SECURITIES AND EXCHANGE COMMISSION

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-9305

STIFEL FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

DELAWARE

43-1273600

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

501 N. Broadway, St. Louis, Missouri

63102-2188

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code

314-342-2000

__________________________________________________________________

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 31, 2006, there were 11,805,316 shares of Stifel Financial Corp. common stock, par value $0.15, outstanding.

Page 1

Stifel Financial Corp.
Amendment No. 1 to the Quarterly Report on Form 10-Q
For the Period Ended June 30, 2006

Explanatory Note

Stifel Financial Corp. (the "Company") is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the period ended June 30, 2006 ("Form 10-Q/A") in order to correct an error in Part I. Item 1, specifically, the pro forma financial data contained in the Notes to Consolidated Financial Statements, Note G - Acquisition, and amend the exhibits to Part II. Item 6 to the Quarterly Report on Form 10-Q originally filed with the United States Securities and Exchange Commission on August 9, 2006 (the "Original Filing"). In Part I Item 1, the Company has restated Note G - Acquisition of the Notes to Condensed Consolidated Financial Statements (Unaudited) changing pro forma net income for the three months ended June 30, 2005, from $7,121,493 to $4,086,884, and pro forma diluted earnings per share, from $0.53 to $0.30 and changing pro forma net income for the six months ended June 30, 2005, from $14,014,412 to $8,458,769, and unaudited pro forma diluted earnings per share, from $1.02 to $0.62. The error had no effect on Company's condensed consolidated statements of financial condition as of June 30, 2006 (Unaudited) and December 31, 2005, its condensed consolidated statements of operations for the three and six months ended June 30, 2006 and 2005, or its condensed consolidated statements of cash flows for the six months ended June 30, 2006 and 2005. In Part II Item 6, the Company has a updated the certification pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. With the exception of the foregoing, no other information in this Form 10-Q/A is being supplemented, updated or amended. This Form 10-Q/A amends and restates only Items 1 and 4 of Part I and Item 6 of Part II of the Form 10-Q. The other Items are not being amended and therefore have been omitted from this Form 10-Q/A. This Form 10-Q/A does not purport to provide a general update or discussion of any other developments subsequent to the Original Filing.

 

PART I. FINANCIAL INFORMATION

 

PAGE

Item 1. Financial Statements

  

Condensed Consolidated Statements of Financial Condition -- June 30, 2006 (Unaudited) and December 31, 2005

3

Condensed Consolidated Statements of Operations (Unaudited) -- Three and Six Months Ended June 30, 2006 and 2005

4

Condensed Consolidated Statements of Cash Flows (Unaudited) -- Six Months Ended June 30, 2006 and 2005

5

Notes to Condensed Consolidated Financial Statements (Unaudited)

6 - 15

Item 4. Controls and Procedures

16

 

PART II. OTHER INFORMATION

Item 6. Exhibits

17

Signatures

18

Page 2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

STIFEL FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 (In thousands, except par values and share amounts)

June 30, 2006

December 31, 2005

(Unaudited)

ASSETS

    

Cash and cash equivalents

$ 21,815

$ 12,529

Cash segregated under federal and other regulations

26

6

Securities purchased under agreements to resell

153,571

65,599

Receivables from brokers and dealers:

    

Securities failed to deliver

14,009

9,137

Deposits paid for securities borrowed

49,577

56,278

Clearing organizations

32,050

24,553
 

95,636

89,968

Receivables from customers, net of allowance for doubtful receivables of $301 and $204, respectively

294,703

259,389

Securities owned, at fair value

139,561

105,514

Securities owned and pledged, at fair value

200,205

135,211
 

339,766

240,725

Investments

50,769

46,628

Membership in exchanges

168

275

Office equipment and leasehold improvements, at cost, net of allowances for depreciation and amortization of $27,938 and $26,026, respectively

12,427

11,422

Goodwill and intangible assets

14,463

13,849

Loans and advances to investment executives and other employees, net of allowance for doubtful receivables from former employees of $664 and $767, respectively

22,803

21,105

Deferred tax asset

12,672

10,336

Other assets

42,134

70,170

Total Assets

$1,060,953

$842,001

LIABILITIES AND STOCKHOLDERS' EQUITY

    

Liabilities

    

Short-term borrowings from banks

$ 193,350

$ 141,000

Drafts payable

16,908

29,697

Payables to brokers and dealers:

    

Securities failed to receive

33,931

8,794

Deposits received from securities loaned

118,936

89,039

Clearing organizations

2,483

797
 

155,350

98,630

Payables to customers

86,099

78,456

Securities sold, but not yet purchased, at fair value

241,158

146,914

Accrued employee compensation

39,695

35,154

Accounts payable and accrued expenses

25,900

59,875

Debenture to Stifel Financial Capital Trust I

34,500

34,500

Debenture to Stifel Financial Capital Trust II

35,000

35,000

Other

24,598

24,598

852,558

683,824

Liabilities subordinated to claims of general creditors

2,955

3,084

Stockholders' Equity

    

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

- -

- -

Common stock -- $0.15 par value; authorized 30,000,000 shares; issued 11,904,945 and 10,296,279 shares respectively

1,786

1,161

Additional paid-in capital

124,110

75,225

Retained earnings

83,053

80,279
 

208,949

156,665

Less:

    

Treasury stock, at cost, 60,698 and 4,316 shares, respectively

2,050

9

Unearned employee stock ownership plan shares, at cost, 151,839 and 162,683 shares, respectively

1,459

1,563

Total Stockholders' Equity

205,440

155,093

Total Liabilities and Stockholders' Equity

$1,060,953

$842,001

See Notes to Condensed Consolidated Financial Statements (unaudited).

Page 3

STIFEL FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)

Three Months Ended
June 30,

Six Months Ended
June 30,

2006

2005

2006

2005

REVENUES

Commissions

$ 48,064

$ 23,557

$ 96,240

$ 47,892

Principal transactions

20,754

10,761

42,380

21,742

Investment banking

15,757

15,656

31,505

29,397

Asset management and service fees

14,239

10,146

27,737

19,597

Interest

8,635

4,318

15,826

7,758

Other

(98)

773

7,260

118

Total revenues

107,351

65,211

220,948

126,504

Less: Interest expense

4,684

1,240

8,747

2,345

Net revenues

102,667

63,971

212,201

124,159

NON-INTEREST EXPENSES

Employee compensation and benefits

74,385

41,593

161,079

82,282

Occupancy and equipment rental

7,267

5,117

14,762

10,622

Communications and office supplies

6,483

2,891

12,896

5,452

Commissions and floor brokerage

1,838

994

3,105

1,838

Other operating expenses

8,721

4,071

15,603

7,396

Total non-interest expenses

98,694

54,666

207,445

107,590

Income before income taxes

3,973

9,305

4,756

16,569

Provision for income taxes

1,675

3,685

1,982

6,591

Net income

$ 2,298

$ 5,620

$ 2,774

$ 9,978

Earnings per share:

Basic

$ 0.20

$ 0.58

$ 0.24

$ 1.02

Diluted

$ 0.16

$ 0.46

$ 0.20

$ 0.81

Weighted average common equivalent shares outstanding:

Basic

11,729

9,720

11,485

9,775

Diluted

14,132

12,350

13,835

12,353

 

See Notes to Condensed Consolidated Financial Statements (unaudited).

Page 4

STIFEL FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)(In thousands)

Six Months Ended

 

June 30, 2006

June 30, 2005

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

$ 2,774

$ 9,978

Non-cash items included in net income:

    

Depreciation and amortization

1,935

2,457

Loans and advances amortization

2,991

3,730

Losses (gains) on investments

(6,512)

966

Deferred items

(2,028)

(446)

Compensation related to the private placement

9,751

- -

Stock based compensation

14,512

4,351
 

23,423

21,036

Decrease (increase) in assets:

    

Operating receivables

(40,982)

(28,266)

Cash segregated for exclusive benefit of customers

(20)

- -

Securities purchased under agreements to resell

(87,972)

- -

Securities owned, including those pledged

(99,041)

(14,614)

Loans and advances to investment executives and other employees

(4,689)

(6,642)

Excess tax benefit associated with stock based awards

(10,158)

- -

Other assets

37,152

(948)

Increase (decrease) in liabilities:

    

Operating payables

32,771

16,831

Securities sold, but not yet purchased

94,244

30,477

Drafts payable, accrued employee compensation, and accounts payable and accrued expenses

(54,378)

(6,858)

Cash Flows From Operating Activities

(109,650)

11,016

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from sale or maturity of other investments

42,214

1,028

Payments for:

   

Purchase of office equipment and leasehold improvements

(2,641)

(2,756)

Purchase of investments

(39,736)

(1,270)

Cash Flows From Investing Activities

(163)

(2,998)

CASH FLOWS FROM FINANCING ACTIVITIES

    

Short-term borrowings, net

52,350

16,750

Securities loaned

31,592

(10,123)

Excess tax benefit associated with stock based awards

10,158

- -

Issuance of stock

1,183

424

Proceeds from private placement

26,306

- -

Payments for:

    

Purchase of stock for treasury

(2,490)

(9,391)

Reduction of subordinated debt

- -

(633)

Principal payments under capital lease obligation

- -

(39)

Cash Flows From Financing Activities

119,099

(3,012)

Increase in cash and cash equivalents

9,286

5,006

Cash and cash equivalents - beginning of period

12,529

21,145

Cash and Cash Equivalents - end of period

$ 21,815

$ 26,151

Supplemental disclosure of cash flow information:

    

Income tax payments

$ 912

$ 9,795

Interest payments

$ 9,071

$ 2,381

Schedule of non-cash investing and financing activities:

    

Employee stock ownership plan

$ 104

$ 105

Stock units, net of forfeitures

$ 75,581

$ 6,874

See Notes to Condensed Consolidated Financial Statements (unaudited).

Page 5

STIFEL FINANCIAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A - REPORTING POLICIES

Basis of Presentation

The condensed consolidated financial statements include the accounts of Stifel Financial Corp. and its subsidiaries (collectively referred to as the "Company"). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2005.

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management considers its significant estimates, which are most susceptible to change, to be the fair value of investments, the accrual for litigation, the allowance for doubtful receivables from loans and advances to employees, and interim incentive compensation accruals. Actual results could differ from those estimates.

Where appropriate, prior periods' financial information has been reclassified to conform to the current period presentation. The reclassification primarily relates to certain fees, which had been previously recorded in other commissions and are now more appropriately reflected in principal transactions.

Comprehensive Income

The Company's comprehensive income for the three and six months ended June 30, 2006 and 2005 was equal to the Company's net income.

Page 6

Stock-Based Compensation

On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004) "Share-Based Payment," ("SFAS No. 123R"), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. The Company adopted SFAS No. 123R using the modified prospective application. Under this method, SFAS No. 123R will apply to new awards and to awards outstanding on the effective date as well as those that are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Accordingly, prior period amounts have not been restated to reflect the impact of SFAS No. 123R.

In the first half of 2006, the adoption of SFAS No. 123R resulted in incremental stock-based compensation expense of $292,363, which caused net income to decrease by $145,597 and basic and diluted earnings per share to decrease by $0.01 per share. Additionally, SFAS No. 123R amends SFAS No. 95, "Statement of Cash Flows," to require the excess tax benefits to be reported as a financing cash inflow rather than a reduction of taxes paid, which is included within operating cash flows. Accordingly, cash provided by operating activities decreased and cash provided by financing activities increased by $10,157,985 for the six months ended June 30, 2006 related to excess tax benefits from stock-based awards.

Prior to the adoption of SFAS No. 123R, the Company applied Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") to account for its stock-based awards. The following table details the effect on net income and earnings per share had compensation expense for the Employee Stock-Based Awards been recorded in the three and six months ended June 30, 2005 based on the fair value method under SFAS No. 123:

(in thousands, except per share amounts)

Three Months Ended
June 30, 2005

Six Months Ended
June 30, 2005

Net Income:

    

As reported

$ 5,620

$ 9,978

Add: Stock-based employee compensation expense included in reported net income, net of related tax

2,034

4,665

Deduct: Total stock-based employee compensation expense determined under SFAS 123

(2,330)

(5,081)

Pro forma

$ 5,324

$ 9,562

Basic earnings per share:

    

As reported

$0.58

$1.02

Pro forma

$0.55

$0.98

Diluted earnings per share:

    

As reported

$0.46

$0.81

Pro forma

$0.43

$0.77

For the Company's pro forma computation, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants in the first six months of 2005: dividend yield of 0.00%; expected volatility of 31.2%; risk-free interest rates of 3.88%; and expected lives of 5.73 years.

Page 7

Recent Accounting Pronouncements

In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset Retirement Obligations ("FIN 47")". FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS No. 143. FIN 47 refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The Company's adoption of FIN 47 did not have a material impact on the Company's Condensed Consolidated Financial Statements.

In June 2005, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights" ("EITF No. 04-5"). EITF No. 04-5 consensus requires a general partner in a limited partnership to consolidate the limited partnership unless the presumption of control is overcome. The general partner may overcome this presumption of control and not consolidate the entity if the limited partners have: (a) the substantive ability to dissolve or liquidate the limited partnership or otherwise remove the general partner without having to show cause; or (b) substantive participating rights in managing the partnership. This consensus is effective for general partners of all new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified subsequent to the date of the ratification of this consensus (June 29, 2005). The adoption of EITF No. 04-5 did not have a material impact on the Company's Condensed Consolidated Financial Statements.

In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3," ("SFAS No. 154"). SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. The adoption of SFAS No. 154 did not have a material impact on the Company's Condensed Consolidated Financial Statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a Company's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for the Company beginning in the first quarter of 2007. The Company is in the process of evaluating the impact of adopting FIN 48 on the Company's Condensed Consolidated Financial Statements.

NOTE B - STOCK-BASED COMPENSATION PLANS

The Company has several stock-based compensation plans. All stock-based compensation plans are administered by the Compensation Committee of the Board of Directors of Stifel Financial Corp., which has the authority to interpret the Plans, determine to whom awards may be granted under the Plans, and determine the terms of each award.

Page 8

Stock Units

A stock unit represents the right to receive a share of common stock from the Company at a designated time in the future without cash payment by the employee and is issued in lieu of cash incentive. A deferred compensation plan is provided to certain revenue producers, officers, and key administrative employees, whereby a certain percentage of their incentive compensation is deferred as defined by the plan into Company stock units with a 25% matching contribution by the Company. Participants may elect to defer up to an additional 15% of their incentive compensation with a 25% matching contribution by the Company. Units generally vest over a three- to five-year period and are distributable upon vesting or at future specified dates. Deferred compensation costs are amortized on a straight-line basis over the vesting period.

During the three month period ended June 30, 2006, the Company granted 92,899 units at an average value of $40.17 per unit and converted 16,318 units into common stock. During the six month period ended June 30, 2006, the Company granted 2,108,476 units at an average value of $37.87 per unit and converted 825,967 units into common stock.

 

Three Months ended June 30, 2006

Six Months ended June 30, 2006

Stock Units

Shares


Average Grant
Price

Shares


Average Grant
Price

Outstanding at beginning of period

4,130,126

  

2,943,484

  

Granted

92,899

$ 40.17

2,108,476

$37.87

Converted

(16,318)

  

(825,967)

  

Cancelled

(6,175)

  

(25,461)

  

Outstanding at end of period

4,200,532

  

4,200,532

  

On January 2, 2006, the Company granted 1,807,610 restricted stock units to key associates of the Legg Mason Capital Markets business ("LM Capital Markets") (See Note G). The units were granted in accordance with the Company's 2001 incentive stock award plan as amended with a grant date fair value of $37.59 per unit. The units vest ratably over a three year period, and accordingly, the Company incurred compensation expense of $5,736,122 in the second quarter of 2006 and $11,253,505 for the first six months of 2006.

The total stock unit compensation cost recognized for the quarter ending June 30, 2006 and 2005 was $8,230,392 and $2,033,580, respectively. For the six month period ended June 30, 2006 and 2005, the total stock unit compensation cost recognized was $16,526,120 and $4,665,394 respectively. The total tax benefit for the three month period ended June 30, 2006 and June 30, 2005 related thereto was $62,994 and $18,967, respectively. For the six-month period ended June 30, 2006 and June 30, 2005 the total tax benefit related thereto was $8,569,507 and $1,443,327 respectively.

Stock Option/Incentive Award Plans

The Company has four incentive stock award plans. Under the Company's 1997 and 2001 Incentive Stock Plans, the Company may grant incentive stock options, stock appreciation rights, restricted stock, performance awards, and stock units up to an aggregate of 8,748,659 shares. Options under these plans are generally granted at market value at the date of the grant and expire ten years from the date of grant. The options generally vest ratably over a three- to five-year vesting period. The Company has also granted stock options to external board members under a non-qualified plan and the "Equity Incentive Plan for Non-Employee Directors." Under the Equity Incentive Plan for Non-Employee Directors, the Company may grant stock options and stock units up to 200,000 shares. The exercise price of the option is equal to market value at the date of the grant and are exercisable six months to one year from date of grant and expire ten years from date of grant. Under the Stifel, Nicolaus & Company, Incorporated Wealth Accumulation Plan ("SWAP"), a deferred compensation plan for Investment Executives, the Company may grant stock units up to 933,333 shares.

Page 9

As of June 30, 2006, there was $1,446,615 of total unrecognized compensation cost related to non-vested option awards. That cost is expected to be recognized over a weighted average period of 2.20 years.

The summary of the status of the Company's stock option plans as of June 30, 2006 and changes during the three and six-month period is presented below:

 

Three Months ended June 30, 2006

Six Months ended June 30, 2006

Options

Shares

Weighted
Average
Exercise Price

Shares

Weighted
Average
Exercise Price

Outstanding at beginning of period

1,589,194

$ 10.15

1,665,363

$ 9.95

Granted

- -

- -

8,000

$38.25

Exercised

(54,618)

$ 8.45

(138,787)

$ 8.71

Cancelled

- -

- -

- -

- -

Outstanding at end of period

1,534,576

$ 10.21

1,534,576

$ 10.21

Options exercisable

1,209,239

$ 8.81

1,209,239

$ 8.81

Weighted-average fair value of options granted during the period

n/a

  

$14.58

  

 

The total intrinsic value of options exercised during the three and six-month periods ended June 30, 2006 was $1,649,067 and $4,050,175, respectively. For the three and six-month periods ended June 30, 2005, the total intrinsic value of options exercised was $532,732 and $938,269, respectively. The total fair value of options vested during the three and six-month period ended June 30, 2006 was $514,405 and $3,991,990, respectively.

The following table summarizes information about stock options outstanding at June 30, 2006:

 

Options Outstanding

Options Exercisable

Range of Exercise Price

Number Outstanding

Weighted-Average Remaining Contractual Life

Weighted-Average Exercise Price

Number Exercisable

Weighted-Average Exercise Price

$4.70 - $7.41

221,294

2.66

$ 7.03

221,294

$ 7.03

7.46 - 7.80

258,509

4.89

7.74

224,920

7.73

7.83 - 8.12

252,452

3.18

7.95

239,397

7.95

8.16 - 8.69

329,312

5.61

8.48

251,882

8.45

8.70 - 11.48

234,715

3.98

9.67

187,423

9.69

13.89 - 22.23

195,086

8.06

17.48

84,323

17.88

22.23 - 38.25

43,208

9.50

37.71

-

0.00

$4.70 - $38.25

1,534,576

4.83

$ 10.21

1,209,239

$ 8.81

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table:

Risk-free interest rate

4.55

%

Expected option life

5.35

Years

Expected stock price volatility

32.6

%

Dividend yield

0

%

Page 10

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life (estimated period of time outstanding) of options granted was estimated using the historical exercise behavior of employees. The expected volatility was based on historical volatility for a period equal to the stock option's expected life.

The total option compensation cost recognized for the three and six-month periods ended June 30, 2006 was $130,282 and $292,363, respectively. There was no compensation costs recognized during the same periods ending June 30, 2005. The Company received $461,712 and $1,209,455 cash from the exercise of stock options during the three and six-month periods ended June 30, 2006, respectively. For the three and six-month periods ended June 30, 2005, the Company received $344,681 and $702,491 respectively, from the exercise of stock options. The total tax benefit for the three and six- month period ended June 30, 2006 related thereto was $646,764 and $1,588,479, respectively. The total tax benefit for the three and six-month period ended June 30, 2005 related thereto was $208,059 and $418,038 respectively.

NOTE C - NET CAPITAL REQUIREMENT

The Company's principal subsidiary, Stifel, Nicolaus & Company, Incorporated ("SN & Co.") is subject to the Uniform Net Capital Rule, Rule 15c3-1 under the Exchange Act (the "Rule"), which requires the maintenance of minimum net capital, as defined. SN & Co. has elected to use the alternative method permitted by the Rule that requires maintenance of minimum net capital equal to the greater of $250,000 or 2% of aggregate debit items arising from customer transactions, as defined. The Rule also provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of aggregate debit items. Another subsidiary, Century Securities Associates, Inc. ("CSA"), is also subject to minimum capital requirements that may restrict the payment of cash dividends and advances to the Company. CSA has consistently operated in excess of their capital adequacy requirements. The only restriction with regard to the payment of cash dividends by the Company is its ability to obtain cash through dividends and advances from its subsidiaries, if needed.

At June 30, 2006, SN & Co. had net capital of $104,437,309, which was 32.00% of its aggregate debit items, and $97,886,688 in excess of the minimum required net capital. CSA had net capital of $3,047,035 which was $2,881,920 in excess of minimum required net capital.

The Company's international subsidiary, Stifel Nicolaus Limited, is subject to the regulatory supervision and requirements of the Financial Services Authority ("FSA") in the United Kingdom. The FSA also has the power to set minimum capital requirements, which Stifel Nicolaus Limited has met.

NOTE D - LEGAL PROCEEDINGS

The Company is named in and subject to various proceedings and claims incidental to its securities business activities, including lawsuits, arbitration claims and regulatory matters. While the ultimate outcome of pending litigation, claims and regulatory matters cannot be predicted with certainty, based upon information currently known, management believes that resolution of all such matters will not have a material adverse effect on the condensed consolidated financial condition of the Company but could be material to its operating results in one or more future periods. It is reasonably possible that certain of these lawsuits, arbitrations, claims and regulatory matters could be resolved in the next year and management does not believe such resolutions will result in losses materially in excess of the amounts previously provided.

Page 11

NOTE E - SEGMENT REPORTING

The Company's reportable segments include the Private Client Group, Equity Capital Markets, Fixed Income Capital Markets, and Other. The Private Client Group segment includes branch offices and independent contractor offices of the Company's broker-dealer subsidiaries located throughout the U.S., primarily in the Midwest. These branches provide securities brokerage services, including the sale of equities, mutual funds, fixed income products, and insurance, to their private clients. The Equity Capital Markets segment includes corporate finance management and participation in underwritings (exclusive of sales credits, which are included in the Private Client Group segment), mergers and acquisitions, institutional sales, trading, research, and market making. The Fixed Income Capital Markets segment includes public finance, institutional sales and competitive underwriting, and trading. The "Other" segment includes clearing revenue, interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, and all unallocated overhead cost associated with the execution of orders; processing of securities transactions; custody of client securities; receipt, identification, and delivery of funds and securities; compliance with regulatory and legal requirements; internal financial accounting and controls; acquisition charges related to the LM Capital Markets acquisition; and general administration.

Intersegment net revenues and charges are eliminated between segments. The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenues.

The Company has moved certain portions of revenues and expenses from the Fixed Income Capital Markets Segment to the Private Client Group Segment to more appropriately reflect how management evaluates the business. Prior period amounts have been reclassified to conform to the current period presentation.

Information concerning operations in these segments of business is as follows:

(in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

Net Revenues

2006

2005

2006

2005

Private Client Group

$ 54,942

$ 48,452

$ 111,000

$ 95,796

Equity Capital Markets

35,311

9,354

69,109

17,968

Fixed Income Capital Markets

10,636

4,404

22,105

8,314

Other

1,778

1,761

9,987

2,081

Total Net Revenues

$ 102,667

$ 63,971

$ 212,201

$ 124,159

Operating Contribution

        

Private Client Group

$ 11,690

$ 11,413

$ 24,125

$ 22,471

Equity Capital Markets

7,932

3,322

15,434

6,052

Fixed Income Capital Markets

1,028

1,043

2,748

1,714

Other/ Unallocated Overhead

(16,677)

(6,473)

(37,551)

(13,668)

Income before income taxes

$ 3,973

$ 9,305

$ 4,756

$ 16,569

Page 12

NOTE F - STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE ("EPS")

The Company has an ongoing authorization, as amended, from the Board of Directors to repurchase its common stock in the open market or in negotiated transactions in order to meet obligations under the Company's employee benefit plans and for general corporate purposes. In May 2005, the Company's Board of Directors authorized the repurchase of an additional 2,000,000 shares, for a total authorization to repurchase up to 3,000,000 shares. During the first six months of 2006, the Company repurchased 73,634 shares of its common stock, at an average price of $33.81 per share. The Company reissued 17,252 shares of common stock and issued 1,608,666 new shares for its employee benefit plans in the first six months of 2006.

On January 23, 2006, the Company completed its private placement of 1,052,220 shares of its common stock at $25.00 per share. The shares were purchased by key associates of the LM Capital Markets business. The Company is required to charge to compensation the difference of $25.00 per share and the grant date fair value, as determined in accordance with SFAS No. 123R, of $34.27 per share. As a result, the Company incurred a compensation charge of $9,750,818 in January 2006.

Basic EPS is calculated by dividing net income by the weighted-average number of common shares outstanding. Diluted EPS is similar to basic EPS but adjusts for the effect of potential common shares.

The components of the basic and diluted EPS calculations for the three and six months ended June 30 are as follows:

 

Three Months Ended

June 30,

Six Months Ended

June 30,

(in thousands, except per share amounts)

2006

2005

2006

2005

Income Available to Common Stockholders

        

Net Income

$ 2,298

$ 5,620

$ 2,774

$ 9,978

Weighted Average Shares Outstanding

        

Basic Weighted Average Shares Outstanding

11,729

9,720

11,485

9,775

Effect of dilutive securities from employee benefit plans

2,403

2,630

2,350

2,578

Diluted Weighted Average Shares Outstanding

14,132

12,350

13,835

12,353

Basic Earnings per share

$ 0.20

$ 0.58

$ 0.24

$ 1.02

Diluted Earnings per share

$ 0.16

$ 0.46

$ 0.20

$ 0.81

NOTE G - ACQUISITION (restated)

On December 1, 2005, the Company closed on the acquisition of the LM Capital Markets, from Citigroup Inc. The LM Capital Markets business was part of Legg Mason Wood Walker, Inc. ("LMWW"), which Citigroup Inc. acquired from Legg Mason, Inc. in a substantially simultaneous closing. The LM Capital Markets business acquired by the Company includes the Investment Banking, Equity and Fixed Income Research, Equity Sales and Trading, and Taxable Fixed Income Sales and Trading Departments of LMWW and employed 429 professional and support staff who became employees of the Company on December 1, 2005. The acquisition was made to grow the Company's business and in particular the Company's Capital Markets business leveraging the skill set of the Legg Mason Capital Markets associates. Under the terms of the agreement, the Company paid Citigroup Inc. an amount equal to the net book value of assets being acquired of $12,178,198 plus a premium of $7,000,000 paid in cash at closing with the balance of up to an additional $30,000,000 in potential earn-out payment by the Company to Citigroup Inc., based on the performance of the combined capital markets business of both the Company's pre-closing Fixed Income and Equity Capital Markets business and Legg Mason Capital Markets for calendar years 2006, 2007, and 2008. Such payments, if any, will be accounted for as additional purchase price.

Page 13

The following is unaudited pro forma financial data for the combined operations, assuming the transaction had taken place on January 1, 2005.

 

Three Months Ended June 30, 2005

Six Months Ended
June 30, 2005

Total revenues

$113,886,075

$243,717,930

Net income

$ 4,086,884

$ 8,458,769

Diluted earnings per share

$0.30

$0.62

Diluted weighted average shares outstanding

13,553,000

13,705,720

The above pro forma net income and diluted earnings per share for the three and six months ended June 30, 2005 has been revised from the originally filed Form 10-Q in order to correct an error. The three months ended pro forma net income and diluted earnings per share in the originally filed Form 10-Q were $7,121,493 and $0.53, respectively and the six months ended pro forma net income and diluted earnings per share in the originally filed Form 10-Q were $14,014,412 and $1.02, respectively.

The above pro forma data excludes reductions of certain administrative allocations by Legg Mason which as a result of synergies of the combined operations, management believes, will be significantly reduced. In addition, for the three and six months ended June 30, 2006 the Company included compensation expense of $5,379,221 and $20,509,261, respectively associated with the issuance of restricted stock units and the discounted offering price on its private placement respectively to key associates of the LM Capital Markets. These results do not purport to be indicative of the results which actually would have occurred.

A summary of the fair values of the net assets acquired as of December 1, 2005, based upon the current valuation estimate, is as follows:

Cash

$324,930

Investments

12,275,536

Furniture & fixtures

1,542,267

Accounts receivables

35,122,667

Prepaid expenses

623,326

Goodwill

7,928,842

Intangible assets

2,255,000

Total assets acquired

60,072,568

Accounts payables

2,642,748

Accrued expenses

35,025,441

Total liabilities assumed

37,668,189

Net assets acquired

$22,404,379

The goodwill and intangible assets of $10,183,842 were assigned to the Equity Capital Markets and Fixed Income Capital Markets in the amounts of $8,147,074 and $2,036,768, respectively. The total amount of goodwill and intangible assets of $10,183,842 is expected to be deductible for tax purposes.

Page 14

 

NOTE H - GOODWILL AND INTANGIBLE ASSETS

The carrying amount of goodwill and intangible assets attributable to each of the Company's reportable segments is presented in the following table:

 

Private
Client
Group

Equity
Capital
Markets

Fixed Income Capital Markets



Total

Goodwill

        

Balance at December 31, 2005

$454,508

$1,675,899

$1,179,834

$3,310,241

Additions

- -

600,202

150,051

750,253

Transfers

- -

5,742,871

1,435,718

7,178,589

Impairment losses

- -

- -

- -

- -

Balance at June 30, 2006

454,508

8,018,972

2,765,603

11,239,083

Intangible Assets

        

Balance at December 31, 2005

566,384

8,085,384

1,887,383

10,539,151

Additions

149,000

116,667

- -

265,667

Transfers

- -

(5,742,871)

(1,435,718)

(7,178,589)

Amortization of intangible assets

(95,024)

(289,822)

(17,500)

(402,346)

Impairment losses

- -

- -

- -

- -

Balance at June 30, 2006

620,360

2,169,358

434,165

3,223,883
         

Total Goodwill and intangible assets

$1,074,868

$10,188,330

$3,199,768

$14,462,966

At June 30, 2006, intangible assets consisted of $2,788,134 for customer list and $435,749 for non-compete notes.

NOTE I - IMPACT OF THE NYSE/ARCHIPELAGO MERGER

On March 7, 2006, the New York Stock Exchange ("NYSE") and Archipelago Holdings Inc. ("Archipelago") completed the combination of their businesses through a series of mergers into a new holding company, NYSE Group, Inc. ("NYSE Group"). Shares of NYSE Group common stock were listed on the NYSE under the ticker symbol "NYX" and commenced trading on March 8, 2006. As a result of the merger, the Company received $370,640 in cash, and 80,177 shares of NYSE Group common stock for its NYSE seat membership. The shares are subject to certain transfer restrictions that expire ratably over a three-year period, unless the NYSE Group board of directors elects to remove or reduce the restrictions. The Company recorded a gain of $4,870,445 which is included in Other revenues in the Condensed Consolidated Statement of Operations for the six months ended June 30, 2006. The gain was impacted by a valuation adjustment for the transfer restrictions on the shares received. Subsequent gains and losses will be recorded as the share price of NYSE Group stock fluctuates and the transfer restrictions lapse.

On May 5, 2006, the Company sold 51,900 shares of NYSE Group through a secondary public offering. The Company received cash proceeds of $3,127,763 or $60.27 per share which represented the fixed offering price.

******

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Item 4. Controls and Procedures

As specified in the SEC's rules and forms, the Company's management, including Mr. Ronald J. Kruszewski as Chief Executive Officer and Mr. James M. Zemlyak as Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report. Under rules promulgated by the SEC, disclosure controls and procedures are defined as those "controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms." Based on the evaluation of the Company's disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of June 30, 2006.

On January 26, 2007, the company amended its June 30, 2006 Quarterly Report on Form 10-Q, originally filed with the United States Securities and Exchange Commission on August 9, 2006, to restate certain of the unaudited pro-forma financial data contained in Note G of the Notes to Condensed Consolidated Financial Statements. Management believes the restatement is immaterial for the following reasons:

Further, as required by the SEC's rules and forms, the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the Company's internal control over financial reporting to determine whether any changes occurred during the quarter ended June 30, 2006 that have materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there have been no such changes during the quarter ended June 30, 2006.

Page 16

PART II. OTHER INFORMATION

Item 6. Exhibits

(a)

Exhibits:

  
 

11

Statement re computation of per share earnings (set forth in "Note F - Stockholders Equity and Earnings Per Share ("EPS")" of the Notes to Condensed Consolidated Financial Statements (Unaudited))
 

31.1

Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 

31.2

Certification by the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
 

32

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is furnished to the SEC.

Page 17

 

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

STIFEL FINANCIAL CORP.
(Registrant)

Date: January 26, 2007

By: /s/ Ronald J. Kruszewski

Ronald J. Kruszewski
(President and Chief Executive Officer)

Date: January 26, 2007

By: /s/ James M. Zemlyak

James M. Zemlyak
(Principal Financial and Accounting Officer)

Page 18

EXHIBIT INDEX

Exhibit No.

 

Description

31.1

 

Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification by the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

32

  

Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
This exhibit is furnished to the SEC.

Page 19