Business Context and Reporting Period
Company: Stifel Financial Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Stifel Financial Corp. operates through three primary segments: Global Wealth Management (Private Client Group and Stifel Bank), Capital Markets, and Other. The company provides retail brokerage, securities trading, investment banking, investment advisory, and banking services. A significant strategic development during the period was the acquisition of 40 branches from UBS Wealth Management Americas, with a final closing of 16 branches occurring in October 2009.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Revenues | $289,683 | $771,169 |
| Net Income | $22,138 | $51,130 |
| Diluted EPS | $0.67 | $1.62 |
| Total Assets (as of Sep 30, 2009) | $2,890,795 | |
| Stockholders' Equity (as of Sep 30, 2009) | $833,594 | |
| Cash and Cash Equivalents (as of Sep 30, 2009) | $345,970 | |
| Short-term Borrowings (as of Sep 30, 2009) | $165,200 | |
| Bank Deposits (as of Sep 30, 2009) | $875,028 |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 32.3% for the quarter and 20.6% for the nine-month period compared to the same periods in 2008. This growth was driven primarily by a surge in principal transactions (up 80.7% QoQ) due to turbulent fixed income markets and increased institutional trading activity.
- Profitability: Net income rose 73.3% for the quarter and 29.6% for the nine-month period year-over-year. The effective tax rate for the nine months was 35.4%, lower than the prior year's 39.5%, due to a $3.4 million tax benefit from an investment and jobs creation credit.
- Expense Increases: Total non-interest expenses increased 30.8% for the quarter and 20.5% for the nine months. Compensation and benefits rose significantly (28.6% QoQ) due to increased headcount, variable compensation, and transition pay associated with acquisitions.
- Balance Sheet Expansion: Total assets grew 85.5% from December 31, 2008, to September 30, 2009. This was largely due to increased receivables, trading inventory, and goodwill recognized from the UBS acquisition. Bank deposits increased to $875.0 million, up from $284.8 million at year-end 2008.
- Asset Management Fees: Asset management and service fees declined 15.9% for the quarter and 17.2% for the nine months, reflecting lower assets under management due to market depreciation and fee waivers on money market funds.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition Activity: The company completed three closings of the UBS branch acquisition in Q3 2009, converting approximately $16.0 billion in customer assets. A final closing of 16 branches occurred in October 2009. The transaction generated $28.5 million in preliminary goodwill.
- Auction Rate Securities (ARS): Stifel announced a voluntary plan to repurchase 100% of eligible ARS held by retail clients. As of September 30, 2009, clients held $114.8 million in eligible ARS. The company estimates future repurchases of approximately $114.8 million over the next three years (phases two through four). A liability has been recorded based on net present value calculations.
- Legal Proceedings: The company is subject to ongoing investigations by the SEC, FINRA, and state regulators regarding ARS sales and CDO investments by school districts. A settlement was reached with the Virginia State Corporation Commission involving penalties and compliance with the ARS repurchase offer. The company maintains it has meritorious defenses for other pending litigation.
- Market Risk: The company faces market risk from interest rate volatility and equity price fluctuations. Stifel Bank utilizes interest rate swaps to hedge exposure. Value-at-Risk (VaR) for institutional trading portfolios averaged $1.2 million daily for the nine months ended September 30, 2009.
- Liquidity: The company maintains strong liquidity with $346.0 million in cash and cash equivalents. It has access to short-term bank borrowings and securities lending arrangements. Stifel Bank is considered "well capitalized" under regulatory frameworks.
Investor Verification Checklist
- UBS Integration: Verify the final purchase price allocation and the impact of the UBS acquisition on future revenue and expense synergies.
- ARS Liability: Monitor the actual cash outflows related to the voluntary ARS repurchase plan against the recorded liability and the estimated redemption rates.
- Legal Reserves: Track the status of ongoing ARS and CDO-related litigation and regulatory investigations to assess potential for additional fines or settlements.
- Compensation Trends: Review the ratio of compensation and benefits to net revenues to ensure expense growth remains aligned with revenue generation as the company integrates new staff.
- Capital Markets Volatility: Assess the sustainability of the principal transactions revenue growth, which is highly correlated with market volatility and may fluctuate significantly.