Back to GetFilings.com
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
-----------------
| | 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
------
STIFEL FINANCIAL CORP.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 43-1273600
- ---------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
501 North Broadway
St. Louis, Missouri 63102-2102
- ---------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 314-342-2000
----------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
- -------------------------------------- -------------------------------
Common Stock, Par Value $.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 permitted
to buy an additional 759,502 shares.
The Company purchased $2.4 million, $3.2 million, and $4.5 million in fixed
assets during 2003, 2002, and 2001, respectively, primarily information
technology equipment, leasehold improvements, and furniture and fixtures.
Management believes that funds from operations, available informal
short-term credit arrangements, long-term borrowings, and its ability to
raise additional capital will provide sufficient resources to meet its
present and anticipated financing needs and fund the Company's continued
expansion for the next 12 months.
Stifel Nicolaus is subject to certain requirements of the SEC with regard to
liquidity and capital requirements. At December 31, 2003, Stifel Nicolaus
had net capital of approximately $59.1 million, which exceeded the minimum
net capital requirements by approximately $53.7 million. Stifel Nicolaus may
not be able to pay dividends from its equity capital without prior
regulatory approval if doing so would jeopardize its ability to satisfy
minimum net capital requirements.
INFLATION
The Company's assets are primarily monetary, consisting of cash, securities
inventory, and receivables from customers and brokers and dealers. These
monetary assets are generally liquid and turn over rapidly and,
consequently, are not significantly affected by inflation. However, the rate
of inflation affects various expenses of the Company, such as employee
compensation and benefits, communications, and occupancy and equipment,
which may not be readily recoverable in the price of its services.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United
States requires management to make judgments, assumptions, and estimates
that affect the amounts reported in the Consolidated Financial Statements
and accompanying notes. Note A to the Consolidated Financial Statements in
the Annual Report on Form 10-K for the year ended December 31, 2003,
describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. The following critical
accounting policies and estimates are impacted significantly by judgments,
assumptions, and estimates used in the preparation of the Consolidated
Financial Statements.
Legal Reserves
The Company records reserves related to legal proceedings resulting from
lawsuits and arbitrations, which arise from its business activities. Some of
these lawsuits and arbitrations claim substantial amounts, including
punitive damage claims. Management has determined that it is likely that
ultimate resolution in favor of the claimant will result in losses to the
Company on certain of these claims. The Company has, after consultation with
outside legal counsel and consideration of facts currently known by
management, recorded estimated losses to the extent they believe certain
claims are probable of loss and the amount of the loss can be reasonably
estimated. Factors considered by management in estimating the Company's
liability are the loss and damages sought by the claimant/plaintiff, the
merits of the claim, the amount of loss in the client's account, the
possibility of wrongdoing on the part of the employee of the Company, the
total cost of defending the litigation, the likelihood of a successful
defense against the claim, and the potential for fines and penalties from
regulatory agencies. Results of litigation and arbitration are inherently
uncertain, and management's assessment of risk associated therewith is
subject to change as the proceedings evolve. After discussion with outside
counsel, management, based on its understanding of the facts, reasonably
estimates a range of loss and accrues what they consider appropriate to
reserve against probable loss for certain claims, which is included in the
consolidated statement of financial condition under the caption "Accounts
payable and accrued expenses."
Reserve for Doubtful Receivables From Former Employees
The Company offers transition pay, principally in the form of upfront loans,
to investment executives and certain key revenue producers as part of the
Company's overall growth strategy. These loans are generally forgiven over a
five- to ten-year period if the individual satisfies certain conditions,
usually based on continued employment and certain performance standards. If
the individual leaves before the term of the loan expires or fails to meet
certain performance standards, the individual is required to repay the
balance. In determining the allowance for doubtful receivables from former
employees, management considers the facts and circumstances surrounding each
receivable, including the amount of the unforgiven balance, the reasons for
the terminated employment relationship, and the former employees' overall
financial positions.
23 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
Valuation of Securities and Investments
Securities not readily marketable, held for investment by the Parent and
certain subsidiaries, of $11.1 million and $11.2 million at December 31,
2003 and 2002, respectively, which consist primarily of investments in
private equity partnerships, start up companies, and other venture capital
investments and are included under the caption "Investments" and are carried
at fair value. Investment securities of registered broker-dealer
subsidiaries are carried at fair value or amounts that approximate fair
value. The fair value of investments, for which a quoted market or dealer
price is not available, are based on management's estimates. Among the
factors considered by management in determining the fair value of
investments are the cost of the investment, terms and liquidity,
developments since the acquisition of the investment, the sales price of
recently issued securities, the financial condition and operating results of
the issuer, earnings trends and consistency of operating cash flows, the
long-term business potential of the issuer, the quoted market price of
securities with similar quality and yield that are publicly traded, and
other factors generally pertinent to the valuation of investments. The fair
value of these investments is subject to a high degree of volatility and may
be susceptible to significant fluctuation in the near term.
Income Tax Matters
The provision for state income taxes and related tax reserves is based on
management's consideration of known liabilities and tax contingencies. Known
liabilities are amounts that will appear on current tax returns, amounts
that have been agreed to in revenue agent revisions as the result of
examinations by the state taxing authorities, and amounts that will follow
from such examinations but affect years other than those being examined. Tax
contingencies are liabilities that might arise from a successful challenge
by the state taxing authorities taking a contrary position or interpretation
regarding the application of tax law to the Company's tax return filings.
Factors considered by management in estimating the Company's liability are
results of state tax audits, historical experience, and consultation with
tax attorneys and other experts.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others ("FIN 45"). FIN 45 requires the recognition of a liability for the
fair value of an obligation undertaken in issuing a guarantee and also
requires certain disclosures of such guarantees. The disclosure requirements
were adopted in 2002. The recognition requirements became effective for the
Company on January 1, 2003. The recognition requirements of FIN 45 did not
have a material impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"), an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements. FIN 46 requires
certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 was
immediately effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 were to
originally be applied as of July 1, 2003. However, the FASB subsequently
issued numerous FASB Staff Positions attempting to clarify and improve the
application of FIN 46, one of which deferred the effective date of FIN 46 to
the fourth quarter of 2003. In December 2003, the FASB issued FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities ("FIN 46R"), which clarifies the definition of a variable
interest, exempts entities that are businesses from its scope, and partially
delays the effective date of FIN 46 for certain entities. The delay
notwithstanding, public companies must apply either FIN 46 or FIN 46R to
special purpose entities ("SPEs"), as defined, no later than the first
reporting period ending after December 15, 2003 (December 31, 2003 for the
Company). FIN 46R must be applied to all variable interest entities that are
not SPEs no later than the end of the first reporting period ending after
March 15, 2004.
The Company's wholly owned subsidiary, Stifel Financial Capital Trust I (the
"Trust"), is considered an SPE. 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 retroactive reclassification of the
obligation from the preferred trust offering from the caption "Guaranteed
preferred beneficial interest in subordinated debt securities" to "Debenture
to Stifel Financial Capital Trust I" in the consolidated statements of
financial condition. Other than the retroactive reclassification, the
adoption of FIN 46R did not have an impact on the Company's consolidated
statements of operations, stockholders' equity, or cash flows. For the
interim period ending March 31, 2004, the Company will adopt FIN 46R related
to any remaining variable interest entities that are not SPEs, which is not
expected to have an impact on the Company's consolidated financial
statements.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 24
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective
for contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of this statement
did not have an impact on the Company's consolidated financial position,
results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures,
in its statement of financial position, certain financial instruments with
characteristics of both liabilities and equity. In accordance with the
standard, a financial instrument that embodies an obligation for the issuer
is required to be classified as a liability (or an asset in some
circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and for all other instruments for
interim periods beginning after June 15, 2003. On November 7, 2003, the FASB
staff issued FASB Staff Position No. 150-3, which defers certain provisions
of SFAS No. 150. The Company has adopted the effective provisions of SFAS
No. 150. The adoption of these provisions did not have an impact on the
Company's consolidated financial position, results of operations, or cash
flows. For the deferred provisions, the Company is currently evaluating the
impact of this statement.
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company's contractual obligations to make
future payments as of December 31, 2003.
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) TOTAL 2004 2005 2006 2007 2008 THEREAFTER
-------- ------- ------- ------- ------ ------- -----------
Debenture to Stifel Financial Capital Trust I (1) $ 34,500 -- -- -- -- -- $ 34,500
Interest on debenture (1) 88,493 3,105 3,105 3,105 3,105 3,105 72,968
LLC non-interest bearing notes (2) 24,598 -- -- -- -- 4,600 19,998
Short-term debt 5,650 5,650 -- -- -- -- --
Liabilities subordinated to general creditors 3,745 698 634 779 720 914 --
Operating leases 44,285 8,574 7,889 6,730 5,483 4,910 10,699
Capital leases 235 157 41 37 -- -- --
Communication and quote minimum commitments 5,896 2,769 2,098 494 271 261 3
Investments -- private equity partnerships (3) 250 250 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total $207,652 $21,203 $13,767 $11,145 $9,579 $13,790 $138,168
- --------------------------------------------------------------------------------------------------------------------------
(1) Debenture to Stifel Financial Capital Trust I is callable at par no earlier
than June 30, 2007, but no later than June 30, 2032.
(2) The Company invested in zero coupon U.S. Government securities in
the amount sufficient to accrete to the repayment amount of the notes
and are placed in an irrevocable trust. At December 31, 2003, these
securities are valued at $17,125 and are included under the caption
"Investments" on the statements of financial condition.
(3) The Company has committed a total of $1,000 to a private equity
partnership. As of December 31, 2003, the Company had invested $750
of this commitment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT
Risks are an inherent part of the Company's business and activities.
Management of these risks is critical to the Company's soundness and
profitability. Risk management at the Company is a multi-faceted process
that requires communication, judgment, and knowledge of financial products
and markets. The Company's senior management takes an active role in the
risk management process and requires specific administrative and business
functions to assist in the identification, assessment, monitoring, and
control of various risks. The principal risks involved in its business
activities are: market, credit, operational, and regulatory and legal.
MARKET RISK
The potential for changes in the value of financial instruments owned by the
Company is referred to as "market risk." Market risk is inherent to
financial instruments, and accordingly, the scope of the Company's market
risk management procedures includes all market risk-sensitive financial
instruments.
The Company trades tax-exempt and taxable debt obligations, including U.S.
Treasury bills, notes, and bonds; U.S. Government agency and municipal notes
and bonds; bank certificates of deposit; mortgage-backed securities; and
corporate obligations. The Company is also an active market-maker in
over-the-counter equity securities. In connection with these activities, the
Company may maintain inventories in order to ensure availability and to
facilitate customer transactions.
25 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
Changes in value of the Company's financial instruments may result from
fluctuations in interest rates, credit ratings, equity prices, and the
correlation among these factors, along with the level of volatility.
The Company manages its trading businesses by product and has established
trading departments that have responsibility for each product. The trading
inventories are managed with a view toward facilitating client transactions,
considering the risk and profitability of each inventory position. Position
limits in trading inventory accounts are established and monitored on a
daily basis. Management monitors inventory levels and results of the trading
departments, as well as inventory aging, pricing, concentration, and
securities ratings. The following table primarily represents trading
inventory associated with our customer facilitation and market-making
activities and includes net long and short fair values, which is consistent
with the way risk exposure is managed.
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
---------------------------------------------------------------
SOLD, BUT NOT SOLD, BUT NOT
SECURITIES, AT FAIR VALUE OWNED YET PURCHASED OWNED YET PURCHASED
- ---------------------------------------------------------------------------------------------------------
U.S. Government obligations $ 2,246 $1,047 $ 1,974 $ 981
State and municipal bonds 13,707 257 16,680 354
Corporate obligations 3,130 385 3,603 467
Corporate stocks 5,332 4,350 6,284 2,062
- ---------------------------------------------------------------------------------------------------------
$24,415 $6,039 $28,541 $3,864
======= ====== ======= ======
The Company is also exposed to market risk based on its other investing
activities. These investments consist of investments in private equity
partnerships, start up companies, venture capital investments and zero
coupon U.S. Government Securities and are included under the caption
"Investments" on the consolidated statement of financial condition.
Interest Rate Risk
The Company is exposed to interest rate risk as a result of maintaining
inventories of interest rate-sensitive financial instruments and from
changes in the interest rates on its interest-earning assets (including
client loans, stock borrow activities, investments, and inventories) and its
funding sources (including client cash balances, stock lending activities,
and bank borrowings), which finance these assets. The collateral underlying
financial instruments at the broker-dealer is repriced daily, thus requiring
collateral to be delivered as necessary. Interest rates on client balances
and stock borrow and lending produce a positive spread to the Company, with
the rates generally fluctuating in parallel.
The Company manages its inventory exposure to interest rate risk by setting
and monitoring limits and, where feasible, hedging with offsetting positions
in securities with similar interest rate risk characteristics. While a
significant portion of the Company's securities inventories have contractual
maturities in excess of five years, these inventories, on average, turn over
several times per year.
Equity Price Risk
The Company is exposed to equity price risk as a consequence of making
markets in equity securities. The Company attempts to reduce the risk of
loss inherent in its inventory of equity securities by monitoring those
security positions constantly throughout each day.
The Company's equity securities inventories are repriced on a regular basis,
and there are no unrecorded gains or losses. The Company's activities as a
dealer are client-driven, with the objective of meeting clients' needs while
earning a positive spread.
CREDIT RISK
The Company is engaged in various trading and brokerage activities, with the
counterparties primarily being broker-dealers. In the event counterparties
do not fulfill their obligations, the Company may be exposed to risk. The
risk of default depends on the creditworthiness of the counterparty or
issuer of the instrument. The Company manages this risk by imposing and
monitoring position limits for each counterparty, monitoring trading
counterparties, conducting regular credit reviews of financial
counterparties, reviewing security concentrations, holding and marking to
market collateral on certain transactions, and conducting business through
clearing organizations, which guarantee performance.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 26
CREDIT RISK (CONTINUED)
The Company's client activities involve the execution, settlement, and
financing of various transactions on behalf of its clients. Client
activities are transacted on either a cash or margin basis. Credit exposure
associated with the Company's private client business consists primarily of
customer margin accounts, which are monitored daily and are collateralized.
The Company monitors exposure to industry sectors and individual securities
and performs analysis on a regular basis in connection with its margin
lending activities. The Company adjusts its margin requirements if it
believes its risk exposure is not appropriate based on market conditions.
At December 31, 2003, securities, primarily from customer margin and
securities borrowing transactions of approximately $362.0 million were
available to the Company to utilize as collateral on various borrowings or
other purposes. The Company had utilized a portion of these available
securities as collateral for bank loans ($28.2 million), stock loans ($107.2
million), OCC margin requirements ($61.9 million), and customer short sales
($10.6 million).
The Company is subject to concentration risk if it holds large positions,
extends large loans to, or has large commitments with a single counterparty,
borrower, or group of similar counterparties or borrowers (i.e., in the same
industry). Receivables from and payables to clients and stock borrow and
lending activities are both with a large number of clients and
counterparties, and any potential concentration is carefully monitored.
Stock borrow and lending activities are executed under master netting
agreements, which gives the Company right of offset in the event of
courterparty default. Inventory and investment positions taken and
commitments made, including underwritings, may involve exposure to
individual issuers and businesses. The Company seeks to limit this risk
through careful review of counterparties and borrowers and the use of limits
established by senior management, taking into consideration factors
including the financial strength of the counterparty, the size of the
position or commitment, the expected duration of the position or commitment,
and other positions or commitments outstanding.
OPERATIONAL RISK
Operational risk generally refers to the risk of loss resulting from the
Company's operations, including, but not limited to, improper or
unauthorized execution and processing of transactions, deficiencies in the
Company's technology or financial operating systems, and inadequacies or
breaches in the Company's control processes. The Company operates different
businesses in diverse markets and is reliant on the ability of its employees
and systems to process a large number of transactions. These risks are less
direct than credit and market risk, but managing them is critical,
particularly in a rapidly changing environment with increasing transaction
volumes. In the event of a breakdown or improper operation of systems or
improper action by employees, the Company could suffer financial loss,
regulatory sanctions, and damage to its reputation. In order to mitigate and
control operational risk, the Company has developed and continues to enhance
specific policies and procedures that are designed to identify and manage
operational risk at appropriate levels throughout the organization and
within such departments as Accounting, Operations, Information Technology,
Legal, Compliance, and Internal Audit. These control mechanisms attempt to
ensure that operational policies and procedures are being followed and that
the Company's various businesses are operating within established corporate
policies and limits. Business continuity plans exist for critical systems,
and redundancies are built into the systems as deemed appropriate.
REGULATORY AND LEGAL RISK
Legal risk includes the risk of large numbers of Private Client Group
customer claims for sales practice violations, a potentially sizable adverse
legal judgment, and non-compliance with applicable legal and regulatory
requirements. The Company is generally subject to extensive regulation by
the SEC, the NASD, the NYSE, and state securities regulators in the
different jurisdictions in which it conducts business. The Company has
comprehensive procedures addressing issues such as regulatory capital
requirements, sales and trading practices, use of and safekeeping of
customer funds, credit granting, collection activities, money laundering,
and record keeping. The Company acts as an underwriter or selling group
member in both equity and fixed income product offerings. Particularly when
acting as lead or co-lead manager, the Company has legal exposure. To manage
this exposure, a committee of senior executives reviews proposed
underwriting commitments to assess the quality of the offering and the
adequacy of due diligence investigation.
The Compliance departments are responsible for monitoring compliance with
regulatory requirements in the home office and at the respective branch
offices of the broker-dealer. In addition, there are compliance officers
concentrating on Fixed Income, Equity Capital Markets, and Asset Management
who focus on the regulations specific to those businesses.
The Company experienced an increase in the number of Private Client Group
claims beginning in fiscal year 2001 as a result of the downturn in the
equity markets. While these claims may not be the result of any wrongdoing,
the Company does, at a minimum, incur costs associated with investigating
and defending against such claims. See further discussion on the Company's
legal reserves policy under "Critical Accounting Policies"; see also "Legal
Proceedings."
27 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS) DECEMBER 31, 2003 DECEMBER 31, 2002
- ------------------------------------------------------------------------------------------------------
ASSETS Cash and cash equivalents $ 12,236 $ 13,885
Cash segregated for the exclusive benefit of customers 5 30
---------------------------------------------------------------------------------------------
Receivable from brokers and dealers:
Securities failed to deliver 1,782 72
Deposits paid for securities borrowed 22,983 22,451
Clearing organizations 10,213 10,471
---------------------------------------------------------------------------------------------
34,978 32,994
---------------------------------------------------------------------------------------------
Receivable from customers, net of allowance for doubtful
receivables of $82 and $144, respectively 255,499 264,646
---------------------------------------------------------------------------------------------
Securities owned, at fair value 14,725 5,173
Securities owned and pledged, at fair value 9,690 23,368
---------------------------------------------------------------------------------------------
24,415 28,541
---------------------------------------------------------------------------------------------
Investments 33,427 30,509
Memberships in exchanges 328 463
Office equipment and leasehold improvements, at cost,
net of allowances for depreciation and amortization of
$20,694 and $19,174, respectively 6,606 7,277
Goodwill 3,310 3,310
Loans and advances to investment executives and other
employees, net of allowance for doubtful receivables
from former employees of $1,397 and $677, respectively 15,902 19,977
Deferred tax asset 5,525 5,952
Other assets 19,788 15,392
---------------------------------------------------------------------------------------------
TOTAL ASSETS $412,019 $422,976
=============================================================================================
See Notes to Consolidated Financial Statements.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 28
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) DECEMBER 31, 2003 DECEMBER 31, 2002
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND Short-term borrowings from banks $ 5,650 $ 43,400
STOCKHOLDERS' --------------------------------------------------------------------------------------------
EQUITY Payable to brokers and dealers:
Securities failed to receive 1,688 1,243
Deposits received from securities loaned 116,986 56,076
Clearing organizations 6,043 1,597
--------------------------------------------------------------------------------------------
124,717 58,916
--------------------------------------------------------------------------------------------
Payable to customers 44,103 110,502
Securities sold, but not yet purchased, at fair value 6,039 3,864
Drafts payable 20,596 19,592
Accrued employee compensation 26,034 20,382
Obligations under capital leases 192 506
Accounts payable and accrued expenses 21,800 23,103
Debenture to Stifel Financial Capital Trust I 34,500 34,500
Other 24,598 24,598
--------------------------------------------------------------------------------------------
308,229 339,363
--------------------------------------------------------------------------------------------
Liabilities subordinated to claims of general creditors 3,745 3,623
Stockholders' equity:
Preferred stock -- $1 par value; authorized 3,000,000
shares; none issued
Common stock -- $.15 par value; authorized 30,000,000
shares; issued 7,675,781 shares 1,152 1,152
Additional paid-in capital 56,939 53,337
Retained earnings 51,168 36,161
--------------------------------------------------------------------------------------------
109,259 90,650
--------------------------------------------------------------------------------------------
Less:
Treasury stock, at cost, 608,640 and 732,228
shares, respectively 7,235 8,467
Unamortized expense of restricted stock awards -- 5
Unearned employee stock ownership plan shares,
at cost, 154,545 and 170,809 shares, respectively 1,979 2,188
--------------------------------------------------------------------------------------------
100,045 79,990
--------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $412,019 $422,976
============================================================================================
See Notes to Consolidated Financial Statements.
29 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
REVENUES Commissions $ 85,409 $ 71,520 $ 73,517
Investment banking 49,705 45,918 37,068
Principal transactions 43,912 36,251 31,009
Asset management and service fees 28,021 25,098 24,769
Interest 12,243 14,544 21,866
Other 2,330 782 761
--------------------------------------------------------------------------------------
Total revenues 221,620 194,113 188,990
Less: Interest expense 5,108 6,319 11,722
--------------------------------------------------------------------------------------
Net revenues 216,512 187,794 177,268
- -----------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES Employee compensation and benefits 140,973 126,726 120,889
Occupancy and equipment rental 19,278 18,631 17,673
Communications and office supplies 10,740 10,737 10,799
Commissions and floor brokerage 3,263 3,373 3,269
Other operating expenses 17,198 23,533 21,251
--------------------------------------------------------------------------------------
Total non-interest expenses 191,452 183,000 173,881
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 25,060 4,794 3,387
Provision for income taxes 10,053 2,014 1,377
--------------------------------------------------------------------------------------
Net income $ 15,007 $ 2,780 $ 2,010
======================================================================================
- -----------------------------------------------------------------------------------------------------------------
EARNINGS PER Net income per share:
COMMON SHARE AND Basic earnings per share $ 2.17 $ 0.40 $ 0.28
SHARE EQUIVALENTS Diluted earnings per share $ 1.82 $ 0.34 $ 0.25
--------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK AND
UNEARNED EMPLOYEE UNAMORTIZED
COMMON STOCK ADDITIONAL STOCK OWNERSHIP PLAN EXPENSE OF
(IN THOUSANDS, ------------------- PAID-IN RETAINED ---------------------- RESTRICTED
EXCEPT SHARE AMOUNTS) SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT STOCK AWARDS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2001 7,525,971 $1,129 $45,920 $32,827 (501,216) $ (5,543) $ (155) $ 74,178
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends -- common
stock ($.12 per share) -- -- -- (908) -- -- -- (908)
Purchase of treasury shares -- -- -- -- (95,930) (1,048) -- (1,048)
Employee stock ownership plan -- -- (20) -- 16,264 208 -- 188
Employee benefit plans 149,810 23 2,105 -- 6,946 68 -- 2,196
Stock options exercised -- -- (88) -- 28,523 286 -- 198
Units and restricted stock
awards amortization -- -- 1,670 -- -- -- 126 1,796
Dividend reinvestment -- -- 8 -- 378 4 -- 12
Net income for the year -- -- -- 2,010 -- -- -- 2,010
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 7,675,781 1,152 49,595 33,929 (545,035) (6,025) (29) 78,622
- -----------------------------------------------------------------------------------------------------------------------------------
Cash dividends -- common
stock ($.06 per share) -- -- -- (463) -- -- -- (463)
Purchase of treasury shares -- -- -- -- (570,124) (6,862) -- (6,862)
Employee stock ownership plan -- -- (10) -- 16,264 208 -- 198
Employee benefit plans -- -- 403 (85) 155,910 1,581 -- 1,899
Stock options exercised -- -- (112) -- 39,802 441 -- 329
Units and restricted stock
awards amortization -- -- 3,461 -- -- -- 24 3,485
Dividend reinvestment -- -- -- -- 146 2 -- 2
Net income for the year -- -- -- 2,780 -- -- -- 2,780
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 7,675,781 1,152 53,337 36,161 (903,037) (10,655) (5) 79,990
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury shares -- -- -- -- (80,263) (984) -- (984)
Tender offer -- -- -- -- (87,471) (1,158) -- (1,158)
Employee stock ownership plan -- -- (12) -- 16,264 208 -- 196
Employee benefit plans -- -- (266) -- 195,633 2,262 -- 1,996
Stock options exercised -- -- (414) -- 95,684 1,112 -- 698
Units and restricted stock
awards amortization -- -- 4,294 -- -- -- 5 4,299
Dividend reinvestment -- -- -- -- 5 1 -- 1
Net income for the year -- -- -- 15,007 -- -- -- 15,007
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 7,675,781 $1,152 $56,939 $51,168 (763,185) $ (9,214) -- $100,045
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
31 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------
(IN THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS Net income $ 15,007 $ 2,780 $ 2,010
FROM OPERATING ----------------------------------------------------------------------------------------------------
ACTIVITIES Noncash items included in earnings:
Depreciation and amortization 3,266 3,390 4,268
Loans and advances amortization 7,860 5,298 5,489
Deferred items 736 502 (1,180)
Amortization of restricted stock awards, units,
and stock benefit 4,491 3,485 1,796
(Gain) losses on investments (247) 927 2,117
----------------------------------------------------------------------------------------------------
31,113 16,382 14,500
Decrease (increase) in operating receivables:
Customers 9,147 (491) 41,323
Brokers and dealers (1,984) 16,806 (19,070)
(Decrease) increase in operating payables:
Customers (66,399) 66,425 3,593
Brokers and dealers (6,101) (22,535) 19,837
Decrease (increase) in assets:
Cash and U.S. Government securities
segregated for the exclusive benefit
of customers 25 161 (4)
Securities owned, including those pledged 4,126 (7,895) (586)
Loans and advancements to investment executives
and other employees (3,785) (3,542) (9,802)
Other assets (4,476) 1,200 4,984
(Decrease) increase in liabilities:
Securities sold, not yet purchased 2,175 1,312 (1,803)
Drafts payable, accounts payable and accrued
expenses, and accrued employee compensation 5,959 2,687 4,865
----------------------------------------------------------------------------------------------------
Cash From Operating Activities $(30,200) $ 70,510 $ 57,837
----------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 32
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------
(IN THOUSANDS) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Cash From Operating Activities --
From Previous Page $(30,200) $ 70,510 $ 57,837
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS Net payments for short-term borrowings
FROM FINANCING from banks (37,750) (23,400) (21,450)
ACTIVITIES Securities loaned 71,902 (68,288) (25,620)
Proceeds from:
Issuance of stock 2,700 2,308 1,888
Sale/lease back of office equipment -- 3,951 --
Issuance of debentures to Stifel Financial
Capital Trust I -- 34,500 --
Payments for:
Purchases of stock for treasury (2,142) (6,862) (1,048)
Settlement of long-term debt -- (10,000) --
Offering cost associated with issuing preferred
securities -- (1,577) --
Principal payments under capital lease obligation (314) (795) (841)
Repayment of notes assumed in acquisition
of subsidiary -- -- (1,232)
Reduction of subordinated debt (796) -- --
Cash dividends -- (463) (908)
----------------------------------------------------------------------------------------------------
Cash From Financing Activities 33,600 (70,626) (49,211)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS Proceeds from sale of investments 2,683 905 100
FROM INVESTING Payments for:
ACTIVITIES Acquisition of office equipment and
leasehold improvements (2,383) (3,183) (4,513)
Acquisition of investments (5,349) (35) (2,488)
----------------------------------------------------------------------------------------------------
Cash From Investing Activities (5,049) (2,313) (6,901)
----------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (1,649) (2,429) 1,725
Cash and cash equivalents -- beginning of year 13,885 16,314 14,589
----------------------------------------------------------------------------------------------------
Cash and cash equivalents -- end of year $ 12,236 $ 13,885 $ 16,314
====================================================================================================
Supplemental disclosures of cash flow information:
Interest payments $ 5,015 $ 4,418 $ 12,854
Income tax payments $ 8,998 $ 3,078 $ 2,904
Schedule of Noncash Investing and Financing
Activities:
Fixed assets acquired under capital lease -- $ 16 $ 355
Units, net of forfeitures $ 6,840 $ 4,368 $ 3,341
Employee stock ownership shares $ 208 $ 197 $ 188
Liabilities subordinated to claims of general
creditors $ 918 $ 1,067 $ 2,629
See Notes to Consolidated Financial Statements.
33 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
NATURE OF OPERATIONS
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.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Parent and
its wholly owned subsidiaries, principally Stifel Nicolaus. Stifel Nicolaus
is a broker-dealer registered under the Securities Exchange Act of 1934. All
material intercompany balances and transactions are eliminated in
consolidation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Management considers
its significant estimates, which are most susceptible to change, to be the
fair value of investments and the accrual for litigation. Actual results
could differ from those estimates.
Where appropriate, prior years' financial information has been reclassified
to conform with the current year presentation.
The Company defines cash equivalents as short-term, highly liquid
investments with original maturities of 90 days or less, other than those
held for sale in the ordinary course of business.
SECURITY TRANSACTIONS
Trading and investment securities owned, including those pledged, and
trading securities sold, but not yet purchased, are carried at fair value,
and unrealized gains and losses are included in principal transaction
revenues. Interest and dividends for trading and investment account
securities owned and trading securities sold, but not yet purchased, are
included in principal transaction revenues.
Securities failed to deliver and receive represent the contract value of
securities that have not been delivered or received by settlement date.
Receivable from customers includes amounts due on cash and margin
transactions. The value of securities owned by customers and held as
collateral for these receivables is not reflected in the consolidated
statements of financial condition.
Customer security transactions are recorded on a settlement date basis, with
related commission revenues and expenses recorded on a trade date basis.
Principal securities transactions are recorded on a trade date basis.
SECURITIES BORROWING AND LENDING ACTIVITIES
Securities borrowed and securities loaned are recorded at the amount of cash
collateral advanced or received. Securities borrowed transactions require
Stifel Nicolaus to deposit cash with the lender generally in excess of the
market value of securities borrowed. With respect to securities loaned,
Stifel Nicolaus receives collateral in the form of cash in an amount
generally in excess of the market value of securities loaned. Stifel
Nicolaus monitors the market value of securities borrowed and loaned on a
daily basis, with additional collateral obtained or refunded as necessary.
Substantially all of these transactions are executed under master netting
agreements, which give Stifel Nicolaus right of offset in the event of
counterparty default; however, such receivables and payables with the same
counterparty are not set off in the Company's statements of financial
condition.
FAIR VALUE
Securities owned, including those pledged; securities sold, but not yet
purchased; and readily marketable investments are valued using quoted market
or dealer prices. Customer receivables, primarily consisting of
floating-rate loans collateralized by customer-owned securities, are charged
interest at rates similar to other such loans made throughout the industry.
Other than those separately discussed in the Notes to Consolidated Financial
Statements, the Company's remaining financial instruments are generally
short-term in nature, and their carrying values approximate fair value.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
INVESTMENTS
Securities not readily marketable, held for investment by the Parent and
certain subsidiaries, are included under the caption "Investments" and are
carried at fair value. Investment securities of registered broker-dealer
subsidiaries are carried at fair value or amounts that approximate fair
value. The fair value of investments, for which a quoted market or dealer
price is not available, are based on management's estimates. Among the
factors considered by management in determining the fair value of
investments are the cost of the investment, terms and liquidity,
developments since the acquisition of the investment, the sales price of
recently issued securities, the financial condition and operating results of
the issuer, earnings trends and consistency of operating cash flows, the
long-term business potential of the issuer, the quoted market price of
securities with similar quality and yield that are publicly traded, and
other factors generally pertinent to the valuation of investments. The fair
value of these investments is subject to a high degree of volatility and may
be susceptible to significant fluctuation in the near term. These
investments were valued at $11,121 and $11,173 at December 31, 2003 and
2002, respectively.
LOANS AND ADVANCES
The Company offers transition pay, principally in the form of upfront loans,
to investment executives and certain key revenue producers as part of the
Company's overall growth strategy. These loans are generally forgiven over a
five- to ten-year period if the individual satisfies certain conditions,
usually based on continued employment and certain performance standards. If
the individual leaves before the term of the loan expires or fails to meet
certain performance standards, the individual is required to repay the
balance. Management monitors and compares individual investment executive
production to each loan issued to ensure future recoverability.
INVESTMENT BANKING
Investment banking revenue is recorded at the time the related transaction
is completed. Investment banking revenues include advisory fees; management
fees; underwriting fees, net of reimbursable expenses; and sales credits
earned in connection with the distribution of the underwritten securities.
ASSET MANAGEMENT AND SERVICE FEES
Asset management and service fees are recorded when earned and consist of
customer account service fees, per account fees (such as IRA fees), wrap
fees on managed accounts, and distribution fees from mutual funds and money
market funds.
STOCK-BASED COMPENSATION
The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and
related interpretations to account for its employees' participation in the
Parent Company's stock plans. Based on the provisions of the plans, no
compensation expense has been recognized for options issued under these
plans. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under the Fixed Stock Option and the Employee Stock Purchase Plans
consistent with the method of the Statement of Financial Accounting Standards
Board ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
- ---------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------
Net income
As reported $15,007 $2,780 $2,010
Pro forma $13,899 $1,845 $1,184
- ---------------------------------------------------------------------------------
Basic earnings per share
As reported $ 2.17 $ 0.40 $ 0.28
Pro forma $ 2.01 $ 0.26 $ 0.17
- ---------------------------------------------------------------------------------
Diluted earnings per share
As reported $ 1.82 $ 0.34 $ 0.25
Pro forma $ 1.69 $ 0.23 $ 0.15
- ---------------------------------------------------------------------------------
35 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial reporting and income tax
bases of assets and liabilities.
COMPREHENSIVE INCOME
The Company had no other comprehensive income items; accordingly, net income
and other comprehensive income are the same.
OTHER
Amortization of assets under capital lease is computed on a straight-line
basis over the estimated useful life of the asset. Leasehold improvements
are amortized over the remaining term of the lease. Depreciation of office
equipment is provided over estimated useful lives of three to seven years
using accelerated methods.
Goodwill recognized in business combinations accounted for as purchases is
no longer amortized, but is tested for impairment in accordance with
provisions of the SFAS No. 142, "Goodwill and Other Intangible Assets,"
adopted in 2002 (see Note G). Goodwill was previously amortized over 25
years on a straight-line basis.
Basic earnings per share of common stock is computed by dividing income
available to shareholders by the weighted average number of common shares
outstanding during the periods. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
entity. Diluted earnings per share include dilutive stock options and stock
units under the treasury stock method.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
("FIN 45"). FIN 45 requires the recognition of a liability for the fair
value of an obligation undertaken in issuing a guarantee and also requires
certain disclosures of such guarantees. The disclosure requirements were
adopted in 2002. The recognition requirements became effective for the
Company on January 1, 2003. The recognition requirements of FIN 45 did not
have a material impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"), an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements. FIN 46 requires
certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 was
immediately effective for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 were to
originally be applied as of July 1, 2003. However, the FASB subsequently
issued numerous FASB Staff Positions attempting to clarify and improve the
application of FIN 46, one of which deferred the effective date of FIN 46 to
the fourth quarter of 2003. In December 2003, the FASB issued FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities ("FIN 46R"), which clarifies the definition of a variable
interest, exempts entities that are businesses from its scope, and partially
delays the effective date of FIN 46 for certain entities. The delay
notwithstanding, public companies must apply either FIN 46 or FIN 46R to
special purpose entities ("SPEs"), as defined, no later than the first
reporting period ending after December 15, 2003 (December 31, 2003 for the
Company). FIN 46R must be applied to all variable interest entities that are
not SPEs no later than the end of the first reporting period ending after
March 15, 2004.
The Company's wholly owned subsidiary, Stifel Financial Capital Trust I (the
"Trust"), is considered an SPE. 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 retroactive reclassification of the
obligation from the preferred trust offering from the caption "Guaranteed
preferred beneficial interest in subordinated debt securities" to "Debenture
to Stifel Financial Capital Trust I" in the consolidated statements of
financial condition (see Note L). Other than the retroactive
reclassification, the adoption of FIN 46R did not have an impact on the
Company's consolidated statements of operations, stockholders' equity, or
cash flows. For the interim period ending March 31, 2004, the Company will
adopt FIN 46R related to any remaining variable interest entities that are
not SPEs, which is not expected to have an impact on the Company's
consolidated financial statements.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The adoption of this statement did not have a material impact
on the Company's consolidated financial position, results of operations, or
cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures,
in its statement of financial position, certain financial instruments with
characteristics of both liabilities and equity. In accordance with the
standard, a financial instrument that embodies an obligation for the issuer
is required to be classified as a liability (or an asset in some
circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and for all other instruments for
interim periods beginning after June 15, 2003. On November 7, 2003, the FASB
staff issued FASB Staff Position No. 150-3, which defers certain provisions
of SFAS No. 150. The Company has adopted the effective provisions of SFAS
No. 150. The adoption of these provisions did not have a material impact on
the Company's consolidated financial position, results of operations, or
cash flows. For the deferred provisions, the Company is currently evaluating
the impact of this statement.
NOTE B -- SPECIAL RESERVE BANK ACCOUNT
At December 31, 2003, cash of $5 has been segregated in a special reserve
bank account for the exclusive benefit of customers pursuant to Rule 15c3-3
under the Securities Exchange Act of 1934. Stifel Nicolaus performs a weekly
reserve calculation for proprietary accounts of introducing brokers. At
December 31, 2003, no deposit was required.
NOTE C -- SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET PURCHASED
The components of securities owned and securities sold, but not yet
purchased at December 31, 2003 and 2002, are as follows:
- -------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------- --------------------------
SOLD, BUT NOT SOLD, BUT NOT
SECURITIES, AT FAIR VALUE OWNED YET PURCHASED OWNED YET PURCHASED
- -------------------------------------------------------------------------------------------------------
U.S. Government obligations $ 2,246 $1,047 $ 1,974 $ 981
State and municipal bonds 13,707 257 16,680 354
Corporate obligations 3,130 385 3,603 467
Corporate stocks 5,332 4,350 6,284 2,062
- -------------------------------------------------------------------------------------------------------
24,415 $6,039 28,541 $3,864
====== ======
Less: Securities owned and pledged (9,690) (23,368)
------- --------
Total $14,725 $ 5,173
======= ========
Stifel Nicolaus pledged securities owned as collateral to counterparties,
who have the ability to repledge the collateral; therefore, the Company has
reported the pledged securities under the caption "Securities owned and
pledged" in the consolidated statements of financial condition.
37 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE D -- SHORT-TERM FINANCING
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 $205,000 at December 31, 2003, of which $199,350 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 $3,650 and $26,400 were
collateralized by customer-owned securities of $13,858 and $71,680 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 $2,000 and $17,000 were
collateralized by Company-owned securities valued at $9,690 and $23,368 at
December 31, 2003 and 2002, respectively. The average bank borrowing was
$8,003, $48,971, and $96,751 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
$116,986 and $56,076, respectively, at average rates of 1.05% and 1.29%,
respectively. The average outstanding securities lending arrangements
utilized in financing activities were $119,528, $118,498, and $127,841 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.
NOTE E -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, Stifel Nicolaus enters into underwriting
commitments. Settlement of transactions relating to such underwriting
commitments, which were open December 31, 2003, had no material effect on
the consolidated financial statements.
In connection with margin deposit requirements of The Options Clearing
Corporation, Stifel Nicolaus had pledged cash and customer-owned securities
valued at $61,924. At December 31, 2003, the amounts on deposit satisfied
the minimum margin deposit requirement of $47,525.
In connection with margin deposit requirements of the National Securities
Clearing Corporation, Stifel Nicolaus had pledged cash and firm-owned
securities valued at $1,936 and a standby letter of credit amounting to
$500. At December 31, 2003, the amounts on deposit satisfied the minimum
margin deposit requirement of $1,836.
Stifel Nicolaus also provides guarantees to securities clearing houses and
exchanges under their standard membership agreement, which requires members
to guarantee the performance of other members. Under the agreement, if
another member becomes unable to satisfy its obligations to the clearing
house, other members would be required to meet shortfalls. Stifel Nicolaus'
liability under these agreements is not quantifiable and may exceed the cash
and securities it has posted as collateral. However, the potential
requirement for Stifel Nicolaus to make payments under these arrangements is
remote. Accordingly, no liability has been recognized for these
transactions.
The Company has committed to invest $250 in a private equity partnership.
The future minimum rental and third-party vendor service commitments at
December 31, 2003, with initial or remaining non-cancellable terms in excess
of one year, some of which contain escalation clauses and renewal options,
are as follows:
- ----------------------------------------------------------------------------------------
OPERATING LEASES
AND SERVICE
YEAR ENDING DECEMBER 31, CAPITAL LEASES AGREEMENTS
- ----------------------------------------------------------------------------------------
2004 $ 157 $11,343
2005 41 9,987
2006 37 7,224
2007 -- 5,754
2008 -- 5,171
Thereafter -- 10,702
- ----------------------------------------------------------------------------------------
Minimum Commitments $ 235 $50,181
Less Interest (43) =======
-----
Net Present Value of Capital Lease Obligations $ 192
=====
Rental expense for the years ended December 31, 2003, 2002, and 2001,
approximated $10,135, $9,907, and $8,216, respectively.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE E -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Office equipment, under capital leases, with a recorded cost of
approximately $883, net of amortization of $704, and $2,257, net of
amortization of $1,783, at December 31, 2003 and 2002, respectively,
collateralizes the above capital lease obligations and is included in the
consolidated statements of financial condition under the caption of "Office
equipment and leasehold improvements."
Amortization and depreciation expense of assets under capital lease and
owned furniture and equipment for 2003, 2002, and 2001 was $3,053, $3,390,
and $4,077, respectively.
On February 19, 2002, the Company entered into a $4,000 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 principal payments of approximately $320, included in the previous
table. 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 being amortized ratably over the life of the lease. The
transaction is being accounted for as an operating lease.
NOTE F -- NET CAPITAL REQUIREMENTS
Stifel Nicolaus is subject to the Uniform Net Capital Rule, Rule 15c3-1
under the Securities Exchange Act of 1934 (the "rule"), which requires the
maintenance of minimum net capital, as defined. Stifel Nicolaus has elected
to use the alternative method permitted by the rule that requires
maintenance of minimum net capital equal to the greater of $250 or 2% of
aggregate debit items arising from customer transactions, as defined. The
rule also provides that equity capital may not be withdrawn or cash
dividends paid if resulting net capital would be less than 5% of aggregate
debit items.
At December 31, 2003, Stifel Nicolaus had net capital of $59,051, which was
22.18% of aggregate debit items and $53,727 in excess of minimum required
net capital.
NOTE G -- GOODWILL
On January 1, 2002, the Company adopted SFAS No. 142. As a result, the
Company ceased amortizing goodwill. The Company tests the goodwill annually
for impairment in accordance with SFAS No. 142. There were no changes in the
carrying amounts of goodwill for the Company for the years ended December
31, 2003 and 2002.
As required by SFAS No. 142, the results for 2001 have not been restated.
The reconciliation of reported net income and earnings per share to adjusted
net income for the year ended December 31, 2001, is presented below:
- -------------------------------------------------------------------------------
YEAR ENDED
(IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, 2001
- -------------------------------------------------------------------------------
Reported net income $2,010
Add back: goodwill amortization, net of tax 73
- -------------------------------------------------------------------------------
Adjusted net income $2,083
======
BASIC EARNINGS PER SHARE:
Reported net income per share $ 0.28
Add back: goodwill amortization 0.01
- -------------------------------------------------------------------------------
Adjusted net income per basic share $ 0.29
======
DILUTED EARNINGS PER SHARE:
Reported net income per share $ 0.25
Add back: goodwill amortization 0.01
- -------------------------------------------------------------------------------
Adjusted net income per diluted share $ 0.26
======
39 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE H -- EMPLOYEE BENEFIT PLANS
The Company has a profit sharing 401(k) plan (the "PSP") covering qualified
employees as defined in the plan. Contributions to the PSP were based upon a
company match of 50% of the employees' first one thousand dollars in annual
contributions. Additional contributions by the Company are discretionary.
Under the PSP, participants can purchase up to 250,000 shares of the
Parent's common stock. The amounts charged to employee compensation and
benefits for the PSP were $418, $425, and $486, for 2003, 2002, and 2001,
respectively.
The Company has an employee stock ownership plan (the "ESOP") covering
qualified employees as defined in the plan. Employer contributions are made
to the ESOP as determined by the Compensation Committee of the Board of
Directors of the Parent on behalf of all eligible employees based upon the
relationship of individual compensation (up to a maximum of $170) to total
compensation. In 1997, the Company purchased 248,063 shares for $3,178 and
contributed these shares to the ESOP. The unallocated shares are being
released for allocation to the participants based upon employer
contributions to fund an internal loan between the Parent and the ESOP. At
December 31, 2003, the plan held 391,115 shares, of which 154,545 shares,
with a fair value of $3,014, were unallocated. The Company charged to
employee compensation and benefits $209, $197, and $188 for the ESOP
contributions for 2003, 2002, and 2001, respectively.
NOTE I -- STOCK-BASED COMPENSATION PLANS
The Company has several stock-based compensation plans, which are described
below. All option plans are administered by the Compensation Committee of
the Board of Directors of the Parent, which has the authority to interpret
the Plans, determine to whom options may be granted under the Plans, and
determine the terms of each option.
STOCK OPTION/INCENTIVE STOCK AWARD PLANS
The Company has four fixed stock option plans and four incentive stock award
plans. Under the Company's 1983 and 1985 Incentive Stock Option Plans, the
Company granted options up to an aggregate of 450,000 shares to key
employees. Under the Company's 1987 non-qualified stock option plan, the
Company granted options up to an aggregate of 100,000 shares. Under the
Company's 1997 and 2001 Incentive Stock Plan, the Company may grant
incentive stock options, stock appreciation rights, restricted stock,
performance awards, and stock units up to an aggregate of 3,200,000 shares.
Options under these plans are generally granted at 100% of market value at
the date of the grant and expire ten years from the date of grant. The
options generally vest ratably over a three- to five-year vesting period.
The Company has also granted stock options to external board members under a
non-qualified plan and the "Equity Incentive Plan for Non-Employee
Directors." Under the Equity Incentive Plan for Non-Employee Directors, the
Company may grant stock options and stock units up to 150,000 shares. These
options are generally granted at 100% of market value at the date of the
grant and are exercisable six months to one year from date of grant and
expire ten years from date of grant. Under the Stifel, Nicolaus & Company,
Incorporated Wealth Accumulation Plan ("SWAP"), a deferred compensation plan
for Investment Executives, the Company may grant stock units up to 700,000
shares.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE I -- STOCK-BASED COMPENSATION PLANS (CONTINUED)
Effective with options granted in 1995 and subsequently, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model, with the following weighted-average assumptions used
for grants in 2003, 2002, and 2001, respectively: dividend yield of 0.00%,
0.00%, and 1.02%; expected volatility of 25.76%, 32.6%, and 34.6%; risk-free
interest rates of 3.05%, 3.82%, and 4.55%; and expected lives of 5.00 years,
5.00 years, and 5.97 years.
The summary of the status of the Company's fixed stock option plans as of
December 31, 2003, 2002, and 2001, and changes during the years ending on
those dates is presented below:
- ---------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- ---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,550,533 $10.56 1,368,435 $10.40 1,200,838 $10.11
- ---------------------------------------------------------------------------------------------------------------------------------
Granted 241,500 14.64 293,500 10.91 241,000 11.48
Exercised (95,684) 7.30 (39,802) 7.54 (28,523) 6.93
Forfeited (43,188) 10.57 (71,600) 10.69 (44,880) 10.63
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,653,161 $11.34 1,550,533 $10.56 1,368,435 $10.40
=================================================================================================================================
Options exercisable at year-end 897,544 748,480 581,957
Weighted-average fair value of
options granted during the year $4.15 $3.63 $4.30
- ---------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options
outstanding at December 31, 2003:
- ---------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ------------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
$ 4.70 - $10.38 385,045 5.10 $ 9.31 320,705 $ 9.16
10.40 - 10.50 348,735 7.39 10.43 132,623 10.44
10.56 - 11.38 390,620 5.95 11.01 272,255 10.96
11.40 - 12.70 331,825 7.63 11.96 105,525 12.15
12.75 - 19.50 196,936 7.97 16.49 66,436 14.62
- ---------------------------------------------------------------------------------------------------------------------------------
$ 4.70 - $19.50 1,653,161 6.63 $11.34 897,544 $10.65
=================================================================================================================================
41 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE I -- STOCK-BASED COMPENSATION PLANS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Under the 1998 Employee Stock Purchase Plan, which was in effect through
2002, and the 2003 Employee Stock Purchase Plan (collectively the "ESPP"),
the Company is authorized to issue up to 150,000 and 200,000 shares of
common stock, respectively, to its full-time employees, nearly all of whom
are eligible to participate. Under the terms of the ESPP, employees can
choose each year to have a specified percentage of their compensation
withheld in 1% increments not to exceed 10%. The participant may also
specify a maximum dollar amount to be withheld. At the beginning of every
year, each participant is granted an option to purchase up to 1,000 shares
of common stock at a price equal to the lower of 85% of the beginning-of-
year or end-of-year fair market value of the common stock. Approximately 33%
to 36% of eligible employees have participated in the ESPP in the last three
years. Under the ESPP, the Company granted 189,108, 149,842, and 149,675
shares to employees in 2003, 2002, and 2001, respectively.
Effective with options granted in 1995, the fair value of each employee's
purchase rights is estimated using the Black-Scholes option-pricing model,
with the following weighted-average assumptions used for grants in 2003,
2002, and 2001, respectively: dividend yield of 0.00%, 0.49%, and 1.02%;
expected volatility of 23.7%, 32.6%, and 34.6%; risk-free interest rates of
1.23%, 2.00%, and 3.48%; and expected lives of one year. The weighted-
average fair value of those purchase rights granted in 2003, 2002, and
2001 was $1.10, $1.41, and $2.37, respectively.
RESTRICTED STOCK AWARDS
Restricted stock awards are made, and shares issued, to certain key
employees without cash payment by the employee. At December 31, 2003, no
restricted stock awards were outstanding. The deferred cost of the
restricted stock awards is amortized on a straight-line basis. The Company
charged to employee compensation and benefits $5, $24, and $126 for the
amortization during 2003, 2002, and 2001, respectively.
STOCK UNITS
A stock unit represents the right to receive a share of common stock from
the Parent at a designated time in the future without cash payment by the
employee and is issued in lieu of cash incentive. A deferred compensation
plan is provided to certain revenue producers, officers, and key
administrative employees, whereby a certain percentage of their incentive
compensation is deferred as defined by the plan into Parent stock units with
a 25% matching contribution by the Company. Participants may elect to defer
up to an additional 15% of their incentive compensation with a 25% matching
contribution by the Company. Units generally vest over a three- to five-year
period and are distributable upon vesting or at future specified dates.
Deferred compensation costs are amortized on a straight-line basis over the
vesting period. As of December 31, 2003, there were 927,881 units
outstanding under this deferred compensation plan. The Company charged
$1,981, $1,940, and $1,263 to employee compensation and benefits relating to
units granted under this plan for 2003, 2002, and 2001, respectively.
Stifel Nicolaus has a deferred compensation plan for its investment
executives ("I.E.s") who achieve certain levels of production, whereby a
certain percentage of their earnings is deferred as defined by the plan, of
which 50% is deferred into Parent stock units with a 25% matching
contribution and 50% earns a return based on optional investments chosen by
the I.E.s. I.E.s may choose to base their return on the performance of an
index mutual fund as designated by the Company or a fixed income option.
I.E.s have no ownership in the mutual funds. Included on the consolidated
Statement of Financial Condition under the caption "Investments" are $3,528 in
2003 and $2,255 in 2002 in mutual funds that were purchased by the Company to
hedge its liability to the I.E.s that choose to base the performance of their
return on the index mutual fund option. I.E.s may elect to defer an
additional 1% of earnings into Parent stock units with a 25% matching
contribution. In addition, certain I.E.s, upon joining the firm, may receive
Parent stock units in lieu of transition cash payments. Deferred
compensation for both plans cliff vests over a five-year period. Deferred
compensation costs are amortized on a straight-line basis over the deferral
period. As of December 31, 2003, there were 1,189,253 units outstanding
under this deferred compensation plan. Charges to employee compensation and
benefits related to these plans were $2,243, $1,988, and $1,337 for 2003,
2002, and 2001, respectively.
Under the Equity Incentive Plan for Non-Employee Directors, the Company
grants stock units to non-employee directors that elect to defer their
director compensation. Participants may elect to defer their compensation
with a 25% matching contribution by the Company. These units are 100% vested
and are distributable after five full calendar years. Directors' fees are
expensed on the grant date. As of December 31, 2003, there were 27,655 units
outstanding under this plan. The Company charged $156, $121, and $128 to
directors' fees relating to units granted under this plan for 2003, 2002,
and 2001, respectively.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE J -- LEGAL PROCEEDINGS
The Company is a defendant in several lawsuits and arbitrations, which
arose from its usual business activities. Some of these lawsuits and
arbitrations claim substantial amounts, including punitive damage claims.
Although the ultimate outcome of these actions cannot be ascertained at this
time and the results of legal proceedings cannot be predicted with
certainty, management, based on its understanding of the facts, its
consultation with outside counsel, and after consideration of amounts
provided for in the accompanying financial statements with respect to these
matters, does not believe the ultimate resolution of these matters will have
a materially adverse effect on the Company's consolidated financial
condition and results of operations. It is reasonably possible that certain
of these lawsuits and arbitrations could be resolved in the next year and
management does not believe such resolutions will result in losses
materially in excess of the amounts previously provided.
On November 3, 2003, the Company announced the favorable settlement of
claims that had initially resulted in a $4.5 million arbitration award in
October 2002, against Stifel Nicolaus. The claims arose in connection with
the activities of a former Stifel Nicolaus broker in its Pikeville, Kentucky
office. The arbitration award was vacated in part and affirmed in part by a
U.S. District Court judgment entered in August 2003. The District Court's
judgment was on appeal to the U.S. Court of Appeals for the Sixth Circuit.
The settlement resolves the arbitration award, the District Court's
judgment, and the appeal of that judgment. The settlement resulted in a
reversal of the original charge of approximately $1.2 million after tax, or
$0.15 per diluted share, to the 2003 third quarter earnings.
NOTE K -- OFF-BALANCE SHEET CREDIT RISK
As a carrying broker-dealer, Stifel Nicolaus clears and executes
transactions for two introducing broker-dealers. Pursuant to the clearing
agreements, the introducing broker-dealers guarantee the performance of
their customers to Stifel Nicolaus. To the extent the introducing
broker-dealers are unable to satisfy their obligations under the terms of
the respective clearing agreements, Stifel Nicolaus would be secondarily
liable. However, the potential requirement for Stifel Nicolaus to fulfill
these obligations under these arrangements is remote. Accordingly, no
liability has been recognized for these transactions.
In the normal course of business, Stifel Nicolaus executes, settles, and
finances customer and proprietary securities transactions. These activities
expose Stifel Nicolaus to off-balance sheet risk in the event that customers
or other parties fail to satisfy their obligations.
In accordance with industry practice, securities transactions are recorded
on settlement date, generally three business days after trade date. Should a
customer or broker fail to deliver cash or securities as agreed, Stifel
Nicolaus may be required to purchase or sell securities at unfavorable
market prices.
Stifel Nicolaus borrows and lends securities to finance transactions and
facilitate the settlement process, utilizing customer margin securities held
as collateral. Stifel Nicolaus monitors the adequacy of collateral levels on
a daily basis. Stifel Nicolaus periodically borrows from banks on a
collateralized basis utilizing firm and customer margin securities in
compliance with SEC rules. Should the counterparty fail to return customer
securities pledged, Stifel Nicolaus is subject to the risk of acquiring the
securities at prevailing market prices in order to satisfy its customer
obligations. Stifel Nicolaus controls its exposure to credit risk by
continually monitoring its counterparties' positions, and, where deemed
necessary, Stifel Nicolaus may require a deposit of additional collateral
and/or a reduction or diversification of positions. Stifel Nicolaus sells
securities it does not currently own (short sales) and is obligated to
subsequently purchase such securities at prevailing market prices. Stifel
Nicolaus is exposed to risk of loss if securities prices increase prior to
closing the transactions. Stifel Nicolaus controls its exposure to price
risk for short sales through daily review and setting position and trading
limits.
Stifel Nicolaus manages its risks associated with the aforementioned
transactions through position and credit limits, and the continuous
monitoring of collateral. Additional collateral is required from customers
and other counterparties when appropriate.
43 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE K -- OFF-BALANCE SHEET CREDIT RISK (CONTINUED)
At December 31, 2003, securities, primarily from customer margin and
securities borrowing transactions, of approximately $362,000 were available
to the Company to utilize as collateral on various borrowings or other
purposes. The Company had utilized a portion of these available securities
as collateral for bank loans ($28,168), stock loans ($107,153), OCC margin
requirements ($61,924), and customer short sales ($10,591).
CONCENTRATIONS OF CREDIT RISK
The Company maintains margin and cash security accounts for its customers
located throughout the United States. The majority of the Company's customer
receivables are serviced by branch locations in Missouri and Illinois.
NOTE L -- DEBENTURE TO STIFEL FINANCIAL CAPITAL TRUST I
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.
NOTE M -- LONG-TERM DEBT
On April 30, 2002, the Company extinguished the $10.0 million principal
amount, as allowed by the agreement, of long-term debt to Western and
Southern Life Insurance Company, a significant shareholder, due June 30,
2004, bearing interest of 8.0% per annum.
NOTE N -- LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Stifel Nicolaus has a deferred compensation plan available to I.E.s who
achieve a certain level of production, whereby a certain percentage of their
earnings is deferred as defined by the plan, a portion of which is deferred
in Parent stock units and the balance into optional investment choices.
Stifel Nicolaus obtained approval from the New York Stock Exchange to
subordinate the liability for future payments to I.E.s for that portion of
compensation not deferred in Parent stock units. Beginning with deferrals
made in plan year 1997, Stifel Nicolaus issued cash subordination agreements
to participants in the plan pursuant to provisions of Appendix D of
Securities and Exchange Act Rule 15c3-1 and included in its computation of
net capital the following:
- ----------------------------------------------------------------------------
DISTRIBUTION
PLAN YEAR JANUARY 31, AMOUNT
- ----------------------------------------------------------------------------
1998 2004 $ 698
1999 2005 634
2000 2006 779
2001 2007 720
2002 2008 914
- ----------------------------------------------------------------------------
$3,745
======
At December 31, 2003, the fair value of the liabilities subordinated to
claims of general creditors using interest rates commensurate with
borrowings of similar terms was $3,115.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE O -- INVESTMENTS IN QUALIFIED MISSOURI BUSINESSES
The Company formed two Limited Liability Corporations, referred to
collectively as "the LLC," to be certified capital companies under the
statutes of the State of Missouri, which provide venture capital for
qualified Missouri businesses, as defined. The LLC issued $4,600
non-interest bearing notes due May 15, 2008, $10,600 non-interest bearing
notes due February 15, 2009, $8,417 non-interest bearing notes due February
15, 2010, and $981 non-interest bearing participating debentures due
December 31, 2010, which are included in the Company's consolidated
statement of financial condition under the caption "Other." Proceeds from
the notes are first invested in zero coupon U.S. Government securities in an
amount sufficient to accrete to the repayment amount of the notes and are
placed in an irrevocable trust. These securities, carried at accreted cost
of $17,125 and $16,129 at December 31, 2003 and 2002, respectively, are held
to maturity and are included under the caption "Investments." The fair value
of the securities is $19,624 and $19,041 at December 31, 2003 and 2002,
respectively. The remaining proceeds were invested in qualified Missouri
businesses.
The LLC invests in qualified Missouri businesses in the form of debt,
preferred, and/or common equity. These investments are not readily
marketable and are valued at fair value. These securities, valued at
approximately $2,662 and $2,670 at December 31, 2003 and 2002, respectively,
are included under the caption "Investments." Due to the structure of the
LLC and under the statutes of the State of Missouri, the Company
participates in a portion of the appreciation of these investments.
Management monitors these investments on a continuous basis.
NOTE P -- PREFERRED STOCK PURCHASE RIGHTS
On July 23, 1996, the Company's Board of Directors authorized and declared a
dividend distribution of one preferred stock purchase right for each
outstanding share of the Company's common stock, par value $0.15 per share.
The dividend was distributed to stockholders of record on August 12, 1996.
Each right will entitle the registered holder to purchase one one-hundredth
of a share of a Series A Junior Participating Preferred Stock, par value
$1.00 per share, at an exercise price of $35 per right. The rights become
exercisable on the tenth day after public announcement that a person or
group has acquired 15% or more of the Company's common stock or upon
commencement of announcement of intent to make a tender offer for 15% or
more of the outstanding shares of common stock without prior written consent
of the Company. If the Company is acquired by any person after the rights
become exercisable, each right will entitle its holder to purchase shares of
common stock at one-half the then current market price and, in the event of
a subsequent merger or other acquisition of the Company, to buy shares of
common stock of the acquiring entity at one-half of the market price of
those shares. The rights may be redeemed by the Company prior to becoming
exercisable by action of the Board of Directors at a redemption price of
$.01 per right. These rights will expire, if not previously exercised, on
August 12, 2006.
NOTE Q -- INCOME TAXES
The Company's provision (benefit) for income taxes consists of:
- ---------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------
CURRENT:
Federal $ 7,827 $1,548 $ 2,734
State 1,799 356 628
- ---------------------------------------------------------------------
9,626 1,904 3,362
DEFERRED:
Federal 347 89 (1,614)
State 80 21 (371)
- ---------------------------------------------------------------------
427 110 (1,985)
- ---------------------------------------------------------------------
$10,053 $2,014 $ 1,377
=====================================================================
45 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE Q -- INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before income taxes for the
following reasons:
- -------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------
Federal tax computed at statutory rates $ 8,772 $1,630 $1,152
State income taxes, net of federal
income tax benefit 1,237 264 170
Other, net 44 120 55
- -------------------------------------------------------------------------------------
Provision for income taxes $10,053 $2,014 $1,377
=====================================================================================
The net deferred tax asset consists of the following temporary differences:
- ----------------------------------------------------------------------------------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
- ----------------------------------------------------------------------------------------------
DEFERRED TAX Accruals not currently deductible $1,846 $3,094
ASSET Deferred compensation 1,159 993
Acquired net operating loss 830 935
Deferred revenue -- 308
Office equipment and leasehold improvements,
principally book over tax depreciation 585 172
Investment valuation 739 378
Reserve for bad debt 574 319
----------------------------------------------------------------------------
Deferred Tax Asset 5,733 6,199
----------------------------------------------------------------------------
DEFERRED TAX Customer and employee receivable (30) (61)
LIABILITY Intangible assets, principally tax over book
amortization (178) (186)
----------------------------------------------------------------------------
Deferred Tax Liability (208) (247)
----------------------------------------------------------------------------
Net Deferred Tax Asset $5,525 $5,952
============================================================================
The Company believes that a valuation allowance with respect to the
realization of the total gross deferred tax asset is not necessary. Based on
the Company's historical earnings and taxes previously paid, future
expectations of taxable income, and the future reversals of gross deferred
tax liability, management believes it is more likely than not that the
Company will realize the gross deferred tax asset.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE R -- RELATED PARTY TRANSACTIONS
In 2003, two directors of the Parent were associated with firms that
provided legal and other services to the Company. The Company charged
approximately $171 (primarily for legal fees) to operations for these
services. In 2002 and 2001, four directors of the Parent were associated
with firms that provide legal and other services to the Company. The Company
charged approximately $40 and $723 (primarily for legal fees) to operations
for these services for 2002 and 2001, respectively.
NOTE S -- SEGMENT REPORTING
The Company's reportable segments include the Private Client Group, Equity
Capital Markets, Fixed Income Capital Markets, and Other. Prior years'
financial information has been reclassified to conform with the current year
presentation. 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.
Intersegment revenues and charges are eliminated between segments. The
Company evaluates the performance of its segments and allocates resources to
them based on various factors, including prospects for growth, return on
investment, and return on revenues.
The Company has not disclosed asset information by segment, as the
information is not produced internally and its preparation is impracticable.
Information concerning operations in these segments of business is as
follows:
- ----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------
NET REVENUES
Private Client Group $163,095 $136,348 $129,247
Equity Capital Markets 35,533 32,010 24,874
Fixed Income Capital Markets 15,384 16,749 18,091
Other 2,500 2,687 5,056
- ----------------------------------------------------------------------------------------
Total Net Revenues $216,512 $187,794 $177,268
========================================================================================
OPERATING CONTRIBUTIONS
Private Client Group $ 35,583 $ 17,046 $ 19,163
Equity Capital Markets 10,788 8,469 4,143
Fixed Income Capital Markets 2,750 3,530 4,449
Other/Unallocated Overhead (24,061) (24,251) (24,368)
- ----------------------------------------------------------------------------------------
Pre-Tax Income $ 25,060 $ 4,794 $ 3,387
========================================================================================
47 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE T -- EARNINGS PER SHARE
The following table reflects a reconciliation between Basic Earnings Per
Share and Diluted Earnings Per Share.
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------- -------------------------------- ---------------------------------
PER PER PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
NET INCOME (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to
shareholders $15,007 6,924,644 $2.17 $2,780 7,033,193 $0.40 $2,010 7,161,698 $0.28
Effect of Dilutive Securities
Employee benefits plans -- 1,303,851 -- -- 1,135,996 -- -- 828,423 --
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $15,007 8,228,495 $1.82 $2,780 8,169,189 $0.34 $2,010 7,990,121 $0.25
- ---------------------------------------------------------------------------------------------------------------------------------
NOTE U -- SHARE REPURCHASES
On May 9, 2002, the Company's board of directors authorized the repurchase
of up to 750,000 additional shares on top of an 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.
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 $1,200.
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
year ending December 31, 2003, 2002, and 2001, respectively, for employee
benefit plans. Under existing board authorizations, the Company is permitted
to buy an additional 759,502 shares.
* * * * * *
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 48
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Stifel Financial Corp.
St. Louis, Missouri
We have audited the accompanying consolidated statements of financial
condition of Stifel Financial Corp. and Subsidiaries (the "Company") as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Stifel Financial Corp. and
Subsidiaries at December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note G to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142.
/s/ Deloitte & Touche LLP
March 12, 2004
St. Louis, Missouri
49 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
QUARTERLY RESULTS
- -------------------------------------------------------------------------------------------------------------------
QUARTERLY OPERATING RESULTS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
BASIC DILUTED
EARNINGS NET EARNINGS EARNINGS
NET (LOSS) BEFORE INCOME (LOSS) (LOSS)
(in thousands, except per share amounts) REVENUE REVENUES INCOME TAXES (LOSS) PER SHARE PER SHARE
- -------------------------------------------------------------------------------------------------------------------
YEAR 2003 BY QUARTER
- -------------------------------------------------------------------------------------------------------------------
First $44,096 $42,733 $ 1,205 $ 722 $ .10 $ .09
Second 53,546 52,252 4,188 2,498 .36 .31
Third (1) 61,184 59,925 8,569 5,124 .74 .62
Fourth 62,794 61,602 11,098 6,663 .96 .78
- -------------------------------------------------------------------------------------------------------------------
YEAR 2002 BY QUARTER
- -------------------------------------------------------------------------------------------------------------------
First $49,087 $47,803 $ 2,847 $ 1,701 $ .24 $ .21
Second 51,352 49,548 3,418 2,045 .29 .25
Third (2) 46,801 45,000 (4,296) (2,624) (.38) (.38)
Fourth 46,873 45,443 2,825 1,658 .24 .21
- -------------------------------------------------------------------------------------------------------------------
(1) Third quarter results include a reversal of approximately $1.2 million,
net of tax, due to a favorable settlement of claims that had initially
resulted in a $4.5 million arbitration award in the third quarter of
2002 in connection with the activities of a former Stifel Nicolaus
broker.
(2) The Company charged approximately $3.5 million, net of tax, due
primarily to an arbitration award and other matters in the third quarter
of 2002. The arbitration award arose from the activities of a former
Stifel Nicolaus broker in its Pikeville, Kentucky office.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
The management of the Company, including Mr. Ronald J. Kruszewski as Chief
Executive Officer and Mr. James M. Zemlyak as Chief Financial Officer, has
evaluated the Company's disclosure controls and procedures as specified in
the SEC's rules and forms. Under rules promulgated by the SEC, disclosure
controls and procedures are defined as those "controls or other procedures
of an issuer that are designed to ensure that information required to be
disclosed by the issuer in the reports filed or submitted by it under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in the Commission's rules and
forms." Based on the evaluation of the Company's disclosure controls and
procedures, it was determined that such controls and procedures were
effective.
Further, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is contained in "Election of Directors,"
included in the Registrant's Proxy Statement for the 2004 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
Information regarding the executive officers is contained in "Item 4a.
Executive Officers of the Registrant," hereof. There is no family
relationship between any of the directors or named executive officers.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is contained in "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's Proxy Statement for the 2004
Annual Meeting of Stockholders, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is contained in "Executive
Compensation," included in the Registrant's Proxy Statement for the 2004
Annual Meeting of Stockholders, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is contained in "Voting Securities and Principal Holders
Thereof," included in the Registrant's Proxy Statement for the 2004 Annual
Meeting of Stockholders, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
contained in "Certain Relationships and Related Transactions," included in
the Registrant's Proxy Statement for the 2004 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal accounting fees and services is contained in
"Independent Auditors," included in the Registrant's Proxy Statement for the
2004 Annual Meeting of Stockholders, which information is incorporated
herein by reference.
51 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements are listed in Item 8 and made part
hereof.
(2) Consolidated Financial Statement Schedules:
Page
----
Independent Auditors' Report...................................55
Schedule II - Valuation and Qualifying Accounts................56
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and,
therefore, have been omitted.
(3) Exhibits: See Exhibit Index on pages 57 and 58 hereof.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K dated November 3, 2003. This
Form 8-K contained information under Item 9. Regulation FD
Disclosure. The Company announced the favorable settlement of
claims that had initially resulted in a $4.5 million arbitration
award in October 2002 against its subsidiary, Stifel, Nicolaus &
Company, Incorporated. The settlement resolves the arbitration
award, the District Court's judgment, and the appeal of that
judgment. The settlement resulted in the addition of approximately
$1.2 million after tax.
The Company filed a report on Form 8-K dated November 14, 2003.
This Form 8-K contained Item 12. Disclosure of Results of Operation
and Financial Condition. The exhibit furnished is the press release
of the Company's results for the three and nine months ended
September 30, 2003.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 52
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of St. Louis,
State of Missouri, on the 15th day of March 2004.
STIFEL FINANCIAL CORP.
(Registrant)
By /s/ Ronald J. Kruszewski
------------------------
Ronald J. Kruszewski
Chairman of the Board, President,
Chief Executive Officer, and Director
53 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant on March 15, 2004, in the capacities indicated.
/s/ Ronald J. Kruszewski ......................Chairman of the Board, President,
-------------------- Chief Executive Officer, and Director
Ronald J. Kruszewski (Principal Executive Officer)
/s/ James M. Zemlyak ..........................Senior Vice President, Chief Financial
---------------- Officer, Treasurer, and Director
James M. Zemlyak (Principal Financial and Accounting Officer)
/s/ Robert J. Baer .............................Director
--------------
Robert J. Baer
/s/ Bruce A. Beda ..............................Director
-------------
Bruce A. Beda
/s/ Charles A. Dill ...........................Director
---------------
Charles A. Dill
/s/ John P. Dubinsky ..........................Director
----------------
John P. Dubinsky
/s/ Richard F. Ford ............................Director
---------------
Richard F. Ford
/s/ Frederick O. Hanser ........................Director
-------------------
Frederick O. Hanser
/s/ Walter F. Imhoff ...........................Director
----------------
Walter F. Imhoff
/s/ Robert E. Lefton ...........................Director
----------------
Robert E. Lefton
/s/ Scott B. McCuaig ...........................Director
----------------
Scott B. McCuaig
/s/ James M. Oates .............................Director
--------------
James M. Oates
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 54
Independent Auditors' Report
To the Board of Directors and Stockholders of
Stifel Financial Corp.
St. Louis, Missouri
We have audited the consolidated financial statements of Stifel Financial
Corp. and Subsidiaries (the "Company") as of December 31, 2003 and 2002, and
for each of the three years in the period ended December 31, 2003, and have
issued our report thereon dated March 12, 2004 (which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
adoption of a new accounting principle); such consolidated financial
statements and report are included elsewhere in this Form 10-K. Our audits
also included the consolidated financial statement schedule of Stifel
Financial Corp. and Subsidiaries, listed in Item 15. This consolidated
financial statement schedule is the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Deloitte & Touche LLP
March 12, 2004
St. Louis, Missouri
55 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO COSTS AT END
DESCRIPTION OF PERIOD AND EXPENSES DEDUCTIONS OF PERIOD
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003
Deducted from asset account:
Allowances for doubtful accounts $143,518 $ 82,497 $144,347(1) $ 81,668
Deducted from asset account:
Allowances for doubtful notes receivables 677,338 1,233,174 513,546(1) 1,396,966
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002
Deducted from asset account:
Allowances for doubtful accounts 228,815 0 85,297(1) 143,518
Deducted from asset account:
Allowances for doubtful notes receivables 526,450 581,225 430,337(1) 677,338
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001
Deducted from asset account:
Allowances for doubtful accounts 104,435 408,220 283,840(2) 228,815
Deducted from asset account:
Allowances for doubtful notes receivables 331,064 448,713 253,327(1) 526,450
- --------------------------------------------------------------------------------------------------------------------------------
(1) Uncollected notes written off and recoveries
(2) Recovery of account
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 56
EXHIBIT INDEX
STIFEL FINANCIAL CORP. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2003
EXHIBIT
NUMBER DESCRIPTION
3. (a) Restated Certificate of Incorporation and as amended of
Financial filed with the Secretary of State of Delaware on May
31, 2001, incorporated herein by reference to Exhibit 3.(a) to
Financial's Quarterly Report on Form 10-Q (File No. 001-9305)
for the quarterly period ended June 30, 2001.
(b) Amended and Restated By-Laws of Financial, incorporated herein
by reference to Exhibit 3.(b)(1) to Financial's Annual Report
on Form 10-K (File No. 1-9305) for fiscal year ended July 30,
1993.
4. (a) Preferred Stock Purchase Rights of Financial, incorporated
herein by reference to Financial's Registration Statement on
Form 8-A (File No. 1-9305) filed July 30, 1996.
10. (a) Form of Indemnification Agreement with directors dated as
of June 30, 1987, incorporated herein by reference to Exhibit
10.2 to Financial's Current Report on Form 8-K (date of
earliest event reported - June 22, 1987) filed July 14, 1987.
(b) 1983 Incentive Stock Option Plan of Financial, incorporated
herein by reference to Exhibit 4.(a) to Financial's
Registration Statement on Form S-8 (Registration File No.
2-94326) filed November 14, 1984.*
(c) 1985 Incentive Stock Option Plan of Financial, incorporated
herein by reference to Exhibit 28C to Financial's Registration
Statement on Form S-8, as amended (Registration File No.
33-10030) filed November 7, 1986.*
(d) 1987 Non-qualified Stock Option Plan of Financial,
incorporated herein by reference to Exhibit 10.(h) to
Financial's Annual Report on Form 10-K (File No. 1-9305) for
the fiscal year ended July 31, 1987.*
(e) Amendment to 1983 Incentive Stock Option Plan, 1985 Incentive
Stock Option Plan, and 1987 Non-Qualified Stock Option Plan,
incorporated herein by reference to Exhibit 10.(f) to
Financial's Annual Report on Form 10-K (File No. 1-9305) for
the fiscal year ended July 28, 1989.*
(f) Dividend Reinvestment and Stock Purchase Plan of Financial,
incorporated herein by reference to Financial's Registration
Statement on Form S-3 (Registration File No. 33-53699) filed
May 18, 1994.
(g) Amended and Restated 1997 Incentive Plan of Financial,
incorporated herein by reference to Financial's Registration
Statement on Form S-8 (Registration File No. 333-84717) filed
on August 6, 1999.*
(h) 1998 Employee Stock Purchase Plan of Financial, incorporated
herein by reference to Financial's Registration Statement on
Form S-8 (Registration File No. 333-37807) filed October 14,
1997.*
(i)(1) Employment Letter with Ronald J. Kruszewski, incorporated
herein by reference to Exhibit 10.(l) to Financial's Annual
Report on Form 10-K (File No. 1-9305) for the year ended
December 31, 1997.*
(i)(2) Stock Unit Agreement with Ronald J. Kruszewski, incorporated
herein by reference to Exhibit 10.(j)(2) to Financial's Annual
Report on Form 10-K (File No. 1-9305) for the year ended
December 31, 1998.*
(j) Amendment of Loan Agreement with Western & Southern Life
Insurance Company dated February 24, 1999, incorporated herein
by reference to Exhibit 10.(a) to Financial's Quarterly Report
on Form 10-Q (File No. 001-9305) for the quarterly period
ended June 30, 2001.
(k) 1999 Executive Incentive Performance Plan of Financial,
incorporated herein by reference to Annex B of Financial's
Proxy Statement for the 1999 Annual Meeting of Stockholders
filed March 26, 1999.*
(l) Equity Incentive Plan for Non-Employee Directors of Financial,
incorporated herein by reference to Financial's Registration
Statement on Form S-8 (Registration File No. 333-52694) filed
December 22, 2000.*
(m) Stifel, Nicolaus & Company, Incorporated Wealth Accumulation
Plan, incorporated herein by reference to Financial's
Registration Statement on Form S-8 (Registration File No.
333-60506) filed May 9, 2001.*
57 STIFEL FINANCIAL CORP. AND SUBSIDIARIES
(m)(1) Stifel, Nicolaus & Company, Incorporated Wealth Accumulation
Plan Amendment No. 1, incorporated herein by reference to
Financial's Registration Statement on Form S-8 (Registration
File No. 333-105759) filed June 2, 2003.*
(n) Stifel Nicolaus Profit Sharing 401(k) Plan, incorporated
herein by reference to Financial's Registration Statement on
Form S-8 (Registration File No. 333-60516) filed May 9, 2001.*
(o) Stifel Financial Corp. 2001 Incentive Plan, incorporated
herein by reference to Financial's Registration Statement on
Form S-8 (Registration File No. 333-82328) filed February 7,
2002.*
(o)(1) Stifel Financial Corp. 2001 Incentive Plan Amendment No. 1,
incorporated herein by reference to Financial's Registration
Statement on Form S-8 (Registration File No. 333-105756) filed
June 2, 2003.
(p) Promissory Note dated August 1, 1999, from Tom Prince payable
to Stifel, Nicolaus & Company, Incorporated, incorporated
herein by reference to Financial's Annual Report on Form 10-K
(File No. 001-9305) for the year ended December 31, 2001,
filed on March 27, 2002.*
(q) Promissory Note dated March 5, 2002, from Tom Prince payable
to Stifel, Nicolaus & Company, Incorporated, incorporated
herein by reference to Financial's Annual Report on Form 10-K
(File No. 001-9305) for the year ended December 31, 2001,
filed on March 27, 2002.*
(r) Stock Unit Agreement with James M. Zemlyak dated January 11,
2000, incorporated herein by reference to Exhibit 10.(s) to
Financial's Annual Report on Form 10-K / A Amendment No. 1
(File No. 1-9305) for the year ended December 31, 2001, filed
on April 9, 2002.*
(s) Stock Unit Agreement with Scott B. McCuaig dated December 20,
1998, incorporated herein by reference to Exhibit 10.(t) to
Financial's Annual Report on Form 10-K / A Amendment No. 1
(File No. 1-9305) for the year ended December 31, 2001, filed
on April 9, 2002.*
(t) Amended and Restated Promissory Note dated December 21, 1998,
from Ronald J. Kruszewski payable to Financial, incorporated
herein by reference to Exhibit 10.(u) to Financial's Annual
Report on Form 10-K / A Amendment No. 1 (File No. 1-9305) for
the year ended December 31, 2001, filed on April 9, 2002.*
(u) Third Amendment to Lease by and among EBS Building, L.L.C.,
Stifel Financial Corp., and Stifel, Nicolaus & Company,
Incorporated, dated September 1, 1999, incorporated herein by
reference to EBS Building, L.L.C.'s Annual Report on Form 10-K
(File No. 000-24167) for the year ended December 31, 2001.
(v) Fourth Amendment to Lease by and among EBS Building, L.L.C.,
Stifel Financial Corp., and Stifel, Nicolaus & Company,
Incorporated, dated November 1, 1999, incorporated herein by
reference to EBS Building, L.L.C.'s Annual Report on Form 10-K
(File No. 000-24167) for the year ended December 31, 2001.
(w) Fifth Amendment to Lease by and among EBS Building, L.L.C.,
Stifel Financial Corp., and Stifel, Nicolaus & Company,
Incorporated dated June 11, 2001, incorporated herein by
reference to EBS Building, L.L.C.'s Annual Report on Form 10-K
(File No. 000-24167) for the year ended December 31, 2001.
(x) Stifel Financial Corp. 2003 Employee Stock Purchase Plan,
incorporated herein by reference to Financial's Registration
Statement on Form S-8 (Registration File No. 333-100414) filed
October 8, 2002.*
21. List of Subsidiaries of Financial, filed herewith.
23. Consent of Independent Auditors, filed herewith.
31.1 Certification by the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32. Certification pursuant to U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. This
exhibit is furnished to the SEC.
* Management contract or compensatory plan or arrangement.
STIFEL FINANCIAL CORP. AND SUBSIDIARIES 58