Good day, and welcome to the Stifel Financial Second Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would 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 second 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. I will now turn the call over to our Chairman and CEO, Ron Kruszewski. Ron?

Thanks, Joel. Good morning. Thanks to everyone for taking the time to listen to our second quarter 2024 earnings conference call. I'm pleased to be with my partners here this morning in New York and look forward to seeing them as well. Stifel's strong results in the second quarter reflected our operating leverage as market conditions improved, particularly in our Institutional business. Stifel's second quarter net revenue totaled $1.22 billion, up 16% from 2023 and represents the second best quarter in our history. All revenue line items showed improvement, except for our predicted decline in net interest income. Commissions and principal transactions increased 24% as a result of stronger client activity levels in both Wealth Management and our Institutional Growth. Investment Banking increased 40% as advisory revenue was up 50% and capital raising growth of 29%. Record asset management revenue was up 19%, reflecting organic growth and market appreciation. Net interest income declined by $40 million or 14%. However, although NII decreased both quarterly and in the first half of the year, the declines were within our guidance. The efficiency of our diversified business model is illustrated by our second quarter pretax margin of 21%, operating earnings per share of $1.60, which was a 33% increase from the prior year, as well as an annualized return on tangible common equity of 22%. We generated record first half net revenue of nearly $2.4 billion, an increase of 10% as improving institutional revenue more than offset the predicted decline in NII. Our consistent growth and significant cash generation also gives us increased financial flexibility. This is highlighted by our recent retirement of $500 million in Senior Notes. We raised the $500 million 10 years ago to support our bank growth strategy. However, our bank is now of the size and scale that it can more than fund its own growth and therefore, in the current rate environment, we felt that retiring the debt makes sense financially. Retirement of these notes not only reduces our long-term liability, but also eliminates $21 million in annual interest expense. While comparison to the prior year are informative, we also like to review our results next to consensus estimates, which we do on Slide 2. Our EPS of $1.60 was $0.06 higher than the consensus estimate as net revenue came in above expectations by $34 million. Looking at the specific line items that drove our earnings beat. First, transactional revenue came in $14 million above estimates, primarily driven by fixed income. Investment Banking came in $10 million above consensus on stronger advisory revenue. I'd also note that underwriting revenue was stronger than consensus than the environment for capital raising has improved. The only revenue item that we fell short of consensus estimates was net interest income. However, NII still came within our guidance range. We stated last quarter that we believe NII may have hit a low point, and the modest incremental decline in the second quarter was the result of higher net interest margin, which I note is positive, but this was more than offset by a slight decline in interest-earning assets. On the expense side, we were essentially in line with consensus as our compensation ratio was 58%, the same as consensus, while non-compensation operating expenses totaled $260 million, $1 million above consensus. Review Slide 3 in recent earnings announcements to illustrate the benefits of our complementary businesses in various markets. Over the past five years, we've been able to offset much of the volatility of our Institutional business with the stability of our fee-based businesses and our increased net interest income. Looking at the most recent three quarters, you can see the rebound in institutional pretax income that has now held counter to the decline in net interest income. Putting this into context, in the first half of the year, our pretax income is up $58 million, as the improvement in institutional margins and growth in PCG revenues has more than offset the $85 million decline in NII. As we look forward, we expect the continued improvement in Wealth Management and Institutional revenue will help. Additionally, stable net interest income achieved by higher interest-earning assets should offset incremental cash sorting and result in higher pretax margins and return on tangible common equity. I know there are a lot of questions on sweep cash and advisory accounts for all firms. While Jim will address some of the specifics on how we view this at Stifel. Let me just state that Stifel anticipated and prepared for this rate cycle, both on the asset side of our balance sheet as well as offering clients options for savings accounts, primarily our Smart Rate. As such, we do not see a material impact relating to this matter. And to underscore this point, we are not changing our NII guidance for the remainder of this year. Before I turn the call over to Jim to discuss our financial results, I want to talk a little bit more about the long-term success of our Global Wealth Management business. As I mentioned earlier, for the second consecutive year, Stifel was ranked #1 in the employee segment of the J.D. Power U.S. Financial Advisor Satisfaction Study. In addition to ranking first overall, Stifel is also ranked #1 in three of six categories. Leadership and culture, products and marketing, and operational support. The results of this survey further prove our core values of respecting our advisers and continually improving the adviser experience, which in turn leads to better client experience. Focusing on these values enables Stifel to continually attract and retain high-quality advisers to our platform, provide exceptional client service, and has been a foundation to our history of strong revenue growth. And with that, our CFO, Jim Marischen will discuss our most recent quarter results.

Thanks, Ron. Good morning, everyone. Looking at the details of our second quarter results on Slide 5. Our quarterly net revenue of over $1.2 billion was up 16% year-on-year. For the first half of the year, revenue of $2.38 billion was up 10%. The increase was driven by stronger client facilitation, advisory, trading and underwriting revenue, which was partially offset by lower net interest income. Our EPS in the second quarter was up 33% from the prior year and up 19% year-to-date. 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 $801 million, and our pretax margins were more than 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 42 advisers; this included 14 experienced advisers with trailing 12-month production of $12.2 million. We ended the quarter with record fee-based assets and total client assets of $180 billion and $474 billion, respectively. The sequential increases were due to higher equity markets and organic growth as our net new assets grew in the low-single-digits. We highlight our longer-term growth drivers for our Wealth Management business on Slide 7. We continue to be on track for our 22nd consecutive year of record revenue, our Global Wealth Management business as our recurring revenues continue to comprise the vast majority of this segment's revenue. Our recruiting continues to be solid as our commitment to the highest level of service for our advisers was once again recognized by J.D. Power. On the next slide, I'll discuss our Institutional Group where the improvement in market conditions that began towards the end of 2023 continued. Total revenue for the segment was $391 million in the quarter, up 41% year-on-year and year-to-date. Revenue of $742 million was up 22%, led by strong increases in capital raising and transactional revenue. Firmwide, Investment Banking revenue totaled $233 million, while both capital raising and advisory revenue increased sequentially and year-on-year. As expected, underwriting revenue continues to lead the rebound in investment banking. Equity underwriting of $48 million was up 19% from the first quarter and 59% over the same period in 2023 as health care and financials were strong contributors. Fixed income underwriting revenue increased 8% from 2Q '23 as improved book finance revenue helped to offset lower taxable issuance. We continue to be a leader in the municipal underwriting business as we were ranked #1 in the number of negotiated transactions with nearly 15% market share. Advisory revenue was $131 million and was our strongest quarter since the first quarter in 2023 as we had solid results in our financials, gaming, and industrial verticals. Equity transactional revenue totaled $53 million, up 16% from the second quarter of 2023. We continue to gain traction in our electronic offerings as well as strong engagement with our high-touch trading and best-in-class research. Fixed income transactional revenue of $107 million was up 58% year-on-year as our Rate business continues to rebound from the very slow 2023, and activity in our Corporate Debt business remains solid. Additionally, we benefited from increased trading gains during the quarter. On Slide 9, I'll discuss our bank results and the recent industry focus on advisory sweep deposits. Net interest income of $251 million was in the lower half of our range as average interest-earning asset levels declined by nearly $1 billion and more than offset the improvement in our bank NIM. The primary driver of the decline in interest-earning assets was a reduction in cash on our balance sheet. The increase in NIM was a result of increased loan yields and a decline in deposit costs. Given our expectations for modest cash sorting and higher interest-earning assets, as well as the interest savings obtained by paying off the $500 million senior debt, we expect that NII in the third quarter will be in the $250 million to $260 million range. Our credit metrics and reserve profile remained strong. The nonperforming asset ratio stands at 29 basis points. Our credit loss provision totaled $3 million for the quarter, and our consolidated allowance to total loans ratio was 88 basis points, which was impacted by the growth in loan balances and fund banking, mortgage and C&I. Our balance sheet continues to be well-capitalized. Tier 1 leverage capital increased 50 basis points sequentially to 11.1%. And also note that the unrealized losses in our bond portfolio continue to improve, as credit spreads tightened in the CLO market. I also want to touch on the recent concerns regarding the potential for higher sweep deposit costs on advisory accounts. This has drawn significant interest as to the impact on the industry, and consequently, we felt it was important to address this issue as it relates to Stifel. Let me start by saying that Stifel has been at the forefront of industry trends for much of the cash sorting cycle. Our Smart Rate product was introduced before rates began to rise and offers clients a competitive savings account, which resulted in the retention of client cash within Stifel. In addition, we positioned our balance sheet to insulate us from interest rate risk and provide acceptable risk-adjusted net interest margin. Before the offset of rate increases, Stifel sweep deposits totaled approximately $28 billion. Today, Stifel has approximately $10 billion in sweep deposits and $16 billion of Smart Rate deposits. Said another way, 63% of Stifel's pre-rate cycle sweep deposits have sorted into Smart Rate. Additionally, I'd point to the growth in our ticketed money market fund and short-term treasury balances to highlight the additional cash alternatives that our advisers utilize to generate higher yields for their clients. Generally speaking, sweep deposits represent operational cash, as the average firm-wide balance per account is roughly $11,000. On the other hand, Smart Rate is more representative of investment cash, with an average account balance of $190,000. In terms of the sweep deposits within our advisory platform, the average deposit size is only $9,000 and represents 1.7% of fee-based assets, which we disclosed in our slide deck. We believe that given the relatively low percentage of sweep deposits maintained in our advisory accounts as compared to total fee-based assets in those accounts, our cash sweep product is being utilized as designed and intended, primarily as a source of account liquidity to pay fees to meet short-term cash needs. Consequently, we believe that through our focused efforts to provide higher-yielding alternatives to our clients, we have mitigated much of the potential impact of this issue and incremental risk to Stifel are not material. To illustrate this, we are not changing our net interest income guidance. On the next slide, we go through expenses. The comp-to-revenue ratio in the second quarter was 58%, which was again at the high end of our full-year guidance that we gave at the beginning of the year. I would note that during the quarter, we incurred nearly $10 million of severance costs tied to our efficiency initiatives in our international operations. Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $248 million. Non-comp operating expenses as a percentage of revenue were 20.4%. The effective tax rate during the quarter came in at 25.8%. Before I turn the call back over to Ron, let me discuss our capital position. On last quarter's call, we indicated the possibility of retiring $500 million of Senior Notes that were maturing in July, given the growth in our bank and its ability to fund its growth. Last week, we paid off this debt. Given our conservative approach and the fact that this was the first time we've retired Senior Notes, we reduced our buyback activity in the quarter to ensure we had more than ample levels of excess liquidity. As a result, our share repurchases of 229,000 shares in the quarter was down significantly from the prior quarter. As of the end of the second quarter, we have approximately 11 million shares remaining on our authorization. We have more than $415 million of excess capital based on a 10% Tier 1 leverage target. Additionally, we continue to generate substantial amounts of excess cash as illustrated by our second quarter GAAP net income of $156 million. We remain focused on generating strong risk-adjusted returns when deploying capital and have done this through reinvesting in the business, making acquisitions as well as through share repurchases. Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the third-quarter fully diluted share count to be 111 million shares. And with that, let me turn the call back over to Ron.

Thanks, Jim. Let me conclude by talking about how we see the remainder of the year playing out and why we are optimistic about the future. Our annualized results for the first half of the year put us above the midpoint of our guidance and roughly in line with estimates for the full year. As I said last quarter, the outlook for the remainder of the year is certainly not without its risks. However, given the current trends we are seeing in the market and the operating leverage in our business, we believe that we are well-positioned for a strong second half. Additionally, as we exit 2024, we believe that we will be on a trajectory to reach our near-term milestones of over $5 billion in annual revenue and $8 per share, as well as our long-term milestone of $1 trillion in client assets and $10 billion in annual revenue. We have not changed our revenue guidance for 2024. But as you can see from the arrows on the right side of the slide, we believe that all of our revenue line items will at least match, if not exceed our first half results, as market conditions continue to improve. On the transactional side, Wealth Management is resilient, and our Rates business continues to improve as banks are seeing more opportunities to trade their securities portfolio. In investment banking, our results so far this year have been driven by increased underwriting activities, both in equity and fixed income. As we look at the second half of the year, we anticipate continued solid results from capital raising, but also increased performance from advisory as activity levels continue to improve and closings pick up. Given that most of our Asset Management revenues are priced off trailing quarter asset levels, we've essentially locked in three quarters of revenue for 2024. In terms of net interest income, as Jim articulated, we're maintaining our previous guidance for NII. On the expense side, we have narrowed the range for our compensation ratio guidance to reflect the conservatism that we've had in the first half of the year. While we are optimistic for the second half, we are still building back to our 2021 revenue levels, particularly in our Institutional segment. As such, we've tightened our guidance to 57.5% to 58%, which still reflects our optimism for stronger revenue results in the second half of the year. In addition to our expectation for a strong second half, we should see some benefit from some of the efficiency initiatives we have implemented. As Jim mentioned, we took a $10 million severance charge in the quarter as we rightsized our international operations. While these decisions are never easy, we believe it puts our business on a stronger path towards improved profitability without impacting our revenue growth. Let me finish by saying that I am optimistic about the future of our business, really as much as I've ever been. We've built a world-class diversified business that has proven its ability to generate strong returns despite ever-changing market conditions. Investments we've made have resulted in increased operating leverage and the growth of our bank, and asset management revenue has added to the stability of our results. Given the excess capital we generate, we'll continue to reinvest in our business and return capital to our shareholders with, as always, a focus on high risk-adjusted returns. With that, operator, please open up the lines for questions.

Thank you. We can take our first question from Devin Ryan with Citizens JMP.

Great, good morning, Ron, Victor, Jim and Jim.

Hi, Devin.

Hey, first question, just on some of the cash sorting commentary, Ron. You spoke about the potential for more cash sorting. And I'm just curious, do you think we're close to the end with transactional cash at such low levels and a little flavor on the difference between brokerage and fee-based would be great? And then also, I really appreciate the comments about the wire house moves over the past couple of weeks. I know you guys were probably getting questions there. Why do you think they did that? Was it a competitive move? Does it have any influence on Stifel at all?

We will address your last question first. I'm observing what others are doing, but honestly, I'm not entirely sure about their actions or motivations. I see comments indicating that not all advisory cash qualifies for higher rates, which suggests that their transactional or operational cash is part of the platform and not eligible. I've noticed other institutions are raising rates slightly, but not to the high yield levels. There are many uncertainties, and while I don't have all the answers, I can share what we have been doing. Generally, Stifel has been performing better. Our sweep deposits don’t have a rate of 0.01, while many institutions still pay very low rates on sweep deposits. This situation may be causing some pressure, as people are reacting to such low rates. Clients require options for higher cash yields, and we need to manage our business by offering operational transactional cash in both brokerage and advisory. We believe the products we've implemented have effectively addressed what has recently become a topic of concern. I think we've handled this situation appropriately even before it gained attention. When looking at recent data, a $9,000 average account represents operational cash that fluctuates with the account, moving around due to events like bond maturities, sweeps, and reallocations. These are typical levels, and I would characterize them as low levels of transactional cash, given the current rate environment. The metrics for brokerage and advisory are quite similar. I hope this addresses your questions, albeit in reverse order, but that's our perspective.

Yes, thank you, Ron. That's really helpful. A question for Jim, just on the balance sheet and just thinking about just potential growth in the balance sheet and appetite for new loans and maybe where you guys would want to lean in? It would just be great to get a bit of an update on what you're seeing in the market spreads and then just the ability to expand the balance sheet into that market? Thanks.

Yes. No. So obviously, we have the capacity to generate additional loans on our balance sheet. I think if you look at this quarter, we grew loans a couple of hundred million dollars. We grew investments in the normal categories we've talked about over the last several quarters. If you look at the growth in fund banking, you look at the growth at mortgage, you look at the growth in the CLO portfolio. All those categories continue to be attractive risk-adjusted returns for us. And obviously, given the capacity to fund that with our liquidity as well as the excess capital we're carrying, I think we're going to continue to see growth there. If you look at the current quarter, most of that growth didn't result in pure asset numbers coming up because we were carrying over $2 million of cash. So most of that was reallocating from cash into loans. As you see going forward, as we bring on more deposits on balance sheet, that incremental pickup will be even more as we grow the loan portfolio as well as CLOs.

Yes. In response to your earlier question, I realize there was a part I missed. For nearly two and a half years, we’ve maintained our commitment to limit the growth of our balance sheet. This decision was primarily due to our goal of understanding cash sorting dynamics better and avoiding a situation where we generate loans only to find that our expected net interest margin differs from our projections. Recently, cash sorting concerns have been diminishing, and I believe there is a growing appetite to expand our balance sheet. The likelihood of a rate increase seems significantly diminished based on recent data, although I wouldn’t completely dismiss the possibility. In fact, we anticipate some rate decreases. While September may not see this, the overall stability has given us confidence to add assets in a way that we believe will effectively manage our risk and net interest margin.

It's great color. Thanks so much.

Sure.

Thank you. We'll take our next question from Steven Chubak with Wolfe Research.

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

Good morning.

Good morning.

Yes, I really appreciate the thoughts on the sweep deposit dynamics. Certainly, the topic is at the moment. One of the questions that we've been getting following your remarks is just folks trying to understand the competitiveness of the sweep offering in the context of, I guess, your overall offering to the adviser. Are you confident that deficient sweep yield is not a competitive disadvantage, at least relative to the recent moves at the wires for Stifel? And just to put this issue, hopefully, at least to that for the time being, are you comfortable maintaining sweep pricing that does not expose you to potential regulatory scrutiny?

Again, your last question first, not really sure of the regulatory aspects. We need to recognize, there's a lot of differences. First of all, you've got a broad question that impacts brokerage, nondiscretionary fee-based accounts, discretionary fee-based accounts. The long and the short of it is that we always have a lot of levers that we can pull as it relates to how we manage our platform for our various products. The wire houses, for instance, charge account fees and we don't. And they have had lower interest on, generally speaking than we have. So look, are we competitive? Yes, we're competitive. We have to be competitive. We wouldn't be recruiting people, we wouldn't be getting clients if we're not competitive. So of course, we're competitive. And we'll remain to be competitive. And we offer a competitive product for our clients when you consider all of the things that go into the clients' experience. So we're very, very confident. And this issue has been laser focused on something that we've been laser focused on for the last 2.5 years.

And when you think of the competitiveness of the rates, if you look at some of the news reports from the larger peer that came out yesterday, the idea that they're moving certain accounts up to 2%, we're already offering 2% on our sweep program. And in terms of competitiveness, I think that's indicative of where we were already at. In addition to the number of products we have on our platform, across alternatives, particularly money market mutual funds.

Steven, I want to clarify that we do not have the issue of being a platform offering our services to other parties. Some might argue that there is no pressure on rates in that scenario, but there is indeed pressure, as you cannot rely solely on low interest rates to subsidize platform fees. I mention this because it seems to have been overlooked in some analyses, and it's important to note that we are not facing that challenge.

Understood. Okay. Well, I'm sure others are going to have questions on this topic. So I'm just going to switch gears to Slide 12, really helpful mark-to-market of the guidance shows consensus revenues or at least near the higher end of the range, the NII guidance unchanged, the comp ratio also near the higher end. I was hoping you could just speak to the drivers of some upward pressure on comp. Is it simply due to mix? Are there other factors? And where are we in the journey of some of the COVID recruiting packages potentially rolling off in the coming years?

COVID recruiting packages? Yes, just folks you hired during 2020, '21 where you were more aggressive in terms of lenient banker recruitment? I'm sorry, I thought you were referring to Wealth Management. We've reviewed our recruiting packages, and I don't think we implemented anything specific for that. We certainly did not have a program that outlines that. Looking at 2021, the opportunity lies in our platform, which is capable of generating significantly more revenue. We achieved $2.2 billion in that business and haven't made significant changes to our staffing. This also addresses your second question about our tighter revenue forecast; we are on track with our expectations. We are working to recover from a drop in revenue, going from $2.2 billion to $1.2 billion. If you examine the annualized rates, we're making progress on this recovery, though we don’t expect it to fully happen this year. I don't share the optimistic view that this will result in a rapid recovery for this part of the business. Thus, we are cautiously narrowing our revenue range to reflect our expectations for the year. Overall, I view this as a positive situation. We are sustaining our platform and generating high returns on tangible capital equity through our investments, while maintaining a realistic outlook on the business's potential for improvement.

I'd add to that a little bit. Obviously, NII plays a big role in the comp leverage, either up or down. We were able to hold a 58% comp revenue last year in a challenging environment for our institutional group, but upward-sloping NII results. This year, for the first six months, NII is down $85 million year-to-date. So you think about that over the first six months, that equates to about two points of comp margin that we got absorbed and how we absorbed it. Some of that is the rebound and the decrease in subsidy in other businesses. And so there's obviously a lot of moving factors here, but I think I'd point to the stability of a diversified business model and how we're able to not see material swings up in a number of different business environments.

Thanks for that. I'm going to squeeze in one more quick question. What caused the decrease in deposit costs from quarter to quarter? It's encouraging to see, but I found it a bit difficult to reconcile given the decline in sweep deposits.

Yes. It was not related to sweep. It was all related to ICS-type deposits, reciprocal-type deposits that are higher-costing deposits that we moved off-balance sheet. We basically used more sweep deposits in a quarter. And so it's a couple of basis points of a change, but that's what drove that fluctuation on a sequential basis.

We have that flexibility to do that. So...

Understood. Well, thanks for taking my questions.

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

Hello, Alex.

Hey guys. Hello, Ron, and good morning everybody. So a couple of more questions on the, so staying on the topic of the weeks or the week, I guess. First, just a clarification. So roughly the $3 billion of advisory sweep cash that you pointed to in the deck, you're saying you're already paying a 2% rate on that. And ultimately, there's no plans to change that. But based on kind of regulatory dynamics and kind of how that evolves, your thinking on that might evolve as well? Did I...

Let me stop you there, Alex. I want to clarify what you heard because that's not what I intended to convey. What I meant is that we consider a portion of our sweep deposits as operational cash with average balances of $9,000. Our definition of operational cash is included in our typical sweep tiering, which is our standard sweep product. The highest rate in that tier is 2%, but not every balance qualifies for that rate. I just want to be clear on that. We are already at the rates some people are hoping to achieve. Our sweep deposit offers up to 2% for all balances, including growth.

Got it. Okay. That's helpful clarification. So and I guess just building on that. So while the balances are obviously small and they are operational in nature, as you described it. How does that insulate you guys and the industry from the fiduciary obligation under Reg BI, right? Because operationally, it's having this transactional cash in smart rate deposit or money market fund, is that different? Does that preclude the customer from performing some of their normal investment activity? I'm just trying to understand that, like is there a red line between small operational sweep under fiduciary or not, right? And whether or not that could still fall under the Reg BI.

I am cautious about making regulatory interpretation statements. It's important to have a clear understanding of our platform. Most advisory platforms typically allocate 2% to 3% into cash to cover fees and maintain operational cash. This is a reasonable aspect of our platform. As long as this is clear, it is simply how we operate, and there is nothing wrong with it. There is no law requiring you to offer the highest rates or the lowest fees. The premise under Reg BI is not about imposing the highest fees; we need to approach this reasonably. Our main focus is on being competitive, offering a product that allows us to grow client assets and provides clients with choices. If we fail to offer a competitive product, clients will leave, and advisers will be dissatisfied and also depart. Overall, we are very comfortable with our position.

I got you. Great. Okay. Thank you for that. Let's maybe move on. Maybe just talk a little bit about the recruiting environment. I know it's been a bit tougher for the industry as a whole over the last couple of quarters with perhaps more competition from some of the higher being kind of providers out there. If this whole cash dynamic results in more pressure relative to some of the more aggressively priced packages, particularly from some of the private firms, I guess. What opportunity, if at all, do you see for Stifel to kind of lean into that market either from aggressively recruiting or perhaps a bit more or doing something inorganically?

Well, look, there's always dynamics that impact recruiting. They're ever-changing and always there. This is just one and it will change. Just broadly speaking, I think that I've said for a long time that part of the competition was the migration from employee adviser full service to independent, that there was a lot of competition because in my view, you were supplementing from a platform perspective, you could supplement higher recruiting costs and maybe ongoing compensation by subsidizing it with very low options for client cash. As that dynamic changes, which I think will change from this very low 0.01 to 0.4 for that platform. That will change the economics on that side of the industry, which we view will be beneficial to us competitively.

Great. Thanks so much.

Thank you. And we'll take our next question from Bill Katz with TD Cowen.

Thank you very much. I have one more question regarding cash sweep, and I apologize if this seems basic. When considering the cash outside of transactional cash and the rest of the sweep cash in the fiduciary account, how do the yields compare? It makes sense that cash yields around 2% if it's kept idle, but with rates around 5%, and taking into account options like Smart Rate and fixed income, does this create upward pressure on third-party sweep yields or the sweep that gets deposited into the bank? I'm just trying to understand that better.

Bill, we implemented products to promote cash sorting and provide various options. We've observed that 63% of our pre-rate cycle sweep deposits have shifted to higher-yield savings, and there's been a significant rise in short-term treasuries and an increase in cash in money funds, which are all part of the competitive landscape. Looking ahead, if we decide to raise yields, our goal will be to attract more deposits that we can utilize on the asset side, given our large liquidity pool from deposits that are off balance sheet. One of the effects of raising rates will be to bring more cash onto our platform, assuming everything else remains the same. Regarding the regulatory aspects, I can't fully understand what's happening behind the scenes at some firms that work with us. Nevertheless, we believe we offer a competitive product on a platform that is fair when considering all associated costs, and I am confident in that. Answering your question is challenging. It’s not straightforward; it’s quite complex with many layers, which I hope to express. I have read that experienced management teams know how to handle such complexities, and I believe we are one of those teams. We have a long history of navigating various market conditions and changes and have managed to stay ahead of many challenges, and I believe we are in that position today.

That's very helpful. And then maybe one for Jim. Just in terms of capital priorities, now that debt is behind you, your Tier 1 leverage ratio and capital ratios are very good. How should we think about maybe the pace of buyback from here? Maybe you could put that in percentage of maybe payout of free cash flow and/or any priorities between de novo versus inorganic opportunities?

Yes. So as we mentioned on the call, we have $415 million of excess capital today. So the capacity has increased in terms of our ability to deploy capital in terms of buyback. That said, the buyback is going to be price dependent, and it will not be linear. Obviously, we've talked a little bit about allocating some capital to bank growth within the loan portfolio. A lot of that can be done with just the capital generated in the bank. And so we don't have a formulaic process in terms of payouts or in terms of price. We will be opportunistic. And you may see capital increase some over time, but we will be active in the buyback at some point in the future.

Thank you.

Thank you. We'll take our next question from Brennan Hawken with UBS.

Good morning. Thanks for taking my question. I'm going to take the same option that all my peers did and have my first question on sweeps. And Ron, though, I got to give you props two years ago, we spoke about this, and you actually flagged the risk about sweep and the potential for some risk here. So tip of the cap there first. But on to my question. Sorry...

No, thank you. We discussed this previously, and I would like to emphasize that we not only talked about it, but we also implemented products to address it. Thank you for recalling that.

Yes, you mentioned the Smart Rate offering, and it's indeed an attractive option for your clients, as shown by the uptake rates. However, my understanding is that Smart Rate cannot be held in advisory accounts and functions similarly to purchasing a money market fund. I'm having difficulty understanding how this addresses the issue at hand, especially since, aside from the one mentioned in the press report, no changes have been made yet. It appears that other firms have transitioned all advisory accounts to a more attractive rate. There seems to be a clear distinction between brokerage and advisory services, which raises a fiduciary concern. In an employee model, the firm acts as a fiduciary, so how can you assert that the firm's actions prioritize the client's interests over its own, rather than moving toward a similar approach as those other firms regarding the management of cash in light of fiduciary responsibilities?

You're mixing up the fiduciary obligation with the idea of having the lowest possible costs everywhere. It's reasonable for us to have an obligation, and we fulfill that obligation. However, taking this to extremes regarding fees and other factors isn't necessary. The platform needs to be clearly disclosed. I'm not certain if all advisory cash has been adjusted. From what I've seen, much of the advisory cash isn't eligible for the savings, which indicates it's actually a reserve for operations and transactions, as the industry has typically functioned. I'm unsure how they've managed that. Additionally, there were reports suggesting a large firm wasn't handling it appropriately. I'm merely trying to grasp the competitive landscape to ensure we remain competitive, and I believe we are. Regarding Smart Rate, which isn’t part of an advisory account, it's surprising some regulatory aspects prevent us from offering it in advisory accounts, even though we would like to. The result is that those funds are in ticked money funds instead. If we had the choice, we would definitely offer Smart Rate to our advisory accounts, but due to some nonsensical rules, we can't, despite our fiduciary obligation.

And the ticketed money funds are yielding roughly equivalent of what Smart Rate is. And what's interesting is the balance of ticketed money funds and advisory accounts is almost identical to the balance of advisory sweep cash accounts. So you can see some of that cash is already sorted over there, as Ron indicated.

Thank you to everyone asking questions; this is the first question and likely will be on every call. I encourage you to consider the different aspects of this situation, including the platform, fiduciary, and brokerage sides, all of which have implications. We are managing two out of those three areas and believe we have done so effectively and competitively.

Great. But I fully appreciate the situation is very fluid, and we're getting data points very frequently. So thanks for providing your perspective on that. Shifting gears a little bit, I think, Jim, you had indicated that expectation for share count in the third quarter will be roughly flat with the end of period at 111 million. Does that mean that we should expect maybe limited buybacks in the third quarter even though the debt is already retired maybe you want to rebuild cash? Or am I misunderstanding?

What we included in our prepared remarks assumes no change in stock price and no additional repurchases. That is not indicating what our plans are for repurchases. We've not said anything specific about what the buyback would look like. That's just to give you an idea of what the number would be absent those two fluctuations. And you could put your assumption in.

Right. Jim gives you the same number he gives me, okay? He said that here's our base now, an increase in the share price will increase our diluted shares outside, decrease and then layer your stock purchases on it. So you can do the same thing that we do, okay? We start with a base of 111 million and the two variables that will impact that base our share repurchases and stock prices.

Thank you. Before we take our next question, I want to remind you that our next question comes from Chris Allen with Citi.

Good morning, everyone. How is it going on? Wanted to switch gears a little bit. I think we've talked about deposit rates enough at this point. Maybe if you could talk about the outlook for growth from here. You noted that cash sorting the impact there is declining. Just wondering if there's any other constraining factors on loan growth from here? I know you've talked about in the past about aligning loans with deposit relationships with clients and kind of what's the appetite for loan growth going forward?

I believe the answer is no. We have always experienced strong demand for loans. One of the limiting factors has been our foundational funding sources, like deposits and cash sorting, along with uncertainties around the forward yield curve and its inversion. A couple of years ago, we decided to restrict balance sheet growth until we had a clearer understanding of how to properly manage assets and funding liabilities. We are now moving past that stage and can see how to grow our balance sheet in a profitable and risk-adjusted manner. Today, I can say we are in a position to grow. The primary constraint is that the entire industry has been caught in a cycle of managing balance sheets, lending on a spread basis to various clients, often only based on that relationship, while ensuring we're generating rental income from deposits. Although we participated in that to some extent, we are not solely a spread lender. We take a broader view when evaluating what to add to our balance sheet, considering multiple aspects of the relationship, including areas like wealth management, treasury, and banking. This is how we approach our internal discussions. Despite this, there is plenty of opportunity for us to grow. The challenge lies in becoming comfortable with the overall economic environment we are entering.

And when you think of some of those relationships, particularly with venture lending, fund banking, those produce additional deposits, as Ron talked about. Last quarter, those were up probably another $200 million. And the pace of that has picked up already in the third quarter. So we're seeing some of the fruits of the investments we've made there, and that's going to continue to provide another source of liquidity to fund overall balance sheet growth.

And another one, just on a different topic. Just on FIC trading, any color on the marks during the quarter? And how are you thinking about the environment moving forward? We know credit trading activity slowed down a little bit, but rate trading outlook continues to look pretty robust from here.

I believe that much of our rate's rating is linked to bank balance sheets, and we observe that activity is increasing for the same reasons I mentioned regarding the asset side, where we need to anticipate what the future environment might look like to guide our decisions. This is directly tied to what banks are doing with their portfolios as they work to understand how to adjust their holdings. We provide advice on that, supporting strategy, interest rate risk management, and portfolio positioning, including stress testing against various scenarios. In 2023, many were cautious due to deposit outflows and uncertainty in the market, which resulted in limited trading activity. However, we are now seeing an uptick in that trend, which should continue unless there is a significant economic shift. Overall, the outlook for that business is positive.

For sure. However, I want to emphasize that we typically observe some seasonality in the third quarter, with a slowdown during that period, followed by a recovery in the fourth quarter. So as you plan your future expectations, please consider this factor. Additionally, we had some gains during the quarter that contributed to the results in the second quarter as well. Just keep these points in mind as you look ahead for the remainder of the year.

I always count on my CFO to put quarterly parameters on my overall viewpoint of the marketplace.

Thank you. It appears we have no further questions at this time. Mr. Kruszewski, I will turn the conference back to you for any additional or closing remarks.

Well, thank you for pronouncing my name perfectly. And what I would say is we're excited about the remainder of the year where we believe that as uncertainty comes off the table, the markets will continue to improve. We still see exit velocity into 2025. I think we are on our way to both our mid and long-term milestones that we've talked about. And I look forward to reporting back to you after the third quarter this year. And thank you, everyone, for taking the time to listen to us, and we will sign off. Thank you.

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