Business context and reporting period
Stifel Financial Corp. is a financial services and bank holding company operating in wealth management, institutional brokerage and investment banking, and retail and commercial banking. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the same periods in 2018 unless otherwise noted.
During 2019, Stifel acquired First Empire, Mooreland Partners, B&F Capital Markets, and certain assets of George K. Baum & Company. Their results are included from their respective acquisition dates. After quarter-end, on November 1, Stifel acquired MainFirst.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenues | $865.7m | $786.8m | $2,539.3m | $2,343.6m |
| Net revenues | $821.6m | $738.3m | $2,392.8m | $2,231.4m |
| Income before taxes | $150.8m | $140.5m | $436.5m | $378.4m |
| Net income available to common shareholders | $104.6m | $101.5m | $305.2m | $272.9m |
| Diluted EPS | $1.34 | $1.25 | $3.87 | $3.35 |
| Pretax margin on net revenues | 18.3% | 19.0% | 18.2% | 16.9% |
Q3 net revenues rose 11.3%, while net income available to common shareholders rose 3.0%. For the first nine months, net revenues rose 7.2% and common net income increased 11.9%. The reported effective tax rates were 27.1% for Q3 and 27.0% for the nine months, versus 26.1% and 26.0%, respectively.
Revenue drivers: Q3 growth included higher advisory fees, brokerage revenue, asset management and service fees, and net interest income. Advisory fees rose 38.5% in Q3 and 12.4% year to date; asset management and service fees grew 8.4% and 4.7%, respectively. Nine-month net interest income increased 17.6% to $411.3m. Nine-month commissions declined 1.3%, partly offsetting other growth.
Expenses and segment performance: Non-interest expenses rose 12.2% in Q3 and 5.6% year to date. Compensation and benefits increased 15.1% in Q3, faster than net revenues, and represented 59.2% of net revenues versus 57.2% a year earlier. Global Wealth Management pretax income increased 10.6% in Q3 and 7.6% year to date; Institutional Group pretax income increased 41.7% in Q3 but 4.6% year to date. Institutional Group’s year-to-date pretax margin slipped to 14.6% from 14.9%.
Cash flow: For the nine months, operating activities provided $33.3m, investing activities provided $166.5m, and financing activities used $1,332.4m. Cash, cash equivalents, and regulatory-segregated cash fell $1,137.9m to $931.5m, primarily reflecting lower bank deposits, FHLB repayments, share repurchases, and dividends.
Financial position, debt and liquidity
At September 30, 2019, total assets were $24.16bn, total liabilities $20.60bn, and total equity $3.56bn. Bank loans, net, were $9.10bn, up from $8.52bn at December 31, 2018. Deposits were $14.84bn, down from $15.86bn; senior notes, net, were $1.02bn, FHLB advances $250m, and trust debentures $60m. Preferred stock issuance during the year raised approximately $155m net.
Stifel reported $9.72bn of cash and assets described as readily convertible to cash, including $3.45bn of available-for-sale securities and $2.88bn of held-to-maturity securities. It also reported $868.9m of cash and cash equivalents. The company said its liquidity stress tests indicated sufficient resources to meet current and contingent funding obligations. It had no advances outstanding on its $200m revolving credit facility or its $250m broker-dealer credit facility and reported compliance with covenants. Stifel Bancorp had $250m of FHLB advances outstanding.
Stifel reported that its broker-dealer and bank subsidiaries exceeded applicable regulatory capital requirements and that its bank subsidiaries were “well capitalized.” Stifel’s broker-dealer had $326.4m of net capital, $290.6m above its minimum requirement.
Material changes, outlook, risks and unusual items
- Management outlook: No specific numerical earnings or revenue guidance is provided. Management described a continued focus on revenue growth, advisor recruiting, client relationships, product diversification, and opportunistic acquisitions. Results remain sensitive to economic conditions, market activity, interest rates, trading volumes, investment banking demand, and client assets.
- Acquisitions and costs: Acquisitions expanded fixed-income brokerage, technology-sector M&A advisory, bank interest-rate derivatives, and public finance capabilities. The company reported $136.2m of cash used for acquisitions in investing activities for the nine months. Acquisition-related purchase accounting remains preliminary for the 2019 acquisitions.
- Securities reclassification: In Q3, Stifel transferred mortgage-backed securities with a fair value of $1.1bn from held-to-maturity to available-for-sale, following early adoption of specified guidance. The transfer increased accumulated other comprehensive income by $17.9m after tax. At quarter-end, held-to-maturity securities had a fair value $25.7m below amortized cost.
- Accounting and leases: Adoption of the lease standard added approximately $670m of right-of-use assets and lease liabilities at transition. Operating lease liabilities were $673.1m at September 30, with a weighted-average remaining term of 11.4 years.
- Risks and contingencies: The company faces market, credit, operational, regulatory, and legal risks. It is subject to securities-related lawsuits, arbitrations, and regulatory proceedings; management said the ultimate resolution was not expected to materially adversely affect financial position or results overall, but an individual matter could materially affect results in a future period. Credit risk includes loan losses and off-balance-sheet lending commitments; loan commitments to originate were $616.1m, and unused lines of credit were $1.4bn.
- Other notable items: Stifel repurchased $180.4m of common stock during the nine months and declared common dividends of $0.45 per share. It reported no material change to previously disclosed contractual obligations and no recognized subsequent event requiring adjustment to the quarter-end financial statements.
Important facts for investors to verify
- Whether revenue growth and stronger year-to-date earnings persist as market conditions, investment banking activity, and client asset levels change.
- How compensation expense, including variable compensation and deferred awards, affects margins as revenues grow.
- The quality and performance of the $9.1bn loan portfolio, including commercial lending exposures, allowance adequacy, and the $616.1m of loan-origination commitments.
- The liquidity and funding implications of deposit changes, securities pledged as collateral, and the large held-to-maturity portfolio, including the Q3 securities transfer.
- Integration costs, purchase-price allocation, and expected contribution from the 2019 acquisitions and the post-quarter MainFirst acquisition.
- Potential outcomes and financial exposure from pending legal, regulatory, and other contingencies.