Stifel Financial Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Stifel operates wealth management, institutional securities and investment banking, and banking businesses. The quarter coincided with the onset of the COVID-19 pandemic and substantial financial-market volatility.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenues | $937.4 million | $819.9 million | +14.3% |
| Net revenues | $913.0 million | $770.4 million | +18.5% |
| Income before taxes | $115.1 million | $137.8 million | -16.5% |
| Net income | $86.6 million | $99.4 million | -12.9% |
| Net income available to common shareholders | $81.7 million | $96.9 million | -15.6% |
| Diluted EPS | $1.07 | $1.22 | -12.3% |
| Net interest income | $136.8 million | $141.6 million | -3.4% |
- Net revenues grew on higher brokerage revenue (+34.8%), asset management and service fees (+21.8%), and investment banking (+10.9%). Advisory fees fell 27.5%; capital-raising revenue rose 81.6%.
- Pre-tax margin declined to 12.6% from 17.9%; net income was 9.5% of net revenues versus 12.9%. Compensation and benefits rose 26.0% to $577.2 million, or 63.2% of net revenues versus 59.5%.
- Provision for loan losses increased to $19.0 million from $2.3 million. Management attributed the increase to loan growth, CECL adoption, and the pandemic-related economic outlook.
- Cash, cash equivalents, and regulatory-segregated cash totaled $1.58 billion at March 31, up from $1.27 billion at year-end. Operating cash flow was a $5.7 million use; investing activities used $1.07 billion and financing activities provided $1.39 billion.
- Total assets were $25.90 billion and total liabilities $22.43 billion. Shareholders’ equity was $3.47 billion. Bank deposits, a major funding source, were $16.88 billion.
- Reported debt and financing included $1.02 billion of senior notes, $250 million of Federal Home Loan Bank advances, $198 million of borrowings, and $60 million of trust debentures. A $300 million senior-note maturity falls due in December 2020.
- Management reported $9.95 billion of cash and assets readily convertible to cash, including investment securities and receivables. It said liquidity stress testing indicated sufficient liquidity for current and contingent obligations. Stifel and its banking subsidiaries met applicable regulatory capital requirements; the company reported a 14.3% common equity Tier 1 ratio.
Material changes and unusual items
- Market volatility drove higher client trading activity and brokerage revenue, but management cautioned that these elevated activity-related revenues may not recur. Lower interest rates reduced interest income and net interest margins.
- Stifel adopted the CECL credit-loss standard on January 1, recording a $10.4 million increase in the allowance and a $7.8 million after-tax reduction to retained earnings. It also recorded $16.2 million of net loan-loss reserves during the quarter, which management linked to the revised economic outlook.
- Available-for-sale securities recorded $73.2 million of net-of-tax unrealized losses in other comprehensive income. Held-to-maturity securities had $389.5 million of gross unrealized losses at quarter-end; these securities are carried at amortized cost, subject to credit-loss accounting.
- The company completed the sale of Ziegler Capital Management on March 27 and recorded a gain; the filing does not state the gain amount in the supplied text. The sale reduced reported client assets by $9.0 billion.
- Stifel repurchased 1.129 million shares for $56.2 million at an average $49.74 per share and declared $0.17 per common share in dividends.
Outlook, commentary, and risks
- The filing provides no quantified earnings or revenue guidance. Management said pandemic effects could worsen in subsequent quarters if conditions persisted or deteriorated.
- Management cited risks from market declines and volatility, widening credit spreads, loan and investment credit deterioration, lower interest rates and margins, weaker advisory activity, and falling client assets. Reduced client activity or asset values could pressure brokerage and asset-management revenue; pandemic-driven loan losses could rise.
- Operational risks include remote-work effectiveness, cybersecurity, and disruption to client, employee, and vendor activity. Management said remote-work and business-continuity arrangements enabled continued client service.
- Legal and regulatory matters include securities-related lawsuits, arbitrations, investigations, and proceedings. The company said it had reserves for probable and estimable losses and did not expect currently known matters to materially affect its financial position or results overall, while acknowledging a matter could materially affect results in a future period.
- Other liquidity considerations include reliance on deposits and subsidiary distributions, the June 2020 maturity of a broker-dealer credit facility, and potential limits on funding availability or higher borrowing costs. The $200 million revolving facility was undrawn at quarter-end and the company reported covenant compliance.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter trading activity, investment banking, client assets, credit quality, and realized or unrealized portfolio values.
- Whether loan-loss allowances and reserves for unfunded commitments adequately reflect economic conditions; the filing reports $18.2 million of expected credit losses on unfunded lending commitments at March 31.
- The timing and cost of refinancing or repaying the $300 million senior notes due December 2020, and renewal or replacement of the broker-dealer facility maturing in June 2020.
- Reconciliation of cash-flow changes with balance-sheet cash: cash flow reports a $305.9 million increase in cash, equivalents, and segregated cash, while balance-sheet cash and equivalents alone rose $240.3 million.
- The final sale proceeds and gain on Ziegler Capital Management, and the continuing effect of the sale on assets and revenues.