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 this Annual Report on Form 10-K for the year ended December 31, 2012.

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. 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.

Results for the year ended December 31, 2012

For the year ended December 31, 2012, our net revenues increased 13.8% to a record $1.61 billion compared to $1.42 billion in 2011, which represents our seventeenth consecutive annual increase in net revenues. Net income increased 64.7% to $138.6 million for the year ended December 31, 2012, compared to $84.1 million 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 year ended December 31, 2011 include litigation-related expenses associated with the civil lawsuit and related regulatory investigation in connection with the ongoing matter with five Southeastern Wisconsin school districts and certain 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. The municipal underwriting market is challenging as state and local governments reduce their debt levels. Investors are showing a lack of demand for longer-dated municipals and are reluctant to take on credit or liquidity risks. Investor confidence has been dampened by continued uncertainty surrounding the U.S. fiscal and debt ceiling, the debt concerns in Europe, and sluggish employment growth.

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 December 30, 2012, the key indicators of the markets' performance, the Dow Jones Industrial Average, S&P 500, and the NASDAQ closed 7.3%, 13.4%, and 15.9% 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

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

                                                                                                                           As a Percentage of
                                                                                                                              Net Revenues
                                                                                              Percentage                   for the Year Ended
                                             For the Year Ended December 31,                    Change                        December 31,
                                                                                         2012           2011
                                                                                          vs.            vs.
                                          2012            2011            2010           2011           2010         2012         2011         2010
Revenues:
Commissions                            $   512,976     $   561,081     $   445,260         (8.6 ) %       26.0 %       31.8 %       39.6 %       32.2 %
Principal transactions                     408,484         343,213         453,533         19.0          (24.3 )       25.3         24.2         32.8
Investment banking                         286,585         199,584         218,104         43.6           (8.5 )       17.8         14.1         15.8
Asset management and service fees          257,981         228,834         193,159         12.7           18.5         16.0         16.2         14.0
Interest                                   109,776          89,466          65,326         22.7           37.0          6.8          6.3          4.7
Other income                                70,231          19,731          19,855        255.9           (0.6 )        4.4          1.4          1.5

Total revenues                           1,646,033       1,441,909       1,395,237         14.2            3.3        102.1        101.8        101.0
Interest expense                            33,383          25,347          13,211         31.7           91.9          2.1          1.8          1.0

Net revenues                             1,612,650       1,416,562       1,382,026         13.8            2.5        100.0        100.0        100.0

Non-interest expenses:
Compensation and benefits                1,023,943         900,421       1,056,202         13.7          (14.7 )       63.5         63.6         76.4
Occupancy and equipment rental             130,247         121,929         115,742          6.8            5.3          8.1          8.6          8.4
Communication and office supplies           80,941          75,589          69,929          7.1            8.1          5.0          5.3          5.1
Commissions and floor brokerage             30,870          27,040          26,301         14.2            2.8          1.9          1.9          1.9
Other operating expenses                   120,777         152,975         114,081        (21.0 )         34.1          7.5         10.8          8.3

Total non-interest expenses              1,386,778       1,277,954       1,382,255          8.5           (7.5 )       86.0         90.2        100.1

Income before income taxes                 225,872         138,608            (229 )       63.0              *         14.0          9.8         (0.1 )
Provision for income taxes/(benefit)        87,299          54,474          (2,136 )       60.3              *          5.4          3.9         (0.2 )

Net income                             $   138,573     $    84,134     $     1,907        64.7  %            * %        8.6 %        5.9 %        0.1 %

* Percentage not meaningful.

NET REVENUES

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



                                          For the Year Ended December 31,                Percentage Change
                                                                                     2012 vs.          2011 vs.
                                       2012            2011            2010            2011              2010
Revenues:
Commissions                         $   512,976     $   561,081     $   445,260           (8.6 ) %          26.0 %
Principal transactions                  408,484         343,213         453,533           19.0             (24.3 )
Investment banking:
Capital raising                         190,502         124,648         135,898           52.8              (8.3 )
Advisory                                 96,083          74,936          82,206           28.2              (8.8 )

                                        286,585         199,584         218,104           43.6              (8.5 )
Asset management and service fees       257,981         228,834         193,159           12.7              18.5
Net interest                             76,393          64,119          52,115           19.1              23.0
Other income                             70,231          19,731          19,855          255.9              (0.6 )

Total net revenues                  $ 1,612,650     $ 1,416,562     $ 1,382,026           13.8 %             2.5 %

Year Ended December 31, 2012 Compared With Year Ended December 31, 2011

Except as noted in the following discussion of variances, the underlying reasons for the increase in net revenues 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. The increase in net revenues for the year ended December 31, 2012 is attributable to the previously mentioned factors.

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 year ended December 31, 2012, commission revenues decreased 8.6% to $513.0 million from $561.1 million in 2011. The decrease in commission revenues is primarily attributable to a decrease in OTC transactions from the comparable period in 2011.

Principal transactions - For the year ended December 31, 2012, principal transactions revenues increased 19.0% to $408.5 million from $343.2 million 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 improved 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, mergers and acquisitions, private placements and other investment banking advisory fees.

For the year ended December 31, 2012, investment banking revenues increased 43.6%, to $286.6 million from $199.6 million 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 aided by 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 52.8% to $190.5 million for the year ended December 31, 2012 from $124.6 million in 2011.

For the year ended December 31, 2012, fixed income capital raising revenues increased 107.6% to $55.4 million from $26.6 million in 2011. For the year ended December 31, 2012, equity capital raising increased 37.9% to $135.1 million from $98.0 million in 2011.

Strategic advisory fees increased 28.2% to $96.1 million for the year ended December 31, 2012 from $74.9 million 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 year ended December 31, 2012, asset management and service fee revenues increased 12.7% to $258.0 million from $228.8 million in 2011. The increase is primarily a result of an increase in the value of assets in fee-based accounts and the number of managed accounts from December 31, 2011, as a result of market performance. See "Assets in fee-based accounts" included in the table in "Results of Operations - Global Wealth Management."

Other income - For the year ended December 31, 2012, other income increased 255.9% to $70.2 million from $19.7 million in 2011. Other income primarily includes investment gains, including gains on our private equity investments, and mortgage banking fee income. The increase in other income is primarily attributable to $39.0 million in realized and unrealized gains recognized on our investment in Knight Capital Group, Inc.

Year Ended December 31, 2011 Compared With Year Ended December 31, 2010

Except as noted in the following discussion of variances, the underlying reasons for the increase in net revenues 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. The increase in net revenues for the year ended December 31, 2011 is attributable to the previously mentioned factors and the acquisition of TWPG on July 1, 2010. The operations of TWPG were integrated with Stifel Nicolaus immediately after the merger, therefore the results of the business, as acquired, does not exist as a discrete entity within our internal reporting structure.

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 year ended December 31, 2011, commission revenues increased 26.0% to $561.1 million from $445.3 million in 2010. The increase is primarily attributable to an increase in client assets and higher productivity.

Principal transactions - For the year ended December 31, 2011, principal transactions revenues decreased 24.3% to $343.2 million from $453.5 million in 2010. The decrease is primarily attributable to a decline in fixed income institutional brokerage revenues, which was negatively impacted by the challenging market conditions present during throughout 2011.

In addition to the items impacting our commissions and principal transactions, as described above, a portion of the increase in commissions and corresponding decrease in principal transactions was attributable to a change in classification of certain equity trades that were recorded as principal transactions during the year ended December 31, 2010 that are now being recorded as commission revenues as a result of regulatory changes.

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 year ended December 31, 2011, asset management and service fee revenues increased 18.5% to $228.8 million from $193.2 million in 2010. The increase is primarily a result of an increase in the value of assets in fee-based accounts and the number of managed accounts from December 31, 2010, as a result of market performance, offset by a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers. In addition, asset management and service fee revenues for the year ended December 31, 2011 were positively impacted by the addition of the TWPG asset management business starting on July 1, 2010. See "Assets in fee-based accounts" included in the table in "Results of Operations - Global Wealth Management."

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, mergers and acquisitions, private placements and other investment banking advisory fees.

For the year ended December 31, 2011, investment banking revenues decreased 8.5%, to $199.6 million from $218.1 million in 2010. The decrease is primarily attributable to a decrease in capital raising and advisory fees as a result of the challenging market conditions that existed during 2011.

Capital raising revenues decreased 8.3% to $124.6 million for the year ended December 31, 2011 from $135.9 million in 2010.

For the year ended December 31, 2011, equity capital raising decreased 9.6% to $98.0 million from $108.4 million in 2010. For the year ended December 31, 2011, fixed income capital raising revenues decreased 2.9% to $26.6 million from $27.5 million in 2010.

Strategic advisory fees decreased 8.8% to $74.9 million for the year ended December 31, 2011 from $82.2 million in 2010.

Other income - For the year ended December 31, 2011, other income decreased 0.6% to $19.7 million from $19.9 million in 2010. The decrease is primarily attributable to lower investment gains recognized during 2011, offset by an increase in mortgage banking fee income due to the increase in loan originations at Stifel Bank.

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):



                                                                                                For the Year Ended
                                               December 31, 2012                                December 31, 2011                                December 31, 2010
                                                    Interest        Average                          Interest        Average                          Interest        Average
                                     Average         Income/        Interest          Average         Income/        Interest          Average         Income/        Interest
                                     Balance         Expense          Rate            Balance         Expense          Rate            Balance         Expense          Rate
Interest-earning assets:
Margin balances (Stifel
Nicolaus)                          $   488,899      $  19,079            3.90 %     $   456,208      $  18,681            4.09 %     $   385,040      $  16,532            4.29 %
Interest-earning assets (Stifel
Bank) *                              2,867,628         74,864            2.60 %       1,937,683         56,970            2.94 %       1,293,339         35,146            2.72 %
Other (Stifel Nicolaus)                                15,833                                           13,815                                           13,648

Total interest revenue                              $ 109,776                                        $  89,466                                        $  65,326

Interest-bearing liabilities:
Short-term borrowings (Stifel
Nicolaus)                          $   184,413      $   2,029            1.10 %     $   199,613      $   2,296            1.15 %     $   108,784      $   1,102            1.01 %
Interest-bearing liabilities
(Stifel Bank) *                      2,665,523         15,013            0.56 %       1,805,544         16,731            0.93 %       1,191,747          5,188            0.44 %
Stock loan (Stifel Nicolaus)           137,284            216            0.16 %         124,130            369            0.30 %          69,507            262            0.38 %
Senior notes (Stifel Financial)        168,989         12,431            7.36 %              -              -               -  %              -              -               -  %
Interest-bearing liabilities
(Capital Trusts)                        82,500          2,956            3.58 %          82,500          3,929            4.76 %          82,500          5,077            6.15 %
Other (Stifel Nicolaus)                                   738                                            2,022                                            1,582

Total interest expense                              $  33,383                                        $  25,347                                        $  13,211

Net interest income                                 $  76,393                                        $  64,119                                        $  52,115

* See Distribution of Assets, Liabilities, and Shareholders' Equity; Interest Rates and Interest Rate Differential table included in "Results of Operations - Global Wealth Management" for additional information on Stifel Bank's average balances and interest income and expense.

Year Ended December 31, 2012 Compared With Year Ended December 31, 2011

Net interest income - Net interest income is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest income is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. For the year ended December 31, 2012, net interest income increased 19.1% to $76.4 million from $64.1 million in 2011.

For the year ended December 31, 2012, interest revenue increased 22.7% to $109.8 million from $89.5 million in 2011, principally as a result of a $17.9 million increase in interest revenue generated from the interest-earning assets of Stifel Bank. The average interest-earning assets of Stifel Bank increased to $2.9 billion during the year ended December 31, 2012 compared to $1.9 billion in 2011 at weighted average interest rates of 2.60% and 2.94%, respectively.

For the year ended December 31, 2012, interest expense increased 31.7% to $33.4 million from $25.3 million in 2011. The increase is primarily attributable to the interest expense associated with our $325.0 million senior notes, offset by . . .