Stifel Financial Corp. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with FY 2016. Stifel is a diversified financial services and bank holding company operating in wealth management, institutional securities and investment banking, and banking.
Financial performance and position
| Metric | FY 2017 / year-end | Change or comparison |
|---|---|---|
| Total revenue | $2.996 billion | Up 13.4% |
| Net revenue | $2.926 billion | Up 13.6%; 22nd consecutive year of record net revenue |
| Income before taxes | $269.5 million | Up from $142.6 million |
| Net income | $182.9 million | Up from $81.5 million |
| Net income available to common shareholders | $173.5 million; diluted EPS $2.14 | Up 123.5%; diluted EPS was $1.00 in 2016 |
| Pre-tax margin on net revenue | 9.2% | Compared with 5.5% in 2016 |
| Operating cash flow | $662.3 million provided | Compared with $287.6 million used in 2016 |
| Cash and cash equivalents | $696.3 million | Down from $912.9 million |
| Total assets / shareholders’ equity | $21.384 billion / $2.862 billion | Assets up 11.8%; book value per common share $38.26 |
Net revenue growth was led by investment banking, asset management fees, and net interest income. Investment banking revenue rose 41.7% to $726.8 million; asset management and service fees rose 20.5% to $702.1 million; and net interest income rose 69.0% to $384.4 million. Commissions fell 7.0% to $678.9 million, principal transactions fell 16.5% to $396.8 million, and other income fell 19.8% to $37.5 million.
Global Wealth Management reported net revenue of $1.822 billion and pre-tax income of $626.9 million, up 16.6% and 45.7%, respectively. Institutional Group reported net revenue of $1.111 billion and pre-tax income of $218.0 million, up 9.5% and 32.8%. Brokerage weakness in both segments was offset by stronger capital-raising and advisory activity and growth in bank-related interest income.
Stifel Bank’s loans, net, were $6.948 billion, and deposits were $13.412 billion at year-end. Deposits were primarily brokerage-client balances. The bank’s allowance for loan losses was $67.5 million, versus $45.2 million in 2016; impaired loans were $29.2 million. Management reported that the company and bank were well-capitalized. The filing reports $10.368 billion in cash and assets readily convertible to cash, including investment securities; this is broader than cash and cash equivalents.
Year-end funding included $1.025 billion of senior notes, $745.0 million of Federal Home Loan Bank advances, $256.0 million of borrowings, and $67.5 million of trust debentures. A $200 million revolving credit facility had no borrowings at year-end. Cash flow from investing activities used $2.647 billion, primarily for securities and loan growth; financing activities provided $1.760 billion, mainly from deposit growth and FHLB advances, partly offset by other financing outflows.
Material changes and unusual items
- The Tax Cuts and Jobs Act led to a $42.4 million fourth-quarter expense from remeasurement of deferred tax assets and liabilities. The tax analysis was provisional, with possible adjustments during 2018. The reported FY effective tax rate was 32.2%, compared with 42.8% in 2016; the 2017 rate also reflected a $57.4 million excess tax benefit from stock-based compensation.
- Management took tax-related compensation actions, including accelerating vesting of awards and modifying restricted stock units. The filing reports charges of $51.4 million and $55.9 million, respectively, for these actions. Total FY compensation and benefits expense rose 13.5% to $1.959 billion.
- Fourth-quarter net revenue was $804.1 million, but the company recorded a $2.0 million net loss and a $4.3 million loss available to common shareholders (diluted EPS: $(0.06)). The quarter included unusually high non-interest expenses of $804.9 million and tax-related compensation actions. Investors should distinguish this quarter’s result from full-year earnings.
- City Securities was acquired in January 2017. Stifel also agreed to acquire Ziegler Wealth Management, with approximately $4.8 billion of client assets; closing was expected in the first quarter of 2018.
- The company began paying a $0.10 quarterly common dividend in the third quarter of 2017 and announced an intended increase to $0.12 per share beginning in the first quarter of 2018. It repurchased $13.0 million of common stock in 2017.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described growth priorities as recruiting experienced financial advisors, expanding institutional and investment banking capabilities, growing Stifel Bank, and selectively pursuing acquisitions. Management cited rising U.S. equity markets in 2017, but emphasized that results remain sensitive to market activity, interest rates, volatility, client assets, and capital-markets transactions.
Key risks include market and interest-rate exposure, credit risk from bank lending and counterparties, dependence on brokerage and investment-banking activity, competitive pricing pressure, recruiting and retention costs, acquisition integration, cybersecurity and operational disruptions, and evolving regulation. The DOL fiduciary rule was in effect, with certain exemption conditions delayed to July 2019; management expected ongoing compliance, legal, and technology costs. Stifel Bank’s growth and concentration in affiliated brokerage deposits also warrant attention.
The company disclosed various securities-related lawsuits, arbitrations, and regulatory matters. Management stated that, based on available information and legal advice, it did not expect their ultimate resolution to materially adversely affect financial position or results overall, while noting that one or more matters could materially affect results in a future period. A major lawsuit concerning the Collybus CDO was settled in December 2017. No credit-related other-than-temporary impairment was recorded on investment securities in 2017; management attributed unrealized losses to market interest rates.
Important facts for investors to verify
- Reconcile the fourth-quarter net loss and award-related charges with the strong full-year earnings; assess which expenses are recurring.
- Track 2018 tax adjustments to the provisional deferred-tax remeasurement and the expected effects of the 21% federal corporate tax rate.
- Monitor bank loan growth, credit-loss provisions, impaired loans, and the extent to which funding depends on brokerage-client deposits.
- Assess sustainability of investment-banking growth against continued weakness in commissions and institutional trading revenues.
- Confirm completion and integration of the announced Ziegler Wealth Management acquisition and its contribution to earnings.
- Review legal contingencies, regulatory developments, capital and liquidity restrictions, and the dilution implications of outstanding equity awards.