Business context and reporting period
Stifel Financial Corp. is a diversified financial services and bank holding company operating in wealth management, institutional brokerage and investment banking, and banking. This Form 10-Q covers the three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless otherwise stated. The filing describes material effects from the COVID-19 pandemic and related market disruption.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $908.9 million | $853.7 million | $1,846.3 million | $1,673.5 million |
| Net revenue | $895.8 million | $800.8 million | $1,808.9 million | $1,571.2 million |
| Income before taxes | $143.0 million | $148.0 million | $258.1 million | $285.8 million |
| Net income available to common shareholders | $103.0 million | $103.8 million | $184.8 million | $200.7 million |
| Diluted EPS | $1.39 | $1.31 | $2.44 | $2.53 |
| Net interest income | $115.3 million | $135.0 million | $252.1 million | $276.7 million |
- Revenue mix: Q2 brokerage revenue rose 31.2% to $343.0 million and investment banking rose 20.8% to $217.0 million; asset management and service fees declined 5.8% to $198.9 million. Net interest income fell 14.6%. For the first half, brokerage revenue rose 33.0%, investment banking 16.1%, and asset management and service fees 7.4%; net interest income fell 8.9%.
- Profitability and expenses: Pretax margin on net revenue was 16.0% in Q2 versus 18.5% a year earlier, and 14.3% for the first half versus 18.2%. Non-interest expense increased 15.3% in Q2 and 20.6% in the first half. Compensation and benefits rose 17.2% and 21.6%, respectively; credit-loss provision was $19.2 million in Q2 and $35.3 million for the first half.
- Cash flow: For the first half, operating activities provided $900.0 million, investing activities used $1,057.1 million, and financing activities provided $795.9 million. Cash, cash equivalents, and cash segregated for regulatory purposes totaled $1.903 billion at June 30, up from $1.274 billion at year-end 2019.
- Balance sheet and liquidity: Total assets were $25.624 billion and shareholders’ equity was $3.884 billion at June 30, 2020. The company reported $9.951 billion of cash and assets readily convertible to cash. Bank deposits were $16.303 billion; held-for-investment loans, net, were $10.448 billion. Management stated that firm-wide stress testing showed sufficient liquidity for current and contingent funding obligations.
- Debt and capital: Senior notes, net, were $1.412 billion, including $400 million of 4.00% notes due 2030 issued in May; $300 million of 3.50% notes mature in December 2020. Federal Home Loan Bank advances were $323 million. The company also issued $225 million of 6.125% Series C preferred stock. The company and its banking subsidiaries were reported as well capitalized; Stifel’s broker-dealer net capital was $449.4 million, $425.2 million above its minimum requirement.
Material changes, outlook, and risks
- Institutional Group net revenue rose 47.1% in Q2 to $398.1 million, supported by higher brokerage, capital-raising, and advisory revenues. Global Wealth Management net revenue declined 5.0% to $505.8 million, principally due to lower net interest income and asset-management fees. For the first half, the respective segments’ net revenue rose 37.3% and 4.4%.
- Management attributed unusually strong trading and principal-transaction revenues to market volatility and client activity, and said such activity may not continue. It reported lower sequential trading volumes in July and expected further pressure on net interest income as low rates flowed through the loan and securities book. Management was cautiously optimistic that business diversity, a potential rebound in asset-management fees after the market recovery, and solid investment-banking activity would help offset headwinds. No specific numerical earnings or revenue guidance was provided.
- COVID-19, economic uncertainty, low rates, and market volatility could adversely affect credit quality, asset values, trading and client activity, investment-banking advisory demand, and asset-management fees. The company warned of potential higher credit and valuation losses, reduced margins, operational and cybersecurity risks from remote work, and possible effects on capital, liquidity, and credit ratings.
- Adoption of CECL on January 1 increased the allowance for credit losses by $10.4 million and reduced retained earnings by $7.8 million after tax. The company recorded $35.3 million of net credit-loss reserves in the first half, reflecting loan growth and a revised economic outlook related to COVID-19.
- The company completed the sale of Ziegler Capital Management on March 27, 2020, recording a gain in Q1; the filing does not specify the gain amount in the supplied text. It also deconsolidated North Shore Aviation following its recapitalization. Legal claims and regulatory matters remain pending; management said their ultimate resolution was not expected to materially affect financial position or results overall, while acknowledging a matter could materially affect a future period.
Important facts for investors to verify
- Whether July’s lower trading volumes persisted, and whether elevated Q2 brokerage and principal-trading revenue proved sustainable.
- How the near-zero interest-rate environment affected subsequent net interest income and margins.
- Loan portfolio performance, including the growth in criticized commercial and construction exposures, and whether CECL reserves adequately reflect the economic outlook.
- Liquidity and funding resilience, including deposit trends, the December 2020 senior-note maturity, and the availability of committed and uncommitted borrowing facilities.
- The realized impact of the Ziegler Capital Management sale and any material developments in legal, regulatory, or COVID-related contingencies.