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SF > SEC Filings for SF > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for STIFEL FINANCIAL CORP

Form 10-Q for STIFEL FINANCIAL CORP


12-Nov-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"), 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 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.

On July 1, 2013, we completed the acquisition of the U.S. institutional fixed income sales and trading business and the hiring of the European institutional fixed income sales and trading team from Knight Capital Group, Inc. The combined teams comprise approximately 90 sales and trading professionals in the U.S. and Europe, covering high-yield and investment-grade corporate bonds, asset-backed and mortgage-backed securities, loan trading, and emerging markets, as well as fixed income research in selected sectors and companies.

On the closing date of the acquisition of the Knight Capital Fixed Income business, we granted restricted stock units to certain employees as retention. There are no continuing service requirements associated with these restricted stock awards, and accordingly were expensed on the date of grant.

Our Canadian subsidiary, Stifel Nicolaus Canada, Inc. ("SN Canada") has ceased business operations as of September 30, 2013. The results of SN Canada, previously reported in the Institutional Group segment, are classified as discontinued operations for all periods presented. See Note 4 to our consolidated financial statements for further discussion of our discontinued operations.

On October 31, 2013, Stifel Bank completed its acquisition of Acacia Federal Savings Bank ("Acacia Federal"), a one-branch community bank with approximately $585.0 million in total assets. Established in 1985, Acacia Federal is a federally chartered savings institution with one retail branch located in Falls Church, Virginia. Over 80% of Acacia Federal's loan portfolio is originated single-family residential mortgages.

Results for the three and nine months ended September 30, 2013

For the three months ended September 30, 2013, net revenues from continuing operations increased 15.6% to $478.6 million compared to $414.2 million during the comparable period in 2012. Net income, including continuing and discontinued operations, increased 84.8% to $69.7 million, or $0.93 per diluted common share for the three months ended September 30, 2013, compared to $37.7 million, or $0.60 per diluted common share during the comparable period in 2012. Net income from continuing operations increased 100.2% to $74.9 million, or $1.00 per diluted common share for the three months ended September 30, 2013 compared to $37.4 million, or $0.60 per diluted common share during the comparable period in 2012.

For the nine months ended September 30, 2013, net revenues from continuing operations increased 19.3% to a record $1.41 billion compared to $1.18 billion during the comparable period in 2012. Net income, including continuing and discontinued operations, increased 15.3% to $113.7 million, or $1.56 per diluted common share for the nine months ended September 30, 2013, compared to $98.6 million, or $1.57 per diluted common share during the comparable period in 2012. Net income from continuing operations increased 18.4% to $120.8 million, or $1.66 per diluted common share for the nine months ended September 30, 2013 compared to $102.0 million, or $1.62 per diluted common share during the comparable period in 2012.

Our revenue growth was primarily attributable to higher investment banking revenues as a result of improved M&A activity; an increase in commission revenue; 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 revenue growth was offset by a decrease in other income as a result of gains recognized on our investment in Knight Capital Group, Inc. in the third quarter of 2012. Our revenue growth was impacted by our recent acquisitions of KBW, Inc., Miller Buckfire, and the Knight Capital Fixed Income business.


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The results from continuing operations for the three months ended September 30, 2013 were significantly impacted by the expensing of stock awards issued as retention as part of the acquisition of the Knight Capital Fixed Income business, and certain non-recurring and merger-related expenses. The aggregate impact of these items was a reduction to net income of $19.5 million (after-tax) or $0.26 per diluted share. The aggregate impact of these items for the nine months ended September 30, 2013 was a reduction to net income of $58.8 million (after-tax) or $0.81 per diluted share.

In connection with discontinuing the business operations of SN Canada during the current quarter, we realized a $58.2 million U.S. tax benefit due to a realized loss on our investment in SN Canada. The reduction in the financial statement carrying amount, which was recorded in 2008, became realizable for U.S. tax purposes in the foreseeable future as a result of our decision to exit the Canadian market. The tax benefit was the excess of the tax basis of our investment in the subsidiary over the financial statement carrying amount (the deductible outside basis difference).

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 September 30, 2013, the key indicators of the markets' performance, the Dow Jones Industrial Average, S&P 500, and the NASDAQ closed 15.5%, 17.9%, and 24.9% 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 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 September 30, 2013 Compared with Three Months Ended
September 30, 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
                                                   For the Three Months Ended               Months Ended
                                                         September 30,                     September 30,
                                                                              %
                                                2013           2012        Change        2013         2012
Revenues:
Commissions                                   $ 145,837      $ 125,509        16.2         30.5 %       30.3 %
Principal transactions                          122,583        102,474        19.6         25.6         24.7
Investment banking                               92,851         71,743        29.4         19.4         17.3
Asset management and service fees                76,710         62,881        22.0         16.0         15.2
Interest                                         39,130         26,360        48.4          8.2          6.4
Other income                                     13,063         31,094       (58.0 )        2.7          7.5

Total revenues                                  490,174        420,061        16.7        102.4        101.4
Interest expense                                 11,535          5,904        95.4          2.4          1.4

Net revenues                                    478,639        414,157        15.6        100.0        100.0

Non-interest expenses:
Compensation and benefits                       326,020        264,458        23.3         68.1         63.8
Occupancy and equipment rental                   41,288         32,596        26.7          8.6          7.9
Communication and office supplies                26,122         19,561        33.5          5.5          4.7
Commissions and floor brokerage                  10,150          7,842        29.4          2.1          1.9
Other operating expenses                         44,051         28,526        54.4          9.2          6.9

Total non-interest expenses                     447,631        352,983        26.8         93.5         85.2

Income from continuing operations before
income taxes                                     31,008         61,174       (49.3 )        6.5         14.8
Provision for income taxes                      (43,921 )       23,740           *         (9.2 )        5.8

Income from continuing operations                74,929         37,434       100.2         15.7          9.0
Discontinued operations:
Income/(loss) from discontinued operations,
net of tax                                       (5,239 )          276           *         (1.1 )         -

Net income                                    $  69,690      $  37,710        84.8         14.6 %        9.0 %

* Percentage not meaningful.


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Nine Months Ended September 30, 2013 Compared with Nine Months Ended
September 30, 2012

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



                                                                                             As a Percentage
                                                                                                  of Net
                                                                                                 Revenues
                                                                                               For the Nine
                                                    For the Nine Months Ended                  Months Ended
                                                          September 30,                       September 30,
                                                                                 %
                                               2013             2012          Change        2013         2012
Revenues:
Commissions                                 $   446,498      $   370,107         20.6         31.7 %       31.3 %
Principal transactions                          341,153          311,420          9.5         24.2         26.3
Investment banking                              289,199          208,342         38.8         20.5         17.6
Asset management and service fees               221,711          189,010         17.3         15.7         16.0
Interest                                        101,829           78,728         29.3          7.2          6.7
Other income                                     45,269           49,991         (9.4 )        3.2          4.2

Total revenues                                1,445,659        1,207,598         19.7        102.5        102.1
Interest expense                                 34,738           24,768         40.3          2.5          2.1

Net revenues                                  1,410,921        1,182,830         19.3        100.0        100.0

Non-interest expenses:
Compensation and benefits                       958,179          751,992         27.4         67.9         63.6
Occupancy and equipment rental                  116,090           94,776         22.5          8.2          8.0
Communication and office supplies                74,034           60,115         23.2          5.3          5.1
Commissions and floor brokerage                  28,777           22,339         28.8          2.0          1.9
Other operating expenses                        126,600           84,212         50.3          9.0          7.1

Total non-interest expenses                   1,303,680        1,013,434         28.6         92.4         85.7

Income from continuing operations before
income taxes                                    107,241          169,396        (36.7 )        7.6         14.3
Provision for income taxes                      (13,541 )         67,384            *         (1.0 )        5.7

Income from continuing operations               120,782          102,012         18.4          8.6          8.6
Discontinued operations:
Income/(loss) from discontinued
operations, net of tax                           (7,037 )         (3,393 )      107.4         (0.5 )       (0.3 )

Net income                                  $   113,745      $    98,619         15.3          8.1 %        8.3 %

* Percentage not meaningful.


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NET REVENUES

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



                                        For the Three Months Ended                  For the Nine Months Ended
                                               September 30,                              September 30,
                                                                   %                                            %
                                      2013          2012        Change          2013            2012         Change
Net revenues:
Commissions                         $ 145,837     $ 125,509        16.2      $   446,498     $   370,107        20.6
Principal transactions                122,583       102,474        19.6          341,153         311,420         9.5
Investment banking:
Capital raising                        53,665        44,563        20.4          175,252         139,441        25.7
Strategic advisory fees                39,186        27,180        44.2          113,947          68,901        65.4

                                       92,851        71,743        29.4          289,199         208,342        38.8
Asset management and service fees      76,710        62,881        22.0          221,711         189,010        17.3
Net interest                           27,595        20,456        34.9           67,091          53,960        24.3
Other income                           13,063        31,094       (58.0 )         45,269          49,991        (9.4 )

Total net revenues                  $ 478,639     $ 414,157        15.6      $ 1,410,921     $ 1,182,830        19.3

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 the Knight Capital Fixed Income business on July 1, 2013, KBW, Inc. on February 15, 2013, and Miller Buckfire on December 20, 2012. The results of operations for the Knight Capital Fixed Income business, 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 September 30, 2013, commission revenues increased 16.2% to $145.8 million from $125.5 million in the comparable period in 2012. For the nine months ended September 30, 2013, commission revenues increased 20.6% to $446.5 million from $370.1 million in the comparable period in 2012. The increase is primarily attributable to an increase in OTC transactions from the comparable period in 2012.

Principal transactions - For the three months ended September 30, 2013, principal transactions revenues increased 19.6% to $122.6 million from $102.5 million in the comparable period in 2012. For the nine months ended September 30, 2013, principal transactions revenues increased 9.5% to $341.2 million from $311.4 million in the comparable period in 2012. The increase is primarily attributable to an increase in equity institutional brokerage revenues as a result of higher 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 September 30, 2013, investment banking revenues increased 29.4%, to $92.9 million from $71.7 million in the comparable period in 2012. For the nine months ended September 30, 2013, investment banking revenues increased 38.8%, to $289.2 million from $208.3 million in the comparable period in 2012. The increase was primarily attributable to an increase in equity capital raising revenues and an increase in strategic advisory fees. 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.


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Capital raising revenues increased 20.4% to $53.7 million for the three months ended September 30, 2013 from $44.6 million in the comparable period in 2012. During the second quarter of 2013, equity capital raising revenues increased 50.3% to $36.4 million from $24.2 million in the comparable period in 2012. For the three months ended September 30, 2013, fixed income capital raising revenues decreased 7.8% to $13.1 million from $14.2 million in the comparable period in 2012. Capital raising revenues increased 25.7% to $175.3 million for the nine months ended September 30, 2013 from $139.4 million in the comparable period in 2012. During the nine months ended September 30, 2013, equity capital raising revenues increased 23.7% to $111.5 million from $90.1 million in the comparable period in 2012. For the nine months ended September 30, 2013, fixed income capital raising revenues increased 23.3% to $49.1 million from $39.8 million in the comparable period in 2012.

Strategic advisory fees increased 44.2% to $39.2 million for the three months ended September 30, 2013 from $27.2 million in the comparable period in 2012. Strategic advisory fees increased 65.4% to $113.9 million for the nine months ended September 30, 2013 from $68.9 million in the comparable period in 2012. The increase is primarily attributable to an increase in the number of completed . . .

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