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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 2003
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| | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________.
Commission file number 1-9305
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STIFEL FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 43-1273600
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
501 North Broadway
St. Louis, Missouri 63102-2102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 314-342-2000
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock, Par Value $.15 per share New York Stock Exchange
Chicago Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 report) and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No | |
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 |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |X | No | |
The aggregate market value of the voting and non-voting common equity held
by non-affiliates on June 30, 2003 (the last business day of the
Registrant's second fiscal quarter), was approximately $75.1 million, based
on the closing sale price of the common stock on the New York Stock Exchange
on that date.
Shares of Common Stock outstanding at February 29, 2004: 7,386,585 shares,
par value $.15 per share.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Company's Proxy Statement filed with the SEC in connection
with the Company's Annual Meeting of Stockholders to be held May 5, 2004,
are incorporated by reference in Part III hereof. Exhibit Index located on
pages 57 and 58.
1 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
CAUTIONS ABOUT FORWARD-LOOKING INFORMATION
This Form 10-K and the information incorporated by reference in this Form
10-K contain certain forward-looking statements that are based upon our
current expectations and projections about current events. We intend these
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995, and we are including this statement for purposes of
these safe harbor provisions. You can identify these statements from our use
of the words "may," "will," "should," "could," "would," "plan," "potential,"
"estimate," "project," "believe," "intend," "anticipate," "expect," and
similar expressions. These forward-looking statements include statements
relating to:
o Our goals, intentions, and expectations;
o Our business plans and growth strategies; and
o Estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks,
assumptions, and uncertainties, including, among other things, changes in
general economic and business conditions and the risks and other factors set
forth in this Form 10-K.
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. You should not place undue reliance on any
forward-looking statements, which speak only as of the date they were made.
We will not update these forward-looking statements, even though our
situation may change in the future, unless we are obligated to do so under
federal securities laws. We qualify all of our forward-looking statements by
these cautionary statements.
Stifel Financial Corp., a Delaware corporation and a holding company for
Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus") and other
subsidiaries, was organized in 1983. Stifel Nicolaus, a full-service
broker-dealer, is the successor to a partnership founded in 1890. Stifel
Financial Corp. operates in an inherently risky environment. Based on the
information currently known to us, we believe that the following information
identifies the most significant risk factors affecting our Company. However,
the risks and uncertainties our Company faces are not limited to those
described below. Additional risks and uncertainties not presently known
to us or that we currently believe to be immaterial may also adversely
affect our business.
If any of the following risks and uncertainties develop into actual events,
these events could have a material adverse effect on our business,
financial condition, or results of operations. In such case, the trading
price of our common stock could decline.
RISK FACTORS RELATING TO STIFEL FINANCIAL CORP.
WE ARE DIRECTLY AFFECTED BY FLUCTUATIONS IN THE TRADING VOLUME AND PRICE
LEVELS OF SECURITIES, NATIONAL AND INTERNATIONAL ECONOMIC AND POLITICAL
CONDITIONS, AND BROAD TRENDS IN BUSINESS AND FINANCE.
As a brokerage and investment banking firm, our business depends heavily on
conditions in the financial markets and on economic conditions generally,
both domestic and abroad. Many factors outside our control may directly
affect the securities business, in many cases in an adverse manner. These
include but are not necessarily limited to:
o Economic and political conditions;
o Broad trends in business and finance;
o Legislation and regulation affecting the national and international
business and financial communities;
o Currency values;
o Inflation;
o Market conditions;
o The availability and cost of short-term or long-term funding and capital;
o The credit capacity or perceived credit worthiness of the securities
industry in the market place; and
o The level and volatility of interest rates.
A DOWNTURN IN THE U.S. SECURITIES MARKET COULD ADVERSELY AFFECT OUR BUSINESS
IN MANY WAYS.
In the late 1990s, the stock markets in the United States achieved record or
near record levels, generating substantial revenues for firms in the
securities industry. However, this favorable business environment began to
erode in early 2000, as all major stock indices declined and volatility
increased. This volatility decreased transaction volumes industry-wide, and
many brokerage and investment banking firms experienced a significant
slowdown in business in 2002 and the first quarter of 2003. As indicated by
the past few years, the securities industry is cyclical. Volatility or
instability in the financial markets could significantly harm our business
for many reasons.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 2
Because a significant portion of our revenue is derived from commissions,
margin interest revenue, principal transactions, asset management and
service fees, and investment banking fees, a decline in stock prices,
trading volumes, or liquidity could significantly harm our profitability in
the following ways:
o The volume of trades we would execute for our clients may decrease;
o The value of the invested assets we manage for our clients may decline;
o Our customer margin balances may decrease;
o The number and size of transactions for which we provide underwriting and
merger and acquisition advisory services may decline;
o The value of the securities we hold in inventory as assets, which we
often purchase in connection with market-making and underwriting
activities, may decline. As a market maker, we may own large positions in
specific securities. 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. In addition, a sizable
portion of our inventory is comprised of fixed income securities, which
are sensitive to interest rates. As interest rates rise or fall, there is
a corresponding increase or decrease in the value of our assets;
o The value of the securities we hold as investments acquired directly
through our subsidiaries may decline. In particular, those investments in
venture capital and start-up type companies, which by their nature are
subject to a high degree of volatility, may be susceptible to significant
fluctuations;
o Because our Equity Capital Markets business is significantly concentrated
in the financial services sector, our financial results may be adversely
affected if future legislative, regulatory, accounting pronouncements, or
other developments in the financial services industry cause a decline in
the number of public offerings, private placements, and other capital
raising efforts, including the issuance of trust preferred securities, by
financial institutions, or if there is a significant slowdown in
financial institution mergers and acquisition activity; and
o Our financial results may be adversely affected by the amortization costs
incurred by us in connection with the upfront loans we offer to
investment executives.
To the extent our clients, or counterparties in transactions with us, are
more likely to suffer financial setbacks in a volatile stock market
environment, our risk of loss during these periods would increase.
Declines in the market value of securities can result in the failure of
buyers and sellers of securities to fulfill their settlement obligations,
and in the failure of our clients to fulfill their credit obligations.
During market downturns, counterparties to us in securities transactions may
be less likely to complete transactions. Also, we often permit our clients
to purchase securities on margin or, in other words, to borrow a portion of
the purchase price from us and collateralize the loan with a set percentage
of the securities. During steep declines in securities prices, the value of
the collateral securing 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.
In addition, particularly during market downturns, we may face additional
expense defending or pursuing claims or litigation related to counterparty
or client defaults.
WE FACE INTENSE COMPETITION IN OUR INDUSTRY.
Our business will suffer if we do not compete successfully. All aspects of
our business and of the securities industry in general are intensely
competitive. We expect competition to continue and intensify in the future.
Because many of our competitors have greater resources and offer more
services than we do, increased competition could have a material and adverse
effect on our profitability.
We compete directly with national full-service broker-dealers and investment
banking firms and, to a lesser extent, with discount brokers and dealers,
investment advisors, and commercial banks. We also compete indirectly for
investment assets with insurance companies, real estate firms, hedge funds,
and others.
Although we believe we have competitive advantages, such as the
qualifications and experience of our professional staff, our reputation in
the marketplace, and our existing client relationships, a number of our
competitors have significantly greater capital and financial resources than
we do. 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. These and other
competitive pressures may adversely affect our competitive position and, as
a result, our operations and financial condition.
3 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
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. 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.
WE ARE SUBJECT TO AN INCREASED RISK 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 securities industry face an
increasing amount of litigation and arbitration proceedings. Dissatisfied
clients regularly make claims against securities firms and their brokers
for, among others, negligence, fraud, unauthorized trading, suitability,
churning, failure to supervise, breach of fiduciary duty, employee errors,
intentional misconduct, unauthorized transactions by investment executives
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 we
cannot assure investors that our risk management procedures and controls
will prevent losses from fraudulent activity. 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. In addition, 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 us. We do not carry insurance that would cover payments regarding
these liabilities, with the exception of fidelity coverage with respect to
fraudulent acts of our employees. In addition, our by-laws provide for the
indemnification of our officers, directors, and employees to the maximum
extent permitted under Delaware law. We have entered into indemnification
agreements with our directors. We are now, and in the future 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.
In addition to the foregoing financial costs and risks associated with
potential liability, the defense of litigation has increased costs
associated with attorneys' fees. The amount of outside attorneys' fees
incurred in connection with the defense of litigation 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.
WE DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL. OUR BUSINESS
IS A SERVICE BUSINESS THAT DEPENDS HEAVILY ON HIGHLY SKILLED PERSONNEL AND
THE RELATIONSHIPS THEY FORM WITH CLIENTS.
Our business, as a service business, relies heavily upon our highly skilled
and often highly specialized employees, particularly Ronald J. Kruszewski,
our chairman of the board, president, and chief executive officer, and our
other 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.
We generally do not enter into written employment agreements with our
employees, and employees can stop working with us at any time. Investment
executives typically take their clients with them when they leave to work
for a competitor of ours. From time to time, in addition to investment
executives, we have lost equity research, investment banking, public
finance, and institutional sales and trading professionals to our
competitors, and some have taken clients away from us.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 4
WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY RETAIN OUR KEY PERSONNEL OR
ATTRACT, ASSIMILATE, OR RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE
FUTURE, AND OUR FAILURE TO DO SO COULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION, AND OPERATING RESULTS.
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 an employee's decision to leave us. As
competition for skilled professionals in the industry increases, we may have
to devote more significant resources to attracting and retaining qualified
personnel.
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.
CONTINUED GROWTH MAY STRAIN OUR RESOURCES.
One of our strategies is to grow through the recruitment of investment
executives and, to a lesser extent, possible future acquisitions. The growth
of our business and expansion of our client base has and will continue to
strain our management and administrative resources. It will also require
increased investment in management personnel and financial, administrative,
and communication systems. Unless offset by a growth of revenues, the costs
associated with these investments will reduce our operating margins. We
cannot assure investors that we will be able to manage or continue to manage
our recent or future growth successfully. The inability to do so could have
a material adverse effect on our business, financial condition, and
operating results.
TERRORIST ATTACKS HAVE CONTRIBUTED TO ECONOMIC INSTABILITY IN THE UNITED
STATES; CONTINUED TERRORIST ATTACKS, WAR, OR OTHER CIVIL DISTURBANCES COULD
LEAD TO FURTHER ECONOMIC INSTABILITY AND ADVERSELY AFFECT INVESTOR
CONFIDENCE.
The financial markets were beset with volatility and uncertainty after the
terrorist attacks of September 11, 2001, escalating tensions in the Middle
East, and the war in Afghanistan and in Iraq. These events increased
volatility in the prices of securities. We are unable to predict whether the
future effects of the ensuing U.S. military and other responsive actions,
and the threat of similar future events or responses to such events, will
result in long-term commercial disruptions or will have a long-term adverse
effect on the financial markets, as well as our business, results of
operations, or financial condition.
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
INVESTMENT EXECUTIVES.
The brokerage and investment banking industry continues to undergo
technological change, with periodic introductions of new technology-driven
products and services. In addition to better serving clients, the effective
use of technology increases efficiency and enables firms to reduce costs.
Our future success will depend, in part, upon 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 implement new
technology-driven products and services or be successful in marketing these
products and services to our clients.
WE RELY UPON THIRD PARTIES TO PROVIDE CRITICAL FUNCTIONS.
Our trade processing software is operated by a third-party vendor under an
agreement whereby they provide us turn-key maintenance and operation of
mainframe computers and servers that operate the software. Likewise, we
contract with another vendor, affiliated with our trade processing software
vendor, to operate our market data servers, which constantly broadcast news,
quotes, analytics, and other important information to the desktop computers
of our investment executives. We contract with other vendors to produce,
batch, and mail our confirmations and customer reports. As our business
grows, we cannot be assured that the technology and services we require from
third parties will be available. A third-party contractor's inability to
meet our needs could cause us to be unable to timely and accurately process
our clients' transactions or maintain complete and accurate records of such
transactions.
5 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
WE DEPEND HEAVILY ON OUR COMMUNICATIONS AND INFORMATION SYSTEMS, WHICH ARE
VULNERABLE TO SYSTEMS FAILURES.
Our business is highly dependent on communications and information systems.
Any failure or interruption of our systems could cause delays in our
securities trading activities, which could significantly harm our operating
results. We cannot assure you that we will not suffer any of these systems
failures or interruptions from power or telecommunication failures, natural
disasters, or that our back-up procedures and capabilities in the event of
any such failure or interruption will be adequate.
LOCALIZED CONDITIONS IN THE MIDWEST REGION OF THE UNITED STATES, OR TO A
LESSER EXTENT THE ROCKY MOUNTAIN REGION, MAY ADVERSELY AFFECT OUR BUSINESS.
Our customers are, and have historically been, concentrated in the Midwest
region of the United States and, to a lesser extent, the Rocky Mountain
region. Our revenue is derived largely from our retail brokerage business in
these regions. Because of this concentration, we are dependent on market
conditions in these regions. A significant downturn in the economy in any of
these regions could materially and adversely affect our underwriting and
brokerage businesses located there.
LACK OF SUFFICIENT LIQUIDITY 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. The principal source of our liquidity is our assets, consisting
mainly of cash or assets readily convertible into cash. These assets are
financed primarily by our equity capital, debenture, 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 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.
Stifel Nicolaus generates substantially all of our revenue. We rely
exclusively 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 long-term debt, 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 our
specific financial position. We cannot assure investors that our internal
sources of liquidity will prove sufficient, or if they prove insufficient,
that we will be able to successfully obtain outside financing on favorable
terms, or at all.
WE ARE SUBJECT TO INCREASING GOVERNMENTAL AND ORGANIZATIONAL REGULATION.
Our business, and the securities industry generally, is subject to extensive
regulation at both the federal and state levels. In addition, self-
regulatory organizations ("SRO"), such as The New York Stock Exchange, Inc.
("NYSE") and the National Association of Securities Dealers, Inc. ("NASD"),
require compliance with their extensive rules and regulations. Among other
things, these regulatory authorities impose restrictions on sales methods,
trading practices, use and safekeeping of customer funds and securities,
record keeping, and the conduct of principals and employees. The extensive
regulatory framework applicable to broker-dealers, the purpose of which is
to protect investors and the integrity of the securities markets, imposes
significant compliance burdens and attendant costs on us. The regulatory
bodies that administer these rules do not attempt to protect the interests
of our security holders as such, but rather the public and markets
generally. Failure to comply with any of the laws, rules, or regulations of
any SRO, state, or federal regulatory authority could result in a fine,
injunction, suspension, or expulsion from the industry, which could
materially and adversely impact us. Furthermore, amendments to existing
state or federal statutes, rules, and regulations or the adoption of new
statutes, rules, and regulations could require us to alter our methods of
operation at costs which could be substantial. In particular, recent
corporate scandals have given rise to the Sarbanes-Oxley Act, which has
far-reaching effects on corporate governance and accountability. In
addition, the Securities and Exchange Commission ("SEC"), the NYSE, and the
NASD have instituted new rules for separation of persons or entities
providing securities research and analysis from investment banks. The
enactment of such a proposal would potentially adversely affect the revenues
and profits of investment banks generally, including the Financial
Institutions Group of our Equity Capital Markets business segment. In
addition, our ability to comply with laws, rules, and regulations is highly
dependent upon our ability to maintain a compliance system which is capable
of evolving with increasingly complex and changing requirements. Moreover,
one of our subsidiaries, Century Securities, gives rise to a higher risk of
noncompliance because of the nature of the independent contractor
relationships involved.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 6
WE ARE SUBJECT TO NET CAPITAL REQUIREMENTS; FAILURE TO COMPLY WITH THESE
RULES 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 broker-dealers to maintain a substantial portion of their
assets in cash or highly liquid investments. Failure to maintain the
required net capital may subject a firm to limitation of its activities,
including suspension or revocation of its registration by the SEC and
suspension or expulsion by the NASD, the NYSE, and other regulatory bodies,
and ultimately may require its liquidation. These rules affect both of our
broker-dealer subsidiaries. Failure to comply with the net capital rules
could have material and adverse consequences, such as:
o Limiting our operations that require intensive use of capital, such as
underwriting or trading activities; or
o Restricting us from withdrawing capital from our subsidiaries, even where
our broker-dealer subsidiaries have more than the minimum amount of
required capital. This, in turn, could limit our ability to implement
our business and growth strategies, pay interest on and repay the
principal of our debt, and/or repurchase our shares.
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.
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, 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 RISK MANAGEMENT POLICIES AND PROCEDURES MAY LEAVE US EXPOSED TO
UNIDENTIFIED OR UNANTICIPATED RISK.
Although we have developed risk management procedures and policies to
identify, monitor, and manage risks, we cannot assure investors that our
procedures will be fully effective. Our risk management methods may not
effectively predict the risks we will face in the future, which may be
different in nature or magnitude than past experiences. In addition, some of
our risk management methods are based on an evaluation of information
regarding markets, clients, and other matters provided by third parties.
This information may not be accurate, complete, up-to-date, or properly
evaluated, and our risk management procedures may be correspondingly flawed.
Management of operational, legal, and regulatory risk requires, among other
things, policies and procedures to record properly and verify a large number
of transactions and events, and we cannot assure investors that our policies
and procedures will be fully effective.
PART I
ITEM 1. BUSINESS
Stifel Financial Corp. ("Financial" or the "Company"), a Delaware
corporation and a holding company for Stifel, Nicolaus & Company,
Incorporated ("Stifel Nicolaus") and other subsidiaries, was organized in
1983. Stifel Nicolaus is the successor to a partnership founded in 1890.
Unless the context requires otherwise, the term "Company" as used herein
means Stifel Financial Corp. and its subsidiaries.
The Company offers securities-related financial services through its wholly
owned operating subsidiaries, Stifel Nicolaus and Century Securities
Associates, Inc. ("CSA"). These subsidiaries provide brokerage, trading,
investment banking, investment advisory, and related financial services
primarily to customers throughout the United States from 129 locations. The
Company's customers include individuals, corporations, municipalities, and
institutions. Although the Company has customers throughout the United
States, its major geographic area of concentration is in the Midwest and, to
a lesser extent, the Rocky Mountain Region.
BUSINESS SEGMENTS
The Company's business has four segments: Private Client Group, Equity
Capital Markets, Fixed Income Capital Markets, and Other. Financial
information for each of the three years ended December 31, 2003, 2002, and
2001 is included in the consolidated financial statements and notes thereto.
Such information is hereby incorporated by reference.
NARRATIVE DESCRIPTION OF BUSINESS
As of February 29, 2004, the Company employed 1,159 individuals. Of these,
Stifel Nicolaus employed 1,151, of which 440 were employed as private client
and institutional sales people. In addition, 158 investment executives were
affiliated with CSA as independent contractors. Through its broker-dealer
subsidiaries, the Company provides securities services to approximately
171,000 client accounts. No single client accounts for a material percentage
of any segment of the Company's business.
7 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
PRIVATE CLIENT GROUP
The Company provides securities transaction and financial planning services
to its private clients through Stifel Nicolaus' branch system and its
independent contractor firm, CSA. Management has made significant
investments in personnel, technology, and market data platforms to grow the
private client group over the past five years. The Private Client Group
employs 778 individuals.
STIFEL NICOLAUS PRIVATE CLIENT
Stifel Nicolaus has 82 private client branches located in 14 states,
primarily in the Midwest. Its 418 investment executives provide a broad
range of services and financial products to their clients. While an
increasing number of clients are electing asset-based fee alternatives to
the traditional commission schedule, in most cases Stifel Nicolaus charges
commissions on both stock exchange and over-the-counter transactions, in
accordance with Stifel Nicolaus' commission schedule. In certain cases,
varying discounts from the schedule are granted. In addition, Stifel
Nicolaus distributes equity securities, through initial public offerings and
secondary markets, and taxable and tax-exempt fixed income products to its
private clients, including municipal, corporate, government agency and
mortgage-backed bonds, preferred stock, and unit investment trusts. In
addition, Stifel Nicolaus distributes insurance and annuity products and
investment company shares. Stifel Nicolaus has dealer-sales agreements with
numerous distributors of investment company shares. These agreements
generally provide for dealer discounts ranging up to 5.75% of the purchase
price, depending upon the size of the transaction.
CSA PRIVATE CLIENT
CSA has affiliations with 158 independent contractors in 45 branch offices
and 92 satellite offices in 30 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. The Company makes 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, NYSE margin requirements, and the Company's internal
policies, which usually are more restrictive than Regulation T or NYSE
requirements. In permitting customers to purchase securities on margin, the
Company is subject to the risk of a market decline, which could reduce the
value of its collateral below the amount of the customers' indebtedness.
EQUITY CAPITAL MARKETS
The Equity Capital Markets segment includes corporate finance, research,
syndicate, over-the-counter equity trading, and institutional sales and
trading. The Equity Capital Markets segment employs 110 individuals.
CORPORATE FINANCE
The corporate finance group consists of 17 professionals, located in St.
Louis, Chicago, Denver, and Louisville, and is involved in public and
private equity and preferred underwritings for corporate clients, merger and
acquisition advisory services, fairness opinions, and evaluations. Stifel
Nicolaus focuses on small and mid-cap companies, primarily financial
institutions.
RESEARCH
The research department consists of 28 analysts, located in St. Louis,
Kansas City, and Denver, who publish research on 240 companies. Proprietary
research reports are provided to private and institutional clients at no
charge and are supplemented by research purchased from outside vendors.
SYNDICATE
The syndicate department, consisting of two professionals, coordinates the
marketing, distribution, pricing, and stabilization of the Company's lead-
and co-managed underwritings. In addition, the syndicate department
coordinates the firm's syndicate and selling
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 8
group activities managed by other investment banking firms.
OVER-THE-COUNTER EQUITY TRADING
The Company trades as principal in the over-the-counter market. The
over-the-counter equity trading group, which consists of four professionals,
acts as both principal and agent to facilitate the execution of customers'
orders. The Company makes a market in various securities of interest to its
customers through buying, selling, and maintaining an inventory of these
securities. At February 29, 2004, Stifel Nicolaus made a market in 292
equity issues in the over-the-counter market. The Company does not engage in
a significant amount of trading for its own account.
INSTITUTIONAL SALES AND TRADING
The institutional equity sales and trading group consists of 16
professionals who provide equity products to its institutional accounts in
both the primary and secondary markets. Primary equity issues are generally
underwritten by Stifel Nicolaus' corporate finance group. At February 29,
2004, the institutional equity sales and trading department had 516
institutional accounts.
FIXED INCOME CAPITAL MARKETS
The Fixed Income Capital Markets segment includes public finance,
institutional sales and competitive underwriting, and trading. The Fixed
Income Capital Markets segment employs 74 individuals.
PUBLIC FINANCE
Public finance consists of 24 professionals, with offices in St. Louis,
Denver, Orlando, Wichita, and Milwaukee. Stifel Nicolaus acts as an
underwriter and dealer in bonds issued by states, cities, and other
political subdivisions and may act as manager or participant in offerings
managed by other firms. The majority of the Company's municipal bond
underwritings are originated through these offices.
INSTITUTIONAL SALES AND COMPETITIVE UNDERWRITING AND TRADING
Institutional sales, consisting of 14 professionals, is comprised of taxable
and tax-exempt sales departments located in St. Louis, Brookfield, and
Denver. Stifel Nicolaus buys both tax-exempt and taxable products, primarily
municipal, corporate, government agency, and mortgage-backed bonds for its
own account, maintains an inventory of these products, and resells from that
inventory to its institutional accounts. The institutional fixed income
sales group maintained relationships with approximately 617 accounts at
February 29, 2004.
OTHER SEGMENT
In addition to its private client segment and capital markets segments,
Stifel Nicolaus clears transactions for another independent introducing
broker-dealer. Revenues and costs associated with clearing these
transactions are included in Other segments. The Company also includes
unallocated interest expense, interest income from stock borrow activities,
and interest income and gains and losses on investments held in Other
segments revenue. The Company includes in Other segments the 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. The Company employs 197 persons in
this segment.
COMPETITION
The Company competes 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, the
Company faces 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. Some
of these firms generally charge lower commission rates to their customers
without offering services such as portfolio valuation, investment
recommendations, and research. Trading on the Internet has increased
significantly.
Management relies on the expertise acquired in its market area over its
113-year history, its personnel, and its equity capital to operate in the
competitive environment.
9 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
REGULATION
The securities industry in the United States is subject to extensive
regulation under federal and state laws. The 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 SROs,
principally the NASD, the Municipal Securities Rulemaking Board, and the
national securities exchanges, such as the NYSE. SROs adopt rules (which are
subject to approval by the SEC) which 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.
As a result of federal and state registration and SRO memberships,
broker-dealers are subject to overlapping schemes of regulation which 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 assure
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 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.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations, and corporate reporting. The Sarbanes-Oxley Act is applicable
to all companies with equity or debt securities registered under the
Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act
establishes: (1) new requirements for audit committees, including
independence, expertise, and responsibilities; (2) additional
responsibilities regarding financial statements for the Chief Executive
Officer and Chief Financial Officer of the reporting company; (3) new
standards for auditors and regulation of audits; (4) increased disclosure
and reporting obligations for the reporting company and its directors and
executive officers; and (5) new and increased civil and criminal penalties
for violations of the securities laws. Many of the provisions became
effective immediately, while other provisions will become effective within
the year and are subject to rulemaking by the SEC. Although there will be
additional expenses incurred in complying with the provisions of the
Sarbanes-Oxley Act and the resulting regulations, management does not expect
that such compliance will have a material impact on our results of
operations or financial condition.
The research departments of broker-dealer firms are the subject of increased
regulatory scrutiny. The SEC, the NYSE, and the NASD have recently adopted
numerous rules affecting the content of research reports, research analysts,
and their interaction with investment banking departments at member
securities firms, as well as other companies. Also, acting in part pursuant
to a mandate contained in the Sarbanes-Oxley Act, the SEC, the NYSE, and the
NASD proposed additional, heightened restrictions on the interaction between
research analysts and investment banking departments at member securities
firms. The Company believes that it is in compliance with all existing
rules.
The USA Patriot Act of 2001, enacted in response to the terrorist attacks on
September 11, 2001, contains anti-money laundering and financial
transparency laws and mandates the implementation of various new regulations
applicable to broker-dealers and other financial services companies,
including standards for verifying client identification at account opening
and obligations to monitor client transactions and report suspicious
activities. Through these and other provisions, the Act seeks to promote
cooperation among financial institutions, regulators, and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering. Anti-money laundering laws outside of the U.S. contain some
similar provisions. The increased obligations of financial institutions,
including the Company, to identify their customers, watch for and report
suspicious transactions, respond to requests for information by regulatory
authorities and law enforcement agencies, and share information with other
financial institutions requires the implementation and maintenance of
internal practices, procedures, and controls, has increased our costs, and
may subject us to liability.
In 2003, the NASD required certain member firms, including Stifel Nicolaus
and CSA, to conduct a self-assessment of compliance with the requirement to
provide breakpoint discounts in certain mutual fund sales transactions where
customers were eligible to receive them. Stifel Nicolaus and CSA voluntarily
expanded the scope of the required self-assessment to include all trades
over $2,500 for years 2001
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 10
through 2003. Based upon the results of the self-assessment review, the NASD
required that firms either conduct a trade-by-trade analysis or participate
in a mail notification process. Stifel Nicolaus and CSA were subsequently
required to do the following: 1) reimburse, with interest, any customers
identified in the self-assessment process that did not receive appropriate
breakpoint discounts, 2) establish reserves for other customers who may make
claims for reimbursement, and 3) send notice by no later than January 15,
2004, to all customers who made purchases of Class A mutual fund shares
since January 1, 1999, that they may be entitled to similar refunds. Stifel
Nicolaus has completed the notice mailing and is currently evaluating
inquiries. The Company estimates the total amount of refunds to customers
resulting from the breakpoint reviews will not have a material adverse
effect on its results of operations.
Also in 2003, the SEC and the NASD began inquiries throughout the industry
of late trading and market timing activity in connection with the sales of
mutual funds. The SEC has asked firms, including Stifel Nicolaus, that use
the National Securities Clearing Corporation's Fund/SERV system to submit
and clear mutual fund orders, to review systems and controls for mutual fund
orders intended to prevent late trading, and to review all mutual fund
orders for a year to determine whether late trading in mutual funds
occurred. As a result of prior internal reviews and the SEC-requested
reviews of systems and controls, Stifel Nicolaus has changed certain
policies and procedures relating to the receipt and supervision of mutual
fund orders. Stifel Nicolaus has provided information to the SEC and the
NASD in conjunction with their industry-wide review of mutual fund trading
practices. While the Company is unable to predict the outcome of these
matters at this time, it does not believe the resolution of these matters
will have a material adverse impact on its results of operations.
As a broker-dealer and member of the NYSE, Stifel Nicolaus is subject to the
Uniform Net Capital Rule (Rule 15c3-1) promulgated by the SEC, which
provides that a broker-dealer doing business with the public shall not
permit its aggregate indebtedness (as defined) to exceed 15 times its net
capital (as defined) or, alternatively, that its net capital shall not be
less than 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). 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. 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. Management believes that the alternative
method, which is utilized by most full-service securities firms, is more
directly related to the level of customer business. Therefore, Stifel
Nicolaus computes its net capital under the alternative method.
Under SEC rules, a broker-dealer may be required to reduce its business and
restrict withdrawal of subordinated capital if its net capital is less than
four percent of aggregate debit balances and may be prohibited from
expanding its business and declaring cash dividends if its net capital is
less than five percent of aggregate debit balances. A broker-dealer that
fails to comply with the Uniform Net Capital Rule may be subject to
disciplinary actions by the SEC and self-regulatory agencies, such as the
NYSE, including censures, fines, suspension, or expulsion. In computing net
capital, various adjustments are made to net worth to exclude assets which
are not readily convertible into cash and to state conservatively the other
assets, such as a firm's position in securities. Compliance with the Uniform
Net Capital Rule may limit those operations of a firm such as Stifel
Nicolaus which require the use of its capital for purposes of maintaining
the inventory required for a firm trading in securities, underwriting
securities, and financing customer margin account balances. Stifel Nicolaus
had net capital of approximately $59.1 million at December 31, 2003, which
was approximately 22.2% of aggregate debit balances and approximately $53.7
million in excess of required net capital.
ITEM 2. PROPERTIES
The Company's headquarters, Stifel Nicolaus' headquarters and operations,
and CSA's headquarters are located in 96,000 square feet of leased office
space in St. Louis. The Company's Private Client segment maintains 82 leased
offices in 14 states, primarily in the Midwest. The Fixed Income Capital
Markets segment resides in seven leased locations. The Equity Capital
Markets segment occupies leased space in five locations. The Company's
management believes that, at the present time, the facilities are suitable
and adequate to meet its needs and that such facilities have sufficient
productive capacity and are appropriately utilized.
The Company also leases communication and other equipment. Aggregate annual
rental expense, for office space and equipment, for the year ended December
31, 2003, was approximately $10.1 million. Further information about the
lease obligations of the Company is provided in Note E of the Notes to
Consolidated Financial Statements filed and made a part hereof.
ITEM 3. LEGAL PROCEEDINGS
See Note J of the Consolidated Financial Statements filed and made a part
hereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to vote of securities holders during the
fourth quarter of 2003.
11 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is furnished pursuant to General Instruction G (3)
of Form 10-K with respect to the executive officers of Financial:
POSITIONS OR OFFICES WITH THE
NAME AGE COMPANY AND STIFEL NICOLAUS
Ronald J. Kruszewski 45 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
Scott B. McCuaig 54 Senior Vice President and Director
of the Company and
President, Co-Chief Operating Officer,
and Director of Stifel Nicolaus
James M. Zemlyak 44 Senior Vice President, Chief Financial Officer,
and Treasurer of the Company and
Senior Vice President, Co-Chief Operating Officer,
Chief Financial Officer, and Director of Stifel Nicolaus
Walter F. Imhoff 72 Senior Vice President of Stifel Nicolaus and
Director of the Company
Thomas A. Prince 54 Senior Vice President and General Counsel of the Company
and General Counsel, Senior Vice President,
and Director of Stifel Nicolaus
David D. Sliney 34 Senior Vice President of the Company and
Senior Vice President and Director of Stifel Nicolaus
Ronald J. Kruszewski has been President and Chief Executive Officer of the
Company and Stifel Nicolaus since September 1997 and Chairman of the Board
of Directors of the 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 of the Company since
September 1997.
Scott B. McCuaig has been Senior Vice President and President of the Private
Client Group of the Company 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 of the Company since April 2001.
James M. Zemlyak joined Stifel Nicolaus in February 1999. Mr. Zemlyak has
been Senior Vice President, Chief Financial Officer, and Treasurer of the
Company and Senior Vice President, Chief Financial Officer, and a member of
the Board of Directors of Stifel Nicolaus since February 1999 and Co-Chief
Operating Officer of Stifel Nicolaus since August 2002. Prior to joining the
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.
Walter F. Imhoff has served as Senior Vice President of Stifel Nicolaus and
a Director of the Company since January 12, 2000. Prior thereto, Mr. Imhoff
served as Chairman, President, and Chief Executive Officer of Hanifen,
Imhoff Inc., a Colorado-based broker-dealer, from 1979 until it was
integrated into the Company on January 12, 2000.
Thomas A. Prince joined Stifel Nicolaus in August 1999. He became Senior
Vice President and General Counsel of the Company and General Counsel,
Senior Vice President, and a Director of Stifel Nicolaus in July 2000. Prior
thereto, he served as Branch Manager of the Little Rock, Arkansas Private
Client Group office of Stifel Nicolaus. Prior to joining Stifel Nicolaus,
Mr. Prince was a principal in the law firm of Jack, Lyon & Jones, PA in
Little Rock, Arkansas from January 1990 to August 1999.
David D. Sliney was promoted to Senior Vice President of the Company in
2003. In 1997, Mr. Sliney began a Strategic Planning and Finance role with
Stifel Nicolaus and now serves as a Director of Stifel Nicolaus and is
responsible for the 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.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
a. MARKET INFORMATION
The common stock of Stifel Financial Corp. is traded on the New York Stock
Exchange and Chicago Stock Exchange under the symbol "SF." The high/low
sales prices for Stifel Financial Corp. common stock, as reported on the
NYSE Consolidated Transactions Reporting System, for each full quarterly
period for the calendar years are as follows:
- --------------------------------------------------------------------
STOCK PRICE
HIGH - LOW
- --------------------------------------------------------------------
YEAR 2003 BY QUARTER
- --------------------------------------------------------------------
First $12.23 - 10.95
Second 13.03 - 11.40
Third 13.85 - 11.90
Fourth 19.78 - 13.28
- --------------------------------------------------------------------
YEAR 2002 BY QUARTER
- --------------------------------------------------------------------
First $13.20 - 10.40
Second 14.65 - 12.45
Third 13.30 - 11.65
Fourth 12.70 - 10.95
- --------------------------------------------------------------------
b. HOLDERS
The approximate number of stockholders of record on March 1, 2004, was
3,500.
c. DIVIDENDS
Dividends paid were as follows:
RECORD PAYMENT CASH
DATE DATE DIVIDEND
2/13/02 2/27/02 $0.03
5/23/02 6/6/02 $0.03
On May 9, 2002, the Company announced the elimination of future dividends on
common stock.
See restrictions related to the payment of dividends in Liquidity and
Capital Resources contained in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and made part hereof.
d. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Information regarding securities authorized for issuance under equity
compensation plans is contained in "Equity Compensation Plan Information,"
included in the Registrant's Proxy Statement for the 2004 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
13 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
(in thousands, except per share amounts) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES Commissions $ 85,409 $ 71,520 $ 73,517 $ 85,109 $ 68,663
Investment banking 49,705 45,918 37,068 21,700 11,507
Principal transactions 43,912 36,251 31,009 28,046 24,654
Asset management and service fees 28,021 25,098 24,769 24,189 19,736
Interest 12,243 14,544 21,866 35,479 20,525
Other 2,330 782 761 3,325 6,108
----------------------------------------------------------------------------------------------------------
Total revenues 221,620 194,113 188,990 197,848 151,193
Less: Interest expense 5,108 6,319 11,722 20,594 10,097
----------------------------------------------------------------------------------------------------------
Net revenues 216,512 187,794 177,268 177,254 141,096
- ---------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST Employee compensation and benefits 140,973 126,726 120,889 117,229 92,819
EXPENSES Occupancy and equipment rental 19,278 18,631 17,673 15,120 11,819
Communications and office supplies 10,740 10,737 10,799 10,879 8,911
Commissions and floor brokerage 3,263 3,373 3,269 3,059 2,838
Other operating expenses 17,198 23,533 21,251 16,278 13,736
----------------------------------------------------------------------------------------------------------
Total non-interest expenses 191,452 183,000 173,881 162,565 130,123
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 25,060 4,794 3,387 14,689 10,973
Provision for income taxes 10,053 2,014 1,377 5,486 3,808
----------------------------------------------------------------------------------------------------------
Net income $ 15,007 $ 2,780 $ 2,010 $ 9,203 $ 7,165
==========================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA Basic earnings $ 2.17 $ .40 $ .28 $ 1.31 $ 1.08
Diluted earnings $ 1.82 $ .34 $ .25 $ 1.20 $ 1.03
Cash dividends -- $ .06 $ .12 $ .12 $ .12
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF Total assets $412,019 $422,976 $440,559 $458,312 $453,110
FINANCIAL CONDITION Long-term obligations $ 63,035 $ 63,227 $ 38,512 $ 36,469 $ 36,036
AND OTHER DATA Stockholders' equity $100,045 $ 79,990 $ 78,622 $ 74,178 $ 59,059
Net income as % average equity 17.09% 3.44% 2.58% 13.33% 12.55%
Net income as % total revenues 6.77% 1.43% 1.06% 4.65% 4.74%
Average common shares and share equivalents
used in determining earnings per share:
Basic 6,925 7,033 7,162 7,007 6,655
Diluted 8,228 8,169 7,990 7,669 6,940
- ---------------------------------------------------------------------------------------------------------------------------------
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations," made part hereof.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
Stifel Financial Corp. (the "Parent"), through its wholly owned
subsidiaries, principally Stifel, Nicolaus & Company, Incorporated ("Stifel
Nicolaus"), collectively referred to as the "Company," is principally
engaged in retail brokerage, securities trading, investment banking,
investment advisory, and related financial services throughout the United
States. Although the Company has offices throughout the United States, its
major geographic area of concentration is in the Midwest and, to a lesser
extent, the Rocky Mountain Region. The Company's principal customers are
individual investors, with the remaining client base composed of
corporations, municipalities, and institutions.
The difficult market and economic conditions that existed over the last two
years continued through the first quarter of 2003. Concerns over weak
corporate earnings, corporate governance scandals, heightened geopolitical
tensions in the Middle East, the war on terrorism, and the war with Iraq
served to dissuade the investor from the market. However, the tax cuts
implemented in the second quarter, combined with increased capital spending,
improved corporate profits, and a more stable situation in Iraq, spurred the
investor back into the equity markets. As a result, the last three quarters
of 2003 saw an improved environment for the securities industry.
As of December 31, 2003, the three major equity indices, key indicators of
investors' confidence, the Dow Jones Industrial Average, the Standard &
Poor's 500 Index, and the Nasdaq Composite closed up 25.3%, 26.4%, and
50.0%, respectively, over their December 31, 2002, closing.
As a result of the Federal Reserve Board's lowering of the Fed funds
interest rates eleven times during 2001, once during the last quarter of
2002, and once again to a 45-year low of 1% during 2003, the Company's rates
charged to its customers for borrowings were reduced. Likewise, the interest
rates paid by the Company to support customer and firm borrowings declined.
The effect of the reduction in interest rates, along with the Company's
issuance of the debenture (see Note L), was to reduce the Company's net
interest margin by $1.1 million.
However, for 2002 and 2003, the economic and interest rate environment
provided favorable conditions industry-wide for municipal bond
underwritings, as state and local governments tapped the capital markets to
fund growing budget deficits and to refinance higher interest debt at very
low borrowing costs.
The Company continued its expansion efforts, albeit somewhat subdued from
the prior years, by opening 6 branch offices, for a total of 83 in 15
states.
The following table presents major categories of revenue and expenses for
the Company for the respective periods.
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------- ------------------ -------------------
% OF NET % INCREASE/ % OF NET % INCREASE/ % OF NET
(IN THOUSANDS) AMOUNT REVENUE (DECREASE) AMOUNT REVENUE (DECREASE) AMOUNT REVENUE
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Commissions and principal transactions $129,321 60% 20% $107,771 57% 3% $104,526 59%
Investment banking 49,705 23 8 45,918 24 24 37,068 21
Asset management and service fees 28,021 13 12 25,098 13 1 24,770 14
Interest 12,243 6 (16) 14,544 8 (33) 21,866 12
Other 2,330 1 198 782 0 3 760 0
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $221,620 102% 14% $194,113 103% 3% $188,990 107%
Less: Interest expense 5,108 2 (19) 6,319 3 (46) 11,722 7
- -----------------------------------------------------------------------------------------------------------------------------------
NET REVENUES $216,512 100% 15% $187,794 100% 6% $177,268 100%
===================================================================================================================================
NON-INTEREST EXPENSES:
Employee compensation and benefits $140,973 65% 11% $126,726 67% 5% $120,889 68%
Commissions and floor brokerage 3,263 2 (3) 3,373 2 3 3,269 2
Communication and office supplies 10,740 5 0 10,737 6 (1) 10,799 6
Occupancy and equipment rental 19,278 9 3 18,631 10 5 17,673 10
Other operating expenses 17,198 8 (27) 23,533 13 11 21,251 12
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSES $191,452 88% 5% $183,000 97% 5% $173,881 98%
- -----------------------------------------------------------------------------------------------------------------------------------
PRE-TAX INCOME $ 25,060 12% 423% $ 4,794 3% 42% $ 3,387 2%
===================================================================================================================================
15 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
2003 AS COMPARED TO 2002 -- TOTAL COMPANY
The Company's total revenues increased $27.5 million, a 14% increase over
2002, and it posted the eighth consecutive annual increase in net revenues
(total revenues less interest expense) of $28.7 million, a 15% increase over
the prior year. The increase in net revenues can be attributed principally
to the Company's strong performance of its Private Client Group and improved
market conditions as the individual investor returned to the equity markets.
As a result, commissions and principal transactions revenues increased 20%
to $129.3 million. In addition, investment banking revenues increased 8% to
$49.7 million, resulting from improved market conditions for equity
underwritings, which offset a decline in municipal finance revenues.
Asset management and service fees increased 12% to $28.0 million from $25.1
million due to increased account service fees, asset management fees for
wrap accounts, which are billed based upon the value of the assets
maintained in the account, and increased distribution fees for money market
funds and mutual funds, which are paid to partially reimburse the Company
for its processing cost relating to statement preparation and tax reporting.
Net interest declined 13% to $7.1 million. Interest revenue from customer
margin accounts decreased 17% to $9.7 million, principally resulting from
decreased borrowings and decreased rates charged to those customers.
Interest expense decreased $1.2 million, resulting principally from
decreased short-term borrowings from banks by the Company to finance
customer borrowings on margin accounts along with lower rates charged on
those borrowings. The decrease was offset by an increase in interest expense
on long-term debt as a result of a full year of interest paid on the $34.5
million 9% debenture to Stifel Financial Capital Trust I issued in April
2002 compared to a partial year of interest paid in 2002 on the debenture
along with a partial year of interest paid on the $10.0 million long-term note
to Western and Southern Life Insurance Company ("W&S"), a significant
shareholder, bearing interest of 8% per annum.
Other revenues increased 198% to $2.3 million as a result of an increase in
cash surrender value of life insurance for outside directors and an increase
in gain on investments resulting from improved market conditions.
Total non-interest expenses increased $8.5 million to $191.5 million,
principally due to increased employee compensation and benefits, offset by a
decrease in other expenses.
Employee compensation and benefis, which comprises 65% of net revenues, down
from 67% in 2002, increased 11% to $141.0 million in conjunction with
increased productivity and profitability. A portion of compensation and
benefits includes transition pay, principally in the form of upfront notes
and accelerated payout, in connection with the Company's expansion efforts.
The upfront notes are amortized over a five- to ten-year period. Excluding
transition pay of $8.2 million and $8.8 million from 2003 and 2002,
respectively, compensation as a percentage of net revenues totaled 61%
compared to 63% in 2002.
Other expense decreased $6.3 million to $17.2 million, resulting principally
from the 2002 $6.5 million charge relating to an arbitration award and other
matters which arose primarily in connection with the activities of a former
Stifel Nicolaus broker. The 2003 other expense includes a reversal of $2.0
million due to the favorable settlement of that award. Excluding the prior
year charge and the current year reversal, other expenses increased $2.1
million, resulting principally from increased litigation settlement and
legal fees of $1.9 million due to the increased costs to defend and settle
claims against the Company.
The effective tax rate decreased to 40% in 2003 from 42% in 2002 as a result
of a non-taxable gain on cash surrender value in 2003 as compared to a
non-taxable loss in 2002.
The current year net income increased 440% over the prior year net income to
$15.0 million or $1.82 per diluted share.
The current year results include a third quarter reversal of a $1.2 million
charge, net of tax, or approximately $0.15 per diluted share, resulting from
the favorable settlement of an arbitration award. The prior year results
include a third quarter after-tax charge of $3.5 million, or $0.44 per
diluted share, related to that arbitration award and other legal matters as
discussed in other expense.
2002 AS COMPARED TO 2001 -- TOTAL COMPANY
The Company recorded its seventh consecutive year of record net revenues of
$187.8 million, up 6% over the previous year record net revenues of $177.3
million. The increase resulted principally from an increase in investment
banking revenues of $8.9 million, primarily corporate finance revenue, and
commissions and principal transactions of $3.2 million, primarily resulting
from increased trading activity in taxable and tax-exempt fixed income
products as investors sought alternatives to equity-based products, offset
by decreased net interest revenue of $1.9 million resulting from a decrease
in interest income of $7.3 million, principally from reduced borrowings by
customers caused by poor market conditions and decreased rates charged to
those customers. Interest expense declined $5.4 million, resulting from
decreased borrowings from banks to finance customer borrowings. The decrease
in interest expense from banks was offset by an increase in interest expense
on long-term debt, resulting from the partial year of interest on the $10.0
million long-term note to W&S bearing interest of 8% per annum and a partial
year of interest on the $34.5 million 9% debenture to Stifel Financial
Capital Trust I issued in April of 2002. The prior year long-term interest
reflects interest on the long-term note to W&S bearing interest of 8%, which
was outstanding for the full year.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 16
Total non-interest expenses increased $9.1million to $183.0 million,
principally due to increased employee compensation and benefits, occupancy
and equipment rental, and other expenses.
Employee compensation and benefits, which comprises 67% of net revenues,
down from 68% in 2001, increased $5.8 million, principally from increased
variable compensation paid to investment executives, resulting from
increased revenue production. Excluding transition pay of $8.8 million and
$9.6 million from 2003 and 2002, respectively, compensation as a percentage
of net revenues totaled 63%, unchanged from the previous year.
Occupancy and equipment rental expense increased $958,000 or 5% as a result
of the Company's continued expansion efforts.
Other non-interest expenses increased $2.3 million, resulting principally
from a $6.5 million charge for an arbitration award and other matters,
primarily for compensatory damages to two customers of the Company in
connection with activities of a former broker in its Pikeville, Kentucky
office. The prior year other expense includes approximately $4.7 million in
legal-related expenses incurred primarily in connection with historical
litigation arising out of the Company's former Oklahoma operations.
Excluding the current and prior year charges, other expenses increased
$482,000 to $17.0 million from $16.6 million.
The effective tax rate increased to 42% in 2002 compared to 41% in 2001 as a
result of non-taxable life insurance proceeds received in 2001.
Net income increased to $2.8 million or $0.34 per diluted share from $2.0
million or $0.25 per diluted share.
The 2002 net income was adversely impacted by $3.5 million, net of tax, or
$0.44 per diluted share, due principally to an arbitration award against the
Company for compensatory damages to two customers of the Company in
connection with activities of a former broker in its Pikeville, Kentucky
office. The prior year was adversely impacted by $2.7 million, net of tax,
or $0.34 per diluted share, due to legal-related expenses incurred primarily
in connection with historical litigation arising out of the Company's former
Oklahoma operations.
SEGMENT ANALYSIS
The Company's reportable segments include the Private Client Group, Equity
Capital Markets, Fixed Income Capital Markets, and Other. The Private Client
Group segment includes branch offices and independent contractor offices of
the Company's broker-dealer subsidiaries located throughout the U.S.,
primarily in the Midwest. These branches provide securities brokerage
services, including the sale of equities, mutual funds, fixed income
products, and insurance, to their private clients. The Equity Capital
Markets segment includes corporate finance management and participation in
underwritings (exclusive of sales credits, which are included in the Private
Client Group segment), mergers and acquisitions, institutional sales,
trading, research, and market making. The Fixed Income Capital Markets
segment includes public finance, institutional sales, and competitive
underwriting and trading. The "Other" segment includes clearing revenue,
interest income from stock borrow activities, unallocated interest expense,
interest income and gains and losses from investments held, 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.
Operating contribution is defined by the Company as net revenues (total
revenues less interest expense) less non-interest expenses of the segment.
17 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
RESULTS OF OPERATIONS FOR PRIVATE CLIENT GROUP
The following table present consolidated information for the Private Client
Group segment for the respective periods.
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------- ------------------ -------------------
% OF NET % INCREASE/ % OF NET % INCREASE/ % OF NET
(IN THOUSANDS) AMOUNT REVENUE (DECREASE) AMOUNT REVENUE (DECREASE) AMOUNT REVENUE
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Commissions and principal transactions $117,441 72% 23% $ 95,380 70% 1% $ 94,333 73%
Investment banking 11,684 7 11 10,520 8 88 5,584 4
Asset management and service fees 27,961 17 13 24,672 18 3 23,853 18
Interest 9,751 6 (17) 11,771 9 (36) 18,524 14
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $166,837 102% 17% $142,343 104% 0% $142,294 110%
Less: Interest expense 3,742 2 (38) 5,995 4 (54) 13,047 10
- -----------------------------------------------------------------------------------------------------------------------------------
NET REVENUES $163,095 100% 20% $136,348 100% 5% $129,247 100%
===================================================================================================================================
NON-INTEREST EXPENSES
Employee compensation and benefits $ 95,249 58% 16% $ 82,394 60% 3% $ 80,328 62%
Commissions and floor brokerage 2,237 1 3 2,174 2 3 2,119 2
Communication and office supplies 6,274 4 (2) 6,415 5 (4) 6,673 5
Occupancy and equipment rental 10,822 7 5 10,319 8 9 9,437 7
Other operating expenses 12,930 8 (28) 18,000 13 56 11,527 9
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSES $127,512 78% 7% $119,302 87% 8% $110,084 85%
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING CONTRIBUTIONS $ 35,583 22% 109% $ 17,046 13% (11)% $ 19,163 15%
===================================================================================================================================
2003 COMPARED TO 2002 -- PRIVATE CLIENT GROUP
Private Client Group total revenues increased 17% to $166.8 million,
principally due to the increase in commissions and principal transactions
resulting from improved market conditions attributable to retail investors
who had been reluctant to invest during 2002 returning to the securities
markets, particularly in the last ten months of 2003. In addition,
commissions from investment banking increased due to the increased number of
lead or co-managed transactions (see 2003 Compared to 2002 -- Equity Capital
Markets).
Asset management and service fees increased, principally due to increased
wrap fees, which are billed based upon the value of the assets maintained in
the account and increased due to improved market conditions, as well as
increased account service fees and distribution fees received for money
market accounts and mutual funds.
Interest revenue and interest expense for the Private Client Group declined
as a result of decreased borrowings by customers along with decreased rates
charged for those borrowings. Interest expense declined due to decreased
borrowings from banks to finance customer borrowings along with decreased
rates charged on those borrowings and an increased utilization of stock loan
to finance customer borrowings, which bears a lower interest rate than bank
borrowings.
Employee compensation and benefits increased, principally due to increased
production by investment executives. As a percentage of net revenues,
employee compensation and benefits decreased to 58% from 60% in the prior
year. Employee compensation and benefits includes transition pay,
principally upfront notes and accelerated payouts, in connection with the
Company's expansion efforts. Excluding transition pay of $7.7 million and
$8.2 million from 2003 and 2002, respectively, compensation and benefits as
a percentage of net revenues remained relatively unchanged at 54%.
Operating contribution for the Private Client Group increased due to the
increase in revenue production in conjunction with a decrease in other
non-interest expenses. Year-to-year comparisons of "other non-interest
expenses" were impacted by the current year $2.0 million reversal of an
arbitration award. The prior year "other expenses" include a $6.5 million
charge related to that arbitration award and other legal matters (see 2003
Compared to 2002 -- Total Company).
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 18
2002 COMPARED TO 2001 -- PRIVATE CLIENT GROUP
Private Client Group net revenues increased $7.1 million resulting from
increased commissions, principally from commissions generated from
investment banking for corporate finance activities and principal
transactions on fixed income products, primarily corporate and government
bonds, as investors sought safer alternatives to equities. Net interest
revenue remained relatively unchanged, as both interest revenue and interest
expense were affected by both the market environment and interest rate
environment. Clients became more conservative in their investing, borrowing
less and holding more cash in their accounts, as the equity markets remained
weak. The decline in customer margin borrowing, coupled with declining
interest rates, was the primary reason for the decline in interest revenues.
Interest expense declined principally as a result of decreased borrowings
from banks for customer borrowings coupled with decreased rates on those
borrowings.
The current year operating contribution declined 11% to $17.0 million from
$19.1 million, principally due to increased employee compensation and
benefits and other expenses.
Employee compensation and benefits increased 3% to $82.4 million from $80.3
million, in line with the increased production. As a percentage of net
revenues, employee compensation and benefits declined to 60% from 62% in the
prior year. Excluding transition pay of $8.2 million and $9.1 million from
2002 and 2001, respectively, employee compensation and benefits as a
percentage of net revenues decreased to 54% from 55%.
Other expenses increased $6.5 million, principally due to an approximate
$6.5 million charge, resulting principally from an arbitration award and
other matters, primarily for compensatory damages to two customers of the
Company in connection with activities of a former broker in its Pikeville,
Kentucky office.
RESULTS OF OPERATIONS FOR EQUITY CAPITAL MARKETS
The following table presents consolidated information for the Equity Capital
Markets Group segment for the respective periods.
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------- ------------------ -------------------
% OF NET % INCREASE/ % OF NET % INCREASE/ % OF NET
(IN THOUSANDS) AMOUNT REVENUE (DECREASE) AMOUNT REVENUE (DECREASE) AMOUNT REVENUE
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Commissions and principal transactions $ 8,250 23% 3% $ 8,036 25% 41% $ 5,696 23%
Investment banking 26,465 74 16 22,839 71 31 17,371 70
Other 1,068 3 (25) 1,427 4 (33) 2,119 9
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $35,783 101% 11% $32,302 101% 28% $25,186 101%
Less: Interest expense 250 1 (14) 292 1 (6) 312 1
- -----------------------------------------------------------------------------------------------------------------------------------
NET REVENUES $35,533 100% 11% $32,010 100% 29% $24,874 100%
===================================================================================================================================
NON-INTEREST EXPENSES:
Employee compensation and benefits $20,289 57% 6% $19,080 60% 15% $16,592 67%
Commissions and floor brokerage 910 3 (14) 1,063 3 7 991 4
Communication and office supplies 1,964 6 (7) 2,114 7 0 2,117 9
Occupancy and equipment rental 1,206 3 9 1,109 3 (5) 1,165 5
Other operating expenses 376 1 115 175 1 (231) (134) (1)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSES $24,745 70% 5% $23,541 74% 14% $20,731 83%
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING CONTRIBUTIONS $10,788 30% 27% $ 8,469 26% 104% $ 4,143 17%
===================================================================================================================================
19 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
2003 COMPARED TO 2002 -- EQUITY CAPITAL MARKETS
Net revenues increased 11% to a record $35.5 million over the 2002 record
performance.
Operating contributions increased $2.3 million or 30%, principally due to
increased underwriting activity. During the year, the Equity Capital Markets
Group lead or co-managed 69 equity, debt, or trust preferred offerings
compared to 47 in 2002 due to improved equity markets, particularly in the
second half of the year. As a result, investment banking revenues and
commissions and principal transactions revenue increased 16% and 3%,
respectively. Total non-interest expenses increased $1.2 million due to
increased employee compensation and benefits, principally variable
compensation as a result of improved productivity and profitability. As a
percentage of net revenues, employee compensation and benefits declined to
57% from 60% in the prior year. Excluding employee compensation and
benefits, non-interest expenses as a percentage of net revenues declined
slightly to 13% from 14% in the prior year.
2002 COMPARED TO 2001 -- EQUITY CAPITAL MARKETS
Operating contribution increased $4.3 million or 104%, resulting from
increased underwriting activity, as equity markets rebounded from a
disastrous 2001. The Equity Capital Markets Group lead or co-managed 47
equity, debt, or trust preferred offerings compared to 24 in the prior year.
As a result, investment banking revenue increased $5.5 million, and
commissions and principal transactions increased $2.3 million. Non-interest
expenses increased $2.8 million, principally due to the increase in employee
compensation and benefits, which increased $2.5 million. As a percentage of
net revenues, employee compensation and benefits decreased to 60% from 67%
in the prior year. Excluding employee compensation and benefits,
non-interest expenses as a percentage of net revenues declined to 14% from
17% in the prior year.
RESULTS OF OPERATIONS FOR FIXED INCOME CAPITAL MARKETS
The following table presents consolidated information for the Fixed Income
Capital Markets Group segment for the respective periods.
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------- ------------------ -------------------
% OF NET % INCREASE/ % OF NET % INCREASE/ % OF NET
(IN THOUSANDS) AMOUNT REVENUE (DECREASE) AMOUNT REVENUE (DECREASE) AMOUNT REVENUE
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Commissions and principal transactions $ 6,898 45% (10)% $ 7,623 46% (8)% $ 8,284 46%
Investment banking 8,478 55 (7) 9,099 54 (5) 9,612 53
Interest 859 6 3 834 5 (9) 914 5
Other 73 0 (43) 127 1 (79) 591 3
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $16,308 106% (8)% $17,683 106% (9)% $19,401 107%
Less: Interest expense 924 6 (1) 934 6 (29) 1,310 7
- -----------------------------------------------------------------------------------------------------------------------------------
NET REVENUES $15,384 100% (8)% $16,749 100% (7)% $18,091 100%
===================================================================================================================================
NON-INTEREST EXPENSES:
Employee compensation and benefits $10,293 67% (5)% $10,861 65% (6)% $11,504 64%
Commissions and floor brokerage 116 1 (15) 136 1 (14) 159 1
Communication and office supplies 975 6 (6) 1,034 6 1 1,028 6
Occupancy and equipment rental 700 5 (3) 722 4 5 687 4
Other operating expenses 550 4 18 466 3 77 264 1
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSES $12,634 82% (4)% $13,219 79% (3)% $13,642 75%
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING CONTRIBUTIONS $ 2,750 18% (22)% $ 3,530 21% (21)% $ 4,449 25%
===================================================================================================================================
2003 COMPARED TO 2002 -- FIXED INCOME CAPITAL MARKETS
Fixed Income Capital Markets recorded an operating contribution of $2.8
million, down 22% from 2002. While the number of senior or co-managed deals
decreased slightly, from 147 in 2002 to 145 in 2003, the amount of
underwriter's discount earned on those transactions declined more
significantly, resulting in decreased investment banking fees and
institutional commissions. As a result, total revenues declined $1.4
million, offset by a decrease in non-interest expenses of $600,000,
principally employee compensation and benefits, which declined due to
decreased productivity and profitability. As a percentage of net revenues,
employee compensation and benefits increased to 67% from 65%.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 20
2002 COMPARED TO 2001 -- RESULTS OF OPERATIONS FOR FIXED INCOME CAPITAL MARKETS
Despite the favorable market conditions for refinancing by municipalities
and institutions that existed industry-wide and after a record-setting
performance by Fixed Income Capital Markets in 2001, operating contribution
decreased 21% to $3.5 million from $4.4 million in 2001. During the year,
Fixed Income Capital Markets senior or co-managed 147 offerings compared to
177 offerings in 2001. As a result, total revenues declined $1.3 million,
offset by a decrease in non-interest expenses of $423,000, principally
employee compensation and benefits, which declined $643,000 due to decreased
productivity and profitability. As a percentage of net revenues, employee
compensation and benefits increased to 65% from 64%. Excluding employee
compensation and benefits, non-interest expenses as a percentage of net
revenues increased to 14% from 12% in the prior year.
RESULTS OF OPERATIONS FOR OTHER SEGMENT
The following table presents consolidated information for Other Segment for
the respective periods.
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------- ------------------ -------------------
% OF NET % INCREASE/ % OF NET % INCREASE/ % OF NET
(IN THOUSANDS) AMOUNT REVENUE (DECREASE) AMOUNT REVENUE (DECREASE) AMOUNT REVENUE
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Interest $ 1,633 65% (16)% $ 1,939 72% (20)% $ 2,426 48%
Other 1,059 42 (788) (154) (6) (51) (317) (6)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 2,692 108% 51% $ 1,785 66% (15)% $ 2,109 42%
Less: Interest expense 192 8 (121) (902) (34) (69) (2,947) (58)
- -----------------------------------------------------------------------------------------------------------------------------------
NET REVENUES $ 2,500 100% (7)% $ 2,687 100% (47)% $ 5,056 100%
===================================================================================================================================
NON-INTEREST EXPENSES:
Employee compensation and benefits $ 15,142 606% 5% $ 14,391 536% 15% $ 12,465 247%
Communication and office supplies 1,527 61 30 1,174 44 20 981 19
Occupancy and equipment rental 6,550 262 1 6,481 241 2 6,384 126
Other operating expenses 3,342 134 (32) 4,892 182 (49) 9,594 190
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSES $ 26,561 1,062% (1)% $ 26,938 1,003% (8)% $ 29,424 582%
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING CONTRIBUTIONS $(24,061) (962)% (1)% $(24,251) (903)% 0% $(24,368) (482)%
===================================================================================================================================
2003 COMPARED TO 2002 -- OTHER SEGMENT
Other Segment total revenues increased 51% to $2.7 million from $1.8
million, resulting principally from an increase in cash surrender value of
life insurance for certain outside directors and an increase in gains on
investments, offset by a decrease in interest revenue as a result of a
decrease in stock borrowings interest income. Interest expense in Other
Segment represents interest charged by banks and interest expense accrued
on the debenture securities less an internal allocation to the Private
Client and Capital Markets segments for use of capital. Total non-interest
expenses decreased 1%, resulting from a decrease in litigation settlement
charges of $1.6 million, offset by an increase in employee compensation and
benefits, principally in incentive compensation, which increased with total
Company profitability.
2002 COMPARED TO 2001 -- OTHER SEGMENT
Total non-interest expenses declined $2.5 million, resulting from a decrease
in legal-related expenses of $4.7 million principally due to historical
litigation arising out of the Company's former Oklahoma operations, offset
by an increase in employee compensation and benefits of $1.9 million,
primarily incentive compensation for total Company profitability.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are principally highly liquid, consisting mainly of
cash or assets readily convertible into cash. These assets are financed
primarily by the Company's equity capital, debenture to Stifel Financial
Capital Trust I, customer credit balances, short-term bank loans, proceeds
from securities lending, and other payables. Changes in securities market
volumes, related customer borrowing demands, underwriting activity, and
levels of securities inventory affect the amount of the Company's financing
requirements.
21 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Stifel Nicolaus' short-term financing is generally obtained through the use
of bank loans and securities lending arrangements. Stifel Nicolaus borrows
from various banks on a demand basis with company-owned and customer
securities pledged as collateral. Available ongoing credit arrangements with
banks totaled $205.0 million at December 31, 2003, of which $199.4 million
was unused. There are no compensating balance requirements under these
arrangements. Stifel Nicolaus' floating rate short-term bank borrowings bore
interest at weighted average rates of 1.38% and 1.74% at December 31, 2003
and 2002, respectively. Short-term borrowings of $3.7 million and $26.4
million were collateralized by customer-owned securities of $13.9 million
and $71.7 million at December 31, 2003 and 2002, respectively. The value of
the customer-owned securities is not reflected in the consolidated statement
of financial condition. The remaining short-term borrowings of $2.0 million
and $17.0 million were collateralized by company-owned securities valued at
$9.7 million and $23.4 million at December 31, 2003 and 2002, respectively.
The average bank borrowing was $8.0 million, $49.0 million, and $96.8
million in 2003, 2002, and 2001, respectively, at effective interest rates
of 1.66%, 2.25%, and 4.50%, respectively. At December 31, 2003 and 2002,
Stifel Nicolaus had a stock loan balance of $116.9 million and $56.1
million, respectively, at average rates of 1.05% and 1.29%, respectively.
The average outstanding securities lending arrangements utilized in
financing activities were $119.5 million, $118.5 million, and $127.8 million
in 2003, 2002, and 2001, respectively, at average effective interest rates
of 1.17%, 1.71%, and 3.85%, respectively. Customer securities were utilized
in these arrangements.
On April 25, 2002, Stifel Financial Capital Trust I (the "Trust"), a
Delaware Trust and wholly owned subsidiary of the Company, completed the
offering of 1,380,000 shares of 9% Cumulative Trust Preferred Securities
("trust preferred securities") for $34.5 million (net proceeds of
approximately $32.9 million after offering expenses and underwriting
commissions). The trust preferred securities represent an indirect interest
in a junior subordinated debenture (the "debenture") purchased from the
Company by the Trust. The debenture bears the same terms as the trust
preferred securities. The trust preferred securities may be redeemed by the
Company, and in turn, the Trust would call the debenture no earlier than
June 30, 2007, but no later than June 30, 2032. The interest payments on the
debenture will be made quarterly, and undistributed payments will accumulate
interest of 9% per annum compounded quarterly. At December 31, 2003, the
fair value of the trust preferred securities was $38,502, which also equals
the fair value of the debenture, as it has the same terms as the trust
preferred securities. The Company has also provided a guarantee to the Trust
to pay all non-interest expenses of the Trust until the Trust is liquidated.
As of December 31, 2003, the Company elected to apply the provisions of FIN
46R to the Trust. The adoption resulted in the deconsolidation of the Trust,
and the trust preferred securities are now presented as "Debenture to Stifel
Financial Capital Trust I" in the consolidated statements of financial
condition.
On April 30, 2002, the Company repaid $10.0 million principal amount, as
allowed by the agreement, of long-term indebtedness due June 30, 2004,
payable to W&S, a significant shareholder, bearing interest of 8.0% per
annum.
The Company paid $3.8 million, $3.5 million, and $9.8 million for the
issuance of upfront notes to investment executives for transition pay for
the years ended December 31, 2003, 2002, and 2001, respectively. The Company
amortizes these notes over a five- to ten-year period. Compensation expense
related to the amortization of these notes was $7.9 million, $5.3 million,
and $5.5 million for the years ended December 31, 2003, 2002, and 2001,
respectively.
On February 19, 2002, the Company entered into a $4.0 million sale-leaseback
arrangement for certain office furniture and equipment. The lease expires in
February 2005, with an option to purchase the equipment at the higher of
market value or 15% of the original purchase price. The Company makes
quarterly payments of approximately $320,000. At the time of the sale, the
Company's recorded net book value for the equipment was $2.9 million,
resulting in a deferred gain of $1.1 million, which is amortized ratably
over the life of the lease. The transaction is being accounted for as an
operating lease.
On May 9, 2002, the Company's board of directors authorized the repurchase
of up to 750,000 additional shares on top of the existing authorization of
600,000 shares. These purchases may be made on the open market or in
privately negotiated transactions, depending upon market conditions and
other factors. Repurchased shares may be used to meet obligations under the
Company's employee benefit plans and for general corporate purposes.
Further, the Company announced on May 9, 2002, the elimination of future
dividends on its common stock.
The Board of Directors of the Company authorized a tender offer to purchase
up to 850,000 shares of Stifel Financial Corp., or approximately 12% of its
outstanding common stock (including associated preferred stock purchase
rights), at a price of $13.25 per share. The tender offer commenced on
September 5, 2003, and expired on October 10, 2003. On September 4, 2003,
the last trading day prior to the commencement of the offer, the closing
price per share reported on The New York Stock Exchange was $12.54. Based on
the final count by the depositary for the tender offer, the Company
purchased 87,471 shares, representing approximately 1.2% of outstanding
shares, at a purchase price of $13.25 per share. The aggregate purchase
price of the shares purchased by the Company through the tender offer,
including fees and expenses associated with the tender offer, was
approximately $1.2 million.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 22
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Exclusive of the tender offer, the Company repurchased 80,263, 570,124, and
95,930 shares for the years ending December 31, 2003, 2002, and 2001,
respectively, using existing board authorizations, at average prices of
$12.26, $12.05, and $10.85 per share, respectively, to meet obligations
under the Company's employee benefit plans and for general corporate
purposes. The Company reissued 291,317, 195,858, and 35,847 shares for the
years ending December 31, 2003, 2002, and 2001, respectively, for employee
benefit plans. Under existing board authorizations, the Company is per