.8

* Percentage not meaningful.

Except as noted in the following discussion of variances, the underlying reasons for the increase in revenue can be attributed principally to the increased number of private client group offices and financial advisors in our Global Wealth Management segment and the increased number of revenue producers in our Institutional Group segment.

Commissions - Commission revenues are primarily generated from agency transactions in OTC and listed equity securities, insurance products and options. In addition, commission revenues also include distribution fees for promoting and distributing mutual funds.

For the three months ended September 30, 2012, commission revenues decreased 10.7% to $128.0 million from $143.2 million in the comparable period in 2011. For the nine months ended September 30, 2012, commission revenues decreased 13.4% to $378.7 million from $437.3 million in the comparable period in 2011. The decrease in commission revenues is primarily attributable to a decrease in OTC transactions from the comparable periods in 2011.

Principal transactions - For the three months ended September 30, 2012, principal transactions revenues increased 34.4% to $103.0 million from $76.7 million in the comparable period in 2011. For the nine months ended September 30, 2012, principal transactions revenues increased 24.7% to $310.8 million from $249.3 million in the comparable period in 2011. The increase in principal transactions revenues is primarily attributable to improved fixed income institutional brokerage revenues as a result of strong trading volumes and tightening credit spreads.

Investment banking - Investment banking revenues include: (i) capital raising revenues representing fees earned from the underwriting of debt and equity securities, and (ii) strategic advisory fees related to corporate debt and equity offerings, municipal debt offerings, merger and acquisitions, private placements and other investment banking advisory fees.

For the three months ended September 30, 2012, investment banking revenues increased 93.6%, to $72.9 million from $37.7 million in the comparable period in 2011. For the nine months ended September 30, 2012, investment banking revenues increased 46.8%, to $210.7 million from $143.5 million in the comparable period in 2011. The increase in investment banking revenues is primarily attributable to an increase in capital raising revenues, which is primarily attributable to improved equity capital markets, strong public finance activity and our acquisition of Stone & Youngberg in October 2011 and an increase in advisory fees as a result of an increase in M&A activity.

Capital raising revenues increased 81.1% to $45.7 million for the three months ended September 30, 2012 from $25.3 million in the comparable period in 2011. For the three months ended September 30, 2012, equity capital raising revenues increased 68.1% to $28.2 million from $16.8 million in the comparable period in 2011. During the third quarter of 2012, fixed income capital raising revenues increased 245.9%, to $14.2 million from $4.1 million in the comparable period in 2011.


Capital raising revenues increased 45.2% to $141.3 million for the nine months ended September 30, 2012 from $97.3 million in the comparable period in 2011. For the nine months ended September 30, 2012, equity capital raising revenues increased 40.1% to $92.0 million from $65.7 million in the comparable period in 2011. During the first nine months of 2012, fixed income capital raising revenues increased 216.8%, to $39.8 million from $12.6 million in the comparable period in 2011.

Strategic advisory fees increased 119.1% to $27.2 million for the three months ended September 30, 2012 from $12.4 million in the comparable period in 2011. Strategic advisory fees increased 50.3% to $69.4 million for the nine months ended September 30, 2012 from $46.2 million in the comparable period in 2011. The increase in strategic advisory fees is primarily attributable to an increase in the number of completed transactions over the comparable periods in 2011.

Asset management and service fees - Asset management and service fees include fees for asset-based financial services provided to individuals and institutional clients. Investment advisory fees are charged based on the value of assets in fee-based accounts. Asset management and service fees are affected by changes in the balances of client assets due to market fluctuations and levels of net new client assets.

For the three months ended September 30, 2012, asset management and service fee revenues increased 7.9% to $62.9 million from $58.3 million in the comparable period of 2011. For the nine months ended September 30, 2012, asset management and service fee revenues increased 9.3% to $189.0 million from $172.9 million in the comparable period of 2011. The increase in asset management and service fees is primarily a result of an increase in investment advisory revenues, offset by a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers. See "Assets in fee-based accounts" included in the table in "Results of Operations - Global Wealth Management."

Other income - For the three months ended September 30, 2012, other income increased $31.4 million to $31.9 million from $0.5 million during the comparable period in 2011. For the nine months ended September 30, 2012, other income increased $39.2 million to $50.6 million from $11.4 million during the comparable period in 2011. Other income primarily includes investment gains, including gains on our private equity investments, and loan originations fees from Stifel Bank. The increase in other income is primarily attributable to $25.6 million in gains recognized on our investment in Knight Capital Group, Inc.


NET INTEREST INCOME

The following tables present average balance data and operating interest revenue
and expense data, as well as related interest yields for the periods indicated
(in thousands, except rates):

                                                                   Three Months Ended
                                            September 30, 2012                            September 30, 2011
                                                      Interest    Average                           Interest    Average
                                                      Income/     Interest                          Income/     Interest
                                  Average Balance     Expense       Rate        Average Balance     Expense       Rate
Interest-earning assets:
Margin balances (Stifel
Nicolaus)                        $         485,669   $    4,781       3.94 %   $         438,489   $    4,569       4.17 %
Interest-earning assets (Stifel
Bank)                                    3,040,622       19,143       2.52             2,010,120       15,230       3.03
Stock borrow (Stifel Nicolaus)              81,402           15       0.07                71,401            4       0.02
Other (Stifel Nicolaus)                                   3,367                                         4,358
Total interest revenue                               $   27,306                                    $   24,161

Interest-bearing liabilities:
Short-term borrowings (Stifel
Nicolaus)                        $         151,271   $      496       1.15 %   $          91,876   $      610       1.15 %
Interest-bearing liabilities
(Stifel Bank)                            2,835,544        3,606       0.51             1,351,502        4,182       0.89
Stock loan (Stifel Nicolaus)               150,630          350       0.93                99,508          413       1.36
Senior notes (Stifel Financial)            175,000        3,048       6.97                     -            -          -
Interest-bearing liabilities
. . .
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