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_________________________
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
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
(Registrants telephone number, including area code)
Large accelerated filer: þ
Accelerated filer: o
Non-accelerated filer: o
Smaller reporting company: o
(Do not check if a smaller reporting company)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STIFEL FINANCIAL CORP.
Condensed Consolidated Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
||
(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 |
|
|
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.
STIFEL FINANCIAL CORP.
Condensed Consolidated Statements of Financial Condition (continued)
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
||
(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.
STIFEL FINANCIAL CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
(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.
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.
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.
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.
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.
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,
|
|
December 31,
|
|
||
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,
|
|
December 31,
|
|
||
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.
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.
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 |
|
$ |
- |
|
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.
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, |
|
||||||
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 |
|
||||
|
|
|
Estimated |
|
|||
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,
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, |
|
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.
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 |
|
Gross unrealized
|
|
Gross unrealized losses (1) |
|
Estimated |
|
||||
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 |
|
Gross unrealized
|
|
Gross unrealized losses (1) |
|
Estimated |
|
||||
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, |
|
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.
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 |
|
Estimated |
|
Amortized |
|
Estimated |
|
||||
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.
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.Changes in the allowance for loan losses at Stifel Bank were as follows (in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30,
|
|
September 30, |
|
September 30,
|
|
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.
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.
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,
|
|
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.
Scheduled maturities of certificates of deposit at September 30, 2009 and December 31, 2008 were as follows (in thousands):
|
|
September 30,
|
|
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.
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.
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.
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 ARS sales and financial penalties. The case was removed to the United States District Court for the Eastern District of Missouri on April 13, 2009 and remanded to the Circuit Court of Franklin County, Missouri on July 21, 2009. On October 1, 2009, the State of Colorado filed a Notice of Charges and the State of Indiana filed an Administrative Complaint against Stifel Nicolaus alleging violations of state securities laws in Colorado and Indiana, respectively, relating to the sale of ARS to Colorado and Indiana residents, respectively. These actions each seek, among other things, statutory remedies and penalties. Stifel Nicolaus has denied the allegations in these actions in its responses to each of these matters. We believe that, based upon currently available information and review with outside counsel, we have meritorious defenses to these matters and intend to vigorously defend the claims made by the Missouri Secretary of State, the State of Colorado and the State of Indiana.
Furthermore, on May 7, 2009, the State Corporation Commission of the Commonwealth of Virginia (the "Commission") filed a Rule to Show Cause against Stifel Nicolaus with the Virginia State Corporation Commission concerning sales of ARS to Virginia residents seeking various remedies under the Virginia statutes, including penalties, assessments and injunctive relief. On June 17, 2009, Stifel Nicolaus filed its Response to the Rule to Show Cause which denied the allegations on a number of legal and factual bases. On September 18, 2009, a Settlement Order was entered by the Commission which resulted in the dismissal of the Rule to Show Cause against Stifel Nicolaus and undertakings by Stifel Nicolaus, among other things, to pay the Commonwealth of Virginia seventeen thousand five hundred dollars in penalties; to pay the Commission twenty-two thousand five hundred dollars to defray the costs of the Commission's investigation; and to fully comply with the terms and conditions of the "Offer to Repurchase Eligible Auction Rate Securities at Par" made to Virginia residents dated April 9, 2009 and supplemented April 30, 2009 (the "ARS repurchase offer").
Each of the clients that are eligible to participate and that have accepted the ARS repurchase offer have executed covenants not to file suit against our company and have released us from all claims relating to the ARS which we repurchase. One hundred percent of the eligible Virginia residents have accepted the ARS repurchase offer. Furthermore, the ARS repurchase offer has been accepted by approximately 96% of eligible Missouri residents and by 100% of eligible Colorado and Indiana residents.
Several large banks and brokerage firms, most of which were the primary underwriters of, and supported the auctions for, ARS have announced agreements, usually as part of a regulatory settlement, to repurchase ARS at par from some of their clients. Other brokerage firms have entered into similar agreements. We are, in conjunction with other industry participants, actively seeking solutions to ARS' illiquidity, which may include the restructuring and refinancing of those ARS. Should issuer redemptions and refinancings continue, our clients' holdings could be reduced further; however, there can be no assurance these events will continue.
Additionally, we are named in a civil lawsuit filed in the Circuit Court of Milwaukee, Wisconsin (the "Wisconsin State Court") on September 29, 2008. The lawsuit has been filed against our company and Stifel Nicolaus, Royal Bank of Canada Europe Ltd. ("RBC") and certain other RBC entities by the school districts and the individual trustees for other post-employment benefit ("OPEB") trusts established by those school districts (the "Plaintiffs"). The suit was removed to the United States District Court for the Eastern District of Wisconsin (the "Wisconsin Federal Court") on October 31, 2008, which remanded the case to the Wisconsin State Court on April 10, 2009.
The suit arises out of the purchase of certain CDOs by the OPEB trusts. The RBC entities structured and served as "arranger" for the CDOs. We served as placement agent/broker in connection with the OPEB trusts purchase of the investments. The total amount of the investments made by the OPEB trusts was $200,000. Plaintiffs assert that the school districts contributed $37,500 to the OPEB trusts to purchase the investments. The balance of $162,500 used to purchase the investments was borrowed by the OPEB trusts. The recourse of the lender is the OPEB trust assets and the moral obligation of the school districts. The legal claims asserted include violation of the Wisconsin Securities Act, fraud and negligence. The lawsuit seeks equitable relief, unspecified compensatory damages, treble damages, punitive damages and attorney's fees and costs. The Plaintiffs claim that the RBC entities and our company either made misrepresentations or failed to disclose material facts in connection with the sale of the CDOs in violation of the Wisconsin Securities Act. We believe the Plaintiffs reviewed and understood the relevant offering materials and that the investments were suitable based upon, among other things, our receipt of a written acknowledgement of risks from the Plaintiffs. We believe, based upon currently available information and review with outside counsel, that we have meritorious defenses to this lawsuit, and intend to vigorously defend all of the Plaintiffs' claims.
NOTE 14 - Regulatory Capital Requirements
We operate in a highly regulated environment and are subject to net capital requirements, which may limit distributions to our company from our broker-dealer subsidiaries. Distributions from our broker-dealer subsidiaries are subject to net capital rules. A broker-dealer that fails to comply with the SEC's Uniform Net Capital Rule (Rule 15c3-1) may be subject to disciplinary actions by the SEC and self-regulatory organizations, such as FINRA, including censures, fines, suspension, or expulsion. Stifel Nicolaus has chosen to calculate its net capital under the alternative method, which prescribes that their net capital shall not be less than the greater of $1,000, or two percent of aggregate debit balances (primarily receivables from customers) computed in accordance with the SEC's Customer Protection Rule (Rule 15c3-3). CSA calculates its net capital under the aggregate indebtedness method whereby its aggregate indebtedness may not be greater than fifteen times its net capital (as defined). Stifel Nicolaus and CSA have consistently operated in excess of their capital adequacy requirements. The only restriction with regard to the payment of cash dividends by our company is its ability to obtain cash through dividends and advances from its subsidiaries, if needed.
At September 30, 2009, Stifel Nicolaus had net capital of $167,218, which was 33.7% of aggregate debit items and $157,298 in excess of its minimum required net capital. CSA had net capital of $2,990, which was $2,812 in excess of minimum required net capital.
Our international subsidiary, SN Ltd, is subject to the regulatory supervision and requirements of the Financial Services Authority ("FSA") in the United Kingdom. At September 30, 2009, SN Ltd's capital and reserves were $6,250, which was $5,689 in excess of the financial resources requirement under the rules of the FSA.
Our company, as a bank holding company, and Stifel Bank are subject to various regulatory capital requirements administered by the Federal Reserve Board and the Missouri State Division of Finance, respectively. Additionally, Stifel Bank is regulated by the Federal Depository Insurance Corporation ("FDIC"). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our company's and Stifel Bank's financial results. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, our company and Stifel Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting practices. Our company's and Stifel Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require our company, as a bank holding company, and Stifel Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital to average assets (as defined). Management believes, as of September 30, 2009, that our company and Stifel Bank meet all capital adequacy requirements to which they are subject and are considered to be categorized as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," our company and Stifel Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tables below.
Stifel Financial Corp. - Federal Reserve Capital Amounts |
||||||||||||||||||
|
|
Actual |
|
For Capital Adequacy Purposes |
|
To be Well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
||||||
Total capital to risk-weighted assets |
|
$ |
701,822 |
|
38.4 |
% |
|
$ |
146,308 |
|
8.0 |
% |
|
$ |
182,884 |
|
10.0 |
% |
Tier 1 capital to risk-weighted assets |
|
|
699,334 |
|
38.2 |
|
|
|
73,154 |
|
4.0 |
|
|
|
109,731 |
|
6.0 |
|
Tier 1 capital to adjusted average total assets |
|
|
699,334 |
|
35.5 |
|
|
|
78,901 |
|
4.0 |
|
|
|
98,627 |
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Stifel Bank - Federal Reserve Capital Amounts |
||||||||||||||||||
|
|
Actual |
|
For Capital Adequacy Purposes |
|
To be Well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||
|
|
Amount |
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|||||||
Total capital to risk-weighted assets |
|
$ |
71,319 |
12.4 |
% |
|
$ |
46,083 |
|
8.0 |
% |
|
$ |
57,604 |
|
10.0 |
% |
|
Tier 1 capital to risk-weighted assets |
|
|
68,831 |
|
11.9 |
|
|
|
23,041 |
|
4.0 |
|
|
|
34,562 |
|
6.0 |
|
Tier 1 capital to adjusted average total assets |
|
|
68,831 |
|
9.8 |
|
|
|
27,981 |
|
4.0 |
|
|
|
34,976 |
|
5.0 |
|
NOTE 15 - Stock-Based Compensation Plans
We maintain several incentive stock award plans that provide for the granting of stock options, stock appreciation rights, restricted stock, performance awards and stock units to our employees. Awards under our company's incentive stock award plans are granted at market value at the date of grant. Options expire ten years from the date of grant. The awards generally vest ratably over a three- to eight-year vesting period.
All stock-based compensation plans are administered by the Compensation Committee of the Board of Directors of the Parent, which has the authority to interpret the plans, determine to whom awards may be granted under the plans, and determine the terms of each award. According to these plans, we are authorized to grant an additional 5,215,301 shares at September 30, 2009.
Stock-based compensation expense included in "Compensation and benefits" in the condensed consolidated statements of operations for our company's incentive stock award plans was $11,038 and $13,458 for the three months ended September 30, 2009 and 2008, respectively. The related income tax benefit recognized in income was $2,242 and $1,488 for the three months ended September 30, 2009 and 2008, respectively.
Stock-based compensation expense included in "Compensation and benefits" in the condensed consolidated statements of operations for our company's incentive stock award plans was $34,332 and $38,138 for the nine months ended September 30, 2009 and 2008, respectively. The related income tax benefit recognized in income was $12,788 and $9,133 for the nine months ended September 30, 2009 and 2008, respectively.
Stock Options
We have substantially eliminated the use of stock options as a form of compensation. During the nine months ended September 30, 2009, no options were granted. As of September 30, 2009, there were 1,024,892 options outstanding at a weighted-average exercise price of $8.53 and a weighted-average contractual life of 3.15 years. As of September 30, 2009, there was $443 of unrecognized compensation cost related to non-vested option awards. The cost is expected to be recognized over a weighted-average period of 1.32 years. We received $585 and $2,099 in cash from the exercise of stock options during the three and nine months ended September 30, 2009, respectively.
Stock Units
A stock unit represents the right to receive a share of common stock from our company at a designated time in the future without cash payment by the employee and is issued in lieu of cash incentive, principally for deferred compensation and employee retention plans. At September 30, 2009, the total number of stock units outstanding was 6,798,194, of which 5,044,324 were non-vested.
Deferred Compensation Plans
Our company's Deferred Compensation Plan (the "Plan") is provided to certain revenue producers, officers, and key administrative employees, whereby a certain percentage of their incentive compensation is deferred as defined by the Plan into company stock units with a 25% matching contribution by our company. Participants may elect to defer up to an additional 15% of their incentive compensation with a 25% matching contribution. Units generally vest over a three- to five-year period and are distributable upon vesting or at future specified dates. Deferred compensation costs are amortized on a straight-line basis over the vesting period. Elective deferrals are 100% vested. We charged $5,944 and $9,339 to "Compensation and benefits" for the three months ended September 30, 2009 and 2008, respectively, relating to units granted under the Plan. We charged $20,953 and $26,777 to "Compensation and benefits" for the nine months ended September 30, 2009 and 2008, respectively, relating to units granted under the Plan. As of September 30, 2009, there were 2,782,468 units outstanding under the Plan.
Additionally, Stifel Nicolaus maintains a deferred compensation plan for its financial advisors who achieve certain levels of production, whereby a certain percentage of their earnings are deferred as defined by the plan, of which 50% is deferred into company stock units with a 25% matching contribution and 50% is deferred in mutual funds which earn a return based on the performance of index mutual funds as designated by our company or a fixed income option. Financial advisors may elect to defer an additional 1% of earnings into company stock units with a 25% matching contribution. Financial advisors have no ownership in the mutual funds. Included on the condensed consolidated statements of financial condition under the caption "Investments" are $26,648 and $23,082 at September 30, 2009 and December 31, 2008, respectively, in mutual funds that were purchased by our company to economically hedge, on an after-tax basis, its liability to the financial advisors who choose to base the performance of their return on the index mutual fund option. At September 30, 2009 and December 31, 2008, the deferred compensation liability of $25,783 and $19,580, respectively, is included in "Accrued employee compensation" on the condensed consolidated statements of financial condition.
In addition, certain financial advisors, upon joining our company, may receive company stock units in lieu of transition cash payments. Deferred compensation related to this plan generally cliff vests over a five to eight-year period. Deferred compensation costs are amortized on a straight-line basis over the deferral period.
Charges to "Compensation and benefits" related to these two plans were $4,794 and $3,739 for the three months ended September 30, 2009 and 2008, respectively. Charges to compensation and benefits related to these plans were $12,532 and $10,327 for the nine months ended September 30, 2009 and 2008, respectively. As of September 30, 2009, there were 3,121,427 units outstanding under the two plans.
NOTE 16 - Off-Balance Sheet Credit Risk
In the normal course of business, we execute, settle, and finance customer and proprietary securities transactions. These activities expose our company to off-balance sheet risk in the event that customers or other parties fail to satisfy their obligations.
In accordance with industry practice, securities transactions generally settle within three business days after trade date. Should a customer or broker fail to deliver cash or securities as agreed, we may be required to purchase or sell securities at unfavorable market prices.
We borrow and lend securities to facilitate the settlement process and finance transactions, utilizing customer margin securities held as collateral. We monitor the adequacy of collateral levels on a daily basis. We periodically borrow from banks on a collateralized basis utilizing firm and customer margin securities in compliance with SEC rules. Should the counterparty fail to return customer securities pledged, we are subject to the risk of acquiring the securities at prevailing market prices in order to satisfy our customer obligations. We control our exposure to credit risk by continually monitoring our counterparties' positions and, where deemed necessary, we may require a deposit of additional collateral and/or a reduction or diversification of positions. Our company sells securities it does not currently own (short sales) and is obligated to subsequently purchase such securities at prevailing market prices. We are exposed to risk of loss if securities prices increase prior to closing the transactions. We control our exposure to price risk from short sales through daily review and setting position and trading limits.
We manage our risks associated with the aforementioned transactions through position and credit limits, and the continuous monitoring of collateral. Additional collateral is required from customers and other counterparties when appropriate.
We have accepted collateral in connection with resale agreements, securities borrowed transactions, and customer margin loans. Under many agreements, we are permitted to sell or repledge these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions. At September 30, 2009, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $638,831, and the fair value of the collateral that had been sold or repledged was $277,159. At December 31, 2008, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $432,751, and the fair value of the collateral that had been sold or repledged was $123,415.
Derivatives' notional contract amounts are not reflected as assets or liabilities in the condensed consolidated statements of financial condition. Rather, the market, or fair value, of the derivative transactions are reported on the condensed consolidated statements of financial condition as other assets or accounts payable and accrued expenses, as applicable.
We enter into interest rate derivative contracts to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are principally used to manage differences in the amount, timing, and duration of our known or expected cash payments related to certain variable-rate affiliated deposits. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments. Our interest rate hedging strategies may not work in all market environments and as a result may not be effective in mitigating interest rate risk.
For a complete discussion of our activities related to derivative instruments, see Note 11 in the notes to our condensed consolidated financial statements.
In the ordinary course of business, Stifel Bank has commitments to originate loans, standby letters of credit and lines of credit. Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established by the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash commitments. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if necessary, is based on the credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
At September 30, 2009 and December 31, 2008, Stifel Bank had outstanding commitments to originate loans aggregating $80,581 and $86,327, respectively. The commitments extended over varying periods of time with all commitments at September 30, 2009 scheduled to be disbursed in the following two months.
Standby letters of credit are irrevocable conditional commitments issued by Stifel Bank to guarantee the performance of a customer to a third-party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should Stifel Bank be obligated to perform under the standby letters of credit, it may seek recourse from the customer for reimbursement of amounts paid. At September 30, 2009 and December 31, 2008, Stifel Bank had outstanding letters of credit totaling $167 and $414, respectively. For all but one of the standby letters of credit commitments at September 30, 2009, the expiration terms are less than one year. The remaining commitment, in the amount of $10, has an expiration term of April 2013.
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if necessary, is based on the credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Stifel Bank uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At September 30, 2009 and December 31, 2008, Stifel Bank had granted unused lines of credit to commercial and consumer borrowers aggregating $27,742 and $18,153, respectively.
NOTE 17 - Income Taxes
Our effective tax rate for the three and nine month period ended September 30, 2009 of 28.2% and 35.4%, respectively, was less than our estimated annual effective tax rate of 39.9%. The decrease is primarily attributable to the recognition of a tax benefit of $3,444 during the third quarter related to the utilization of an investment and jobs creation tax credit.
The liability for unrecognized tax benefits was $2,378 and $2,105 as of September 30, 2009 and December 31, 2008, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate for income before taxes are $2,378 and $2,105 at September 30, 2009 and December 31, 2008, respectively.
We recognize the accrual of interest and penalties related to income tax matters in the "Provision for income taxes" on the condensed consolidated statements of operations. As of September 30, 2009 and December 31, 2008, accrued interest and penalties included in the unrecognized tax benefits liability were $557 and $647, respectively.
We file income tax returns in the U.S. federal jurisdiction and various states, and foreign jurisdictions with varying statutes of limitation. For the U.S. and most state and foreign jurisdictions, the years 2005 through 2008 remain subject to examination by their respective authorities. We are subject to examination by state tax jurisdictions. It is possible that these examinations will be resolved in the next twelve months. We do not anticipate that payments made during the next twelve month period for these examinations will be material, nor do we expect that the reduction to unrecognized tax benefits as a result of a lapse of applicable statue of limitations will be significant. Our company's foreign jurisdictions are generally fully taxable by the United States.
NOTE 18 - Segment Reporting
We currently operate through the following three business segments: Global Wealth Management; Capital Markets; and various corporate activities combined in the Other segment. The UBS branch acquisition and related customer account conversion to our platform has enabled us to leverage our customers' assets which allows us the ability to provide a full array of financial products to both our Private Client Group and Stifel Bank customers. As a result, we have changed how we manage these reporting units and consequently they were combined to form the Global Wealth Management segment. Previously reported segment information has been revised to reflect this change.
As a result of organizational changes in the second quarter of 2009, which included a change in the management reporting structure of our company, the segments formerly reported as Equity Capital Markets and Fixed Income Capital Markets have been combined into a single segment called Capital Markets. Previously reported segment information has been revised to reflect this change.
Our Global Wealth Management segment consists of two businesses, the Private Client Group and Stifel Bank. The Private Client Group includes branch offices and independent contractor offices of our broker-dealer subsidiaries located throughout the United States, primarily in the Midwest and Mid-Atlantic regions with a growing presence in the Northeast, Southeast and Western United States. These branches provide securities brokerage services, including the sale of equities, mutual funds, fixed income products, and insurance, as well as offering banking products to their private clients through Stifel Bank. Stifel Bank segment provides residential, consumer, and commercial lending, as well as Federal Depository Insurance Corporation ("FDIC")-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public.
The Capital Markets segment includes institutional sales and trading. It provides securities brokerage, trading, and research services to institutions with an emphasis on the sale of equity and fixed income products. This segment also includes the management of and participation in underwritings for both corporate and public finance (exclusive of sales credits, which are included in the Private Client Group segment), merger and acquisition, and financial advisory services.
The Other segment includes certain corporate activities of our company.
Information concerning operations in these segments of business for the three months and nine months ended September 30, 2009 and 2008 is as follows (in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Net revenues: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Wealth Management |
|
$ |
157,145 |
|
$ |
117,151 |
|
$ |
406,619 |
|
$ |
358,322 |
|
Capital Markets |
|
|
130,179 |
|
|
101,598 |
|
|
360,787 |
|
|
277,548 |
|
Other |
|
|
2,359 |
|
|
174 |
|
|
3,763 |
|
|
3,481 |
|
|
|
$ |
289,683 |
|
$ |
218,923 |
|
$ |
771,169 |
|
$ |
639,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Wealth Management |
|
$ |
27,540 |
|
$ |
23,533 |
|
$ |
67,081 |
|
$ |
79,725 |
|
Capital Markets |
|
|
33,433 |
|
|
23,789 |
|
|
91,317 |
|
|
60,999 |
|
Other |
|
|
(30,137 |
) |
|
(26,228 |
) |
|
(79,298 |
) |
|
(75,555 |
) |
|
|
$ |
30,836 |
|
$ |
21,094 |
|
$ |
79,100 |
|
$ |
65,169 |
|
(1)
No individual client accounted for more than 10 percent of total net revenues for the three months and nine months ended September 30, 2009 or 2008.The following table presents our company's total assets on a segment basis at September 30, 2009 and December 31, 2008 (in thousands):
|
|
September 30,
|
|
December 31, 2008 |
|
||
Total assets: |
|
|
|
|
|
|
|
Global Wealth Management |
|
$ |
2,034,168 |
|
$ |
959,638 |
|
Capital Markets |
|
|
606,969 |
|
|
243,130 |
|
Other |
|
|
249,658 |
|
|
355,377 |
|
|
|
$ |
2,890,795 |
|
$ |
1,558,145 |
|
We have operations in the United States, United Kingdom and Europe. Our company's foreign operations are conducted through its wholly-owned subsidiary, SN Ltd. Substantially all long-lived assets are located in the United States.
Revenues, classified by the major geographic areas in which they are earned for the three months and nine months ended September 30, 2009 and 2008, were as follows (in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
284,095 |
|
$ |
209,255 |
|
$ |
755,876 |
|
$ |
612,753 |
|
United Kingdom |
|
|
3,577 |
|
|
5,569 |
|
|
10,146 |
|
|
17,153 |
|
Other European |
|
|
2,011 |
|
|
4,099 |
|
|
5,147 |
|
|
9,445 |
|
|
|
$ |
289,683 |
|
$ |
218,923 |
|
$ |
771,169 |
|
$ |
639,351 |
|
NOTE 19 - Other Comprehensive income
The following table sets forth the components of other comprehensive income for the three months and nine months ended September 30, 2009 and 2008 (in thousands):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Net income |
|
$ |
22,138 |
|
$ |
12,777 |
|
$ |
51,130 |
|
$ |
39,456 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains/(losses) on available-for-sale securities, net of tax |
|
|
5,874 |
|
|
(1,019 |
) |
|
7,985 |
|
|
(3,191 |
) |
Unrealized losses in cash flow hedging instruments, net of tax |
|
|
) |
|
- |
|
|
(526 |
) |
|
- |
|
|
Other comprehensive income, net of tax |
|
$ |
27,486 |
|
$ |
11,758 |
|
$ |
58,589 |
|
$ |
36,265 |
|
NOTE 20 - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share for the three months and nine months ended September 30, 2009 and 2008 (in thousands, except per share data):
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Net income |
|
$ |
22,138 |
|
$ |
12,777 |
|
$ |
51,130 |
|
$ |
39,456 |
|
Shares for basic and diluted calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares used in basic computation |
|
|
28,708 |
|
|
23,830 |
|
|
27,652 |
|
|
23,520 |
|
Dilutive effect of stock options and units (1) (2) |
|
|
4,109 |
|
|
4,215 |
|
|
3,816 |
|
|
3,815 |
|
Average shares used in diluted computation |
|
|
32,817 |
|
|
28,045 |
|
|
31,468 |
|
|
27,335 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.77 |
|
$ |
0.54 |
|
$ |
1.85 |
|
$ |
1.68 |
|
Diluted (1) (2) |
|
$ |
0.67 |
|
$ |
0.46 |
|
$ |
1.62 |
|
$ |
1.44 |
|
(1)
Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury method. Diluted earnings per share include stock options and units.(2) For the three months and nine months ended September 30, 2009 and 2008, there were no securities excluded from the weighted average diluted common shares calculation because their effect would be antidilutive.
NOTE 21 - Stockholders' Equity
On May 5, 2005, the board of directors authorized the repurchase of up to 3,000,000 additional shares in addition to an existing authorization of 1,500,000 shares. These purchases may be made on the open market or in privately negotiated transactions, depending upon market conditions and other factors. Repurchased shares may be used to meet obligations under our employee benefit plans and for general corporate purposes. Under existing Board authorizations at September 30, 2009, we are permitted to buy an additional 2,010,831 shares. The repurchase program has no expiration date. During the nine months ended September 30, 2009, we issued 999,306 new shares for employee benefit plans.
During the first quarter of 2009, we paid $9,307 related to the Ryan Beck 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, with partial shares paid in cash.
In June 2009, we completed an "at-the-market" public offering of 1,000,000 shares of our common stock at an average price of $45.00 per share, which generated gross proceeds of $45,000 (net proceeds of $43,875 after fees and expenses). Net proceeds were used for general corporate purposes.
In September 2009, we completed a public offering of 1,725,000 shares of our common stock at an average price of $56.00 per share, which generated gross proceeds of $96,600 (net proceeds of $91,770 after fees and expenses). Net proceeds were used for general corporate purposes.
NOTE 22 - Variable Interest Entities ("VIE")
The determination as to whether an entity is a VIE is based on the structure and nature of the entity. We also consider other characteristics such as the ability to influence the decision making relative to the entity's activities and how the entity is financed. The determination as to whether we are the primary beneficiary is based on a qualitative analysis of the VIE's expected losses and expected residual returns. This analysis includes a review of, among other factors, the VIE's capital structure, contractual terms, which interests create or absorb variability, related party relationships and the design of the VIE. Where qualitative analysis is not conclusive, we perform a quantitative analysis.
Our company's involvement with VIEs is limited to entities used as investment vehicles, the establishment of Stifel Financial Capital Trusts and our investment in a convertible promissory note.
We have investments in and/or act as the general partner or managing member to 12 partnerships and limited liability companies ("LLCs"). These entities were established for the purpose of investing in equity and debt securities of public and private investments and were initially financed through the capital commitments of the members. These entities meet the definition of a VIE; however, we are not the primary beneficiary of the entities as a result of our minority interest in the expected losses or expected residual returns of these entities. These partnerships and LLCs have assets of approximately $204,779 at June 30, 2009. At September 30, 2009, the carrying value of our investment in these partnerships and LLCs is not material. Our remaining capital commitment to these partnerships and LLCs is not material at September 30, 2009. Management fee revenue earned by our company during the three and nine months ended September 30, 2009 was insignificant.
Debenture to Stifel Financial Capital Trusts
We have completed private placements of cumulative trust preferred securities through Stifel Financial Capital Trust II, Stifel Financial Capital Trust III, and Stifel Financial Capital Trust IV (collectively, the "Trusts"). The Trusts are non-consolidated wholly-owned business trust subsidiaries of our company and were established for the limited purpose of issuing trust securities to third parties and lending the proceeds to our company.
The trust preferred securities represent an indirect interest in junior subordinated debentures purchased from our company by the Trusts, and we effectively provide for the full and unconditional guarantee of the securities issued by the Trusts. We make timely payments of interest to the Trusts as required by contractual obligations, which are sufficient to cover payments due on the securities issued by the Trusts and believe that it is unlikely that any circumstances would occur that would make it necessary for our company to make payments related to these Trusts other than those required under the terms of the debenture agreements and the trust preferred securities agreements. The trusts were determined to be VIEs because the holders of the equity investment at risk do not have adequate decision making ability over the Trust's activities. Our investment in the Trusts is not a variable interest because equity interests are variable interests only to the extent that the investment is considered to be at risk. Because our investment was funded by the Trusts, it is not considered to be at risk.
Investment in FSI Group, LLC ("FSI")
We have invested $18,000 in a convertible promissory note issued by FSI, a limited liability company specializing in investing in banks, thrifts, insurance companies, and other financial services firms. The note is convertible at our election into a 49.9% interest in FSI at any time after the third anniversary or during the defined conversion period. The convertible promissory note has a minimum coupon rate equal to 10% per annum plus additional interest related to certain defined cash flows of the business, not to exceed 18% per annum. As we do not absorb a majority of the expected losses, receive a majority of the expected residual returns, it was determined that we are not the primary beneficiary.
Our company's exposure to loss is limited to its investment in FSI at September 30, 2009 of $18,000, which is included in "Other assets" on the consolidated statement of financial condition. Our Company had no liabilities related to this entity at September 30, 2009. We have the discretion to make additional capital contributions. We have not provided financial or other support to FSI that we were not previously contractually required to provide as of September 30, 2009. Our company's involvement with FSI has not had a material effect on its consolidated financial position, operations or cash flows.
NOTE 23 - Subsequent Events
In accordance with ASC 855 "Subsequent Events," we evaluate subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. We evaluated subsequent events through November 10, 2009.
Based on the evaluation, we did not identify any recognized subsequent events that would have required adjustment to the consolidated financial statements. We identified the following as non-recognized subsequent events:
On October 15, 2009, we completed the final closing of the UBS acquisition. For additional information on our acquisition of UBS, refer to Note 2.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of our company should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008, and the accompanying condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q.
Certain statements in this report may be considered forward-looking. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements cover, among other things, statements made about general economic and market conditions, the investment banking industry, our objectives and results, and also may include our belief regarding the effect of various legal proceedings, management expectations, our liquidity and funding sources, counterparty credit risk, or other similar matters. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including those factors discussed below under "External Factors Impacting Our Business" as well as the factors identified under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, as updated in our subsequent reports filed with the SEC. These reports are available at our web site at www.stifel.com and at the SEC web site at www.sec.gov.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events, unless we are obligated to do so under federal securities laws.
Unless otherwise indicated, the terms "we," "us," "our" or "our company" in this report refer to Stifel Financial Corp. and its wholly-owned subsidiaries.
Executive Summary
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 engaged in retail brokerage, securities trading, investment banking, investment advisory, residential, consumer and commercial banking and related financial services throughout the United States and in three European offices. Although we have offices across the United States, our major geographic area of concentration is in the Midwest and Mid-Atlantic regions with a growing presence in the Northeast, Southwest and Western United States. Our principal customers are individual investors, corporations, municipalities and institutions.
We plan to maintain our focus on revenue growth with a continued focus on developing quality relationships with our clients. Within our private client business, our efforts will be focused on recruiting experienced financial advisors with established client relationships. Within our capital markets business, our focus continues to be on providing quality client management and product diversification. In executing our growth strategy, we take advantage of the consolidation among middle market firms, which we believe provides us opportunities in our private client and capital markets businesses.
Our ability to attract and retain highly skilled and productive employees is critical to the success of our business. Accordingly, compensation and benefits comprise the largest component of our expenses, and our performance is dependent upon our ability to attract, develop and retain highly skilled employees who are motivated and committed to providing the highest quality of service and guidance to our clients.
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 from UBS in four separate closings pursuant to this agreement. During the third quarter, we completed three of the four closings, which represented 40 branches. The final closing of 16 branches was completed on October 16, 2009.
As a result of the acquisition, Stifel Nicolaus hired 495 financial advisors and support staff in these branches and successfully converted approximately 144,000 accounts with approximately $16.2 billion in customer assets, including related Reg U and Reg T loans of $204.4 million and $1.7 billion in money market accounts and FDIC-insured balances to the Stifel Nicolaus platform.
Our overall financial results continue to be highly and directly correlated to the direction and activity levels of the United States equity and fixed income markets, our expansion of the Capital Markets segment, and the continued expansion of our Global Wealth Management segment. Since September 30, 2008, we have increased our number of financial advisors and branch offices by hiring 597 financial advisors and opening 96 branches, of which 312 financial advisors and 57 branches were part of our acquisitions of UBS and Butler Wick & Company, Inc. ("Butler Wick"). In addition, we added 59 revenue producing investment bankers, traders, institutional sales staff and mortgage bankers along with 437 branch and home office support staff.
Results for the three and nine months ended September 30, 2009
For the three months ended September 30, 2009, our net revenues increased 32.3% to a record $289.7 million compared to $218.9 million during the comparable period in 2008. Net income increased 73.3% to a record $22.1 million for the three months ended September 30, 2009 compared to $12.8 million during the comparable period in 2008.
For the nine months ended September 30, 2009, our net revenues increased 20.6% to a record $771.2 million compared to $639.4 million during the comparable period in 2008. Net income increased 29.6% to a record $51.1 million for the nine months ended September 30, 2009 compared to $39.4 million during the comparable period in 2008.
Our revenue growth was primarily derived from increased principal transactions in institutional fixed income sales and trading resulting from turbulent markets, as institutions rebalanced their portfolios and their exposure to the market. In addition, the market upheaval and the resultant failure of some Wall Street firms have led to increased market share of institutional business. Certain of our business activities, however, were impacted by the particularly challenging equity market conditions, which have led to a decrease in the value of our customers' assets. As a result, commissions, asset management and service fees, and margin interest income decreased during the nine months ended September 30, 2009 and may diminish in the future. Our business does not produce predictable earnings and is affected by many risk factors such as the global economic and credit slowdown, among others.
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 auction rate securities ("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 $114.8 million of eligible ARS after issuer redemptions of $24.6 million and Stifel purchases of $40.6 million. 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.
External Factors Impacting our Business
We are currently operating in a challenging environment: a recession and financial services industry issues related to credit quality, auction rate securities and liquidity continue to negatively impact activity levels. Concerns regarding future economic growth and corporate earnings created challenging conditions for the equity markets, which experienced broad-based declines, with equity indices starting to trend higher at the end of the third quarter of 2009. Fixed income credit markets experienced high levels of volatility, though there were signs of improvement in credit market liquidity at the end of the third quarter. The impact of these events marked a challenging environment for investment banking businesses with continued limited opportunities to distribute securities in the equity and debt capital markets.
Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and mostly unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, the level and shape of various yield curves, the volume and value of trading in securities, and the value of our customers' assets under management.
Although we do not engage in any significant proprietary trading for our own account, the inventory of securities held to facilitate customer trades and our market making activities are sensitive to market movements. We do not have any significant direct exposure to the sub-prime market, but are subject to market fluctuations resulting from news and corporate events in the sub-prime mortgage markets, associated write-downs by other financial services firms and interest rate fluctuations. Stock prices for companies in this industry, including Stifel Financial Corp., have been volatile as a result of reactions to the global credit crisis and the continued volatility in the financial services industry. We will continue to monitor our market capitalization and review for potential goodwill asset impairment losses if events or changes in circumstances occur that would more likely than not reduce the fair value of the asset below its carrying amount.
In connection with ARS, our broker-dealer subsidiaries have been subject to ongoing investigations, which include inquiries from the Securities and Exchange Commission (the "SEC"), the Financial Industry Regulatory Authority ("FINRA") and several state regulatory agencies, with which we are cooperating fully. We are also named in a class action lawsuit similar to that filed against a number of brokerage firms alleging various securities law violations, which we are vigorously defending. We are, in conjunction with other industry participants actively seeking a solution to ARS' illiquidity. See Item 1, "Legal Proceedings," in Part II of this report for further details regarding ARS investigations and claims.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
The following table presents consolidated financial information for the periods indicated (in thousands, except percentages):
|
|
For the Three Months Ended |
|
|
As a Percentage of Net |
|
|||||||||||
|
|
2009 |
|
2008 |
|
% |
|
|
2009 |
|
2008 |
|
|||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions |
|
$ |
123,238 |
|
$ |
68,182 |
|
|
80.7 |
% |
|
|
42.5 |
% |
|
31.2 |
% |
Commissions |
|
|
90,905 |
|
|
88,727 |
|
|
2.5 |
|
|
|
31.4 |
|
|
40.5 |
|
Investment banking |
|
|
35,056 |
|
|
25,156 |
|
|
39.4 |
|
|
|
12.1 |
|
|
11.5 |
|
Asset management and service fees |
|
|
25,498 |
|
|
30,336 |
|
|
(15.9 |
) |
|
|
8.8 |
|
|
13.8 |
|
Interest |
|
|
11,306 |
|
|
12,819 |
|
|
(11.8 |
) |
|
|
3.9 |
|
|
5.8 |
|
Other income/(loss) |
|
|
6,586 |
|
|
(1,391 |
) |
|
* |
|
|
|
2.3 |
|
|
(0.6 |
) |
Total revenues |
|
|
292,589 |
|
|
223,829 |
|
|
30.7 |
|
|
|
101.0 |
|
|
102.2 |
|
Interest expense |
|
|
2,906 |
|
|
4,906 |
|
|
(40.8 |
) |
|
|
1.0 |
|
2.2 |
|
|
Net revenues |
|
|
289,683 |
|
|
218,923 |
|
|
32.3 |
|
|
|
100.0 |
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
193,131 |
|
|
150,203 |
|
|
28.6 |
|
|
|
66.7 |
|
|
68.6 |
|
Occupancy and equipment rental |
|
|
24,730 |
|
|
17,286 |
|
|
43.1 |
|
|
|
8.5 |
|
|
7.9 |
|
Communication and office supplies |
|
|
14,429 |
|
|
11,192 |
|
|
28.9 |
|
|
|
5.0 |
|
|
5.1 |
|
Commissions and floor brokerage |
|
|
6,486 |
|
|
4,348 |
|
|
49.2 |
|
|
|
2.2 |
|
|
2.0 |
|
Other operating expenses |
|
|
20,071 |
|
|
14,800 |
|
|
35.6 |
|
|
|
7.0 |
|
|
6.8 |
|
Total non-interest expenses |
|
|
258,847 |
|
|
197,829 |
|
|
30.8 |
|
|
|
89.4 |
|
|
90.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
30,836 |
|
|
21,094 |
|
|
46.2 |
|
|
|
10.6 |
|
|
9.6 |
|
Provision for income taxes |
|
|
8,698 |
|
|
8,317 |
|
|
4.6 |
|
|
|
3.0 |
|
|
3.8 |
|
Net income |
|
$ |
22,138 |
|
$ |
12,777 |
|
|
73.3 |
% |
|
|
7.6 |
% |
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Percentage is not meaningful. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2009, net revenues (total revenues less interest expense) increased $70.8 million to a record $289.7 million; a 32.3% increase over the $218.9 million recorded for the three months ended September 30, 2008. Net income increased 73.3% to a record $22.1 million for the three months ended September 30, 2009 compared to $12.8 million during the comparable period in 2008.
Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
The following table presents consolidated financial information for the periods indicated (in thousands, except percentages):
|
|
For the Nine Months Ended |
|
|
As a Percentage of Net |
|
|||||||||||
|
|
2009 |
|
2008 |
|
% |
|
|
2009 |
|
2008 |
|
|||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions |
|
$ |
341,777 |
|
$ |
200,793 |
|
|
70.2 |
% |
|
|
44.3 |
% |
|
31.4 |
% |
Commissions |
|
|
246,236 |
|
|
257,491 |
|
|
(4.4 |
) |
|
|
31.9 |
% |
|
40.3 |
|
Investment banking |
|
|
75,262 |
|
|
67,935 |
|
|
10.8 |
|
|
|
9.8 |
|
|
10.6 |
|
Asset management and service fees |
|
|
74,974 |
|
|
90,580 |
|
|
(17.2 |
) |
|
|
9.7 |
|
|
14.2 |
|
Interest |
|
|
31,782 |
|
|
39,175 |
|
|
(18.9 |
) |
|
|
4.1 |
|
|
6.1 |
|
Other income/(loss) |
|
|
9,440 |
|
|
(883 |
) |
|
* |
|
|
|
1.3 |
|
|
(0.1 |
) |
Total revenues |
|
|
779,471 |
|
|
655,091 |
|
|
19.0 |
|
|
|
101.1 |
|
|
102.5 |
|
Interest expense |
|
|
8,302 |
|
|
15,740 |
|
|
(47.3 |
) |
|
|
1.1 |
|
2.5 |
|
|
Net revenues |
|
|
771,169 |
|
|
639,351 |
|
|
20.6 |
|
|
|
100.0 |
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
516,852 |
|
|
441,028 |
|
|
17.2 |
|
|
|
67.0 |
|
|
69.0 |
|
Occupancy and equipment rental |
|
|
63,311 |
|
|
49,012 |
|
|
29.2 |
|
|
|
8.2 |
|
|
7.7 |
|
Communication and office supplies |
|
|
39,403 |
|
|
32,887 |
|
|
19.8 |
|
|
|
5.1 |
|
|
5.1 |
|
Commissions and floor brokerage |
|
|
17,167 |
|
|
8,315 |
|
|
106.5 |
|
|
|
2.2 |
|
|
1.3 |
|
Other operating expenses |
|
|
55,336 |
|
|
42,940 |
|
|
28.9 |
|
|
|
7.2 |
|
|
6.7 |
|
Total non-interest expenses |
|
|
692,069 |
|
|
574,182 |
|
|
20.5 |
|
|
|
89.7 |
|
|
89.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
79,100 |
|
|
65,169 |
|
|
21.4 |
|
|
|
10.3 |
|
|
10.2 |
|
Provision for income taxes |
|
|
27,970 |
|
|
25,713 |
|
|
8.8 |
|
|
|
3.6 |
|
|
4.0 |
|
Net income |
|
$ |
51,130 |
|
$ |
39,456 |
|
|
29.6 |
% |
|
|
6.7 |
% |
|
6.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Percentage is not meaningful. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2009, net revenues (total revenues less interest expense) increased $131.8 million to a record $771.2 million; a 20.6% increase over the $639.4 million recorded for the nine months ended September 30, 2008. Net income increased 29.6% to a record $51.1 million for the nine months ended September 30, 2009 compared to $39.4 million during the comparable period in 2008.
NET REVENUES
The following table presents consolidated net revenues for the periods indicated (in thousands, except percentages):
|
|
For the Three Months Ended |
|
For the Nine Months Ended |
||||||||||||||
|
|
2009 |
|
2008 |
|
% |
|
2009 |
|
2008 |
|
% |
||||||
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions |
|
$ |
123,238 |
|
$ |
68,182 |
|
80.7 |
% |
|
$ |
341,777 |
|
$ |
200,793 |
|
70.2 |
% |
Commissions |
|
|
90,905 |
|
|
88,727 |
|
2.5 |
|
|
|
246,236 |
|
|
257,491 |
|
(4.4 |
) |
Investment banking: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital raising |
|
|
22,332 |
|
|
11,104 |
|
101.1 |
|
|
|
42,065 |
|
|
35,946 |
|
17.0 |
|
Strategic advisory fees |
|
|
12,724 |
|
|
14,052 |
|
(9.4 |
) |
|
|
33,197 |
|
31,989 |
|
3.8 |
|
|
|
|
|
35,056 |
|
|
25,156 |
|
39.4 |
|
|
|
75,262 |
|
|
67,935 |
|
10.8 |
|
Asset management and service fees |
|
|
25,498 |
|
|
30,336 |
|
(15.9 |
) |
|
|
74,974 |
|
|
90,580 |
|
(17.2 |
) |
Net interest |
|
|
8,400 |
|
|
7,913 |
|
6.2 |
|
|
|
23,480 |
|
|
23,435 |
|
0.2 |
|
Other income/(loss) |
|
|
6,586 |
|
|
(1,391 |
) |
* |
|
|
|
9,440 |
|
|
(883 |
) |
* |
|
Total net revenues |
|
$ |
289,683 |
|
$ |
218,923 |
|
32.3 |
% |
|
$ |
771,169 |
|
$ |
639,351 |
|
20.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Percentage is not meaningful. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Except as noted in the following discussion of variances, the underlying reasons for the increase in revenue can be attributed principally to the increased number of private client group offices and financial advisors in our Global Wealth Management segment, the increased number of revenue producers in our Capital Markets segment, the acquisition of Butler Wick on December 31, 2008, and the closing of the first three waves of the UBS acquisition during the third quarter of 2009. Butler Wick's results of operations are included in our results of operations prospectively from December 31, 2008, the date of acquisition. The results of operations for the acquired UBS branches are included in our results prospectively from the date of their respective conversion.
For the three and nine month periods ended September 30, 2009, these business acquisitions generated net revenues of $9.8 million and $21.2 million, respectively.
Principal transactions - For the three months ended September 30, 2009, principal transactions revenue increased 80.7% to $123.3 million from $68.2 million in the comparable period in 2008. For the nine months ended September 30, 2009, principal transactions revenue increased 70.2% to $341.8 million from $200.8 million in the comparable period in 2008. The increases are primarily attributable to increased principal transactions, primarily in over-the-counter ("OTC") equity, corporate and municipal debt and mortgage-backed bonds due to turbulent markets and customers returning to traditional fixed income products. The change in the mix from commissions-based revenues to principal transactions revenue has created an increase in our trading inventory levels primarily related to fixed income products.
Commissions - Commission revenues are primarily generated from agency transactions in OTC and listed equity securities, insurance products and options. In addition, commission revenues also include distribution fees for promoting and distributing mutual funds.
For the three months ended September 30, 2009, commission revenues increased 2.5% to $90.9 million from $88.7 million in the comparable period in 2008 primarily due to higher revenues from insurance sales and mutual funds. For the nine months ended September 30, 2009, commission revenues decreased 4.4% to $246.2 million from $257.5 million in the comparable period in 2008. While the equity markets began showing signs of improvement during the third quarter, the volatility in capital markets during the first half of 2009 has resulted in lower revenues for the nine months ended September 30, 2009 due to a decrease in trading volumes, as customers returned to traditional fixed income products.
Investment banking - Investment banking revenues include: (i) capital raising revenues representing fees earned from the underwriting of debt and equity securities, and (ii) strategic advisory fees related to corporate debt and equity offerings, municipal debt offerings, merger and acquisitions, private placements and other investment banking advisory fees.
For the three months ended September 30, 2009, investment banking revenues increased 39.4% to $35.1 million from $25.2 million in the comparable period in 2008. For the nine months ended September 30, 2009, investment banking revenues increased 10.8% to $75.3 million from $67.9 million in the comparable period in 2008.
Capital raising revenues increased $11.3 million, or 101.1%, to $22.4 million for the three months ended September 30, 2009 from $11.1 million in the comparable period in 2008. During the third quarter of 2009, equity and fixed income capital raising revenues were $15.9 million and $5.2 million, respectively, an increase of $9.4 million and $2.2 million, respectively, from the comparable period in 2008. Capital raising revenues increased 17.0% to $42.1 million for the nine months ended September 30, 2009 from $35.9 million in the comparable period in 2008. Equity and fixed income capital raising revenues were $26.5 million and $13.8 million, respectively, an increase of $2.1 million, or 8.5%, and $6.2 million, or 81.0%, respectively, from the comparable period in 2008. During the third quarter of 2009, capital market conditions continued to build upon the improvement that began in the second quarter for both equity and fixed income, and we raised capital for our clients in a number of successful corporate and public finance underwritings. The significant rebound in equity and fixed income financings during the second and third quarters were offset by the challenging market conditions that began during the second half of 2008 and continued into the first quarter of 2009.
Strategic advisory fees decreased 9.4% to $12.7 million for the three months ended September 30, 2009 from $14.1 million in the comparable period in 2008. Strategic advisory fees increased 3.8% to $33.2 million for the nine months ended September 30, 2009 from $32.0 million in the comparable period in 2008. The increase is primarily attributable to an increase in the number of completed equity transactions and the aggregate transaction value, as well as the average revenue per transaction, over the comparable periods in 2008.
Asset management and service fees - Asset management and service fees include fees for asset-based financial services provided to individuals and institutional clients. Investment advisory fees are charged based on the value of assets in fee-based accounts. Asset management and service fees are affected by changes in the balances of client assets due to market fluctuations and levels of net new client assets.
For the three months ended September 30, 2009, asset management and service fee revenues decreased 15.9% to $25.5 million from $30.3 million in the comparable period of 2008. For the nine months ended September 30, 2009, asset management and service fee revenues decreased 17.2% to $75.0 million from $90.6 million in the comparable period of 2008. The decrease is primarily a result of a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers and lower assets under management as a result of market depreciation, offset by an increase in the number of managed accounts attributable principally to the continued growth of the private client group. See Assets in Fee-based Accounts included in the table in "Results of Operations - Global Wealth Management."
Other income - For the three months ended September 30, 2009, other income increased $8.0 million to $6.6 million from a loss of $1.4 million during the comparable period in 2008. For the nine months ended September 30, 2009, other income increased $10.3 million to $9.4 million from a loss of $0.9 million during the comparable period in 2008.
The increases are primarily attributable to the reduction of investment losses during the three and nine months ended September 30, 2009.
NET INTEREST INCOME
The following tables present average balance data and operating interest revenue and expense data, as well as related interest yields for the periods indicated (in thousands, except rates):
|
|
Three Months Ended |
||||||||||||||||
|
|
September 30, 2009 |
|
September 30, 2008 |
||||||||||||||
|
|
Average Balance |
|
Interest Income/ |
|
Average Interest Rate |
|
Average Balance |
|
Interest Income/ |
|
Average Interest Rate |
||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin balances (Stifel Nicolaus) |
|
$ |
301,697 |
|
$ |
3,277 |
|
4.34 |
% |
|
$ |
389,272 |
|
$ |
5,173 |
|
5.32 |
% |
Interest-earning assets (Stifel Bank) |
|
|
687,211 |
|
|
4,961 |
|
2.89 |
|
|
|
296,296 |
|
|
4,129 |
|
5.57 |
|
Stock borrow (Stifel Nicolaus) |
|
|
64,009 |
|
|
6 |
|
0.04 |
|
|
|
86,772 |
|
|
272 |
|
1.25 |
|
Other (Stifel Nicolaus) |
|
|
|
|
|
3,062 |
|
|
|
|
|
|
|
|
3,245 |
|
|
|
Total interest revenue |
|
|
|
|
$ |
11,306 |
|
|
|
|
|
|
|
$ |
12,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (Stifel Nicolaus) |
|
$ |
107,826 |
|
$ |
287 |
|
1.07 |
% |
|
$ |
162,732 |
|
$ |
980 |
|
2.41 |
% |
Interest-bearing liabilities (Stifel Bank) |
|
|
633,259 |
|
|
911 |
|
0.58 |
|
|
|
247,859 |
|
|
1,447 |
|
2.34 |
|
Stock loan (Stifel Nicolaus) |
|
|
78,898 |
|
|
221 |
|
1.12 |
|
|
|
105,273 |
|
|
539 |
|
2.05 |
|
Interest-bearing liabilities (Capital Trusts) |
|
|
82,500 |
|
|
1,373 |
|
6.66 |
|
|
|
95,000 |
|
|
1,587 |
|
6.68 |
|
Other (Stifel Nicolaus) |
|
|
|
|
|
114 |
|
|
|
|
|
|
|
|
353 |
|
|
|
Total interest expense |
|
|
|
|
|
2,906 |
|
|
|
|
|
|
|
|
4,906 |
|
|
|
Net interest income |
|
|
|
|
$ |
8,400 |
|
|
|
|
|
|
|
$ |
7,913 |
|
|
|
|
|
Nine Months Ended |
||||||||||||||||
|
|
September 30, 2009 |
|
September 30, 2008 |
||||||||||||||
|
|
Average Balance |
|
Interest Income/ |
|
Average Interest Rate |
|
Average Balance |
|
Interest Income/ |
|
Average Interest Rate |
||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin balances (Stifel Nicolaus) |
|
$ |
273,845 |
|
$ |
8,820 |
|
4.29 |
% |
|
$ |
416,297 |
|
$ |
17,413 |
|
5.58 |
% |
Interest-earning assets (Stifel Bank) |
|
|
555,153 |
|
|
12,395 |
|
2.98 |
|
|
|
269,551 |
|
|
11,491 |
|
5.68 |
|
Stock borrow (Stifel Nicolaus) |
|
|
25,855 |
|
|
32 |
|
0.16 |
|
|
|
63,273 |
|
|
726 |
|
1.53 |
|
Other (Stifel Nicolaus) |
|
|
|
|
|
10,535 |
|
|
|
|
|
|
|
|
9,545 |
|
|
|
Total interest revenue |
|
|
|
|
$ |
31,782 |
|
|
|
|
|
|
|
$ |
39,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (Stifel Nicolaus) |
|
$ |
119,381 |
|
$ |
870 |
|
0.97 |
% |
|
$ |
153,053 |
|
$ |
2,656 |
|
2.31 |
% |
Interest-bearing liabilities (Stifel Bank) |
|
|
505,545 |
|
|
2,605 |
|
0.69 |
|
|
|
220,341 |
|
|
4,599 |
|
2.78 |
|
Stock loan (Stifel Nicolaus) |
|
|
54,820 |
|
|
416 |
|
1.01 |
|
|
|
131,562 |
|
|
2,549 |
|
2.58 |
|
Interest-bearing liabilities (Capital Trusts) |
|
|
82,500 |
|
|
4,102 |
|
6.63 |
|
|
|
95,000 |
|
|
4,783 |
|
6.71 |
|
Other (Stifel Nicolaus) |
|
|
|
|
|
309 |
|
|
|
|
|
|
|
|
1,153 |
|
|
|
Total interest expense |
|
|
|
|
|
8,302 |
|
|
|
|
|
|
|
|
15,740 |
|
|
|
Net interest income |
|
|
|
|
$ |
23,480 |
|
|
|
|
|
|
|
$ |
23,435 |
|
|
|
Net interest income - Net interest income is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest income is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. For the quarter ended September 30, 2009, net interest income increased to $8.4 million from $7.9 million during the comparable period in 2008. For the nine months ended September 30, 2009, net interest income of $23.5 million remained consistent with the comparable period in 2008.
or the three months ended September 30, 2009, interest revenue decreased 11.8%, or $1.5 million, to $11.3 million from $12.8 million in the comparable period in 2008, principally as a result of a $1.9 million decrease in interest revenue from customer margin borrowing. The average margin balances of Stifel Nicolaus decreased to $301.7 million during the three months ended September 30, 2009 compared to $389.3 million during the comparable period in 2008 at weighted average interest rates of 4.34% and 5.32%, respectively.
For the nine months ended September 30, 2009, interest revenue decreased 18.9%, or $7.4 million, to $31.8 million from $39.2 million in the comparable period in 2008, principally as a result of an $8.6 million decrease in interest revenue from customer margin borrowing. The average margin balances of Stifel Nicolaus decreased to $273.8 million during the first nine months of 2009 compared to $416.3 million during the comparable period in 2008 at weighted average interest rates of 4.29% and 5.58%, respectively.
For the three months ended September 30, 2009, interest expense decreased 40.8%, or $2.0 million, to $2.9 million from $4.9 million in the comparable period in 2008. For the nine months ended September 30, 2009, interest expense decreased 47.3%, or $7.4 million, to $8.3 million from $15.7 million in the comparable period in 2008. The decreases are due to decreased interest rates charged by banks on lower levels of borrowings to finance customer borrowing and firm inventory, decreased interest rates on stock loan borrowings and the extinguishment of $12.5 million of 6.78% Stifel Financial Capital Trust IV Cumulative Preferred Securities in November 2008. See "Net Interest Income" table above for more details.
NON-INTEREST EXPENSES
The following table presents consolidated non-interest expenses for the periods indicated (in thousands, except percentages):
|
|
For the Three Months Ended |
|
For the Nine Months Ended |
||||||||||||||
|
|
2009 |
|
2008 |
|
% |
|
2009 |
|
2008 |
|
% |
||||||
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
$ |
193,131 |
|
$ |
150,203 |
|
28.6 |
% |
|
$ |
516,852 |
|
$ |
441,028 |
|
17.2 |
% |
Occupancy and equipment rental |
|
|
24,730 |
|
|
17,286 |
|
43.1 |
|
|
|
63,311 |
|
|
49,012 |
|
29.2 |
|
Communications and office supplies |
|
|
14,429 |
|
|
11,192 |
|
28.9 |
|
|
|
39,403 |
|
|
32,887 |
|
19.8 |
|
Commissions and floor brokerage |
|
|
6,486 |
|
|
4,348 |
|
49.2 |
|
|
|
17,167 |
|
|
8,315 |
|
106.5 |
|
Other operating expenses |
|
|
20,071 |
|
|
14,800 |
|
35.6 |
|
|
|
55,336 |
|
|
42,940 |
|
28.9 |
|
Total non-interest expenses |
|
$ |
258,847 |
|
$ |
197,829 |
|
30.8 |
% |
|
$ |
692,069 |
|
$ |
574,182 |
|
20.5 |
% |
Except as noted in the following discussion of variances, the underlying reasons for the increase in non-interest expenses can be attributed principally to our continued expansion, increased administrative overhead to support the growth in our segments and the transaction costs associated with the UBS acquisition.
Compensation and benefits - Compensation and benefits expenses, which are the largest component of our expenses, include salaries, bonuses, transition pay, benefits, amortization of stock-based compensation, employment taxes and other employee-related costs. A significant portion of compensation expense is comprised of production-based variable compensation, including discretionary bonuses, which fluctuates in proportion to the level of business activity, increasing with higher revenues and operating profits. Other compensation costs, including base salaries, stock-based compensation amortization, and benefits, are more fixed in nature.
For the three months ended September 30, 2009, compensation and benefits expense increased 28.6%, or $42.9 million, to $193.1 million from $150.2 million during the comparable period in 2008. For the nine months ended September 30, 2009, compensation and benefits expense increased 17.2%, or $75.9 million, to $516.9 million from $441.0 million during the comparable period in 2008. The increase in compensation and benefits expense over the prior year periods is primarily attributable to increased headcount and higher production-based variable compensation.
Compensation and benefits expense as a percentage of net revenues decreased to 66.7% for the three months ended September 30, 2009, compared to 68.6% for the comparable period in 2008. Compensation and benefits expense as a percentage of net revenues decreased to 67.0% for the nine months ended September 30, 2009, compared to 69.0% for the comparable period in 2008. The decrease in compensation and benefits expense as a percent of net revenues is primarily attributable to increased net revenues as compared to the three and nine month periods ended September 30, 2008, offset by an increase in transition pay and base salaries.
A portion of compensation and benefits expenses includes transition pay, principally in the form of upfront notes, signing bonuses and retention awards in connection with our continuing expansion efforts, of $14.8 million (5.1% of net revenues) and $40.9 million (5.3% of net revenues) for the three and nine month periods ended September 30, 2009, respectively, compared to $9.7 million (4.4% of net revenues) and $25.5 million (4.0% of net revenues) for the three and nine month periods ended September 30, 2008, respectively. The upfront notes are amortized over a five to ten year period. In addition, for the three and nine month periods ended September 30, 2008, compensation and benefits expense includes $6.5 million and $19.1 million, respectively, for amortization of units awarded to Legg Mason ("LM Capital Markets") associates, which were fully amortized as of December 31, 2008.
Occupancy and equipment rental - For the three months ended September 30, 2009, occupancy and equipment rental expense increased 43.1% to $24.7 million from $17.3 million during the three months ended September 30, 2008. For the nine months ended September 30, 2009, occupancy and equipment rental expense increased 29.2% to $63.3 million from $49.0 million during the nine months ended September 30, 2008. The increase is primarily due to the increase in rent and depreciation expense. As of September 30, 2009, we have 256 branch offices compared to 166 at September 30, 2008.
Communications and office supplies - Communications expense include costs for telecommunication and data communication, primarily for obtaining third-party market data information. For the three months ended September 30, 2009, communications and office supplies expense increased 28.9% to $14.4 million from $11.2 million during the second quarter of 2008. For the nine months ended September 30, 2009, communications and office supplies expense increased 19.8% to $39.4 million from $32.9 million during the comparable period in 2008. The increases were primarily attributable to our continued expansion as we sustained our growth initiatives throughout the first nine months of 2009 by adding additional revenue producers and support staff.
Commissions and floor brokerage - For the three months ended September 30, 2009, commissions and floor brokerage expense increased to $6.5 million from $4.3 million during the comparable period in 2008. For the nine months ended September 30, 2009, commissions and floor brokerage expense increased to $17.2 million from $8.3 million during the comparable period in 2008. The increases were primarily attributable to increased business activity. The increase over the comparable nine month period in 2008 is also attributable to a rebate of $1.5 million received during the first quarter of 2008 related to 2007 clearing fees. We received no such rebates in 2009.
Other operating expenses - Other operating expenses primarily include license and registration fees, litigation-related expenses, which consist of amounts we reserve and/or pay out related to legal and regulatory matters, travel and entertainment, promotional expenses and expenses for professional services.
For the three months ended September 30, 2009, other operating expenses increased 35.6% to $20.1 million from $14.8 million during the three months ended September 30, 2008. For the nine months ended September 30, 2009, other operating expenses increased 28.9% to $55.3 million from $42.9 million during the nine months ended September 30, 2008.
The increases were primarily attributable to the continued growth in all segments during the first nine months of 2009, which included increased license and registration fees, SIPC assessments, securities processing fees, travel and promotion, and legal expenses. The increase in legal expenses is attributable to an increase in litigation associated with the ongoing investigations in connection with ARS, and litigation costs to defend industry recruitment claims.
Provision for income taxes - For the three months ended September 30, 2009, our provision for income taxes was $8.7 million, representing an effective tax rate of 28.2%, compared to $8.3 million for the comparable period in 2008, representing an effective tax rate of 39.4%. For the nine months ended September 30, 2009, our provision for income taxes was $28.0 million, representing an effective tax rate of 35.4%, compared to $25.7 million for the comparable period in 2008, representing an effective tax rate of 39.5%. Our current year third quarter and year-to-date effective tax rates were reduced due to the recognition of a tax benefit of $3.4 million during the third quarter related to an investment and jobs creation tax credit.
SEGMENT ANALYSIS
Our reportable segments include Global Wealth Management, Capital Markets, and Other. The UBS branch acquisition and related customer account conversion to our platform has enabled us to leverage our customers' assets which allows us the ability to provide a full array of financial products to both our Private Client Group and Stifel Bank customers. As a result, we have changed how we manage these reporting units and consequently they were combined to form the Global Wealth Management segment Previously reported segment information has been revised to reflect this change.
As a result of organizational changes in the second quarter of 2009, which included a change in the management reporting structure of our company, the segments formerly reported as Equity Capital Markets and Fixed Income Capital Markets have been combined into a single segment called Capital Markets. Previously reported segment information has been revised to reflect this change.
Our Global Wealth Management segment consists of two businesses, the Private Client Group and Stifel Bank. The Private Client Group includes branch offices and independent contractor offices of our broker-dealer subsidiaries located throughout the United States, primarily in the Midwest and Mid-Atlantic regions with a growing presence in the Northeast, Southeast and Western United States. These branches provide securities brokerage services, including the sale of equities, mutual funds, fixed income products, and insurance, as well as offering banking products to their private clients through Stifel Bank, which provides residential, consumer, and commercial lending, as well as Federal Depository Insurance Corporation ("FDIC")-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public.
The Capital Markets segment includes institutional sales and trading. It provides securities brokerage, trading, and research services to institutions with an emphasis on the sale of equity and fixed income products. This segment also includes the management of and participation in underwritings for both corporate and public finance (exclusive of sales credits, which are included in the Global Wealth Management segment), merger and acquisition, and financial advisory services.
The Other segment includes interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, and all unallocated overhead cost associated with the execution of orders; processing of securities transactions; custody of client securities; receipt, identification, and delivery of funds and securities; compliance with regulatory and legal requirements; internal financial accounting and controls; acquisition charges related to the LM Capital Markets and Ryan Beck & Company, Inc. ("Ryan Beck") acquisitions, and general administration.
We evaluate the performance of our segments and allocate resources to them based on various factors, including prospects for growth, return on investment, and return on revenues.
Results of Operations - Global Wealth Management
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
The following table presents consolidated financial information for the Global Wealth Management segment for the periods indicated (in thousands, except percentages):
|
|
For the Three Months Ended |
|
|
As a Percentage of Net |
|
|||||||||||
|
|
2009 |
|
2008 |
|
% |
|
|
2009 |
|
2008 |
|
|||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
63,161 |
|
$ |
49,563 |
|
|
27.4 |
% |
|
|
40.2 |
% |
|
42.3 |
% |
|
Principal transactions |
|
|
53,052 |
|
|
28,468 |
|
|
86.4 |
|
|
|
33.8 |
|
|
24.3 |
|
Asset management and service fees |
|
|
25,406 |
|
|
30,111 |
|
|
(15.6 |
) |
|
|
16.2 |
|
|
25.7 |
|
Investment banking |
|
|
4,263 |
|
|
3,371 |
|
|
26.4 |
|
|
|
2.7 |
|
|
2.9 |
|
Interest |
|
|
8,997 |
|
|
9,672 |
|
|
(7.0 |
) |
|
|
5.7 |
|
|
8.3 |
|
Other income |
|
|
4,077 |
|
|
241 |
|
|
* |
|
|
|
2.6 |
|
|
0.2 |
|
Total revenues |
|
|
158,956 |
|
|
121,426 |
|
|
30.9 |
|
|
|
101.2 |
|
|
103.7 |
|
Interest expense |
|
|
1,811 |
|
|
4,275 |
|
|
(57.6 |
) |
|
|
1.2 |
|
3.7 |
|
|
Net revenues |
|
|
157,145 |
|
|
117,151 |
|
|
34.1 |
|
|
|
100.0 |
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
96,711 |
|
|
71,388 |
|
|
35.5 |
|
|
|
61.5 |
|
|
60.9 |
|
Occupancy and equipment rental |
|
|
13,447 |
|
|
9,466 |
|
|
42.1 |
|
|
|
8.6 |
|
|
8.1 |
|
Communication and office supplies |
|
|
7,295 |
|
|
4,930 |
|
|
48.0 |
|
|
|
4.6 |
|
|
4.2 |
|
Commissions and floor brokerage |
|
|
1,875 |
|
|
1,815 |
|
|
3.3 |
|
|
|
1.2 |
|
|
1.6 |
|
Other operating expenses |
|
|
10,277 |
|
|
6,019 |
|
|
70.7 |
|
|
|
6.6 |
|
|
5.1 |
|
Total non-interest expenses |
|
|
129,605 |
|
|
93,618 |
|
|
38.4 |
|
|
|
82.5 |
|
|
79.9 |
|
Income before income taxes |
|
$ |
27,540 |
|
$ |
23,533 |
|
|
17.0 |
% |
|
|
17.5 |
% |
|
20.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Percentage is not meaningful. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, 2008 |
|
|
September 30,
|
|
Branch offices (actual) |
|
|
256 |
|
|
196 |
|
|
166 |
|
Financial advisors (actual) |
|
|
1,640 |
|
|
1,142 |
|
|
1,043 |
|
Independent contractors (actual) |
|
|
183 |
|
|
173 |
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets in fee-based accounts: |
|
|
|
|
|
|
|
|
|
|
Value (in thousands) |
|
|
5,699,311 |
|
|
5,775,565 |
|
|
6,319,028 |
|
Number of accounts (actual) |
|
|
27,593 |
|
|
24,177 |
|
|
23,569 |
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents consolidated financial information for the Global Wealth Management segment for the periods indicated (in thousands, except percentages):
|
|
For the Nine Months Ended |
|
|
As a Percentage of Net |
|
|||||||||||
|
|
2009 |
|
2008 |
|
% |
|
|
2009 |
|
2008 |
|
|||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
158,468 |
|
$ |
146,860 |
|
|
7.9 |
% |
|
|
38.9 |
% |
|
41.0 |
% |
Principal transactions |
|
|
140,248 |
|
|
90,663 |
|
|
54.7 |
|
|
|
34.5 |
|
|
25.3 |
|
Asset management and service fees |
|
|
74,689 |
|
|
90,199 |
|
|
(17.2 |
) |
|
|
18.4 |
|
|
25.2 |
|
Investment banking |
|
|
9,176 |
|
|
13,690 |
|
|
(33.0 |
) |
|
|
2.3 |
|
|
3.8 |
|
Interest |
|
|
23,190 |
|
|
30,318 |
|
|
(23.5 |
) |
|
|
5.7 |
|
|
8.5 |
|
Other income |
|
|
5,914 |
|
|
1,100 |
|
|
* |
|
|
|
1.4 |
|
|
0.3 |
|
Total revenues |
|
|
411,685 |
|
|
372,830 |
|
|
10.4 |
|
|
|
101.2 |
|
|
104.1 |
|
Interest expense |
|
|
5,066 |
|
|
14,508 |
|
|
(65.1 |
) |
|
|
1.2 |
|
4.1 |
|
|
Net revenues |
|
|
406,619 |
|
|
358,322 |
|
|
13.5 |
|
|
|
100.0 |
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
253,169 |
|
|
218,661 |
|
|
15.8 |
|
|
|
62.3 |
|
|
61.0 |
|
Occupancy and equipment rental |
|
|
35,441 |
|
|
26,329 |
|
|
34.6 |
|
|
|
8.7 |
|
|
7.4 |
|
Communication and office supplies |
|
|
18,515 |
|
|
13,604 |
|
|
36.1 |
|
|
|
4.5 |
|
|
3.8 |
|
Commissions and floor brokerage |
|
|
5,580 |
|
|
3,308 |
|
|
68.7 |
|
|
|
1.4 |
|
|
0.9 |
|
Other operating expenses |
|
|
26,833 |
|
|
16,695 |
|
|
60.7 |
|
|
|
6.6 |
|
|
4.7 |
|
Total non-interest expenses |
|
|
339,538 |
|
|
278,597 |
|
|
21.9 |
|
|
|
83.5 |
|
|
77.8 |
|
Income before income taxes |
|
$ |
67,081 |
|
$ |
79,725 |
|
|
(15.9) |
% |
|
|
16.5 |
% |
|
22.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Percentage is not meaningful. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Except as noted in the following discussion of variances, the underlying reasons for the increase in revenue can be attributed principally to the increased number of private client group offices and financial advisors, the acquisition of Butler Wick on December 31, 2008, and the first three closings of the UBS acquisition during the third quarter of 2009.
NET REVENUES
For the three months ended September 30, 2009, Global Wealth Management net revenues increased 34.1% to $157.1 million from $117.2 million for the comparable period in 2008. For the nine months ended September 30, 2009, Global Wealth Management net revenues increased 13.5% to $406.6 million from $358.3 million for the comparable period in 2008.
The increase in net revenues for the three and nine month periods ended September 30, 2009 over the comparable periods in 2008 are primarily attributable to an increase in principal transactions and net interest revenues offset by decreases in asset management and service fees, and investment banking.
Commissions - For the three months ended September 30, 2009, commission revenues increased 27.4% to $63.2 million from $49.6 million in the comparable period in 2008. For the nine months ended September 30, 2009, commission revenues increased 7.9% to $158.5 million from $146.9 million in the comparable period in 2008. The increase is primarily attributable to an increase in agency transactions in OTC and listed equity securities, and insurance products. In addition, mutual fund revenue has increased over the comparable period in 2008.
Principal transactions - For the three months ended September 30, 2009, principal transactions revenue increased 86.4% to $53.1 million from $28.5 million in the comparable period in 2008. For the nine months ended September 30, 2009, principal transactions revenue increased 54.7% to $140.2 million from $90.7 million in the comparable period in 2008. The increases are primarily attributable to increased principal transactions, primarily in OTC equity, corporate and municipal debt and mortgage-backed bonds due to turbulent markets and customers returning to traditional fixed income products. The change in the mix from commissions-based revenues to principal transactions revenue has created an increase in our trading inventory levels primarily related to fixed income products.
Asset management and service fees - For the three months ended September 30, 2009, asset management and service fees decreased 15.6% to $25.4 million from $30.1 million in the comparable period in 2008. For the nine months ended September 30, 2009, asset management and service fees decreased 17.2% to $74.7 million from $90.2 million in the comparable period in 2008. The decrease is primarily a result of a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers and a 9.8% decrease in the value of assets in fee-based accounts from September 30, 2008, offset by a 17.1% increase in the number of managed accounts attributable principally to the continued growth of the private client group. See Assets in Fee-based Accounts included in the table above for further details.
Investment banking - Investment banking, which represents sales credits for investment banking underwritings, increased 26.4% to $4.3 million for the three months ended September 30, 2009 from $3.4 million during the comparable period in 2008. For the nine months ended September 30, 2009, investment banking decreased 33.0% to $9.2 million from $13.7 million during the comparable period in 2008. During the third quarter of 2009, capital market conditions continued to build upon the improvement that began in the second quarter and we raised capital for our clients in a number of successful transactions. While there has been a significant rebound in investment banking activity during the second and third quarter, our nine month results were negatively impacted by the challenging market conditions that began during the second half of 2008 and continued into the first quarter of 2009. See further discussion of investment banking activities in the Capital Markets segment section.
Interest revenue - For the three months ended September 30, 2009, interest revenue decreased 7.0% to $9.0 million from $9.7 million in the comparable period in 2008. For the nine months ended September 30, 2009, interest revenue decreased 23.5% to $23.2 million from $30.3 million in the comparable period in 2008. The decreases are primarily due to a decrease in interest revenue from customer margin borrowing to finance trading activity and lower average customer margin balances. See "Net Interest Income - Stifel Bank" below for a further discussion of the changes in net revenues.
Interest expense - For the three months ended September 30, 2009, interest expense decreased 57.6% to $1.8 million from $4.3 million in the comparable period in 2008. For the nine months ended September 30, 2009, interest expense decreased 65.1% to $5.1 million from $14.5 million in the comparable period in 2008. The decreases are primarily due to decreased interest rates charged by banks on lower levels of borrowings to finance customer borrowing. See "Net Interest Income - Stifel Bank" below for a further discussion of the changes in net revenues.
The following tables present average balance data and operating interest revenue and expense data for Stifel Bank, as well as related interest yields for the periods indicated (in thousands, except rates):
|
|
Three Months Ended |
|
Three Months Ended |
||||||||||||||
|
|
September 30, 2009 |
|
September 30, 2008 |
||||||||||||||
|
|
Average Balance |
|
Interest Income/ |
|
Average Interest Rate |
|
Average Balance |
|
Interest Income/ |
|
Average Interest Rate |
||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
$ |
225,562 |
|
$ |
163 |
|
0.29 |
% |
|
$ |
5,623 |
|
$ |
26 |
|
1.85 |
% |
U.S. government agencies |
|
|
1,126 |
|
|
14 |
|
5.16 |
|
|
|
9,792 |
|
|
185 |
|
7.56 |
|
State and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
- |
|
|
- |
|
- |
|
|
|
10,191 |
|
|
86 |
|
3.38 |
|
Non-taxable (1) |
|
|
961 |
|
|
9 |
|
4.02 |
|
|
|
1,527 |
|
|
15 |
|
3.93 |
|
Mortgage-backed securities |
|
|
147,557 |
|
|
1,477 |
|
4.00 |
|
|
|
35,014 |
|
|
453 |
|
5.18 |
|
Corporate bonds |
|
|
41,276 |
|
|
484 |
|
4.70 |
|
|
|
- |
|
- |
|
- |
|
|
Asset-backed securities |
|
|
15,692 |
|
|
162 |
|
4.13 |
|
|
|
21,364 |
|
|
410 |
|
7.68 |
|
Federal Home Loan Bank ("FHLB") and other capital stock |
|
|
783 |
|
|
3 |
|
1.68 |
|
|
|
1,707 |
|
|
11 |
|
2.58 |
|
Loans (2) |
|
|
224,375 |
|
|
2,340 |
|
4.17 |
|
|
|
197,330 |
|
|
2,771 |
|
5.62 |
|
Loans held for sale |
|
|
29,879 |
|
|
309 |
|
4.12 |
|
|
|
13,748 |
|
|
172 |
|
5.00 |
|
Total interest-earning assets (3) |
|
$ |
687,211 |
|
$ |
4,961 |
|
2.89 |
% |
|
$ |
296,296 |
|
$ |
4,129 |
|
5.57 |
% |
Cash and due from banks |
|
|
5,940 |
|
|
|
|
|
|
|
|
1,858 |
|
|
|
|
|
|
Other non interest-earning assets |
|
|
23,395 |
|
|
|
|
|
|
|
|
22,097 |
|
|
|
|
|
|
Total assets |
|
$ |
716,546 |
|
|
|
|
|
|
|
$ |
320,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
11,145 |
|
$ |
7 |
|
0.25 |
% |
|
$ |
3,055 |
|
$ |
13 |
|
1.70 |
% |
Money market |
|
|
600,536 |
|
|
727 |
|
0.48 |
|
|
|
188,205 |
|
|
934 |
|
1.99 |
|
Savings |
|
|
286 |
|
|
- |
|
- |
|
|
|
304 |
|
|
1 |
|
1.32 |
|
Time deposits |
|
|
19,292 |
|
|
160 |
|
3.32 |
|
|
|
32,797 |
|
|
344 |
|
4.20 |
|
FHLB advances |
|
|
2,000 |
|
|
17 |
|
3.27 |
|
|
|
21,692 |
|
|
145 |
|
2.67 |
|
Federal funds and repurchase agreements |
|
|
- |
|
|
- |
|
- |
|
|
|
1,806 |
|
|
10 |
|
2.21 |
|
Total interest-bearing liabilities (3) |
|
$ |
633,259 |
|
$ |
911 |
|
0.58 |
% |
|
$ |
247,859 |
|
$ |
1,447 |
|
2.34 |
% |
Non interest-bearing deposits |
|
|
12,228 |
|
|
|
|
|
|
|
|
16,342 |
|
|
|
|
|
|
Other non interest-bearing liabilities |
|
|
2,073 |
|
|
|
|
|
|
|
|
1,859 |
|
|
|
|
|
|
Total liabilities |
|
|
647,560 |
|
|
|
|
|
|
|
|
266,060 |
|
|
|
|
|
|
Stockholders' equity |
|
|
68,986 |
|
|
|
|
|
|
|
|
54,191 |
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
716,546 |
|
|
|
|
|
|
|
$ |
320,251 |
|
|
|
|
|
|
Net interest margin |
|
|
|
|
$ |
4,050 |
|
2.36 |
% |
|
|
|
|
$ |
2,682 |
|
3.63 |
% |
(1) Due to immaterial amount of income recognized on tax-exempt securities, yields were not calculated on a tax equivalent basis.
(2) Loans on non-accrual status are included in average balances.
(3) See Net Interest Income table included in "Results of Operations" for additional information on our company's average balances and operating interest and expenses.
|
|
Nine Months Ended |
|
Nine Months Ended |
||||||||||||||
|
|
September 30, 2009 |
|
September 30, 2008 |
||||||||||||||
|
|
Average Balance |
|
Interest Income/ |
|
Average Interest Rate |
|
Average Balance |
|
Interest Income/ |
|
Average Interest Rate |
||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
$ |
201,396 |
|
$ |
653 |
|
0.43 |
% |
|
$ |
10,203 |
|
$ |
201 |
|
2.63 |
% |
U.S. government agencies |
|
|
2,037 |
|
|
85 |
|
5.57 |
|
|
|
14,974 |
|
|
699 |
|
6.22 |
|
State and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
- |
|
|
- |
|
- |
|
|
|
10,939 |
|
|
316 |
|
3.85 |
|
Non-taxable (1) |
|
|
1,142 |
|
|
35 |
|
4.10 |
|
|
|
1,533 |
|
|
43 |
|
3.74 |
|
Mortgage-backed securities |
|
|
77,593 |
|
|
2,404 |
|
4.13 |
|
|
|
33,262 |
|
|
1,288 |
|
5.16 |
|
Corporate bonds |
|
|
23,202 |
|
|
799 |
|
4.59 |
|
|
|
1,237 |
|
57 |
|
6.14 |
|
|
Asset-backed securities |
|
|
12,928 |
|
|
579 |
|
5.97 |
|
|
|
20,119 |
|
|
1,226 |
|
8.12 |
|
FHLB and other capital stock |
|
|
756 |
|
|
5 |
|
0.89 |
|
|
|
1,012 |
|
|
19 |
|
2.50 |
|
Loans (2) |
|
|
198,599 |
|
|
6,670 |
|
4.48 |
|
|
|
160,815 |
|
|
7,089 |
|
5.88 |
|
Loans held for sale |
|
|
37,500 |
|
|
1,165 |
|
4.14 |
|
|
|
15,457 |
|
|
553 |
|
4.77 |
|
Total interest-earning assets (3) |
|
$ |
555,153 |
|
$ |
12,395 |
|
2.98 |
% |
|
$ |
269,551 |
|
$ |
11,491 |
|
5.68 |
% |
Cash and due from banks |
|
|
4,867 |
|
|
|
|
|
|
|
|
1,848 |
|
|
|
|
|
|
Other non interest-earning assets |
|
|
26,105 |
|
|
|
|
|
|
|
|
21,395 |
|
|
|
|
|
|
Total assets |
|
$ |
586,125 |
|
|
|
|
|
|
|
$ |
292,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
9,108 |
|
$ |
22 |
|
0.31 |
% |
|
$ |
2,689 |
|
$ |
39 |
|
1.93 |
% |
Money market |
|
|
471,997 |
|
|
1,975 |
|
0.56 |
|
|
|
164,825 |
|
|
2,962 |
|
2.40 |
|
Savings |
|
|
321 |
|
|
- |
|
- |
|
|
|
342 |
|
|
3 |
|
1.17 |
|
Time deposits |
|
|
20,361 |
|
|
521 |
|
3.14 |
|
|
|
39,792 |
|
|
1,350 |
|
4.52 |
|
FHLB advances |
|
|
3,744 |
|
|
87 |
|
3.09 |
|
|
|
11,527 |
|
|
225 |
|
2.60 |
|
Federal funds and repurchase agreements |
|
|
14 |
|
|
- |
|
- |
|
|
|
1,166 |
|
|
20 |
|
2.29 |
|
Total interest-bearing liabilities (3) |
|
$ |
505,545 |
|
$ |
2,605 |
|
0.69 |
% |
|
$ |
220,341 |
|
$ |
4,599 |
|
2.78 |
% |
Non interest-bearing deposits |
|
|
14,801 |
|
|
|
|
|
|
|
|
15,620 |
|
|
|
|
|
|
Other non interest-bearing liabilities |
|
|
1,989 |
|
|
|
|
|
|
|
|
1,532 |
|
|
|
|
|
|
Total liabilities |
|
|
522,335 |
|
|
|
|
|
|
|
|
237,493 |
|
|
|
|
|
|
Stockholders' equity |
|
|
63,790 |
|
|
|
|
|
|
|
|
55,301 |
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
586,125 |
|
|
|
|
|
|
|
$ |
292,794 |
|
|
|
|
|
|
Net interest margin |
|
|
|
|
$ |
9,790 |
|
2.35 |
% |
|
|
|
|
$ |
6,892 |
|
3.41 |
% |
(1) Due to immaterial amount of income recognized on tax-exempt securities, yields were not calculated on a tax equivalent basis.
(2) Loans on non-accrual status are included in average balances.
(3) See Net Interest Income table included in "Results of Operations" for additional information on our company's average balances and operating interest and expenses.
The following table sets forth an analysis of the effect on net interest income of volume and rate changes for the three and nine month periods ended September 30, 2009 compared to the three and nine month periods ended September 30, 2008 (in thousands):
|
|
Three Months Ended September 30, 2009 |
|
Nine Months Ended September 30, 2009 |
|
||||||||||||||
|
|
Increase (decrease) due to: |
|
Increase (decrease) due to: |
|
||||||||||||||
|
|
Volume |
|
Rate |
|
Total |
|
Volume |
|
Rate |
|
Total |
|
||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
$ |
304 |
|
$ |
(167 |
) |
$ |
137 |
|
$ |
862 |
|
$ |
(410 |
) |
$ |
452 |
|
U.S. government agencies |
|
|
(126 |
) |
|
(45 |
) |
|
(171 |
) |
|
(547 |
) |
|
(67 |
) |
|
(614 |
) |
State and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(43 |
) |
|
(43 |
) |
|
(86 |
) |
|
(158 |
) |
|
(158 |
) |
|
(316 |
) |
Non-taxable |
|
|
(9 |
) |
|
3 |
|
|
(6 |
) |
|
(13 |
) |
|
5 |
|
|
(8 |
) |
Mortgage-backed securities |
|
|
1,725 |
|
|
(701 |
) |
|
1,024 |
|
|
1,567 |
|
|
(451 |
) |
|
1,116 |
|
Corporate bonds |
|
|
242 |
|
|
242 |
|
|
484 |
|
|
769 |
|
|
(27 |
) |
|
742 |
|
Asset-backed securities |
|
|
(90 |
) |
|
(158 |
) |
|
(248 |
) |
|
(371 |
) |
|
(276 |
) |
|
(647 |
) |
FHLB and other capital stock |
|
|
(5 |
) |
|
(3 |
) |
|
(8 |
) |
|
(4 |
) |
|
(10 |
) |
|
(14 |
) |
Loans |
|
|
1,871 |
|
|
(2,302 |
) |
|
(431 |
) |
|
2,022 |
|
|
(2,441 |
) |
|
(419 |
) |
Loans held for sale |
|
|
334 |
|
|
(197 |
) |
|
137 |
|
|
739 |
|
|
(127 |
) |
|
612 |
|
|
|
$ |
4,203 |
|
$ |
(3,371 |
) |
$ |
832 |
|
$ |
4,866 |
|
$ |
(3,962 |
) |
$ |
904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) due to: |
|
Increase (decrease) due to: |
|
||||||||||||||
|
|
Volume |
|
Rate |
|
Total |
|
Volume |
|
Rate |
|
Total |
|
||||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
60 |
|
$ |
(66 |
) |
$ |
(6 |
) |
$ |
52 |
|
$ |
(69 |
) |
$ |
(17 |
) |
Money market |
|
|
4,044 |
|
|
(4,251 |
) |
|
(207 |
) |
|
3,592 |
|
|
(4,579 |
) |
|
(987 |
) |
Savings |
|
|
- |
|
|
(1 |
) |
|
(1 |
) |
|
- |
|
|
(3 |
) |
|
(3 |
) |
Time deposits |
|
|
(122 |
) |
|
(62 |
) |
|
(184 |
) |
|
(551 |
) |
|
(278 |
) |
|
(829 |
) |
FHLB advances |
|
|
(392 |
) |
|
264 |
|
|
(128 |
) |
|
(196 |
) |
|
58 |
|
|
(138 |
) |
Federal funds and repurchase agreements |
|
|
(5 |
) |
|
(5 |
) |
|
(10 |
) |
|
(10 |
) |
|
(10 |
) |
|
(20 |
) |
|
|
$ |
3,585 |
|
$ |
(4,121 |
) |
$ |
(536 |
) |
$ |
2,887 |
|
$ |
(4,881 |
) |
$ |
(1,994 |
) |
Increases and decreases in interest revenue and interest expense result from changes in average balances (volume) of interest-earning bank assets and liabilities, as well as changes in average interest rates. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year's volume. Changes applicable to both volume and rate have been allocated proportionately.
Net interest income - Net interest income is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest income is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies.
For the three months ended September 30, 2009, interest revenue of $5.0 million was generated from weighted average interest-earning assets of $687.2 million at a weighted average interest rate of 2.89%. Interest revenue of $4.1 million for the comparable period in 2008 was generated from weighted average interest-earning assets of $296.3 million at a weighted average interest rate of 5.57%.
For the nine months ended September 30, 2009, interest revenue of $12.4 million was generated from weighted average interest-earning assets of $555.2 million at a weighted average interest rate of 2.98%. Interest revenue of $11.5 million for the comparable period in 2008 was generated from weighted average interest-earning assets of $269.6 million at a weighted average interest rate of 5.68%. Interest-earning assets principally consist of residential, consumer, and commercial loans, securities, and federal funds sold.
Interest expense represents interest on customer money market and savings accounts, interest on time deposits and other interest expense. The weighted average balance of interest-bearing liabilities during the three months ended September 30, 2009 was $633.3 million at a weighted average interest rate of 0.58%. The weighted average balance of interest-bearing liabilities for the comparable period in 2008 was $247.9 million at a weighted average interest rate of 2.34%.
The weighted average balance of interest-bearing liabilities during the nine months ended September 30, 2009 was $505.5 million at a weighted average interest rate of 0.69%. The weighted average balance of interest-bearing liabilities for the comparable period in 2008 was $220.3 million at a weighted average interest rate of 2.78%.
The growth in Stifel Bank has been primarily driven by (i) the conversion of UBS branches to the Stifel Nicolaus platform with money market funds and FDIC-insured balances of $1.7 billion and (ii) the growth in deposits associated with brokerage customers of Stifel Nicolaus. At September 30, 2009, the balance of Stifel Nicolaus brokerage customer deposits at Stifel Bank was $834.8 million compared to $197.5 million at September 30, 2008.
See the average balances and interest rates for Stifel Bank presented above for more information regarding average balances, interest income and expense, and average interest rate yields.
NON-INTEREST EXPENSES
For the three months ended September 30, 2009, Global Wealth Management non-interest expenses increased 38.4% to $129.6 million from $93.6 million for the comparable period in 2008. For the nine months ended September 30, 2009, Global Wealth Management non-interest expenses increased 21.9% to $339.5 million from $278.6 million for the comparable period in 2008.
Unless specifically discussed below, the fluctuations in non-interest expenses were primarily attributable to the continued growth of our Private Client Group during the three and nine month period ended September 30, 2009. Our expansion efforts include the acquisitions of UBS and Butler Wick, as well as organic growth. As of September 30, 2009, we have 256 branch offices compared to 166 at September 20, 2008. In addition, since September 30, 2008, we have added 960 revenue producers and support staff.
Compensation and benefits - For the three months ended September 30, 2009, compensation and benefits expense increased 35.5% to $96.7 million from $71.4 million during the three months ended September 30, 2008. For the nine months ended September 30, 2009, compensation and benefits expense increased 15.8% to $253.2 million from $218.7 million during the comparable period in 2008. The increase is principally due to increased variable compensation as a result of increased production and fixed compensation.
Compensation and benefits expense as a percentage of net revenues increased to 61.5% for the three months ended September 30, 2009, compared to 60.9% for the comparable period in 2008. Compensation and benefits expense as a percentage of net revenues increased to 62.3% for the nine months ended September 30, 2009, compared to 61.0% for the comparable period in 2008. The increase in compensation and benefits expense as a percent of net revenues is primarily attributable to increased transition pay, which consists of the amortization of upfront notes, signing bonuses and retention awards, and increased overhead in connection with our continued expansion efforts.
A portion of compensation and benefits expenses includes transition pay, principally in the form of upfront notes, signing bonuses and retention awards in connection with our continuing expansion efforts, of $10.8 million (6.9% of net revenues) and $28.7 million (7.1% of net revenues) for the three and nine month periods ended September 30, 2009, respectively, compared to $7.3 million (6.3% of net revenues) and $20.8 million (5.8% of net revenues) for the three and nine month periods ended September 30, 2008, respectively. The upfront notes are amortized over a five to ten year period.
Occupancy and equipment rental - For the three months ended September 30, 2009, occupancy and equipment rental expense increased 42.1% to $13.4 million from $9.5 million during the comparable period in 2008. For the nine months ended September 30, 2009, occupancy and equipment rental expense increased 34.6% to $35.4 million from $26.3 million during the comparable period in 2008.
Communications and office supplies - For the three months ended September 30, 2009, communications and office supplies expense increased 48.0% to $7.3 million from $4.9 million during the third quarter of 2008. For the nine months ended September 30, 2009, communications and office supplies expense increased 36.1% to $18.5 million from $13.6 million during the comparable period in 2008.
Commissions and floor brokerage - For the three months ended September 30, 2009, commissions and floor brokerage expense increased 3.3% to $1.9 million from $1.8 million during the third quarter of 2008. For the nine months ended September 30, 2009, commissions and floor brokerage expense increased $2.3 million, or 68.7%, to $5.6 million from $3.3 million during the comparable period in 2008.
Other operating expenses - For the three months ended September 30, 2009, other operating expenses increased 70.7% to $10.3 million from $6.0 million during the comparable period in 2008. For the nine months ended September 30, 2009, other operating expenses increased 60.7% to $26.8 million from $16.7 million during the comparable period in 2008. As a result of the growth of our Private Client Group segment during the nine months ended September 30, 2009, there has been an increase in license and registration fees, securities processing fees, and travel-related expenses associated with our acquisition of UBS, as well as litigation costs to defend industry recruiting claims.
INCOME BEFORE INCOME TAXES
For the three months ended September 30, 2009, income before income taxes increased 17.0% to $27.5 million from $23.5 million during the comparable period in 2008. For the nine months ended September 30, 2009, income before income taxes decreased 15.9% to $67.1 million from $79.7 million during the comparable period in 2008. Profit margins have diminished resulting from start-up costs associated with branch office openings and the transaction costs associated with the UBS acquisition, as we took advantage of the opportunities created by market displacement.
Results of Operations - Capital Markets
Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
The following table presents consolidated financial information for the Capital Markets segment for the periods indicated (in thousands, except percentages):
|
|
For the Three Months Ended |
|
|
As a Percentage of Net |
|
|||||||||||
|
|
2009 |
|
2008 |
|
% |
|
|
2009 |
|
2008 |
|
|||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions |
|
$ |
70,186 |
|
$ |
39,713 |
|
|
76.7 |
% |
|
|
53.9 |
% |
|
39.1 |
% |
Commissions |
|
|
27,743 |
|
|
39,164 |
|
|
(29.2 |
) |
|
|
21.3 |
|
|
38.6 |
|
Capital raising |
|
|
18,070 |
|
|
7,733 |
|
|
133.7 |
|
|
|
13.9 |
|
|
7.6 |
|
Advisory |
|
|
12,724 |
|
|
14,052 |
|
|
(9.5 |
) |
|
|
9.8 |
|
|
13.8 |
|
Investment banking |
|
|
30,794 |
|
|
21,785 |
|
|
41.4 |
|
|
|
23.7 |
|
|
21.4 |
|
Interest |
|
|
2,256 |
|
|
2,382 |
|
|
(5.3 |
) |
|
|
1.7 |
|
|
2.3 |
|
Other income |
|
|
306 |
|
|
354 |
|
|
(13.6 |
) |
|
|
0.2 |
|
|
0.4 |
|
Total revenues |
|
|
131,285 |
|
|
103,398 |
|
|
27.0 |
|
|
|
100.8 |
|
|
101.8 |
|
Interest expense |
|
|
1,106 |
|
|
1,800 |
|
|
(38.6 |
) |
|
|
0.8 |
|
1.8 |
|
|
Net revenues |
|
|
130,179 |
|
|
101,598 |
|
|
28.1 |
|
|
|
100.0 |
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
77,483 |
|
|
62,030 |
|
|
24.9 |
|
|
|
59.5 |
|
|
61.0 |
|
Occupancy and equipment rental |
|
|
4,697 |
|
|
3,734 |
|
|
25.8 |
|
|
|
3.6 |
|
|
3.7 |
|
Communication and office supplies |
|
|
4,490 |
|
|
4,160 |
|
|
7.9 |
|
|
|
3.5 |
|
|
4.1 |
|
Commissions and floor brokerage |
|
|
4,564 |
|
|
2,533 |
|
|
80.2 |
|
|
|
3.5 |
|
|
2.5 |
|
Other operating expenses |
|
|
5,512 |
|
|
5,352 |
|
|
3.0 |
|
|
|
4.2 |
|
|
5.3 |
|
Total non-interest expenses |
|
|
96,746 |
|
|
77,809 |
|
|
24.3 |
|
|
|
74.3 |
|
|
76.6 |
|
Income before income taxes |
|
$ |
33,433 |
|
$ |
23,789 |
|
|
40.5 |
% |
|
|
25.7 |
% |
|
23.4 |
% |
Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
The following table presents consolidated financial information for the Capital Markets segment for the periods indicated (in thousands, except percentages):
|
|
For the Nine Months Ended |
|
|
As a Percentage of Net |
|
|||||||||||
|
|
2009 |
|
2008 |
|
% |
|
|
2009 |
|
2008 |
|
|||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions |
|
$ |
201,529 |
|
$ |
110,129 |
|
|
83.0 |
% |
|
|
55.9 |
|
|
39.7 |
% |
Commissions |
|
|
87,767 |
|
$ |
110,631 |
|
|
(20.7 |
) |
|
|
24.3 |
|
|
39.9 |
|
Capital raising |
|
|
32,890 |
|
|
22,257 |
|
|
47.8 |
|
|
|
9.1 |
|
|
8.0 |
|
Advisory |
|
|
33,197 |
|
|
31,988 |
|
|
3.8 |
|
|
|
9.2 |
|
|
11.5 |
|
Investment banking |
|
|
66,087 |
|
|
54,245 |
|
|
21.8 |
|
|
|
18.3 |
|
|
19.5 |
|
Interest |
|
|
6,973 |
|
|
6,790 |
|
|
2.7 |
|
|
|
1.9 |
|
|
2.5 |
|
Other income |
|
|
895 |
|
|
920 |
|
|
(2.7 |
) |
|
|
0.3 |
|
|
0.3 |
|
Total revenues |
|
|
363,251 |
|
|
282,715 |
|
|
32.7 |
|
|
|
100.7 |
|
|
101.9 |
|
Interest expense |
|
|
2,464 |
|
|
5,167 |
|
|
(52.3 |
) |
|
|
0.7 |
|
1.9 |
|
|
Net revenues |
|
|
360,787 |
|
|
277,548 |
|
|
30.0 |
|
|
|
100.0 |
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
214,251 |
|
|
171,875 |
|
|
24.7 |
|
|
|
59.4 |
|
|
61.9 |
|
Occupancy and equipment rental |
|
|
12,201 |
|
|
10,026 |
|
|
21.7 |
|
|
|
3.4 |
|
|
3.6 |
|
Communication and office supplies |
|
|
13,767 |
|
|
14,253 |
|
|
(3.4 |
) |
|
|
3.8 |
|
|
5.1 |
|
Commissions and floor brokerage |
|
|
11,537 |
|
|
5,007 |
|
|
130.4 |
|
|
|
3.2 |
|
|
1.8 |
|
Other operating expenses |
|
|
17,714 |
|
|
15,388 |
|
|
15.1 |
|
|
|
4.9 |
|
|
5.6 |
|
Total non-interest expenses |
|
|
269,470 |
|
|
216,549 |
|
|
24.4 |
|
|
|
74.7 |
|
|
78.0 |
|
Income before income taxes |
|
$ |
91,317 |
|
$ |
60,999 |
|
|
49.7 |
% |
|
|
25.3 |
% |
|
22.0 |
% |
NET REVENUES
For the three months ended September 30, 2009, Capital Markets net revenues increased 28.1% to $130.2 million from $101.6 million for the comparable period in 2008. For the nine months ended September 30, 2009, Capital Markets net revenues increased 30.0% to $360.8 million from $277.5 million for the comparable period in 2008.
The increase in net revenues for the three and nine month periods ended September 30, 2009 over the comparable periods in 2008 are primarily attributable to an increase in principal transactions, investment banking and net interest revenues offset by a decrease in commissions.
Principal transactions - For the three months ended September 30, 2009, principal transactions revenue increased $30.5 million, or 76.7%, to $70.2 million from $39.7 million in the comparable period in 2008. For the nine months ended September 30, 2009, principal transactions revenue increased $91.4 million, or 83.0%, to $201.5 million from $110.1 million in the comparable period in 2008. The increases are primarily attributable to increased principal transactions, primarily in OTC equity, corporate and municipal debt and mortgage-backed bonds due to turbulent markets and institutional customers returning to traditional fixed income products. The change in the mix from commissions-based revenues to principal transactions revenue has created an increase in our trading inventory levels primarily related to fixed income products.
Commissions - For the three months ended September 30, 2009, commission revenues decreased 29.2% to $27.7 million from $39.2 million in the comparable period in 2008. For the nine months ended September 30, 2009, commission revenues decreased 20.7% to $87.8 million from $110.6 million in the comparable period in 2008. The volatility in capital markets has resulted in a decrease in trading volumes, as customers have returned to traditional fixed income products.
Investment banking - For the three months ended September 30, 2009, investment banking revenues increased 41.4% to $30.8 million from $21.8 million in the comparable period in 2008. For the nine months ended September 30, 2009, investment banking revenues increased 21.8% to $66.1 million from $54.2 million in the comparable period in 2008.
For the three months ended September 30, 2009, capital raising revenues increased $10.4 million to $18.1 million from $7.7 million in the comparable period in 2008. For the nine months ended September 30, 2009, capital raising revenues increased $10.6 million, or 47.8%, to $32.9 million from $22.3 million in the comparable period in 2008.
For the three months ended September 30, 2009, fixed income capital raising revenues increased $1.8 million to $3.8 million from $2.0 million during the third quarter of 2008. For the nine months ended September 30, 2009, fixed income capital raising revenues increased $4.1 million to $8.1 million from $4.0 million during the comparable period in 2008.
During the second and third quarters of 2009, capital market conditions began to improve, and we raised capital for our clients in a number of successful public finance underwritings. In addition, our revenues were positively impacted by our investment in public finance offices and professional staff during the second half of 2008. For the nine months ended September 30, 2009, we were involved, as manager or co-manager, in 251 tax-exempt issues with a total par value of $13.9 billion compared to 97 issues with a total par value of $5.7 billion during the comparable period in 2008.
For the three months ended September 30, 2009, equity capital raising revenues increased $8.5 million to $12.9 million from $4.4 million during the third quarter of 2008. For the nine months ended September 30, 2009, equity capital raising revenues increased $7.9 million to $23.0 million from $15.1 million during the comparable period in 2008. During the quarter ended September 30, 2009, we were involved, as manager or co-manger, in 27 equity underwritings which raised a total of $3.5 billion, an increase of 80.0% in the number of underwritings over the comparable period in 2008. For the nine months ended September 30, 2009, we were involved, as manager or co-manager in 52 equity underwritings which raised a total of $16.9 billion, compared to 42 during the comparable period in 2008, an increase of 23.8% in the number of underwritings over the comparable period in 2008.
For the three months ended September 30, 2009, strategic advisory fees decreased 9.5% to $12.7 million from $14.1 million in the comparable period in 2008. For the nine months ended September 30, 2009, strategic advisory fees increased 3.8% to $33.2 million from $32.0 million in the comparable period in 2008. The increases are primarily due to an increase in the number of completed transactions and the aggregate transaction value, as well as the average revenue per transaction, over the comparable periods in 2008.
Interest revenue - For the three months ended September 30, 2009, interest revenue decreased 5.3% to $2.3 million from $2.4 million in the comparable period in 2008. For the nine months ended September 30, 2009, interest revenue increased 2.7% to $7.0 million from $6.8 million in the comparable period in 2008. The increase in interest revenues is primarily attributable to increased interest earned on our trading inventory. The change in the mix from commissions-based revenues to principal transactions revenue has created an increase in our trading inventory levels primarily related to fixed income products.
Interest expense - For the three months ended September 30, 2009, interest expense decreased 38.6%, or $0.7 million, to $1.1 million from $1.8 million in the comparable period in 2008. For the nine months ended September 30, 2009, interest expense decreased 52.3%, or $2.7 million, to $2.5 million from $5.2 million in the comparable period in 2008. The decreases are due to decreased interest rates charged by banks on lower levels of borrowings to finance firm inventory.
NON-INTEREST EXPENSES
For the three months ended September 30, 2009, Capital Markets non-interest expenses increased 24.3% to $96.7 million from $77.8 million for the comparable period in 2008. For the nine months ended September 30, 2009, Capital Markets non-interest expenses increased 24.4% to $269.5 million from $216.5 million for the comparable period in 2008.
Unless specifically discussed below, the fluctuations in non-interest expenses were primarily attributable to the continued growth of our Capital Markets segment during the three and nine month period ended September 30, 2009. We have added 38 revenue producers and support staff since September 30, 2008.
Compensation and benefits - For the three months ended September 30, 2009, compensation and benefits expense increased 24.9% to $77.5 million from $62.0 million during the comparable period in 2008. For the nine months ended September 30, 2009, compensation and benefits expense increased 24.7% to $214.3 million from $171.9 million during the comparable period in 2008. The increase is primarily due to increased fixed compensation and higher production-based variable compensation due to higher production as compared to the prior year.
Compensation and benefits expense as a percentage of net revenues decreased to 59.5% for the three months ended September 30, 2009, compared to 61.0% for the comparable period in 2008. Compensation and benefits expense as a percentage of net revenues decreased to 59.4% for the nine months ended September 30, 2009, compared to 61.9% for the comparable period in 2008. The decrease in compensation and benefits expense as a percent of net revenues is primarily attributable to increased net revenues.
Occupancy and equipment rental - For the three months ended September 30, 2009, occupancy and equipment rental expense increased 25.8% to $4.7 million from $3.7 million during the comparable period in 2008. For the nine months ended September 30, 2009, occupancy and equipment rental expense increased 21.7% to $12.2 million from $10.0 million during the comparable period in 2008.
Communications and office supplies - For the three months ended September 30, 2009, communications and office supplies expense increased 7.9% to $4.5 million from $4.2 million during the third quarter of 2008. For the nine months ended September 30, 2009, communications and office supplies expense decreased 3.4% to $13.8 million from $14.3 million during the first nine months of 2008.
Commissions and floor brokerage - For the three months ended September 30, 2009, commissions and floor brokerage expense increased $2.1 million to $4.6 million from $2.5 million during the third quarter of 2008. For the nine months ended September 30, 2009, commissions and floor brokerage expense increased $6.5 million to $11.5 million from $5.0 million during the first nine months of 2008.
Other operating expenses - For the three months ended September 30, 2009, other operating expenses increased 3.0% to $5.5 million from $5.4 million during the comparable period in 2008. For the nine months ended September 30, 2009, other operating expenses increased 15.1% to $17.7 million from $15.4 million during the comparable period in 2008.
INCOME BEFORE INCOME TAXES
For the three months ended September 30, 2009, income before income taxes for the Capital Markets segment increased $9.6 million, or 40.5%, to $33.4 million from $23.8 million during the comparable period in 2008. For the nine months ended September 30, 2009, income before income taxes for the Capital Markets segment increased $30.3 million, or 49.7%, to $91.3 million from $61.0 million during the comparable period in 2008. The increase is primarily attributable to increased revenues and the scalability of increased production as a result of our continued expansion of the Capital Markets segment during the first nine months of 2009.
The following table presents consolidated financial information for the Other segment for the periods presented (in thousands, except percentages):
|
|
For the Three Months Ended |
|
For the Nine Months Ended |
||||||||||||||
|
|
2009 |
|
2008 |
|
% |
|
2009 |
|
2008 |
|
% |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
2,359 |
|
$ |
174 |
|
* |
% |
|
$ |
3,763 |
|
$ |
3,481 |
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
18,937 |
|
|
16,785 |
|
12.8 |
|
|
|
49,432 |
|
|
50,492 |
|
(2.1 |
) |
Other operating expenses |
|
|
13,559 |
|
|
9,617 |
|
41.0 |
|
|
|
33,629 |
|
|
28,544 |
|
17.8 |
|
Total non-interest expenses |
|
|
32,496 |
|
|
26,402 |
|
23.1 |
|
|
|
83,061 |
|
|
79,036 |
|
5.1 |
|
Loss before income taxes |
|
$ |
(30,137 |
) |
$ |
(26,228 |
) |
14.9 |
% |
|
$ |
(79,298 |
) |
$ |
(75,555 |
) |
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Percentage is not meaningful. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues - For the three months ended September 30, 2009, net revenues increased $2.2 million to $2.4 million from $0.2 million for the comparable period in 2008. For the nine months ended September 30, 2009, net revenues increased 8.1% to $3.8 million from $3.5 million for the comparable period in 2008. The increase in net revenues is primarily attributable to the reduction of investment losses during the three and nine months ended September 30, 2009, offset by declining net interest revenues.
Compensation and benefits - For the three months ended September 30, 2009, compensation and benefits expense increased 12.8% to $18.9 million from $16.8 million for the comparable period in 2008. For the nine months ended September 30, 2009, compensation and benefits expense decreased 2.1% to $49.4 million from $50.5 million for the comparable period in 2008.
The increases in compensation and benefits expense during the nine months ended September 30, 2009 were related to an increase in support personnel as we continued our growth initiatives. For the three and nine month periods ended September 30, 2009, the increases were offset by compensation charges of $6.5 million and $19.1 million, respectively, related to the amortization of units awarded to LM Capital Markets associates, which were fully amortized as of December 31, 2008.
Other operating expenses - For the three months ended September 30, 2009, other operating expenses increased 41.0% to $13.6 million from $9.6 million for the comparable period in 2008. For the nine months ended September 30, 2009, other operating expenses increased 17.8% to $33.6 million from $28.5 million for the comparable period in 2008.
The increases were primarily attributable to the continued growth in all segments during the first nine months of 2009, which included increased SIPC assessments, securities processing fees, travel and promotion, and legal expenses. The increase in legal expenses is attributable to an increase in litigation associated with the ongoing investigations in connection with ARS and an increase in the number of claims and litigation costs to defend industry recruitment claims.
Analysis of Financial Condition
Our company's consolidated statements of financial condition consist primarily of cash and cash equivalents, receivables, trading inventory, bank loans, investments, goodwill, loans and advances to financial advisors, bank deposits, and payables. Total assets of $2.9 billion at September 30, 2009 were up 85.5% over December 31, 2008. The increase is primarily attributable to increased receivables, trading inventory, financial instruments, loans and advances to financial advisors and the recognition of goodwill associated with our acquisition of UBS, which is based on preliminary estimates and is subject to change upon the final valuation. Our broker-dealer subsidiary's gross assets and liabilities, including trading inventory, stock loan/borrow, receivables and payables from/to brokers, dealers and clearing organizations and clients, fluctuate with our business levels and overall market conditions. The increase in assets is primarily attributable to the growth of our company, both organically and through the acquisition of UBS.
As of September 30, 2009, our liabilities were comprised primarily of short-term borrowings of $165.2 million, deposits of $875.0 million at Stifel Bank and payables to brokerage clients and broker, dealers and clearing organizations of $196.4 million and $133.3 million, respectively, at our broker-dealer subsidiaries, as well as accounts payable and accrued expenses, including accrued employee compensation of $220.8 million. To meet our obligations to clients and operating needs, we have $346.0 million in cash. We also have client brokerage receivables of $367.4 million and $329.5 million in loans at Stifel Bank.
Liquidity and Capital Resources
Liquidity is essential to our business. We regularly monitor our liquidity position, including our cash and net capital positions, and we have implemented a liquidity strategy designed to enable our business to continue to operate even under adverse circumstances, although there can be no assurance that our strategy will be successful under all circumstances.
Our assets, consisting mainly of cash or assets readily convertible into cash are our principal source of liquidity. The liquid nature of these assets provides for flexibility in managing and financing the projected operating needs of the business. These assets are financed primarily by our equity capital, debentures to trusts, client credit balances, short-term bank loans, proceeds from securities lending, and other payables. We currently finance our client accounts and firm trading positions through ordinary course borrowings at floating interest rates from various banks on a demand basis and securities lending, with company-owned and client securities pledged as collateral. Changes in securities market volumes, related client borrowing demands, underwriting activity, and levels of securities inventory affect the amount of our financing requirements.
Our bank assets consist principally of retained loans, available-for-sale securities, and cash and cash equivalents. Stifel Bank's current liquidity needs are generally met through deposits from bank clients and equity capital. We monitor the liquidity of Stifel Bank daily to ensure its ability to meet customer deposit withdrawals, maintain reserve requirements and support asset growth.
We rely exclusively on financing activities and distributions from our subsidiaries for funds to implement our business and growth strategies. Net capital rules, restrictions under the borrowing arrangements of our subsidiaries, as well as the earnings, financial condition, and cash requirements of our subsidiaries, may each limit distributions to us from our subsidiaries.
We have an ongoing authorization, as amended, from the Board of Directors to repurchase our common stock in the open market or in negotiated transactions. In May 2005, the Board of Directors authorized the repurchase of an additional 3,000,000 shares, for a total authorization to repurchase up to 4,500,000 shares (as adjusted for the three-for-two stock split in June 2008). The share repurchase program will manage our equity capital relative to the growth of our business and help to meet obligations under our employee benefit plans. Under existing Board authorizations at September 30, 2009, we are permitted to buy an additional 2,010,831 shares.
We currently do not pay cash dividends on our common stock.
We believe our existing assets, most of which are liquid in nature, together with the funds from operations, available informal short-term credit arrangements and our ability to raise additional capital will provide sufficient resources to meet our present and anticipated financing needs.
Cash Flow
Cash and cash equivalents increased $106.3 million to $346.0 million at September 30, 2009 from $239.7 million at December 31, 2008. Operating activities used $362.8 million of cash primarily due to an increase in operating assets and liabilities offset by the net effect of non-cash expenses and cash from earnings. Investing activities used cash of $511.9 million due to cash used for our acquisition of the UBS branches, bank customer loan originations, purchases of eligible ARS from our customers as part of our voluntary repurchase plan, purchases of available-for-sale securities as part of our investment strategy at Stifel Bank, and fixed asset purchases, offset by proceeds from the sale of proprietary investments and bank customer loan repayments. During the nine months ended September 30, 2009, we purchased $21.2 million in fixed assets, consisting primarily of information technology equipment, leasehold improvements and furniture and fixtures. Financing activities provided cash of $981.0 million due to an increase in bank deposits due to the growth of our bank principally due to the increase in affiliated deposits as a result of organic growth and the acquisition of UBS, proceeds received from borrowings from banks, net proceeds of $43.9 million from an "at-the-market" public offering of 1.0 million shares of our common stock in June 2009, and net proceeds of $91.8 million from a public offering of 1.7 million shares of our common stock in September 2009.
Funding Sources
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 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 $379.3 million 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 $165.2 million at an average rate of 1.02%, which were collateralized by company-owned securities valued at $216.6 million. At December 31, 2008, there were no short-term borrowings from banks. The average bank borrowing was $107.8 million and $162.7 million 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 $119.4 million and $153.1 million 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 $47.8 million and $17.0 million, 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 $78.9 million and $105.3 million 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 $54.8 million and $131.6 million 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.
The impact of the tightened credit markets has resulted in decreased financing through stock loan as our counterparties sought liquidity. As a result, bank loan financing used to finance trading inventories increased.
Stifel Bank has borrowing capacity with the Federal Home Loan Bank of $127.8 million at September 30, 2009, of which $125.8 million was unused, and a $13.2 million federal funds agreement for the purpose of purchasing short-term funds should additional liquidity be needed. Stifel Bank receives overnight funds from excess cash held in Stifel Nicolaus brokerage accounts, which are deposited into a money market account. These balances totaled $834.8 million at September 30, 2009.
Our liquidity requirements may change in the event we need to raise more funds than anticipated to increase inventory positions, support more rapid expansion, develop new or enhanced services and products, acquire technologies, or respond to other unanticipated liquidity requirements. We rely exclusively on financing activities and distributions from our subsidiaries for funds to implement our business and growth strategies, and repurchase our shares. Net capital rules, restrictions under our borrowing arrangements of our subsidiaries, as well as the earnings, financial condition, and cash requirements of our subsidiaries, may each limit distributions to us from our subsidiaries.
In the event existing internal and external financial resources do not satisfy our needs, we may have to seek additional outside financing. The availability of outside financing will depend on a variety of factors, such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, credit ratings, and credit capacity, as well as the possibility that lenders could develop a negative perception of our long-term or short-term financial prospects if we incurred large trading losses or if the level of our business activity decreased due to a market downturn or otherwise. We currently do not have a credit rating, which could adversely affect our liquidity and competitive position by increasing our borrowing costs and limiting access to sources of liquidity that require a credit rating as a condition to providing funds.
Use of Capital Resources
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 $114.8 million of eligible ARS after issuer redemptions of $24.6 million and Stifel purchases of $40.6 million. See "Contractual Obligations," in this section of the report for a discussion of our voluntary plan to repurchase ARS.
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.
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 $248.5 million included: (i) an upfront cash payment of $29.0 million based on the actual number of branches and financial advisors acquired by Stifel Nicolaus; and (ii) aggregate payment of $15.0 million for net fixed assets, employee forgivable loans and other assets, and (iii) Reg U and Reg T loans of $204.4 million 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.
We have paid $108.8 million in the form of upfront notes to investment executives for transition pay during the period from January 1, 2009 through October 31, 2009, which includes $14.6 million of upfront notes issued to UBS financial advisors as a form of transition pay. As we continue to take advantage of the opportunities created by market displacement and as competition for skilled professionals in the industry increases, we may have to devote more significant resources to attracting and retaining qualified personnel.
We paid a contingent earn-out of $25.5 million related to our acquisition of the LM Capital Markets business from Citigroup Inc. during the second quarter of 2009.
Net Capital Requirements
We operate in a highly regulated environment and are subject to net capital requirements, which may limit distributions to our company from our broker-dealer subsidiaries. Distributions from our broker-dealer subsidiaries are subject to net capital rules. These subsidiaries have historically operated in excess of minimum net capital requirements. However, if distributions were to be limited in the future due to the failure of our subsidiaries to comply with the net capital rules or a change in the net capital rules, it could have a material and adverse affect to our company by limiting our operations that require intensive use of capital, such as underwriting or trading activities, or limit our ability to implement our business and growth strategies, pay interest on and repay the principal of our debt, and/or repurchase our common stock. Our non broker-dealer subsidiary, Stifel Bank is also subject to various regulatory capital requirements administered by the federal banking agencies.
At September 30, 2009, Stifel Nicolaus had net capital of $167.2 million, which was 33.7% of its aggregate debit items, and $157.3 million in excess of its minimum required net capital; CSA had net capital of $3.0 million, which was $2.8 million in excess of its minimum required net capital. At September 30, 2009, SN Ltd had capital and reserves of $6.3 million, which was $5.7 million in excess of the financial resources requirement under the rules of the FSA. At September 30, 2009, Stifel Bank was considered well capitalized under the regulatory framework for prompt corrective action. See Note 14 of the Notes to Condensed Consolidated Financial Statements for details of our regulatory capital requirements.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
We believe that the assumptions, judgments and estimates involved in the accounting policies described below have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules that require us to make assumptions, judgments and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies and estimates have not differed materially from actual results.
For a full description of these and other accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.
Valuation 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.
Trading securities owned and pledged and trading securities sold, but not yet purchased, are carried at fair value on the consolidated statements of financial condition, with unrealized gains and losses reflected in the condensed consolidated statements of operations.
The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted have less pricing observability and are measured at fair value using valuation models that require more judgment. 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, the characteristics specific to the transaction, and overall market conditions generally.
When available, we use observable market prices, observable market parameters, or broker or dealer quotes (bid and ask prices) to derive the fair value of financial instruments. In the case of financial instruments transacted on recognized exchanges, the observable market prices represent quotations for completed transactions from the exchange on which the financial instrument is principally traded.
A substantial percentage of the fair value of our trading securities and other investments owned, trading securities pledged as collateral, and trading securities sold, but not yet purchased, are based on observable market prices, observable market parameters, or derived from broker or dealer prices. The availability of observable market prices and pricing parameters can vary from product to product. Where available, observable market prices and pricing or market parameters in a product may be used to derive a price without requiring significant judgment. In certain markets, observable market prices or market parameters are not available for all products, and fair value is determined using techniques appropriate for each particular product. These techniques involve some degree of judgment.
For investments in illiquid or privately held securities that do not have readily determinable fair values, the determination of fair value requires us to estimate the value of the securities using the best information available. Among the factors we consider in determining the fair value of investments are the cost of the investment, terms and liquidity, developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. In instances where a security is subject to transfer restrictions, the value of the security is based primarily on the quoted price of a similar security without restriction but may be reduced by an amount estimated to reflect such restrictions. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term and the differences could be material.
We have categorized our financial instruments measured at fair value into a three-level classification in accordance with ASC 820, "Fair Value Measurement and Disclosures." Fair value measurements of financial instruments that use quoted prices in active markets for identical assets or liabilities are generally categorized as Level I, and fair value measurements of financial instruments that have no direct observable levels are generally categorized as Level III. All other fair value measurements of financial instruments that do not fall within the Level I or Level III classification are considered Level II. The lowest level input that is significant to the fair value measurement of a financial instrument is used to categorize the instrument and reflects the judgment of management.
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 cash 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. 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.
At September 30, 2009, Level III assets for which we bear economic exposure were $73.3 million or 7.4% of the total assets measured at fair value. During the nine months ended September 30, 2009, we recorded net purchases of $40.3 million of Level III assets. Our valuation adjustments (realized and unrealized) reduced the value of our Level III assets by $4.7 million. In June 2009, we began repurchasing eligible ARS from our customers as part of our voluntary repurchase plan, which have been classified as Level III assets at September 30, 2009.
During the three months ended September 30, 2009, we recorded net purchases of $3.8 million of Level III assets. Our valuation adjustments (realized and unrealized) reduced the value of our Level III assets by $1.4 million.
At September 30, 2009, Level III assets included the following: $55.8 million of auction rate securities, of which the auctions have failed, $6.5 million of asset-backed securities, $5.2 million of mortgage-backed securities, and $5.8 million of private equity and other fixed income securities.
Contingencies
We are involved in various pending and potential legal proceedings related to our business, including litigation, arbitration and regulatory proceedings. Some of these matters involve claims for substantial amounts, including claims for punitive damages. We have, after consultation with outside legal counsel and consideration of facts currently known by management, recorded estimated losses in accordance with ASC 450 ("ASC 450"), "Contingencies," to the extent that claims are probable of loss and the amount of the loss can be reasonably estimated. The determination of these reserve amounts requires us to use significant judgment and our final liabilities may ultimately be materially different. This determination is inherently subjective, as it requires estimates that are subject to potentially significant revision as more information becomes available and due to subsequent events. In making these determinations, we consider many factors, including, but not limited to, the loss and damages sought by the plaintiff or claimant, the basis and validity of the claim, the likelihood of a successful defense against the claim, and the potential for, and magnitude of, damages or settlements from such pending and potential litigation and arbitration proceedings, and fines and penalties or orders from regulatory agencies. See Item 1, "Legal Proceedings," in Part II of this report for information on our legal, regulatory and arbitration proceedings.
Allowance for Doubtful Receivables from Former Employees
We offer transition pay, principally in the form of upfront loans, to financial advisors and certain key revenue producers as part of our overall growth strategy. These loans are generally forgiven over a five- to ten-year period if the individual satisfies certain conditions, usually based on continued employment and certain performance standards. If the individual leaves before the term of the loan expires or fails to meet certain performance standards, the individual is required to repay the balance. In determining the allowance for doubtful receivables from former employees, we consider the facts and circumstances surrounding each receivable, including the amount of the unforgiven balance, the reasons for the terminated employment relationship, and the former employees' overall financial position. The loan balance from former employees at September 30, 2009 and December 31, 2008 was $2.6 million and $2.4 million, respectively, with associated loss allowances of $1.1 million and $1.2 million, respectively.
Allowance for Loan Losses
We regularly review the loan portfolio of Stifel Bank and have established an allowance for loan losses in accordance with ASC 450. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. In providing for the allowance for loan losses, we consider historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements.
In addition, impairment is measured on a loan-by loan basis for commercial and construction loans and a specific allowance established for individual loans determined to be impaired in accordance with ASC 310 "Receivables." Impairment is measured using the present value of the impaired loan's expected cash flow discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.
A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement will not be collectible. Factors considered in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.
Once a loan is determined to be impaired, usually when principal or interest becomes 90 days past due or when collection becomes uncertain, the accrual of interest and amortization of deferred loan origination fees is discontinued ("non-accrual status"), and any accrued and unpaid interest income is written off. Loans placed on non-accrual status are returned to accrual status when all delinquent principal and interest payments are collected and the collectibility of future principal and interest payments is reasonably assured. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
Derivative Instruments and Hedging Activities
Stifel Bank utilizes certain derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our company's goal is to manage sensitivity to changes in rates by offsetting the repricing or maturity characteristics of certain assets and liabilities, thereby limiting the impact on earnings. The use of derivative instruments does expose our company to credit and market risk. We manage credit risk through strict counterparty credit risk limits and/or collateralization agreements. At inception, we determine if a derivative instrument meets the criteria for hedge accounting under ASC 815, "Derivatives and Hedging." Ongoing effectiveness evaluations are made for instruments that are designated and qualify as hedges. If the derivative does not qualify for hedge accounting, no assessment of effectiveness is needed.
Income Taxes
The provision for income taxes and related tax reserves is based on our consideration of known liabilities and tax contingencies for multiple taxing authorities. Known liabilities are amounts that will appear on current tax returns, amounts that have been agreed to in revenue agent revisions as the result of examinations by the taxing authorities and amounts that will follow from such examinations but affect years other than those being examined. Tax contingencies are liabilities that might arise from a successful challenge by the taxing authorities taking a contrary position or interpretation regarding the application of tax law to our tax return filings. Factors considered in estimating our liability are results of tax audits, historical experience, and consultation with tax attorneys and other experts.
ASC 740 ("ASC 740"), "Income Taxes," ,clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements and prescribed recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, ASC 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Goodwill and Intangible Assets
Under the provisions of ASC 805, "Business Combinations," we record all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value. Determining the fair value of assets and liabilities requires certain estimates. At September 30, 2009, we had goodwill of $159.2 million and intangible assets of $15.6 million.
In accordance with ASC 350, "Intangibles - Goodwill and Other," indefinite-life intangible assets and goodwill are not amortized. Rather, they are subject to impairment testing on an annual basis, or more often if events or circumstances indicate there may be impairment. This test involves assigning tangible assets and liabilities, identified intangible assets and goodwill to reporting units and comparing the fair value of each reporting unit to its carrying amount. If the fair value is less than the carrying amount, a further test is required to measure the amount of the impairment. We have elected to test for goodwill impairment in the third quarter of each calendar year. The results of the impairment test performed as of July 31, 2009, our last annual measurement date, did not indicate any impairment.
The goodwill impairment test is a two-step process, which requires us to make judgments in determining what assumptions to use in the calculation. Assumptions, judgments and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of factors, including, among others, economic trends and market conditions, changes in revenue growth trends or business strategies, unanticipated competition, discount rates, technology, or government regulations. In assessing the fair value of our reporting units, the volatile nature of the securities markets and industry requires us to consider the business and market cycle and assess the stage of the cycle in estimating the timing and extent of future cash flows. In addition to discounted cash flows, we consider other information such as public market comparables and multiples of recent mergers and acquisitions of similar businesses. Although we believe the assumptions, judgments and estimates we have made in the past have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our reported financial results.
Identifiable intangible assets, which are amortized over their estimated useful lives, are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset or asset group may not be fully recoverable.
Recent Accounting Pronouncements
See Note 1 of the Notes to Condensed Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our consolidated financial statements.
Off-balance Sheet Arrangements
Information concerning our off-balance sheet arrangements is included in Note 16 of the Notes to Condensed Consolidated Financial Statements. Such information is hereby incorporated by reference.
Contractual Obligations
The following item constitutes a material change in our contractual obligations outside the ordinary course of business from those reported in our Annual Report on Form 10-K for the year ended December 31, 2008:
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 $114.8 million of eligible ARS after issuer redemptions of $24.6 million and Stifel purchases of $40.6 million.
As part of the first phase, 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 $21.2 million, $15.3 million and $78.3 million, 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. See Item 1, "Legal Proceedings," in Part II of this report for further details regarding our voluntary repurchase plan of eligible ARS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
Risks are an inherent part of our business and activities. Management of these risks is critical to our soundness and profitability. Risk management at our company is a multi-faceted process that requires communication, judgment, and knowledge of financial products and markets. Our senior management group takes an active role in the risk management process and requires specific administrative and business functions to assist in the identification, assessment, monitoring, and control of various risks. The principal risks involved in our business activities are: market (interest rates and equity prices), credit, operational, and regulatory and legal.
Market RiskThe potential for changes in the value of financial instruments owned by our company resulting from changes in interest rates and equity prices is referred to as "market risk." Market risk is inherent to financial instruments, and accordingly, the scope of our market risk management procedures includes all market risk-sensitive financial instruments.
We trade tax-exempt and taxable debt obligations, including U.S. treasury bills, notes, and bonds; U.S. government agency and municipal notes and bonds; bank certificates of deposit; mortgage-backed securities; and corporate obligations. We are also an active market-maker in over-the-counter equity securities. In connection with these activities, we may maintain inventories in order to ensure availability and to facilitate customer transactions.
Changes in value of our financial instruments may result from fluctuations in interest rates, credit ratings, equity prices, and the correlation among these factors, along with the level of volatility.
We manage our trading businesses by product and have established trading departments that have responsibility for each product. The trading inventories are managed with a view toward facilitating client transactions, considering the risk and profitability of each inventory position. Position limits in trading inventory accounts are established and monitored on a daily basis. We monitor inventory levels and results of the trading departments, as well as inventory aging, pricing, concentration, and securities ratings.
We are also exposed to market risk based on our other investing activities. These investments consist of investments in private equity partnerships, start up companies, venture capital investments and zero coupon U.S. government securities and are included under the caption "Investments" on the condensed consolidated statements of financial condition.
Interest Rate Risk
We are exposed to interest rate risk as a result of maintaining inventories of interest rate-sensitive financial instruments and from changes in the interest rates on our interest-earning assets (including client loans, stock borrow activities, investments, and inventories) and our funding sources (including client cash balances, stock lending activities, bank borrowings, and resale agreements), which finance these assets. The collateral underlying financial instruments at the broker-dealer is repriced daily, thus requiring collateral to be delivered as necessary. Interest rates on client balances and stock borrow and lending produce a positive spread to our company, with the rates generally fluctuating in parallel.
We manage our inventory exposure to interest rate risk by setting and monitoring limits and, where feasible, hedging with offsetting positions in securities with similar interest rate risk characteristics. While a significant portion of our securities inventories have contractual maturities in excess of five years, these inventories, on average, turn over several times per year.
Additionally, we monitor, on a daily basis, the Value-at-Risk ("VaR") in our institutional Capital Markets trading portfolios using daily market data for the previous twelve months and report VaR at a 95% confidence level. VaR is a statistical technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatility. This model assumes that historical changes in market conditions are representative of future changes, and trading losses on any given day could exceed the reported VaR by significant amounts in unusual volatile markets. Further, the model involves a number of assumptions and inputs. While we believe that the assumptions and inputs we use in our risk model are reasonable, different assumptions and inputs could produce materially different VaR estimates.
The following table sets forth the high, low, and daily average VaR for our institutional Capital Markets trading portfolios during the nine months ended September 30, 2009 and the daily VaR at September 30, 2009 and December 31, 2008 (in thousands, except rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
VaR calculation at |
|
||||||||||||
|
|
High |
|
Low |
|
|
Daily |
|
September 30,
|
|
December 31,
|
|
|||||
Daily VaR |
|
5,849 |
|
$ |
278 |
|
$ |
1,204 |
|
|
$ |
649 |
|
$ |
467 |
|
|
Related portfolio value |
|
$ |
127,620 |
|
$ |
91,566 |
|
$ |
119,984 |
|
|
$ |
161,551 |
|
$ |
19,157 |
|
VaR as a percentage of portfolio value |
|
|
4.58 |
% |
|
0.30 |
% |
|
1.00 |
% |
|
|
0.40 |
% |
|
2.44 |
% |
Stifel Bank's interest rate risk is principally associated with changes in market interest rates related to residential, consumer, and commercial lending activities, as well as FDIC-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public.
Our primary emphasis in interest rate risk management for Stifel Bank is the matching of assets and liabilities of similar cash flow and re-pricing time frames. This matching of assets and liabilities reduces exposure to interest rate movements and aids in stabilizing positive interest spreads. Stifel Bank has established limits for acceptable interest rate risk and acceptable portfolio value risk. To ensure that Stifel Bank is within the limits established for net interest margin, an analysis of net interest margin based on various shifts in interest rates is prepared each quarter and presented to Stifel Bank's Board of Directors. Stifel Bank utilizes a third party vendor to analyze the available data.
The following table illustrates the estimated change in net interest margin at September 30, 2009 based on shifts in interest rates of up to positive 200 basis points and negative 200 basis points:
Hypothetical change |
|
Projected change in net interest margin |
|
+200 |
|
n/a |
|
+100 |
|
n/a |
|
0 |
|
0.00% |
|
-100 |
|
4.11% |
|
-200 |
|
7.70% |
|
The following GAP Analysis table indicates Stifel Bank's interest rate sensitivity position at September 30, 2009 (in thousands):
|
|
Repricing Opportunities |
|
||||||||||
|
|
0-6 Months |
|
7-12 Months |
|
1-5 Years |
|
5+ Years |
|
||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
305,572 |
|
$ |
19,133 |
|
$ |
34,892 |
|
$ |
11,426 |
|
Securities |
|
|
66,161 |
|
|
19,160 |
|
|
99,968 |
|
|
112,620 |
|
Interest-bearing cash |
|
|
271,255 |
|
|
- |
|
|
- |
|
|
- |
|
|
|
$ |
642,988 |
|
$ |
38,293 |
|
$ |
134,860 |
|
$ |
124,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction accounts and savings |
|
$ |
632,861 |
|
$ |
15,040 |
|
$ |
193,992 |
|
$ |
14,017 |
|
Certificates of deposit |
|
|
5,910 |
|
|
6,427 |
|
|
6,780 |
|
|
- |
|
Borrowings |
|
|
2,000 |
|
|
- |
|
|
- |
|
|
- |
|
|
|
$ |
640,771 |
|
$ |
21,467 |
|
$ |
200,772 |
|
$ |
14,017 |
|
GAP |
|
|
2,217 |
|
|
16,826 |
|
|
(65,912 |
) |
|
110,029 |
|
Cumulative GAP |
|
$ |
2,217 |
|
$ |
19,043 |
|
$ |
(46,869 |
) |
$ |
63,160 |
|
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. Our interest rate hedging strategies may not work in all market environments and as a result may not be effective in mitigating interest rate risk.
Equity Price Risk
We are exposed to equity price risk as a consequence of making markets in equity securities. We attempt to reduce the risk of loss inherent in our inventory of equity securities by monitoring those security positions constantly throughout each day. Our equity securities inventories are repriced on a regular basis, and there are no unrecorded gains or losses. Our activities as a dealer are client-driven, with the objective of meeting clients' needs while earning a positive spread.
Credit Risk
We are engaged in various trading and brokerage activities, with the counterparties primarily being broker-dealers. In the event counterparties do not fulfill their obligations, we may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. We manage this risk by imposing and monitoring position limits for each counterparty, monitoring trading counterparties, conducting regular credit reviews of financial counterparties, reviewing security concentrations, holding and marking to market collateral on certain transactions, and conducting business through clearing organizations, which guarantee performance.
Our client activities involve the execution, settlement, and financing of various transactions on behalf of our clients. Client activities are transacted on either a cash or margin basis. Credit exposure associated with our private client business consists primarily of customer margin accounts, which are monitored daily and are collateralized. We monitor exposure to industry sectors and individual securities and perform analyses on a regular basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.
We have accepted collateral in connection with resale agreements, securities borrowed transactions, and customer margin loans. Under many agreements, we are permitted to sell or repledge these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions. At September 30, 2009, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $638.8 million, and the fair value of the collateral that had been sold or repledged was $277.2 million.
By using derivative instruments, we are exposed to credit and market risk on those derivative positions. Credit risk is equal to 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 extends credit to individual and commercial borrowers through a variety of loan products, including residential and commercial mortgage loans, home equity loans, construction loans and non-real-estate commercial and consumer loans. Bank loans are generally collateralized by real estate, real property, or other assets of the borrower. Stifel Bank's loan policy includes criteria to adequately underwrite, document, monitor, and manage credit risk. Underwriting requires reviewing and documenting the fundamental characteristics of credit including character, capacity to service the debt, capital, conditions, and collateral. Benchmark capital and coverage ratios are utilized which include liquidity, debt service coverage, credit, working capital, and capital to asset ratios. Lending limits are established to include individual, collective, committee, and board authority. Monitoring credit risk is accomplished through defined loan review procedures including frequency and scope.
We are subject to concentration risk if we hold large positions, extend large loans to, or have large commitments with a single counterparty, borrower, or group of similar counterparties or borrowers (i.e., in the same industry). Securities purchased under agreements to resell consist of securities issued by the U.S. government or its agencies. Receivables from and payables to clients and stock borrow and lending activities both with a large number of clients and counterparties, and any potential concentration is carefully monitored. Stock borrow and lending activities are executed under master netting agreements, which gives our company right of offset in the event of counterparty default. Inventory and investment positions taken and commitments made, including underwritings, may involve exposure to individual issuers and businesses. We seek to limit this risk through careful review of counterparties and borrowers and the use of limits established by our senior management group, taking into consideration factors including the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment, and other positions or commitments outstanding.
Operational Risk
Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems, and inadequacies or breaches in our control processes. We operate different businesses in diverse markets and are reliant on the ability of our employees and systems to process a large number of transactions. These risks are less direct than credit and market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes. In the event of a breakdown or improper operation of systems or improper action by employees, we could suffer financial loss, regulatory sanctions, and damage to our reputation. In order to mitigate and control operational risk, we have developed and continue to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization and within such departments as Accounting, Operations, Information Technology, Legal, Compliance, and Internal Audit. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits. Business continuity plans exist for critical systems, and redundancies are built into the systems as deemed appropriate.
Regulatory and Legal Risk
Legal risk includes the risk of large numbers of Private Client Group customer claims for sales practice violations. While these claims may not be the result of any wrongdoing, we do, at a minimum, incur costs associated with investigating and defending against such claims. See further discussion on our legal reserves policy under "Critical Accounting Policies and Estimates" in Item 2 and "Legal Proceedings" in Item 1, Part II of this report. In addition, we are subject to potentially sizable adverse legal judgments or arbitration awards, and fines, penalties, and other sanctions for non-compliance with applicable legal and regulatory requirements. We are generally subject to extensive regulation by the SEC, FINRA, and state securities regulators in the different jurisdictions in which we conduct business. We have comprehensive procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, the extension of credit, including margin loans, collection activities, money laundering, and record keeping. We act as an underwriter or selling group member in both equity and fixed income product offerings. Particularly when acting as lead or co-lead manager, we have potential legal exposure to claims relating to these securities offerings. To manage this exposure, a committee of senior executives review proposed underwriting commitments to assess the quality of the offering and the adequacy of due diligence investigation.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out by Stifel Financial Corps' management with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following supplements and amends our discussion set forth under Item 3. "Legal Proceedings" in our Annual Report on Form 10-K for the year ended December 31, 2008.
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 ARS sales and financial penalties. The case was removed to the United States District Court for the Eastern District of Missouri on April 13, 2009 and remanded to the Circuit Court of Franklin County, Missouri on July 21, 2009. On October 1, 2009, the State of Colorado filed a Notice of Charges and the State of Indiana filed an Administrative Complaint against Stifel Nicolaus alleging violation of state securities laws in Colorado and Indiana, respectively, relating to the sale of ARS to Colorado and Indiana residents, respectively. These actions each seek, among other things, statutory remedies and penalties. Stifel Nicolaus has denied the allegations in these actions in its responses to each of these matters. We believe that, based upon currently available information and review with outside counsel, we have meritorious defenses to these matters and intend to vigorously defend the claims made by the Missouri Secretary of State, the State of Colorado and the State of Indiana.
Furthermore, on May 7, 2009, the State Corporation Commission of the Commonwealth of Virginia (the "Commission") filed a Rule to Show Cause against Stifel Nicolaus with the Virginia State Corporation Commission concerning sales of ARS to Virginia residents seeking various remedies under the Virginia statutes, including penalties, assessments and injunctive relief. On June 17, 2009, Stifel Nicolaus filed its Response to the Rule to Show Cause which denied the allegations on a number of legal and factual bases. On September 18, 2009, a Settlement Order was entered by the Commission which resulted in the dismissal of the Rule to Show Cause against Stifel Nicolaus and undertakings by Stifel Nicolaus, among other things, to pay the Commonwealth of Virginia seventeen thousand five hundred dollars in penalties; to pay the Commission twenty two thousand five hundred dollars to defray the costs of the Commission's investigation; and to fully comply with the terms and conditions of the "Offer to Repurchase Eligible Auction Rate Securities at Par" made to Virginia residents dated April 9, 2009 and supplemented April 30, 2009 (the "ARS repurchase offer").
Each of the clients that are eligible to participate and that have accepted the ARS repurchase offer have executed covenants not to file suit against our company and have released us from all claims relating to the ARS which we repurchase. One hundred percent of the eligible Virginia residents have accepted the ARS repurchase offer. Furthermore, the ARS repurchase offer has been accepted by approximately 96% of eligible Missouri residents and by 100% of eligible Colorado and Indiana residents.
Several large banks and brokerage firms, most of which were the primary underwriters of, and supported the auctions for, ARS have announced agreements, usually as part of a regulatory settlement, to repurchase ARS at par from some of their clients. Other brokerage firms have entered into similar agreements. We are, in conjunction with other industry participants, actively seeking solutions to ARS' illiquidity, which may include the restructuring and refinancing of those ARS. Should issuer redemptions and refinancings continue, our clients' holdings could be reduced further; however, there can be no assurance these events will continue.
Additionally, we are named in a civil lawsuit filed in the Circuit Court of Milwaukee, Wisconsin (the "Wisconsin State Court") on September 29, 2008. The lawsuit has been filed against our company and Stifel Nicolaus, Royal Bank of Canada Europe Ltd. ("RBC") and certain other RBC entities by the school districts and the individual trustees for other post-employment benefit ("OPEB") trusts established by those school districts (the "Plaintiffs"). The suit was removed to the United States District Court for the Eastern District of Wisconsin (the "Wisconsin Federal Court") on October 31, 2008, which remanded the case to the Wisconsin State Court on April 10, 2009.
The suit arises out of the purchase of certain CDOs by the OPEB trusts. The RBC entities structured and served as "arranger" for the CDOs. We served as placement agent/broker in connection with the OPEB trusts purchase of the investments. The total amount of the investments made by the OPEB trusts was $200.0 million. Plaintiffs assert that the school districts contributed $37.5 million to the OPEB trusts to purchase the investments. The balance of $162.5 million used to purchase the investments was borrowed by the OPEB trusts. The recourse of the lender is the OPEB trust assets and the moral obligation of the school districts. The legal claims asserted include violation of the Wisconsin Securities Act, fraud and negligence. The lawsuit seeks equitable relief, unspecified compensatory damages, treble damages, punitive damages and attorney's fees and costs. The Plaintiffs claim that the RBC entities and our company either made misrepresentations or failed to disclose material facts in connection with the sale of the CDOs in violation of the Wisconsin Securities Act. We believe the Plaintiffs reviewed and understood the relevant offering materials and that the investments were suitable based upon, among other things, our receipt of a written acknowledgement of risks from the Plaintiffs. We believe, based upon currently available information and review with outside counsel, that we have meritorious defenses to this lawsuit, and intend to vigorously defend all of the Plaintiffs' claims.
ITEM 1A. RISK FACTORS
The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC, as updated in our subsequent reports on Form 10-Q filed with the SEC. These risk factors describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered sales of equity securities during the quarter ended September 30, 2009. There were also no purchases made by or on behalf of Stifel Financial Corp. or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended), of our common stock during the quarter ended September 30, 2009.
We have an ongoing authorization, as amended, from the Board of Directors to repurchase our common stock in the open market or in negotiated transactions. In May 2005, the Board of Directors authorized the repurchase of an additional 3,000,000 shares, for a total authorization to repurchase up to 4,500,000 shares (as adjusted for the three-for-two stock split in June 2008). At September 30, 2009, the maximum number of shares that may yet be purchased under this plan was 2,010,831.
ITEM 6. EXHIBITS
Exhibit No. |
Description |
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10. |
(aa) |
Amendment No. 2 to Asset Purchase Agreement, dated June 1, 2009, by and between Stifel, Nicolaus & Company, Incorporated and UBS Financial Services, Inc. filed herewith.* |
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(bb) |
Amendment No. 3 to Asset Purchase Agreement, dated August 12, 2009, by and between Stifel, Nicolaus & Company, Incorporated and UBS Financial Services, Inc. incorporated herein by reference to Exhibit 2.1 to Stifel Financial Corp.'s Current Report on Form 8-K (date of earliest event reported August 12, 2009) filed on August 18, 2009. |
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(cc) |
Amendment No. 4 to Asset Purchase Agreement, dated September 11, 2009, by and between Stifel, Nicolaus & Company, Incorporated and UBS Financial Services, Inc. filed herewith.* |
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(dd) |
Office Sublease Agreement by and between The Bear Stearns Companies LLC (Landlord) and Stifel, Nicolaus & Company, Incorporated (Tenant), filed herewith.* |
11.1 |
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Statement Re: Computation of per Share Earnings (The calculation of per share earnings is included in Part I, Item 1 in the Notes to Condensed Consolidated Financial Statements (Earnings Per Share) and is omitted here in accordance with Section (b)(11) of Item 601 of Regulation S-K). |
31.1 |
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Rule 13a-14(a) Certification of Chief Executive Officer. |
31.2 |
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Rule 13a-14(a) Certification of Chief Financial Officer. |
32.1 |
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Section 1350 Certification of Chief Executive Officer.** |
32.2 |
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Section 1350 Certification of Chief Financial Officer.** |
* The appendices, exhibits and similar attachments to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We will furnish supplementally a copy of any omitted appendix, exhibit or similar attachment to the SEC upon request.
** The certifications attached as Exhibits 32.1 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Stifel Financial Corp. under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STIFEL FINANCIAL CORP. |
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Ronald
J. Kruszewski |
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James
M. Zemlyak |
Date: November 9, 2009
Exhibit 10.aa
Amendment No. 2 to Asset Purchase Agreement (this "Amendment"), dated as of June 1, 2009, between UBS Financial Services Inc., a Delaware corporation ("Seller"), and Stifel, Nicolaus & Company, Incorporated, a Missouri corporation ("Buyer").
RECITALS
Reference is hereby made to the Asset Purchase Agreement, dated as of March 23, 2009, between Seller and Buyer, as amended to date, including by that certain Amendment No. 1 to Asset Purchase Agreement between Buyer and Seller, dated as of May 4, 2009 (as amended, the "Purchase Agreement").
Reference is also hereby made to that certain letter from Buyer to Seller dated May 11, 2009, designating "Excluded Locations" for purposes of the Purchase Agreement (the "Excluded Location Notice").
Buyer and Seller wish to further amend the Purchase Agreement to provide that one of the branch offices of Seller designated as an "Excluded Location" in the Excluded Location Notice shall, subject to the terms and conditions set forth herein, instead be an "Acquired Location" for purposes of the Purchase Agreement and to provide for certain other agreements related to Buyer's acquisition of such branch office and certain assets related thereto.
AGREEMENT
The parties hereto hereby agree as follows:
1. Designation of Additional Acquired Location.
(a) On the terms and conditions set forth herein, from and after the date of this Amendment, the branch office identified on Appendix 1 to this Amendment (the "Additional Acquired Location") is hereby added as an Acquired Location for purposes of the Purchase Agreement, notwithstanding anything to the contrary in the Excluded Location Notice.
(b) By consequence of the Excluded Location Notice and the addition of the Additional Acquired Location as an Acquired Location pursuant hereto, Exhibit B-1 and Exhibit B-2 to the Purchase Agreement shall be in the forms attached as Appendices 2-1 and 2-2, respectively, to this Amendment.
2. Related Agreements.
(a) Notwithstanding anything to the contrary in Section 3.1(b)(i) or Section 3.2(b)(ii) of the Purchase Agreement, at the Closing in which the Assets related to the Additional Acquired Location (together with the Assets related to other Business Locations being acquired at such Closing) are being acquired by Buyer pursuant to the Purchase Agreement (the "AAL Closing"), Buyer shall, in lieu of the Acquired Location Payment otherwise payable by Buyer to Seller at the AAL Closing with respect to the Additional Acquired Location, pay Seller the relevant Transferred Employee Amount (as set forth on Exhibit E to the Purchase Agreement) for each Transferred Employee and Non-Transferred SOI Employee related to the Additional Acquired Location (as set forth on Exhibit E to the Purchase Agreement) who or which becomes a Transferred Employee or Non-Transferred SOI Employee at or as of such Closing.
(b) Notwithstanding anything to the contrary in Section 3.1(b)(i) or Section 3.2(b)(ii) of the Purchase Agreement, Seller agrees that, at and contingent upon consummation of the AAL Closing, the Acquisition Consideration otherwise payable by Buyer to Seller at the AAL Closing shall be reduced by an amount equal to the Buyer Lease Value Amount (as defined below).
(c) Except as provided in Section 2(a) and Section 2(b) of this Amendment, nothing in this Amendment shall modify the consideration payable to Seller (i) with respect to the Acquired Location status of the Additional Acquired Location, or (ii) at the AAL Closing.
(d) For purposes hereof:
"Buyer Lease Value Amount" means $230,000 (being the total amount that the parties have ascribed to Buyer's remaining aggregate leasehold payments, costs and obligations in respect of the lease and occupancy of the Relevant Buyer Premises (as defined below), as of the date of this Amendment).
"Relevant Buyer Premises" the business premises leased by Buyer as of the date of this Amendment identified on Appendix 3 to this Amendment.
(e) Buyer acknowledges and agrees that, except as provided in Section 2(b) of this Amendment, Buyer shall not be entitled to any other payment, offset, reduction, reimbursement or indemnification from Seller in respect of the Relevant Buyer Premises, or any costs, expenses, payments, obligations or liabilities of Buyer or any third party with respect thereto, including pursuant to the agreements and documents listed on Appendix 4 to this Amendment. Buyer and Seller each acknowledge and agree that the Buyer Lease Value Amount is not subject to increase or decrease for any reason, except as the parties may otherwise mutually agree in writing.
(f) Buyer represents and warrants to Seller that (i) all material agreements and documents relating to Buyer's lease or license, and occupancy, of the Relevant Buyer Premises (including the relevant lease agreement, all sublease and license agreements, and all amendments to any of the foregoing) are listed on Appendix 4 to this Amendment, (ii) it has delivered to Seller true and complete copies of all such agreements and documents listed on Appendix 4 to this Amendment, and (iii) the commencement date of Buyer's occupancy of the Relevant Buyer Premises was on or about February 20, 2009.
3. Excluded Location Response Notice. Buyer and Seller acknowledge and agree that this Amendment is being executed by the parties in lieu of Seller's delivery of the Excluded Location Response Notice pursuant to Section 1.6(c) of the Purchase Agreement.
4. No Other Amendments. Except as expressly set forth above, all of the terms and provisions of the Purchase Agreement remain in full force and effect unchanged.
5. Capitalized Terms. Capitalized terms used but not otherwise defined in this Amendment shall have the meanings assigned to them in the Purchase Agreement.
6. Counterparts. This Amendment may be executed in one or more counterparts, each of which (including counterparts delivered by facsimile or e-mail) shall constitute the executing party's original binding agreement, but all of which together shall constitute one and the same instrument.
7. Governing Law. This Amendment and the rights and obligations of the parties hereunder shall be governed by, interpreted, and enforced in accordance with the laws of the State of New York (without giving effect to its conflict of laws principles). Section 24 of the Purchase Agreement shall be deemed to apply with respect to this Amendment.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have executed, or have caused their duly authorized representatives to execute, this Amendment No. 2 to Asset Purchase Agreement as of the date first set forth above.
SELLER: |
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UBS FINANCIAL SERVICES INC. |
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By: |
/s/ James D. Price |
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Name: |
James D. Price |
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Title |
Head, Wealth Management |
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By: |
/s/ Diane Frimmel |
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Name: |
Diane Frimmel |
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Title: |
Chief Operations Officer |
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BUYER: |
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Stifel, Nicolaus & Company, Incorporated |
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By: |
/s/ Ronald J. Kruszewski |
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Name: |
Ronald J. Kruszewski |
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Title: |
President and Chief Executive Officer |
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List of Appendices | ||
Appendix 1 | Additional Acquired Location | |
Appendix 2-1 | Exhibit B-1 to the Purchase Agreement | |
Excluded Locations | ||
Appendix 2-2 | Exhibit B-2 to the Purchase Agreement | |
Partially Acquired Locations | ||
Appendix 3 | Relevant Buyer Premises | |
Appendix 4 | Agreements and Documents Material to Relevant Buyer Premises | |
The appendices to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We will furnish supplementally a copy of any omitted appendices to the Securities and Exchange Commission upon request.
Exhibit 10.cc
Amendment No. 4 to Asset Purchase Agreement (this "Amendment"), dated as of September 11, 2009, between UBS Financial Services Inc., a Delaware corporation ("Seller"), and Stifel, Nicolaus & Company, Incorporated, a Missouri corporation ("Buyer").
RECITALS
Reference is hereby made to the Asset Purchase Agreement, dated as of March 23, 2009, between Seller and Buyer, as amended to date (the "Purchase Agreement"), including as amended by that certain Amendment No. 1 to Asset Purchase Agreement between Buyer and Seller, dated as of May 4, 2009, by that certain Amendment No. 2 to Asset Purchase Agreement between Buyer and Seller, dated as of June 1, 2009, and by that certain Amendment No. 3 to Asset Purchase Agreement between Buyer and Seller, dated as of August 12, 2009.
Buyer and Seller wish to further amend the Purchase Agreement as provided below, and wish to set forth certain other agreements of Buyer and Seller.
AGREEMENT
The parties hereto hereby agree as follows:
1. Modified Agreement Regarding Certain Initial Closing Employees.
(a) The parties hereby agree that, notwithstanding anything to the contrary in the Purchase Agreement, Employees employed by Seller, as of the time immediately prior to the consummation of the Initial Closing, at the Acquired Locations for which Branch Assets and Branch Liabilities were acquired and assumed by Buyer from Seller at the Initial Closing, became, as of the consummation of the Initial Closing, an employee of Buyer and "Transferred Employees" for purposes of the Purchase Agreement, notwithstanding that certain of such employees did not execute and deliver Statements of Intention and/or Employee Releases in connection with the Initial Closing, as required by the Purchase Agreement (such employees who did not execute and deliver Statements of Intention and/or Employee Releases in connection with the Initial Closing, "Non-Signing Initial Closing Employees").
(b) Buyer shall use its reasonable best efforts to promptly after the date of this Amendment procure and deliver to Seller a Transition Agreement (as defined below) executed by each Non-Signing Initial Closing Employee and dated as of the date of execution thereof, provided that in no event shall Buyer be obligated to offer any additional compensation or other consideration (beyond employment of the relevant Employee in accordance with the terms (including as to compensation and benefits) of the Purchase Agreement and this Amendment) to any such Employee specifically to induce such Employee to sign any such agreement, and provided that Buyer shall not be obligated to pursue any such agreement for a period of longer than 30 days following the Initial Closing. Notwithstanding anything to the contrary in the Purchase Agreement, including Section 10.1(a) and Section 10.1(c) thereof, Buyer's hiring and/or compensation of a Non-Signing Initial Closing Employee shall not be deemed to be a breach of the Purchase Agreement, by reason of the failure to deliver and/or obtain an executed Statement of Intention and Employee Release from such Employee, if Buyer shall have complied with its obligations pursuant to this Section 1 of this Amendment with respect to such Employee.
(c) Buyer represents and warrants to Seller that, at or prior to the Initial Closing, Buyer offered employment to each Non-Signing Initial Closing Employee upon the terms (including as to compensation and benefits) provided for in, and otherwise in accordance with, the Purchase Agreement (assuming that the 2009 compensation information provided by Seller to Buyer in Section 5.8 of the Disclosure Schedule (to the Purchase Agreement) is accurate with respect to the relevant Employee), except that such offers were not made by means of a written Statement of Intention and Buyer did not obtain an executed Statement of Intention or Employee Release from any Non-Signing Initial Closing Employee.
2. Modified Agreement Regarding Certain Subsequent Closing Employees.
(a) It is the intention and agreement of the parties with respect to Subsequent Closings that, as and to the extent contemplated by Section 1.6(a) of the Purchase Agreement, Buyer and Seller shall use reasonable efforts to cause each Relevant Subsequent Closing Employee (as defined below) to deliver to Buyer or Seller (to the extent not previously delivered to Buyer or Seller by such Employee) an executed Statement of Intention prior to the relevant Subsequent Closing at which the Branch Assets and Branch Liabilities of the Acquired Location or Partially Acquired Location at which such Employee is employed or located are acquired and assumed by Buyer; provided, however, that the parties hereby agree, with respect to Subsequent Closings only, that, notwithstanding anything to the contrary in the Purchase Agreement:
(i) in the case of a Relevant Subsequent Closing Employee who is an Administrative Support Employee (as defined below), a Transition Agreement shall be deemed to qualify as both a Statement of Intention and an Employee Release for purposes of the Purchase Agreement; and
(ii) each Relevant Subsequent Closing Employee who is an Administrative Support Employee shall become, as of the consummation of the applicable Subsequent Closing, an employee of Buyer and a "Transferred Employee" for purposes of the Purchase Agreement, notwithstanding that such employee may not have executed and delivered a Statement of Intention, an Employee Release and/or a Transition Agreement in connection with such Subsequent Closing.
(b) For the purposes hereof:
(i) "Administrative Support Employee" means an Employee, other than an Employee who is employed by Seller as a registered financial advisor immediately prior to the consummation of the relevant Subsequent Closing;
(ii) "Relevant Subsequent Closing Employee" means an Employee employed by Seller who is employed or located, as of the time immediately prior to the consummation of the relevant Subsequent Closing, at an Acquired Location or Partially Acquired Location for which Branch Assets and Branch Liabilities are acquired and assumed by Buyer from Seller at such Subsequent Closing.
(c) If a Relevant Subsequent Closing Employee who is an Administrative Support Employee has not executed and delivered a Transition Agreement at or prior to the relevant Subsequent Closing, Buyer shall use its reasonable best efforts to promptly after the relevant Subsequent Closing Date procure and deliver to Seller a Transition Agreement executed by such Employee, dated as of the date of execution thereof, provided that in no event shall Buyer be obligated to offer any additional compensation or other consideration (beyond employment of the relevant Employee in accordance with the terms (including as to compensation and benefits) of the Purchase Agreement and this Amendment) to any such Employee specifically to induce such Employee to sign any such agreement and provided that Buyer shall not be obligated to pursue any such agreement for a period of longer than 30 days following the relevant Subsequent Closing. Notwithstanding anything to the contrary in the Purchase Agreement, including Section 10.1(a) and Section 10.1(c) thereof, Buyer's hiring, and/or compensation of a Relevant Subsequent Closing Employee who is an Administrative Support Employee and who has not executed and delivered a Transition Agreement at or prior to the relevant Subsequent Closing (a "Non-Signing Subsequent Closing Employee") shall not be deemed to be a breach of the Purchase Agreement by reason of the failure to deliver and/or obtain an executed Statement of Intention and Employee Release from such Employee, if Buyer shall have complied with its obligations pursuant to this Section 2 of this Amendment with respect to such Employee.
(d) Nothing in this Amendment shall modify or limit the provisions of the Purchase Agreement to the effect that (i) a Relevant Subsequent Closing Employee who is not an Administrative Support Employee (a "Non-Administrative Support Employee") must execute and deliver a Statement of Intention at or prior to the relevant Subsequent Closing in order to become a "Transferred Employee" for purposes of the Purchase Agreement, (ii) Buyer shall cause Transferred Employees who are Non-Administrative Support Employees to execute and deliver an Employee Release in accordance with Section 10.1(c) of the Purchase Agreement and their respective Statement of Intention, and (iii) except with the prior written consent of Seller, Buyer shall not hire Non-Administrative Support Employees who have not executed and delivered a Statement of Intention at or prior to the relevant Subsequent Closing.
(e) Buyer represents, warrants and covenants to Seller that, at or prior to the relevant Subsequent Closing at which the Branch Assets and Branch Liabilities of the Acquired Location or Partially Acquired Location at which the particular Relevant Subsequent Closing Employee is then employed or located are acquired and assumed by Buyer, Buyer shall offer employment to each Relevant Subsequent Closing Employee, upon the terms (including as to compensation and benefits) provided for in, and otherwise in accordance with, the Purchase Agreement, except that, in the case of Relevant Subsequent Closing Employees who are Administrative Support Employees, such offers need not be made by means of a Statement of Intention specifying the relevant employment, compensation and benefits terms in writing.
3. Certain Related Agreements.
(a) For purposes of Section 10.1(a) and Section 10.3 of the Purchase Agreement, an offer to (i) a Non-Signing Initial Closing Employee or (ii) a Relevant Subsequent Closing Employee who is an Administrative Support Employee, shall (in either case) not be deemed to be on terms other than those specified in Section 10 of the Purchase Agreement solely by reason of the fact that such offer was not made by means of a Statement of Intention or that Buyer did not obtain an executed Statement of Intention or Employee Release from any such Employee.
(b) Notwithstanding anything to the contrary in the Purchase Agreement or this Amendment, including Section 6.11 and Section 8.12 of the Purchase Agreement (i) Seller's obligations pursuant to Section 6.11 of the Purchase Agreement as to a Transferred Employee shall be conditioned upon the applicability of the terms identified in Section 6.11 of the Purchase Agreement to the relevant Transferred Employee, and upon the execution and delivery by the relevant Transferred Employee of a Statement of Intention or Transition Agreement; and (ii) Buyer shall provide Transferred Employees who or which do not execute and deliver a Statement of Intention with the compensation and benefits provided for in the Purchase Agreement, which shall be no less favorable than the compensation and benefits made available to similarly situated employees of Buyer.
4. Definition of Transition Agreement. For the purposes of this Amendment, "Transition Agreement" means a Transition and Release Agreement in the form attached hereto as Exhibit A; provided, however, that with respect to a Relevant Subsequent Closing Employee (a) who (i) is an Administrative Support Employee, (ii) has not already executed and delivered a Statement of Intention substantially in the form attached as Exhibit C to the Purchase Agreement dated as of March 23, 2009, and (iii) is a debtor or borrower with respect to Employee Indebtedness that is an "Employee Forgivable Loan", the form of Transition Agreement shall be the form attached hereto as Exhibit B, and/or (b) who is employed at an Acquired Location or Partially Acquired Location the Branch Assets and Branch Liabilities of which will be acquired and assumed by Buyer by means of the Third Closing or Fourth Closing, the language set forth on Exhibit C, attached hereto, shall be included in and added to the form of Transition Agreement.
5. No Other Amendments. This Amendment is deemed to be a part of and to be integrated into the Purchase Agreement. Except as amended by this Amendment, all of the terms and provisions of the Purchase Agreement remain in full force and effect unchanged.
6. Capitalized Terms. Capitalized terms used but not otherwise defined in this Amendment shall have the meanings assigned to them in the Purchase Agreement.
7. Counterparts. This Amendment may be executed in one or more counterparts, each of which (including counterparts delivered by facsimile or e-mail) shall constitute the executing party's original binding agreement, but all of which together shall constitute one and the same instrument.
8. Governing Law. This Amendment and the rights and obligations of the parties hereunder shall be governed by, interpreted, and enforced in accordance with the laws of the State of New York (without giving effect to its conflict of laws principles). Section 24 of the Purchase Agreement shall be deemed to apply with respect to this Amendment.
[Signature Page Follows]
In Witness Whereof, the parties hereto have executed, or have caused their duly authorized representatives to execute, this Amendment No. 4 to Asset Purchase Agreement as of the date first set forth above.
SELLER: |
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UBS FINANCIAL SERVICES INC. |
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By: |
/s/ James D. Price |
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Name: |
James D. Price |
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Title |
Head, Wealth Management |
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By: |
/s/ Diane Frimmel |
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Name: |
Diane Frimmel |
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Title: |
Chief Operations Officer |
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BUYER: |
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Stifel, Nicolaus & Company, Incorporated |
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By: |
/s/ Ronald J. Kruszewski |
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Name: |
Ronald J. Kruszewski |
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Title: |
President and Chief Executive Officer |
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List of Exhibits |
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Exhibit A | Form of Transition and Release Agreement |
Exhibit B | Form of Employee Forgivable Loan |
Exhibit C | Addendum to Transition Agreement |
The exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We will furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request.
Exhibit 10.dd
AGREEMENT OF SUBLEASE By and Between THE BEAR STEARNS COMPANIES LLC Landlord and STIFEL, NICOLAUS & COMPANY, INCORPORATED Tenant
Dated as of January 30, 2009
The entire 8th Floor 237 Park Avenue New York, New York
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TABLE OF CONTENTS |
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1. |
Defined Terms |
3 |
2. |
Agreement to Lease |
3 |
3. |
Term |
3 |
4. |
Rent |
4 |
5. |
Possession Improvements; Furniture and Equipment; Surrender of Premises; Alterations; and Signage |
5 |
6. |
Use of the Premises |
7 |
7. |
Overlease; Incorporation by Reference |
7 |
8. |
Benefits Under the Overlease, Services of the Landlord |
10 |
9. |
Tenant's Compliance with Overlease; Tenant Default; Remedies |
10 |
10. |
Landlord's Compliance with Overlease; Limitation on Landlord's Right to Amend or Terminate the Overlease |
11 |
11. |
Overlandlord's Consent |
11 |
12. |
Indemnification by Tenant and Landlord |
11 |
13. |
Notices from Overlandlord |
11 |
14. |
Subordination; Quiet Enjoyment |
11 |
15. |
Assigning and Subleasing |
12 |
16. |
Security Deposit |
13 |
17. |
Miscellaneous |
15 |
18. |
Effectiveness; Recognition Agreement |
17 |
19. |
Tenant's Alterations |
17 |
20. |
Tenant's Work; Work Allowance |
18 |
21. |
No Personal Liability |
18 |
22. |
Supplemental Air Conditioning Units |
19 |
23. |
LAN Room and Landlord's Access to the Premises |
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24. |
Use of Telecommunications Conduit |
19 |
25. |
Commercial Rent and Occupancy Tax |
19 |
26. |
Counterparts |
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27. |
Hazardous Materials |
19 |
28. |
Mutual Waiver |
19 |
EXECUTION COPY
AGREEMENT OF SUBLEASE
THIS AGREEMENT OF SUBLEASE (this "Sublease") dated as of January , 2009 ("Effective Date") between THE BEAR STEARNS COMPANIES LLC, a Delaware limited liability company (formerly known as The Bear Stearns Companies Inc. and formerly a Delaware corporation) having an office at 383 Madison Avenue, New York, New York 10179 ("Landlord") and STIFEL, NICOLAUS & COMPANY, INCORPORATED, a Missouri Corporation having an office at 501 N. Broadway, St. Louis, Missouri 63102 ("Tenant").
WITNESSETH:
WHEREAS, pursuant to that certain lease dated as of September 20, 2006 (the "Original Lease"), between 237 Park Avenue Owner, L.P. ("Overlandlord"), as landlord and Landlord, as tenant, as amended by that certain First Amendment to Lease dated as of January 29, 2007 (the "First Amendment"), and as further amended by that certain Second Amendment to Lease dated as of July 17, 2007 (the "Second Amendment", said Original Lease, as amended by the First Amendment and the Second Amendment, and as may be further amended, the "Overlease"), Overlandlord has leased to Landlord, and Landlord has leased from Overlandlord, a portion of the rentable area of the 6th, 13th and 21st floors and the entire rentable areas of the 7th, 8th and 12th floors (collectively, the "Overlease Premises") in the office building located at 237 Park Avenue, in the Borough of Manhattan, City, County and State of New York (the "Building");
WHEREAS, the initially named tenant under the Original Lease, The Bear Stearns Companies Inc. was converted from a Delaware corporation to a Delaware limited liability company pursuant to the Certificate of Conversion from a Corporation to a Limited Liability Company pursuant to Section 18-214 of the Limited Liability Company Act filed on July 16, 2008 with the Secretary of State of the State of Delaware (SRV 080788870 - 2069460 File), and is now The Bear Stearns Companies LLC;
WHEREAS, Landlord wishes to sublet to Tenant, and Tenant wishes to hire from Landlord a portion of the Overlease Premises consisting of the entire rentable area of the 8th floor of the Building as is shown on the floor plan attached hereto as Exhibit A (the "Premises"), subject to the terms and conditions hereof;
NOW, THEREFORE, Landlord and Tenant hereby agree as follows:
1. Defined Terms. All capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Overlease.
2. Agreement to Lease. Landlord hereby subleases to Tenant, and Tenant hereby hires from Landlord, the Premises upon and subject to all of the terms, covenants and conditions provided for herein. Landlord and Tenant agree for the purposes of this Sublease that the Premises shall be deemed to contain 58,654 rentable square feet. This area is specified for reference and calculation purposes only, and shall be used for purposes of this Sublease regardless of the actual area of the Premises. Landlord shall not be deemed to have represented the accuracy of the rentable square feet of the Premise.
3. Term.
3.1 Sublease Commencement Date. The term of this Sublease (the "Term ") shall, subject to the provisions of Section 3.2 below, commence on the date (the "Sublease Commencement Date") that is the earlier to occur of:
(a) the latest of the dates on which Landlord shall have (i) substantially completed Landlord's Work (as defined below in this Section), (ii) delivered the Premises to Tenant, vacant, free of all occupancies and tenancies (other than Landlord's tenancy under the Overlease) and in broom clean condition and with all low voltage telecommunication lines existing as the date of this Sublease remaining in place and uncut (although Landlord shall have terminated its contractual relationship with the applicable carrier for telecommunication service to the Premises), and (iii) given written notice to Tenant that Overlandlord has given its consent to this Sublease (or Tenant has received same directly from the Overlandlord), or
(b) the date on which Tenant or anyone claiming by through or under Tenant first occupies all or any portion of the Premises for the performance of Tenant's Work (as such term is hereinafter defined) therein or for any other purpose (other than for Customary Pre-Construction Activities), as defined below in this Section.
The Term shall end at 11:59 pm on May 31, 2020 or such earlier date on which this Sublease may be terminated pursuant to the teens hereof or by law (the "Sublease Expiration Date").
For purposes hereof, the following terms shall have the meanings indicated below:
(1) "Customary Pre-Construction Activities" shall mean such architectural and engineering activities that are generally performed in preparation for the construction of office space in midtown Manhattan and which do not involve the performance of work which physically alters in any way any portion of the Premises or the Building and which do not affect or interfere with the operation of Building Systems, as hereafter defined. Examples of Customary Pre-Construction Activities are the taking or preparation of measurements, surveys, elevations, sketches and layouts.
(2) "Landlord's Work" shall mean (i) the removal of Landlord's personal property from the Premises other than the Furniture and Equipment that is to remain in place pursuant to Section 5.1(b), (ii) the removal of telephone switch/system trading turrets and other moveable office equipment such as computers, printers and copy machines, (iii) the disconnection of certain communication infrastructure located in the LAN room identified on Exhibit A (the "LAN Room") and (iv) the installation of a four (4) inch conduit shaft running between the Premises and the telecommunications closet located on the 6th floor (the "Connection Conduit") and connecting with the existing four (4) inch conduit shaft, which runs between such 6th floor telecommunications closet and the Building's point-of-entry in the basement (together with the Connection Conduit, the "Telecommunications Conduit"). Tenant shall reimburse Landlord for the actual, third party costs incurred to install the Connection Conduit within thirty (30) days following delivery of invoice for such costs and reasonable evidence substantiating such costs incurred.
3.2 Landlord's Inability to Deliver Premises. Landlord shall endeavor to cause Landlord's Work to be substantially completed and the Premises delivered to Tenant in the condition required by this Sublease not later than April 1, 2009 (the "Target Commencement Date"). However, Landlord shall not be subject to any liability if Landlord fails to cause the Sublease Commencement Date to occur on or prior to the Target Commencement Date, and with respect to any such failure, Tenant hereby waives the right to rescind this Sublease or to recover any damages that may result from such failure and agrees that the provisions of this Section 3.2 shall constitute an "express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. Notwithstanding anything herein to the contrary, if the Sublease Commencement Date has not occurred by the Target Commencement Date (other than to the extent due to Force Majeure, as hereafter defined, or due to any act, fault, willful act or negligence of a Tenant Party, as hereafter defined), then (i) for each day that occurs on or after the Target Commencement Date and through the earlier of: (a) April 30, 2009 or (b) the Sublease Commencement Date, there shall be a one (1) day postponement of the Sublease Rent Commencement Date and (ii) for each day that occurs on and after May 1, 2009, until the Sublease Commencement Date actually occurs, there shall be a one and one half (1 1/2) day postponement of the Sublease Rent Commencement Date. The foregoing postponement of the Sublease Commencement Date shall be Tenant's sole remedy for the failure to cause the Sublease Commencement Date to occur by the Target Commencement Date, other than Tenant's rights to terminate the Sublease as provided below in this Section 3.2. Notwithstanding anything in this Sublease to the contrary, if for any reason (other than to the extent due to Force Majeure or due to any act, fault, willful act or negligence of a Tenant Party), Landlord has failed to cause the Sublease Commencement Date to occur by July 1, 2009 ("Outside Commencement Date"), then Tenant, as its sole remedy for such failure to cause the Sublease Commencement Date to occur by the Outside Commencement Date, to be exercised at any time after the occurrence of the Outside Commencement Date, shall have the right to give a notice to Landlord terminating this Sublease ("Tenant's Cancellation Notice") effective as of the date that is ten (10) Business Days (as such term is hereafter defined in this Section) following Landlord's receipt of Tenant's Cancellation Notice (the "Final Date"), in which event this Sublease shall terminate, unless Landlord causes the Sublease Commencement Date to occur on or before the Final Date. If this Sublease is so terminated, neither Landlord nor Tenant shall have any liability to the other, except that (i) Landlord shall return to Tenant the Security Letter (as such term is defined in Section 16.1 hereof) and (ii) the rights and obligations of Landlord and Tenant under Section 17.4 hereof shall survive such termination. This Sublease shall also terminate and come to an end and the terms of the immediately preceding sentence shall apply if, for any reason, the Sublease Commencement Date shall not have occurred by two hundred and seventy (270) days following the Effective Date. "Business Day" shall mean a day other than Saturday, Sunday or any day on which commercial banks in New York, New York are authorized or obligated to close. "Force Majeure" shall mean any acts of God, extreme weather conditions, war, terrorist act, riot, fire, casualty, flood, any strike, lock-out or other labor trouble, governmental preemption of priorities or other controls by a governmental authority in connection with a national or other public emergency or any other delay which is beyond Landlord's reasonable control.
4. Rent.
4.1 Fixed Rent. Tenant shall pay to Landlord a fixed annual rent ("Fixed Rent") for the Premises commencing as of the Sublease Commencement Date, subject to abatement as provided in this Section 4.1, as follows: FOUR MILLION ONE HUNDRED FIVE THOUSAND SEVEN HUNDRED EIGHTY AND 00/100 ($4,105,780.00) DOLLARS per annum (payable in equal monthly installments of $342,148.33 per month). Notwithstanding the foregoing, the Fixed Rent shall be abated for the period commencing on the Sublease Commencement Date and ending on October 31, 2009 ("Sublease Rent Abatement Period") and Fixed Rent shall commence on November 1, 2009 ("Sublease Rent Commencement Date") Notwithstanding anything to the contrary contained herein, if during the Sublease Rent Abatement Period, Tenant shall be in default after applicable notice from Landlord and expiration of any applicable cure period, in each case, as expressly provided in this Sublease, of any of the monetary or material non-monetary terns, conditions or covenants of this Sublease on its part to be performed, Tenant shall not be entitled to any further abatement of Fixed Rent.
4.2 Taxes and Operating Expense Escalations. Throughout the Tem', Tenant shall also pay to Landlord all escalations pursuant to Article 5 of the Overlease with respect to Taxes and Operating Expenses attributable to the Premises; provided, however, that for purposes of this Sublease (a) the Base Tax Rate shall mean the Taxes as finally determined for the fiscal year July 1, 2009 through June 30, 2010, and the Base Tax Year shall mean July 1, 2009, to June 30, 2010, (b) the Base Operational Year shall mean the calendar year 2009, (c) Tenant's Proportionate Tax Share shall mean 4.8110% (which is the percentage obtained by dividing (a) 58,654, which is the agreed upon rentable square feet of the Premises, by (b) 1,219,174, which is the rentable square feet of the Building set forth in the Overlease for determining Landlord's share of Taxes), and (d) Tenant's Proportionate Operating Share shall mean 4.9109% (which is the percentage obtained by dividing (a) 58,654, which is the agreed upon rentable square feet of the Premises, by (b) 1,194,362, which is the rentable square feet of the Building, excluding retail space in the Building, set forth in the Overlease for determining Landlord's share of Operating Expenses).
4.3 Electricity Payments. Landlord represents, and Tenant acknowledges, that the Premises are directly metered for electricity by the applicable utility company supplying such electricity; Tenant shall pay directly such utility company for the use of electricity in the Premises the amounts charged by such utility company as and when due and prior to the date any late charge or other similar fee would be imposed for delinquent payments. During the Term, Tenant shall maintain, repair, and, if necessary, replace the electric meters currently serving the Premises, at Tenant's sole cost and expense, so that such meters remain in good working order. If the Premises ever ceases to be directly metered, then Tenant shall be obligated to pay to Landlord, within thirty (30) days following delivery of an invoice for same, additional rent for the use of electricity in the Premises in an amount equal to 100% of the amount which Landlord is obligated to pay to the utility company supplying electricity to the Premises pursuant Article 16 of the Overlease, or pay to Overlandlord, together with any costs incurred by Landlord or Overlandlord in connection with the maintenance, upgrading or replacement of the electric meters currently serving the Premises.
4.4 Special Charges.
(a) General Obligation to Pay. Tenant shall pay any charges relating to any special privileges or services provided to Tenant or with respect to the Premises, at Tenant's request including but not limited to, "after hours" heating, ventilating and air conditioning service, "after hours" freight elevator service and extra cleaning services for which Landlord is separately charged by Overlandlord (such charges are referred to herein as "Special Charges"). Tenant shall be responsible for, and shall pay to Landlord any Special Charges due on account of services or other matters requested by or performed on behalf of Tenant or with respect to the Premises pursuant to Section 4.6(b).
(b) Request for Services. Landlord agrees to deliver promptly to Overlandlord any request for any special services or privileges that Tenant delivers to Landlord. Notwithstanding the foregoing, Landlord will use good faith efforts to arrange for Overlandlord to permit Tenant to request services directly from Overlandlord in accordance with procedures mutually acceptable to Landlord and Tenant which, among other things, will permit Landlord to monitor Tenant's usage of such services and accumulation of charges that Landlord may be responsible for to Overlandlord if Tenant does not make payment to Overlandlord for same.
4.5 Other Additional Rent. Tenant shall, in addition to all other amounts listed above, pay to Landlord any and all sums of money which actually are or may become actually payable by Landlord to Overlandlord under the Overlease caused by the actions or omissions of Tenant or any of Tenant's agents, employees, affiliates, contractors, invitees, subtenants, assignees, or anyone claiming by, through or under Tenant (each, including, Tenant, a "Tenant Party") and any and all charges of Overlandlord under the Overlease to the extent directly caused by Tenant's failure to perform its obligations under this Sublease.
4.6 Rent Payments.
(a) Fixed Rent. Commencing as of the Sublease Commencement Date, subject to abatement as provided in Section 3.2 and Section 4.1, Tenant shall pay to Landlord monthly installments of Fixed Rent without notice, demand, deduction, offset or abatement in lawful money of the United States, in the monthly installment amounts indicated in Section 4.1, in immediately available funds. Tenant shall pay to Landlord each full monthly installment of Fixed Rent in advance on or before the first day of each and every successive calendar month during the Term provided, however, the first monthly installment of Fixed Rent shall be payable on the Sublease Rent Commencement Date. If the Sublease Rent Commencement Date is not the first day of a calendar month, the first monthly installment of Fixed Rent shall be prorated based upon the number of days during the month from and after the Sublease Rent Commencement Date until and including the last day of the calendar month in which the Sublease Rent Commencement Date occurs. In addition, the monthly installment of Fixed Rent due for any partial month at the end of the Taint shall be prorated based upon the number of days remaining in the month from and after the last day of the Term.
(b) Additional Rent; Disputes. Except to the extent expressly provided to the contrary in this Sublease, all foul's of additional rent shall be payable by Tenant not later than thirty (30) days after receipt of written demand therefor from Landlord, provided that if the additional rent payments results from a service provided at Tenant's request and under the Overlease payments are due in fewer than thirty (30) days, then Tenant shall pay the amount prior to the later of (i) five (5) days prior to the date such amounts are due from Landlord to Overlandlord under the Overlease and (ii) ten (10) days notice to Tenant of the amount due. Landlord shall provide copies of all statements received from Overlandlord relating to additional rent promptly following Landlord's receipt from Overlandlord; provided, however, that any failure by Landlord to promptly deliver such statements shall not relieve Tenant from its liability to pay for any amounts relating thereto. Landlord may redact from the statements to be delivered to Tenant under this Section, any financial or other information not relevant to calculating amounts due from Tenant under this Sublease. If Landlord is successful in obtaining any refund of additional rent relating to the Premises, then if and to the extent that Tenant paid all or a portion of such additional rent to which such refund directly relates ("Tenant's Additional Rent Payment"), and provided that Tenant is not in default hereunder beyond any cure period expressly provided in this Sublease, Landlord shall pay to Tenant the portion of the net refund after deducting from such total refund the costs and expenses including, but not limited to, appraisal, accounting and legal fees of obtaining the same which is fairly allocable to the Tenant's Additional Rent Payment to which such refund is directly related. Tenant shall not have the right without Landlord's written consent (which Landlord may grant or withhold in its reasonable discretion) to lodge any dispute with Overlandlord in its own name or in the name of Landlord with respect to such amounts of additional rent provided, however, if the amount of additional rent in dispute is allocable only to the Premises and no other portion of the Overlease Premises or is with regard only to Tenant's request for services from the Overlandlord then, at Landlord's option, either (a) Landlord shall lodge such dispute with Overlandlord on Tenant's behalf, in which case Landlord shall use commercially reasonable efforts to pursue such matter to resolution and shall not settle same without the consent of Tenant, such consent not to be unreasonably withheld or (b) Landlord shall permit Tenant to pursue such dispute directly with Overlandlord in Tenant's own name and Tenant shall be subrogated to the rights of Landlord under the Overlease as necessary for that purpose and only to the extent such rights are applicable to the Premises. In no circumstance shall Tenant be permitted or authorized to commence or pursue a legal proceeding in the name of Landlord, its successors or assigns.
(c) Place of Payment. Except as otherwise expressly provided under this Sublease, Fixed Rent and all forms of additional rent (collectively, "Rent") shall be payable by Tenant to Landlord at the following address:
Regular Delivery
The Bear Stearns Company LLC P.O. Box 714982 Columbus, Ohio 43271-4982
|
Overnight/Express Delivery
The Bear Stearns Company LLC Columbus, Ohio 43271-4982 Department 4982 370 Cleveland Avenue Westerville, OH 43081
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or to such other persons or at such other places as Landlord may designate in writing. If Tenant is delinquent in the payment of Rent more than two (2) times in any calendar year, then Landlord may elect to have Tenant make all payments of Rent or Fixed Rent by wire transfer by notice to Tenant, which notice must be given at least twenty (20) days prior to when the first payment by wire is to be made, such notice to contain applicable wiring instructions. At any time following such election by Landlord, Landlord may elect to have Tenant make all payments of Rent or Fixed Rent by check rather than wire transfer, as provided herein.
5. Possession; Improvements; Furniture and Equipment; Surrender of Premises; Alterations; and Signage.
5.1 Delivery of Possession. Landlord shall have no obligation to prepare the Premises for Tenant's occupancy other than to complete Landlord's Work.
(a) Condition of Premises and Improvements. Tenant acknowledges that it has inspected the Premises and improvements contained in the Premises (the "Improvements") and Tenant agrees to accept the Premises in its "AS IS" condition as of the date hereof, normal wear and tear excepted and subject to the completion of Landlord's Work. Without limiting the foregoing, Landlord makes no representation or warranty as to the physical condition, fitness for any use or merchantability of the Premises or the Improvements provided, however, this disclaimer shall not nullify any representation made by Landlord expressly in this Sublease. Landlord shall cause Overlandlord to have all Building Systems serving the Premises to be in working order as of the Sublease Commencement Date. The term, "Building Systems" shall mean all mechanical; electrical; plumbing; heating, ventilation and air-conditioning; and fire and life safety systems that are operated and maintained by Overlandlord for the operation of the Building.
(b) Furniture and Equipment.
(i) In consideration of the obligations of Tenant under this Sublease, Landlord leases to Tenant (1) the items of furniture and furnishings described and/or identified on Exhibit B annexed hereto and (2) the LAN Room Equipment (as defined below) (collectively, the "Furniture and Equipment") for so long as the Sublease is in effect. Tenant agrees to accept the Furniture and Equipment on the Sublease Commencement Date "as is, where is, with all faults", and without representation or warranty of any kind, nature or description relative to the same, including representations concerning merchantability, fitness or fitness for a particular purpose, all of which are hereby expressly disclaimed by Landlord and waived by Tenant. During the Term, Tenant shall (x) insure the Furniture and Equipment against loss or damage by fire or other casualty (and all of the provisions of this Sublease applicable to insurance required to be carried by Tenant shall be applicable thereto) and (y) maintain the Furniture and Equipment in at least as good a condition and working order as when delivered to Tenant, subject to reasonable wear and tear and damage by fire or other casualty. Upon request by Landlord no more than one (1) time during any calendar year, Tenant shall deliver to Landlord within five (5) Business Days of such request, evidence that Tenant is maintaining the insurance coverage with regard to the Furniture and Equipment as required pursuant to this Section. Upon the expiration of the Tem', and provided Tenant is not in default under this Sublease, or at Landlord's option following a termination of this Sublease, Landlord shall be deemed to have transferred, conveyed and delivered to Tenant all of the Furniture and Equipment then in the Premises in then "as is, where is condition, with all faults", and without representation or warranty of any kind, nature or description relative to the same, including representations concerning merchantability, fitness or fitness for a particular purpose (and Tenant shall be obligated to remove from the Premises all such Furniture and Equipment pursuant to Section 5.2). Landlord and Tenant hereby agree that little or no value will be attributable to the Furniture and Equipment at the time of the transfer of the Furniture and Equipment to Tenant and that no part of the Fixed Rent payable by Tenant hereunder will be attributable to the transfer of the Furniture and Equipment by Landlord to Tenant upon the expiration of the Tenn. Notwithstanding the foregoing, if sales tax is due to the City or State of New York in connection with the transfer of the Furniture and Equipment to Tenant pursuant to this Sublease ( "Sales Tax"), Tenant hereby agrees to pay as and when due such amounts and Tenant further agrees to save, defend, indemnify and hold Landlord harmless from any obligation for any Sales Tax which may now or hereafter be imposed upon Landlord or Tenant in connection with such transfer of the Furniture and Equipment, including interest and penalties thereon, and any loss, liability, cost or expense that Landlord may incur by reason of Tenant's failure to pay the Sales Tax in a timely manner. The provisions of the preceding sentence shall survive the expiration or earlier termination of this Sublease. Landlord covenants that immediately prior to the transfer of the Furniture and Equipment to Tenant, Landlord shall own the Furniture and Equipment free of any liens or encumbrances of any kind, subject to Tenant's rights set forth in this Section.
(ii) As used herein, "LAN Room Equipment" shall mean the two (2) supplemental heating, ventilation and air-conditioning units and the uninterrupted power supply unit currently located in the LAN Room.
(iii) Notwithstanding Section 5.1(b)(i), if this Sublease is terminated as a result of a default by Tenant, then Landlord shall retain ownership of the Furniture and Equipment (unless Landlord elects to have transferred the Furniture and Equipment to Tenant as provided in Section 5.1(b)(i)) and Tenant shall surrender the Furniture and Equipment to Landlord in at least as good a condition and working order as when delivered to Tenant, subject to reasonable wear and tear and damage by fire or other casualty.
(iv) Notwithstanding anything herein to the contrary, if, in Tenant's discretion, any Furniture and Equipment is beyond its useful life, needs to be replaced, or is no longer necessary in the Premises, then Tenant may discard, sell, or dispose of such Furniture and Equipment and Landlord shall not receive any compensation for such Furniture and Equipment removed from the Premises provided, however, from the Sublease Commencement Date until February 28, 2013, Tenant shall replace such removed Furniture and Equipment as necessary to maintain the Premises in a furnished condition reasonably necessary for Tenant's business operation in Tenant's reasonable opinion, with furniture and equipment of a quality at least as high as the Furniture and Equipment delivered by Landlord to Tenant, subject to reasonable wear and tear.
5.2 Surrender of Premises. Tenant shall at Tenant's sole expense and no later than the expiration or earlier termination of this Sublease and subject to all of the terms of this Sublease and the Overlease, vacate and surrender the Premises to Landlord in the condition that Landlord is required to surrender the Premises to Overlandlord pursuant to Section 14.01, 14.02, 14.03, 14.04 and 14.05(a), (b) and (g), and Section 24.01 of the Overlease upon the expiration or earlier termination of the Overlease. As part of Tenant's obligations under this Section, Tenant shall (a) remove from the Premises all Furniture and Equipment, unless title to same has been retained by Landlord pursuant to Section 5.1(b)(iii) and (b) remove Tenant's Changes including, without limitation, Tenant's Work (as defined in Section 20) if, and to the extent, required by this Sublease. In addition, Tenant shall repair any damage to the Premises caused by Tenant's removal of the Furniture and Equipment or Tenant's Changes. In no event shall Tenant be required to perform any Restoration Work required to be performed under the Overlease by Landlord as tenant under the Overlease as of the Sublease Commencement Date (as if such were the Expiration Date under the Overlease) or to remove any improvements existing in the Premises as of the Sublease Commencement Date. Notwithstanding any contrary provision in the Overlease or Sublease (a) Tenant's surrender obligation is limited to the agreement that Tenant shall return the Premises to Landlord in substantially the same condition as originally received by Tenant, approved alterations, ordinary wear and tear and casualty excepted and (b) Tenant shall not have any obligation to remove those Tenant Changes installed by Tenant for which Landlord has failed to indicate that it is requiring such removal at the time Landlord approves such Tenant Changes but as to clause (b), only if at the time Tenant requests Landlord's consent to such proposed Tenant Changes, Tenant indicates in a notice to Landlord in bold upper case letters on the first page: "SUBTENANT IS REQUESTING A DETERMINATION AS TO WHETHER SUBLANDLORD WILL BE REQUIRING THE REMOVAL OF CERTAIN SUBTENANT ALTERATIONS AT THE END OF THE SUBLEASE TERM, AND IF SUBLANDLORD FAILS TO INDICATE THAT SUCH REMOVAL IS REQUIRED, THEN IT SHALL BE DEEMED THAT SUBLANDLORD HAS IRREVOCABLY ELECTED THAT SUCH REMOVAL SHALL NOT BE REQUIRED."
5.3 Holdover by Tenant. If the Premises shall not be surrendered upon the expiration or earlier termination of the Term of this Sublease in the condition required by Section 5.2 hereof, Tenant shall be deemed to be occupying the Premises as a subtenant from month-to-month, at a monthly rental equal to one hundred and fifty percent (150%) of the aggregate Fixed Rent and additional rent payable during the last month of the Term, subject to all the other conditions, provisions and obligations of this Sublease insofar as the same are applicable to a month-to-month tenancy. In addition, Tenant shall indemnify and hold harmless Landlord for, from and against any and all liabilities, losses, obligations, damages (direct, indirect, consequential or otherwise), penalties, claims, costs and expenses (including, without limitation, reasonable attorneys' fees and other charges) which are paid, suffered or incurred by Landlord as a result of the failure of, or the delay by, Tenant in so surrendering the Premises including, without limitation, all sums payable by Landlord to Overlandlord, or other liabilities of Landlord to Overlandlord, pursuant to Section 24.02 of the Overlease or otherwise (whether allocable to the Premises or any other portions of the premises demised to Landlord under the Overlease) resulting from such delay. Tenant acknowledges and understands that if Tenant holds over in all or a portion of the Premises past the expiration or termination of this Sublease, Landlord may incur holdover rent damages as to the entire Overlease Premises as a result thereof, and that Tenant will be liable to Landlord for all such damages, liabilities, costs and expenses payable to Overlandlord or otherwise directly due to Tenant's holding over in the Premises. Notwithstanding anything to the contrary contained in this Sublease, the acceptance of any rent paid by Tenant to this Section 5.3 shall not preclude Landlord from commencing and prosecuting a holdover or summary eviction proceeding, and the preceding provisions of this Section shall be deemed to be an "agreement expressly providing otherwise" within the meaning of Section 232-c of the Real Property Law of the State of New York.
5.4 Alterations. In addition to the incorporation by reference of Section 13 of the Overlease with regard to Tenant's Changes (as defined therein), Tenant shall reimburse Overlandlord for all costs payable by Landlord under the Overlease with regard to reviewing any proposed Tenant's Changes and all other reasonable out-of-pocket costs Landlord may incur in connection with reviewing proposed Tenant's Changes including, without limitation, engineer's, architects, attorney's and other consultants' fees and costs. However, Landlord shall not charge Tenant a fee for any in-house review of Tenant plans and specifications with regard to Tenant's Changes or for in-house supervision of construction of Tenant's Changes.
5.5 Signage. Tenant shall be permitted to install a sign setting forth Tenant's name and logo on each entry door to the Premises subject to (a) compliance with Section 19.10(b) of the Overlease and to the prior written approval of Overlandlord (if required under the Overlease), and (b) the prior written approval of Landlord to the method of affixing such sign, such approval of Landlord not to be unreasonably withheld or delayed.
6. Use of the Premises. The Premises may be used only for the purposes permitted under Article 2 of the Overlease other than the use described in clause (iii) of Section 2.01(b) of the Overlease, and for no other purpose.
7. Overlease; Incorporation by Reference.
7.1 Provisions Incorporated in Sublease. This Sublease is and shall be at all times subject and subordinate to the Overlease (excluding redacted provisions and the First Amendment and the Second Amendment). Except as otherwise expressly provided herein or to the extent the terms and conditions of the Overlease are inconsistent herewith or are otherwise inapplicable to the Premises, Landlord leases to Tenant, and Tenant leases from Landlord, the Premises upon all of the same terms and conditions of the Overlease applicable to the Premises (excluding redacted provisions), which Overlease provisions are hereby incorporated herein by this reference as if Landlord were "Landlord" thereunder, Tenant were "Tenant" thereunder, the Premises were the "Demised Premises" thereunder, Fixed Rent were "fixed rent" thereunder, all other payments of Rent were "additional rent" thereunder, and this Sublease were the "Lease" thereunder. A true, correct and complete copy of the Overlease (except for certain financial and other information deemed to be confidential or not relevant to the Premises that has been redacted) is attached as Exhibit D.
7.2 Incorporation and Modification of the Provisions of the Overlease. Notwithstanding the provisions of Section 7.1 above, the following provisions of the Original Lease shall not be incorporated into the Sublease (other than as necessary as a reference to understand the application of terms of the Overlease that are incorporated into this Sublease):
Article/Section of Overlease |
Topic or Caption |
|
|
1.02, 1.03, 1.04(a) and 1.08 |
Rent and Rent Commencement Date |
2.01(b)(iii) and 2.06 |
Certain Permitted Uses |
4 |
Preparation of Demised Premises |
6 |
Generator |
7 |
Subordination; Notice to Lessors and Mortgagees |
8 |
Quiet Enjoyment |
9.01, 9.02(b), 9.07, 9.15 |
Certain Assigning and Subletting Provisions |
9.17 - 9.20 |
|
10.04(a) and (b) |
Installation by Tenant of Class E System |
11.09 |
Insurance for Generator |
14.05(c), (d), (e) and (f) |
Provisions Regarding Specialty Alterations |
18.01 |
Hoist |
19.10(c) and 19.12 |
Signage and Access to Certain Areas |
21.02 |
Landlord Indemnity |
22 |
Destruction or Damage |
23 |
Eminent Domain |
24.02 |
Holdover |
31 |
Broker |
32 |
Notices |
39 |
Renewal Right |
40 |
Right of First Offer |
41 |
Roof Equipment |
42 |
Redacted |
Exhibit B |
Floor Plan |
In addition, the First Amendment and the Second Amendment shall be deleted in their entirety. For avoidance of doubt, as between Landlord and Tenant, Tenant shall have none of the rights granted to Landlord as tenant under Overlease that are provided exclusively in one or more of any of the deleted provisions of the Overlease such as by way of example and not limitation, the "renewal rights" and "rights of first offer" granted to the tenant under the Overlease pursuant to Section 39 and 40 of the Overlease, respectively.
Notwithstanding anything in this Sublease to the contrary, the following provisions of the Overlease shall be incorporated into the Sublease with the modifications indicated below:
Article/Section of Overlease |
Modification |
2.05(d) |
Tenant may use the Premises as a (i) general, administrative or executive offices and/or (ii) operation of an investment firm and/or financial services film including, without limitation, the operation of a stock brokerage office provided however, Tenant's business at the Premises shall not primarily and regularly consist of off-the-street, in-person retail sales to the general public. |
5 |
As modified by Section 4.2 of this Sublease. |
9.10 |
As modified by Section 15 of this Sublease. |
9.11(b) |
As modified by Section 15.7 of this Sublease. |
9.15 |
As is deleted or modified in Overlandlord's consent to the Sublease. |
11 and 13.02 |
Reference to Landlord shall be deemed to include the JPMorgan Chase & Co. |
13.01 |
The amount of $150,000 referenced twice in the third to last sentence of Section 13.01(f) (such sentence begins with the word "Notwithstanding" on the second to last line of page 52) shall be replaced with the amount of $50,000. In addition, the term "decorative changes" shall be amended so that if the aggregate cost of an alteration exceeds $50,000, then such alteration shall be deemed not to be a "decorative change." |
15.04 |
As modified by Section 8.3 of this Sublease. |
19.11 |
As modified by Section 24 of this Sublease. |
21.02 |
The definition of "Landlord Parties" shall be deemed to include JPMorgan Chase & Co and its direct and indirect members, shareholders, partners, principals, employees, directors, officers, affiliates, agents, and representatives. |
16.01 |
References to eight (8) watts shall be replaced by references to six (6) watts and shall apply to the connected load, inclusive of lighting but exclusive of heating, ventilation and air conditioning systems. Landlord agrees not to redirect, during the Term, any electricity supply capacity from the Premises to any other portion of the Overlease Premises. |
16.03 |
The parenthetical comment shall be deleted. |
17.03 |
Supplemental Assignment/Sublease - The amount of condenser water to be made available for Tenant's Supplemental Air Conditional System, if any, shall be limited as provided in Section 22 of this Sublease. |
30.01 |
The email address for notices to Tenant for the purpose of Section 30.01 as incorporated by reference into this Sublease are as follows: zemlyakj@stifel.com; fierstp@stifel.com; and dolanr@stifel.com. |
7.3 Conflicts. In the event of any conflict or inconsistency between the provisions of the Overlease and this Sublease, this Sublease shall govern and control except to the extent such interpretation would result or penult a default under the Overlease.
7.4 No Representations. Except as expressly provided in this Sublease (excluding Section 7.2), any covenants, representations and other undertakings of Overlandlord under the Overlease shall not be deemed to be made by, or otherwise constitute obligations of, Landlord under this Sublease.
7.5 Limitation of Landlord Obligations and Liability under the Overlease.
(a) Notwithstanding anything to the contrary contained in this Sublease or the Overlease (as incorporated into this Sublease), Tenant expressly agrees that Landlord shall not be obligated to perform, and shall not be liable or responsible for the performance by or failure of performance of Overlandlord, of any of the obligations of Overlandlord under the Overlease and Tenant shall have no claim against Landlord for any default of the Overlandlord. Landlord shall use commercially reasonable efforts to cause Overlandlord to perform its obligations under the Overlease as they relate to the Premises and Tenant's use and occupancy of the Premises, provided such commercially reasonable efforts shall not require Landlord to incur any out-of-pocket expenses to cause Overlandlord to perform its obligations under the Overlease unless Tenant agrees in writing to pay, and does pay, such expenses as and when incurred. In no event shall Landlord be obligated to commence a legal proceeding against Overlandlord in order to cause Overlandlord to perform its obligations under the Overlease.
(b) Landlord shall not incur any liability whatsoever to Tenant for any injury, inconvenience, incidental or consequential damages incurred or suffered by Tenant as a result of the exercise by Overlandlord of any of the rights reserved to Overlandlord under the Overlease, nor shall such exercise constitute a constructive eviction or a default by Landlord hereunder provided, however, the foregoing waiver of liability shall not apply to the exercise of remedies by Overlandlord as a result of Landlord's default under the Overlease in violation of Section 10 of this Sublease, which default by Landlord is not caused by the default, acts, fault, willful act or negligence of a Tenant Party. Tenant's obligations to pay Fixed Rent, additional rent and any other charges due under this Sublease shall not be reduced or abated in the event that Overlandlord fails to provide any service, to perform any maintenance or repairs, or to perform any other obligation of Overlandlord under the Overlease, except if and only to the extent expressly provided in Section 7.6.
7.6 Rent Abatement under Overlease. To the extent Landlord is entitled to any abatement under the Overlease for interruption of any service affecting the Premises during the Term or otherwise under the Overlease including, without limitation, pursuant to Section 18.05 of the Overlease, Tenant shall be entitled to the same abatement of rent on its behalf, but only to the extent that (i) such abatement is actually received by Landlord, (ii) such abatement relates to the Premises or a portion thereof and (iii) Tenant is not in default hereunder beyond any applicable cure period expressly provided for in this Sublease.
7.7 Casualty and Condemnation.
(a) All rights of termination, if any, of Landlord (as tenant under the Overlease) that are set forth in Articles 22 and 23 of the Overlease are exclusively reserved to Landlord, to be exercised or waived in Landlord's sole discretion and Tenant shall have no right to terminate this Sublease pursuant to the provisions of Articles 22 or 23. In the event of any damage, destruction, casualty, condemnation or threat of condemnation affecting the Premises, Fixed Rent payable hereunder shall be abated only if and in the same proportion that fixed rent is abated under the Overlease with respect to the Premises. The provisions of this Section 7.7 shall be considered an express agreement governing any case of damage or destruction of the Premises by fire or their casualty, and Section 227 of the Real Property Law of the State of New York, providing for such a contingency in the absence of any express agreement, and any other law of like import, now or hereafter in force, shall have no application in such case.
(b) Notwithstanding the foregoing or anything herein to the contrary, if (i) the Building is damaged by casualty or condemnation and Tenant cannot access or use the Premises; or (ii) the Premises is damaged by casualty or condemnation such that Tenant is prevented from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such casualty or condemnation, and (1) if the damage caused thereby cannot be repaired within six (6) months after the occurrence of such casualty or condemnation as estimated by an independent construction contractor selected by Landlord, and subject to the approval of Tenant, not to be unreasonably withheld, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within thirty (30) days following the determination by such construction contractor of the time to repair, time being of the essence, or (2) if the damage caused thereby is not repaired within six (6) months days after the occurrence of such casualty or condemnation then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within thirty (30) days following the end of such six (6) month period, time being of the essence, unless prior to such termination, such repairs have been completed. In the event of any casualty or condemnation during the last twenty four (24) months of the Term of this Sublease, the foregoing sentence shall apply to allow Tenant to terminate this Sublease except that the 6-month period wherever used in such sentence shall be reduced to three (3) months.
8. Benefits under the Overlease, Services of Overlandlord.
8.1 In General. Landlord hereby grants to Tenant the right to receive all of the services and benefits with respect to the Premises which are to be provided under the Overlease. Notwithstanding anything provided herein or the Overlease to the contrary, Tenant acknowledges and agrees that Landlord shall not be obligated to furnish any services or utilities of any nature whatsoever or be responsible for the performance of any of Overlandlord's obligations under the Overlease, and shall not be liable in damages or otherwise for any negligence of Overlandlord or for any damage or injury suffered by Tenant as a result of any act or failure to act by Overlandlord, or any default by Overlandlord in the performance of its obligations under the Overlease. Except as provided Section 7.5(a) with regard to out-of-pocket expenses incurred by Landlord to cause Overlandlord to perform its obligations under the Overlease for which Tenant agrees to reimburse Landlord as and when incurred, Landlord shall have no obligation to expend any money for the preservation of or to render any services to the Premises or to expend any money for the repair of or perform any obligation for Tenant in, to or with respect to the Premises of any nature whatsoever. Subject to the following provisions of this Section 8, Tenant agrees to look solely to Overlandlord for the furnishing of any services or the performance of any obligation to which Landlord may be entitled as tenant under the Overlease.
8.2 Landlord's Enforcement of Overlandlord's Obligations. If Overlandlord shall default under its obligations with respect to the Premises (any such failure, an "Overlandlord Default"), then Landlord shall, after receipt of Tenant's written request specifying the nature of the Overlandlord Default, make demand upon Overlandlord to remedy such Overlandlord Default and shall use other commercially reasonable efforts, as determined by Landlord in its sole but reasonable discretion, to cause Overlandlord to perform its obligations under the Overlease, provided such commercially reasonable efforts shall not require Landlord to incur any out-of-pocket expenses to cause Overlandlord to perform its obligations under the Overlease unless Tenant agrees in writing to pay, and does pay, such expenses as and when incurred. In no event shall Landlord be obligated to commence a legal proceeding against Overlandlord in order to cause Overlandlord to perform its obligations under the Overlease.
8.3 Self Help Rights. If (i) Overlandlord fails to make repairs or perform its maintenance obligations with regard to the Premises in accordance with the Overlease then, upon written request of Tenant, Landlord shall provide to Overlandlord the notices referenced in Section 15.04 of the Overlease and (ii) the other conditions necessary for Landlord to exercise the Self Help Right with regard to the Premises pursuant to Section 15.04 of the Overlease are met including, without limitation, the expiration of the applicable time period provided to Overlandlord to discharge its obligations as set forth in Section 15.04 of the Overlease ("Overlandlord's Cure Period"), then Tenant shall have the right to exercise such Self Help Right provided (a) Tenant is not then in default under this Sublease, beyond notice and applicable cure periods, (b) Tenant shall have provided written notification to Landlord that Overlandlord's Cure Period has expired and Overlandlord's failure to make repairs or perform its maintenance obligations with regard to the Premises continues uncured, (c) Landlord has not notified Tenant within two (2) Business Days following delivery of the notice described in the foregoing clause (b) that Landlord elects to exercise the Self Help Right or thereafter Landlord fails to diligently prosecute the applicable repair or maintenance to completion, (d) Tenant's exercise of the Self Help Right shall be performed entirely within the Premises and shall not affect any portion of the Overlease Premises outside of the Premises, (e) Tenant's exercise of the Self Help Right would not reasonably be expected to interfere with Landlord's use or occupancy of, or rights to exercise the Self Help Right with respect to, any portion of the Overlease Premises outside of the Premises, and (f) Tenant shall notify Landlord prior to exercising the Self Help Right of its intention to do so. Notwithstanding the foregoing, Tenant shall cease immediately exercising such Self Help Right upon notice that Overlandlord has declared such exercise a default under Overlease.
9. Tenant's Compliance with Overlease; Tenant Default; Remedies.
9.1 Tenant shall not do or permit to be done anything which would constitute a violation or breach of any of the terms, conditions or provisions of the Overlease. With respect to any of Tenant's non-monetary obligations to be performed under this Sublease, when the Overlease grants Landlord a specific number of days to perform such non-monetary obligations, Tenant shall have either (i) five (5) fewer Business Days to perform if such specific number of days within which Tenant is to perform is thirty (30) or more days or (ii) two (2) fewer Business Days to perform in all other circumstances.
9.2 The occurrence of any of the following shall constitute a material breach of this Sublease and a default by Tenant: (a) failure to pay regularly scheduled installments of Rent within five (5) Business Days after same is due provided that the first two (2) instances of Tenant's failure to pay such regularly scheduled installments of Rent in any calendar year shall not be deemed a default by Tenant unless same remain unpaid for more than five (5) Business Days after written notice from Landlord that such payment is past due, (b) failure to pay any other item of Rent not described in the foregoing clause (a) within five (5) Business Days after written notice from Landlord that such payment is past due; (c) all those items of default set forth in the Overlease which remain uncured after the cure period provided in the Overlease, less either (i) five (5) days if the cure period under the Overlease is thirty (30) or more days, (ii) less two (2) days if the cure period under the Overlease is more than ten (10) days but less than thirty (30) days, or less one (1) day in all other circumstances; and (d) Tenant's failure to perform any other covenants of this Sublease not described in clauses (a), (b), or (c) of this Section 9.2 within thirty (30) days following Landlord's notice to Tenant specifying the nature of such default or in the event Tenant shall reasonably require in excess of thirty (30) days to cure said default, Tenant shall fail to commence said cure within said thirty (30) day period, or thereafter fail to diligently prosecute the same to completion.
9.3 Landlord shall have the remedies set forth in the Overlease as if Landlord is Overlandlord. These remedies are not exclusive; they are cumulative and in addition to any remedies now or later allowed by law. Tenant hereby expressly waives any and all rights of redemption to which it may be entitled by or under any present or future laws in the event Landlord shall obtain a judgment for possession of the Premises.
9.4 If Tenant shall at any time during the Term fail to perform any of the obligations, conditions or covenants of this Sublease or the Overlease within any applicable cure period, Landlord shall have the right following written notice, but not the obligation, to immediately perform any such obligation, condition or covenant in order to protect Landlord's leasehold interest. Tenant shall reimburse Landlord for all actual costs and expenses incurred by Landlord as a result of such performance, and any sum not paid within ten (10) days after Tenant receives written demand for reimbursement shall bear interest at the Default Rate from the expiration of such ten (10) day period to the date of reimbursement by Tenant.
10. Landlord's Compliance with Overlease; Limitation on Landlord's Right to Amend or Terminate the Overlease. So long as this Sublease is in effect, and Tenant is not in monetary or material non-monetary default under this Sublease beyond any cure period expressly provided in this Sublease, Landlord (a) shall comply with all of its obligations under the Overlease, the failure of which would reasonably be likely to result in Overlandlord bringing an action to terminate the Overlease, (b) shall not, without the prior written consent of Tenant, amend the Overlease in a manner that would have a materially adverse effect on Tenant's rights or obligations under this Sublease or Tenant's use of the Premises, and (c) shall not terminate or cancel the Overlease with respect to the Premises or voluntarily surrender the Premises or take any other action that would otherwise cause or permit Overlandlord to terminate or cancel the Overlease with respect to the Premises unless Overlandlord either has agreed or will agree to recognize Tenant's rights under this Sublease from and after the date of such surrender or termination of the Overlease, other than as a result of the exercise of rights under Article 22 as a result of a fire or other cause, under Article 23 as a result of a taking, or under Article 9 with regard to a proposed assignment or sublease.
11. Overlandlord's Consent. Tenant agrees that in any case where any event, transaction, action or omission requires the consent or approval of Overlandlord under the Overlease, it shall be a condition precedent to such event, transaction, action or omission that the prior consent or approval of Overlandlord shall be obtained. If Landlord is obligated to be reasonable with respect to any approval or consent required under the terms of this Sublease, in addition to and without limitation of any reasons set forth in the Overlease for which Landlord may withhold consent, Landlord shall not be deemed to be unreasonable in withholding such consent if Overlandlord withholds its consent thereto and Landlord shall have no liability to Tenant for any loss, damage or injury in the event that Overlandlord withholds its consent. Tenant agrees that Landlord shall not have any duty or responsibility with respect to obtaining the consent or approval of Overlandlord when the same is required or desired by Tenant, other than (a) to transmit to Overlandlord, Tenant's request for such consent or approval, (b) to cooperate with Tenant to obtain such approval or consent, provided that such cooperation does not require Landlord to pay any sum or incur any out-of-pocket expense (unless Tenant agrees to pay (and, in fact, pays) such sum or expense on behalf of Landlord) or to undertake any material performance obligation and (c) in the event of an Overlandlord Default in connection therewith, the enforcement of Landlord's rights under the Overlease as provided in Section 8 hereof.
12. Indemnification by Tenant and Landlord.
12.1 Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, suits, judgments, losses, costs, obligations, damages, expenses, and liabilities including, without limitation, reasonable attorneys' fees and disbursements (collectively, "Claims") in any way arising out of or connected with (a) any breach, default or failure to perform on the part of a Tenant Party under this Sublease, (b) any act or omission of a Tenant Party which constitutes a default under the Overlease, (c) any negligence or willful misconduct of a Tenant Party, (d) the use or occupancy of the Premises by a Tenant Party, (e) any holdover by a Tenant Party beyond the expiration of the Tenn, as more particularly set forth in Section 5.3 hereof, (f) any actions taken by Landlord pursuant to Section 4.6(b) or Section 8.2 following Tenant's request of Landlord to take action pursuant to either of such sections, (g) any actions taken by Tenant pursuant to Section 4.6(b) or Section 8.2, and (h) any actions taken by Tenant pursuant to Section 8.3. The provisions of this Section 12 shall survive the expiration or earlier termination of this Sublease.
12.2 Landlord shall indemnify, defend and hold Tenant harmless from and against any and all Claims in any way arising out of or connected with (a) any breach, default or failure to perform on the part of Landlord under this Sublease, (b) any act or omission of Landlord which constitutes a default under the Overlease except to the extent attributable to the act, fault, willful act or negligence of a Tenant Party or a default by Tenant under this Sublease, and (c) any negligence or willful misconduct of Landlord.
13. Notices from Overlandlord. Tenant shall furnish Landlord with copies of all notices which Tenant shall receive from Overlandlord promptly after receipt from Overlandlord, and Landlord shall furnish Tenant with copies of all notices relating to, or otherwise affecting, the Premises which Landlord receives from Overlandlord promptly after receipt by Overlandlord (other than notices received by Landlord with respect to additional rent, which shall be furnished to Tenant in accordance with the provisions of Section 4.6(b) hereof).
14. Subordination; Quiet Enjoyment.
14.1 Subordination. As required by Section 9.09(c) of the Overlease, Tenant agrees to the following:
this Sublease is subject and subordinate to the
Overlease and to the matters to which the Overlease is or shall be subordinate,
and that in the event of termination,
re-entry or dispossess by Overlandlord under the Overlease, Overlandlord may, at
its option, take over all of the right, title an interest of
Landlord, as sublessor, under this Sublease,
and Tenant, as subtenant shall, at
Overlandlord's option, attorn to Overlandlord pursuant to the then executory
provisions of this
Sublease except
that Overlandlord shall not (i) be liable for
any previous act or omission of Landlord (as
sublandlord) under such sublease, (ii) be subject to any offset, not expressly
provided in this Sublease, which
theretofore accrued to Tenant (as subtenant) against Landlord (as sublandlord),
or (iii) be bound by any previous modification of this Sublease or by any
previous prepayment of more than one month's rent.
14.2 Quiet Enjoyment. Landlord covenants and agrees that upon Tenant paying the Rent and observing and performing all the terms, covenants and conditions under this Sublease on Tenant's part to be observed and performed, Tenant shall peaceably and quietly enjoy the Premises, without hindrance or molestation, subject, nevertheless, to the terms and conditions of this Sublease, the Overlease and to any encumbrance to which the Overlease is subject including, without limitation, any mortgages or ground leases entered into at any time.
15. Assignment and Subleasing.
15.1 Prohibition. Tenant shall not (a) assign this Sublease, (b) permit this Sublease to be assigned by operation of law or otherwise, (c) sublease the Premises in whole or in part, (d) permit the Premises or any desk space therein to be occupied by any person(s) other than Tenant or a Tenant Affiliate, or (e) pledge or encumber this Sublease, the term and estate hereby granted or the rentals hereunder, without first obtaining in each instance Overlandlord's written consent, and Landlord's written consent (which consent Landlord shall grant or withhold in accordance with the following provisions of this Section 15). The foregoing restriction and the provisions of Section 15.2 and Section 15.7 shall not apply to assignments, subleases, or desk space agreements with a Tenant Affiliate (as such teem is hereinafter defined) but only for so long as such party remains a Tenant Affiliate. Except to the extent, if any, that Overlandlord's consent is required in accordance with the provisions of the Overlease, the foregoing provisions of clauses (a) and (b) hereof shall not apply to (1) a Corporate Transaction as described in Section 9.11(b) of the Overlease provided that each of the conditions provided therein are satisfied and the Sufficient Net Worth condition shall be deemed satisfied if the entity to which it is to be applied has a net worth (i.e. for purposes hereof, shareholder's equity), computed in accordance with generally accepted accounting principles, consistently applied, that is equal to or greater than $415,000,000 or (2) arrangements described in Section 9.15 of the Overlease provided that each of the conditions provided therein are satisfied and only to the extent that Overlandlord has consented in Overlandlord's Consent to the application of Section 9.15 of the Overlease to Tenant. For purposes of this Section 15.1, as used herein, "Affiliate" shall mean a person or business entity, corporate or otherwise, that, through one or more intermediaries, controls or is controlled by, or is under common control with Tenant. The term "control" means the possession, directly or indirectly, of the right and power to direct or cause the direction of the management and policies of a person or entity (in contrast to day-to-day management activities), whether through ownership of voting equity interests, as trustee or executor, by contract or credit arrangements or otherwise. A modification, amendment or extension of a sublease or assignment that has a material affect on the rights or obligations of the parties to the sublease or assignment shall be deemed a new sublease or assignment to which the provisions of this Section 15.1 shall apply.
15.2 Recapture. Tenant acknowledges that pursuant to Section 9.16 of the Overlease, the request of Tenant for consent to an assignment or sublease may trigger Landlord's Option (as defined in the Overlease) which in certain circumstances would allow Overlandlord to terminate this Sublease in its entirety or just with respect to the space to be subleased. If Overlandlord does not exercise Landlord's Option, then Landlord will also have the same rights as Overlandlord to exercise Landlord's Option as if Landlord were the Landlord under the Overlease except that the time frame for Landlord to exercise Landlord's Option shall be five (5) Business Days after expiration of Landlord's Option.
15.3 Consent Conditions. If (i) neither Overlandlord nor Landlord has exercised Landlord's Option, (ii) Overlandlord has consented to the proposed assignment or Sublease (if consent is required under the Overlease) and (iii) Tenant is not in default of any of Tenant's obligations under this Sublease following applicable notice, then Landlord's consent (which must be in writing and in form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld, conditioned or delayed. In determining whether to grant such consent, Landlord will determine whether the following conditions have been met or waived, in writing:
(a) Tenant shall have thereafter submitted to Landlord (i) a conformed or photostatic copy of the proposed assignment or sublease (and all ancillary documents to be executed in connection with or with respect to or modifying such proposed assignment or sublease), the effective or commencement date of which shall be at least thirty (30) days after the giving of such notice, (ii) a statement setting forth in reasonable detail the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the Premises, (iii) current financial information with respect to the proposed assignee or subtenant including, without limitation, its most recent certified financial statement and (iv) such other information as Landlord may reasonably request; So long as Landlord occupies space in the Building, the proposed subtenant or assignee is a responsible party whose reputation is reasonably satisfactory to Landlord;
(b) The proposed subtenant or assignee has the financial net worth, credit and financial position to discharge its obligations under the proposed sublease or assignment and is not facing pending entity-wide financial difficulty that jeopardizes the continuing viability of such entity as reasonably determined by Landlord;
(c) The proposed assignment or sublease shall prohibit use of the Premises for any purpose other than the purposes specifically permitted under Section 6 of this Sublease;
(d) Provided that Landlord shall have, or within six (6) months thereafter, reasonably anticipates having (based upon anticipated expiration or restructuring of existing leases) comparable space in the Building available for sublease, the proposed assignee or sublessee is not a person with whom Landlord is then or was during the prior six (6) months, negotiating to sublease space in the Building from Landlord;
(e) The form of the proposed sublease shall be reasonably satisfactory to Landlord and shall comply with the applicable provisions of this Section 15;
(f) Tenant shall not have advertised or publicized in any way the availability of the Premises without prior notice to and approval by Landlord, which approval shall not be unreasonably withheld, nor shall any advertisement state the name (as distinguished from the address) of the Building or the proposed rental and no such advertisement shall be permitted if the consent of Overlandlord is required, unless such consent is obtained in writing with a copy delivered to Landlord;
(g) There shall not be more than four (4) entities (including Tenant) occupying the Premises at any time;
(h) The sublease shall not allow the use of the Premises by, nor shall the assignment be to, a foreign or domestic government or governmental agency; and
(j) In the case of an assignment, the assignee shall have executed and delivered to Landlord an instrument in form reasonably satisfactory to Landlord assuming all of the covenants and obligations of Tenant hereunder from and after the effective date of the assignment.
Regardless of whether consent is granted to a proposed assignment or sublease, Tenant shall reimburse Landlord on demand for any reasonable out-of-pocket costs that may be incurred by Landlord in connection with said proposed assignment or sublease including, without limitation (1) all payments due to the Overlandlord under the Overlease with regard to such proposed assignment or sublease, (2) the reasonable out-of-pocket costs of making investigations as to the acceptability of the proposed assignee or subtenant, and (3) reasonable outside counsel costs incurred in connection with the granting of any requested consent, and no Landlord consent to an assignment or sublease shall be effective until and unless all such costs have been reimbursed to Landlord.
15.4 Lapse. In the event that Tenant fails to execute and deliver the assignment or sublease to which Landlord consented within ninety (90) days after the giving of such consent, then, Tenant shall again be required to obtain Landlord's consent to the assignment or sublease pursuant to Section 15.2 of this Sublease before assigning this Sublease or subletting all or part of the Premises.
15.5 General Sublease Terms. With respect to each and every sublease or subletting authorized by Landlord under the provisions of this Sublease, it is further agreed:
(a) No subletting shall be for a term (including any renewal or extension options contained in the sublease) ending later than one day prior to the expiration date of this Sublease.
(b) No sublease shall be valid, and no subtenant shall take possession of the Premises or any part thereof, until an executed counterpart of such sublease (and all ancillary documents executed in connection with, with respect to or modifying such sublease) has been delivered to Landlord.
(c) Each sublease shall provide that it is subject and subordinate to this Sublease and to any matters to which this Sublease is or shall be subordinate, and that in the event of termination, reentry or dispossess by Landlord under this Sublease Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublessor, under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not be (i) liable for any previous act or omission of Tenant under such sublease, (ii) subject to any credit, offset, claim, counterclaim, demand or defense which such subtenant may have against Tenant, (iii) bound by any previous modification of such sublease made without the written consent of Landlord or by any previous prepayment of more than one (1) month's rent, (iv) required to account for any security deposit of the subtenant other than any security deposit actually delivered to Landlord by Tenant on account thereof, (v) responsible for any monies owing by Tenant to the credit of the subtenant or (vi) required to remove any person occupying the Premises or any part thereof
(d) Each sublease shall provide that the subtenant may not assign its rights thereunder or further sublet the Premises, in whole or in part, without Landlord's consent which consent shall not be unreasonably withheld, conditioned, or delayed (using the same criteria as set forth in Section 15.3) and without Overlandlord's consent if required under the Overlease.
15.6 Miscellaneous. Tenant shall be solely responsible for all costs required to be paid to Overlandlord pursuant to the terms of the Overlease in connection with the review, consideration and documentation of any sublease or assignment proposed by Tenant hereunder. The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision of this Sublease or to be a consent to any subletting, assignment, mortgage or other encumbrance. Consent to one sublease shall not be deemed to constitute consent to any subsequent attempted sublease. Each subletting shall be subject to all of the covenants, agreements, teens, provisions and conditions contained in this Sublease. Notwithstanding any such subletting to Landlord or any such subletting to any other subtenant and/or acceptance of rent or additional rent by Landlord from any subtenant, Tenant shall and will remain fully liable for the payment of the Fixed Rent and additional rent due and to become due hereunder and for the performance of all the covenants, agreements, terms, provisions and conditions contained in this Sublease on the part of Tenant to be performed and all acts and omissions of any licensee of Tenant or anyone claiming under or through any subtenant which shall be in violation of any of the obligations of this Sublease, and any such violation shall be deemed to be a violation by Tenant. Tenant further agrees that notwithstanding any such subletting, no other and further subletting of the Premises by Tenant or any person claiming through or under Tenant shall or will be made except upon compliance with and subject to the provisions of this Section. If Landlord shall decline to give its consent to any proposed assignment or sublease in circumstances where it has been determined that Landlord had the right to do so under this Sublease, then Tenant shall indemnify, defend and hold harmless Landlord against and from any and all loss, liability, damages, costs and expenses (including, but not limited to, reasonable counsel fees) resulting from any claims that may be made against Landlord by the proposed assignee or sublessee or by any brokers, finders or other persons claiming a commission, finder's fee or similar compensation in connection with the proposed assignment or sublease. If this Sublease is assigned, or if the Premises or any part thereof is subleased or occupied by anybody other than Tenant, Landlord may, after default by Tenant beyond applicable notice and grace periods expressly provided for in this Sublease, collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the Rent herein reserved, but no assignment, subleasing, occupancy or collection shall be deemed a waiver of the provisions of this Sublease, the acceptance of the assignee, subtenant or occupant as Tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant contained in this Sublease.
15.7 Additional Charges. If Landlord shall give its consent to any assignment of this Sublease or to any sublease (other than an assignment or sublease pursuant to Section 15.1 of this Sublease for which Landlord's consent is not required), Tenant shall in consideration therefor, pay to Landlord, as additional rent, seventy-five (75%) percent of the amount Landlord would be required to pay to Overlandlord under Section 9.10 of the Overlease had Landlord assigned the Overlease or subleased the premises to be subleased by Tenant and had incurred the costs incurred by Tenant ("Profit"). Tenant acknowledges that Landlord is obligated under the Overlease to pay to Overlandlord fifty (50%) of such Profit thereby leaving the balance - 50% - to be shared equally by Landlord and Tenant. The sums payable under this Section 15.9 shall be paid to Landlord on or prior to the date on which the share of the Profit is due and payable by Landlord to Overlandlord under the Overlease. Tenant shall provide to Landlord all information regarding such assignment or sublease necessary to allow Landlord to comply with its obligations under Article 9 of the Overlease.
16. Security Deposit.
16.1 Security
Deposit. Within ten (10) days following the execution of this
Sublease, Tenant shall deliver to Landlord, and
Tenant shall thereafter maintain in effect at all
times during the term hereof, as security
for the faithful performance and observance by Tenant
of all of the terms, covenants and
conditions of this Sublease on Tenant's part to be performed
and observed, a clean, unconditional, and
irrevocable letter of credit in the amount of
$1,026,445.00 (i.e. three months rent)
subject to the Reduction Rights (as defined below in this
Section), substantially in the form annexed
hereto as Exhibit C modified to reflect that it (a) shall be
drawable upon presentation of documents to effect a draw (including a copy of
the letter of credit) by facsimile, (b)
shall allow for partial draws, and (c) shall be transferable. Tenant shall use
reasonable efforts to have the letter of credit also provide that it shall be
drawable on site draft only and shall
provide that all bank fees shall be on account of applicant, other than a
transfer fee.
Such letter of credit shall be issued by either US Bank National
Association (so long as there has not
been a material adverse change to the financial condition of such entity
after the Effective Date) or a banking
corporation (other than JPMorgan Chase & Co or any of its
affiliates) that is satisfactory to Landlord
in Landlord's good faith business judgment. In
addition, such letter of credit shall have
an expiration date no earlier than the first anniversary of the date of
issuance thereof and shall be automatically renewed from
year to year unless
terminated by the issuer thereof by notice
to Landlord given not less than thirty (30) days prior to
the expiration thereof. Tenant shall,
throughout the term of this Sublease, deliver to Landlord, in
the event of the termination of any such
letter of credit, or at Landlord's request, in the event the
issuing bank of such letter of credit is
downgraded to a point where it is no longer reasonably
satisfactory to Landlord, replacement
letters of credit in lieu thereof (each such letter of credit and such
extensions or replacements thereof, as the case may be, is herein called a
"Security Letter")
no later than ten (10) days following notice
from Landlord of such event. The term of
each such Security Letter shall be not less
than one (1) year and shall be automatically renewable
from year to year as aforesaid.
Notwithstanding the foregoing, if Landlord shall elect, in its sole
discretion, to accept a Security Letter which is subject to a final expiration
date, Tenant shall deliver a replacement of or amendment to such Security Letter
no later than thirty (30) days prior to such
final expiration date, and the final Security Letter delivered to Landlord
pursuant to this Section 16.1
shall have a final expiration date occurring not earlier than one hundred twenty
(120) days following the Sublease
Expiration Date. If Tenant shall fail to obtain any
replacement of or amendment to a Security
Letter within any of the applicable time limits set
forth in this Section 16.1, Tenant
shall be in default of its obligations under this Section 16 and
Landlord shall have the right (but not the
obligation), at its option, to draw down the full amount
of the existing Security Letter and use,
apply and retain the same as security hereunder, and notwithstanding such
draw by Landlord, Landlord shall have the right (but not the obligation), at
its option, to give written notice to Tenant
stating that such failure by Tenant to deliver such replacement of or
amendment to the Security Letter constitutes a continuing default by Tenant of
its obligations under this Section 16,
and in the event that Tenant shall not have delivered such
replacement or amendment to Landlord within
sixty (60) days after Tenant's receipt of such
notice, Landlord may give to Tenant a notice
of intention to end the term of this Sublease at the expiration of five (5) days
from the date of the service of such notice of
intention, and upon the
expiration of said five (5) days this Sublease and the term and estate hereby
granted, whether or not the term shall
theretofore have commenced, shall terminate with the same effect as if that day
was the day herein definitely fixed for the end and expiration of this Sublease,
but Tenant shall remain liable for
damages as provided in this Sublease and in the Overlease (to the extent that
the provisions of the Overlease have
been incorporated herein by reference). Upon delivery to
Landlord of any such replacement of or
amendment to the Security Letter within the sixty (60)
day period described in the preceding
sentence, such default shall be deemed cured and
Landlord, simultaneously with such delivery,
shall return to Tenant (or, at Tenant's request, to the bank issuing such
replacement or amended Security Letter) the proceeds of the Security
Letter which had been drawn by Landlord
pursuant to the preceding sentence (or any balance thereof to which
Tenant is entitled). Notwithstanding anything contained herein to the contrary,
at any time on or after the third (3rd) anniversary of the Sublease
Rent Commencement Date, Tenant shall have
the right to reduce the amount of the Security Letter (the "Reduction Right")
by (a) causing an amendment to the Security Letter to reduce the
amount thereof to $684,297.00 or (b) delivering a substitute clean,
unconditional and irrevocable letter of credit to Landlord in
the amount of to $684,297.00, satisfying the
requirements of a Security Letter set forth above
and otherwise reasonably satisfactory to
Landlord and issued by a banking corporation (other
than JPMorgan Chase & Co or any of its
affiliates) that is satisfactory to Landlord in Landlord's
good faith business judgment and has its
principal place of business in the Borough of
Manhattan, City and County of New York (the
team "Security Letter" shall include such amended or substitute letter of
credit) provided the following conditions are satisfied at the time
Tenant seeks to take either such action:
(i) Tenant shall not have been, at any time previously, in
default after applicable notice from
Landlord and expiration of any applicable cure period, in
each case, as expressly provided in this
Sublease, of any of the monetary or material non-monetary
terns, conditions or covenants of this Sublease on its part to be performed,
(ii) none of the of the circumstances set forth in Section 25.01 of the
Overlease shall have occurred with respect
to Tenant with or without the acquiescence of Tenant and shall remain applicable
at such time, and (iii) Tenant, at
such time, shall have a net worth (i.e. for purposes hereof, shareholder's
equity), computed in accordance with generally accepted accounting principles,
consistently applied, that is equal
to or greater than $415,000,000. Upon receipt of the substitute letter of
credit delivered in compliance with all the provisions of this Section 16.1,
Landlord shall return the Security Letter it then holds to Tenant.
16.2 If Tenant defaults in respect of the full and prompt payment and performance of any of the terms, provisions, covenants and conditions of this Sublease beyond notice (the delivery of which shall not be required for purposes of this Section 16.2 if Landlord is prevented or prohibited from delivering the same under applicable law, including, but not limited to, applicable bankruptcy and insolvency law) and the expiration of any applicable cure periods (except that no notice and cure period shall be required for purposes of this Section 16.2 with respect to any default by Tenant hereunder if, at the time of such default, any of the events set forth in Section 25.01 of the Overlease shall have occurred with respect to Tenant with or without the acquiescence of Tenant) including, without limitation, the payment of Fixed Rent and additional rent, Landlord may, at its election (but shall not be obligated to), draw down the entire Security Letter or any portion thereof and use, apply or retain the whole or any part of the security represented by the Security Letter to the extent required for the payment of: (a) Fixed Rent, additional rent or any other sum as to which Tenant is in default, (b) any sum which Landlord may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, provisions, covenants, and conditions of this Sublease including, without limitation, any reletting costs or expenses (including, without limitation, any free rent, tenant improvement allowance, leasing commissions, third-party attorneys' fees, costs and expenses, and other fees, costs and expenses relating to the reletting of all or any portion of the Premises), (c) any damages or deficiency in the reletting of the Premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord, or (d) any damages awarded to Landlord in accordance with the terms and conditions of this Sublease or otherwise, it being understood that any use of the whole or any part of the security represented by the Security Letter shall not constitute a bar or defense to any of Landlord's other remedies under this Sublease or any law, rule or regulation including, without limitation, Landlord's right to assert a claim against Tenant under 11 U.S.C. §502(b)(6) or any other provision of title 11 of the United States Code (the "Bankruptcy Code"). To insure that Landlord may utilize the security represented by the Security Letter in the manner, for the purpose, and to the extent provided in this Section 16, each Security Letter shall provide that the full amount or any portion thereof may be drawn down by Landlord upon the presentation to the issuing bank (or the advising bank, if applicable) of Landlord's draft drawn on the issuing bank (or the advising bank, if applicable) without accompanying memoranda or statement of beneficiary. In no event shall the Security Letter require Landlord to submit evidence to the issuing (or advising) bank of the truth or accuracy of any such written statement and in no event shall the issuing bank or Tenant have the right to dispute the truth or accuracy of any such statement nor shall the issuing (or advising) bank have the right to review the applicable provisions of this Sublease. In no event and under no circumstance shall the draw down on or use of any amounts under the Security Letter constitute a basis or defense to the exercise of any other of Landlord's rights and remedies under this Sublease or under any law, rule or regulation including, without limitation, Landlord's right to assert a claim against Tenant under 11 U.S.C. §502(b)(6) of the Bankruptcy Code, or any other provision of the Bankruptcy Code.
16.3 If Tenant defaults
in respect of any of the terms, provisions, covenants and
conditions of this
Sublease beyond notice and the expiration of any applicable cure periods
(except to the extent that such notice and cure
periods are not applicable pursuant to Section 16.2
of this Sublease) and Landlord utilizes all
or any part of the security represented by the Security Letter but does
not terminate this Sublease as provided in Article 25 of the Overlease (as
incorporated herein by reference), Landlord
may, in
addition to exercising its rights as provided
in Section 16.2 of this Sublease,
retain the unapplied and unused balance of the portion of the
Security Letter drawn down by Landlord
(herein called the "Cash Security") as security for the
faithful performance and observance by
Tenant thereafter of the terms, provisions, and
conditions of this Sublease, and may use,
apply, or retain the whole or any part of said Cash
Security to the extent required for payment
of Fixed Rent, additional rent, or any other sum as to
which
Tenant is in default or for any sum
which Landlord may expend or be required to expend
by reason of Tenant's default in respect of
any of the terms, covenants, and conditions of this
Sublease. In the event Landlord uses, applies
or retains any portion or all of the security
represented by the Security Letter, Tenant
shall forthwith restore the amount so used, applied or retained (at Landlord's
option, either by the deposit with Landlord of cash or the provision of a
replacement Security Letter) so that at all times the amount of the security
represented by the Security Letter and
the Cash Security (if any) shall be not less than the security required by
Section 16.1
of this Sublease, failing which Tenant shall be in default of its obligations
under this Section 16
and Landlord shall have the same rights and remedies as for the non-payment of
Fixed Rent beyond the applicable grace period.
16.4 If Tenant shall fully and faithfully comply with all of Tenant's covenants and obligations under this Sublease, the Security Letter and the Cash Security (if any) shall be returned to Tenant within thirty (30) days after both (i) the expiration or early termination of this Sublease and (ii) the delivery to Landlord of entire possession of the Premises as provided in this Sublease; provided, however, that in no event shall any such return be construed as an admission by Landlord that Tenant has performed all of its obligations hereunder. In the event of any sale, transfer or leasing of Landlord's interest in the Premises, Landlord shall have the right to transfer the Security Letter and the Cash Security (if any) to the vendee, transferee or lessee or, in the alternative, to require Tenant to deliver a replacement Security Letter naming the new landlord as beneficiary, and, upon such delivery by Tenant of such replacement Security Letter, Landlord shall return the existing Security Letter to Tenant. Upon such transfer or return of the Security Letter and the Cash Security (if any), Landlord shall thereupon be released by Tenant from all liability for the return thereof, and Tenant shall look solely to the new landlord for the return of the same. The provisions of the preceding sentence shall apply to every subsequent sale, transfer or leasing of the Premises by any successor landlord, and any successor (immediate or remote) of Landlord may, upon a sale, transfer, leasing or other cessation of the interest of such successor in the Premises, whether in whole or in part, transfer the Security Letter and the Cash Security (if any) to any vendee, transferee or lessee of the Building (or require Tenant to deliver a replacement Security Letter as hereinabove set forth) and shall thereupon be relieved of all liability with respect thereto. Except in connection with a permitted assignment of this Sublease, Tenant shall not assign or encumber or attempt to assign or encumber the security represented by the Security Letter, and neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. In any event, in the absence of evidence satisfactory to Landlord of an assignment of the right to receive the security represented by the Security Letter, Landlord may return the Security Letter to the original Tenant regardless of one or more assignments of this Sublease.
16.5 Neither the Security Letter, any proceeds therefrom or the Cash Security, if any, shall be deemed an advance rent deposit or an advance payment of any other kind, or a measure or limitation of Landlord's damages or constitute a bar or defense to any of the Landlord's other remedies under this Sublease or at law or in equity upon Tenant's default.
16.6 As a material inducement to Landlord to enter into this Sublease, Tenant hereby acknowledges and agrees that the Security Letter and the proceeds thereof (including, without limitation, any Cash Security created by the draw down of all or any portion of the Security Letter) and the obligation to make available or pay to Landlord all or a portion thereof in satisfaction of any obligation of Tenant under this Sublease, shall be deemed third-party obligations and not the obligation of Tenant hereunder. Tenant hereby acknowledges and agrees that the Security Letter (and any Cash Security created by the draw down of all or any portion of the Security Letter) held by Landlord does not and shall not constitute property of the estate of Tenant within the meaning of Section 541 of the Bankruptcy Code, or substantially similar provisions of state law. Therefore, when dealing with the Security Letter or any of the aforesaid Cash Security, Tenant hereby acknowledges and agrees that no approval shall be required of any court with jurisdiction over any case in which Tenant or any affiliate of Tenant is a debtor. Tenant hereby waives any provision of the Bankruptcy Code necessary to invoke the foregoing including, without limitation, Sections 105 and 362 of the Bankruptcy Code, and waives any right to defend against any motion for relief from the automatic stay that may be filed by Landlord. Accordingly, the Security Letter and the proceeds thereof (including, without limitation, any Cash Security created by the draw down of all or any portion of the Security Letter) and the obligation to make available or pay to Landlord all or a portion thereof in satisfaction of any obligation of Tenant under this Sublease (a) shall not be subject to any limitation on damages contained in Section 502(b)(6) of the Bankruptcy Code or any other limitation on damages that may apply under any federal, state or local law, rule or regulation in connection with a bankruptcy, insolvency or other similar proceeding by, against or on behalf of Tenant, (b) shall not diminish or be offset against any amounts that Landlord would be able to claim against Tenant pursuant to 11 U.S.C. §502(b)(6) as if no Security Letter existed, and (c) may be relied on by Landlord in the event of an assignment of this Sublease that is not expressly in accordance with the terms of this Sublease even if such assignment has been authorized and approved by a court exercising jurisdiction in connection with a bankruptcy, insolvency or other similar proceeding by, against or on behalf of Tenant.
17. Miscellaneous.
17.1 Form of Notice. All notices, demands, requests, consents and other communications hereunder to either party shall be in writing only and shall be given or made by (a) first class certified or registered mail, return receipt requested, postage prepaid, (b) Federal Express or other nationally recognized overnight mail carrier, postage prepaid, (c) as between Landlord and Tenant, personal delivery against receipt or affidavit of service, in each case to such party at its respective address set forth below or otherwise specified by written notice to the other party given in accordance with this Section 17.1. Notices shall be deemed delivered (i) on the next Business Day if delivered by overnight mail, (ii) on the third Business Day after depositing the same with the United States mail if delivered by first class certified or registered mail and (iii) on the same Business Day if delivered by personal delivery prior to 2pm local time on a Business Day.
Either party may, by notice as aforesaid, designate a different addressee(s) and/or address(es) for notices intended for it.
Landlord:
The Bear Stearns Companies LLC 1111 Polaris Parkway, Suite 1J Mail Code OH-0241 Columbus, Ohio 43240 Attn: Lease Administration Manager
With Copies to: JPMorgan Chase 270 Park Avenue New York, NY 10017 Attn: Head of Real Estate
and
JPMorgan Chase Legal 245 Park Avenue New York, NY 10167 Attn: Real Estate Counsel
and:
Paul, Hastings, Janofsky & Walker LLP 75 East 55th Street New York, New York 10022 Attention: Dean Stiffle |
Tenant:
Stifel, Nicolaus and Company, Incorporated 501 N. Broadway St. Louis, MO 63102 Attn: James M. Zemlyak, EVP, Co-COO
and
Stifel, Nicolaus and Company, Incorporated 237 Park Avenue, 8th Floor New York, New York 10167 Attn: Branch Manager |
17.2 Waiver of Right to Jury Trial. Landlord and Tenant hereby mutually waive, to the extent permitted by law, the right to a jury trial in any action or legal proceeding between the parties arising out of this Sublease or Tenant's occupancy of the Premises.
17.3 Integration; Successors and Assigns, etc. This Sublease (including the Exhibits hereto which are hereby made a part hereof) contains the entire agreement between the parties, and any agreement hereafter made shall be ineffective to change, modify or discharge it in whole or in part unless such agreement is in writing and signed by the party against whom enforcement of the change, modification or discharge is sought. This Sublease shall bind and inure to the benefit of the parties hereto and their respective successors and, subject to the provisions of Section 15 of this Sublease, their respective assigns.
17.4 Brokerage. Each party represents and warrants to the other that it has not dealt with any broker, agent, salesperson, real estate consultant or finder in connection with this Sublease, other than Cushman & Wakefield, Inc. and Grubb & Ellis New York, Inc. (the "Brokers"). Tenant agrees to indemnify and hold Landlord harmless against and from any and all claims for any brokerage commissions made by any brokers or agents claiming representation of Tenant other than the Brokers, and all costs, expenses and liabilities in connection therewith including, without limitation, third-party attorneys' fees and expenses, arising from any breach by Tenant of the foregoing representation and warranty made by it. Landlord agrees to indemnify and hold Tenant harmless against and from any and all claims for any brokerage commissions made by any brokers or agents claiming representation of Landlord other than the Brokers, and all costs, expenses and liabilities in connection therewith including, without limitation, third-party attorneys' fees and expenses, arising from any breach by Landlord of the foregoing representation and warranty made by it. Landlord shall pay the Brokers any commission which may be due to them in connection with this Sublease pursuant to a separate agreement and Tenant shall have no obligations with respect thereto. The provisions of this Section 17.4 shall survive the expiration or earlier termination of this Sublease.
17.5 Memorandum of Lease. Neither Landlord nor Tenant shall execute a memorandum of this Sublease for the purpose of recording without the consent of both Landlord and Tenant.
17.6 Time of Essence. Time is of essence in respect of each and every term, covenant and condition of this Sublease.
17.7 Governing Law; Consent to Jurisdiction. This Sublease shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflicts of law principles thereof. To the fullest extent permitted by law, Landlord and Tenant hereby unconditionally and irrevocably waive any claims to assert that the law of any other jurisdiction governs this Sublease and agree that this Sublease shall be governed by and construed in accordance with the laws of the State of New York pursuant to Section 5-1401 of the New York General Obligations Law. Any legal suit, action or proceeding against Tenant or Landlord arising out of or relating to this Sublease may be instituted in any federal or state court in New York, New York, pursuant to Section 5-1402 of the New York General Obligations Law, and Landlord and Tenant hereby waive any objection which they may now or hereafter have to the laying of venue of any such suit, action or proceeding including, without limitation, any claim of forum non conveniens pursuant to any rule of common law and/or any applicable federal or state statute, law or provision, and Landlord and Tenant hereby irrevocably submit to the jurisdiction of any such court in any suit, action or proceeding.
17.8 Severability. If any of the provisions of this Sublease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Sublease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Sublease shall be valid and enforceable to the fullest extent permitted by law.
17.9 Representations and Warranties of Tenant and Landlord.
(a) Tenant hereby represents and warrants to Landlord that (i) each person signing this Sublease on behalf of Tenant is duly authorized to execute and deliver this Sublease on behalf of Tenant and (ii) the execution, delivery and performance of this Sublease has been duly and validly authorized in accordance with the relevant organizational documents of Tenant.
(b) Landlord hereby represents and warrants to Tenant that as of the date of this Sublease (i) the person signing this Sublease on behalf of Landlord is duly authorized to execute and deliver this Sublease on behalf of Landlord, (ii) the execution, delivery and performance of this Sublease has been duly and validly authorized by Landlord, (iii) the Overlease is in full force and effect, (iv) none of the circumstances described in Section 25.02 (Conditions of Limitation) have occurred and remain uncured (e.g. failure to comply with a provision of the Overlease after notice from Overlandlord and expiration of applicable cure period) and (v) Landlord has not delivered a written notice of default to Overlandlord with regard to the Premises that remains uncured.
18. Effectiveness; Recognition Agreement.
18.1 This Sublease is
expressly conditioned upon Overlandlord's written consent
thereto substantially the same as the form
attached hereto as Exhibit F but subject to the
modifications provided in Section 18.3
("Overlandlord's Consent"), and other than the
provisions of this Section and Section
17.4, this Sublease shall not take effect unless and until
Overlandlord's Consent has been obtained. Promptly following delivery of an
executed version of this Sublease by Tenant,
Landlord shall request Overlandlord's Consent thereto and shall use
commercially reasonable efforts to obtain
such Overlandlord's Consent; provided, however, Landlord shall have no
liability to Tenant in the event that Overlandlord does not give Overlandlord's
Consent and Landlord shall not be required to pay any consideration to
Overlandlord in order to obtain such Overlandlord's Consent in excess of fees
and reimbursements expressly provided for in the Overlease (such excess,
("Additional Compensation"),
or to commence a legal proceeding against
Overlandlord. If Overlandlord
requests or requires to be paid Additional Compensation in order to obtain such
Overlandlord's Consent and Landlord elects not to pay the same, Landlord
shall notify Tenant and Tenant shall have
the right, but not the obligation, to pay such Additional Compensation within
ten (10) Business Days after
Landlord's notice to Tenant that Landlord has elected not to pay same.
Tenant shall use commercially reasonable
efforts to furnish all reasonably requested information
and documentation within Tenant's possession
or control reasonably requested by Overlandlord pursuant to Article 9 of
the Overlease in evaluating the request for Overlandlord's Consent.
18.2 If Overlandlord's Consent is not obtained within sixty (60) days after the Effective Date, then Tenant may terminate this Sublease upon written notice to Landlord delivered at any time prior to either Landlord or Tenant obtaining Overlandlord's Consent. If Overlandlord's Consent is not obtained within ninety (90) days after the Effective Date, then Landlord may terminate this Sublease upon written notice to Tenant delivered at any time prior to either Landlord or Tenant obtaining Overlandlord's Consent.
18.3 Overlandlord's Consent shall be on Overlandlord's standard form as attached hereto as Exhibit F modified to include the following: (a) permission for Tenant's particular use as a (i) general, administrative or executive offices and/or (ii) operation of an investment film and/or financial services firm including, without limitation, the operation of a stock brokerage office provided however, Tenant's business at the Premises shall not primarily and regularly consist of off-the-street, in-person retail sales to the general public; (b) application of the Section 9.15 (desk use) of the Overlease for the benefit of Tenant, (c) permission for Tenant to install a sign setting forth Tenant's name and logo on each entry door to the Premises; (d) a waiver of rights of subrogation against Tenant, (e) consent of Overlandlord to the use of the Telecommunications Conduit, if required under the Overlease, and (f) such other changes as are reasonably requested by Overlandlord, Landlord or Tenant. If such items are not contained in the Overlandlord's Consent, then the Overlandlord's Consent shall not be deemed obtained, and Tenant may, at its option, terminate this Sublease as provided above.
18.4 Notwithstanding Overlandlord's initial rejection of Landlord's request for an NDA (as defined below) for the benefit of Tenant, Landlord agrees to use commercially reasonable efforts (which shall consist of a second written email request and one follow up telephone call with Overlandlord or its counsel) to obtain along with Overlandlord's Consent, Overlandlord's customary non-disturbance or recognition agreement for the benefit of Tenant which, among other matters, may require Tenant to pay rent to the Overlandlord at rates applicable to Landlord under the Overlease in the event of a termination of this Sublease and recognition of Tenant (an "NDA") provided, however, Landlord shall not be required to pay any consideration to Overlandlord in order to obtain such NDA, to amend the Overlease in a manner that Landlord in good faith determines materially impairs Landlord's rights or increases Landlord's obligations under the Overlease, to enter into any other agreement with Overlandlord or to take any efforts beyond those described in the parenthetical above in this sentence). If Tenant elects to enter into an NDA with Overlandlord, Tenant shall pay all fees and reimbursements charged by Overlandlord for such NDA. It shall not be a condition of the effectiveness of this Sublease that Landlord deliver an NDA from Overlandlord or that Tenant and Overlandlord enter into an NDA at any time, and Landlord shall not be liable to Tenant if such NDA is not tendered or entered into , nor will such failure entitle to any credit or offset against amounts due under this Sublease.
19. Tenant's Alterations. Tenant shall not perform or cause to be performed any "Tenant's Changes" (as defined in the Overlease) in or to the Premises, including any Tenant's Work without the prior written consent of Overlandlord (if such is required under the Overlease) and the prior written consent of Landlord, such consent of Landlord not to be unreasonably withheld.
20. Tenant's Work; Work Allowance.
20.1 Work Allowance. Tenant shall, at its sole cost and expense except as set forth to the contrary in this Section 20, perform all work necessary or desirable by Tenant to prepare the Premises for its occupancy in accordance with detailed dimensioned coordinated plans and specifications, including layout, architectural, mechanical, electrical, plumbing and structural drawings, to be submitted by Tenant to Landlord for Landlord's and Overlandlord's written approval, which approval shall be governed by the provisions of the Overlease as incorporated herein by reference including, without limitation, the provisions of Article 13 thereof relating to the performance of Tenant Changes (such work being referred to herein as "Tenant's Work"). In connection therewith, Landlord shall give Tenant a cash work allowance (the "Work Allowance"), of EIGHT HUNDRED SEVENTY-NINE THOUSAND EIGHT HUNDRED TEN and 00/100 ($879,810.00) DOLLARS ($15.00 x 58,654, which is the agreed upon rentable square feet comprising the Premises and which is not subject to adjustment), which Work Allowance shall be applied solely against the cost and expense of the actual construction work performed by Tenant in connection with Tenant's Work in the Premises ("Hard Costs"); provided that Tenant may use up to $263,943.00 (i.e. thirty (30%) percent of the Work Allowance for design consultants, architect's and engineering fees or other so-called "soft" costs incurred by Tenant in connection with the performance of Tenant's Work (collectively, "Soft Costs"). In the event that the Hard Costs and Soft Costs shall exceed the aggregate amount of the Work Allowance, Tenant shall be entirely responsible for such excess. To the extent that the Work Allowance has not been fully applied by the first (1st) anniversary of the Sublease Commencement Date, then Tenant may apply such unapplied balance, to the extent not in excess of the sum of $263,943.00 as a credit against then ensuing installments of Fixed Rent and the extent the unapplied balance of the Tenant's Work Allowance is in excess of such sum, Landlord shall have no further obligation to disburse such excess, Tenant shall not be entitled to any further credit against Rent, and Tenant shall have waived its rights to such unused excess.
20.2 Procedure.
(a) Provided that Tenant is not then in default hereunder after notice from Landlord, Work Allowance (to the extent not previously paid pursuant to Section 20.2(b) below) shall be paid to Tenant upon the later of (i) the Sublease Rent Commencement Date and (ii) thirty (30) days following the later of substantial completion of Tenant's Work and the delivery by Tenant to Landlord of the following items: (1) paid invoices for all of Tenant's Work, (2) a certificate signed by Tenant's architect certifying that Tenant's Work has been satisfactorily completed in accordance with Tenant's approved final plans and specifications, (3) a certificate signed by Tenant listing all contractors retained directly by Tenant for the performance of Tenant's Work, (4) a certificate signed by Tenant's directly-retained contractor identifying all subcontractors and materialmen retained by, through or under them for the performance of Tenant's Work and the provision of materials in connection therewith, (5) lien waivers (in recordable form and form satisfactory to Landlord) from all contractors who shall have performed Tenant's Work or provided materials in connection therewith releasing Overlandlord, Landlord and Tenant for liability for the same, (6) all New York City Building Department sign-offs, inspection certificates and any permits required to be issued by any governmental entities having jurisdiction thereover and (7) any other information reasonably requested by Landlord. At any and all reasonable times during the progress of Tenant's Work, representatives of Overlandlord and Landlord shall have the right of access to the Premises and inspection thereof. Landlord shall incur no liability, obligation or responsibility to Tenant or any third party by reason of such access and inspection other than as a direct result of failing to discharge its obligation in the immediately following sentence. Landlord shall use commercially reasonable efforts consistent with good construction inspection practice to minimize any interference with the performance of Tenant's Work by reason of such access and/or inspection.
(b) Notwithstanding Section 20.2(a), provided that Tenant is not then in default hereunder after notice from Landlord, then Tenant shall have the one-time right to request a progress payment from Landlord for an amount equal to ninety percent (90%) of the cost of a portion of Tenant's Work then completed in a accordance with the terms of this Sublease requested ("Progress Payment Work"), such amount ("Progress Payment Disbursement") to be payable by Landlord to Tenant within thirty (30) days following the delivery by Tenant to Landlord of all of the information referred to in Section 20.2(a) but only to the extent relating to the Progress Payment Work. The balance of the amount of the cost of the Progress Payment Work not paid pursuant to this Section 20.2(b) shall be paid by Landlord pursuant to Section 20.2(a). For avoidance of doubt, if there has been a default by Tenant under this Sublease, which default has been fully cured within the applicable cure period, if any, then from and after such cure, Tenant shall have the right to obtain the Progress Payment Disbursement provided all other conditions for such payment are satisfied in accordance with the Sublease.
20.3 No Third-Party Beneficiary. The Work Allowance is being given for the benefit of Tenant only. No third party shall be permitted to make any claims against Landlord or Tenant with respect to any portion of the Work Allowance.
20.4 Space Plan. Attached hereto as Exhibit E, is a space plan depicting the improvements and standards to be installed in the Premises and Tenant's intended finishes (the "Space Plan"). Landlord shall not disapprove or request changes to the plans and specifications to be submitted by Tenant pursuant to Section 20 solely based on the layout, general nature of improvements, standards or finishes indicated on the Space Plan.
21. No Personal Liability.
21.1 Notwithstanding anything contained herein to the contrary, Landlord shall look solely to the assets of Tenant to enforce Tenant's obligations hereunder and no partner, retired or withdrawn partner, shareholder, director, officer, principal, client, employee or agent, directly and indirectly, of Tenant (collectively, the "Tenant Exculpated Parties") shall be personally liable for the performance of Tenant's obligations under this Sublease. Landlord shall not seek any damages against any of the Tenant Exculpated Parties nor shall any file, record or work product of Tenant or any Tenant Exculpated Party be subject to levy, lien, execution, attachment, or other enforcement procedure for the satisfaction of Landlord's rights and remedies under or with respect to this Sublease. The limitation on the personal liability of the Tenant Exculpated Parties shall not in any manner constitute a waiver of or affect any of the obligations of Tenant under this Sublease, nor limit Landlord's rights to name any of the Tenant Exculpated Parties in any action or proceeding relating to this Sublease to the extent (but only to the extent) necessary to recover any judgment from Tenant or Tenant's assets or to recover possession of the Premises, provided that no such judgment shall be enforced against any of the Tenant Exculpated Parties. In furtherance of the foregoing, Landlord shall not have or benefit from any claim available to any creditor or trustee seeking any recovery from any Tenant Exculpated Party of any portion of any distribution made by Tenant to any such Tenant Exculpated Party consistent with Tenant's practices in the ordinary course consistent with historical practices, except to the extent of any assets of the Tenant fraudulently transferred to such Tenant Exculpated Party with the intent to deprive Landlord of the benefit of its bargain under this Sublease or illegally converted to such Tenant Exculpated Party's use.
21.2 Notwithstanding
anything contained herein to the contrary, Tenant shall look
solely to the assets of
Landlord to enforce Landlord's obligations hereunder and no partner,
retired or withdrawn
partner, shareholder, director, officer, principal, client, employee or agent,
directly and indirectly, of Landlord (collectively, the "Landlord
Exculpated Parties") shall be
personally liable for the performance of Landlord's obligations under this
Sublease. Tenant shall not seek any damages
against any of the Landlord Exculpated Parties nor shall any file, record or
work product of Landlord or any
Landlord Exculpated Party be subject to levy, lien, execution,
attachment, or other enforcement procedure
for the satisfaction of Tenant's rights and remedies under or with respect to
this Sublease. The limitation on the personal liability of the Landlord
Exculpated Parties shall not in any manner constitute a waiver of or affect any
of the obligations of Landlord under this
Sublease, nor limit Tenant's rights to name any of the Landlord
Exculpated Parties in any action or
proceeding relating to this Sublease to the extent (but only to
the extent) necessary to recover any
judgment from Landlord or Landlord's assets or to recover possession of the
Premises, provided that no such judgment shall be enforced against any of
the Landlord Exculpated Parties. In furtherance of the foregoing, Tenant
shall not have or benefit from any claim
available to any creditor or trustee seeking any recovery from any Landlord
Exculpated Party of any portion of any distribution made by Landlord to any such
Landlord Exculpated Party consistent
with Landlord's practices in the ordinary course consistent with
historical practices, except to the extent of any assets of Landlord
fraudulently transferred to such Landlord
Exculpated Party with the intent to deprive Tenant of the benefit of its bargain
under this Sublease or illegally converted to such Landlord Exculpated
Party's use.
22. Supplemental Air Conditioning Units.
22.1 Additional AC Unit. Subject to Overlandlord's consent and Landlord's approval of final plans and specifications in connection therewith, Landlord hereby consents to the installation by Tenant of one (1) water-cooled, supplemental air-conditioning unit in the Premises (the "Additional AC Unit").
22.2 Condenser Water. Tenant shall pay to Landlord, on a straight pass-through basis without any profit or markup, the amounts charged by Overlandlord to Landlord for the condenser water used by the Additional AC Unit at the rates charged to Landlord by Overlandlord pursuant to the Overlease for condenser water consumed, together with any costs incurred by Landlord in connection with the maintenance, repair or necessary replacement of any meters currently serving the Premises. Landlord and Tenant agree that if at any time during the Term, Overlandlord is furnishing more than 100 tons of condenser water for supplemental air conditioning for the Overlease Premises pursuant to Article 17 of the Overlease (including amounts supplied to the Premises), then Tenant shall be responsible for the amounts charged by Overlandlord for such condenser water to the extent the aggregate condenser water supplied to Overlease Premises for supplemental air conditioning (including amounts supplied to the Premises and regardless of when the condenser water was first requested by Landlord or Tenant) exceeds 100 tons but not in excess of the number of tons of condenser water supplied to the Premises for the Additional AC Unit.
23. LAN Room and Landlord's Access to the Premises. Notwithstanding anything to the contrary contained herein, Landlord shall have an easement to enter and use the LAN Room for the installation, maintenance, repair, replacement and vertical distribution of various types of cabling and wiring and any equipment that may be required in connection therewith ("Landlord LAN Room Rights") upon reasonable prior notice to Tenant, from time to time during the Term. Tenant shall permit Landlord, and Landlord's agents and contractors, reasonable access to the LAN Room during normal business hours upon no less than one (1) Business Day's notice. In addition, Landlord shall have an exclusive easement to maintain in place the existing conduits from the LAN Room to the Building's electrical closets. Landlord shall use commercially reasonable efforts to minimize any interference with the Tenant's use and occupancy of the Premises by reason of the exercise of Landlord's LAN Room Rights. Other than with regard to an emergency, Tenant shall have the right to require Landlord to perform installation of equipment, to perform maintenance or repair work, or to replace cabling, wiring or equipment, in the LAN Room outside of Tenant's normal business hours (which for the purpose of this Section shall be 9:00 am to 6:00 pm on Business Days.
24. Use of Telecommunications Conduit. Subject to Overlandlord's consent (if required under the Overlease) and Landlord's approval of final plans and specifications in connection therewith, Landlord hereby consents to the use by Tenant of the Telecommunications Conduit for telecommunications purposes.
25. Commercial Rent and Occupancy Tax. Tenant covenants and agrees that it will pay in a timely manner all New York City Commercial Rent and Occupancy Tax (and/or any successor or similar or dissimilar tax or imposition) payable with respect to the sums payable by Tenant hereunder, and Tenant shall indemnify and hold Landlord harmless from and against any and all claims, suits, judgments, losses, costs, obligations, damages, expenses, interest and liabilities including, without limitation, reasonable attorneys' fees incurred by Landlord in connection with or arising from Tenant's failure to make any such payment.
26. Counterparts. This Sublease may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the parties hereto and delivered to each of the other parties hereto. The exchange of signature pages by facsimile or Portable Document Format (PDF) transmission shall constitute effective delivery of such signature pages and may be used in lieu of the original signature pages for all purposes.
27. Hazardous Materials. It is acknowledged and agreed that Tenant shall have absolutely no liability, obligation or other responsibility to inspect, clean-up, remove or otherwise remediate the Premises or any adjacent area (or to reimburse Landlord for the same) respecting any Hazardous Materials or ACM that was (a) installed at, or released in, the Premises by Landlord or any of its contractors, employees, licensees or agents, or (b) in existence at the Premises at or before the Sublease Commencement Date other than (as to (b) only), (i) if the material or substance is first defined or classified as a Hazardous Material under a law, ordinance, rule or regulation first enacted, or pursuant to an amendment of same that is first enacted, after the Sublease Commencement Date or (ii) to the extent Tenant or any of its contractors, employees, licensees or agents handles, releases, transports or disposes of such Hazardous Material or ACM in violation of applicable law, ordinance, rule or regulation.
28. Mutual Waiver. Under no circumstances shall either Landlord or Tenant be liable to the other under any theory of tort, contract, strict liability or other legal or equitable theory for any punitive, special, incidental, indirect or consequential damages, each of which is excluded by agreement of the parties regardless of whether or not any of the parties have been advised of the possibility of such damages; provided, however the foregoing waiver shall not apply to any amounts for which Landlord is liable to Overlandlord as a result of the failure of Tenant to surrender the Premises upon the expiration or earlier termination of the Term of this Sublease in the condition required by Section 5.2 hereof.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
LANDLORD: |
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THE BEAR STEARNS COMPANIES LLC, |
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a Delaware limited liability company |
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By: |
/s/ George Ross |
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Name: |
George Ross |
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Title |
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TENANT: |
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STIFEL, NICOLAUS & COMPANY |
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a Missouri corporation | ||
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By: |
/s/ James M. Zemlyak |
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Name: |
James M. Zemlyak |
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Title: |
EVP and Co-Chief Operating Officer |
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List of Exhibits |
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Exhibit A | Floor Plans |
Exhibit B | Furniture Schedule |
Exhibit C | Form of Letter of Credit |
Exhibit D | Overlease |
Exhibit E | Space Plan |
Exhibit F | Form of Overlandlord Consent |
The exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We will furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request.
EXHIBIT 31.1
Certification
Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Ronald J. Kruszewski, certify that:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b). Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 9, 2009
/s/ Ronald J. Kruszewski
Ronald J. Kruszewski
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
Certification
Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, James M. Zemlyak, certify that:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b). Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 9, 2009
/s/ James M. Zemlyak
James M. Zemlyak
Senior Vice President, Treasurer and
Chief
Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
Certification
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Stifel Financial Corp. (the "Company") hereby certifies this Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 9, 2009
/s/ Ronald J. Kruszewski
Ronald J. Kruszewski
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
EXHIBIT 32.2
Certification
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Stifel Financial Corp. (the "Company") hereby certifies this Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 9, 2009
/s/ James M. Zemlyak
James M. Zemlyak
Senior Vice President, Treasurer and
Chief
Financial Officer
(Principal Financial Officer)
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
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