Stifel Financial Corp. — Q1 2021 Form 10-Q
Business context and reporting period. Stifel is a diversified financial-services and bank holding company operating in wealth management, institutional brokerage and investment banking, and banking. This summary covers the unaudited quarter ended March 31, 2021, compared with the quarter ended March 31, 2020, unless otherwise noted.
Financial performance and position
| Metric | Q1 2021 | Prior comparable period / balance date |
|---|---|---|
| Total revenue | $1.149 billion | $937.4 million; up 22.6% |
| Net revenue | $1.135 billion | $913.0 million; up 24.3% |
| Net income | $173.0 million | $86.6 million; up 99.8% |
| Net income available to common shareholders | $164.7 million | $81.7 million; up 101.5% |
| Diluted EPS | $1.40 | $0.71 |
| Pre-tax margin on net revenue | 20.1% | 12.6% |
| Net interest income / margin | $113.1 million / 2.00% | $136.8 million / 2.66% |
| Operating cash flow | $(520.2) million | $(5.7) million |
| Cash, cash equivalents and regulatory-segregated cash | $1.521 billion | $2.452 billion at Dec. 31, 2020 |
| Total assets / equity | $28.142 billion / $4.319 billion | $26.604 billion / $4.239 billion at Dec. 31, 2020 |
- Revenue mix: Investment banking rose 89.1% to $339.3 million; asset management and service fees increased 17.0% to $278.1 million; brokerage revenue increased 8.3% to $378.6 million. Interest revenue declined 20.9% to $127.5 million, while interest expense fell 40.7% to $14.4 million.
- Costs and margins: Non-interest expense increased 13.7% to $906.9 million, slower than net revenue growth. Compensation and benefits rose 20.9% to $697.9 million and equaled 61.5% of net revenue, versus 63.2% a year earlier. The credit-loss provision was a $5.3 million credit, compared with a $16.1 million expense in Q1 2020.
- Cash flow: Investing activities used $1.723 billion, principally reflecting growth in loans and purchases of investment securities. Financing activities provided $1.309 billion, mainly from increased bank deposits. Cash and regulatory-segregated cash decreased by $931.6 million during the quarter.
- Funding and debt: Bank deposits were $18.715 billion, up from $17.396 billion at year-end 2020. Senior notes, net, totaled $1.113 billion; trust debentures were $60.0 million. The company reported no borrowings on its $200 million revolving credit facility, $300 million Stifel Credit Facility, or uncommitted secured lines at quarter-end.
- Banking and capital: Loans held for investment, net, were $12.092 billion, up from $11.007 billion at year-end; the allowance for loan losses was $107.7 million. Stifel reported $13.6 million of impaired loans, and 98.9% of the loan portfolio was collateralized. The company and its banking subsidiaries were categorized as well capitalized; Stifel broker-dealer reported $570.3 million of net capital, $541.6 million above its minimum.
Material changes and operating trends
- Institutional Group net revenue rose 52.3% to $506.1 million and pre-tax income increased to $117.2 million from $41.7 million. Investment banking growth reflected higher capital raising and advisory activity.
- Global Wealth Management net revenue rose 8.3% to $631.5 million; pre-tax income increased 15.0% to $223.2 million. Client assets were $378.6 billion, up 36.9% year over year, and fee-based client assets were $137.8 billion, up 47.2%.
- Lower short-term rates pressured net interest income despite growth in average interest-earning assets. Management attributed the decline primarily to lower yields on bank assets; net interest margin contracted year over year.
- Cash and cash equivalents fell from year-end, while total assets increased 5.8%. The balance sheet also reflected loan growth and higher deposits.
Outlook, risks and unusual items
- Outlook: The filing gives no quantified earnings or revenue guidance. Management said market volatility and the effects of COVID-19 could make brokerage and investment banking revenues volatile and could prevent the company from sustaining Q1 revenue levels. Management continued to monitor pandemic, economic and capital-market conditions.
- Interest-rate and market risk: The company’s results are sensitive to market activity, client asset values, investment-banking demand and interest rates. Management reported that lower short-term rates negatively affected net interest income. Trading portfolio daily VaR averaged $12.7 million for the quarter and was $9.5 million at March 31.
- Liquidity and funding risks: Liquidity depends in part on deposits and access to secured and unsecured funding. Management reported sufficient liquidity under its stress tests; however, credit-market stress, deposit withdrawals, collateral requirements or reduced funding access could affect liquidity. Brokerage customer deposits represented $16.8 billion of deposits at quarter-end.
- Credit and valuation: Loan growth and credit performance remain relevant risks. Management released credit-loss reserves based partly on an improved macroeconomic outlook. The filing also identifies valuation uncertainty for certain Level 3 assets, including auction-rate securities, and notes that changes in model assumptions can affect fair values.
- Unusual items: The quarter included a $5.3 million credit provision for credit losses and a $312.9 million transfer of certain asset-backed securities from available-for-sale to held-to-maturity; no gain or loss was recognized on that transfer. The company reported $20.3 million of other comprehensive loss, primarily from unrealized losses on available-for-sale securities.
- Contingencies: Stifel is a defendant in litigation relating to its role as a co-manager on 2014 bonds for the Karegnondi Water Authority. The company intends to defend the matter. It says the ultimate resolution of pending matters is uncertain and could affect results in a future period, although it did not expect currently known matters to materially adversely affect financial position or results overall.
- Other developments: The company acquired North Atlantic Capital Corporation in February 2021; the acquisition-related goodwill adjustment was not quantified separately in the excerpt. It repurchased approximately 205,000 shares for $12.7 million during the quarter and declared common dividends of $0.15 per share.
Important facts for investors to verify
- Whether investment-banking activity and elevated market conditions persist, and how revenue concentration across business lines evolves.
- Whether net interest income and margin stabilize as rates, deposit costs and the asset mix change.
- Drivers of the quarter’s negative operating cash flow and the decline in cash, alongside loan growth and deposit funding.
- Credit quality, allowance adequacy and portfolio concentrations, particularly as loans expand and economic assumptions change.
- Liquidity resources, deposit behavior, available credit facilities and any refinancing or covenant developments, including the Stifel Credit Facility maturity in June 2021.
- Developments in the Karegnondi litigation and other legal or regulatory matters, and any change in related reserves or estimated exposure.