Stifel Financial Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparative periods ended June 30, 2022. Stifel operates wealth management, institutional brokerage and investment banking, and banking businesses, primarily in the U.S., with operations in the U.K., Europe, and Canada.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenues | $1.242 billion | $1.125 billion | $2.504 billion | $2.251 billion |
| Net revenues | $1.051 billion | $1.108 billion | $2.158 billion | $2.225 billion |
| Net income | $134.4 million | $160.8 million | $291.9 million | $334.4 million |
| Net income available to common shareholders | $125.0 million | $151.5 million | $273.3 million | $315.7 million |
| Diluted EPS | $1.10 | $1.29 | $2.38 | $2.68 |
| Income before taxes | $181.4 million | $218.5 million | $391.3 million | $445.7 million |
| Net interest income | $291.7 million | $195.4 million | $588.2 million | $351.4 million |
Margins and costs: Pretax margin on net revenues was 17.3% in Q2 (19.7% prior year) and 18.1% for the first half (20.0% prior year). Non-interest expenses declined 2.3% in Q2 and 0.7% for the first half. Compensation was 58.6% of net revenues in Q2 and 58.7% for the first half. The filing reports consolidated net interest margin of 3.53% for Q2 and 3.55% for the first half, versus 2.53% and 2.33%, respectively, in 2022.
Balance sheet and funding at June 30: Total assets were $37.30 billion and equity was $5.34 billion. Cash and cash equivalents were $1.91 billion. Bank deposits, the largest funding source, were $27.00 billion; senior notes were $1.125 billion face value ($1.115 billion net carrying value), including $500 million due in 2024. The company reported $11.36 billion of cash or assets it considers readily convertible to cash. It had no outstanding borrowings on its committed $500 million revolving credit facility, uncommitted secured lines, or Federal Home Loan Bank advances.
Cash flow, first half: Operating activities used $6.3 million; investing activities provided $33.6 million; financing activities used $331.3 million. Cash, cash equivalents, and regulatory cash declined $299.7 million to $1.93 billion. Financing outflows included $181.3 million of share repurchases and cash dividends of $104.5 million across common and preferred shares.
Material changes and business drivers
- Q2 net revenues fell 5.2% and first-half net revenues fell 3.0%, despite higher total revenues, as the increase in interest income was more than offset by sharply higher interest expense.
- Net interest income rose 49.3% in Q2 and 67.4% for the first half, reflecting higher rates and interest-earning assets. Deposit interest expense increased substantially as deposit rates rose.
- Investment banking revenue declined 38.5% in Q2 and 28.0% for the first half. Advisory revenue fell 56.0% and 37.3%, respectively, amid fewer completed transactions. Q2 capital-raising revenue increased 10.4%, partly offsetting the advisory decline.
- Commissions declined 11.4% in Q2 and 12.5% for the first half; asset management revenue declined 3.3% and 5.5%. Principal transactions revenue also declined in both periods.
- Global Wealth Management net revenues increased 8.6% in Q2 and 9.8% for the first half, supported by net interest income; pretax income rose 22.3% and 30.9%. Institutional Group net revenues fell 32.8% and 27.8%; Q2 pretax results were a $12.9 million loss, versus $73.0 million income a year earlier.
- Credit-loss provision decreased to $7.8 million in Q2 and $12.7 million for the first half. The loan-loss allowance was $122.7 million against $20.53 billion of gross bank loans. Loans past due totaled $24.1 million; no loans were 90 days past due and still accruing.
- Stifel acquired Torreya Partners, a life-sciences advisory firm, on March 1, 2023. The filing recorded $61.2 million of goodwill and intangible assets related to the acquisition; purchase-price allocation remained preliminary.
Outlook, risks, and contingencies
The filing provides no quantified earnings or revenue guidance. Management said higher rates can support interest-based revenue and margin lending, but may raise deposit costs and reduce client cash-sweep balances. Management also cited possible recession, market volatility, weaker investor confidence and discretionary activity, and potential pressure on commissions and asset-based fees if equity markets decline. Results remain sensitive to capital-markets activity, advisory completions, asset values, rates, and funding conditions.
At June 30, available-for-sale securities had $215.1 million of gross unrealized losses; held-to-maturity securities had a $5.95 billion amortized cost and estimated fair value of $5.79 billion. The filing states there was no investment-portfolio credit-loss allowance. These valuations, deposit behavior and funding costs warrant monitoring.
The company reported that its broker-dealer and bank subsidiaries exceeded applicable regulatory capital requirements; Stifel had $456.5 million of net capital, $433.9 million above its minimum. Management said firmwide liquidity stress testing indicated sufficient liquidity under modeled scenarios. These assessments do not remove risks from funding-market disruption, withdrawals, collateral demands, or regulatory limits on subsidiary distributions.
Stifel is subject to securities-related legal and regulatory matters. The SEC is investigating records preservation for business communications on unapproved channels; the CFTC has also contacted the company about non-Stifel platforms used for business communications. The company cannot estimate the outcomes or possible resolutions. Management believes pending matters will not materially affect financial position and results overall, but says one or more could materially affect results in a future period.
Management identified rate, market, credit, liquidity, operational, regulatory, and legal risks. The filing states no material changes to the risk factors in the 2022 Form 10-K. Disclosure controls were assessed as effective as of June 30, 2023, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether rising deposit rates and changes in client cash-sweep balances continue to compress the benefit from higher asset yields.
- Whether investment banking advisory activity recovers, and whether Institutional Group performance improves after its Q2 pretax loss.
- Loan credit trends, especially the increase in criticized/substandard commercial exposures and the adequacy of the $122.7 million loan-loss allowance.
- Liquidity and valuation sensitivity: unrealized fixed-income losses, collateral availability, deposit stability, and the $500 million senior-note maturity in 2024.
- Developments and potential financial consequences of the SEC and CFTC communications-recordkeeping investigations and other legal matters.
- Integration and final purchase-price allocation for Torreya, and the expense implications of deferred compensation and advisor transition awards.