Stifel Financial Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Stifel is a financial-services and bank holding company operating in wealth management, institutional brokerage and investment banking, and banking. Figures below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $776.8 | $691.4; up 12.3% |
| Net revenue | $750.4 | $675.5; up 11.1% |
| Income before taxes | $119.6 | $79.0; up 51.3% |
| Net income | $88.8 | $65.5; up 35.5% |
| Net income available to common shareholders | $86.4 | $63.2; up 36.8% |
| Diluted EPS | $1.06 | $0.78 |
| Operating cash flow | $(371.8) | $263.0 provided |
| Cash and cash equivalents at period-end | $450.3 | $696.3 at Dec. 31, 2017 |
| Total assets | $21,715.3 | $21,384.0 at Dec. 31, 2017 |
| Total liabilities / shareholders’ equity | $18,797.8 / $2,917.5 | $18,522.4 / $2,861.6 at Dec. 31, 2017 |
Revenue mix and profitability: Investment banking revenue increased 39.0% to $176.4 million, asset management and service fees rose 20.3% to $195.8 million, and interest revenue rose 36.4% to $137.7 million. Brokerage revenue declined 9.8% to $263.6 million, including lower commissions and principal transactions. Net interest income increased 30.8% to $111.3 million; net interest margin was 2.43%, versus 2.14%. Non-interest expense rose 5.7% to $630.8 million. Compensation was 61.0% of net revenue, compared with 64.6%; pretax margin improved to 16.0% from 11.7%. The effective tax rate was 25.8%, versus 17.1%.
Cash flow and liquidity: Investing activities used $266.3 million, primarily reflecting investment-portfolio and loan growth, acquisitions, and fixed-asset purchases. Financing activities provided $324.3 million, including increased securities lending and FHLB advances, partly offset by lower deposits and dividends. Cash, cash equivalents, and regulatory-segregated cash totaled $477.0 million at quarter-end. Management reported $10.5 billion of cash and assets readily convertible to cash and said firm-wide stress testing showed sufficient liquidity for modeled current and contingent obligations. Stifel Bank’s available cash and highly liquid investments were approximately 12% of its assets.
Debt and capital: Period-end funding included $13.3 billion of bank deposits, $827.0 million of FHLB advances, $316.0 million of borrowings, $1.015 billion of senior notes, and $67.5 million of trust debentures. The $200 million revolving credit facility had no advances outstanding, and the company reported compliance with its covenants. Stifel and Stifel Bank were categorized as well capitalized; Stifel broker-dealer net capital was $300.8 million, $263.4 million above its minimum.
Material changes and notable items
- Acquisition: Stifel completed its acquisition of Ziegler Wealth Management on March 19, funded with operating cash. Ziegler had 55 advisors managing approximately $5 billion in client assets. Stifel recorded $27.5 million of goodwill and intangible assets; purchase-price allocation remained preliminary.
- Revenue accounting: Stifel adopted ASC 606 prospectively on January 1, 2018. Adoption reduced opening retained earnings by $3.9 million after tax. Gross presentation increased investment banking revenue and other operating expense by the same $8.6 million, with no net-income effect; prior-year results were not revised.
- Drivers and offsets: Management attributed growth to higher fee-based assets, bank interest-earning assets and yields, and advisory and equity underwriting activity. Offsetting factors included lower brokerage revenues, reduced fixed-income trading, and weaker municipal issuance. Fee-based account assets reached $89.0 billion, up 18.1% year over year.
- Comprehensive income: Other comprehensive loss was $6.6 million, including $13.1 million of after-tax unrealized losses on available-for-sale securities. Accumulated other comprehensive loss was $36.4 million at quarter-end.
- Shareholder returns: Stifel declared and paid a $0.12-per-share common dividend; it also repurchased 50,000 shares for $2.8 million at an average $56.78 per share.
Outlook, commentary and risks
The filing provides no quantified earnings or revenue guidance. Management described a strategy focused on organic growth, recruiting experienced advisors, client relationships, product diversification, and selective acquisitions. It cautioned that results are closely tied to equity and fixed-income markets, market volatility, investment-banking demand, interest rates, and client assets. Risks also include regulatory change, funding-market disruption or a credit-rating decline, credit and counterparty exposures, operational and legal matters, and the possibility that allowance or fair-value estimates prove inadequate. Management cited a challenging municipal underwriting market and ongoing pressure on institutional brokerage from passive investing and electronic trading.
Stifel is involved in securities-related litigation, arbitration, and regulatory proceedings. It stated that currently available information and recorded reserves did not indicate a material adverse impact on financial position or results overall, but one or more resolutions could materially affect results in a future period. The filing also describes clearinghouse guarantees, mortgage-loan repurchase representations and warranties, and bank lending commitments. Loan commitments totaled $214.8 million, standby letters of credit $58.9 million, and unused lines of credit $745.1 million at March 31, 2018. Management reported disclosure controls and procedures were adequate and effective.
Investor facts to verify
- How much of investment-banking growth reflects transaction volume versus ASC 606’s gross presentation, and whether advisory activity is repeatable.
- Whether net interest income growth can continue as deposit costs rise; deposits’ weighted-average rate increased to 0.25% from 0.10% at year-end.
- The cash-flow drivers and the distinction between $450.3 million of cash and cash equivalents and $477.0 million including regulatory-segregated cash.
- Ziegler’s final purchase-price allocation, integration progress, and contribution to revenue and expenses after closing.
- Credit quality and concentration in the $7.15 billion loan portfolio, allowance adequacy, and potential exposure from legal matters and off-balance-sheet commitments.
- Exposure to interest-rate, securities-market, funding, and municipal-issuance conditions, including the impact of unrealized investment losses.