Stifel Financial Corp. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. Stifel is a diversified financial services and bank holding company, with Global Wealth Management, Institutional Group, and Other segments. The year included the acquisitions of Sterne Agee (June) and Barclays’ U.S. wealth franchise (December).
Key financial results
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenues | $2.377 billion | $2.250 billion | +5.7% |
| Net revenues | $2.332 billion | $2.208 billion | +5.6% |
| Income before tax | $141.6 million | $290.8 million | -51.3% |
| Net income | $92.3 million | $176.1 million | -47.6% |
| Diluted EPS | $1.18 | $2.31 | Down |
| Non-interest expenses | $2.190 billion | $1.918 billion | +14.2% |
| Net income / net revenues | 4.0% | 8.1% | Down |
Fourth quarter: Net revenues were $581.3 million and net income was $11.2 million, versus $578.1 million and $45.2 million, respectively, in Q4 2014. Quarterly net income declined each quarter during 2015, from $43.1 million in Q1 to $11.2 million in Q4.
Commissions rose 8.6% to $749.5 million and asset management and service fees rose 27.9% to $493.8 million. Investment banking revenue fell 10.6% to $503.1 million, principally reflecting lower advisory fees; principal transactions declined 5.0% to $389.3 million. Net interest income fell 7.6% to $133.7 million. Other income rose to $62.2 million, including a gain on the sale of part of the Acacia loan portfolio.
Balance sheet, liquidity and capital
- Assets were $13.336 billion, up 40.1% year over year; shareholders’ equity was $2.492 billion.
- Cash and cash equivalents were $811.0 million. The company reported $5.909 billion of cash and assets readily convertible to cash, using its stated classifications.
- Bank loans, net, were $3.144 billion; bank deposits were $6.638 billion, up from $4.790 billion. Brokerage-client deposits are a major funding source.
- Senior notes totaled $750 million; other borrowings were $237.1 million and trust debentures were $82.5 million. The notes include $300 million due 2020, $150 million due 2022 and $300 million due 2024.
- Cash increased $121.2 million during the year. The cash-flow statement reports operating cash use of $379.5 million, investing cash use of $1.973 billion, and financing cash provided of $2.425 billion.
- Stifel reported $310.1 million of broker-dealer net capital, $279.3 million above its minimum. The company and Stifel Bank were classified as well capitalized; reported total capital ratios were 26.8% and 14.6%, respectively.
- No common dividends were paid. Stifel repurchased $117.7 million of stock during 2015.
Material changes and management commentary
- Revenue growth did not translate into higher earnings: non-interest expenses grew substantially faster than net revenues. Compensation and benefits rose 11.7% to $1.569 billion and equaled 67.3% of net revenues, versus 63.6% in 2014.
- Management attributed fee growth to higher fee-based assets and acquisitions. Fee-based account assets rose 20.9% to $42.2 billion; the filing attributes 52.9% of the increase to net inflows and 47.1% to market appreciation.
- Global Wealth Management pretax income increased 10.1% to $382.1 million. Institutional Group pretax income fell 14.8% to $141.0 million. Other-segment pretax loss widened to $381.6 million, reflecting acquisition-related costs and investment in infrastructure and controls.
- Stifel issued $300 million of 3.50% senior notes due 2020 and redeemed $175 million of 6.70% notes in January 2015. Sterne Agee consideration included 1.4 million shares; Barclays added approximately $2.1 billion of assets.
- The company recorded a $23.8 million non-cash compensation charge for Sterne Agee retention awards without continuing service requirements. It also reported $18.5 million of outstanding stock units and approximately $319 million of unrecognized stock-unit compensation cost.
- Management’s stated priorities include recruiting experienced financial advisors, expanding institutional and investment banking capabilities, developing bank services, and pursuing acquisitions selectively. No quantified revenue or earnings guidance is provided.
Risks, contingencies and unusual items
- Results are sensitive to market activity, asset values, interest rates, trading volumes, investment banking transactions, and municipal credit conditions. Management also cites pricing pressure, competition for talent, acquisition integration, bank credit and interest-rate exposure, liquidity, cybersecurity, and regulatory risks.
- Three significant legal matters include the SEC/Wisconsin school-district CDO case, a Wisconsin bond-issuance dispute involving a $50 million 2008 offering, and the Broyles CDO litigation. Stifel says it will vigorously defend the matters and does not expect current claims to materially affect its financial position overall, while acknowledging a matter could affect results in a future period.
- At year-end, the bank loan portfolio was $3.181 billion gross, with a $29.8 million allowance; non-accrual loans were $0.9 million. The filing reports $21.0 million of gross unrealized losses on securities and no credit-related other-than-temporary impairment for 2015.
- The filing contains inconsistent disclosures that warrant reconciliation: MD&A describes operating cash use of $326.7 million, while the cash-flow statement reports $379.5 million; and the expected Q1 2016 Barclays-award expense is stated as approximately $50 million in one section and $60 million in another. Some narrative revenue comparisons also appear internally inconsistent; the reported financial tables are used above.
Important facts for investors to verify
- Reconcile operating cash flow and the stated Q1 2016 Barclays retention-award expense against the audited statements and subsequent filings.
- Assess whether fee and commission growth can offset weaker advisory, trading and net interest revenue, and whether expense growth moderates.
- Review acquisition integration, retention costs, stock-based compensation, dilution and the performance of the acquired Sterne Agee and Barclays businesses.
- Monitor bank loan growth and composition, deposit concentration in affiliated brokerage balances, credit quality, securities valuation and interest-rate sensitivity.
- Track developments and reserve adequacy in the disclosed litigation, alongside regulatory capital, liquidity and debt-service requirements.