Stifel Financial Corporation

Please stand by, we're about to begin. Good day and welcome to the Stiefel Financial third quarter 2022 financial results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joel Jeffrey, head of investor relations at Stiefel Financial. Please go ahead.

Thank you, Katie. I'd like to welcome everyone to Stiefel Financial's third 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 Marisham. 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 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 our consent. I will now turn the call over to our Chairman and CEO, Ron Koschevsky.

Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our third quarter results. Stiefel posts a strong quarter as our global wealth management segment generated its seventh consecutive record quarter. Investments we have made have diversified our revenue sources and continue to enable us to create solid results despite market headwinds. The first nine months, revenues totaled $3.3 billion with earnings per share of $4.17. And we are on track to record our second strongest annual revenue in earnings per share. This performance is despite market conditions that included a 25% decline in the S&P 500 nearly non-existent capital raising activity in subdued trading markets. Our results prove that a diverse business model is capable of generating consistent top and bottom line results, as well as solid book value growth. As our year-to-date tangible book value per share is up 5%, and our book value per share increased 3%. Looking at the details of our third quarter results in slide two, revenue totaled nearly 1.05%. billion in earnings per share came in at $1.29. I would highlight that our pre-tax margin of almost 21% was our eighth consecutive quarter with operating margins above 20%. Our tangible book value of $29.63 increased by nearly a dollar share sequentially and is up 90% since 2017. In addition, our return on tangible equity has exceeded 20% in each year since 2017, and is at 21.5% year-to-date on an annualized basis. As we did last quarter, we included a year-on-year revenue bridge to illustrate the changes in revenue in the third quarter of 22 compared to 2021. Simply, our increase in net interest income was more than offset by about $100 million by the absence of underwriting and reduced trading. Looking at our segments, global wealth management revenue increased 7% to a record $702 million with pre-tax margins of 40%, an increase of 380 basis points sequentially. As I noted earlier, the increase in net interest income was the primary driver of revenue growth. While Jim will get into the details of our net interest income later in the presentation, I want to highlight that our third quarter NII was up 86% compared to the prior year's quarter, and year-to-date is up 60%. We continue to invest in our wealth business through recruiting and improving our technology. We now have hundreds of thousands of accounts using our WealthTracker app. Our advisors are using WealthTracker to not only deepen their relationships with existing clients and to review relationships holistically, but also to attract new clients to steeple. The development of WealthTracker is a great example of our fundamental approach to this business. Steeple is an advisor-focused firm that offers a platform and culture that enables financial advisors to grow their business without the bureaucracy that plagues many other firms. This advisor-first culture resulted in Steeple being ranked number two by J.D. Powers in their 2022 U.S. Financial Advisor Satisfaction Survey. This is a testament not only to our culture, but the investments we've made into the business. Our continuous improvement is on display as our J.D. Power ranks have improved every year since 2019. Importantly, we rank number one in the survey in three categories, leadership and culture, customer service and marketing, customer service and marketing. I would also note that these rankings are based on feedback from the advisors themselves, but underscores the quality of the culture we've built here at Steeple, which is a vital aspect of our ability to continue recruiting high-quality advisors. Speaking of recruiting, we added 36 advisors. I would say that recruiting activity remains strong, but we've seen throughout the year that the pullback in markets has slowed the actual transition of advisors while also accelerating the retirement of others. As we look forward to more stable markets, we anticipate meaningful increases in recruiting levels. The markets have also influenced our transactional and asset management revenues. Regardless, we ended the quarter with fee-based assets of $136 billion and total client assets of $365 billion. Speaking of growth, our net new assets increased 6% in both the third quarter and over the trailing 12 months. On the next slide, you see some of the longer-term trends within our global wealth franchise. As I mentioned earlier, we continue to see the benefits of investing this business through recruiting and bank growth. which has not only led to revenue growth, but also a significant increase in the percentage of recurring revenue. For the quarter and a foundation of our long-term strategy, 16 experienced advisors joined Stiefel as their firm of choice, choosing us because of our friendly culture, expansive products, industry-leading, yet simple and fair compensation plans, and excellent technology. These new advisors brought trailing 12-month production of $14 million. Since the beginning of 2019, we've recruited nearly 500 advisors to our platform, a total trailing 12-month productivity of more than $350 million. Our recruiting pipeline remains strong, and we are encouraged by the traction we are gaining in the independent channel. One of the many benefits of our increased NII is the increased percentage of recurring revenue, which adds to greater stability and predictability of results. Our recurring revenue reached 75 percent for the first nine months of the year, which surpassed our previous full-year high by 900 basis points. We achieved this high watermark while generating record revenue in this segment. What makes this more impressive is that we did this in light of the fact that our asset management revenues, which accounts for the majority of our recurring revenue, has been impacted by market valuation. We grew our loan portfolio by $1.7 billion during the quarter, up 9% sequentially. Total firm-wide assets on September 30th were $37.6 billion, up $3.6 billion year-to-date. Starting in November, we will publish monthly metrics for wealth management. This will include commentary on our business during the month, as well as metrics such as total client assets, fee-based assets, client cash balances, and total loans. We believe that by updating the street on a monthly basis, we can help better align expectations with our quarterly results. Moving on to our institutional group. We built a diversified business that has made us more relevant to our clients, and we are well positioned for future growth when the operating environment stabilizes. As always, we'll also look to continue for additional growth opportunities. In the quarter, revenue was $339 million. Year-to-date revenue was $1.2 billion, led by record advisory revenue and represented our second strongest first nine months, only trailing last year. However, the 75% decline in capital raising activity across the industry and the reduction of sequential trading volumes have more than offset the strength of our advisory business. Investment banking revenue totaled $222 million. I'll focus on advisory business for the remainder of this slide and discuss our underwriting business on the following slide. Advisory revenue of $167 million, an acceptable result, was negatively impacted by delays in deal closings. I particularly highlight the impact that we've seen in our financials verticals as regulators have slowed approval of bank transactions, including a few of our deals. While we believe these deals should close in the fourth quarter, we, of course, cannot be certain. Looking at advisory fees and other business verticals, we had a relatively strong quarter as we saw strength in the U.S. M&A markets. particularly in technology, healthcare, consumer, and real estate, as well as restructuring. Additionally, we have increased the number of high fee assignments as we continue to deepen our relationships with our clients. Overall, while closings have slowed, we continue to see positive signs in our business as client engagement remains high and our investment banking pipelines remain solid. On the next slide, we look at the remainder of our institutional business. looking through the lens of equities and fixed income. Fixed income generated net revenue of $101 million in the quarter and posted our third highest revenue for the first three quarters of the year. Our equities business was down 50%, again, due primarily to the industry-wide drop in capital raising. Fixed income transactional revenue totaled $74 million with lower activity in our rates business. Our bank clients continue to face a lack of liquidity on their balance sheets as they contend with lower deposit levels, which has resulted in lower trading activity in their investment portfolio. Fixed income capital raising came in at $27 million. The sequential decline was due in part to a slowdown in industry-wide public finance volumes, which, for the record, were down 16%. As interest rates have risen, refunding transactions have essentially ceased, and new money bond volume is still being impacted by the unspent federal ARPA funds. Additionally, we had lower activity in our taxable debt capital markets business. Looking at public finance business, Stifel has increased its market share, which we calculate based on the total number of transactions, to approximately 15% up from 13% in 2021. Equity transactional revenue totaled $46 million, up modestly from the prior quarter. The increase compares favorably to industry-wide buy-ins that were down 12%. Overall, we see increased engagement in electronic trading. Also, we've generated modest trading profits compared to the trading losses that we discussed last quarter. In terms of equity underwriting, Steeples activity is really no different than what's happening industry-wide. However, I do believe that this business will rebound as many transactions are delayed as opposed to being canceled, and we have seen some green shoots from the technology and healthcare verticals. And with that, let me turn the call over to our CFO, Jim Marishen.