Stifel Financial Corp. — Q2 2022 Form 10-Q
Business context and period. Stifel is a diversified financial-services and bank holding company, with wealth management, institutional brokerage and investment banking, and banking operations. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Net revenues | $1.108bn | $1.153bn | $2.225bn | $2.288bn |
| Net income | $160.8m | $198.1m | $334.4m | $371.1m |
| Net income available to common | $151.5m | $189.8m | $315.7m | $354.5m |
| Diluted EPS | $1.29 | $1.60 | $2.68 | $3.00 |
| Net interest income | $195.4m | $119.4m | $351.4m | $232.5m |
| Income before taxes | $218.5m | $264.0m | $445.7m | $491.9m |
Q2 net revenues fell 3.9% and common net income fell 20.2%; H1 net revenues fell 2.8% and common net income fell 10.9%. Pretax margin was 19.7% in Q2 versus 22.9% a year earlier, and 20.0% for H1 versus 21.5%. Net income margin was 14.5% and 15.0%, respectively, compared with 17.2% and 16.2%.
- Revenue mix: Q2 investment banking revenue declined 28.0% to $271.1m, including a 57.9% drop in capital raising; transactional revenue fell 10.3% to $312.3m. Asset management rose 12.0% to $331.3m and net interest income rose 63.7% to $195.4m. H1 investment banking fell 26.5%, while asset management increased 17.2% and net interest income increased 51.1%.
- Expenses: Q2 non-interest expenses were nearly flat at $889.6m, while the credit-loss provision was $12.8m versus a $9.7m release in Q2 2021. Compensation and benefits declined 5.7% to $652.7m. H1 non-interest expenses declined 0.9% to $1.779bn; the credit-loss provision was $21.0m versus a $14.9m release a year earlier.
- Segments: Q2 Global Wealth Management net revenue increased 9.5% to $698.0m and pretax income rose 7.9% to $245.2m. Institutional Group net revenue declined 21.0% to $411.4m and pretax income fell 48.4% to $73.0m. H1 segment pretax income was $470.6m for Global Wealth Management and $169.6m for Institutional Group.
Financial position, cash flow and capital
- At June 30, 2022, total assets were $36.48bn, up 7.1% from year-end 2021; total equity was $5.12bn. Bank loans held for investment, net, were $18.98bn, up from $16.63bn, and deposits were $26.01bn, up from $23.28bn.
- Cash and cash equivalents were $1.58bn, down from $1.96bn at December 31, 2021. Management reported $11.49bn of cash or assets readily convertible into cash. Six-month cash flows were $200.5m used in operations, $2.89bn used in investing, and $2.57bn provided by financing, primarily reflecting loan growth funded by higher deposits.
- Senior notes, net, totaled $1.114bn; trust debentures were $60m. There were no borrowings outstanding on the $500m committed revolving facility or Federal Home Loan Bank advances at quarter-end. The $500m senior notes due 2024 are the nearest stated senior-note maturity.
- Available-for-sale securities had $176.6m of gross unrealized losses at quarter-end; held-to-maturity securities had $290.6m of gross unrealized losses. The six-month other comprehensive loss was $114.8m, largely reflecting securities valuation losses, partly offset by cash-flow hedge gains.
- Broker-dealer and banking subsidiaries were reported above applicable regulatory capital requirements; Stifel had $596.5m of excess net capital. The company declared common dividends of $0.30 per share in Q2, double the year-earlier quarterly amount, and repurchased $30.7m of common stock in H1.
Outlook, commentary and risks
Management provided no quantified earnings or revenue guidance in the supplied filing text. It described results as sensitive to market activity, interest rates, client asset values, trading volumes, underwriting and advisory deal flow, and funding conditions. U.S. equity benchmarks were materially lower at June 30 than at year-end 2021; management cited uncertain markets and lower issuance volumes as key factors behind weaker capital-raising and transactional revenues. It also noted that higher rates and a larger interest-earning asset base supported net interest income.
- Client assets were $377.6bn at June 30, down 6.2% year over year and 10.4% from March 31; fee-based client assets were $141.2bn. Market declines were partly offset by recruiting-related asset growth.
- Management said liquidity stress tests indicated sufficient liquidity for modeled current and contingent funding needs. Risks include market volatility, loan and credit exposure, deposit withdrawals, reliance on subsidiaries for parent-company liquidity, regulatory capital limits, and availability and cost of external funding.
- The filing identifies legal, operational, regulatory and counterparty risks. In the Karegnondi Water Authority bond-underwriting case, the court dismissed the case with prejudice in March 2022; plaintiffs appealed in April, and Stifel said it would continue to defend the matter. Management stated pending matters were not expected to materially harm financial position or results overall, while acknowledging a future-period impact is possible.
- Stifel acquired ACXIT Capital Partners on July 1, 2022, after the reporting date. The filing reported no recognized subsequent event requiring adjustment. The company also reported no material change in risk factors from its 2021 Form 10-K.
Important facts for investors to verify
- Whether weaker investment banking, trading and commission revenues persist, and how much future performance depends on stronger deal activity versus net interest income.
- Loan growth, credit quality and allowance adequacy: nonperforming loans were $29.3m, impaired loans were $29.3m, and the allowance for loan losses was $107.5m at June 30.
- Deposit stability and funding sensitivity as interest rates rise, including the effect on deposit costs, net interest margins and liquidity.
- Realized outcomes and potential earnings or equity effects from the sizeable unrealized securities losses, particularly in held-to-maturity securities.
- The impact of the ACXIT acquisition, ongoing compensation and deferred-award costs, and the outcome of the appealed Karegnondi litigation.