Stifel Financial Corp (SF) 2013 Q1 法說會逐字稿

Good afternoon, my name is Candace, and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter 2013 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.

(Operator Instructions)

Thank you. Mr. Jim Zemlyak, CFO of Stifel, you may begin your conference.

Thank you, Candace. I would like to welcome everyone to our conference call today to discuss our first quarter 2013 financial results. Please note that this conference call is being recorded. If you would like a copy of today's presentation, you may download slides from our website at www.Stifel.com.

Before we begin today's call, I would like to remind listeners 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 may include statements regarding other things -- among other things, our ability to successfully integrate acquired companies or branch offices and financial advisors, general economic, political, regulatory and market conditions of the investment banking and brokerage industry, our objectives and results. And also may include our belief regarding the effect of various legal proceedings, Management expectations, our liquidity and funding sources, counter party, credit risks or other similar matters. As such, they are subject to risks, uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP we may use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the Company's GAAP results. To the extent we discuss non-GAAP measures, the reconciliation to GAAP is available on our website at www.Stifel.com.

And finally, for a discussion of risks and uncertainties in our business, please see the business factors affecting the Company and the financial services industry and the Company's annual report on Form 10-K and MD&A results in the Company's quarterly results on Form 10-Q. I will turn the call over to the Chairman, CEO and President of Stifel, Ron Kruszewski.

Thank you, Jim. Good afternoon, everyone. We are pleased with our performance for the quarter which included record net revenues. While our profitability is clouded by merger-related charges, it is noteworthy our global wealth management segment posted both record revenue and profitability and our institutional segment generated record quarterly revenue.

As we work through our KBW integration process and the related expense reductions, we expect to continue to report both GAAP and non-GAAP results for the remainder of the year. Looking forward, we are focused on leveraging our new and established businesses to drive growth and profits across the platform. Additionally, we are on track this quarter to complete the acquisition of the US institutional fixed income sales and trading team and the hiring of the European team from Knight Capital Group.

The first fight I would like to address is a market overview. Today, market indices are achieving new highs with the S&P 500. I believe it closed today at 1626. The Dow is above 15,000.

So, the market is scaling new heights. But in terms of equity volumes, while we've seen a bounce from March today, volumes remain relatively weak. They have been approximately 6 billion shares a day, which are well off their highs of prior years.

With respect to M&A activity, we believe a fair amount of activity was pulled into the fourth quarter of 2012. As noted, the number of completed M&A transactions was down 21% sequentially.

On a positive note, I am optimistic about equity returns really for two factors. First, domestic equity flows turned positive in the first quarter. From the first quarter of 2010 through the end of last year, we have $370 billion of outflows from domestic equity funds and Q1 turned around with $20 billion of inflow.

Second is the equity risk premium, which is wide. The forward earnings estimate, about $113 a share into the S&P 500, would generate an earnings yield of about 6.9%, 10 years at 180, give or take. That's an equity risk premium which historically is very wide at 510 basis points.

I believe in any growth scenario. If you take deflation off the table, and I believe it is being taken off the table, in any growth scenario, equities are undervalued relative to bonds. And I believe that the investments that we have made in this firm are going to begin to reap the rewards of a better market environment for securities firms such as Stifel.

I want to give you an update on the KBW merger. The merger closed February 15, 2000 -- February 15 of the first quarter. The back office conversion was completed on March 6.

I want to give a congratulations to our operations staff. That is quite of an accomplishment, given that we closed the transaction on February 15. Kudos to the hard working people that got that done and got it done both successfully and timely.

Since the close, we have made significant steps towards achieving our initial cost-saving targets, and I believe that the rationale for the deal is compelling, as you see in the numbers. KBW is number one year-to-date and the number of FIG and bank mergers and it has advised on the five largest bank mergers this year. Cross-selling synergies are evident by deals such as Boston Private Financial holdings where we did a preferred equity holding. Zions Bank Corp, we did a preferred equity offering; Radiant Group, we did a convertible where it combined the relationships with KBW with the expertise on our convertible debt. And same with MGIC Investment Corp, we had a convertible senior debt offering.

On the equity side of the business, KBW Research, we've combined the research staff and re-launched it. I am pleased that in one measure, which is the number of hits that we've had on our research for KBW, are above pre-deal level, and that is very encouraging. More encouraging is that April was the best month for equity commissions for KBW in over a year and both in US and European products. And I think our strategy of maintaining the brand, the best of what KBW has in financial services, both with specialty sales and research and their brand in investment banking, has, at least at this early returns, has proven to be successful, and I'm excited about that.

The next slide will look at non-core expenses relating to our KBW. And two items that significantly impacted our GAAP results are, first, a non-cash charge of $19.2 million after tax, and that relates to expensing of stock awards issued in connection with the acquisition of KBW. We took this charge to align our plans to make KBW awards retirement eligible. And second of all, we had $6.1 million in merger related expenses, that was pretax.

I want to talk about this because as I've talked in the past, we view items such as stock based retention, duplicate compensation, non-recurring expenses and duplicate expenses, effectively as purchase price. We analyze these when we look at doing deals and we take those costs, the after tax costs of these duplicative items, and we view it as purchase price. However, accounting rules require that we run these items through the income statement. As such, we look at core results excluding these items. Said another way, we view the after tax cost of retention and these duplicate expenses, in that this case, approximately $40 million, as purchase price.

The next slide will project what you can expect as we eliminate the duplicate expenses over the next three quarters. This schedule includes KBW Miller Buckfire and the expense -- expected expenses related to the fixed income business of Knight Capital. This is our best guess at this time and could change, but I think is a pretty good estimate.

The impact in the second quarter on a pretax basis is $13 million. In the third quarter, we have $7.5 million related to KBW and another $20 million, which is the stock-based retention for Knight Capital employees. And in the fourth quarter we expect non-core expenses to be $5.3 million.

We believe after that -- and many of these are the duplicate in subscriptions, clearing services, communications, rent; this is all of the things that we have plans to eliminate to make KBW operate on what we said was going to be their non-comp operating expenses of $60 million annually. And we're on track for that today as we speak.

Now turning to our financial results for the quarter, we posted record quarterly revenues of $442 million, which was up 10% from a year ago. Non-GAAP net income was $40 million, or $0.58 per diluted share, and that compared with GAAP net income of $35 million, or $0.55 a diluted share last year. As I previously stated, there were two non-core items that impacted earnings by $0.37 a share. The non-GAAP pretax margin was 14%.

Look, I don't like to give out guidance, and in fact, we don't give guidance, but we need some context in this case because of all the moving parts. So, I'll start by saying that if KBW had been in our results for full quarter, revenues would have been approximately $467 million. We closed the deal mid-quarter, you don't get started immediately. There is a lot of drag as you do close deals.

But the other thing I would say is that our quarterly run rate as of March was approximately $480 million. And I'm pleased to say that we have a nice start to our second quarter. So, I want to give some context to that.

And the second thing is that there is -- there has been some questions about our shares outstanding. Again, we had 69 million shares outstanding for the quarter, but KBW was only half the quarter. And I would just like to sate that looking at the second quarter, our shares outstanding fully dilutive would be approximately 73.5 million. So, just to give some context to some numbers that are going on here.

The next slide looks at our sources of revenues, commission revenues increased 21% to $149 million. This increase was due really to higher mutual funds and listed in OTC transactions. Principal transactions decreased 8%. This was due to lower taxable debt and a decline in our equities due to -- we had a decline in our market-making activities.

Investment banking revenues up 11% to $78 million from $70 million. The year-over-year increase was a result of a 74% increase in advisory revenues, offset by a 7% decline in capital raising. Again, to put some context in these numbers, though, I think our advisory revenues were positively impacted on a comparative basis by our merger with KBW and the addition of Miller Buckfire. On a historical basis, as I've said, I think our advisory business was negatively impacted by the pull into the fourth quarter of last year, due to tax considerations.

So, while I'm pleased with investment banking, all in all, I would say investment banking was -- had a relatively soft quarter, all things considered. Our asset management service fees were up 13% to $69 million. This increase is due to the increase in the value of assets in our fee-based accounts.

Turning to brokerage revenues, our first quarter brokerage revenues, which we look at by combining commissions and principal transactions, increased 7% versus the year ago quarter and was up 10% sequentially. This increase was driven largely by commissions, which was up 21%. On a segment basis, we made nice progress in private client brokerage, equity brokerage, again, related to the historical business and KBW, and fixed income was flat.

The next slide reviews our core non-interest expenses. Comp and benefits as a percentage of net revenues was 63.8% in the first quarter compared to 63.6% in the year ago quarter and 62.8% in the fourth quarter of 2012. Our goal is to maintain comp as a percentage of revenues in our targeted range of 62% to 64%. Included in that number, though, is a significant amount for transition pay, which reflects our growth primarily in th private client group over the last few years. Transition pay totaled 5.3% of -- within our compensation ratio.

Non-comp operating expenses were $96.2 million, or 21.8% of net revenues versus 21.6% last year. Again, to give some context, our current run rate estimate of core non-comp operating expenses will be in the range of $107 million to $110 million per quarter. This excludes the Knight transaction, which won't close until the end of the second quarter. But to get some idea of how we're looking at non-comp OpEx on a run rate, I will repeat that we think it is in the $107 million to $110 million item -- or range.

The increase in year-over-year non-comp operating expenses is related, again, to our growth through acquisition. We've added a number of revenue producers and support staff and offices. And we're also -- we need work on rationalizing our office space given our recent mergers, primarily in New York and San Francisco.

Commissions and floor brokerage increased due to increasing clearing fees trade execution of costs as a result of higher business. And the other increase due to increase due to an increase in loan loss provisions we've added some -- we have been adding to the loan portfolio on the bank, and legal fees and professional fees.

If you look at our segment comparison, we posted record revenues in both global wealth management and the institutional group. Quarter-over-quarter, global wealth increased 8%, our institutional group was up 18%. The revenue mix in the first quarter was 60% from global wealth and 40% from institutional. Looking forward, I would say that will be in the mid to high 50%s for global wealth and the remainder in our institutional group.

Our global wealth operating contribution was $69 million, which was an all-time quarterly record. The institutional group's operating contribution was $28 million, which was up 17%.

Turning to global wealth management, this segment continued to perform well. Margins were 26% in the quarter, net revenues record $267 million up 8%, agency transactions and mutual funds equities and insurance products increased, which was slightly offset by fixed income products. Just said another way, when we look at our business, we are seeing the beginning, not the end, of a rotation into equity products out of fixed income. I think that bodes well for the markets, and we're seeing it in our private client group.

Asset management service fees increased again due to an increase in our fee-based assets, which totalled over $21 billion, which was up 14%. The net interest revenues increased as a result of the growth of interest earning assets at Stifel Bank. And comp and benefits was up, again, primarily for -- we have been adding financial advisors and some new offices, and we've added the associated fixed compensation for our support staff.

Looking at the bank, asset quality remains high, less than $600,000 in trailing 12-month charge office, we have four basis points of non-performing assets. The assets totaled $3.8 billion at March 31, which was up 40% -- 47% from last year. Of those assets, investment securities are $2.4 billion. Our total loan portfolio is over $1 billion.

We continue to grow securities-based loans and corporate loans. The market has been and continues to be competitive, but we have been able to grow, retain loans 30% year-over-year. Deposits of $3.6 billion, which we sweep from the brokerage, has increased 51%. The bank will continue and continues to prudently grow assets on a risk adjusted basis, capitalizing more and more on the access to the Stifel platform.

The next slide looks at our institutional group results. We posted record net revenues for the quarter, up 18% to $176 million. This increase was due to higher equity institutional commissions and investment banking, which was positively impacted by our acquisitions of KBW and Miller Buckfire. And our non-comp expenses increased, again, due to these mergers.

Pretax operating income was $28.1 million. It's up 17%, but I will tell you, it's depressed versus our targets. We believe that the pretax operating margins, which used to be in the mid-20s, can get there again with better markets.

If you look at our institutional group revenues, our institutional brokerage revenues were $98 million, up 8%. Equity brokerage increased 18% to $52 million. Again, we have a basically 1.5 months of KBW in those numbers. Fixed income brokerage revenues declined slightly to $46 million.

Investment banking, our advisory fee revenues were $27 million, which was 74% higher than last year and 2% higher than in the fourth quarter. And as I said, even though we believed that deals were accelerated in the fourth quarter and I do believe M&A was tepid, the fact is that we did add KBW and Miller Buckfire. So, the numbers are not quite comparative. I can tell you that we believe that the activity is picking up nicely in the second quarter and our pipeline is building. And we're optimistic that M&A revenue will grow this year, but we see a lot of activity in the second half of the year based on our pipeline.

With respect to Miller Buckfire, as you know, we completed the full merger with them at the end of the year. We're excited that Norma Corio joined us as co-president along with Ken Buckfire, and I'm excited to acknowledge that.

Capital-raising revenues $40 million, down 6%. The capital raising year-over-year comparison is really due both to a strong Q1 in 2012, which simply had larger and more book-managed deals. The first quarter this year was flat in terms of fees and on the growth side. In other words, our underwritten deals in growth companies was really flat.

We did a lot more on yields deals. We completed generally just fewer deals this quarter. And again, though, when I look at our pipeline, I'm optimistic about that business, given receptive capital markets.

Looking at our capital structure, total assets $8 billion, driven primarily by growth in the assets of Stifel Bank along with our acquisitions. Total capitalization, $2.4 billion, book value per share came in at $30.13.

Looking at other financial data, our total leverage ratio was 3.4%. It's 2.1% at the broker dealer and 13.5 times at the bank, which is really how we're running our leverage, most of the leverage is in the bank. We were excited to welcome a team of 11 financial advisors in Bellevue, Washington and Portland right at the end of the quarter. They brought more than $1 billion in client assets. They have long-standing relationships in the northwest, and we would like to continue to grow in that market.

Our marketing efforts are paying off and recruiting is active and the pipeline is building and recruiting. Full-time associates up 11%, which includes approximately 400 new partners from KBW and Miller Buckfire. And as of March 30, or end of the quarter, our total client assets were $147 billion, which was up 13% from last year.

In conclusion, we believe we've significantly added to our capabilities and we're well positioned to increase our institutional market share and continue to significantly grow our global wealth management business. I'm excited about our KBW merger and the integration is going well. As I previously stated, the first quarter revenues, if you would have included KBW, would have been $467 million. If you look at March, it would be $480 million, and I again think that we have a nice start to the second quarter.

We're on track to complete the acquisition of the US fixed income and the European trading team of Knight Capital Group. This is another growth opportunity we saw to increase our product mix with established group of professionals.

Markets are -- they're at all-time highs. I don't think -- I think this is a bull market that gets no respect. I think this market can continue to provide opportunities, but also be more conducive to the type of firm that we built over the last few years. We've closed a lot of deals so far this quarter, and we're optimistic about the future.

I will now open the call for questions.

(Operator Instructions)

And your first question comes from David Trone, your line is now open.

Hey, Ron, how are you doing, thanks for taking my question. Couple of questions for you. This was very detailed as usual, and I appreciate all that information. Can you maybe talk about something else, what are your -- how does international expansion fit into your future growth plans?

Well, we -- we've always had a presence in Europe selling our US equity research in Europe. And that goes back to our acquisition or merger with Legg Mason Capital Markets. Since that time, we've looked at the European expansion as almost an option. The KBW business at one time was quite robust, probably was operating more of a breakeven basis last year, talking about in Europe and not in Asia. And so we looked it as an opportunity to build on what we already had in Europe.

The Knight business, the European bond business of Knight, we believe is quite profitable, and so we now have some profitable scale in Europe. And we're going to -- we'll go on cautiously, but we see an opportunity to gain some market share there in a lot of -- especially with what we have with KBW. They're behind where we are in the United States in their restructuring of all of their banks, and we see some real opportunity there.

Okay. So, if I can summarize that. Basically you have these three footholds in Europe, and you think that might be a sufficient platform to at some point add on some additional opportunities.

Well look, I think that our revenues in Europe are pro forma -- are well in excess of $100 million, and --

Okay.

-- more than that, and it's profitable. So, we're not over there losing money. We believe we have a profitable base with which we can we can add.

Okay, good. Thank you.

That was easy. (laughter).That's not like you. Next question. Are you done, David?

Your next question comes from Chris Harris, your line is now open.

Thanks a lot. Want to start out, Ron, with your comments on the revenue side of things. You did mention you guys were getting some synergies. I think you -- when you're putting KBW and Stifel together, and kind of just curious if you guys are seeing any attrition happening, and particularly wondering if you're getting any attrition occurring on the commission side of the institutional business?

Well, you can see in the numbers that our flow business is up and the answer is that we have said that we will maintain the separate brand, separately brand of research in sales and trading. And I believe that -- it adds value to the marketplace and it has been accepted. We really have not seen the attrition on that side of the business. Certainly not what some of all of you have been predicting, but we have not. I have been pleased, and it goes to their platform, which is a very specialized and very deep in the financial services.

Okay. It sounds like the April number is really strong, KBW highlighted that. Is April similarly strong for the legacy Stifel business, as well?

The -- yes, we had a -- we've had a very nice start to the second quarter. That is what I've said. I don't really want to get into projections, Chris, but I am pleased with -- I'm pleased that our strategy of maintaining the brand for KBW is effective.

Okay. Then on the question on the expenses, if we look at just the institutional business, it looks like your revenues went up quarter over quarter but your comp actually went down quarter over quarter. And it just seems really odd to us that you would have comp that was going down while you've added employees from KBW and you've added employees from Miller Buckfire. So, if you can just elaborate a little bit on that.

And then related to that question, your comp ratio is 61% in that segment, and I think that's the lowest it's been in two years, and revenues are probably below where you think they would be. So, maybe you could talk a little bit about that, it would be great.

Well, I think you got to go back to a couple of years where the ratio was, the institutional group was in the high 50s. And as I said last year, we were making investments in this business, which was costing some money in the comp ratio. I think that if you asked where our plan is for compensation expense in the segment, I would say that where it is today, which is for the quarter is 61%, is high in terms of -- you don't run the firm at 63% and a segment at 61% if -- the way we think about things. So, part of it is, is that we did have record revenue and -- in this group, but it went from 63% to 61%, and I don't view that as significantly low.

Okay. So, potentially more upside in that number, then?

Yes.

Okay. All right, real quick, last question for me, and I'll let others get in. On the Knight deal, can you guys give us a little color on the revenue and margin you expect to get from that transaction?

We have not -- I guess it's -- I plan to next quarter, okay, when we close it. We're sort of betwixt and between with what they've disclosed, there's another merger transaction going on. And so we've -- I'd like to -- I want to talk about it and certainly, it's not a huge material thing, but it is -- there is another merger going on, and I'm mindful of what they've said and what they've disclosed of revenues, and so I'm just being quiet at this point. I intend to talk about what we think that does next quarter. It closes -- it will close the end of the second quarter.

Okay, Ron. Understood. Thank you.

Thank you.

And your next question comes from Alex Blostein, your line is now open.

Great, thanks. Good afternoon, everybody. Maybe just a couple of questions in numbers. So, you gave the pro forma revenue number for the quarter of KBW. Is it possible to get the expense number as well, so we have the apples to apples if the franchise was together for a full quarter, what the profitability would look like?

Well, if you -- what I've said is that on a core basis, there is a lot of expenses, as you know, that go on in mergers, and there is a lot of charges that they took. But as I've said, the -- we believe, and we've done a lot of work, that the core operating expenses for KBW was -- is $60 million. And so if you want to work backwards, we had about, say, $7.5 million for half of a quarter, and so the other half would have been about $7.5 million, and you can do the math. But it is difficult just to -- I don't want to state numbers when they had also a lot of unusual expenses in their last month or quarter.

Right, but I guess you guys strip out merger-related expenses and things like that. So, there is, I guess, like a quarterly expense number for KBW that would be apples to apples. So, what we should think about on the go-forward basis. I'm just trying to think for $467 million on the revenue side, what is the expense number associated with that?

Right, well, look, I think the -- another way to look at it could have been that you could have added to our OpEx $7.5 million to $8 million, plus the compensation expense that would go with that. If you go back to our merger model, and this is pretty accurate, the comp expense, we view it about 58%, and the core operating expenses are not duplicative of about $15 million a quarter.

Got you. All right, that's helpful. And then on the -- I guess the outlook you gave on the core non-comp numbers are like $107 million to $110 million run rate for the next couple of quarters with KBW on a full run rate basis. Are there any expense synergies we should think about from here, or the business kind of is what it is at this point, so there is really no -- it's not from merger-related things going away, there is really no incremental expense savings that will still come through?

Well, as I've said, if you look at the OpEx number of $107 million to $110 million and then apply it against whatever revenue number that you want, to the extent that that number is over 20%, and it is, I have a firm belief that to be efficient we should be running non-comp OpEx at 20% of net revenue. And we have -- there is a lot of things that we have been looking at, and we have to do a better job, frankly, on the expense side.

We have done a lot of mergers, space is one of them. We went from no space to five locations in New York, and we have plans to consolidate there and in San Francisco and a lot of expenses that are going to come out. So I would say that what I'm trying to show is the -- that's where our run rate is today, but I believe that we can do better.

Okay, and I guess just one on the strategy. You made a couple of interesting points as far as flows coming back and just greater appetite for equities and you make a point of that you believe we're in the earlier innings of an equity cycle. Can you run us through the rationale of buying a fixed income franchise at this point on the cycle from Knight?

Well, first of all, yes, I'll go through it. First of all, it is a -- we bought it right. Second of all, the -- it fills a significant need of the Knight US business is complementary to loan sale, distressed high-yield business. So, we did not have a lot of capability and not a lot of overlap. That is going to fit very nicely, not only with our fixed income, but our equity strategy in the space, obviously.

You got equity convert, high preferred convert, high-yield, to investment grade. And we need this capability to complement not only what we're doing on our fixed income offering, but also for our equity platform. We viewed it as a great opportunity. It will be a nice addition in terms of revenue, and we believe that we've modeled this to be profitable.

Got you. Great, thanks.

You're welcome.

And your next question comes from David Soshnik your line is now open.

Hey, Ron. Can you hear me?

Is this Soshnik?

Yes.

Hey, how are you?

How did book value go from $27 to $30?

Because we issued equity with respect to the KBW transaction above book. But in all fairness, you also have to look at the fact that we increased goodwill, and so --

That was the other aspect of it. So, what's the -- of the $30, how much goodwill is on the books right now?

Well, we have about -- I don't know that number exactly, but it is somewhere in the $11, $11.50. I mean, tangible book is -- goodwill is $700 million. So, what happened, David, was that we priced the deal at $32. We had a collar, so we benefited up to $35. But when we closed the deal, the stock was at $38. That had the effect of both increasing equity and increasing goodwill. It is all paper, but that is what happened.

Got you.

Glad to see you're listening, Mr. Soshnik.

I always listen. Good-bye.

We have no further questions at this time. I'll turn the call back to Mr. Kruszewski.

I would like to take this opportunity to welcome our new partners from KBW and Miller Buckfire and our potential new partners from Knight. And would like to say we look forward to our next earnings call and to show what we've built and what it can do, and what we've built and how it will perform in these markets. I will end with that and look forward to seeing and talking to everyone next quarter. Thank you very much.

And this concludes today's conference call. You may now disconnect.