Stifel Financial Corp. — Q2 2019 Form 10-Q
Business context and period. Stifel is a diversified financial-services and bank holding company operating in wealth management, institutional brokerage and investment banking, and retail and commercial banking. This unaudited filing covers the quarter and six months ended June 30, 2019, compared with the same periods in 2018; balance-sheet comparisons are with December 31, 2018. Stifel acquired fixed-income broker-dealer First Empire on January 2, 2019. The July 1, 2019 acquisition of Mooreland Partners occurred after quarter-end.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenues | $853.7 million | $780.0 million | $1,673.5 million | $1,556.8 million |
| Net revenues | $800.8 million | $742.7 million | $1,571.2 million | $1,493.1 million |
| Income before tax | $148.0 million | $118.3 million | $285.8 million | $237.9 million |
| Net income | $109.8 million | $87.3 million | $209.2 million | $176.0 million |
| Net income available to common shareholders | $103.8 million | $84.9 million | $200.7 million | $171.4 million |
| Diluted EPS | $1.31 | $1.04 | $2.53 | $2.10 |
| Net interest income | $135.0 million | $117.1 million | $276.7 million | $228.4 million |
Q2 net revenues rose 7.8%; common earnings rose 22.2%. For the first half, net revenues rose 5.2% and common earnings rose 17.1%. Q2 pretax margin was 18.5% of net revenues, versus 16.0%; the first-half margin was 18.2%, versus 15.9%. Non-interest expenses were 81.5% of Q2 net revenues, down from 84.0%; for the first half, 81.8%, down from 84.1%.
Drivers and changes versus prior periods
- Q2 revenue growth reflected higher capital-raising revenue (+30.6%), net interest income (+15.3%), asset-management and service fees (+5.8%), and principal transactions (+8.4%). Advisory fees fell 4.7% and commissions fell 1.2%.
- First-half growth was led by net interest income (+21.1%), principal transactions (+7.4%), and asset-management and service fees (+2.8%). Commissions declined 3.7%; investment banking rose 1.2%.
- Management attributed stronger net interest income chiefly to growth and higher yields in Stifel Bancorp’s interest-earning assets. Deposit interest expense also rose as funding costs increased.
- Global Wealth Management first-half pretax income increased 6.1% to $386.8 million. Institutional Group first-half pretax income decreased 11.3% to $71.5 million, as expense growth outpaced modest net-revenue growth.
- Client assets were $305.2 billion at June 30, up 9.9% year over year; fee-based client assets were $103.8 billion, up 13.7%. Management cited market appreciation and recruiting, while noting tax-season cash outflows.
Cash flow, balance sheet, debt and liquidity
- Total assets were $24.34 billion, down from $24.52 billion at year-end. Bank loans, net, were $8.96 billion; bank deposits were $14.90 billion, down from $15.86 billion.
- Cash and cash equivalents were $797.4 million, with $21.2 million segregated for regulatory purposes. Combined cash and restricted cash declined $1.25 billion during the first half to $818.6 million.
- Operating cash flow was negative $310.4 million; investing activities provided $82.9 million; financing activities used $1.02 billion. Financing outflows included lower deposits, FHLB repayments, share repurchases and dividends.
- Management identified $10.23 billion of cash and assets readily convertible to cash. It reported sufficient liquidity under its firm-wide stress testing; bank cash and highly liquid investments were approximately 17% of Stifel Bancorp assets.
- At quarter-end, funded debt included $1.02 billion of senior notes, $250 million of FHLB advances, $117.8 million of borrowings and $60 million of trust debentures. The $300 million 3.50% senior notes mature in 2020. Stifel had no advances outstanding on its $200 million revolving facility or $250 million broker-dealer credit facility and reported covenant compliance.
- Total equity was $3.49 billion. Stifel issued $160 million of Series B preferred stock during the first half, with a 6.25% stated dividend rate. Common dividends declared were $0.15 per share for Q2 and $0.30 for the first half. The company repurchased 2.3 million shares for $125.0 million in the first half.
- Stifel Financial Corp. reported a 15.6% common equity Tier 1 ratio and 19.2% total capital ratio and was categorized as well capitalized. Stifel’s broker-dealer net capital was $347.2 million, $312.9 million above its minimum.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management says results depend significantly on market activity, securities prices and volatility, investment-banking demand, interest rates, and assets under management. It notes challenging municipal underwriting conditions and investor reluctance toward longer-dated municipal securities and credit or liquidity risk.
- Key disclosed risks include market and interest-rate exposure, credit and counterparty risk, liquidity and funding access, operational and regulatory risk, and litigation. Management’s liquidity tests assume, among other stresses, no access to equity or unsecured debt markets and reduced secured funding availability.
- Stifel is involved in securities-related litigation, arbitrations, investigations and regulatory matters. Management believes the ultimate resolution should not materially adversely affect financial position or results overall, but says one or more matters could materially affect results in a future period; outcomes and potential losses are uncertain.
- Adoption of the new lease standard on January 1, 2019 added approximately $670 million of right-of-use assets and lease liabilities. Operating lease liabilities were $678.4 million at June 30. Adoption reduced beginning retained earnings by $6.4 million after tax; other accounting adoptions also reduced retained earnings.
- The loan portfolio was $9.07 billion gross, with a $90.5 million allowance for loan losses; 98.1% of loans were collateralized. Management reported no credit-related securities impairment recognized in the periods presented and did not consider existing unrealized investment-security losses other-than-temporary.
- Management stated disclosure controls were adequate and effective as of June 30, 2019. It did not identify recognized subsequent events requiring financial-statement adjustment.
Investor verification points
- Verify whether net-interest growth and wider net interest margin can persist as deposit funding costs and rates change.
- Review loan growth, credit quality, allowance adequacy and concentrations, particularly commercial and industrial and real-estate exposures.
- Assess liquidity and funding after the substantial first-half cash decline and deposit outflows, including the availability and terms of contingent funding.
- Track the effect of compensation, lease obligations and acquisition integration on margins and cash generation, including Mooreland Partners’ post-quarter acquisition.
- Monitor investment-banking and brokerage activity, market sensitivity, legal and regulatory exposures, and the 2020 senior-note maturity.