Stifel Financial Corp. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 2, 2015. Stifel is a diversified financial-services and bank holding company spanning wealth management, institutional brokerage and investment banking, asset management, and banking. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenues | $2.250 billion | $2.020 billion |
| Net revenues | $2.208 billion | $1.973 billion |
| Income from continuing operations | $179.1 million | $172.9 million |
| Net income | $176.1 million | $162.0 million |
| Diluted EPS, continuing operations | $2.35 | $2.35 |
| Total diluted EPS | $2.31 | $2.20 |
| Non-interest expenses | $1.918 billion | $1.788 billion |
| Cash and cash equivalents at year-end | $689.8 million | $716.6 million |
| Total assets at year-end | $9.518 billion | $9.009 billion |
| Shareholders’ equity at year-end | $2.322 billion | $2.059 billion |
- Net revenues rose 11.9%; net income rose 8.7%. Net income from continuing operations increased 3.6%, while continuing-operations diluted EPS was unchanged.
- Net income margin was approximately 8.0% of net revenues, versus 8.3% in 2013. Compensation and benefits were 63.6% of net revenues, down from 66.5%.
- Operating cash flow was $250.3 million; investing activities used $392.9 million; financing activities provided $123.2 million. Cash decreased $26.8 million during the year.
- Year-end bank deposits were $4.790 billion and net bank loans were $2.065 billion. Senior notes totaled $625 million, with $82.5 million of debentures to capital trusts. Short-term bank borrowings were zero at year-end. The company reported $5.001 billion of cash and assets readily convertible to cash.
- Stifel Bank’s net interest margin was 2.75%, compared with 2.14% in 2013. Its loan portfolio expanded to $2.117 billion gross from $1.464 billion; the allowance for loan losses was $20.7 million, up from $12.7 million.
Material changes and drivers
- Investment banking revenue increased 26.4% to $578.7 million, reflecting higher advisory activity and capital raising. Asset management and service fees rose 26.3% to $386.0 million, and net interest income increased 50.5% to $144.7 million, principally with Stifel Bank growth.
- Commissions increased 5.3% to $674.4 million. Principal transaction revenue was nearly flat at $409.8 million. Other income fell 77.1% to $14.8 million, reflecting lower investment gains and other items.
- Global Wealth Management net revenues grew 10.3% to $1.233 billion and pretax income rose 15.8% to $347.0 million. Institutional Group net revenues increased 15.4% to $993.6 million, but pretax margin declined to 15.4% from 16.6% as expenses grew.
- Acquisitions during 2014 included De La Rosa, Oriel, 1919 Investment Counsel, and Merchant. Their results were included from acquisition dates; acquisition-related goodwill contributed to the increase in assets.
- Year-end assets under management were reported at $186.6 billion. Global Wealth Management fee-based account assets increased 20.4% to $34.9 billion, with growth from both net inflows and market appreciation.
Outlook, risks, contingencies, and unusual items
- Management provided no specific quantitative earnings or revenue guidance. Its stated priorities are revenue growth, advisor recruiting, improved client management and product diversification, selective acquisitions, and expansion of banking and trust services.
- Management cited market activity, interest rates, trading volumes, underwriting and M&A activity, and client asset values as important external drivers. It noted municipal-market challenges and continuing pricing pressure in equity and fixed-income trading.
- The 2014 tax provision was $111.7 million, an effective rate of 38.4%, compared with $12.3 million and 6.7% in 2013. The prior-year rate benefited from a $58.2 million U.S. tax benefit associated with exiting the Canadian business. The 2014 provision also reflected a valuation-allowance change.
- FY 2014 included a $17.9 million noncash compensation charge for acquisition-related restricted stock awards without continuing service requirements. Management also identified other non-recurring and merger-related costs. SN Canada, which ceased operations in 2013, remained in discontinued operations; its 2014 after-tax loss was $3.1 million.
- On January 15, 2015, the company redeemed $175 million of 6.70% senior notes. In February 2015, it agreed to acquire Sterne Agee for expected consideration of about $150 million, subject to shareholder and regulatory approvals; closing was expected in Q2 2015. The transaction could involve 1.42–1.62 million shares and approximately $66–$77 million in cash.
- Key risks include market, interest-rate, credit, liquidity, operational, cyber, regulatory, acquisition-integration, recruiting, and litigation risks. Basel III capital rules took effect for the company in January 2015; management expected to meet requirements but cautioned that higher capital requirements could constrain growth or require additional capital. The filing identified $63 million of CLO holdings potentially subject to Volcker Rule covered-fund restrictions absent compliance remedies.
- Legal matters include the SEC action concerning Wisconsin school-district CDO investments and the EDC bond litigation involving a $50 million offering. The company disputes allegations and says it intends to defend itself. It states that ultimate resolution is not expected to materially affect financial position or results overall, but one or more matters could materially affect a future period; the filing does not provide a clear total potential loss value.
- Level 3 assets were $168.5 million at year-end, including $91.6 million of auction-rate securities. Stifel also estimated $15.2 million of auction-rate securities customer repurchases over the following year, assuming no issuer redemptions. Fair values and legal reserves rely on estimates and judgment.
- Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Fourth-quarter snapshot
Q4 2014 net revenues were $578.1 million and net income was $45.2 million, with diluted EPS of $0.58. Q4 2013 net revenues were $562.5 million, net income was $48.3 million, and diluted EPS was $0.64. Thus, quarterly revenue increased while net income and diluted EPS declined.
Important facts for investors to verify
- Reconcile reported growth with acquisition contributions and assess the sustainability of organic growth in investment banking, fee-based assets, and bank net interest income.
- Review the 2013 tax benefit and 2014 effective tax rate when comparing earnings, and distinguish recurring results from acquisition-related and other unusual expenses.
- Assess Stifel Bank’s rapid loan and investment growth, credit quality, allowance adequacy, deposit concentration, and sensitivity to interest-rate changes.
- Review debt and liquidity after the January 2015 note redemption, including subsidiary dividend and regulatory-capital constraints and the funding needs of the Sterne Agee acquisition.
- Monitor dilution from outstanding stock units and any acquisition-related share issuance, as well as the progress and potential exposure of the disclosed litigation and auction-rate-security commitments.