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SF > SEC Filings for SF > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for STIFEL FINANCIAL CORP


10-May-2013

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, 2012, 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, 2012, 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 Global Wealth Management 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"), Keefe, Bruyette & Woods, Inc. ("KBW"), Keefe, Bruyette & Woods Limited ("KBW Limited"), Stifel Nicolaus Canada, Inc. ("SN Canada") and Miller Buckfire & Co. LLC ("Miller Buckfire"), 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 company's principal customers are individual investors, corporations, municipalities, and institutions.


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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 February 15, 2013, we completed the purchase of all of the outstanding shares of common stock of KBW, Inc. ("KBW, Inc."), a full-service investment bank specializing in the financial services industry based in New York, New York. The purchase was completed pursuant to the merger agreement dated November 5, 2012. Under the terms of the merger agreement, each share of common stock, including certain restricted stock, of KBW, Inc. issued and outstanding immediately prior to the effective time of the merger was cancelled and converted into the right to receive a combination of (i) cash consideration of $8.00 ($10.00 less the extraordinary dividend amount of $2.00) and (ii) stock consideration of 0.2143 a share of our common stock.

In conjunction with the close of the merger, we issued 6.7 million shares of common stock to holders of KBW, Inc. common stock, issued 2.2 million restricted stock awards to KBW, Inc. employees, and paid $253.0 million in cash.

On the closing date of the acquisition of KBW, Inc., we granted restricted stock or restricted stock units to certain employees of KBW, Inc and our company as retention. There are no continuing service requirements associated with these restricted stock awards, and accordingly were expensed on the date of grant.

Results for the three months ended March 31, 2013

For the three months ended March 31, 2013, our net revenues increased 10.4% to $441.8 million compared to $400.3 million during the comparable period in 2012. Net income decreased 58.0% to $14.6 million for the three months ended March 31, 2013 compared to $34.8 million during the comparable period in 2012.

Our revenue growth was primarily attributable to an increase in commission revenue; growth in asset management and service fees as a result of an increase in investment advisory revenues; higher investment banking revenues as a result of improved M&A revenues; gains recognized on our investment in Knight Capital Group, Inc.; and increased net interest revenues as a result of the growth of net interest-earning assets at Stifel Bank. Our revenue growth was impacted by our recent acquisitions of KBW, Inc. and Miller Buckfire. The increase in revenue growth was offset by a decline in principal transaction revenues.

The results for the three months ended March 31, 2013 were significantly impacted by the expensing of stock awards issued as retention as part of the acquisition of KBW, Inc. and certain non-recurring and merger-related expenses. The aggregate impact of these items was a reduction to net income of $25.3 million (after-tax) or $0.37 per diluted share.

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 March 31, 2013, the key indicators of the markets' performance, the Dow Jones Industrial Average, S&P 500, and the NASDAQ closed 11.3%, 10.0%, and 8.2% higher than their December 31, 2012 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


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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.


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RESULTS OF OPERATIONS

Three Months Ended March 31, 2013 Compared with Three Months Ended March 31,
2012

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



                                                                                     As a Percentage of Net
                                                                                            Revenues
                                           For the Three Months Ended              For the Three Months  Ended
                                                    March 31,                               March 31,
                                                                      %
                                         2013          2012        Change           2013                 2012
Revenues:
Commissions                            $ 148,648     $ 123,303        20.6              33.6 %               30.8 %
Principal transactions                   107,244       116,233        (7.7 )            24.3                 29.1
Investment banking                        78,379        70,438        11.3              17.7                 17.6
Asset management and service fees         68,912        60,818        13.3              15.6                 15.2
Interest                                  29,845        25,257        18.2               6.8                  6.3
Other income                              20,212        13,294        52.0               4.6                  3.3

Total revenues                           453,240       409,343        10.7             102.6                102.3
Interest expense                          11,460         9,010        27.2               2.6                  2.3

Net revenues                             441,780       400,333        10.4             100.0                100.0


Non-interest expenses:
Compensation and benefits                315,727       254,704        24.0              71.5                 63.6
Occupancy and equipment rental            34,048        30,791        10.6               7.7                  7.7
Communication and office supplies         22,979        20,373        12.8               5.2                  5.1
Commissions and floor brokerage            9,058         7,612        19.0               2.0                  1.9
Other operating expenses                  36,622        27,599        32.7               8.3                  6.9

Total non-interest expenses              418,434       341,079        22.7              94.7                 85.2


Income before income taxes                23,346        59,254       (60.6 )             5.3                 14.8
Provision for income taxes                 8,727        24,481       (64.4 )             2.0                  6.1

Net income                             $  14,619     $  34,773       (58.0 )             3.3 %                8.7 %


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NET REVENUES

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



                                                Three Months Ended March 31,
                                                                             %
                                              2013            2012        Change
       Net revenues:
       Commissions                         $   148,648      $ 123,303        20.6
       Principal transactions                  107,244        116,233        (7.7 )
       Investment banking:
       Capital raising                          51,199         54,833        (6.6 )
       Strategic advisory fees                  27,180         15,605        74.2

                                                78,379         70,438        11.3
       Asset management and service fees        68,912         60,818        13.3
       Net interest                             18,385         16,247        13.2
       Other income                             20,212         13,294        52.0

       Total net revenues                  $   441,780      $ 400,333        10.4

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 and the acquisitions of KBW, Inc. on February 15, 2013 and Miller Buckfire on December 31, 2012. The results of operations for the KBW, Inc. and Miller Buckfire are included in our results prospectively from the date of their respective acquisitions.

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 March 31, 2013, commission revenues increased 20.6% to $148.6 million from $123.3 million in the comparable period in 2012. The increase is primarily attributable to a increase in OTC transactions from the comparable period in 2012.

Principal transactions - For the three months ended March 31, 2013, principal transactions revenues decreased 7.7% to $107.2 million from $116.2 million in the comparable period in 2012. The decrease is primarily attributable to a decline in fixed income institutional brokerage revenues as a result of lower trading volumes.

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 March 31, 2013, investment banking revenues increased 11.3%, to $78.4 million from $70.4 million in the comparable period in 2012. The increase was primarily attributable to an increase in advisory fees offset by reduction in capital raising revenues. Our investment banking revenues were positively impacted by our acquisition of KBW, Inc. and Miller Buckfire, offset by sluggish equity capital market conditions during the quarter.

Capital raising revenues decreased 6.6% to $51.2 million for the three months ended March 31, 2013 from $54.8 million in the comparable period in 2012. During the first quarter of 2013, equity capital raising revenues decreased 20.3% to $31.5 million from $39.5 million in the comparable period in 2012. For the three months ended March 31, 2013, fixed income capital raising revenues increased 31.6% to $14.6 million from $11.1 million in the comparable period in 2012.

Strategic advisory fees increased 74.2% to $27.2 million for the three months ended March 31, 2013 from $15.6 million in the comparable period in 2012. The increase is primarily attributable to an increase in the number of completed equity transactions over the comparable period in 2012.


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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 March 31, 2013, asset management and service fee revenues increased 13.3% to $68.9 million from $60.8 million in the comparable period of 2012. The increase is primarily a result of an increase in investment advisory revenues, as a result of an increase in the value of fee-based accounts. See "Assets in fee-based accounts" included in the table in "Results of Operations - Global Wealth Management."

Other income - For the three months ended March 31, 2013, other income increased 52.0% to $20.2 million from $13.3 million during the comparable period in 2012. Other income primarily includes investment gains, including gains on our private equity investments, and loan originations fees from 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):



                                                                       Three Months Ended
                                                  March 31, 2013                                March 31, 2012
                                                     Interest       Average                        Interest       Average
                                       Average        Income/       Interest         Average        Income/       Interest
                                       Balance        Expense         Rate           Balance        Expense         Rate
Interest-earning assets:
Margin balances (Stifel Nicolaus)    $   442,504     $   4,255           3.85 %    $   504,287     $   4,885           3.87 %
Interest-earning assets (Stifel
Bank)                                  3,752,030        20,825           2.22        2,385,689        17,476           2.93
Other (Stifel Nicolaus)                                  4,765                                         2,896

Total interest revenue                               $  29,845                                     $  25,257


Interest-bearing liabilities:
Short-term borrowings (Stifel
Nicolaus)                            $   209,392     $     984           1.17 %    $   185,342     $     522           1.13 %
Interest-bearing liabilities
(Stifel Bank)                          3,502,898         2,894           0.33        2,213,848         4,064           0.73
Stock loan (Stifel Nicolaus)              64,646            65           0.10          155,986           206           0.13
Senior notes (Stifel Financial)          325,000         6,211           7.64          175,000         2,293           6.94
Interest-bearing liabilities
(Capital Trusts)                          82,500           433           2.10           82,500         1,005           4.87
Other (Stifel Nicolaus)                                    873                                           920

Total interest expense                                  11,460                                         9,010

Net interest income                                  $  18,385                                     $  16,247

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 three months ended March 31, 2013, net interest income increased to $18.4 million from $16.2 million during the comparable period in 2012.

For the three months ended March 31, 2013, interest revenue increased 18.2% to $29.8 million from $25.3 million in the comparable period in 2012, principally as a result of a $3.3 million increase in interest revenue generated from the interest-earning assets of Stifel Bank. The average interest-earning assets of Stifel Bank increased to $3.8 billion during the three months ended March 31, 2013 compared to $2.4 billion during the comparable period in 2012 at average interest rates of 2.22% and 2.93%, respectively.

For the three months ended March 31, 2013, interest expense increased 27.2% to $11.5 million from $9.0 million during the comparable period in 2012. The increase is primarily attributable to the interest expense associated with our December 2012 issuance of $150.0 million of 5.375% senior notes.


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NON-INTEREST EXPENSES

The following table presents consolidated non-interest expenses for the periods
indicated (in thousands, except percentages):



                                             For the Three Months Ended March 31,
                                                                                   %
                                             2013                 2012          Change
   Non-interest expenses:
   Compensation and benefits            $      315,727       $      254,704        24.0
   Occupancy and equipment rental               34,048               30,791        10.6
   Communications and office supplies           22,979               20,373        12.8
   Commissions and floor brokerage               9,058                7,612        19.0
   Other operating expenses                     36,622               27,599        32.7

   Total non-interest expenses          $      418,434       $      341,079        22.7

Except as noted in the following discussion of variances, the underlying reasons for the increase in non-interest expenses can be attributed principally to our continued expansion, both organically and through our acquisitions of KBW, Inc. on February 15, 2013 and Miller Buckfire on December 20, 2012, and increased administrative overhead to support the growth in our segments.

Compensation and benefits - Compensation and benefits expenses, which are the largest component of our expenses, include salaries, bonuses, transition pay, benefits, amortization of stock-based compensation, employment taxes and other employee-related costs. A significant portion of compensation expense is comprised of production-based variable compensation, including discretionary bonuses, which fluctuates in proportion to the level of business activity, increasing with higher revenues and operating profits. Other compensation costs, including base salaries, stock-based compensation amortization, and benefits, are more fixed in nature.

For the three months ended March 31, 2013, compensation and benefits expense increased 24.0%, or $61.0 million, to $315.7 million from $254.7 million during the comparable period in 2012. The increase is principally due to the following:
1) the expensing of stock awards issued as retention as part of the acquisition of KBW, Inc.; 2) increased variable compensation as a result of increased revenue production and profitability; and 3) an increase in fixed compensation for the additional administrative support staff.

On the closing date of the acquisition of KBW, Inc., we granted restricted stock or restricted stock units to certain employees of KBW, Inc and our company as retention. There are no continuing service requirements associated with these restricted stock awards, and accordingly were expensed on the date of grant. The expensing of the awards resulted in a non-cash charge of $30.6 million (pre-tax).

Compensation and benefits expense as a percentage of net revenues was 71.5% for the three months ended March 31, 2013, compared to 63.6% for the three months ended March 31, 2012. Excluding the expensing of the awards and merger-related expenses, compensation and benefits expense as a percentage of net revenues was 63.8% for the three months ended March 31, 2013.

A portion of compensation and benefits expenses includes transition pay, principally in the form of upfront notes, signing bonuses and retention awards in connection with our continuing expansion efforts, of $20.9 million (4.7% of net revenues) for the three months ended March 31, 2013, compared to $17.1 million (4.3% of net revenues) for the comparable period in 2012. The upfront notes are amortized over a five to ten year period.

Occupancy and equipment rental - For the three months ended March 31, 2013, occupancy and equipment rental expense increased 10.6% to $34.0 million from $30.8 million during the three months ended March 31, 2012. The increase is primarily due to the increase in rent and depreciation expense due primarily to an increase in office locations. As of March 31, 2013, we have 355 locations compared to 326 at March 31, 2012.

Communications and office supplies - Communications expense includes costs for telecommunication and data communication, primarily for obtaining third-party . . .

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