Good day, and welcome to the Stifel Financial Third Quarter 2024 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joel Jeffrey, Senior Vice President of Investor Relations. Please go ahead.

Thanks, operator. I'd like to welcome everyone to Stifel Financial's Third Quarter 2024 Earnings 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 for some of the numbers we state throughout our presentation are presented on a non-GAAP basis and I would refer to a 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 other slide presentation and 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, Joel. Good morning, and thanks to everyone for taking the time to listen to our Third Quarter 2024 Earnings Conference Call. Looking at our third quarter results, net revenue of $1.23 billion was in our history, our second highest quarterly revenue, up 17% year-on-year. The growth in our business was essentially across the Board as follows. Commissions and principal transactions increased 15% as both Wealth Management and our Institutional Group generated double-digit increases. Investment banking increased 66% as capital raising revenue more than doubled while advisory revenue increased 41%. Record asset management revenue was up 15%, reflecting organic growth and market appreciation. As we noted earlier in the year, we thought net interest income had bottomed, and providing evidence of this in the third quarter, NII increased by 4% and reached the high end of our guidance. I'd also highlight that our sweep deposit balances increased by nearly $370 million, which was the first quarterly increase since the first quarter of 2022, which by the way coincided with the Fed beginning to raise rates. Third quarter earnings per share totaled $1.50, which increased 150% from the same period last year. Both this quarter and last year's third quarter were impacted by legal reserves, which Jim will address in greater detail later in the presentation. Excluding these reserves, earnings per share would have been $1.60 in the third quarter, which represents a 36% increase over the adjusted EPS from the third quarter of last year. Our results in the quarter and through the first nine months of the year illustrate the strength of our franchise and our ability to capitalize on the improving market conditions. Year-to-date, we've generated record net revenue of $3.6 billion, up 13%, driven by the continued growth of our Wealth Management franchise, improvement in our Institutional…

Thanks, Ron, and good morning, everyone. Looking at the details of our third quarter results on Slide 5, our quarterly net revenue of $1.23 billion was up 17% year-on-year. Year-to-date, revenue of $3.6 billion was up 13%. Each of our operating line items showed improvement from the same period in 2023 with the exception of NII. Our EPS in the third quarter was up 150% from the prior year and up 43% year-to-date, as higher revenues and lower operating expenses drove the overall improvement. Moving on to our segment results. Global Wealth Management revenue was a record $827 million and pre-tax margins totaled 37% on record asset management revenues and our highest transactional revenue in nearly three years. As Ron mentioned earlier, asset management revenue came in below analyst estimates. This was due to lower third-party bank sweep balances as we moved more of our lower-cost sweep deposits back into the bank, which positively impacted net interest income. Excluding the impact of the charge in the third parties -- I'm sorry, excluding the impact of the change in third party suites, asset management revenue would have been in line with Street estimates. During the quarter, we added 28 total advisors to our platform. This included 13 experienced advisors with trailing 12-month production of $10.5 million. We ended the quarter with record fee-based assets and total client assets of $191 billion and $496 billion, respectively. The sequential increases were due to higher equity markets and organic growth as net new assets grew in the low-single digits. On Slide 7, I'll discuss our bank results. As Ron mentioned earlier, client cash levels increased during the quarter and sweep cash balances increased for the first time since the beginning of 2022. While we're not going to say that cash sorting is done, we…

Thanks, Jim. Let me conclude by saying that we are on track to reach our near and longer-term goals. We started 2024 with a more conservative outlook for the operating environment then the Street forecast that guided to solid revenue growth and expense controls. Our market outlook turned out to be more accurate in the Street and yet our net revenue is on pace to finish the year at the high end of our guidance and our expenses are also on track to come in within our initial guidance range. To put the strength of our performance so far in 2024 in context, our revenue run rate of $4.8 billion is just shy of the $5 billion we've discussed as a realistic level of revenue in a normalized environment. Look, it's important to note that our $4.8 billion run rate does not factor in what we believe will be a good fourth quarter. We anticipate a strong fourth quarter as we continue to benefit from the growth trends we've experienced in 2024, as well as the typical seasonality that we experienced in the fourth quarter. That said, there are still meaningful -- there is still meaningful uncertainty to the current operating environment, including the outcome of the upcoming elections and geopolitical risks. As we typically do, we will give our formal guidance for 2025 on our fourth-quarter conference call. However, let me just say this about, how we see 2025 at this point. Given the strength of our results in what we considered a transition year, our expectation for further revenue growth as markets continue to normalize, and our anticipated increased operating leverage, we feel confident in our ability to achieve our targets of more than $5 billion in revenue and $8 of EPS. With that, operator, please open the line for questions.

Thank you. [Operator Instructions] And we can take our first question from Devin Ryan with Citizens JMP.

Hey, good morning, Ryan. Good morning, Jim. How are you?

Good morning, Devin.

Good morning.

First question just on lending, obviously, great loan growth in the quarter. Ron, it sounds like you still expect more from here or pretty good demand. And I also appreciate you'll be opportunistic if conditions change. But can you just maybe help quantify kind of the level of demand that you're seeing and where it's coming from incrementally? And then it sounds like you guys think you can still grow net interest income from here even as rates come down. So just want to kind of get the interplay with that as well. Thanks.

Yes, I'll let Jim give some details. As we've said, we've gotten to the position with our deposits and Smart Rate and then versus Sweep that we're essentially neutral to 100 basis point move in terms of our margin, frankly. And what we see going forward is the opportunity to build our balance sheet. We see great opportunity. And as you know, we have limited our balance sheet growth on purpose during a more uncertain rate environment. So as we look today, we have an ability to grow in a risk-adjusted basis as we always do, our net interest income.

Yes. I would say we are less dependent on a lot of the general loan market but the economy in general and the ability for us to put loans on our book, given our captive audience base, whether that's mortgages and securities-based loans or fund banking and venture, we have the ability to generate a fair amount, as Ron said, risk adjusted returns that are very attractive. You couple that with the liquidity and the sensitivity to interest rates that Ron talked about, plus the $500 million of excess capital. We're essentially saying, we have a fair amount of capacity with over $3 billion in sweep deposits that are available to the bank today to generate balance sheet growth at roughly a 3% NIM.

Okay, terrific. And then just a follow-up on fixed-income brokerage. I appreciate revenues there were up year-over-year. And I think the second quarter had roughly $20 million gain, but it still seemed a little bit softer than we were looking for. So just love to get any sense of whether there were losses there. And then just the outlook, particularly with depositories as we look into kind of later this year and next year there as well. Thanks.

A little bit of seasonality always in the third quarter and I don't see any real slowing of that business. You did mention the reason that it was down from the second quarter. But I'm optimistic about that business, both as rates normalize and most our depository clients continue to actively manage their portfolios.

We should hear talk about cash building because the interest rate risk curve is normalizing. The same things happen to our clients and they're going to be more active in trading activity in an environment like that. And that presents a great situation for our fixed income rates group.

Okay, great. I'll leave it there. Thanks guys.

Thanks, Devin.

Thank you. We'll take our next question from Alex Blostein with Goldman Sachs.

Hey guys, this is Michael on for Alex. Maybe just a follow-up to the $3 billion of third-party deposits that you guys have. So it sounds like that would all be available to move over to the bank at your discretion. I was wondering if we could just double-click into the -- maybe the funding rate on those deposits and how that works.

Yes, so the sweep deposits, obviously that's very well-known rates. We're at 4.5% on Smart Rate and you can see the tiering on our Sweep program. The remainder of that are primarily treasury deposits. I will say, generally speaking, they are closer to Smart Rate, but on a blended basis, a little bit less expensive than Smart Rate. Some of that will depend if it is a pure lending relationship -- I'm sorry, pure deposit relationship only or it also comes with a lending relationship. But again, it's going to be a little bit less than Smart Rate.

Thanks. That's helpful. Maybe just moving on quickly to the comp rate, so it sounds like you guys guided for the fourth quarter about 58%. It's been pretty range bound for the last two years. So obviously, the mix of revenues matters, but how would you frame the opportunity for leverage over time? And maybe you can kind of talk about how that would play into your early plans for 2025, both on the comp rate side, but also on the non-comp.

Yes. I think we've been conservative in comp as we have been keeping net interest income has been relatively flat because our interest earning assets have been relatively flat. And as I've said, we anticipate that line item growing and that has a positive impact on our comp ratio. Couple that with a normalization of our institutional business, which is annualizing today at $1.5 billion down from $2.2 billion in 2021 and up from [$1.250] (ph) billion-ish last year on an annualized basis. And we've talked about a conservative normalization of $1.7 billion to $1.8 billion. As that occurs, that also positively impacts the comp ratio. So, I would -- in this environment would say, that 58% will be at the high end of our guidance range for 2025, to try to answer your question, as I see the market environment providing leverage to the comp ratio.

Thank you.

Thank you. Our next question comes from Steven Chubak with Wolfe Research.

Hey, Steven.

Hi. Good morning. Hey, Ron. How are you?

Good morning.

Jim, I hope you're doing well also. So I wanted to start off just -- it's a clarifying question, Ron. You mentioned the $8 earnings target. It's something you've alluded to before in a more normalized environment. Was that something that you were speaking to in the context of a more normal operating backdrop? Or is that actually a 2025 expectation for where earnings could shake out?

I mean, I love the question, I understand what you're saying. Let me go back to what I said because I'm not really prepared to talk about that 2025. But what I did say back in 2024 was that as we look forward to 2025 then that we saw the ability to get to I think it was $5.2 billion and $8 of operating in 2025, that's what I said. And what I said today was that my view hasn't changed.

Understood, Ron. I appreciate that.

Does that answer your question.

No, no, I appreciate that, Ron. And I did also want to ask on the buyback just for my follow-up. Historically, you've been a good tactical buyer of your stock. We did see the moderation in share repurchases in the quarter. Just trying to square that positive message on the outlook, the earnings growth potential for next year that you outlined with that moderation in buyback, and just how you're thinking about the relative attractiveness of repurchase versus other alternatives, whether it'd be bank growth or M&A.

Again, we -- those three levers, bank growth, M&A, and stock buyback are always on the table, coupled with our dividends, which are the four primary levers that we do to manage capital levels and provide the returns and make sure that, our return on investment is adequate. And look, we have done, I mean, we purchased stock at an average of $80 today, there's a lot of optimism in the market in terms of financials, I'll share that. But when we look at deploying capital, the lever for bank growth appears a little more attractive and to us and not to say, we're not buying back stock, we are, but we also repaid our note. And from a liquidity perspective, I was probably a little bit more saying, hey, I never paid off a note by just wiring $500 million of cash. So I was a little more saying about our liquidity position. But look, I think our -- we'll continue to buy back stock and we'll continue to grow our balance sheet and we'll continue to look at acquisitions. Each are measured against each other as to which is the most attractive.

And if you tie this into your original question, it's about $8 of EPS. We probably had a little bit more of emphasis on share repurchases at that point. You got to remember if we're adding, call it $1 billion of interest-earning assets at a 3% NIM, that's roughly a $0.20 of EPS. So there's obviously some give and take of the balance sheet growth versus the buyback and the impact on how we get to the $8 per share as well.

And those dynamics have changed since the beginning of the year, primarily our stock price.

No, of course. I appreciate that, Ron. I'll hop back in the queue. Thanks so much for taking my questions.

Okay.

Thank you. Our next question comes from Brennan Hawken with UBS.

Hi. Good morning. Thank you for taking my questions. This is Ben Rubin filling in for Brennan. I wanted to start on the cash trends and obviously positively inflecting with sweep deposits up by nearly $370 million, although Smart Rate was up about $500 million as well. And you recently cut rates on the Smart Rate. So I was just curious, what type of impact have you seen on client flows on the back of rate cuts, if any? And what does that mean as far as your expectations for cash growth towards the end of the year? Thank you.

We've actually seen the deposit inflows in both Sweep and Smart Rate since we've cut rates and we've also seen inflows since the end of the quarter. Again, we're not ready to say cash sorting is over. So, I can -- as of yesterday, I'll say our Sweep program is up another $100 million in the fourth quarter thus far. So the impact of rate cuts has been minimal. Again, the bigger impact on this going forward is going to be the normalization of the yield curve and the competitiveness of various different alternatives.

Great. Thanks. And then I was hoping to ask about the recovery in sponsor M&A. You're obviously, your advisory results are trending in the right direction. So I was hoping if you can kind of just circle back on whether or not you've seen any improvement in the sponsor market as conditions improve and as borrowing costs and rates come down. Thank you.

Generally, yes. I mean, I would say that's across the Street and you'll see it in M&A results. So, certainly, the market conditions are conducive for that activity. If there's any governor on it, I think it is still the uncertainty around the election, which at least as it relates to M&A, could -- the election could provide some real tailwinds to M&A or maybe the more current environments I would say is, more regulatory burdened would continue. But I don't see it getting worse. I can see it getting better from a regulatory perspective. But overall, the M&A environment on the sponsor side is good.

Great. Thank you for taking my questions.

Thank you. And our next question will come from Bill Katz with TD Cowen.

Hey, Bill.

Okay. Thank you very much. Good morning, everybody. Thank you very much for taking the questions. A busy morning. So FA count was relatively flat despite adding some more seasoned folks to the platform with good trailing production. Can you step back a little bit and talk about, how you sort of see the net growth and maybe the competitive backdrop and what it means for incremental profit contribution per FA? Thank you.

Yes. I think we've been dealing for a while with sort of the balancing recruiting with generally retirements and we've seen net growth, although on a net basis, it appears muted. What you see is increased productivity per advisor because we retain clients and we're adding more productive advisors. And look, I would say overall, I'm probably as optimistic about the recruiting landscape as I've been, both our relative position. I've seen, I've seen it being our relative offering, especially on the transition side being more competitive. I think rates probably had something to do with that or at least we're seeing that trend. And we're talking to as many productive teams as we ever have. And so I'm optimistic. The fourth quarter is always is a muted quarter because they -- you really close the transition window in early December. But as I look at both the trends and primarily the number of people visiting us who we're talking to, I feel really good about our continued growth of that business and the addition of high-quality advisors to our platform.

Okay, that's helpful. And then just a follow-up, maybe a conceptual question. Obviously, we haven't been here in a while. At what level of rates do you think you need to get to or we need to get to for money to migrate out of Smart? It sounds like both are up again into the fourth quarter, which is nice. But is there -- at what level do you think you might actually start to see a migration back towards sort of balance sheet cash or is it different this time? It's always a dangerous thing to say, in that higher rates, higher awareness just would structurally change the mix, a real sharp drop in rates. Thank you.

Yes. Well, first of all, I'm not sure, it's different this time in terms of that it was different in a zero rate environment, okay? I mean the question has to be -- will we get back so that the effective spread between, where sweep balances are and say the one-year treasury narrows so that you don't really have the incentive. So to answer your question, even a normalization of rates, which to me would be Fed funds settling at 3% to 3.5%. And I get there by thinking inflation is going to be closer to 3% than 2% and probably should have a real interest rate, so 3.25% to 3.5%. That's where I kind of see rates settling. And as you get a normal yield curve, what will happen -- that Smart Rate will still be there because the rate differential between transactional cash and savings cash will still provide our clients with that choice. In contrast, when rates were zero and it didn't really matter. And so is it different this time? Yes, I don't think we're going back to a zero-rate environment. I think, we are well positioned as evidenced by our neutrality to changes, 100 basis point changes in Fed funds. And we've retained cash and I actually see us growing cash and having a NIM, which drives appropriate return on investment on our loans, which I don't feel we have to take excessive credit risk to do so. So I wouldn't be baking in something that says that our -- we're going to drive NIM because people are going to go back into sweep. Sweep will always be there for transactional cash, but savings cash is a -- is the new normal.

We've had roughly -- it was essentially 100% beta of Smart Rates. So at some point in as rates start to decline, the attractiveness of that alternative decrease is fairly significant. You also have seen a fair amount of money come out of treasuries as that becomes a less attractive alternative, more money coming back into Smart and into our Sweep. And the other thing I would just say, at a high level, as we continue to increase recruiting, recruiting is going to continue to add to the level of that operational cash balance as well.

Great. Can I sneak in a clarifying question? That was my third question, so I apologize for taxing everyone's goodwill. Just in terms of the tax rate into the fourth quarter, is this a new development that we should now start baking in prospectively as we think about 2025 and beyond? Or is this more idiosyncratic just to this particular upcoming quarter?

This happens every year. The impact is larger than normal because of the increase in the stock price. So basically, this is the excess tax benefit related to stock-based compensation. The difference between grant date fair value and the fair value of stock when it vests. And as your stock price -- as your stock price increases, you get a larger benefit, which runs through is a negative or decline in your effective tax rate. You'll see it in most quarters historically in the fourth quarter for us. This is just a larger impact than normal.

Okay. Thank you very much for taking all the questions.

Thank you. It appears there are no further questions at this time. Mr. Kruszewski, I'll turn the call back to you for any additional or closing remarks.

Thank you. Great job on pronouncing the name. I appreciate that. And to all of our shareholders, we look forward to recapping 2024, talking about what we anticipate will be a good fourth quarter, and giving you some updates on our views into 2025. And with that, I bet everyone a great day. Thank you for your time.

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