Stifel Financial Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Stiefel Financial Corporation second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 in your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Joel Jeffrey, head of investor relations. Thank you. Please go ahead, sir.

Thank you, operator. I'd like to welcome everyone to Stifel Financial's second quarter 2020 financial results conference call. Earlier this morning, we issued an earnings release and posted a slide deck to our website, which can be found on the investor relations page at www.stifel.com. I would remind listeners to refer to our earnings released and our slide presentation for information on forward-looking statements, and Non-GAAP Measures. This audio cast is copyrighted material of Stiefel Financial Corp and may not be duplicated, reproduced or rebroadcast without the consent of Stiefel Financial. I will now turn the call over to our Chairman and Chief Executive Officer, Ron Kruszewski.

Thank you, Joel. Good morning and thank you for taking the time to listen to our second quarter 2020 results. I'm joined on the call today from various locations by co-presidents Jim Zemlyak and Victor Nisi, as well as our CFO, Jim Marischen. I'm going to start the call by running through the highlights of our second quarter before turning the call over to Jim Marischen who will take you through our balance sheet and expenses. I will then come back with my concluding thoughts. But before I review our company's financial results, I want to comment on the events affecting the black community and all minorities. These recent events which have too many historical antecedents require us as Americans and associates to take informed action to confront these challenges head on. Stiefel had committed to improving diversity within its workforce, as you can see from this year's annual report. The words written in my annual shareholder letter are a worthy principle, but to make progress, we must take an honest look at ourselves and recognize that our company can do better. We must increase our commitment to accepting diversity in all its forms and to promoting diversity as a priority and a responsibility. In this regard, we must and will do better. We have several initiatives at Stiefel to improve our diversity, starting with listening to our associates. I have been conducting sessions called Listen and Act to hear from the diverse population at Stiefel. I am confident these and other steps will prove beneficial and I've committed to the Stiefel board to regularly report on these initiatives. So now let's take a look at our results. First of all, Stiefel had a great quarter. COVID has certainly presented significant operational and safety challenges, but frankly, the amount of activity resulting from increased volatility and the capital requirements of our clients has bolstered activity levels at Stiefel and across our industry. This quarter, and in reality the last several years demonstrate the diversity of Stifel's business model. Banking in general has been negatively impacted by zero interest rates and increased loan loss provisions while our wealth management business had reduced quarterly fee income resulting from the first quarter market sell-off. These factors, specifically asset management and net interest income, were relatively in line with analyst expectations. However, the institutional business we have built has consistently been underestimated by analysts. This quarter is no exception. In the second quarter, we continue to successfully execute our business strategy while navigating the challenges of COVID. I've talked a lot in the past about the value of our diversified business model as we are able to generate strong operating results in a variety of operating environments. Our results in the second quarter of 2020, and quite frankly over the past 12 months, underscore the value of the Stiefel franchise. On an adjusted or non-GAAP basis, net revenues were $896 million, up 12% from the prior year, representing our third highest quarterly net revenues. In fact, for the 12 months ending June 30, 2020, Stiefel generated revenue of $3.6 billion, up 15% from the same period ending June 30, 2019. Reflecting the uncertain economic outlook, our results were again impacted by both an elevated credit loss reserve and compensation accrual. After considering these items, both of which we will discuss in greater detail later in the presentation, I am pleased to report earnings per share of $1.55, reflecting earnings available to common of $115 million. annualized return on tangible common equity even after the aforementioned credit loss and conflict rules totaled 23%. In addition, we strengthened our already robust and liquid balance sheet and increased our book value to $48.84. In short, this was another excellent quarter that highlighted the benefits of the investments we've made over the last 20 years. The diversity of our platform is illustrated by record institutional revenue driven by increases across the board, which balanced the expected decline in asset management revenue due to lower equity valuations at the end of the first quarter and lower net interest income driven by the zero rate environment. Turning to slide three, Stifel recorded a 12% increase in net revenue and a 10% increase in earnings per share. As I stated earlier, Our institutional segment posted record revenue driven by double digit growth in essentially all our business lines when compared to a year ago. Although our expenses increased from a year ago, primarily due to acquisitions and revenue growth, they declined significantly from the first quarter, reflecting expense discipline and the impact of lower travel and conference costs due to the pandemic. That said, in the second quarter, we were again impacted by both elevated credit loss provisions as well as an elevated compensation ratio. Our loan loss provision was driven by the 2020 adoption of CECL as we are required to estimate all potential future loan losses, taking into account the current and projected economic outlook. Much like last quarter, our provision expense was driven mostly by a decline in the economic outlook as loan growth was relatively modest and credit remained solid. In terms of compensation expense, we believe it remains prudent to be conservative in how we accrue for compensation expense. This is particularly important given the uncertainty surrounding the economy in the back half of the year. Similar to what we did in the first quarter, we took advantage of the strength in our revenue base to accrue compensation at a higher level than we typically would. This resulted in an additional 9 million in compensation expense this quarter and a total of 41 million in the first half of the year. We believe this puts us in a very strong position to manage through any substantial changes in the operating environment in the second half of the year. While these expenses, especially the credit loss provision, are in line with what is being experienced in our industry, I do believe it is noteworthy that our earnings per share increased 10% even after recording the credit loss and additional compensation accrual, which represented approximately 28 cents per share. Excluding these two items, our pre-tax income totaled $187 million, up 18% year over year. For the first six months of 2020, these items accounted for nearly $76 million of increased provision and compensation accruals, or $0.76 per share. Again, after absorbing these increases, earnings per share was essentially flat with the comparable prior year period. Moving on to our segment results and starting with our global wealth management. Revenues of $506 million declined in the quarter, but year-to-date is up 4% to nearly $1.1 billion, which matches the strongest six-month stretch in our history. In addition, after a slow start to the quarter as a result of the travel restrictions associated with COVID, our recruiting activity ramped up nicely during the quarter, which I'll discuss in greater detail on the next slide. We entered the quarter knowing this would be a tough comparison, both sequentially and year over year, due to lower client asset levels at the end of last quarter, which negatively impacted fee income, as well as the impact of lower rates on our net interest income. However, we expect our asset management revenue to benefit in the third quarter from the 13% sequential increase in fee-based client assets, which totaled $106 billion at June 30, 2020. I would also note that total client assets reached $306 billion. Finally, we continue to invest in our technology, especially digital and mobile applications. Stiefel Wealth Tractor was formally introduced in the quarter and I am excited about its capabilities. Turning to the next slide and in terms of wealth management metrics, I want to focus on recruiting as we had a very strong quarter despite the issues surrounding COVID-19. We recruited 28 FAs with total trailing 12-month production of $23 million. I am pleased that we have adjusted our recruiting to the current environment. Simply, the historic strength of our recruiting is centered around home office visits, which by their nature highlight the cultural advantage enjoyed by Stiefel. Of course, the pandemic has changed that. Yet our activity levels improved throughout the quarter as we became more adept at recruiting remotely. In April, we added one advisor. In May, we added five. And in June, we added 22. I would also highlight that the average production level of these advisors is our highest since the first quarter of 2019. So not only did we add meaningful number of advisors to our platform, but they are also creative to our productivity per advisor. As you can see from the chart on the upper left of the slide, our recruiting success since the beginning of 2019 has been meaningful as we brought on 204 new advisors that have trailing 12-month production of roughly $161 million. Additionally, over the past 10 years, 85% of the FAs that have joined Stiefel have come through organic recruiting, with the remainder coming from acquisitions. So overall, I feel very good about our wealth management franchise as Stifel remains a very attractive destination for high-quality advisors, and our continued growth in client assets will drive future revenue growth. Moving on to our institutional group, as I stated earlier, we had a record quarter in our institutional segment as revenue reached nearly $400 million. Noteworthy was the performance of our fixed income business, which posted record quarterly revenue of $169 million, up 96%. Advisory revenues were $98 million, up 18%, while our equity businesses generated $126 million, up 26%. While the second quarter was a record, the strength of our institutional business has been apparent for some time now. For the first six months of 2020, we've generated $730 million in revenue, which is up 37% from the same period in 2019, which I would remind was also a record year. Additionally, over our last three quarters, we've generated annualized net revenue of approximately $1.5 billion. Ten years ago, that number was just under $500 million. The point is we have built a balanced institutional business and despite a substantial change in the markets over the past decade, the diversification of our business enables us to generate relatively consistent revenue and positions us well to continue to gain market share. On slide seven, we look at our institutional equities and fixed income businesses. While this slide depicts brokerage and capital raising for both equities and fixed income, I'll focus on the brokerage business now and address capital raising on the investment banking slide. Fixed income brokerage revenue was a record at $121 million, up 107% year on year. The increase was driven by increased activity in investment grade, high yield mortgages, as well as municipals. Well, I believe these record results, what I believe makes these record results even more impressive is that we've generated them at lower risk levels as our inventories are roughly 50% of what we've carried in the past. This illustrates the talent of our people and investments we made into the business over the past few years. Equity brokerage revenue of $63 million was up 55% year-on-year. The improvement was a combination of the rebound in the markets as the S&P 500 bounced back from the sell-off in the first quarter, as well as solid contributions from our European business, as well as our acquisitions, primarily main first and GMP. Both equity and fixed income benefited from increased market share and the rebounds in the market from the March lows. Looking forward, we do not expect these levels to continue into the third quarter as market volumes have slowed and the third quarter has historically been lighter due to seasonality. That said, we do expect brokerage revenues to be above those that were recorded in the third quarter of 2019. On the following slide, we look at our firm-wide investment banking revenue. Revenue of $217 million was the third highest in our history and was up more than 20% year on year as activity levels and capital raising and advisory improved from first quarter levels. Capital raising again displayed impressive growth, especially in the fixed income business. Our public finance business had a strong quarter as the issuance market rebounded from a very slow march. Stifel lead managed 211 negotiated municipal issues and was again ranked number one in the nation in terms of number of issues managed. Additionally, we generated solid non-public fixed income revenues during the quarter, particularly from KBW as a number of financial companies looked to raise capital through debt issuance. Moving on to our equity capital raising business, revenue of $70 million was up 4% year on year and essentially flat with the first quarter. Thank you for joining us today. The contribution from our largest vertical financials was down meaningfully compared to the first quarter as more financial firms accessed the debt markets. As such, our growth was driven by increased activity levels in verticals such as technology and healthcare. For our advisory business, revenue of 98 million increased nearly 20% year-on-year as we benefited from the closing of some large fee transactions, particularly from KBW. In terms of verticals, the performance of our advisory business was driven by financials, industrials, restructuring, and our European business. While the market environment remains challenging for our advisory business and our pipelines are down modestly from where they were in the first quarter, we are starting to see business pick up as clients are reengaging. Given the time it takes from deal announcement to closing, the near term for advisory could remain subdued. However, we continue to add new assignments to our pipeline and businesses such as restructuring continue to be very strong. So overall, I remain cautiously optimistic for our investment banking business overall as the diversity of our business can help us sustain activity levels through challenging market conditions. And with that, let me now turn the call over to our CFO, Jim Marischen.