Stifel Financial Corp. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 28, 2012. The filing is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Stifel is a financial holding company with three reportable segments: Global Wealth Management, Institutional Group, and Other. Its businesses include retail brokerage and financial advice, institutional sales and trading, research, investment banking and public finance, and retail and commercial banking. At year-end it had 5,097 associates, including 1,987 financial advisors, and approximately 1.3 million client accounts.
Stifel acquired municipal-finance and fixed-income firm Stone & Youngberg on October 1, 2011, expanding its public finance, institutional and private-client businesses. The acquisition included cash, stock, $24.0 million of payments over three years, and a potential five-year earn-out.
Financial results and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $1,441.9 | $1,395.2 |
| Net revenue | $1,416.6 | $1,382.0 |
| Income before tax | $138.6 | $(0.2) |
| Net income | $84.1 | $1.9 |
| Diluted EPS | $1.33 | $0.03 |
| Operating cash flow | $45.9 | $142.2 |
Net revenue grew 2.5%; net income improved by $82.2 million. Net income included $29.4 million after tax of litigation-related and certain merger-related expenses. FY2010 included a $179.5 million pre-tax noncash deferred-compensation charge and merger-related costs, making the earnings comparison unusually affected by prior-year items. FY2011 pre-tax income was 9.8% of net revenue and net income was 5.9% of net revenue. Compensation and benefits were $900.4 million, or 63.6% of net revenue; total non-interest expenses were $1,278.0 million.
Commissions rose 26.0% to $561.1 million and asset-management and service fees rose 18.5% to $228.8 million. Principal-transaction revenue fell 24.3% to $343.2 million, while investment-banking revenue declined 8.5% to $199.6 million. Net interest income increased 23.0% to $64.1 million, principally on growth in Stifel Bank assets.
Global Wealth Management net revenue increased 7.7% to $908.2 million and pre-tax income rose 21.3% to $235.4 million. Institutional Group net revenue declined 6.4% to $507.4 million and pre-tax income fell 51.2% to $63.3 million, reflecting weaker fixed-income brokerage and investment-banking activity and higher expenses. The Other segment reported a $160.0 million pre-tax loss, including litigation and corporate costs.
For the fourth quarter, net revenue was $356.9 million, pre-tax income $45.0 million and net income $27.0 million, compared with $401.6 million, $66.8 million and $41.4 million, respectively, in fourth-quarter 2010.
Cash and cash equivalents were $167.7 million, down from $253.5 million. Operating activities provided $45.9 million; investing activities used $716.1 million, largely for bank investment securities, customer ARS purchases, fixed assets and the acquisition; financing activities provided $585.1 million, principally from higher deposits and bank borrowings. Total assets were $4,951.9 million and shareholders’ equity was $1,302.1 million. Bank deposits were $2,071.7 million; short-term bank borrowings were $199.4 million. Long-term obligations were $89.5 million, comprising trust debentures and subordinated liabilities. The company reported $680 million of uncommitted secured bank lines and $613.5 million of unused FHLB capacity; availability of uncommitted lines is subject to lender approval and collateral.
Material changes, outlook and risks
- FY2011 revenue growth was supported by higher commissions, fee-based assets and bank net interest income, but offset by lower fixed-income brokerage and investment-banking revenue amid volatile, weak markets. Management said market conditions, municipal-credit uncertainty, low interest rates and fee waivers could continue to pressure results; it provided no quantified earnings or revenue guidance.
- Stifel completed the final phase of its retail auction-rate securities repurchase plan in 2011, repurchasing $48.7 million par value. TWP customers held an estimated $36.0 million par value potentially subject to repurchase over five years, assuming no issuer redemptions.
- Material litigation includes SEC and Wisconsin proceedings concerning CDO investments by five school-district OPEB trusts. The trusts’ investments totaled $200 million and plaintiffs allege total losses; Stifel purchased the approximately $162.5 million face-value Depfa notes at a substantial discount. Stifel disputes the claims. Management said ultimate resolution could materially affect results in a future period, although it did not expect a material adverse effect on financial position based on information then available.
- Other legal matters include a FINRA appeal following a $0.2 million panel fine against TWP and a Wisconsin suit filed in January 2012 concerning a $50 million bond offering. The filing also describes customer claims, regulatory reviews, and potential mortgage-loan repurchase or indemnification exposure.
- Market, interest-rate, credit, liquidity, regulatory, legal, operational and acquisition-integration risks are significant. Dodd-Frank implementation remained uncertain. Stifel reported $234.6 million of Level 3 fair-value assets, including $181.8 million of auction-rate securities, and recognized a $1.9 million credit-related impairment charge. The bank allowance for loan losses rose to $5.3 million from $2.3 million; $2.3 million of loans were non-accrual at year-end.
- After year-end, Stifel issued $175 million of 6.70% senior notes due 2022, receiving $169.3 million net proceeds for general corporate purposes. No cash dividends were paid in 2011 or 2010. The board had authorization to repurchase up to 4.3 million additional shares at year-end.
Important facts for investors to verify
- Reconcile reported earnings with the litigation and merger-related charges, and assess the status and potential financial exposure of the OPEB/SEC, FINRA and EDC matters.
- Review the quality and liquidity of Level 3 assets, ARS positions and investment securities, including the assumptions supporting fair values and expected redemptions.
- Monitor Stifel Bank’s deposit growth, funding concentration, securities-based lending, loan-loss allowance and exposure to changing interest rates.
- Assess Institutional Group revenue and margin trends, compensation costs, and whether the Stone & Youngberg acquisition delivers expected benefits and earn-out obligations.
- Consider the 14.7 million outstanding stock units, potential dilution, share repurchases, and the effect of the post-year-end senior-note issuance on leverage and interest expense.