Stifel Financial Corporation

Good day and thank you for standing by. Welcome to the Stiefel Second Quarter 2022 Earnings 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 this session, you will 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'd now like to turn the call over to Mr. Joel Jeffrey, Head of Investor Relations. Please go ahead, sir.

Thank you, Operator. I'd like to welcome everyone to Stifel Financial's second 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 Marishan. 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.stifel.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 you 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. I will now turn the call over to our chairman and CEO, Ron Krashevsky.

Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our second quarter results. Let me start by saying our second quarter and first half results were good, particularly in light of the significant market headwinds. As widely reported and known, financial conditions in 2022 have been challenging, to say the least. The S&P 500 had its worst first half since 1970, down 21.4%. Bonds fared a little better as the Bloomberg U.S. Aggregate Bond Index declined 11%. The 10-year yield was approximately 3% at June 30th, more than double the year-end yield of 1.46%, while credit spreads have also widened significantly since the beginning of the year, with investment grade spread widening to 155 from 93 and high yield of 569 from 278. Economic measures of inflation hit 40-year highs. In addition, the Russian-Ukraine conflict, China lockdowns, and increasing risk of recession all contributed to the economic malaise while driving sentiment much lower. To address inflation, the Federal Reserve has become very hawkish. Remember, at the beginning of the year, the markets were pricing in three 25 basis point increases for all of 2022. Today, the markets are pricing the equivalent of 12 to 13 25 basis point rate hikes. Clearly, the actions of the Federal Reserve will continue to tighten economic conditions. Going forward, I expect increased volatility and more uncertainty. We will manage our business accordingly. Against this backdrop, we recorded our second highest net revenue in EPS for both the second quarter and first half of the year. Our second quarter revenue totaled a little more than $1.1 billion, a 1% substantial decline and a 4% decline from the second quarter of 2021. Earnings per share came in at $1.40. So while the market environment was difficult, we nevertheless generated pre-tax margins over 21%, pre-tax pre-provision income of $248 million, which was in line with the first quarter, and a return on tangible common equity of 22%. As I have stated on numerous occasions, Steeples is a diversified financial services company with balance across businesses. The second quarter just demonstrated this resiliency and the benefits of the investments we have made in our client-facing franchises. To illustrate, slide two provides a revenue break from the prior year quarter, depicting the $45 million decline in revenue. I would note that client facilitation revenue and NII both reflective of our increasing relevance to our clients and indicating the building of our franchise, increased nearly $100 million. Offsetting this was the decrease in revenues more closely tied to the difficult market conditions. One headwind worth noting is the $39 million decline in our trading gains, investments, and warrant valuations. Of this, $23 million is reflected in transactional revenue while another $15 million is recorded in other revenues. In addition, underwriting declined nearly 100 million as industry volumes remain muted given the ongoing market volatility. Said another way, we are pleased with our client engagement activities, both in wealth management and institutional. More and more, especially during times of stress and volatility, when good advice and execution skills matter most, clients are turning to steeple. The increasing confidence our clients have in us will far outlast the current difficult markets. The diversity and balance of our business model yield good earning results. I would note that our pre-tax, pre-provision income was essentially unchanged from the first quarter and down 9% from the prior year. Net income and earnings per share both declined 18% from the prior year, and the difference between the 9% decline and pre-tax, pre-provision is due to a $22 million increase in loan loss provision due to loan growth and last year's reserve relief. Additionally, there was an increase in the effective tax rate to 26.4% from 25%. Looking at segments, global wealth management revenue increased 10% to a record $698 million. These results were driven by the growth in our balance sheet and higher interest rates, as well as the addition of productive financial advisors. As you can see from the chart on the lower right of the slide, our pre-tax margins reached 35% in the quarter as we continue to benefit from increased net interest income contribution. Asset management revenue was up 12% from the last year. As I mentioned earlier, the equities markets declined further in the second quarter, with the S&P 500 falling 16%. The decline offset strong inflows of our fee-based assets end of the quarter at $141 billion in total client assets for $378 billion. On the next slide, we highlight our strong recruiting activity, client asset growth, and increased loan portfolio. For the quarter, and as a foundation of our long-term growth strategy, we added 41 advisors, including 23 experienced advisors, who joined Stifel as their former choice, choosing us because of our advisor-friendly culture, expansive products, industry-leading, yet simple and fair compensation plan, and excellent technology. These new advisors brought trailing 12-month production of $24 million. Our recruiting pipeline remains strong, and we are encouraged by the traction we are gaining in the independent channel that added eight net advisors during the quarter. Our recurring revenue was more than 74% for the first half of the year. Although the percentage of recurring revenue benefited from slower transaction activity, we expected to remain elevated over historical levels as contributions from net interest income and asset management continue to grow. Lastly, we grew our loan portfolio by $1.4 billion during the quarter, up 8% sequentially. Total firm-wide assets on June 30th were $36 million $2.5 billion, up $2.5 billion year-to-date. Institutional revenue of $411 million illustrates the balance of our franchise against the difficult markets. Revenues declined from an exceptionally strong prior year. We continue to generate solid advisory revenue, down only slightly from last year and up 10% from the first quarter, and our client facilitation business performed well. As I previously mentioned, our transactional revenue was negatively impacted by changes in warrant valuations and a reduction in trading gains, totaling $23 million within the institutional segment. Excluding the valuation and trading results from both periods, our client flow business totaled $139 million, up about 8%. I will refer to this further when I discuss transactional revenue for both equities and fixed income. Market conditions weighed heavily on capital raising activity, especially in equities. Institutional has been and continues to be a growth business, albeit with some cyclicality. Despite the market headwinds, we are still on track to generate the second highest institutional revenue in our history. We've built a diversified business in this segment by consistently adding capacity and products, all to enhance our market relevance to clients. And we believe that we are well positioned for continued growth as the operating environment recovers. As you know, we look at our institutional business through the lens of equities and fixed income. Fixed income generated net revenue of $136 million in the quarter and posted record revenue for the first half of the year. Our equities business was down 56%, primarily due to an industry-wide capital-raising decline of over 75%. As I mentioned, the comparison of our transactional business is skewed by a quarter-over-quarter reduction in warrant marks and trading gains. I do view the warrant marks and trading as somewhat unusual and will exclude its impact as I discuss overall trends. Therefore, adjusted client equity transactional revenue totaled $52 million, essentially unchanged from the prior year. We are seeing fruits from our investments in electronic and algo trading, but these were essentially offset by weakness in our international businesses. Also, the lack of comparable equity underwriting is a factor in our equity transaction trading revenue. Adjusted fixed income client transactional revenue totaled $87 million, up 15%. This increase is primarily attributable to our addition of Binding Sparks, which has been a successful integration. I would note that Stifel does not engage in commodities and currency trading, which During the quarter, we believe was a primary driver of the fixed income results of some of the both bracket firms. On slide seven, we look at our investment banking business. For the quarter, we posted revenue of $271 million, which was down $105 million, or 28%. Simply, heightened volatility led clients to delay strategic actions and new issue activities. Nearly all of this decline was in capital raising, as advisory fees totaled $200 million, down slightly from a strong prior year quarter. The diversity of our advisory business continued as we generated strong contributions from financials, healthcare, technology, and gaming. Additionally, we are seeing solid production from Miller-Buckfire in restructuring and Eaton Partners in fund placement. In terms of underwriting, Our equity capital raising business declined 75% from the same period last year and was down 78% for the first half of the year. But frankly, a small consolation by our calculations, reflecting the investments we have made, people have gained market share. As I look forward, we are well positioned for the return of capital markets activity, which usually happens quickly when valuations stabilize with reduced volatility. Look, said another way, our first half equity underwriting results are much closer to zero than what our capabilities will generate in normal market conditions. Markets also impacted fixed income investment banking. Fixed income underwriting posted $40 million of revenue, a decline of 27% from last year. We look at this business through the lens of taxable issuance, generally high-grade and leveraged loans, and unique finance. Starting with municipal or public finance, Year-to-date industry new issue negotiated deal volume declined 27%, while our first half revenue declined 18%. For the quarter, steeple public finance revenue increased 10% sequentially. Given the industry slowdown, I am pleased with our market share, calculated on the number of negotiated transactions, which increased to an industry leading 15.2% from 12.5%. in the first half of last year. Widening credit spreads and the sharp rise in rates impacted our taxable issuance business, as we saw a 40% decline in the second quarter of 2021. Overall, our investment banking pipelines remain solid. Conversion of this backlog to revenue will largely be dependent on market conditions and corporate competence. That said, our client dialogue and engagement continues to be strong. And with that, let me turn the call over to our CFO, Jim Marish.