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. 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. The investments we have made have diversified our revenue sources and continue to enable us to create solid results despite market headwinds. In 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 and 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 revenue increased 7% to a record $702 million with pretax margins up 40%, an increase of 380 basis points sequentially. As I noted earlier, the increase in net interest income was the primary driver of revenue growth. While Jim will get into the details of our net interest income later in the presentation, I want to highlight that our third quarter NII was up 86% compared to the prior year's quarter, and year-to-date is up 60%. We continue to invest in our wealth business through recruiting and improving our technology. We now have hundreds of thousands of accounts using our Wealth Tracker app. Our advisers are using Wealth Tracker to not only deepen their relationships with existing clients and to review relationships holistically, but also to attract new clients to Stifel. The development of Wealth Tracker is a great example of our fundamental approach to this business. Stifel is an advisor-focused firm that offers a platform and culture that enables financial advisers to grow their business without the bureaucracy that plagues many other firms. This adviser-first culture resulted in Stifel being ranked No. 2 by J.D. Power in their 2022 U.S. Financial Advisor Satisfaction Survey. This is a testament not only to our culture, but to the investments we've made into the business. Our continuous improvement is on display as our J.D. Power ranks have improved every year since 2019. Importantly, we ranked number one in the survey in three categories: leadership and culture, customer service, and marketing. I would also note that these rankings are based on feedback from the advisers themselves but underscore the quality of the culture we've built here at Stifel, which is a vital aspect of our ability to continue recruiting high-quality advisers. Speaking of recruiting, we added 36 advisers. I would say that recruiting activity remains strong, but we've seen throughout the year that the pullback in the market has slowed the actual transition of advisers while also accelerating the retirement of others. As we look forward to more stable markets, we anticipate meaningful increases in recruiting levels. The markets have also influenced our transactional and asset management revenues. Regardless, we ended the quarter with fee-based assets of $136 million and total client assets of $365 billion. Speaking of growth, our net new assets increased 6% in both the third quarter and over the trailing 12 months. On the next slide, you see some of the longer-term trends within our Global Wealth franchise. As I mentioned earlier, we continue to see the benefits of investing this business through recruiting and bank growth, which has not only led to revenue growth but also a significant increase in the percentage of recurring revenue. For the quarter and as a foundation of our long-term strategy, 16 experienced advisers joined Stifel as their firm of choice, choosing us because of our friendly culture, expansive products, industry-leading yet simple and fair compensation plans, and excellent technology. These new advisers brought trailing 12-month production of $14 million. Since the beginning of 2019, we've recruited nearly 500 advisers to our platform, a total trailing 12-month productivity of more than $350 million. Our recruiting pipeline remains strong, and we are encouraged by the traction we are gaining in the independent channel. One of the many benefits of our increased NII is the increased percentage of recurring revenue, which adds to greater stability and predictability of results. Our recurring revenue reached 75% for the first nine months of the year, which surpassed our previous full-year high by 900 basis points. We achieved this high watermark while generating record revenue in this segment. What makes it more impressive is that we do this in light of the fact that our asset management revenues, which accounts for the majority of our recurring revenue, have been impacted by market valuations. We grew our loan portfolio by $1.7 billion during the quarter, up 9% sequentially. Total firm-wide assets on September 30 were $37.6 billion, up $3.6 billion year-to-date. Starting in November, we will publish monthly metrics for wealth management. This will include commentary on our business during the month as well as metrics such as total client assets, fee-based assets, client cash balances, and total loans. We believe that by updating the street on a monthly basis, we can align expectations better with our quarterly results. Moving on to our Institutional Group. We built a diversified business that has made us more relevant to our clients, and we are well positioned for future growth when the operating environment stabilizes. As always, we'll also look to continue to explore additional growth opportunities. In the quarter, revenue was $339 million. Year-to-date, revenue was $1.2 billion, led by record advisory revenue and represented our second strongest first nine months, only trailing last year. However, the 75% decline in capital raising activity across the industry and the reduction of sequential trading volumes have more than offset the strength of our advisory business. Investment banking revenue totaled $222 million. I'll focus on the advisory business for the remainder of this slide and discuss our underwriting business on the following slide. Advisory revenue of $167 million, while an acceptable result, was negatively impacted by delays in deal closing. I'd particularly highlight the impact that we've seen in our financials vertical as regulators have slowed the approval of bank transactions, including a few of our deals. While we believe these deals should close in the fourth quarter, of course, we cannot be certain. Looking at advisory fees and other business verticals, we had a relatively strong quarter as we saw strength in the U.S. M&A market, particularly in technology, health care, consumer, and real estate, as well as restructuring. Additionally, we have increased the number of high fee assignments as we continue to deepen our relationships with our clients. Overall, while closings have slowed, we continue to see positive signs in our business as client engagement remains high, and our investment banking pipelines remain solid. On the next slide, we look at the remainder of our institutional business, looking through the lens of equities and fixed income. Fixed income generated net revenue of $101 million in the quarter and posted our third highest revenue for the first three quarters of the year. Our equity business was down 50%, again, due primarily to the industry-wide drop in capital raising. Fixed income transactional revenue totaled $74 million, with lower activity in our rates business. Our bank clients continue to face a lack of liquidity on their balance sheets as they contend with lower deposit levels, which has resulted in lower trading activity in their investment portfolios. Fixed income capital raising came in at $27 million. The sequential decline was due in part to a slowdown in industry-wide public finance volumes, which, for the record, were down 16%. As interest rates have risen, refunding transactions have essentially ceased, and new money bond volume is still being impacted by the unspent federal ARPA funds. Additionally, we had lower activity in our taxable debt capital markets business. Looking at the public finance business, Stifel has increased its market share, which we calculate based on the total number of transactions to approximately 15%, up from 13% in 2021. Equity transactional revenue totaled $46 million, up modestly from the prior quarter. The increase compares favorably to industry-wide volumes that were down 12%. Overall, we see increased engagement in electronic trading. Also, we generated modest trading profits compared to trading losses that we discussed last quarter. In terms of equity underwriting, Stifel's activity is really no different than what's happening industry-wide. However, I do believe that this business will rebound as many transactions are delayed as opposed to being canceled, and we have seen some green shoots from the technology and health care verticals. And with that, let me turn the call over to our CFO, Jim Marischen.

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 a 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 million. Moving on to the investment portfolio, total investment book value decreased by approximately $40 million sequentially, most of which was driven by portfolio amortization and maturities. Turning to credit metrics, our credit loss provision totaled $6.5 million. Loan growth in residential mortgages and fund banking were primary drivers. Given their lower expected loss levels, our allowance to total loans ratio declined to 70 basis points. Overall, our credit metrics remain very strong. Our nonperforming assets as a percentage of total assets were four basis points, while our nonperforming loans were five basis points. Moving on to capital and liquidity, our risk-based and leverage capital ratios remained strong at 17% and 11.1%, respectively. The modest decrease in our capital ratios were the result of loan growth. Our funding base increased modestly in the third quarter, and PCG client cash, which consists of sweep deposits and smart rate deposits, were essentially flat at $26 billion and I would note, have increased since quarter end. The products that we launched in order to keep client cash within Stifel have proved successful. And consequently, we have not been as impacted by many of the recent cash sorting trends in the industry. Specifically, our smart rate program is approximately $4.7 billion in deposits, up from approximately $1.5 billion as of the time of our last earnings call. These are yield-seeking deposits that would have historically gone into third-party money market funds. It's products like this that have enabled us to grow our balance sheet without reliance on wholesale funding. As I stated earlier, we'll likely see limited balance sheet growth in the fourth quarter. As we think about future growth, much of that will be driven by growth in assets from adviser recruiting, and we can potentially tap into some of the $6 billion in additional money market fund balances. On the next slide, we go through expenses. Our comp-to-revenue ratio of 58% was down 10 basis points sequentially as the benefits from increased NII contributions have been partially offset by slower institutional activity. Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $209 million, which is flat sequentially. This represented 20% of our net revenue. While the absolute amount of our non-comp operating expenses was in line with our expectations, it came in above our guidance as a percentage of revenue due to lower-than-expected revenue. The effective tax rate during the quarter came in at 26.5%, which was above our guidance due to our forward operations. Finally, our average fully diluted share count came in below our guidance due to our lower share price. We currently have approximately 10.3 million shares remaining on our share repurchase authorization. Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the fourth quarter fully diluted share count to be 116.8 million shares. Before I turn the presentation back to Ron, I wanted to give some additional color on our expectations for the fourth quarter and the full year. The market so far this year hasn't rebounded as much as we had expected. As a result, we now forecast net revenue to come in at the low end of last quarter's guidance for 2022 despite continued strength in our net interest income. So by definition, if our revenues are down, this puts pressure on our expense ratios. As such, we expect our comp ratio to come in at the high end of our prior guidance. Our non-comp expenses have essentially been in line with our initial forecast, but due to lower revenues, we've increased our expectations for operating non-compensation ratio to 18% to 20%. And with that, I'll turn the call back to Ron.

Thanks, Jim. It's been a challenging year with financial conditions tightening and market returns being poor across the board. However, I remain optimistic. We have developed a solid and balanced business that is well positioned to capture market share and deliver value to our shareholders and associates. It's important to recognize that Stifel is experiencing its second-best year, with operating margins and returns on tangible common equity both surpassing 20%, along with strong credit and capital metrics. As Jim mentioned, we expect our net interest income to return to 2022 levels with a run rate of $1.2 billion, assuming no growth in interest-earning assets. It's worth noting that NII was just $500 million for the entirety of 2021. We will keep building our wealth management business through strategic investments and a focus on recruitment. Concerns about the institutional business are prevalent, but I believe it will see continued strong growth, and we will eventually view 2022 as a challenging yet temporary period for operations. As we have frequently mentioned, our strategy involves using excess capital in various ways to benefit our shareholders. Depending on the phase of the cycle, we might choose organic growth, acquisitions, increased dividends, or share buybacks to effectively deploy capital. Given the current economic outlook, we anticipate a slowdown in our asset-light growth. Thus, due to our strong profitability, capital ratios exceeding target levels, and the decision to decelerate our balance sheet growth, we are likely to emphasize dividend increases and share repurchases, and potentially acquisitions, in our capital deployment strategy. Operator, please open the line for questions.

We'll take our first question from Steven Chubak with Wolfe Research.

Hey, good morning, Ron and Jim. Hey, it's Michael 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. Jim, you can begin with this.

We discussed the smart rate program, which had $4.7 billion at the end of the quarter and has since increased. We've observed some additional cash sorting, but most of the changes are due to the decline in the Sweep Program being balanced out by smart rates, allowing us to retain those deposits. Considering the total deposit beta and the asset yields we're achieving, we can generate a return that justifies continuing to attract those deposits. At the end of the quarter, the end-of-period book yield on our bonds and loan portfolio exceeded 475 basis points. We noted a 38% deposit beta by the end of the period, resulting in a cost of funds of about 114 basis points, ignoring any lag. We anticipate that the deposit beta will increase from here, and we believe it will ultimately settle between 25% and 50%. As we look ahead, we’ve outlined some impacts of this on the 2023 results. Without growth and the capacity to maintain those deposits, the effects are significant.

Yes. From a client behavior perspective, we have consistently maintained that in this cycle, cash sorting would ultimately be higher than in the past. The one-year rate is at 4.60, while the effective Fed funds rate is at 3.08. So, regarding our total cost of funds, that's about 1.14, and that is the key question. We anticipate that our net interest margin will actually expand despite the expected cash sorting. However, the situation is different this time because of the alternatives clients have 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.

Certainly. The fixed income aspect of our business can be divided into three main segments. First is our capital raising efforts in fixed income, and I've mentioned the current state of public finance. Unfortunately, taxable underwriting, similar to equity underwriting, has been quite sluggish, largely due to corporations being less active in capital raising. Our rates business is significant for us and is primarily served by depository institutions. The challenges with bank deposits and liquidity are affecting their portfolios, leading to a slowdown that I don't expect to change quickly. However, I believe we are nearing the lowest point of that activity. Additionally, the credit segment has been affected as credit-wide spreads have widened, particularly in the high-yield market. Overall, I think we've performed reasonably well in this area and anticipate improvement moving forward. While we are closer to the low point than the high, it's important to note that we do not engage in commodities and currencies like some of our larger competitors. They have experienced considerable activity and volatility, which we have not participated in.

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. I think you look at both the loan and the bond portfolio, and 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 and various 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 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 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 believe that aligns with the industry trends. Devin, I want to revisit your question regarding the growth of the balance sheet. We have significantly increased our balance sheet, with loans rising by 25% over the past nine months. We see strong demand and opportunities to adjust our portfolio. However, in this environment, where discussions about a potential recession are prevalent and forecasts are shifting, our approach has evolved. A few years ago, we made similar decisions. We believe that the substantial cash we are generating raises questions about the best use of that cash. It may be more advantageous to return it to shareholders, given the current stock prices in relation to growth. So, the key takeaway is that while we have the chance to realign our balance sheet, we also need to consider where to invest the significant cash flow we are generating daily.

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

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

Good morning everyone. I have another question regarding the balance sheet. If you examine the loan mix, Stifel has a significant amount allocated to private equity and venture capital commitments. How is that sector performing in the current environment? As you consider the potential risk of paydowns in those balances or any other types of loans as we look to 2023, should we view that as an additional challenge to loan growth? Would that necessitate a reallocation in the securities portfolio? I know you mentioned CLOs. Additionally, while the yield curve is flat, the overall yield levels are quite appealing, particularly if you anticipate rate cuts in the next 12 to 18 months. Do you have any interest in extending duration to take advantage of these wider spreads?

The first question is about fund banking. It's an important question regarding the growth in that business related to capital raises, which are interconnected. Loans originate from private equity firms that raise capital and then prefund commitments with the banks, and that's a process we, along with other banks, engage in. As of now, we don't see prepayments as a risk because the demand for homes remains strong. In fact, we might experience an increase in yield. While those loans are solid, they're not our highest-yielding options, though they are very safe. Therefore, I don’t consider this a headwind. If prepayments happen, we would be adjusting our balance sheet and loan portfolio with assets of similar quality, so that's not a concern. Regarding duration, it's a valid point. We tend to maintain a balance and it might be sensible to extend some duration here. However, as demonstrated by recent events in Britain, making drastic changes all at once doesn't usually end well. Thus, I don’t anticipate a complete overhaul of our duration strategy, but I do see merit in extending it gradually.

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 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.

We have seen trailing 12-month net income of approximately $700 million, and we distribute around $185 million in common and preferred dividends. This allows for some excess capital, along with about $400 million exceeding our Tier 1 leverage target. These figures illustrate the additional capital we have available for deployment.

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.