Stifel Financial Corp. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Amounts below are in U.S. dollars. Stifel operates wealth management, institutional brokerage and investment banking, and banking businesses.
Financial performance and position
- Revenue and earnings: Total revenue was $574.0 million, up 3.3% year over year; net revenue was $561.0 million, up 2.6%. Net income fell 9.0% to $43.1 million. Diluted EPS was $0.56, versus $0.63.
- Revenue mix: Asset management and service fees rose 27.7% to $113.9 million, and commissions rose 4.7% to $180.3 million. Principal transactions declined 9.2% to $100.2 million; investment banking fell 7.7% to $125.1 million; net interest income declined 13.0% to $29.7 million. Other income increased to $11.8 million from $5.2 million.
- Expenses and margins: Non-interest expenses increased 4.6% to $490.9 million. Compensation and benefits were $355.7 million, or 63.4% of net revenue. Pre-tax income declined 9.5% to $70.1 million; pre-tax margin was 12.5%, versus 14.2%. Net margin was 7.7%, versus 8.7%. The effective tax rate was 38.5%.
- Cash flow: Operating activities used $300.4 million; investing activities used $100.3 million; financing activities provided $118.5 million. Cash and cash equivalents fell $286.0 million during the quarter to $403.8 million. Management attributed operating cash use mainly to changes in operating assets and liabilities.
- Balance sheet and liquidity: Total assets were $9.37 billion, down from $9.52 billion at year-end. Cash and assets described as readily convertible to cash totaled $4.59 billion, compared with $5.00 billion. Bank loans, net, rose to $2.25 billion from $2.07 billion; bank deposits were $4.83 billion.
- Debt and capital: Senior notes totaled $450 million after redemption of $175 million of 6.70% notes in January; trust debentures remained $82.5 million. Short-term bank borrowings were $20.5 million. The $100 million revolving credit facility was undrawn and in covenant compliance. Stifel reported $399.8 million of net capital, $388.1 million above its minimum; the bank and holding company exceeded applicable “well capitalized” thresholds.
- Credit quality: The loan-loss allowance was $22.6 million, up from $20.7 million at year-end. Non-accrual loans were $5.8 million, compared with $4.9 million. Management reported 97.2% of the loan portfolio was collateralized.
Changes versus the prior comparable quarter
- Growth in fee-based assets and accounts supported the increase in asset management and service fees; management cited both net inflows and market appreciation in the underlying prior-year asset growth.
- Global Wealth Management net revenue increased 10.8% to $329.4 million and pre-tax income rose 24.1% to $98.8 million. Institutional Group net revenue declined 4.5% to $238.6 million and pre-tax income declined to $32.3 million; lower advisory and equity capital-raising revenues were key pressures.
- Higher compensation and operating costs outpaced net-revenue growth overall. Net interest income was pressured by higher interest expense, including interest on the 2014 notes issuance.
Outlook, risks, contingencies, and unusual items
- Outlook: No quantified earnings or revenue guidance is provided. Management says it intends to pursue growth through financial-advisor recruiting, client relationships, product diversification, and selective acquisitions. It expected the Sterne Agee acquisition, announced in February 2015, to close in Q2 2015, subject to shareholder, regulatory, and other customary approvals. Expected consideration was approximately $150 million, with a stock-and-cash mix subject to elections and adjustments.
- Market and funding risks: Results are sensitive to securities-market activity, investment-banking demand, trading volumes, interest rates, client assets, and municipal underwriting conditions. Management noted risks from funding availability, collateral requirements, credit ratings, and possible limits on subsidiary distributions. Its liquidity stress tests indicated sufficient liquidity for modeled current and contingent obligations at quarter-end.
- Legal matters: Significant ongoing matters include the SEC and Wisconsin school-district litigation concerning CDO sales, related claims involving RBC, and litigation arising from a 2008 Lake of the Torches bond offering. Management said it intends to defend the claims; outcomes and potential losses remain uncertain. It stated resolution could materially affect results in a future period, although it did not expect the matters, based on information then available, to materially adversely affect financial position or results overall.
- Other commitments and valuation: TWP customers held an estimated $15.2 million par value of auction-rate securities potentially subject to repurchase by year-end 2015, assuming no issuer redemptions. Level 3 assets were $158.8 million; valuations include significant unobservable inputs. The Merchant Capital acquisition purchase-price allocation remained preliminary. No credit-related other-than-temporary impairment was recognized in the quarter.
- Controls: Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether fee-based asset growth, inflows, and market levels continue to support advisory-fee revenue.
- Whether investment banking, trading, and net interest income recover, and how compensation and other costs affect margins.
- Cash-flow drivers, usable liquidity after pledged collateral, and the funding implications of deposit concentration and loan growth.
- Final Sterne Agee purchase consideration, share issuance, closing status, and integration costs or benefits.
- Developments in the disclosed litigation and auction-rate-security repurchase exposure, including any changes to reserves or estimated losses.
- Loan performance, allowance adequacy, and sensitivity of fair values to market changes and unobservable valuation assumptions.