Stifel Financial Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; comparisons are with Q3 2021 unless noted. Stifel provides wealth management, brokerage, investment banking, trading, advisory and banking services. It acquired European financial-advisory firm ACXIT Capital Partners on July 1, 2022.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1,104.9 million | $1,155.0 million | $3,356.3 million | $3,471.5 million |
| Net revenue | $1,045.1 million | $1,144.9 million | $3,269.8 million | $3,432.9 million |
| Income before tax | $205.8 million | $256.5 million | $651.4 million | $748.4 million |
| Net income | $151.2 million | $192.4 million | $485.5 million | $563.5 million |
| Net income available to common shareholders | $141.8 million | $182.7 million | $457.6 million | $537.2 million |
| Diluted EPS | $1.21 | $1.54 | $3.89 | $4.54 |
| Net interest income | $244.4 million | $131.8 million | $595.8 million | $364.3 million |
Net revenue fell 8.7% in Q3 and 4.8% year to date; common net income fell 22.4% and 14.8%, respectively. Reported pre-tax margin was 19.7% in Q3 (22.4% prior year) and 19.9% year to date (21.8%). The effective tax rate was 26.5% for Q3 and 25.5% year to date.
Revenue drivers and material changes
- Investment banking revenue declined 40.4% in Q3 and 31.3% year to date, mainly reflecting sharply lower capital-raising activity. Q3 advisory revenue also declined, while year-to-date advisory revenue was slightly higher.
- Transactional revenue declined 10.0% in Q3 and 8.7% year to date; commissions were down 16.0% and 9.5%, respectively.
- Asset-management revenue decreased 4.2% in Q3 but increased 9.6% year to date. Client assets were $364.8 billion, down 10.4% year over year, largely reflecting market declines.
- Net interest income rose 85.4% in Q3 and 63.5% year to date, benefiting from higher interest rates and asset growth. Interest expense also rose substantially as deposit balances and funding costs increased.
- Global Wealth Management net revenue increased 7.1% in Q3 and 8.2% year to date; Institutional Group net revenue fell 31.1% and 22.2%. Institutional Group pre-tax income declined 68.0% in Q3 and 45.4% year to date.
- Non-interest expenses decreased 5.5% in Q3 and 2.5% year to date, primarily due to lower compensation. The provision for credit losses was $6.5 million in Q3 and $27.5 million year to date, versus credits in the comparable 2021 periods.
Cash flow, balance sheet and capital
- At September 30, 2022, total assets were $37.6 billion, up 10.5% from year-end 2021; total equity was $5.23 billion. Cash and cash equivalents were $1.41 billion, and cash including regulatory-segregated balances was $1.45 billion.
- Bank deposits were $27.19 billion, up from $23.28 billion at year-end; held-for-investment loans, net, were $20.68 billion, up from $16.63 billion. The loan portfolio was 97.5% collateralized; the allowance for loan losses was $105.0 million.
- Senior notes, net, were $1.11 billion, with $1.125 billion principal outstanding; $500 million principal matures in 2024. There were no borrowings under the $500 million committed revolving facility or Federal Home Loan Bank advances at quarter-end. Broker-dealer and bank subsidiaries reported capital above applicable minimums; Stifel Financial Corp. reported a 14.1% common equity Tier 1 ratio.
- The cash flow statement reports $370.2 million of cash provided by operating activities, $4.59 billion used in investing and $3.54 billion provided by financing for the first nine months. However, MD&A says operating activities used $370.2 million. This internal inconsistency should be reconciled. Cash, cash equivalents and regulatory-segregated cash decreased $703.2 million over the period.
- Other comprehensive loss was $148.4 million year to date, including $189.8 million of after-tax unrealized losses on available-for-sale securities, partly offset by hedge gains. Held-to-maturity securities had a $326 million fair-value shortfall versus amortized cost at September 30, 2022.
- Common dividends declared were $0.30 per share in Q3, double the prior-year quarter; the company repurchased $30.7 million of shares year to date and made no repurchases in Q3.
Outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management describes results as sensitive to economic conditions, market activity, interest rates, investment banking demand, trading volumes and client asset values. U.S. equity indexes were substantially below year-end 2021 levels at September 30, 2022. Rising rates supported net interest income, but also increased deposit costs; market volatility and weaker issuance activity pressured capital markets revenue.
Management reported sufficient liquidity under its modeled stress tests and said the bank subsidiaries had not breached internal liquidity limits. Liquidity nevertheless depends on market access, collateral availability, deposit behavior and distributions from regulated subsidiaries. Other risks include credit deterioration, market and operational risk, regulatory requirements and litigation. The company is party to securities-related lawsuits, arbitrations and regulatory matters; it says reserves are established where losses are probable and estimable, and does not expect currently known matters to materially affect overall financial position, while acknowledging an individual matter could materially affect a future period.
ACXIT was acquired during the quarter. The filing also reports $720.3 million of unrecognized compensation cost on deferred awards. Management stated there were no material changes in risk factors from the 2021 Form 10-K and no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile the cash-flow statement’s $370.2 million of operating cash provided with MD&A’s statement that the same amount was used.
- Assess the sustainability of net interest income growth against higher deposit costs, deposit mix and interest-rate sensitivity.
- Review loan growth, credit-quality classifications, allowance adequacy and unfunded lending commitments as economic conditions evolve.
- Examine the duration and recovery implications of unrealized securities losses, particularly the held-to-maturity portfolio’s fair-value shortfall and available-for-sale losses.
- Track investment banking and transactional activity, client-asset trends, and the contribution and integration costs of the ACXIT acquisition.
- Review legal-proceeding developments, liquidity and regulatory-capital constraints, and the timing of the $500 million senior-note maturity in 2024.