Stifel Financial Corp. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; fourth-quarter results are included in the unaudited quarterly data. Amounts below are in U.S. dollars unless noted.
Business context
Stifel is a financial services and bank holding company operating through Global Wealth Management, Institutional Group, and Other. Its businesses include wealth management, investment banking, institutional sales and trading, asset management, and retail and commercial banking. At year-end it had more than 7,500 associates, including 2,301 financial advisors. The company completed acquisitions of Ziegler, Business Bancshares (BBI), and Rand during 2018; BBI added a bank with approximately $600 million in assets.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenues | $3.195 billion | $2.996 billion |
| Net revenues | $3.025 billion | $2.926 billion |
| Income before tax | $534.4 million | $269.5 million |
| Net income | $394.0 million | $182.9 million |
| Net income available to common shareholders | $384.6 million | $173.5 million |
| Diluted EPS | $4.73 | $2.14 |
| Net interest income | $476.4 million | $384.4 million |
| Operating cash flow | $529.5 million | $679.9 million |
- Management reported record annual net revenues for the 23rd consecutive year. Net revenues rose 3.4%, while common net income increased 121.7%. The effective tax rate fell to 26.3% from 32.2%, with the lower federal corporate tax rate among the factors affecting the comparison.
- Consolidated pretax margin was 17.7% of net revenues, versus 9.2% in 2017. Compensation and benefits fell 9.6% to $1.771 billion, or 58.5% of net revenues versus 66.9%; management cited higher-margin business growth and lower deferred-compensation expense.
- Revenue mix shifted: asset management and service fees increased 14.8% to $806.2 million and net interest income rose 23.9% to $476.4 million. Brokerage revenue fell 6.2% to $1.009 billion, and investment banking revenue declined 2.6% to $707.7 million.
- Global Wealth Management net revenues increased 9.2% to $1.990 billion and pretax income rose 17.6% to $737.0 million. Institutional Group net revenues declined 5.0% to $1.055 billion and pretax income fell 28.0% to $157.1 million.
- Fourth quarter: Net revenues were $793.4 million and net income available to common shareholders was $111.7 million, or diluted EPS of $1.38. In fourth-quarter 2017, net revenues were $804.1 million and common shareholders had a $4.3 million loss, or diluted EPS of -$0.06.
- Total assets were $24.520 billion, up 14.7%; shareholders’ equity was $3.198 billion. Cash and cash equivalents were $1.937 billion, up from $696.3 million. Cash and assets the company described as readily convertible to cash totaled $11.759 billion.
- Bank loans, net, were $8.518 billion; deposits were $15.864 billion. Senior notes were $1.016 billion net of issuance costs, FHLB advances were $540.0 million, borrowings were $180.7 million, and trust debentures were $60.0 million. Common dividends were $0.48 per share for the year; the company repurchased $170.2 million of stock.
- Return on assets was 1.76% and return on equity was 13.94%, compared with 0.93% and 6.70%, respectively, in 2017. Average equity to average assets was 12.59%, versus 13.83%.
Material changes, outlook, and notable items
- Growth in fee-based accounts, bank interest-earning assets, and net interest income supported results. Conversely, management cited lower trading volumes, passive-investing trends, electronic trading, and reduced fixed-income capital raising as pressures on brokerage and institutional activity. U.S. equity indices ended 2018 lower than at year-end 2017.
- Management’s stated strategy is to grow through advisor recruiting, expansion of institutional and investment banking capabilities, banking services, and selective acquisitions. The filing provides no specific numerical earnings or revenue guidance.
- Operating cash flow was $529.5 million; investing activities used $989.2 million, mainly reflecting loan and investment portfolio growth, fixed-asset purchases, and acquisitions. Financing activities provided $1.748 billion, principally from deposit growth and other financing flows.
- 2018 adoption of the revenue-recognition standard changed the gross presentation of certain investment-banking reimbursements, increasing both investment-banking revenue and operating expenses by $33.8 million, with no net-income effect. Adoption also reduced opening retained earnings by $4.2 million after tax. A $15.3 million gain was recognized on consolidation of an aircraft-engine securitization; related assets and liabilities were described as immaterial at year-end.
- Investment securities had $157.9 million of gross unrealized losses at year-end, which management attributed to interest-rate changes; it reported no credit-related other-than-temporary impairment and said it did not intend, and was not more likely than not required, to sell the affected securities before recovery.
- Bank subsidiaries were reported as well capitalized. Company liquidity stress testing indicated sufficient resources for modeled current and contingent funding obligations. However, deposits are a key funding source, substantially tied to brokerage-customer cash balances, and regulatory restrictions can limit subsidiary distributions to the parent.
- Legal proceedings include securities-related litigation, arbitrations, and regulatory matters. Management said ultimate resolution was not expected to materially affect financial position or results overall, while noting that one or more matters could materially affect results in a future period. The company reported no material cyber-attack losses to date, but identified cybersecurity, market, credit, interest-rate, regulatory, and acquisition-integration risks.
Important facts for investors to verify
- Whether the strong earnings increase is repeatable, particularly given the lower 2018 effective tax rate, reduced compensation expense, and the prior-year unusual compensation charges.
- How much future earnings depend on bank spread income and brokerage-customer deposits, including the effect of rising deposit costs, rate changes, and potential cash outflows.
- Credit quality and concentration in the rapidly growing loan portfolio: year-end allowance for loan losses was $85.8 million against $8.582 billion of gross loans; impaired loans were $24.4 million.
- The outlook for Institutional Group brokerage and fixed-income capital raising, given the reported revenue and pretax-income declines, and the sustainability of fee-based asset growth.
- Acquisition integration and dilution: BBI consideration included approximately 2.0 million newly issued shares, and 14.1 million restricted stock units and restricted shares were unvested at year-end.
- Potential effects of legal proceedings, regulatory changes, and the 2019 adoption of the lease standard, for which the company expected to recognize approximately $600–$700 million of right-of-use assets and corresponding lease liabilities.