Stifel Financial Corp. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. Stifel is a diversified financial-services and bank holding company spanning wealth management, institutional brokerage and investment banking, asset management, and banking.
Key financial results
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Total revenues | $3.515 billion | $3.195 billion | +10.0% |
| Net revenues | $3.337 billion | $3.025 billion | +10.3% |
| Income before taxes | $599.1 million | $534.4 million | +12.1% |
| Net income | $450.0 million | $394.0 million | +14.2% |
| Net income available to common shareholders | $431.1 million | $384.6 million | +12.1% |
| Diluted EPS | $5.49 | $4.73 | Up |
| Net interest income | $547.0 million | $476.4 million | +14.8% |
| Cash from operating activities | $626.9 million | $529.5 million | Up |
Consolidated pretax margin was 18.0% of net revenues, versus 17.7% in 2018. The effective tax rate was 25.0%, compared with 26.3%. Compensation and benefits rose 11.7% to $1.978 billion, or 59.3% of net revenues, from 58.5%.
Fourth quarter: Net revenues were $944.3 million, income before taxes $162.6 million, net income available to common shareholders $125.8 million, and diluted EPS $1.62. In fourth-quarter 2018, the comparable figures were $793.4 million, $155.9 million, $111.7 million, and $1.38, respectively.
Financial condition, cash flow, debt, and liquidity
- Total assets were $24.61 billion at year-end, broadly unchanged from $24.52 billion; Stifel Financial Corp. shareholders’ equity increased to $3.61 billion from $3.17 billion.
- Cash and cash equivalents fell to $1.14 billion from $1.94 billion. Operating activities provided $626.9 million; investing activities used $350.3 million and financing activities used $1.077 billion, primarily reflecting lower bank deposits, FHLB repayments, repurchases, and dividends.
- Management reported $9.28 billion of cash and assets readily convertible to cash. This measure includes securities and other assets, not only cash; the filing lists average conversion periods for several categories.
- Bank loans held for investment, net, were $9.62 billion; gross loans grew to $9.75 billion from $8.58 billion. The allowance for loan losses was $95.6 million, versus $85.8 million.
- Bank deposits were $15.33 billion, down from $15.86 billion. Senior notes totaled $1.025 billion face value, including $300 million due in December 2020; trust debentures were $60 million. FHLB advances were $250 million at year-end.
- The $200 million parent revolving facility and Stifel’s $250 million committed facility had no outstanding draws. Stifel reported $369.6 million of net capital, $334.7 million above its minimum; the company and its bank subsidiaries were reported as well-capitalized.
Material changes and business developments
- Net revenue growth was led by investment banking (+15.5%), net interest income (+14.8%), brokerage revenue (+6.3%), and asset management and service fees (+5.2%). Investment banking advisory fees rose 20.6%; fixed-income capital raising increased, while equity capital raising was nearly flat.
- Global Wealth Management net revenues rose 7.0% to $2.13 billion and pretax income rose 6.6% to $786.0 million. Institutional Group net revenues rose 15.0% to $1.21 billion and pretax income rose 11.9% to $175.7 million; its pretax margin declined to 14.5% from 14.9%.
- Client assets increased 22.1% to $329.5 billion, including fee-based assets up 30.0% to $117.2 billion. Management attributed growth to stronger markets and recruiting; the S&P 500 rose 28.9% during 2019.
- Stifel completed acquisitions of First Empire, Mooreland, B&F Capital Markets, certain GKB assets, MainFirst, and substantially all of GMP’s capital-markets business. Acquisition effects complicate year-over-year comparisons.
- The company issued $160 million of Series B preferred stock, repurchased $215.4 million of common stock (3.9 million shares) at an average $54.94, and paid $0.60 per common share in dividends. In January 2020, the board increased authorized repurchases to 10 million shares.
Outlook, commentary, risks, and unusual items
- No quantitative earnings or revenue guidance is provided. Management described continued priorities of recruiting experienced financial advisors, growing institutional and investment-banking businesses, expanding banking services, and pursuing acquisitions selectively.
- Management cited market activity as a key earnings driver and described municipal underwriting as challenging, with weaker demand for longer-dated municipals and investor reluctance to assume credit or liquidity risk. It also identified continuing active-to-passive migration and pricing pressure in brokerage as headwinds.
- On December 9, 2019, Stifel announced an agreement to sell Ziegler Capital Management; closing was expected in the first quarter of 2020. The filing classifies its assets and liabilities as held for sale.
- The company reported no credit-related other-than-temporary impairment on investment securities in 2017–2019 and attributed year-end unrealized investment losses of $49.1 million to interest-rate movements. It transferred $1.1 billion of mortgage-backed securities from held-to-maturity to available-for-sale in 2019.
- Stifel deconsolidated an aircraft-engine securitization in July 2019 after a default notice changed its exposure to benefits and control; the reported financial-statement impact was immaterial.
- CECL was scheduled for adoption January 1, 2020; management estimated an opening credit-loss reserve of $107.5–$120.5 million and did not expect a material consolidated financial-statement impact. The auditor identified the C&I loan-loss allowance as a critical audit matter because it relies on judgmental risk factors and selected proxy data.
- Principal risks include market and interest-rate sensitivity, credit and loan concentration, deposit and funding availability, acquisition integration, advisor retention, litigation and regulatory costs, cybersecurity and privacy, and the LIBOR transition. Legal proceedings are ongoing; management said current matters were not expected to materially affect financial position or results overall, while acknowledging a possible material effect in an individual future period.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- How much of 2019 revenue and earnings growth was organic versus attributable to acquisitions, market appreciation, and higher interest-earning assets.
- Whether the expanded loan portfolio, especially commercial and industrial, construction, and real-estate lending, maintains credit quality; review allowance assumptions, criticized loans, and CECL adoption effects.
- Whether deposit balances and client cash-sweep funding remain stable, and how lower interest rates or client cash withdrawals affect net interest income and liquidity.
- The cash proceeds, timing, and earnings impact of the announced Ziegler Capital Management sale, and the integration results of the 2019 acquisitions.
- Near-term refinancing and funding plans for the $300 million senior notes due in 2020, alongside capital distributions, dividends, and the expanded share-repurchase authorization.
- Updates on pending legal and regulatory matters, LIBOR replacement, and the implementation costs or business effects of Regulation Best Interest and other regulatory changes.