Stifel Financial Corp. — Q2 2018 Form 10-Q
Business context and reporting period. Stifel is a financial services and bank holding company operating in wealth management, institutional brokerage and investment banking, and banking. This unaudited filing covers the three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods unless otherwise noted. Stifel acquired Ziegler Wealth Management on March 19, 2018.
Financial performance
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenues | $780.0 | $742.3 | $1,556.8 | $1,433.7 |
| Net revenues | $742.7 | $725.6 | $1,493.1 | $1,401.2 |
| Net income | $87.3 | $52.8 | $176.0 | $118.3 |
| Net income available to common shareholders | $84.9 | $50.5 | $171.4 | $113.6 |
| Diluted EPS | $1.04 | $0.63 | $2.10 | $1.41 |
| Net interest income | $117.1 | $92.3 | $228.4 | $177.4 |
| Pre-tax margin on net revenues | 16.0% | 11.5% | 15.9% | 11.6% |
- Q2 net revenues increased 2.4%; common net income rose 68.3%. First-half net revenues increased 6.6%; common net income rose 50.8%.
- Q2 revenue drivers included asset management and service fees (+15.4%), interest income (+41.7%), and investment banking (-13.1%). Brokerage revenues fell 4.5%. For the first half, asset management and service fees rose 17.8%, interest income 39.2%, and investment banking 8.1%; brokerage revenues fell 7.3%.
- Interest expense increased 124.0% in Q2 and 95.9% in the first half, reflecting growth in bank deposits and other interest-bearing liabilities and the 2017 senior-note issuance. Net interest margin was 2.47% in Q2 versus 2.25% and 2.44% for the first half versus 2.20%.
- Non-interest expenses were $624.4 million in Q2, down 2.8%, and $1,255.2 million in the first half, up 1.3%. Compensation and benefits were 59.5% of net revenues in Q2 and 60.3% year to date, down from 62.5% and 63.5%, respectively.
- Q2 Global Wealth Management net revenues rose 10.0% and pre-tax income rose 22.6% to $187.9 million. Institutional Group net revenues fell 8.4% and pre-tax income fell 31.9% to $36.0 million. First-half pre-tax income rose 23.5% in Global Wealth Management and fell 13.1% in Institutional Group.
Financial position, cash flow, and liquidity
- At June 30, 2018, total assets were $22.61 billion, up 5.7% from year-end 2017; total liabilities were $19.65 billion and shareholders’ equity was $2.95 billion.
- Cash and cash equivalents were $472.2 million; cash segregated for regulatory purposes was $112.8 million. Combined, these balances were $585.0 million, down from $787.1 million at December 31, 2017.
- First-half operating activities used $214.8 million, investing activities used $1.01 billion, and financing activities provided $1.03 billion. The investing outflow primarily reflected investment portfolio and loan growth, acquisitions, and fixed-asset purchases; financing inflows included growth in deposits and securities lending.
- Bank loans, net, were $7.35 billion; available-for-sale securities were $3.48 billion and held-to-maturity securities were $4.52 billion. Deposits were $13.89 billion, including $13.6 billion of brokerage customer deposits. The filing identifies $11.06 billion of cash and assets readily convertible to cash, while also disclosing pledged collateral.
- Funding obligations included $1.02 billion of senior notes, $760 million of Federal Home Loan Bank advances, $243 million of borrowings, and $67.5 million of trust debentures. The $300 million 3.50% senior notes mature in 2020; other senior notes mature in 2024 and 2047.
- Stifel reported $200 million of unused revolving credit capacity through March 2020 and a newly established $250 million broker-dealer facility maturing in June 2019; neither facility was drawn at quarter-end. It also had $1.0 billion in uncommitted secured lines, which are subject to lender approval and collateral availability.
- Stifel and Stifel Bank were reported as well capitalized. Stifel broker-dealer net capital was $302.1 million, $267.4 million above its minimum requirement.
Changes, outlook, and material risks
- Acquisitions and expansion: Ziegler was acquired for cash from operations and added 55 private client advisors managing approximately $5 billion in client assets. On May 10, Stifel agreed to acquire Business Bancshares and The Business Bank of St. Louis; the transaction was expected to close in Q3 2018, with Stifel common shares as consideration.
- Accounting comparability: Stifel adopted the new revenue standard on January 1, 2018. It reduced opening retained earnings by $3.9 million after tax. Gross presentation increased both investment banking revenue and other operating expenses by $16.2 million for the first half, with no net-income impact. Historical comparative periods were not restated.
- Management commentary and outlook: Management cited higher fee-based assets, bank interest-earning assets, and advisory activity as growth drivers, offset in part by weaker brokerage activity and capital raising. It highlighted industry pressures from passive investing and electronic trading, and a challenging municipal underwriting market. The filing provides no specific financial guidance or quantified forward outlook.
- Risks and contingencies: Results are sensitive to market activity, interest rates, asset values, client flows, and demand for underwriting and advisory services. Liquidity, funding access, credit, regulatory, operational, and legal risks are also discussed. Management said liquidity stress tests showed sufficient resources for modeled obligations. Pending legal and regulatory matters are reserved where probable and estimable; outcomes remain uncertain, and a matter could materially affect results in a future period.
- Other notable items: The allowance for loan losses increased to $73.8 million from $67.5 million at year-end; impaired loans were $24.1 million, including $9.1 million of troubled debt restructurings. The investment portfolio had $95.5 million of gross unrealized losses; management reported no credit-related other-than-temporary impairment. The company repurchased $45.9 million of shares in the first half and declared $0.24 per common share in dividends.
Important facts for investors to verify
- Whether recurring fee and net interest income growth can offset continued weakness in brokerage and capital raising, particularly in Institutional Group.
- How deposit costs, deposit mix, loan growth, and interest-rate changes affect net interest margin and funding costs.
- The quality and concentration of the loan and securities portfolios, adequacy of the allowance, and implications of unrealized securities losses.
- Final purchase accounting and integration results for Ziegler, and the closing terms and execution risks of the Business Bancshares acquisition.
- Available liquidity after considering collateral pledges, subsidiary distribution restrictions, and the conditional availability of uncommitted credit lines.
- Developments in legal, regulatory, and other contingencies, and any changes in capital, liquidity, or market-risk disclosures.