Stifel Financial Corp (SF) 2005 Q3 法說會逐字稿

Good morning. My name is [Sherlyn], and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Stifel Financial’s third quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time simply press star, then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.

I would now like to turn the conference over to Mr. James Zemlyak. Sir, Please go ahead.

Thank you, Sherlyn. Good morning, everyone.

This is Jim Zemlyak. I’m the Chief Financial Officer of Stifel Financial Corp. On behalf of the Company, I would like to welcome everyone to our conference call to discuss operating results for the third 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 risks and uncertainties please see the factors affecting the Company in the financial services industry and the Company’s Annual Report on Form 10-K, and Management’s discussion and analysis of results, and the Company’s quarterly report on Form 10-Q.

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

Thank you, Jim. Good morning to everyone.

All things considered, Stifel Financial posted strong results for the third quarter of 2005. Both revenues and net income increased 15% over the prior year quarter. For the nine months revenues increased 3%. The prior year nine-month net income had a $1 million tax benefit. Excluding this, the 2005 nine-month net income of 14.9 million was down 1% due primarily to a three-quarter of a million dollar swing in the Company’s investment portfolio. For the quarter pretax margins were 13%, and annualized return on average equity totaled 14%, while for the nine months pretax margins were 13% and ROE totaled 15%.

Jim, if you’d like to look at some of the details?

Thanks, Ron.

For the third quarter net revenues increased 15% to $63.9 million from $55.7 million in the prior third quarter. The primary drivers were the continuing strong performance of the private client group and increased net interest income. The detailed components in that revenue were commission and principal transaction revenue which increased 15% to 37.4 million from 32.6 million for the prior period last year.

Investment banking revenues increased 2% to 11.7 million in the third quarter from 11.5 in the prior year quarter. Asset management and service fees increased 29% to 11.4 million from 8.9 million in the prior year as our assets under management increased from $1.4 billion to $2.3 billion.

Net interest increased 29% to 3.1 million from 2.4 million in the prior year’s quarter, and other revenue decreased 18% to 174,000 from 211,000 from the previous year.

As to the expenses, total non-interest expenses, primarily comp and benefits were 55.7 million in the third quarter of ’05, up 14% from $48.7 million in the previous year. A portion of comp and benefits includes transition pay in connection with the Company’s expansion efforts primarily in the private client group. Excluding these expenses comp and benefits as a percentage of net revenues totaled 62.1% in the third quarter of ’05 versus 60.6% in the 2004 comparable quarter. Excluding comp and benefits, non-interest expenses increased 4% from the prior year.

As to our three major business segments, the private client group net revenue for the third quarter of 2005 were 51.3 million, an increase of 20% from the third quarter of ’04. Private client recorded an operating contribution of 12.7 million, a 21% increase from the prior year quarter. During the third quarter, the number of investment executives increased by 24, and we also opened two new branch offices.

Equity capital markets recorded net revenues of 8.3 million, a 2% decrease from the same quarter last year, while the operating contribution totaled 2.3 million for a 10% increase over the prior year. We [relayed] or co-managed 22 offerings during the quarter compared to 19 a year earlier.

Fixed income capital markets posted net revenues of $3 million, a 17% decrease from the prior year. While posting a slight operating loss for the quarter fixed income capital markets is a $1.4 million operating contribution for the year. We’ve seniored or co-managed 29 offerings, both in the third quarter of ’05 and ’04.

At September 30th the Company’s equity was 146 million resulting in a book value per share of $14.89.

And I put the call back to Ron for some closing comments.

Thanks, Jim.

As we all know, our Company is about to close what I termed a transforming deal sfor Stifel Financial in its transactions with the Capital Markets Unit Legg Mason. Our transaction is scheduled to close December 1st, and I can report that the integration process is going well.

This transaction should almost double our revenue and position us for additional growth. We see our private client group expanding to the east and southeast as a result of this transaction.

We are well capitalized to pursue our growth plans. In addition to the $35 million trust preferred offering completed in the third quarter of 2005 our new partners from Legg are investing approximately $26 million in our common equity.

Obviously, the market likes our deal and our prospects. Our common stock is up over 80% for the year and over 50% since our deal announcement.

While exciting, the increase in our stock price creates some interesting accounting issues. Because we’ve structured our transaction where a significant portion of the value was allocated to our new partners we are required to account for this as compensation expense rather than goodwill.

As we noted in our press release, this will result in significant non-cash charges for compensation expense over the next three years, as well as a possible earnings charge related to our private placement shares scheduled to close in early 2006.

I think it’s important to note that going forward we will evaluate our business based upon earnings prior to these accounting charges. We believe that our transaction with Legg Mason Capital Markets is nicely accretive to our EPS prior to the aforementioned non-cash charges.

With that, Operator, I’ll take any questions that we may have. Operator.

[OPERATOR INSTRUCTIONS.]

Your first question comes from Scott Cooper.

Scott?

Congratulations, guys. I just had one brief question. After all the deal is done and the new stock issuances and the private placement, would you estimate that your share float is going to increase by about 25%?

You know, Scott, I’m only trying to look, grab a report here. It’s your 25% number I have to think about for a second. And in your comment about float. You know, the transaction, I mean one of our challenges is that our float, if you define float as what’s held in the employee hands, I guess that that would be about right.

We, the transaction, the shares issued in the transactions are – we’re placing about 1 million shares in a private placement. And we’re going to place an additional 1,900,000 approximately shares in the form of stock units to the associates of Legg Mason. So, that would be 2.9 million shares in total.

But as we’ve noted in previous discussions of this deal, the 1,900,000 shares are pretax and it’s our expectation that when we get around to actually issuing those shares we’ll do net shares because we can withhold shares for tax withholding. So, that would give out 1,300,000 or 1,200,000 shares. So, we’re looking at about 2.2 million shares outstanding or additive on this deal when it’s all said and done. Add that to about 10 million shares, and I guess that’s 22%.

So, I think your numbers are pretty close. Although those shares are being placed with the associates. So, I don’t know if I would define that as float or not. I’d leave that to you. Does that answer your question?

Yes, yes, it does. Thank you. I’m sorry I went over something you’ve been over before, but I just found it a little bit confusing.

No, no, actually, it is quite confusing and especially the treatment of those units. I think it’s a great question, and I’m glad you asked it because, hopefully, that people can understand our total shares more going forward. But thank you for your question.

And, also, I just wanted to say I appreciate the fact that instead of taking a big goodwill charge on this, you are accounting for it as a compensation expense.

Well, I think – I’ll take just a moment to comment on that, because that will be the thing that we will probably be talking about for the next, let’s see, three years. I guess that’s 12 quarters, so in the next 12 conference calls, we’ll be talking about the fact that this transaction is -- the consideration will validate it to our new partners, and we will be effectively writing off the purchase price over the next three years.

That’ll look somewhat goofy, if you will, from a profit and loss perspective but we think from an economic perspective it was exactly the right thing to do. Also, the fact that it’s considered compensation expense we get a tax deduction over the next three years. So, I think it is the right thing to do economically. It probably doesn’t come out with the optimum accounting, but in this case it’s the right thing to do.

Thank you for your question.

Thank you.

[OPERATOR INSTRUCTIONS.]

At this time, there are no further questions.

Okay, well, I would like to thank everyone for joining us today. And our next call, which will be if February of ’06, we will be in a lot of ways a new Firm with some 1,800 associates and over 118 offices. It’s exciting times for the Company. We look forward to an exciting year in 2006 and to continue to deliver value to our shareholders.

With that, may everyone have a great day, and thank you for your time. Good-bye.

That concludes today’s Stifel Financial third quarter earnings release conference. You may now disconnect.