Stifel Financial's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Stifel Financial Corporation (SF)

Q2 2012 Earnings Call

August 8, 2012 5:00 p.m. ET

Executives

Ron Kruszewski - Chairman, President, and CEO

Jim Zemlyak - SVP and CFO

Analysts

Devin Ryan - Sandler O'Neill & Partners

Joel Jeffrey – KBW

Hugh Miller - Sidoti & Company

Michael Wong - Morningstar

Presentation

Operator

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Nicolaus 2012 second quarter 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, you may begin your conference call.

Jim Zemlyak

Thank you, Mike. Sorry for the delay this afternoon. I am Jim Zemlyak, CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss our second quarter 2012 financial results. Please note that this conference call is being recorded. If you'd like a copy of today's presentation, you may download the slides from our website at www.stifel.com.

Before we begin today's call, I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of fact or guarantees of performance. They are subject to risks, uncertainties, and other factors that may cause actual future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP, we 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. 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 in the company's Annual Report on Form 10-K and MD&A and results in the company's quarterly reports on 10-Q.

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

Ron Kruszewski

Thanks Jim. Good afternoon everyone. The operating environment in the second quarter was challenging especially compared with the strong start to the year. The headwinds in equity and bond markets as well as macro-economic factors affected the industry, our business and client activity.

In the quarter asset management, investment banking, advisory and Stifel Bank performed well while commission stabilized and principal transactions and equity capital raising results were lower. Throughout the year, we have continued to grow through investments in selected professionals and certain businesses, namely our fixed income platform. We are well positioned with the scale and expertise to gain market share.

While the challenging environment impacted the results, we also continued to invest in growth opportunities. Before I review the financials, I would like to discuss the market backdrop. The major indices were down in the quarter with U.S. equities giving back much of the first-quarter gains as the reemergence of European credit and debt concerns increased.

The macro trends and lack of investor confidence resulted in first, lower share of volumes, next, continued equity mutual fund outflows, three, fewer new issues than lower trade volume, average daily share of volumes on the New York and NASDAQ although flat sequentially is on pace to declines for three consecutive years. Over $300 billion has been withdrawn from equity funds since May of 2010. Only 33 IPOs priced in the second quarter, which was down 35% from a year ago quarter of 51 and trade volume sequentially declined 15% from the strong start to the year. All of these underscore the second quarter difficult market environment.

I will now go through our results for the second quarter. As compared with the year ago quarter, net revenues were $374 million which were up 4%. Net income was $26.1 million or $0.42 per diluted share, compared with net income of $3.4 million or $0.05 cents per diluted share. Of course last year’s quarter included a nearly $28 million after-tax charge or $0.45 per diluted share related to previously disclosed litigation related charges and merger related expenses.

Pre-tax margin for the quarter was 12%. I will discuss the impact of our growth strategy on our pre-tax margins in a moment. Our results were lower than street expectations by 10% mainly due to higher non-comp expenses and the significant investments in our growth which again I will discuss. Net revenues were essentially in line off 1% while total non-interest expanse was 7% higher.

I am going to skip over our six month results which basically tell the same story, which was an increase in revenue with higher expenses.

Next slide compares our sources of revenue. Commission revenues decreased 8% to $127.4 million in the second quarter from $138 million last year. Principal transaction revenues increased 15% to nearly $92 million from $80 million in the year ago quarter. Investment banking revenues were up 5% to $67.4 million. The year-over-year increase was the result of an increase in advisory fees and fixed income capital raising activities, primarily attributable to our Stone & Youngberg acquisition. Sequentially, the difficult market for capital raising particularly in the last part of the second-quarter resulted in a 26% sequential decline. This decline in capital raising was almost entirely offset by increase in advisory revenue.

Looking at our brokerage revenues, commissions and principal transactions combined were flat compared with last year and decreased 9% sequentially. Year-over-year taxable debt increased 11% and muni debt increased 26.5% while equity declined 5%. As I said, the increases in taxes and muni are attributable to increased fixed income trading volumes again, as compared to last year, tighter credit spreads and our acquisition of Stone & Youngberg in October 2011.

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