Good day. And welcome to Stifel Financial Third Quarter 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Joel Jeffrey, Head of Investor Relations at Stifel Financial. Please go ahead.

Thank you, Katie. I'd like to welcome everyone to Stifel Financial's third quarter 2021 financial results conference call. 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. Earlier this morning, we issued our earnings release and posted a slide deck and financial supplement to our website, which can be found on our Investor Relations page at www.stifel.com. I would note that some of the numbers that we state throughout our presentation are presented on a non-GAAP basis and I would refer to our reconciliation of GAAP to non-GAAP as disclosed in our press release. I would also remind listeners to refer to our earnings release, financial supplement and our slide presentation for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material of Stifel Financial. It may not be duplicated, reproduced or rebroadcast without our consent. I will now turn the call over to our Chairman and CEO, Ron Kruszewski.

Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our third quarter results. Stifel posted a strong quarter as our Global Wealth Management segment generated its seventh consecutive record quarter. Investments we have made have diversified our revenue sources and continue to enable us to create solid results despite market headwinds. The first nine months, revenues totaled $3.3 billion, with earnings per share of $4.17, and we are on track to record our second strongest annual revenue and earnings per share. This performance was despite market conditions that included a 25% decline in the S&P 500, nearly nonexistent capital raising activity in subdued trading markets. Our results prove that our diverse business model is capable of generating consistent top and bottom-line results as well as solid book value growth as our year-to-date tangible book value per share is up 5% and our book value per share increased 3%. Looking at the details of our third quarter results on Slide 2. Revenue totaled nearly $1.05 billion, and earnings per share came in at $1.29. I would highlight that our pretax margin of almost 21% was our eighth consecutive quarter with operating margins above 20%. Our tangible book value of $29.63 increased by nearly $1 a share sequentially and is up 90% since 2017. In addition, our return on tangible equity has exceeded 20% in each year since 2017 and is at 21.5% year-to-date on an annualized basis. As we did last quarter, we included a year-on-year revenue bridge to illustrate the changes in revenue in the third quarter of '22 compared to 2021. Simply, our increase in net interest income was more than offset by about $100 million by the absence of underwriting and reduced trading. Looking at our segments. Global Wealth Management…

Thanks, Ron, and good morning, everyone. I'll start by addressing net interest income. NII was up 25% sequentially to $244 million and came in at the high end of our guidance. The growth was driven by a 40-basis point increase in our bank NIM to 328 basis points and a 5% increase in our interest-earning assets. We continue to see further upside from the recent Fed fund increases. We anticipate that the 75 basis point increases that occurred in July and September will further benefit our fourth quarter results. As such, we project net interest income in the fourth quarter in a range of $290 million to $300 million and a bank NIM of 375 to 385 basis points. Based on our fourth quarter NII guidance, we expect our full year NII to be between $885 million and $895 million. Year-to-date, we've increased our average interest-earning assets by nearly $6 billion, which is at the high end of our full year guidance. As such, we expect limited balance sheet growth in the fourth quarter. I'll address our 2023 expectations on our fourth quarter call. But as I said last quarter, we anticipate exiting 2022 with a full year NII run rate of $1.2 billion. Thus far, through the current interest rate cycle, we've experienced a 38% deposit beta, which is consistent with our original guidance range of 25% to 50%. Moving on to the next slide. I'll quickly review the bank's loan and investment portfolios. We ended the quarter with total of $21 billion, which was up approximately $1.7 billion from the prior quarter. Our commercial portfolio increased by $1.4 billion, with particular strength in the fund banking and industrial sectors. On the consumer side, our mortgage portfolio increased by $400 million, while our securities-based loan portfolio fell by $200…

Thanks, Jim. Look, it's been a tough year as financial conditions have tightened significantly, and market returns have been dismal pretty much regardless of asset class. Yet, I am optimistic. We have built a strong and balanced business, which remains well positioned to gain market share and deliver for our shareholders and associates alike. Let's not lose sight of the fact that Stifel is having its second-best year, with operating margins and return on tangible common equity both exceeding 20% and very strong credit and capital metrics. As Jim detailed, we anticipate net interest income back to 2022 with a run rate of $1.2 billion, assuming -- and assuming -- that assumes no growth in interest-earning assets. It is noteworthy that NII totaled only $500 million for all of 2021. We will continue to build our wealth management business through strategic investments and a continued focus on recruiting. Everyone is concerned about the state of the institutional business, and I see this as a business that will continue with strong growth, and we will look back at 2022 as a difficult, yet temporary operating environment. As we have often stated, our strategy is to use our excess capital in a variety of ways to benefit our shareholders. At different moments in the cycle in order to effectively deploy capital, we may elect organic growth, acquisitions, increased dividends or share repurchase. At this point, it is our expectation given the economic outlook that our asset-light growth is likely to slow. So given our high level of profitability, the fact that our capital ratios are well above our target levels and the fact that we will slow our balance sheet growth, it is likely that our capital deployment will focus more on dividend increases and share repurchases and, if appropriate, acquisitions. With that, operator, please open the line for questions.

[Operator Instructions] We'll take our first question from Steven Chubak with Wolfe Research.

Hey, good morning, Ron and Jim. Hey, it's Michael [Inaudible] for Steven. Good morning. So I guess starting off on the maybe cash sorting here. I was just trying to dig into the numbers here a little bit more. I guess you've rolled out the smart program. That has been an attractive way to retain deposits. How much of that yield-seeking activity have you seen thus far? And maybe if you could provide any thoughts around the incremental behavior you may see as cash continues to migrate into that program. You had also noted 40% to 50% betas in the NII guidance. I guess is that a through-the-cycle expectation? Or is that on further rate hikes? So just trying to think about the trajectory of deposits and the incremental deposit costs there.

Yes. I'll let Jim -- you could start with this, Jim.

Yes. So we talked about smart rate program at the end of the quarter had $4.7 billion, and it's increased some since then. We have seen some additional cash sorting. But I think most of what we've seen is the decline in the Sweep Program has ended up being retained via smart rates. So we're able to retain those deposits. And when we think about the total deposit beta here and the asset yields, we're getting, we're able to generate a return that it makes sense to continue to capture those deposits. We ended the quarter with -- if you look at, like I said, in the end-of-period book yield on our bonds and our loan portfolio, it was north of 475 basis points. And inherent, what we talked about a 38% deposit beta through the end of the period, so ignore the lag, you're at about 114 basis point cost of funds. And so if you think about, yes, do we think the deposit beta will go up from here? Yes, we do. We still feel over the life that we're comfortable of saying somewhere between the 25% and 50% deposit beta. And as we look forward, we've tried to illustrate some of the impact of that on the 2023 results. And I think without growth and the ability to retain those deposits, it's pretty impactful.

Yes. And then I would just add from a client behavior perspective, I think we've always said we've been consistent that we felt in this cycle that cash sorting would ultimately be greater than what we've seen in the past. I mean, look, the one year is at 4.60, and effective Fed funds is at 3.08. And so to -- in our case, we're sitting here with which is what the question should be is what is our total cost of funds. That's about 1.14. And that's the real question. We see our NIM -- our margins actually expanding even with the cash sorting that we're anticipating. So that's how I would do it. But it's different this time around in terms of the alternatives that clients face for idle cash.

Got it. That's extremely helpful. I guess pivoting to the institutional side, I just wanted to dig into the FIC business a little bit more. Understanding that business is different from the bulge bracket in terms of mix, a bit surprised to see fees in that business come down on a year-over-year basis following that Vining Sparks deal that you guys completed. Given that the Fed balance sheet hasn't begun shrinking at this juncture, should we expect that business to continue to come in from here? And maybe you could just speak to some of the drivers of that decline in a little bit greater detail, that would be great. Thank you.

Sure. Well, the fixed income, there's -- you could think of it as really three of the business that we do. One is our capital raising on fixed income. And I spoke to what's been going on in public finance. Frankly, taxable underwriting like equity underwriting has been very slow in terms of debt activity with corporations not really engaging that much in the capital raising side. Look, our rates business is a big business for us. Our rates business is dominated by depository institutions. And I've said these issues with deposits and liquidity of banks impact bank's portfolio. So we've seen that slow. I don't see that turning on a dime, but I think we're near the lows of that activity. And then, of course, the credit business has been impacted just as credit wide have really spread, especially what's going on in the high-yield market. So for us, that business -- I think the results have been pretty good. I see it getting better from here. We're near the low than we are at the top, sure. But for us, we don't also, we don't participate in commodities and currencies like our bigger brethren do. And there's been a lot of activity and a lot of volatility that has driven those results, which we don't do.

We'll take our next question from Devin Ryan with JMP Securities.

Good morning. How are you guys? Doing great, excellent. Maybe first one here for Jim. Just coming back to the balance sheet and maybe focusing on the asset side a bit. So clearly appreciate the dynamics around growth from here. Is there any room or opportunity to be opportunistic around just optimization on the asset side? Or do you guys like the current mix? Just curious if there's any places where you can maybe pick up some more spread by recalibrating that a little bit.

So I think there's always opportunities for optimization. And I think you look at both the loan and the bond portfolio, there's opportunities in both. I think where it's going to be limited due is more so of how we're generating deposits to support that, but there's a number of different lending verticals across fund banking, various different C&I channels that offer pretty attractive yields today. And you think about on the bond side as well, CLOs are being priced anywhere from, it so offers to plus 2.10 to 3.50. And so from a yield perspective, those offer some pretty attractive yields compared to where we're at today.

Okay. Appreciate that. And then a quick follow-up here on the GWM commissions. Just want to parse that a little bit. Is the decline that we've been seeing in the last several quarters, is that primarily just driven by lower trailing commissions, just kind of the mark-to-market on what's already kind of in the book? Or is that just a lot more subdued engagement? I'm just trying to think about if markets come back versus engagement coming back.

I think a good portion of that is being driven by just lower client engagement. There is some fund placement business that goes on through that transactional line that has been slowed as well, and that's impacted the results from retail transactional results.

Yes. I think that's consistent across the industry. And Devin, I want to go back a little bit to your question about growth in the balance sheet. We've been growing our balance sheet quite large. We've grown loans through nine months, 25%. And we see demand. There are remixing opportunities. It's just in this environment where we are -- or everyone's talking about potential recession. Forecasts are changing. And we did this a few years ago. Our belief is that with the cash that we're generating, which is substantial cash, the math has changed on whether or not that cash is better deployed back to shareholders, especially our stock prices relative to growth and in the current environment. So that's really the message, is that it's an opportunity to remix the balance sheet, but it's also where is the best investment for the substantial amount of cash that we're generating, frankly, on a daily basis.

Yes. No, really appreciate that and makes sense, and I think people will like to see buybacks here. So thank you.

[Operator Instructions] We'll take our next question from Alex Blostein with Goldman Sachs.

Hey, guys. Good morning. Hey, so just another one on the balance sheet for you guys. So if you look at the loan mix, Stifel has a fairly outsized balance with PE and venture capital commitments -- capital commitment lines. How does that business perform in this environment? And as you think about any risk of sort of paydowns in those balances or any other kind of loan buckets that you have as you look out into 2023. So should we be thinking of that as an incremental headwind to loan growth, and therefore, you'd have to remix in the securities portfolio? I know you mentioned CLOs. And maybe as a follow-up to that, obviously, the yield curve is flat, but the absolute level of yield is reasonably attractive, especially if, I guess, if you believe the forward curve and that we'll get rate cuts at some point of time in the next 12 to 18 months. So any appetite to extend duration to lock in some of these wider spreads?

Well, the first question, there's two questions there. The first question around fund banking. And look, I think it's a good question as to the growth in that business considering capital raises, that's all tied together. Those loans come off of PE firms actually raising our capital and then taking those commitments and prefunding them sort of with the banks, that's what we and other banks do. What I would say to you, as we sit here today, we don't really view that as a risk if prepayments exist because we do have a lot of home demand. And so if anything, we'd see a pickup in yield. Those are great loans, but -- or they're not our highest yielding loans. They're very safe so as we look at them. But I think it's a great question. I don't view that as a headwind. If that prepayment would occur, we would be remixing our balance sheet and our loan portfolio and with equally quality assets. So that's not the issue. With respect to duration, it's a great question. And I think that, like we do everything, we'll probably have some balance in that. I think it makes some sense to extend some duration here, but -- and we saw with our friends over in Britain, if you do everything all at once, that doesn't always end very well. And so I don't see us completely changing our duration here. But it makes some sense to extend duration incrementally here, for sure.

Yes. Great. And then just a follow-up to your discussion earlier about sort of capital returns. And obviously, it sounds like there's an appetite for a bigger buyback. You guys have always been opportunistic, of course, on the M&A front as well. So if there are opportunities to do deals, especially some of the other players might be a little bit more pressured, any sense of which way you will be sort of pivoting, whether it's on the institutional side or the wealth side or maybe the asset management side, again, presumably nothing imminent? But if you were to consider M&A, what part of the model would be more interesting to do deals right now?

Yes. Well, I think that we're allocating certainly, and it's an efficient capital allocation model, but we're allocating to recruiting. Our recruiting is strong. A number of the things that we have done have made that a very attractive area for us to put investment, and you're going to see us really focusing on building wealth management through recruiting. On the other acquisition front, we've been focusing on advisory type businesses. So capital-light type businesses, and that would certainly be on the advisory front on the institutional side. That said, there's always a lot of opportunities that present themselves in markets like this. What I would say on balance is that if you think about it, we grew our assets so far about $4 billion. That's $400 million of use of capital. As we slow that, that's capital that can be used for deployment back to shareholders. And frankly, our stock price, where it sits today, is a very attractive alternative for our excess capital.

And maybe another couple of numbers around there. You think -- we've been -- we've had trailing 12 net income of around $700 million. We pay out about $185 million in common preferred dividends. So you can think about the excess there. And on top of that, you have about $400 million in excess of, like, a Tier 1 leverage target. So that kind of gives you some additional numbers around where we have excess capital to deploy.

Yes. And we've been growing, Alex, and we've been deploying our capital, as I said, $4 billion of growth. But one of the best investments I see out there right now has a similar effect. So that's how I see it.

With no additional questions in queue, I'd like to turn the call back over to our speakers for any additional or closing remarks.

Well, I appreciate everyone joining in this month of October. We look forward to reporting on our fourth quarter late January, and we'll give everyone a look forward into 2023. But with that, thank you for your time and attention and look forward to communicating again. Thank you.

Thank you. And that will conclude today's call. We appreciate your participation.