Stifel Financial Corporation (SF)

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Start Time: 08:33

End Time: 09:49

Stifel Financial Corp. (SF)

Q3 2012 Earnings Call

November 5, 2012 8:30 am ET

Executives

James M. Zemlyak – Senior Vice President and Chief Financial Officer

Ronald J. Kruszewski – Chairman, President and Chief Executive Officer

Thomas B. Michaud – President and Chief Executive Officer, KBW, Inc

Analysts

Devin Ryan – Sandler O’Neill & Partners LP

Hugh M. Miller – Sidoti & Co. LLC

Christopher Harris – Wells Fargo Securities, LLC

Patrick O’Shaughnessy – Raymond James

Alexander Blostein – Goldman Sachs

Glenn Schorr – Nomura Securities Co. Ltd.

Judy Delgado – Alpine Associates

Anthony Christopher Reiner – Cantor Fitzgerald & Co.

Christopher Harris – Wells Fargo Securities, LLC

Presentation

Operator

Good morning. My name is Sara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Financial Third Quarter Earnings and Merger Announcement with KBW 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)

I would now like to turn the call over to Mr. Jim Zemlyak, CFO. You may begin your conference.

James M. Zemlyak

Thank you, and good morning, operator. Good morning, everyone. This is Jim Zemlyak, CFO of Stifel Financial Corp. I’d like to welcome everyone to our conference call today to discuss two items of importance; number one, our third quarter results, and secondly, our merger agreement with KBW, Inc.

Please note that this conference call is being recorded. If you’d like to follow along with 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 that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Slide number 1 of today’s presentation covers this in greater detail. Forward-looking 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 results in the Company’s Quarterly Report on From 10-Q.

With that, I’d like to turn the call over to our Chairman, CEO, and President of Stifel Financial Corp., Ron Kruszewski.

Ronald J. Kruszewski

Thank you, Jim. Good morning, everyone. First of all I’d like to apologize for the delay. We have literally hundreds of people that were calling in and we wanted to have some time to allow people to get out of the queue and onto the call. So we did delay for a moment. But I want to be respectful of all of your time and we will get going. It’s very, very exciting day for people and I think KBW with me as Tom Michaud, who is CEO of KBW. Tom and I are going to talk about what I think is the real exciting news, which is our strategic merger with KBW. But before we get to that, we released earnings this morning.

And so, I thought I would do sort of an abbreviated call on our earnings. I’m very pleased with our third quarter results. It included record net revenues, as well as record net revenues and net income for the first nine months of 2012. Our results highlight the soundness of our balanced business model particularly against the challenging economic backdrop. In the quarter both Global Wealth Management and Institutional Group segment performed well.

And as you will see today, we continue to invest in businesses that expand our client services in which we believe will return shareholder value. Opportunities drive our growth in today’s announcement of our merger with KBW furthers our goal of creating the premier Middle Market Investment Bank with a specialized focus certainly on the financial services industry today.

In the third quarter, the major industries moved higher and the Fed announced their much anticipated QE3 program and investors gained confidence with what is happening in Europe. However, the global growth prospects, pending election, fiscal cliff, concerns all crept back into the market towards the end of the third quarter and have continued today. Given that backdrop, I’m very pleased with our results for the three months, in the third quarter, we have record net revenue of $420 million, was of 26% compared to last year. Results for the quarter include realized and unrealized gains on our investment in Knight Capital of $25.6 million pre-tax to $0.09 per diluted share after-tax.

Excluding Knight revenues of $395 million, or 18% above last year’s third quarter. We recorded net income of $37.7 million, or $0.60 per diluted share, compared to net income of $22.3 million, or $0.35 per share last year, excluding Knight EPS of $0.51, or 46% above the third quarter of last year.

Pre-tax margin improved to 15% and was 13% excluding Knight, that compares to 12% a year ago. For the nine months ended September 30, we posted again record net revenues and net income, net revenues of nearly $1.2 billion, increased 13% as compared to the first nine months of last year. Net income of $98.6 million, or $1.57 per diluted share compared with net income of $57.1 million, or $0.90 per diluted share in the year ago period.

Results for the nine months last year if you recall included a $0.47 per diluted share after-tax charge related to previously disclosed litigation and merger expenses. Pre-tax margins of the first nine months were 14%. The next slide breaks out our sources of revenues. Comparing year-over-year results lower industry volumes, I have continued to put pressure on our commission revenues, which declined 11% to $128 million. Our principal transaction revenues increased 34% to $103 million, that was really due to our strong fixed-income trading volumes and which were further helped by tightening credit spreads.

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