Stifel Financial Corp. — Q2 2014 Form 10-Q
Business context and reporting period
Stifel is a diversified financial services and bank holding company spanning wealth management and brokerage, institutional sales and trading, investment banking, and retail and commercial banking. This unaudited filing covers the quarter and six months ended June 30, 2014; balance-sheet comparisons are with December 31, 2013. Stifel completed its acquisition of California public-finance boutique De La Rosa on April 3 and agreed to acquire London-based Oriel Securities on May 8.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenues | $560.1m | $493.7m | $1,106.9m | $932.3m |
| Income from continuing operations | $45.6m | $30.9m | $93.6m | $45.9m |
| Net income, including discontinued operations | $43.6m | $29.4m | $91.0m | $44.1m |
| Diluted EPS, including discontinued operations | $0.58 | $0.40 | $1.20 | $0.62 |
| Pre-tax margin on net revenues | 13.8% | 10.6% | 14.1% | 8.2% |
| Net interest income | $37.3m | $20.3m | $71.5m | $39.5m |
Net revenues rose 13.5% for Q2 and 18.7% for the first half; net income rose 48.1% and 106.5%, respectively. Revenue gains reflected stronger investment banking, asset-management fees, principal transactions, and net interest income. Commissions dipped 1.3% in Q2 amid lower industry trading volumes but increased 3.8% for the half. Other income fell 25.8% in Q2 and 56.7% for the half.
Non-interest expenses increased 9.4% in Q2 and 11.1% for the half, slower than net revenue growth. Compensation and benefits remained the largest cost, at $355.3m in Q2 and $702.0m for the half. Compensation was 63.4% of net revenues for both 2014 periods, versus 64.3% in Q2 2013 and 67.8% in the first half of 2013.
Balance sheet, liquidity and cash flow
- At June 30, 2014, total assets were $9.58bn, up from $9.01bn at year-end; shareholders’ equity was $2.17bn. Cash and cash equivalents fell to $420.3m from $716.6m.
- Bank loans, net of allowance, were $1.76bn, up from $1.40bn. The loan allowance was $17.1m; non-accrual loans were $4.4m. Approximately 97.4% of the loan portfolio was collateralized.
- Bank deposits were $4.65bn, broadly unchanged from year-end. Short-term bank borrowings increased to $368.0m from $55.7m. Senior notes were $325.0m and trust debentures $82.5m; these balances exclude the $300m notes issued after quarter-end.
- For the first half, operating cash flow was negative $396.1m, investing cash flow negative $229.8m, and financing cash flow positive $327.6m; cash declined $296.3m. Operating cash use principally reflected changes in operating assets and liabilities.
- Management reported $5.46bn of cash and assets readily convertible to cash. The company had a $100m committed revolver with no advances, $680m in uncommitted secured lines subject to lender approval, and $1.46bn of unused FHLB borrowing capacity at Stifel Bank. These facilities and liquid assets are subject to collateral, availability, and other constraints.
- Broker-dealer subsidiary Stifel Nicolaus reported $336.6m of net capital, $323.4m above its minimum. Stifel Bank and the parent company exceeded applicable “well capitalized” thresholds.
Material changes, outlook and risks
- Institutional Group net revenues increased 18.7% in Q2 and 30.1% for the half, supported by advisory and capital-raising activity and fixed-income brokerage, including the acquired Knight Capital fixed-income business. Global Wealth Management net revenues rose 8.7% and 10.0%, respectively, aided by fee-based assets and bank interest income.
- Management attributed fee growth to increased fee-based account assets; those assets were $32.0bn at March 31, 2014, up 34.7% year over year, with growth reflecting both net inflows and market appreciation. The filing provides no formal earnings or revenue guidance.
- Management said it intends to pursue revenue growth through advisor recruiting, product diversification, and selective acquisitions. The Oriel transaction was an announced agreement, not a completed acquisition as of June 30. Separately, on July 15, Stifel issued $300m of 4.25% senior notes due 2024; net proceeds of $295.3m were designated for general corporate purposes.
- Non-recurring and merger-related expenses reduced continuing-operations net income by $5.7m after tax in Q2 and $9.7m after tax for the half. First-half 2013 expenses included a $30.6m pre-tax non-cash KBW retention-stock charge, affecting comparisons.
- Stifel noted sensitivity to securities-market activity, trading volumes, interest rates, credit conditions, and investment-banking demand, as well as regulatory and funding-market risk. It also disclosed that legal matters may affect future-period results; outcomes and potential losses are difficult to predict. The SEC’s Wisconsin CDO case remained in discovery, with discovery scheduled to close in January 2015. Other disclosed matters include related Wisconsin school-district litigation and tribal bond lawsuits.
- Other exposures include short-sale and counterparty risk, loan-credit risk, Level 3 asset valuation uncertainty, and potential repurchases of up to $18.3m par value of customer auction-rate securities over two years under settlement agreements. The company recorded no credit-related other-than-temporary impairment in the first half.
Important facts for investors to verify
- Whether investment-banking and market-sensitive revenue gains persist, and how much depends on acquisitions versus underlying activity.
- How loan growth, non-accrual balances, and the rising loan-loss allowance evolve, especially within consumer and securities-based lending.
- Drivers of the $396.1m first-half operating cash outflow and the sustainability of liquidity, deposits, and collateral availability.
- The eventual funding, integration, and financial effects of the Oriel agreement and the completed De La Rosa acquisition.
- Developments in the disclosed litigation and the adequacy of legal reserves; the filing does not quantify a clear maximum exposure.
- Execution and cost of the post-quarter $300m debt issuance, and implications of increased borrowings and interest-rate sensitivity.