Stifel Financial Thesis: We believe Stifel Financial Corp (SF) is an attractive short opportunity.

Our thesis is fairly straightforward and has three basic highlights: 1) SF is investing heavily in capital markets businesses that are in secular decline 2) Earnings projections in 2013 and beyond are too high and are unlikely to be met due to our view that capital markets activity will not be as robust. 3) SF trades at a premium to its peers which we believe is unwarranted given nearly half of SF revenues are tied to capital markets cyclicality. Background: Stifel, led by Ron Kruszewski, has transformed itself from a small regional brokerage firm with a sub $100mn market capitalization in 2002 to a $2.6B full-service retail and institutional brokerage and investment banking firm today. SF accomplished this massive growth through organic growth and by making over twenty acquisitions spending over $1.7B. In the last five years net revenues have grown from $870mn in 2008 to $1.6B and its balance sheet pro-forma including KBW is now $7.5B up from $0.4B ten years ago. While other competitors are shuttering and exiting a secularly declining commission driven business, SF continues to grow and acquire. Kruszewskis goal is to become the dominant middle market brokerage firm. We believe he is rolling up capital markets businesses making clubby deals that will prove to be value destructive. Notable acquisitions: Legg Mason Capital Markets in December 2005 Ryan Beck in February 2007 for $100mn First Service Financial in April 2007 Butler, Wick & Co in December 2008 UBS Financial Services (56 branches from UBS Wealth Management Americas) in 2 nd half of 2009 for $46mn Thomas Weisel Partners Group in July 2010 for $240mn Stone & Youngberg in October 2011 Miller Buckfire in December of 2012 for $57mn KBW in February of 2013 for $567mn Knight Capital Group just announced (terms not disclosed)

We believe Stifel has been overpaying for capital markets businesses in secular decline We believe the most recent acquisition (and largest in Stifel history) of KBW was a reach and will prove to be value destructive for SF. Stifel paid $567mn in a cash and stock deal for KBW. The purchase price was roughly 1.5x tangible book and 13x consensus 2013 earnings. We note that KBW has not made money on an annual basis since 2010 losing more than $40mn in the

last two years alone. Per our analysis, KBW has not earned more than $53mn in annual earnings (in 2006 the year they went public) in the last ten years. Roughly 80% of KBW revenues are driven off investment banking and commissions which have fallen for three consecutive years. For the year-ended 2012 KBW revenues came in at $246mn, down from $263mn in 2011 and $424mn in 2010. Investment banking revenues were $74mn in the first nine months of 2012, $99mn in 2011, and $209mn in 2010. Commission revenues were $75mn in the first nine months of 2012, $128mn in 2011 and $133mn in 2010. We note SF reported the total revenue for KBW in Q4 but not by line item, hence why we only show the first nine months. KBW Net Income
$60 $40 $20 $0 -$20 -$40 -$60 -$80 2005 2006 2007 2008 2009 2010 2011 2012

Source: Company 10Ks

Post the acquisition, SF will generate roughly 50% of its revenues from capital marketsinvestment banking and commissions. Anecdotally, we have engaged several SF current and former employees for color on the views of the firm and their recent acquisitions. Feedback we received: Clients dont understand why they are paying up for KBW and Thomas Weisel. What are they buying? Couldnt they just hire people away? There is a culture of clubby deals. There are duplicative heads of sales. Most of the Thomas Weisel head guys are still around. Ron Kruszewski and Thomas Weisel are longtime friends and Ron wont make the difficult decisions. We note Th omas Weisel is CoChairman of SF.

Morale is at all-time lows among the research staff There is too much fat on the sales side. Look at Stifel in (one key market). The sales team is staffed with 8 or 9 people double from a few years ago. JP Morgan runs lean with 4. Commissions continue to trend lower despite doubling the staff The Board now has 19 directors. Two were added from KBW. How can they decide anything?

We also point to the sweetheart deal KBW management received which Tom Brown at Second Curve outlines well. See link: http://www.bankstocks.com/ArticleViewer.aspx?ArticleID=6616&ArticleTypeID=2 In essence, the Board at KBW drove up the price of by an additional $20.8mn with the majority going to senior managers and employees in the form of a $17mn retention pool. Shareholders received a meager $3.8mn more. Further, key management personnel including KBW CEO Tom Michaud will continue to run KBW as a separate subsidiary. For SF to realize value for the price they paid assumes that Stifel/KBW will have large revenue synergies and/or both the investment banking and institutional business environment picks up tremendously in financials. We are skeptical. Our view is that the days of big bank roll-ups are over. SF projects that they will be moving the best financials analysts to Stifel which will position them for the upturn in capital markets in the financial sector for years to come. PreStifel, KBW investment banking franchise is not particularly stellar, in our view. For perspective, KBW does not even rank in the top 25 firms for all managed equity deals since 2010. Stifel ranks #8 in all managed equity deals since 2010.

Earnings in 2012 had a one-time benefit and projections in 2013 are too high and are unlikely to be met Our view is that earnings expectations in 2013 and beyond are aggressive. In 2012 figures were benefited by a one-time gain from the Knight Capital Group preferred stock investment. As shown below Q3 and Q4 of 2012 SF had big jumps in its other revenue line driven off of a $39mn realized gain in Knight Capital Group which occurred in both Q3 and Q4. The success of Knight Capital Groups preferred investment is unlikely to be repeated. SF breaks out their revenues into six buckets: commissions, principal transactions, asset management and service fees, interest, and other. Per the table below, the other income line jumped significantly in 2012 driven off the performance of Knight Capital Group preferred investments in the 2nd half of the year.

2010 December Revenues: Commissions Principal transactions Investment banking Asset management Interest Other Total revenue Interest expenses Net revenues

1Q11 3/31/2011

2Q11 6/30/2011

3Q11 9/30/2011

4Q11 2011 12/31/2011 December

1Q12 3/31/2012

2Q12 6/30/2012

3Q12 9/30/2012

4Q12 2012 12/31/2012 December

445,260 453,533 218,104 193,159 65,326 19,855 1,395,237 13,211 1,382,026

155,786 92,859 41,418 57,680 18,856 6,256 372,855 6,242 366,613

138,315 79,741 64,418 56,981 21,229 4,556 365,240 6,383 358,857

143,243 76,650 37,673 58,253 24,161 540 340,520 6,306 334,214

123,737 93,963 56,075 55,920 25,220 8,379 363,294 6,416 356,878

561,081 343,213 199,584 228,834 89,466 19,731 1,441,909 25,347 1,416,562

123,303 116,233 70,438 60,818 25,257 13,294 409,343 9,010 400,333

127,427 91,564 67,363 65,311 27,181 5,418 384,264 9,857 374,407

127,966 102,979 72,938 62,881 27,306 31,922 425,992 5,912 420,080

134,280 97,708 75,846 68,971 30,032 19,597 426,434 8,604 417,830

512,976 408,484 286,585 257,981 109,776 70,231 1,646,033 33,383 1,612,650

Other Revs 2012 Knight Capital Gains Other Revs ex Knight 2013E Other Adjusted Ex-Knight

70,231 39,000 31,231 78,000 150%

Based on our analysis, the other revenue would have been $31mn excluding the Knight Capital gains. This compares to other income of around $20mn in both 2010 and 2011. Analysts currently forecast around 12% growth in the other revenue segment in 2013, which implies $78mn. However, from a pro-forma perspective of $31mn in other revenue last year excluding KBW gains, analyst projections imply a robust 150% growth we view this level of growth as unlikely. If SFs other revenue reverts to its historical levels of $20mn as in 2010 and 2011, it would imply 10c in earnings downside alone. On page 144 of the SF 10K, pro forma SF/KBW figures are shown as follows: (mns) Total Net Revenues Net Income EPS 2010 $1,806.8 $25.5 $0.43 2011 $1,680.1 $52.5 $0.73 2012 $1,857.9 $112.5 $1.56

Combined SF/KBW consensus estimates currently project net revenues of 1,954.9 in 2013 and $2,133.8 in 2014 and earnings per share of $2.50 in 2013 and $2.79 in 2014. Consensus earnings suggest that KBW will revert from its slide in revenues and losses and return to profitability. Additionally, $2.50 per share in EPS implies that pre-tax margins rise meaningfully to 15%, a level SF has never achieved. Pre-tax margins were break-even in 2010, 9.6% in 2011 and 13.7% (benefited by Knight gains) in 2012. To assume that SF will achieve peak margins in 2013 is a stretch in our view. Street expectations for 2013 Net revenues 1,954 Pre-tax profits 293

Margin Taxes at 39% Net Income Shs Outs EPS

15% 114 179 72 $2.50

SF trades at a rich valuation which believe is unwarranted SF trades at 1.9x TBV (1.3x stated book value). Given ROEs have been running under 10% for the past several years and due to the fact that 50% of their business is highly cyclical, we believe the multiple is too high. We think a more appropriate valuation would be closer to book value. In a scenario where SF maintains a historically high run-rate of 12-13% in pre-tax margins, EPS would range from $1.99 to $2.15. Based on these figures, SF stock, currenty at $36 per share, is trading at 17-18x 2013 earnings. We believe peer multiples of 13x more realistic 2013 earnings of $2.00-$2.15 would result in a $25-$28 share price. Conclusion: SF is a compelling short. SF boasts about consolidating players to become the preeminent middle market firm in the brokerage industry; we believe they are making uneconomic deals to the benefit of sellers and the detriment of shareholders. Results are very correlated to capital markets activity and the KBW deal only increases earnings volatility. We are skeptical that the SF/KBW combination will deliver expected revenue synergies. We believe there is $10$12 of downside to the stock from its current $36 level. One final note: While not a core tenet of our SF short thesis, we are also very intrigued by the sensitivity of the business model to capital markets. If the market were to hit a rough patch, SF business will be hit very hard. With its current stretched valuation assuming a healthy trajectory in capital markets activity, we view the risk/reward very favorably in the event there is a dislocation in the credit or equity markets. Risks to short: Capital market activity remains robust and SF/KBW benefit There is high correlation between the SF results and the US equity and fixed-income markets. If markets continue on their upward path, results may be better than we envision.

* Historical financial data from SF financial filings, consensus numbers from Bloomberg