Stifel Financial Corp. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts below are in U.S. dollars; financial-statement figures are reported in thousands unless noted. Stifel provides brokerage, investment banking, investment advisory, trading, and banking services.
Financial performance
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Net revenues | $498.7 million, up 33.2% year over year | $940.5 million, up 21.4% |
| Income before taxes | $51.2 million, up 16.7% | $74.5 million, down 27.7% |
| Net income | $29.4 million, up 12.6% | $44.1 million, down 27.7% |
| Diluted EPS | $0.40, versus $0.42 | $0.62, versus $0.97 |
| Net income / net revenues | 5.9%, versus 7.0% | 4.7%, versus 7.9% |
| Net interest income | $20.2 million, versus $17.3 million | $38.6 million, versus $33.6 million |
| Operating cash flow | $89.9 million provided in the six months, versus $302.8 million used in the prior-year period |
Q2 revenue growth reflected higher investment banking, commission, advisory-fee, and interest revenue. For the six months, investment banking revenue rose 45.5%, commissions 22.0%, and asset management and service fees 15.0%; principal-transaction revenue rose 5.2%. Management also cited investment gains, including gains on its Knight Capital investment, and growth in Stifel Bank’s interest-earning assets.
Expense growth outpaced net-revenue growth: non-interest expenses increased 35.4% in Q2 and 28.9% for the six months. Compensation and benefits were $321.3 million in Q2 and $637.1 million for the six months. The effective tax rate was 42.5% for Q2 and 40.9% for the six-month period.
Balance sheet, debt, and liquidity
- At June 30, 2013, total assets were $8.49 billion and shareholders’ equity was $1.90 billion, compared with $6.97 billion and $1.49 billion, respectively, at year-end 2012.
- Cash and cash equivalents were $366.9 million, down from $403.9 million at year-end. Stifel reported $5.08 billion of cash and assets it considered readily convertible to cash.
- Bank deposits were $4.01 billion, up from $3.35 billion, primarily reflecting brokerage-customer deposits. Bank loans, net, were $984.8 million, up from $815.9 million.
- Short-term bank borrowings were $506.7 million, including $100 million outstanding on a committed revolving facility due December 2013. Corporate debt was $378.0 million, including $325 million of senior notes and $53.0 million of non-recourse debt; trust debentures were an additional $82.5 million.
- Six-month cash flows included $1.06 billion used in investing activities, largely for securities purchases and the KBW acquisition, and $934.5 million provided by financing activities, primarily from increased deposits and short-term borrowing.
Changes, acquisition, and unusual items
- Stifel completed its acquisition of KBW, Inc. on February 15, 2013, for preliminary purchase consideration of approximately $601.9 million, comprising $253.0 million cash, stock, and exchanged restricted awards. The company issued 6.7 million common shares and granted 2.2 million restricted awards to KBW employees. KBW results are included from the acquisition date; year-over-year comparisons therefore include only part of its 2013 contribution.
- KBW-related retention awards resulted in a $30.6 million pre-tax non-cash compensation charge. The company also reported $9.8 million of KBW transaction costs for the six months. Management said Q2 non-recurring and merger-related items reduced net income by $14.9 million after tax, or $0.20 per diluted share; for the six months, the aggregate reduction was $40.2 million after tax, or $0.56 per diluted share.
- Available-for-sale securities increased to $2.26 billion from $1.63 billion at year-end. Six-month other comprehensive income included a $40.0 million after-tax unrealized loss on these securities; accumulated other comprehensive income consequently moved from $4.9 million to a $31.4 million loss. Stifel reported no credit-related other-than-temporary impairment charges for the period.
- Goodwill rose to $743.6 million, primarily from acquisitions. The KBW purchase-price allocation remained preliminary; no goodwill impairment was reported.
Outlook, risks, and contingencies
- No numerical earnings or revenue guidance was provided. Management described a continuing focus on revenue growth, recruiting experienced financial advisors, diversifying capital-markets products, and pursuing acquisition opportunities.
- Management cautioned that results are sensitive to market direction and activity, investment-banking demand, interest rates, trading volumes, client assets, and municipal-market conditions. It also cited uncertainty around economic growth, employment, U.S. fiscal and debt-ceiling matters, and European debt concerns.
- Liquidity depends on market access, secured and unsecured funding, client deposits, and subsidiary distributions, which may be limited by regulatory capital rules. The $100 million committed revolver expires in December 2013; Stifel reported compliance with its covenants at quarter-end. Uncommitted secured lines are subject to lender approval when drawn.
- Risks include securities-market and interest-rate volatility, counterparty and credit exposure, short-sale losses, valuation uncertainty in Level 3 investments, regulatory change, and operational and legal risks. Level 3 fair-value assets were $262.0 million, including $152.0 million of auction-rate securities. Management noted that higher discount-rate assumptions could reduce their estimated values.
- Legal matters include the SEC and Wisconsin school-district CDO litigation, bond-related claims involving the Lake of the Torches Economic Development Corporation and tribal entities, and a tribal-court lawsuit concerning an earlier bond transaction. Stifel contested the claims. In the Stetson Oil & Gas matter, a Canadian court awarded approximately $16 million plus interest and costs; Stifel Nicolaus Canada was appealing and stated it had adequate reserves. The filing says outcomes are uncertain and could materially affect results in a future period.
- Stifel estimated that certain customers could require repurchase of up to $18.3 million par value of auction-rate securities over three years, assuming no issuer redemptions. Outstanding loan-origination commitments were $137.8 million; unused lines of credit were $274.3 million.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects acquired KBW and Miller Buckfire operations versus organic growth, and whether integration produces expected benefits.
- The recurring earnings impact of compensation, acquisition, and other unusual charges; reported six-month net income and diluted EPS declined despite revenue growth.
- Deposit stability and concentration, liquidity under stressed conditions, and the refinancing or replacement of the committed revolving facility expiring in December 2013.
- Potential changes in available-for-sale portfolio values, Level 3 valuations, and auction-rate-security liquidity and customer repurchase exposure.
- Developments, reserves, and possible future financial effects of the disclosed litigation and regulatory matters.