Stifel Financial Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Stifel provides wealth management, brokerage, investment banking, trading, advisory, and banking services. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial performance
| Metric | Q1 2023 | Q1 2022 / prior date | Change |
|---|---|---|---|
| Total revenues | $1,261.8 million | $1,126.0 million | +12.1% |
| Net revenues | $1,106.8 million | $1,116.5 million | -0.9% |
| Net interest income | $296.6 million | $156.0 million | +90.1% |
| Income before taxes | $209.9 million | $227.1 million | -7.6% |
| Net income | $157.5 million | $173.5 million | -9.2% |
| Net income available to common shareholders | $148.2 million | $164.2 million | -9.7% |
| Diluted EPS | $1.28 | $1.39 | -7.9% |
| Common dividend declared per share | $0.36 | $0.30 | +20.0% |
Interest revenue rose sharply with higher rates and growth in interest-earning assets, but interest expense also increased substantially, from $9.5 million to $155.0 million, largely reflecting higher deposit costs. Net interest margin was 3.57%, compared with 2.13%. Non-interest expenses increased 0.8% to $896.9 million. Compensation and benefits were $651.2 million, or 58.8% of net revenues, versus 60.3% a year earlier. Pretax margin was 19.0%, down from 20.3%.
Balance sheet, liquidity, and capital
- Total assets were $38.6 billion, up 3.8% from year-end 2022; total equity was $5.33 billion.
- Cash and cash equivalents were $2.77 billion; cash segregated for regulatory purposes was $20.6 million. Management reported $12.3 billion of cash or assets readily convertible into cash under its stated liquidity measure.
- Bank deposits were $28.33 billion, up from $27.12 billion. The weighted-average deposit rate rose to 2.02% from 0.58% at year-end. Brokerage customer deposits were $24.8 billion, including $10.8 billion in the Smart Rate program.
- Loans held for investment, net, were $20.71 billion, up from $20.47 billion. The allowance for loan losses was $117.2 million; 97.2% of the loan portfolio was collateralized. Past-due loans totaled $15.6 million, and nonperforming loans were $10.7 million.
- Senior notes, net, were $1.11 billion; the company also reported $60 million of debentures to capital trusts. The $500 million of 4.25% senior notes due in 2024 is the next stated senior-note maturity. No borrowings were outstanding under the $500 million committed revolving credit facility.
- Stifel Financial Corp. and its banking subsidiaries were categorized as well capitalized. Stifel’s broker-dealer net capital was $514.5 million, $491.5 million above its minimum requirement.
Cash flow and material changes
Operating activities used $385.1 million and investing activities used $289.7 million; financing activities provided $1.23 billion. Cash, cash equivalents, and regulatory cash increased $557.3 million to $2.79 billion, primarily as financing inflows included a $1.21 billion increase in bank deposits. The cash-flow statement reports cash flows for the quarter, which can be affected by changes in client and trading balances.
- Transactional revenue declined 19.7% to $285.1 million; investment banking revenue declined 16.9% to $211.9 million; and asset management revenue declined 7.6% to $315.6 million. Management cited weaker client activity, lower completed advisory transactions, reduced issuance activity, and lower asset values.
- Global Wealth Management net revenues rose 11.1% to $757.2 million, with pretax income increasing 40.2% to $316.1 million, mainly due to higher net interest income.
- Institutional Group net revenues fell 22.9% to $332.6 million and pretax income fell 65.1% to $33.7 million, reflecting weaker trading and investment banking activity.
- On March 1, 2023, Stifel acquired Torreya Partners, a life-sciences-focused M&A and private-capital advisory firm. The preliminary allocation recorded $59.7 million of goodwill and intangible assets; the purchase-price allocation remained subject to finalization.
- Stifel repurchased 1.45 million shares for $94.5 million, at an average price of $65.07. The board authorization had 7.6 million shares remaining at quarter-end.
Outlook, risks, and contingencies
The filing provides no quantified earnings or revenue guidance. Management’s strategy is to pursue revenue growth, recruit experienced financial advisors, diversify capital-markets products, and seek acquisition opportunities. Management said Q1 Federal Reserve rate increases supported interest-based revenue but noted that bank failures, economic uncertainty, and possible recession could weaken client confidence, discretionary activity, commissions, and asset-based fees. Further rate increases may benefit interest revenue while raising deposit costs; cash-sweep balances could also shift as customers seek higher yields.
- Interest-rate and market risks include potential pressure on securities valuations, trading results, client assets, and funding costs. Available-for-sale securities had $196.9 million of gross unrealized losses at March 31; held-to-maturity securities had $208.7 million of gross unrealized losses. The filing says there was no investment-portfolio credit-loss allowance at quarter-end.
- Liquidity depends in part on customer deposits, secured funding, market access, and distributions from regulated subsidiaries. Management reported sufficient liquidity under its stress-test model, while noting that funding availability and terms can deteriorate in stressed markets.
- The SEC and CFTC contacted the company regarding business communications on non-approved or non-Stifel platforms. Stifel said it could not estimate the outcome or range of possible resolutions. The filing also describes other litigation and regulatory matters; outcomes may affect results in a future period.
- Stifel reported no material changes to the risk factors disclosed in its 2022 Form 10-K and stated that disclosure controls were effective as of March 31, 2023.
Important facts for investors to verify
- Whether deposit growth and client cash retention continue, and how rising deposit rates affect net interest income and margins.
- Loan-portfolio performance, including commercial and real-estate exposures, credit-quality migration, and allowance adequacy.
- Actual and unrealized losses, duration, and liquidity implications in the AFS and HTM securities portfolios, particularly under changing interest rates.
- Progress and final purchase accounting for Torreya, including acquisition costs, integration, and contribution to results.
- Developments, potential financial exposure, and any eventual resolution of the SEC and CFTC communications-recordkeeping investigations and other legal matters.
- Whether the quarter’s operating cash outflow and reliance on deposit and other financing inflows persist, alongside upcoming $500 million senior-note maturity in 2024.