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 Financial’s 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. Power for employees' adviser satisfaction. Increasing our relevancy to our institutional clients where we can capitalize on the eventual market improvement, controlling our expenses in an inflationary environment while building our brand recognition. Managing balance sheet growth and liquidity and strategically deploying excess capital. In today's environment, this has been accomplished primarily through share repurchases, dividend increases and investments in our business. With this approach in mind, I would highlight that our Board of Directors has improved and increased share repurchase authorization by 10 million shares, which brings our total authorization to 14.2 million shares. Lastly, as we've always done, we continue to look at potential acquisitions, but in the current environment, they are less attractive, particularly in a market with a 5% risk-free rate. Moving on to Slide 2. On the variance payable to consensus estimates, we've highlighted our results and include the impact of the non-recurring legal charges we accrued during the quarter. Given the impact on our bottom line, I'll address this item first. The $67 million in legal charges was primarily the result of the SEC's industry-wide review of off-channel communications. While this matter has not yet settled, we believe that we are properly accrued. Additionally, we have reserved from some smaller legal items as well. The impact of the non-deductibility of the SEC matter negatively impacted our tax rate. All said, the after-tax impact of these legal matters was $0.58 per share. In terms of revenue, the $28 million shortfall to expectations was almost entirely due to lower investment banking revenue as we continue to see delays in deal closings in advisory and both equity underwriting and public finance activity was slow, given market volatility and, of course, higher rates. Our transactional revenue was ahead of the street by $5 million as wealth management revenues were higher than estimates and asset management revenue came in $3 million above the street. Net interest income came $2 million below street estimate, primarily due to cash sorting, which I note has slowed from the earlier pace. In terms of expenses, excluding the impact of the $67 million in legal charges, much of the difference in non-comp expenses versus expectations was tied to higher provision expenses, which Jim will discuss later. Moving on to Slide 3. I want to focus on the strength and growth of our wealth management franchise. The third quarter represented our 11th consecutive quarter of record net revenue in Wealth Management. Since 2015, Global Wealth Management revenue has increased more than 120%, while the percentage of recurring revenues increased from 47% to 78%. This level of growth has been the result of our strategy to recruit high quality advisers and to provide them with an extraordinary level of service. In this effort, we have continually invested in resources, support and technology to reduce bureaucracy and enable our advisers to thrive. Our substantial recruiting efforts are illustrated by the fact that over the past five years, we have recruited nearly 670 financial advisers with cumulative trailing 12-month production of approximately $430 million. I would also highlight that year-to-date, we've increased the number of recruited advisers by 34%. As I mentioned earlier, a vital component to our recruiting strategy has been the adviser friendly culture at Stifel as well as the industry-leading level of service we provide. This strategy has been validated by the growth in the number of our advisers and our number one ranking in the most recent J.D. Power survey of overall employee adviser satisfaction. This level of recognition has resulted in increased inbound calls from potential recruits. And as I look out over the next few quarters, I anticipate that we will see continued strength in recruiting. So the bottom line is that our Global Wealth Management business continues to be a meaningful growth driver despite more challenging market conditions for our overall business. While we remain very well positioned to capitalize on the eventual rebound in investment banking, our growth in wealth management will continue to enable Stifel to generate relatively stable returns. Now let me turn the call over to Jim Marischen to discuss our most recent quarterly results.

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 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 cash sorting activity, we project net interest income in the fourth quarter to be in a range of $270 million to $280 million. Our credit metrics and reserve profile remained strong. The non-performing asset ratio stands at 17 basis points and charge-offs were essentially zero. Our credit loss provision totaled $10 million for the quarter, and our consolidated allowance to total loans ratio was 85 basis points. I would reiterate what I said last quarter that only 1% of our loan portfolio is comprised of office CRE exposures or only nine loans, which are primarily Class A space with average LTVs of approximately 44%. Lastly, our balance sheet continues to be well capitalized. Tier 1 leverage capital decreased 30 basis points sequentially to 10.8%, even when incorporating the unrealized losses in our bond portfolio, our Tier 1 capital ratio remained strong at 10.2%. On the next slide, I'll discuss our Institutional Group. Total revenue for the segment was $257 million in the third quarter. Firm-wide investment banking revenue totaled $147 million, as a result, we're impacted by both lower capital raising revenue and the continued delays in M&A closings. Advisory revenue was $97 million, which represented an increase of 11% sequentially. Although, this remains a difficult M&A environment, we've seen some signs of life in industry-wide announcements and our pipelines have improved when we ended the second quarter. That being said, the timing of that improvement will very much be market dependent. Equity revenues totaled $68 million in the quarter as an increase in transactional revenue was offset by lower underwriting activity. Equity transactional revenue totaled $47 million up modestly, both sequentially and year-on-year, which compares favorably to modest declines in industry-wide trading volumes for both periods as we continue to see traction on our electronic offerings as well as strong engagement with our high touch trading and best-in-class research. Fixed income generated net revenue of $92 million in the quarter as lower public finance activity offset relatively flat transactional revenue compared to the second quarter. We continue to be a leader in the municipal underwriting business, as we rank number one in the number of negotiated transactions as our market share was nearly 14% for the first three quarters of the year. On the next slide, we go through expenses. Our comp to revenue ratio in the third quarter was 58%, which was in line with our forecast for the second half of the year. Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $302 million. Our non-comp OpEx as a percentage of revenue was 28.9%. Excluding the legal charges we referenced earlier, our non-comp OpEx as a percentage of revenue totaled 22.6%. Effective tax rate during the quarter came in at 37.7%. Again, the higher tax rate was primarily due to the non-deductibility of legal expenses. Before I turn the call back over to Ron, let me discuss our capital position. We have approximately $300 million of excess capital based on a 10% Tier 1 leverage target. Additionally, we continue to generate a substantial amount of excess cash as illustrated by our annualized year-to-date net income of $450 million. We remain focused on generating strong risk-adjusted returns when deploying capital, and we've done this through reinvesting in the business, making acquisitions as well as through share repurchases. Given the uncertainty in the market and our discounted valuation, so far this year, we have primarily deployed excess capital through share repurchases. In the third quarter, we repurchased 1.9 million shares. I'd note that through three quarters in 2023, we've deployed more capital into share repurchases than in any of the past five full years. Absent any assumption for additional share repurchases and assuming a stable stock price, we expect the fourth quarter fully diluted share count to be 111.8 million shares. And with that, I'll turn the call back over to Ron.

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 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 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 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. And we now go to our first line from Steven Chubak with Wolfe Research. Please proceed.

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 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.

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 than 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 solace 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 about $100 million, you're talking about equity revenue. We priced an IPO last night, the 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.

Starting with the overall loan book, we feel quite positive. The portfolio declined by approximately $140 million to $150 million this quarter, primarily in fund banking; however, the vast majority, over 70%, consists of mortgage, fund banking, SBLs, and CRE, totaling only $1.5 billion. The reserves did increase, and we are monitoring that area, but it represents a relatively minor exposure for us. In the broader context of our portfolio size, a $10 million provision is not something we consider a concerning trend. Non-performing loans are under $40 million, with past-due loans at $16 million. Overall, we are confident in the bank's credit profile.

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?

At a high level, the inflows and outflows within the sweep program can vary significantly from day to day. Recently, we experienced a substantial outflow on the last day of the quarter, which explains the difference between those two dates. As I mentioned earlier, the sweep program and the decline we've seen in it during the first month of the fourth quarter have closely followed the decline seen in the third quarter. We have not observed any increase there; it was just some variability over a few specific days.

I believe that mid-single digit growth is a reasonable projection for this quarter. Regarding our recruiting pipeline, I am particularly encouraged by the quality of candidates we're attracting, as we now have larger teams engaging with us, which was not the case before. The consistency across accounts, whether they are related to sweep or smart rate, seems unchanged. However, I have noticed that our short-term cash obligations are nearing $10 billion. When discussing cash sorting, it’s important to recognize that this isn't just about the differentiation between sweep and smart rate; rather, it's about how client assets are allocated on our balance sheet. The capital isn't leaving; it’s simply being redistributed geographically among our resources. Jim, do you have anything to add?

I think you covered it.

Good morning. Thank you for answering my questions. I wanted to begin by noting that the credit, although it represents a small percentage of assets and loans, increased by more than three times this quarter. Could you explain what contributed to that growth? Also, could you provide some insight into the outlook? 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.

I believe that you'll start hearing terms like term premium, and it's not just about short-term rates or the 10-year rate. The overall interest rate environment certainly influences activity and confidence. There’s considerable disagreement among experts about whether short-term rates will reach 6% or drop to 4%, and this uncertainty is dampening activity. As someone active in the marketplace, I can attest to this; we used to complete two to three deals per year for nearly 19 years, but we haven't done any in the last two years. If you recall, there was a time when the forward curve indicated that the first cut in short-term rates would be in December, which was not too long ago, but that prediction has shifted. While I won't attempt to forecast when the markets will turn, I want to emphasize that we've built a strong franchise and are committed to maintaining it. We believe that when the markets do improve, we will capture our fair share of business, but I can't speculate on when that will happen.

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. As I mentioned, we did price an IPO last night that used to be more common. However, that situation was perhaps unique in itself. Overall, I think the environment has remained quite consistent. 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.