Stifel Financial Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are to the same 2019 periods unless noted. Stifel operates wealth management, institutional brokerage and investment banking, and retail and commercial banking businesses.
Financial performance
| Metric | Q3 2020 | Nine months 2020 |
|---|---|---|
| Total revenue | $897.1 million, up 3.6% | $2.743 billion, up 8.0% |
| Net revenue | $883.3 million, up 7.5% | $2.692 billion, up 12.5% |
| Net income | $120.5 million, up 9.4% | $315.0 million, down 1.4% |
| Net income available to common shareholders | $110.6 million, up 5.8%; diluted EPS $1.46 versus $1.34 | $295.4 million, down 3.2%; diluted EPS $3.90 versus $3.87 |
| Pre-tax margin on net revenue | 17.9%, versus 18.3% | 15.5%, versus 18.2% |
| Net interest income | $100.6 million, down 25.3% | $352.7 million, down 14.3% |
| Provision for credit losses | $1.4 million credit, versus $0.9 million expense | $33.9 million expense, versus $5.6 million |
- Revenue mix: Q3 brokerage revenue increased 19.8%, capital raising increased 46.1%, and asset management and service fees increased 6.0%. Advisory fees declined 22.9%. For the nine months, brokerage revenue rose 28.6%, capital raising 45.3%, and asset management and service fees 7.0%; advisory fees declined 12.9%.
- Expenses and margins: Non-interest expenses rose 8.1% in Q3 and 16.3% year to date. Compensation and benefits, the largest expense category, increased 9.8% and 17.5%, respectively. Year-to-date credit-loss provision rose substantially under CECL and in response to the economic outlook.
- Cash flow: For the nine months, operating activities provided $1.335 billion, investing activities used $1.204 billion, and financing activities provided $468.6 million. Cash and cash equivalents were $1.717 billion at quarter-end, versus $1.143 billion at year-end 2019; another $154.4 million was segregated for regulatory purposes.
- Balance sheet and funding: Total assets were $25.55 billion and shareholders’ equity was $4.03 billion at September 30. Bank loans held for investment, net, were $10.65 billion; bank deposits were $16.40 billion. Senior notes, net, were $1.412 billion, with $60 million of trust debentures. The company had $300 million of 3.50% senior notes due December 2020.
- Liquidity and capital: Management reported $9.67 billion of cash and assets readily convertible to cash. It stated that the firm had sufficient liquidity in its modeled stress tests. The company and its banking subsidiaries were categorized as well capitalized; Stifel’s broker-dealer net capital was $468.5 million, $443.7 million above its minimum requirement.
Material changes and notable items
- Q3 earnings improved year over year, while nine-month net income available to common shareholders declined. Institutional Group growth offset pressure in Global Wealth Management: Q3 Institutional Group pre-tax income rose 58.0%, while Global Wealth Management pre-tax income fell 11.8%.
- Low interest rates reduced yields and net interest income. Management also reported lower sequential trading volumes in Q3, although trading and client activity remained strong compared with the prior-year quarter.
- CECL adoption on January 1, 2020 increased the allowance for credit losses by $10.4 million and reduced retained earnings by $7.8 million after tax. The allowance for loan losses was $114.1 million at September 30; the filing attributes year-to-date credit provisioning to loan growth and pandemic-related economic assumptions.
- Stifel issued $400 million of 4.00% senior notes due 2030 and $225 million of Series C preferred stock in May 2020. It sold Ziegler Capital Management on March 27 and recorded a gain; the gain’s amount is not clear in the provided filing text.
- The company reported no common-stock repurchases in Q3; year-to-date repurchases were $56.5 million. The common dividend was $0.17 per share for Q3.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management said the pandemic was expected to continue affecting the economy and the company’s business into 2021, with future effects uncertain.
- Management cited pandemic-driven volatility, lower interest rates, potential credit deterioration, changes in client trading and investment activity, and reduced investment banking advisory activity as risks. Increased trading revenue from elevated activity may not persist. Work-from-home arrangements may also heighten operational and cybersecurity risks.
- The company reported $1.0 billion in outstanding commitments to originate loans, scheduled to be disbursed within three months, and $2.1 billion in unused commercial and consumer credit lines. It also discussed mortgage-loan repurchase obligations and clearinghouse guarantees; potential clearinghouse liability is not quantifiable, though management considered payment remote.
- Stifel is defending litigation related to its role as a co-manager of 2014 Karegnondi Water Authority bonds. The company said pending matters were not expected, based on available information, to materially affect its financial position and results, while noting a matter could materially affect results in a future period.
- The filing reported no material subsequent events requiring adjustment and no material changes to previously disclosed risk factors other than the COVID-19 update.
Important facts for investors to verify
- Whether lower rates and the resulting decline in net interest income persist, and how interest margins respond to changes in rates and deposit costs.
- Whether the $114.1 million loan-loss allowance and $33.9 million year-to-date provision adequately reflect credit risk, including pandemic-sensitive borrowers and the company’s CECL assumptions.
- Whether elevated brokerage and capital-raising activity can be sustained, given the decline in advisory fees and management’s warning that pandemic-related trading volume may not recur.
- How the December 2020 maturity of $300 million of senior notes was addressed after quarter-end, and the implications of the May 2020 debt and preferred-stock issuances for funding costs and common shareholders.
- Developments in the Karegnondi litigation, loan commitments and other contingencies, and whether any subsequent events or updated disclosures change the reported liquidity or risk outlook.