Stifel Financial Corporation

Ladies and gentlemen, thank you for standing by, and welcome to Stipa Financial Corporation's 2Q 2021 earnings conference call. Our 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.

Thank you, Operator. I'd like to welcome everyone to Stiefel Financial's second quarter 2021 financial results conference call. I'm joined on the call today by our chairman and CEO, Ron Kruszewski, 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 our investor relations page at www.stiefel.com. I would note that some of the numbers that 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 also remind listeners to refer to our earnings release, financial supplement, and our slide presentation for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material of Stiefel Financial and may not be duplicated, reproduced, or rebroadcast without the consent of Stiefel Financial Corp. I will now turn the call over to our Chairman and CEO, Ron Kruszewski.

Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our second quarter 2021 results. I'll start the call with some highlights from our quarterly and first-half results, and I'll discuss our revised outlook for the full year. Jim Marichan will review our balance sheet and expenses, and then I'll wrap up with some concluding thoughts. Before I get into the specifics of our quarterly results, let me start by saying that overall, steeple business in the first half of 2021 has surpassed any six-month stretch by a wide margin and rivals some of our most recent full-year results. Our record six-month net revenue was the result of records in both of our major operating segments. The strength of our top line and our continued focus on operating efficiency resulted in record quarterly and six-month revenue, as well as record earnings per share. As we head into the back half of this year, we are well-positioned to continue our strong performance, which is illustrated by our increased full-year guidance, which I'll discuss in greater detail in a few minutes. So looking at our quarterly and year-to-date snapshot, the numbers really speak for themselves and are the result of the investments over the last several years in a strong operating environment, especially for our investment bank. Revenue in the second quarter was a record of more than $1.15 billion, an increase of 29%. For the six-month period, revenue was nearly $2.3 billion, up 27%, and further illustrating our growth was roughly as much as our 2015 full-year revenue. The growth in revenue and lower expense ratios resulted in record non-GAAP EPS of $1.70, which was up 65% year-on-year, and $3.20 here today, which is up 75%. And when compared to our past full-year results, would rank as the fourth best in our history. I'm also pleased with our operating leverage as we generated record pre-tax margin of 24% and our annualized return on tangible common equity was nearly 31%. Tangible book value per share increased 29% in the last year. Turning to the next slide, our record second quarter net revenue was driven by global wealth management that increased 26% and our institutional business which posted a 31% improvement. Compensation as a percentage of net revenue declined sequentially to 59.5%, which was in line with our guidance on last quarter's call. Our operating expense ratio was 17%, and excluding credit provision and investment banking gross ups, our operating ratio totaled 16%. This was, again, well below our full-year guidance due to the strength of our revenue and expense management. As the economic outlook improves, we, like other banks, have updated our economic models. This, coupled with strong credit performance in our loan portfolio, resulted in a reversal of more than $9 million of credit provisions during the quarter. I would note that this was comprised of a $4 million release of credit provisions due to improving economic outlook and approximately $5 million relating to loan sales. As it relates to the loan sales, Jim Marishen will provide more color in his remarks. Neutralizing the impact of credit provisions, Stifel's pre-tax, pre-provision income totaled $270 million, which increased 31% year-on-year and 13% sequentially. While the strength of the operating environment, particularly in investment banking, has been a primary driver of our results, I do not want to understate the importance of the investments we've made in our business as a meaningful contributor to our performance. Stifel is and will continue to be a growth company. Our focus on investing in our business and making us more relevant to our clients has resulted in not only impressive top-line growth, but significant operating leverage. As you can see from the numbers on this slide, our total net revenue on an annualized basis in 2021 has doubled since 2015 and was driven by both our wealth management and institutional businesses essentially doubling in that time frame. What is particularly interesting is not only has our revenue growth doubled, but our growth rate has accelerated. To illustrate some of the numbers, at the end of 2015, our net revenue totaled approximately $2.3 billion, with nearly $1.4 billion from wealth management and roughly $1 billion from our institutional group. Since that time, we've grown our wealth management business by hiring experienced financial advisors and more than doubling our balance sheet. This has led to a more than 70% increase in total client assets and annualized global wealth revenue that would surpass 2015 results by 84%. Our institutional business, we've made six acquisitions and our total managing directors have increased 67% in our investment banking business, contributing to an 111% increase in our institutional revenue since 2015. While our revenues are on an impressive trajectory, our ability to generate operating leverage I think is even more outstanding. In the first half of 2021, our pre-tax margin increased to 23% from 10% in 2015, while our return on tangible common equity improved to 30% from 10% in that same time period. Looking at our operating leverage another way, our EPS has quadrupled on a doubling of revenue since 2015. This increase in our scale and the fact that we continue to be more relevant to our clients are the primary drivers behind my optimism for the back half of this year. Now, before I go into details of our updated guidance, I want to note that our revised outlook is based on continued favorable market conditions. There are always risks such as market corrections or geopolitical crisis that could negatively impact the operating environment and particularly our investment banking business. But given the strength of our results in the first half of the year, the current strength of our pipelines and my visibility into the beginning of this quarter, we believe that it is appropriate to increase our full year guidance at this time. We now expect net revenue to be in the range of four and a half to 4.7 billion up 13% to 18% from the high end of our prior guidance. This is a reflection of the strength of our investment banking and wealth management businesses. We are tightening our net interest income guidance to $465 to $485 million as the benefits of the growth in our balance sheet has helped to offset the decline in short-term rates. In the second half of 2021, we anticipate an additional $2 billion of asset growth at our bank. As a result of our increased revenue expectations, we are lowering our expense ratio guidance. Our comp ratio is lowered to 58 to 60 percent, given our expected NII results and strong investment banking. Our operating non-comp expense ratio expectation has declined to 16.5 to 18.5 percent as we continue to see improved operating leverage in our business. I would note that the midpoint of our revenue guidance would suggest that Stiefel achieve second half revenue essentially equal to our first six months of revenue. The current market environment, our pipelines clearly support this guidance. And further, historically, the second half of the year, especially the fourth quarter, are strong seasonal periods for Stiefel. I would also note that not only is our updated guidance significantly above our original expectations, but also well above the current 2021 street expectations of $4.3 billion in revenue and $5.57 of earnings per share. And with that, let me move on to the results of our operating segments, starting with global wealth management. Second quarter revenue totaled a record of $638 million, up 26% year-on-year, and with six-month revenue of $1.3 billion, also a record and up 17%. Our growth was driven by increased asset management revenue and net interest income. The continued growth in our asset management revenue was driven by higher market valuations and increased client assets, which finished the quarter at record levels. Total assets under administration were $402 billion, and fee-based assets of $149 billion rose 8% sequentially. These asset levels should drive further growth in asset management revenue in the current quarter. Net interest income increased 3% year-over-year, primarily given our continued ability to grow loans and produce a stable net interest margin. Jim will touch on this further later in the presentation. The next slide highlights the strength of recruiting and the growth drivers of our platform. We added 26 advisors, including 14 experienced advisors, with total trailing 12-month production of 12 million. The gross number of recruits is down compared to last year as the return of advisors to their offices has slowed recruiting. In addition, there is increased competition from larger firms offering what is, in our opinion, very high transition packages. That said, as our inflation experts in Washington like to say, we view this situation as transitory as our pipeline remains robust. Additionally, we definitely are seeing activity within Stiefel Independent Advisors and look forward to recruiting to pick up in this channel. Moving on to our institutional group, we posted our third consecutive record quarter in our institutional business as we continue to benefit from increased activity levels and the scale of our business. Our quarterly net revenues total a record $521 million, which was up 31% from the prior year. Six-month revenue increased 41% to over $1 billion. Quarterly advisory revenues more than doubled to $207 million, while capital raising posted revenue of $158 million, which was up 42%. These results more than offset a 17% decline in our trading revenue. While the decline in trading revenue was expected as compared to the robust activity in the second quarter of 2020, I am pleased with our results relative to the streak. at least to the reported numbers that I have seen. As noted on previous earnings calls, we've been investing in our institutional business with the objective of becoming more relevant to our clients and the market as a whole. The leverage in these investments was on display this quarter as our pre-tax margins improved by 630 basis points to 27%. Looking at the revenue components of our institutional business, our equities business posted record first half results of 391 million, up 52%, while our second quarter revenue totaled 163 million, up 29% year on year. Our fixed income business posted quarterly revenue of 147 million, while down 13% year over year was up sequentially. On this slide, I'll focus on the trading businesses of these segments and discuss capital raising on the next slide when I talk about investment banking. With respect to our trading businesses, equity quarterly revenue totaled $61 million, down 22% from record levels in the first quarter, which was slightly better than the overall market volume declines which we witnessed. Six-month revenue was $141 million, which was up 5% from 2020. Fixed income trading revenue of $92 million was down 7% sequentially. Similar to my comments regarding institutional equity, our fixed income trading was impacted by lower industry volumes. While an industry-wide slowdown in credit trading was the primary driver of our revenue decline, I want to say that our rates and muni revenue experienced solid improvement. On slide nine, investment banking revenue of $376 million was our third consecutive quarterly record, an increase of 73%, driven primarily by record advisory revenue First half revenue of $716 million increased 81% as we generated record capital raising in the first quarter and record advisory revenue in the second quarter of this year. I noted on last quarter's call that we expected a strong second quarter for our advisory business, and that is exactly what we got. Record revenue of $207 million surpassed our prior quarterly record by 19%. In terms of verticals, financials was a standout as KBW had its best quarter since our merger back in 2013. Since the beginning of 2020, KBW has advised on eight of the 10 largest bank mergers and has the highest market share in the firm's illustrious history. Additionally, we saw strong contributions from technology, consumer, and diversified services, as well as in the fund placement business from Eaton Partners. Looking at our third quarter, barring a substantial change in the market or economy, we expect to see continued strength in advisory revenue. Moving on to capital raising, our equity underwriting business posted revenue of $112 million, up 61%, and our second-best quarter in history, trailing only the first quarter of this year. Strongest verticals were consumer, healthcare, technology, and financials. In addition to the strength of our equity business, we generated record results in our fixed income underwriting business of 57 million, which was up 16%. Our municipal finance business posted another great quarter as we lead managed 244 municipal issues. For the first six months, our market share in terms of number of transactions increased to 12.5% from 10.9% in the first half of 2020. I think it's noteworthy that in the first half of 2021, non-public finance revenue, which was minimal just a few years ago, now accounts for nearly 20% of our fixed income underwriting. This is the result of our efforts to diversify both domestically and internationally. In terms of our overall pipelines, they continue to build and remain at record levels. We expect strong performance from all of our major verticals, and as our updated guidance indicates, I am very optimistic for our investment banking business in 2021. With that, let me turn off the call over to our CFO, Jim Marish.