Stifel Financial Corp. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Stifel operates wealth management and brokerage, institutional sales and trading, investment banking, and banking businesses.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $340.5 | $344.1 | $1,078.6 | $988.8 |
| Net revenue | $334.2 | $340.4 | $1,059.7 | $980.4 |
| Net income/(loss) | $22.3 | $(84.3) | $57.1 | $(39.5) |
| Diluted EPS | $0.35 | $(1.65) | $0.90 | $(0.82) |
| Pre-tax margin on net revenue | 11.7% | (41.9)% | 8.8% | (6.8)% |
- Revenue mix: Q3 commissions rose 47.7% to $143.2 million; principal transactions fell 37.8% to $76.7 million; investment banking fell 27.1% to $37.7 million. Nine-month net revenue rose 8.1%, supported by commissions, asset management fees, investment banking, and net interest income.
- Expenses and margins: Non-interest expense was $295.2 million in Q3 and $966.1 million for nine months. Compensation equaled 63.0% and 63.4% of net revenue, respectively. Nine-month other operating expense rose 62.9% to $127.3 million, principally due to OPEB-related litigation and regulatory costs.
- Cash flow: Operating activities used $129.3 million and investing activities used $620.4 million in the first nine months; financing activities provided $712.1 million. Cash and cash equivalents declined $38.9 million to $214.6 million.
- Balance sheet and liquidity: Total assets were $4.94 billion and shareholders’ equity was $1.26 billion at September 30, 2011. Bank deposits were $2.12 billion, up from $1.62 billion at year-end 2010. Stifel reported $310.6 million of short-term bank borrowings on the balance sheet; the borrowings note separately reports $259.7 million of bank borrowings and $119.5 million of stock-loan balances. Reconcile these reported amounts when assessing funding.
- Credit and capital: Bank loans, net of allowance, were $568.3 million, up from $389.7 million; approximately 98.7% of the loan portfolio was collateralized. The allowance for loan losses was $3.8 million. Stifel Nicolaus reported $190.2 million in net capital, $177.8 million above its minimum. Stifel Financial and Stifel Bank reported capital ratios above minimum requirements.
Material changes versus comparable periods
- Q3 net revenue declined 1.8%, while nine-month net revenue increased 8.1%. Q3 institutional activity was pressured by market volatility and lower fixed-income trading volumes; wealth management commissions and fees grew.
- Profit comparisons are heavily affected by Q3 2010’s $181.1 million non-cash charge from accelerating deferred compensation after a plan modification, along with other TWPG merger-related expenses. TWPG had been acquired in July 2010, so the nine-month comparisons also reflect different periods of acquired-business contribution.
- Nine-month assets grew 17.3% from year-end 2010. Bank deposits, securities portfolios, and bank loans expanded, while cash declined.
- Stifel repurchased 1.7 million shares for $48.5 million during the first nine months. The board authorized an additional 3.0 million shares on November 7, 2011.
Outlook, risks, contingencies, and unusual items
- Management emphasized revenue growth, advisor recruitment and retention, and client relationships; the filing provides no quantified earnings or revenue guidance. Management cautioned that results depend on market activity, asset values, financing and underwriting volumes, and interest rates.
- Management described difficult municipal markets, weak demand for longer-dated municipal securities, and investor concern about European debt, U.S. economic data, and budget uncertainty. The company also cited regulatory change, including the Dodd-Frank Act, as a potential source of cost and business-model risk.
- OPEB litigation: The SEC sued Stifel in August 2011 over CDO sales to five Wisconsin school districts. The districts’ related state-court case concerns $200 million of investments and seeks unspecified, potentially substantial damages; dismissal motions had been denied. Stifel purchased approximately $162.5 million face value of Depfa notes at a substantial discount and recorded related provisions, but the filing does not give a clear amount for those provisions. The company intends to defend the claims.
- ARS commitments: Stifel estimated $45.3 million par value of client auction-rate securities remained for repurchase by December 31, 2011 under its regulatory agreement, assuming no issuer redemptions. Separate TWP customer agreements could involve up to $38.6 million par value over five years, also assuming no redemptions. Estimated liabilities depend on redemptions and fair values.
- Other risks include market and counterparty exposure, short-sale losses, liquidity and subsidiary-distribution constraints, and legal or regulatory claims. Derivative agreements had a $26.9 million termination value in a net liability position; $32.9 million of collateral had been posted. Stifel reported no goodwill impairment in its July 2011 annual test.
- Stone & Youngberg was acquired on October 1, 2011, after quarter-end; consideration included cash and stock plus a contingent earn-out. The filing reports a $0.2 million FINRA fine for TWP, subject to the stated appeal process.
Important facts for investors to verify
- Reconcile the balance-sheet short-term borrowing figure with the borrowing and securities-lending balances described in the notes.
- Review the size, timing, and potential range of OPEB-related provisions and litigation exposure; the filing does not provide a clear quantified total.
- Track completion and cash cost of the remaining ARS repurchases, including the separate TWP customer agreements and possible issuer redemptions.
- Assess whether growth in bank assets and deposits, increased interest costs, and the reported operating cash outflow remain sustainable.
- Separate underlying operating performance from the unusually large 2010 deferred-compensation charge and the differing TWPG comparison periods.
- Monitor the post-quarter Stone & Youngberg acquisition, including contingent earn-out obligations, and the effect of the expanded share-repurchase authorization.