Stifel Financial Corp. Form 10-Q
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File No. 1-9305

_________________________

STIFEL FINANCIAL CORP.

(Exact name of registrant as specified in its charter)
     
DELAWARE
(State or other jurisdiction of
  43-1273600
(IRS Employer Identification No.)
incorporation or organization)    
     
501North Broadway    
St. Louis, Missouri   63102
(Address of principal executive offices)   (Zip Code)
(314) 342-2000
(Registrant’s telephone number, including area code)
     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 þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer: þ   Accelerated filer: o   Non-accelerated filer: o   Smaller reporting company: o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No þ
     The number of shares outstanding of the registrant's common stock as of October 31, 2009 was 30,301,318.
 
 

 

 

STIFEL FINANCIAL CORP.

Form 10-Q

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statements of Financial Condition as of September 30, 2009 (unaudited) and December 31, 2008

Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2009 and September 30, 2008 (unaudited)

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and September 30, 2008 (unaudited)

Notes to Condensed Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 6. Exhibits

Signatures

2


 

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

STIFEL FINANCIAL CORP.

Condensed Consolidated Statements of Financial Condition

 

 

 

 

 

 

 

 

 

 

September 30,
 2009

 

December 31,
 2008

 

(in thousands)

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

345,970

 

$

239,725

 

Cash segregated under federal and other regulations

 

 

19

 

 

40

 

Receivables:

 

 

 

 

 

 

 

Customers

 

 

367,363

 

 

280,143

 

Broker, dealers and clearing organizations

 

 

280,046

 

 

111,575

 

Securities purchased under agreements to resell

 

 

91,545

 

 

17,723

 

Trading securities owned, at fair value (includes securities pledged of $217,867 and $0, respectively)

 

 

449,408

 

 

122,576

 

Available-for-sale securities, at fair value

 

 

300,623

 

 

50,397

 

Held-to-maturity securities, at amortized cost

 

 

7,574

 

 

7,574

 

Mortgages held for sale

 

 

30,947

 

 

31,246

 

Bank loans, net of allowance for loan losses of $2,488 and $2,448, respectively

 

 

329,509

 

 

181,269

 

Bank foreclosed assets held for sale, net of estimated cost to sell

 

 

2,657

 

 

2,326

 

Investments

 

 

105,562

 

 

75,407

 

Fixed assets, at cost, net of accumulated depreciation and amortization of $66,225 and $54,075, respectively

 

 

60,296

 

 

47,765

 

Goodwill

 

 

159,191

 

 

128,278

 

Intangible assets, net of accumulated amortization of $10,350
and $8,290, respectively

 

 

15,600

 

 

15,984

 

Loans and advances to financial advisors and other employees, net

 

 

181,841

 

 

105,767

 

Deferred tax assets, net

 

 

49,350

 

 

47,337

 

Other assets

 

 

113,294

 

 

93,013

 

Total assets

 

$ 

2,890,795

 

$

1,558,145

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3


 

STIFEL FINANCIAL CORP.

Condensed Consolidated Statements of Financial Condition (continued)

 

 

 

 

 

 

 

 

 

 

September 30,
 2009

 

December 31,
 2008

 

(in thousands, except share amounts)

 

(Unaudited)

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Short-term borrowings from banks

 

$

165,200

 

$

-

 

Payables:

 

 

 

 

 

 

 

Customers

 

 

196,368

 

 

156,495

 

Brokers, dealers and clearing organizations

 

 

133,321

 

 

29,691

 

Drafts

 

 

39,974

 

 

49,401

 

Securities sold under agreements to repurchase

 

 

43,949

 

 

2,216

 

Bank deposits

 

 

875,028

 

 

284,798

 

Federal Home Loan Bank advances and other secured financing

 

 

2,000

 

 

6,000

 

Trading securities sold, but not yet purchased, at fair value

 

 

278,629

 

 

98,934

 

Accrued compensation

 

 

133,150

 

 

130,037

 

Accounts payable and accrued expenses

 

 

87,603

 

 

100,528

 

Debenture to Stifel Financial Capital Trust II

 

 

35,000

 

 

35,000

 

Debenture to Stifel Financial Capital Trust III

 

 

35,000

 

 

35,000

 

Debenture to Stifel Financial Capital Trust IV

 

 

12,500

 

 

12,500

 

Other

 

 

9,398

 

 

19,998

 

 

 

 

2,047,120

 

 

960,598

 

Liabilities subordinated to claims of general creditors

 

 

10,081

 

 

4,362

 

Stockholders' equity:

 

 

 

 

 

 

 

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

 

 

-

 

 

-

 

Common stock - $0.15 par value; authorized 97,000,000 shares; issued 30,295,624 and 26,300,135 shares, respectively

 

 

4,545

 

 

3,945

 

Additional paid-in-capital

 

 

608,263

 

 

427,480

 

Retained earnings

 

 

220,403

 

 

168,993

 

Accumulated other comprehensive income/(loss)

 

 

1,165

 

 

(6,295

)

 

 

 

834,376

 

 

594,123

 

Unearned employee stock ownership plan shares, at cost, 122,019 and 146,421 shares, respectively

 

 

(782

)

 

(938

)

 

 

 

833,594

 

 

593,185

 

Total liabilities and stockholders' equity

 

$

2,890,795

 

$

1,558,145

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4


 

STIFEL FINANCIAL CORP.

Condensed Consolidated Statements of Operations

(Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands, except per share amounts)

 

2009

 

2008

 

2009

 

2008

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal transactions

 

$

123,238

 

68,182

 

$ 

341,777

 

200,793

 

Commissions

 

 

90,905

 

 

88,727

 

 

246,236

 

 

257,491

 

Investment banking

 

 

35,056

 

 

25,156

 

 

75,262

 

 

67,935

 

Asset management and service fees

 

 

25,498

 

 

30,336

 

 

74,974

 

 

90,580

 

Interest

 

 

11,306

 

 

12,819

 

 

31,782

 

 

39,175

 

Other income/(loss)

 

 

6,586

 

 

(1,391

)

 

9,440

 

 

(883

)

Total revenues

 

 

292,589

 

 

223,829

 

 

779,471

 

 

655,091

 

Interest expense

 

 

2,906

 

 

4,906

 

 

8,302

 

 

15,740

 

Net revenues

 

 

289,683

 

 

218,923

 

 

771,169

 

 

639,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

193,131

 

 

150,203

 

 

516,852

 

 

441,028

 

Occupancy and equipment rental

 

 

24,730

 

 

17,286

 

 

63,311

 

 

49,012

 

Communications and office supplies

 

 

14,429

 

 

11,192

 

 

39,403

 

 

32,887

 

Commissions and floor brokerage

 

 

6,486

 

 

4,348

 

 

17,167

 

 

8,315

 

Other operating expenses

 

 

20,071

 

 

14,800

 

 

55,336

 

 

42,940

 

Total non-interest expenses

 

 

258,847

 

 

197,829

 

 

692,069

 

 

574,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

 

30,836

 

 

21,094

 

 

79,100

 

 

65,169

 

Provision for income taxes

 

 

8,698

 

 

8,317

 

 

27,970

 

 

25,713

 

Net income

 

$

22,138

 

$

12,777

 

$

51,130

 

$

39,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.77

 

$

0.54

 

$

1.85

 

$

1.68

 

Diluted

 

$

0.67

 

$

0.46

 

$

1.62

 

$

1.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

28,708

 

 

23,830

 

 

27,652

 

 

23,520

 

Diluted

 

 

32,817

 

 

28,045

 

 

31,468

 

 

27,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


 

STIFEL FINANCIAL CORP.

Condensed Consolidated Statements of Cash Flows

(Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

(in thousands) 

 

2009

 

 

2008

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

51,130

 

 

$

39,456

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

22,666

 

 

 

29,960

 

Amortization of loans and advances to financial advisors and other employees

 

 

20,910

 

 

 

15,063

 

Depreciation and amortization

 

 

16,777

 

 

 

9,219

 

Loss on the sale of investments

 

 

16,576

 

 

 

6,836

 

Amortization of intangible assets

 

 

2,060

 

 

 

2,337

 

Provision for loan losses and allowance for loans and advances to financial advisors and other employees

 

 

861

 

 

 

1,025

 

Accretion of discounts on available-for-sale securities

 

 

(174

)

 

 

(589

)

Deferred income taxes

 

 

(4,925

)

 

 

(3,966

)

Other, net

 

 

506

 

 

 

253

 

Decrease/(increase) in operating assets, net of assets acquired:

 

 

 

 

 

 

 

 

Receivables:

 

 

 

 

 

 

 

 

Customers

 

 

(69,262

)

 

 

36,525

 

Brokers, dealers and clearing organizations

 

 

(168,471

)

 

 

(266,830

)

Securities purchased under agreements to resell

 

 

(73,822

)

 

 

(29,219

)

Loans originated as mortgages held for sale

 

 

(677,851

)

 

 

(226,714

)

Proceeds from mortgages held for sale

 

 

678,150

 

 

 

218,654

 

Trading securities owned, including those pledged

 

 

(326,832

)

 

 

(128,689

)

Loans and advances to financial advisors and other employees

 

 

(88,077

)

 

 

(34,176

)

Other assets

 

 

(10,685

)

 

 

(5,205

)

Increase/(decrease) in operating liabilities, net of liabilities assumed:

 

 

 

 

 

 

 

 

Payables:

 

 

 

 

 

 

 

 

Customers

 

 

39,873

 

 

 

60,661

 

Drafts

 

 

(9,427

)

 

 

(7,641

)

Brokers, dealers and clearing organizations

 

 

73,068

 

 

 

90,262

 

Trading securities sold, but not yet purchased

 

 

179,695

 

 

 

172,686

 

Other liabilities and accrued expenses

 

 

(35,569

)

 

 

(46,937

)

Net cash used in operating activities

 

 

(362,823

)

 

 

(67,029

)

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 

STIFEL FINANCIAL CORP.

Condensed Consolidated Statements of Cash Flows (continued)

(Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

(in thousands) 

 

2009

 

 

2008

 

Investing Activities:

 

 

 

 

 

 

 

 

Proceeds from:

 

 

 

 

 

 

 

 

Sale or maturity of investments

 

$

45,238

 

 

$

38,583

 

Maturities, calls and principal paydowns on available-for sale securities

 

 

24,526

 

 

 

34,445

 

Sale of property

 

 

-

 

 

 

766

 

Sale of bank foreclosed assets held for sale

 

 

3,108

 

 

 

1,000

 

Decrease/(increase) in bank loans, net

 

 

(7,437

)

 

 

(70,342

)

Payments for:

 

 

 

 

 

 

 

 

Purchase of available-for-sale securities

 

 

(264,285

)

 

 

(24,909

)

Acquisitions, net

 

 

(196,046

)

 

 

-

 

Purchase of investments

 

 

(91,922

)

 

 

(53,297

)

Purchase of fixed assets

 

 

(21,210

)

 

 

(14,643

)

Purchase of bank foreclosed loans held for sale

 

 

(3,854

)

 

 

(1,322

)

Net cash used in investing activities

 

 

(511,882

)

 

 

(89,719

)

Financing Activities:

 

 

 

 

 

 

 

 

Increase in bank deposits, net

 

 

590,230

 

 

 

68,537

 

Net proceeds from short-term borrowings from banks

 

 

165,200

 

 

 

137,450

 

Proceeds from offering of common stock

 

 

135,645

 

 

 

64,369

 

Securities sold under agreements to repurchase

 

 

41,733

 

 

 

-

 

Increase/(decrease) in securities loaned

 

 

30,562

 

 

 

(92,272

)

Excess tax benefits from stock-based compensation

 

 

12,788

 

 

 

9,133

 

Issuance of common stock

 

 

10,092

 

 

 

2,330

 

Reissuance of treasury stock

 

 

-

 

 

 

751

 

Proceeds from/(payments to) Federal Home Loan Bank advances and other secured financing

 

 

(4,000

)

 

 

10,250

 

Extinguishment of subordinated debt

 

 

(1,300

)

 

 

(914

)

Repurchase of common stock

 

 

-

 

 

 

(12,141

)

Net cash provided by financing activities

 

 

980,950

 

 

 

187,493

 

 

 

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

 

106,245

 

 

 

30,745

 

Cash and cash equivalents at beginning of period

 

 

239,725

 

 

 

47,963

 

Cash and cash equivalents at end of period

 

$

345,970

 

 

$

78,708

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

8,121

 

 

$

15,708

 

Cash paid for income taxes, net of refunds

 

$

4,692

 

 

$

20,673

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Units, net of forfeitures

 

$

67,383

 

 

$

53,447

 

Payment of Ryan Beck contingent earn-out

 

$

9,307

 

 

$

-

 

See accompanying Notes to Condensed Consolidated Financial Statements.

7


 

STIFEL FINANCIAL CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share amounts)

(Unaudited) 

NOTE 1 - Nature of Operation and Basis of Presentation

Nature of Operations

Stifel Financial Corp. (the "Parent"), through its wholly-owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus"), Century Securities Associates, Inc. ("CSA"), Stifel Nicolaus Limited ("SN Ltd"), and Stifel Bank & Trust ("Stifel Bank"), is principally engaged in retail brokerage, securities trading, investment banking, investment advisory, retail, consumer and commercial banking and related financial services throughout the United States. Although we have offices throughout the United States and three European cities, our major geographic area of concentration is in 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.

Basis of Presentation

The condensed consolidated financial statements include the accounts of Stifel Financial Corp. and its wholly-owned subsidiaries, principally Stifel Nicolaus & Company, Incorporated. Intercompany balances and transactions have been eliminated. Unless otherwise indicated, the terms "we," "us" "our" or "our company" in this report refer to Stifel Financial Corp. and its wholly-owned subsidiaries.

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. In management's opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise noted) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2008 on file with the SEC.

Certain amounts from prior periods have been reclassified to conform to the current period's presentation. The effect of these reclassifications on our company's previously reported consolidated financial statements was not material.

Derivative Instruments and Hedging Activities

Stifel Bank recognizes all of its derivative instruments as either assets or liabilities in the condensed consolidated statements of financial condition at fair value. These instruments are recorded in other assets or accounts payable and accrued expenses in the condensed consolidated statements of financial condition and in the operating section of the condensed consolidated statement of cash flows as increases or decreases of other assets and accounts payable and accrued expenses. Our company's policy is not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under master netting arrangements. The accounting for changes in the fair value (i.e., gains and losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments under ASC 815, "Derivatives and Hedging," we must designate the hedging instrument, based upon the exposure being hedged.

For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income/(loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. See Note 11 for additional detail.

8


Other than those described above, there have been no material changes in our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2008.

Financial Accounting Standards Board ("FASB") Accounting Standards Codification

In June 2009, the FASB issued Accounting Standards Codification (the "Codification" or "ASC"), which will serve as the single source of authoritative non-governmental generally accepted accounting principles, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and related accounting literature. This guidance is effective for interim and annual reporting periods ending after September 15, 2009 (September 30, 2009 for our company) and has impacted our financial statement disclosures since all future references to authoritative accounting literature will be referenced in accordance with the Codification.

Recently Adopted Accounting Guidance

With the exception of those discussed in the notes to the condensed consolidated financial statements, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2009, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2008, that are of significance, or potential significance, to our company's consolidated financial statements.

NOTE 2 - Acquisitions

UBS Wealth Management Americas Branch Network

On March 23, 2009, we announced that Stifel Nicolaus had entered into a definitive agreement with UBS Financial Services Inc. ("UBS") to acquire certain specified branches from the UBS Wealth Management Americas branch network. As subsequently amended, we agreed to acquire 56 branches (the "Acquired Locations") from UBS in four separate closings pursuant to this agreement. We completed three of the closings on the following dates during the third quarter: August 14, 2009, September 11, 2009, and September 25, 2009. The final closing was completed on October 16, 2009. This acquisition further expands our private client footprint. Pro forma information is not presented because the acquisition is not considered to be material. The results of operations of the Acquired Locations have been included in our results prospectively from the respective acquisition dates.

The transaction was structured as an asset purchase for cash at a premium over certain balance sheet items, subject to adjustment. The payments to UBS in conjunction with all four closings of $248,487 were funded by available liquidity and included: (i) an upfront cash payment of $29,046 based on the actual number of branches and financial advisors acquired by Stifel Nicolaus; and (ii) aggregate payment of $15,037 for net fixed assets, employee forgivable loans and other assets, and (iii) Reg U and Reg T loans of $204,404 that were collateralized by securities included in customer accounts converted to the Stifel platform. In addition, a contingent earn-out payment is payable based on the performance of those UBS financial advisors who joined Stifel Nicolaus, over the two-year period following the closing.

As a result of all four closings, we converted approximately $16.0 billion in customer assets, which included $1.8 billion in money market accounts and FDIC-insured balances to the Stifel Nicolaus platform.

This acquisition is being accounted for under the acquisition method of accounting in accordance with ASC 280, "Business Combinations." Accordingly, the purchase price was allocated to the acquired assets and liabilities based on their estimated fair values as of the respective acquisition dates. The preliminary allocation resulted in an excess of the fair value of the acquired net assets over the purchase price, as a result, we have allocated $28,541 to goodwill. The goodwill recognized represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of the hired financial advisors and the conversion of the customer accounts to the Stifel platform. The allocation of the purchase price is preliminary and will be finalized upon completion of the analysis of the fair values of the contingent earn-out liability, net assets of the Acquired Locations and any potential intangible assets.

9


Butler Wick & Company, Inc.

On December 31, 2008, we closed on the acquisition of Butler Wick & Company, Inc. ("Butler Wick"), a privately-held broker-dealer that provides financial advice to individuals, municipalities, and corporate clients. We acquired 100% of the voting interests of Butler Wick from United Community Financial Corp. This acquisition extends our company's geographic reach in the Ohio Valley region. The purchase price of $12,000 was funded from cash generated from operations. Under the purchase method of accounting, the assets and liabilities of Butler Wick are recorded as of the acquisition date, at their respective fair values and consolidated in our company's financial statements. Revisions to the allocation will be reported as changes to various assets and liabilities, including goodwill and other intangible assets. Pro forma information is not presented because the acquisition is not considered to be material. Butler Wick's results of operations have been included in our results prospectively from January 1, 2009.

Ryan Beck & Company, Inc. Earn-Out

On February 28, 2007, we completed the acquisition of Ryan Beck & Company, Inc. ("Ryan Beck"), a full-service brokerage and investment banking firm and wholly-owned subsidiary of BankAtlantic Bancorp, Inc. Pursuant to the stock purchase agreement, an additional earn-out payment was payable based on the achievement of defined revenues over the two year period following the closing. We paid the final earn-out payment of $9,307 related to the two-year private client contingent earn-out in 271,353 shares of our company's common stock at an average price of $34.30 per share in the first quarter of 2009, with partial shares paid in cash.

NOTE 3 - Receivables from and Payables to Brokers, Dealers and Clearing Organizations

Amounts receivable from brokers, dealers and clearing organizations at September 30, 2009 and December 31, 2008, included (in thousands):

 

 

September 30,
 2009

 

December 31,
 2008

 

Deposits paid for securities borrowed

 

$

123,629

 

$

49,784

 

Securities failed to deliver

 

 

83,750

 

 

3,837

 

Receivable from clearing organization

 

 

72,667

 

 

57,954

 

 

 

$ 

280,046

 

$

111,575

 

Amounts payable to brokers, dealers and clearing organizations at September 30, 2009, and December 31, 2008, included (in thousands):

 

 

September 30,
 2009

 

December 31,
 2008

 

Securities failed to receive

 

$

85,484

 

$

8,811

 

Deposits received from securities loaned

 

 

47,837

 

 

16,987

 

Payable to clearing organizations

 

 

-

 

 

3,893

 

 

 

$ 

133,321

 

$

29,691

 

Deposits paid for securities borrowed approximate the market value of the securities. Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received on settlement date.

NOTE 4 - Fair Value 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 and trading securities sold, but not yet purchased.

10


The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. 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 and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.

The following is a description of the valuation techniques used to measure fair value.

Cash equivalents

Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value and classified as Level I.

Financial instruments (Trading securities and available-for-sale securities)

When available, the fair value of financial instruments are based on quoted prices in active markets and reported in Level I. Level I financial instruments include highly liquid instruments with quoted prices such as certain U.S. treasury bonds, corporate bonds, certain municipal securities and equities listed in active markets.

If quoted prices are not available, fair values are obtained from pricing services, broker quotes, or other model-based valuation techniques with observable inputs such as the present value of estimated cash flows and reported as Level II. The nature of these financial instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Level II financial instruments generally include certain U.S. government agency securities, certain corporate bonds, certain municipal securities, asset-backed securities, and mortgage-backed securities.

Level III 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 have identified Level III financial instruments to include certain asset-backed securities, consisting of collateral loan obligation securities, that have experienced low volumes of executed transactions; and certain corporate bonds where there was less frequent or nominal market activity or when we were able to obtain only a single broker quote. Our Level III asset-backed securities are valued using cash flow models that utilize unobservable inputs. Level III corporate bonds are valued using prices from comparable securities.

Investments

Investments in public companies are valued based on quoted prices in active markets and reported in Level I. Investments in certain equity securities with unobservable inputs and auction-rate securities for which the market has been dislocated and largely ceased to function are reported as Level III assets. Investments in certain 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.

Derivatives

Derivatives are valued using quoted market prices when available or pricing models based on the net present value of estimated future cash flows. The valuation models used require market observable inputs including contractual terms, market prices, yield curves, credit curves and measures of volatility. These measurements are classified as Level II within the fair value hierarchy and are used to value interest rate swaps.

11


The following table summarizes the valuation of our financial instruments by pricing observability levels as of September 30, 2009 (in thousands):

 

 

September 30, 2009

 

 

 

Total

 

Level I

 

Level II

 

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

142,813

 

142,813

 

$

-

 

-

 

Trading securities owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

 

97,280

 

 

-

 

 

97,280

 

 

-

 

U.S. government securities

 

 

8,648

 

 

8,648

 

 

-

 

 

-

 

Corporate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

16,731

 

 

16,731

 

 

-

 

 

-

 

Fixed income securities

 

 

267,235

 

 

125,717

 

 

140,751

 

 

767

 

State and municipal securities

 

 

59,514

 

 

-

 

 

59,514

 

 

-

 

Total trading securities owned

 

 

449,408

 

 

151,096

 

 

297,545

 

 

767

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

 

1,021

 

 

-

 

 

1,021

 

 

-

 

State and municipal securities

 

 

996

 

 

-

 

 

996

 

 

-

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

173,205

 

 

-

 

 

173,205

 

 

-

 

Non-agency

 

 

26,330

 

 

-

 

 

26,330

 

 

-

 

Commercial

 

 

38,419

 

 

-

 

 

33,232

 

 

5,187

 

Corporate fixed income securities

 

 

42,444

 

 

32,160

 

 

10,284

 

 

-

 

Asset-backed securities

 

 

18,208

 

 

-

 

 

11,695

 

 

6,513

 

Total available-for-sale securities

 

 

300,623

 

 

32,160

 

 

256,763

 

 

11,700

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate equity securities

 

 

2,953

 

 

2,953

 

 

-

 

 

-

 

Mutual funds

 

 

26,648

 

 

26,648

 

 

-

 

 

-

 

U.S. government securities

 

 

5,766

 

 

5,766

 

 

-

 

 

-

 

Auction rate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

45,843

 

 

-

 

 

-

 

 

45,843

 

Municipal securities

 

 

9,943

 

 

-

 

 

-

 

 

9,943

 

Other

 

 

6,204

 

 

674

 

 

437

 

 

5,093

 

Total investments

 

 

97,357

 

 

36,041

 

 

437

 

 

60,879

 

 

 

$

990,201

 

362,110

 

$

554,745

 

 $

73,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities sold, but not yet purchased:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

$

1,248

 

$

-

 

$

1,248

 

$

-

 

U.S. government securities

 

 

101,531

 

 

101,531

 

 

-

 

 

-

 

Corporate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

23,188

 

 

23,188

 

 

-

 

 

-

 

Fixed income securities

 

 

151,927

 

 

69,319

 

 

82,608

 

 

-

 

State and municipal securities

 

 

735

 

 

-

 

 

735

 

 

-

 

Total trading securities sold, but not yet purchased

 

 

278,629

 

 

194,038

 

 

84,591

 

 

-

 

Derivative contracts

 

 

525

 

 

-

 

 

525

 

 

-

 

 

 

$

279,154

 

$

194,038

 

$

85,116

 

$

-

 

12


The following table summarizes the valuation of our financial instruments by pricing observability levels as of December 31, 2008 (in thousands):

 

 

December 31, 2008

 

 

 

Total

 

Level I

 

Level II

 

Level III

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

172,589

 

172,589

 

$

-

 

-

 

Trading securities owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

 

26,525

 

 

-

 

 

26,525

 

 

-

 

U.S. government securities

 

 

13,876

 

 

13,876

 

 

-

 

 

-

 

Corporate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

14,094

 

 

14,094

 

 

-

 

 

-

 

Fixed income securities

 

 

43,131

 

 

11,820

 

 

27,150

 

 

4,161

 

State and municipal securities

 

 

24,950

 

 

4,397

 

 

20,553

 

 

-

 

Total trading securities owned

 

 

122,576

 

 

44,187

 

 

74,228

 

 

4,161

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

 

8,591

 

 

-

 

 

8,591

 

 

-

 

State and municipal securities

 

 

1,531

 

 

-

 

 

1,531

 

 

-

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

12,430

 

 

-

 

 

12,430

 

 

-

 

Non-agency

 

 

17,422

 

 

-

 

 

17,422

 

 

-

 

Asset-backed securities

 

 

10,423

 

 

-

 

 

-

 

 

10,423

 

Total available-for-sale securities

 

 

50,397

 

 

-

 

 

39,974

 

 

10,423

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate equity securities

 

 

2,668

 

 

2,668

 

 

-

 

 

-

 

Mutual funds

 

 

23,082

 

 

23,082

 

 

-

 

 

-

 

U.S. government securities

 

 

7,132

 

 

9

 

 

7,123

 

 

-

 

Auction rate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

11,470

 

 

-

 

 

-

 

 

11,470

 

Municipal securities

 

 

7,039

 

 

-

 

 

-

 

 

7,039

 

Other

 

 

5,678

 

 

90

 

 

419

 

 

5,169

 

Total investments

 

 

57,069

 

 

25,849

 

 

7,542

 

 

23,678

 

 

 

$

402,631

 

242,625

 

$

121,744

 

 $

38,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities sold, but not yet purchased:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

33,279

 

$

33,279

 

$

-

 

$

-

 

Corporate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

3,489

 

 

3,489

 

 

-

 

 

-

 

Fixed income securities

 

 

62,012

 

 

24,081

 

 

37,931

 

 

-

 

State and municipal securities

 

 

154

 

 

-

 

 

154

 

 

-

 

 

 

$

98,934

 

$

60,849

 

$

38,085

 

$

-

 

Our company's investment in a U.S. government security used to fund our venture capital activities in qualified Missouri businesses is classified as held-to-maturity and is not subject to fair value accounting and therefore is not included in the above analysis of fair value at September 30, 2009 and December 31, 2008. This investment is included in "Investments" in the condensed consolidated statements of financial condition at September 30, 2009.

13


The following table summarizes the changes in fair value carrying values associated with Level III financial instruments during the nine months ended September 30, 2009 (in thousands):

 

Balance at December 31, 2008

 

 Purchases/ (sales), net

 

Net transfers in/(out)

 

Realized gains/ (losses)

 

Unrealized gains/(losses)

 

Balance at September 30,
2009

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities owned: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate fixed income securities

4,161

 

(2,454

)

-

 

352

 

 $

(1,292

)

767

 

Available-for-sale securities: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

-

 

 

5,187

 

 

-

 

 

-

 

 

-

 

 

5,187

 

Asset-backed securities

 

10,423

 

 

(3,326

)

 

-

 

 

-

 

 

(584

)

 

6,513

 

Total available-for-sale securities

 

10,423

 

 

1,861

 

 

-

 

 

-

 

 

(584

)

 

11,700

 

Investments: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

11,470

 

 

37,515

 

 

-

 

 

-

 

 

(3,142

)

 

45,843

 

Municipal securities

 

7,039

 

 

3,050

 

 

-

 

 

-

 

 

(146

)

 

9,943

 

Other

 

5,169

 

 

321

 

 

(503

)

 

-

 

 

106

 

 

5,093

 

Total investments

 

23,678

 

 

40,886

 

 

(503

)

 

-

 

 

(3,182

)

 

60,879

 

 

$

38,262

 

$

40,293

 

$

(503

)

352

 

$

(5,058

)

$

73,346

 

(1)    Realized and unrealized gains/(losses) related to trading securities and investments are reported in other income on the consolidated statements of operations.

(2)    Unrealized gains/(losses) related to available-for-sale securities are reported in other comprehensive income.

The results included in the table above are only a component of the overall trading strategies of our company. The table above does not present Level I or Level II valued assets or liabilities. We did not have any Level III liabilities at September 30, 2009 or December 31, 2008. The changes to our company's Level III classified instruments were principally a result of: purchases of auction rate securities ("ARS") from our customers, principal pay-downs of our available-for-sale securities, unrealized gains and losses, and redemptions of ARS at par during the first nine months of 2009. There were no changes in unrealized gains/(losses) recorded in earnings for the nine months ended September 30, 2009 relating to Level III assets still held at September 30, 2009. Investment gains and losses of our investments are included in our condensed consolidated statements of operations as a component of other income.

The following is a summary of the carrying values and estimated fair values of certain financial instruments as of September 30, 2009 (in thousands):

 

 

September 30, 2009

 

 

 

Carrying
Value

 

Estimated
fair value

 

Financial assets:

 

 

 

 

 

 

 

Held-to-maturity securities

 

$

7,574

 

$

4,760

 

Bank loans (including loans held for sale), net of allowance

 

 

360,456

 

 

328,911

 

Financial liabilities:

 

 

 

 

 

 

 

Time deposits

 

 

19,118

 

 

19,574

 

Debentures to Stifel Financial Capital Trusts

 

 

82,500

 

 

39,436

 

This summary excludes financial assets and liabilities for which carrying value approximates fair value. For financial assets, these include cash and cash equivalents, cash segregated under federal and other regulations, our investment in a U.S. government security used to fund our venture capital activities in qualified Missouri business which is classified as held-to-maturity and included in "Investments," convertible notes and bank foreclosed assets held for sale. For financial liabilities, these include demand,

14


savings, and money market deposits, Federal Home Loan Bank advances and other secured financing, federal funds purchased, and security repurchase agreements. The estimated fair value of demand, savings, and money market deposits is the amount payable on demand at the reporting date. Carrying value approximates fair value because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately. Also excluded from the summary are financial instruments recorded at fair value on a recurring basis, as previously described.

The fair value of loans is estimated by discounting future cash flows on 'pass' grade loans using the LIBOR yield curve adjusted by a factor that reflects the credit and interest rate risk inherent in the loan. These future cash flows are then reduced by the estimated 'life-of-the-loan' aggregate credit losses in the loan portfolio. These adjustments for lifetime future credit losses are highly judgmental because we do not have a validated model to estimate lifetime losses on large portions of our loan portfolio. Loans accounted for under ASC 310,  "Receivables" are not included in this credit adjustment as they are already considered to be held at fair value. Loans, other than those held for sale, are not normally purchased and sold by our company, and there are no active trading markets for most of this portfolio. The fair value of time deposits is estimated by discounting future cash flows using the LIBOR yield curve.

These fair value disclosures represent our best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected losses, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.

NOTE 5 - Trading Securities Owned and Trading Securities Sold, But Not Yet Purchased

The components of trading securities owned and trading securities sold, but not yet purchased at September 30, 2009 and December 31, 2008, are as follows (in thousands):

 

 

September 30,
2009

 

December 31, 2008

 

Trading securities owned:

 

 

 

 

 

 

 

U.S. government agency securities

 

$

97,280

 

$

26,525

 

U.S. government securities

 

 

8,648

 

 

13,876

 

Corporate securities:

 

 

 

 

 

 

 

Equity securities

 

 

16,731

 

 

14,094

 

Fixed income securities

 

 

267,235

 

 

43,131

 

State and municipal securities

 

 

59,514

 

 

24,950

 

 

 

$

449,408

 

$

122,576

 

Trading securities sold, but not yet purchased:

 

 

 

 

 

 

 

U.S. government agency securities

 

$

1,248

 

$

-

 

U.S. government securities

 

 

101,531

 

 

33,279

 

Corporate securities:

 

 

 

 

 

 

 

Equity securities

 

 

23,188

 

 

3,489

 

Fixed income securities

 

 

151,927

 

 

62,012

 

State and municipal securities

 

 

735

 

 

154

 

 

 

$

278,629

 

$

98,934

 

At September 30, 2009 and December 31, 2008, trading securities owned in the amount of $217,867 and $0, respectively, were pledged as collateral for our Repurchase Agreements and short-term borrowings from banks.

Trading securities sold, but not yet purchased represent obligations of our company to deliver the specified security at the contracted price, thereby creating a liability to purchase the security in the market at prevailing prices. We are obligated to acquire the securities sold short at prevailing market prices, which may exceed the amount reflected on the consolidated statements of financial condition.

15


NOTE 6 - Available-for-Sale Securities and Held-to-Maturity Securities

The following tables provide a summary of the amortized cost and fair values of the available-for-sale securities and held-to-maturity securities at September 30, 2009 and December 31, 2008 (in thousands):

 

 

September 30, 2009

 

 

 

Amortized
cost

 

Gross unrealized
gains (1)

 

Gross unrealized losses (1)

 

Estimated
fair value

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

997

 

$

24

 

$

-

 

$

1,021

 

State and municipal securities

 

 

960

 

 

36

 

 

-

 

 

996

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

171,390

 

 

2,027

 

 

(212

)

 

173,205

 

Non-agency

 

 

28,382

 

 

188

 

 

(2,240

)

 

26,330

 

Commercial

 

 

37,990

 

 

667

 

 

(238

)

 

38,419

 

Corporate fixed income securities

 

 

40,728

 

 

1,716

 

 

-

 

 

42,444

 

Asset-backed securities

 

 

16,679

 

 

1,567

 

 

(38

)

 

18,208

 

 

 

$

297,126

 

$

6,225

 

$

(2,728

)

$

300,623

 

(1)     Unrealized gains/(losses) related to available-for-sale securities are reported in other comprehensive income.

 

 

December 31, 2008

 

 

 

Amortized
cost

 

Gross unrealized
gains (1)

 

Gross unrealized losses (1)

 

Estimated
fair value

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

8,447

 

$

144

 

$

-

 

$

8,591

 

State and municipal securities

 

 

1,513

 

 

19

 

 

(1

)

 

1,531

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

12,821

 

 

-

 

 

(391

)

 

12,430

 

Non-agency

 

 

23,091

 

 

-

 

 

(5,669

)

 

17,422

 

Asset-backed securities

 

 

11,400

 

 

-

 

 

(977

)

 

10,423

 

 

 

$

57,272

 

$

163

 

$

(7,038

)

$

50,397

 

(1)     Unrealized gains/(losses) related to available-for-sale securities are reported in other comprehensive income.

 

 

September 30,
2009

 

December 31, 2008

 

Held-to-maturity:

 

 

 

 

 

 

 

Amortized cost

 

$

10,069

 

$

10,069

 

Gross unrealized gains (1)

 

 

-

 

 

-

 

Gross unrealized losses (1)

 

 

(2,495

)

 

(2,495

)

Carrying value

 

 

7,574 

 

 

7,574

 

Gross unrealized gains (2)

 

$

-

 

$

-

 

Gross unrealized losses (2)

 

 

(2,814

)

 

(1,324

)

Estimated fair value 

 

$

4,760

 

$

6,250

 

(1) Unrealized gains/(losses) recognized in other comprehensive income.

(2) Unrealized gains/(losses) not recognized in other comprehensive income.

16


During the three and nine months ended September 30, 2009, available-for-sale securities with an aggregate par value of $1,000 and $8,050, respectively, were called by the issuing agencies or matured resulting in no gains or losses recorded through the condensed consolidated statement of operations. Additionally, during the three and nine months ended September 30, 2009, Stifel Bank received principal payments on asset-backed and mortgage-backed securities of $10,877 and $16,476, respectively. During the three months ended September 30, 2009, unrealized gains, net of deferred taxes, of $5,859 were recorded in accumulated other comprehensive income. During the three months ended September 30, 2008, unrealized losses, net of deferred tax benefits, of $1,387 were recorded in accumulated other comprehensive income. During the nine months ended September 30, 2009, unrealized gains, net of deferred taxes, of $7,859 were recorded in accumulated other comprehensive income. During the nine months ended September 30, 2008, unrealized losses, net of deferred tax benefits, of $3,312 were recorded in accumulated other comprehensive income.

On June 30, 2008, we transferred a $10,000 par value asset backed security, consisting of investment-grade trust preferred securities related primarily to banks, with an amortized cost basis of $10,069 from our available-for-sale securities portfolio to our held-to-maturity portfolio. This security was transferred at the estimated fair value of $7,574. The gross unrealized loss of $2,495 included in accumulated other comprehensive income is being amortized as an adjustment of yield over the remaining life of the security. The estimated fair value of the held-to-maturity security at September 30, 2009 was $4,760. The estimated fair value was determined using several factors; however, primary weight was given to discounted cash flow modeling techniques that incorporated an estimated discount rate based upon recent observable debt security issuances with similar characteristics. Based upon the results of this analysis and our intent and ability to hold this investment to maturity, we do not consider this security to be other-than-temporarily impaired as of September 30, 2009.

The table below summarizes the amortized cost and fair values of debt securities, by contractual maturity (in thousands). Expected maturities may differ significantly from contractual maturities, as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

September 30, 2009

 

 

 

Available-for-sale

 

Held-to-maturity

 

 

 

Amortized
cost

 

Estimated
fair value

 

Amortized
cost

 

Estimated
fair value

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Within one year

 

$

6,160

 

$

6,180

 

$

-

 

$

-

 

After one year through three years

 

 

33,409

 

 

34,627

 

 

-

 

 

-

 

After three years through five years

 

 

9,880

 

 

11,304

 

 

-

 

 

-

 

After five years through ten years

 

 

9,915

 

 

10,558

 

 

-

 

 

-

 

After ten years

 

 

-

 

 

-

 

 

7,574

 

 

4,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

After five years through ten years

 

 

26,102

 

 

25,748

 

 

-

 

 

-

 

After ten years

 

 

211,660

 

 

212,206

 

 

-

 

 

-

 

 

 

$

297,126

 

$

300,623

 

$

7,574

 

$

4,760

 

The carrying value of securities pledged as collateral to secure public deposits and other purposes was $82,226 and $39,570 at September 30, 2009 and December 31, 2008, respectively.

Certain investments in the available-for-sale portfolio at September 30, 2009 are reported in the condensed consolidated statements of financial condition at an amount less than their amortized cost. The total fair value of these investments at September 30, 2009 was $42,965, which was 14.3% of our company's available-for-sale investment portfolio. The amortized cost basis of these investments was $45,693 at September 30, 2009. The declines in the available-for-sale portfolio primarily resulted from changes in interest rates, the widening of credit spreads and liquidity issues that have had a pervasive impact on the market.

Our investment in a held-to-maturity asset-backed security consists of pools of trust preferred securities related to banks. Unrealized losses were caused primarily by: 1) widening of credit spreads; 2) illiquid markets for collateralized debt obligations; 3) global disruptions in the credit markets; 4) increased supply of collateralized debt obligation secondary market securities from distressed sellers; and 5) difficult times in the banking sector, which has lead to a significant amount of bank failures. There have been no adverse changes to the estimated cash flows of these securities.

17


The following table is a summary of the amount of gross unrealized losses and the estimated fair value by length of time that the securities have been in an unrealized loss position at September 30, 2009 (in thousands):

 

 

September 30, 2009

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Gross unrealized losses

 

Estimated fair value

 

Gross unrealized losses

 

Estimated fair value

 

Gross unrealized losses

 

Estimated fair value

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

$

-

 

$

-

 

$

(212

)

$

10,925

 

$

(212

)

$

10,925

 

Non-agency

 

 

(332

)

 

10,684

 

 

(1,908

)

 

9,783

 

 

(2,240

)

 

20,467

 

Commercial

 

 

-

 

 

-

 

 

(238

)

 

9,733

 

 

(238

)

 

9,733

 

Asset-backed securities

 

 

-

 

 

-

 

 

(38

)

 

1,840

 

 

(38

)

 

1,840

 

 

 

$

(332

)

$

10,684

 

$

(2,396

)

$

32,281

 

$

(2,728

)

$

42,965

 

Our company's available-for-sale securities and held-to-maturity security are reviewed quarterly in accordance with its accounting policy for other-than-temporary impairment. Since the decline in fair value of the securities presented in the table above is not attributable to credit quality but to changes in interest rates, the widening of credit spreads, and the liquidity issues that have had a pervasive impact on the market and because we have the ability and intent to hold these investments until a fair value recovery or maturity, we do not consider these securities to be other-than-temporarily impaired as of September 30, 2009.

NOTE 7 - Bank Loans

The following table presents the balance and associated percentage of each major loan category in Stifel Bank's loan portfolio at September 30, 2009 and December 31, 2008 (in thousands, except percentages):

 

 

September 30, 2009

 

 

December 31, 2008

 

 

 

Balance

 

Percent

 

 

Balance

 

Percent

 

Consumer (1)

 

$

186,861

 

 

56.3

%

 

$

19,662

 

 

10.5

%

Residential real estate

 

 

53,395

 

 

16.1

 

 

 

58,778

 

 

31.4

 

Commercial real estate

 

 

37,603

 

 

11.3

 

 

 

38,446

 

 

20.6

 

Home equity lines of credit

 

 

33,279

 

 

10.0

 

 

 

28,612

 

 

15.3

 

Commercial

 

 

19,409

 

 

5.8

 

 

 

27,538

 

 

14.7

 

Construction and land

 

 

1,541

 

 

0.5

 

 

 

13,968

 

 

7.5

 

 

 

 

332,088

 

 

100.0

%

 

 

187,004

 

 

100.0

%

Unamortized loan origination costs, net of loan fees

 

 

756

 

 

 

 

 

 

591

 

 

 

 

Loans in process

 

 

(847

)

 

 

 

 

 

(3,878

)

 

 

 

Allowance for loan losses

 

 

(2,488

)

 

 

 

 

 

(2,448

)

 

 

 

 

 

$

329,509

 

 

 

 

 

$

181,269

 

 

 

 

(1)       Includes stock-secured loans of $185,605 and $18,861 at September 30, 2009 and December 31, 2008, respectively.

18


Changes in the allowance for loan losses at Stifel Bank were as follows (in thousands):

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,
2009

 

September 30,
2008

 

September 30,
2009

 

September 30, 2008

 

Allowance for loan losses, beginning of period

 

$

3,060

 

2,009

 

$

2,448

 

$

1,685

 

Provision for loan losses

 

 

482

 

 

552

 

 

1,389

 

 

1,622

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land

 

 

(829)

 

 

-

 

 

(859)

 

 

(493)

 

Commercial real estate

 

 

(188)

 

 

-

 

 

(294)

 

 

(253)

 

Real estate construction loans

 

 

(37)

 

 

(60)

 

 

(171)

 

 

(60)

 

Other

 

 

-

 

 

-

 

 

(25)

 

 

-

 

Total charge-offs

 

 

(1,054)

 

 

(60)

 

 

(1,349)

 

 

(806)

 

Recoveries

 

 

-

 

 

-

 

 

-

 

 

-

 

Allowance for loan losses, end of period

 

$

2,488

 

$

2,501

 

$

2,488

 

$

2,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs to average bank loans outstanding, net

 

 

0.42

%

 

0.03

%

 

0.58

%

 

0.47

%

At September 30, 2009, Stifel Bank had $30,947 in mortgage loans held for sale. For the three months ended September 30, 2009 and 2008, Stifel Bank recognized a gain of $809 and $502, respectively, from the sale of loans originated for sale, net of fees and costs to originate these loans. For the nine months ended September 30, 2009 and 2008, Stifel Bank recognized a gain of $3,044 and $1,558, respectively, from the sale of loans originated for sale, net of fees and costs to originate these loans.

A loan is impaired when it is probable that interest and principal payments will not be made in accordance with the contractual terms of the loan agreement. At September 30, 2009, Stifel Bank had $1,907 of non-accrual loans that were more than 90 days past due, for which there was a specific allowance of $107. Further, Stifel Bank had $464 in troubled debt restructurings at September 30, 2009.  At December 31, 2008, Stifel Bank had $573 in non-accrual loans, for which there was a specific reserve of $189. In addition, there were no accrual loans delinquent 90 days or more or troubled debt restructurings at December 31, 2008. Stifel Bank has no exposure to sub-prime mortgages. The gross interest income related to impaired loans, which would have been recorded had these loans been current in accordance with their original terms, and the interest income recognized on these loans during the year, were immaterial to the condensed consolidated financial statements.

At September 30, 2009 and December 31, 2008, Stifel Bank had loans outstanding to its executive officers, directors and significant stockholders and their affiliates in the amount of $0 and $1,578, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors and significant stockholders and their affiliates in the amount of $42 and $48, respectively. Such loans and other extensions of credit were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral requirements) as those prevailing at the time for comparable transactions with other persons.

NOTE 8 - Goodwill and Intangible Assets

During the third quarter of 2009, we acquired 40 branches from the UBS Wealth Management Americas branch network, which created $26,512 of goodwill. The allocation of the purchase price is still preliminary and will be finalized upon completion of the analysis of the fair values of the UBS branches' assets and liabilities. The goodwill associated with the acquisition of these branches is reported in our Global Wealth Management segment at September 30, 2009. See Note 2 for additional information regarding our acquisition of the UBS branches.

Goodwill impairment is tested at the reporting unit level, which is an operating segment or one level below an operating segment on an annual basis. Our reporting units are Private Client Group, Fixed Income Capital Markets, Equity Capital Markets, and Stifel Bank. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit's fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment. No indicators of impairment were identified during our annual impairment testing as of July 31, 2009.

19


The carrying amount of goodwill and intangible assets attributable to each of our reporting units is presented in the following table (in thousands):

 

 

December 31, 2008

 

Net additions

 

Impairment losses

 

September 30, 2009

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Wealth Management

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Client Group

 

$

58,373

 

$

29,828

 

$

-

 

$

88,201

 

Stifel Bank

 

 

16,685

 

 

-

 

 

-

 

 

16,685

 

 

 

$

75,058

 

$

29,828

 

$

-

 

$

104,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Markets

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Capital Markets

 

$

41,868

 

$

868

 

$

-

 

$

42,736

 

Fixed Income Capital Markets

 

 

11,352

 

 

217

 

 

-

 

 

11,569

 

 

 

 

53,220

 

 

1,085

 

 

-

 

 

54,305

 

 

 

$

128,278

 

$

30,913

 

$

-

 

$

159,191

 

 

  

 

December 31, 2008

 

Net additions

 

Amortization

 

September 30, 2009

 

Intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Wealth Management

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Client Group

 

$

10,888

 

$

1,676

 

$

(1,472

)

$

11,092

 

Stifel Bank

 

 

1,354

 

 

-

 

 

(245

)

 

1,109

 

 

 

$

12,242

 

$

1,676

 

$

(1,717

)

$

12,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Markets

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Capital Markets

 

$

2,657

 

$

-

 

$

(247

)

$

2,410

 

Fixed Income Capital Markets

 

 

1,085

 

 

-

 

 

(96

)

 

989

 

 

 

 

3,742

 

 

-

 

 

(343

)

 

3,399

 

 

 

$

15,984

 

$

1,676

 

$

(2,060

)

$

15,600

 

In addition to the goodwill recorded from our acquisition of the UBS branches during the third quarter of 2009, the changes in goodwill during the nine months ended September 30, 2009 primarily consist of payments for the contingent earn-out of $4,338 for the Ryan Beck acquisition. The change in intangible assets during the nine months ended September 30, 2009 primarily consist of purchase price adjustments related to our acquisition of Butler Wick on December 31, 2008.

Amortizable intangible assets consist of acquired customer lists, non-compete agreements, and core deposits that are amortized to expense over their contractual or determined useful lives. Intangible assets subject to amortization as of September 30, 2009 and December 31, 2008 were as follows (in thousands):

 

 

September 30, 2009

 

December 31, 2008

 

 

 

Gross carrying value

 

Accumulated Amortization

 

Gross carrying value

 

Accumulated Amortization

 

Customer lists

 

$

21,004

 

$

6,985

 

$

19,533

 

$

5,371

 

Non-compete agreement

 

 

2,789

 

 

2,317

 

 

2,584

 

 

2,115

 

Core deposits

 

 

2,157

 

 

1,048

 

 

2,157

 

 

804

 

 

 

$

25,950

 

$

10,350

 

$

24,274

 

$

8,290

 

Amortization expense related to intangible assets was $661 and $743 for the three months ended September 30, 2009 and 2008, respectively. Amortization expense related to intangible assets was $2,060 and $2,337 for the nine months ended September 30, 2009 and 2008, respectively.

20


The weighted-average remaining lives of the following intangible assets at September 30, 2009 are: customer lists 6.6 years; core deposits 5.5 years; and non-compete agreements 2.2 years. As of September 30, 2009, we expect amortization expense in future periods to be as follows (in thousands):

Fiscal year

 

 

 

 

Remainder of 2009

 

$

658

 

2010

 

 

2,317

 

2011

 

 

2,104

 

2012

 

 

1,743

 

2013

 

 

1,575

 

Thereafter

 

 

7,203

 

 

 

$

15,600

 

NOTE 9 - Short-Term Borrowings from Banks

Our short-term financing is generally obtained through the use of bank loans 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 the customer-owned securities used as collateral is not reflected in the condensed consolidated statements of financial condition. We maintain available ongoing credit arrangements with banks that provided a peak daily borrowing of $379,300 during the nine months ended September 30, 2009. There are no compensating balance requirements under these arrangements. At September 30, 2009, short-term borrowings from banks were $165,200 at an average rate of 1.02%, which were collateralized by company-owned securities valued at $216,631. At December 31, 2008, there were no short-term borrowings from banks. The average bank borrowing was $107,826 and $162,732 during the three months ended September 30, 2009 and 2008, respectively, at weighted average daily interest rates of 1.07%, and 2.41%, respectively. The average bank borrowing was $119,381 and $153,053 during the nine months ended September 30, 2009 and 2008, respectively, at weighted average daily interest rates of 0.97%, and 2.31%, respectively. At September 30, 2009 and December 31, 2008, Stifel Nicolaus had a stock loan balance of $47,837 and $16,987, respectively, at weighted average daily interest rates of 0.69% and 0.52%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $78,898 and $105,273 during the three months ended September 30, 2009 and 2008, respectively, at weighted average daily effective interest rates of 1.12%, and 2.05%, respectively. The average outstanding securities lending arrangements utilized in financing activities were $54,820 and $131,562 during the nine months ended September 30, 2009 and 2008, respectively, at weighted average daily effective interest rates of 1.01%, and 2.58%, respectively. Customer-owned securities were utilized in these arrangements.

NOTE 10 - Bank Deposits

Deposits consist of money market and savings accounts, certificates of deposit and demand deposits. Deposits at September 30, 2009 and December 31, 2008 were as follows (in thousands):

 

 

September 30,
2009

 

December 31, 2008

 

Money market and savings accounts

 

$

826,881

 

$

233,276

 

Certificates of deposit

 

 

19,118

 

 

24,102

 

Demand deposits (non-interest bearing)

 

 

15,647

 

 

23,162

 

Demand deposits (interest bearing)

 

 

13,382

 

 

4,258

 

 

 

$ 

875,028

 

$

284,798

 

The weighted average interest rate on deposits was 0.4% and 0.4% at September 30, 2009 and December 31, 2008, respectively.

21


Scheduled maturities of certificates of deposit at September 30, 2009 and December 31, 2008 were as follows (in thousands):

 

 

September 30,
2009

 

December 31, 2008

 

Certificates of deposit, less than $100:

 

 

 

 

 

 

 

Within one year

 

$

6,625

 

$

8,525

 

One to three years

 

 

1,956

 

 

 3,562

 

Over three years

 

 

2,119

 

 

1,349

 

 

 

 

10,700

 

 

13,436

 

 

 

 

 

 

 

 

 

Certificates of deposit, $100 and greater:

 

 

 

 

 

 

 

Within one year

 

$ 

5,713

 

$

7,455

 

One to three years

 

 

1,045

 

 

1,949

 

Over three years

 

 

1,660

 

 

1,262

 

 

 

 

8,418

 

 

10,666

 

 

 

 

 

 

 

 

 

 

 

$

19,118

 

$

24,102

 

At September 30, 2009 and December 31, 2008, the amount of deposits includes deposits of related parties, including $834,835 and $228,653, respectively, of brokerage customer's deposits from Stifel Nicolaus, and interest-bearing and time deposits of executive officers, directors and significant stockholders and their affiliates of $483 and $750, respectively. Such deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates) as those prevailing at the time for comparable transactions with other persons.

NOTE 11 - Derivative Instruments and Hedging Activities

We maintain a risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our goal is to manage sensitivity to changes in rates by hedging the maturity characteristics of Fed-funds based affiliated deposits, thereby limiting the impact on earnings. By using derivative instruments, we are exposed to credit and market risk on those derivative positions. We manage the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Credit risk is equal to the extent of the fair value gain in a derivative, if the counterparty fails to perform. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes our company and, therefore, creates a repayment risk for our company. When the fair value of a derivative contract is negative, we owe the counterparty and therefore, have no repayment risk. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by senior management.

Stifel Bank uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts. As a result of interest rate fluctuations, hedged liabilities will appreciate or depreciate in market value. To the extent that there is a high degree of correlation between the hedged liability and the derivative instrument, the income or loss generated will generally offset the effect of this unrealized appreciation or depreciation.

22


The following table provides the notional values and fair values of Stifel Bank's derivative instruments as of September 30, 2009 (in thousands):

 

As of September 30, 2009

 

 

 

 

 

Asset derivatives

 

Liability derivatives

 

 

Notional Value

 

Balance sheet location

 

Positive fair value

 

Balance sheet location

 

Negative fair value

 

Derivatives designated as hedging instruments under ASC 815:

 

 

 

 

 

 

 

 

 

 

 

Cash flow interest rate contracts

$

219,837

 

Other assets

$

-

 

*

$

(526

)

* Included in Accounts payable and accrued expenses.              

Cash Flow Hedges

Stifel Bank has entered into interest rate swap agreements that effectively modify its exposure to interest rate risk by converting floating rate debt to a fixed rate debt over the next ten years. The agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of underlying principal amounts.

Any unrealized gains or losses related to cash flow hedging instruments are reclassified from other comprehensive loss into earnings in the same period or periods during which the hedged forecasted transaction affects earnings and are recorded in interest income or interest expense. Adjustments related to the ineffective portion of the cash flow hedging instruments are recorded in other income or other expense. There was no ineffectiveness recognized during the three and nine months ended September 30, 2009.

At September 30, 2009, we expect to reclassify $2,981 of net gains, after tax, on derivative instruments from cumulative other comprehensive income/(loss) to earnings during the next 12 months as terminated swaps are amortized and as interest payments and receipts on derivative instruments occur.

The following table shows the effect of our company's derivative instruments on the condensed consolidated statement of operations for the three and nine months ended September 30, 2009 (in thousands):

 

Gain/(loss) recognized in OCI (effectiveness)

 

Location of gain/(loss) reclassified from OCI into income

 

Gain/(loss) reclassified from OCI into income

 

Location of gain/(loss) recognized in OCI (ineffectiveness)

 

Gain/(loss) recognized due to ineffectiveness

 

For the three months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

Cash flow interest rate contracts

$

(684

)

Interest expense

$

(158

)

None

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

Cash flow interest rate contracts

$

(684

)

Interest expense

$

(158

)

None

$

-

 

Regulatory Capital-Related Contingency Features

Certain of Stifel Bank's derivative instruments contain provisions that require it to maintain its capital adequacy requirements. If Stifel Bank were to lose its status as "adequately capitalized," it would be in violation of those provisions, and the counterparties of the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with regulatory capital-related contingent features that are in a liability position on September 30, 2009, is $526. We have minimum collateral posting thresholds with certain of our counterparties; however, at September 30, 2009, we were not required to post collateral against our obligations under these agreements.

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Counterparty Risk

In the event of counterparty default, our economic loss may be higher than the uncollateralized exposure of our derivatives if we were not able to replace the defaulted derivatives in a timely fashion. We monitor the risk that our uncollateralized exposure to each of our counterparties for interest-rate swaps will increase under certain adverse market conditions by performing periodic market stress tests. These tests evaluate the potential additional uncollateralized exposure we would have to each of these derivative counterparties assuming changes in the level of market rates over a brief time period.

NOTE 12 - Commitments and Contingencies

Concentration of Credit Risk

We provide investment, capital-raising and related services to a diverse group of domestic customers, including governments, corporations, and institutional and individual investors. Our company's exposure to credit risk associated with the non-performance of customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile securities markets, credit markets and regulatory changes. This exposure is measured on an individual customer basis and on a group basis for customers that share similar attributes. To alleviate the potential for risk concentrations, counterparty credit limits have been implemented for certain products and are continually monitored in light of changing customer and market conditions. As of September 30, 2009 and December 31, 2008, we did not have significant concentrations of credit risk with any one customer or counterparty, or any group of customers or counterparties.

Other Commitments

In the normal course of business, we enter into underwriting commitments. Settlement of transactions relating to such underwriting commitments, which were open at September 30, 2009, had no material effect on the condensed consolidated financial statements.

In connection with margin deposit requirements of The Options Clearing Corporation, we pledged customer-owned securities valued at $126,060 to satisfy the minimum margin deposit requirement of $106,674 at September 30, 2009.

In connection with margin deposit requirements of the National Securities Clearing Corporation, we deposited $28,600 in cash at September 30, 2009, which satisfied the minimum margin deposit requirements of $24,618.

We also provide guarantees to securities clearinghouses and exchanges under their standard membership agreement, which requires members to guarantee the performance of other members. Under the agreement, if another member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. Our company's liability under these agreements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for our company to make payments under these arrangements is considered remote. Accordingly, no liability has been recognized for these arrangements.

On June 23, 2009, we announced that Stifel Nicolaus had received acceptance from approximately 95 percent of its clients that are eligible to participate in its voluntary plan to repurchase 100 percent of their ARS. The eligible ARS were purchased by our retail clients before the collapse of the ARS market in February 2008. At September 30, 2009, we estimate that our retail clients held $114,795 of eligible ARS after issuer redemptions of $24,550 and Stifel repurchases of $40,575. The repurchased ARS are included in "Investments" in our consolidated statements of financial condition at September 30, 2009.

As part of the first phase of the voluntary repurchase plan, we repurchased at par the greater of ten percent or twenty-five thousand dollars of eligible ARS. After the initial repurchases, the voluntary plan provides for additional repurchases from eligible investors during each of the next three years. During phases two, three and four, we estimate that we will repurchase ARS of $21,150, $15,250 and $78,395, which will be completed by each June 30, of 2010, 2011 and 2012, respectively.

We have recorded a liability for our estimated exposure to the voluntary repurchase plan based upon a net present value calculation, which is subject to change and future events, including redemptions. ARS redemptions have been at par and we believe will continue to be at par over the voluntary repurchase period. Future periods' results may be affected by changes in estimated redemption rates or changes in the fair value of ARS.

In the ordinary course of business, Stifel Bank has commitments to extend credit in the form of commitments to originate loans, standby letters of credit, and lines of credit. See Note 16 for further details.

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Note 13 - Legal Proceedings

Our company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from our securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. Our company and its subsidiaries are also involved in other reviews, investigations and proceedings by governmental and self-regulatory organizations regarding our business which may result in adverse judgments, settlements, fines, penalties, injunctions and other relief.  We are contesting the allegations in these claims, and we believe that there are meritorious defenses in each of these lawsuits, arbitrations and regulatory investigations. In view of the number and diversity of claims against the company, the number of jurisdictions in which litigation is pending and the inherent difficulty of predicting the outcome of litigation and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be. In our opinion, based on currently available information, review with outside legal counsel, and consideration of amounts provided for in our consolidated financial statements with respect to these matters, the ultimate resolution of these matters will not have a material adverse impact on our financial position. However, resolution of one or more of these matters may have a material effect on the results of operations in any future period, depending upon the ultimate resolution of those matters and depending upon the level of income for such period.

The regulatory investigations include inquiries from the SEC, FINRA and several state regulatory authorities requesting information concerning our activities with respect to auction rate securities ("ARS"), and inquiries from the SEC and a state regulatory authority requesting information relating to our role in investments made by five Southeastern Wisconsin school districts (the "school districts") in transactions involving collateralized debt obligations ("CDOs"). We intend to cooperate fully with the SEC, FINRA and the several states in these investigations.

Current claims include a civil lawsuit filed in the United States District Court for the Eastern District of Missouri (the "Missouri Federal Court") on August 8, 2008 seeking class action status for investors who purchased and continue to hold ARS offered for sale between June 11, 2003 and February 13, 2008, the date when most auctions began to fail and the auction market froze, which alleges misrepresentation about the investment characteristics of ARS and the auction markets (the "ARS Class Action"). We believe that, based upon currently available information and review with outside counsel, we have meritorious defenses to this lawsuit, and intend to vigorously defend all claims asserted therein.

We are also named in an action filed in the Circuit Court of Franklin County, Missouri, on March 12, 2009, by the Missouri Secretary of State concerning sales of ARS to our customers. The Secretary of State seeks relief, which includes requiring us to pay restitution with interest to those customers who purchased ARS from Stifel Nicolaus and continue to hold ARS, disgorgement of commissions and fees earned on the