Stifel Financial Corp. 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Stifel Financial Corp., a financial services company engaged in retail brokerage, securities trading, investment banking, and banking through its subsidiary, Stifel Bank & Trust. The reporting period covers the three and nine months ended September 30, 2008. The company operates primarily in the Midwest and Mid-Atlantic regions of the United States with a growing presence in other regions and three European cities.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Net Revenues | $218.9 million | $639.4 million | $550.9 million |
| Net Income | $12.8 million | $39.5 million | $18.3 million |
| Diluted EPS | $0.46 | $1.44 | $0.73 |
| Total Assets | $2.04 billion | - | - |
| Stockholders' Equity | $565.4 million | - | - |
| Short-term Borrowings | $265.3 million | - | - |
| Cash and Cash Equivalents | $78.7 million | - | - |
Operating Margins (Nine Months 2008): Net income margin was 6.2% of net revenues. Employee compensation and benefits represented 69.0% of net revenues.
Cash Flow (Nine Months 2008): Net cash used in operating activities was $67.0 million. Net cash provided by financing activities was $187.5 million, driven by short-term borrowings and a public equity offering. Net cash used in investing activities was $89.7 million.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 16% year-over-year for the nine months ended September 30, 2008. This was driven by a 45% increase in commissions and principal transactions and a 26% increase in asset management fees.
- Investment Banking Decline: Investment banking revenues decreased 51% year-over-year (nine months) due to industry-wide declines in equity offerings and M&A activity caused by market volatility.
- Profitability: Net income increased 115% year-over-year for the nine-month period, primarily due to revenue growth and lower acquisition-related charges compared to the prior year.
- Balance Sheet Expansion: Total assets increased 36% from December 31, 2007, to September 30, 2008, largely due to growth in loans, trading securities, and receivables from brokers.
- Interest Rates: Interest expense decreased 32% year-over-year (nine months) due to lower interest rates on borrowings and stock loans.
Outlook, Risks, and Contingencies
- Market Conditions: Management notes that results are highly correlated to equity and fixed income market activity. The third quarter of 2008 was marked by unprecedented market turmoil, including the failure of major financial institutions and a freeze in credit markets.
- Auction Rate Securities (ARS): The company holds approximately $21.9 million of ARS in its trading inventory, classified as Level 3 (illiquid). Clients hold approximately $226.4 million of ARS. The company is facing regulatory inquiries and a class-action lawsuit regarding ARS. Management states that purchasing these securities from clients to resolve claims could have a material adverse effect on financial condition.
- Legal Proceedings: The company is named in a civil lawsuit regarding CDO investments made by Wisconsin school districts and the aforementioned ARS class action. Management intends to vigorously defend these suits but cannot predict the outcome or potential losses.
- Capital Resources: The company completed a public offering of 1.5 million shares in September 2008, raising net proceeds of $64.4 million. It maintains significant unused credit capacity ($489.7 million) and is considered "well capitalized" by regulators.
- Goodwill Impairment: Management monitors goodwill for impairment. While no impairment was recorded as of July 31, 2008, continued market volatility could necessitate future charges.
Investor Verification Checklist
- ARS Exposure: Verify the current status of the $21.9 million ARS inventory and the potential liability associated with the $226.4 million held by clients.
- Legal Accruals: Review the adequacy of loss allowances for the pending ARS class action and CDO lawsuit, noting that management cannot currently estimate the range of losses.
- Investment Banking Pipeline: Assess the sustainability of revenue given the 51% year-over-year decline in investment banking fees and the broader market freeze.
- Liquidity Position: Confirm the company's ability to meet short-term borrowing needs ($265.3 million outstanding) amidst tightened credit markets.
- Acquisition Integration: Monitor the performance of the Ryan Beck and Stifel Bank & Trust acquisitions, which contributed significantly to revenue growth but also carry contingent earn-out liabilities.