Stifel Financial Corp. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. Stifel is a diversified financial services and bank holding company operating in brokerage, securities trading, investment banking, advisory services, and banking.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2012 | Q1 2011 / prior period |
|---|---|---|
| Total revenues | $409.3 | $372.9 |
| Net revenues | $400.3 | $366.6 |
| Income before taxes | $59.3 | $50.7 |
| Net income | $34.8 | $31.4 |
| Basic / diluted EPS | $0.65 / $0.55 | $0.60 / $0.50 |
| Operating cash flow | $(189.8) | $(252.2) |
- Net revenues grew 9.2% and net income grew 10.7% year over year. Net income was 8.7% of net revenues, versus 8.6% a year earlier; pretax income was 14.8% of net revenues, versus 13.8%.
- Revenue mix: commissions $123.3 million; principal transactions $116.2 million; investment banking $70.4 million; asset management and service fees $60.8 million; net interest income $16.2 million; and other income $13.3 million.
- Non-interest expenses rose 8.0% to $341.1 million. Compensation and benefits were $254.7 million, or 63.6% of net revenues. Management said the ratio excluding accelerated deferred-compensation expense was 62.7%, compared with 62.9% in Q1 2011.
- At March 31, total assets were $5.47 billion, up 10.4% from year-end 2011; shareholders’ equity was $1.34 billion. Cash and cash equivalents were $226.5 million.
- Bank deposits were $2.36 billion; short-term bank borrowings were $187.4 million. The company issued $175 million of 6.70% senior notes due 2022 in January 2012; carrying debt also included $82.5 million of trust debentures. The $50 million committed revolving facility was undrawn, and the company reported covenant compliance.
- Stifel Bank held $657.2 million of net loans and $2.36 billion of deposits. The company reported strong regulatory capital: Stifel Bank’s total risk-based capital ratio was 10.8%, and the parent’s was 25.2%.
Changes versus the prior comparable period
- Investment banking revenue increased 70.1%, principal-transaction revenue increased 25.2%, and net interest income increased 28.8%. Management attributed gains to improved capital-markets performance, stronger fixed-income trading volumes and tighter credit spreads, and growth in Stifel Bank’s interest-earning assets.
- Commissions declined 20.9%, which management linked to lower OTC and agency activity and reduced market volatility compared with the unusually strong first quarter of 2011.
- Interest expense increased 44.3%, primarily reflecting the new senior notes. Compensation expense rose 10.2%; management cited higher variable compensation, added staffing, and an acceleration of deferred-compensation vesting for retirement-eligible employees.
- Investing cash outflow was $291.9 million, mainly due to purchases of available-for-sale and held-to-maturity securities. Financing cash inflow was $539.9 million, principally from increased deposits and the senior-note issuance. Cash increased $58.8 million during the quarter.
- Bank deposits rose from $2.07 billion at year-end, while net bank loans increased from $632.1 million to $657.2 million. Total assets increased from $4.95 billion.
Outlook, risks, contingencies, and unusual items
- Outlook: No numerical earnings or revenue guidance is provided. Management said it plans to pursue revenue growth, recruit experienced financial advisors, diversify capital-markets products, and consider opportunities arising from consolidation among middle-market firms. Management cautioned that results depend heavily on economic conditions and equity and fixed-income market activity.
- Legal matters: Stifel settled the school districts’ Wisconsin lawsuit for a $13 million cash payment and a $9.5 million letter of credit payable upon final resolution of the related SEC lawsuit. The SEC case remained pending; the company said it would defend the claims. Stifel also disclosed a separate bond-offering lawsuit and a pending FINRA appeal concerning a $0.2 million fine against TWP. Management said reserves had been recorded where appropriate, but outcomes remain uncertain and a matter could affect results in a future period.
- Other commitments: TWP estimated that customers held $32.7 million par value of auction-rate securities potentially subject to repurchase over five years, assuming no issuer redemptions. Stifel Bank reported $169.9 million in commitments to originate loans, $119.3 million in unused credit lines, and $10.6 million in standby letters of credit.
- Valuation and market risks: Level 3 assets measured at fair value totaled $227.0 million, including $170.3 million of auction-rate securities. Valuations rely on significant unobservable assumptions. The company also cited market, credit, operational, regulatory, and legal risks; its VaR model may not capture losses in unusually volatile markets.
- Liquidity considerations: Operating activities used cash despite positive earnings, reflecting working-capital movements and loan-origination activity. The $680 million of uncommitted secured credit lines requires collateral and lender approval for each advance; the company also reported $673.5 million of unused Federal Home Loan Bank borrowing capacity at Stifel Bank. Subsidiary capital rules and funding needs can restrict distributions to the parent.
- The company paid no cash dividend and made no common-stock repurchases during the quarter. It had authorization to repurchase up to 4.3 million additional shares at March 31.
Most important facts for investors to verify
- Whether the sharp growth in investment banking and fixed-income trading revenues is sustainable, particularly given the decline in commissions and management’s comments on subdued market volatility.
- How the company’s negative operating cash flow, securities purchases, deposit growth, and loan growth affect liquidity and funding needs in subsequent quarters.
- The eventual cost and status of the SEC and Wisconsin matters, including the settlement letter of credit, recovery claims against RBC, and the separate bond-offering litigation.
- The assumptions and liquidity of the Level 3 auction-rate securities and other hard-to-value assets, and the extent of potential customer ARS repurchases.
- The impact of the new senior notes, variable-rate exposures, derivative collateral provisions, and limits on subsidiary distributions on capital and financing flexibility.