Stifel Financial Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods unless noted. Stifel operates wealth management, institutional brokerage and investment banking, and banking businesses. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $1,265.6m | $1,104.9m | $3,769.2m | $3,356.3m |
| Net revenue | $1,045.1m | $1,045.1m | $3,202.6m | $3,269.8m |
| Net interest income | $284.7m | $244.4m | $872.9m | $595.8m |
| Income before tax | $109.4m | $205.8m | $500.7m | $651.4m |
| Net income | $68.2m | $151.2m | $360.1m | $485.5m |
| Net income available to common shareholders | $58.8m | $141.8m | $332.1m | $457.6m |
| Diluted EPS | $0.52 | $1.21 | $2.91 | $3.89 |
| Net interest margin | 3.43% | 3.00% | 3.51% | 2.57% |
Q3 net revenue was essentially flat: higher net interest income, asset-management and commission revenue were offset by weaker investment banking and principal-transaction revenue. Nine-month net revenue declined 2.1%. Net income available to common shareholders fell 58.5% in Q3 and 27.4% year to date.
- Revenue mix: Q3 investment banking revenue declined 33.8% to $146.9m, including a 41.7% decline in advisory revenue. Nine-month investment banking revenue fell 29.7% to $525.6m. Asset-management revenue rose 10.8% in Q3 to $333.1m but was down 0.5% year to date.
- Interest: Q3 net interest income increased 16.5%; year-to-date net interest income rose 46.5%. Higher rates lifted interest revenue but also sharply raised funding costs: nine-month interest expense was $566.6m versus $86.5m.
- Expenses and margins: Non-interest expenses increased 11.5% in Q3 and 3.2% year to date. Q3 pretax margin was 10.5% of net revenue, versus 19.7% a year earlier; the nine-month margin was 15.6%, versus 19.9%.
- Segments: Global Wealth Management pretax income increased 6.6% in Q3 to $298.4m and 21.8% year to date to $914.5m. Institutional Group posted a Q3 pretax loss of $27.8m and a nine-month pretax loss of $5.7m, versus profits of $40.0m and $209.6m in the respective 2022 periods.
Balance sheet, cash flow and capital
- At September 30, 2023, total assets were $37.9bn, liabilities $32.6bn and equity $5.2bn. Cash and cash equivalents were $2.8bn; the company reported $11.9bn of cash or assets readily convertible into cash.
- Bank deposits were $27.6bn, up from $27.1bn at December 31, 2022. The weighted-average deposit rate was 2.48% at quarter-end, compared with 0.58% at year-end 2022. Brokerage client deposits were $24.7bn.
- Senior notes, net of issuance costs, totaled $1.115bn; $500m of 4.25% notes mature in 2024. The company also had $60m of trust debentures. A new unsecured credit facility provides up to $750m through September 2028; no amount was drawn at quarter-end. No Federal Home Loan Bank advances were outstanding.
- For the first nine months, operating cash flow was $224.2m, investing cash flow was $178.7m and financing cash flow was $169.0m. Cash, cash equivalents and regulatory cash increased $572.8m, primarily reflecting deposit growth, partly offset by $300.2m of share repurchases and dividends.
- Loans held for investment, net, were $20.3bn. The allowance for loan losses was $135.8m, up from $111.7m at year-end 2022. Management reported $50.7m of impaired loans and said 97.0% of the loan portfolio was collateralized.
- Available-for-sale securities had $250.5m of gross unrealized losses at quarter-end; $247.3m related to positions in loss for at least 12 months. Held-to-maturity securities had a $5.9bn amortized cost and $5.812bn estimated fair value. The filing reported no investment-portfolio credit-loss allowance.
Material changes, outlook and risks
- Management attributed weaker institutional and investment-banking results to fewer completed advisory transactions, lower issuance volumes and reduced trading activity. It described the economic environment as uncertain, citing persistent inflation, high interest rates and geopolitical risks.
- Management said higher rates benefited interest-based revenue, while warning that continued rate increases could weigh on economic activity, client confidence, commissions and asset-based fees. Its discussion cited the Federal Reserve’s then-current forecast of one additional rate increase in 2023; this was not company earnings guidance.
- Q3 other operating expenses rose 93.6% to $167.3m. Management attributed approximately $67m of the increase to elevated legal and regulatory provisions, including an after-tax diluted EPS impact of $0.58. The higher provision also contributed to a 37.7% Q3 effective tax rate, which management said was affected by non-deductibility of the legal and regulatory provision.
- The SEC is investigating off-channel business communications and has made a settlement offer; Stifel recorded reserves for probable and estimable losses but said resolution was uncertain. The CFTC also contacted the company regarding business communications, and the outcome could not be estimated. Stifel said litigation may affect results in a future period, although it did not expect the matters, based on available information, to materially affect financial position and results of operations overall.
- The company acquired Torreya Partners in March and Sierra Pacific in August 2023. Sierra Pacific purchase-price allocation remained preliminary. In October, the board authorized an additional 10m shares for repurchases, bringing the authorization to 14.2m shares.
- Stifel stated that it maintained sufficient liquidity under its stress-test scenarios, that its bank subsidiaries were well capitalized, and that disclosure controls were effective. No quantitative earnings or revenue guidance was provided in the supplied filing text.
Important facts for investors to verify
- How legal and regulatory provisions, including the SEC and CFTC matters, develop and whether additional charges or settlements arise.
- Whether deposit costs continue to rise, client cash balances shift to higher-yielding alternatives, and net interest income remains resilient.
- Whether investment banking activity and Institutional Group profitability recover, and how market conditions affect asset-based fees and trading revenue.
- Credit trends in commercial and industrial, commercial real estate, construction and land, and other loan portfolios, including allowance adequacy and impaired loans.
- The fair-value and liquidity implications of unrealized securities losses, alongside the 2024 senior-note maturity and the company’s capital-return plans.