Stifel Financial Corporation

Welcome to the Stifel Financial First Quarter 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. Please go ahead.

Thank you, Operator. I'd like to welcome everyone to Stifel Financial's First Quarter 2023 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 Marish. Earlier this morning, we issued an earnings release and posted a slide deck of 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 the consent of Stiefel. 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 first quarter conference call. We had a strong first quarter. Stiefel generated our third highest first quarter revenue as record global wealth management revenues continue to drive our business, and offset the market headwinds in our institutional group. Revenue came in a little over $1.1 billion with non-GAAP earnings per share of $1.40. We generated pre-tax margin of 21% and return on tangible common equity of 20%. All things considered, these are solid numbers. I would also note that these results include the impact of a loss on sub-debt we held in the bank bond portfolio that equated to $0.05 of earnings per share. I believe this quarter's performance once again demonstrated our ability to generate strong returns in light of ever-changing market conditions. This is the direct result of the diversity of our business and our long-term growth strategy. Overall, I am pleased with the continued growth in wealth management, our recruiting, and the performance of our bank. Frankly, the banking crisis had a bigger impact on our institutional business because of increased volatility and uncertainty than its impact on our bank, which frankly saw deposit inflows, although the events did put a higher focus on cash sorting. When the operating environment improves, and I believe it will, there's a lot of business to do in our institutional segment, whether in private markets, capital raising, or strategic advisory. We are well positioned for this outcome. That said, All anyone wants to talk about is bank metrics and trends, so let's do. Over the past few years, we've deployed significant capital into growing our bank, yet although we've grown our assets, we have also effectively managed both credit risk and interest rate risk. As you can see on slide two, Stifo compares favorably to other regional banks. Stifo Bank is designed to efficiently manage and redeploy client cash by providing banking products, primarily loans, to our global wealth management and institutional clients. Because our bank has a favorable efficiency ratio, we do not need to take additional risk to generate acceptable returns on invested capital. As you can see, we generate superior returns as compared to the average regional bank. Look, I would describe our business as follows. Stifel has balanced earnings power across multiple business lines. Simply, Stifel's mix of business is both synergistic and balanced. The stability of the wealth management and consistency of net interest income provides balance to the more cyclical institutional business. Next point is we have a well-structured balance sheet. Our balance sheet has 85% of its assets loading rate, 82% of our securities portfolio, which includes available for sale and held to maturity, repriced within a year. Approximately 60% of our loans repriced and mature in under three months. As a result, the yield on our assets has increased to 5.43% from 2.26% a year ago. Over that same period, consolidated net interest margin has increased to 3.57% from 2.13%. Before I move on to the next point, I want to note that with all the turbulence in the market and balance sheet concerns at regional banks, I believe the fact that we are able to reaffirm our NII guidance for the full year, albeit at the low end of our prior guidance, demonstrates just how well we've managed our balance sheet. Jim will give more details around this later in the presentation. Our next point highlights TIFO's strong capital levels, which are significantly in excess of regulatory requirements. Our Tier 1 and Common Equity Tier 1 ratios rank in the top percentiles when compared to the banks that comprise the KRX. Even when factoring potential unrealized losses from our securities holdings, DEPO's common equity Tier 1 ratio declines just 120 basis points to a still robust 12.7%. For comparison purposes, Silicon Valley Bank's CET1 ratio of 12.1% declined to a negative 0.2% when factoring in mark-to-market losses. Besides a well-structured balance sheet, our assets demonstrate superior credit quality. The majority of our securities portfolio, besides being floating rate, are rated AA or AAA. Equally important is the fact that our loan book has strong credit metrics as our non-performing assets to total assets ratio is just four basis points. Charge-offs, essentially zero. Finally, it's noteworthy what our loan book does not have. One, our CRE office exposure is less than 2%. We have no consumer, no autos. Frankly, we have nothing that we would want to exit by reclassifying to available for sale. Lastly, we have a robust liquidity profile with abundant cash levels and low-cost borrowing capacity, as well as high-quality relationship-oriented deposits, all of this with low levels of uninsured deposits, which leads to our next slide. Much like the assets in our balance sheet or funding sources are equally important to our success. We have a highly diversified funding base. We are focused on providing our clients with the necessary products to help them best manage their financial situation. 90% of our deposits are generated by wealth management clients and more specifically the cash they generate from their investment accounts. Transactional cash consists of more than 1 million accounts with an average balance of $15,000. It is also important to note that our clients' cash through all of this has remained at steeple. As shown, we've managed to keep the vast majority of client cash at steeple through programs like SmartRate, our commercial lending products, and our ability to offer enhanced levels of deposit insurance. SmartRate balances increased from less than $500 million a year ago to nearly $11 billion as yield-seeking client cash stayed at steeple due to our competitive yields. I believe it noteworthy that we anticipate the need for SmartRate as we introduced this product over three years ago. Commercial deposits have more than doubled in the past year as we've invested in our VC banking business and more traditional commercial banking services. 85% of our deposits are insured as the benefits of our four bank charters and access to ICS have enabled clients and corporations with larger cash balances to keep their deposits with us. In terms of liquidity, we have about three times coverage for our uninsured. As indicated, cash sorting has been the biggest driver of our deposit betas. The most significant pressure on our funding costs have come from moves out of client transactional cash and into smart rates. Look, in times of low interest rates, deposits that are considered savings versus those considered transactional were essentially indistinguishable. However, over the past year, The difference between the two has become clear as transactional balances have decreased by $8 billion and savings balances have increased by more than $10 billion. Given the difference in yield on these deposits, it's apparent what has driven our deposit betas. As we sit here today, we believe that this cash sorting process is slowing and getting closer to its end point. At that point, this process may reverse to a stage where bank balance sheet cash begins to grow as a result of our organic net new asset growth, as well as new accounts that we attract. Next, I'm consistently asked about the impact of 100 basis point increase or decrease on our projected NII. Forward curve is calling for the potential for interest rate cuts in the near future. I am not as confident in this outcome as I see the Fed pausing here. That said, 100 basis point reduction would reduce yield on our assets, obviously, but we would also see a benefit on deposit costs. We would anticipate that 100 basis point rate cut would result in a 65 million annual decline in our NII as we anticipate very high deposit betas on our smart rate product, and we don't see significant additional cash sortings. On the other hand, a 100 basis point increase in rates would add approximately $100 million to NII. Next, let's examine what has happened to client cash. It's important to note the following. We offer client choices for how they deploy their assets and manage their cash. This is illustrated by increased client holdings in money market funds and treasuries. Third-party money market funds are up $1.5 billion in the past year, and while these funds didn't go into smart rate, they stayed within steeple. Similarly, some of the decline in transactional cash has moved into short-term treasuries. This is something I first highlighted in 2022 as a strategy our advisors advised on for generating the best yields. T-bills, maturing in less than one year, have grown from $1.5 billion to nearly $7 billion. The bottom line is that client cash has moved geography but remains with Stiefel. The growth and structure of our balance sheet has resulted in Stifel being a significant beneficiary of the rise in interest rates. Our increased scale and asset sensitivity resulted in our projected net interest income more than doubling since 2021. So what happens if the Fed begins to cut short-term rates? As I indicated, NII will be modestly impacted by 100 basis point decline in rates. I also get asked why we don't hedge against this possibility. What I think is overlooked is the highly complementary nature of our other revenue lines, particularly our institutional group. As you can see on the chart, higher rates had a positive impact on our net interest income, yet arguably negatively impacted market conditions that drive our institutional group. Specifically, the increase in market volatility and higher financing costs have weighed on both the M&A and underwriting markets. However, in periods when rates were either lower or just stable, our institutional group revenues were a primary driver of growth. In fact, our record return on tangible common equity and pre-tax margins occurred in 2021 when the Fed funds rate was essentially zero and investment banking activity soared. So the belief that our margins will significantly decline as rates are cut seems a little misplaced to me. The bottom line is that we have built a diversified business in order to succeed in ever-changing market environments. And given our past performance, we believe that our business will continue to prosper despite the potential for lower interest rates. As we think about our long-term strategic objectives, I go back to a statement I've made a number of times. Past is prologue. We've built a diversified business in order to succeed in ever-changing market conditions. As you saw on the previous slide, our net interest income and institutional group revenue are highly complementary and essentially act as a hedge to each other. With this in mind, we'll continue to do what we've always done, which is to reinvest our considerable excess capital into the business with a focus on generating the best risk-adjusted returns and becoming more relevant to our clients. In wealth management, We'll continue to recruit high-quality financial advisors that choose to make Stifel their firm of choice due to our advisor-friendly culture, expansive products, excellent technology, and industry-leading yet simple and fair compensation plan. With this approach, we believe that our target of $1 trillion of assets under management is attainable. As our client assets increase, we'll experience corresponding growth in our bank deposits, which will further enhance our ability to grow our bank balance sheet in the same conservative way as we always have. We will continue to build out additional capabilities on the commercial side of the business. For example, in the first quarter, we hired a number of high-quality individuals from Silicon Valley Bank. This again illustrates our strategy of taking advantage of market disruptions to make opportunistic hires that enhance our long-term growth. Although we believe that our global wealth management segment will continue to represent an increasing percentage of our total revenue, our institutional group is a vital component to our strategy, and we will continue to opportunistically invest in this segment. In the first quarter, we added a number of talented individuals from credit suites and continue to invest in our fixed income trading technology. Now let me turn the call over to Jim Marish to discuss our most recent quarter results.