Stifel Financial Corporation

Good day and thank you for standing by. Welcome to the first quarter earnings call 2022. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's call is being recorded. If you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today, Mr. Joel Jeffrey, Head of Investor Relations. Please go ahead.

Thank you, operator. I'd like to welcome everyone to Stiefel Financial's first quarter 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 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 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 Corp. I will now turn the call over to our chairman and CEO, Ron Krzyzewski.

Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our first quarter results. 2022 is off to an interesting start, to say the least. The war in Ukraine, surging inflation, and the post-COVID reopening have resulted in increased volatility, higher rates, lower equity markets, and a fear of a recession in the United States. This contrasts markedly with 2021 when the yield on the 10-year Treasury was 1.6%, oil was $60 a barrel, The VIX was 18, and the Fed's dot plot forecasted zero rate hikes in 2022. Last year, we generated record revenue and earnings per share led by our institutional business, and more specifically, our investment banking businesses. Fast forward today, and the environment couldn't be more different. Ten-year treasury yields are around 2.8%. Oil is above $100 a barrel. The VIX, as of this morning, is above 30%. and the market is forecasting the Fed to raise short-term rates to 2.5% by year-end. One of the objectives of this call is to highlight the diversity and balance of our business model, which has proven over time to generate consistent growth despite ever-changing market conditions. Simply, all else being equal, rising short-term rates are good for most banks and very good for Stifel. As I look to the remainder of 2022, The expected benefits from increases in short-term interest rates will be substantial to our net interest income. As Jim Marison will elaborate, our net interest income is now expected to increase by $300 to $400 million over 2021. This, coupled with the growth in other global wealth management revenues and our fixed income businesses can help to offset the impact of some of our more market-sensitive revenue lines. In short, We expect 2022 to be another strong year for Stiefel. So with that said, let's look at our first quarter results. Stiefel recorded our second highest net revenue and EPS for a first quarter, which is no small feat considering the difficult market environment, especially for our equities business. Much like our forecast for the full year, excuse me, 2022, our results in the first quarter illustrate why it's important to have a diversified business model that can provide balance. To illustrate, global wealth management revenue increased 8% to a record $682 million as our fee-based revenue and net interest income had record quarters. On the other hand, our institutional revenue declined 15% to $431 million, yet we are also balanced within our institutional business as the strength of our advisory and fixed income revenues helped offset a roughly 80% decline in industry-wide equity issuance. Taken together, Stifel's first quarter revenue totaled $1.12 billion, only slightly down from the prior year. This underscores the balance of our businesses. The next slide contains more detail on our quarterly results. As I said, our revenues were down modestly. However, our bottom line benefited from our variable expense model that resulted in pre-tax margins of 22%, and return on tangible common equity of 24%. A measure of our profitability as compared to the same period last year is to compare pre-tax, pre-provision income. So let's compare. Our pre-tax, pre-provision income of 250 million was up 5%. Excluding the impact of our credit provisions, which I would note are related to loan growth, our earnings per share would have increased by 10 cents per share this quarter. Driving this improvement in operating margin, our compensation ratio declined from the first quarter of last year to 59.5% as our operating leverage continues to improve. Additionally, our operating expense ratio was 18.1%, and excluding the investment banking growth ups, totaled 17.7%, which was just above our full-year guidance. Taken together, Our EPS of $1.49 represented our sixth best quarterly result and second strongest first quarter. Moving on to our operating segments and starting with global wealth management. Our record net revenue increased 8% and was driven by the addition of productive financial advisors as well as the growth in our balance sheet, coupled with improving net interest margin. Asset management revenue was up 7% sequentially and 23% from last year. When we discussed our 2022 outlook back in January, we projected that the market would be down in the first quarter. And I guess we were proven right as the S&P 500 finished the quarter off about 5%. However, the impact of the decline in equity valuation was partially offset by continued strong inflows as our fee-based assets ended the quarter at $158 billion and total client assets were $421 billion. On the next slide, we highlight our strong recruiting activity, client asset growth, and an increased loan portfolio. For the quarter, we added 39 advisors with total trailing 12-month production of $18 million. This includes 16 recruits with trailing 12-month production of $18 million. The remaining advisors were added through Stiefel's training program as well as advisors that achieved minimum productivity standards. Although market volatility was a bit of a headwind in terms of overall recruiting, we continue to see extremely strong interest in our platform, and we anticipate increased conditions as the year goes on. The consistency of our revenue continues to benefit from our growth in fee-based revenue and net interest income. This resulted in nearly 75% of wealth management revenue coming from recurring sources during the quarter. Lastly, we grew our loan portfolio by $1.1 billion during the quarter, up 6% sequentially. And if you annualize our first quarter, it would represent a 25% increase in loan balances from the end of 2021. Our growth was driven by both commercial and consumer lending. The commercial growth was spread across a number of verticals as we continue to invest in people and capabilities across multiple commercial lending channels. including fund and venture banking, sponsor finance, CRE, and broadly syndicated lending. Our consumer growth continued to be the result of increases in our retained mortgage portfolio, and while we anticipate that the second quarter will be strong, we also expect higher interest rates will moderate the pace of growth in our retained mortgage book in the second half of the year. The increase in our loan portfolio helped drive the 13% sequential increase in net interest income. As Jim will discuss, our projections for net interest income are strong and highlight the asset sensitivity of our balance sheet. Moving on to our institutional group. Let me start by saying that at Stiefel, we view this segment, our institutional segment, as a growth business, albeit with some cyclicalities. As you can see from the chart on the bottom of the slide, we have consistently grown our institutional revenue. Through 2021, our five and ten year compound annual growth rate were 18 and 15% respectively, despite some minor down years. While our first quarter net revenue of $431 million was down 15% versus last year's record first quarter, We are still on track to generate the second highest institutional revenue in our history. Our advisory and transactional revenue increased year over year, but the decline in underwriting activity resulted in lower net revenue. Our institutional business generated pre-tax margin of 22.4%, reflecting the operating leverage in this business. Moving on to the components of the institutional group, our fixed income business generated net revenue of $161 million of 15 million or 10% from last year, helping to offset the fact that our equities business was down 140 million or 62% and came in at 86 million. As I've done in the past, I will speak to our transactional revenue on this slide and leave the capital raising discussion for the next one. In terms of the trading businesses, combining equity and fixed income, we had the second strongest quarter in our history as record fixed income revenue offset declines in our equity business. Fixed income trading revenues was a record 122 million, up 24% driven primarily by the addition of binding sparks and increased overall activity in our rates business. Equity trading revenue was down 29%. Remember that last year's first quarter benefited from strong global volumes tied to increased retail activity and strong issuance markets. In addition, the S&P 500 was up 6% in the first quarter of 2021, compared to a 5% decline in 2022, which impacted our trading gain. On slide seven, we look at our investment banking business. For the quarter, we posted revenue of $255 million, which was down 25% as record first quarter advisory revenue was more than offset by the weakest equity underwriting markets we've seen in some time. We continue to be pleased with the strength of our advisory business as our revenue of 181 million was up 40%. Our advisory business is diverse across business segments as KBW, a proxy for financials, posted a record quarter while we also got strong contributions from industrial, consumer, technology, as well as our Miller-Buckfire restructuring practice. We continue to see strength in public backlogs, and we're also benefiting from the investments we've made in our ability to do private transactions. Overall, while timing can always impact deal closings, we feel very good about the outlook for our advisory business. In terms of underwriting, despite our 62% decline in equity underwriting, according to our internal calculations, Steve will gain market share. This was, again, a result of the investments we've made in the business. Our fixed income underwriting business posted $40 million of revenue, a decline of 17% from last year. But again, our market share in the municipal finance business, in terms of number of transactions, increased to 15.8% from 12.9% and helped to partially offset the impact of a greater than 20% decline in industry-wide activities. Overall, we experienced the cyclicality of our institutional business this quarter. As primarily a transactional business, this is to be expected from time to time as market conditions can be volatile. However, the diversity of our revenues within the institutional business mitigated that volatility. We've demonstrated our ability to consistently grow this business over the past 10 years, and we anticipate that to continue to grow as markets stabilize. in the coming period. And with that, let me turn the call over to our CFO, Jim Marishen.