Stifel Financial Corp. — FY2013 Form 10-K
Business context and period. Stifel is a diversified financial-services and bank holding company, operating Global Wealth Management, Institutional Group, and Other segments. Its businesses include brokerage, investment banking, institutional sales and trading, asset management, and retail and commercial banking. This filing covers the fiscal year ended December 31, 2013; it is an annual report, not a standalone fourth-quarter filing. The company acquired KBW in February, Knight Capital’s fixed-income business in July, Acacia Federal in October, and Ziegler Lotsoff in November 2013.
Financial results and key metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenues | $2.020 billion | $1.627 billion |
| Net revenues | $1.973 billion | $1.594 billion |
| Income from continuing operations | $172.9 million | $145.3 million |
| Net income, including discontinued operations | $162.0 million | $138.6 million |
| Diluted EPS | $2.20 | $2.20 |
| Cash from operating activities | $702.2 million | $(264.3) million |
| Total assets at year-end | $9.009 billion | $6.966 billion |
| Shareholders’ equity at year-end | $2.059 billion | $1.495 billion |
Revenue mix and profitability. Investment banking revenue rose 59.3% to $448.1 million, commissions rose 19.4% to $598.9 million, principal transactions rose 12.5% to $460.0 million, and asset-management and service fees rose 18.5% to $305.6 million. Net interest income increased 27.7% to $96.2 million. Pretax income from continuing operations declined 19.4% to $185.2 million; pretax margin on net revenues was 9.4%, versus 14.4% in 2012. Net income from continuing operations was 8.8% of net revenues, versus 9.1%. Compensation and benefits rose 29.8% to $1.311 billion, or 66.5% of net revenues, compared with 63.4% in 2012; excluding specified retention-award and merger-related charges, management reported a 62.4% ratio.
Fourth quarter. Unaudited Q4 2013 net revenues were $562.5 million, compared with $411.3 million in Q4 2012. Q4 net income was $48.3 million versus $40.0 million; diluted EPS was $0.64 versus $0.63.
Material changes versus the prior year
- FY2013 net revenues grew 23.8%; management attributed growth to stronger investment banking activity, higher commissions and institutional trading, fee-based account growth, acquisitions, and increased bank net interest income.
- Institutional Group net revenues increased 42.4% to $861.2 million; Global Wealth Management net revenues increased 12.7% to $1.117 billion. Acquisitions materially expanded the Institutional Group and increased expenses.
- Non-interest expenses rose 31.1% to $1.788 billion, faster than net revenues. Compensation expense included a $49.3 million pretax non-cash charge for retention awards with no continuing service requirements; the company reported a total $66.9 million after-tax reduction to net income from retention-award and certain non-recurring and merger-related items.
- A $58.2 million U.S. tax benefit related to exiting Canadian operations lowered the effective tax rate to 6.7%, from 36.8% in 2012. Stifel Nicolaus Canada ceased operations, and its results are classified as discontinued operations; the discontinued business recorded a $10.9 million after-tax loss in 2013.
- Bank deposits increased to $4.663 billion from $3.346 billion; bank loans, net, increased to $1.404 billion from $815.9 million. The company’s securities portfolio also grew, including a substantial increase in held-to-maturity securities.
Cash flow, liquidity, debt, and capital
- Cash and cash equivalents ended 2013 at $716.6 million, up from $403.9 million. Operating activities provided $702.2 million; investing activities used $1.106 billion, principally reflecting securities purchases, bank-loan growth, acquisitions, and fixed-asset purchases; financing activities provided $715.0 million, principally from increased bank deposits.
- Management identified $5.287 billion of cash and assets readily convertible to cash at year-end, though some securities and assets may be pledged or subject to market and liquidity risks. It reported approximately 50% of Stifel Bank assets were cash and highly liquid investments.
- Corporate debt comprised $325.0 million of senior notes due 2022 (6.70% and 5.375% coupons) and $82.5 million of trust debentures. Short-term bank borrowings were $55.7 million, down from $304.7 million. The $100 million revolving credit facility had no outstanding advances at year-end; the company was in covenant compliance. The facility was due to expire in December 2014.
- Stifel reported $368.2 million of net capital, $355.7 million above its minimum requirement. Stifel Bank was classified as well capitalized; its total risk-based capital ratio was 12.9%. The company reported no cash dividends in 2013 or 2012.
Outlook, commentary, risks, and contingencies
Management described continued growth as a priority, with plans to recruit experienced financial advisors, develop institutional and investment banking businesses, expand banking and trust services, and consider acquisitions selectively. The filing provides no numerical earnings or revenue guidance. Management cautioned that results depend on market activity, client assets, trading volumes, interest rates, and investment banking conditions; it also cited pricing pressure, acquisition integration and retention, credit and liquidity exposure, and regulatory change as risks.
- Regulation: U.S. Basel III capital rules were scheduled to become effective for the company in 2015, subject to transition provisions. The Volcker Rule’s impact remained uncertain; compliance was required over time, with a stated general deadline of July 2015, subject to possible extensions.
- Legal matters: The company faced SEC and related litigation concerning CDO transactions with Wisconsin school districts, contested bond-related litigation involving the Lake of the Torches Economic Development Corporation and tribal entities, and a separate tribal lawsuit. Management said it believed it had meritorious defenses, while noting outcomes could affect results in a future period. Stifel Nicolaus Canada was appealing an adverse decision awarding Stetson Oil & Gas approximately $16 million plus interest and costs.
- Other commitments and valuation: Certain former customers could require repurchase of up to $18.3 million par value of auction-rate securities by 2015, assuming no issuer redemptions. Level 3 assets were $232.0 million, including $125.7 million of auction-rate securities; valuations rely in part on unobservable inputs. The bank’s allowance for loan losses rose to $12.7 million from $8.1 million, with $4.4 million of net charge-offs in 2013.
- Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Separate acquisition-driven growth from organic performance, and assess whether higher investment banking and trading revenues are sustainable.
- Reconcile reported earnings with the $66.9 million after-tax special-item impact and the $58.2 million tax benefit; confirm the treatment of these items in any adjusted analysis.
- Review the bank’s rapid deposit, loan, and securities-portfolio growth, asset quality, allowance coverage, and sensitivity to interest rates and deposit outflows.
- Track the outcomes and potential financial exposure of the Wisconsin school-district, EDC bond, tribal, and Stetson matters, as well as the auction-rate-security repurchase obligation.
- Assess dilution: 17.7 million stock units were outstanding at year-end, including 8.8 million unvested, and 6.7 million shares were issued to KBW shareholders during the acquisition.
- Check subsequent filings for the status of the De La Rosa acquisition agreement announced in January 2014 and for refinancing or renewal of the revolving credit facility due in December 2014.
Note: The filing text contains inconsistent figures in some narrative and selected-data passages. The summary uses the audited financial statements where available; investors should verify reported amounts against the filed statements and notes.