Stifel Financial Corporation

Ladies and gentlemen, thank you for standing by and welcome to Stifel Financial's third quarter 2020 earnings conference call. All lines are currently on a listen only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, you may do so by pressing star and the number one on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to hand the conference over to Mr. Joel Jeffrey, head of investor relations at Stifel.

Thank you, operator. I'd like to welcome everyone to Stiefel Financial's third quarter 2020 financial results conference call. Yesterday, we issued an earnings release and posted a slide deck to our website, which can be found on the investor relations page at www.stiefel.com. I would remind listeners to refer to our earnings release 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 Krzyzewski.

Thanks, Joel. Good morning, and thank everyone for taking the time to listen to our third quarter 2020 results. I'm joined on the call today by co-presidents Jim Zemlack and Victor Nisi, as well as our CFO, Jim Marishen. I'm going to start the call by running through the highlights of our third quarter before turning it over to Jim, who will take you through our balance sheet and expenses. I'll then come back with my concluding thoughts. Before I discuss our results, let me begin by thanking all Stiefel associates for their dedication to client service. The COVID pandemic has impacted millions of people worldwide and resulted in ever-changing challenges for both our healthcare system and our economy. Despite this backdrop, It's the focus of my partners and associates at Stifel that has enabled us to provide the high-quality financial advice that our clients have come to rely on over the past 20-plus years as we've grown into a premier wealth management and middle market investment bank. So again, to my more than 8,000 partners at Stifel, I want to say thank you. With that, let's look at our results. Simply, we had another great quarter. FIFO benefited from strong capital raising and trading activity, as well as continued growth in fee-based assets. This more than offset the expected pullback in advisory revenue and net interest. Noteworthy, we had one of our strongest recruiting quarters in recent history as we've been able to successfully implement a virtual recruiting strategy. Our pipeline remains strong, and despite the uncertainty of the U.S. economy resulting from the pandemic, Stifel remains well-positioned for continued growth. I want to highlight the strength of our business for both the quarter and year-to-date. We generated record third-quarter revenue and our second-best quarterly earnings per share. For the first nine months of the year, we achieved record revenue and earnings per share. Capital-raising revenue achieved a quarterly record, trading volumes are up year-over-year, and credit quality remains strong at Stifel Bank. Additionally, wealth advisor recruiting accelerated, which built on the momentum we achieved during the first six months. The financial performance during the quarter, and frankly, the past few years, is driven by a diverse business mix that's enabled both our institutional group and wealth management segment to generate strong growth. This diversification is illustrated by record nine-month wealth management revenue and despite significant declines in net interest income and deposit sweep fees, both a result of the Fed's implementation of a zero-rate environment. Likewise, we achieved record nine-month institutional revenue as record capital raising and brokerage more than compensated for a 13% decline in advisory revenue. Simply, Stiefel is a growth company with diversified, balanced, and synergistic businesses. Over the last 12 months, wealth management under both brokerage and fee models, has contributed 46% of net revenue. Institutional revenues, comprised of equity and fixed income, investment banking and trading, made up 41%, while net interest income comprised the remaining 13%. The synergy and complementary nature of these businesses is reflected in our return on tangible common equity, which is 23.2% over the past 12 months. Let's turn to slide two. I would note that some of the numbers we state throughout this presentation are presented on a non-GAAP basis, and I would refer to our reconciliation of GAAP to non-GAAP as disclosed in our press release. For the third quarter, STPL's net revenues were $883 million, up 8% from the prior year, representing the fourth highest quarterly revenue in our history. In fact, for the 12 months ending September 30, 2020, steeple generated revenue of more than $3.6 billion, up 14% from the 12 months ending September 30, 2019. Compensation as a percentage of net revenue came in at 59.6%, while operating expenses totaled 21%. I would note that our compensation ratio is higher for both the quarter and year-to-date as compared to the full year 2019, primarily as a result of the decline in NII. Relatively modest loan growth and a stabilization of economic factors coupled with our management overlay resulted in essentially no provision for loan losses. To give a sense of the range of outcomes under our CECL economic models, assuming our base case scenario, we are approximately 40 million over accrued. Under our most severe scenario, we would be approximately 60 million under accrued. Altogether, Earnings per share were $1.59, up 6%. Pre-tax margins were 19.4%. Annualized return on tangible common equity was 22.2%. And tangible book value per share increased 13% over last year to $32.34. Moving on to our segment results and starting with our global wealth management group, third quarter wealth management revenue totaled $527 million, up 4% sequentially. The third quarter benefited from the expected rebound in asset management and service fees, which increased by 16% sequentially, as well as improved brokerage revenue, both offsetting an 11% decline in NII. Through the first nine months of the year, our wealth management revenue is up 2% to a record of more than $1.6 billion. Again, These results were achieved despite the fact that our NII and deposit fee income declined approximately $65 million. Excluding this impact, our year-to-date wealth management revenue increased 18% driven by strong growth in our brokerage and asset management revenues, both of which reflect strong recruiting and markets. In the fourth quarter, we expect another strong quarter for our asset management revenue due to the 8% sequential increase in fee-based client assets, which totaled $115 billion at September 30th. I would also note that total client assets reached $326 billion at the end of the quarter and are just $3 billion below the record level set in the fourth quarter of 2019. As you can see on the wealth management metric slides, We had another outstanding recruiting quarter as our virtual recruiting strategies continue to produce significant growth in our advisor headcount. To put numbers to this, we recruited 45 financial advisors with total trailing 12-month production of 38 million. Our recruiting performance this quarter is a continuation of our successful recruiting efforts since the beginning of 2019, as we've added nearly 250 new advisors who had trailing 12-month production of roughly $200 million. This will continue to drive future revenue growth and wealth management as the new advisors transition their clients onto our platform. Looking forward, we have a lot of momentum behind our recruiting efforts. And while there is some seasonality in the fourth quarter, primarily due to the holidays, our pipeline remains extremely strong as Steeple remains a very attractive destination for high quality advisors. Moving on to our institutional group. Through nine months, we generated record net revenue of 1.1 billion, which is up 33% from last year. Reflecting our growth in investments, the first nine months of 2020 would represent our third highest annual revenue. These results were driven by capital raising and brokerage, both up more than 50% from last year. For the third quarter, Net revenue totaled $363 million, up 25% from last year. Similar to our year-to-date results, capital raising and brokerage increases of approximately 50% drove the increase in the quarter and more than offset the expected softness in advisory revenue. Before I go into the details of this segment's performance on the next few slides, I want to take a minute to talk about the general perception of our institutional business. I'm sure you remember that on last quarter's call I commented that this segment is continually underappreciated by analysts. In general, institutional businesses tend to be transactional in nature, and consequently there are persistent concerns that strong results in any given quarter are not sustainable. While it's true that we're not likely to generate record results every quarter, we believe that performance in this business is better judged by annual results. As you can see by the chart on the bottom half of the slide, not only have our results been sustainable, they've grown substantially. In fact, if you annualize our results for the first three months of 2020, our institutional revenues have grown at a compound annual rate of nearly 11% since 2009, despite substantial changes in the operating environment. This growth is a direct result of the investments we've made into our business that has enabled us to pick up market share and become more relevant to our clients, which will help to drive continued growth in the future. With that said, let's move on to 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 $97 million, up 60% year on year, and was our third highest quarterly revenue ever, with the top two quarters occurring in the first half of the year. As such, we are having a record year in fixed income brokerage, as the first three quarters are not only up 70% from 2019, but already surpassed our previous full year record in 2016 by 5%. The strength of our results continues to be driven by activity and investment grade, high yield, rates, as well as municipals. Equity brokerage revenue of $54 million was up 32% year-on-year as activity levels slowed from the record levels in the second quarter as market volatility slowed. Like our fixed income businesses, we are also having a record year in our institutional equity brokerage business as through the first nine months, revenues are up 23% from our previous nine-month high recorded in 2014. I would also note that I'm pleased with the contributions from our international businesses. On the following slide, we look at our firm-wide investment banking revenue. Revenue of $218 million was relatively flat with the prior quarter and up 10% year-on-year, driven by record revenue and capital raising. Overall, the third quarter was our third strongest investment banking quarter. Much like my comments about our overall institutional business, Our investment banking business has not only been sustainable on an annual basis, but has grown at a compound annual rate of 20% since 2009 and has more than offset industry headwinds in our institutional brokerage business. We will continue to invest in this business as we believe that we can continue to take market share and grow as a premier middle market investment bank. Looking at our capital raising business in the quarter, We generated record revenues in both our equity and fixed income issuance. Equity underwriting revenue of $85 million was up 41% year on year and surpassed our prior record by 20% as IPO activity was up significantly from the prior quarter. The record results in the quarter underscore the diversity of the business we built as healthcare and technology were our strongest contributors, while our largest vertical, financials, as clients looked to raise capital in the debt markets. Our fixed income underwriting revenue of $53 million was also a record as our public finance business had a strong quarter and the issuance market continued to improve. Stiple lead managed 264 negotiated municipal issues and was again ranked number one nationally in terms of the number of issues managed. Through the first nine months, we have lead managed 632 municipal issues, which is up 17% compared to the combined volume of Stiefel and George K. Baum for the same period in 2019. I would also note that although our corporate debt issuance revenues were down from the prior quarter, we continue to benefit from our bankers' ability to cross-sell services. As I mentioned earlier, KBW's clients continue to benefit from our expertise in the debt issuance markets. This again highlights the benefits of our model. For our advisory business, revenue of $81 million decreased by 23% year-on-year as we were negatively impacted by the slowdown in bank M&A following a very strong year in 2019. In terms of verticals, the performance of our advisory business was driven by technology, industrials, and restructuring. The decline in advisory was expected as the market had been impacted by the slowdown in deal announcements earlier this year following the pandemic. That said, we continue to see our clients re-engage and our pipelines continue to pick up. While bank M&A activity continues to lag the robust levels we saw in 2019, we are starting to see some green shoots as we recently advised CIT on their announced sale to First Citizens, which will create a bank with $100 billion in assets. Additionally, in the fourth quarter, we advised Eastern Bank on the largest-ever first-step mutual conversion. In terms of our overall pipelines, they continue to build, and I'm optimistic for our investment banking business overall. I would note that the capital-raising business is robust, yet highly market-dependent. And with that, let me now turn the call over to our CFO, Jim Marishen.