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

Thanks, operator. I'd like to welcome everyone to Stifel Financial's Third Quarter 2024 Earnings Conference Call. I'm joined on the call today by our Chairman and CEO, Ron Kruszewski; our Co-Presidents, Victor Nesi and Jim Zemlyak; and our CFO, Jim Marischen. Earlier this morning, we issued an earnings release and posted a slide deck and financial supplement to our website, which can be found on the Investor Relations page at www.stifel.com. I would note that some of the numbers we state throughout our presentation are presented on a non-GAAP basis, and I would refer to a reconciliation of GAAP to non-GAAP as disclosed in our press release. I would also remind listeners to refer to our earnings release, financial supplement, and other slide presentations for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material of Stifel Financial Corp and may not be duplicated, reproduced, or rebroadcast without the consent of Stifel Financial. I will now turn the call over to our Chairman and CEO, Ron Kruszewski.

Thanks, Joel. Good morning, and thanks to everyone for taking the time to listen to our Third Quarter 2024 Earnings Conference Call. Looking at our third-quarter results, net revenue of $1.23 billion was the second highest quarterly revenue in our history, up 17% year-on-year. The growth in our business was essentially across the board as follows: Commissions and principal transactions increased by 15% as both Wealth Management and our Institutional Group generated double-digit increases. Investment banking increased 66% as capital raising revenue more than doubled while advisory revenue increased 41%. Record asset management revenue was up 15%, reflecting organic growth and market appreciation. As we noted earlier in the year, we thought net interest income had bottomed, and providing evidence of this in the third quarter, NII increased by 4% and reached the high end of our guidance. I'd also highlight that our sweep deposit balances increased by nearly $370 million, which was the first quarterly increase since the first quarter of 2022, coinciding with the Fed beginning to raise rates. Third quarter earnings per share totaled $1.50, which increased 150% from the same period last year. Both this quarter and last year's third quarter were impacted by legal reserves, which Jim will address in greater detail later in the presentation. Excluding these reserves, earnings per share would have been $1.60 in the third quarter, representing a 36% increase over the adjusted EPS from the third quarter of last year. Our results in the quarter and through the first nine months of the year illustrate the strength of our franchise and our ability to capitalize on the improving market conditions. Year-to-date, we've generated record net revenue of $3.6 billion, up 13%, driven by the continued growth of our Wealth Management franchise, improvement in our Institutional business, and the stabilization of net interest income. It's important to note that we generated strong results in an environment for our institutional business that, while improving, remains below historical norms. Additionally, net revenue increased sequentially in each of the first three quarters of this year, and all of these quarters rank in the top four quarters in our history. Looking forward to the fourth quarter and beyond, we expect the momentum in our business to continue to build, and we believe that there is further upside to our results as the operating environment improves and we capitalize on the investments we've made in our business. On Slide 2, we compare our quarterly results to the Street consensus estimates. Net revenue came in approximately $30 million, or about 2%, above the Street forecast, as all line items except asset management surpassed expectations. Transactional revenue came in slightly above consensus due to stronger wealth management results. Investment banking revenue was 6% ahead of the Street, driven by a higher advisory and fixed-income capital raising. Net interest income was $3 million above the Street estimate and at the high end of our guidance, as net interest margin came in above expectations. Asset management revenue was slightly below the Street, primarily due to lower revenue from third-party cash suite, which Jim will give more detail on later in the presentation. On the expense side, our compensation ratio was 58%, above the Street by 7 basis points as we continue to conservatively accrue throughout 2024. Non-comp expenses, excluding the aforementioned legal reserves, were essentially in line with Street estimates. Turning to Slide 3, we've used this slide a number of times to show how our institutional business and net interest income provide natural hedges to each other. As you can see from the chart, this inverse relationship has provided increased stability to our bottom line over the past five years. That said, we believe we've hit an inflection point in that both line items should grow going forward. Our confidence in this forecast is driven by the current composition of our balance sheet and continued improvement of the capital markets from their recent troughs. In other words, we are entering a period where both net interest income and our institutional business will add to our bottom line. While Jim will give more details on the specifics of our balance sheet, let me just say that today we are relatively insensitive to changes in interest rates and that we believe that in the current environment, deploying excess capital into asset growth provides attractive risk-adjusted returns. As such, we anticipate growing net interest income. Growth in our institutional pre-tax income will be driven by the return of more normalized market conditions and the increased scale of our business. We've seen a substantial improvement in this business in 2024, as pre-tax income of nearly $130 million is up significantly from the modest loss that we had over the same period last year. However, our year-to-date pre-tax margins of 11.5% are well below the 20% we should generate in more normal market conditions, and as such, we see a meaningful upside to this business. There's been a lot of focus on the potential upside that a rebound in our institutional business will generate as the environment improves. While we agree with this analysis, I think it's important to recognize that our Global Wealth Management business has and will continue to be our long-term growth driver. Given our record revenue through the first nine months of the year and our record client asset levels, Global Wealth is likely to reach its 22nd consecutive year of record net revenue. The key to our growth has been both the retention and recruitment of highly productive advisors while providing the products, service, and entrepreneurial culture that drive our advisors’ growth and productivity. Additionally, the investments we made into our platform and service have been validated by Stifel being named the number one Wealth Management firm in terms of Employee Advisor Satisfaction by J.D. Power for the second consecutive year. Looking forward, we will remain focused on our core values of respecting our advisors and continually improving their experience at Stifel as we continue to strive for our target of $1 trillion in client assets. This approach has not only improved our advisor satisfaction levels but, just as importantly, resulted in a better client experience. Now I'll turn the call over to our CFO, Jim Marischen, to discuss our most recent quarter.

Thanks, Ron, and good morning, everyone. Looking at the details of our third quarter results on Slide 5, our quarterly net revenue of $1.23 billion was up 17% year-on-year. Year-to-date, revenue of $3.6 billion was up 13%. Each of our operating line items showed improvement from the same period in 2023 with the exception of NII. Our EPS in the third quarter was up 150% from the prior year and up 43% year-to-date, as higher revenues and lower operating expenses drove the overall improvement. Moving on to our segment results, Global Wealth Management revenue was a record $827 million, and pre-tax margins totaled 37% on record asset management revenues and our highest transactional revenue in nearly three years. As Ron mentioned earlier, asset management revenue came in below analyst estimates due to lower third-party bank sweep balances as we moved more of our lower-cost sweep deposits back into the bank, which positively impacted net interest income. Excluding the impact of the change in third party suites, asset management revenue would have been in line with Street estimates. During the quarter, we added 28 total advisors to our platform. This included 13 experienced advisors with trailing 12-month production of $10.5 million. We ended the quarter with record fee-based assets and total client assets of $191 billion and $496 billion, respectively. The sequential increases were due to higher equity markets and organic growth as net new assets grew in the low-single digits. On Slide 7, I'll discuss our bank results. As Ron mentioned earlier, client cash levels increased during the quarter, and sweep cash balances increased for the first time since the beginning of 2022. While we're not going to say that cash sorting is done, we feel that the trends continue to improve and that we’ll be seeing more cash moving into the Sweep program as interest rates normalize. Net interest income of $260 million was at the high end of our range as average interest-earning asset levels increased by nearly $650 million, and our net interest margin increased by 5 basis points to 3.09%. The primary driver of the increase in interest-earning assets was growth in residential mortgages, C&I, and fund banking loans as well as CLOs. The increase in NIM was the result of increased loan and security yields that more than offset higher deposit costs. Additionally, based on the percentage deposits in our Smart Rate product, we've essentially gotten to a point where we are neutral to 100 basis point rate movement, either up or down. This lack of rate sensitivity, coupled with our expectation for balance sheet growth, should result in stable to growing NII in future quarters. Even with our expectation for another rate cut in the fourth quarter, we expect NII to be in a range of $255 million to $265 million. Our credit metrics and reserve profile remained strong. The non-performing asset ratio stands at 47 basis points. Our credit loss provision totaled $5.3 million for the quarter, and our consolidated allowance to total loans ratio was 83 basis points, which was impacted by growth in loan balances in fund banking and residential mortgages, which are lower-risk loan types that carry lower relative reserves. Moving on to the Institutional Group, total revenue for that segment was $372 million in the quarter, which was up 45% year-on-year. Revenue of $1.11 billion was up 29%, led by strong increases in capital raising and transactional revenue. Firmwide investment banking revenue totaled $243 million. Similar to last quarter, both capital raising and advisory revenue increased sequentially and year-on-year. Equity underwriting of $51 million was up 6% from the second quarter and 141% over the same period in 2023, as healthcare, industrials, and financials were our strongest contributors. Year-to-date, we continue to see strong improvement in capital raising as Stifel ranks number eight in terms of the number of IPOs. Fixed income underwriting revenue increased 3% sequentially and 100% from 3Q23 as public finance revenue increased more than 73%. We continue to be a leader in the municipal underwriting business as we were ranked number one in the number of negotiated transactions, with nearly a 15% market share. Advisory revenue was $137 million, an increase of 41% from last year as activity levels continue to improve. We had solid results in our healthcare, technology, and industrial verticals. We're also seeing momentum build in our financials practice. Year-to-date, KBW has over 70% market share of announced bank and trust M&A transactions based on deal value. This is a good indication of the momentum we have heading into 2025, in our advisory practice, as revenue from these announcements is likely to be realized next year. Equity transactional revenue totaled $49 million, up 4% from the second quarter of 2023. We continue to gain traction in our electronic offerings, and we see continued engagement with our high-touch trading and best-in-class research. Fixed income transactional revenue of $79 million was up 17% year-on-year, as we continue to benefit from the rebound in our rates business as a result of the anticipated shift in Fed policy, which has increased client activity. On the next slide, we go through expenses. Our comp-to-revenue ratio in the third quarter was 58%, which was again at the high end of our full-year guidance, as we continue to accrue conservatively. In terms of expectations for the comp ratio in the fourth quarter, we estimate it will remain at 58%. As Ron mentioned earlier in the call, non-comp expenses came in at $279 million and were negatively impacted by additional legal accruals. Excluding the legal charge, our credit provision, and investment banking gross-ups, our non-comp operating ratio was essentially 20% and at the midpoint of our full-year range of 19% to 21%. I would also note that we expect to see a decline in our effective tax rate in the fourth quarter, given the excess tax benefit associated with stock-based compensation. We are currently forecasting an effective tax rate between 16% and 18% for the fourth quarter. On Slide 10, I'll review our capital position. Our balance sheet continues to be well capitalized. Tier 1 leverage capital increased 20 basis points sequentially to 11.3%, and our Tier 1 risk-based capital ratio increased by 10 basis points to 17.9%. Based on our target 10% Tier 1 leverage ratio, we have nearly $500 million of excess capital and continue to generate significant levels of additional excess capital, as illustrated by the $149 million of GAAP net income that we generated in the third quarter. In terms of capital deployment during the quarter, I note that we've increased bank assets by $1.1 billion to $30.4 billion. We repurchased roughly 250,000 shares at an average price of $81.23, with roughly 10.5 million shares remaining on our current authorization. We paid quarterly dividends on our common deferred stock. I'd also highlight that we retired $500 million of long-term debt in July. Although this doesn't impact capital levels, it helps us reduce annual interest expense by more than $20 million. 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 111.9 million shares. With that, let me turn the call back to Ron.

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

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

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

Good morning, Devin.

Good morning.

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

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

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

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

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

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

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

Thanks, Devin.

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

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

The sweep deposits have well-known rates, currently at 4.5% for Smart Rate, and our Sweep program has a tiered structure. Most of the remaining deposits are treasury deposits. Generally, they are close to Smart Rate, but on a blended basis, they tend to be slightly less expensive than Smart Rate. The cost may vary depending on whether it's solely a deposit relationship or if it includes a lending relationship, but overall, it will be somewhat lower than Smart Rate.

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

Yes. I think we've been conservative in comp, as we have been keeping net interest income relatively flat because our interest-earning assets have been relatively flat. As I've said, we anticipate that line item growing, and that has a positive impact on our comp ratio. Couple that with a normalization of our institutional business, which is annualizing today at $1.5 billion, down from $2.2 billion in 2021 and up from approximately $1.25 billion last year on an annualized basis. We've discussed a conservative normalization of $1.7 billion to $1.8 billion. As that occurs, that also positively impacts the comp ratio. So, in this environment, I would say that 58% will be at the high end of our guidance range for 2025, to try to answer your question, as I see the market environment providing leverage to the comp ratio.

Thank you.

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

Hey, Steven.

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

Good morning.

Jim, I hope you're doing well. I wanted to clarify something, Ron. You mentioned the $8 earnings target, which you've referred to in a more normalized environment. Were you speaking about a more standard operating backdrop, or is that a 2025 expectation for where earnings might land?

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

Understood, Ron. I appreciate that.

Does that answer your question?

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

We always consider three main options: bank growth, mergers and acquisitions, and stock buybacks, along with our dividends, which are the four key strategies we use to manage capital levels and deliver returns while ensuring our return on investment is sufficient. We have purchased stock at an average price of $80; there's significant optimism in the market regarding financials. However, when it comes to deploying capital, bank growth seems more appealing to us, although we are still buying back stock. Additionally, we repaid our note, and I took a cautious approach as I had never paid off a note by wiring $500 million in cash, which indicates our liquidity position. Nonetheless, we plan to continue buying back stock, expanding our balance sheet, and exploring acquisitions, each assessed against the others in terms of attractiveness.

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

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

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

Okay.

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

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

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

Great. Thank you. And then I was hoping to ask about the recovery in sponsor M&A. Your advisory results are trending in the right direction. So could you circle back on whether or not you've seen any improvement in the sponsor market as conditions improve and as borrowing costs and rates come down? Thank you.

Generally, yes. I would say that's true across the Street, and you'll see it in M&A results. The market conditions are certainly conducive for that activity. If there's any governor on it, I think it is still the uncertainty around the election, which could provide some real tailwinds to M&A or maybe the more current environments might add to a regulatory burden. However, I don't see it getting worse; I can see it getting better from a regulatory perspective. Overall, the M&A environment on the sponsor side is good.

Great. Thank you for taking my questions.

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

Hey, Bill.

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

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

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

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

We've had roughly a 100% beta of Smart Rates. So at some point, as rates start to decline, the attractiveness of that alternative decreases significantly. You have also seen a fair amount of money come out of treasuries as that becomes a less attractive alternative, thus more money coming back into Smart and into our Sweep. Another point to consider is that as we continue increasing recruiting, it's going to continue to add to the level of that operational cash balance as well.

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

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

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

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

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

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