Stifel Financial Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless otherwise noted. Stifel provides wealth management, brokerage, investment banking, trading and banking services.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenues | $1.155 billion | $897.1 million | $3.472 billion | $2.743 billion |
| Net revenues | $1.145 billion | $883.3 million | $3.433 billion | $2.692 billion |
| Income before taxes | $256.5 million | $158.4 million | $748.4 million | $416.5 million |
| Net income | $192.4 million | $120.5 million | $563.5 million | $315.0 million |
| Net income available to common shareholders | $182.7 million | $110.6 million | $537.2 million | $295.4 million |
| Diluted EPS | $1.54 | $0.97 | $4.54 | $2.60 |
| Net interest income | $131.8 million | $100.6 million | $364.3 million | $352.7 million |
Q3 net revenues rose 29.6% and common net income rose 65.1%; nine-month net revenues rose 27.5% and common net income rose 81.8%. Pre-tax margin on net revenues was 22.4% for Q3 and 21.8% for the nine-month period, compared with 17.9% and 15.5%, respectively. Effective tax rates were 25.0% for Q3 and 24.7% year to date.
- Revenue mix: Q3 investment banking revenue increased 70.7% to $372.3 million, including advisory fees up 157.6%; asset management and service fees increased 36.0% to $313.9 million. Net interest income increased 31.0% to $131.8 million. Principal transactions declined 15.5% to $119.0 million.
- Nine-month drivers: Investment banking increased 77.0% to $1.088 billion and asset management and service fees increased 33.0% to $887.9 million. Net interest income rose 3.3%; principal transactions declined 2.0%.
- Expenses and credit: Compensation and benefits increased 26.0% in Q3 and 24.4% year to date, but declined as a share of net revenues. Nine-month provision for credit losses was a $15.6 million credit, versus a $33.9 million expense in 2020, reflecting allowance releases tied to improved macroeconomic expectations and loan sales. Q3 other operating expenses included higher litigation, travel, conference and professional costs, as well as additional acquisition earn-out expense.
Financial position, cash flow and capital
- Total assets were $30.8 billion at September 30, up 15.8% from December 31, 2020. Net loans held for investment increased to $13.5 billion from $11.0 billion; available-for-sale and held-to-maturity securities were $2.2 billion and $5.3 billion, respectively.
- Cash and cash equivalents were $2.05 billion, with another $26.1 million segregated for regulatory purposes. Management reported $11.9 billion of cash and assets considered readily convertible to cash. Deposits rose to $20.4 billion from $17.4 billion and are Stifel Bancorp’s primary funding source.
- Senior notes, net, were $1.11 billion; trust debentures were $60.0 million and Federal Home Loan Bank advances were $52.0 million. A $500 million committed unsecured revolving facility, with a $200 million company sublimit, had no borrowings outstanding. The filing reports compliance with its covenants.
- Nine-month operating cash flow was $570.7 million, investing cash flow was negative $3.93 billion and financing cash flow was positive $2.99 billion. Cash, cash equivalents and regulatory cash together decreased $371.8 million to $2.08 billion, primarily as lending and securities investment used cash, partly funded by deposit growth and preferred issuance.
- Bank loans held for investment grew to $13.6 billion gross. The allowance for loan losses was $94.3 million, down from $112.0 million at year-end. Approximately 98.9% of loans were collateralized; $8.3 million were nonperforming, versus $13.8 million at year-end.
- Stifel reported $654.9 million of net capital at its principal broker-dealer, $628.6 million above its minimum requirement; the company and its banking subsidiaries were classified as well capitalized.
Material changes, outlook and risks
- Growth was led by investment banking advisory and capital raising, and asset-based fees, which benefited from higher client asset values and fee-based asset flows. Management noted that equity and fixed-income market activity, volatility, interest rates, deal volumes and client assets can materially affect results.
- Management provided no specific financial guidance in the supplied filing text. It cautioned that Q3 revenue levels may not be sustainable amid market and economic uncertainty. Lower short-term rates have weighed on net interest income; Stifel also disclosed sensitivity to market, credit, operational, regulatory and legal risks.
- COVID-19 remained an uncertainty. The company said it maintained largely remote operations without significant business or control disruptions and recorded no impairment from its review of goodwill, intangibles or fair-value assets as of September 30.
- On July 22, Stifel issued $300 million of 4.50% Series D preferred stock; on August 20 it redeemed all $150 million of Series A preferred stock bearing a 6.25% rate. It repurchased $86.4 million of common stock in the first nine months and declared $0.45 per common share in dividends.
- On October 31, 2021, after quarter-end, Stifel acquired Vining Sparks, a fixed-income brokerage and underwriting business. Consideration included cash and Stifel common stock; the filing does not provide the purchase price in the supplied text. The company also reported an $7.4 million gain on the Q3 sale of certain loans and associated deposits.
- Legal proceedings include the Karegnondi Water Authority bond-underwriting lawsuit, which Stifel intends to defend. The company says it cannot predict all claim outcomes; resolution of one or more matters could materially affect results in a future period, although management did not expect a material adverse impact on financial position and results overall based on information available.
Investor verification priorities
- Check whether unusually strong investment banking and asset-fee growth persists, and how much depends on market levels, deal completions and client flows.
- Track loan growth, credit quality, allowance releases and the effect of the loan and deposit sale; verify subsequent portfolio performance.
- Assess deposit concentration and stability, liquidity under stress, and the valuation and liquidity of held-to-maturity securities and other assets.
- Review Vining Sparks acquisition terms, integration costs and contribution, along with continuing earn-out expenses and compensation costs.
- Monitor legal and regulatory proceedings, interest-rate sensitivity, and capital and liquidity constraints that could affect distributions from subsidiaries.