Stifel Financial Corp. — Q3 2015 Form 10-Q
Business context and reporting period. Stifel is a financial-services and bank holding company operating in brokerage, investment banking, asset management, trading, and retail and commercial banking. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenues | $591.6m | $523.5m | $1,750.3m | $1,630.3m |
| Income before taxes | $22.3m | $65.8m | $130.5m | $221.4m |
| Net income | $17.2m | $39.9m | $81.2m | $130.9m |
| Diluted EPS | $0.22 | $0.52 | $1.04 | $1.72 |
| Net interest income | $33.6m | $40.9m | $97.1m | $112.3m |
- Q3 net revenues rose 13.0%, but net income fell 56.9%; for the nine months, net revenues rose 7.4% while net income fell 38.0%. Management attributed revenue growth mainly to higher asset-management fees and commissions; YTD investment banking also increased. Lower net interest income and, YTD, lower principal-transaction revenue partly offset growth.
- Expense growth outpaced revenue growth: non-interest expenses increased 24.4% in Q3 and 15.0% YTD. Compensation and benefits were $404.2m in Q3 and $1,169.9m YTD. As a share of net revenues, they rose to 68.3% and 66.8%, respectively, from 63.3% and 63.4%.
- Pretax margin was 3.8% in Q3 versus 12.6% a year earlier, and 7.5% YTD versus 13.6%. Global Wealth Management pretax income increased 3.4% in Q3 and 10.4% YTD; Institutional Group pretax income decreased 12.4% and 15.0%, respectively.
- Balance sheet at September 30: assets $9.36bn, liabilities $6.87bn, shareholders’ equity $2.49bn, and cash and cash equivalents $607.1m. Bank loans, net, were $2.41bn; bank deposits were $4.12bn.
- Debt included $398.3m of borrowings, $450.0m of senior notes, and $82.5m of trust debentures. The company redeemed $175.0m of 6.70% senior notes in January; senior notes outstanding declined from $625.0m at year-end 2014.
- Cash and assets described as readily convertible to cash totaled $4.02bn, down from $5.00bn at December 31, 2014. Operating activities used $1.4m of cash YTD; investing activities provided $553.4m and financing activities used $633.2m. Cash declined $82.7m from year-end.
- Stifel and Stifel Bank were reported as well capitalized. Stifel broker-dealer net capital was $333.4m, $320.2m above its minimum.
Material changes, outlook, and risks
- Stifel completed its acquisition of Sterne Agee on June 5, 2015, issuing 1.4m shares. Preliminary acquisition accounting included $90.1m of goodwill. A $23.8m grant of retention restricted stock units with no continuing service requirement was expensed; $33.8m of retention notes are subject to forgiveness over five to ten years under specified conditions.
- Stifel agreed to acquire Barclays’ U.S. Wealth and Investment Management Americas franchise; the filing said the transaction was expected to close in Q4 2015. No quantified earnings or revenue guidance is provided.
- Other income included a $14.7m gain on the September sale of residential mortgages previously reclassified to held for sale. Management also cited gains from a portion of the Acacia loan portfolio and mortgage origination fees. These items contributed to the increase in other income.
- Stifel repurchased 1.5m shares for $65.9m during the first nine months, at an average $45.17 per share. On November 3, the Board authorized an additional 5.0m shares; management stated the program supports capital management and employee-plan obligations. The company does not currently pay a cash dividend.
- Management highlighted sensitivity to equity and fixed-income markets, trading volumes, investment-banking activity, interest rates, funding conditions, and regulatory changes. It reported sufficient liquidity under its modeled stress tests, while noting that secured funding availability, collateral demands, deposit withdrawals, and market access could change in stressed conditions.
- Bank loan exposure grew; net bank loans increased to $2.41bn from $2.07bn at year-end. The allowance for loan losses was $27.7m, up from $20.7m. Management cautioned that its allowance estimates depend on assumptions and could prove insufficient. Most loans were classified Pass, and 96.4% of the portfolio was collateralized.
- Legal matters include an SEC lawsuit set for trial beginning April 11, 2016, and claims relating to an EDC bond issuance. Management said it intended to defend the matters and did not expect their ultimate resolution to materially adversely affect overall financial position or results, while acknowledging a matter could materially affect results in a future period.
Important facts for investors to verify
- Whether Sterne Agee integration and the anticipated Barclays acquisition deliver revenue growth without further disproportionate expense or retention costs.
- How much of Q3 and YTD earnings benefited from loan-sale and other unusual income, and whether those items recur.
- Whether fee-based asset growth, advisor recruitment, and commission gains can offset weaker net interest income and fixed-income or equity-market activity.
- Trends in compensation expense, operating margins, bank loan growth, and the loan-loss allowance and credit quality.
- Liquidity and funding availability, including the implications of lower deposits and reliance on secured borrowing; and developments in the SEC and EDC legal matters.