Stifel Financial Corp (SF) 2005 Q1 法說會逐字稿

Good morning, and welcome everyone to Stifel Financial first quarter 2005 earnings conference call. All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS] Mr. Zemlyak, you may begin your conference.

Thank you Nicole. Good morning everyone. This is Jim Zemlyak, the CFO of Stifel Financial Corp. On behalf of the Company, I would like to welcome everyone to our conference call to discuss operating results of the first quarter of 2005. Please note that this conference call is being recorded.

Before we begin today's call, I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of fact or guarantees of performance. They are subject to risks, uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statements.

For a discussion of these risks and uncertainties, please see the business factors affecting the Company and the financial services industry in the Company's annual report on form 10-K and management discussion and analysis of results in the Company's quarterly reports on form 10-Q.

With that, I'd like to turn the call over to Chairman, CEO, and President of Stifel Financial, Ron Kruszewski.

Thank you, Jim. This morning I would like to cover a few topics. First I will start with a general overview of the quarter. Jim will then review the relevant numbers. I will finish with a little color, if you will, on our business segments, and then we'll take any questions you may have.

Stifel Financial yesterday reported quarterly net become of 4.4 million or $0.35 per diluted share, on net revenues of 60.2 million. We're comparing against a record quarter in 2004, last year we reported net income of 6.9 million, which included a $1 million tax benefit on record net revenues of 67.5 million. If you exclude the tax benefit, we earned 5.9 million or $0.49 per diluted share in the first quarter of 2004. Therefore, revenues for our most recent quarter declined 11% while net income excluding the prior year tax benefit, declined 26%.

We can attribute the decline in earnings to three factors. First, a difficult market characterized by decline in the S&P of 2.5%, in the NASDAQ of over 8% in the first quarter of 2005. Second, a flattening yield curve. Both the market and the uncertainty about rates negatively impacted investors and, therefore, our revenues. Third, a decline in the Company's investment portfolio. We took a mark to market writedown of approximately $800,000 pretax which equated to about $0.03 per diluted share.

With that, I will ask Jim to review the numbers.

Thanks, Ron. Let's look at the revenue components for the quarter. The Company's results correlated to the industry-wide diminished equity markets. Revenues from commissions and principal transactions decreased 11% from the prior year to 35.2 million. As a result of the weakened market for equity products in the first quarter of '05 compared to a relatively strong market for the same period one year earlier, for both the private client group and the equity capital market segments.

Investment banking revenues decreased 19% to 13.8 million resulting principally from a decrease in lead and co-managed equity debt, closed-end funds and trust preferred offerings. Asset management service fees increased 10% to 9.5 million, primarily as a result of increased fees on managed accounts as assets under management and fee-based accounts increased to 1.6 billion from 1.1 billion in the prior period.

Other revenues decreased principally due to losses on investments as Ron commented earlier. Net interest revenue increased 21% to 2.3 million principally as a result of increased interest revenue on customer margin accounts. Margin interest increased 15% to 2.8 million resulting from a 45% increase in the weighted average rate charged to those accounts, which was offset primarily by lower average margin borrowings.

Interest expense remains relatively unchanged as a result of decreased borrow rings from bank loans and stock loan activity to financial customer borrowings as the customer increased its internal capital to finance those customer borrowings. Total noninterest expense decreased 8% to 52.9 million, resulting principally from decreased employee compensation and benefits, which decreased as expected due to lower revenue production.

Employee compensation and benefits includes transition pay, principally up front notes and accelerated payouts in connection with the Company's expansion efforts primarily in the private client group. Excluding transition pay of 2.3 million, both in '05 and '04, compensation as a percentage of net revenue was 63.8% and 63.5% in '05 and '04 respectively.

Occupancy and equipment rental increased 11% to 5.5 million resulting from the increased number of offices in the private client group sector, and increased depreciation expense for computer equipment as the resulting from the firm-wide upgrade of PC desktop units. Other operating expenses decreased 21% to 3.3 million, principally from decreased settlement charges for claims, and decreased litigation costs in connection with the resolution of those claims.

As a result of the 11% decrease in net revenues and an 8% decrease in noninterest expenses, the Company income before taxes decreased 26% to 7.3 million. The effective tax rate for the three months ending March 31, 2005, was 40%, compared with 30% for the three months ending March 31, 2004 as previously discussed by Ron earlier. At March 31, 2005, the Company's equity was 132.9 million, resulting in book value per share of $13.59. During the first quarter of '05 the Company repurchased 345,914 shares under existing Board authorization at an average cost of $20.62 per share.

Now we'll talk about the three primary business segments for the three months ended March 31st of '05. Private client group net revenues for the first quarter of 2005 were 47.2 million, a decrease of 10% from the first quarter of '04, and a 1% decrease from the fourth quarter of 2004. Private client group reported an operating contribution of 11.2 million, a 22% decrease from the first quarter of '04, and a decrease of 3% from the fourth quarter of 2004.

The next segment we'll talk about equity capital market, ECM. They record net revenues of 8.6 million, a 21% decrease from the same quarter last year and a 17% decrease in the fourth quarter of 2004. ECM operating contribution totalled 2.7 million, a 23% decrease from the first quarter of '04, and a 32% decrease from the fourth quarter of '04. The Company led or co-managed 19 equity debt closed-end fund or trust preferred offering during the first quarter of '05, compared to 22 in the same period one year earlier, and 27 during the fourth quarter of '04.

Last segment we'll talk about is Fixed Income Capital Markets, which posted net revenues of 4.1 million, an increase of 5% from the prior year first quarter, and a decrease of 17% from the previous quarter. During the 2005 first quarter Fixed Income Capital Markets recorded an operating contribution of 542,000, an increase of 54% from the prior year first quarter, and decrease of 63% from the previous quarter. The Fixed Income Capital Markets area was senior or co-managed 27 offerings during the first quarter of '05, compared to 43 offerings in the same period one year earlier, and 32 offerings during the fourth quarter of 2004.

I will now turn it back to Ron for final comments.

Thank you, Jim. I'll just provide a little color on our business, and then again take questions. First, with respect to the private client group, we continue our optimism for this segment. We have a full recruiting pipeline of investment executives. We are currently in the process of adding a new Indianapolis branch, which we project to have annual revenues in excess of $12 million, and it will be immediatly accretive to earnings.

Our business model remains attractive for experienced entrepreneurial financial advisers, and we are optimistic about the growth in this business throughout the coming years. Second, with respect to equity capital markets, it was a tough quarter comparing -- first of all, it was a tough quarter in and of itself, but then we were comparing against a very strong quarter for the first quarter of 2004.

On the good news side, we have a strong pipeline of both M&A, and capital market transactions. On the negative front, the market structure changes and the resulting pressures on the institutional equity business will make it increasingly difficult for firms without scale to have or achieve adequate returns on invested capital. However, we believe we will not be as negatively impacted by these changes, because of our niche focus in this segment.

Fixed Income Capital Markets was impacted as I have already said, by the flattening yield curve, which has made it difficult in the surrounding uncertainty of interest rates. While it didn't impact the quarter, certainly the Ford and General Motors announcement has added to that uncertainty. However, we have made several strategic hires of experienced investment bankers, and we are optimistic about this business for the remainder of '05 and the future.

So, in conclusion, it was an acceptable quarter in a difficult environment. We strive to achieve 15% return on equity across all market cycles for the most recent quarter, our annualized return on equity was 13%, and our pretax margins were 12%.

So with that, operator, I'll take any questions.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Sir, you have no responses at this time.

Very good. Thank you, everyone for your time, and have a great day. Good-bye now.

This concludes today's teleconference. You may now disconnect.