Stifel Financial Corporation

Ladies and gentlemen, thank you for standing by and welcome to the CFO Financial year-to-date and quarterly financial conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on 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, Joel Jeffrey, Head of Investor Relations at Stifel Financial. Thank you. Please go ahead, sir.

Thank you, operator. I'd like to welcome everyone to Stifel Financial's fourth quarter and full year 2021 financial results conference call. I'm joined on the call today by our chairman and CEO, Ron Koshefsky, 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 and financial supplement to our website, which can be found on the 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 slide presentation for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material by 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 Krzyzewski.

Thanks, Joe. To our guests, good morning, and thank you for taking the time to listen to our fourth quarter and full year 2021 results. As always, I'll start the call by highlighting our full year and quarterly results. Then Jim Marish will review our balance sheet and expenses. and I'll wrap up with our outlook for 2022 and some concluding thoughts. With that, let me turn to our results. For the full year, Steeples' performance was stellar. 2021 marked our 26th consecutive year of record revenue and our fifth consecutive year of record earnings per share. Furthermore, we posted record results basically across the board. Simply, 2021 is the result of the historical investments we've made in people, products, and technology, accompanied both with organic growth and strategic acquisition. The market environment certainly was a wind at our backs, but we would not or could not have produced these results without these strategic investments. Looking forward, our optimism for our business is a direct result of our focus on constantly reinvesting in our business and improving our relevance to our clients. For the year, Revenue totaled $4.74 billion, up nearly $1 billion over 2020, while earnings per share of $7.08 increased 55% and drove a return on tangible common equity of 31%. In terms of capital deployment, I've stated that Stifel will attempt to maximize returns on invested capital, primarily through growth investments, including acquisitions. We also utilized capital by increasing the size of our bank. And finally, we returned capital to shareholders through dividends and stock buybacks. In 2021, Stiefel increased capital by approximately $1 billion. In pursuing the objective of maximizing returns on capital, in 2021, we grew our loan portfolio by nearly 50%, made a strategic acquisition of Binding Sparks, paid common and preferred dividends of approximately 100 million and repurchased 173 million in common stock. As we examine the various levers to attempt to maximize the best risk adjusted returns, we concluded that we have underweighted our common dividend relative to other capital deployment strategies and relative to our peers. Given our outlook for 2022, the increased scale and breadth of our business and our ability to generate significant excess capital after continued and anticipated investments in our franchise, I'm happy to announce that Stiefel's Board of Directors has approved the doubling of our annual common dividend to $1.20 a share from $0.60 per share. The fact that we've generated strong revenue growth should not have come as a big surprise, as Stiefel is a growth company. and we posted record revenue every year for over a quarter century. Yet, as good stewards of shareholder capital, we focus not only on revenue growth, but also on profitability and returns on capital. Slide two illustrates our growth since 2015. Basically, in six years, we have doubled Stiefel's net revenue, with global wealth increasing nearly 90% and institutional more than doubling. A particular note is our growing advisory franchise, which has increased from about $200 million in advisory fees in 2015 to $850 million in 2021. I have stated on numerous occasions that our lending opportunities were significant considering the relative size of Stiefel Bank to our combined client-facing franchises in global wealth and institutional. This has resulted, over the past six years, in a 33% average annual growth in our loan portfolio, with our most recent quarter further underscoring Stiefel's ability to source quality loans. To summarize this slide, the growth in the scale of our operations has, over the past six years, produced average revenue growth of 13%, pre-tax margins that improved from 10% to 24%, return on tangible common equity that has surged from 10% to 31%, and earnings per share that has averaged 35% annual growth. Now let me discuss our most recent quarter results. Stiefel generated record quarterly net revenue that surpassed 1.3 billion, an increase of 23% over 2020. Our revenue growth coupled with our expense discipline resulted in a pre-tax margin of 26%, non-GAAP earnings per share of $2.23, which was up 34% year-on-year, and an annualized return on common tangible equity for the quarter of nearly 37%. We are also pleased that we closed on our Binding Sparks deal and welcomed them to Stiefel. The next slide provides more detail on our quarterly results. Our net revenue was driven by record performance in both global wealth management and the institutional growth. Compensation as a percentage of net revenue declined sequentially to 57.5%, reflecting the operating leverage of record revenue. Our operating expense ratio was 16.5%, and excluding credit provision and investment banking growth ups, totaled 15.5%, which was well below our full-year guidance. Taken together, Stifel's quarterly pre-tax income totaled $335 million, which increased 33% from the fourth quarter of 2020. Moving on to our operating segments and starting with global wealth management. Before I talk about the financial results for global wealth, I want to reiterate the importance and stability of this business and the consistency of profitability. Our more than 2,300 advisors serve clients from nearly 400 locations, and combine an entrepreneurial culture with a full suite of financial solutions coupled with excellent service. Their efforts helped us achieve record quarterly and annual results as fourth quarter revenue totaled $674 million of 17% year on year and full year revenue was $2.6 billion, an increase of 19%. The drivers of this continue to be recruiting, increased client activity, and growth in interest-earning assets. Asset management revenue was up 2% sequentially, and we experienced solid asset inflows in fee-based assets, ending the year with $162 billion. We generated annualized net new asset growth of 7% during the quarter as total client assets finished the year at $436 billion. Revenue for this line item is correlated to beginning of quarter asset values as we build and advance for the majority of our fee-based products. As such, the first quarter of 2022 will positively reflect this reality. The next slide highlights the strength of our recruiting and loan growth as growth drivers, as well as the increasing stability of our revenue. For the quarter, we added 34 advisors with total trailing 12-month production of 16 million. This includes 27 employee advisors, of which 16 were experienced advisors, and seven advisors hired into steeple independent advisors as recruiting in this channel is beginning to pay off. That said, I would remind everyone that the fourth quarter tends to be seasonally slower for recruiting, but as I look forward, I'd expect 2022 to be another strong year from a recruiting standpoint as our current pipelines remain robust. Not only have we added more than 121 advisors in 2021, but we continue to see our private client revenue shift to a more fee-based model. In 2015, transactional revenue accounted for 51% of our global wealth management, yet today totals 32%. The increase in fee-based revenues has been the result of recruiting high net worth advisors that typically have more of a fee-based clientele as well as the growth of net interest income as we expand Stifel Bank. While I always said that Stifel is product agnostic, given the trends in the industry and the growth of our balance sheet, I would expect a percentage of these more recurring revenues to increase in the years to come. I am particularly pleased with our loan growth, driven by significant demand from the various facets of Stifel's client platform. Loans increased $3 billion, up 23% sequentially, or 92% annualized. This increase helped drive a 7% sequential increase in net interest income. Jim will provide more color on this later in this presentation. Moving on to our institutional group. Our quarterly net revenue totaled a record $633 million, up 29% both sequentially and from the prior year. Full year revenue, also a record, increased 36% to approximately $2.2 billion. We posted our third consecutive record advisory quarter of $311 million, which was up 49% sequentially. Capital raising posted revenue of $155 million, and was up modestly from last year. Transactional revenue, or some say sales and trading or client facilitation revenue, increased 30% sequentially to $161 million and totaled $616 million for the full year. Our institutional pre-tax margin was 28%. For the full year, pre-tax margin was 26% and was up 550 basis points as we continue to generate substantial top-line growth, which drives operating leverage. Moving on to the components of the institutional group. Our equities business increased 22% to $689 million in 2021, with fourth quarter revenue of $157 million. Our fixed income business finished the year with revenue of $588 million, up slightly from 2020, but still a record. For the quarter, we posted revenue of $160 million, which was the second highest in our history. Our quarterly fixed income business reflected strength in capital raising as well as the benefit of our acquisition of Vining Sparks. As I typically do, I'll focus on the transactional businesses of these segments on this slide. Quarterly equity transactional revenue was up 36% sequentially. This was the result of normal seasonality in our business, increased market activity levels, and solid mark-to-market gains on our portfolio. For the full year, equity transaction revenue was $255 million, roughly flat with the prior year. Fixed income transactional revenue of $95 million was up 25% sequentially. The increase was driven primarily by binding sparks, which contributed to the last two months of the quarter. For the year, fixed income transactional revenue totaled $361 million. On slide nine, we look at our investment banking business. For the full year, investment banking increased 64%. For the quarter, revenues were up 41%. Our performance was strong across our entire platform, and I would note that Stiefel's business is diversified across verticals, products, and geographies. Looking at our advisory practice, I'll simply say that 2021 was outstanding. Our full-year revenue of $856 million was double our 2020 results and an increase of more than 90% from our prior record in 2019, as essentially all of our verticals had strong years, which illustrates the success of the growth strategy. Our fourth quarter results were equally impressive, as $311 million of advisory revenue surpassed our prior record by almost 50%. Moving on to capital raising. Our equity underwriting business posted revenue of $100 million. For the year, we had our strongest ever equity underwriting results with revenue of $476 million. In 2021, Stifel ranked as the fifth most active underwriter and the 11th most active book runner across all equity and equity-linked products. Our fixed income underwriting business posted its third consecutive record quarter with $67 million in revenue, up 11% sequentially. Our municipal finance business posted another great quarter as we lead managed 264 municipal issues. For the full year, our market share, in terms of number of transactions, increased by 130 basis points. to a 13.2% market share. In addition to the strength of our public finance business, we continue to see strong contributions from our debt capital markets business. As you can see from the chart on this slide, we've had a long track record of growth. Allow me to explain this growth and its sustainability. Back in 2011, we made the strategic decision to build our investment banking capabilities. Our growth plan centered on layering investment banking on top of our core strength in equity research. We were then and remain today one of the largest and most respected global providers of equity research. Thus, we have focused our efforts on adding talented investment bankers through selective hiring and opportunistic acquisitions and broadening our product offering and geographic footprint. Our managing director headcount has increased from 79 in 2011 to 205 today, and we've transformed our investment banking product. Stifla has grown from a purely U.S. small-cap focused effort to a full-service investment bank. We started by improving from co-manager to book runner in our equity origination efforts, largely on the back of the strength and research. From there, we have grown to be a full-service global investment bank with growing revenue centers in the United States, Europe, and Canada. We now have the capabilities of a bulge bracket firm and can offer a broad range of products that include restructuring, SPACs, leveraged finance, 144As, private placements, private equity, and venture sponsor coverage. The result of this process is substantial operating leverage in our business, as our bankers that have been on our platform since 2016 have roughly tripled their production over the past six years. Increased productivity, the growth in our total MD headcount, and the breadth of our product offering have combined to drive a nearly 700% increase in investment banking revenue over this timeframe. Said another way, we are building this franchise as we do in global wealth, which is via the addition of talented and entrepreneurial associates armed with a broad array of product offerings and technology. So as we start out 2022, we continue to believe that our investment banking activity will be strong. Our pipelines are meaningfully larger than they were coming into 2021. That said, market volatility can impact the timing of closings, and our performance during the year will not be linear. We do look at our current pipelines, and under relatively normal operating environment, we expect another solid year from our investment banking business. And now, let me turn the call over to our CFO, Jim Marichan.