Stifel Financial Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. Stifel provides wealth management and brokerage, institutional sales and trading, investment banking, and banking services, principally in the United States.
Financial performance
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2020 period.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net revenues | $1,153.1 (+28.7%) | $895.8 | $2,287.9 (+26.5%) | $1,808.9 |
| Income before taxes | $264.0 (+84.7%) | $143.0 | $491.9 (+90.6%) | $258.1 |
| Net income | $198.1 | $107.9 | $371.1 | $194.5 |
| Net income available to common shareholders | $189.8 (+84.2%) | $103.0 | $354.5 (+91.8%) | $184.8 |
| Diluted EPS | $1.60 | $0.92 | $3.00 | $1.63 |
| Net interest income | $119.4 (+3.6%) | $115.3 | $232.5 (-7.8%) | $252.1 |
| Non-interest expenses | $889.1 (+18.1%) | $752.9 | $1,796.0 (+15.8%) | $1,550.8 |
| Provision for credit losses | ($9.7) credit | $19.2 expense | ($14.9) credit | $35.3 expense |
Pre-tax margin increased to 22.9% from 16.0% in Q2 and to 21.5% from 14.3% in the first half. Compensation and benefits were 60.0% and 60.8% of net revenues, respectively, versus 61.1% and 62.2% a year earlier. Common dividends declared were $0.15 per share in Q2 and $0.30 for the first half.
Revenue drivers and changes
- Investment banking was the leading growth driver: Q2 revenue rose 73.4% to $376.4 million, while first-half revenue increased 80.5% to $715.7 million. Higher advisory fees reflected more completed transactions; capital raising also grew.
- Asset management and service fees rose 48.7% in Q2 to $295.9 million and 31.4% for the first half to $574.0 million. Management cited higher market-driven asset values and strong fee-based asset flows. Client assets were $402.4 billion, up 31.4% year over year.
- Q2 commissions grew 10.5%; principal transactions declined 8.1%, which management attributed to lower volatility and tighter credit spreads. First-half brokerage revenue increased 4.9% overall.
- First-half net interest income declined 7.8% as lower rates more than offset larger earning-asset balances; Q2 net interest income increased 3.6%. The reported net interest margin was 2.00% in Q2 and 1.99% for the first half, compared with 2.18% and 2.41% a year earlier.
- Global Wealth Management generated Q2 net revenue of $637.6 million and pre-tax income of $227.3 million; Institutional Group generated $520.8 million and $141.5 million, respectively. Institutional Group growth chiefly reflected investment banking, partly offset by weaker institutional brokerage.
Financial position, cash flow and liquidity
- At June 30, total assets were $29.7 billion, up 11.8% from year-end 2020; total liabilities were $25.2 billion and shareholders’ equity was $4.5 billion.
- Cash and cash equivalents were $1.36 billion, down from $2.28 billion at year-end. Including regulatory-segregated cash, the balance was $1.51 billion. Management reported $11.2 billion in cash and assets readily convertible to cash.
- Bank deposits, the company’s largest funding source, rose to $19.6 billion from $17.4 billion. Net held-for-investment loans increased to $12.8 billion from $11.0 billion. The loan portfolio was 99.0% collateralized; the allowance for loan losses was $99.2 million, down from $112.0 million at year-end.
- Senior notes were $1.113 billion net of issuance costs ($1.125 billion principal); trust debentures were $60 million. The company had no outstanding borrowings on its new $500 million revolving credit facility at quarter-end (company sublimit $200 million), or on Federal Home Loan Bank advances. The revolver matures in May 2026.
- For the first half, operating activities used $436.0 million, investing activities used $2.929 billion, and financing activities provided $2.414 billion. Investing outflows mainly reflected loan growth and purchases of investment securities; financing inflows largely reflected increased bank deposits.
- Stifel’s broker-dealer net capital was $614.5 million, $584.0 million above its minimum. The company and its banking subsidiaries reported capital ratios above regulatory minimums and were categorized as well capitalized.
Outlook, risks and notable items
- The filing gives no quantified earnings or revenue guidance. Management cautioned that strong current-quarter brokerage and investment banking revenue levels may not persist, given market and transaction volatility.
- Management identified COVID-19-related uncertainty, market conditions, interest rates, client activity, and extensive financial-services regulation as important factors. It said remote operations continued without significant disruption and that its June 30 review identified no impairments.
- The credit-loss provision was a benefit in both Q2 and the first half, reflecting allowance releases tied to an improved macroeconomic outlook and loans being sold at a premium. Future credit costs remain sensitive to economic conditions and loan performance.
- Other operating expenses included additional earn-out expense in Q2 for a prior acquisition that performed better than expected; the amount is not specified in the provided filing text. North Atlantic Capital Corporation was acquired in February 2021.
- Stifel disclosed litigation, including a claim concerning its role as co-manager of Karegnondi Water Authority bonds. Management said it would defend the case; outcomes of pending matters remain uncertain and could affect results in a future period.
- After quarter-end, the company issued $300 million of 4.50% Series D preferred stock and announced redemption of its 6.25% Series A preferred stock. It also purchased three leased commercial aircraft for $145.9 million on July 15, funded from operating cash.
- Other exposures include securities-market and short-sale risk, credit and counterparty risk, and unfunded loan commitments. At June 30, unfunded loan commitments were $782.9 million, unused lines of credit were $2.8 billion, and standby letters of credit were $16.8 million.
Important facts for investors to verify
- Whether investment banking and fee-based asset growth continue, and how much of the reported growth reflects market levels versus durable client activity.
- Whether lower interest rates continue to pressure net interest income and margins as deposits and loans grow.
- Loan quality, allowance adequacy, nonperforming loans, and the sustainability of credit-loss provision releases.
- Cash-flow needs and funding mix as the loan and securities portfolios expand, including the terms and covenant requirements of the new revolver.
- The final costs and timing of the Series A redemption and Series D issuance, the aircraft purchase, and the resolution or evolution of legal and other contingent exposures.