News Column

STIFEL FINANCIAL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 12, 2014

The following discussion of the financial condition and results of operations of our company should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013, and the accompanying consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q. Certain statements in this report may be considered forward-looking. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements cover, among other things, statements made about general economic and market conditions, the investment banking industry, our objectives and results, and also may include our belief regarding the effect of various legal proceedings, management expectations, our liquidity and funding sources, counterparty credit risk, or other similar matters. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including those factors discussed below under "External Factors Impacting Our Business" as well as the factors identified under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, as updated in our subsequent reports filed with the SEC. These reports are available at our web site at www.stifel.com and at the SEC web site at www.sec.gov. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events, unless we are obligated to do so under federal securities laws.



Unless otherwise indicated, the terms "we," "us," "our" or "our company" in this report refer to Stifel Financial Corp. and its wholly owned subsidiaries.

Executive Summary

We operate as a financial services and bank holding company. We have built a diversified business serving private clients, institutional investors, and investment banking clients located across the country. Our principal activities are: (i) private client services, including securities transaction and financial planning services; (ii) institutional equity and fixed income sales, trading and research, and municipal finance; (iii) investment banking services, including mergers and acquisitions, public offerings, and private placements; and (iv) retail and commercial banking, including personal and commercial lending programs. Our core philosophy is based upon a tradition of trust, understanding, and studied advice. We attract and retain experienced professionals by fostering a culture of entrepreneurial, long-term thinking. We provide our private, institutional and corporate clients quality, personalized service, with the theory that if we place clients' needs first, both our clients and our company will prosper. Our unwavering client and employee focus have earned us a reputation as one of the leading brokerage and investment banking firms off Wall Street. We have grown our business both organically and through opportunistic acquisitions. These acquisitions have positively impacted our results. We plan to maintain our focus on revenue growth with a continued appreciation for the development of quality client relationships. Within our private client business, our efforts will be focused on recruiting experienced financial advisors with established client relationships. Within our capital markets business, our focus continues to be on providing quality client management and product diversification. In executing our growth strategy, we will continue to seek out opportunities that allow us to take advantage of the consolidation among middle-market firms, whereby allowing us to increase market share in our Global Wealth Management and Institutional Group businesses. Stifel Financial Corp. (the "Parent"), through its wholly owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus"), Stifel Bank & Trust ("Stifel Bank"), Stifel Nicolaus Europe Limited ("SNEL"), Century Securities Associates, Inc. ("CSA"), Keefe, Bruyette & Woods, Inc. ("KBW"), Keefe, Bruyette & Woods Limited ("KBW Limited"), and Miller Buckfire & Co. LLC ("Miller Buckfire"), is principally engaged in retail brokerage; securities trading; investment banking; investment advisory; retail, consumer, and commercial banking; and related financial services. We have offices throughout the United States, and three European cities. Our major geographic area of concentration is the Midwest and Mid-Atlantic regions, with a growing presence in the Northeast, Southeast and Western United States. Our company's principal customers are individual investors, corporations, municipalities, and institutions. 47



--------------------------------------------------------------------------------

Table of Contents

Our ability to attract and retain highly skilled and productive employees is critical to the success of our business. Accordingly, compensation and benefits comprise the largest component of our expenses, and our performance is dependent upon our ability to attract, develop and retain highly skilled employees who are motivated and committed to providing the highest quality of service and guidance to our clients.



On April 3, 2014, we completed the acquisition of De La Rosa & Co. ("De La Rosa"), a California-based public finance investment banking boutique. The addition of the De La Rosa team is expected to further strengthen our company's position in a number of key underwriting markets in California.

On May 8, 2014 we entered into an agreement to acquire Oriel Securities ("Oriel"), a London-based stockbroking and investment banking firm, to build out our company's international platform across all of its institutional businesses. The combination of our company and Oriel will bring together more than 250 professionals to create a significant middle-market investment banking group in London, with broad research coverage across most sectors of the economy, equity and debt sales and trading, and investment banking services.



Results for the three months ended March 31, 2014

For the three months ended March 31, 2014, net revenues from continuing operations increased 24.7% to $546.7 million compared to $438.6 million during the comparable period in 2013. Net income, including continuing and discontinued operations, increased 224.1% to $47.4 million, or $0.63 per diluted common share for the three months ended March 31, 2014, compared to $14.6 million, or $0.21 per diluted common share during the comparable period in 2013. Net income from continuing operations increased 221.2% to $48.0 million, or $0.63 per diluted common share for the three months ended March 31, 2014 compared to $14.9 million, or $0.22 per diluted common share during the comparable period in 2013. Our revenue growth was primarily attributable to higher investment banking revenues as a result of improved M&A activity and capital raising revenues; growth in asset management and service fees as a result of increased assets under management; an increase in principal transactions; increased net interest revenues as a result of the growth of net interest-earning assets at Stifel Bank; and an increase in commission revenue. The increase in revenue growth was offset by a decline in other revenues. The results for the three months ended March 31, 2014 were impacted by certain non-recurring and merger-related expenses. The aggregate impact of these items was a reduction to net income from continuing operations of $4.1 million (after-tax) or $0.06 per diluted common share.



External Factors Impacting our Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and mostly unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, the level and shape of various yield curves, the volume and value of trading in securities, and the value of our customers' assets under management. The municipal underwriting market is challenging as state and local governments reduce their debt levels. Investors are showing a lack of demand for longer-dated municipals and are reluctant to take on credit or liquidity risks. Investor confidence has been dampened by continued uncertainty surrounding the U.S. fiscal and debt ceiling, the debt concerns in Europe, and sluggish employment growth. Our overall financial results continue to be highly and directly correlated to the direction and activity levels of the United States equity and fixed income markets. At March 31, 2014, the key indicators of the markets' performance, the Dow Jones Industrial Average, S&P 500, and the NASDAQ closed 12.9%, 19.3%, and 28.5% higher than their March 31, 2013 closing prices, respectively. Equity markets finished the quarter slightly ahead of their record levels at the end of 2013, and attracted both issuers and investors into the market. As a result, equity capital raising remained strong and trading volumes increased from 2013 levels. As a participant in the financial services industry, we are subject to complicated and extensive regulation of our business. The recent economic and political environment has led to legislative and regulatory initiatives, both enacted and proposed, that could substantially intensify the regulation of the financial services industry and may significantly impact us. On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act will have a broad impact on the financial services industry and will impose significant new regulatory and compliance 48



--------------------------------------------------------------------------------

Table of Contents

requirements, including the designation of certain financial companies as systemically significant, the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. The expectation is that this new legislation will significantly restructure and increase regulation in the financial services industry, which could increase our cost of doing business, change certain business practices, and alter the competitive landscape. 49



--------------------------------------------------------------------------------

Table of Contents

RESULTS OF OPERATIONS

Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013

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

As a Percentage of Net Revenues For the Three For the Three Months Months Ended Ended March 31, March 31, % 2014 2013 Change 2014 2013 Revenues: Commissions $ 159,416$ 145,867 9.3 29.2 % 33.3 % Principal transactions 126,461 107,264 17.9 23.1 24.5 Investment banking 132,304 76,905 72.0 24.2 17.5 Asset management and service fees 89,170 68,912 29.4 16.3 15.7 Interest 42,826 29,806 43.7 7.8 6.8 Other income 5,200 20,419 (74.5 ) 1.0 4.6 Total revenues 555,377 449,173 23.6 101.6 102.4 Interest expense 8,631 10,569 (18.3 ) 1.6 2.4 Net revenues 546,746 438,604 24.7 100.0 100.0 Non-interest expenses: Compensation and benefits 346,771 314,912 10.1 63.4 71.8 Occupancy and equipment rental 40,532 33,519 20.9 7.4 7.6 Communication and office supplies 24,818 22,457 10.5 4.5 5.1 Commissions and floor brokerage 9,028 8,837 2.2 1.7 2.0 Other operating expenses 47,469 35,221



34.8 8.7 8.1

Total non-interest expenses 468,618 414,946



12.9 85.7 94.6

Income before from continuing operations income taxes 78,128 23,658 230.2 14.3 5.4 Provision for income taxes 30,155 8,722 245.8 5.5 2.0 Net income from continuing operations 47,973 14,936



221.2 8.8 3.4

Discontinued operations: Loss from discontinued operations, net of tax (591 ) (317 ) 86.4 (0.1 ) - Net income $ 47,382$ 14,619 224.1 8.7 % 3.4 % 50



--------------------------------------------------------------------------------

Table of Contents

NET REVENUES

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

Three Months Ended March 31, % 2014 2013 Change Net revenues: Commissions $ 159,416$ 145,867 9.3 Principal transactions 126,461 107,264



17.9

Investment banking:

Capital raising 73,804 49,849



48.1

Strategic advisory fees 58,500 27,056



116.2

132,304 76,905



72.0

Asset management and service fees 89,170 68,912

29.4 Net interest 34,195 19,237 77.8 Other income 5,200 20,419 (74.5 ) Total net revenues $ 546,746$ 438,604 24.7 Except as noted in the following discussion of variances, the underlying reasons for the increase in revenue can be attributed principally to the increased number of private client group offices and financial advisors in our Global Wealth Management segment and the increased number of revenue producers in our Institutional Group segment.



Commissions - Commission revenues are primarily generated from agency transactions in OTC and listed equity securities, insurance products and options. In addition, commission revenues also include distribution fees for promoting and distributing mutual funds.

For the three months ended March 31, 2014, commission revenues increased 9.3% to $159.4 million from $145.9 million in the comparable period in 2013. The increase is primarily attributable to an increase in OTC transactions from the comparable period in 2013. Principal transactions - For the three months ended March 31, 2014, principal transactions revenues increased 17.9% to $126.5 million from $107.3 million in the comparable period in 2013. The increase is primarily attributable to an increase in fixed income institutional brokerage revenues as a result of higher trading volumes. Investment banking - Investment banking revenues include: (i) capital raising revenues representing fees earned from the underwriting of debt and equity securities, and (ii) strategic advisory fees related to corporate debt and equity offerings, municipal debt offerings, merger and acquisitions, private placements and other investment banking advisory fees. For the three months ended March 31, 2014, investment banking revenues increased 72.0%, to $132.3 million from $76.9 million in the comparable period in 2013. The increase was primarily attributable to an increase in advisory fees and capital raising revenues. Capital raising revenues increased 48.1% to $73.8 million for the three months ended March 31, 2014 from $49.9 million in the comparable period in 2013. During the first quarter of 2014, equity capital raising revenues increased 80.6% to $56.5 million from $31.3 million in the comparable period in 2013. For the three months ended March 31, 2014, fixed income capital raising revenues decreased 37.6% to $9.1 million from $14.6 million in the comparable period in 2013. Strategic advisory fees increased 116.2% to $58.5 million for the three months ended March 31, 2014 from $27.1 million in the comparable period in 2013. The increase is primarily attributable to an increase in the number of completed equity transactions over the comparable period in 2013. Asset management and service fees - Asset management and service fees include fees for asset-based financial services provided to individuals and institutional clients. Investment advisory fees are charged based on the value of assets in fee-based accounts. Asset management and service fees are affected by changes in the balances of client assets due to market fluctuations and levels of net new client assets. 51



--------------------------------------------------------------------------------

Table of Contents

For the three months ended March 31, 2014, asset management and service fee revenues increased 29.4% to $89.2 million from $68.9 million in the comparable period in 2013. The increase is primarily a result of an increase in the number and value of fee-based accounts. See "Asset management and service fees" in the Global Wealth Management segment discussion for information on the changes in asset management and service fees revenues. Other income - For the three months ended March 31, 2014, other income decreased 74.5% to $5.2 million from $20.4 million during the comparable period in 2013. Other income primarily includes investment gains, including gains on our private equity investments, and loan originations fees from Stifel Bank.



NET INTEREST INCOME

The following tables present average balance data and operating interest revenue and expense data, as well as related interest yields for the periods indicated (in thousands, except rates): Three Months Ended March 31, 2014 March 31, 2013 Interest Average Interest Average Average Income/ Interest Average Income/ Interest Balance Expense Rate Balance Expense Rate Interest-earning assets: Margin balances (Stifel Nicolaus) $ 482,058$ 4,666 3.87 % $ 442,504$ 4,255 3.85 % Interest-earning assets (Stifel Bank) 4,957,732 33,095 2.67 3,752,030 20,825 2.22 Other (Stifel Nicolaus) 5,065 4,726 Total interest revenue $ 42,826$ 29,806 Interest-bearing liabilities: Short-term borrowings (Stifel Nicolaus) $ 97,707$ 1,104 1.13 % $ 209,392$ 984 1.17 % Interest-bearing liabilities (Stifel Bank) 4,679,794 1,745 0.15 3,502,898 2,894 0.33 Stock loan (Stifel Nicolaus) 72,541 123 0.17 64,646 65 0.10



Senior notes (Stifel Financial) 325,000 5,205 6.41 325,000 6,211

7.64 Interest-bearing liabilities (Capital Trusts) 82,500 419 2.10 82,500 433 2.10 Other (Stifel Nicolaus) 35 (18 ) Total interest expense 8,631 10,569 Net interest income $ 34,195$ 19,237 Net interest income - Net interest income is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest income is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. For the three months ended March 31, 2014, net interest income increased to $34.2 million from $19.2 million during the comparable period in 2013. For the three months ended March 31, 2014, interest revenue increased 43.7% to $42.8 million from $29.8 million in the comparable period in 2013, principally as a result of a $12.3 million increase in interest revenue generated from the interest-earning assets of Stifel Bank. The average interest-earning assets of Stifel Bank increased to $5.0 billion during the three months ended March 31, 2014 compared to $3.8 billion during the comparable period in 2013 at average interest rates of 2.67% and 2.22%, respectively. For the three months ended March 31, 2014, interest expense decreased 18.3% to $8.6 million from $10.6 million during the comparable period in 2013. The decrease is primarily attributable to a decrease in interest expense on the interest-bearing liabilities of Stifel Bank and the payoff of our non-recourse debt during the fourth quarter of 2013. 52



--------------------------------------------------------------------------------

Table of Contents

NON-INTEREST EXPENSES

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

For the Three Months Ended March 31, % 2014 2013 Change Non-interest expenses: Compensation and benefits $ 346,771$ 314,912 10.1 Occupancy and equipment rental 40,532 33,519 20.9 Communications and office supplies 24,818 22,457 10.5 Commissions and floor brokerage 9,028 8,837 2.2 Other operating expenses 47,469 35,221 34.8 Total non-interest expenses $ 468,618$ 414,946 12.9 Except as noted in the following discussion of variances, the underlying reasons for the increase in non-interest expenses can be attributed principally to our continued expansion, both organically and through our acquisition of KBW, Inc. on February 15, 2013, and increased administrative overhead to support the growth in our segments. Compensation and benefits - Compensation and benefits expenses, which are the largest component of our expenses, include salaries, bonuses, transition pay, benefits, amortization of stock-based compensation, employment taxes and other employee-related costs. A significant portion of compensation expense is comprised of production-based variable compensation, including discretionary bonuses, which fluctuates in proportion to the level of business activity, increasing with higher revenues and operating profits. Other compensation costs, including base salaries, stock-based compensation amortization, and benefits, are more fixed in nature. For the three months ended March 31, 2014, compensation and benefits expense increased 10.1% to $346.8 million from $314.9 million during the comparable period in 2013. The increase is principally due to the following: 1) increased variable compensation as a result of increased revenue production and profitability; and 2) an increase in fixed compensation for the additional administrative support staff. Compensation and benefits expense for the three months ended March 31, 2013 includes a non-cash charge of $30.6 million (pre-tax) related to the expensing of restricted stock awards granted to certain employees of KBW, Inc and our company as retention related to the acquisition of KBW, Inc. There were no continuing service requirements associated with these restricted stock awards, and accordingly were expensed on the date of grant. Compensation and benefits expense as a percentage of net revenues was 63.4% for the three months ended March 31, 2014, compared to 71.8% for the three months ended March 31, 2013. Excluding the expensing of the awards and merger-related expenses, compensation and benefits expense as a percentage of net revenues was 63.8% for the three months ended March 31, 2013. A portion of compensation and benefits expenses includes transition pay, principally in the form of upfront notes, signing bonuses and retention awards in connection with our continuing expansion efforts, of $24.9 million (4.6% of net revenues) for the three months ended March 31, 2014, compared to $21.5 million (4.9% of net revenues) for the comparable period in 2013. The upfront notes are amortized over a five to ten year period. Occupancy and equipment rental - For the three months ended March 31, 2014, occupancy and equipment rental expense increased 20.9% to $40.5 million from $33.5 million during the three months ended March 31, 2013. The increase is primarily due to the increase in rent and depreciation expense due primarily to an increase in office locations. As of March 31, 2014, we have 359 locations compared to 357 at March 31, 2013. Communications and office supplies - Communications expense includes costs for telecommunication and data communication, primarily for obtaining third-party market data information. For the three months ended March 31, 2014, communications and office supplies expense increased 10.5% to $24.8 million from $22.5 million during the first quarter of 2013. The increase is primarily attributable to our continued expansion through our acquisitions and the addition of revenue producers and support staff. Commissions and floor brokerage - For the three months ended March 31, 2014, commissions and floor brokerage expense increased 2.2% to $9.0 million from $8.8 million during the comparable period in 2013. The increase is primarily attributable to 1) an increase in clearing fees as a result of an increase in commission revenues; and 2) an increase in trade execution costs from our flow business. 53



--------------------------------------------------------------------------------

Table of Contents

Other operating expenses - Other operating expenses primarily include license and registration fees, litigation-related expenses, which consist of amounts we reserve and/or pay out related to legal and regulatory matters, travel and entertainment, promotional expenses and expenses for professional services. For the three months ended March 31, 2014, other operating expenses increased 34.8% to $47.5 million from $35.2 million during the three months ended March 31, 2013. The increase is primarily attributable to an increase in legal expenses, travel and promotion, professional service fees in connection with our acquisitions and subscriptions expenses. Provision for income taxes - For the three months ended March 31, 2014, our provision for income taxes was $30.2 million, representing an effective tax rate of 38.6%, compared to expense of $8.7 million for the comparable period in 2013, representing an effective tax rate of 36.9%.



DISCONTINUED OPERATIONS

Stifel Nicolaus Canada, Inc. ("SN Canada") ceased business operations as of September 30, 2013. The results of SN Canada, previously reported in the Institutional Group segment, are classified as discontinued operations for all periods presented. Three months ended March 31, 2014 2013 Net revenues $ 10$ 3,176 Restructuring expense 217 - Operating expenses 492 3,488 Total non-interest expenses 709 3,488



Loss from discontinued operations before income tax expense (699 )

(312 ) Income tax expense (108 ) 5 Loss from discontinued operations, net of tax $ (591 )



$ (317 )

See Note 3 to our consolidated financial statements for further discussion of our discontinued operations.

54



--------------------------------------------------------------------------------

Table of Contents

SEGMENT ANALYSIS

Our reportable segments include Global Wealth Management, Institutional Group, and Other.

Our Global Wealth Management segment consists of two businesses, the Private Client Group and Stifel Bank. The Private Client Group includes branch offices and independent contractor offices of our broker-dealer subsidiaries located throughout the United States, primarily in the Midwest and Mid-Atlantic regions with a growing presence in the Northeast, Southeast and Western United States. These branches provide securities brokerage services, including the sale of equities, mutual funds, fixed income products, and insurance, as well as offering banking products to their private clients through Stifel Bank, which provides residential, consumer, and commercial lending, as well as Federal Depository Insurance Corporation ("FDIC")-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public. The Institutional Group segment includes institutional sales and trading. It provides securities brokerage, trading, and research services to institutions with an emphasis on the sale of equity and fixed income products. This segment also includes the management of and participation in underwritings for both corporate and public finance (exclusive of sales credits generated through the private client group, which are included in the Global Wealth Management segment), merger and acquisition, and financial advisory services. The Other segment includes interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, 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. We evaluate the performance of our segments and allocate resources to them based on various factors, including prospects for growth, return on investment, and return on revenues. 55



--------------------------------------------------------------------------------

Table of Contents

Results of Operations - Global Wealth Management

Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013

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

As a Percentage of Net Revenues For the Three Months Ended For the Three Months Ended March 31, March 31, % 2014 2013 Change 2014 2013

Revenues: Commissions $ 107,739$ 102,086 5.5 36.3 % 38.3 % Principal transactions 53,766 56,307 (4.5 ) 18.0 21.1



Asset management and service fees 89,130 68,934 29.3

30.0 25.8 Investment banking 9,926 11,103 (10.6 ) 3.3 4.2 Interest 38,379 25,755 49.0 12.9 9.6 Other income 1,360 7,041 (80.7 ) 0.5 2.6 Total revenues 300,300 271,226 10.7 101.0 101.6 Interest expense 3,117 4,269 (27.0 ) 1.0 1.6 Net revenues 297,183 266,957 11.3 100.0 100.0 Non-interest expenses: Compensation and benefits 174,168 157,596 10.5 58.6 59.0 Occupancy and equipment rental 17,601 16,006 10.0 5.9 6.0



Communication and office supplies 8,932 9,028 (1.1 )

3.0 3.4 Commissions and floor brokerage 3,470 3,827 (9.4 ) 1.2 1.4 Other operating expenses 13,336 11,001 21.1 4.5 4.2 Total non-interest expenses 217,507 197,458 10.2 73.2 74.0 Income before income taxes $ 79,676$ 69,499 14.6 26.8 % 26.0 % March 31, March 31, 2014 2013 Branch offices (actual) 320 312 Financial advisors (actual) 1,940 1,915 Independent contractors (actual) 141 148 56



--------------------------------------------------------------------------------

Table of Contents

NET REVENUES

For the three months ended March 31, 2014, Global Wealth Management net revenues increased 11.3% to $297.2 million from $267.0 million for the comparable period in 2013. The increase in net revenues from the three months ended March 31, 2014 over the comparable period in 2013 is primarily attributable to growth in asset management and service fees; increased net interest revenues; and an increase in commission revenues. The increase in net revenues was offset by a decrease in investment gains (included in other revenues); and a decline in principal transaction revenues. Commissions - For the three months ended March 31, 2014, commission revenues increased 5.5% to $107.7 million from $102.1 million in the comparable period in 2013. The increase is primarily attributable to an increase in agency transactions in mutual funds, equities and insurance products. Principal transactions - For the three months ended March 31, 2014, principal transactions revenues decreased 4.5% to $53.8 million from $56.3 million in the comparable period in 2013. The decrease is primarily attributable to a decrease in fixed income products from the first quarter of 2013. Asset management and service fees - For the three months ended March 31, 2014, asset management and service fees increased 29.3% to $89.1 million from $68.9 million in the comparable period in 2013. The increase is primarily a result of an increase in assets under management in our fee-based accounts. The value of assets in fee-based accounts increased 34.7% from March 31, 2013, of which 33.8% is attributable to net inflows and 66.2% is attributable to market appreciation. The number of fee-based accounts at March 31, 2014 increased 14.5% from March 31, 2013. The following table summarizes the changes in our assets in fee-based accounts for the three months ended March 31, 2014 (in thousands): Assets in fee-based accounts: Balance at December 31, 2013$ 26,157,792 Inflows 218,724 Market appreciation 2,056,616 Balance at March 31, 2014$ 28,433,132 Investment banking - Investment banking, which represents sales credits for investment banking underwritings, decreased 10.6% to $9.9 million for the three months ended March 31, 2014 from $11.1 million during the comparable period in 2013. See "Investment banking" in the Institutional Group segment discussion for information on the changes in net revenues. Interest revenue - For the three months ended March 31, 2014, interest revenue increased 49.0% to $38.4 million from $25.8 million in the comparable period in 2013. The increase is primarily due to the growth of the interest-earning assets of Stifel Bank and increased interest rates on our investment portfolio. See "Net Interest Income - Stifel Bank" below for a further discussion of the changes in net revenues. Other income - For the three months ended March 31, 2014, other income decreased 80.7% to $1.4 million from $7.0 million during the comparable period in 2013. The decrease is primarily attributable to a decrease in investment gains on our private equity investments and a decrease in mortgage fees from loan originations at Stifel Bank. Interest expense - For the three months ended March 31, 2014, interest expense decreased 27.0% to $3.1 million from $4.3 million during the comparable period in 2013. 57



--------------------------------------------------------------------------------

Table of Contents

NET INTEREST INCOME - STIFEL BANK

The following tables present average balance data and operating interest revenue and expense data for Stifel Bank, as well as related interest yields for the periods indicated (in thousands, except rates): Three Months Ended Three Months Ended March 31, 2014 March 31, 2013 Interest Average Interest Average Average Income/ Interest Average Income/ Interest Balance Expense Rate Balance Expense Rate Assets: Federal funds sold $ 355,547$ 164 0.55 % $ 367,720$ 232 0.25 % State and political subdivisions: Taxable 18,383 265 5.76 127,414 1,383 4.34 Non-taxable (1) 77,975 1,672 8.57 62,809 352 2.24 Mortgage-backed securities 1,410,046 9,548 2.71 934,772 4,229 1.81 Corporate bonds 534,980 2,978 2.23 543,106 2,996 2.21 Asset-backed securities 995,672 4,848 1.95 658,007 3,411 2.07 Federal Home Loan Bank ("FHLB") and other capital stock 4,478 12 1.03 2,870 6 0.84 Loans (2) 1,467,370 13,011 3.55 920,883 7,195 3.13 Loans held for sale 93,281 597 2.56 134,449 1,021 3.04 Total interest-earning assets (3) $ 4,957,732$ 33,095 2.67 % $ 3,752,030$ 20,825 2.22 % Cash and due from banks 1,868 8,143 Other non interest-earning assets 79,741 71,808 Total assets $ 5,039,341$ 3,831,981 Liabilities and stockholders' equity: Deposits: Money market $ 4,437,143$ 2,214 0.20 % $ 3,443,363$ 2,881 0.33 % Demand deposits 26,433 13 0.20 58,859 9 0.06 Time deposits 213,432 (482 ) (0.90 ) 632 4 2.26 Savings 2,786 - - 44 - - Total interest-bearing liabilities (3) $ 4,679,794$ 1,745 0.15 % $ 3,502,898$ 2,894 0.33 % Non interest-bearing deposits 9,129 16,978 Other non interest-bearing liabilities 31,895 39,998 Total liabilities 4,720,818 3,559,874 Stockholders' equity 318,523 272,107 Total liabilities and stockholders' equity $ 5,039,341$ 3,831,981 Net interest margin $ 31,350 2.53 % $ 17,931 1.91 %



(1) Due to immaterial amount of income recognized on tax-exempt securities,

yields were not calculated on a tax equivalent basis. (2) Loans on non-accrual status are included in average balances. (3) See Net Interest Income table included in "Results of Operations" for additional information on our company's average balances and operating interest and expenses. 58



--------------------------------------------------------------------------------

Table of Contents

The following table sets forth an analysis of the effect on net interest income of volume and rate changes for the three month period ended March 31, 2014 compared to the three month period ended March 31, 2013 (in thousands):

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 Increase (decrease) due to: Volume Rate Total Interest income: Federal funds sold $ 2 $ (70 )$ (68 ) State and political subdivisions: Taxable (1,812 ) 694



(1,118 )

Non-taxable 104 1,216



1,320

Mortgage-backed securities 3,772 1,547

5,319 Corporate bonds (36 ) 18 (18 ) Asset-backed securities 1,624 (187 ) 1,437

FHLB and other capital stock (9 ) 15

6 Loans (2,400 ) 8,216 5,816 Loans held for sale 1,755 (2,179 ) (424 ) $ 3,000$ 9,270$ 12,270 Increase (decrease) due to: Volume Rate Total Interest expense: Deposits: Money market $ 3,203$ (3,870 )$ (667 ) Demand deposits (20 ) 24 4 Time deposits 1,385 (1,871 ) (486 ) Savings - - - $ 4,568$ (5,717 )$ (1,149 ) Increases and decreases in interest revenue and interest expense result from changes in average balances (volume) of interest-earning bank assets and liabilities, as well as changes in average interest rates. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year's volume. Changes applicable to both volume and rate have been allocated proportionately. Net interest income - Net interest income is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest income is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. For the three months ended March 31, 2014, interest revenue of $33.0 million was generated from average interest-earning assets of $5.0 billion at an average interest rate of 2.66%. Interest revenue of $20.8 million for the comparable period in 2013 was generated from average interest-earning assets of $3.8 billion at an average interest rate of 2.22%. Interest-earning assets principally consist of residential, consumer, and commercial loans, securities, and federal funds sold. Interest expense represents interest on customer money market accounts, interest on time deposits and other interest expense. The average balance of interest-bearing liabilities during the three months ended March 31, 2014 was $4.7 billion at an average interest rate of 0.15%. The average balance of interest-bearing liabilities for the comparable period in 2013 was $3.5 billion at an average interest rate of 0.33%. 59



--------------------------------------------------------------------------------

Table of Contents

The growth in Stifel Bank has been primarily driven by the growth in deposits associated with brokerage customers of Stifel Nicolaus. At March 31, 2014, the balance of Stifel Nicolaus brokerage customer deposits at Stifel Bank was $4.4 billion compared to $3.5 billion at March 31, 2013.



See "Net Interest Income - Stifel Bank" above for more information regarding average balances, interest income and expense, and average interest rate yields.

NON-INTEREST EXPENSES

For the three months ended March 31, 2014, Global Wealth Management non-interest expenses increased 10.2% to $217.5 million from $197.5 million for the comparable period in 2013. The fluctuations in non-interest expenses, discussed below, were primarily attributable to the continued growth of our Private Client Group. As of March 31, 2014, we have 320 branch offices compared to 312 at March 31, 2013. In addition, since March 31, 2013, we have added 132 financial advisors and 243 support staff. Compensation and benefits - For the three months ended March 31, 2014, compensation and benefits expense increased 10.5% to $174.2 million from $157.6 million during the three months ended March 31, 2013. The increase is principally due to increased variable compensation as a result of increased production due to the growth in financial advisors and fixed compensation for the additional administrative support staff. Compensation and benefits expense as a percentage of net revenues decreased to 58.6% for the three months ended March 31, 2014, compared to 59.0% for the comparable period in 2013. A portion of compensation and benefits expenses includes transition pay, principally in the form of upfront notes, signing bonuses and retention awards in connection with our continuing expansion efforts, of $17.2 million (5.8% of net revenues) for the three months ended March 31, 2014, compared to $16.1 million (6.0% of net revenues) for the three months ended March 31, 2013. The upfront notes are amortized over a five to ten year period. Occupancy and equipment rental - For the three months ended March 31, 2014, occupancy and equipment rental expense increased 10.0% to $17.6 million from $16.0 million during the comparable period in 2013. The increase is primarily due to the increase in office locations. Communications and office supplies - For the three months ended March 31, 2014, communications and office supplies expense decreased 1.1% to $8.9 million from $9.0 million during the first quarter of 2013. The decrease is primarily attributable to a reduction in office supplies expense. Commissions and floor brokerage - For the three months ended March 31, 2014, commissions and floor brokerage expense decreased 9.4% to $3.5 million from $3.8 million during the first quarter of 2013. The decrease is primarily attributable to a decrease in clearing fees. Other operating expenses - For the three months ended March 31, 2014, other operating expenses increased 21.1% to $13.3 million from $11.0 million during the comparable period in 2013. The increase in other operating expenses is primarily attributable to an increase in legal expenses and the provision for loan losses from the first quarter of 2013.



INCOME BEFORE INCOME TAXES

For the three months ended March 31, 2014, income before income taxes increased 14.6% to $79.7 million from $69.5 million during the comparable period in 2013. Profit margins (income before income taxes as a percent of net revenues) were positively impacted by revenue growth. 60



--------------------------------------------------------------------------------

Table of Contents

Results of Operations - Institutional Group

Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013

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

As a Percentage of Net Revenues For the Three Months Ended For the Three Months Ended March 31, March 31, % 2014 2013 Change 2014 2013 Revenues: Commissions $ 51,677$ 43,781 18.0 20.7 % 25.3 Principal transactions 72,695 50,957 42.7 29.1 29.4 Capital raising 63,878 38,746 64.9 25.6 22.4 Advisory 58,500 27,056 116.2 23.4 15.6 Investment banking 122,378 65,802 86.0 49.0 38.0 Interest 4,664 4,180 11.6 1.9 2.4 Other income 663 10,930 (93.9 ) 0.1 6.3 Total revenues 252,077 175,650 43.5 100.8 101.4 Interest expense 2,100 2,350 (10.7 ) 0.8 1.4 Net revenues 249,977 173,300 44.2 100.0 100.0 Non-interest expenses: Compensation and benefits 154,016 106,821 44.2 61.6 61.6 Occupancy and equipment rental 12,151 8,142 49.2 4.9 4.7



Communication and office supplies 12,772 9,462 35.0

5.1 5.5 Commissions and floor brokerage 5,558 5,010 11.0 2.2 2.9 Other operating expenses 19,858 15,635 27.0 7.9 9.0 Total non-interest expenses 204,355 145,070 40.9 81.7 83.7 Income before income taxes $ 45,622$ 28,230 61.6 18.3 % 16.3 % * Percentage not meaningful. NET REVENUES For the three months ended March 31, 2014, Institutional Group net revenues increased 44.2% to $250.0 million from $173.3 million for the comparable period in 2013. The increase in net revenues for the three months ended March 31, 2014 over the comparable period in 2013 was primarily attributable to an increase in advisory fees; an increase in equity capital raising revenues; and higher institutional brokerage revenues. The increase in net revenues was offset by a reduction in other revenues as a result of gains recorded on the investment in Knight Capital during the first quarter of 2013. Commissions - For the three months ended March 31, 2014, commission revenues increased 18.0% to $51.7 million from $43.8 million in the comparable period in 2013. Principal transactions - For the three months ended March 31, 2014, principal transactions revenues increased 42.7% to $72.7 million from $51.0 million in the comparable period in 2013. For the three months ended March 31, 2014, equity institutional brokerage revenues increased 33.6% to $65.8 million from $49.2 million during the comparable period in 2013. The increase is primarily attributable to an increase in market volatility, which increased trading volume during the first quarter of 2014. 61



--------------------------------------------------------------------------------

Table of Contents

For the three months ended March 31, 2014, fixed income institutional brokerage revenues increased 28.8% to $58.6 million from $45.5 million in the comparable period in 2013. The increase is primarily attributable to an improvement in fixed income trading volumes from the comparable period in 2013.



Investment banking - For the three months ended March 31, 2014, investment banking revenues increased 86.0% to $122.4 million from $65.8 million in the first quarter of 2013, which is attributable to an increase in advisory fee revenues and equity and fixed income capital raising revenues over the comparable period in 2013.

For the three months ended March 31, 2014, capital raising revenues increased 64.9% to $63.9 million from $38.7 million in the comparable period in 2013.

For the three months ended March 31, 2014, equity capital raising revenues increased 93.1% to $44.5 million from $23.0 million during the first quarter of 2013. The increase was primarily attributable to an increase in the number of transactions over the comparable period in 2013. During the three months ended March 31, 2014, we were involved as manager or co-manager in 80 equity underwritings, compared to 45 equity underwritings, during the comparable period in 2013. For the three months ended March 31, 2014, fixed income capital raising revenues increased 23.5% to $19.4 million from $15.7 million during the first quarter of 2013. The increase is primarily attributable to an increase in the municipal bond origination business. For the three months ended March 31, 2014, strategic advisory fees increased 116.2% to $58.5 million from $27.1 million in the comparable period in 2013. The increase is primarily attributable to an increase in the number of completed equity transactions and the aggregate transaction value over the comparable period in 2013. Other income - For the three months ended March 31, 2014, other income decreased 93.9% to $0.7 million from $10.9 million in the comparable period in 2013. The decrease in other income is primarily attributable to gains recognized on our investment in Knight Capital Group, Inc. during the first quarter of 2013.



NON-INTEREST EXPENSES

For the three months ended March 31, 2014, Institutional Group non-interest expenses increased 40.9% to $204.4 million from $145.1 million for the comparable period in 2013.

Unless specifically discussed below, the fluctuations in non-interest expenses were primarily attributable to the continued growth of our Institutional Group segment. We have added 269 revenue producers and 63 support staff since March 31, 2013. Compensation and benefits - For the three months ended March 31, 2014, compensation and benefits expense increased 44.2% to $154.0 million from $106.8 million during the comparable period in 2013. The increase is principally due to increased compensation as a result of the growth of the business and fixed compensation for the additional administrative support staff. Compensation and benefits expense as a percentage of net revenues was 61.6% for the three months ended March 31, 2014 compared to 61.6% for the comparable period in 2013. Occupancy and equipment rental - For the three months ended March 31, 2014, occupancy and equipment rental expense increased 49.2% to $12.2 million from $8.1 million during the comparable period in 2013. The increase is primarily due to the increase in office locations. Communications and office supplies - For the three months ended March 31, 2014, communications and office supplies expense increased 35.0% to $12.8 million from $9.5 million during the first quarter of 2013. The increase is primarily attributable to an increase in communication and quote equipment as a result of the growth of the business. Commissions and floor brokerage - For the three months ended March 31, 2014, commissions and floor brokerage expense increased 11.0% to $5.6 million from $5.0 million during the first quarter of 2013. The increase is primarily attributable to an increase in trade execution costs from our flow business.



Other operating expenses - For the three months ended March 31, 2014, other operating expenses increased 27.0% to $19.9 million from $15.6 million during the comparable period in 2013. The increase is primarily attributable to an increase in travel and promotion expenses, professional service fees, subscriptions, dues, and legal expenses.

62



--------------------------------------------------------------------------------

Table of Contents

INCOME BEFORE INCOME TAXES

For the three months ended March 31, 2014, income before income taxes for the Institutional Group segment increased 61.6% to $45.6 million from $28.2 million during the comparable period in 2013. Profit margins (income before income taxes as a percentage of net revenues) have improved as a result of an increase in revenues.



Results of Operations - Other Segment

Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013

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

For the Three Months Ended March 31, % 2014 2013 Change Net revenues $ (414 )$ (1,653 ) 74.9 Non-interest expenses: Compensation and benefits 18,587 50,494



(63.2 )

Other operating expenses 28,169 21,924



28.5

Total non-interest expenses 46,756 72,418



(35.4 )

Loss before income taxes $ (47,170 )$ (74,071 )

(36.6 )

Net revenues - For the three month period ended March 31, 2014, net revenues increased $1.2 million from the comparable period in 2013. Net revenues for the three months ended March 31, 2014 were positively impacted by investment gains.



Compensation and benefits - For the three months ended March 31, 2014, compensation and benefits expense decreased 63.2% to $18.6 million from $50.5 million for the comparable period in 2013.

Compensation and benefits expense for the three months ended March 31, 2013 includes a non-cash charge of $30.6 million (pre-tax) related to the expensing of restricted stock awards granted to certain employees of KBW, Inc and our company as retention related to the acquisition of KBW, Inc. There were no continuing service requirements associated with these restricted stock awards, and accordingly were expensed on the date of grant.



Other operating expenses - For the three months ended March 31, 2014, other operating expenses increased 28.5% to $28.2 million from $21.9 million for the comparable period in 2013. The increase is primarily attributable to non-recurring non-compensation operating expenses (including merger-related expenses) associated with our recent acquisitions.

63



--------------------------------------------------------------------------------

Table of Contents

Analysis of Financial Condition

Our company's consolidated statements of financial condition consist primarily of cash and cash equivalents, receivables, trading inventory, bank loans, investments, goodwill, loans and advances to financial advisors, bank deposits, and payables. As of March 31, 2014, our total assets increased 4.2% to $9.4 billion from $9.0 billion at December 31, 2013. The increase is primarily attributable to increases in (1) our trading inventory, (2) receivables from brokers, dealers, and clearing organizations, (3) bank loans, (4) investments, and (5) our investment portfolio, which consists of available-for-sale and held-to-maturity securities. The increase in assets was offset by decreases in (1) cash and cash equivalents and (2) deferred taxes, net. Our broker-dealer subsidiary's gross assets and liabilities, including trading inventory, stock loan/borrow, receivables and payables from/to brokers, dealers, and clearing organizations and clients, fluctuate with our business levels and overall market conditions. As of March 31, 2014, our liabilities were comprised primarily of short-term borrowings of $414.9 million, senior notes of $325.0 million, trust preferred securities of $82.5 million, deposits of $4.6 billion at Stifel Bank, and payables to customers of $327.3 million at our broker-dealer subsidiaries, as well as accounts payable and accrued expenses, and accrued employee compensation of $396.0 million. To meet our obligations to clients and operating needs, we had $525.4 million in cash and cash equivalents at March 31, 2014. We also had client brokerage receivables of $582.7 million at Stifel Nicolaus and $1.6 billion in loans at Stifel Bank.



Cash Flow

Cash and cash equivalents decreased $191.2 million to $525.4 million at March 31, 2014, from $716.6 million at December 31, 2013. Operating activities used $338.3 million of cash primarily due to the net effect of non-cash items, an increase in operating assets, offset by net income recognized during the first quarter of 2013. Investing activities used cash of $146.3 million due to purchases of available-for-sale and held-to-maturity securities as part of our investment strategy at Stifel Bank, and fixed asset purchases, offset by proceeds from the maturity of available-for-sale securities, and sale of investments. Financing activities provided cash of $293.4 million principally due to proceeds received from our short-term borrowings.



Liquidity and Capital Resources

The Company's senior management establishes the liquidity and capital policies of the Company. The Company's senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity and interest rate sensitivity of the Company's asset and liability position. Our assets, consisting mainly of cash or assets readily convertible into cash, are our principal source of liquidity. The liquid nature of these assets provides for flexibility in managing and financing the projected operating needs of the business. These assets are financed primarily by our equity capital, corporate debt, debentures to trusts, client credit balances, short-term bank loans, proceeds from securities lending, and other payables. We currently finance our client accounts and firm trading positions through ordinary course borrowings at floating interest rates from various banks on a demand basis, securities lending, and repurchase agreements, with company-owned and client securities pledged as collateral. Changes in securities market volumes, related client borrowing demands, underwriting activity, and levels of securities inventory affect the amount of our financing requirements. Our bank assets consist principally of available-for-sale and held-to-maturity securities, retained loans, and cash and cash equivalents. Stifel Bank's current liquidity needs are generally met through deposits from bank clients and equity capital. We monitor the liquidity of Stifel Bank daily to ensure its ability to meet customer deposit withdrawals, maintain reserve requirements, and support asset growth. 64



--------------------------------------------------------------------------------

Table of Contents

As of March 31, 2014, we had $9.4 billion in assets, $5.6 billion of which consisted of cash or assets readily convertible into cash as follows (in thousands, except average days to conversion):

March 31, December 31, Avg. 2014 2013 Conversion Cash and cash equivalents $ 525,409$ 716,560 Receivables from brokers, dealers, and clearing organizations 535,248 381,122 3 days Securities purchased under agreements to resell 294,263 225,075 1 day Financial instruments owned at fair value 990,129 779,214 5 days Available-for-sale securities at fair value 1,795,516 1,756,253 3 days Held-to-maturity securities at amortized cost 1,294,853 1,312,115 10 days Investments 149,478 117,028 5 days Total cash and assets readily convertible to cash $ 5,584,896$ 5,287,367



As of March 31, 2014 and December 31, 2013, the amount of collateral by asset class is as follows (in thousands):

March 31, 2014 December 31, 2013 Contractual Contingent Contractual Contingent Cash and cash equivalents $ 52,704 $ - $ 43,104 $ - Trading securities owned at fair value 246,159 806,676 263,809 686,997 Available-for-sale securities at fair value - 604,300 - 504,100 Investments - 52,736 - 51,051 $ 298,863$ 1,463,712$ 306,913$ 1,242,148



Capital Management

We have an ongoing authorization from the Board of Directors to repurchase our common stock in the open market or in negotiated transactions. At March 31, 2014, the maximum number of shares that may yet be purchased under this plan was 3.5 million. We utilize the share repurchase program to manage our equity capital relative to the growth of our business and help to meet obligations under our employee benefit plans. We currently do not pay cash dividends on our common stock. Liquidity Risk Management Our businesses are diverse, and our liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change. We manage liquidity risk by diversifying our funding sources across products and among individual counterparties within those products. As a holding company, whereby all of our operations are conducted through our subsidiaries, our cash flow and our ability to service our debt, including the notes, depend upon the earnings of our subsidiaries. Our subsidiaries are separate and distinct legal entities. Our subsidiaries have no obligation to pay any amounts due on the notes or to provide us with funds to pay our obligations, whether by dividends, distributions, loans or other payments. Our liquidity requirements may change in the event we need to raise more funds than anticipated to increase inventory positions, support more rapid expansion, develop new or enhanced services and products, acquire technologies, or respond to other unanticipated liquidity requirements. We primarily rely on financing activities and distributions from our subsidiaries for funds to implement our business and growth strategies, and repurchase our shares. Net capital rules, restrictions under our borrowing arrangements of our subsidiaries, as well as the earnings, financial condition, and cash requirements of our subsidiaries, may each limit distributions to us from our subsidiaries. The availability of outside financing, including access to the capital markets and bank lending, depends 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 sector and our credit rating. Our cost and availability of funding may be adversely affected by illiquid credit markets and wider credit spreads. As a result of any future concerns about the stability of the markets generally and the strength of counterparties specifically, lenders may from time to time curtail, or even cease, to provide funding to borrowers. 65



--------------------------------------------------------------------------------

Table of Contents

Our liquidity management policies are designed to mitigate the potential risk that we may be unable to access adequate financing to service our financial obligations without material business impact. The principal elements of our liquidity management framework are: (a) daily monitoring of our liquidity needs at the holding company and significant subsidiary level; (b) stress testing the liquidity position at Stifel Bank; and (c) diversification of our funding sources.



Monitoring of liquidity

Senior management establishes our liquidity and capital policies. These policies include senior management's review of short and long-term cash flow forecasts, review of monthly capital expenditures, the monitoring of the availability of alternative sources of financing, and the daily monitoring of liquidity in our significant subsidiaries. Our decisions on the allocation of capital to our business units consider, among other factors, projected profitability and cash flow, risk and impact on future liquidity needs. Our treasury department assists in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure as well as maintains our relationships with various lenders. The objectives of these policies are to support the successful execution of our business strategies while ensuring ongoing and sufficient liquidity.



Liquidity stress testing (Stifel Bank)

Stifel Bank performs two primary stress tests on its liquidity position. These stress tests are based on the following company-specific stresses: (1) the amount of deposit run-off that Stifel Bank could withstand over a one month period of time based on its on-balance sheet liquidity and available credit; and (2) Stifel Bank's ability to fund operations if all available credit were to be drawn immediately, with no additional available credit. The goal of these stress tests is determine Stifel Bank's ability to fund continuing operations under significant pressures on both assets and liabilities. Under both stress tests, Stifel Bank considers cash and highly liquid investments as available to meet liquidity needs. In its analysis, Stifel Bank considers Agency MBS, Corporate Bonds, and CMBS as highly liquid. In addition to being able to be readily financed at modest haircut levels, Stifel Bank estimates that each of the individual securities within each of the asset classes described above could be sold into the market and converted into cash within three business days under normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously liquidated. At March 31, 2014, available cash and highly liquid investments comprised approximately 40% of Stifel Bank's assets, which was well in excess of its internal target. In addition to these stress tests, Stifel Bank management performs a daily liquidity review. The daily analysis provides Stifel Bank management with all major fluctuations in liquidity. The analysis also tracks the proportion of deposits that Stifel Bank is sweeping from its affiliated broker-dealer, Stifel Nicolaus. On a monthly basis, liquidity key performance indicators and compliance with liquidity policy limits are reported to the Board of Directors. Stifel Bank has not violated any internal liquidity policy limits.



Funding Sources

The Company pursues a strategy of diversification of secured and unsecured funding sources (by product and by investor) and attempts to ensure that the tenor of the Company's liabilities equals or exceeds the expected holding period of the assets being financed. The Company funds its balance sheet through diverse sources. These sources may include the Company's equity capital, long-term debt, repurchase agreements, securities lending, deposits, committed and uncommitted credit facilities, FHLB advances, and federal funds agreements. At March 31, 2014, we have $123.7 million of ARS. Any redemptions by issuers of the ARS will create liquidity during the period in which the redemption occurs. ARS redemptions have been at par, and we believe will continue to be at par. Cash and Cash Equivalents. We held $525.4 million of cash and cash equivalents at March 31, 2014, compared to $716.6 million at December 31, 2013. Cash and cash equivalents provide immediate sources of funds to meet our liquidity needs.



Securities Available-for-Sale. We held $1.80 billion in available-for-sale investment securities at March 31, 2014, compared to $1.76 billion at December 31, 2013. As of March 31, 2014, the weighted average life of the investment securities portfolio was 2.8 years. These investment securities provide increased liquidity and flexibility to support our company's funding requirements.

66



--------------------------------------------------------------------------------

Table of Contents

We monitor the available-for-sale investment portfolio for other-than-temporary impairment based on a number of criteria, including the size of the unrealized loss position, the duration for which the security has been in a loss position, credit rating, the nature of the investments, and current market conditions. For debt securities, we also consider any intent to sell the security and the likelihood we will be required to sell the security before its anticipated recovery. We continually monitor the ratings of our security holdings and conduct regular reviews of our credit sensitive assets. Deposits. Deposits have become one of our largest funding sources. Deposits provide a stable, low-cost source of funds that we utilize to fund loan and asset growth and to diversify funding sources. We have continued to expand our deposit-gathering efforts through our existing private client network and through expansion. These channels offer a broad set of deposit products that include demand deposits, money market deposits, and certificates of deposit ("CDs"). As of March 31, 2014, we had $4.61 billion in deposits compared to $4.66 billion at December 31, 2013. Our core deposits are comprised of non-interest-bearing deposits, money market deposit accounts, savings accounts, and CDs. Short-term borrowings. Our short-term financing is generally obtained through short-term bank line financing on an uncommitted, secured basis, short-term bank line financing on an unsecured basis and securities lending arrangements. We borrow from various banks on a demand basis with company-owned and customer securities pledged as collateral. The value of customer-owned securities used as collateral is not reflected in the consolidated statements of financial condition. Our uncommitted secured lines of credit at March 31, 2014 totaled $680.0 million with four banks and are dependent on having appropriate collateral, as determined by the bank agreements, to secure an advance under the line. The availability of our uncommitted lines are subject to approval by the individual banks each time an advance is requested and may be denied. Our peak daily borrowing was $414.9 million during the three months ended March 31, 2014. There are no compensating balance requirements under these arrangements. At March 31, 2014, short-term borrowings from banks were $414.9 million at an average rate of 1.10%, which were collateralized by company-owned securities valued at $592.7 million. At December 31, 2013, short-term borrowings from banks were $55.7 million at an average rate of 1.22%, which were collateralized by company-owned securities valued at $440.8 million. The average bank borrowing was $97.7 million and $209.4 million for the three months ended March 31, 2014 and 2013, respectively, at average daily interest rates of 1.13% and 1.17%, respectively. At March 31, 2014 and December 31, 2013, Stifel had a stock loan balance of $35.8 million and $40.1 million, respectively, at average daily interest rates of 0.17% and 0.16%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $72.5 million and $64.6 million during the three months ended March 31, 2014 and 2013, respectively, at average daily effective interest rates of 0.17% and 0.10%, respectively. Customer-owned securities were utilized in these arrangements. Unsecured short-term borrowings. Our committed short-term bank line financing at March 31, 2014 consisted of a $100.0 million committed revolving credit facility. The credit facility expires in December 2014. The applicable interest rate under the revolving credit facility is calculated as a per annum rate equal to the one-month Eurocurrency rate plus 1.00%, as defined in the revolving credit facility. We can draw upon this line as long as certain restrictive covenants are maintained. Under our revolving credit facility, we are also required to maintain compliance with a minimum consolidated tangible net worth covenant under which we are required to have at all times a consolidated tangible net worth, as defined in the revolving credit facility, and a maximum consolidated total capitalization ratio covenant under which we are required to have at all times a consolidated total capitalization ratio, as defined in the revolving credit facility. In addition, Stifel, our broker-dealer subsidiary, is required to maintain compliance with a minimum regulatory net capital covenant of not less than 10% of aggregate debits, as defined in the revolving credit facility. At March 31, 2014, we had no advances on our revolving credit facility and were in compliance with all covenants. Our revolving credit facility contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency and judgment defaults. 67



--------------------------------------------------------------------------------

Table of Contents

Federal Home Loan Bank Advances and other secured financing. Stifel Bank has borrowing capacity with the Federal Home Loan Bank of $604.3 million at March 31, 2014, all of which was unused, and a $25.0 million federal funds agreement for the purpose of purchasing short-term funds should additional liquidity be needed. Stifel Bank receives overnight funds from excess cash held in Stifel Nicolaus brokerage accounts, which are deposited into a money market account. These balances totaled $4.4 billion at March 31, 2014. Public Offering of Senior Notes. On January 18, 2012, we issued $175.0 million principal amount of 6.70% Senior Notes due 2022 (the "notes"). Interest on the notes accrue from January 23, 2012 and will be paid quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on April 15, 2012. The notes will mature on January 15, 2022. We may redeem the notes in whole or in part on or after January 15, 2015 at our option at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest to the date of redemption. Proceeds from the notes issuance of $169.3 million, after discounts, commissions and expenses, were used for general corporate purposes. On December 18, 2012, we issued $150.0 million principal amount of 5.375% Senior Notes due 2022 (the "December 2012 Notes"). Interest on the December 2012 Notes accrue from December 21, 2012 and will be paid quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on April 15, 2013. The December 2012 Notes will mature on December 31, 2022. We may redeem the December 2012 Notes in whole or in part on or after December 31, 2015 at our option at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest to the date of redemption. Proceeds from the December 2012 Notes issuance of $146.1 million, after discounts, commissions and expenses, were used for general corporate purposes. In January 2013, we received a BBB- rating on the December 2012 Notes.



Credit Rating

In January 2012, we received an initial credit rating from Standard & Poor's Financial Services LLC of BBB-, along with a BBB- rating on the notes. We believe our current rating depends upon a number of factors including industry dynamics, operating and economic environment, operating results, operating margins, earnings trends and volatility, balance sheet composition, liquidity and liquidity management, our capital structure, our overall risk management, business diversification and our market share and competitive position in the markets in which we operate. Deteriorations in any of these factors could impact our credit rating. A reduction in our credit rating could adversely affect our liquidity and competitive position, increase our incremental borrowing costs, limit our access to the capital markets or trigger our obligations under certain financial agreements. As such, we may not be able to successfully obtain additional outside financing to fund our operations on favorable terms, or at all.



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

Use of Capital Resources

On April 3, 2014, we completed the acquisition of De La Rosa & Co. ("De La Rosa"), a California-based public finance investment banking boutique. The addition of the De La Rosa team is expected to further strengthen our company's position in a number of key underwriting markets in California.

On May 8, 2014 we entered into an agreement to acquire Oriel Securities ("Oriel"), a London-based stockbroking and investment banking firm, to build out our company's international platform across all of its institutional businesses. The combination of our company and Oriel will bring together more than 250 professionals to create a significant middle-market investment banking group in London, with broad research coverage across most sectors of the economy, equity and debt sales and trading, and investment banking services. TWP entered into settlement and release agreements ("Settlement Agreements") with certain customers, whereby it will purchase their ARS, at par, in exchange for a release from any future claims. At March 31, 2014, we estimate that TWP customers held $18.3 million par value of ARS, which may be repurchased over the next 2 years. The amount estimated for repurchase assumes no issuer redemptions. We have paid $13.8 million in the form of upfront notes to financial advisors for transition pay during the period from January 1, 2014 through April 30, 2014. As we continue to take advantage of the opportunities created by market displacement and as competition for skilled professionals in the industry increases, we may decide to devote more significant resources to attracting and retaining qualified personnel. We utilize transition pay, principally in the form of upfront demand notes, to aid financial advisors, who have elected to join our firm, to supplement their lost compensation while transitioning their customers' accounts to the 68



--------------------------------------------------------------------------------

Table of Contents

Stifel platform. The initial value of the notes is determined primarily by the financial advisors trailing production and assets under management. These notes are generally forgiven over a five to ten year period based on production. The future estimated amortization expense of the upfront notes, assuming current year production levels and static growth for the remaining nine months of 2014 and the years ended December 31, 2015, 2016, 2017, 2018, and thereafter are $39.8 million, $43.2 million, $32.6 million, $21.1 million, $15.0 million and $23.2 million, respectively. These estimates could change if we continue to grow our business through expansion or experience increased production levels. We maintain several incentive stock award plans that provide for the granting of stock options, stock appreciation rights, restricted stock, performance awards, and stock units to our employees. Historically, we have granted stock units to our employees as part of our retention program. A stock unit represents the right to receive a share of common stock from our company at a designated time in the future without cash payment by the employee and is issued in lieu of cash incentive, principally for deferred compensation and employee retention plans. The restricted stock units vest on an annual basis over the next three to eight years and are distributable, if vested, at future specified dates. At March 31, 2014, the total number of stock units outstanding was 17.4 million, of which 10.6 million were unvested. At March 31, 2014, there was unrecognized compensation cost for stock units of $317.3 million, which is expected to be recognized over a weighted-average period of 2.8 years.



Net Capital Requirements

We operate in a highly regulated environment and are subject to capital requirements, which may limit distributions to our company from our subsidiaries. Distributions from our broker-dealer subsidiaries are subject to net capital rules. These subsidiaries have historically operated in excess of minimum net capital requirements. However, if distributions were to be limited in the future due to the failure of our subsidiaries to comply with the net capital rules or a change in the net capital rules, it could have a material and adverse affect to our company by limiting our operations that require intensive use of capital, such as underwriting or trading activities, or limit our ability to implement our business and growth strategies, pay interest on and repay the principal of our debt, and/or repurchase our common stock. Our non broker-dealer subsidiary, Stifel Bank is also subject to various regulatory capital requirements administered by the federal banking agencies. Our broker-dealer subsidiaries and Stifel Bank have consistently operated in excess of their capital adequacy requirements. At March 31, 2014, Stifel Nicolaus had net capital of $345.7 million, which was 53.1% of aggregate debit items and $332.7 million in excess of its minimum required net capital. At March 31, 2014, KBW's, CSA's, and Miller Buckfire's net capital exceeded the minimum net capital required under the SEC rule. At March 31, 2014, SNEL's and KBW Limited's net capital and reserves was in excess of the financial resources requirement under the rules of the FCA. At March 31, 2014, Stifel Bank was considered well capitalized under the regulatory framework for prompt corrective action. See Note 19 of the Notes to Consolidated Financial Statements for details of our regulatory capital requirements.



Critical Accounting Policies and Estimates

In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the SEC, we make assumptions, judgments, and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments, and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments, and estimates involved in the accounting policies described below have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules that require us to make assumptions, judgments, and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies and estimates have not differed materially from actual results. 69



--------------------------------------------------------------------------------

Table of Contents

For a full description of these and other accounting policies, see Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.



Valuation of Financial Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, trading securities owned, available-for-sale securities, investments, trading securities sold, but not yet purchased, and derivatives. Trading securities owned and pledged and trading securities sold, but not yet purchased, are carried at fair value on the consolidated statements of financial condition, with unrealized gains and losses reflected on the consolidated statements of operations. The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted have less pricing observability and are measured at fair value using valuation models that require more judgment. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, and overall market conditions generally. When available, we use observable market prices, observable market parameters, or broker or dealer quotes (bid and ask prices) to derive the fair value of financial instruments. In the case of financial instruments transacted on recognized exchanges, the observable market prices represent quotations for completed transactions from the exchange on which the financial instrument is principally traded. A substantial percentage of the fair value of our trading securities and other investments owned, trading securities pledged as collateral, and trading securities sold, but not yet purchased, are based on observable market prices, observable market parameters, or derived from broker or dealer prices. The availability of observable market prices and pricing parameters can vary from product to product. Where available, observable market prices and pricing or market parameters in a product may be used to derive a price without requiring significant judgment. In certain markets, observable market prices or market parameters are not available for all products, and fair value is determined using techniques appropriate for each particular product. These techniques involve some degree of judgment. For investments in illiquid or privately held securities that do not have readily determinable fair values, the determination of fair value requires us to estimate the value of the securities using the best information available. Among the factors we consider in determining the fair value of investments are the cost of the investment, terms and liquidity, developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. In instances where a security is subject to transfer restrictions, the value of the security is based primarily on the quoted price of a similar security without restriction but may be reduced by an amount estimated to reflect such restrictions. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term, and the differences could be material. We have categorized our financial instruments measured at fair value into a three-level classification in accordance with Topic 820, "Fair Value Measurement and Disclosures." Fair value measurements of financial instruments that use quoted prices in active markets for identical assets or liabilities are generally categorized as Level 1, and fair value measurements of financial instruments that have no direct observable levels are generally categorized as Level 3. All other fair value measurements of financial instruments that do not fall within the Level 1 or Level 3 classification are considered Level 2. The lowest level input that is significant to the fair value measurement of a financial instrument is used to categorize the instrument and reflects the judgment of management. Level 3 financial instruments have little to no pricing observability as of the report date. These financial instruments do not have active two-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We 70



--------------------------------------------------------------------------------

Table of Contents

have identified Level 3 financial instruments to include certain asset-backed securities, consisting of collateral loan obligation securities, that have experienced low volumes of executed transactions, certain corporate bonds and equity securities where there was less frequent or nominal market activity, investments in private equity funds, and auction rate securities for which the market has been dislocated and largely ceased to function. Our Level 3 asset-backed securities are valued using cash flow models that utilize unobservable inputs. Level 3 corporate bonds are valued using prices from comparable securities. Equity securities with unobservable inputs are valued using management's best estimate of fair value, where the inputs require significant management judgment. Auction rate securities are valued based upon our expectations of issuer redemptions and using internal models. At March 31, 2014, Level 3 assets for which we bear economic exposure were $224.5 million or 7.3% of the total assets measured at fair value. During the three months ended March 31, 2014, we recorded purchases of $2.6 million and sales and redemptions of $9.8 million of Level 3 assets. Our valuation adjustments (realized and unrealized) decreased the value of our Level 3 assets by $0.3 million.



At March 31, 2014, Level 3 assets included the following: $123.7 million of auction rate securities and $100.8 million of private equity, municipal securities, and other fixed income securities.

Investments in Partnerships

Investments in partnerships and other investments include our general and limited partnership interests in investment partnerships and direct investments in non-public companies. These interests are carried at estimated fair value. The net assets of investment partnerships consist primarily of investments in non-marketable securities. The underlying investments held by such partnerships and direct investments in non-public companies are valued based on estimated fair value ultimately determined by us in our capacity as general partner or investor and, in the case of an investment in an unaffiliated investment partnership, are based on financial statements prepared by an unaffiliated general partner. Due to the inherent uncertainty of valuation, fair values of these non-marketable investments may differ from the values that would have been used had a ready market existed for these investments, and the differences could be material. Increases and decreases in estimated fair value are recorded based on underlying information of these non-public company investments, including third-party transactions evidencing a change in value, market comparables, operating cash flows and financial performance of the companies, trends within sectors and/or regions, underlying business models, expected exit timing and strategy, and specific rights or terms associated with the investment, such as conversion features and liquidation preferences. In cases where an estimate of fair value is determined based on financial statements prepared by an unaffiliated general partner, such financial statements are generally unaudited other than audited year-end financial statements. Upon receipt of audited financial statements from an investment partnership, we adjust the fair value of the investments to reflect the audited partnership results if they differ from initial estimates. We also perform procedures to evaluate fair value estimates provided by unaffiliated general partners. At March 31, 2014, we had commitments to invest in affiliated and unaffiliated investment partnerships of $11.8 million. These commitments are generally called as investment opportunities are identified by the underlying partnerships. These commitments may be called in full at any time. The investment partnerships in which we are general partner may allocate carried interest and make carried interest distributions, which represent an additional allocation of net realized and unrealized gains to the general partner if the partnerships' investment performance reaches a threshold as defined in the respective partnership agreements. These allocations are recognized in revenue as realized and unrealized gains and losses on investments in partnerships. Our recognition of allocations of carried interest gains and losses from the investment partnerships in revenue is not adjusted to reflect expectations about future performance of the partnerships. As the investment partnerships realize proceeds from the sale of their investments, they may make cash distributions as provided for in the partnership agreements. Distributions that result from carried interest may subsequently become subject to claw back if the fair value of private equity partnership assets subsequently decreases in fair value. To the extent these decreases in fair value and allocated losses exceed our capital account balance, a liability is recorded by us. These liabilities for claw back obligations are not required to be paid to the investment partnerships until the dissolution of such partnerships, and are only required to be paid if the cumulative amounts actually distributed exceed the amount due based on the cumulative operating results of the partnerships. We earn fees from the investment partnerships that we manage or of which we are a general partner. Such management fees are generally based on the net assets or committed capital of the underlying partnerships. We have agreed, in certain cases, to waive management fees, in lieu of making a cash contribution, in satisfaction of our general partner investment commitments to the investment partnerships. In these cases, we generally recognize our management fee revenues at the time when we are allocated a special profit interest in realized gains from these partnerships. 71



--------------------------------------------------------------------------------

Table of Contents

Contingencies

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



Allowance for Loan Losses

We regularly review the loan portfolio and have established an allowance for loan losses for inherent losses estimated to have occurred in the loan portfolio through a provision for loan losses charged to income. In providing for the allowance for loan losses, we consider historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement will not be collectible. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Once a loan is determined to be impaired, when principal or interest becomes 90 days past due or when collection becomes uncertain, the accrual of interest and amortization of deferred loan origination fees is discontinued ("non-accrual status"), and any accrued and unpaid interest income is reversed. Loans placed on non-accrual status are returned to accrual status when all delinquent principal and interest payments are collected and the collectibility of future principal and interest payments is reasonably assured. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is certain. Subsequent recoveries, if any, are credited to the allowance for loan loss Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements. Impairment is measured on a loan-by-loan basis for non-homogeneous loans and a specific allowance is established for individual loans determined to be impaired. Impairment is measured by comparing the carrying value of the impaired loan to the present value of its expected cash flow discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.



Derivative Instruments and Hedging Activities

Our derivative instruments are carried on the consolidated statement of financial condition at fair value. We utilize these derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our company's goal is to manage sensitivity to changes in rates by offsetting the repricing or maturity characteristics of certain assets and liabilities, thereby limiting the impact on earnings. The use of derivative instruments does expose our company to credit and market risk. We manage credit risk through strict counterparty credit risk limits and/or collateralization agreements. At inception, we determine if a derivative instrument meets the criteria for hedge accounting under Topic 815, "Derivatives and Hedging." Ongoing effectiveness evaluations are made for instruments that are designated and qualify as hedges. If the derivative does not qualify for hedge accounting, no assessment of effectiveness is needed. 72



--------------------------------------------------------------------------------

Table of Contents

Income Taxes

The provision for income taxes and related tax reserves is based on our consideration of known liabilities and tax contingencies for multiple taxing authorities. Known liabilities are amounts that will appear on current tax returns, amounts that have been agreed to in revenue agent revisions as the result of examinations by the taxing authorities, and amounts that will follow from such examinations but affect years other than those being examined. Tax contingencies are liabilities that might arise from a successful challenge by the taxing authorities taking a contrary position or interpretation regarding the application of tax law to our tax return filings. Factors considered in estimating our liability are results of tax audits, historical experience, and consultation with tax attorneys and other experts. Topic 740 ("Topic 740"), "Income Taxes," clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements and prescribed recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, Topic 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.



Goodwill and Intangible Assets

Under the provisions of Topic 805, "Business Combinations," we record all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value. Determining the fair value of assets and liabilities requires certain estimates. At March 31, 2014, we had goodwill of $730.4 million and intangible assets of $45.1 million. In accordance with Topic 350, "Intangibles - Goodwill and Other," indefinite-life intangible assets and goodwill are not amortized. Rather, they are subject to impairment testing on an annual basis, or more often if events or circumstances indicate there may be impairment. This test involves assigning tangible assets and liabilities as well as identified intangible assets and goodwill to reporting units and comparing the fair value of each reporting unit to its carrying amount. If the fair value is less than the carrying amount, a further test is required to measure the amount of the impairment. We have elected to test for goodwill impairment in the third quarter of each calendar year. We test goodwill for impairment on an annual basis and on an interim basis when certain events or circumstances exist. We test for impairment at the reporting unit level, which is generally at the level of or one level below our company's business segments. For both the annual and interim tests, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is not required. However, if we conclude otherwise, we are then required to perform the first step of the two-step impairment test. Goodwill impairment is determined by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not deemed to be impaired. If the estimated fair value is below carrying value, however, further analysis is required to determine the amount of the impairment. Additionally, if the carrying value of a reporting unit is zero or a negative value and it is determined that it is more likely than not the goodwill is impaired, further analysis is required. The estimated fair values of the reporting units are derived based on valuation techniques we believe market participants would use for each of the reporting units. Our annual goodwill impairment testing was completed as of July 31, 2012, with no impairment identified. The goodwill impairment test requires us to make judgments in determining what assumptions to use in the calculation. Assumptions, judgments, and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of factors, including, among others, economic trends and market conditions, changes in revenue growth trends or business strategies, unanticipated competition, discount rates, technology, or government regulations. In assessing the fair value of our reporting units, the volatile nature of the securities markets and industry requires us to consider the business and market cycle and assess the stage of the cycle in estimating the timing and extent of future cash flows. In addition to discounted cash flows, we consider other information, such as public market comparables and multiples of recent mergers and acquisitions of similar businesses. Although we believe the assumptions, judgments, and estimates we have made in the past have been reasonable and appropriate, different assumptions, judgments, and estimates could materially affect our reported financial results. 73



--------------------------------------------------------------------------------

Table of Contents

Identifiable intangible assets, which are amortized over their estimated useful lives, are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset or asset group may not be fully recoverable. 74



--------------------------------------------------------------------------------

Table of Contents

Recent Accounting Pronouncements

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

Off-Balance Sheet Arrangements

Information concerning our off-balance sheet arrangements is included in Note 22 of the Notes to Consolidated Financial Statements. Such information is hereby incorporated by reference. Contractual Obligations



Our contractual obligations have not materially changed from those reported in our Annual Report on Form 10-K for the year ended December 31, 2013.

75



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters