Q3 2023 Stifel Financial Corp Earnings Call
Please standby your conference is about to begin.
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 Nathan can jump in.
Our CFO Jim Morrison.
Earlier. This morning, we issued an earnings release and posted a slide deck of financial supplement to our website, which can be found on the investor Relations page at Www Dot Stifel Dot com.
I would note that some of the numbers that we state Dorado presentation are presented on a non-GAAP basis, when I 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.
Audiocast is copyrighted material of Stifel Financial Corp.
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 talked yes, 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 onetime extraordinary nonrecurring legal expenses.
People generated a solid quarter.
Our operating results of 1.15 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. It can be summarized by increased wealth management NII offset by institutional decline, which result from subdued industry wide activity.
So actually I feel like I'm stuck in the movie Groundhog day, where bill Murray's character wakes up and experienced the same day over and over well Thankfully My alarm doesn't wake me up each morning to the song I've got you Babe.
Seriously since the end of 2021, it feels like every quarter, we talk about the optimism for near term results based on green shoots in investment banking activity the potential for delayed M&A deals to finally close the market stability when the fed stops raising rates and then cut.
And declining cash sorting.
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 catalyst for improvement very 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 and maintaining the high level of support as illustrated by our number one ranking by J D power for employee adviser satisfaction.
Increasing our relevancy to our institutional clients that 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 an increased share repurchase authorization of 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.
In the current environment, they are less attractive, particularly in a market with a 5% risk free rate.
Moving on to slide two on the.
Various table to consensus estimates we've highlighted our results did include the impact of the nonrecurring legal charges, we accrued during the quarter given the impact on our bottom line I'll dress. This item first the 67 million in legal charges was primarily the result of the Sec's industry wide review of all channels.
On occasions.
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 FTC matter negative of the SEC matter negatively impacted our tax rate all sad the after tax impact of these legal matters.
With 58 cents per share.
In terms of revenue the 28 million shortfall to expectations was almost entirely due to lower investment banking revenue as we continued to see delays in deal closings and advisory and both equity underwriting and public finance activity was slow given market volatility and of course higher rate.
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 to millions below street estimates, primarily due to cash sorting, which I'd note and I've been saying has slowed from earlier pace.
In terms of expenses, excluding the impact of the 67 million of legal charges much of the difference in non comp expenses versus expectations was tied to higher provision expense, which Jim will discuss later.
Moving on to slide three 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 and wealth management since 2015 global wealth management revenue has increased more than 120% of the percentage of recurring revenue.
It was increased from 47% to 78%.
Our growth has been the result of our strategy to recruit high quality advisors and to provide them with an extraordinary level of service and this effort. We've 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. The cumulative trailing 12 month production of approximately $430 million.
I'd also highlight that year to date, we've increased the number of recruited advisors like 34%.
As I mentioned earlier, a vital component to our recruiting strategy has been the advisor 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 advisors and our number one ranking in the most recent J D power survey.
Of overall employee advisor satisfaction this.
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.
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, but 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.
Generate relatively stable return.
Now, let me turn the call over to Jim Morrison to discuss our most recent quarterly results.
Thanks, Ron and good morning, everyone.
Looking at the details of our third quarter results on slide four.
Our revenue of 1.05 billion was flat year on year.
They are 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.
Pre tax margins were 39%.
During the quarter, we added a total of 36 advisers, including 24 experienced advisors 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 six 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.
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.
We are not projecting any balance sheet growth and given us some expectation for additional cash sorting activity.
<unk> net interest income in the fourth quarter to be in a range of $270 million to $280 million.
Our credit metrics and reserve profile remains 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 were 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 one leverage capital decreased 30 basis points sequentially to 10, 8%.
Even when incorporating the unrealized losses in our bond portfolio, our tier one capital ratio remains strong at 10, 2%.
On the next slide I will 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 our results were 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.
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.
<unk>.
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 ranked number one and 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%.
The 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.
Let me discuss our capital position with approximately $300 million of excess capital at least on a 10% tier one leverage target.
Italy, we continue to generate 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 to reinvesting 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 are primarily deployed excess capital through share repurchases.
In the third quarter, we repurchased one 9 million shares.
I would note that through three quarters in 2023, we've deployed more capital into share repurchases than any of the past five full years.
Absent any assumption for additional share repurchases and assuming a stable stock price, we would 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 Rob.
Thanks, Jim.
So let me conclude by talking about how we're positioned and what I believe the potential of our franchise is.
Needless to say, our current institutional businesses not constructive to operate efficiently in the current market conditions.
To put institutional weakness in the 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.
On that note I also want to be clear that when it comes to expenses, we are not going to blank 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 markets return.
No I'm not going to try to do you've never 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 if people look like when market conditions normalize.
Well 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 one to $1 2 billion based on a car.
Combination of balance sheet growth and changes in NIM.
Institutional revenue of one seven to one 8 billion and consistent are modestly higher share repurchase activity.
I want to highlight this as they recognize the value created for our shareholders by share repurchases at the current price level and valuation, particularly when compared to what I believe are potential is there.
It's a nice segue to discussing how we think about deploying capital as we go toward this level of revenue and earnings.
We're 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 our recruiting productive advisors.
We will continue to look at acquisitions, but given higher interest rates inflation and still continued elevated valuation. This opportunity today is what's attractive.
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 with that operator. Please open the line for questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Once again that is star one to signal for a question.
Just briefly to assemble our queue.
And we do go to our first line from Steven <unk> with Wolfe Research. Please go ahead.
Hey, good morning, Ron Good morning, Jim.
Good morning morning.
So wanted to ask you a question on NII and some of the sweep deposit commentary the NII resiliency in the fourth quarter are certainly encouraging but you noted you're contemplating some sorting activity in that guidance in the fourth quarter and was hoping you could speak to what youre seeing so far in October in terms of.
Sweet deposit trends and whether your NII guide contemplate any seasonal benefit in terms of cash uplift from tax loss harvesting.
No.
This is we haven't really thought about the seasonal benefit of <unk>.
Increasing cash.
Through tax loss harvesting and they just haven't really thought about that.
I think that's a good point.
Overall, you know as I said on another call Steve.
We started our smart rate program, along three years ago.
And what we're seeing is.
Slower and factors in where you know a lot slower in cash sorting because a lot of it has occurred.
The reason that we project.
Excuse me lower.
Lower NII I'll, let Jim jump in on the spot.
You know, we're not we don't know what the future holds in the yield curve is significantly inverted and we see a preferred investment for clients.
Be short term duration fixed income.
And that 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 and 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 PSEG AUM.
And at some point that level of operational cash can fight against some of the impacts of the inverted yield curve, but thats part of our guidance the only thing I'd kind of <unk>.
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 and three Q in that book of deposits now stands at <unk>.
$1 8 billion or about 75% of that balance that was offset by a decline mainly of additional ics deposits from our zero and so I would also say I mean, we've seen a similar pace of deposit growth within the funded venture banking space, So far in the fourth quarter as well.
Please stand by, your conference is about to begin.
Operator: Good day and welcome to the Stifel Financial 3rd quarter financial results conference call. Today's conference ends being recorded.
That's great and just for my follow up on capital management, you were pretty clear that buyback.
Joel Jeffrey: At this time, I'd like to turn the conference over to Joel Jeffrey, head of investor relations. Please go ahead. Thank you operator.
Buyback is at least the preferred avenue or 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.
Joel Jeffrey: I'd like to welcome everyone to Stifel Financial's 3rd quarter conference call. I'm joined on the call today by our chairman and CEO, Ron Kruszewski, our co-presidents, Victor Neetian, Jim Zemlak, 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-gap basis, and I refer to our reconciliation gap to non-gap 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-gap measures.
I would say, it's definitely price dependent but I think you've seen a step up the buyback cadence over the last few quarters and at the current prices I would expect it to be higher.
Very helpful. Thanks for taking my questions.
If you find that your question has been answered you may remove yourself from the queue by pressing the star two and next we go to Devin Ryan with JMP Securities. Please go ahead.
Operator: This audio cast is copyrighted material of Stifel Financial Court and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial.
Hey, Thanks, Good morning, Ron Jim how are you.
Ron Kruszewski: I will now turn the call over to our chairman and CEO, Ron Kruszewski. Thanks, Joel. To our guests, good morning and thank you for taking the time to listen to our 3rd 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, people generated a solid quarter. Our operating results of 1.05 billion in net revenue and a $1.18 of operating EPS, excluding the aforementioned legal reserves, are essentially the same as our numbers last quarter and in the 3rd quarter of 2022.
Morning.
I just want to start here on investment banking I appreciate the outlook commentary.
We obviously track M&A backlogs and equity issuance pretty closely.
Income capital raising business a bit harder for us to follow and that was actually the biggest area of delta from our model.
So if I just look at that business it's.
Lots of half where it was a year ago at least in the third quarter run rating about $100 million. If you go back to 2021, who generated $225 million. So just wanted to kind of dig in a little bit around the intermediate term outlook for that business and is it does normalize or something more normal somewhere between where we are maybe right now in <unk>.
Ron Kruszewski: I will address the legal reserves momentarily, but frankly, our results over the past 7 quarters can be summarized by increased wealth management and NII offset by institutional decline, which results 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.
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 [laughter].
Look.
As Ive said.
This business.
We build capabilities and.
And we haven't lost market share that that's small saw us to what I'm, saying in terms of the.
Ron Kruszewski: 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's capability when the Fed stops raising rates and then cuts, and declining cash sorting. Look, we are all positioned with institutional conditions improved. However, when these conditions actually do improve is open for debate. History tells us that while the catalyst for improvement vary, my experience has been that institutional activity tends to improve slowly and then ramps up suddenly.
In this environment in fact, I believe the way we measure we've gained market share.
So I don't really want to put.
Number on you know.
What the normalized overall equity capital markets revenue will be.
When everybody 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 of them when you're talking about Hermione how about equity revenue.
So are you.
You know.
We priced an IPO last night, a lead left IPO, which was which felt good I don't think we haven't done that in a while and win.
Ron Kruszewski: Of course, we cannot control market conditions, but there are things we do control, such as recruiting high-quality advisors in our wealth management business, maintaining the high levels of support as illustrated by our number one ranking by JD Power for employees, advisor, satisfaction. Increasing our relevancy to our institutional clients that 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. Today's environment, this has been accomplished primarily through share repurchases, give it an increases and investments in our business.
When when these markets I I've said as I've said it in my remarks.
There may be markets like this.
Ted do improve slowly and then suddenly.
And suddenly there is a lot to do I the potential for that suddenly is there because I see and talk to a lot of clients that have a lot to do and they're in their capital stacks I'm just gonna be reluctant to try to put a timeframe on it which might be the most optimistic thing I'm, saying because they.
It all at once I quit.
Predicting when things are going to rebound is kind to be closer to that moment.
Understood got it okay. Thanks, Ron appreciate it so.
Ron Kruszewski: With this approach in mind, I would highlight that our board of directors has improved an increased share repurchase authorization of 10 million shares, which brings our total authorization to 14.2 million shares. Lastly, as we've always, we continue to look at potential acquisitions, but in the current environment, they are less attractive, particularly in a market with a 5% risk of free rate.
It's a follow up here.
On CRE, so provision, obviously ticked up a little bit I know, it's a small portion.
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.
I would kind of maybe starting with the top down across the entire loan book, we feel pretty good the portfolio was down probably 140 $150 million in the quarter, mainly and fund banking, but the vast majority of that portfolio 70 plus percent in mortgage.
Ron Kruszewski: Moving on to slide two, on the variance cable 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 legal charges was primarily the result of the SEC's industry wide review of off-channel communications. While this matter is not yet settled, we believe that we are properly accrued. Additionally, we have reserved from some smaller legal items as well.
Mortgage banking Spl's CRE is only $1 five.
The reserves did tick up on there we are continuing to watch that space, but it is a relatively modest exposure for us and you know do you think about in the Grand scheme of things a $10 million provision given.
Given the size of our portfolio.
Not something that we view as a concerning trend nonperforming loans only less than $40 million past due loans of $16 million, we feel pretty good overall in the credit profile of the bank.
Ron Kruszewski: 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 58 cents per share. In terms of revenue, the 28 million shortfall of expectations was almost entirely due to lower investment banking revenue, as we continue to see delays and deal closings in advisory and both equity underwriting and public finance activity was slow, given market volatility. 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.
Okay perfect. Thanks, so much guys.
Our next question or comment comes from the line of Alex <unk> with Goldman Sachs. Please go ahead.
Hey, guys. Good morning, Thanks for the question.
Hello.
First just a follow up to maybe Steve's questions around deposit sweep deposit trends Youre monthly commentary seem to have suggested that the deposit trends in 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 departure.
<unk> suite 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 dynamics.
Ron Kruszewski: Then interest income came 2 million below street estimate, primarily due to cash sorting, which I note and I've been saying has slowed from earlier pace. In terms of expenses, excluding the impact of the 67 million legal charges, much of the difference in non-conference expenses versus expectations was tied to higher provision expense, which Jim will discuss later.
Yes, so I would say at a high level, the inflows and outflows within the sweep program can be lumpy on a day to day basis, and we just happen to see a decent size outflow in pretty much the last day of the quarter, which accounted for the discrepancy between those two dates as.
Ron Kruszewski: Moving on to slide 3, I want to focus on the strength and growth of our wealth management franchise. The third quarter represented are 11th consecutive quarter of record net revenue in wealth management. Since 2015, global wealth management revenue has increased more than 120 percent, while the percentage of recurring revenue has increased from 47 to 78 percent. This level of growth has been the result of our strategy to recruit high-quality advisors and to provide them with an extraordinary level of service.
As I mentioned earlier, the suite program and the decline we've seen there over the basically the first month of the fourth quarter is basically match the cadence of decline you saw during the third quarter. So we have not seen an increase on there. It was just some lumpiness over a particular few days.
Got it okay.
Little bit bigger picture question. So wealth management continues to do nicely here until you guys said.
Mid single digit organic growth in net new asset growth in the third quarter.
Ron Kruszewski: In this effort, we've continually invested in resources, support and technology to reduce bureaucracy and enable our advisors to thrive. Our substantial recruiting efforts are illustrated by the fact that over the past 5 years, we have recruited nearly 670 financial advisors with cumulative trailing 12-month production of approximately 430. I would also highlight that year-to-date, we've increased the number of recruited advisors by 34%. As I mentioned earlier, a vital component to our recruiting strategy has been the advisor-friendly culture at Stifel, as well as the industry leading level of service we provide.
Ron you alluded to is really strong pipeline and I guess theres, maybe a mix shift occurring as well with the top advisers that you're bringing in so as you look a little bit further out what do you see as a reasonable net new asset growth for this business for you guys and then the assets that are coming in can you give us a sense of how much is going into sweep deposits as a percentage of <unk>.
Assets in other words in line with kind of firm wide average or more kind of balances disproportionately go to the high yielding options. Thanks.
Hello, guys I think the growth is as.
We said this quarter you know I think I do you know mid single digit growth.
Ron Kruszewski: This strategy has been validated by the growth in the number of our advisors, and our number one ranking in the most recent 80-power survey of overall employee advisor 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. 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.
As is reasonable and is what I would say you know asked to try to project that.
That growth as it relates just overall to recruiting.
The our just our recruiting pipeline what I'm most encouraged about is the as the quad.
Quality and frankly, the fact that we have large teams that are really talking to us that we haven't had in the past so.
We would have.
That's the biggest thing is the quality and the level of the teams that are that are joining us.
Not sure that I see any difference in the AK added in cow counts as to what's in sweep or or or you know what goes into our smart rate I think it's really pretty consistent I would note, though that one of the things that is noticeable to me is the amount of cash that we have and in bills.
Jim Marischen: Now let me turn the call over to Jim Marish and to discuss our most recent quarterly results. Thanks, Ron, and good morning, everyone. Look at the details of our third quarter results on slide four. Our revenue of $1.05 billion was flat year-on-year. Earlier 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.
No less than one year, which as you know up.
You know almost approaching $10 billion and that's where you know when you talk about cash sorting, it's not just between our sweep in our smart rate. It's the fact that today you know the trade.
The trade.
And then everyone likes to talk about is I don't know what I want to do is to find me a six month treasury.
Jim Marischen: 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 pre-tax margins was 39%. During the quarter, we added a total of 36 advisors, including 24 experienced advisors, with trading 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.
And we've seen a lot of that but the good news is that money has not gone it hadn't lapped it just geographically somewhat.
Where else on our balance sheet.
And.
Client assets so that's.
If you have anything to add to that Jim that covered it.
Alright, Thank you very much.
We'll go next to the line of Brennan Hawken with UBS. Please go ahead.
Good morning, Thanks for taking my questions.
Sure, Brian I wanted to start with the.
Jim Marischen: 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 six, 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.
The fact that our the credit well appreciating that it's small as a P.
Percentage of assets and loans.
The.
It's like more than tripled.
In the quarter, So could you talk about what.
What drove that.
And.
Yeah in the outlook. Please thank you.
Yeah. So I would just maybe starting with your outlook I think we feel good about that portfolio. We are very very low cost, we talked a little bit at some of the loan to values on the prepared remarks on the call you will see in some of the detail in the 10-Q, there was probably five or $6 million of specific reserve on one credit.
Jim Marischen: 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 boundary 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 to $280 million. Arcredit Metrics and Reserve Profile remain strong.
We feel that that totally addresses that.
That particular credit in terms of reserve and Thats really what drove a lot of the underlying build that you're talking about within CRE.
Okay. Thanks for that and I guess, when we sit there and think about.
The green shoots narrative, it's been a little hard to keep track of because it seems like there was a lot of optimism around.
Uh huh.
Green shoots starting in about May here in the past month or so we've heard.
Jim Marischen: The non-forming asset ratio stands at 17 basis points and charge drops were essentially zero. Arcredit lost 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 one percent of our loan portfolio is comprised of office CR re exposures or only nine loans, which are primarily class A space with average LTVs of approximately 44%.
It come off.
And so or maybe moderate a bit and pull back.
Are you seeing that are the higher rates.
On the long end of the curve constraining, maybe some of that optimism on the margin.
How would you characterize the recent development in the dialogues and how that's impacting your outlook.
I think look I think.
Jim Marischen: Lastly, our balance sheet continues to be well capitalized. If you were in leverage capital decreased 30 basis points sequentially to 10.8%, even when incorporating the unrealized losses in our bond portfolio, our tier one capital ratio remained strong at 10.2%.
I was gonna here.
Things like term premium and you know it won't be just a short term rate what's the tenure of doing them in the overall interest rate environment clearly.
<unk> has an impact on on activity and on confidence and frankly, you know I.
Jim Marischen: On the next slide I'll discuss our institutional group. Total revenue for the segment was $257 million in the third quarter. Formwide, invest in banking revenue totaled 147 million.
I think many of the abundance you know well will disagree on whether short term rates are now at a six or a four.
And all of that uncertainty.
Jim Marischen: As our results were impacted by both lower capital raising revenue and the continued delays in NMNA closings. Advisory revenue was $97 million, which represented an increase of 11% sequentially. Although this remains a difficult NMNA environment, we've seen some signs of life in industry wide announcements and our pipelines have improved when we ended the second quarter.
Yes.
Mutes activity I know it as a participant in the marketplace and our own M&A activity. We haven't we did a deal a year or two to three deal year for almost 19 years and we haven't done one and two.
So I think it's all you know all of that together.
Hum.
If you remember when you talk about Green shows there was a time when the forward curve.
Jim Marischen: That being said, the timing of that improvement will very much be marked 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 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.
Did that the first cut in the short term rates would be this December.
That wasn't that long ago, and that certainly has moved out.
I don't want to try to protect.
When when the markets will turn but I do want to say is that we've built a great franchise, we're maintaining it and we believe that we will get our fair share of business when the markets improve I'm, just not going to venture a guess as to when.
No no I totally appreciate that run in venture a guess in this environment has been super challenging I'm I'm I'm actually not asking for a guess on the forward what I'm asking for is what's been happening.
Jim Marischen: Six 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 and the number of negotiated transactions as our market share was nearly 14% for the first three quarters of the year.
Since you know maybe early September in the past roughly month as you noticed any changes in the dialogue and engagement or not really.
Not really.
Like I said, we get price of an IPO last night that they used to be a lot more common place. So.
Jim Marischen: On the next slide, we go through expenses. Our compter revenue ratio in the third quarter was 58%, which was in line with our forecast for the second half of the year. Non-competition operating expenses excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $302 million. Our non-compop X as a percentage of revenue was 28.9%. Excluding the legal charges we referenced earlier, our non-compop X as a percentage revenue totaled 22.6%. The 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.
That was maybe even idiosyncratic in itself so.
Not really I think I think the the environment.
Has stayed pretty consistent.
Okay, great. Thanks for the color.
Yeah.
We now turn the floor to Ron Kruszewski for closing remarks.
Thank you operator.
Everyone.
I.
I look forward to.
Bringing up everyone up to date on our yearend results and in January and I do look forward to <unk>.
Not waking up to.
Jim Marischen: Before I turn the call back over to Ron, let me discuss our capital position. We've reproximately $300 million of excess capital based on a 10% tier-1 leverage targ. Additionally, we continue to generate 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 the business, making acquisitions, as well as through share repurchases.
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.
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Jim Marischen: You have the uncertainty in the market and our discount evaluation. So far this year, we've primarily deployed excess capital through share repurchases. In the third quarter, we repurchased 1.9 million shares. I note that through three quarters in 2023, we've deployed more capital into share repurchases than any of the past five full years. Absent any assumption for additional share repurchases and assuming a stable stock price. We expect a fourth quarter fully blue to check out to be 111.8 million shares.
Ron Kruszewski: With that, I'll put 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.
Ron Kruszewski: Needless to say, our current institutional business is not constructed to operate efficiently in a current market condition. To put institutional weakness into perspective, annualized industry-wide 2023 U.S, equity capital market fee revenue is down nearly 80% for 2021, and M&A fee revenue is 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.
Yeah.
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Ron Kruszewski: And that note 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 as markets return. 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 if people look like when market conditions normalize?
Ron Kruszewski: Well, 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 in operating leverage. Under these assumptions, we believe that net revenue of 5.2 billion and EPS of approximately $8 for shares reasonable. Now you can all do the math, but this is essentially based on continued, if not modestly accelerated growth and wealth management, NII of approximately 1.1 to 1.2 billion based on a combination of balance sheet growth and changes in them, an institutional revenue of 1.7 to 1.8 billion.
Okay.
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Ron Kruszewski: And consistent or modestly higher share repercussions activity. I want to highlight this as I recognize the value created for our shareholders by share repercussions at the current price level and valuation, particularly when compared to what I believe our potential is.
Ron Kruszewski: This is a nice segue to discussing how we think about deploying capital as we build toward the 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 advice. We will continue to look at acquisitions, but given higher interest rates and inflation and still continued elevated valuation, this opportunity today is less attractive.
Ron Kruszewski: 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 terms outlook and upside, and with that operator, please open the line for questions. Thank you.
Operator: If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 to signal for a question and we'll pause just briefly to assemble our queue.
Steven Chubak: And we do go to our first line from Steven Chubak with Wolf Research. Please go ahead. Hey, good morning, Ron. Good morning, Jim. Good morning, morning. So I wanted to ask you a question on NII and some of the sweep deposit commentary. The NII of resilience in the fourth quarter certainly encouraging, but you noted you're contemplating some sorting activity in that guidance in the fourth quarter. And we're 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.
Steven Chubak: You know, you know, 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 said, another call Steve, we started our smart rate program a long three years ago. And what we're seeing is this 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, Jim jumped in on this, but, you know, we don't know what the future holds in the yield curve is, you know, significantly inverted.
Steven Chubak: 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. Yeah. 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.
Steven Chubak: 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 kind of dive into a little bit, you know, if you look at the other deposit line in the supplement, that went down about $85 million sequentially. But we did see some very positive trends in the venture and flood banking deposit base.
Steven Chubak: 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 decline mainly of additional ICS deposits from 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 a preferred avenue for capital deployment relative to M&A and other potential considerations.
Steven Chubak: How should we think about the buyback cadence from here, given the strength of your access 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 a step up the buyback cadence over the last few quarters, and at the current prices, I would expect it to be higher. Very helpful, thanks for taking my questions.
Devin Ryan: If you find that your question has been answered, you may remove yourself from the queue by pressing star two, and next we go to Devin Ryan with JMP Securities. Please go ahead. Thanks, good morning, Ron Jim. How are you? I guess want to start here on investment banking. 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.
Devin Ryan: If I just look at that business, it's less of half where it was a year ago, at least in the third quarter, it's run writing about $100 million. You go back to 2021, you generated $225 million.
Devin Ryan: Just want to dig in a little bit around the intermediate term outlook for that business, and is normalize 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. You know, look, as I said, this business, we built capabilities and we haven't lost market share.
Devin Ryan: That's small follows to what I'm saying in terms of this 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, you know, 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 a new normal at all of about $100 million. When you're talking about $100 million, talk about equity revenue.
Devin Ryan: So, you know, we priced an IPO last night, the lead left IPO, which felt good. I don't think we've done that in a while. And when, you know, these markets, I've said that I said it in my remarks that markets like this can do improve slowly. And then suddenly, okay, and suddenly there's a lot to do. I, 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.
Ron Kruszewski: 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 be kind of closer to that, at the moment. Okay, thanks, Ron, appreciate it.
Devin Ryan: So follow up here, just on CRE, so provision obviously picked up a little bit and 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.
Jim Marischen: I would kind of maybe starting with the top down across the entire little book. We feel pretty good. You know, the portfolio was down probably $140,000,000 in the quarter, mainly in fund banking, but the vast majority of that portfolio, 70 plus percent in mortgage, fund banking, SBL, CRE is only a billion five. Obviously, the reserves did take up on there. We are continuing to watch that space, but it is a real to the modest exposure for us and, you know, in the grand team of things, a $10 million provision, you know, given the size of our portfolio, not something that we view as a concerning trend. Now, performing loans only, you know, less than $40 million, past two loans and $16 million, we feel pretty good overall on the credit profile of the bank.
Devin Ryan: Okay, perfect. Thanks so much, guys.
Alexander Blostein: Our next question or comment comes from the line of Alex Blostein with Goldman Sachs. Please go ahead. Thank you guys. Good morning. Thanks for the question. First, hello.
Alexander Blostein: So, first is to follow up to maybe see these questions around deposit and the suite deposit trends. You're monthly commentary. I seem to have suggested that the deposit trends and the outflows improved in September. I think you said there 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 suite trends over the course of the quarter and then I guess relative to the $11 billion of suite deposit and balance sheet, I guess, called it about 600 million in 30-body banks.
Alexander Blostein: Where do things stand today and does that include the monthly billing dynamic? Yeah, so I would say at a high level, the inflows and outflows within the suite program can be lumpy on a day-to-day basis. We just happen to see a decent size outflow and pretty much the last day of the quarter, which accounted for the discrepancy between those two days. As I mentioned earlier, the suite program and the decline we've seen there over the first month of the fourth quarter, it basically matched the cadence of decline you saw during the third quarter. So, we have not seen an increase on there. It was just some lumpiness over a particular few days. Got it. Okay.
Ron Kruszewski: A little bit bigger picture question. So, wealth management continues to do nicely here. I think you guys said, mid-tingle digit organic growth and net new asset growth in the third quarter. Ron, you alluded to a really strong pipeline and I guess there's maybe a mixed shift occurring as well with the top advisors you're bringing in. So, as you look a little bit further out, what do you see as a reasonable net new asset growth for this business for you guys?
Ron Kruszewski: And then the assets that are coming in, can you give us a sense of how much is going into suite deposits as a percentage of coin assets. In other words, in line with kind of firm white average or more kind of balances disproportionately go to the high yielding options. Thanks. Well, guys, I think the growth is, as we said this quarter, you know, I think you know, mid-tingle digit growth is reasonable and is what I would say, you know, ask to try to reject that growth.
Ron Kruszewski: As it relates just overall to recruiting, just a recruiting pipeline, what I most encourage about it is the quality and frankly the fact that we have large teams that are really talking to us that we haven't had in the past. So, we've have That's the biggest thing, is quality and the level of the teams that are joining us. I'm not sure that I see any difference in the A-catted counts as to what's in sweep or what goes in our smart rate.
Ron Kruszewski: I think it's really pretty consistent. I wouldn't know, though, that one of the things that is notable to me is the amount of cash that we have in bills, less than one year, which is up, you know, almost approaching probably $10 billion. And that's where, you know, when you talk about cash sorting, it's not just between our sweep and our smart rate. It's the fact that today, you know, the trade of the trade, you know, that everyone likes to talk about is, well, I don't know what I want to do, so find me a six-month treasury. And we've seen a lot of that. But the good news is, that money's not going to have enough. It's just geographically, somewhere else on our balance sheet. And, you know, it's client asset.
Jim Marischen: So, you know, that's, I don't give anything to add to that gym.
Brennan Hawken: All right, thank you very much. We'll go next to the line of Brennan Hawking with UBS. Please go ahead. Good morning. Thanks for taking my questions. I wanted to start with the fact that the credit, well, appreciating that it's small, you know, as a percentage of assets and loans, the, like, more than tripled in the quarter. So, could you talk about what, what drove that? And, yeah. And the outlook, please. Thank you.
Jim Marischen: Yeah, so I would maybe start with the outlook. I think we feel good about that portfolio. We have very, very low in the cost. We talked a little bit about some of the low in the values on the prepare remarks in the call. You will see in some of the detail in the 10Q, there was probably, you know, five or six million dollars specific reserve on one credit. We feel that totally addresses that particular credit in terms of a reserve. And that's really would drove a lot of the underlying bill that you're talking about within CRU. Okay, thanks for that.
Ron Kruszewski: And I guess when we sit there and think about all the brain sheets narrative, it's been a little hard to keep track of because it seems like there was a lot of optimism around the, the green sheets that started in about May. Here in the past month or so, we've heard it come off. And so, or maybe moderate a bit and pull back. Are you seeing that are the higher rates on the long end of the curve, you know, constraining, maybe some of that optimism on the margin.
Ron Kruszewski: How would you characterize the recent development in the dialogues and how that's impacting outlook? I think, look, I think, you know, you're now going to hear things like term premium and, you know, it won't be just a short term rate. What's the 10 you're doing? And it'll over all interest rate environment clearly has an impact on activity and on confidence. And frankly, you know, there's many of the pundits, you know, will disagree on whether short term rates are 0 to 6 or 0 to 4.
Ron Kruszewski: And all of that uncertainty, you know, Youth Activity. I know it as a participant in the marketplace in our own M&A activity. You know, we haven't, you know, we did a deal a year, a two to three deal years for almost 19 years, and we haven't done one in two. So I think it's all, you know, all of that together, you know, if you remember when you come on green shows, there was a time when the forward curve predicted that the first cut in the short-term rates would be this December.
Ron Kruszewski: You know, that wasn't that long ago, and that certainly has moved out. So I, you know, I don't want to, I don't want to try to predict when, when the markets will turn. What I do want to say is that we, we've built a great franchise where maintaining it, and we believe that we will get our fair share of business when the markets improve. I'm just not going to venture a guess as to when.
Ron Kruszewski: No, I totally appreciate that Ron and venturing a guess in this environment has been super challenging. I'm, I'm actually not asking for a, for a guess from the forward. What I'm asking for is, is what's been happening since, you know, maybe early September in the past roughly month, as you noticed, any changes in the dialogue and engagement were not really. Not really. Like I said, we, we get prices, an IPO, plus nine, that, that used to be a lot more commonplace. So, you know, that, but that's just a, that was maybe even idiosyncratic in itself. So, not really. I think, I think the, the environment has stayed pretty consistent. Okay. Right. Thanks for the color.
Ron Kruszewski: We now turn the floor to Ron Krashevsky for closing remarks. Thank you, operator. Everyone, I, I look forward to bringing up everyone up to date on our year end results in, in January.
Operator: And I do look forward to not waking up to groundhog day. So, with that, have a great day. Thank you.
Operator: This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time. Thank you.