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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.
This audio cast is copyrighted material of Stifel Financial.
It may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial Corp.
I'll start the call with some highlights from our quarterly and first half results, then I'll discuss our revised outlook for the full year.
Jim Marischen will review our balance sheet expenses and then I'll wrap up with some concluding thoughts.
Before I get into the specifics of our quarterly results, let me start by saying that overall, Stifel business in the first half of 2021 has surpassed any six-months stretch by a wide margin and rivals some of our most recent full-year results.
Our record six-month net revenue was the result of records in both of our major operating segments.
The strength of our top line and our continued focus on operating efficiency resulted in record quarterly and six months revenue, as well as record-earnings per share.
As we head into the back half of this year, we are well-positioned to continue our strong performance, which is illustrated by our increased full year guidance, which I'll discuss in greater detail in a few minutes.
So, looking at our quarterly and year-to-date snapshot, the numbers really speak for themselves and are the result of the investments over the last several years and a strong operating environment, especially for our Investment Bank.
Revenue in the second quarter was a record of more than $1.5 billion, an increase of 29%.
For the six-month period, revenue was nearly $2.3 billion, up 27% and further illustrating our growth was roughly as much as our 2015 full year revenue.
The growth in revenue and lower expense ratios resulted in record non-GAAP earnings per share of $1.70, which was up 65% year-on-year and $3.20 year-to-date, which is up 75% and when compared to our past full year results would rank as the fourth best in our history.
I'm also pleased with our operating leverage as we generated record pre-tax margin of 24% and our annualized return on tangible common equity was nearly 31%.
Tangible book value per share increased 29% in the last year.
Turning to the next slide.
Our record second quarter net revenue was driven by global wealth management and increased 26% in our institutional business, which posted a 31% improvement.
Compensation as a percentage of net revenue declined sequentially to 59.5%, which was in-line with our guidance on last quarter's call.
Our operating expense ratio of 17% and excluding credit provision in investment banking grow subs, our operating ratio totaled 16%.
This was again well below our full year guidance due to the strength of our revenue and expense management.
As the economic outlook improves, we, like other banks have updated our economic models.
This, coupled with strong credit performance in our loan portfolio resulted in a reversal of more than $9 million of credit provisions during the quarter.
I would note that this was comprised of a $4 million release of credit provisions due to improving economic outlook and approximately $5 million relating to loan sales.
As it relates to the loan sales, Jim Marischen will provide more color in his remarks.
Neutralizing the impact of credit provisions, Stifel's pre-tax, pre-provision income totaled $270 million, which increased 31% year-on-year and 13% sequentially.
While the strength of the operating environment, particularly in investment banking has been a primary driver of our results, I do not want to understate the importance of the investments we've made in our business as a meaningful contributor to our performance.
Stifel is and will continue to be a growth company.
Our focus on investing in our business and making us more relevant to our clients has resulted in not only impressive topline growth, but significant operating leverage.
As you can see from the numbers on the slide, our total net revenue on an annualized basis in 2021 has doubled since 2015 and was driven by both our wealth management and institutional businesses, essentially doubling in that timeframe.
What is particularly interesting is not only as our revenue growth doubled, but our growth rate has accelerated.
To illustrate some of the numbers, at the end of 2015, our net revenue total approximately $2.3 billion, with nearly $1.4 billion from Wealth Management and roughly $1 billion from our institutional group.
Since that time, we've grown our Wealth Management business by hiring experienced financial advisors and more than doubling our balance sheet.
This has led to a more than 70% increase in total client assets and annualized global wealth revenue that would surpass 2015 results by 84%.
Our institutional business, we've made six acquisitions and our total Managing Directors have increased 67% and our investment banking business contributing an 111% increase in our institutional revenue since 2015.
While our revenues are on an impressive trajectory, our ability to generate operating leverage, I think is even more outstanding.
In the first half of 2021, our pre-tax margin increased to 23% from 10% in 2015, while our return on tangible common equity improved to 30% from 10% in that same time period.
Looking at our operating leverage another way, our earnings per share has quadrupled on a doubling of revenue since 2015.
This increase in our scale and the fact that we continue to be more relevant to our clients are the primary drivers behind my optimism for the back half of this year.
Now before I go into details of our updated guidance, I want to note that our revised outlook is based on continued favorable market conditions.
There are always risks such as market corrections or geopolitical crisis that could negatively impact the operating environment and particularly our investment banking business.
But given the strength of our results in the first half of the year, the current strength of our pipelines and my visibility into the beginning of this quarter, we believe that it is appropriate to increase our full year guidance at this time.
We now expect net revenue to be in the range of $4.5 billion to $7 billion, up 13% to 18% from the high end of our prior guidance.
This is a reflection of the strength of our investment banking and Wealth Management businesses.
We are tightening our net interest income guidance to $465 million to $485 million as the benefits of the growth in our balance sheet has helped to offset the decline in short-term rate.
In the second half of 2021, we anticipate an additional $2 billion of asset growth at our bank.
As a result of our increased revenue expectations, we are lowering our expense ratio guidance.
Our comp ratio is lowered to 58% to 60%, given our expected NII results and strong investment banking.
Our operating non-comp expense ratio expectations has declined to 16.5% to 18.5% as we continue to see improved operating leverage in our business.
I would note that the midpoint of our revenue guidance would suggest that Stifel achieve second half revenue essentially equal to our first six months of revenue, the current market environment, our pipelines clearly support this guidance and further historically the second half of the year, especially the fourth quarter are strong seasonal periods for Stifel.
I would also note that not only is our updated guidance, significantly above our original expectations, but also well above the current 2021 Street expectations of $4.3 billion in revenue and $5.57 of earnings per share.
And with that, let me move on to the results of our operating segments, starting with Global Wealth Management.
Second quarter revenue totaled a record of $638 million, up 26% year-on-year and with six-month revenue of $1.3 billion, also a record and up 17%.
Our growth was driven by increased asset management, revenue and net interest income.
The continued growth in our asset management revenue was driven by higher market valuations and increased client assets, which finished the quarter at record level.
Total assets under administration were $402 billion and fee-based assets of $149 billion rose 8% sequentially.
These asset levels should drive further growth in asset management revenue in the current quarter.
Net interest income increased 3% year-over-year, primarily, given our continued ability to grow loans and produce a stable net interest margin.
The next slide highlights the strength of recruiting in the growth drivers of our platform.
We added 26 advisors, including 14 experienced advisors with total trailing 12-month production of $12 million.
The gross number of recruits is down compared to last year as the return of advises to their offices have slowed recruiting.
In addition, there was increased competition from larger firms offering, what is in our opinion very high transition packages.
That said, as our inflation experts in Washington like to say, we view the situation as transitory as our pipeline remains robust.
Additionally, we definitely are seeing activity within Stifel independent advisors and look forward to recruiting to pick up in this channel.
Moving onto our institutional group.
We posted our third consecutive record quarter in our institutional business as we continue to benefit from increased activity levels and the scale of our business.
Our quarterly net revenues total a record $521 million, which was up 31% from the prior year.
Six-month revenue increased 41% over $1 billion.
Quarterly advisory revenues more than doubled to $207 million while capital raising posted revenue of $158 million, which was up 42%.
These results more than offset a 17% decline in our trading revenue.
While the decline in trading revenue was expected as compared to the robust activity in the second quarter of 2020, I am pleased with our results relative to The Street, at least to the reported numbers that I have seen.
As noted on previous earnings calls, we've been investing in our institutional business with the objective of becoming more relevant to our clients and the market as a whole.
The leverage in these investments was on display this quarter as our pre-tax margins improved by 630 basis points to 27%.
Looking at the revenue components of our institutional business, our equities business posted record first half results of $391 million, up 52% while our second quarter revenue totaled $163 million, up 29% year-on-year.
Our fixed income business posted quarterly revenue of $147 million, while down 13% year-over-year was up sequentially.
On this slide, our focus on the trading businesses of these segments and discuss capital raising on the next slide when I talk about investment banking.
With respect to our trading businesses, equity quarterly revenue totaled $61 million, down 22% from record levels in the first quarter, which was slightly better than the overall market volume declines which we witnessed.
Six-month revenue was $141 million, which was up 5% from 2020.
Fixed income trading revenue of $92 million was down 7% sequentially.
Similar to my comments regarding Institutional Equities, our fixed income trading was impacted by lower industry volumes.
While an industrywide slowdown in credit trading was the primary driver of our revenue decline, I want to say that our rates of muni revenue experienced solid improvement.
On slide 9, investment banking revenue of $376 million was our third consecutive quarterly record, an increase of 73%, driven primarily by record advisory revenue.
First half revenue of $716 million increased 81% as we generated record capital raising in the first quarter and record advisory revenue in the second quarter of this year.
I noted on last quarter's call that we expected a strong second quarter for our advisory business and that is exactly what we got.
Record revenue of $207 million surpassed our prior quarterly record by 19%.
In terms of verticals, financials was a standout as KBW had its best quarter since our merger back in 2013.
Since the beginning of 2020, KBW has advised on 8 of the 10 largest bank mergers and has the highest market share in the firm's illustrious history.
Additionally, we saw strong contributions from technology, consumer and diversified services as well as in the fund placement business from Eaton partners.
Looking at our third quarter, borrowing [Phonetic] a substantial change in the market or economy, we expect to see continued strength in advisory revenue.
Moving on to capital raising.
Our equity underwriting business posted revenue of $112 million, up 61% and our second best quarter in history, trailing only the first quarter of this year.
Strongest verticals were consumer, healthcare, technology and financials.
In addition to the strength of our equity business, we generated record results in our fixed income underwriting business of $57 million, which was up 16%.
Our municipal finance business posted another great quarter, as we lead managed 244 municipal issues.
For the first 6 months, our market share in terms of number of transactions increased to 12.5% from 10.9% in the first half of 2020.
I think it is noteworthy that in the first half of 2021, non-public finance revenue which was minimal just a few years ago now accounts for nearly 20% of our fixed income underwriting.
This is a result of our efforts to diversify both domestically and internationally.
In terms of our overall pipelines, they continue to build and remain at record levels, we expect strong performance from all of our major verticals and as our updated guidance indicates, I am very optimistic for our investment banking business in 2021.
With that let me turn off the call over to our CFO, Jim Marischen.
Before getting into our net interest income and balance sheet, I want to make a few comments on our GAAP earnings and non-GAAP charges.
I the quarter, we saw a $0.10 differential between our GAAP and non-GAAP results.
To add some color to these items, the differential is almost entirely related to three basic deal-related expenses including stock-based compensation, intangible amortization expense, and an additional true up on an earn out from an acquisition has performed better than our original projections.
And now let's turn to net interest income.
For the quarter, net interest income totaled $190 million, which was up $6 million sequentially.
Our firmwide and bank debt interest margins remained at 200 basis points and 240 basis points respectively.
As expected, our NIM did not change from the prior quarter.
While net interest income, benefited from a 6% increase in interest earning assets.
I'll touch at this growth in more detail on the next slide.
In terms of our third quarter expectations, we see a net interest income in a range of $115 million to $125 million and with a similar NIM to the second quarter.
We noted last quarter the significant improvement in our asset sensitivity when compared to just a few years ago.
We are maintaining our prior guidance of $150 million to $175 million of incremental pre-tax income as a result of 100 basis point increase in rates.
This assumes the same set of assumptions discussed last quarter applied to our quarter end balance sheet.
Moving on 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 $12.9 billion, which is up approximately $700 million from the prior quarter and was primarily driven by growth in our consumer channel.
Our mortgage portfolio increased by $400 million sequentially as we continue to see demand for residential loans from our Wealth Management clients.
Our securities based loan portfolio increased by approximately $240 million.
Growth in these loans continues to be strong as FA recruiting momentum continues to drive increased loan balances.
Our commercial portfolio accounts for 37% of our total loan portfolio, it is primarily comprised of C&I loans, which were up slightly from the prior quarter.
Our portfolio is well-diversified with our highest sector exposure in Fund Banking, which increased outstanding balances by $325 million during the quarter.
We believe these loans continue to represent an attractive risk-adjusted return and we expect to continue to be active in this space.
I also want to note that we had a nearly $200 million reduction in our PPP loans during the quarter.
This is expected as a good portion of these loans were originated as part of a third party origination platform.
We also expect to see further reduction of PPP loans in the third quarter.
Moving to the investment portfolio, which increased by $300 million sequentially.
About two-thirds of this increase was seen within CLOs, while the remainder of the growth was primarily and shorter duration corporate bonds.
Turning to the allowance.
For the second straight quarter, we recorded a reserve release.
In the second quarter, we had a $9 million reversal of our allowance through a negative provision expense as additional reserves tied to loan growth we're more than offset by the improved economic scenario in our CECL model.
I would also highlight that approximately $5 million of the negative provision expense was tied to $200 million of loans that are being sold at a premium.
As we entered into agreement to sell these loans at a premium, the accounting guidance dictates that these loans be reclassified to held for sale and the allowance tied to these loans reversed.
We continually look at our retained loan portfolio and determine this specific pool of loans was not a core area of growth for the bank.
And as such, we made the decision to sell.
As a result of the reserve release in the composition of our loan growth during the quarter, our ratio of allowance to total loans declined to 99 basis points, excluding PPP loans.
As I've stated last quarter, 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 35 basis points, while the commercial portfolio was 142 basis points.
We also continue to see strong credit metrics with non-performing assets and non-performing loans declining to 5 basis points.
Moving on to capital and liquidity.
Our risk-base and leverage capital ratios came in at 18.9% from 11.7% respectively.
The increase in the leverage ratio was driven by the strength of our retained earnings and was offset by loan growth in the quarter.
During July, we also closed on a $300 million, 4.5% non-cumulative perpetual preferred stock offering and announced the redemption of our 6.25% percent Series A preferred.
We continued our share repurchase program in the second quarter by buying back 440,000 shares at an average price of $65.85.
We continue to feel good about our financial position as our liquidity remains strong.
In addition to the $6 billion available on our 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 have 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 Fitch recently affirmed our credit rating and improved outlook to positive based on our strong operating results and overall financial position.
On the next slide, we go through expenses.
In the second quarter, our pre-tax margin improved 650 basis points year-on-year to a record 24%.
The increase was a result of strong revenue growth, lower compensation accruals and our continued expense discipline.
Our comp-to-revenue ratio of 59.5% was down 50 basis points from the prior year.
The ratio came in at the midpoint of our previous full year guidance range.
For the first six months of this year, our comp ratio was 60.2% and given our updated guidance, it is safe to assume that we expect the comp ratio in the second half of the year to be below the first.
Non-comp operating expenses excluding the credit-loss provision and expenses related to investment banking transactions totaled approximately $185 million that represented approximately 16% of net revenue.
This is also below our prior guidance primarily due to stronger-than-expected revenue.
We expect the travel and entertainment-related expenses will pick up in the second half of the year, but will likely have a larger impact from the fourth quarter than the third.
The effective tax rate during the quarter came in at 25%, which is at the lower end of the range and in-line with our commentary on last quarter's call.
Absent any other discrete items, we'd expect to see an effective rate to be between 24% and 26% in the second half of the year.
In terms of our share count, our average fully diluted share count was up 1% primarily as a result of normal stock-based compensation, offset by share repurchases.
Absent any assumption for additional share repurchases and assuming a stable stock price we'd expect the third quarter, fully diluted share count to total 118.5 million shares.
As you can see from our record first half results and the significant increase in our guidance 2021 is shaping up to be a far better year than we had originally forecast.
Given our performance to date and our outlook for the second half of the year, we should again generate significant levels of excess capital.
In addition to the excess capital we generate from operations as Jim noted, we raised an additional $300 million in preferred shares during July after redeeming our Series A preferred, we added an incremental $150 million in capital.
I mentioned this to illustrate just how well positioned we are to take advantage of opportunities that come our way.
I think it's pretty clear from our results and my comments about the benefits of our increased scale that reinvestment into our business is my preferred use of capital.
As our updated guidance illustrates, we believe that we can grow our balance sheet by an additional $2 billion in the second half of the year.
Many bolt-backed [Phonetic] firms and smaller regional banks have had muted loan growth rates given their sheer size or geographic limitations.
By contrast, our loan portfolio is relatively small compared to the national footprint of our wealth management and institutional businesses.
Security-based and mortgage loans have grown primarily through retail demand and new advisor recruiting and in recent years, we have expanded our capabilities and new commercial lending businesses.
The combination of these growth channels has enabled us to generate and the average annual loan growth rate of 30% in the last seven years, while maintaining a strong credit profile.
In terms of growth in our other business lines, we continue to focus on both hiring and acquisitions while we haven't done an acquisition in 18 months.
We continue to believe that this is an attractive use of capital and a key element to our growth strategy.
That said, we will always focus on deploying capital based on where we can generate the best risk adjusted returns and we'll continue to deploy capital through dividends and share repurchases.
However, as a growth company, I believe that Stifel and our shareholders have and will continue to see the greatest upside from growth in our franchise.

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qtrly non gaap diluted earnings per share $1.70.

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