Stifel Financial Corp. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Although the request references Q4, this is an annual filing; selected fourth-quarter results are included below. Stifel is a diversified wealth management, institutional brokerage, investment banking, and banking company.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total net revenues | $2.575 billion | $2.332 billion | +10.5% |
| Income before tax | $142.6 million | $141.6 million | +0.7% |
| Net income | $81.5 million | $92.3 million | -11.7% |
| Net income available to common shareholders | $77.6 million | $92.3 million | -15.9% |
| Diluted EPS | $1.00 | $1.18 | -15.3% |
| Net interest income | $227.5 million | $133.7 million | +70.1% |
| Total non-interest expenses | $2.433 billion | $2.190 billion | +11.1% |
| Total assets | $19.129 billion | $13.326 billion | +43.5% |
| Shareholders’ equity | $2.738 billion | $2.492 billion | +9.9% |
Net income margin was approximately 3.2% of net revenues, versus 4.0% in 2015; pre-tax margin was 5.5%, versus 6.1%. The effective tax rate rose to 42.8% from 34.8%, including tax expense from nondeductible settlement penalties. No common cash dividend was paid in 2016 or 2015.
- Commissions declined 2.6% to $730.0 million; principal transactions increased 22.1% to $475.4 million.
- Investment banking revenue rose 2.0% to $513.0 million: advisory fees increased 31.3%, while capital-raising revenue fell 16.6%.
- Asset management and service fees increased 18.0% to $582.8 million; fee-based account assets rose 12.0% to $70.2 billion.
- Interest revenue increased 64.3% to $294.3 million, chiefly reflecting growth at Stifel Bank. Interest expense increased 47.3% to $66.9 million.
- Compensation and benefits were $1.726 billion, or 67.0% of net revenues. This included a $58.6 million pretax non-cash charge for modified Barclays restricted stock awards.
Fourth-quarter snapshot
Q4 2016 net revenues were $661.4 million, compared with $581.3 million in Q4 2015. Net income was $26.9 million versus $11.2 million; income available to common shareholders was $24.5 million after preferred dividends, and diluted EPS was $0.31 versus $0.14.
Cash flow, debt and liquidity
- Cash and cash equivalents ended 2016 at $912.9 million, up from $811.0 million. Operating activities used $349.2 million; investing activities used $5.255 billion; financing activities provided $5.718 billion.
- At year-end, bank loans were $5.591 billion net, available-for-sale securities were $3.181 billion, and held-to-maturity securities were $3.038 billion. The company reported $9.406 billion in cash and assets considered readily convertible to cash; some securities and other assets were pledged as collateral.
- Bank deposits were $11.527 billion, primarily brokerage-customer deposits, up from $6.638 billion. Stifel Bank’s rapid balance-sheet growth drove much of the increase in assets and net interest income.
- Senior notes had $800 million principal outstanding: $300 million due 2020 and $500 million due 2024. Book value was $795.9 million. Other year-end funding included $500 million of Federal Home Loan Bank advances, $377 million of borrowings, and $67.5 million of trust debentures.
- Stifel reported $228.8 million of excess net capital; the company and Stifel Bank were categorized as well capitalized. The company’s and bank’s reported common equity Tier 1 ratios were 18.0% and 16.0%, respectively.
Material changes and notable items
- Stifel acquired Eaton Partners in January 2016 and ISM Capital in May 2016, expanding fund placement and European debt-capital-markets capabilities. It sold Sterne Agee’s legacy independent brokerage and clearing businesses in July and its legacy RIA business in August.
- In July, the company issued $200 million of 4.25% senior notes due 2024 and $150 million of 6.25% perpetual non-cumulative preferred stock, and redeemed $150 million of 5.375% senior notes.
- Share repurchases totaled $113.5 million, or 3.4 million shares, at an average $33.22 per share. The board had authorized repurchases of up to 7.4 million additional shares at year-end.
- The company increased legal reserves by $31.8 million. The SEC’s Wisconsin CDO matter settled for approximately $24.5 million in penalties, disgorgement, and interest; the settlement also contributed to $8.9 million of tax expense due to nondeductibility. A separate $50 million bond-issuance dispute was settled in early 2017. A Louisiana CDO-related case remained pending, with trial postponed.
- Stifel Bank’s gross loans increased to $5.638 billion from $3.181 billion. Its allowance for loan losses rose to $45.2 million from $29.8 million, and the 2016 provision was $15.7 million. Non-accrual loans increased to $26.9 million from $0.9 million, including $9.7 million in troubled debt restructurings.
Outlook, risks and management commentary
Management provided no specific quantified earnings or revenue guidance. It described continued growth ambitions in private-client recruiting, institutional and investment banking expansion, Stifel Bank lending and deposits, and disciplined consideration of acquisitions. Management said 2016 marked the company’s 21st consecutive year of record net revenues, while earnings available to common shareholders declined.
- Results remain sensitive to market activity, asset values, interest rates, trading volumes, capital-markets transactions, and municipal issuance. Management cited challenging municipal underwriting conditions and uncertainty in economic and regulatory environments.
- The DOL fiduciary rule was expected to raise legal, compliance, and technology costs; the company was evaluating its impact and implementation timing. Stifel was also subject to stress-testing requirements and planned its first company-prepared stress test in 2017.
- Key risks include rapid bank growth and associated credit, funding, operational, interest-rate, and regulatory exposure; securities-market and counterparty risk; advisor retention and compensation costs; regulatory change; litigation; and cybersecurity and business-continuity events.
- Management reported sufficient liquidity under its stress-test scenarios. Its interest-rate sensitivity analysis estimated Stifel Bank net interest margin would rise 6.6% under a +200 basis-point shock and fall 22.4% under a -200 basis-point shock.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether 2016 revenue growth, particularly from bank balance-sheet expansion and acquisitions, can translate into improved earnings and margins.
- Loan performance, non-accrual trends, reserve adequacy, and concentrations as Stifel Bank’s loan portfolio expands.
- Deposit stability and funding costs, including reliance on affiliated brokerage-customer deposits and floating-rate FHLB advances.
- The continuing impact of litigation, legal reserves, and regulatory requirements, including the fiduciary rule and bank stress testing.
- Future dilution and compensation expense from stock units: 21.8 million units were outstanding, 16.3 million unvested, with $379.1 million of unrecognized compensation cost.