Stifel Financial Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Stifel provides brokerage, investment banking, advisory, trading and banking services in the U.S. and Europe. It completed the acquisition of City Financial Corporation and City Securities on January 3, 2017, funded with cash and common stock.
Financial performance
Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $691.4 | $634.1 | +9.0% |
| Net revenue | $675.5 | $620.0 | +9.0% |
| Income before taxes | $79.0 | $43.9 | +79.9% |
| Net income | $65.5 | $27.1 | +142.1% |
| Net income available to common shareholders | $63.2 | $27.1 | +133.5% |
| Diluted EPS | $0.78 | $0.36 | — |
| Operating cash flow | $336.0 | $(61.6) | — |
- Revenue mix: Investment banking rose 26.0% to $126.9 million; asset management and service fees increased 12.6% to $162.7 million; and interest revenue increased 60.8% to $101.0 million. Commissions fell 11.4% to $175.3 million and principal transactions declined 3.4% to $116.9 million.
- Profitability and margins: Pretax income was 11.7% of net revenue, versus 7.1% a year earlier. Non-interest expenses increased 3.6% to $596.5 million; expenses were 88.3% of net revenue, compared with 92.9%. Compensation and benefits were $436.4 million, or 64.6% of net revenue, versus 66.3%.
- Taxes: The effective tax rate was 17.1%, compared with 38.4%. Adoption of stock-compensation accounting guidance generated a $16.9 million excess tax benefit in Q1 2017, materially benefiting reported earnings.
- Segments: Global Wealth Management net revenue was $442.7 million (+16.6%) and pretax income was $142.1 million (+52.2%). Institutional Group net revenue was $237.5 million (-1.6%) and pretax income was $39.9 million (+36.6%). Other reported a pretax loss of $102.9 million, versus $78.6 million.
Financial position, liquidity and capital
- Total assets were $19.14 billion, broadly unchanged from year-end; shareholders’ equity was $2.78 billion.
- Cash and cash equivalents were $658.4 million, down from $912.9 million. Management reported $9.24 billion of cash and assets readily convertible to cash, including securities and receivables.
- Bank loans, net, were $5.86 billion, up from $5.59 billion; the allowance for loan losses increased to $51.3 million from $45.2 million. The loan portfolio was 98.4% collateralized. Loans 90 or more days past due totaled $9.7 million, all reported as restructured commercial real estate loans; none were 90 days past due and still accruing.
- Bank deposits were $11.70 billion, up from $11.53 billion. Federal Home Loan Bank advances rose to $790 million from $500 million; short-term borrowings fell to $199 million from $377 million. Senior notes, net of issuance costs, were $795.2 million, and trust debentures were $67.5 million. No advances were outstanding on the $165 million revolving credit facility at quarter-end; the filing says its capacity was increased to $200 million during Q2 2017.
- Operating activities provided $336.0 million; investing activities used $629.4 million, primarily reflecting investment and loan portfolio growth; financing activities provided $36.5 million. Cash declined by $254.5 million during the quarter.
- Stifel and Stifel Bank were reported as well capitalized. Stifel’s net capital was $226.5 million, $199.5 million above its minimum. The company’s and bank’s common equity Tier 1 ratios were 18.4% and 15.4%, respectively.
Material changes, outlook and risks
- Management attributed revenue growth chiefly to higher bank net interest income, increased investment banking activity, and higher asset-management fees. Stifel Bank’s average interest-earning assets increased to $12.9 billion from $7.6 billion year over year. Equity-market gains and higher interest rates also supported activity and fees.
- Brokerage revenue was weaker: management cited lower commission volumes, the 2016 sale of certain Sterne Agee businesses, lower market volatility, and reduced institutional fixed-income trading volumes. It described municipal underwriting conditions as challenging.
- Management provided no specific earnings or revenue guidance in the supplied filing text. It said results depend materially on market activity, client assets, investment-banking demand, interest rates, funding conditions and regulation. The company stated that its liquidity stress tests indicated sufficient liquidity for current and contingent obligations.
- Key exposures include market and interest-rate risk, credit and counterparty risk, liquidity and funding access, regulatory and operational risk, and potential losses from litigation. The company cautioned that its interest-rate hedges may not work in all market environments and that its uncommitted secured credit lines are subject to lender approval.
- Legal proceedings include the Broyles matter, in which plaintiffs allege losses exceeding $200 million and assert successor or alter-ego liability against Stifel related to Stone & Youngberg. A separate investor action seeking approximately $90 million was dismissed for lack of standing and is on appeal. Stifel says it will defend the claims; it believes the ultimate resolution of pending matters will not materially affect its financial position and results, but notes a matter could materially affect results in a future period.
- Other items to note: no common-stock repurchases occurred in Q1 2017; the company adopted new stock-compensation accounting guidance; and the purchase-price allocation for City Securities remained preliminary at quarter-end.
Most important facts for investors to verify
- How much of earnings growth is sustainable versus attributable to the $16.9 million stock-compensation tax benefit and acquisition-related effects.
- Whether Stifel Bank can sustain loan and deposit growth, net interest income, and credit quality; review the increase in its allowance and the concentration of deposits linked to brokerage customers.
- How City Securities performs and how the acquisition’s final purchase-price allocation, integration costs and contribution affect results.
- Whether weaker commissions and institutional brokerage revenues persist, and whether investment banking and asset-management growth continues.
- Liquidity and funding availability under stress, including reliance on deposits, floating-rate FHLB advances, collateralized financing and uncommitted credit lines.
- Developments in the Broyles litigation and other legal or regulatory matters, and any change in estimated exposure or reserves.