Form10vk





 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2010
Commission File No. 001-09305
STIFEL FINANCIAL CORP.
(Exact Name of Registrant as specified in its Charter)
      DELAWARE   43-1273600 (State or Other Jurisdiction of   (IRS Employer Identification No.) Incorporation or Organization)           501 North Broadway     St. Louis, Missouri   63102 (Address of Principal Executive Offices)   (Zip Code)
(314) 342-2000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
          Name of Each Exchange Title of Each Class   On Which Registered       Common Stock, par value $0.15 per share   The New York Stock Exchange     Chicago Stock Exchange Preferred Stock Purchase Rights   The New York Stock Exchange     Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
              Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o         (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the registrant's common stock, $0.15 par value per share, held by non-affiliates of the registrant as of the close of business on June 30, 2010, was $1,452,102,019.(1)

The number of shares outstanding of the registrant's common stock, $0.15 par value per share, as of the close of business on February 23, 2011, was 35,912,912, which includes exchangeable shares of TWP Acquisition Company (Canada), Inc., a wholly owned subsidiary of the registrant. These shares are exchangeable at any time into an aggregate of 281,720 shares of common stock of the registrant; entitle the holder to dividend and other rights substantially economically equivalent to those of a share of common stock; and, through a voting trust, entitle the holder to a vote on matters presented to common shareholders.

(1)   In determining this amount, the registrant assumed that the executive officers of the registrant and the registrant's directors are affiliates of the registrant. Such assumptions shall not be deemed to be conclusive for any other purposes.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders, to be filed within 120 days of our fiscal year ended December 31, 2010, are incorporated by reference in Part III hereof.
 
 
 

 

STIFEL FINANCIAL CORP.

TABLE OF CONTENTS

 

 

   

Part I

 

   

 

Item 1.

Business 4

 

Item 1A.

Risk Factors 15

 

Item 1B.

Unresolved Staff Comments 23

 

Item 2.

Properties 24

 

Item 3.

Legal Proceedings 25

 

Item 4.

(Removed and Reserved) 25

Part II

 

   

 

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 26

 

Item 6.

Selected Financial Data 29

 

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations 30

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk 73

 

Item 8.

Financial Statements and Supplementary Data 78

 

Item 9.

Changes in and Disagreements with Accountants and Accounting and Financial Disclosure 143

 

Item 9A.

Controls and Procedures 143

 

Item 9B.

Other Information 145

Part III

 

   

 

Item 10.

Directors, Executive Officers and Corporate Governance 145

 

Item 11.

Executive Compensation 145

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 145

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence 146

 

Item 14.

Principal Accounting Fees and Services 146

Part IV

 

   

 

Item 15.

Exhibits, Financial Statement Schedules 147

 

 

   

 

 

Signatures 151

 

 

   

3


PART I

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, political, regulatory, and market conditions, the investment banking and brokerage industries, 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 "Risk Factors" in Item 1A, as well as those discussed in "External Factors Impacting Our Business" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this report.

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. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

ITEM 1.  BUSINESS

Stifel Financial Corp. is a Delaware corporation and a financial holding company headquartered in St. Louis. We were organized in 1983. Our principal subsidiary is Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus"), a full-service retail and institutional brokerage and investment banking firm. Stifel Nicolaus is the successor to a partnership founded in 1890. Our other subsidiaries include Thomas Weisel Partners LLC ("TWP"), a registered broker-dealer firm; Century Securities Associates, Inc. ("CSA"), an independent contractor broker-dealer firm; Stifel Nicolaus Limited ("SN Ltd") and Thomas Weisel Partners International Limited ("TWPIL"), our European subsidiaries; Stifel Nicolaus Canada, Inc. ("SN Canada"), our registered Canadian broker-dealer subsidiary; and Stifel Bank & Trust ("Stifel Bank"), a retail and commercial bank. Unless the context requires otherwise, the terms "our company," "we," and "our," as used herein, refer to Stifel Financial Corp. and its subsidiaries.

With our century-old operating history, we have built a diversified business serving private clients, institutional investors, and investment banking clients located across the country. Our principal activities are:

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. Over the past several years, we have grown substantially, primarily by completing and successfully integrating a number of acquisitions, including our acquisition of the capital markets business of Legg Mason ("LM Capital Markets") from Citigroup in December 2005 and the following acquisitions:

4


Business Segments

We operate in the following segments: Global Wealth Management, Institutional Group, and Other. As a result of organizational changes in the second quarter of 2009, which included a change in the management reporting structure of our company, the segments formerly reported as Equity Capital Markets and Fixed Income Capital Markets have been combined into a single segment called Institutional Group. In addition, the UBS branch acquisition and related customer account conversion to our platform has enabled us to further leverage our customers' assets, which allows us the ability to provide a full array of financial products to both our Private Client Group and Stifel Bank customers. As a result, during the third quarter of 2009, we changed how we manage these reporting units, and consequently, they were combined to form the Global Wealth Management segment. Previously reported segment information has been revised to reflect this change. For a discussion of the financial results of our segments, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Segment Analysis."

Narrative description of business

As of December 31, 2010, we employed 4,906 associates, including 1,775 financial advisors. As of December 31, 2010, through our broker-dealer subsidiaries, we provide securities-related financial services to approximately 1.0 million client accounts of customers throughout the United States, Canada, and Europe. Our customers include individuals, corporations, municipalities, and institutions. Although we have customers throughout the United States, our major geographic area of concentration is in the Midwest and Mid-Atlantic regions, with a growing presence in the Northeast, Southeast, and Western United States. No single client accounts for a material percentage of any segment of our business. Our inventory, which we believe is of modest size and intended to turn over quickly, exists to facilitate order flow and support the investment strategies of our clients. Although we do not engage in significant proprietary trading for our own account, the inventory of securities held to facilitate customer trades and our market-making activities are sensitive to market movements. Furthermore, our balance sheet is highly liquid, without material holdings of securities that are difficult to value or remarket. We believe that our broad platform, fee-based revenues, and strong distribution network position us well to take advantage of current trends within the financial services sector.

5


GLOBAL WEALTH MANAGEMENT

We provide securities transaction, brokerage, and investment services to our clients through the consolidated Stifel Nicolaus branch system and through CSA, our wholly owned independent contractor subsidiary, and TWP. We have made significant investments in personnel and technology to grow the Private Client Group over the past ten years. At December 31, 2010, the Private Client Group, with a concentration in the Midwest and Mid-Atlantic regions and a growing presence in the Northeast, Southeast, and Western United States, had a network of 1,775 financial advisors located in 285 branch offices in 44 states and the District of Columbia. In addition, we have 160 independent contractors.

Consolidated Stifel Nicolaus Branch System

Our financial advisors provide a broad range of investments and services, including financial planning services to our clients. We offer equity securities; taxable and tax-exempt fixed income securities, including municipal, corporate, and government agency securities; preferred stock; and unit investment trusts. We also offer a broad range of externally managed fee-based products. In addition, we offer insurance and annuity products and investment company shares through agreements with numerous third-party distributors. We encourage our financial advisors to pursue the products and services that best fit their clients' needs and that they feel most comfortable recommending. Our private clients may choose from a traditional, commission-based structure or fee-based money management programs. In most cases, commissions are charged for sales of investment products to clients based on an established commission schedule. In certain cases, varying discounts may be given based on relevant client or trade factors determined by the financial advisor.

CSA Private Client

At December 31, 2010, CSA had affiliations with 160 independent contractors in 127 branch offices in 27 states. CSA's independent contractors provide the same types of financial products and services to its private clients as does Stifel Nicolaus. Under their contractual arrangements, these independent contractors may also provide accounting services, real estate brokerage, insurance, or other business activities for their own account. However, all securities transactions must be transacted through CSA. Independent contractors are responsible for all of their direct costs and are paid a larger percentage of commissions to compensate them for their added expenses. CSA is an introducing broker-dealer and, as such, clears its transactions through Stifel Nicolaus.

Customer Financing

Client securities transactions are effected on either a cash or margin basis. The customer deposits less than the full cost of the security when securities are purchased on a margin basis. We make a loan for the balance of the purchase price. Such loans are collateralized by the securities purchased. The amounts of the loans are subject to the margin requirements of Regulation T of the Board of Governors of the Federal Reserve System, Financial Industry Regulatory Authority ("FINRA") margin requirements, and our internal policies, which usually are more restrictive than Regulation T or FINRA requirements. In permitting customers to purchase securities on margin, we are subject to the risk of a market decline, which could reduce the value of our collateral below the amount of the customers' indebtedness.

Stifel Bank

In April 2007, we completed the acquisition of First Service, a St. Louis-based full-service bank, which now operates as Stifel Bank & Trust and is reported in the Global Wealth Management segment. Since the closing of the bank acquisition, we have grown retail and commercial bank assets from $145.6 million on acquisition date to $1.8 billion at December 31, 2010. Through Stifel Bank, we offer retail and commercial banking services to private and corporate clients, including personal loan programs, such as fixed and variable mortgage loans, home equity lines of credit, personal loans, loans secured by CDs or savings, automobile loans, and securities-based loans, as well as commercial lending programs, such as small business loans, commercial real estate loans, lines of credit, credit cards, term loans, and inventory and receivables financing, in addition to other banking products. We believe this acquisition will not only help us serve our private clients more effectively by offering them a broader range of services, but will also enable us to better utilize our private client cash balances.

6


INSTITUTIONAL GROUP

The Institutional Group segment includes research, equity and fixed income institutional sales and trading, investment banking, public finance, and syndicate, and consisted of 980 employees at December 31, 2010.

Research

Our research department consisted of 218 analysts and support associates who publish research across multiple industry groups and provide our clients with timely, insightful, and actionable research, aimed at improving investment performance.

Institutional Sales and Trading

Our equity sales and trading team distributes our proprietary equity research products and communicates our investment recommendations to our client base of institutional investors, executes equity trades, sells the securities of companies for which we act as an underwriter, and makes a market in over 3,000 domestic securities at December 31, 2010. In our various sales and trading activities, we take a focused approach on servicing our clients as opposed to proprietary trading for our own account. Located in 18 cities in the United States as well as Geneva, London, and Madrid in Europe and Toronto and Calgary, our equity sales and trading team, consisting of 197 professionals and support associates, services approximately 3,500 clients globally.

The fixed income institutional sales and trading group consists of 227 professionals and support associates, located in 32 cities in the United States and is comprised of taxable and tax-exempt sales departments. Our institutional sales and trading group executes trades in both tax-exempt and taxable products, with diversification across municipal, corporate, government agency, and mortgage-backed securities. Our fixed income inventory is maintained primarily to facilitate order flow and support the investment strategies of our institutional fixed income clients, as opposed to seeking trading profits through proprietary trading.

Investment Banking

Our investment banking activities include the provision of financial advisory services principally with respect to mergers and acquisitions and the execution of public offerings and private placements of debt and equity securities. The investment banking group, consisting of 266 professionals and support associates, focuses on middle-market companies as well as on larger companies in targeted industries where we have particular expertise, which include real estate, financial services, healthcare, aerospace/defense and government services, telecommunications, transportation, energy, business services, consumer services, industrial, technology, and education.

Our public finance group acts as an underwriter and dealer in bonds issued by states, cities, and other political subdivisions and acts as manager or participant in offerings managed by other firms. The public finance group consists of 59 professionals and support associates.

Syndicate

Our syndicate department, which consists of 13 origination and execution professionals and support associates, coordinates marketing, distribution, pricing, and stabilization of our managed equity and debt offerings.  In addition, the department coordinates our underwriting participations and selling group opportunities managed by other investment banking firms.

OTHER SEGMENT

The Other segment includes interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, compensation expense associated with the deferred compensation plan modification, and all unallocated overhead cost associated with the execution of orders; processing of securities transactions; custody of client securities; receipt, identification, and delivery of funds and securities; compliance with regulatory and legal requirements; internal financial accounting and controls; and general administration and acquisition charges primarily related to the TWPG acquisition. At December 31, 2010, we employed 643 persons in this segment.

7


BUSINESS CONTINUITY

We have developed a business continuity plan that is designed to permit continued operation of business critical functions in the event of disruptions to our St. Louis, Missouri headquarters facility. Several critical business applications are supported by our outside vendors who maintain backup capabilities. We periodically participate in testing these backup facilities. Likewise, the business functions that we run internally can be supported without the St. Louis headquarters, through a combination of redundant computer facilities in other east and west coast data centers, and from certain branch locations that can connect to our third-party securities processing vendor through its primary or redundant facilities. Systems have been designed so that we can route mission-critical processing activity to alternate locations, which can be staffed with relocated personnel as appropriate.

GROWTH STRATEGY

We believe our plans for growth will allow us to increase our revenues and to expand our role with clients as a valued partner. In executing our growth strategy, we take advantage of the consolidation among mid-tier firms, which we believe provides us opportunities in our private client and capital markets businesses. We do not create specific growth or business plans for any particular type of acquisition, focus on specific firms, or geographic expansion, nor do we establish quantitative goals such as intended numbers of new hires or new office openings; however, our corporate philosophy has always been to be in a position to take advantage of opportunities as they arise. We intend to pursue the following strategies with discipline:

8


COMPETITION

We compete with other securities firms, some of which offer their customers a broader range of brokerage services, have substantially greater resources, and may have greater operating efficiencies. In addition, we face increasing competition from other financial institutions, such as commercial banks, online service providers, and other companies offering financial services. The Financial Modernization Act, signed into law in late 1999, lifted restrictions on banks and insurance companies, permitting them to provide financial services once dominated by securities firms. In addition, recent consolidation in the financial services industry may lead to increased competition from larger, more diversified organizations.

We rely on the expertise acquired in our market area over our 120-year history, our personnel, and our equity capital to operate in the competitive environment.

REGULATION

The securities industry in the United States is subject to extensive regulation under federal and state laws. The Securities and Exchange Commission ("SEC") is the federal agency charged with the administration of the federal securities laws. Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations ("SRO"), principally FINRA, the Municipal Securities Rulemaking Board, and securities exchanges. SROs adopt rules (which are subject to approval by the SEC) that govern the industry and conduct periodic examinations of member broker-dealers. Securities firms are also subject to regulation by state securities commissions in the states in which they are registered. A number of changes have been proposed to the rules and regulations that govern our securities business, and other rules and regulations have been adopted, which may result in changes in the way we conduct our business.

As a result of federal and state registration and SRO memberships, broker-dealers are subject to overlapping schemes of regulation that cover all aspects of their securities businesses. Such regulations cover matters including capital requirements; uses and safekeeping of clients' funds; conduct of directors, officers, and employees; recordkeeping and reporting requirements; supervisory and organizational procedures intended to ensure compliance with securities laws and to prevent improper trading on material nonpublic information; employee-related matters, including qualification and licensing of supervisory and sales personnel; limitations on extensions of credit in securities transactions; clearance and settlement procedures; requirements for the registration, underwriting, sale, and distribution of securities; and rules of the SROs designed to promote high standards of commercial honor and just and equitable principles of trade. A particular focus of the applicable regulations concerns the relationship between broker-dealers and their customers. As a result, many aspects of the broker-dealer customer relationship are subject to regulation, including, in some instances, "suitability" determinations as to certain customer transactions, limitations on the amounts that may be charged to customers, timing of proprietary trading in relation to customers' trades, and disclosures to customers.

Additional legislation, changes in rules promulgated by the SEC and by SROs, and changes in the interpretation or enforcement of existing laws and rules often directly affect the method of operation and profitability of broker-dealers. The SEC and the SROs conduct regular examinations of our broker-dealer subsidiaries and also initiate targeted and other specific inquiries from time to time, which generally include the investigation of issues involving substantial portions of the securities industry. The SEC and the SROs may conduct administrative proceedings, which can result in censures, fines, suspension, or expulsion of a broker-dealer, its officers, or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets rather than the protection of creditors and stockholders of broker-dealers.

Our U.S. broker-dealer subsidiaries are required by federal law to belong to Securities Investors Protection Corporation ("SIPC"). When the SIPC fund falls below a certain amount, members are required to pay annual assessments to replenish the reserves. If SIPC fund levels become inadequate, certain of our domestic broker-dealer subsidiaries may be required to pay a special assessment.

9


As broker-dealers, Stifel Nicolaus, TWP, and CSA are subject to the Uniform Net Capital Rule (Rule 15c3-1) promulgated by the SEC. The Uniform Net Capital Rule is designed to measure the general financial integrity and liquidity of a broker-dealer and the minimum net capital deemed necessary to meet the broker-dealer's continuing commitments to its customers and other broker-dealers. Broker-dealers may be prohibited from expanding their business and declaring cash dividends. A broker-dealer that fails to comply with the Uniform Net Capital Rule may be subject to disciplinary actions by the SEC and SROs, such as FINRA, including censures, fines, suspension, or expulsion. Stifel Nicolaus and TWP have chosen to calculate their net capital under the alternative method, which prescribes that their net capital shall not be less than the greater of $1.0 million or two percent of aggregate debit balances (primarily receivables from customers and broker-dealers) computed in accordance with the SEC's Customer Protection Rule (Rule 15c3-3). CSA calculates its net capital under the aggregate indebtedness method, whereby its aggregate indebtedness may not be greater than fifteen times its net capital (as defined). Both methods allow broker-dealers to increase their commitments to customers only to the extent their net capital is deemed adequate to support an increase. Our European subsidiaries, SN Ltd and TWPIL, are subject to the regulatory supervision and requirements of the Financial Services Authority ("FSA") in the United Kingdom. For further discussion of our net capital requirements, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

The financial services industry in the U.S. is subject to extensive regulation under federal and state laws. The U.S. government recently enacted financial services reform legislation known as the Dodd-Frank Wall Street Reform & Consumer Protection Act ("Dodd-Frank Act"). Because of the nature of our business and business practices, this legislation may have a significant direct impact on our operations. However, because many of the implementing regulations will result from further studies and are yet to be written by the various regulatory agencies, the impact is uncertain.

SN Canada, our registered Canadian broker-dealer subsidiary, is subject to regulation by the securities commissions of Ontario, Quebec, Alberta, British Columbia, Manitoba, Saskatchewan, and Nova Scotia; is a member of the Investment Industry Regulatory Organization of Canada ("IIROC"); and is a participating organization of the Toronto Stock Exchange, a member of the TSX Venture Exchange, and a dealer with the Canadian National Stock Exchange.

The financial services industry in Canada is subject to comprehensive regulation under both federal and provincial laws. Securities commissions have been established in all provinces and territorial jurisdictions which are charged with the administration of securities laws. Investment dealers in Canada are also subject to regulation by SROs, which are responsible for the enforcement of, and conformity with, securities legislation for their members and have been granted the powers to prescribe their own rules of conduct and financial requirements of members.

SN Canada is required by the IIROC to belong to the Canadian Investors Protection Fund ("CIPF"), whose primary role is investor protection. The CIPF Board of Directors determines the fund size required to meet its coverage obligations and sets a quarterly assessment rate. The CIPF provides protection for securities and cash held in client accounts. This coverage does not protect against market fluctuations.

See the section entitled "Liquidity and Capital Resources" in Item 7 of this report for further information on SEC, FINRA, FSA, and IIROC regulations pertaining to broker-dealer regulatory minimum net capital requirements.

Our company, as a bank and financial holding company, is subject to regulation, including capital requirements, by the Federal Reserve. Stifel Bank is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation ("FDIC") and state banking authorities. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our company's and Stifel Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, our company and Stifel Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our company's and Stifel Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require our company and Stifel Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). We may be required to increase our regulatory capital and pay higher FDIC premiums, including special assessments, due to the impact of increased bank failures over the last two years on the insurance fund of the FDIC.

10


The statistical disclosures required to be made by a bank holding company are included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.

In addition, TWP and several other wholly owned subsidiaries of ours, including Thomas Weisel Capital Management LLC, Thomas Weisel Asset Management LLC, TW Asset Management LLC, and Thomas Weisel Global Growth Partners LLC, are registered as investment advisers with the SEC and, therefore, are subject to its regulation and oversight.

As a public company whose common stock is listed on the New York Stock Exchange ("NYSE") and the Chicago Stock Exchange ("CHX"), we are subject to corporate governance requirements established by the SEC, NYSE, and CHX, as well as federal and state law. Under the Sarbanes-Oxley Act of 2002 (the "Act"), we are required to meet certain requirements regarding business dealings with members of the Board of Directors, the structure of our Audit and Compensation Committees, ethical standards for our senior financial officers, implementation of an internal control structure and procedures for financial reporting, and additional responsibilities regarding financial statements for our Chief Executive Officer and Chief Financial Officer and their assessment of our internal controls over financial reporting. Compliance with all aspects of the Act, particularly the provisions related to management's assessment of internal controls, has imposed additional costs on our company, reflecting internal staff and management time, as well as additional audit fees since the Act went into effect.

11


Executive Officers

Information regarding our executive officers and their ages as of February 28, 2011, are as follows:

Name

 

Age

 

Position(s)

Ronald J. Kruszewski

 

 

 

52

 

 

 

Co-Chairman of the Board of Directors, President, and Chief Executive Officer of the Company and Chairman of the Board of Directors and Chief Executive Officer of Stifel Nicolaus.

Thomas W. Weisel

 

70

 

Co-Chairman of the Board of Directors of the Company.

Scott B. McCuaig

 

 

61

 

 

Senior Vice President and Director of the Company and President, Co-Chief Operating Officer, and Director of Stifel Nicolaus.

James M. Zemlyak

 

 

 

51

 

 

 

Senior Vice President, Chief Financial Officer, Treasurer, and Director of the Company and Executive Vice President, Co-Chief Operating Officer, and Director of Stifel Nicolaus.

Richard J. Himelfarb

 

 

 

69

 

 

 

Vice Chairman, Senior Vice President, and Director of the Company and Executive Vice President, Chairman of Investment Banking, and Director of Stifel Nicolaus.

David M. Minnick

 

 

54

 

 

Senior Vice President and General Counsel of the Company and Stifel Nicolaus.

Thomas P. Mulroy

 

 

 

49

 

 

 

Senior Vice President and Director of the Company and Executive Vice President, Co-Director of Institutional Group, and Director of Stifel Nicolaus.

Victor J. Nesi

 

 

 

50

 

 

 

Senior Vice President and Director of the Company and Executive Vice President, Director of Investment Banking, Co-Director of Institutional Group, and Director of Stifel Nicolaus.

Ben A. Plotkin

 

 

55

 

 

Vice Chairman, Senior Vice President, and Director of the Company and Executive Vice President of Stifel Nicolaus.

David D. Sliney

 

 

41

 

 

Senior Vice President of the Company and Senior Vice President and Director of Stifel Nicolaus.

12


Ronald J. Kruszewski has been President and Chief Executive Officer of our company and Stifel Nicolaus since September 1997 and Chairman of the Board of Directors of our company and Stifel Nicolaus since April 2001. Prior thereto, Mr. Kruszewski served as Managing Director and Chief Financial Officer of Baird Financial Corporation and Managing Director of Robert W. Baird & Co. Incorporated, a securities broker-dealer firm, from 1993 to September 1997. Mr. Kruszewski has been a Director since September 1997.

Thomas W. Weisel was elected Co-Chairman of the Board of Directors of our company in August 2010 after the completion of the merger between our company and Thomas Weisel Partners Group, Inc. Prior thereto, Mr. Weisel served as Chairman and CEO of Thomas Weisel Partners Group, Inc., a firm he founded, from 1998 to June 2010. Prior to founding Thomas Weisel Partners, Mr. Weisel was a founder, in 1971, of Robertson, Coleman, Siebel & Weisel that became Montgomery Securities in 1978, where he was Chairman and CEO until September 1998. Mr. Weisel served as a Board Member of the Stanford Endowment from 2001 to 2009 and as an Advisory Board Member of Harvard Business School from 2007 to 2009. Mr. Weisel served as a director on the NASDAQ Stock Market board of directors from 2002 to 2006.

Scott B. McCuaig has been Senior Vice President and President of the Private Client Group and Stifel Nicolaus and Director of Stifel Nicolaus since January 1998 and President and Co-Chief Operating Officer of Stifel Nicolaus since August 2002. Prior thereto, Mr. McCuaig served as Managing Director, head of marketing, and regional sales manager of Robert W. Baird & Co. Incorporated from June 1988 to January 1998. Mr. McCuaig has been a Director since April 2001.

James M. Zemlyak joined Stifel Nicolaus in February 1999. Mr. Zemlyak has been our Senior Vice President, Chief Financial Officer, and Treasurer and a member of the Board of Directors of Stifel Nicolaus since February 1999, Co-Chief Operating Officer of Stifel Nicolaus since August 2002, and Executive Vice President of Stifel Nicolaus since December 1, 2005. Mr. Zemlyak also served as Chief Financial Officer of Stifel Nicolaus from February 1999 to October 2006. Prior to joining our company, Mr. Zemlyak served as Managing Director and Chief Financial Officer of Baird Financial Corporation from 1997 to 1999 and Senior Vice President and Chief Financial Officer of Robert W. Baird & Co. Incorporated from 1994 to 1999.

Richard J. Himelfarb has served as Senior Vice President and Director of our company and Executive Vice President and Director of Stifel Nicolaus since December 2005. Mr. Himelfarb was designated Chairman of Investment Banking in July 2009. Prior to that, Mr. Himelfarb served as Executive Vice President and Director of Investment Banking from December 2005 through July 2009. Prior to joining our company, Mr. Himelfarb served as a director of Legg Mason, Inc. from November 1983 and Legg Mason Wood Walker, Inc. from January 2005. Mr. Himelfarb was elected Executive Vice President of Legg Mason and Legg Mason Wood Walker, Inc. in July 1995, having previously served as Senior Vice President from November 1983.

David M. Minnick has served as Senior Vice President and General Counsel of our company and Stifel Nicolaus since October 2004. Prior thereto, Mr. Minnick served as Vice President and Counsel for A.G. Edwards & Sons, Inc. from August 2002 through October 2004, Senior Regional Attorney for NASD Regulation, Inc. from November 2000 through July 2002, as an attorney in private law practice from September 1998 through November 2000, and as General Counsel and Managing Director of Morgan Keegan & Company, Inc. from October 1990 through August 1998.

Thomas P. Mulroy has served as Senior Vice President and Director of our company and Executive Vice President and Director of Stifel Nicolaus since December 2005. Mr. Mulroy was named Co-Director of our Institutional Group in July 2009. Prior to that, Mr. Mulroy served as Director of Equity Capital Markets from December 2005 through July 2009. Mr. Mulroy has responsibility for institutional equity sales, trading, and research. Prior to joining our company, Mr. Mulroy was elected Executive Vice President of Legg Mason, Inc. in July 2002 and of Legg Mason Wood Walker, Inc. in November 2000. Mr. Mulroy became a Senior Vice President of Legg Mason, Inc. in July 2000 and Legg Mason Wood Walker, Inc. in August 1998.

Victor J. Nesi has served as Executive Vice President, Director of Investment Banking, and Co-Director of our Institutional Group since July 2009. Mr. Nesi has served as Director of our company since August 2009. Mr. Nesi has responsibility for corporate finance investment banking activities and is Co-Director of our Capital Markets segment. Mr. Nesi has more than 20 years of banking and private equity experience, most recently with Merrill Lynch, where he headed the global private equity business for the telecommunications and media industry. From 2005 to 2007, he directed Merrill Lynch's investment banking group for the Americas region. Prior to joining Merrill Lynch in 1996, Mr. Nesi spent seven years as an investment banker at Salomon Brothers and Goldman Sachs.

Ben A. Plotkin has been Vice Chairman, Senior Vice President, and Director of our company since August 2007 and Executive Vice President of Stifel Nicolaus since February 2007. Mr. Plotkin also served as Chairman and Chief Executive Officer of Ryan Beck & Company, Inc. from 1997 until its acquisition by our company in 2007. Mr. Plotkin was elected Executive Vice President of Ryan Beck in 1990. Mr. Plotkin became a Senior Vice President of Ryan Beck in 1989 and was appointed First Vice President of Ryan Beck in December of 1987. Mr. Plotkin joined Ryan Beck in May of 1987 as a Director and Vice President in the Investment Banking Division.

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David D. Sliney has been a Senior Vice President of our company since May 2003. In 1997, Mr. Sliney began a Strategic Planning and Finance role with Stifel Nicolaus and has served as a Director of Stifel Nicolaus since May 2003. Mr. Sliney is also responsible for our company's Operations and Technology departments. Mr. Sliney joined Stifel Nicolaus in 1992, and between 1992 and 1995, Mr. Sliney worked as a fixed income trader and later assumed responsibility for the firm's Equity Syndicate Department.

AVAILABLE INFORMATION

Our internet address is www.stifel.com. We make available, free of charge, through a link to the SEC web site, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Additionally, we make available on our web site under "Investor Relations - Corporate Governance," and in print upon request of any shareholder to our Chief Financial Officer, a number of our corporate governance documents. These include: Executive Committee charter, Audit Committee charter, Compensation Committee charter, Nominating/Corporate Governance Committee charter, Corporate Governance Guidelines, Complaint Reporting Process, and the Code of Ethics for Employees. Within the time period required by the SEC and the NYSE, we will post on our web site any modifications to any of the available documents. The information on our website is not incorporated by reference into this report. Our Chief Financial Officer can be contacted at Stifel Financial Corp., One Financial Plaza, 501 N. Broadway, St. Louis, Missouri 63102, telephone: (314) 342-2000.

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ITEM 1A.  RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the following factors which could materially affect our business, financial condition, or future results of operations. Although the risks described below are those that management believes are the most significant, these are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently do not deem to be material also may materially affect our business, financial condition, or future results of operations. We may amend or supplement these risk factors from time to time in other reports we file with the SEC.

Our results of operations may be adversely affected by conditions in the global financial markets and economic downturn.

We are engaged in various financial services businesses. As such, we are affected by economic and political conditions. These conditions may directly and indirectly impact a number of factors that may be detrimental to our operating results, including the inflation rate, the related impact on the securities markets, including changes in volume and price levels of securities, fluctuations in interest rates, reduced investor confidence, and a slowdown in economic activity. These conditions historically have impacted our trading volume and net revenues and affected our profitability. Additionally, a decline in the strength of the U.S. economy can lead to deterioration in credit quality and decreased loan demand. Continued or further credit dislocations or sustained market downturns may result in a decrease in the volume of trades we execute for our clients, a decline in the value of securities we hold in inventory as assets, and potentially reduced investment banking revenues, given that associated fees are directly related to the number and size of transactions in which we participate.

A significant portion of our revenue is derived from commissions, margin interest revenue, principal transactions, asset management and service fees, and investment banking fees. Accordingly, severe market fluctuations, weak economic conditions, or a decline in stock prices, trading volumes, or liquidity could have an adverse effect on our profitability. Continued or further credit dislocations or sustained market downturns may result in a decrease in the volume of trades we execute for our clients, a decline in the value of securities we hold in inventory as assets, and reduced investment banking revenues.

Declines in the market value of securities generally result in a decline in revenues from fees based on the asset values of client portfolios and may result in the failure of buyers and sellers of securities to fulfill their settlement obligations, as well as the failure of our clients to fulfill their credit and settlement obligations. Also, we permit our clients to purchase securities on margin. During periods of steep declines in securities prices, the value of the collateral securing client accounts margin purchases may drop below the amount of the purchaser's indebtedness. If the clients are unable to provide additional collateral for these loans, we may lose money on these margin transactions. This may cause us to incur additional expenses defending or pursuing claims or litigation related to counterparty or client defaults.

In addition, in certain transactions, we are required to post collateral to secure our obligations to our counterparties. In the event of a bankruptcy or insolvency proceeding involving such counterparties, we may experience delays in recovering our assets posted as collateral or may incur a loss to the extent that a counterparty was holding collateral in excess of our obligation to such counterparty. There is no assurance that any such losses would not materially and adversely affect our business, financial condition, and results of operations.

Recent legislative and regulatory actions, and any such future actions, to address the current liquidity and credit crisis in the financial industry may significantly affect our financial condition, results of operation, liquidity, or stock price.

Recent market and economic conditions have led to new legislation and numerous proposals for changes in the regulation of the financial services industry, including significant additional legislation and regulation in the United States and abroad. The Dodd-Frank Act calls for sweeping changes in the supervision and regulation of the financial industry designed to provide for greater oversight of financial industry participants, reduce risk in banking practices and in securities and derivatives trading, enhance public company corporate governance practices and executive compensation disclosures, and provide for greater protections to individual consumers and investors. Certain elements of the Dodd-Frank Act became effective immediately, though the details of many provisions are subject to additional studies and will not be known until final rules are adopted by applicable regulatory agencies. The ultimate impact that the Dodd-Frank Act will have on us, the financial industry, and the economy cannot be known until all such rules and regulations called for under the Dodd-Frank Act have been finalized.

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Certain provisions of the Dodd-Frank Act that may impact our business include, but are not limited to: the establishment of a fiduciary standard for broker-dealers, the imposition of capital requirements on financial holding companies, and to a lesser extent, greater oversight over derivatives trading and restrictions on proprietary trading. Other regulatory changes and proposed changes concerning municipal securities and the issuance of public debt may adversely impact our business. These initiatives include changes to existing 'pay to play' rules for brokers, dealers, and municipal securities dealers; expansion of disclosure, suitability and pricing obligations for brokers, dealers and municipal securities dealers; and changes in the definition of, and registration requirements for, municipal advisers.

A number of changes have been proposed to the rules and regulations that govern our securities business, and other rules and regulations have been adopted, which may result in changes in the way in which we conduct our business. These legislative and regulatory initiatives could require us to change certain of our business practices, impose additional costs on us, limit the products that we offer, result in a loss of revenue, limit our competitiveness or our ability to pursue business opportunities, cause business disruptions, impact the value of assets that we hold, or otherwise adversely affect our business, results of operations, or financial condition. The long-term impact of these initiatives on our business practices and revenues will depend upon the successful implementation of our strategies and competitors' responses to such initiatives, all of which are difficult to predict.

Lack of sufficient liquidity or access to capital could impair our business and financial condition.

Liquidity is essential to our business. If we have insufficient liquid assets, we will be forced to curtail our operations, and our business will suffer. Our assets, consisting mainly of cash or assets readily convertible into cash, are our principal source of liquidity. These assets are financed primarily by our equity capital, debentures to trusts, client credit balances, short-term bank loans, proceeds from securities lending, customer deposits, and other payables. We currently finance our client accounts and firm trading positions through ordinary course borrowings at floating interest rates from various banks on a demand basis and securities lending, with company-owned and client securities pledged as collateral. Changes in securities market volumes, related client borrowing demands, underwriting activity, and levels of securities inventory affect the amount of our financing requirements.

The capital and credit markets have been experiencing volatility and disruption since early 2008, and reached unprecedented levels during the first quarter of 2009. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying financial strength. Despite recent improvements in market conditions, if market disruption and volatility return to the unprecedented levels reached in early 2009 or worsen, there can be no assurance that we will not experience an adverse effect, which may be material to our business, financial condition, and results of operations and affect our ability to access capital.

Our liquidity requirements may change in the event we need to raise more funds than anticipated to increase inventory positions, support more rapid expansion, develop new or enhanced services and products, acquire technologies, or respond to other unanticipated liquidity requirements. We rely exclusively on financing activities and distributions from our subsidiaries for funds to implement our business and growth strategies. Net capital rules or the borrowing arrangements of our subsidiaries, as well as the earnings, financial condition, and cash requirements of our subsidiaries, may each limit distributions to us from our subsidiaries.

In the event existing internal and external financial resources do not satisfy our needs, we may have to seek additional outside financing. The availability of outside financing will depend on a variety of factors, such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, credit ratings, and credit capacity, as well as the possibility that lenders could develop a negative perception of our long-term or short-term financial prospects if we incurred large trading losses or if the level of our business activity decreased due to a market downturn or otherwise. We currently do not have a credit rating, which could adversely affect our liquidity and competitive position by increasing our borrowing costs and limiting access to sources of liquidity that require a credit rating as a condition to providing funds.

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Current trends in the global financial markets could cause significant fluctuations in our stock price.

Stock markets in general, and stock prices of financial services firms in particular, including us, have in recent years, experienced significant price and volume fluctuations. The market price of our common stock may continue to be subject to similar market fluctuations which may be unrelated to our operating performance or prospects, and increased volatility could result in an overall decline in the market price of our common stock. Factors that could significantly impact the volatility of our stock price include:

Significant declines in the market price of our common stock or failure of the market price of our common stock to increase could harm our ability to recruit and retain key employees, including our executives and financial advisors and other key professional employees and those who have joined us from companies we have acquired, reduce our access to debt or equity capital, and otherwise harm our business or financial condition. In addition, we may not be able to use our common stock effectively as consideration in connection with future acquisitions.

We face intense competition in our industry.

All aspects of our business and of the financial services industry in general are intensely competitive. We expect competition to continue and intensify in the future. Our business will suffer if we do not compete successfully. We compete on the basis of a number of factors, including the quality of our personnel, the quality and selection of our investment products and services, pricing (such as execution pricing and fee levels), and reputation. Because of market unrest and increased government intervention, the financial services industry has recently undergone significant consolidation, which has further concentrated equity capital and other financial resources in the industry and further increased competition. Many of our competitors use their significantly greater financial capital and scope of operations to offer their customers more products and services, broader research capabilities, access to international markets, and other products and services not currently offered by us.

We compete directly with national full-service broker-dealers, investment banking firms, and commercial banks, and to a lesser extent, with discount brokers and dealers and investment advisors. In addition, we face competition from new entrants into the market and increased use of alternative sales channels by other firms. Domestic commercial banks and investment banking boutique firms have entered the broker-dealer business, and large international banks have begun serving our markets as well. Legislative and regulatory initiatives intended to ease restrictions on the sale of securities and underwriting activities by commercial banks have increased competition. We also compete indirectly for investment assets with insurance companies, real estate firms, hedge funds, and others. This increased competition could cause our business to suffer.

The industry of electronic and/or discount brokerage services is continuing to develop. Increased competition from firms using new technology to deliver these products and services may materially and adversely affect our operating results and financial position. Competitors offering internet-based or other electronic brokerage services may have lower costs and offer their customers more attractive pricing and more convenient services than we do. In addition, we anticipate additional competition from underwriters who conduct offerings of securities through electronic distribution channels, bypassing financial intermediaries such as us altogether. These and other competitive pressures may have an adverse effect on our competitive position and, as a result, our operations, financial condition, and liquidity.

Regulatory and legal developments could adversely affect our business and financial condition.

The financial services industry is subject to extensive regulation, and broker-dealers and investment advisors are subject to regulations covering all aspects of the securities business. We could be subject to civil liability, criminal liability, or sanctions, including revocation of our subsidiaries' registrations as investment advisors or broker-dealers, revocation of the licenses of our financial advisors, censures, fines, or a temporary suspension or permanent bar from conducting business if we violate such laws or regulations. Any such liability or sanction could have a material adverse effect on our business, financial condition, and prospects. Moreover, our independent contractor subsidiaries, CSA and SN Ltd, give rise to a potentially higher risk of noncompliance because of the nature of the independent contractor relationships involved.

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As a bank holding company, we are subject to regulation by the Federal Reserve. Stifel Bank is subject to regulation by the FDIC. As a result, we are subject to a risk of loss resulting from failure to comply with banking laws. The recent economic and political environment has caused regulators to increase their focus on the regulation of the financial services industry, including introducing proposals for new legislation. We are unable to predict whether any of these proposals will be implemented and in what form, or whether any additional or similar changes to statutes or regulations, including the interpretation or implementation thereof, will occur in the future. Any such action could affect us in substantial and unpredictable ways and could have an adverse effect on our business, financial condition, and results of operations. We also may be adversely affected as a result of changes in federal, state, or foreign tax laws, or by changes in the interpretation or enforcement of existing laws and regulations.  For additional information regarding our regulatory environment and our approach to managing regulatory risk, see Item 1, "Business - Regulation," and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."

Our company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from our securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. Our company and its subsidiaries are also involved in other reviews, investigations, and proceedings by governmental and self-regulatory organizations regarding our business, which may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief.

The regulatory investigations include inquiries from the SEC, FINRA, and several state regulatory authorities requesting information concerning our activities with respect to auction rate securities ("ARS") and in connection with certain investments made by other post-employment benefit ("OPEB") trusts formed by five Southwestern Wisconsin school districts.

In turbulent economic times such as these, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions have historically increased. These risks include potential liability under securities and other laws for alleged materially false or misleading statements made in connection with securities offerings and other transactions, issues related to the suitability of our investment advice based on our clients' investment objectives, and potential liability for other advice we provide to participants in strategic transactions. Legal actions brought against us may result in judgments, settlements, fines, penalties, or other results, any of which could materially adversely affect our business, financial condition, or results of operations, or cause us serious reputational harm.

For a discussion of our legal matters, including ARS and OPEB litigation, and our approach to managing legal risk, see Item 3, "Legal Proceedings," and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."

Failure to comply with regulatory capital requirements would significantly harm our business.

The SEC requires broker-dealers to maintain adequate regulatory capital in relation to their liabilities and the size of their customer business. These rules require Stifel Nicolaus, TWP, and CSA, our broker-dealer subsidiaries, to maintain a substantial portion of their assets in cash or highly liquid investments. Failure to maintain the required net capital may subject our broker-dealer subsidiaries to limitations on their activities, or in extreme cases, suspension or revocation of their registration by the SEC and suspension or expulsion by FINRA and other regulatory bodies, and, ultimately, liquidation. Our European subsidiaries, SN Ltd and TWPIL, are subject to similar limitations under applicable laws in the United Kingdom. Our Canadian subsidiary, SN Canada, is subject to the regulatory supervision and requirements of the Investment Industry Regulatory Organization of Canada ("IIROC"). Failure to comply with the net capital rules could have material and adverse consequences, such as:

In addition, a change in the net capital rules or the imposition of new rules affecting the scope, coverage, calculation, or amount of net capital requirements, or a significant operating loss or any large charge against net capital, could have similar adverse effects. In addition, as a bank holding company, we and our bank subsidiary are subject to various regulatory requirements administered by the federal banking agencies, including capital adequacy requirements pursuant to which we and our bank subsidiary must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. See Item 1, "Business - Regulation," for additional information regarding our regulatory environment.

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We have experienced significant pricing pressure in areas of our business, which may impair our revenues and profitability.

In recent years, our business has experienced significant pricing pressures on trading margins and commissions in fixed income and equity trading. In the fixed income market, regulatory requirements have resulted in greater price transparency, leading to increased price competition and decreased trading margins. In the equity market, we have experienced increased pricing pressure from institutional clients to reduce commissions, and this pressure has been augmented by the increased use of electronic and direct market access trading, which has created additional competitive downward pressure on trading margins. The trend towards using alternative trading systems is continuing to grow, which may result in decreased commission and trading revenue, reduce our participation in the trading markets and our ability to access market information, and lead to the creation of new and stronger competitors. Institutional clients also have pressured financial services firms to alter "soft dollar" practices under which brokerage firms bundle the cost of trade execution with research products and services. Some institutions are entering into arrangements that separate (or "unbundle") payments for research products or services from sales commissions. These arrangements have increased the competitive pressures on sales commissions and have affected the value our clients place on high-quality research. Additional pressure on sales and trading revenue may impair the profitability of our business. Moreover, our inability to reach agreement regarding the terms of unbundling arrangements with institutional clients who are actively seeking such arrangements could result in the loss of those clients, which would likely reduce our institutional commissions. We believe that price competition and pricing pressures in these and other areas will continue as institutional investors continue to reduce the amounts they are willing to pay, including by reducing the number of brokerage firms they use, and some of our competitors seek to obtain market share by reducing fees, commissions, or margins.

Our underwriting and market-making activities place our capital at risk.

We may incur losses and be subject to reputational harm to the extent that, for any reason, we are unable to sell securities we purchased as an underwriter at the anticipated price levels. As an underwriter, we also are subject to heightened standards regarding liability for material misstatements or omissions in prospectuses and other offering documents relating to offerings we underwrite. As a market maker, we may own large positions in specific securities, and these undiversified holdings concentrate the risk of market fluctuations and may result in greater losses than would be the case if our holdings were more diversified.

Our ability to attract, develop, and retain highly skilled and productive employees is critical to the success of our business.

Our people are our most valuable asset. Our ability to develop and retain our client base and to obtain investment banking and advisory engagements depends upon the reputation, judgment, business generation capabilities, and project execution skills of highly skilled and often highly specialized employees, including our executive officers. The unexpected loss of services of any of these key employees and executive officers, or the inability to recruit and retain highly qualified personnel in the future, could have an adverse effect on our business and results of operations.

Financial advisors typically take their clients with them when they leave us to work for a competitor. From time to time, in addition to financial advisors, we have lost equity research, investment banking, public finance, institutional sales and trading professionals, and in some cases, clients, to our competitors.

Competition for personnel within the financial services industry is intense. The cost of retaining skilled professionals in the financial services industry has escalated considerably, as competition for these professionals has intensified. Employers in the industry are increasingly offering guaranteed contracts, upfront payments, and increased compensation. These can be important factors in a current employee's decision to leave us as well as a prospective employee's decision to join us. As competition for skilled professionals in the industry increases, we may have to devote more significant resources to attracting and retaining qualified personnel. In particular, our financial results may be adversely affected by the amortization costs incurred by us in connection with the upfront loans we offer to financial advisors.

Moreover, companies in our industry whose employees accept positions with competitors frequently claim that those competitors have engaged in unfair hiring practices. We are currently subject to several such claims and may be subject to additional claims in the future as we seek to hire qualified personnel, some of whom may currently be working for our competitors. Some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. Such claims could also discourage potential employees who currently work for our competitors from joining us.

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We may recruit financial advisors, make strategic acquisitions of businesses, or divest or exit existing businesses, which could cause us to incur unforeseen expenses and could have disruptive effects on our business and may strain our resources.

Our growth strategies have included, and will continue to include, the recruitment of financial advisors and strategic acquisitions. Over the last few years, we have completed several significant acquisitions. These acquisitions or any acquisition that we determine to pursue will be accompanied by a number of risks. The growth of our business and expansion of our client base have strained, and may continue to strain, our management and administrative resources. Costs or difficulties relating to such transactions, including integration of financial advisors and other employees, products and services, technology systems, accounting systems, and management controls, may be greater than expected. Unless offset by a growth of revenues, the costs associated with these investments will reduce our operating margins. In addition, because, as noted above, financial professionals typically take their clients with them when they leave, if key employees or other senior management personnel of the businesses we have acquired determine that they do not wish to remain with our company over the long term or at all, we would not inherit portions of the client base of those businesses, which would reduce the value of those acquisitions to us.

In addition to past growth, we cannot assure investors that we will be able to manage our future growth successfully. The inability to do so could have a material adverse effect on our business, financial condition, and results of operations. After we announce or complete any given acquisition in the future, our share price could decline if investors view the transaction as too costly or unlikely to improve our competitive position. We may be unable to retain key personnel after any such transaction, and the transaction may impair relationships with customers and business partners. These difficulties could disrupt our ongoing business, increase our expenses, and adversely affect our operating results and financial condition. In addition, we may be unable to achieve anticipated benefits and synergies from any such transaction as fully as expected or within the expected time frame. Divestitures or elimination of existing businesses or products could have similar effects.

Moreover, to the extent we pursue increased expansion to different geographic markets or grow generally through additional strategic acquisitions, we cannot assure you that we will identify suitable acquisition candidates, that acquisitions will be completed on acceptable terms, or that we will be able to successfully integrate the operations of any acquired business into our existing business. Such acquisitions could be of significant size and involve firms located in regions of the United States where we do not currently operate, or internationally. To acquire and integrate a separate organization would further divert management attention from other business activities. This diversion, together with other difficulties we may encounter in integrating an acquired business, could have a material adverse effect on our business, financial condition, and results of operations. In addition, we may need to borrow money to finance acquisitions, which would increase our leverage. Such funds might not be available on terms as favorable to us as our current borrowing terms or at all.

The rapid growth of Stifel Bank may expose us to increased operational risk, credit risk, and sensitivity to market interest rates along with increased regulation, examinations, and supervision by regulators.

We have experienced rapid growth in the balance sheet of Stifel Bank. The increase is primarily attributable to the growth in securities-based loans and deposits as a result of the UBS Acquired Locations acquisition. Although our stock-secured loans are collateralized by assets held in brokerage accounts, we are exposed to some credit and operational risk associated with these loans. We describe some of the integration-related operational risks associated with our recent acquisitions above, which includes many of the same risks related to the growth of Stifel Bank. With the increase in deposits and resulting liquidity, we have been able to expand our investment portfolio, primarily with government agency securities. In addition, Stifel Bank has significantly grown its mortgage banking business. Although we believe we have adequate underwriting policies in place, there are inherent risks associated with the mortgage banking business. For further discussion of our segments, including our Stifel Bank reporting unit, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Segment Analysis."

As a result of the high percentage of our assets and liabilities that are in the form of interest-bearing or interest-related instruments, we are more sensitive to changes in interest rates, in the shape of the yield curve, or in relative spreads between market interest rates.

The monetary, tax, and other policies of the government and its agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance. An important function of the Federal Reserve is to regulate the national supply of bank credit and market interest rates. The actions of the Federal Reserve influence the rates of interest that we charge on loans and that we pay on borrowings and interest-bearing deposits, which may also affect the value of our on-balance sheet and off-balance sheet financial instruments. We cannot predict the nature or timing of future changes in monetary, tax, and other policies or the effect that they may have on our activities and results of operations.

In addition, Stifel Bank is heavily regulated at the state and federal level. This regulation is to protect depositors, federal deposit insurance funds, consumers, and the banking system as a whole, not our stockholders. Federal and state regulations can significantly restrict our businesses, and we are subject to various regulatory actions, which could include fines, penalties, or other sanctions for violations of laws and regulatory rules if we are ultimately found to be out of compliance.

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We may experience losses associated with mortgage repurchases and indemnification obligations.

Through Stifel Bank, in the normal course of business, we originate residential mortgage loans and sell them to investors. We are subject to the inherent risk associated with selling mortgage loans in the secondary market. We may be required to repurchase mortgage loans that have been sold to investors in the event there are breaches of certain representations and warranties contained within the sales agreements. While we have yet to repurchase a loan sold to an investor, we may be required to repurchase mortgage loans that were sold to investors in the event that there was inadequate underwriting or fraud, or in the event that the loans become delinquent shortly after they are originated. We also may be required to indemnify certain purchasers and others against losses they incur in the event of breaches of representations and warranties and in various other circumstances, and the amount of such losses could exceed the repurchase amount of the related loans. Consequently, we may be exposed to credit risk associated with sold loans. There is no assurance that any such losses would not materially and adversely affect our business, financial condition, and results of operations.

Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk.

We seek to manage, monitor, and control our operational, legal, and regulatory risk through operational and compliance reporting systems, internal controls, management review processes, and other mechanisms; however, there can be no assurance that our procedures will be fully effective. Further, our risk management methods are based on an evaluation of information regarding markets, clients, and other matters that are based on assumptions that may no longer be accurate. In addition, we have undergone significant growth in recent years. A failure to adequately manage our growth, or to effectively manage our risk, could materially and adversely affect our business and financial condition. We must also address potential conflicts of interest that arise in our business. We have procedures and controls in place to address conflicts of interest, but identifying and managing potential conflicts of interest can be complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with conflicts of interest. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," for more information on how we monitor and manage market and certain other risks.

We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements, which are important to attract and retain financial advisors.

We rely extensively on electronic data processing and communications systems. Adapting or developing our technology systems to meet new regulatory requirements, client needs, and industry demands is critical for our business. Introduction of new technologies presents new challenges on a regular basis. In addition to better serving our clients, the effective use of technology increases efficiency and enables our company to reduce costs. Our future success will depend, in part, upon our ability to successfully maintain and upgrade our systems and our ability to address the needs of our clients by using technology to provide products and services that will satisfy their demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot assure you that we will be able to effectively upgrade our systems, implement new technology-driven products and services, or be successful in marketing these products and services to our clients.

Our operations and infrastructure and those of the service providers upon which we rely may malfunction or fail.

Our business is highly dependent on our ability to process, on a daily basis, a large number of transactions across diverse markets, and the transactions we process have become increasingly complex. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses. If any of these systems do not operate properly or are disabled, or if there are other shortcomings or failures in our internal processes, people, or systems, we could suffer impairments, financial loss, a disruption of our businesses, liability to clients, regulatory intervention, or reputational damage.

We have outsourced certain aspects of our technology infrastructure, including trade processing, data centers, disaster recovery systems, and wide area networks, as well as market data servers, which constantly broadcast news, quotes, analytics, and other important information to the desktop computers of our financial advisors. We contract with other vendors to produce, batch, and mail our confirmations and customer reports. We are dependent on our technology providers to manage and monitor those functions. A disruption of any of the outsourced services would be out of our control and could negatively impact our business. We have experienced disruptions on occasion, none of which has been material to our operations and results. However, there can be no guarantee that future disruptions with these providers will not occur.

We also face the risk of operational failure, termination, or capacity constraints of any of the clearing agents, exchanges, clearing houses, or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and to manage our exposure to risk.

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Our operations also rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software, and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. If one or more of such events occur, this could jeopardize our or our clients' or counterparties' confidential and other information processed, stored in, and transmitted through our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients', our counterparties', or third parties' operations, which could result in significant losses or reputational damage. We may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures, or to make required notifications, and we may be subject to litigation and financial losses that are either not insured or not fully covered through any insurance maintained by us.

We may suffer losses if our reputation is harmed.

Our ability to attract and retain customers and employees may be adversely affected to the extent our reputation is damaged. If we fail to deal with, or appear to fail to deal with, various issues that may give rise to reputational risk, we could harm our business prospects. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, record-keeping, sales and trading practices, and the proper identification of the legal, reputational, credit, liquidity, and market risks inherent in our products. Failure to appropriately address these issues could also give rise to additional legal risk to us, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to regulatory enforcement actions, fines, and penalties.

Our current stockholders may experience dilution in their holdings if we issue additional shares of common stock as a result of future offerings or acquisitions where we use our common stock.

As part of our business strategy, we may continue to seek opportunities for growth through strategic acquisitions, in which we may consider issuing equity securities as part of the consideration. Additionally, we may obtain additional capital through the public or private sale of equity securities. If we sell equity securities, the value of our common stock could experience dilution. Furthermore, these securities could have rights, preferences, and privileges more favorable than those of the common stock. Moreover, if we issue additional shares of common stock in connection with future acquisitions or as a result of a financing, investors' ownership interest in our company will be diluted.

The issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock or the exercise of such securities, could be substantially dilutive to stockholders of our common stock. Holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our stockholders. The market price of our common stock could decline as a result of sales of shares of our common stock or securities convertible into or exchangeable for common stock.

We are subject to risks of legal proceedings, which may result in significant losses to us that we cannot recover. Claimants in these proceedings may be customers, employees, or regulatory agencies, among others, seeking damages for mistakes, errors, negligence, or acts of fraud by our employees.

Many aspects of our business subject us to substantial risks of potential liability to customers and to regulatory enforcement proceedings by state and federal regulators. Participants in the financial services industry face an increasing amount of litigation and arbitration proceedings. Dissatisfied clients regularly make claims against broker-dealers and their employees for, among others, negligence, fraud, unauthorized trading, suitability, churning, failure to supervise, breach of fiduciary duty, employee errors, intentional misconduct, unauthorized transactions by financial advisors or traders, improper recruiting activity, and failures in the processing of securities transactions. These types of claims expose us to the risk of significant loss. Acts of fraud are difficult to detect and deter, and while we believe our supervisory procedures are reasonably designed to detect and prevent violations of applicable laws, rules, and regulations, we cannot assure investors that our risk management procedures and controls will prevent losses from fraudulent activity. In our role as underwriter and selling agent, we may be liable if there are material misstatements or omissions of material information in prospectuses and other communications regarding underwritten offerings of securities. At any point in time, the aggregate amount of existing claims against us could be material. While we do not expect the outcome of any existing claims against us to have a material adverse impact on our business, financial condition, or results of operations, we cannot assure you that these types of proceedings will not materially and adversely affect our company. We do not carry insurance that would cover payments regarding these liabilities, with the exception of fidelity coverage with respect to certain fraudulent acts of our employees. In addition, our bylaws provide for the indemnification of our officers, directors, and employees to the maximum extent permitted under Delaware law. In the future, we may be the subject of indemnification assertions under these documents by our officers, directors, or employees who have or may become defendants in litigation. These claims for indemnification may subject us to substantial risks of potential liability.  For a discussion of our legal matters (including ARS and OPEB litigation) and our approach to managing legal risk, see Item 3, "Legal Proceedings."

22


 

In addition to the foregoing financial costs and risks associated with potential liability, the costs of defending litigation and claims has increased over the last several years. The amount of outside attorneys' fees incurred in connection with the defense of litigation and claims could be substantial and might materially and adversely affect our results of operations as such fees occur. Securities class action litigation, in particular, is highly complex and can extend for a protracted period of time, thereby substantially increasing the costs incurred to resolve this litigation.

Misconduct by our employees or by the employees of our business partners could harm us and is difficult to detect and prevent.

There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur at our company. For example, misconduct could involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. Our ability to detect and prevent misconduct by entities with which we do business may be even more limited. We may suffer reputational harm for any misconduct by our employees or those entities with which we do business.

Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the market value of our common stock.

Our articles of incorporation and bylaws and Delaware law contain provisions that are intended to deter abusive takeover tactics by making them unacceptably expensive to prospective acquirors and to encourage prospective acquirors to negotiate with our board of directors rather than to attempt a hostile takeover. Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock. We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of our company and our stockholders. 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

23


ITEM 2.  PROPERTIES

The following table sets forth the location, approximate square footage, and use of each of the principal properties used by our company during the year ended December 31, 2010. We lease or sublease all of these properties. All properties are leased under operating leases. Such leases expire at various times through 2021. We have multiple sublease arrangements for approximately 40,000 square feet of office space in San Francisco, California, the terms of which expire on April 30, 2012.

 

 

 

 

 

Location

 

Approximate Square Footage

 

Use

St. Louis, Missouri

 

127,000

 

 

 

Headquarters and administrative offices of Stifel Nicolaus, Global Wealth Management operations (including CSA), and Institutional Group operations.

 

New York, New York

 

103,000

 

 

Global Wealth Management and Institutional Group operations.

Baltimore, Maryland

 

76,000

 

 

Institutional Group operations and Administrative offices.

 

San Francisco, California

 

68,000

 

Global Wealth Management and Institutional Group operations.

Florham Park, New Jersey

 

50,000

 

 

 

Global Wealth Management and Institutional Group operations.

Toronto, Ontario

 

20,000

 

Institutional Group operations.

We also maintain operations in 305 branch offices in various locations throughout the United States and in certain foreign countries, primarily for our broker-dealer business. Our Global Wealth Management segment leases 285 offices, which are primarily concentrated in the Midwest and Mid-Atlantic regions with a growing presence in the Northeast, Southeast, and Western United States. In addition, Stifel Bank leases one location in the St. Louis area for its administrative offices and operations. Our Institutional Group segment leases 19 offices in the United States and certain foreign locations. We believe that, at the present time, the space available to us in the facilities under our current leases and co-location arrangements are suitable and adequate to meet our needs and that such facilities have sufficient productive capacity and are appropriately utilized.

Leases for the branch offices of CSA, our independent contractor firm, are the responsibility of the respective independent financial advisors. The Geneva and Madrid Institutional Group branch offices are the responsibility of the respective consultancies associated with SN Ltd.

See Note 18 of the Notes to Consolidated Financial Statements for further information regarding our lease obligations.

24


ITEM 3.  LEGAL PROCEEDINGS

Our company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from our securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. Our company and its subsidiaries are also involved in other reviews, investigations, and proceedings by governmental and self-regulatory organizations regarding our business, which may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief. We are contesting the allegations in these claims, and we believe that there are meritorious defenses in each of these lawsuits, arbitrations, and regulatory investigations. In view of the number and diversity of claims against the company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be. In our opinion, based on currently available information, review with outside legal counsel, and consideration of amounts provided for in our consolidated financial statements with respect to these matters, the ultimate resolution of these matters will not have a material adverse impact on our financial position. However, resolution of one or more of these matters may have a material effect on the results of operations in any future period, depending upon the ultimate resolution of those matters and depending upon the level of income for such period.

The regulatory investigations include inquiries from the SEC and a state regulatory authority relating to our role in investments made by five Southeastern Wisconsin school districts (the "school districts") in transactions involving collateralized debt obligations ("CDO"). We are fully cooperating with the SEC and the state regulatory authority in these investigations and have provided information and testimony.

We were named in a civil lawsuit filed in the Circuit Court of Milwaukee, Wisconsin (the "Wisconsin State Court") on September 29, 2008. The lawsuit has been filed against our company, Stifel Nicolaus, Royal Bank of Canada Europe Ltd. ("RBC"), and certain other RBC entities (collectively the "Defendants") by the school districts and the individual trustees for other post-employment benefit ("OPEB") trusts established by those school districts (collectively the "Plaintiffs").

The suit arises out of purchases of certain CDO by the OPEB trusts. The RBC entities structured and served as "arranger" for the CDO. We served as the placement agent/broker in connection with the transactions.  The school districts each formed trusts that made investments designed to address their OPEB liabilities.  The total amount of the investments made by the OPEB trusts was $200.0 million. Since the investments were made, we believe their value has declined significantly and may ultimately result in a total loss for the OPEB trusts.  The Plaintiffs have asserted that the school districts contributed $37.5 million to the OPEB trusts to purchase the investments. The balance of $162.5 million used to purchase the investments was borrowed by the OPEB trusts from Depfa Bank.  The recourse of Depfa Bank, as the lender, is each of the OPEB trusts' respective assets and the moral obligation of each school district. The legal claims asserted include violation of the Wisconsin Securities Act, fraud, and negligence. The lawsuit seeks equitable relief, unspecified compensatory damages, treble damages, punitive damages, and attorney's fees and costs. The Plaintiffs claim that the RBC entities and our company either made misrepresentations or failed to disclose material facts in connection with the sale of the CDO, and thus allegedly violated the Wisconsin Securities Act. We believe the Plaintiffs reviewed and understood the relevant offering materials and that the investments were suitable based upon, among other things, our receipt of written acknowledgement of risks from each of the Plaintiffs. The Wisconsin State Court denied the Defendants' motions to dismiss, and the Defendants have responded to the allegations of the Second Amended Complaint, denying the substantive allegations and asserting various affirmative defenses. Stifel Nicolaus and the RBC entities have asserted cross-claims for indemnity and contribution against each other. We believe, based upon currently available information and review with outside counsel, that we have meritorious defenses to this lawsuit, and intend to vigorously defend all of the Plaintiffs' claims.

Prior to the acquisition of TWPG, FINRA commenced an administrative proceeding against TWP, a wholly owned broker-dealer subsidiary of TWPG, related to a transaction undertaken by a former employee in which approximately $15.7 million of ARS were sold from a TWPG account to the accounts of three customers. FINRA has alleged that TWP violated various NASD and FINRA rules, as well as Section 10(b) of the Securities Exchange Act and Rule 10b-5. TWP has filed an answer denying the substantive allegations and asserting various affirmative defenses. TWP has repurchased the ARS at issue from the customers at par. FINRA is seeking fines and other relief against TWP and the former employee. TWP is defending the FINRA proceeding vigorously.

ITEM 4.  (Removed and Reserved)

25


PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on the New York Stock Exchange and Chicago Stock Exchange under the symbol "SF." The closing sale price of our common stock as reported on the New York Stock Exchange on February 23, 2011, was $70.00. As of that date, our common stock was held by approximately 15,400 shareholders. The following table sets forth for the periods indicated the high and low trades for our common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

2009

 

 

High

 

Low

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First quarter

$

59.63

 

$

49.60

 

$

48.41

 

$

29.13

 

Second quarter

$

59.51

 

$

43.05

 

$

52.33

 

$

41.00

 

Third quarter

$

50.00

 

$

42.68

 

$

57.23

 

$

43.43

 

Fourth quarter

$

63.13

 

$

43.88

 

$

59.54

 

$

50.76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We did not pay cash dividends during 2010 or 2009 and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock is subject to several factors, including operating results, financial requirements of our company, and the availability of funds from our subsidiaries. See Note 20 of the Notes to Consolidated Financial Statements for more information on the capital restrictions placed on our broker-dealer subsidiaries and Stifel Bank.

Securities Authorized for Issuance Under Equity Compensation Plans

Information about securities authorized for issuance under our equity compensation plans is contained in Item 12 - "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."

Issuer Purchases of Equity Securities

There were no unregistered sales of equity securities during the quarter ended December 31, 2010. There were also no purchases made by or on behalf of Stifel Financial Corp. or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of our common stock during the quarter ended December 31, 2010.

We have an ongoing authorization, as amended, from the Board of Directors to repurchase our common stock in the open market or in negotiated transactions. On August 3, 2010, the Board authorized the repurchase of an additional 2,000,000 shares. At December 31, 2010, the maximum number of shares that may yet be purchased under this plan was 2,038,517.

26


Stock Performance Graph

Five-Year Shareholder Return Comparison

The graph below compares the cumulative stockholder return on our common stock with the cumulative total return of a Peer Group Index, the Standard & Poor's 500 Index ("S&P 500"), and the Securities Broker-Dealer Index for the five year period ended December 31, 2010. The AMEX Securities Broker-Dealer Index consists of twelve firms in the brokerage sector. The Broker-Dealer Index does not include our company. The stock price information shown on the graph below is not necessarily indicative of future price performance.

The material in this report is not deemed "filed" with the SEC and is not to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filings.

The following table and graph assume that $100.00 was invested on December 31, 2005, in our common stock, the Peer Group Index, the S&P 500 Index, and the AMEX Securities Broker-Dealer Index, with reinvestment of dividends.

 

 

2006

 

2007

 

2008

 

2009

 

2010

 

Stifel Financial Corp.

 

$

104

 

$

140

 

$

183

 

$

236

 

$

248

 

Peer Group

 

$

135

 

$

132

 

$

91

 

$

122

 

$

139

 

S&P 500 Index

 

$

116

 

$

122

 

$

77

 

$

97

 

$

112

 

AMEX Securities Broker-Dealer Index

 

$

123

 

$

106

 

$

39

 

$

59

 

$

62

 

* Compound Annual Growth Rate

27


The Peer Group Index consists of the following companies that serve the same markets as us and which compete with us in one or more markets:

 

 

 

 

Oppenheimer Holdings, Inc.

 

SWS Group, Inc.

 

Sanders Morris Harris Group Inc.

 

Stifel Financial Corp.

 

Raymond James Financial, Inc.

 

Piper Jaffray Companies

 

 

28


ITEM 6.  SELECTED FINANCIAL DATA

The following selected consolidated financial data (presented in thousands, except per share amounts) is derived from our consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto and with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 

 

Year Ended December 31,

 

 

 

2010

 

2009

 

2008

 

2007

 

2006

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal transactions

 

$

453,533

 

458,188

 

293,285

 

$

139,248

 

$

86,365

 

Commissions

 

 

445,260

 

 

345,520

 

 

341,090

 

 

315,514

 

 

199,056

 

Investment banking

 

 

218,104

 

 

125,807

 

 

83,710

 

 

169,413

 

 

82,856

 

Asset management and service fees

 

 

193,159

 

 

117,357

 

 

122,773

 

 

101,610

 

 

57,713

 

Interest

 

 

65,326

 

 

46,860

 

 

50,148

 

 

59,071

 

 

35,804

 

Other income/(loss)

 

 

19,855

 

 

9,138

 

 

(2,159

)

 

8,234

 

 

9,594

 

Total revenues

 

 

1,395,237

 

 

1,102,870

 

 

888,847

 

 

793,090

 

 

471,388

 

Interest expense

 

 

13,211

 

 

12,234

 

 

18,510

 

 

30,025

 

 

19,581

 

Net revenues

 

 

1,382,026

 

 

1,090,636

 

 

870,337

 

 

763,065

 

 

451,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

1,056,202

 

 

718,115

 

 

582,778

 

 

543,021

 

 

329,703

 

Occupancy and equipment rental

 

 

115,742

 

 

89,741

 

 

67,984

 

 

57,796

 

 

30,751

 

Communications and office supplies

 

 

69,929

 

 

54,745

 

 

45,621

 

 

42,355

 

 

26,666

 

Commissions and floor brokerage

 

 

26,301

 

 

23,416

 

 

13,287

 

 

9,921

 

 

6,388

 

Other operating expenses

 

 

114,081

 

 

84,205

 

 

68,898

 

 

56,126

 

 

31,930

 

Total non-interest expenses

 

 

1,382,255

 

 

970,222

 

 

778,568

 

 

709,219

 

 

425,438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

(229

 

120,414

 

 

91,769

 

 

53,846

 

 

26,369

 

Provision for income taxes

 

 

(2,136

) 

 

44,616

 

 

36,267

 

 

21,676

 

 

10,938

 

Net income

 

$

1,907

 

$

75,798

 

$

55,502

 

$

32,170

 

$

15,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

$

2.68

 

$

2.31

 

$

1.48

 

$

0.89

 

Diluted

 

$

0.05

 

$

2.35

 

$

1.98

 

$

1.25

 

$

0.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

32,482

 

 

28,297

 

 

24,069

 

 

21,754

 

 

17,269

 

Diluted

 

 

38,448

 

 

32,294

 

 

28,073

 

 

25,723

 

 

20,863

 

Financial Condition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,218,030

 

$

3,167,356

 

$

1,558,145

 

$

1,499,440

 

$

1,084,774

 

Long-term obligations

 

$

90,741

 

$

101,979

 

$

106,860

 

$

124,242

 

$

98,379

 

Shareholders' equity

 

$

1,258,798

 

$

873,446

 

$

593,185

 

$

424,637

 

$

220,265

 

On May 12, 2008, our Board of Directors approved a 50% stock dividend, in the form of a three-for-two stock split, of our common stock payable on June 12, 2008 to stockholders of record as of May 29, 2008. Per share data, for all periods presented, have been adjusted to give effect to this stock split.

The following items should be considered when comparing the data from year-to-year: 1) the continued expansion of our Private Client Group, including the acquisition of MJSK in December 2006; 2) the acquisition of Ryan Beck in February 2007; 3) the acquisition of FirstService Bank in April 2007; 4) the acquisition of Butler Wick on December 31, 2008; 5) the acquisition of the UBS Acquired Locations during the third and fourth quarters of 2009; 6) the merger with TWPG on July 1, 2010; and 7) the acceleration of our deferred compensation expense during 2010 as a result of the plan modification. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," made part hereof, for a discussion of these items and other items that may affect the comparability of data from year-to-year.

29


ITEM 7.  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 this Annual Report on Form 10-K for the year ended December 31, 2010.

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.

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 July 1, 2010, we acquired Thomas Weisel Partners Group, Inc. ("TWPG"), an investment bank focused principally on the growth sectors of the economy, which generated revenues from three principal sources: investment banking, brokerage, and asset management. The investment banking group is comprised of two primary categories of services: corporate finance and strategic advisory. The brokerage group provided equity sales and trading services to institutional investors and offered brokerage and advisory services to high net worth individuals and corporate clients. The asset management group consists of: private investment funds, public equity investment products, and distribution management. We believe the combination of our company and TWPG will allow us to realize the benefits of the firms' highly complementary investment banking and research platforms; accelerate our investment banking business growth by expanding our presence in key growth areas of the global economy, particularly in Technology, Healthcare, and Natural Resources; raise our profile within the venture capital community, where TWPG maintains key relationships; enhance our mergers and acquisitions advisory services and equities lead manager credentials; and realize benefits from the expansion of our west coast market presence and the expansion of our international capabilities through the operations of SN Canada.

The employees of the investment banking, research, and institutional brokerage businesses of Thomas Weisel Partners, LLC ("TWP"), a wholly owned subsidiary of TWPG, were transitioned into Stifel Nicolaus during the third quarter of 2010. TWP will remain a wholly owned broker-dealer subsidiary of our company.

30


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, our expansion of the Institutional Group segment, and the continued expansion of our Global Wealth Management segment. Despite the significant volatility in the market during the first half of 2010, we began to see signs of improvement in the capital markets during the third and fourth quarters of 2010. At December 31, 2010, the key indicators of the markets' performance, the Dow Jones Industrial Average, the NASDAQ, and the S&P 500 closed 11.0%, 16.9%, and 12.8%, respectively, higher than their December 31, 2009 closing prices.

Results for the year ended December 31, 2010

For the year ended December 31, 2010, our net revenues increased 26.7% to a record $1.4 billion compared to $1.1 billion for the prior year, which represents our fifteenth consecutive annual increase in net revenues. Net income decreased 97.5% to $1.9 million for the year ended December 31, 2010, compared to $75.8 million in 2009. Net income for 2010 included several significant expense items (after-tax): (1) $106.4 million of deferred compensation expense due to the modification of our deferred compensation plan, and (2) merger-related expenses of $16.5 million related to the merger with TWPG.

Our revenue growth was primarily derived from improved equity market conditions, the acquisition of the UBS Acquired Locations at the end of 2009, and the recently completed merger with TWPG. The increase in financial advisors, client assets, and productivity and the improving equity capital markets have contributed to the increase in our commissions and asset management fee revenues. Principal transactions revenues, while positively impacted by the improved equity market conditions, remained relatively consistent with 2009 as challenging fixed income market conditions negatively impacted our principal transaction revenues. Our fixed income institutional brokerage business was negatively impacted by the challenging fixed income market conditions during 2010, which contributed to lower trading volumes and the tightening of corporate bond spreads. The improved market conditions and our merger with TWPG have contributed to the improvement in our investment banking revenues from 2009. Our business does not produce predictable earnings and is affected by many risk factors, such as the global economic and credit slowdown, among others.

While we have experienced an increase in market share due to market upheaval, we have incurred additional expenses related to increased SIPC assessments, higher FDIC premiums, including special assessments, increased litigation costs, and an increase in the cost of growth as we continue our expansion efforts. These additional costs have reduced our profit margins and may continue to do so in the future if our revenue growth does not absorb the additional costs of operating in the current environment. In addition to our increased operating costs resulting from organic growth, we incurred significant costs related to the acquisition of TWPG and a significant increase in compensation and benefits expense resulting from the acceleration of our deferred compensation plan, which aligned the requirements for vesting with that of the TWPG deferred compensation plan.

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.

Although we do not engage in significant proprietary trading for our own account, the inventory of securities held to facilitate customer trades and our market-making activities are sensitive to market movements. We do not have any significant direct exposure to the sub-prime market, but are subject to market fluctuations resulting from news and corporate events in the sub-prime mortgage markets, associated write-downs by other financial services firms, and interest rate fluctuations. Stock prices for companies in this industry, including Stifel Financial Corp., have been volatile as a result of reactions to the global credit crisis and the continued volatility in the financial services industry.

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. This increased focus has resulted in the Dodd-Frank Act, which was signed into law during the third quarter of 2010. The Dodd-Frank Act 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.

31


RESULTS OF OPERATIONS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31,

 

Percentage
Change

 

 

As a Percentage of
Net Revenues
for the Year Ended
December 31,

 

 

 

2010

 

2009

 

2008

 

2010 vs. 2009

 

2009 vs. 2008

 

 

2010

 

2009

 

2008

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal transactions

 

$

453,533

 

$

458,188

 

$

293,285

 

(1.0)

%

56.2

%

 

32.8

%

42.0

%

33.7

%

Commissions

 

 

445,260

 

 

345,520

 

 

341,090

 

28.9

 

1.3

 

 

32.2

 

31.7

 

39.2

 

Investment banking

 

 

218,104

 

 

125,807

 

 

83,710

 

73.4

 

50.3

 

 

15.8

 

11.5

 

9.6

 

Asset management and service fees

 

 

193,159

 

 

117,357

 

 

122,773

 

64.6

 

(4.4

)

 

14.0

 

10.8

 

14.1

 

Interest

 

 

65,326

 

 

46,860

 

 

50,148

 

39.4

 

(6.6

)

 

4.7

 

4.3

 

5.7

 

Other income/(loss)

 

 

19,855

 

 

9,138

 

 

(2,159

117.3

 

*

 

 

1.5

 

0.8

 

(0.2

)

Total revenues

 

 

1,395,237

 

 

1,102,870

 

 

888,847

 

26.5

 

24.1

 

 

101.0

 

101.1

 

102.1

 

Interest expense

 

 

13,211

 

 

12,234

 

 

18,510

 

8.0

 

(33.9

)

 

1.0

 

1.1

 

2.1

 

Net revenues

 

 

1,382,026

 

 

1,090,636

 

 

870,337

 

26.7

 

25.3

 

 

100.0

 

100.0

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

1,056,202

 

 

718,115

 

 

582,778

 

47.1

 

23.2

 

 

76.4

 

65.8

 

67.0

 

Occupancy and equipment rental

 

 

115,742

 

 

89,741

 

 

67,984

 

29.0

 

32.0

 

 

8.4

 

8.2

 

7.8

 

Communication and office supplies

 

 

69,929

 

 

54,745

 

 

45,621

 

27.7

 

20.0

 

 

5.1

 

5.0

 

5.2

 

Commissions and floor brokerage

 

 

26,301

 

 

23,416

 

 

13,287

 

12.3

 

76.2

 

 

1.9

 

2.2

 

1.5

 

Other operating expenses

 

 

114,081

 

 

84,205

 

 

68,898

 

35.5

 

22.2

 

 

8.3

 

7.8

 

7.9

 

Total non-interest expenses

 

 

1,382,255

 

 

970,222

 

 

778,568

 

42.5

 

24.6

 

 

100.1

 

89.0

 

89.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

(229

)

 

120,414

 

 

91,769

 

(100.0

31.2

 

 

(0.1

)

11.0

 

10.6

 

Provision for income taxes

 

 

(2,136

)

 

44,616

 

 

36,267

 

(104.8

23.0

 

 

(0.2

4.1

 

4.2

 

Net income

 

$

1,907

 

$

75,798

 

$

55,502

 

(97.5)

%

36.6

%

 

0.1

%

6.9

%

6.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Percentage not meaningful.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2010, our net revenues increased 26.7% to a record $1.4 billion compared to $1.1 billion for the prior year, which represents our fifteenth consecutive annual increase in net revenues. Net income decreased 97.5% to $1.9 million for the year ended December 31, 2010, compared to $75.8 million in 2009. Net income for 2010 included several significant expense items (after-tax): (1) $106.4 million of deferred compensation expense due to the modification of our deferred compensation plan, and (2) merger-related expenses of $16.5 million related to the merger with TWPG.

32


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

 

 

 

2010

 

2009

 

2008

 

2010 vs. 2009

 

2009 vs. 2008

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal transactions

 

$

453,533

 

$

458,188

 

$

293,285

 

 

(1.0)

%

 

56.2

%

Commissions

 

 

445,260

 

 

345,520

 

 

341,090

 

 

28.9

 

 

1.3

 

Investment banking:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital raising

 

 

135,898

 

 

76,563

 

 

45,205

 

 

77.5

 

 

69.4

 

Advisory

 

 

82,206

 

 

49,244

 

 

38,505

 

 

66.9

 

 

27.9

 

 

 

 

218,104

 

 

125,807

 

 

83,710

 

 

73.4

 

 

50.3

 

Asset management and service fees

 

 

193,159

 

 

117,357

 

 

122,773

 

 

64.6

 

 

(4.4

)

Net interest

 

 

52,115

 

 

34,626

 

 

31,638

 

 

50.5

 

 

9.4

 

Other income/(loss)

 

 

19,855

 

 

9,138

 

 

(2,159

 

117.3

 

 

*

 

Total net revenues

 

1,382,026

 

1,090,636

 

$

870,337

 

 

26.7

%

 

25.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*     Percentage is not meaningful.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2010 Compared With Year Ended December 31, 2009

Except as noted in the following discussion of variances, 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, the increased number of revenue producers in our Institutional Group segment, and the acquisitions of the UBS Acquired Locations during the third and fourth quarters of 2009 and TWPG on July 1, 2010. The results of operations for the UBS Acquired Locations are included in our results prospectively from the date of their respective acquisitions. For the year ended December 31, 2010, the acquisition generated net revenues of $111.4 million compared to $27.1 million during 2009. The prior year revenues of the UBS Acquired Locations were generated from the date of acquisition through the end of the year. The investment banking, research, and institutional brokerage businesses of TWPG were integrated with Stifel Nicolaus immediately after the merger; therefore, the revenues, expenses, and net income of the integrated businesses are not distinguishable within the results of our company.

Principal transactions - For the year ended December 31, 2010, principal transactions revenues decreased 1.0% to $453.5 million from $458.2 million in 2009. The growth of our company, both organically and through acquisitions, has been negatively impacted by the challenging fixed income market conditions that existed during most of 2010, which significantly impacted the flow in our fixed income business. The decline in principal transactions from 2009 is primarily attributable to decreases in revenue from corporate bonds and mortgage-backed securities.

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, 2010, commission revenues increased 28.9% to $445.3 million from $345.5 million in the prior year. The increase is primarily attributable to an increase in the number of financial advisors, client assets, and higher productivity.

Investment banking - Investment banking revenues include: (i) capital-raising revenues representing fees earned from the underwriting of debt and equity securities, (ii) sales credits, and (iii) 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 year ended December 31, 2010, investment banking revenues increased $92.3 million, or 73.4%, to $218.1 million from $125.8 million in 2009. The increase was primarily attributable to our acquisition of TWPG on July 1, 2010, and improved equity markets during the second half of 2010.

33


For the year ended December 31, 2010, capital-raising revenues increased $59.3 million, or 77.5%, to $135.9 million from $76.6 million in 2009. For the year ended December 31, 2010, equity capital-raising revenues increased 76.2% to $92.6 million from $52.6 million in 2009. For the year ended December 31, 2010, fixed income capital-raising revenues increased 34.8% to $26.8 million from $19.9 million in 2009.

For the year ended December 31, 2010, strategic advisory fees increased 66.9% to $82.2 million from $49.2 million in the prior year. The increase is primarily attributable to an increase in the number of completed equity transactions and the aggregate transaction value from the prior year.

Asset management and service fees - Asset management and service fees include fees for asset-based financial services provided to individuals and institutional clients, fees from investment partnerships we manage, and fees we earn from the management of equity distributions we receive from our clients. Asset management and service 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, 2010, asset management and service fee revenues increased 64.6% to $193.2 million from $117.4 million in 2009. The increase is primarily a result of an increase in the value of assets in fee-based accounts, the number of managed accounts during 2010, and the impact of the addition of the TWPG asset management business.  During the year ended December 31, 2010, we experienced a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers of approximately $50.0 million compared to approximately $30.0 million in the prior year. 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, 2010, other income increased $10.8 million to $19.9 million from $9.1 million in 2009. The increase is primarily attributable to an increase in investment gains on our private equity investments, which were acquired from TWPG, of $4.8 million and the recognition of a $2.1 million gain on the conversion of our seat membership on the Chicago Board Options Exchange to shares in conjunction with its initial public offering during the second quarter of 2010 and an increase in mortgage fees due to the increase in loan originations at Stifel Bank.

Year Ended December 31, 2009 Compared With Year Ended December 31, 2008

Except as noted in the following discussion of variances, 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, the increased number of revenue producers in our Capital Markets segment, the acquisition of Butler Wick on December 31, 2008, and the closing of the UBS Acquired Locations acquisition during the third and fourth quarters of 2009. The results of operations for the UBS Acquired Locations are included in our results prospectively from the date of their respective conversion. For the year ended December 31, 2009, these business acquisitions generated net revenues of $23.0 million and $27.1 million, respectively.

Principal transactions - For the year ended December 31, 2009, principal transactions revenue increased 56.2% to $458.2 million from $293.3 million in 2008. The increase was primarily attributable to increased principal transactions, primarily in corporate debt, over-the-counter ("OTC") equity, mortgage-backed bonds, and municipal debt as a result of turbulent markets and customers returning to traditional fixed income products.

Commissions - For the year ended December 31, 2009, commission revenues increased 1.3% to $345.5 million from $341.1 million in 2008. While the equity markets began showing signs of improvement during the second half of 2009, the volatility in capital markets during the first half of 2009 resulted in modest revenue growth for the year ended December 31, 2009. The continued expansion of our private client group through acquisitions and organic growth was offset by a decrease in trading volumes, as customers returned to traditional fixed income products.

Investment banking - For the year ended December 31, 2009, investment banking revenues increased 50.3% to $125.8 million from $83.7 million in the prior year.

Capital-raising revenues increased 69.4% to $76.6 million for the year ended December 31, 2009, from $45.2 million in 2008. Equity and fixed income capital-raising revenues were $52.6 million and $19.9 million, respectively, an increase of $23.8 million, or 82.6%, and $8.6 million, or 76.2%, respectively, from the prior year.

34


During the second half of 2009, capital market conditions continued to build upon the improvement that began in the second quarter for both equity and fixed income, and we raised capital for our clients in a number of successful corporate and public finance underwritings. The significant rebound in equity and fixed income financings during the second half of 2009 was offset by the challenging market conditions that began during the second half of 2008 and continued into the first half of 2009.

Strategic advisory fees increased 27.9% to $49.2 million for the year ended December 31, 2009, from $38.5 million in 2008. The increase is primarily attributable to an increase in the number of completed equity transactions and the aggregate transaction value over the prior year.

Asset management and service fees - For the year ended December 31, 2009, asset management and service fee revenues decreased 4.4% to $117.4 million from $122.8 million in 2008. The decrease was primarily a result of a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers and lower assets under management as a result of market depreciation, offset by an increase in the number of managed accounts attributable principally to the continued growth of the private client group.  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, 2009, other income increased $11.3 million to $9.1 million from a loss of $2.2 million in 2008. The increase was primarily attributable to the reduction of investment losses during the year ended December 31, 2009, offset by the recognition of other-than-temporary impairment of $1.9 million on our held-to-maturity debt security.

35


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, 2010

 

December 31, 2009

 

December 31, 2008

 

 

Average Balance

 

Interest Income/ Expense

 

Average Interest Rate

 

Average Balance

 

Interest Income/ Expense

 

Average Interest Rate

 

Average Balance

 

Interest Income/ Expense

 

Average Interest Rate

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Margin balances (Stifel Nicolaus)

 

$

385,040

 

$

16,532

 

4.29

%

 

$

290,043

 

$

12,499

 

4.31

%

 

$

382,536

 

$

20,930

 

5.47

%

Interest-earning assets (Stifel Bank) *

 

 

1,293,339

 

 

35,146

 

2.72

%

 

 

687,232

 

 

20,283

 

2.95

%

 

 

273,893

 

 

15,253

 

5.57

%

Stock borrow (Stifel Nicolaus)

 

 

78,313

 

 

22

 

0.03

%

 

 

32,588

 

 

43

 

0.13

%

 

 

61,097

 

 

733

 

1.20

%

Other (Stifel Nicolaus)

 

 

 

 

 

13,626

 

 

 

 

 

 

 

 

14,035

 

 

 

 

 

 

 

 

13,232

 

 

 

Total interest revenue

 

 

 

 

$

65,326

 

 

 

 

 

 

 

$

46,860

 

 

 

 

 

 

 

$

50,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

Short-term borrowings (Stifel Nicolaus)

 

108,784

 

$

1,102

 

1.01

%

 

$

107,383

 

$

1,065

 

0.99

%

 

$

132,660

 

$

3,021

 

2.28

%

Interest-bearing liabilities (Stifel Bank) *

 

 

1,191,747

 

 

5,188

 

0.44

 

 

626,754

 

 

4,649

 

0.74

%

 

 

229,205

 

 

5,434

 

2.37

%

Stock loan (Stifel Nicolaus)

 

 

69,507

 

 

1,071

 

1.54

%

 

 

53,110

 

 

570

 

1.07

%

 

 

105,424

 

 

2,608

 

2.47

%

Interest-bearing liabilities (Capital Trusts)

 

 

82,500

 

 

5,077

 

6.15

%

 

 

82,500

 

 

5,488

 

6.65

%

 

 

93,019

 

 

6,233

 

6.70

%

Other (Stifel Nicolaus)

 

 

 

 

 

773

 

 

 

 

 

 

 

 

462

 

 

 

 

 

 

 

 

1,214

 

 

 

Total interest expense

 

 

 

 

13,211

 

 

 

 

 

 

 

12,234

 

 

 

 

 

 

 

$

18,510

 

 

 

Net interest income

 

 

 

 

$

52,115

 

 

 

 

 

 

 

$

34,626

 

 

 

 

 

 

 

$

31,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* 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, 2010 Compared With Year Ended December 31, 2009

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, 2010, net interest income increased 50.5% to $52.1 million from $34.6 million in 2009.

For the year ended December 31, 2010, interest revenue increased 39.4%, or $18.4 million, to $65.3 million from $46.9 million in 2009, principally as a result of a $14.9 million increase in interest revenue generated from the interest-earning assets of Stifel Bank and a $4.0 million increase in interest revenue from customer margin borrowing. The average interest-earning assets of Stifel Bank increased to $1.3 billion during the year ended December 31, 2010, compared to $687.2 million in 2009 at weighted average interest rates of 2.72% and 2.95%, respectively. The average margin balances of Stifel Nicolaus increased to $385.0 million during the year ended December 31, 2010, compared to $290.0 million in 2009 at weighted average interest rates of 4.29% and 4.31%, respectively.

For the year ended December 31, 2010, interest expense increased 8.0% to $13.2 million from $12.2 million in 2009. See "Net Interest Income" table above for more details.

36


Year Ended December 31, 2009 Compared With Year Ended December 31, 2008

Net interest income - For the year ended December 31, 2009, net interest income increased 9.4% to $34.6 million from $31.6 million in 2008.

For the year ended December 31, 2009, interest revenue decreased 6.6%, or $3.3 million, to $46.9 million from $50.1 million in 2008, principally as a result of an $8.4 million decrease in interest revenue from customer margin borrowing, offset by increased interest revenues of $5.0 million from the interest-earning assets of Stifel Bank. The average margin balances of Stifel Nicolaus decreased to $290.0 million for the year ended December 31, 2009, compared to $382.5 million in 2008 at weighted average interest rates of 4.31% and 5.47%, respectively. The average interest-earning assets of Stifel Bank increased to $687.2 million for the year ended December 31, 2009, compared to $273.9 million in 2008 at weighted average interest rates of 2.95% and 5.57%, respectively.

For the year ended December 31, 2009, interest expense decreased 33.9%, or $6.3 million, to $12.2 million from $18.5 million in the prior year. The decrease was due to decreased interest rates charged by banks on lower levels of borrowings to finance customer borrowing and firm inventory, decreased interest rates on stock loan borrowings, and the extinguishment of $12.5 million of 6.78% Stifel Financial Capital Trust IV Cumulative Preferred Securities in November 2008. See "Net Interest Income" table above for more details.

NON-INTEREST EXPENSES

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

 

 

For the Year Ended December 31,

 

Percentage Change

 

 

 

2010

 

2009

 

2008

 

2010 vs. 2009

 

2009 vs. 2008

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

1,056,202

 

$

718,115

 

$

582,778

 

 

47.1

%

 

23.2

%

Occupancy and equipment rental

 

 

115,742

 

 

89,741

 

 

67,984

 

 

29.0

 

 

32.0

 

Communications and office supplies

 

 

69,929

 

 

54,745

 

 

45,621

 

 

27.7

 

 

20.0

 

Commissions and floor brokerage

 

 

26,301

 

 

23,416

 

 

13,287

 

 

12.3

 

 

76.2

 

Other operating expenses

 

 

114,081

 

 

84,205

 

 

68,898

 

 

35.5

 

 

22.2

 

Total non-interest expenses

 

1,382,255

 

970,222

 

$

778,568

 

 

42.5

%

 

24.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2010 Compared With Year Ended December 31, 2009

Except as noted in the following discussion of variances, the increase in non-interest expenses can be attributed principally to our continued expansion, both organically and through our acquisitions of TWPG on July 1, 2010, and the UBS Acquired Locations in the third and fourth quarters of 2009, and an increase in administrative overhead to support our growth.

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 year ended December 31, 2010, compensation and benefits expense increased 47.1%, or $338.1 million, to $1.1 billion from $718.1 million in 2009. The increase is primarily attributable to an increase in deferred compensation expense as a result of the modification of our deferred compensation plan. We accelerated all unvested deferred compensation as a result of the plan modification resulting in a non-cash, pre-tax charge of $179.5 million.

37


Excluding the acceleration of deferred compensation expenses and merger-related expenses, compensation and benefits expense as a percentage of net revenues was 62.9% for the year ended December 31, 2010, compared to 65.8% in 2009.

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 $79.8 million (5.8% of net revenues) for the year ended December 31, 2010, compared to $56.2 million (5.2% of net revenues) in 2009. The upfront notes are amortized over a five- to ten-year period if the individual satisfies certain conditions, usually based on continued employment and certain performance standards.

Occupancy and equipment rental - For the year ended December 31, 2010, occupancy and equipment rental expense increased 29.0% to $115.7 million from $89.7 million during the year ended December 31, 2009. The increase was attributable to additional occupancy expense from organic growth and our merger with TWPG, including costs related to abandonment of certain leased property as a result of our continued integration effort. As of December 31, 2010, we had 312 locations compared to 294 at December 31, 2009.

Communications and office supplies - Communications expense includes costs for telecommunication and data communication, primarily for obtaining third-party market data information. For the year ended December 31, 2010, communications and office supplies expense increased 27.7% to $69.9 million from $54.7 million in 2009.

Commissions and floor brokerage - For the year ended December 31, 2010, commissions and floor brokerage expense increased 12.3% to $26.3 million from $23.4 million in 2009.

Other operating expenses - Other operating expenses primarily include license and registration fees, litigation-related expenses, which consist of amounts we reserve and/or pay out related to legal and regulatory matters, travel and entertainment, promotional expenses, and expenses for professional services.

For the year ended December 31, 2010, other operating expenses increased 35.5% to $114.1 million from $84.2 million during the year ended December 31, 2009. The increase is primarily attributable to the continued growth in all segments during 2010, which included increased license and registration fees, SIPC and FDIC assessments, securities processing fees, travel and promotion, transaction costs associated with the TWPG acquisition, and legal expenses. The increase in legal expenses is attributable to an increase in the number of customer claims arising from volatile market conditions. We are subject to various proceedings and claims arising primarily from our securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters.

Provision for income taxes/(benefit) - For the year ended December 31, 2010, our provision for income taxes was a benefit of $2.1 million compared to expense of $44.6 million in 2009.

The current year effective tax rate was impacted by state tax adjustments, a change in our valuation allowance, and an increase in the rate applied to our deferred tax assets, all of which had a noticeable impact on our effective rate because of the small pre-tax loss we incurred for the year. The effective tax rate for the year ended December 31, 2009, was reduced due to the recognition of a tax benefit related to an investment and jobs creation tax credit during the third quarter of 2009.

38


Year Ended December 31, 2009 Compared With Year Ended December 31, 2008

Except as noted in the following discussion of variances, the increase in non-interest expenses was attributable principally to our continued expansion, increased administrative overhead to support the growth in our segments, and the transaction costs associated with the UBS Acquired Locations acquisition.

Compensation and benefits - For the year ended December 31, 2009, compensation and benefits expense increased 23.2%, or $135.3 million, to $718.1 million from $582.8 million in 2008. The increase in compensation and benefits expense was primarily attributable to increased headcount and higher production-based variable compensation.

Compensation and benefits expense as a percentage of net revenues decreased to 65.8% for the year ended December 31, 2009, from 67.0% in 2008. The decrease in compensation and benefits expense as a percent of net revenues was primarily attributable to increased net revenues as compared to the year ended December 31, 2008, offset by an increase in transition pay and base salaries.

A portion of compensation and benefits expense includes transition pay of $56.2 million (5.2% of net revenues) for the year ended December 31, 2009, compared to $34.3 million (3.9% of net revenues) in 2008. In addition, for the year ended December 31, 2008, compensation and benefits expense included $25.6 million for amortization of units awarded to Legg Mason ("LM Capital Markets") associates, which were fully amortized as of December 31, 2008.

Occupancy and equipment rental - For the year ended December 31, 2009, occupancy and equipment rental expense increased 32.0% to $89.7 million from $68.0 million in 2008. The increase was primarily due to the continued expansion of our segments, which increased our rent and depreciation expense.  As of December 31, 2009, we had 294 locations compared to 225 at December 31, 2008.

Communications and office supplies - For the year ended December 31, 2009, communications and office supplies expense increased 20.0% to $54.7 million from $45.6 million in 2008. The increases were primarily attributable to our continued expansion as we sustained our growth initiatives throughout 2009.

Commissions and floor brokerage - For the year ended December 31, 2009, commissions and floor brokerage expense increased 76.2% to $23.4 million from $13.3 million in 2008. The increase from the prior year is attributable to a rebate of $1.5 million received during the first quarter of 2008 related to 2007 clearing fees. We received no such rebates in 2009.

Other operating expenses - For the year ended December 31, 2009, other operating expenses increased 22.2% to $84.2 million from $68.9 million in 2008.

The increase was primarily attributable to the continued growth in all segments during 2009, which included increased license and registration fees, SIPC assessments, securities processing fees, travel and promotion, legal expenses, and the UBS Acquired Locations acquisition costs of $3.4 million. The increase in legal expenses was attributable to an increase in litigation associated with ARS investigations and litigation costs to defend industry recruitment claims.

Provision for income taxes - For the year ended December 31, 2009, our provision for income taxes was $44.6 million, representing an effective tax rate of 37.1%, compared to $36.3 million in 2008, representing an effective tax rate of 39.5%. Our 2009 effective tax rate was reduced due to the recognition of a tax benefit of $3.4 million during the third quarter related to an investment and jobs creation tax credit.

39


SEGMENT ANALYSIS

Our reportable segments include Global Wealth Management, Institutional Group, and Other. The UBS Acquired Locations acquisition and related customer account conversion to our platform has enabled us to leverage our customers' assets, which allows us the ability to provide a full array of financial products to both our private client group and Stifel Bank customers. As a result, during the third quarter of 2009, we changed how we manage these reporting units, and consequently, they were combined to form the Global Wealth Management segment. Previously reported segment information has been revised to reflect this change.

As a result of organizational changes in the second quarter of 2009, which included a change in the management reporting structure of our company, the segments formerly reported as Equity Capital Markets and Fixed Income Capital Markets have been combined into a single segment called Institutional Group. Previously reported segment information has been revised to reflect this change.

Our Global Wealth Management segment consists of two businesses, the private client group and Stifel Bank.  The private client group includes branch offices and independent contractor offices of our broker-dealer subsidiaries located throughout the United States, primarily in the Midwest and Mid-Atlantic regions with a growing presence in the Northeast, Southeast, and Western United States. These branches provide securities brokerage services, including the sale of equities, mutual funds, fixed income products, and insurance, as well as offering banking products to their private clients through Stifel Bank, which provides residential, consumer, and commercial lending, as well as Federal Depository Insurance Corporation-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public.

The Institutional Group segment includes institutional sales and trading. It provides securities brokerage, trading, and research services to institutions, with an emphasis on the sale of equity and fixed income products. This segment also includes the management of and participation in underwritings for both corporate and public finance (exclusive of sales credits, which are included in the Global Wealth Management segment), merger and acquisition, and financial advisory services.

The Other segment includes interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, compensation expense associated with the deferred compensation plan modification, and all unallocated overhead cost associated with the execution of orders; processing of securities transactions; custody of client securities; receipt, identification, and delivery of funds and securities; compliance with regulatory and legal requirements; internal financial accounting and controls; and general administration and acquisition charges primarily related to the TWPG acquisition.

We evaluate the performance of our segments and allocate resources to them based on various factors, including prospects for growth, return on investment, and return on revenues.

40


 Results of Operations - Global Wealth Management

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31,

 

Percentage
Change

 

 

As a Percentage of
Net Revenues
for the Year Ended
December 31,

 

 

 

2010

 

2009

 

2008

 

2010 vs. 2009

 

2009 vs. 2008

 

 

2010

 

2009

 

2008

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

$

321,541

 

$

234,052

 

$

191,542

 

37.4

%

22.2

%

 

38.2

%

39.3

%

40.4

%

Principal transactions

 

 

239,851

 

 

194,384

 

 

124,578

 

23.4

 

56.0

 

 

28.4

 

32.6

 

26.3

 

Asset management and service fees

 

 

192,073

 

 

116,818

 

 

121,894

 

64.4

 

(4.2

)

 

22.8

 

19.6

 

25.7

 

Interest

 

 

54,543

 

 

35,269

 

 

38,207

 

54.6

 

(7.7

)

 

6.5

 

5.9

 

8.1

 

Investment banking

 

 

22,768

 

 

14,906

 

 

15,515

 

52.7

 

(3.9

)

 

2.7

 

2.5

 

3.3

 

Other income/(loss)

 

 

22,202

 

 

8,626

 

 

(1,174

157.4

 

*

 

 

2.6

 

1.5

 

(0.2

)

Total revenues

 

 

852,978

 

 

604,055

 

 

490,562

 

41.2

 

23.1

 

 

101.2

 

101.4

 

103.5

 

Interest expense

 

 

9,709

 

 

8,081

 

 

16,710

 

20.1

 

(51.6

)

 

1.2

 

1.4

 

3.5

 

Net revenues

 

 

843,269

 

 

595,974

 

 

473,852

 

41.5

 

25.8

 

 

100.0

 

100.0

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

503,456

 

 

370,157

 

 

289,207

 

36.0

 

28.0

 

 

59.7

 

62.1

 

61.0

 

Occupancy and equipment rental

 

 

60,886

 

 

50,487

 

 

36,200

 

20.6

 

39.5

 

 

7.2

 

8.5

 

7.6

 

Communication and office supplies

 

 

31,356

 

 

26,628

 

 

19,341

 

17.8

 

37.7

 

 

3.7

 

4.4

 

4.1

 

Commissions and floor brokerage

 

 

12,126

 

 

7,606

 

 

4,452

 

59.4

 

70.9

 

 

1.5

 

1.3

 

0.9

 

Other operating expenses

 

 

41,422

 

 

36,397

 

 

23,708

 

13.8

 

53.5

 

 

4.9

 

6.1

 

5.0

 

Total non-interest expenses

 

 

649,246

 

 

491,275

 

 

372,908

 

32.2

 

31.7

 

 

77.0

 

82.4

 

78.7

 

Income before income taxes

 

$

194,023

 

$

104,699

 

$

100,944

 

85.3

%

3.7

 %

 

23.0

%

17.6

%

21.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*     Percentage is not meaningful.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

December 31, 2009

 

 

December 31, 2008

 

Branch offices (actual)

 

 

285

 

 

272

 

 

196

 

Financial advisors (actual)

 

 

1,775

 

 

1,719

 

 

1,142

 

Independent contractors (actual)

 

 

160

 

 

166

 

 

173

 

 

 

 

 

 

 

 

 

 

 

 

Assets in fee-based accounts:

 

 

 

 

 

 

 

 

 

 

Value (in thousands)

 

$

13,001,502

 

$

9,309,775

 

$

5,775,565

 

Number of accounts (actual)

 

 

57,220

 

 

44,071

 

 

24,177

 

 

 

 

 

 

 

 

 

 

 

 

41


Year Ended December 31, 2010 Compared With Year Ended December 31, 2009

NET REVENUES

For the year ended December 31, 2010, Global Wealth Management net revenues increased 41.5% to $843.3 million from $596.0 million in 2009. The increase in net revenues for the year ended December 31, 2010, from the prior year is attributable to growth across all revenue line items, primarily due to an increase in financial advisors and client assets resulting from the acquisition of the UBS Acquired Locations during the third and fourth quarters of 2009 and the acquisition of TWPG on July 1, 2010. For the year ended December 31, 2010, revenues generated in the Global Wealth Management segment from the UBS Acquired Locations was $111.4 million compared to $27.1 million in 2009. The prior year revenues of the UBS Acquired Locations were generated from the date of acquisition through the end of the year.

Commissions - For the year ended December 31, 2010, commission revenues increased 37.4% to $321.5 million from $234.1 million in 2009. The increase is primarily attributable to an increase in agency transactions in mutual fund and insurance products. These increases are primarily attributable to an increase in the number of financial advisors, client assets, and higher productivity. In addition, the market turmoil and downturns, which were at unprecedented levels at the beginning of 2009, have improved in 2010.

Principal transactions - For the year ended December 31, 2010, principal transactions revenues increased 23.4% to $239.9 million from $194.4 million in 2009. The increase is primarily attributable to increased principal transactions, primarily in OTC equity and municipal debt.

Asset management and service fees - For the year ended December 31, 2010, asset management and service fees increased 64.4% to $192.1 million from $116.8 million in 2009. The increase is primarily a result of a 39.7% increase in the value of assets in fee-based accounts in the current year and a 29.8% increase in the number of managed accounts attributable principally to the continued growth of the private client group and the impact of the addition of the TWPG asset management business. During the year ended December 31, 2010, we experienced a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers of approximately $50.0 million compared to approximately $30.0 million in the prior year. See "Assets in fee-based accounts" included in the table above for further details.

Interest revenue - For the year ended December 31, 2010, interest revenue increased 54.6% to $54.5 million from $35.3 million in 2009. The increase is primarily due to an increase in interest revenue from customer margin borrowing to finance trading activity and higher average customer margin balances. The increase is also attributable to the growth of the interest-earning assets of Stifel Bank. See "Net Interest Income - Stifel Bank" below for a further discussion of the changes in net revenues.

Investment banking - For the year ended December 31, 2010, investment banking revenues, which represents sales credits related to the management of and participation in corporate and public finance underwritings, increased 52.7% to $22.8 million from $14.9 million in 2009. See "Investment banking" in the Institutional Group segment discussion for additional information regarding the changes in our investment banking revenues.

Other income - For the year ended December 31, 2010, other income increased 157.4% to $22.2 million from $8.6 million in 2009. The increase is primarily attributable to an increase in investment gains recorded on our investment that hedges our deferred compensation liability, gains on our private equity investments, and an increase in mortgage fees due to an increase in loan originations at Stifel Bank.

Interest expense - For the year ended December 31, 2010, interest expense increased 20.1% to $9.7 million from $8.1 million in 2009. The increase is primarily due to the growth of the interest-bearing liabilities of Stifel Bank, offset by lower interest rates. See "Net Interest Income - Stifel Bank" below for a further discussion of the changes in net revenues.

42


NON-INTEREST EXPENSES

For the year ended December 31, 2010, Global Wealth Management non-interest expenses increased 32.2% to $649.2 million from $491.3 million in 2009.

The fluctuations in non-interest expenses, discussed below, were primarily attributable to the continued growth of our Private Client Group during 2010. Our expansion efforts include the UBS Acquired Locations acquisition in the third and fourth quarters of 2009 and TWPG on July 1, 2010, as well as organic growth. As of December 31, 2010, we had 285 branch offices compared to 272 at December 31, 2009. In addition, since December 31, 2009, we have added 339 financial advisors and support staff.

Compensation and benefits - For the year ended December 31, 2010, compensation and benefits expense increased 36.0% to $503.5 million from $370.2 million in 2009. The increase is principally due to increased variable compensation as a result of increased production due to the growth in the number of financial advisors and fixed compensation for the additional administrative support staff, offset by the elimination of deferred compensation expense as a result of the modification to our deferred compensation plan, whereby we removed the service requirement during the third quarter of 2010. See "Compensation and benefits" in the Other segment discussion for additional information on the plan modification.

Compensation and benefits expense as a percentage of net revenues decreased to 59.7% for the year ended December 31, 2010, compared to 62.1% in 2009. The decrease in compensation and benefits expense as a percent of net revenues is primarily attributable to the increase in net revenues and, to a lesser extent, the reduction in deferred compensation expense, offset by an increase in transition pay, which consists of the amortization of upfront notes, which are amortized over a five- to ten-year period, signing bonuses and retention awards, and increased overhead in connection with our continued expansion efforts. Transition pay was $54.9 million (6.5% of net revenues) for the year ended December 31, 2010, compared to $40.6 million (6.9% of net revenues) in 2009.

Occupancy and equipment rental - For the year ended December 31, 2010, occupancy and equipment rental expense increased 20.6% to $60.9 million from $50.5 million in 2009.

Communications and office supplies - For the year ended December 31, 2010, communications and office supplies expense increased 17.8% to $31.4 million from $26.6 million in 2009.

Commissions and floor brokerage - For the year ended December 31, 2009, commissions and floor brokerage expense increased 59.4% to $12.1 million from $7.6 million in 2009.

Other operating expenses - For the year ended December 31, 2010, other operating expenses increased 13.8% to $41.4 million from $36.4 million in 2009. The increase is primarily attributable to the growth of our private client business, as well as an increase in litigation costs to defend industry recruiting claims. On a comparative basis, the increase over the prior year is offset by non-recurring license and registration fees, securities processing fees, and travel-related expenses associated with the UBS Acquired Locations acquisition during the fourth quarter of 2009.

INCOME BEFORE INCOME TAXES

For the year ended December 31, 2010, income before income taxes increased $89.3 million, or 85.3%, to $194.0 million from $104.7 million in 2009. Profit margins have improved as a result of the increase in revenue growth, a reduction in deferred compensation expense, and a decline in start-up costs associated with the branches we opened during 2009, both organically and through the acquisition of the UBS Acquired Locations.

43


Year Ended December 31, 2009 Compared With Year Ended December 31, 2008

Except as noted in the following discussion of variances, the increase in revenue can be attributed principally to the increased number of private client group offices and financial advisors, the acquisition of Butler Wick on December 31, 2008, and the closing of the UBS Acquired Locations acquisition during the third and fourth quarters of 2009. During the year ended December 31, 2009, we added 99 private client group offices and 645 financial advisors, including 56 offices and 321 Financial Advisors from UBS and 17 offices and 67 financial advisors from Butler Wick as part of our ongoing footprint expansion efforts.

NET REVENUES

For the year ended December 31, 2009, Global Wealth Management net revenues increased 25.8% to $596.0 million from $473.9 million in 2008. The increase in net revenues was primarily attributable to an increase in principal transactions, commissions, and net interest revenues, offset by decreases in asset management and service fees and investment banking.

Commissions - For the year ended December 31, 2009, commission revenues increased 22.2% to $234.1 million from $191.5 million in 2008. The increase was primarily attributable to an increase in agency transactions in OTC and listed equity securities, mutual fund, and insurance products.

Principal transactions - For the year ended December 31, 2009, principal transactions revenue increased 56.0% to $194.4 million from $124.6 million in 2008. The increase was primarily attributable to increased principal transactions, primarily in corporate debt, OTC equity, mortgage-backed bonds, and municipal debt due to turbulent markets and customers returning to traditional fixed income products.

Asset management and service fees - For the year ended December 31, 2009, asset management and service fees decreased 4.2% to $116.8 million from $121.9 million in 2008. The decrease was primarily a result of a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers, offset by an increase in the number of managed accounts attributable principally to the continued growth of the private client group through the UBS Acquired Locations acquisition and organic growth and the growth in the value of assets in fee-based accounts from December 31, 2008. See Assets in Fee-based Accounts included in the table above for further details.

Interest revenue - For the year ended December 31, 2009, interest revenue decreased 7.7% to $35.3 million from $38.2 million in 2008. The decrease was primarily due to a decrease in interest revenue from customer margin borrowing to finance trading activity and lower average customer margin balances, offset by increased interest revenues of $4.7 million from the interest-earning assets of Stifel Bank. See "Distribution of Assets, Liabilities, and Shareholders' Equity; Interest Rates and Interest Rate Differential" below for a further discussion of the changes in interest revenues.

Investment banking - For the year ended December 31, 2009, investment banking revenues decreased 3.9% to $14.9 million from $15.5 million in 2008. While there was a significant rebound in investment banking activity, which began during the second quarter of 2009, the full-year results were negatively impacted by the challenging market conditions that began during the second half of 2008 and continued into the first half of 2009. See "Investment banking" in the Institutional Group segment discussion for additional information regarding the changes in our investment banking revenues.

Interest expense - For the year ended December 31, 2009, interest expense decreased 51.6% to $8.1 million from $16.7 million in 2008. The decrease was primarily due to decreased interest rates charged by banks on lower levels of borrowings.  See "Distribution of Assets, Liabilities, and Shareholders' Equity; Interest Rates and Interest Rate Differential" below for a further discussion of the changes in interest expense.

NON-INTEREST EXPENSES

For the year ended December 31, 2009, Global Wealth Management non-interest expenses increased 31.7% to $491.3 million from $372.9 million in 2008.

Unless specifically discussed below, the fluctuations in non-interest expenses were primarily attributable to the continued growth of our private client group during the year ended December 31, 2009. Our expansion efforts include the acquisitions of the UBS Acquired Locations and Butler Wick, as well as organic growth. As of December 31, 2009, we have 272 branch offices compared to 196 at December 31, 2008. In addition, during the year ended December 31, 2009, we added 1,087 financial advisors and support staff.

Compensation and benefits - For the year ended December 31, 2009, compensation and benefits expense increased 28.0% to $370.2 million from $289.2 million in 2008. The increase was principally due to increased variable compensation as a result of increased production and increased fixed compensation as a result of the expansion of our branch office support.

44


Compensation and benefits expense as a percentage of net revenues increased to 62.1% for the year ended December 31, 2009, compared to 61.0% in 2008. The increase in compensation and benefits expense as a percent of net revenues was primarily attributable to increased transition pay, which consisted of the amortization of upfront notes, which are amortized over a five- to ten-year period, signing bonuses and retention awards, and increased overhead in connection with our continued expansion efforts. For the year ended December 31, 2009, transition pay was $40.6 million (6.9% of net revenues) compared to $28.2 million (6.0% of net revenues) for the year ended December 31, 2008.

Occupancy and equipment rental - For the year ended December 31, 2009, occupancy and equipment rental expense increased 39.5% to $50.5 million from $36.2 million in 2008.

Communications and office supplies - For the year ended December 31, 2009, communications and office supplies expense increased 37.7% to $26.6 million from $19.3 million in 2008.

Commissions and floor brokerage - For the year ended December 31, 2009, commissions and floor brokerage expense increased $3.1 million, or 70.9%, to $7.6 million from $4.5 million in 2008.

Other operating expenses - For the year ended December 31, 2009, other operating expenses increased 53.5% to $36.4 million from $23.7 million in 2008. As a result of the growth of the private client group during the year ended December 31, 2009, there was an increase in license and registration fees, securities processing fees, as well as litigation costs to defend industry recruiting claims. In addition, we incurred expenses associated with our acquisition of the UBS Acquired Locations of $3.4 million.

INCOME BEFORE INCOME TAXES

For the year ended December 31, 2009, income before income taxes increased 3.7% to $104.7 million from $100.9 million in 2008. Profit margins for the year ended December 31, 2009, have decreased to 17.6% from 21.3% in 2008. Profit margins have diminished resulting from start-up costs associated with branch office openings and the transaction costs associated with the UBS Acquired Locations acquisition.

45


The information required by Securities Act Guide 3 - Statistical Disclosure by Bank Holding Company is presented below:

I.     Distribution of Assets, Liabilities, and Shareholders' Equity; Interest Rates and Interest Rate Differential

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

 

 

 

 

 

 

 

For the Year Ended

 

 

December 31, 2010

 

December 31, 2009

 

 

Average Balance

 

Interest Income/
Expense

 

Average Interest Rate

 

Average Balance

 

Interest Income/
Expense

 

Average Interest Rate

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

148,533

 

$

404

 

0.27

%

 

$

195,783

 

$

763

 

0.39

%

U.S. government agencies

 

 

56,796

 

 

609

 

1.07

 

 

 

1,775

 

 

97

 

5.46

 

State and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

20,819

 

 

1,031

 

4.95

 

 

 

-

 

 

-

 

-

 

Non-taxable (1)

 

 

1,324

 

 

49

 

3.70

 

 

 

1,096

 

 

45

 

4.11

 

Mortgage-backed securities

 

 

549,666

 

 

14,804

 

2.69

 

 

 

162,694

 

 

5,878

 

3.61

 

Corporate bonds

 

 

57,606

 

 

2,254

 

3.91

 

 

 

27,627

 

 

1,244

 

4.50

 

Asset-backed securities

 

 

11,450

 

 

320

 

2.79

 

 

 

16,997

 

 

717

 

4.22

 

Federal Home Loan Bank ("FHLB") and other capital stock

 

 

1,272

 

 

27

 

2.12

 

 

 

762

 

 

9

 

1.18

 

Loans (2)

 

 

364,811

 

 

12,347

 

3.38

 

 

 

239,879

 

 

9,914

 

4.13

 

Loans held for sale

 

 

81,062

 

 

3,301

 

4.07

 

 

 

40,619

 

 

1,616

 

3.98

 

Total interest-earning assets (3)

 

$

1,293,339

 

$

35,146

 

2.72

%

 

$

687,232

 

$

20,283

 

2.95

%

Cash and due from banks

 

 

6,717

 

 

 

 

 

 

 

 

4,927

 

 

 

 

 

 

Other non interest-earning assets

 

 

39,518

 

 

 

 

 

 

 

 

23,289

 

 

 

 

 

 

Total assets

 

$

1,339,574

 

 

 

 

 

 

 

$

715,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

$

1,162,749

 

$

4,919

 

0.42

%

 

$

591,961

 

$

3,841

 

0.65

%

Demand deposits

 

 

20,568

 

 

31

 

0.15

 

 

 

11,072

 

 

29

 

0.26

 

Time deposits

 

 

7,686

 

 

217

 

2.82

 

 

 

20,104

 

 

676

 

3.36

 

Savings

 

 

92

 

 

-

 

-

 

 

 

303

 

 

-

 

-

 

FHLB advances

 

 

652

 

 

21

 

3.22

 

 

 

3,304

 

 

103

 

3.12

 

Federal funds and repurchase agreements

 

 

-

 

 

-

 

-

 

 

 

10

 

 

-

 

-

 

Total interest-bearing liabilities (3)

 

$

1,191,747

 

$

5,188

 

0.44

%

 

$

626,754

 

$

4,649

 

0.74

%

Non-interest-bearing deposits

 

 

18,192

 

 

 

 

 

 

 

 

15,054

 

 

 

 

 

 

Other non-interest-bearing liabilities

 

 

14,352

 

 

 

 

 

 

 

 

3,014

 

 

 

 

 

 

Total liabilities

 

 

1,224,291

 

 

 

 

 

 

 

 

644,822

 

 

 

 

 

 

Shareholders' equity

 

 

115,283

 

 

 

 

 

 

 

 

70,626

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

1,339,574

 

 

 

 

 

 

 

$

715,448

 

 

 

 

 

 

Net interest margin

 

 

 

 

$

29,958

 

2.32

%

 

 

 

 

$

15,634

 

2.27

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Due to the immaterial amount of income recognized on tax-exempt securities, yields were not calculated on a tax equivalent basis.

(2) Loans on non-accrual status are included in average balances.

(3) See Net Interest Income table included in "Results of Operations" for additional information on our average balances and interest income and expenses.

46


 

 

 

 

 

 

For the Year Ended December 31, 2008

 

 

 

Average Balance

 

Interest Income/
Expense

 

Average Interest Rate

 

Assets:

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

10,027

 

$

214

 

2.14

%

 

U.S. government agencies

 

 

13,361

 

 

824

 

6.17

 

 

State and political subdivisions:

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

9,240

 

 

375

 

4.05

 

 

Non-taxable (1)

 

 

1,530

 

 

58

 

3.81

 

 

Mortgage-backed securities

 

 

32,916

 

 

1,731

 

5.26

 

 

Corporate bonds

 

 

926

   

57

 

6.12

 

 

Asset-backed securities

 

 

20,060

 

 

1,519

 

7.57

 

 

FHLB and other capital stock

 

 

991

 

 

28

 

2.82

 

 

Loans (2)

 

 

170,244

 

 

9,807

 

5.76

 

 

Loans held for sale

 

 

14,598

 

 

640

 

4.38

 

 

Total interest-earning assets (3)

 

$

273,893

 

$

15,253

 

5.57

%

 

Cash and due from banks

 

 

3,444

 

 

 

 

 

 

 

Other non interest-earning assets

 

 

23,350

 

 

 

 

 

 

 

Total assets

 

$

300,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity:

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

Money market

 

$

178,198

 

$

3,491

 

1.96

%

 

Demand deposits

 

 

2,755

 

 

44

 

1.60

 

 

Time deposits

 

 

36,287

 

 

1,600

 

4.41

 

 

Savings

 

 

339

 

 

3

 

0.97

 

 

FHLB advances

 

 

10,739

 

 

275

 

2.56

 

 

Federal funds and repurchase agreements

 

 

887

 

 

21

 

2.41

 

 

Total interest-bearing liabilities (3)

 

$

229,205

 

$

5,434

 

2.37

%

 

Non-interest-bearing deposits

 

 

15,293

 

 

 

 

 

 

 

Other non-interest-bearing liabilities

 

 

1,480

 

 

 

 

 

 

 

Total liabilities

 

 

245,978

 

 

 

 

 

 

 

Shareholders' equity

 

 

54,709

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

300,687

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

$

9,819

 

3.58

%

 

 

 

 

 

 

 

 

 

 

 

 

(1) Due to the immaterial amount of income recognized on tax-exempt securities, yields were not calculated on a tax equivalent basis.

(2) Loans on non-accrual status are included in average balances.

(3) See Net Interest Income table included in "Results of Operations" for additional information on our average balances and interest income and expenses.

47


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, 2010, interest revenue of $35.1 million was generated from weighted average interest-earning assets of $1.3 billion at a weighted average interest rate of 2.72%. For the year ended December 31, 2009, interest revenue of $20.3 million was generated from weighted average interest-earning assets of $687.2 million at a weighted average interest rate of 2.95%. For the year ended December 31, 2008, interest revenue of $15.3 million was generated from weighted average interest-earning assets of $273.9 million at a weighted average interest rate of 5.57%. Interest-earning assets principally consist of residential, consumer, and commercial loans, securities, and federal funds sold.

Interest expense represents interest on customer money market accounts, interest on time deposits, and other interest expense. The weighted average balance of interest-bearing liabilities during the year ended December 31, 2010, was $1.2 billion at a weighted average interest rate of 0.44%. For the year ended December 31, 2009, the weighted average balance of interest-bearing liabilities was $626.8 million at a weighted average interest rate of 0.74%. For the year ended December 31, 2008, the weighted average balance of interest-bearing liabilities was $229.2 million at a weighted average interest rate of 2.37%.

The growth in Stifel Bank has been primarily driven by: (i) the conversion of the former UBS branches to the Stifel Nicolaus platform with money market funds and FDIC-insured balances, and (ii) the growth in deposits associated with brokerage customers of Stifel Nicolaus. At December 31, 2010, the balance of Stifel Nicolaus brokerage customer deposits at Stifel Bank was $1.6 billion compared to $1.0 billion at December 31, 2009.

See the average balances and interest rates for Stifel Bank presented above for more information regarding average balances, interest income and expense, and average interest rate yields.

48


The following table sets forth an analysis of the effect on net interest income of volume and rate changes for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2010
Compared to Year Ended
December 31, 2009

 

Year Ended December 31, 2008
Compared to Year Ended
December 31, 2007

 

 

 

Increase (decrease) due to:

 

Increase (decrease) due to:

 

 

 

Volume

 

Rate

 

Total

 

Volume

 

Rate

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

(375

)

$

16

 

$

(359

)

$

862

 

$

(313

)

$

549

 

U.S. government agencies

 

 

454

 

 

58

 

 

512

 

 

(646

)

 

(81

)

 

(727

)

State and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

515

 

 

516

 

 

1,031

 

 

(187

)

 

(188

)

 

(375

)

Non-taxable

 

 

8

 

 

(4

)

 

4

 

 

(17

)

 

4

 

 

(13

)

Mortgage-backed securities

 

 

9,696

 

 

(770

)

 

8,926

 

 

4,846

 

 

(699

)

 

4,147

 

Corporate bonds

 

 

1,019

 

 

(9

)

 

1,010

 

 

1,206

 

 

(19

)

 

1,187

 

Asset-backed securities

 

 

(102

)

 

(295

)

 

(397

)

 

(205

)

 

(597

)

 

(802

)

FHLB and other capital stock

 

 

5

 

 

13

 

 

18

 

 

(5

)

 

(14

)

 

(19

)

Loans

 

 

7,862

 

 

(5,429

)

 

2,433

 

 

3,697

 

 

(3,590

)

 

107

 

Loans held for sale

 

 

1,714

 

 

(29

)

 

1,685

 

 

912

 

 

64

 

 

976

 

 

 

$

20,796

 

$

(5,933

)

$

14,863

 

$

10,463

 

$

(5,433

)

$

5,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) due to:

 

Increase (decrease) due to:

 

 

 

Volume

 

Rate

 

Total

 

Volume

 

Rate

 

Total

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market

 

$

1,514

 

$

(436

)

$

1,078

 

$

3,900

 

$

(3,550

)

$

350

 

Time deposits

 

 

(300

)

 

(159

)

 

(459

)

 

(603

)

 

(321

)

 

(924

)

Demand deposits

 

 

3

 

 

(1

)

 

2

 

 

46

 

 

(61

)

 

(15

)

Savings

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(3

)

 

(3

)

FHLB advances

 

 

(120

)

 

38

 

 

(82

)

 

(222

)

 

50

 

 

(172

)

Federal funds and repurchase agreements

 

 

-

 

 

-

 

 

-

 

 

(11

)

 

(10

)

 

(21

)

 

 

$

1,097

 

$

(558

)

$

539

 

$

3,110

 

$

(3,895

)

$

(785

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increases and decreases in interest revenue and interest expense result from changes in average balances (volume) of interest-earning bank assets and liabilities, as well as changes in average interest rates. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year's volume. Changes applicable to both volume and rate have been allocated proportionately.

49


II.    Investment Portfolio

The following tables provide a summary of the amortized cost and fair values of the available-for-sale and held-to-maturity securities for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

Amortized
cost

 

Gross unrealized
gains (1)

 

Gross unrealized losses (1)

 

Estimated
fair value

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

24,972

 

$

58

 

$

-

 

$

25,030

 

State and municipal securities

 

 

26,678

 

 

727

 

 

(1,062

)

 

26,343

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

692,922

 

 

6,938

 

 

(2,697

)

 

697,163

 

Non-agency

 

 

29,319

 

 

744

 

 

(790

)

 

29,273

 

Commercial

 

 

66,912

 

 

1,212

 

 

(128

)

 

67,996

 

Corporate fixed income securities

 

 

153,523

 

 

1,705

 

 

(327

)

 

154,901

 

Asset-backed securities

 

 

11,331

 

 

677

 

 

-

 

 

12,008

 

 

 

$

1,005,657

 

$

12,061

 

$

(5,004

)

$

1,012,714

 

Held-to-maturity (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal auction rate securities

 

$

43,719

 

$

3,803

 

$

(171

)

$

47,351

 

Asset-backed securities

 

 

8,921

 

 

198

 

 

(3,486

)

 

5,633

 

 

 

$

52,640

 

$

4,001

 

$

(3,657

)

$

52,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

 

 

Amortized
cost

 

Gross unrealized
gains (1)

 

Gross unrealized losses (1)

 

Estimated
fair value

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

998

 

$

13

 

$

-

 

$

1,011

 

State and municipal securities

 

 

960

 

 

32

 

 

-

 

 

992

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

432,820

 

 

1,880

 

 

(1,681

)

 

433,019

 

Non-agency

 

 

39,905

 

 

683

 

 

(2,122

)

 

38,466

 

Commercial

 

 

47,274

 

 

683

 

 

(317

)

 

47,640

 

Corporate fixed income securities

 

 

40,788

 

 

2,102

 

 

-

 

 

42,890

 

Asset-backed securities

 

 

13,235

 

 

1,235

 

 

-

 

 

14,470

 

 

 

$

575,980

 

$

6,628

 

$

(4,120

)

$

578,488

 

Held-to-maturity (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

7,574

 

 

-

 

 

(3,298

)

$

4,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Unrealized gains/(losses) related to available-for-sale securities are reported in other comprehensive income.

(2) Held-to-maturity securities are carried on the consolidated statements of financial condition at amortized cost, and the changes in the value of these securities, other than impairment charges, are not reported on the consolidated financial statements.

50


 

 

December 31, 2008

 

 

 

Amortized
cost

 

Gross unrealized
gains (1)

 

Gross unrealized losses (1)

 

Estimated
fair value

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

8,447

 

$

144

 

$

-

 

$

8,591

 

State and municipal securities

 

 

1,513

 

 

19

 

 

(1

)

 

1,531

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

12,821

 

 

-

 

 

(391

)

 

12,430

 

Non-agency

 

 

23,091

 

 

-

 

 

(5,669

)

 

17,422

 

Asset-backed securities

 

 

11,400

 

 

-

 

 

(977

)

 

10,423

 

 

 

$

57,272

 

$

163

 

$

(7,038

)

$

50,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

7,574

 

 

-

 

 

(1,324

)

$

6,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Unrealized gains/(losses) related to available-for-sale securities are reported in other comprehensive income.

(2) Held-to-maturity securities are carried on the consolidated statements of financial condition at amortized cost, and the changes in the value of these securities, other than impairment charges, are not reported on the consolidated financial statements.

Other-Than-Temporary Impairment

We evaluate our investment securities portfolio on a quarterly basis for other-than-temporary impairment ("OTTI"). We assess whether OTTI has occurred when the fair value of a debt security is less than the amortized cost basis at the balance sheet date. Under these circumstances, OTTI is considered to have occurred: (1) if we intend to sell the security, (2) if it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. For securities that we do not expect to sell or will not be required to sell, credit-related OTTI, represented by the expected loss in principal, is recognized in earnings, while non-credit-related OTTI is recognized in other comprehensive income. For securities which we expect to sell, all OTTI is recognized in earnings.

Non-credit-related OTTI results from several factors, including increased liquidity spreads and extension of the security. Presentation of OTTI is made in the income statement on a gross basis with a reduction for the amount of OTTI recognized in accumulated other comprehensive income. We applied the related OTTI guidance on the debt security types described below.

Pooled trust preferred securities represent collateralized debt obligations ("CDO") backed by a pool of debt securities issued by financial institutions. The collateral generally consisted of trust preferred securities and subordinated debt securities issued by banks, bank holding companies, and insurance companies. A full cash flow analysis was used to estimate fair values and assess impairment for each security within this portfolio. We utilized an internal resource with industry experience in pooled trust preferred securities valuations to provide assistance in estimating the fair value and expected cash flows for each security in this portfolio. Relying on cash flows was necessary because there was a lack of observable transactions in the market and many of the original sponsors or dealers for these securities were no longer able to provide a fair value that was compliant with Topic 820.

Based on the evaluation, we recognized a credit-related other-than-temporary impairment of $0.9 million through earnings for the year ended December 31, 2010. During the year ended December 31, 2010, the remaining balance of other comprehensive income related to the CDO was written off, and consequently, we reduced the amortized cost of the security. If certain loss thresholds are exceeded, this bond would experience an event of default that would allow the senior class to liquidate the collateral securing this investment, which could adversely impact our valuation.

51


As of December 31, 2010, management has evaluated all other investment securities with unrealized losses and all non-marketable securities for impairment. The unrealized losses were primarily the result of wider liquidity spreads on asset-backed securities and, additionally, increased market volatility on non-agency mortgage and asset-backed securities that are backed by certain mortgage loans. The fair values of these assets have been impacted by various market conditions. In addition, the expected average lives of the asset-backed securities backed by trust preferred securities have been extended, due to changes in the expectations of when the underlying securities would be repaid. The contractual terms and/or cash flows of the investments do not permit the issuer to settle the securities at a price less than the amortized cost. We have reviewed our asset-backed portfolio and do not believe there is additional OTTI from these securities other than what has already been recorded.

Since the decline in fair value of the securities is not attributable to credit quality but rather to changes in interest rates and the liquidity issues that have had a pervasive impact on the market, and because we do not have the intent to sell these securities and it is not likely we would be required to sell these securities until a fair value recovery or maturity, we do not consider these securities to be other-than-temporarily impaired as of December 31, 2010.

The maturities and related weighted-average yields of available-for-sale and held-to-maturity securities at December 31, 2010, are as follows (in thousands, except rates):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within 1
Year

 

1-5 Years

 

5-10 Years

 

After 10 Years

 

Total

 

Available-for-sale: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

-

 

$

25,030

 

$

-

 

$

-

 

$

25,030

 

State and municipal securities

 

 

-

 

 

2,938

 

 

-

 

 

23,405

 

 

26,343

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

-

 

 

-

 

 

49,661

 

 

647,502

 

 

697,163

 

Non-agency

 

 

-

 

 

-

 

 

6,195

 

 

23,078

 

 

29,273

 

Commercial

 

 

-

 

 

10,119

 

 

15,151

 

 

42,726

 

 

67,996

 

Corporate fixed income securities

 

 

14,067

 

 

139,654

 

 

1,180

 

 

-

 

 

154,901

 

Asset-backed securities

 

 

-

 

 

7,073

 

 

4,935

 

 

-

 

 

12,008

 

 

 

$

14,067

 

$

184,814

 

$

77,122

 

$

736,711

 

$

1,012,714

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal auction rate securities

 

$

-

 

$

-

 

$

-

 

$

43,719

 

$

43,719

 

Asset-backed securities

 

 

-

 

 

-

 

 

-

 

 

8,921

 

 

8,921

 

 

 

$

-

 

$

-

 

$

-

 

$

52,640

 

$

52,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average yield

 

 

3.64

%

 

2.31

%

 

3.20

%

 

3.29

%

 

3.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Due to the immaterial amount of income recognized on tax-exempt securities, yields were not calculated on a tax equivalent basis.

We did not hold securities from any single issuer that exceeded ten percent of our shareholders' equity at December 31, 2010.

52


III.  Loan Portfolio

The following table presents the balance and associated percentage of each major loan category in Stifel Bank's loan portfolio for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

 

 

2010

 

2009

 

2008

 

2007 (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$

266,806

 

$

227,436

 

$

19,662

 

$

4,044

 

Residential real estate

 

 

49,550

 

 

52,086

 

 

58,778

 

 

24,285

 

Commercial

 

 

41,965

 

 

11,294

 

 

27,538

 

 

31,417

 

Home equity lines of credit

 

 

30,966

 

 

33,369

 

 

28,612

 

 

1,524

 

Commercial real estate

 

 

1,637

 

 

10,152

 

 

38,446

 

 

39,184

 

Construction and land

 

 

524

 

 

952

 

 

13,968

 

 

24,447

 

 

 

 

391,448

 

 

335,289

 

 

187,004

 

 

124,901

 

Unamortized loan origination costs, net of loan fees

 

 

392

 

 

1,556

 

 

591

 

 

-

 

Loans in process

 

 

233

 

 

14

 

 

(3,878

)

 

109

 

Allowance for loan losses

 

 

(2,331

)

 

(1,702

)

 

(2,448

)

 

(1,685

)

 

 

$

389,742

 

$

335,157

 

$

181,269

 

$

123,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Stifel Bank was acquired on April 2, 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

The maturities of the loan portfolio at December 31, 2010, are as follows (in thousands):

 

 

Within 1 Year

 

1-5 Years

 

Over 5 Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

281,046

 

$

48,047

 

$

62,355

 

$

391,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The sensitivity of loans with maturities in excess of one year at December 31, 2010, is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

1-5 Years

 

Over 5 Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate loans

 

$

16,248

 

$

3,867

 

$

20,115

 

Variable or adjustable rate loans

 

 

31,799

 

 

58,488

 

 

90,287

 

 

 

$

48,047

 

$

62,355

 

$

110,402

 

 

 

 

 

 

 

 

 

 

 

 

53


Changes in the allowance for loan losses at Stifel Bank were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2010

 

2009

 

2008

 

2007 (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses, beginning of period

 

$

1,702

 

$

2,448

 

1,685

 

$

-

 

Acquisition of Stifel Bank

 

 

-

 

 

-

 

 

-

 

 

1,127

 

Provision for loan losses

 

 

460

 

 

604

 

 

1,923

 

 

558

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate construction loans

 

 

(216

)

 

(213

)

 

(414

)

 

-

 

Construction and land

 

 

-

 

 

(859

)

 

(493

)

 

(2

)

Commercial real estate

 

 

-

 

 

(294

)

 

(253

)

 

-

 

Other

 

 

(2

)

 

(25

)

 

-

 

 

-

 

Total charge-offs

 

 

(218

)

 

(1,391

)

 

(1,160

)

 

(2

)

Recoveries

 

 

387

 

 

41

 

 

-

 

 

2

 

Allowance for loan losses, end of period

 

$

2,331

 

$

1,702

 

$

2,448

 

$

1,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs to average bank loans outstanding, net

 

 

(0.05)

%

 

0.58

%

 

0.64

%

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  The results of Stifel Bank are included prospectively from April 2, 2007, the date of acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following is a breakdown of the allowance for loan losses by type for the periods indicated (in thousands, except rates):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

December 31, 2009

 

 

 

Balance

 

Percent(1)

 

 

Balance

 

Percent(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

696

 

 

10.7

%

 

$  

321

 

 

3.4

%

Residential real estate

 

 

681

 

 

12.7

 

 

 

619

 

 

15.8

 

Commercial real estate

 

 

278

 

 

0.4

 

 

 

610

 

 

3.0

 

Consumer

 

 

288

 

 

68.2

 

 

 

152

 

 

77.8

 

Unallocated

 

 

388

 

 

8.0

 

 

 

-

 

 

-

 

 

 

$

2,331

 

 

100.0

%

 

$

1,702

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

December 31, 2007(2)

 

 

 

Balance

 

Percent(1)

 

 

Balance

 

Percent(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

646

 

 

14.7

%

 

$

56

 

 

3.3

%

Residential real estate

 

 

584

 

 

44.8

 

 

 

100

 

 

5.9

 

Commercial real estate

 

 

1,192

 

 

30.0

 

 

 

972

 

 

57.7

 

Consumer

 

 

26

 

 

10.5

 

 

 

8

 

 

0.5

 

Unallocated

 

 

-

 

 

-

 

 

 

549

 

 

32.6

 

 

 

$

2,448

 

 

100.0

%

 

$

1,685

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Percent of loans to loan portfolio total.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)  Stifel Bank was acquired on April 2, 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54


At December 31, 2010, Stifel Bank had $1.1 million of non-accrual loans that were more than 90 days past due, for which there was a specific allowance of $0.2 million. Further, Stifel Bank had $0.4 million and $0.5 million in troubled debt restructurings at December 31, 2010 and 2009, respectively. At December 31, 2009, 2008, and 2007, Stifel Bank had $1.4 million, $0.6 million, and $0.7 million in non-accrual loans, respectively, for which there was a specific reserve of $0.1 million, $0.2 million, and $0.3 million, respectively. In addition, there were no accrual loans delinquent 90 days or more or troubled debt restructurings at December 31, 2008 and 2007.

Stifel Bank does not engage in sub-prime lending. The gross interest income related to impaired loans, which would have been recorded had these loans been current in accordance with their original terms, and the interest income recognized on these loans during the years ended December 31, 2010, 2009, 2008, and 2007, were immaterial to the consolidated financial statements.

See the section entitled "Critical Accounting Policies and Estimates" herein regarding Stifel Bank's policies for establishing loan loss reserves, including placing loans on non-accrual status.

V.    Deposits

Deposits consist of money market and savings accounts, certificates of deposit, and demand deposits. The average balances of deposits and the associated weighted average interest rates for the periods indicated are as follows (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2010

 

2009

 

2008

 

 

Average Balance

 

Average Interest Rate

 

Average Balance

 

Average Interest Rate

 

Average Balance

 

Average Interest Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits (interest bearing)

 

$

1,183,317

 

0.15

%

 

$

603,033

 

0.64

%

 

$

180,953

 

1.95

%

Certificates of deposit (time deposits)

 

$

7,686

 

2.82

%

 

$

20,104

 

3.36

%

 

$

36,287

 

4.41

%

Demand deposits (non-interest bearing)

 

$

18,192

 

*

 

 

$

15,054

 

*

 

 

$

15,293

 

*

 

Savings accounts

 

$

92

 

-

%

 

$

303

 

-

%

 

$

339

 

0.97

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Not applicable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scheduled maturities of certificates of deposit greater than $100,000 at December 31, 2010, were as follows (in thousands):

 

 

0-3 Months

 

3-6 Months

 

6-12 Months

 

Over 12 Months

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

-

 

$

199

 

$

493

 

$

1,020

 

$

1,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55


VI.  Return on Equity and Assets

 

 

Year Ended December 31,

 

 

 

2010

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

Return on assets (net income as a percentage of average total assets)

 

 

0.05

%

 

2.93

%

 

3.32

%

Return on equity (net income as a percentage of average shareholders' equity)

 

 

0.18

%

 

9.97

%

 

11.10

%

Dividend payout ratio (1)

 

 

-

%

 

-

%

 

-

%

Equity to assets ratio (average shareholders' equity as a percentage of average total assets)

 

 

29.16

%

 

29.35

%

 

29.90

%

 

 

 

 

 

 

 

 

 

 

 

(1) We did not declare or pay any dividends during 2010, 2009, or 2008.

 

 

 

 

 

 

 

VII.  Short-Term Borrowings

The following is a summary of our short-term borrowings for the periods indicated (in thousands, except rates):

 

 

Short-Term Borrowings

 

 

Stock Loan

 

Year Ended December 31, 2010:

 

 

 

 

 

 

 

 

Amount outstanding at December 31, 2010

 

$

109,600

 

 

$

27,907

 

Weighted average interest rate thereon

 

 

1.05

%

 

 

0.26

%

 

 

 

 

 

 

 

 

 

Maximum amount outstanding at any month-end

 

$

259,700

 

 

$

101,580

 

 

 

 

 

 

 

 

 

 

Average amount outstanding during the year

 

$

108,784

 

 

$

69,507

 

Weighted average interest rate thereon

 

 

1.01

%

 

 

1.54

%

Year Ended December 31, 2009:

 

 

 

 

 

 

 

 

Amount outstanding at December 31, 2009

 

$

90,800

 

 

$

16,667

 

Weighted average interest rate thereon

 

 

1.04

%

 

 

0.33

%

 

 

 

 

 

 

 

 

 

Maximum amount outstanding at any month-end

 

$

212,300

 

 

$

85,432

 

 

 

 

 

 

 

 

 

 

Average amount outstanding during the year

 

$

107,383

 

 

$

53,110

 

Weighted average interest rate thereon

 

 

0.99

%

 

 

1.07

%

Year Ended December 31, 2008:

 

 

 

 

 

 

 

 

Amount outstanding at December 31, 2008

 

$

-

 

 

$

16,987

 

Weighted average interest rate thereon

 

 

-

%

 

 

0.52

%

 

 

 

 

 

 

 

 

 

Maximum amount outstanding at any month-end

 

$

265,300

 

 

$

162,888

 

 

 

 

 

 

 

 

 

 

Average amount outstanding during the year

 

$

132,660

 

 

$

105,424

 

Weighted average interest rate thereon

 

 

2.28

%

 

 

2.47

%

56


Results of Operations - Institutional Group

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31,

 

Percentage
Change

 

 

As a Percentage of
Net Revenues
for the Year Ended
December 31,

 

 

 

2010

 

2009

 

2008

 

2010 vs. 2009

 

2009 vs. 2008

 

 

2010

 

2009

 

2008

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal transactions

 

$

217,770

 

$

263,804

 

$

168,707

 

(17.5)

%

56.4

%

 

40.2

%

53.3

%

43.2

%

Commissions

 

 

123,719

 

 

111,469

 

 

149,547

 

11.0

 

(25.5

)

 

22.8

 

22.6

 

38.3

 

Capital raising

 

 

108,473

 

 

61,657

 

 

29,690

 

75.9

 

107.7

 

 

20.0

 

12.5

 

7.6

 

Advisory

 

 

83,425

 

 

49,244

 

 

38,506

 

69.4

 

27.9

 

 

15.4

 

10.0

 

9.9

 

Investment banking

 

 

191,898

 

 

110,901

 

 

68,196

 

73.0

 

62.6

 

 

35.4

 

22.5

 

17.5

 

Interest

 

 

8,315

 

 

9,847

 

 

9,068

 

(15.6

)

8.6

 

 

1.5

 

2.0

 

2.3

 

Other income

 

 

4,255

 

 

1,331

 

 

1,439

 

219.7

 

(7.6

)

 

0.8

 

0.3

 

0.3

 

Total revenues

 

 

545,957

 

 

497,352

 

 

396,957

 

9.9

 

25.3

 

 

100.7

 

100.7

 

101.6

 

Interest expense

 

 

4,118

 

 

3,260

 

 

6,231

 

26.4

 

(47.7

)

 

0.7

 

0.7

 

1.6

 

Net revenues

 

 

541,839

 

 

494,092

 

 

390,726

 

9.8

 

26.5

 

 

100.0

 

100.0

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

315,329

 

 

287,835

 

 

233,679

 

9.6

 

23.2

 

 

58.2

 

58.3

 

59.8

 

Occupancy and equipment rental

 

 

19,663

 

 

16,249

 

 

14,194

 

21.0

 

14.5

 

 

3.6

 

3.3

 

3.6

 

Communication and office supplies

 

 

23,725

 

 

18,540

 

 

19,087

 

28.0

 

(2.9

)

 

4.4

 

3.7

 

4.9

 

Commissions and floor brokerage

 

 

14,402

 

 

15,716

 

 

8,806

 

(8.4

)

78.5

 

 

2.7

 

3.2

 

2.3

 

Other operating expenses

 

 

39,185

 

 

26,619

 

 

23,068

 

47.2

 

15.4

 

 

7.2

 

5.4

 

5.9

 

Total non-interest expenses

 

 

412,304

 

 

364,959

 

 

298,834

 

13.0

 

22.1

 

 

76.1

 

73.9

 

76.5

 

Income before income taxes

 

$

129,535

 

$

129,133

 

$

91,892

 

0.3

%

40.5

%

 

23.9

%

26.1

%

23.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2010 Compared With Year Ended December 31, 2009

NET REVENUES

For the year ended December 31, 2010, Institutional Group net revenues increased 9.8% to $541.8 million from $494.1 million in 2009. The increase in net revenues is primarily attributable to improved equity capital markets and our acquisition of TWPG on July 1, 2010.

Principal transactions - For the year ended December 31, 2010, principal transactions revenues decreased 17.5%, to $217.8 million from $263.8 million in 2009. Principal transactions revenues were negatively impacted by challenging fixed income market conditions during 2010, which contributed to lower trading volumes and the tightening of corporate bond spreads. Additionally, in the second half of 2010, investor concerns over credit risk continued, which led to wider credit spreads and lower client activity in municipal products and reduced trading performance.  The impact of the decline in our fixed income business was offset by improved equity market conditions during the second half of 2010.

Commissions - For the year ended December 31, 2010, commission revenues increased 11.0% to $123.7 million from $111.5 million in 2009. The increase is attributable to an increase in trading volumes in equities over the prior year.

57


Investment banking - For the year ended December 31, 2010, investment banking revenues increased 73.0% to $191.9 million from $110.9 million in 2009. The increase is attributable to an increase in equity financing revenues and advisory fee revenues from the prior year and the acquisition of TWPG, which closed on July 1, 2010.

For the year ended December 31, 2010, capital-raising revenues increased 75.9% to $108.5 million from $61.7 million in 2009.

For the year ended December 31, 2010, equity capital-raising revenues increased 96.0% to $87.5 million from $44.6 million in 2009. The increase is primarily attributable to an increase in the number of transactions in the current year. During the year ended December 31, 2010, we were involved, as manager or co-manager, in 149 equity underwritings compared to 72 equity underwritings in 2009.

For the year ended December 31, 2010, fixed income capital-raising revenues increased 23.2%, to $21.0 million from $17.1 million in 2009. For the year ended December 31, 2010, we were involved, as manager or co-manager, in 564 tax-exempt issues compared to 369 issues in 2009.

For the year ended December 31, 2010, strategic advisory fees increased 69.4% to $83.4 million from $49.2 million in 2009. The increase is primarily attributable to an increase in the number of completed equity transactions and the aggregate transaction value from 2009.

Interest revenue - For the year ended December 31, 2010, interest revenue decreased 15.6% to $8.3 million from $9.8 million in 2009. The decrease in interest revenues is primarily attributable to decreased interest earned on our trading inventory during 2010.

Interest expense - For the year ended December 31, 2010, interest expense increased 26.4% to $4.1 million from $3.3 million in 2009.

NON-INTEREST EXPENSES

For the year ended December 31, 2010, Institutional Group non-interest expenses increased 13.0% to $412.3 million from $365.0 million in 2009.

Unless specifically discussed below, the fluctuations in non-interest expenses were primarily attributable to the continued growth of our Institutional Group segment, primarily through the acquisition of TWPG on July 1, 2010. During the year ended December 31, 2010, we added 403 revenue producers (investment bankers, research, and traders) and support staff, including 219 from the TWPG acquisition.

Compensation and benefits - For the year ended December 31, 2010, compensation and benefits expense increased 9.6% to $315.3 million from $287.8 million in 2009. The increase is principally due to increased compensation as a result of the acquisition of TWPG on July 1, 2010, offset by the elimination of deferred compensation expense as a result of the modification to our deferred compensation plan, whereby we removed the service requirement, as previously discussed. Compensation and benefits expense as a percentage of net revenues decreased to 58.2% for the year ended December 31, 2010, compared to 58.3% in 2009. The change in compensation and benefits expense as a percent of net revenues is primarily attributable the increase in net revenues and profitability and, to a lesser extent, the reduction in deferred compensation expense, offset by an increase in compensation expense due to the acquisition of TWPG.

Occupancy and equipment rental - For the year ended December 31, 2010, occupancy and equipment rental expense increased 21.0% to $19.7 million from $16.2 million in 2009.

Communications and office supplies - For the year ended December 31, 2010, communications and office supplies expense increased 23.7% to $23.7 million from $18.5 million in 2009.

Commissions and floor brokerage - For the year ended December 31, 2010, commissions and floor brokerage expense decreased 8.4% to $14.4 million from $15.7 million in 2009. The decrease is primarily attributable to vendor billing issues, resulting in higher than normal expense for the year ended December 31, 2009.

 Other operating expenses - For the year ended December 31, 2010, other operating expenses increased 47.2% to $39.2 million from $26.6 million in 2009. The increase is primarily attributable to merger-related costs associated with the acquisition of TWPG, including approximately $3.0 million in transaction costs.

INCOME BEFORE INCOME TAXES

For the year ended December 31, 2010, income before income taxes for the Institutional Group segment increased 0.3%, to $129.5 million from $129.1 million in 2009. Increased non-interest expense resulting from the TWPG acquisition and decreased fixed income institutional brokerage revenues and fixed income trading profits have resulted in lower profit margins.

58


Year Ended December 31, 2009 Compared With Year Ended December 31, 2008

NET REVENUES

For the year ended December 31, 2009, Institutional Group net revenues increased 26.5% to $494.1 million from $390.7 million in 2008.

The increase in net revenues for the year ended December 31, 2009, over the prior year was primarily attributable to an increase in principal transactions, investment banking, and net interest revenues, offset by a decrease in commissions.

Principal transactions - For the year ended December 31, 2009, principal transactions revenue increased $95.1 million, or 56.4%, to $263.8 million from $168.7 million in 2008. The increase was primarily attributable to increased principal transactions, primarily in corporate debt, OTC equity, mortgage-backed bonds, and municipal debt due to turbulent markets and institutional customers returning to traditional fixed income products.

Commissions - For the year ended December 31, 2009, commission revenues decreased 25.5% to $111.5 million from $149.5 million in 2008. The volatility in capital markets resulted in a decrease in trading volumes, as customers have returned to traditional fixed income products.

Investment banking - For the year ended December 31, 2009, investment banking revenues increased 62.6% to $110.9 million from $68.2 million in 2008.

For the year ended December 31, 2009, capital-raising revenues increased $32.0 million, or 107.7%, to $61.7 million from $29.7 million in 2008.

For the year ended December 31, 2009, equity capital-raising revenues increased $22.7 million to $44.6 million from $21.9 million in 2008. During the year ended December 31, 2009, we were involved, as manager or co-manager, in 72 equity underwritings, which raised a total of $21.4 billion, compared to 46 in 2008, an increase of 56.5% in the number of underwritings from the prior year.

For the year ended December 31, 2009, fixed income capital-raising revenues increased $9.3 million to $17.1 million from $7.8 million in 2008.

During the second half of 2009, capital market conditions began to improve, and we experienced an increase in the number of public finance underwritings. In addition, our revenues were positively impacted by our investment in public finance offices and professional staff during the second half of 2008. For the year ended December 31, 2009, we were involved, as manager or co-manager, in 369 tax-exempt issues with a total par value of $21.6 billion compared to 108 issues with a total par value of $6.4 billion in 2008.

For the year ended December 31, 2009, strategic advisory fees increased 27.9% to $49.2 million from $38.5 million in 2008. The increase was primarily due to an increase in the number of completed equity transactions and the aggregate transaction value from the prior year.

Interest revenue - For the year ended December 31, 2009, interest revenue increased 8.6% to $9.8 million from $9.1 million in 2008. The increase in interest revenues was primarily attributable to increased interest earned on our trading inventory.

Interest expense - For the year ended December 31, 2009, interest expense decreased 47.7%, or $2.9 million, to $3.3 million from $6.2 million in 2008. The decrease was due to decreased interest rates charged by banks on lower levels of borrowings to finance firm inventory.

59


NON-INTEREST EXPENSES

For the year ended December 31, 2009, Institutional Group non-interest expenses increased 22.1% to $365.0 million from $298.8 million in 2008.

Unless specifically discussed below, the fluctuations in non-interest expenses were primarily attributable to the continued growth of our Institutional Group segment during the year ended December 31, 2009. During the year ended December 31, 2009, we added 63 revenue producers (15 equity sales and trading professionals, 19 investment bankers, 19 fixed income sales and trading professionals, and 10 public finance professionals) and 34 support staff.

Compensation and benefits - For the year ended December 31, 2009, compensation and benefits expense increased 23.2% to $287.8 million from $233.7 million in 2008. The increase was primarily due to increased fixed compensation and higher production-based variable compensation due to higher production as compared to the prior year.

Compensation and benefits expense as a percentage of net revenues decreased to 58.3% for the year ended December 31, 2009, compared to 59.8% in 2008. The decrease in compensation and benefits expense as a percent of net revenues was primarily attributable to increased net revenues, offset by increased costs associated with our continued expansion efforts during 2009.

Occupancy and equipment rental - For the year ended December 31, 2009, occupancy and equipment rental expense increased 14.5% to $16.2 million from $14.2 million in 2008.

Communications and office supplies - For the year ended December 31, 2009, communications and office supplies expense decreased 2.9% to $18.5 million from $19.1 million in 2008.

Commissions and floor brokerage - For the year ended December 31, 2009, commissions and floor brokerage expense increased $6.9 million to $15.7 million from $8.8 million in 2008.

 Other operating expenses - For the year ended December 31, 2009, other operating expenses increased 15.4% to $26.6 million from $23.1 million in 2008.

INCOME BEFORE INCOME TAXES

For the year ended December 31, 2009, income before income taxes for the Institutional Group segment increased $37.2 million, or 40.5%, to $129.1 million from $91.9 million in 2008. The increase was primarily attributable to increased revenues and the scalability of increased production as a result of our continued expansion of the Institutional Group segment during 2009.

60


Results of Operations - Other Segment

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31,

 

 

As a Percentage of
Net Revenues
for the Year Ended
December 31,

 

 

2010

 

2009

 

2008

 

 

2010 vs. 2009

 

2009 vs. 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

(3,082

)

$

570

 

$

5,759

 

 

*

%

(90.1

) %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

237,417

 

 

60,124

 

 

59,892

 

 

294.9

 

0.4

 

Other operating expenses

 

 

83,288

 

 

53,864

 

 

46,934

 

 

54.6

 

14.8

 

Total non-interest expenses

 

 

320,705

 

 

113,988

 

 

106,826

 

 

181.4

 

6.7

 

Loss before income taxes

 

(323,787

)

(113,418

)

$

(101,067

)

 

185.5

12.2

  %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Percentage is not meaningful.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2010 Compared With Year Ended December 31, 2009

Net revenues - For the year ended December 31, 2010, net revenues decreased $3.7 million from the prior year. The decrease in net revenues for the year ended December 31, 2010, is primarily attributable to an increase in investment losses. In addition, we recorded an impairment charge of $0.9 million on a held-to-maturity investment during 2010 due to an other-than-temporary decline in value. The decrease in net revenues is offset by the recognition of a $2.1 million gain on the conversion of our seat membership on the Chicago Board Options Exchange to shares in conjunction with its initial public offering during the second quarter of 2010.

Compensation and benefits - For the year ended December 31, 2010, compensation and benefits expense increased $177.3 million to $237.4 million from $60.1 million in 2009. The increase is primarily attributable to an increase in deferred compensation expense due to the modification of our deferred compensation plan. We accelerated all unvested deferred compensation as a result of the plan modification resulting in a non-cash, pre-tax charge of $179.5 million.

Other operating expenses - For the year ended December 31, 2010, other operating expenses increased 14.8% to $83.3 million from $53.9 million in 2009. The increase is primarily attributable to the continued growth in all segments during 2010, which included merger-related expenses of $19.0 million related to our acquisition of TWPG. In addition, the growth of our company contributed to increased SIPC assessments, securities processing fees, travel and promotion, and legal expenses. The increase in legal expenses is attributable to an increase in the number of customer claims arising from volatile market conditions. We are subject to various proceedings and claims arising primarily from our securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters.

61


Year Ended December 31, 2009 Compared With Year Ended December 31, 2008

Net revenues - For the year ended December 31, 2009, net revenues decreased 90.1% to $0.6 million from $5.7 million in 2008. The decrease in net revenues was primarily attributable to a $6.5 million decrease in net interest revenues to $0.8 million in 2009 as a result of decreased interest charged for short-term borrowings, offset by the reduction of investment losses during the year ended December 31, 2009. In addition, we recorded an impairment charge of $1.9 million on a held-to-maturity investment during 2009 due to an other-than-temporary decline in value.

Compensation and benefits - For the year ended December 31, 2009, compensation and benefits expense of $60.1 million remained consistent with the prior year.

For the year ended December 31, 2008, we incurred compensation charges of $25.6 million related to the amortization of units awarded to LM Capital Markets associates, which were fully amortized as of December 31, 2008. Excluding the impact of these charges, the increase in compensation and benefits expense for the year ended December 31, 2009, over the prior year was primarily attributable to an increase in support personnel, as we continued our growth initiatives during 2009. During the year ended December 31, 2009, we have added 145 support associates primarily in Information Technology and Operations.

Other operating expenses - For the year ended December 31, 2009, other operating expenses increased 14.8% to $53.9 million from $46.9 million in 2008.

The increase was primarily attributable to the continued growth in all segments during 2009, which included increased SIPC assessments, securities processing fees, travel and promotion, and legal expenses.  The increase in legal expenses was attributable to an increase in litigation associated with the ongoing investigations in connection with ARS and an increase in the number of claims and litigation costs to defend industry recruitment claims.

62


Analysis of Financial Condition

Our company's consolidated statements of financial condition consist primarily of cash and cash equivalents, receivables, trading inventory, bank loans, investments, goodwill, loans and advances to financial advisors, bank deposits, and payables. Total assets of $4.2 billion at December 31, 2010, were up 33.0% over December 31, 2009. The increase is primarily attributable to increased receivables, trading inventory, financial instruments, loans and advances to financial advisors and the recognition of goodwill associated with our acquisition of TWPG. Our broker-dealer subsidiary's gross assets and liabilities, including trading inventory, stock loan/borrow, receivables and payables from/to brokers, dealers, and clearing organizations and clients, fluctuate with our business levels and overall market conditions. The increase in assets is primarily attributable to the growth of our company, both organically and through the acquisition of TWPG.

As of December 31, 2010, our liabilities were comprised primarily of short-term borrowings of $109.6 million, deposits of $1.6 billion at Stifel Bank, and payables to customers, and brokers, dealers and clearing organizations of $212.6 million and $114.9 million, respectively, at our broker-dealer subsidiaries, as well as accounts payable and accrued expenses, and accrued employee compensation of $404.9 million. To meet our obligations to clients and operating needs, we had $253.5 million in cash at December 31, 2010. We also had client brokerage receivables of $477.5 million and $476.1 million in loans at Stifel Bank.

Liquidity and Capital Resources

Management of Our Liquidity

Liquidity is essential to our business. We regularly evaluate cash requirements for current operations, commitments, development activities, and capital expenditures, and we may elect to raise additional funds for these purposes in the future through the issuance of either debt or equity, under our universal shelf registration filed with the SEC on March 30, 2009.

Management assesses our liquidity position and potential sources of supplemental liquidity in view of our operating performance, current economic and capital market conditions, and other relevant circumstances.

Our assets, consisting mainly of cash or assets readily convertible into cash, are our principal source of liquidity. The liquid nature of these assets provides for flexibility in managing and financing the projected operating needs of the business. These assets are financed primarily by our equity capital, debentures to trusts, client credit balances, short-term bank loans, proceeds from securities lending, and other payables. We currently finance our client accounts and firm trading positions through ordinary course borrowings at floating interest rates from various banks on a demand basis and securities lending, with company-owned and client securities pledged as collateral. Changes in securities market volumes, related client borrowing demands, underwriting activity, and levels of securities inventory affect the amount of our financing requirements.

Our bank assets consist principally of available-for-sale securities, retained loans, and cash and cash equivalents. Stifel Bank's current liquidity needs are generally met through deposits from bank clients and equity capital. We monitor the liquidity of Stifel Bank daily to ensure its ability to meet customer deposit withdrawals, maintain reserve requirements, and support asset growth.

We rely exclusively on financing activities and distributions from our subsidiaries for funds to implement our business and growth strategies. Net capital rules, restrictions under the borrowing arrangements of our subsidiaries, as well as the earnings, financial condition, and cash requirements of our subsidiaries, may each limit distributions to us from our subsidiaries.

We have an ongoing authorization, as amended, from the Board of Directors to repurchase our common stock in the open market or in negotiated transactions. On August 3, 2010, the Board authorized the repurchase of an additional 2,000,000 shares. The share repurchase program will manage our equity capital relative to the growth of our business and help to meet obligations under our employee benefit plans. Under existing Board authorizations at December 31, 2010, we are permitted to buy an additional 2,038,517 shares. We currently do not pay cash dividends on our common stock.

We believe our existing assets, most of which are liquid in nature, together with the funds from operations, available informal short-term credit arrangements, and our ability to raise additional capital will provide sufficient resources to meet our present and anticipated financing needs.

63


Cash Flow

Cash and cash equivalents increased $91.7 million to $253.5 million at December 31, 2010, from $161.8 million at December 31, 2009. Operating activities provided $142.2 million of cash primarily due to an increase in operating assets and liabilities offset by the net effect of non-cash expenses. Investing activities used cash of $568.0 million due to purchases of available-for-sale and held-to-maturity securities as part of our investment strategy at Stifel Bank,  purchases of eligible ARS from our customers as part of our voluntary repurchase plan, and fixed asset purchases, offset by proceeds from the maturity of available-for-sale securities, sale of investments, and bank customer loan repayments. During the year ended December 31, 2010, we purchased $27.7 million in fixed assets, consisting primarily of information technology equipment, leasehold improvements, and furniture and fixtures. Financing activities provided cash of $515.8 million principally due to the increase in affiliated deposits as a result of organic growth and the acquisition of the UBS Acquired Locations, and proceeds received from bank borrowings, offset by repurchases of our common stock and the repayment of two senior notes held by TWPG after the close of the merger.

Funding Sources

We use a variety of funding sources to obtain funds, which includes, but is not limited to, gathering deposits, issuing equity securities, and securitizing assets. Further liquidity is available to our company through uncommitted facilities, FHLB advances, and federal funds agreements.

Cash and Cash Equivalents

We held $253.5 million of cash and cash equivalents at December 31, 2010, compared to $161.8 million at December 31, 2009. Cash and cash equivalents provide immediate sources of funds to meet our liquidity needs.

Securities Available-for-Sale

We held $1.0 billion in available-for-sale investment securities at December 31, 2010, compared to $578.5 million at December 31, 2009. As of December 31, 2010, the weighted average life of the investment securities portfolio was approximately 3.67 years. These investment securities provide increased liquidity and flexibility to support our company's funding requirements.

We monitor the available-for-sale investment portfolio for other-than-temporary impairment based on a number of criteria, including the size of the unrealized loss position, the duration for which the security has been in a loss position, credit rating, the nature of the investments, and current market conditions. For debt securities, we also consider any intent to sell the security and the likelihood we will be required to sell the security before its anticipated recovery. We continually monitor the ratings of our security holdings and conduct regular reviews of our credit sensitive assets.

Deposits

Deposits have become one of our largest funding sources. Deposits provide a stable, low-cost source of funds that we utilize to fund loan and asset growth and to diversify funding sources. We have continued to expand our deposit-gathering efforts through our existing private client network and through expansion. These channels offer a broad set of deposit products that include demand deposits, money market deposits, and certificates of deposit ("CDs").

As of December 31, 2010, we had $1.6 billion in deposits compared to $1.0 billion at December 31, 2009. The growth in deposits is primarily attributable to the increase in brokerage deposits held by the bank and the UBS Acquired Location acquisition. Our core deposits are comprised of non-interest-bearing deposits, money market deposit accounts, savings accounts, and CDs.

Short-term borrowings

Our short-term financing is generally obtained through the use of bank loans and securities lending arrangements. We borrow from various banks on a demand basis with company-owned and customer securities pledged as collateral. The value of customer-owned securities is not reflected on our consolidated statements of financial condition. We maintain available ongoing credit arrangements with banks that provided a peak daily borrowing of $313.5 million during the year ended December 31, 2010. There are no compensating balance requirements under these arrangements. At December 31, 2010, short-term borrowings from banks were $109.6 million at an average rate of 1.05%, which were collateralized by company-owned securities valued at $162.6 million. At December 31, 2009, short-term borrowings from banks were $90.8 million at an average rate of 1.04%, which were collateralized by company-owned securities valued at $165.2 million. The average bank borrowing was $108.8 million, $107.4 million, and $132.7 million during the years ended December 31, 2010, 2009, and 2008, respectively, at weighted average daily interest rates of 1.01%, 0.99%, and 2.28%, respectively.

64


At December 31, 2010 and 2009, Stifel Nicolaus had a stock loan balance of $27.9 million and $16.7 million, respectively, at weighted average daily interest rates of 0.26% and 0.33%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $69.5 million, $53.1 million, and $105.4 million during the years ended December 31, 2010, 2009, and 2008, respectively, at weighted average daily effective interest rates of 1.54%, 1.07%, and 2.47%, respectively. Customer-owned securities were utilized in these arrangements.

The impact of the tightened credit markets has resulted in decreased financing through stock loan as our counterparties sought liquidity. As a result, bank loan financing used to finance trading inventories increased.

Unsecured short-term borrowings

On September 8, 2010, we entered into an unsecured line of credit with two lenders totaling $50.0 million. We can draw upon this line, as long as certain restrictive covenants are maintained. At December 31, 2010, we had no advances against this line of credit.

Federal Home Loan Bank Advances and other secured financing

Stifel Bank has borrowing capacity with the Federal Home Loan Bank of $156.1 million at December 31, 2010, all of which was unused, and a $5.0 million federal funds agreement for the purpose of purchasing short-term funds should additional liquidity be needed. Stifel Bank receives overnight funds from excess cash held in Stifel Nicolaus brokerage accounts, which are deposited into a money market account. These balances totaled $1.6 billion at December 31, 2010.

Our liquidity requirements may change in the event we need to raise more funds than anticipated to increase inventory positions, support more rapid expansion, develop new or enhanced services and products, acquire technologies, or respond to other unanticipated liquidity requirements. We primarily rely on financing activities and distributions from our subsidiaries for funds to implement our business and growth strategies, and repurchase our shares. Net capital rules, restrictions under our borrowing arrangements of our subsidiaries, as well as the earnings, financial condition, and cash requirements of our subsidiaries, may each limit distributions to us from our subsidiaries.

In the event existing internal and external financial resources do not satisfy our needs, we may have to seek additional outside financing. The availability of outside financing will depend on a variety of factors, such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, credit ratings, and credit capacity, as well as the possibility that lenders could develop a negative perception of our long-term or short-term financial prospects if we incurred significant losses or if the level of our business activity decreased due to a market downturn or otherwise. We currently do not have a credit rating, which could adversely affect our liquidity and competitive position by increasing our borrowing costs and limiting access to sources of liquidity that require a credit rating as a condition to providing funds.

Use of Capital Resources

On December 28, 2009, we announced that Stifel Nicolaus had reached an agreement between the State of Missouri, the State of Indiana, the State of Colorado, and with an association of other State securities regulatory authorities regarding the repurchase of ARS from Eligible ARS investors. As part of the modified ARS repurchase offer, we have accelerated the previously announced repurchase plan. We have agreed to repurchase ARS from Eligible ARS investors in four phases starting in January 2010 and ending on December 31, 2011. During 2010, we repurchased $39.2 million of ARS at par. At December 31, 2010, we estimate that our retail clients held $64.5 million of eligible ARS after issuer redemptions of $38.4 million and Stifel repurchases of $81.7 million. See Item 3, "Legal Proceedings," for further details regarding ARS claims.

65


We utilize transition pay, principally in the form of upfront demand notes, to financial advisors and certain key revenue producers as part of our overall growth strategy. The initial value of the notes is determined primarily by the financial advisors' trailing production and assets under management. These notes are generally forgiven over a five- to ten-year period based on production.  The future estimated amortization expense of the upfront notes, assuming current year production levels and static growth for the years ended December 31, 2011, 2012, 2013, 2014, 2015, and thereafter are $51.3 million, $39.4 million, $29.7 million, $20.1 million, and $39.1 million, respectively. These estimates could change if we continue to grow our business through expansion or experience increased production levels.

The following table summarizes the activity related to our company's demand note receivable from January 1, 2009 to December 31, 2010 (in thousands):

 

 

 

 

 

 

 

 

 

 

December 31,
2010

 

December 31,
 2009

 

 

 

 

 

 

 

 

 

Beginning balance

 

185,123

 

$

 

105,767

 

Notes issued - organic growth

 

 

39,777

 

 

81,953

 

Notes issued - acquisitions (1)

 

 

4,681

 

 

31,659

 

Amortization

 

 

(50,162

)

 

(33,407

)

Other

 

 

1,938

 

 

(849

)

Ending balance

 

$

181,357

 

$

185,123

 

 

 

 

 

 

 

 

 

(1)  Notes issued in conjunction with the acquisitions of TWPG in 2010 and the UBS Acquired Locations and Butler Wick in 2009, respectively.

 

 

 

 

 

 

 

 

 

We have paid $44.5 million in the form of upfront notes to financial advisors for transition pay during the year ended December 31, 2010. As we continue to take advantage of the opportunities created by market displacement and as competition for skilled professionals in the industry increases, we may decide to devote more significant resources to attracting and retaining qualified personnel.

Net Capital Requirements

We operate in a highly regulated environment and are subject to net capital requirements, which may limit distributions to our company from our broker-dealer subsidiaries. Distributions from our broker-dealer subsidiaries are subject to net capital rules. These subsidiaries have historically operated in excess of minimum net capital requirements. However, if distributions were to be limited in the future due to the failure of our subsidiaries to comply with the net capital rules or a change in the net capital rules, it could have a material and adverse effect to our company by limiting our operations that require intensive use of capital, such as underwriting or trading activities, or limit our ability to implement our business and growth strategies, pay interest on and repay the principal of our debt, and/or repurchase our common stock. Our non-broker-dealer subsidiary, Stifel Bank is also subject to various regulatory capital requirements administered by the federal banking agencies.

At December 31, 2010, Stifel Nicolaus had net capital of $180.5 million, which was 30.8% of its aggregate debit items and $168.8 million in excess of its minimum required net capital. At December 31, 2010, CSA's and TWP's net capital exceeded the minimum net capital required under the SEC rule. At December 31, 2010, SN Ltd's and TWPIL's net capital and reserves were in excess of the financial resources requirement under the rules of the FSA. At December 31, 2010, SN Canada's net capital and reserves was in excess of the financial resources requirement under the rules of the IIROC. At December 31, 2010, Stifel Bank was considered well capitalized under the regulatory framework for prompt corrective action. See Note 20 of the Notes to Consolidated Financial Statements for details of our regulatory capital requirements.

66


Critical Accounting Policies and Estimates

In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the SEC, we make assumptions, judgments, and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments, and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

We believe that the assumptions, judgments, and estimates involved in the accounting policies described below have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules that require us to make assumptions, judgments, and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies and estimates have not differed materially from actual results.

For a full description of these and other accounting policies, see Note 2 of the Notes to Consolidated Financial Statements.

Valuation of Financial Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, trading securities owned, available-for-sale securities, investments, trading securities sold, but not yet purchased, and derivatives.

Trading securities owned and pledged and trading securities sold, but not yet purchased, are carried at fair value on the consolidated statements of financial condition, with unrealized gains and losses reflected on the consolidated statements of operations.

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted have less pricing observability and are measured at fair value using valuation models that require more judgment. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, and overall market conditions generally.

When available, we use observable market prices, observable market parameters, or broker or dealer quotes (bid and ask prices) to derive the fair value of financial instruments. In the case of financial instruments transacted on recognized exchanges, the observable market prices represent quotations for completed transactions from the exchange on which the financial instrument is principally traded.

A substantial percentage of the fair value of our trading securities and other investments owned, trading securities pledged as collateral, and trading securities sold, but not yet purchased, are based on observable market prices, observable market parameters, or derived from broker or dealer prices. The availability of observable market prices and pricing parameters can vary from product to product. Where available, observable market prices and pricing or market parameters in a product may be used to derive a price without requiring significant judgment. In certain markets, observable market prices or market parameters are not available for all products, and fair value is determined using techniques appropriate for each particular product. These techniques involve some degree of judgment.

For investments in illiquid or privately held securities that do not have readily determinable fair values, the determination of fair value requires us to estimate the value of the securities using the best information available. Among the factors we consider in determining the fair value of investments are the cost of the investment, terms and liquidity, developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. In instances where a security is subject to transfer restrictions, the value of the security is based primarily on the quoted price of a similar security without restriction but may be reduced by an amount estimated to reflect such restrictions. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term, and the differences could be material.

67


We have categorized our financial instruments measured at fair value into a three-level classification in accordance with ASC 820, "Fair Value Measurement and Disclosures." Fair value measurements of financial instruments that use quoted prices in active markets for identical assets or liabilities are generally categorized as Level 1, and fair value measurements of financial instruments that have no direct observable levels are generally categorized as Level 3. All other fair value measurements of financial instruments that do not fall within the Level 1 or Level 3 classification are considered Level 2. The lowest level input that is significant to the fair value measurement of a financial instrument is used to categorize the instrument and reflects the judgment of management.

Level 3 financial instruments have little to no pricing observability as of the report date. These financial instruments do not have active two-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have identified Level 3 financial instruments to include certain asset-backed securities, consisting of collateral loan obligation securities, that have experienced low volumes of executed transactions, certain corporate bonds and equity securities where there was less frequent or nominal market activity, investments in private equity funds, and auction rate securities for which the market has been dislocated and largely ceased to function. Our Level 3 asset-backed securities are valued using cash flow models that utilize unobservable inputs. Level 3 corporate bonds are valued using prices from comparable securities. Equity securities with unobservable inputs are valued using management's best estimate of fair value, where the inputs require significant management judgment. Auction rate securities are valued based upon our expectations of issuer redemptions and using internal models.

At December 31, 2010, Level 3 assets for which we bear economic exposure were $173.5 million, or 10.5% of the total assets measured at fair value. During the year ended December 31, 2010, we recorded net purchases of $100.2 million of Level 3 assets. Our valuation adjustments (realized and unrealized) increased the value of our Level 3 assets by $7.8 million. During 2010, we continued repurchasing eligible ARS from our customers as part of our voluntary repurchase plan, which have been classified as Level 3 assets at December 31, 2010.

At December 31, 2009, Level 3 assets for which we bear economic exposure were $65.4 million, or 5.7% of the total assets measured at fair value. During the year ended December 31, 2009, we recorded net purchases of $31.3 million of Level 3 assets. Our valuation adjustments (realized and unrealized) reduced the value of our Level 3 assets by $3.9 million. In June 2009, we began repurchasing eligible ARS from our customers as part of our voluntary repurchase plan, which have been classified as Level 3 assets at December 31, 2009.

At December 31, 2010, Level 3 assets included the following: $94.8 million of auction rate securities and $78.7 million of private equity and other fixed income securities.

Investments in Partnerships

Investments in partnerships and other investments include our general and limited partnership interests in investment partnerships and direct investments in non-public companies. These interests are carried at estimated fair value. The net assets of investment partnerships consist primarily of investments in non-marketable securities. The underlying investments held by such partnerships and direct investments in non-public companies are valued based on estimated fair value ultimately determined by us in our capacity as general partner or investor and, in the case of an investment in an unaffiliated investment partnership, are based on financial statements prepared by an unaffiliated general partner. Due to the inherent uncertainty of valuation, fair values of these non-marketable investments may differ from the values that would have been used had a ready market existed for these investments, and the differences could be material. Increases and decreases in estimated fair value are recorded based on underlying information of these non-public company investments, including third-party transactions evidencing a change in value, market comparables, operating cash flows and financial performance of the companies, trends within sectors and/or regions, underlying business models, expected exit timing and strategy, and specific rights or terms associated with the investment, such as conversion features and liquidation preferences. In cases where an estimate of fair value is determined based on financial statements prepared by an unaffiliated general partner, such financial statements are generally unaudited other than audited year-end financial statements. Upon receipt of audited financial statements from an investment partnership, we adjust the fair value of the investments to reflect the audited partnership results if they differ from initial estimates. We also perform procedures to evaluate fair value estimates provided by unaffiliated general partners. At December 31, 2010, we had commitments to invest in affiliated and unaffiliated investment partnerships of $4.6 million. These commitments are generally called as investment opportunities are identified by the underlying partnerships. These commitments may be called in full at any time.

68


The investment partnerships in which we are general partner may allocate carried interest and make carried interest distributions, which represent an additional allocation of net realized and unrealized gains to the general partner if the partnerships' investment performance reaches a threshold as defined in the respective partnership agreements. These allocations are recognized in revenue as realized and unrealized gains and losses on investments in partnerships. Our recognition of allocations of carried interest gains and losses from the investment partnerships in revenue is not adjusted to reflect expectations about future performance of the partnerships.

As the investment partnerships realize proceeds from the sale of their investments, they may make cash distributions as provided for in the partnership agreements. Distributions that result from carried interest may subsequently become subject to claw back if the fair value of private equity partnership assets subsequently decreases in fair value. To the extent these decreases in fair value and allocated losses exceed our capital account balance, a liability is recorded by us. These liabilities for claw back obligations are not required to be paid to the investment partnerships until the dissolution of such partnerships, and are only required to be paid if the cumulative amounts actually distributed exceed the amount due based on the cumulative operating results of the partnerships.

We earn fees from the investment partnerships that we manage or of which we are a general partner. Such management fees are generally based on the net assets or committed capital of the underlying partnerships. We have agreed, in certain cases, to waive management fees, in lieu of making a cash contribution, in satisfaction of our general partner investment commitments to the investment partnerships. In these cases, we generally recognize our management fee revenues at the time when we are allocated a special profit interest in realized gains from these partnerships.

Contingencies

We are involved in various pending and potential legal proceedings related to our business, including litigation, arbitration, and regulatory proceedings. Some of these matters involve claims for substantial amounts, including claims for punitive damages. We have, after consultation with outside legal counsel and consideration of facts currently known by management, recorded estimated losses in accordance with ASC 450 ("ASC 450"), "Contingencies," to the extent that claims are probable of loss and the amount of the loss can be reasonably estimated. The determination of these reserve amounts requires us to use significant judgment, and our final liabilities may ultimately be materially different. This determination is inherently subjective, as it requires estimates that are subject to potentially significant revision as more information becomes available and due to subsequent events. In making these determinations, we consider many factors, including, but not limited to, the loss and damages sought by the plaintiff or claimant, the basis and validity of the claim, the likelihood of a successful defense against the claim, and the potential for, and magnitude of, damages or settlements from such pending and potential litigation and arbitration proceedings, and fines and penalties or orders from regulatory agencies. See Item 3, "Legal Proceedings," in Part I of this report for information on our legal, regulatory, and arbitration proceedings.

Allowance for Loan Losses

We regularly review the loan portfolio of Stifel Bank and have established an allowance for loan losses in accordance with ASC 450.  The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. In providing for the allowance for loan losses, we consider historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements.

In addition, impairment is measured on a loan-by-loan basis for non-homogeneous loans and a specific allowance established for individual loans determined to be impaired in accordance with ASC 310 "Receivables." Impairment is measured using the present value of the impaired loan's expected cash flow discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.

A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement will not be collectible. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

69


Once a loan is determined to be impaired, usually when principal or interest becomes 90 days past due or when collection becomes uncertain, the accrual of interest and amortization of deferred loan origination fees is discontinued ("non-accrual status"), and any accrued and unpaid interest income is written off. Loans placed on non-accrual status are returned to accrual status when all delinquent principal and interest payments are collected and the collectibility of future principal and interest payments is reasonably assured. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

Derivative Instruments and Hedging Activities

Stifel Bank utilizes certain derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our company's goal is to manage sensitivity to changes in rates by offsetting the repricing or maturity characteristics of certain assets and liabilities, thereby limiting the impact on earnings. The use of derivative instruments does expose our company to credit and market risk. We manage credit risk through strict counterparty credit risk limits and/or collateralization agreements. At inception, we determine if a derivative instrument meets the criteria for hedge accounting under ASC 815, "Derivatives and Hedging." Ongoing effectiveness evaluations are made for instruments that are designated and qualify as hedges. If the derivative does not qualify for hedge accounting, no assessment of effectiveness is needed.

Income Taxes

The provision for income taxes and related tax reserves is based on our consideration of known liabilities and tax contingencies for multiple taxing authorities. Known liabilities are amounts that will appear on current tax returns, amounts that have been agreed to in revenue agent revisions as the result of examinations by the taxing authorities, and amounts that will follow from such examinations but affect years other than those being examined. Tax contingencies are liabilities that might arise from a successful challenge by the taxing authorities taking a contrary position or interpretation regarding the application of tax law to our tax return filings. Factors considered in estimating our liability are results of tax audits, historical experience, and consultation with tax attorneys and other experts.

Topic 740 ("Topic 740"), "Income Taxes," clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements and prescribed recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, Topic 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Goodwill and Intangible Assets

Under the provisions of ASC 805, "Business Combinations," we record all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value. Determining the fair value of assets and liabilities requires certain estimates. At December 31, 2010, we had goodwill of $301.9 million and intangible assets of $34.6 million.

In accordance with ASC 350, "Intangibles - Goodwill and Other," indefinite-life intangible assets and goodwill are not amortized. Rather, they are subject to impairment testing on an annual basis, or more often if events or circumstances indicate there may be impairment. This test involves assigning tangible assets and liabilities as well as identified intangible assets and goodwill to reporting units and comparing the fair value of each reporting unit to its carrying amount. If the fair value is less than the carrying amount, a further test is required to measure the amount of the impairment. We have elected to test for goodwill impairment in the third quarter of each calendar year. The results of the impairment test performed as of July 31, 2010, our last annual measurement date, did not indicate any impairment.

The goodwill impairment test is a two-step process, which requires us to make judgments in determining what assumptions to use in the calculation. Assumptions, judgments, and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of factors, including, among others, economic trends and market conditions, changes in revenue growth trends or business strategies, unanticipated competition, discount rates, technology, or government regulations. In assessing the fair value of our reporting units, the volatile nature of the securities markets and industry requires us to consider the business and market cycle and assess the stage of the cycle in estimating the timing and extent of future cash flows. In addition to discounted cash flows, we consider other information, such as public market comparables and multiples of recent mergers and acquisitions of similar businesses. Although we believe the assumptions, judgments, and estimates we have made in the past have been reasonable and appropriate, different assumptions, judgments, and estimates could materially affect our reported financial results.

Identifiable intangible assets, which are amortized over their estimated useful lives, are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset or asset group may not be fully recoverable.

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Recent Accounting Pronouncements

See Note 2 of the Notes to Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our consolidated financial statements.

Off-Balance Sheet Arrangements

Information concerning our off-balance sheet arrangements is included in Note 23 of the Notes to Consolidated Financial Statements. Such information is hereby incorporated by reference.

Dilution

As of December 31, 2010, there were 726,210 shares of our common stock issuable on outstanding options, with an average weighted exercise price of $13.36, and 9,445,071 outstanding stock unit grants, with each unit representing the right to receive shares of our common stock at a designated time in the future. The restricted stock units vest on an annual basis over the next three to eight years and are distributable, if vested, at future specified dates. Of the outstanding restricted stock unit awards, 8,985,748 shares are currently vested and 459,323 are unvested. Assuming vesting requirements are met, the Company anticipates that 1,685,268 shares under these awards will be distributed in 2011, 1,665,106 will be distributed in 2012, 2,580,269 will be distributed in 2013, and the balance of 3,514,428 will be distributed thereafter.

An employee will realize income as a result of an award of stock units at the time shares are distributed in an amount equal to the fair market value of such shares at that time, and we are entitled to a corresponding tax deduction in the year of such issuance. Unless an employee elects to satisfy such withholding in another manner, such as by paying the amount in cash or by delivering shares of Stifel Financial Corp. common stock already owned by such person and held by such person for at least six months, we may satisfy tax withholding obligations on income associated with such grants by reducing the number of shares otherwise deliverable in connection with such awards, such reduction to be calculated based on a current market price of our common stock. Based on current tax law, we anticipate that the shares issued when the awards are paid to the employees will be reduced by approximately 35% to satisfy such withholding obligations, so that approximately 65% of the total restricted stock units that are distributable in any particular year will be converted into issued and outstanding shares.

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Contractual Obligations

The following table sets forth our contractual obligations to make future payments as of December 31, 2010 (in thousands):

 

Total

 

2011

 

2012

 

2013

 

2014

 

2015

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debenture to Stifel Financial Capital Trust II (1)

$

35,000

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

$

35,000

Interest on debenture (1)

 

55,267

 

 

2,233

 

 

2,233

 

 

2,233

 

 

2,233

 

 

2,233

 

 

44,102

Debenture to Stifel Financial Capital Trust III (2)

 

35,000

 

 

-

 

 

35,000

 

 

-

 

 

-

 

 

-

 

 

-

Interest on debenture (2)

 

62,383

 

 

2,377

 

 

2,377

 

 

2,377

 

 

2,377

 

 

2,377

 

 

50,498

Debenture to Stifel Financial Capital Trust IV (3)

 

12,500

 

 

-

 

 

12,500

 

 

-

 

 

-

 

 

-

 

 

-

Interest on debenture (3)

 

22,876

 

 

848

 

 

848

 

 

848

 

 

848

 

 

848

 

 

18,636

Operating leases

 

293,015

 

 

58,420

 

 

53,901

 

 

44,640

 

 

38,988

 

 

34,145

 

 

62,921

Commitments to extend credit - Stifel Bank (4)

 

213,747

 

 

150,576

 

 

7,771

 

 

23,239

 

 

21,984

 

 

336

 

 

9,841

ARS repurchase plan (5)

 

64,250

 

 

64,250

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

$

794,038

 

$

278,704

 

$

114,630

 

$

73,337

 

$

66,430

 

$

39,939

 

$

220,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Debenture to Stifel Financial Capital Trust II is callable at par no later than September 30, 2035. The interest is payable at a floating interest rate equal to three-month London Interbank Offered Rate ("LIBOR") plus 1.70% per annum. Thereafter, interest rate assumes no increase.

(2)  Debenture to Stifel Financial Capital Trust III is callable at par no earlier than June 6, 2012, but no later than June 6, 2037. The interest is payable, in arrears, at a fixed interest rate equal to 6.79% per annum from the issue date to June 6, 2012, and then will be payable at a floating interest rate equal to three-month LIBOR plus 1.85% per annum. Thereafter, interest rate assumes no increase.

(3)  Debenture to Stifel Financial Capital Trust IV is callable at par no earlier than September 6, 2012, but no later than September 6, 2037. The interest is payable, in arrears, at a fixed interest rate equal to 6.78% per annum from the issue date to September 6, 2012, and then will be payable at a floating interest rate equal to three-month LIBOR plus 1.85% per annum. Thereafter, interest rate assumes no increase.

(4)  Commitments to extend credit include commitments to originate loans, outstanding standby letters of credit, and lines of credit which may expire without being funded and, as such, do not represent estimates of future cash flow.

(5)  Stifel Nicolaus' modified ARS repurchase plan, wherein it will complete the repurchase of auction rate securities, at par, from its retail clients who purchased ARS through Stifel Nicolaus before the collapse of the ARS market in early 2008 no later than December 31, 2011. The amounts estimated for repurchase assume no issuer redemptions. Issuer redemptions have been at par, and we expect this to continue.

The contractual obligations table excludes uncertain tax position liabilities of $3.1 million, because we cannot make a reliable estimate of the timing of cash payments.

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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

Risks are an inherent part of our business and activities. Management of these risks is critical to our soundness and profitability. Risk management at our company is a multi-faceted process that requires communication, judgment, and knowledge of financial products and markets. Our senior management group takes an active role in the risk management process and requires specific administrative and business functions to assist in the identification, assessment, monitoring, and control of various risks. The principal risks involved in our business activities are: market (interest rates and equity prices), credit, operational, and regulatory and legal. We have adopted policies and procedures concerning risk management, and our Board of Directors, in exercising its oversight of management's activities, conducts periodic reviews and discussions with management regarding the guidelines and policies governing the processes by which risk assessment and risk management are handled.

Market Risk

The potential for changes in the value of financial instruments owned by our company resulting from changes in interest rates and equity prices is referred to as "market risk." Market risk is inherent to financial instruments, and accordingly, the scope of our market risk management procedures includes all market risk-sensitive financial instruments.

We trade tax-exempt and taxable debt obligations, including U.S. treasury bills, notes, and bonds; U.S. government agency and municipal notes and bonds; bank certificates of deposit; mortgage-backed securities; and corporate obligations. We are also an active market maker in over-the-counter equity securities. In connection with these activities, we may maintain inventories in order to ensure availability and to facilitate customer transactions.

Changes in value of our financial instruments may result from fluctuations in interest rates, credit ratings, equity prices, and the correlation among these factors, along with the level of volatility.

We manage our trading businesses by product and have established trading departments that have responsibility for each product. The trading inventories are managed with a view toward facilitating client transactions, considering the risk and profitability of each inventory position. Position limits in trading inventory accounts are established and monitored on a daily basis. We monitor inventory levels and results of the trading departments, as well as inventory aging, pricing, concentration, and securities ratings.

We are also exposed to market risk based on our other investing activities. These investments consist of investments in private equity partnerships, start-up companies, venture capital investments, and zero coupon U.S. government securities and are included under the caption "Investments" on the consolidated statements of financial condition.

Interest Rate Risk

We are exposed to interest rate risk as a result of maintaining inventories of interest rate-sensitive financial instruments and from changes in the interest rates on our interest-earning assets (including client loans, stock borrow activities, investments, inventories, and resale agreements) and our funding sources (including client cash balances, stock lending activities, bank borrowings, and repurchase agreements), which finance these assets. The collateral underlying financial instruments at the broker-dealer is repriced daily, thus requiring collateral to be delivered as necessary. Interest rates on client balances and stock borrow and lending produce a positive spread to our company, with the rates generally fluctuating in parallel.

We manage our inventory exposure to interest rate risk by setting and monitoring limits and, where feasible, hedging with offsetting positions in securities with similar interest rate risk characteristics. While a significant portion of our securities inventories have contractual maturities in excess of five years, these inventories, on average, turn over several times per year.

Additionally, we monitor, on a daily basis, the Value-at-Risk ("VaR") in our trading portfolios using a ten-day horizon and report VaR at a 99% confidence level. VaR is a statistical technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatility. This model assumes that historical changes in market conditions are representative of future changes, and trading losses on any given day could exceed the reported VaR by significant amounts in unusually volatile markets. Further, the model involves a number of assumptions and inputs. While we believe that the assumptions and inputs we use in our risk model are reasonable, different assumptions and inputs could produce materially different VaR estimates.

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The following table sets forth the high, low, and daily average VaR for our trading portfolios during the year ended December 31, 2010, and the daily VaR at December 31, 2010 and 2009 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2010

 

VaR calculation at

 

 

 

High

 

Low

 

 

Daily
Average

 

December 31,
2010

 

December 31,
2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Daily VaR

 

$

15,027

 

$

1,894

 

6,145

 

 

$

8,043

 

$

3,277

 

Stifel Bank's interest rate risk is principally associated with changes in market interest rates related to residential, consumer, and commercial lending activities, as well as FDIC-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public.

Our primary emphasis in interest rate risk management for Stifel Bank is the matching of assets and liabilities of similar cash flow and repricing time frames. This matching of assets and liabilities reduces exposure to interest rate movements and aids in stabilizing positive interest spreads. Stifel Bank has established limits for acceptable interest rate risk and acceptable portfolio value risk. To ensure that Stifel Bank is within the limits established for net interest margin, an analysis of net interest margin based on various shifts in interest rates is prepared each quarter and presented to Stifel Bank's Board of Directors. Stifel Bank utilizes a third-party vendor to analyze the available data.

The following table illustrates the estimated change in net interest margin at December 31, 2010, based on shifts in interest rates of up to positive 200 basis points and negative 200 basis points:

Hypothetical change
 in interest rates

 

Projected change in net interest margin

 

+200

 

57.8

+100

 

29.3

%

0

 

0.00%

 

-100

 

n/a

 

-200

 

n/a

 

 

 

 

 

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The following GAP Analysis table indicates Stifel Bank's interest rate sensitivity position at December 31, 2010 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repricing Opportunities

 

 

 

0-6 Months

 

7-12 Months

 

1-5 Years

 

5+ Years

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

438,830

 

$

23,032

 

$

31,990

 

$

2,744

 

Securities

 

 

286,851

 

 

108,387

 

 

444,656

 

 

214,810

 

Interest-bearing cash

 

 

198,053

 

 

-

 

 

-

 

 

-

 

 

 

923,734

 

131,419

 

$

476,646

 

$

217,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction accounts and savings

 

280,044

 

$

252,375

 

$

948,401

  $

143,758

 

Certificates of deposit

 

 

294

 

 

596

 

 

1,788

 

 

-

 

 

 

$

280,338

 

$

252,971

 

$

950,189

 

$

143,758

 

GAP

 

 

643,396

 

 

(121,552

 

(473,543

)

 

73,796

 

Cumulative GAP

 

$

643,396

 

$

521,844

 

$

48,301

 

$

122,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We maintain a risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our goal is to manage sensitivity to changes in rates by hedging the maturity characteristics of Fed funds-based affiliated deposits, thereby limiting the impact on earnings. By using derivative instruments, we are exposed to credit and market risk on those derivative positions. We manage the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Our interest rate hedging strategies may not work in all market environments and, as a result, may not be effective in mitigating interest rate risk.

Equity Price Risk

We are exposed to equity price risk as a consequence of making markets in equity securities. We attempt to reduce the risk of loss inherent in our inventory of equity securities by monitoring those security positions constantly throughout each day.

Our equity securities inventories are repriced on a regular basis, and there are no unrecorded gains or losses. Our activities as a dealer are client-driven, with the objective of meeting clients' needs while earning a positive spread.

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Credit Risk

We are engaged in various trading and brokerage activities, with the counterparties primarily being broker-dealers. In the event counterparties do not fulfill their obligations, we may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. We manage this risk by imposing and monitoring position limits for each counterparty, monitoring trading counterparties, conducting regular credit reviews of financial counterparties, reviewing security concentrations, holding and marking to market collateral on certain transactions, and conducting business through clearing organizations, which guarantee performance.

Our client activities involve the execution, settlement, and financing of various transactions on behalf of our clients. Client activities are transacted on either a cash or margin basis. Credit exposure associated with our private client business consists primarily of customer margin accounts, which are monitored daily and are collateralized. We monitor exposure to industry sectors and individual securities and perform analyses on a regular basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.

We have accepted collateral in connection with resale agreements, securities borrowed transactions, and customer margin loans. Under many agreements, we are permitted to sell or repledge these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions. At December 31, 2010, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $864.7 million, and the fair value of the collateral that had been sold or repledged was $109.6 million.

By using derivative instruments, we are exposed to credit and market risk on those derivative positions. Credit risk is equal to the fair value gain in a derivative, if the counterparty fails to perform. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes our company and, therefore, creates a repayment risk for our company. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, have no repayment risk. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by senior management.

Stifel Bank extends credit to individual and commercial borrowers through a variety of loan products, including residential and commercial mortgage loans, home equity loans, construction loans, and non-real-estate commercial and consumer loans. Bank loans are generally collateralized by real estate, real property, or other assets of the borrower. Stifel Bank's loan policy includes criteria to adequately underwrite, document, monitor, and manage credit risk. Underwriting requires reviewing and documenting the fundamental characteristics of credit, including character, capacity to service the debt, capital, conditions, and collateral. Benchmark capital and coverage ratios are utilized, which include liquidity, debt service coverage, credit, working capital, and capital to asset ratios. Lending limits are established to include individual, collective, committee, and board authority. Monitoring credit risk is accomplished through defined loan review procedures, including frequency and scope.

We are subject to concentration risk if we hold large positions, extend large loans to, or have large commitments with a single counterparty, borrower, or group of similar counterparties or borrowers (i.e., in the same industry). Securities purchased under agreements to resell consist of securities issued by the U.S. government or its agencies. Receivables from and payables to clients and stock borrow and lending activities, both with a large number of clients and counterparties, and any potential concentration is carefully monitored. Stock borrow and lending activities are executed under master netting agreements, which gives our company right of offset in the event of counterparty default. Inventory and investment positions taken and commitments made, including underwritings, may involve exposure to individual issuers and businesses. We seek to limit this risk through careful review of counterparties and borrowers and the use of limits established by our senior management group, taking into consideration factors including the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment, and other positions or commitments outstanding.

76


Operational Risk

Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems, and inadequacies or breaches in our control processes. We operate different businesses in diverse markets and are reliant on the ability of our employees and systems to process a large number of transactions. These risks are less direct than credit and market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes. In the event of a breakdown or improper operation of systems or improper action by employees, we could suffer financial loss, regulatory sanctions, and damage to our reputation. In order to mitigate and control operational risk, we have developed and continue to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization and within such departments as Accounting, Operations, Information Technology, Legal, Compliance, and Internal Audit. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits. Business continuity plans exist for critical systems, and redundancies are built into the systems as deemed appropriate.

Regulatory and Legal Risk

Legal risk includes the risk of large numbers of private client group customer claims for sales practice violations. While these claims may not be the result of any wrongdoing, we do, at a minimum, incur costs associated with investigating and defending against such claims. See further discussion on our legal reserves policy under "Critical Accounting Policies and Estimates" in Item 7, Part II and "Legal Proceedings" in Item 3, Part I of this report. In addition, we are subject to potentially sizable adverse legal judgments or arbitration awards, and fines, penalties, and other sanctions for non-compliance with applicable legal and regulatory requirements. We are generally subject to extensive regulation by the SEC, FINRA, and state securities regulators in the different jurisdictions in which we conduct business. As a bank holding company, we are subject to regulation by the Federal Reserve. Stifel Bank is subject to regulation by the FDIC. As a result, we are subject to a risk of loss resulting from failure to comply with banking laws. We have comprehensive procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, the extension of credit, including margin loans, collection activities, money laundering, and record keeping. We act as an underwriter or selling group member in both equity and fixed income product offerings. Particularly when acting as lead or co-lead manager, we have potential legal exposure to claims relating to these securities offerings. To manage this exposure, a committee of senior executives review proposed underwriting commitments to assess the quality of the offering and the adequacy of due diligence investigation.

Effects of Inflation

Our assets are primarily monetary, consisting of cash, securities inventory, and receivables from customers and brokers and dealers. These monetary assets are generally liquid and turn over rapidly and, consequently, are not significantly affected by inflation. However, the rate of inflation affects various expenses of our company, such as employee compensation and benefits, communications and office supplies, and occupancy and equipment rental, which may not be readily recoverable in the price of services we offer to our clients. Further, to the extent inflation results in rising interest rates and has other adverse effects upon the securities markets, it may adversely affect our financial position and results of operations.

77


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

79

Consolidated Statements of Financial Condition

80

Consolidated Statements of Operations

82

Consolidated Statements of Changes in Shareholders' Equity

83

Consolidated Statements of Cash Flows

85

Notes to the Consolidated Financial Statements

 

Note 1    Nature of Operation and Basis of Presentation

88

Note 2    Summary of Significant Accounting Policies

89

Note 3    Acquisitions

97

Note 4    Sale of Bank Branch

99

Note 5    Receivables From and Payables to Brokers, Dealers, and Clearing Organizations

99

Note 6    Fair Value of Financial Instruments

100

Note 7    Trading Securities Owned and Trading Securities Sold, But Not Yet Purchased

108

Note 8    Available-for-Sale and Held-to-Maturity Securities

109

Note 9    Bank Loans

112

Note 10  Fixed Assets

113

Note 11  Goodwill and Intangible Assets

114

Note 12  Short-Term Borrowings

115

Note 13  Bank Deposits

116

Note 14  Federal Home Loan Bank Advances

117

Note 15  Debentures to Stifel Financial Capital Trusts

117

Note 16  Derivative Instruments and Hedging Activities

118

Note 17  Liabilities Subordinated to Claims of General Creditors

121

Note 18  Commitments, Guarantees, and Contingencies

121

Note 19  Legal Proceedings

123

Note 20  Regulatory Capital Requirements

124

Note 21  Employee Incentive, Deferred Compensation, and Retirement Plans

126

Note 22  Restructuring

129

Note 23  Off-Balance Sheet Credit Risk

130

Note 24  Income Taxes

132

Note 25  Segment Reporting

135

Note 26  Other Comprehensive Income

138

Note 27  Earnings Per Share

138

Note 28  Shareholders' Equity

139

Note 29  Variable Interest Entities

140

Note 30  Subsequent Events

141

Note 31  Quarterly Financial Information (Unaudited)

142

78


 

Report of Independent Registered Public Accounting Firm

               

The Board of Directors and Shareholders of Stifel Financial Corp.

We have audited the accompanying consolidated statements of financial condition of Stifel Financial Corp. (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stifel Financial Corp. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2011, expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Chicago, Illinois

February 28, 2011 

79


STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition

 

 

 

 

 

 

 

 

 

 

December 31,

 

(in thousands)

 

2010

 

2009

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

253,529

 

$

161,820

 

Restricted cash

 

 

6,868

 

 

-

 

Cash segregated for regulatory purposes

 

 

6,023

 

 

19

 

Receivables:

 

 

 

 

 

 

 

Brokerage clients, net

 

 

477,514

 

 

383,222

 

Brokers, dealers, and clearing organizations

 

 

247,707

 

 

309,609

 

Securities purchased under agreements to resell

 

 

123,617

 

 

124,854

 

Trading securities owned, at fair value (includes securities pledged of $272,172 and $287,683, respectively)

 

 

444,170

 

 

454,891

 

Available-for-sale securities, at fair value

 

 

1,012,714

 

 

578,488

 

Held-to-maturity securities, at amortized cost

 

 

52,640

 

 

7,574

 

Loans held for sale

 

 

86,344

 

 

91,117

 

Bank loans, net

 

 

389,742

 

 

335,157

 

Bank foreclosed assets held for sale, net of estimated cost to sell

 

 

1,577

 

 

3,143

 

Investments

 

 

178,936

 

 

109,403

 

Fixed assets, net

 

 

71,498

 

 

62,115

 

Goodwill

 

 

301,919

 

 

166,725

 

Intangible assets, net

 

 

34,595

 

 

24,648

 

Loans and advances to financial advisors and other employees, net

 

 

181,357

 

 

185,123

 

Deferred tax assets, net

 

 

197,139

 

 

53,462

 

Other assets

 

 

145,226

 

 

115,986

 

Total Assets

 

$ 

4,213,115

 

$

3,167,356

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

80


 

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition (continued) 

 

 

 

 

 

 

 

 

 

 

December 31,

 

(in thousands, except share and per share amounts)

 

2010

 

2009

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

Short-term borrowings from banks

 

$

109,600

 

$

90,800

 

Payables:

 

 

 

 

 

 

 

Customers

 

 

212,642

 

 

214,883

 

Brokers, dealers, and clearing organizations

 

 

114,869

 

 

90,460

 

Drafts

 

 

73,248

 

 

66,964

 

Securities sold under agreements to repurchase

 

 

109,595

 

 

122,533

 

Bank deposits

 

 

1,623,568

 

 

1,047,211

 

Federal Home Loan Bank advances

 

 

-

 

 

2,000

 

Trading securities sold, but not yet purchased, at fair value

 

 

200,140

 

 

277,370

 

Accrued compensation

 

 

234,512

 

 

166,346

 

Accounts payable and accrued expenses

 

 

170,382

 

 

113,364

 

Debenture to Stifel Financial Capital Trust II

 

 

35,000

 

 

35,000

 

Debenture to Stifel Financial Capital Trust III

 

 

35,000

 

 

35,000

 

Debenture to Stifel Financial Capital Trust IV

 

 

12,500

 

 

12,500

 

Other

 

 

19,935

 

 

9,398

 

 

 

 

2,950,991

 

 

2,283,829

 

Liabilities subordinated to claims of general creditors

 

 

8,241

 

 

10,081

 

Shareholders' Equity:

 

 

 

 

 

 

 

Preferred stock - $1 par value; authorized 3,000,000 shares; none issued

 

 

-

 

 

-

 

Exchangeable common stock - $0.15 par value; issued 598,412 and zero shares, respectively

 

 

90

 

 

-

 

Common stock - $0.15 par value; authorized 97,000,000 shares; issued 35,214,952 and 30,388,270 shares, respectively

 

 

5,282

 

 

4,558

 

Additional paid-in-capital

 

 

1,085,474

 

 

623,943

 

Retained earnings

 

 

232,415

 

 

244,615

 

Accumulated other comprehensive income

 

 

381

 

 

1,302

 

 

 

 

1,323,642

 

 

874,418

 

Treasury stock, at cost, 1,490,315 and 4,221 shares, respectively

 

 

(69,238

)

 

(242

)

Unearned employee stock ownership plan shares, at cost, 81,349 and 113,885 shares, respectively

 

 

(521

)

 

(730

)

 

 

 

1,253,883

 

 

873,446

 

Total Liabilities and Shareholders' Equity

 

$

4,213,115

 

$

3,167,356

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

81


 

STIFEL FINANCIAL CORP.

Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

(in thousands, except per share amounts)

 

2010

 

2009

 

2008

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Principal transactions

 

$

453,533

 

458,188

 

293,285

 

Commissions

 

 

445,260

 

 

345,520

 

 

341,090

 

Investment banking

 

 

218,104

 

 

125,807

 

 

83,710

 

Asset management and service fees

 

 

193,159

 

 

117,357

 

 

122,773

 

Interest

 

 

65,326

 

 

46,860

 

 

50,148

 

Other income/(loss)

 

 

19,855

 

 

9,138

 

 

(2,159

)

Total revenues

 

 

1,395,237

 

 

1,102,870

 

 

888,847

 

Interest expense

 

 

13,211

 

 

12,234

 

 

18,510

 

Net revenues

 

 

1,382,026

 

 

1,090,636

 

 

870,337

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

1,056,202

 

 

718,115

 

 

582,778

 

Occupancy and equipment rental

 

 

115,742

 

 

89,741

 

 

67,984

 

Communications and office supplies

 

 

69,929

 

 

54,745

 

 

45,621

 

Commissions and floor brokerage

 

 

26,301

 

 

23,416

 

 

13,287

 

Other operating expenses

 

 

114,081

 

 

84,205

 

 

68,898

 

Total non-interest expenses

 

 

1,382,255

 

 

970,222

 

 

778,568

 

 

 

 

 

 

 

 

 

 

 

 

Income/(loss) before income tax expense

 

 

(229

 

120,414

 

 

91,769

 

Provision for income taxes/(benefit)

 

 

(2,136

 

44,616

 

 

36,267

 

Net income

 

$

1,907

 

$

75,798

 

$

55,502

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

$

2.68

 

$

2.31

 

Diluted

 

$

0.05

 

$

2.35

 

$

1.98

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

32,482

 

 

28,297

 

 

24,069

 

Diluted

 

 

38,448

 

 

32,294

 

 

28,073

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

82


 

STIFEL FINANCIAL CORP.

Consolidated Statements of Changes in Shareholders' Equity

 

 

Common Stock

 

Additional Paid-In

 

Retained

 

Accumulated Other Comprehensive

 

Treasury Stock, at

 

Unearned Employee Stock Ownership

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

cost

 

Plan

 

Total

 

Balance at December 31, 2007

 

23,320

 

 

3,498

 

 

298,092

 

 

125,303

 

 

(660

)

 

(450

)

 

(1,146

)

 

424,637

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

 

-

 

 

-

 

 

55,502

 

 

-

 

 

-

 

 

-

 

 

55,502

 

Net unrealized loss on securities, net of tax

 

-

 

 

-

 

 

-

 

 

-

 

 

(6,634

)

 

-

 

 

-

 

 

(6,634

)

Reclassification adjustment for losses included in net income, net of tax

 

-

 

 

-

 

 

-

 

 

-

 

 

999

 

 

-

 

 

-

 

 

999

 

Total comprehensive income

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

49,867

 

Purchase of treasury stock

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(12,141

)

 

-

 

 

(12,141

)

Employee stock ownership plan purchases

 

-

 

 

-

 

 

1,004

 

 

-

 

 

-

 

 

-

 

 

208

 

 

1,212

 

Issuance of stock for employee benefit plans

 

811

 

 

122

 

 

(21,480

)

 

(9,951

)

 

-

 

 

9,874

 

 

-

 

 

(21,435

)

Stock option exercises

 

243

 

 

37

 

 

1,062

 

 

(1,861

)

 

-

 

 

2,657

 

 

-

 

 

1,895

 

Warrant exercises

 

-

 

 

-

 

 

(4

)

 

-

 

 

-

 

 

4

 

 

-

 

 

-

 

Unit amortization

 

-

 

 

-

 

 

52,593

 

 

-

 

 

-

 

 

-

 

 

-

 

 

52,593

 

Excess tax benefit from stock-based compensation

 

-

 

 

-

 

 

14,840

 

 

-

 

 

-

 

 

-

 

 

-

 

 

14,840

 

Ryan Beck contingent earn-out

 

289

 

 

43

 

 

11,277

 

 

-

 

 

-

 

 

56

 

 

-

 

 

11,376

 

Issuance of stock - public offering

 

1,495

 

 

224

 

 

64,145

 

 

-

 

 

-

 

 

-

 

 

-

 

 

64,369

 

Extinguishment of Stifel Financial Capital Trust IV

 

142

 

 

21

 

 

5,951

 

 

-

 

 

-

 

 

-

 

 

-

 

 

5,972

 

Balance at December 31, 2008

 

26,300

 

$

3,945

 

$

427,480

 

$

168,993

 

$

(6,295

)

$

-

 

$

(938

)

$

593,185

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

 

-

 

 

-

 

 

75,798

 

 

-

 

 

-

 

 

-

 

 

75,798

 

Unrealized gain on securities, net of tax

 

-

 

 

-

 

 

-

 

 

-

 

 

7,517

 

 

-

 

 

-

 

 

7,517

 

Unrealized loss on cash flow hedging activities, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

80

 

 

 

 

 

 

 

 

80

 

Total comprehensive income

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

83,395

 

Purchase of treasury stock

 

-

 

 

-

 

 

572

 

 

-

 

 

-

 

 

(572

)

 

-

 

 

-

 

Employee stock ownership plan purchases

 

-

 

 

-

 

 

1,347

 

 

-

 

 

-

 

 

-

 

 

208

 

 

1,555

 

Issuance of stock for employee benefit plans

 

738

 

 

110

 

 

(7,607

)

 

(72

)

 

-

 

 

102

 

 

-

 

 

(7,467

)

Stock option exercises

 

354

 

 

53

 

 

986

 

 

(104

)

 

-

 

 

228

 

 

-

 

 

1,163

 

Unit amortization

 

-

 

 

-

 

 

42,502

 

 

-

 

 

-

 

 

-

 

 

-

 

 

42,502

 

Excess tax benefit from stock-based compensation

 

-

 

 

-

 

 

13,337

 

 

-

 

 

-

 

 

-

 

 

-

 

 

13,337

 

Ryan Beck contingent earn-out

 

271

 

 

41

 

 

9,260

 

 

-

 

 

-

 

 

-

 

 

-

 

 

9,301

 

Issuance of stock - at the market offering

 

1,000

 

 

150

 

 

44,544

 

 

-

 

 

-

 

 

-

 

 

-

 

 

44,694

 

Issuance of stock - public offering

 

1,725

 

 

259

 

 

91,511

 

 

-

 

 

-

 

 

-

 

 

-

 

 

91,770

 

Warrant exercises

 

-

 

 

-

 

 

11

 

 

-

 

 

-

 

 

-

 

 

-

 

 

11

 

Balance at December 31, 2009

 

30,388

 

$

4,558

 

$

623,943

 

$

244,615

 

$

1,302

 

$

(242

)

$

(730

)

$

873,446

 

See accompanying Notes to Consolidated Financial Statements.

83


STIFEL FINANCIAL CORP.

Consolidated Statements of Changes in Shareholders' Equity (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional Paid-In

 

Retained

 

Accumulated Other Comprehensive

 

Treasury Stock, at

 

Unearned Employee Stock Ownership

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

cost

 

Plan

 

Total

 

Balance at December 31, 2009

 

30,388

 

$

4,558

 

$

623,943

 

$

244,615

 

$

1,302

 

$

(242

)

$

(730

)

$

873,446

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

 

-

 

 

-

 

 

1,907

 

 

-

 

 

-

 

 

-

 

 

1,907

 

Unrealized gain on securities, net of tax

 

-

 

 

-

 

 

-

 

 

-

 

 

3,132

 

 

-

 

 

-

 

 

3,132

 

Unrealized loss on cash flow hedging activities, net of tax

 

-

 

 

-

 

 

-

 

 

-

 

 

(5,793

)

 

-

 

 

-

 

 

(5,793

)

Foreign currency translation adjustment, net of tax

 

-

 

 

-

 

 

-

 

 

-

 

 

1,740

 

 

-

 

 

-

 

 

1,740

 

Total comprehensive income

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

986

 

Purchase of treasury stock

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(91,769

)

 

-

 

 

(91,769

)

Employee stock ownership plan purchases

 

-

 

 

-

 

 

1,446

 

 

-

 

 

-

 

 

-

 

 

209

&nbs