Stifel Financial Corp. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Stifel is a financial-services and bank holding company operating in wealth management, institutional brokerage and investment banking, and retail and commercial banking. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenues | $786.8 | $738.8 | $2,343.6 | $2,172.5 |
| Net revenues | $738.3 | $721.2 | $2,231.4 | $2,122.3 |
| Income before taxes | $140.5 | $108.1 | $378.4 | $270.4 |
| Net income | $103.9 | $66.5 | $279.9 | $184.9 |
| Net income available to common shareholders | $101.5 | $64.2 | $272.9 | $177.8 |
| Diluted EPS | $1.25 | $0.79 | $3.35 | $2.21 |
| Net interest income | $121.3 | $100.2 | $349.7 | $277.6 |
- Q3 net revenues rose 2.4%; common net income rose 58.1%. For the first nine months, net revenues rose 5.1% and common net income rose 53.4%.
- Q3 pre-tax margin was 19.0%, versus 15.0%; nine-month pre-tax margin was 16.9%, versus 12.7%. Compensation and benefits were 57.2% of net revenues in Q3 and 59.3% year to date, down from 62.2% and 63.1%, respectively.
- Growth was led by net interest income and asset-management fees. Q3 investment banking fell 7.1%, including advisory fees down 25.8%; brokerage revenue fell 3.4%. For nine months, investment banking rose 2.5%, while brokerage revenue fell 6.1%.
- Interest expense increased sharply: 175.0% in Q3 and 123.7% year to date, principally reflecting higher deposit and Federal Home Loan Bank (FHLB) funding costs and the 2017 senior-note issuance. Net interest margin increased to 2.46% in Q3 from 2.25% and to 2.45% year to date from 2.22%.
Cash flow, balance sheet and capital
- At September 30, 2018, total assets were $23.76 billion, up from $21.38 billion at year-end 2017. Cash, cash equivalents and regulatory-segregated cash totaled $715.9 million.
- Bank loans, net, were $8.25 billion, up from $6.95 billion; deposits were $14.50 billion, up from $13.41 billion. Loan growth was concentrated in commercial and industrial, residential real estate, and securities-based lending.
- Major funding and debt included $1.06 billion of FHLB advances, $1.02 billion of senior notes, $140.0 million of borrowings and $67.5 million of trust debentures. Senior notes include $300 million due in 2020, $500 million due in 2024 and $225 million due in 2047. The company reported no draws on its $200 million revolving facility or $250 million broker-dealer facility and said it was covenant-compliant.
- Management reported $11.1 billion of cash and assets readily convertible to cash. The bank subsidiaries had liquidity equal to approximately 17% of assets, above their internal target. Stifel’s broker-dealer had $355.9 million of net capital, $320.4 million above its minimum; the company and bank subsidiaries were reported as well-capitalized.
- For the first nine months, operating activities used $48.1 million; investing activities used $1.25 billion; and financing activities provided $1.23 billion. Cash and regulatory-segregated cash decreased $71.2 million. Investing outflows reflected portfolio and loan growth, acquisitions and fixed-asset purchases; financing inflows were largely from deposits and securities-lending activity.
Changes, outlook and risks
- Stifel acquired Ziegler Wealth Management in March, adding 55 advisors and approximately $5 billion in client assets; the acquisition was funded with cash from operations. It acquired Business Bancshares in August, issuing approximately 2.0 million shares; the acquired bank had approximately $600 million in assets. BBI purchase-price allocation remained preliminary.
- Adoption of the new revenue-recognition standard in 2018 reduced opening retained earnings by $3.9 million after tax. It also moved certain investment-banking deal costs to expense and client reimbursements to revenue, increasing both revenue and operating expenses by $25.9 million for the nine months, with no net-income effect. Comparisons of these line items with 2017 are therefore affected by presentation changes.
- Management emphasized growth through advisor recruiting, fee-based wealth management, business expansion and selective acquisitions. It provided no specific financial guidance in the supplied filing text and cautioned that interim results do not necessarily indicate full-year results.
- Management cited dependence on market activity, trading volumes, investment-banking demand, client assets and interest rates. It noted pressure in municipal underwriting and brokerage from reduced activity, passive investing and electronic trading. Liquidity access, funding costs, credit quality, regulation, operational matters and legal proceedings are additional risks.
- The securities portfolio had $113.2 million of gross unrealized losses across available-for-sale and held-to-maturity securities. Management attributed these mainly to market rates, spreads and issuer-specific credit spreads, reported no credit-related impairment, and said it did not expect credit losses or a need to sell before recovery. Bank loans included $24.2 million of impaired loans; the allowance for loan losses was $80.7 million.
- Legal claims and regulatory matters remain pending. The company said the ultimate resolution was not expected to materially affect financial position or results overall, while acknowledging that one or more matters could materially affect results in a future period. Management stated disclosure controls were adequate and effective as of September 30, 2018.
Important facts for investors to verify
- How much of earnings growth is sustainable from banking net interest income, given rising deposit costs and the changing mix of funding and assets?
- Whether wealth-management fee growth and acquired businesses translate into durable organic growth and successful integration, including final BBI purchase accounting.
- Whether the declines in brokerage and Q3 advisory fees persist, and how market volatility, passive strategies and municipal issuance affect Institutional Group results.
- Credit performance as the loan portfolio expands, especially commercial and industrial exposure, impaired and past-due loans, and adequacy of the allowance.
- The liquidity and valuation implications of the securities portfolio’s unrealized losses, and the company’s continued access to deposits, secured funding and capital markets.
- The effect of revenue-recognition presentation changes when comparing 2018 with prior periods, and the development of legal, regulatory and other contingencies.