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I'm joined on the call today by Co-Presidents, Jim Zemlyak and Victor Nesi; as well as our CFO, Jim Marischen.
I'm going to start the call by running through the highlights of our third quarter, before turning it over to Jim, who will take you through our balance sheet and expenses.
I'll then come back with my concluding thoughts.
The COVID pandemic has impacted millions of people worldwide and resulted in ever-changing challenges for both our healthcare system and our economy.
Despite this backdrop, it's the focus of my partners and associates at Stifel that has enabled us to provide the high-quality financial advice that our clients have come to rely on over the past 20-plus years as we've grown into a premier wealth management and middle market investment bank.
With that, let's look at our results.
Simply, we had another great quarter.
Stifel benefited from strong capital raising and trading activity as well as continued growth in fee-based assets.
This more than offset the expected pullback in advisory revenue and net interest.
Noteworthy, we had one of our strongest recruiting quarters in recent history as we've been able to successfully implement a virtual recruiting strategy.
Our pipeline remains strong and despite the uncertainty of the U.S. economy resulting from the pandemic, Stifel remains well positioned for continued growth.
I want to highlight the strength of our business for both the quarter and year-to-date.
We generated record third quarter revenue and our second best quarterly earnings per share.
For the first nine months of the year, we achieved record revenue and earnings per share.
Capital raising revenue achieved a quarterly record, trading volumes are up year-over-year and credit quality remains strong at Stifel Bank.
Additionally, wealth advisor recruiting accelerated, which built on the momentum we achieved during the first six months.
The financial performance during the quarter and frankly, the past few years is driven by a diverse business mix that's enabled both our Institutional Group and Wealth Management segment to generate strong growth.
This diversification is illustrated by record nine month wealth management revenue despite significant declines in net interest income and deposit sweep fees, both a result of the Fed's implementation of a 0 rate environment.
Likewise, we achieved record nine month institutional revenue as record capital raising and brokerage more than compensated for a 13% decline in advisory revenue.
Simply, Stifel is a growth company with diversified, balanced and synergistic businesses.
Over the last 12 months, Wealth Management, under both brokerage and fee models has contributed 46% of net revenue.
Institutional revenues, comprised of equity and fixed income, investment banking and trading, made up 41%, while net interest income comprised the remaining 13%.
The synergy and complementary nature of these businesses is reflected in our return on tangible common equity, which is 23.2% over the past 12 months.
For the third quarter, Stifel's net revenues were $883 million, up 8% from the prior year, representing the fourth highest quarterly revenue in our history.
In fact, for the 12 months ending September 30, 2020, Stifel generated revenue of more than $3.6 billion, up 14% from the 12 months ending September 30, 2019.
Compensation as a percentage of net revenue came in at 59.6%, while operating expenses totaled 21%.
I would note that our compensation ratio is higher for both the quarter and year-to-date as compared to the full year 2019, primarily as a result of the decline in NII.
Relatively modest loan growth and the stabilization of economic factors, coupled with our management overlay, resulted in essentially no provision for loan losses.
To give a sense of the range of outcomes under our CECL economic models, assuming our base case scenario, we are approximately $40 million over accrued.
On our most severe scenario, we would be approximately $60 million under accrued.
Altogether, earnings per share were $1.59, up 6%.
Pretax margins were 19.4%, annualized return on tangible common equity was 22.2% and tangible book value per share increased 13% over last year to $32.34.
Moving on to our segment results.
And starting with our Global Wealth Management group.
Third quarter wealth management revenue totaled $527 million, up 4% sequentially.
The third quarter benefited from the expected rebound in asset management and service fees, which increased by 16% sequentially as well as improved brokerage revenue both offsetting an 11% decline in NII.
Through the first nine months of the year, our wealth management revenue was up 2% to a record of more than $1.6 billion.
Again, these results were achieved despite the fact that our NII and deposit fee income declined approximately $65 million.
Excluding this impact, our year-to-date wealth management revenue increased 18%, driven by strong growth in our brokerage and asset management revenues, both of which reflect strong recruiting end markets.
In the fourth quarter, we expect another strong quarter for our asset management revenue due to the 8% sequential increase in fee-based client assets, which totaled $115 billion at September 30.
I would also note that total client assets reached $326 billion at the end of the quarter and are just $3 billion below the record level set in the fourth quarter of 2019.
As you can see on the wealth management metrics slide, we had another outstanding recruiting quarter as our virtual recruiting strategies continue to produce significant growth in our advisor headcount.
To put numbers to this, we recruited 45 financial advisors with total trailing 12-month production of $38 million.
Our recruiting performance this quarter is a continuation of our successful recruiting efforts since the beginning of 2019, as we've added nearly 250 new advisors who had trailing 12-month production of roughly $200 million.
This will continue to drive future revenue growth in wealth management as the new advisors transition their clients onto our platform.
Looking forward, we have a lot of momentum behind our recruiting efforts.
And while there is some seasonality in the fourth quarter, primarily due to the holidays, our pipeline remains extremely strong, as Stifel remains a very attractive destination for high-quality advisors.
Moving on to our Institutional Group.
Through nine months, we generated record net revenue of $1.1 billion, which is up 33% from last year.
Reflecting our growth in investments, the first nine months of 2020 would represent our third highest annual revenue.
These results were driven by capital raising and brokerage, both up more than 50% from last year.
For the third quarter, net revenue totaled $363 million, up 25% from last year.
Similar to our year-to-date results, capital raising and brokerage increases of approximately 50% drove the increase in the quarter and more than offset the expected softness in advisory revenue.
Before I go into the details of this segment's performance on the next few slides, I want to take a minute to talk about the general perception of our institutional business.
I'm sure you remember that on last quarter's call, I commented that this segment is continually underappreciated by analysts.
In general, institutional businesses tend to be transactional in nature.
And consequently, there are persistent concerns that strong results in any given quarter are not sustainable.
While it's true that we're not likely to generate record results every quarter, we believe that performance in this business is better judged by annual results.
As you can see by the chart on the bottom half of the slide, not only have our results been sustainable, they've grown substantially.
In fact, if you annualize our results for the first three months of 2020, our institutional revenues have grown at a compound annual rate of nearly 11% since 2009 despite substantial changes in the operating environment.
This growth is a direct result of the investments we've made into our business that has enabled us to pick up market share and become more relevant to our clients, which will help to drive continued growth in the future.
With that said, let's move on to our institutional equities and fixed income businesses.
While this slide depicts brokerage and capital raising for both equities and fixed income, I'll focus on the brokerage business now and address capital raising on the investment banking slide.
Fixed income brokerage revenue was $97 million, up 60% year-on-year and was our third highest quarterly revenue ever, with the top two quarters occurring in the first half of the year.
As such, we are having a record year in fixed income brokerage, as the first three quarters are not only up 70% from 2019, but already surpassed our previous full year record in 2016 by 5%.
The strength of our results continues to be driven by activity in investment-grade, high-yield rates as well as municipals.
Equity brokerage revenue of $54 million was up 32% year-on-year as activity levels slowed from the record levels in the second quarter as market volatility slowed.
Like our fixed income businesses, we are also having a record year in our institutional equity brokerage business, as through the first nine months, revenues are up 23% from our previous nine month high recorded in 2014.
I would also note that I'm pleased with the contributions from our international businesses.
On the following slide, we look at our firmwide investment banking revenue.
Revenue of $218 million was relatively flat with the prior quarter and up 10% year-on-year, driven by record revenue and capital raising.
Overall, the third quarter was our third strongest investment banking quarter.
Much like my comments about our overall institutional business, our investment banking business has not only been sustainable on an annual basis, but has grown at a compound annual rate of 20% since 2009 and has more than offset industry headwinds in our institutional brokerage business.
We will continue to invest in this business as we believe that we can continue to take market share and grow as a premier middle market investment bank.
Looking at our capital raising business in the quarter, we generated record revenues in both our equity and fixed income issuance.
Equity underwriting revenue of $85 million was up 41% year-on-year and surpassed our prior record by 20% as IPO activity was up significantly from the prior quarter.
The record results in the quarter underscore the diversity of the business we've built as healthcare and technology were our strongest contributors, while our largest vertical, financials, slowed as clients looked to raise capital in the debt markets.
Our fixed income underwriting revenue of $53 million was also a record as our public finance business had a strong quarter and the issuance market continued to improve.
Stifel lead managed 264 negotiated municipal issues and one was again ranked number one nationally in terms of the number of issues managed.
Through the first nine months, we have lead managed 632 municipal issues, which is up 17% compared to the combined volume of Stifel and George K. Baum for the same period in 2019.
I would also note that although our corporate debt issuance revenues were down from the prior quarter, we continued to benefit from our bankers' ability to cross-sell services.
As I mentioned earlier, KBW's clients continue to benefit from our expertise in the debt issuance markets.
This again highlights the benefits of our model.
For our advisory business, revenue of $81 million decreased by 23% year-on-year as we were negatively impacted by the slowdown in bank M&A following a very strong year in 2019.
In terms of verticals, the performance of our advisory business was driven by technology, industrials and restructuring.
The decline in advisory was expected as the market had been impacted by the slowdown in deal announcements earlier this year following the pandemic.
That said, we continue to see our clients reengage and our pipelines continue to pick up.
While bank M&A activity continues to lag the robust levels we saw in 2019, we are starting to see some green shoots as we recently advised CIT on their announced sale of First Citizens, which will create a bank with $100 billion in assets.
Additionally in the fourth quarter, we advised Eastern Bank on the largest ever first step mutual conversion.
In terms of our overall pipelines, they continue to build, and I'm optimistic for our investment banking business overall.
I would note that the capital raising business is robust yet highly market dependent.
Before I discuss net interest income, I'll make a few brief comments regarding our GAAP earnings.
I would note that as we successfully integrated all of our recent acquisitions, we've seen the continued convergence of our GAAP and non-GAAP results.
This can be seen in what was our second highest quarterly GAAP earnings per share in our history, which resulted in an ROE of nearly 13%, an ROTCE of more than 20%.
Similar to last quarter, the strong GAAP earnings and the pause in our share buyback program resulted in fairly meaningful increases in book value and tangible book value that I'll describe in more detail in the following slides.
And now let's turn to net interest income.
For the quarter, net interest income totaled $101 million, which was down $14 million sequentially.
Our results were impacted by the 0% interest rate environment and elevated levels of cash on our balance sheet.
Our firmwide net interest margin declined to 190 basis points, which was consistent with the bank's net interest margin declining to 237 basis points.
Firmwide, average interest-earning assets were relatively flat due to a modest increase in our loan portfolio, primarily due to mortgage loan originations and an 80% increase in our cash position as a result of the debt and preferred equity issuances earlier this year as well as the elevated cash position held at the bank.
Moving on to the next slide, we review the bank's Loan and Investment portfolios.
We ended the period with total net loans of $10.9 billion, which was flat sequentially.
The breakdown of our portfolio skewed to a greater percentage of consumer loans through the end of the third quarter.
Our mortgage portfolio increased by $100 million sequentially as we continue to see demand for residential loans and refinancings from wealth management clients given the decline in interest rates.
Our securities-based loans increased in the quarter by approximately $120 million.
Growth in securities-based loans continues to be strong as FA recruiting momentum continues to grow.
Our commercial portfolio accounts for just less than half of our total loan portfolio and is comprised of C&I loans, which declined by 2% during the quarter.
Our portfolio is well diversified with our highest concentration in any one sector at less than 7%.
While the size of our portfolio declined in the quarter, we continue to focus our lending efforts on credits that have been less negatively impacted by the pandemic and typically have access to the capital markets, including such sectors as manufacturing, technology, healthcare and homebuilding supplies.
While we remain cautious in our approach to loan growth, we continue to look for opportunities to grow our balance sheet with limited credit risk.
Moving to the investment portfolio.
As you can see, the vast majority of our securities continue to be comprised of AA and AAA CLOs.
We've provided granular detail on the credit risk profile of this portfolio over the last few quarters and have not seen any material change in the underlying credit subordination provided by the securities.
We continue to view these securities as an attractive risk-adjusted return and an opportunity to have exposure to the underlying loans with structural credit protection.
We've not incurred any losses in this portfolio, and even under the most severe stress testing we deploy, we do not anticipate incurring any losses.
Turning to the allowance.
We adopted CECL earlier this year, and in the first half of the year, we incurred $35 million of credit loss provisions through the P&L, which doesn't include the $11 million opening adjustment that ran through equity.
Much of the increase in the first half of the year was driven by changes in macroeconomic scenarios based on the Moody's model, which estimated increasingly severe declines in GDP as well as increasing unemployment.
As you can see on the slide, while the allowance for credit loss was essentially unchanged, we did see an increase in the allowance and our coverage ratio on our commercial portfolio, which increased to 2.03% as a result of additional management overlays.
We continue to see strong credit metrics with nonperforming assets and nonperforming loans at eight basis points.
While we understand we are still in the early innings of the current credit cycle, we've yet to see anything but nominal charge-offs over the last several quarters.
Moving to capital and liquidity.
Our capital ratios were relatively stable during the quarter.
Our Tier one leverage ratio increased to 11.3%, primarily on the strength of our earnings and a lack of share repurchases.
Our Tier one risk-based capital ratio was 19.2%, a slight decline from last quarter's 19.3%, as we had elevated risk-weighted asset density in our trading portfolio, given some of the volatility we saw earlier in the year.
This decreased risk-based capital by approximately 90 basis points.
Looking forward to the fourth quarter, we would not anticipate any material changes in our balance sheet.
As I mentioned earlier, we will pay off our $300 million, five year senior notes when they mature in December.
Given the timing of the maturity, we anticipate that interest expenses will be modestly lower in the fourth quarter.
Our book value per share increased to $50.95, an increase of $2.11 sequentially and our tangible book value per share increased to $32.34, up from $30.16.
These increases were driven by strong quarterly earnings and improved marks on our AFS portfolio.
As I noted last quarter, our liquidity position remains strong.
In addition to the Sweep Program, the bank has access to off-balance sheet funding of more than $4 billion.
Within our primary broker-dealer and holding company, we've access to nearly $2 billion of liquidity from cash, credit facilities that are committed and unsecured as well as secured funding sources.
I would also highlight that despite another quarter -- another strong quarter in the equities market, we continue to see an increase in client allocations to cash.
Within our Sweep Program, we saw balances increase by $1.7 billion in the third quarter.
So far in the fourth quarter, client cash has grown another $400 million.
On the next slide, we provide 4Q guidance and go through our expenses.
In terms of our outlook for the fourth quarter, we would expect net revenues to be in the range of $870 million to $920 million based on strong growth in fee-based assets and the robust investment banking pipelines that Ron described earlier.
We forecast the bank's net interest margin to come in between 235 and 245 basis points, which is in line with our third quarter guidance.
Barring a meaningful decline in LIBOR, we estimate that our current guidance represents a good estimate for where we see bank NIM stabilizing.
This is based on the fact that our assets are predominantly floating rate, and we have limited reinvestment of cash flows from our bond portfolio in an environment with limited options for yield and fixed income.
We expect our firmwide net interest margin in the fourth quarter to come in between 190 and 200 basis points given the impact of the maturity of our five year debt in December.
Given NIM expectations, we expect our NII in the fourth quarter to be between $100 million and $110 million, which is in line with our third quarter guidance.
In the third quarter, our pre-tax margin improved 160 basis points sequentially to 19.4%.
This increase was a result of lower compensation accruals and a decline in our reserve for credit losses.
Specifically, the comp-to-revenue ratio of 59.6% was down sequentially as we accrued conservatively in the first half of the year.
And given our clear outlook for the remainder of the year, we feel more comfortable with our overall comp accruals.
As such, we are forecasting a comp ratio of between 57.5% and 59.5% in the fourth quarter.
Non-comp operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $173 million and represented less than 20% of our net revenue.
We estimate that non-comp operating expenses in the fourth quarter will represent between 19% and 21% of net revenue.
In terms of our share count, our average fully diluted share count was up by 2% as a result of the increased share price and some modest issuance related to normal stock compensation practices.
In the fourth quarter, assuming a stable share price and no repurchases, we estimate our average fully diluted share count will be 77.4 million shares.
Unlike some of our peers that have more mono line business models, we are not solely reliant on strategies such as balance sheet growth or advisory growth.
Underscoring this, we've generated three of our top four strongest revenue quarters and are on pace to record our 25th consecutive year of record net revenue.
The strength of our performance was not limited to the top line as we also generated two of our top four earnings per share quarters, and our annualized earnings per share in the first three quarters would result in our second strongest annual earnings despite significantly lower NII and a substantial increase in our credit provision as a result of the implementation of CECL.
As we move toward 2021, I feel there is numerous questions about the impact of the elections, now less than a week away, and the impact on our outlook.
Regardless of the outcome, the short-term environment should be favorable for our various businesses.
As pundits often say, don't fight the Fed.
And in this case, you shouldn't fight an accommodative Fed coupled with huge additional stimulus package.
In conclusion, the diversified business model we've built continues to prove that it can generate substantial and sustainable revenue growth.
While the market and the economy remain uncertain given the pandemic and the presidential election, the business we've built over the past 20-plus years will continue to generate strong growth and solid returns over the long term.

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q3 non-gaap earnings per share $1.59.

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