Stifel Financial Corp. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; the filing also reports unaudited fourth-quarter results. Stifel is a diversified brokerage, investment banking, wealth management, and banking company. It acquired Thomas Weisel Partners Group (TWPG) on July 1, 2010.
Financial performance and condition
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenues | $1.395 billion | $1.103 billion |
| Net revenues | $1.382 billion | $1.091 billion |
| Income before taxes | $(0.2) million | $120.4 million |
| Net income | $1.9 million | $75.8 million |
| Diluted earnings per share | $0.05 | $2.35 |
| Operating cash flow | $142.2 million | $(347.3) million |
| Cash and cash equivalents at year-end | $253.5 million | $161.8 million |
- Net revenues rose 26.7%, while total non-interest expenses increased 42.5% to $1.382 billion. Compensation and benefits were $1.056 billion, or 76.4% of net revenues, versus 65.8% in 2009. The resulting pretax loss was approximately $0.2 million.
- Revenue growth included commissions of $445.3 million (+28.9%), investment banking revenue of $218.1 million (+73.4%), and asset management and service fees of $193.2 million (+64.6%). Principal transactions were nearly flat at $453.5 million, reflecting weaker fixed-income activity.
- Fourth-quarter net revenues were $401.6 million and net income was $41.4 million, compared with $319.5 million and $24.7 million, respectively, in fourth-quarter 2009. Third-quarter 2010 included a net loss of $84.3 million.
- At year-end, total assets were $4.213 billion and shareholders’ equity was $1.254 billion. Cash was $253.5 million; available-for-sale securities were $1.013 billion; and bank loans, net, were $389.7 million.
- Funding included $1.624 billion of bank deposits, $109.6 million of short-term bank borrowings, $82.5 million of trust debentures, and $8.2 million of subordinated liabilities. The company reported Stifel Bank and the parent as well capitalized; Stifel Nicolaus had $180.5 million of regulatory net capital, $168.8 million above its minimum.
- Investing activities used $568.0 million, chiefly for securities purchases; financing activities provided $515.8 million, principally from increased bank deposits. Cash increased $91.7 million during the year.
Material changes and unusual items
- The TWPG acquisition was funded with stock and restricted stock units, with purchase consideration of $271.3 million. It added $132.3 million of goodwill initially recorded and expanded investment banking, research, and wealth management operations. TWPG results are included from the acquisition date.
- A modification to the deferred compensation plan accelerated unvested awards, producing a non-cash pretax compensation charge of $179.5 million ($106.4 million after tax). The filing also identifies $16.5 million of after-tax merger-related expenses.
- Global Wealth Management pretax income increased to $194.0 million from $104.7 million. Institutional Group pretax income was broadly unchanged at $129.5 million, as higher investment banking revenue was offset by weaker fixed-income results and higher expenses. The Other segment recorded a $323.8 million pretax loss, principally reflecting the deferred-compensation charge and acquisition-related costs.
- The company repurchased $91.8 million of its shares in 2010 and had authorization for up to 2,038,517 additional shares at year-end. It paid no cash dividends in 2010 or 2009 and did not anticipate dividends in the foreseeable future.
Outlook, risks, and contingencies
- Management plans to pursue measured growth through financial-advisor recruiting, expansion of institutional equity and investment banking, banking-product growth, and selective acquisitions. No quantitative earnings or revenue guidance is provided.
- Management reported improving capital-market conditions in the second half of 2010, but emphasized that results remain sensitive to market activity, trading volumes, asset values, interest rates, credit conditions, and investment-banking transactions. Challenging fixed-income conditions reduced trading activity and revenue during 2010.
- Key risks include market and credit volatility, liquidity and funding access, regulatory change including implementation of the Dodd-Frank Act, pricing pressure, competition for skilled personnel, acquisition integration, bank credit and interest-rate exposure, operational and technology disruptions, and legal or reputational harm.
- Stifel agreed to repurchase eligible auction-rate securities (ARS) from clients by December 31, 2011. It estimated $64.3 million remained for repurchase at year-end, assuming no issuer redemptions; it repurchased $39.2 million during 2010. Level 3 assets, requiring significant valuation judgment, totaled $173.5 million.
- Legal matters include claims and regulatory inquiries concerning investments by five Wisconsin school-district OPEB trusts in CDOs totaling $200 million, and a FINRA proceeding involving approximately $15.7 million of ARS transactions at TWP. The company disputes the allegations and says ultimate resolution is uncertain; it states outcomes could materially affect results in a future period.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- How much of 2010’s revenue growth is sustainable absent the TWPG acquisition and the full-year contribution from the 2009 UBS branch acquisitions.
- The future expense, vesting, and dilution effects of the modified deferred-compensation plan and the company’s substantial outstanding stock units.
- Actual ARS repurchases, issuer redemptions, valuation assumptions, and any additional exposure from the Wisconsin OPEB litigation and regulatory matters.
- Credit quality and concentration in Stifel Bank’s loan portfolio, particularly stock-secured lending, alongside deposit funding and interest-rate sensitivity.
- Whether expense growth, including compensation, acquisition integration, litigation, and regulatory costs, can be contained as business volumes and markets change.
- Capital availability and restrictions on distributions from regulated subsidiaries, as well as the company’s repurchase activity and no-dividend policy.