Stifel Financial Annual Report 2016

FY2016 Annual Report · Stifel Financial

Loading PDF…

ANNUAL REPORT 2016

ABOUT STIFEL

Stifel Financial Corp. is a financial services holding company headquartered in St. Louis, Missouri, that conducts its
banking, securities, and financial services business through several wholly owned subsidiaries. Stifel’s broker-dealer
clients are served in the United States through Stifel, Nicolaus & Company, Incorporated; Keefe, Bruyette & Woods, Inc.;
Miller Buckfire & Co., LLC; Century Securities Associates, Inc.; and Eaton Partners, LLC and in the United Kingdom and
Europe through Stifel Nicolaus Europe Limited. The Company’s broker-dealer affiliates provide securities brokerage,
investment banking, trading, investment advisory, and related financial services to individual investors, professional
money managers, businesses, and municipalities. Stifel Bank & Trust offers a full range of consumer and commercial
lending solutions. Stifel Trust Company, N.A. and Stifel Trust Company Delaware, N.A. offer trust and related services.

STATEMENT OF COMMITMENT

TO OUR ASSOCIATES: current and future, our commitment is to provide an entrepreneurial environment that
encourages unconfined, long-term thinking. We seek to reward hard-working team players that devote their energy and
attention to client needs. At work, at home, and in their communities, we seek to be their Firm of Choice.

TO OUR CLIENTS: individual, institutional, corporate, and municipal, our commitment is to listen and consistently
deliver innovative financial solutions. Putting the welfare of clients and community first, we strive to be the Advisor of
Choice in the industry. Pursuit of excellence and a desire to exceed clients’ expectations are the values that empower our
Company to achieve this status.

TO OUR SHAREHOLDERS: small and large, our commitment is to create value and maximize your return on investment
through all market cycles. By achieving the status of Firm of Choice for our professionals and Advisor of Choice for
our clients, we are able to deliver value to our shareholders as their Investment of Choice.

INVESTMENT
OF CHOICE

ADVISOR
OF CHOICE

FIRM
OF CHOICE

FINANCIAL HIGHLIGHTS

OPERATING RESULTS:1
in thousands, except per share amounts

2012

2013

2014

2015

2016

Total Revenues

$1,627,483

$2,019,814

$2,249,685

$2,376,993

$2,642,370

Net Income Available to Common Shareholders

$145,296

Earnings Per Diluted Share
Non-GAAP Net Income2
Non-GAAP Earnings Per Diluted Share2

$2.31

$145,296

$2.31

$172,907

$2.35

$172,191

$2.34

$179,130

$2.35

$205,579

$2.69

$92,336

$1.18

$149,252

$1.90

$77,614

$1.00

$185,706

$2.39

FINANCIAL POSITION:
in thousands, except per share amounts

Total Assets

Shareholders’ Equity

Book Value Per Share

2012

2013

2014

2015

2016

$6,966,140

$9,008,870

$9,518,151

$13,326,051

$19,129,356

$1,494,661

$2,058,849

$2,322,038

$2,492,416

$2,738,408

$27.24

$32.30

$35.00

$37.19

$38.84

1 The operating results are from continuing operations. The results for SN Canada are classified as discontinued operations for all periods presented.
2 Non-GAAP Net Income and Non-GAAP Earnings Per Diluted Share represent GAAP net income and GAAP diluted earnings per share adjusted for:
(1) acquisition-related charges other than duplicative expenses; (2) litigation-related expenses; and (3) the U.S. tax benefit in 2013 arising out of the
Company’s investment in SN Canada. See Reconciliation of GAAP Net Income to Non-GAAP Net Income on page 16.

TOTAL REVENUES
(In millions)

NON-GAAP NET INCOME2
(In millions)

NON-GAAP EARNINGS
PER DILUTED SHARE2

3,000

2,250

1,500

750

20,000

15,000

10,000

5,000

220

165

110

3.00

2.25

1.50

.75

TOTAL ASSETS
(In millions)

SHAREHOLDERS’ EQUITY
(In millions)

BOOK VALUE PER SHARE

3,000

2,250

1,500

750

40.00

30.00

20.00

10.00

RONALD J. KRUSZEWSKI
Chairman of the Board
Chief Executive Officer

CHAIRMAN’S LETTER

Dear Fellow Shareholders, Clients, and Associates

In last year’s letter, I described Stifel’s results against the backdrop of a year of duality. 2016 was much the same, but in
reverse order. The year began with a sharp market correction and corresponding concern about global economic growth.
While markets generally improved as the year progressed, two major events shocked the system. First, the United Kingdom’s
rejection of the European Union roiled financial markets while highlighting the vulnerability of democracies to non-traditional
political movements. The U.S. presidential election was equally jolting – especially to pollsters – yet markets responded with
exuberance. Both outcomes were unexpected and defied conventional wisdom, and they reminded us how quickly things can
change, be it markets or politics.

Events like these have happened before and will happen again. As the saying goes, the only constant is change. Change
is disruptive, yet presents unexpected opportunities as well. Our strategy has always been to position ourselves to take
advantage of opportunity, and to embrace a long-term view.

Stifel’s 2016 results reflect this long-term view as we recorded our 21st consecutive year of record net revenue. During 2016,
Stifel continued significant investments in our infrastructure, accelerated the growth of our balance sheet while remaining
cognizant of credit and interest rate risk, and improved our client service capabilities through organic hiring and integrating
mergers. Accounting for all this, net income under generally accepted accounting principles (“GAAP”) was $78 million, or
$1.00 per diluted share.

We also provide our results on a non-GAAP basis, which excludes the impact of merger-related expenses. Our long-term
approach to strategic mergers is to structure transactions in order to maximize both associate retention and tax efficiency.
Excluding the impact of these merger-related expenses, non-GAAP net income was $186 million, or $2.39 per diluted share,
for 2016. Our non-GAAP net income includes the impact of duplicative expenses, which was $0.23 per diluted share in 2016.

RONALD J. KRUSZEWSKI

Chairman of the Board

Chief Executive Officer

Global Wealth Management posted record revenue of $1.6 billion,
an increase of 14% over 2015, and achieved record profitability.
Stifel Bank ended the year with approximately $13 billion in assets
while maintaining a conservative risk profile. Asset management
and fees totaled $582 million, an increase of 18%. Strategically,
we understand that as much as things change, one thing remains
constant – the value and importance of the relationships
between our advisors and their clients. We remain focused on
the intersection of technology and personal advice. As such, we
are committed to investing in systems to assist our advisors in
helping their clients understand, organize, and plan their assets,
liabilities, and wealth. Our focus on the advisor relationship and
our investments has not gone unnoticed. We are pleased that J.D.
Power ranked Stifel 6th in Investor Satisfaction with Full-Service
Brokerage Firms.

Our Institutional Business comprises Institutional Client Services
and Investment Banking. Our strategy is to provide our institutional
clients value-added services, while addressing the structural
changes occurring in this sector. This business is highly correlated
to the growth in the U.S. economy, and we believe we are well
positioned as economic conditions improve. For 2016, Institutional
revenues were in excess of a record $1 billion with solid profitability.

2016 RESULTS

(in thousands)

2016

TOTAL FIRM
Total Revenues

Non-GAAP Net Income

Non-GAAP EPS

$2,642,370

185,706

2.39

GLOBAL WEALTH MANAGEMENT
Net Revenues

1,563,410

Contribution

AUM

430,318

236,942,000

INSTITUTIONAL
Equity Net Revenues

Fixed Income Net Revenues

Net Revenues

Contribution

582,083

432,081

1,014,164

164,143

INSTITUTIONAL CLIENT SERVICES
Equity

238,775

Fixed Income

Total

INVESTMENT BANKING
Equity

Fixed Income

296,008

534,783

344,171

168,863

(2)

Total

513,034

Capital Raising

Institutional Client Services (sales, trading, and research for debt
and equity) recorded revenue of $535 million, an increase of 10%.
We are pleased with the increase in our equity brokerage revenues,
which totaled $239 million. Increased activity and volatility after
Brexit and the U.S. presidential election offset otherwise tepid industry-wide volumes. Fixed income brokerage revenues,
buoyed by our acquisition of Sterne Agee, were $296 million, up 18%. Our Stifel and KBW franchises combine to make us
the largest provider of U.S. research. Together, we achieved the No. 1 ranking in the 2016 Thomson Reuters StarMine Analyst
Awards. This marks our third No. 1 ranking since 2010 and tenth consecutive top 10 finish. In addition, Stifel Nicolaus Europe
Limited won four StarMine awards for United Kingdom and Ireland, plus one award in its Europe rankings. With respect to
Fixed Income, Greenwich Associates’ U.S. Investment Grade Credit study ranked Stifel No. 1 in quality of service among its
mid-tier, non-bulge-bracket peers.

Percent represents the increase/(decrease) over prior year results.

Advisory

256,397

256,637

(17)

Investment Banking revenues totaled $513 million, an increase of 2% from 2015. Banking revenues were equally divided
between capital raising and advisory revenue. However, it was a difficult year for capital raising, especially in several of
Stifel’s strongest verticals, as these revenues declined 17%. Offsetting this decline was an exceptional year for advisory
services, with advisory revenue of $257 million, up 31% from 2015.

Stifel’s debt financing business is anchored by our public finance business, driven by both geographic and sector
diversification. For the third consecutive year, Stifel led the nation in the number of municipal negotiated issues, serving
as sole or senior manager for 801 transactions with a total par value of approximately $17 billion. In addition, Stifel ranked
No. 1 nationally in underwriting bonds for primary education (K-12) with 409 issues totaling nearly $8 billion, issues
supporting economic development and redevelopment with 118 issues raising $2.9 billion, and issues to finance the
construction or renovation of affordable housing projects with 56 issues raising over $600 million across the country.

With respect to equity, we managed or co-managed more than 150 offerings, of which nearly 50% were book-run deals.
Our strength across key sectors, including Financial Institutions, Healthcare, and Technology, continued with book-managed
transactions for a number of clients, including Achoagen, TherapeuticsMD, Everspin Technologies, and Ichor Systems.

CHAIRMAN’S LETTER

The power of our KBW franchise was highlighted by our leading position in raising equity after the 2016 U.S. presidential
election. KBW raised over $1.0 billion of equity and book ran 14 transactions, four times more than any other firm in the 2016
post-election period, including transactions for Iberiabank Corporation, Renasant Corporation, and Valley National Bancorp.

In the United Kingdom, Stifel was the fourth leading capital raiser across all U.K. equity markets. The investment funds
team had over 26% of market share in 2016, including banner transactions for Secure Income REIT plc and two follow-ons
for Sequoia Economic Infrastructure Income Fund Limited.

On the advisory front, we were involved in several marquee transactions, including MicroSemi’s $2.5 billion acquisition
of PMC, Talmer Bancorp’s $1.65 billion merger with Chemical Financial Corporation, and Aéropostale, Inc.’s unique
restructuring and Section 363 sale.

As planned, 2016 represented a year of growth in company assets, primarily interest-earning assets in Stifel Bank. We
grew our assets by 43%, ending the year with over $19 billion. In addition, we achieved our stated capital ratio goals,
ending the year with a Tier 1 leverage ratio of 10.2% and risk-based capital ratio of 20.3%. Looking forward, our future
organic asset growth will be funded primarily by retained earnings.

Stifel has long approached mergers and acquisitions opportunistically and with patience. We are not motivated to achieve
growth for growth’s sake, and our philosophy is to wait for the right opportunities. Each opportunity that we consider must satisfy
the following criteria: (1) the business needs to be a strategic fit, (2) the people need to be a cultural fit, and (3) the merger needs
to be shareholder accretive in a reasonable period of time. The following depicts our key acquisitions since 2005:

2005

2006

2007

2008

2009

56 UBS Branches

2010

2015

Wealth
and
Investment
Management,
Americas

2011

2013

2014

2016

2012

2017

Since my letter to you last year, we met these criteria with the acquisition of City Securities. Through that acquisition and
our other recent strategic investments, we have augmented our wealth management and public finance capabilities while
enhancing our advisory platform. I am pleased to welcome these talented associates to Stifel.

Stifel’s growth over the past 20 years would not have been possible without a strong and capable Board of Directors. Bruce
Beda, who is retiring this year, exemplifies these characteristics, and I have been honored to work with him since I joined Stifel
in 1997. In fact, I owe a debt of gratitude to Bruce, as he was the Director who first recruited me as CEO. Recently, Bruce has

served as Audit Committee chair and provided leadership as Lead Director to Stifel’s Board. Thank you, Bruce, for your service
and friendship.

I am also pleased to welcome David Peacock, former President of Anheuser-Busch, to our Board. Dave will bring
entrepreneurial, corporate, manufacturing, and marketing expertise to the Board of Directors. In addition, through his
service as president of a global consumer brand, Dave will bring an in-depth knowledge and expertise in corporate
governance, branding, marketing, and market presence.

The events of the past year are a reminder that the unexpected happens – consistently. Risk is everywhere and omnipresent.
Global issues, including geopolitical risk, the sustainability of the Eurozone, populist backlash against globalization and free
trade, and environmental concerns, pose significant challenges individually and collectively. In addition, our industry faces
challenges, including the trend toward passive investing, global regulations regarding research payments (MiFID II), and the
Department of Labor Fiduciary Rule. The market changes influenced by passive investment and regulations have caused
many in our industry to exit sales and trading. However, we believe that the pendulum will swing back to active investment
(I have stated I want to be the only active investor in a passive world), and we are committed to providing value to our clients.

A HISTORY OF GROWTH – NET REVENUES, IN MILLIONS

1 7 . 4 %

C A G R

3
2
1
$

7
2
1
$

1
4
1
$

7
7
1
$

8
8
1
$

7
1
2
$

7
4
2
$

4
6
2
$

3
6
7
2 $
5
4
$

5
7
5
,
2
$

2
2
3
,
2
$

8
0
2
,
2
3 $
7
9
,
1

4 $
9
5
,
1
$

2
8
3
,
1
$

3
9
3
,
1
$

1
9
0
,
1
$

0
7
8
$

$3,000

$2,500

$2,000

$1,500

$1,000

$500

1997

1998 1999 2000 2001 2002 2003 2004

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Opportunities are myriad. At home, the possibility of tax reform and increased infrastructure spending, coupled with less
burdensome regulations, provides a foundation for increased and sustained economic growth. If these events do indeed
occur, Stifel will benefit along with the broader financial services industry. In the meantime, we will continue to focus on
growing our business organically, controlling costs while preserving optionality for business improvement, and remaining
diligent for opportunistic acquisitions.

Looking forward, we are reminded of the value of our long-term strategy, which since 1997, has grown the firm from 700
associates to over 7,000; from $110 million in revenue to over $2.6 billion; from $40 million in market capitalization to over
$3 billion. By remaining true to our values and traditions, which have guided us for over 125 years, we believe we are well-
positioned to meet challenges while remaining poised to seize the opportunities borne of change.

As always, we sincerely thank our shareholders and clients for their support, as well as our more than 7,000 associates for
their commitment to excellence.

RONALD J. KRUSZEWSKI
Chairman of the Board and Chief Executive Officer

WEALTH MANAGEMENT

PRIVATE CLIENT GROUP
An industry leader with a client-first, advisor-centric culture

Through a combination of strategic acquisitions and organic growth, Stifel has grown to become one of the nation’s
largest full-service investment firms, ranking No. 7 in terms of financial advisors, and J.D. Power ranked Stifel 6th in
Investor Satisfaction with Full-Service Brokerage Firms.

Our impressive standing is no accident. It’s a reflection of the highly appealing culture we’ve built here at Stifel.
We value our advisors and the client relationships they’ve worked so hard to build. As such, we seek to provide our
advisors with the tools they need to strengthen those relationships as we continually work to eliminate bureaucracy
and other impediments to success.

We know that by offering an environment in which advisors are empowered to do what’s best for their clients,
we will continue to attract creative, entrepreneurial professionals who share our commitment to client service.

2016

140

Financial Advisors
joined Stifel

360

Private Client
Group branches

$237 billion

in Assets Under
Management

J.D. Power ranked Stifel

6th

in Investor Satisfaction
with Full-Service
Brokerage Firms

ASSET MANAGEMENT
Providing investment management and
services to individuals and institutions
and over a breadth of asset classes

Stifel Asset Management Affiliates

A Stifel Company

$237 billion

in Assets Under

Management

7th

largest full-service
investment firm in
the nation in number
of financial advisors

RANK

FIRM

ADVISORS

Bank of America Merrill Lynch

16,069

Morgan Stanley Wealth Management

15,856

Wells Fargo Securities

15,086

Raymond James

UBS

JPMorgan

Stifel

RBC Capital Markets

Oppenheimer & Co.

7,146

7,087

2,560

2,282

2,000

1,177

Source: SIFMA and publicly available information for U.S. brokerage networks.
Includes full-service firms only.

STIFEL BANK
Delivering a full range of lending services,
including mortgages and securities-based lending

$ 13 billion in assets

STIFEL TRUST | Offering trust and fiduciary services to clients

INVESTMENT BANKING

Stifel is the industry’s preeminent middle-market investment bank.

Our industry-focused investment banking groups provide the
breadth of services typically offered by much larger firms.

Today, our 400 investment banking professionals deliver the full
resources of our institutional capital markets platform and retail
brokerage network.

In the middle market, Stifel Investment Banking is …

No. 1 in Total Number of Managed Equity Deals Under $1 Billion1
No. 2 in Total Number of Bookrun Equity Deals Under $1 Billion1
No. 1 in Total Number of Preferred & Baby Bonds Under $200 Million
No. 1 in Total Number of M&A Deals Under $1 Billion

… since 2010

Source: Dealogic. Includes firms acquired by Stifel.
1 Rank-eligible SEC-registered IPOs and follow-on offerings since 2010

Keefe, Bruyette & Woods (KBW)

The premier advisor on financial services industry transactions

No. 1 M&A Advisor:
Most completed M&A transactions since 20001

No. 1 Capital Markets Team:
Most IPOs and follow-on offerings since 20002

No. 1 Sales Force:
Largest financial services specialist sales force

No. 1

Institutional Investor:
Best Salesforce
Financials Category3

1 Source: SNL Financial. Data includes Banking, Insurance, Securities & Investments, and Specialty Finance sectors; excludes government-assisted transactions.
2 Source: Dealogic. Based on SEC-registered underwritten IPOs and follow-on offerings since 2000 for financial services companies in the U.S., Puerto Rico, Bermuda,
and Cayman Islands.
3 Source: Institutional Investor Buy-Side Survey

Miller Buckfire

A leader in restructuring and recapitalization

The M&A Advisor

Restructuring Deal of the Year ($250 million+) – Aéropostale

Section 363 Sale of the Year ($250 million+) – Aéropostale

Materials Deal of the Year ($250 million+) – Molycorp

Turnaround Atlas
Awards

Turnaround of the Year – Aéropostale

Private Equity Turnaround of the Year – Molycorp

Eaton Partners

One of the world’s largest fund placement and advisory firms

Placed or arranged more than $60 billion of commitments since 2004
Received 1,100 commitments for 70 alternative investment funds since 2004

No. 1 in Total Number of Preferred & Baby Bonds Under $200 Million

No. 1 in Total Number of M&A Deals Under $1 Billion

INSTITUTIONAL SERVICES

EQUITY RESEARCH

Solid, studied investment advice has been a hallmark of Stifel’s approach since our founding in 1890,
but our 2005 acquisition of Legg Mason Capital Markets transformed us into an industry leader.

And while our coverage growth has been nothing short of extraordinary, it’s the quality of

our research that truly sets us apart from our peers.

At the heart of our research success is our analysts, many of whom have hands-
on experience in the industries they cover. We stress stability, working to

internally develop, train, and retain talent. Our high retention rate drives

continuity and experience, leading to better research and better results

for our clients and advisors.

No. 1

out of 167 firms in the 2016
Thomson Reuters StarMine
Analyst Awards

■ 113 analysts across 12 sectors

■ Top 10 provider of U.S. equity coverage in:

– Diversified Industrials

– Financial Services

– Healthcare

– Internet & Media

– Real Estate

– Technology

– Transportation

■ 1,612 global stocks under coverage

■ Largest U.S. Equity Research platform

■ Second largest provider of global small-cap coverage

■ Largest global provider of financials

■ 14th largest provider of global coverage

Stifel’s consistent performance has produced ten consecutive
top ten finishes in the Thomson Reuters StarMine Analyst Awards,
with No. 1 rankings in 2012 and 2016.

Includes firms acquired by Stifel. See www.stifel.com/research for more information on the Thomson Reuters StarMine Analyst Awards.

■ 113 analysts across 12 sectors

■ Top 10 provider of U.S. equity coverage in:

– Diversified Industrials

– Financial Services

– Healthcare

– Internet & Media

– Real Estate

– Technology

– Transportation

FIXED INCOME
■ 95 traders with annual client trade volume

approaching $500 billion

■ 50-person Fixed Income Research and Strategy

Group

■ More than 220 fixed income institutional
sales professionals covering more than
8,500 accounts

EQUITIES
■ Second largest equity trading platform
in the U.S. outside of the bulge bracket

■ Relationships with more than 3,500
institutional accounts globally

■ Active daily market maker in more than

3,700 stocks

■ Major liquidity provider to largest equity

■ International offices in London, Zurich,

money management complexes

and Madrid

■ Dedicated convertible sales, trading,

■ 40 institutional fixed income offices nationwide

and research desk

No.1 Ranking in

Greenwich Associates’ U.S.
Investment Grade Credit Study
for quality of service1

1Amongst our peers

>7.4 billion

Shares traded in 2016

PUBLIC FINANCE

Negotiated New Issues