Stifel Financial Corporation

Good day, and welcome to the Stiefel Financial Fourth 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. Please go ahead.

Thank you, Justin. I'd like to welcome everyone to Stiefel Financial's Fourth Quarter and Full Year 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 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.steeple.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 Kershepi.

Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our fourth quarter and full year results conference call. 2022 represented Stiefel's 132nd year in business. and represented our second best annual results as our balanced business model enabled us to deliver return on tangible common equity of 22%. Simply stated, Stifel performed as we expected with our more stable global wealth management business offsetting declines in our institutional segment. As is well reported, 2022 represented a difficult operating environment characterized by persistent inflation, and rapid central bank tightening, which put pressure on equity valuations, illustrated by a 19% decline in the S&P 500. The pressure on asset valuations was broad-based, and in the case of high-growth technology companies, dramatic. The complex and volatile environment, including the highest inflation in 40 years and significant geopolitical turmoil, had a chilling effect on capital raising and related strategic activity. impacting our institutional business worldwide. Despite this volatility, Steeple revenues totaled $4.4 billion with earnings per share of $5.74. Additionally, we increased our book value by 6% and our tangible book value by 9%. Global wealth recorded record revenue and record profitability, and our institutional business, despite a difficult year when compared to 2021, was approximately the same as 2020, which represented record revenue at that time. Again, these results are a testament to the diversity of our business model and our long-term strategy of continually reinvesting for growth. On the basis of our 2022 results and our belief in consistently increasing our dividends, I'm happy to announce that our Board of Directors has approved a 20% increase to our common dividend, which will now total annually $1.44 per share or $0.36 per quarter. Moving to slide two, we review the significant growth in our business since 2015. Even with the difficult operating environment in 2022, our growth has been stellar. Net revenue is up 86%, net interest income up nearly 600%, advisory revenue up 300%, and earnings per share increased more than 350%. Further, comparing our 2022 results to 2020, our growth story is equally clear. We have increased net revenue by 17%, net interest income nearly doubled, advisory revenue is up 67%, and earnings per share grew 26%. You've heard me say it a thousand times, but I remind you again, Stifel is a growth company. We'll continue to reinvest in our business as it has been instrumental in our long history of consistent, profitable growth. Our focus on long-term growth is a key factor in reaching our strategic objectives. Over the past 25 years, Stifel has grown from a small regional wealth management firm to a premier global wealth management and investment bank. As I look to the future, we will continue to grow both our business segments by redeploying our substantial excess capital with the goal of generating the best risk-adjusted returns. For our wealth management franchise, this means continuing to recruit high-quality financial advisors that choose to make Stifel their firm of choice. due to our advisor-friendly culture, expansive product suite, excellent technology, and industry-leading yet simple and fair compensation systems. Since 2018, we've added more than 500 financial advisors with trailing 12-month production levels that total more than $350 million. As you've heard me say before, we believe that we can reach $1 trillion in total client assets through a combination of strong recruiting, net new asset growth, and market appreciation. This growth will not only help us grow our private client asset base, but increase our deposit base at our bank and further expand our bank balance sheet, which has been a significant contributor to our top and bottom line growth. Speaking of the bank, we are pleased with both our net interest income and expanding net interest margin. As Jim will expand on later in this presentation, we believe our net interest will increase nearly 40% next year, with our net interest margin expanding to between 4.05% and 4.25%. We have accomplished this because of our focus on building an asset-sensitive balance sheet over the past several years of near-zero short-term rates. This asset strategy has allowed Steeple to offer competitive saving-type accounts and pass more of the rate increases to our clients. A particular note is our bank's smart rate program. This high-yield savings account has enabled Stiefel to increase its client deposits over the past few quarters, while many in our industry have been dealing with the impact of cash sorting by clients looking for higher yields on their cash. Also, we will continue to pursue deposits from our corporate clients as our expansion into fund banking and other corporate banking services has further expanded our deposit base. Our institutional group has grown from essentially zero a little less than 20 years ago into a global business that generated average total revenue in the past three years of $1.75 billion. This was accomplished through both organic growth as well as a number of strategic acquisitions. Our growth has been focused on increasing our relevancy to our clients. As we look forward, this will continue to be a driving principle. In terms of our overall business outlook, we believe that we will achieve our objective of $1 trillion in assets under management, which coupled with loan growth would more than double the revenue generated from wealth management. As such, even considering the substantial growth we expect from our institutional business, we expect wealth management to comprise a greater percentage of our revenue in the years ahead. In addition, given our strategic objectives for our business, we anticipate that our excess capital levels will continue to grow meaningfully. That said, we will continue our long-standing policy of focusing on generating the best risk-adjusted returns, which I'll discuss in greater detail on the next slide. As you can see from the chart on slide four, at year end, we have approximately $400 million of excess capital. And based on consensus analyst estimates, we could generate an additional $800 million in 2023. Look, it is strategic that we have the capital to be able to take advantage of opportunities in the market, particularly in down cycles. However, as you can see from the chart in the lower left, we have a history of deploying our excess capital to both grow our business and return it to shareholders. Our approach in either case has been and will be based, again, on risk-adjusted returns. Over the past two years, we have focused on growing our balance sheet And as such, we've deployed more than $1.8 billion in capital, supporting balance sheet growth of nearly $11 billion. Of course, this asset growth has been funded by deposits, which have grown since 2017 by $16 billion, attributable to strong recruiting as well as an increase in retail and commercial deposit gathering capabilities. While balance sheet growth has been the recent focus of our capital deployment strategy, We've also paid out $275 million in common and preferred dividends. We purchased nearly $280 million of common stock and allocated $136 million to acquisitions. As we enter 2023, we have stated our intention to slow our bank growth, which effectively increases capital available for other uses. Further, we believe in consistently growing our dividend. And as we did again today, reinvesting our dividends we did today, and reinvesting in our franchise for future growth. That said, we also feel that given our current share price, our stock is attractively valued compared to others in our peer group, and we currently have 8.7 million shares remaining on our current repurchase authorization. During the quarter, we repurchased about 1.3 million shares, or about 75 million. I suspect many in the analyst community had expectations for a higher level of share repurchases. I would note two factors impacting the level of buyback. First, we were only in the market two months, and second, we were working on an acquisition during late December. Thus, why don't you not read too much into this, and we will continue to utilize share repurchases as a tool for capital utilization. Speaking of valuation, On slide five, we illustrate how Stifel compares to two high-quality peers, Raymond James and Morgan Stanley. I respect these firms and would note that our business models, which combine wealth management, institutional, and a bank, are quite similar. Much like these firms, we run our company to be recognized as a consistent, high-quality performer. Look, when we compare our valuation metrics to these companies, we see that we trade at a 25% to 33% discount based on PEs or price to tangible book. However, since 2017, our growth in EPS and tangible book value is considerably higher than these two quality companies, as is our trailing 12-month return on tangible common equity. Simply, our team's goal is to continue to perform consistently, and as a natural result, close the valuation gap. Finally, on the next slide, I'll discuss our outlook for 2023 in terms of current street analyst estimates. The current consensus estimate for net revenue for 2023 is $4.8 billion, which is up about $425 million from 2022. The primary driver of the increase is the expectation that our net interest income will grow to $1.25 billion, about a $360 million increase. Of note, our fourth quarter NII total about $300 million, which of course annualizes at $1.2 billion for 2023 and does not take into account any increase in net interest margin or interest earning assets. Taking out NII, the street is essentially predicting that our operating net revenue will be flat to up slightly. Said another way, the street consensus implies the overall market conditions for 2023 will be similar to 2022. Of course, markets can turn very quickly, and improving market conditions will positively impact revenues, while a recession is also possible. Considering both possibilities, we are guiding to total net revenue of $4.6 to $5 billion in 2023. This includes our expectation that net interest income will be in the range of $1.2 to $1.3 billion. Operating revenue has a little less clarity as the environment for our institutional business remains challenging. While we expect the capital raising activity will improve and M&A announcements will pick up, the overall market environment will play an important role in 2023's revenue, thus, again, the wider range of net revenue guidance. I would note that given the expected increased contribution from NII in 2023 and our revenue guidance, we expect that our compensation ratio will decline to 56 to 58 percent, and that operating non-comp will be in the range of 18 to 19 percent of net revenue. Now, let me turn the call over to Jim Merisham to discuss our most recent quarterly results.