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Text: I'm joined on the call today by our Chairman and CEO, Ron Kruszewski; our Co-Presidents, Victor Nesi and Jim Zemlyak; and our CFO, Jim Marischen.
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I'll start the call with some highlights from our quarter and first nine months.
Then Jim Marischen will review our balance sheet and expenses, and I'll wrap up with some concluding thoughts.
Our third quarter represented our second-highest net revenue and earnings per share, as both operating segments, Global Wealth and Institutional, generated strong results.
As I've said before, our success is driven by the continued reinvestment in our business.
And based on our investment banking and recruiting pipelines, organic bank growth and expertise in acquisitions, Stifel remains well positioned to continue and build upon our decades-long growth.
Revenue in the quarter totaled nearly $1.15 billion, an increase of 30%.
While certainly pleased with our quarterly revenue, it is noteworthy that we achieved this despite the fact that several large advisory assignments which we had forecast to close in the third quarter have slipped into the fourth quarter.
For the nine-month period, we generated record revenue of more than $3.4 billion, up 28% over the comparable period in 2020.
The growth in revenue and lower expense ratios resulted in non-GAAP earnings per share of $1.65, which is up 56% year-on-year, and $4.85 year-to-date, which is up 68%.
The strength of our results were driven by a combination of revenue growth and expense discipline, resulting in pre-tax margins of nearly 24%.
In addition, reflecting our focus on returns to investor capital, we earned nearly 28% annualized return on tangible common equity.
Tangible book value per share also increased 27% in the last year.
Turning to the next slide.
Our third quarter net revenue was driven by record Global Wealth Management revenue and robust Institutional revenue.
As we forecasted, compensation as a percentage of net revenue declined sequentially to 58.2%.
Our operating expense ratio was 17.9% and, excluding credit provision and investment banking gross-ups, totaled 16.9%, which was within the guidance range we gave on last quarter's call.
Taken together, Stifel's quarterly pre-tax income totaled $274 million, which increased 60% from the third quarter of 2020.
As I said on last quarter's call, Stifel is and will continue to be a growth company, and our results in the third quarter and year-to-date illustrate our impressive long-term growth trajectory.
Our disciplined approach to capital deployment and acquisitions has resulted in a diversified business model that has not only made us more relevant to our clients, but also enabled us to grow during good and bad market environments.
Last quarter, we updated our full year 2021 revenue guidance to be in a range of $4.5 billion to $4.7 billion.
Our annualized nine-months revenue is essentially in the middle of our guidance and would represent our 26th consecutive year of record net revenue and up over 20% from last year.
Our performance in 2021 and, quite frankly, over the past six years has been a testament to our focus on consistently reinvesting in our business and our people.
We've built a diversified business comprised of highly talented people that has enabled our firm to generate consistent growth regardless of the operating environment, which is something I believe gets overlooked by analysts and investors.
We take a disciplined approach to capital deployment by focusing on where we can generate the best risk-adjusted returns.
Since the end of 2015, this approach has enabled us to consistently grow our assets from $13 billion to over $30 billion, execute and integrate 11 acquisitions, add nearly 700 financial advisors, initiate and consistently grow our dividend and repurchase approximately 20 million shares.
We accomplished all of this while improving our pre-tax margins over that time period from 10% to nearly 24% and through the first nine months of 2021 generated an annualized return on tangible equity of nearly 30%.
I would note these results are against a backdrop of a 0-rate environment, and Stifel is very well positioned from a net interest income and margin perspective for an increase in interest rates.
We expect this transaction to close at the end of October, and I'm excited about the strategic fit of this business.
As shown on this slide, we are adding a highly complementary business to our already strong fixed income franchise.
Vining Sparks focuses on providing institutional fixed income brokerage, balance sheet management, portfolio accounting and underwriting services to depository institutions.
Our analysis indicates that 70% of Vining Sparks' revenue is generated from depositories with less than $2 billion in assets, while nearly 75% of Stifel's depository revenue comes from clients with greater than $2 billion in assets.
As such, we believe that the combination of our two firms is not only highly complementary, but cements Stifel's position as the leading investment bank for depository institutions in the United States.
Looking another way at the complementary profile of this combination, there exists only a 5% revenue overlap within end clients of the combined client base.
We also believe there exist solid synergy opportunities in debt offerings and M&A through KBW and correspondent banking through Stifel Bank.
Moving on to our operating segments, and starting with Global Wealth Management.
Again we posted record quarterly and year-to-date revenue.
Third quarter revenue totaled $656 million, up 24% year-on-year, and year-to-date revenue was approximately $1.9 billion, an increase of 19%.
This growth was driven by recruiting, increased client activity and growth in interest-earning assets.
The continued growth in our asset management revenue in the third quarter was buoyed by higher market valuations and increased client assets in the second quarter, as the majority of our fee-based assets don't advance.
Despite muted growth in equity valuations during the third quarter, as measured by the S&P 500, we finished the quarter with record client assets of $407 billion and fee-based assets of approximately $150 billion.
I am pleased with both our loan growth and improvement in both net interest income, which increased 21% over last year, and a 10-basis point sequential improvement in our net interest margin.
The next slide highlights the strength of our recruiting and growth drivers of our platform.
For the quarter, we added 46 advisors, including 41 experienced advisors, with total trailing 12-month production of $35 million.
Our recruiting pipelines remain very robust.
And furthermore, I expect that our independent channel will begin to add to our recruiting success, as that advisor channel is gaining traction and momentum.
Moving on to our Institutional group.
We posted our second-highest revenue quarter, as we continue to benefit from increased activity levels and the scale of our business.
Our quarterly net revenue totaled $492 million, which was up 36% from the prior year.
nine-month revenue increased 39%, to over $1.5 billion.
Record quarterly advisory revenues of $208 million were up nearly 160%, while capital raising posted revenue of $153 million, up 18%.
As expected, trading revenue declined to $124 million, while year-to-date trading declined 10%, to $455 million.
Our Institutional pre-tax margin for the quarter was 25.4%, which was our second highest, trailing only the second quarter of this year.
For the first nine months, pre-tax margin was 25.3% and was up nearly 700 basis points, as we continue to generate substantial top line growth, which drives operating leverage.
Looking at the revenue components of the Institutional group, our equities business posted record nine-month results of $533 million, up 37%, while our third quarter revenue totaled $142 million, up 7% year-on-year.
Our fixed income business posted year-to-date revenue of $428 million and quarterly revenue of $135 million.
Our quarterly fixed income business reflected strength in capital raising, offset by a decline in trading revenue.
I'll focus on the trading businesses of these segments and discuss capital raising on the next slide regarding investment banking.
With respect to our trading businesses, quarterly equity revenue totaled $48 million, down 21% sequentially.
As I stated earlier, this was the result of lower market activity level, as volumes on the NYSE and NASDAQ declined 8% sequentially.
Additionally, we incurred mark-to-market losses attributed to warrants associated with certain investment banking transactions versus gains in the prior quarter.
For the first nine months, equity trading revenue was $189 million, up 1% from 2020.
Fixed income trading revenue of $76 million was down 17% sequentially, as we saw lower activity levels in agencies, corporates and munis, as overall market activity declined a similar amount.
On slide nine, investment banking quarterly revenue increased 71%, to $372 million, which was just $5 million short of what would have amounted to our fourth consecutive quarterly record.
Year-to-date, investment banking revenue totals nearly $1.1 billion, up 77%, as both advisory and capital raising are having record years.
The $208 million of advisory revenue was our second consecutive record quarter, driven primarily by the strength of our U.S. business; notably, financials, diversified services and technology.
While essentially all of our major verticals generated strong results, we also saw sequential gains in healthcare, industrials and in the fund placement business from Eaton Partners.
With our pipelines at record levels and barring a substantial change in the market or the economy, we expect another strong advisory quarter for the fourth quarter of 2021.
Moving on to capital raising, our equity underwriting business posted revenue of $104 million, up 22%.
We saw a balance in this business, with contributions from healthcare, technology, financials and industrials.
Our fixed income underwriting business posted its second consecutive record quarter, with $61 million in revenue, up 6% sequentially.
Our municipal finance business posted another great quarter, as we lead-managed 257 municipal issues.
For the first nine months, our market share in terms of number of transactions increased year-on-year by 140 basis points, to 12.7% market share.
In addition to the strength of our public finance business, we continue to see strong contributions from our debt capital markets business, as we completed a record number of deals in the quarter.
While activity levels in equity capital raising have slowed from the robust levels earlier this year, overall activity remains solid, and with strong pipelines in our fixed income underwriting business I expect another strong quarter for the fourth quarter.
Turning to slide 10.
For the quarter, net interest income totaled $132 million, which was up 10% sequentially.
Our firmwide net interest margin increased to 210 basis points, primarily due to increases in leverage finance fee income and our stock loan business, while our bank NIM remained at 240 basis points.
The growth in our NII was driven by a 5% increase in our interest-earning assets as well as the aforementioned increased leverage finance fee income and security lending activity.
In terms of our fourth quarter expectations, we see net interest income in a range of $125 million to $135 million and with a similar NIM to the third quarter, as we expect lower activity levels in some of the more episodic fee income opportunities to -- growth in our balance sheet.
I'd also note that we've updated our asset sensitivity based on the increased size of our balance sheet.
In our first quarter earnings call, we estimated that we'd generate an incremental $150 million to $175 million of pre-tax income as a result of a 100-basis point increase in rates.
However, given the nearly $3 billion increase in our balance sheet since the end of the first quarter, we are revising this forecast to a range of $175 million to $200 million, using the same market and deposit beta assumptions.
Moving on to the next slide.
I'll go into more detail on the bank's loan and investment portfolios.
We ended the quarter with total net loans of $13.6 billion, which was up approximately $730 million from the prior quarter and was primarily driven by growth in our consumer channel.
Our mortgage portfolio increased by $390 million sequentially, as we continue to see demand for residential loans from our Wealth Management clients.
Our securities-based loan portfolio increased by approximately $250 million.
Growth in these loans continues to be strong, as FA recruiting momentum continues to drive increased loan balances.
Our commercial portfolio increased by nearly $100 million sequentially, primarily due to a 5% increase in C&I loans, as increases in fund banking loans more than offset the expected reduction in PPP loans.
Moving to the investment portfolio, which increased by $330 million sequentially, the vast majority of the sequential growth was in our CLO portfolio, as we continue to see these securities as generating strong risk-adjusted returns.
Turning to the allowance.
We had a modest reserve release of approximately $700,000, as the improvement in our economic projections was essentially offset by the additional reserves tied to loan growth.
As a result of the reserve release and the composition of our loan growth during the quarter, our ratio of allowance to total loans declined to 91 basis points, excluding PPP loans.
I would reiterate that it's important to look at the level of reserves between our consumer and commercial portfolios, given the relative levels of inherent risk.
At quarter-end, the consumer allowance to total loans was 36 basis points; for the commercial portfolio, it was 120 basis points.
We also continue to see strong credit metrics, with nonperforming assets and nonperforming loans declining to only four basis points.
Moving on to capital and liquidity.
Our risk-based and leveraged capital ratios increased to 20.6% and 12%, respectively.
The increase in our capital ratios was a result of continued strength in our operating results, an incremental $150 million of preferred equity and the decreasing impact of volatility associated with the pandemic on our trading portfolio.
We continued our share repurchase program in the third quarter by buying back 670,000 shares at an average price of $66.74.
Year-to-date, we've repurchased nearly 1.5 million shares, at an average cost of $66.34.
We have approximately 11.8 million shares remaining on our current share repurchase authorization.
We continue to feel good about our financial position, as our liquidity remains strong.
In addition to the $6 billion available in our Sweep Program, the bank has access to off-balance sheet funding of more than $5 billion.
On the next slide, we go through expenses.
In the third quarter, our pre-tax margin improved 450 basis points year-on-year, to nearly 24%.
The increase was a result of strong revenue growth, a lower compensation ratio and our continued expense discipline.
Our comp-to-revenue ratio of 58.2% was down 140 basis points from the prior year and was down 130 basis points from the prior quarter.
For the first nine months of this year, our comp ratio was 59.5%, which was down 120 basis points from 2020.
But I would note that our total year-to-date comp expense is more than $400 million above the comparable period in 2020.
Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $194 million and represented 16.9% of our net revenue.
The increase from the prior quarter was driven by increased conference, travel and entertainment expenses.
In the quarter, our non-GAAP after-tax adjustments totaled $13 million, or $0.11 per share.
As previously noted, the difference between GAAP and non-GAAP results are mainly related to deal expenses that primarily include stock-based compensation and intangible amortization.
The effective tax rate during the quarter came in at 25%, which was at the midpoint of our guidance we gave for the second half of 2021 on our last earnings call.
We'd expect to see the effective rate to move lower in the fourth quarter, given the anticipated benefit related to the tax impact on stock-based compensation.
In terms of our share count, our average fully diluted share count declined by 125,000 shares and was roughly in line with our guidance on last quarter's call.
Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the fourth quarter fully diluted share count to be 119.5 million shares.
This increase is largely attributable to the shares that will be issued in conjunction with the Vining Sparks transaction.
2021 has clearly been an outstanding year in the markets, and our results so far illustrate the power of the business we've built and our ability to capitalize on this type of environment.
Through the first nine months, we're not only on pace to surpass our full year record revenue by more than 20%, but our earnings per share has already eclipsed last year's full year record, as our pre-tax margin is up more than 400 basis points despite the headwinds of a 0-interest rate environment.
Our ability to generate these types of returns is a direct result of both the acquisitions we've made and the people we've hired.
Our acquisition strategy has focused on adding complementary businesses that are not only accretive but are a good cultural fit.
And at that point, let me again emphasize how happy we are to be adding a firm like Vining Sparks to the Stifel organization.
Our strategy for recruiting is similar in many ways to our approach to acquisition, and we look not only for high-quality advisors and bankers but also individuals that are attracted to the culture we've built at Stifel.
Simply, this growth strategy has increased the scale of our business and relevance to our clients while enabling us to capitalize on the strength of the operating environment in ways we could not have seen just five years ago.
As I look forward, the fundamentals of the current market remain positive, as fiscal and monetary policies remain accommodative and low interest rates continue to benefit the equities markets.
That said, there are a number of potential headwinds that include increased inflation, the potential for tax law changes, regulatory reforms as well as the ongoing impact of COVID-19.
However, as we've proved over the past few years, our diversified business model is capable of generating strong results in a variety of market conditions, and I believe we remain well positioned for the future, fully understanding that market conditions can change quickly.

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compname posts quarterly non-gaap earnings per share $1.65.
q3 revenue rose 30 percent to $1.1 billion.
qtrly non-gaap earnings per share $1.65.

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