Good day, and welcome to the Stifel Financial First Quarter 2024 Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Mr. Joel Jeffrey, Head of Investor Relations of Stifel Financial. Please go ahead.

Thanks, operator. I'd like to welcome everyone to Stifel Financial's First Quarter 2024 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 and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial Corp. 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 first quarter 2024 conference call. The momentum we had exiting 2023 continued as we generated the second highest quarterly revenues in our history. We benefited from market conditions that included strong equity markets, recovering capital markets and an improving U.S. economy. Total net revenue of more than $1.16 billion was driven by record global wealth management revenue as well as the continued improvement in our institutional group. As revenues improved, we maintained a focus on expense discipline and this approach resulted in a 20% pretax margin, operating earnings per share of $1.49, which was a 6% increase year-on-year as well as a return on tangible common equity of 21%. This resulted in another quarter of substantial excess capital generation, which we deploy primarily via share repurchases. Even with the substantial share repurchase activity and our increased dividend, our Tier 1 leverage ratio increased by 10 basis points during the quarter. I'd also note that the strength of our business was recognized by the credit agency upgrade we received from Standard & Poor's earlier this month. Slide 2 is a variance table to consensus estimates. Our EPS of $1.49 was $0.03 higher than consensus and was the result of net revenue that came in $20 million above expectations. We beat on all revenue items except net interest income, which I note came within our guidance range. I think it's important to note that our NII for the quarter of $252 million may very well be the low point of the year, as we anticipate balance sheet growth and less impact from cash sorting during the remainder of the year. In terms of where we beat consensus, I'd note that investment banking came in…

Thanks, Ron, and good morning, everyone. Looking at the details of our first quarter results on Slide 4. Our quarterly net revenue of $1.16 billion was up 5% year-on-year. The increase was driven by stronger client facilitation, trading and underwriting revenue that was partially offset by lower net interest income and advisory revenue. Our EPS was up 6% from the prior year as higher revenues and a lower share count more than offset modest expense growth. Moving on to our segment results. Global Wealth Management revenue was a record $791 million, and our pretax margins were 37% on record asset management revenue and strong growth in transactional revenue. We continue to add new advisers to our platform. During the quarter, we added a total of 22 advisers. This included 15 experienced advisers with trailing 12-month production of $6.8 million. We ended the quarter with record fee-based assets and total client assets of $177 billion and $468 billion, respectively. The sequential increases were due to higher equity markets and organic growth as our net new assets grew in the mid-single digits. We highlight our longer-term growth drivers of our Wealth Management business on Slide 6. Our focus on recruiting and supporting our advisers with best-in-class service has been the approach to our long-term success. Not only has our revenue contribution from this segment continue to increase, but the percentage of revenue generated by recurring sources such as asset management and net interest income, has increased significantly and now stands at 77%. Moving on to Slide 7, where we highlight the solid trends at the bank. Net interest income of $252 million was in the lower half of our guidance range as bank net interest margin was impacted by higher deposit costs, larger average cash balances and the movement of sweep deposits…

Thanks, Jim. At the end of last year, I said 2024 would be a transition year and that my outlook for 2024 was optimistic. I stand by those statements. I would add that so far in 2024, we're off to a good start in both revenue and EPS in the first quarter exceeded consensus estimates. Simply looking at our annualized first quarter revenue, we are already near the midpoint of our full year guidance despite market conditions that aren't overly accommodating. The outlook for the remainder of the year is certainly not without risk as our performance could be negatively impacted by the ongoing geopolitical crisises, the uncertainty of the U.S. presidential elections, potential credit market deterioration and persistent elevated inflation, just to name a few. Speaking of inflation and Fed policy. I would note that at the beginning of 2024, the market anticipated 6 to 7 rate cuts. Stifel was not in this camp, and we projected 2 to 3 rate cuts. We stand by this view, although we now believe that 0 to 1 rate cuts and even a rate increase are also in the cards. Look, the Federal Reserve finds itself in a precarious position, navigating the tight rope between controlling inflation and preventing recession. It's not an easy task. The Fed's unprecedented series of rate hikes in 2022 were successful at slowing the inflation that reached 40-year highs. Yet the market has numerous reasons to justify the Fed to begin a cycle of rate reductions. Cheap among them a desire to achieve a soft economic landing. While we and everyone, it seems would like lower rates, the Fed should recognize that reducing rates now is both unnecessary and risky for the economy. We believe that inflation will prove sticky and cutting rates too soon may reignite…

[Operator Instructions] We will take our first question from Devin Ryan with Citizens JMP.

First question, just want to take a step back and look at the investment banking business that you guys have built here. And just really thinking about kind of the evolution in recent years. And it may be great just to maybe give some perspective around how you guys have increased the size and capabilities of that business relative to where you were in pre-COVID because revenues have clearly been anything from normal the last few years from 2021, extremely good to the last couple of years, maybe on the other side of that. And so just trying to think about what kind of a normalization for Stifel could look like because of all those investments? It would seem that you don't need a 2021 like environment to get back to something into that ballpark of revenues.

I think it's a great question. It requires a little bit of a crystal ball, Devin. But what I'm confident in saying is that as you look and compare to 2019, the capabilities of the firm across our institutional business, not just in investment banking, but are significantly greater in terms of senior producing people, managing directors, products, services and just the evolution of the business. As you continue to do more business and are more relevant to your clients that leads to more business. That's just the cycle of the business. I don't think there's any question that we'll look, I think for a little while as 2021 being a high watermark, everything that came together at that time, including the phenomenon of SPACs and everything that happened, that will be a high watermark in revenue, at least for a little while, in my opinion. But as we've looked at it, we can get back to acceptable margins in this business. And we've said that instead of 2021 being $2.2 billion, we say more like $1.7 billion to $1.8 billion. I think that, that's easily attainable. And the important thing is going back to some profitability from a business where we essentially broke even last year and yet still achieved great corporate results as that business improves the profitability improved. And of course, that will be part of getting to the targets that I mentioned in my remarks.

So Ron talked about increased capabilities, more managing directors, just to put some numbers behind that. We've increased the number of managed directors by 65 people from 2018. So it's a fairly significant investment. You talked about a lot of our capabilities we've added. I would say we've also made investments in some of our key verticals. We've got a best-in-class product in our financials group with KBW. And you heard us reference multiple times on this call, some of the investments in the results being generated by the investments we've made in our health care and our industrial franchises. So I'll just add to that.

Okay. Great color. Just a real quick follow-up here for Jim. In the bank, obviously, loan balances declined a bit from last quarter. I'd love to just get some flavor for kind of the environment you're seeing around the loan book or appetite to grow the loan book from here would have the risk-adjusted returns in the market today? And then just also kind of an interplay between kind of growing the balance sheet versus just leaning in on buybacks that you guys have been doing.

Yes. I mean, I think we kind of hinted to this in the prepared remarks as well is that we do anticipate seeing some balance sheet growth, specifically in the loan portfolio. I think you will see more loan growth in the areas we've historically grown. If you think about fund banking and venture banking as well as our mortgage portfolio, those are all areas that we're going to continue to invest in. And I think you can look at the yield table and see the kind of returns we can generate there. And I think as we sit here in balance today, we are generating a lot of excess capital and thinking about balancing some of the buyback versus balance sheet growth is part of that consideration. It does take some time to start to generate and get those things going in terms of adding loan balances, but that's something we're definitely focused on.

We will take our next question from Bill Katz of TD Cowen.

Just following up on those last sets of questions. As you think through the interplay between your NII guide. How do we think about to the extent that if rates are sort of higher for longer the interplay between the NIM looking ahead versus the opportunity to grow the balance sheet to sort of calculate through to that NII outlook?

I think the answer to that is a little bit hard to predict because understanding and predicting client behavior in that environment is going to have an impact on the NIM. As we've said, we continue to see cash sorting continue to slow. But obviously, there was an impact associated with tax season that we see every year. I think the key thing to think about there is we continue to monitor this what happens to these balances, not just to Stifel across the industry as we continue to get further and further away from tax season. That said, even if we saw additional sorting pressures, the capabilities we've built and the yield opportunity on the loan portfolio would allow us to continue to grow and make the reasonable risk-adjusted returns that we target. So even if there is continued pressure there, we do feel comfortable with what that environment looks like.

Yes, I would just add that I've always been cautious in an inverted yield curve environment, both as it relates to the behavior on cash client sorting activities. And frankly, that the SOFR rate is significantly inverted and the pressure that can put on various credit metrics. So we see, though, from this point, we have been limiting our balance sheet growth, and we see a lot of quality demand. So as I said in my remarks, we believe that whatever cash sorting as it impacts our NII will be offset by balance sheet growth so that we think that we're at a low part at NII.

Great. Just sticking with that theme, just one level deeper, as you just sort of think through [ April ]. So I wonder if you could comment on behaviorally, how clients are funding any tax liabilities? And then as you look in a world where rates sort of stay here and we stay sort of in your framework of maybe just plus or minus one rate move, how do you think the mix of client assets might migrate from here? That is what percent might stick in the sweep vehicles versus what might stay in more of the money market, higher-cost vehicles. And when might you start see more favorable inflection to that?

Well, 2 things. First of all, every year, the clients, they deal with tax season by wiring money to the federal government, generally out of our accounts and out of every brokerage account. That's some -- and that can be exasperated in years where you also have to make estimated tax payments. So you had a strong first quarter, you might have some more capital gains. So we see what I would say, normal activity, whereby clients just take it out of our various cash products and wire it to the federal government. Thank you very much. So it's just taxes. As it relates to client behavior, it will be interesting because when and if, at some point, the Fed will begin to cut rates. I'll say as an aside, if I could be Fed Chairman for the day, I don't really think that we need rate cuts as much as we need a rate adjustment. Meaning that if you could just snap your fingers and not signal to the market that you're beginning a rate cycle, you probably want the Fed funds rate to be about 4.75%, which would be flat to the 2-year. It wouldn't be inverted. That would be ideal, I think, but probably not going to happen. But what will happen as rates do start to decline, as clients like the 5% handle on short-term rates, and they might reach for some duration to maintain rates. We've been thinking about that and have some products to make sure that we have that alternative for our clients, just like we got ahead of the curve of the smart rate. We will, in terms of what the yield curve might our clients might want to do as the yield curve begins to normalize.

One other thing I think I would add to that is we already have about $18 billion of client assets that have moved into short-term treasuries and money market mutual funds. And obviously, that number can go up some from here, but that's a pretty big allocation relative to historical norms. And obviously, if rates stay higher for longer, those are probably going to stay somewhat elevated. If we turn around at some point, see rates come back down, that's a fair amount of investable dollars that aren't really earning much today that's potential revenue within our Private Client Group that's kind of sitting on the sidelines today.

We will take our next question from Steven Chubak with Wolfe Research.

Ron and Jim, it's Michael, and I hopping in for Steven. I wanted to start off with one on the DOL fiduciary rule. Ron, you had been relatively cautious versus some of the peers on the implications of the rule back at the conference in November. With the final rule now published, maybe you can remind us your views there? What this means for the industry? Any implications that you would highlight for Stifel's earnings as well?

Yes. Look, I mean, it was published yesterday, it's about 500 pages with numerous preambles and various things. As a first blush, I want to say, I was somewhat maybe surprised that at least an initial review of the rule appears to be less restrictive than what was proposed. I think that a number of people in the administration are trying to not create a rule that is so similar to the one that was struck down by the Fifth Circuit back in 2018 or whatever it was. And so I would say that with the rule really targets just to say that it's primarily fixed indexed annuities, which we don't really sell at Stifel. However, I would say that, that probably is going to draw a legal challenge from the insurance groups. The rule probably is still susceptible to legal challenge. But they did some things like that you can continue to have education for IRA rollovers. And I thought that it was interesting that they expanded the principal transaction which was always a concern of ours, mostly from investor choice that you should be able to do an IPO in your IRA if you wanted to. And it appears they put that back in. So on balance, I think the rule has an implementation period of about a year. I think it's going to get challenged. But as I see it today, I think the -- it doesn't really significantly impact our business as I've seen it now. We've done a lot to implement BI, Reg BI. Overall, I always say the same thing that to the extent that it varies, it has a lot of variance to Reg BI, then that just becomes very difficult to manage. Most of our clients have retirement IRAs and they have taxable accounts, and we can't be operating under 2 standards. I'll continue to be looking at that. I know the industry is going to look at that. But I guess my first blush reaction was that it appeared to dial back from the proposal that came out a month or so ago.

Right. That's very helpful. And then just one on bank M&A. Following the close of the Lakeland merger that had lingered for quite a while, are dialogues among potential deal candidates in the bank space picking up? Or is the view that the current administration will continue to cause headwinds there? And then maybe just to round it out, can you give us a sense of how you expect the environment for bank M&A to evolve depending on the election outcome?

I don't know, maybe you gave me some information. I wasn't sure that Lakeland had closed. That deal has been sitting around for a while. I think we think it will close and if it...

Maybe I misspoke. I'm sorry about that, but the...

That's all right. That's all right. We -- I think we do expect it to close. In general, look, I think the overall, the guidelines and what's been put out and the FDIC and a number of guidelines and having different -- this administration has clearly put a delay in transactions. That will continue. I don't see why that's not going to continue. And if it does anything as it relates to M&A, if I'm on a Board, I'm considering and putting a risk factor into my thought processes as to how to manage a delay in closing. That's part of assessing price and the ability to do transactions. So I'm hopeful that the administration, whichever it would -- could be after November, will recognize that a lot of midsized banks need to combine to meet enhanced -- regulatory enhanced liquidity and everything else. We don't need over 4,000 banks, we need more than 10. But there is a lot of M&A activity that's going to occur, and I'm hopeful that the administration will encourage bank mergers because it's good not only for shareholders but also communities and for the fabric of the United States Capital Markets, which has at its foundation community and regional banks.

I think one thing to add there is, obviously, the time line of the -- from announcement to close has extended significantly. We are hearing from clients that we feel like they've gotten to the point where they don't feel like that's going to get any longer from here. And I think I would just say that if the environment switches to be more conducive for financial M&A, we're very well positioned to take advantage of that.

We will take our next question from Brennan Hawken with UBS.

So Jim, in your prepared remarks, you commented that you added, I believe, 22 advisers in the quarter, but the FA head count dropped by about 30 quarter-over-quarter. Can you speak to what drove that drop despite the healthy gross adds?

Yes. It was primarily driven by retirements. I think you see that early in the year often. I think, generally speaking, the pace of recruiting has slowed a little bit. And so some of the natural attrition from retirements was more of a similar number to what we added in terms of net new advisers. And that is really the trend we're seeing there. I think when you see markets moving like they have moved, typically, advisers take a little time to make the decision to transition, and I think that's something you're seeing kind of across the industry today.

When you have those FA retirements, do you have any stats around what portion of those retiring advisers books you are able to retain or maybe finance to move to a younger adviser or anything like that?

We don't have stats that we published. We obviously look at that. I would say, with retirements most advisers, we have programs for them to transition their books. We give them incentives to do so. And those assets are generally retained at the firm, if there's a challenge, it's that those assets like our advisers that are going through retirement, those assets are often going through intergenerational changes too. And so there's sometimes the higher challenges you go from parents to kids, but we have programs to do that, too. So net-net, we believe that when someone retires at Stifel, that's a good thing. When you want to look at what's not necessarily a good thing, it's our regrettable attrition, which has been low. When someone is leaving to retire somewhere else or something, that's not good. But when they retire here, that's a good thing.

Got it. And if I could squeeze in one more, just somewhat maybe technical or nitty-gritty, but it seems as though the other deposits were net of $1.3 billion at third-party banks. Are those balances that are third-party banks are reflected elsewhere in the supplement? And why -- what drove the decision to move those off...

I'll let Jim on that one.

So if you look at Page 9 of the supplement, you can see the roughly $2 billion of other bank deposits. So in essence, late in the quarter, we moved about $1.3 billion of primarily venture deposits over to third-party banks. Some of that was a function of just the cash on hand at the bank and the lack of growth that we saw in the first quarter. So we can move deposits off balance sheet either through the suite program or through these venture deposits. This is the first time we did that. I would just say, if you think about that, you add the $1.3 billion back to the $2 billion, you -- yes, sorry, $1.3 billion to the $2 billion, you in essence, you can see that we were up about $500 million. Venture deposits drove about $300 million of that increase. And there were other corporate deposits here of about $200 million. That's probably more unusual in nature, but the $300 million has been a fairly consistent pace over the last few quarters in terms of growth in venture deposits.

We will take our next question from Alex Blostein with Goldman Sachs.

Just a question around your comments as far as loan growth demand goes. So it sounds like for the last couple of quarters, and we've seen that you guys have been sort of reluctant to extend the balance sheet a little bit. Now it seems like you want to lean in a little more. Can you just characterize a little bit on your comments around the sort of the high-quality demand that you referred to which buckets is that likely to drive growth? And then around the same topic, the bank -- the fund banking loan, I know has been an area of focus, but that's been down. So what's kind of been driving the decline? And how do you guys expect to sort of bridge the gap to loan growth?

Yes. I'll let Jim give a little detail. But from my perspective, we've had and continue to have strong loan demand, primarily in our consumer type areas. And yet what we said that we were going to do was remix our balance sheet a little bit. So you're -- while you see some loan growth, we've been not "running our balance sheet as much." We have sold some broadly syndicated loans. We don't renew deals that were necessarily just part of a group. We want to be lending more holistically and achieving more fee income, not just net interest income from our relationship. So you've seen a sort of remixing of that. I think that we're getting -- we've seen a lot of that, and maybe we'll see now just net loan growth, which has been going on. It just won't be as offset as much by the fact that we just frankly, haven't renewed some loans, I would say.

I think it's fair. Obviously, we've made a number of investments across both fund banking and our venture banking efforts. And those are still bearing fruit. On the fund banking side, we have been transitioning more to lending on a bilateral basis, as Ron had mentioned, basically allowing us more opportunities for other fee income or other deposits. And that's been a driver of more of the short-term changes you've seen there. And I think as we go forward, we see a fair amount of capacity from both the fund and venture banking teams.

I got you. And on the pay side of things, there's been maybe a little bit more chatter around rising competition for recruiting and the pay packages. And I know that's always part of the framework, and it's always competitive. But have you noticed any directional changes just the degree of competition and economics that are provided in the channel? And as you think about Stifel's net new asset contribution, can you help us characterize the mix between recruits versus same-store sales?

Obviously, we've not broken out a mix between recruits and same-store sales. I think it's one of those things where at what point do you consider someone no longer being recruited? Is it after 6 months? 9 months? Or 12 months? Where do you break it and where do you look at that? Obviously, we think we are holding our own in terms of net new assets, particularly when you look at your total assets and your total fee-based assets and the way those percentages changed period-over-period, both sequentially and year-over-year, others are reporting higher net new asset numbers but total assets that are managed, which drive fees generally are moving in very competitive directions with peers there.

Yes. And look, I always look at I've commented before that I don't want to say the obsession, but a lot of the net new asset metrics, I can't always draw a line between that and revenue growth and profitability. I'll stick by our growth, like I said, almost in our view, to double our assets under administration to $1 trillion, and our historical growth and our historical improvement in productivity by person are the metrics that I really look at, and I feel very good about those.

Got it. And just a cleanup for Jim on the back of Brennan's question as well. The $1.3 billion that moved to sweep. What's the revenue yield on that? And just where does that show up because I don't think it's in your wealth business?

It -- well, it shows up within Global Wealth Management because it's going to show up in the asset management line. It was de minimis for the quarter. The fee capture rate on that is significantly lower than what we get on third-party sweeps. Just given the inherent interest rate on those deposits relative to the sweeps. So you're talking something around 10 basis points or so because it's basically an amount you're taking off the top of the yield. And there's a lot less room there to do that on venture deposits relative to sweep deposits. That's relatively de minimis. It's in fee income.

Got it. Okay. But the point being is like you can move it back to the bank whenever you want if there's loan growth, you could use [ the fund over ]?

Correct. We just wanted to make sure people understood that's an additional $1.3 billion not shown on Page 9 of the supplement to fund loan growth as we go forward.

I have a feeling next quarter, it's not going to be in that foot, okay, on the number of questions...

We will take our next question from Chris Allen with Citi.

Maybe just a quick one on Global Wealth Management brokerage revenues, obviously, a nice quarter, both commissions and principal transactions. Maybe just some color just on the commission, what was driven by mutual fund trails kind of what's the outlook and principal transaction is more appetite for credit or rate-related products there?

Most of the increase we saw on the sequential basis was driven by equities activity and mutual fund trails, those are built up nicely. I think you saw people engaging in the market as we saw some pretty attractive returns in the market, and I think that spurred a lot of client behavior.

Yes. I mean I -- look, it's correlated to market levels and both trails and activity. So that's good markets generally will result in that line item transactional improving, and this was no different.

We will take our next question from Bill Katz with TD Cowen.

So Ron, you have me [ kneel ] around with my calculate here a little bit on your $10 billion revenue number that you laid out, and I appreciate that's rather aspirational. So just a couple of questions underneath that all into related. What kind of time frame -- does the model compound a little more quickly today just given the commentary just about having a stronger platform versus the last couple of years, number one. And then underneath that, relatedly, what kind of aspirational margin target should we be applying against that sort of thing through the earnings power of the company?

Yes. Look, I appreciate the question, Bill, and I hope you'll appreciate that I'm not really going to answer it. But the -- I mean, I -- that's forward looking. First of all, I don't know how aspirational I'm going to say that, that is. I've had these aspirational comments back when we had $200 million of revenue that went to $400 million in 2009, we were at $900 million. I said we doubled the firm and we got to $1.8 billion. And then I said it we doubled the firm and people said, "Oh my gosh, by when?" and we'd say, "Well, we wouldn't" and we've done that, and we've continued to do that because our ability to gain market share across all of our businesses is still a lot of open runway. And so when I look at our historical growth rate, to put not an aspirational goal, but a milestone in the ground, which, in this case, is $10 billion of revenue and $1 trillion of assets. They are correlated as to -- if you take that calculator, you're talking about and go back and look at our wealth management, our assets under management and our institutional business and you plot those, you'll see that $10 billion and $1 trillion are correlated. So I just want to underscore the fact that we believe that we're a growth company and we have been a growth company, and we're not at the end of this journey. So I'm confident that at $10 billion and $1 trillion of assets are in proper capital management, our margins will be higher just from scale. Our returns will be higher. And our shareholders will be happy. Much more than that, I'm really not going to get into. Look, I appreciate it, okay. Send me your calculator. I'll look at it.

We will take our next question from Steven Chubak with Wolfe Research.

It's Michael again. Just one more question here on capital. It was nice to see improved repurchase activity during the quarter. Is this like $150 million or $160 million zone more reasonable in the near term? Your capital ratios are still very healthy. Free cash flow gens still quite strong. But at the same time, you guys are planning to grow the balance sheet a decent amount more this year. So I just wanted to understand whether or not we should expect it to return maybe to the 2023 run rate.

So obviously, the buyback activity is all price dependent. And we've obviously talked about allocating more capital to balance sheet growth. So you may see that slow some in the near term. That very one would be the case. We do have a senior debt offering that comes due in July. At this point, we may fully just pay that off. So some of that may play into this as well. But I think as we look at the back half of the year, I would anticipate that, that buyback activity probably returns to those more normalized levels.

[Operator Instructions] We do not have any questions in the queue. I would like to turn the call back over to our speaker today for closing remarks.

Well, I would, again, as always, thank everyone for taking the time to look at our first quarter results. I'm optimistic about the markets in general and look forward to reporting our second quarter results this summer. So with that, everyone, have a great day. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.