Stifel Financial Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter and full year results conference call for Siebel Financial Corporation. All lines are currently in a listen-only mode. After the speaker's presentation, 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, today's conference is being recorded. It is now my pleasure to hand the conference over to Mr. Joel Jeffrey. Please go ahead, sir.

Thank you, Operator. I'd like to welcome everyone to Stiefel Financial's fourth quarter and full year 2020 Financial Results Conference Call. I'm joined on the call today by our Chairman and CEO, Ron Krzyzewski, our co-presidents, Victor Nisi and Jim Zemlack, and our CFO, Jim Marishen. 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.stiefel.com. I would note that some of the numbers we state throughout our 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. 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 by 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 CEO, Ron Krzyzewski. Ron?

Thanks, Joel. Good morning, and thank you for taking the time to listen to our fourth quarter and full year 2020 results. I'm going to start the call by running through the highlights of our results before turning it over to our CFO, Jim Marishen, who will take you through our balance sheet and expenses. I'll then come back to discuss our outlook for 2021 and my concluding thoughts. With that, let me turn to our results. marked Stiefel's 130th anniversary and also the best year in our history. Stiefel's net revenue increased to a record $3.8 billion, and earnings per share totaled $4.56, both up 12%, while return on tangible equity was 25%. The company's two operating segments, global wealth and institutional, both achieved record revenue. We continued our strategic growth initiatives by integrating the six acquisitions we closed in 2019, while continuing to grow our business through investments in both talented individuals and technology. The fact that Stiefel recorded its 25th consecutive year of record net revenue against the backdrop of rapidly changing and volatile market conditions illustrates the diversity and balance of our business. To illustrate, let's look back on our 2020 results as compared to our original guidance issued in January of 2020. So turning to slide two, as you can see, back in the beginning of 2020, we forecasted net revenue of $3.5 to $3.7 billion, which at the time was driven by NII growth of approximately $50 million and $125 million in incremental revenue from the acquisitions. Additionally, we expected revenue growth from investment banking, driven largely by advisory revenue, as KBW was anticipating another strong year of bank M&A. On the expense side, we targeted compensation of 57% to 59%, with non-comp expenses of 19% to 21%, both as a percentage of net revenue. So what happened? Well, as we all know, the pandemic materially changed market conditions, while also presenting us with the challenge of protecting our employees, yet maintaining client service levels, all while working remotely. Thus, in March, market volatility increased significantly. The U.S. economy contracted. The government provided nearly $4 trillion of stimulus, $2.9 at the time, and the Federal Reserve cut interest rates to effectively zero, with negative real rates, also ramping up quantitative easing. How did this impact our 2020 results compared to what we thought at the beginning of the year? Let's first look at the items that were negatively impacted. As a result of the zero-rate environment, our net interest income came in below the midpoint of our forecast by approximately $140 million, with our bank net interest margin more than 70 points below the low end of our guidance. Lower rates also weighed on our asset management fees as fees from our third-party bank program declined an additional $25 million. In addition, our asset management fees were negatively impacted by lower market levels. On the investment banking side, a surge in volatility and the significant contraction of economic activity negatively impacted our advisory business, particularly in financials and technology verticals, as well as our fund placement business. Taken alone, These factors should have led to a decline in 2020 from our 2019 revenue. However, the diversity of our business model enabled us not only to post another record year, but to surpass the high end of our guidance. How did this happen? Well, first on the revenue side, we were able to quickly transition our staff to remote locations, which allowed our traders to take advantage of the spike in volatility in the first and second quarters. which drove our record brokerage revenue. Second, the performance of our 2019 acquisitions was slightly better than we expected. Third, our investment banking business benefited from the strength of our healthcare franchise, which more than offset the weakness in financials. On the expense side, the decline in net interest income did drive up a higher comp ratio, but our expense discipline drove down non-comp expenses below our guidance. So, the diversity of our model to changes in market environment not only resulted in our 25th consecutive year of record revenue, but also our fifth consecutive year of record earnings per share. Moving on to our fourth quarter results, we had record net revenue as we surpassed $1 billion in quarterly revenue for the first time. This was driven by record investment banking revenue and our second strongest quarter in global wealth management. The growth in revenue and our focus on expense management resulted in record non-GAAP EPS of $1.67 and an annualized return on tangible common equity of more than 33%. As one way of expressing our confidence in our future, we announced a 32% increase in our quarterly dividend, as well as splitting our stock three for two. Turning to the next slide, as I stated, our fourth quarter net revenue totaled $1.6 billion, which was up 12%. Compensation as a percentage of net revenue came in at 57.9%, which was below our recent guidance range. I'll let Jim speak about this in greater detail, but this was essentially due to the composition of our revenues. Our operating expense ratio, excluding credit provision and investment banking gross-ups, totaled 16.9%. which came in below our guidance of expenses due to the strength of our revenue and strong expense management. For the second consecutive quarter, we had essentially no increase in our credit loss provisions. This was the result of continued improvement in the economic factors that drive our CISO models that was offset by additional provisions tied to loan growth. Altogether, compared with last year's record fourth quarter, earnings per share were up 33%. Pre-tax margins, nearly 24%, which increased 330 basis points. Annualized return on common equity, as I said, over 33%, which increased 340 basis points. And our tangible book value per share increased 21%. Moving on to our segment results and starting with global wealth management. Fourth quarter revenue totaled $575 million, up 9% sequentially. The increase in the quarterly was driven by the expected strength in asset management fees, which increased 8% sequentially, as well as a 14% sequential increase in brokerage revenue due to growth in corporate debt, equities, and private placement commissions. For the full year, our wealth management revenue is up 3% to a record of nearly $2.2 billion. Again, these results were achieved despite the fact that our net interest income and sweep fee income declined significantly. approximately $96 million. Excluding this impact, our full year wealth management revenue increased 9%, again driven by strong growth in our brokerage and asset management revenues, both which reflect strong recruiting and markets. We finished the year with record client assets. Total assets under administration were more than $357 billion, an increase of $32 billion from the prior quarter, and fee-based assets of $129 billion, which rose 12% sequentially, which should drive another strong quarter of asset management revenue in the first quarter. Before moving on to our recruiting, I want to highlight our year-on-year growth rates. Our assets under administration and fee-based assets were impacted by the sale of Ziegler Capital Markets. Specifically, our fee-based assets, excluding the Ziegler sale, increased 22%. The next slide highlights the strength of our recruiting and the investments we've made into our platform. We had another good quarter in terms of gross advisor additions, despite what is typically a seasonally slow period of the year. In the fourth quarter, we added 32 financial advisors with total trailing 12-month production of $22 million. Our recruiting performance this quarter is a continuation of our successful recruiting efforts. Since the beginning of 2019, we've added more than 280 new advisors that had trailing 12-month production of $221 million. Moving on to our institutional group, they also had an outstanding year. For the full year, we generated record net revenue of nearly $1.6 billion, which is up 30% from last year. Our results were driven by capital raising and brokerage, which were both up roughly 50% from last year. For the fourth quarter, net revenue totaled $489 million, up 25% from last year and driven by more than a 35% growth in both capital raising and brokerage. 2020 underscored the value of the diversified business model we've built. As you can see from the chart at the bottom of this slide, our business model helps to provide more consistency to our revenue during changes in market conditions, and we expect this to continue into 2021. Moving on to our institutional equities and fixed income businesses, I'll focus my comments on this slide on the brokerage business and discuss capital raising on the investment banking slide. Equity brokerage revenue in the fourth quarter was up 51% year on year as activity levels increased, and we benefited from solid trading gains. For the full year, we generated a record revenue of $257 million, which increased 90 million from the prior year. While market volatility in 2021 will likely be lower than in 2020, we expect to see increased contributions from our electronic businesses, which include our ATS and Algo products. Fixed income brokerage revenue in the quarter was up 26% year on year and was our fourth highest quarterly revenue ever. All of the top four actually occurring in 2020. Our full-year revenue of $405 million surpassed our prior record set in 2016 by 34%. Our results continue to be driven by activity in investment-grade high-yield rates in municipalities. I would note that we are also seeing solid results from our non-QCIP businesses as well, which we have been investing in for the past few years. On the following slide, we look at our firm-wide investment banking revenue. Revenue of $338 million surpassed our prior record from the fourth quarter last year by more than 22%, driven by record capital raising and advisory revenue. Equity underwriting revenue of $111 million was up 58% year-on-year and surpassed our prior record by 20%. The record results in the quarter underscored the diversity of the business we built as healthcare technology and SPACs were strong contributors. Our fixed income underwriting revenue of $53 million was up modestly from the prior quarter as our public finance business had a strong quarter, despite what we saw as low activity levels in November, which we believe was due to the election. For the full year, we lead managed 929 issues, which is up 17% versus 2019. Given our market position and the possibility of an infrastructure bill from Congress in 2021, we believe that public finance should have another strong year. For our advisory business, revenue of 173 million more than doubled third quarter results. In terms of verticals, our top performers were technology and consumer, as well as another solid quarter from our restructuring franchise. In terms of our overall pipelines, we entered 2021 at levels that are above where we had pipelines in 2020, at the beginning of 2020. And as such, I'm optimistic for our investment banking business overall. So with that, let me now turn the call over to Jim Marashin.