Stifel Financial Corp (SF) 2012 Q1 法說會逐字稿

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Nicolaus first quarter earnings 2012 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.

(Operator Instructions)

Mr. Jim Zemlyak you may begin your conference call.

Thanks, Mike. Good afternoon, I'm Jim Zemlyak, CFO of Stifel Financial Corp.

I would like to welcome everyone to our conference call today to discuss our first quarter 2012 financial results. Please note that this conference call is being recorded. If you'd like a copy of today's presentation, you may download slides for our website at www.stifel.com.

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 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 in our Business, please see the business factors affecting the Company and financial services industry in the Company's annual report on Form 10-K and MD&A as a result of the Company's quarterly report on form 10-Q.

I will now turn the call over to the Chairman and CEO and president of Stifel Financial Corp, Ron Kruszewski.

Thank you, Jim. Welcome everyone to our call.

The first quarter of 2012 proved to be our second best quarter in terms of net revenues, net income and diluted earnings per share. The overall improvement in the economy positively impacted both our global wealth management and institutional group businesses during the quarter, particularly in investment banking and fixed income trading. During the quarter, we continued to expand our retail platform as a result of successful recruiting efforts of financial visors.

The increased activity -- levels of activity which we saw in the quarter can be attributed to strong performance of the equity markets, improving investor sentiment, lower volatility, and increased risk-taking has evidenced by improved pricing and performance for new offerings. However outside of a major event or catalyst to move the market, we remain cautious on the outlook for the remember of the year. That said, we continue to believe we are well-positioned to gain market share from the dislocation of the market place and changing regulatory requirements.

Turning to slide 4, this reviews quarterly results which reflect, frankly, a good first quarter. As compared to the year-ago quarter, the 2011 first quarter, net revenues this quarter of a little over $400 million represented a 9% increase. Our GAAP net income was $34.8 million or $0.55 per diluted share, compared to GAAP net income of $31.4 million or $0.50 a diluted share last year. Our pretax margins were 15% compared with 14%. Looking sequentially, or versus the fourth quarter of 2011, our net revenues were up 12%, our GAAP net income increased 29%, and our operating margin increased 200 basis points from 13% to 15%.

Our effective income tax rate for the quarter was 41% compared to 38% in the year-ago quarter, and really, 40% for the fourth quarter. I just want to point out if you use a normalized tax rate of 40%, the difference in tax rate accounted for $0.02 per share, or said another way, our EPS would have been $0.57. The change in our effective tax rate this quarter was due to an increase in our state tax rate and in, more so, by losses incurred at a lower tax rate in foreign jurisdictions. So net-net, it's not our normalized tax rate, what we had in the first quarter. I would more look at 40%.

Also, last year in the first quarter, we had a reduction in our deferred tax valuation allowance, which then effectively lowered our tax rate. Our results exceeded expectations by $0.01, net revenues were 5% higher mainly attributable to upside in principal transaction investment banking, while total non-interest expenses were 4% higher as a result of an increase in compensation expense on higher revenues and an increase in non-comp expenses.

The next slide compares, really, our sources of revenues comparing year-over-year results. Commission revenues decreased 21%, to $123 million, from $155 million. This was attributable to lower volumes, primarily in our institutional business. I think our results were consistent with the overall decline in market volumes. Principal transaction revenues were up 25% from the year-ago quarter, due to an increase, really, in the fixed income business. And I'll come back to that.

Investment banking revenues were a bright spot in the quarter. They were up 70% to $70.4 million from $41.4 million. The year-over-year increase was in both capital raising and advisory fees. Asset Management service fees were up a little over 5% to $60.8 million. This increase was due to an increase in revenues generated from fee-based accounts which increase both in asset value and in the number of accounts.

Turning to our brokerage revenue, commissions and principal transactions decreased 4% from last year, and increased 10% sequentially. On a year-over-year basis, all categories that comprised principal transactions increased. Taxable debt was up nearly 20%, muni debt was up almost 12%. Those increases were attributable to increased flow in our Fixed Income business, and the muni debt category was positively impacted by contributions from Stone & Youngberg. Overall, while the equity markets are challenged from a volume perspective, we continue to believe that our research driven model is not a commodity. It's something that we believe that does add value, and we believe we are gaining market share.

This next slide reviews our non interest expenses. Comp benefits as a percentage of net revenues were 63.6% for the first quarter compared to 63.1% in the year-ago quarter and 64.1% in the fourth quarter of '11. The increase was primarily the result of the expensing of retirement eligible deferred comp, which we were required to do, and that impacted our comp ratio by about 0.9%. So, if you just want to look at that as something that happened in the quarter, if you took that out, our comp ratio would have been in line at about 62.7%. We give a targeted range of about 62% to 64%, and we're within that range.

Transition pay, which primarily consists of the amortization of upfront notes, signing bonuses and retention awards was consistent for quarter-over-quarter at about 5% of revenue. Non-comp operating expenses were $86.4 million, 2% over the first quarter of '11. As a percent of net revenues, they were at 21.6% compared to 23%. This increase was primarily the result of an increase in commission and floor brokerage charges, as a result of cost really associated with converting customer accounts to a new platform that we had to do -- it was what we did with our trading system. As well as an increase in occupancy due to more offices that we opened and the resulting cost. Looking forward, we expect non-comp expenses to be in the targeted range of $85 million to $87 million per quarter.

I'll now turn to our segment comparisons. Overall results for the quarter in both our global wealth management institutional group improved year-over-year and sequentially as aided by rising equity markets increased activities. The revenue mix level of 62% from global wealth management and 37% from institutional group, and as I've said I thought that the target in there was more like 60/40. Excluding the other segment, our global wealth management contributed 74% of our profits, while the institutional group's contribution was 26%.

The next slide details global wealth management results. Compared to the first quarter of '11, this segment generated pretax operating income of $69.2 million, which was up 12.5%. Net revenues for the quarter were a record $248.3 million, which was up 4%. This was primarily due to an increase in net interest revenues as a result of the growth of net interest earning assets at our bank. And an increase in sales credits resulting from our investment banking. We did a fair amount of deals in the quarter.

Sequentially, pretax operating income was up 10%. Net revenues were up 11%, and our fee-based assets increased 7% to $18.6 billion. This was driven by higher asset levels and a 3% increase in new accounts. I'm pleased that for April, the activity continued for April, although I will say that May does have a tinge of slowness to it.

Looking at the bank, Stifel Bank reported what I think were solid revenues of $16 million, up 80% compared to the first quarter of '11. This increase was due to a 46% increase in assets and an increase in mortgage fees due to an increase in our loan originations. Interest expense decreased 4%, primarily as a result of lower yield, that we were paying for deposits in this industry environment. The growth in our bank has primarily been driven by growth in deposits associated with our -- with the brokerage Stifel Nicolaus.

As of March at the end of the quarter, the balance of customer deposits at the bank was $2.3 billion compared to $1.6 billion a year ago. Sequentially though, net revenues declined 17%, as mainly due to a decline in other income, and it really was that we had some gain on sales in the fourth quarter of last year. If you look at asset quality on the next slide, asset quality remains high with nonperforming loans really 0.32%, nonperforming assets of 0.11%, and we've had less than $100,000 in losses over the last 12 months. Our interest earning assets were $2.5 billion at the end of the quarter. That's up 14% from the end of the year.

Our investment portfolio stands at $1.7 billion. It's up 19% from the end of the year. And still it's 99% comprised of investment grade securities, of which, of those 67% are government-sponsored enterprise, MDS or AAA rated investments. Our loan portfolio is about 5%, a little over $800 million. And our strategy at the bank remains the same, to prudently grow the bank's assets on a risk adjusted basis.

Next item looks at our institutional group results. Year-over-year comparisons mark an improvement, which is again the result of the more favorable environment. Pretax operating income, $23.7 million, up nearly 11%. Net revenues were $148.5 million, up nearly 17%. Sequentially, revenues were up 10.6%. Again, it was a more challenged fourth quarter, and the activity was better.

Overall, sequentially, our profitability sequentially increased 120%. Although I will say that looking at this business, we -- improvement in markets and more flow across the board will help. We target 25% contribution margins from our segments and our institutional group you can see is at 16%, and we have achieved 25% in the past, so this does leave room for improvement. If you look at our revenues in the institutional side, our brokerage revenues were nearly $90 million, but that was down slightly, 1.4% from the first quarter of '11. On the equity side, brokerage revenues were $44.2 million, which was down 15.7% compared to the year-ago quarter, and again, it's just a decline in overall volumes on the equity side.

Of course, offsetting this decline for us, our fixed income brokerage revenues were $45.3 million, and that was up 18% compared to the first quarter of '11. Investment banking I said was a bright spot. It increased 65%, within our institutional group, increased 65% to $58 million. Capital raising revenues were $42.4 million, up 62%, while advisory fee revenues were nearly $16 million, up 7% compared to the year-ago quarter.

I'll now provide some additional color on investment banking results. We experienced a pickup in equity capital markets activity, mainly new issues and follow-ons, which as I said was attributable to rising equity markets and valuations. Our focus on improving our deal economics has contributed to the increase in book managed deals, which were 30% of our deals completed year-to-date, which was up 25% in 2011. And this improvement is tangible in that in the first quarter, we completed five equity capital markets transactions with fees greater than $2 million. The most active sectors in the quarter were technology, [sig], energy and healthcare. April's activity was solid, and issues are cautiously optimistic looking forward.

I am pleased to report in April we achieved a significant milestone for our firm, where we acted as an exclusive financial advisor to Viasystems and their pending acquisition of DDI, but we also provided and participated in the bridge financing and acted as a joint book manager in their high yield offering to take out the bridge. And that's a significant milestone in the way we're building this firm.

While the global M&A environment remains challenging and dollar volume is down over 35% from the same period last year, we remain active. In the first quarter, we had 16 announced and/or closed M&A deals, including 4 buy sides and 12 sell sides. In addition, we've announced we're closing another six M&A deals in April, including 3 buy side and 3 sell side for a total of 22 year-to-date.

Our equity in M&A backlog is strong. We've continued to execute on our pipeline as we rebuild -- and rebuild our pipeline, which is encouraging. Volatility is trending higher and as I said, I'm somewhat cautious about the outlook as I look forward from today. But with a decent market, we have a nice pipeline to execute against. Slide 15 lays out our capital structure. At March 31, 2012, total assets were $5.5 billion. Our capitalization including debt was $1.6 billion. That's $1.3 billion of equity and about $258 million of debt. Book value, $25.07.

Tier one capital was $934 million, which is 25.7% of risk weighted assets. During the quarter, we floated $175 million, 6.7% senior notes due in 2022. As a result of that, our debt to equity increased to 19% from 6.3% at the end of the year. Our leverage ratio calculated by total assets divided by total capitalizations was 3.4%. And maybe another way to look at leverage is just our equity capitalization to total assets was 4.1%, so we still have certainly a relatively unleveraged business balance sheet.

Turning to other financial data, as I said we have a strong balance sheet, we continue to manage our Business utilizing a low leverage model. At the end of the quarter, the leverage ratio at the parent and broker-dealer was two times, while at the bank it was 13 times, which as I've told you on past calls is that when we increase the leverage in this institution, it's primarily going to be done in the bank and with funding at the bank level, not at the broker-dealer. In the quarter, we added a net 26 financial advisors and we opened six new offices. Recruiting remains active and we are going to continue to build that business. Total assets, client assets under administration increased to a little over $127 billion, which was up 6.6% from the end of the year, to reflect both net inflows and market appreciation.

The final slide looks at our level three assets. As in past quarters, the majority of our level three assets are auction rate securities for the carrying value of $170.3 million, but of that, $65 million is held at Stifel Bank in our investment portfolio. The other investments consist primarily of private investments held by the former TWPG subsidiary, about $30 million.

Looking forward, what I see is continued ability to grow our Global Wealth Management business. The private client investor remains active. We see the recruiting picking up and being very positive. The bank will continue to grow as I said in the past. You'll see the same measured growth in the bank, the yield curve is certainly favorable for us, building the bank, we're seeing good loan demand in the bank, and that's encouraging.

I see a lot of opportunity for growth in fixed income, and we're seeing a lot of opportunities to build our Fixed Income business. Investment Banking, we've made a lot of progress in our pipeline, looks good. That's encouraging. If I -- my cautionary light that's flashing for me is still in the equity markets, and in the, really, the lack of flows into equity funds.

I think this market, to get healthy, will require that investors start allocating more funds into equity. As I see flow of funds and our firm if they leave the money markets, they tend to go into yielding investments, bonds, and longer dated instruments, not into equities. And that is a concern, which I think is evidenced by the rather tepid volumes in the equity markets.

So we've had a very good start to the year. Given the recent weak economic data, the slow rate of growth in the country and the continued almost drumbeat of headlines out of Europe, we are cautious, but we remain well-positioned to take advantage of opportunities and gain market share.

So with that, operator, I will take questions.

(Operator Instructions)

Patrick Davitt, Bank of America.

You mentioned the high-yield deal in April, which is great, obviously. Do you feel like you're starting to see a lot more trends -- traction in terms of being involved in the entire cycle of a transaction like that, given it was the first time you've done it? Or is there not much of a pipeline of that?

It's actually not the first time we've done it. We had done a similar deal to that in the past, but I think -- I just pointed it out because it speaks to the progress we've made in building the investment bank. And across that deal in particular, where we were the sole, exclusive advisor on the buy side and were able to -- while not being a universal bank, was able to be involved in all aspects of that transaction, the advice, the bridge, and the take up. And so do I think that we're going to do more? I certainly hope so.

Okay. And in the institutional business, you had a pretty strong revenue quarter, but still year-over-year at least, a lack of compensation leverage. Do you still have a number of producers in there that really haven't ramped up? Or is there something else going on that is making you accrue so much so early in the year?

I think we tend to try to be a little more conservative in the way we build our accruals. Historically, that's how we look at it. We're obviously doing our level best to estimate comp levels. But that said, we have a model that is built for some rebound in the equity markets. And while we thought starting in investment banking, the equity volumes are low.

And so net-net, we've also made some investments, so there is some compensation transition expenses in those equity numbers. But I'm comfortable with where we are, Patrick. I watch our contribution margins. And our contribution margins, our fixed income businesses are strong and they are weaker in the equity businesses, but I think that's across The Street. We're not -- we're continuing to build and gain market share.

So it's really about just getting to a more active environment, and that should naturally come down?

Yes.

And then on the hiring side, you mentioned that you are seeing some pick up there. Can you talk about where you're seeing most of the people coming your way? Is it more wire houses, regionals? And to the extent that there's a lot of upfront money required to get them, I know you've never really played that game, but do you feel like the wire houses have stopped playing it?

No. I don't. In terms of that, I think that we have just on balance have seen a lot more interest in our Company across the board. And so we're seeing it -- I think I mentioned this on the last call -- that we're seeing a lot of activity. And it's encouraging.

Okay. Thanks.

Joel Jeffrey, KBW.

So in terms of the -- given what's going on in the markets, I understand a cautious outlook particularly on the equity side of the business. But is there anything near-term you see in any of your other businesses that has given you reason to be more cautious than maybe you were at the end of last quarter?

No. Actually, the overall -- what concerns me and what makes me positive, I'll give you both. What concerns me is that I don't want to 2012 to turn into 2011. We had a start of the year, rather -- optimistically and then ran into the Europe downgrade of the US, blah, blah, and ended the year weakly. We started off very strong this year. Hearing these rumblings out of Europe, so these are the things that are out of our control.

That has been mostly impacted in the equity side of our business. The fixed income and the bank and the private client brokerage business, absent some real upheaval, I'm optimistic about those businesses, certainly for the horizon I can see. So not a lot that we can do about the overall global economic environment.

Thinking about the fixed income markets in the near term, first quarter we had pretty high trace volumes and spread certainly contracted. Is that a sustainable number in the near term? Or should there be a pullback in your opinion in the next couple of quarters?

A lot of people are concerned about fixed income and saying that -- what's going to happen when rates start to rise or whatever? I would say that the fixed income volumes are sustainable, primarily because the average durations, I believe, the average durations of a lot of these portfolios are pretty short, and there's a lot of activity moving around in these portfolios.

Certainly I look at our own bank and look at the average duration. I think if that's going on elsewhere, I can see why volumes are okay. Look, they are going to fluctuate and trade volumes and credit spreads are going to do what they are going to do, but I think fixed income certainly is down from its 2009 levels, but I think it's at a sustainable level at this point.

Okay. In terms of thinking about the 26 advisors you added this quarter, is that impacted in any way by seasonality or is this how you see a potentially consistent run rate of new advisors being added throughout the year?

Seasonality, because for us, when we have departures, seasonal departures, they occur in the first quarter. It has to do with year-end reviews, et cetera, et cetera. So most of our departures occur in the first quarter. So a net 26, I would hope, would be -- our run rate would be higher.

Okay. And then lastly, looked like other revenue was up a little bit more than what we are modeling and up from the prior quarter. What was driving that?

All right, Joel. I would say I don't know, but I will try to answer before I get off the call.

You can get back to me on it.

Thanks, Joel.

Devin Ryan, Sandler O'Neill.

Just a couple follow-ups for me here. First, all the debt trading -- obviously you had a real nice rebound and taxable debt trading, but I was a little surprised to see the 15% decline in muni brokerage revenues from what was a tough quarter last quarter. So -- especially with Stone & Youngberg being on your platform a little bit longer this quarter. So just love to get some color there and thoughts on that business going forward.

I think most of that decline -- I don't have it by group. I know that the activity in munis in the private client group was significantly lower. And so you've got to be careful to -- remember, we are reporting these numbers across the board. And Stone & Youngberg has been a fantastic addition across many facets on the institutional side, but you've got to look at it also as what's going on in the private client group.

Okay. Got it. And then also, just on the comp level, you mentioned the expensing of retirement-eligible deferred comp and how that negatively impacted the comp ratio in the quarter. Is that just a first-quarter event, or is that something that's going to recur going forward in addition in further quarters, I guess?

That was a first-quarter event.

So don't expect that -- is that always a first-quarter event?

When it occurs, it occurs in the first quarter because that's when we are finally allocating bonuses and determining -- it's a first-quarter event when it happens, yes.

Okay. Got it. Thank you. That's it for me.

Thanks, Devin.

Chris Harris, Wells Fargo.

So sounds like you are a little bit cautious here as you remarked, but nothing terribly bearish. But I was curious to get your sense of where volumes have to go or how much does the business potentially need to decline before we start looking at maybe doing something on the expense side of the ledger? It seems like you are wanting to continue to pull expenses where they are, keep headcount where they are. Just wondering if things declined a lot further than you are expecting, what are your thoughts there?

Look, first of all, I am striking somewhat of a cautious tone. Look at the markets the last week and -- I remember last year and I remember pipelines drying up because of increased volatility and choppy markets, but let's not lose sight of the fact we just had our second best quarter ever. $400 million of revenue. 15% margins across the board. We raised additional capital. It's not like we're struggling.

We had a very acceptable quarter, and really didn't fire on all engines, is that we can do in this firm. So I am cautious about the overall market, but I'm not concerned about the performance of this Company. I think this Company on a relative basis is performing fantastically. So am I worried about cutting expenses or worrying about headcount? No. I'm worried about gaining market share. So I'm cautious about the market that we operate in. I'm not really concerned about our positioning.

What do you think it's going to take to get equity volumes going again? We've obviously seen a huge recovery in the market. But really, people seem very disengaged. I'd love your opinion or some color there on what you think is going to get to fund flows getting positive or transaction volumes increasing from here?

A couple things. One is I think you have to -- we all have to recognize that the volumes that occurred post the crisis were way above the mean. And so reversion to the mean is what we're doing to where we are. I would hope that the level of activity is higher than what we are now. But to get back to the volumes and the volumes when Citigroup was trading like water -- it was crazy, those volumes. We're not going to -- I don't think we're going to get back to that. The -- that's the first thing.

So is it -- from these levels, I'd like to think we're higher, but I don't think we're going back to the 12 -- those days anytime soon. But what I do think for the health of the equity market is we need to see flow of funds into equities. Not into -- we just don't see net flows into equities that I think would be the foundation of a bull market.

What it will take to do that is -- it's the confidence. It's fiscal policy, getting our arms around the budget, all the things that concern people. The guys on CNBC not talking about the end of the world seems like every other minute. Those kind of sentiment changes. So we will see. It's an election year, and hope springs eternal.

Okay. Great. And then switching gears a little bit here, on the bank, I don't think anybody could take issue with the how well you guys have run the bank. Very strong performance there. But wondering why loan growth hasn't been a little bit stronger than it has. I got it that you guys want to be conservative growing the bank, but it seems like you have a tremendous opportunity to increase the loan capacity there, so just wondering what you think about loan growth from here.

I think we have an ability -- and continued ability to grow the loan book. We're being prudent. We're growing. On a prudent basis if I could -- the loan growth could be a lot faster if I didn't think it would outstrip how we're building the bank. I've always said that banks that get in trouble are banks that grow too fast. And so we're just taking a prudent approach.

There's a lot of loan demand and there's a lot of loans that we don't do. And some of the best loans we've made are the ones we haven't made. So I don't really have a comment on that. I'm not disappointed at all about what's going on in our bank.

Okay. Great, Ron. Thanks very much.

There are no further questions at this time. I turn the call back over to Mr. Ron Kruszewski.

Very good, operator. Well, everyone on the call, thank you. I again want to conclude by saying that it was a very, very good quarter. Run rate revenues of $1.6 billion, acceptable margins, and I see real opportunity to build our franchise, while I am cautious about the macroeconomic environment with which we are operating today. With that, I'll look forward to talking to everyone next quarter. Bye.

This concludes today's conference call. You may now disconnect.