Stifel Financial Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Stifel provides wealth management, institutional brokerage and investment banking, and banking services, primarily in the United States. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $819.9 | $776.8; up 5.5% |
| Net revenue | $770.4 | $750.4; up 2.7% |
| Income before tax | $137.8 | $119.6; up 15.3% |
| Net income | $99.4 | $88.8; up 12.0% |
| Net income available to common shareholders | $96.9 | $86.4; up 12.1% |
| Diluted EPS | $1.22 | $1.06 |
| Net interest income | $141.6 | $111.3; up 27.3% |
| Cash dividends per common share | $0.15 | $0.12 |
Net revenue was 2.7% higher while non-interest expense rose 0.3% to $632.6 million. Income before tax was 17.9% of net revenue, versus 16.0%; compensation and benefits were 59.5% of net revenue, versus 61.0%. The effective tax rate increased to 27.8% from 25.8%.
Revenue mix and segment performance
- Net interest income rose to $141.6 million, principally from higher interest-earning assets and yields at Stifel Bancorp and higher margin interest income. Interest expense also rose substantially, to $49.4 million from $26.5 million, mainly due to deposits.
- Investment banking revenue fell 8.2% to $161.8 million: advisory fees increased 7.4%, but capital-raising revenue declined 27.6%, including lower equity issuance activity. Management cited lower deal volumes and the federal government shutdown as contributing factors.
- Commissions declined 6.2% to $155.4 million. Principal transactions increased 6.4% to $104.0 million, reflecting stronger institutional fixed-income trading.
- Asset management and service fees were nearly unchanged at $195.3 million. Management cited lower asset values following the Q4 2018 market decline; fee-based assets were $99.6 billion at March 31, 2019, up 11.8% year over year.
- Global Wealth Management net revenue rose 5.2% to $510.6 million and pretax income rose 10.0% to $194.5 million. Institutional Group net revenue declined 3.3% to $261.3 million and pretax income fell 27.7% to $32.2 million. Its margin fell to 12.3% from 16.5%, amid weaker equity capital raising and equity brokerage.
Cash flow, balance sheet, debt and liquidity
- Operating activities used $366.8 million of cash; investing activities used $88.9 million; and financing activities used $764.3 million. Cash and cash equivalents declined $1.2 billion from year-end to $777.8 million. Cash plus cash segregated for regulatory purposes was $851.5 million at quarter-end.
- Total assets were $24.2 billion and total equity was $3.4 billion at March 31, 2019. Bank loans, net, were $8.7 billion; customer bank deposits were $15.0 billion, down from $15.9 billion at December 31, 2018.
- Reported debt and funding balances included $1.016 billion of senior notes, $399.0 million of borrowings, $250.0 million of Federal Home Loan Bank advances and $60.0 million of trust debentures. The $300 million 3.50% senior notes mature in 2020; $725 million of senior notes mature thereafter. The company reported no advances on its $200 million revolving credit facility and compliance with its covenants.
- Management reported $10.4 billion of cash and assets readily convertible to cash, including investment securities and broker-dealer receivables. It said firm-wide liquidity stress testing indicated sufficient liquidity for current and contingent funding obligations. The bank subsidiaries reported liquid cash and investments equal to approximately 19% of Stifel Bancorp assets, above its internal target.
- Stifel reported regulatory net capital of $371.5 million, $338.4 million above its minimum; the company and bank subsidiaries were categorized as well capitalized.
Material changes, outlook and risks
- Stifel completed its acquisition of First Empire Holding Corp. on January 2, 2019, funded with operating cash. First Empire specializes in institutional fixed-income markets; its results are included from the acquisition date. Purchase-price allocation remained preliminary.
- The company issued $160 million of Series B preferred stock, including the over-allotment, at a 6.25% non-cumulative dividend rate. It repurchased $53.9 million of common stock during the quarter.
- Adoption of the lease standard added approximately $670 million of right-of-use assets and lease liabilities. Operating lease liabilities were $670.8 million at quarter-end; the adoption reduced beginning retained earnings by $2.4 million after tax.
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management described a strategy of revenue growth, advisor recruiting, product diversification and selective acquisitions. It emphasized that results are sensitive to market activity, interest rates, investment banking demand and client assets.
- Key risks include market and interest-rate volatility, funding and liquidity access, credit and counterparty exposure, regulatory capital constraints, operational risks and legal proceedings. The company is involved in securities-related litigation, arbitration and regulatory matters; it stated that the ultimate outcomes are uncertain and that an individual matter could materially affect results in a future period, although it did not expect the matters collectively to materially affect financial position or results based on information then available.
- Management reported no credit-related other-than-temporary impairment on investment securities in the quarter. It recorded $79.1 million of gross unrealized losses across available-for-sale and held-to-maturity securities and stated it did not intend, and was not likely required, to sell the affected securities before recovery.
Most important facts for investors to verify
- Whether deposit costs continue rising faster than yields and how that affects net interest income and margin.
- Whether the decline in capital raising, commissions and institutional equity activity persists, and whether advisory and fixed-income strength offsets it.
- The drivers of the large operating and financing cash outflows and the sustainability of liquidity after the quarter-end cash decline.
- Credit quality, concentrations and allowance adequacy in the $8.8 billion gross bank loan portfolio; review delinquency, non-accrual and risk-rating trends.
- The final First Empire purchase-price allocation and integration results, as well as the continuing cost of leases, deferred compensation and advisor transition payments.
- Developments in legal and regulatory matters, contingent funding commitments, and the company’s ability to maintain regulatory capital and access financing under stressed conditions.