Stifel Financial Corp. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted. Stifel provides wealth management, brokerage, investment banking, trading, and banking services. It completed the City Securities acquisition on January 3, 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $738.8 | $661.4 | $2,172.5 | $1,964.9 |
| Net revenue | $721.2 | $642.0 | $2,122.3 | $1,914.1 |
| Income before taxes | $108.1 | $28.0 | $270.4 | $87.7 |
| Net income | $66.5 | $17.8 | $184.9 | $54.6 |
| Net income available to common shareholders | $64.2 | $16.3 | $177.8 | $53.1 |
| Diluted EPS | $0.79 | $0.21 | $2.21 | $0.69 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $943.3 | $(179.5) |
- Net revenue rose 12.3% in Q3 and 10.9% year to date; pretax margin increased to 15.0% and 12.7%, respectively, from 4.4% and 4.6% in the comparable periods.
- Q3 revenue drivers included investment banking ($181.9, up 25.6%), asset management and service fees ($179.8, up 24.7%), and net interest income ($100.2, up 80.6%). For nine months, the respective increases were 30.5%, 19.0%, and 81.8%.
- Brokerage revenue declined: commissions and principal transactions together fell 13.4% in Q3 and 11.6% year to date. Management cited lower trading volumes and volatility, a flatter yield curve, and migration toward passive strategies.
- Non-interest expense was nearly flat in Q3, down 0.2% to $613.0; year-to-date it increased 1.4% to $1,852.0. Compensation was the largest expense, while compensation as a share of net revenue fell to 62.2% in Q3 and 63.1% year to date.
- Effective tax rates were 38.5% for Q3 and 31.6% year to date, versus 36.3% and 37.7%. Adoption of stock-compensation accounting guidance contributed a $17.4 million excess tax benefit for the nine months.
Balance sheet, liquidity, and capital
- At September 30, total assets were $20.48 billion, versus $19.13 billion at year-end 2016; shareholders’ equity was $2.93 billion, versus $2.74 billion.
- Cash and cash equivalents fell to $588.9 million from $912.9 million. The company reported $9.78 billion of cash and assets readily convertible to cash, although securities and other assets may be pledged or otherwise encumbered.
- Bank loans, net, increased to $6.78 billion from $5.59 billion, and bank deposits rose to $12.88 billion from $11.53 billion. The loan portfolio was 96.8% collateralized; the allowance for loan losses was $62.2 million, up from $45.2 million.
- Major financing balances included $790.0 million of Federal Home Loan Bank advances, $796.6 million of senior notes net of issuance costs, $78.0 million of borrowings, and $67.5 million of trust debentures. The $200 million revolving credit facility had no advances outstanding; the company reported covenant compliance.
- For the nine months, operating activities provided $943.3 million, investing activities used $2.23 billion, and financing activities provided $951.0 million. Cash declined by $324.0 million overall.
- Stifel and Stifel Bank were categorized as well capitalized. Stifel reported regulatory net capital of $273.8 million, $244.2 million above its minimum.
Material changes, outlook, and risks
- Global Wealth Management net revenue increased 16.3% in Q3 and 16.6% year to date; Institutional Group net revenue increased 2.3% in both periods. Institutional brokerage weakened, offset by stronger capital raising and advisory fees.
- Management emphasized continued revenue growth, advisor recruiting, client relationships, product diversification, and selective acquisition opportunities. The filing provides no quantified earnings or revenue guidance.
- After quarter-end, Stifel priced $200 million of 5.20% senior notes due 2047 and completed an additional $25 million issuance under the over-allotment option. It also agreed to acquire Ziegler Wealth Management, with approximately $4.8 billion in client assets, expected to close in Q1 2018.
- The board initiated a regular quarterly common dividend; $0.10 per share was paid in September. The company repurchased $13.0 million of shares during the nine months.
- Legal proceedings include the Broyles/Collybus CDO matter. A settlement with individual plaintiffs was reached in August 2017 but remained subject to court approval. Management said it could not predict all litigation outcomes; resolution of a matter could materially affect results in a future period, though the company did not expect the matters, based on available information, to materially affect its overall financial position and results.
- Market, interest-rate, credit, liquidity, regulatory, operational, and legal risks remain material. Management noted municipal underwriting challenges and that trading and investment-banking results depend on market activity. A 200-basis-point rate decrease was modeled to reduce Stifel Bank’s net interest margin by 28.0%.
- The company implemented a new ERP system during Q3. Management concluded disclosure controls were adequate and effective as of September 30, 2017. The filing also notes ongoing implementation work for new revenue-recognition standards, including expected gross presentation of certain underwriting costs.
Important facts for investors to verify
- Whether growth in fee revenue and bank net interest income can offset continued weakness in brokerage activity, and how sustainable the reported margins are.
- Credit quality and reserve adequacy as the loan portfolio expands, particularly in commercial and industrial lending; track delinquencies, nonperforming loans, and provisions.
- Liquidity and funding sensitivity to brokerage-client deposit withdrawals, collateral requirements, and changes in secured or unsecured market access.
- Final court approval and financial implications of the Broyles-related settlement, along with developments in other legal and regulatory matters.
- Closing and integration of the Ziegler Wealth Management acquisition, and the effect of the post-quarter $225 million senior-note issuance on leverage and interest expense.
- Effects of the ERP implementation and upcoming accounting-standard adoption, including revenue presentation and disclosures.