Business context and reporting period
Stifel Financial Corp. is a diversified financial services and bank holding company, with wealth management, institutional brokerage and investment banking, and banking operations. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. Unless noted, dollar amounts are in millions.
Financial results and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenues | $420.1 | $334.2 | $1,194.8 | $1,059.7 |
| Income before taxes | $61.7 | $39.0 | $164.8 | $93.6 |
| Net income | $37.7 | $22.3 | $98.6 | $57.1 |
| Diluted EPS | $0.60 | $0.35 | $1.57 | $0.90 |
- Q3 net revenue increased 25.7% and net income increased 69.1%; nine-month net revenue increased 12.8% and net income increased 72.7%.
- Net income as a share of net revenue was 9.0% in Q3 (6.7% prior year) and 8.3% for nine months (5.4% prior year). Compensation and benefits were 63.7% and 63.8% of net revenue, respectively, versus 63.0% and 63.4%.
- Q3 revenue drivers included investment banking ($72.9, up 93.6%), principal transactions ($103.0, up 34.4%), and a $31.9 total for other income, which included a $25.6 gain on the Knight Capital investment. Commissions declined 10.7% to $128.0. For nine months, investment banking rose 46.8%, principal transactions 24.7%, while commissions fell 13.4%.
- Operating cash flow was negative $50.7 for nine months, compared with negative $129.6 in 2011. Investing used $821.4, principally reflecting securities purchases; financing provided $896.4, mainly from higher bank deposits and the senior-note issuance. Cash and cash equivalents ended at $193.3, up from $167.7.
- At September 30, total assets were $6.14 billion and shareholders’ equity was $1.43 billion. Bank deposits were $2.92 billion, compared with $2.07 billion at year-end; bank loans net of allowance were $746.6 million. Short-term bank borrowings were $97.9 million, down from $199.4 million. The company also had $175 million of 6.70% senior notes due 2022 and $82.5 million of trust debentures.
- Management identified $3.59 billion of cash and assets readily convertible to cash, while noting collateral and funding requirements. Stifel Bank’s deposits were largely affiliated brokerage-customer deposits. The company reported strong regulatory capital ratios; Stifel Bank was categorized as well capitalized.
Changes, outlook and material risks
- Growth reflected stronger public finance and M&A activity, fixed-income trading volumes and credit spreads, greater fee-based assets, and expansion of Stifel Bank. Management also attributed results to the October 2011 Stone & Youngberg acquisition. Fee-based account assets were $20.7 billion, up 11.8% year over year; management said growth reflected both net inflows and market appreciation.
- The 2011 nine-month comparison included estimated school-district litigation settlement and related legal costs, as well as merger-related expenses. Their lower level in 2012 contributed to the reported decline in nine-month other operating expenses; excluding those prior-year items, management said expenses increased.
- Management’s stated strategy is continued revenue growth, recruiting experienced financial advisors, broadening capital-markets products, and pursuing selective acquisitions. No quantitative earnings or revenue guidance was provided. Management cautioned that market activity and results are uncertain; it cited subdued investor and CEO confidence, economic concerns, and weaker 2012 IPO activity.
- On November 5, 2012, after quarter-end, Stifel agreed to acquire KBW for an estimated $577.8 million: $10.00 per share in cash and $7.50 in Stifel stock, subject to approvals and closing conditions. The transaction was expected to close in Q1 2013.
- Significant uncertainties include the SEC action and related Wisconsin school-district litigation, the EDC bond litigation, and other legal and regulatory matters. The company said it believed these matters would not materially harm its financial position, but acknowledged resolution could materially affect results in a future period. TWP also estimated possible repurchases of $25.1 million par value of auction-rate securities over three years, including $6.2 million expected in December 2012, assuming no issuer redemptions.
- Other risks include volatile markets, reliance on funding availability and affiliated deposits, interest-rate and counterparty exposure, and valuation uncertainty in illiquid or Level 3 assets. The company reported $214.5 million of Level 3 assets measured at fair value and noted that assumptions in valuation models could materially affect estimates.
Important facts for investors to verify
- How much of 2012 earnings growth is sustainable without the $25.6 million Knight-related gain and the unusually high investment-banking activity.
- KBW transaction financing, expected dilution, regulatory and shareholder approvals, integration costs, and whether the stated closing timetable was achieved.
- Potential financial exposure from the SEC, Wisconsin school-district, EDC, and other legal matters, including the status of reserves and any settlement developments.
- Liquidity and funding concentration, particularly the growth in affiliated brokerage deposits, collateral availability, and the December 2012 expiration of the $50 million committed revolving facility.
- Credit quality and valuation assumptions for bank loans, held-to-maturity securities, auction-rate securities, and other Level 3 holdings; also track redemption experience and possible securities repurchases.