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

Thank you, operator. I'd like to welcome everyone to Stifel Financials’ third quarter 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 an earnings release and posted a slide deck and financial supplement to our website, which can be found on the 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 Corp and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial. I will now turn the call over to our Chairman and CEO, Ron Kruszewski.

Thanks, Joe. To our guests, good morning, and thank you for taking the time to listen to our third quarter conference call. Let me start by saying that given the market conditions and what I consider to be one-time extraordinary non-recurring legal expenses, Stifel generated a solid quarter. Our operating results of $1.05 billion in net revenue and $1.18 of operating EPS excluding the aforementioned legal reserves are essentially the same as our numbers last quarter and in the third quarter of 2022. I will address the legal reserves momentarily. But frankly, our results over the past seven quarters can be summarized by increased wealth management and NII, offset by institutional declines which result from subdued industry-wide activity. As such, I feel like I'm stuck in the movie Groundhog Day, where Bill Murray's character wakes up and experiences the same day over and over. Though thankfully, my alarm doesn't wake me up each morning to the song, I've got you babe. But seriously, since the end of 2021, it feels like every quarter, we talk about the optimism for near-term results based on green shoots and investment banking activity, the potential for delayed M&A deals to finally close the market stability when the Fed stops raising rates and then cuts, and declining cash sorting. Look, we are well positioned when institutional conditions improve. However, when these conditions actually do improve is open for debate. History tells us that while the catalysts for improvement vary, my experience has been that institutional activity tends to improve slowly and then ramps up suddenly. Of course, we cannot control market conditions, but there are things we do control such as recruiting high quality advisers in our wealth management business, maintaining the high levels of support, as illustrated by our number one ranking by J.D.…

Thanks, Ron, and good morning, everyone. Looking at the details of our third quarter results on Slide 4. Our revenue of $1.05 billion was flat year-on-year. Compared (ph) to the same period a year ago, we saw growth in net interest income, client facilitation and trading, which was offset by declines in advisory and to a lesser degree, underwriting. While revenue was essentially flat, our bottom line was negatively impacted by higher non-compensation expenses tied to the legal charges that Ron referenced earlier. Moving on to our segment results. Global Wealth Management revenue increased 10% to a record $769 million. Our pretax margins were 39%. During the quarter, we added a total of 36 advisers, including 24 experienced advisers with trailing 12-month production of more than $24 million. We ended the quarter with fee-based assets of $151 billion and total client assets of $412 billion. The sequential declines were due to lower equity markets as our net new assets grew in the mid-single digits during the quarter. Moving on to Slide 6, where we highlight the solid trends in our bank subsidiary. Total deposits increased both sequentially and year-on-year, primarily as a result of increased wealth management deposits. As we highlighted last quarter, cash sorting continues to slow and sweep deposits are stabilizing. While we continue to believe that the vast majority of cash sorting is behind us, if the yield curve remains inverted, we expect to see inflows into smart rate, money market funds and short-term treasuries. Given the movements within cash products, along with the timing of the last Fed rate increase, this resulted in the modest sequential decline in NII to $285 million. In terms of our expectations for the fourth quarter, as we are not projecting any balance sheet growth and given some expectation for additional…

Thanks, Jim. Let me conclude by talking about how we are positioned and what I believe the potential of our franchise is. Needless to say, our current institutional business is not constructed to operate efficiently in the current market conditions. To put institutional weakness into perspective, annualized industry wide 2023 U.S. equity capital markets fee revenue is down nearly 80% from 2021 and M&A fee revenue was down 50%. In short, while we don't need activity levels to return to record levels, we do not expect this institutional environment to be the new norm in any shape or form. And then note, I also want to be clear that when it comes to expenses, we are not going to blink at the bottom and try to generate near-term operating leverage by significant reductions in workforce. The vast majority of our operating leverage will come from the scale of our business with market returns. I'm not going to try to do -- you're never going to try to predict when markets will turn. But I want to highlight that we are, in fact, well positioned. I regularly get asked the question, what does Stifel look like when market conditions normalize. I'm not offering up long-term guidance. I think all you need to do is look at our combination of historical growth rates as well as increased scale and operating leverage. Under these assumptions, we believe that net revenue of $5.2 billion and EPS of approximately $8 per share is reasonable. Now you can all do the math, but this is essentially based on continued, if not modestly accelerated growth in wealth management, NII of approximately $1.1 billion to $1.2 billion based on a combination of balance sheet growth and changes in NIM and institutional revenue of $1.7 million to $1.8 million (ph) and consistent or modestly higher share repurchase activity. I want to highlight this as I recognize the value created for our shareholders by share repurchases at the current price level and valuation particularly when compared to what I believe our potential is. This is a nice segue to discussing how we think about deploying capital as we build toward this level of revenue and earnings. We've always focused on generating the best risk-adjusted returns with our capital. And as I look at the opportunities today, the best returns will come from repurchasing our stock, growing our dividend and recruiting productive advisers. We will continue to look at acquisitions, but given higher interest rates, inflation and still continued elevated valuations, this opportunity today is less attractive. So before I turn the call over to the operator for questions, let me close by reiterating that while the near-term environment is uncertain, I'm very optimistic about our longer-term outlook and upside. And with that, operator, please open the line for questions.

Thank you. [Operator Instructions] And we do go to our first line from Steven Chubak with Wolfe Research. Please go ahead.

Hi. Good morning, Ron. Good morning, Jim.

Good morning.

Good morning.

So I wanted to ask you a question on NII and some of the sweep deposit commentary. The NII resiliency in the fourth quarter, certainly encouraging, but you noted you're contemplating some sorting activity in that guidance in the fourth quarter. And I was hoping you could speak to what you're seeing so far in October in terms of sweep deposit trends and whether your NII guide contemplates any seasonal benefit in terms of cash uplift from tax loss harvesting.

We haven't really thought about the seasonal benefit of increasing cash through tax loss harvesting. I just haven't really thought about that. I think that's a good point. Overall, as we've said in other calls, Steve, we started our Smart Rate program a long -- three years ago. And what we're seeing is slower, in fact, a lot slower in cash sorting because a lot of it has occurred. The reason that we project -- excuse me, lower NII and I'll let Jim jump in on this. But we don't know what the future holds and the yield curve is significantly inverted and we see a preferred investment for clients to be short-term duration fixed income, and that will impact cash sorting. So as we look forward, while we think things have slowed, we want to be conservative when we talk about it.

Yes. And to add to that a little bit, the slowing in the third quarter is about the same pace we've seen thus far in the decline in sweep in terms of what we see in the fourth quarter. And so we've seen that kind of come to right around 3% of PCG AUM. And at some point, that level of operational cash can fight against some of the impacts of the inverted yield curve, but that's part of our guidance. The other thing I'd kind of dive into a little bit, if you look at the other deposit line in the supplement, that was down about $85 million sequentially. But we did see some very positive trends in the venture and fund banking deposit base. Those groups saw inflows of about $300 million in 3Q. And that book of deposits now stands at about $1.8 billion or about 75% of that balance. That was offset by a decline mainly of additional ICS deposits, now at zero. And so I would also say we've seen a similar pace of deposit growth within the funded venture banking space so far in the fourth quarter as well.

That's great. And just for my follow-up on capital management, you were pretty clear that buyback is at least the preferred avenue for capital deployment relative to M&A and other potential considerations. How should we think about the buyback cadence from here, given the strength of your excess capital position, should we assume the $120 million that you did this quarter is a reasonable run rate in terms of the go forward?

I would say it's definitely price dependent, but I think you've seen us step up the buyback cadence over the last few quarters. And at the current prices, I would expect it to be higher.

Very helpful. Thanks for taking my questions.

[Operator Instructions] And next, we go to Devin Ryan with JMP Securities. Please go ahead.

Thanks. Good morning, Ron, Jim. How are you?

Good morning.

I guess I want to start here on investment banking. I appreciate the outlook commentary. We obviously track M&A backlogs and equity issuance pretty closely. The fixed income capital raising business is a bit harder for us to follow, and that was actually the biggest area of delta from our model. And so if I could look at that business, it's less of half where it was a year ago at least in the third quarter. It's run rating about $100 million. If you go back to 2021, you generated $225 million. So I just want to kind of dig in a little bit around the intermediate-term outlook for that business. And is normalized or something more normal, somewhere between where we are maybe right now in 2021 or how would you frame where that business is right now? Thanks.

Well, certainly depressed. I mean, thank you for reminding me about how depressed it is, but of course, I know that. Look, as I've said, this business we've built capabilities, and we haven't lost market share. That's small solids to what I'm saying in terms of -- in this environment. In fact, I believe the way we measure, we've gained market share. So I don't really want to put numbers on what the normalized overall equity capital market revenue will be when it rebounds. That's a hard thing to do. I certainly don't believe this is the new normal at all of about $100 million. And when you're talking to $100 million, you're talking about equity revenue. We priced an IPO last night, the [indiscernible] IPO, which felt good. I don't think we haven't done that in a while. And when these markets -- I've said this, I said it in my remarks, the markets like this tend to improve slowly and then suddenly, okay? And suddenly, there's a lot to do. The potential for that suddenly is there because I see and talk to a lot of clients that have a lot to do in their capital stacks. I'm just going to be reluctant to try to put a time frame on it, which might be the most optimistic thing I'm saying because I feel that once I quit predicting when things are going to rebound and tend to be closer to that moment.

Understood. Got it. Okay. Thanks, Ron. Appreciate it. So a follow-up here. Just on CRE. So provision obviously picked up a little bit. I know it's a small portion of the balance sheet and the allowance looks pretty healthy. But how do you guys feel about that portfolio right now and anything else that you might need to do there? Thanks.

I would kind of -- maybe starting with the top down across the entire loan book, we feel pretty good. The portfolio was down probably $140 million, $150 million in the quarter, mainly in fund banking, but the vast majority of that portfolio, 70%-plus in mortgage, fund banking, SBLs, CRE is only $1.5 billion. Obviously, the reserves did tick up on there. We are continuing to watch that space, but it is a relatively modest exposure for us. And you think about, in the grand scheme of things, a $10 million provision, given the size of our portfolio, not something that we view as a concerning trend. Non-performing loans, only less than $40 million, past-due loans at $16 million. We feel pretty good overall on the credit profile of the bank.

Okay. Perfect. Thanks so much, guys.

Our next question or comment comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Hi, guys. Good morning. Thanks for the question.

Good morning, Alex.

Hello. So first, just a follow-up to maybe Steve's questions around deposit and the sweep deposit trends. Your monthly commentary seemed to have suggested that the deposit trends and the outflows improved in September. I think you said they were up in September versus August, today's results seem to be a little bit more muted. So maybe just kind of the cadence of deposit sweep trends over the course of the quarter? And then I guess relative to the $11 billion of sweep deposits on balance sheet, I guess, call it, about $600 million in third-party banks. Where do things stand today and does that include the sort of the monthly billing dynamic?

Yeah. So I would say at a high level, the inflows and outflows within the sweep program can be lumpy on a day-to-day basis. And we just happened to see a decent sized outflow in pretty much the last day of the quarter, which accounted for the discrepancy between those two dates. As I mentioned earlier, the sweep program and the decline we've seen there over the -- basically the first month of the fourth quarter, it basically matched the cadence of decline you saw during the third quarter. So we have not seen an increase on there. It was just some lumpiness over a particular few days.

Got it. Okay. A little bit bigger picture question. So Wealth Management continues to do nicely here. I think you guys said mid-single digit organic growth in net new asset growth in the third quarter. Ron, you alluded to a really strong pipeline, and I guess there's maybe a mix shift occurring as well with the top advisers you're bringing in. So as you look a little bit further out, what do you see as a reasonable net new asset growth for this business for you guys? And then the assets that are coming in, can you give us a sense of how much is going into sweep deposits as a percentage of client assets in other words, in line with kind of firm-wide average or more kind of balances disproportionately go into higher-yielding options? Thanks.

Look, I think the growth is -- as we said this quarter, I think mid-single digit growth is reasonable and is what I would say, asked to try to project that growth. As it relates just overall to recruiting, our -- just our recruiting pipeline, what I'm most encouraged about is the quality and frankly, the fact that we have large teams that are really talking to us that we haven't had in the past. So we've had -- that's the biggest thing, is the quality and the level of the teams that are joining us. I'm not sure that I see any difference in the [indiscernible] accounts as to what's in sweep or what goes into our smart rate, I think it's really pretty consistent. I would note, though, that one of the things that is noticeable to me is the amount of cash that we have in bills, less than one year, which is up almost approaching probably $10 billion. And that's where when you talk about cash sorting, it's not just between our sweep and our smart rate, it's a fact that today, the trade that everyone likes to talk about is, well, I don't know what I want to do so find me a six-month treasury and we've seen a lot of that. But the good news is that money is not going. It hasn't left. It's just geographically somewhere else on our balance sheet. And as client assets. So that -- I don't know, if you have anything to add to that, Jim.

I think you covered it.

All right. Thank you very much.

We go next to the line of Brennan Hawken with UBS. Please go ahead.

Good morning. Thanks for taking my questions. I wanted to start with the fact that the credit -- well, appreciating that it's small as a percentage of assets and loans, like more than tripled in the quarter. So could you talk about what drove that? And -- yes, and the outlook, please? Thank you.

Yeah. So I would maybe start with the outlook. I think we feel good about that portfolio. We have very, very loan to cost. We talked a little bit about some of the loan to values on the prepared remarks in the call. You'll see in some of the detail in the 10-Q, there was probably a $5 million or $6 million specific reserve on one credit. We feel that totally addresses that particular credit in terms of reserve. And that's really what drove a lot of the underlying build that you're talking about within CRE.

Okay. Thanks for that. And I guess, when we sit there and think about all the green shoots narrative. It's been a little hard to keep track of because it seems like there was a lot of optimism around the green shoots that started about May. Here in the past month or so, we've heard it come off. And so -- or maybe moderate a bit and pull back, are you seeing that are the higher rates on the long end of the curve, constraining maybe some of that optimism on the margin, how would you characterize the recent development in the dialogues and how that's impacting the outlook?

I think -- look, I think you're now going to hear things like term premium and it won't be just a short-term rate, what's the 10-year doing? I mean the overall interest rate environment clearly has an impact on activity and on confidence. And frankly, many of the pundits will disagree on whether short-term rates are going to 6% or go to 4%. And all of that uncertainty just mutes activity. I know it as a participant in the marketplace and our own M&A activity. We haven't -- we did a deal a year to two to three deals a year for almost 19 years and we haven't done one in two. So I think it's all of that together. If you remember, when you're talking about green shoots, there was a time when the forward curve predicted that the first cut in the short-term rates would be this December. That wasn't that long ago. And that certainly has moved out. So I don't want to try to predict when the markets will turn. But I do want to say is that we've built a great franchise and we're maintaining it, and we believe that we will get our fair share of business when the markets improve. I'm just not going to venture a guess as to when.

No, I totally appreciate that, Ron, and venturing a guess in this environment has been super challenging. I'm actually not asking for a guess on the forward. What I'm asking for is what's been happening since maybe early September, in the past roughly a month, have you noticed any changes in the dialogue and engagement or not really?

Not really. Like I said, we did price an IPO last night that, that used to be a lot more commonplace. So -- but that's just -- that was maybe even idiosyncratic in itself. So not really. I think the environment has stayed pretty consistent.

Okay. Great. Thanks for the color.

We now turn the floor to Ron Kruszewski for closing remarks.

Thank you, operator. Everyone, I look forward to bringing everyone up to date on our year-end results in January. And I do look forward to not waking up to Groundhog Day. So with that, have a great day. Thank you.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.