Stifel Financial Q3 2024 Earnings Call Transcript

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October 23, 2024

There are 9 speakers on the call.

Operator

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.

Speaker 1

Thanks, operator. I'd like to welcome everyone to Stifel Financial's Q3 2024 earnings conference call. I'm joined on the call today by our Chairman and CEO, Ron Kruszewski our Co Presidents, Victor Niecy 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 for some of the numbers we state throughout our presentation are presented on a non GAAP basis, and I would refer to our reconciliation of GAAP to non GAAP as disclosed in our press release.

Speaker 1

I would also remind listeners to refer to our earnings release, financial supplement and other slide presentation for information on forward looking statements and non GAAP measures. This audio cast is copyrighted material of Stifel Financial Corp and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial. I will now turn the call over to our Chairman and CEO, Ron Kruschetti.

Speaker 2

Thanks, Joel. Good morning and thanks to everyone for taking the time to listen to our Q3 2024 earnings conference call. Looking at our Q3 results, net revenue of $1,230,000,000 was in our history our 2nd highest quarterly revenue, up 17% year on year. The growth in our business was essentially across the board as follows. Commissions and principal transactions increased 15% as both Wealth Management and our institutional group generated double digit increases.

Speaker 2

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 Q3, NII increased by 4% and reached the high end of our guidance. I'd also highlight that our sweep deposit balances increased by nearly $370,000,000 which was the 1st quarterly increase since the Q1 of 2022, which by the way coincided with the Fed beginning to raise rates. 3rd quarter earnings per share totaled $1.50 which increased 150% from the same period last year.

Speaker 2

Both this quarter and last year's Q3 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 $1.16 in the 3rd quarter, which represents a 36% increase over the adjusted EPS from the Q3 of last year. Our results in the quarter and through the 1st 9 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 $3,600,000,000 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.

Speaker 2

Additionally, net revenue increased sequentially in each of the 1st three quarters of this year and all of these quarters rank in the top four quarters in our history. So looking forward to the Q4 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 $30,000,000 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.

Speaker 2

Investment Banking revenue was 6% ahead of The Street, driven by a higher advisory and fixed income capital raising. Net interest income was $3,000,000 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 3rd 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.

Speaker 2

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 5 years. That said, we believe we've hit an inflection point and that both line items should grow as we go forward. Our confidence in this forecast is driven by the current composition of our balance sheet and continued improvement of the capital markets from the recent troughs. Said another way, we are entering a period where both net interest income and our institutional business will add to our bottom line.

Speaker 2

While Jim will give more details on the specifics of our balance sheet, let me just say that we today are relatively insensitive to changes in interest rates and that we believe that in the current environment, deploying excess capital on the 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 pretax income of nearly $130,000,000 is up meaningfully from the modest loss that we had over the same period last year. However, our year to date pretax margins of 11.5 percent are well below the 20% we should generate in more normal market conditions.

Speaker 2

And as such, we see meaningful upside to this business. There's been a lot of focus on the potential upside at a rebound in our institutional business will generate as the buck environment improves. And 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 1st 9 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 taken together, which drive our advisors' growth and productivity.

Speaker 2

Additionally, the investments we've made into our platform and service has been validated by Stifel being named the number one wealth management firm in terms of employee advisor satisfaction by J. D. Power for the 2nd 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 $1,000,000,000,000 in client assets. This approach has not only improved our advisor satisfaction levels, but just as importantly, resulted in better client experience.

Speaker 2

And now I'll turn the call over to our CFO, Jim Marischen to discuss our most recent quarter.

Speaker 3

Thanks, Ron, and good morning, everyone. Looking at the details of our Q3 results on Slide 5, our quarterly net revenue of $1,230,000,000 was up 17% year on year. Year to date, revenue of $3,600,000,000 was up 13%. Each of our operating line items show improvement from the same period in 2023 with the exception of NII. Our EPS in the 3rd 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.

Speaker 3

Moving on to our segment results. Global Wealth Management revenue was a record $827,000,000 and pre tax margins totaled 37% on record asset management revenues and our highest transactional revenue in nearly 3 years. As Ron mentioned earlier, asset management revenue came in below analyst estimates. This was due to lower 3rd party bank sweep balances as we move more of our lower cost sweep deposits back into the bank, which positively impacted net interest income. Excluding the impact of the charge in the 3rd party I'm sorry, excluding the impact of the change in 3rd party suites, asset management revenue would have been in line with Street estimates.

Speaker 3

During the quarter, we added 28 total advisors to our platform. This included 13 experienced advisors with trailing 12 month production of $10,500,000 We ended the quarter with record fee based assets and total client assets of $191,000,000,000 $496,000,000,000 respectively. 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.

Speaker 3

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 $260,000,000 was at the high end of our range as average interest earning asset levels increased by nearly $650,000,000 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 and 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 a 100 basis point rate movement, either up or down.

Speaker 3

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 Q4, we expect NII to be in a range of $255,000,000 to $265,000,000 Our credit metrics and reserve profile remains strong. The non performing asset ratios stands at 47 basis points. Our credit loss provision totaled $5,300,000 for the quarter and our consolidated allowance total loans ratio was 83 basis points, which was impacted by growth in loan balances and fund banking and residential mortgages, which are lower risk loan types that carry lower relative reserves. Moving on to the institutional group.

Speaker 3

Total revenue for that segment was $372,000,000 in the quarter, which was up 45% year on year. Revenue of $1,110,000,000 was up 29% led by strong increases in capital raising and transactional revenue. Firm wide investment banking revenue totaled $243,000,000 Similar to last quarter, both capital raising and advisory revenue increased sequentially and year on year. Equity underwriting of $51,000,000 was up 6% from the 2nd 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 8 in terms of the number of IPOs.

Speaker 3

Fixed income underwriting revenue increased 3% sequentially and 100% from 3Q, 2023 as public finance revenue increased more than 73%. We continue to be a leader in the municipal underwriting business as we ranked number 1 in the number of negotiated transactions with a nearly 15% market share. Advisory revenue was $137,000,000 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.

Speaker 3

Year to date, KBW has over 70% market share of announced bank and thrift M and 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 are likely to be realized next year. Equity transactional revenue totaled $49,000,000 up 4% from the Q2 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 $79,000,000 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.

Speaker 3

The next slide we go through expenses. Our comp to revenue ratio in the Q3 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 4th quarter, we estimate it will remain at 58%. As Ron mentioned earlier in the call, non comp expenses came in at $279,000,000 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% at the midpoint of our full year range of 19% to 21%.

Speaker 3

I would also note that we expect to see the decline in our effective tax rate in the 4th quarter given the excess tax benefit associated with stock based compensation. We are currently forecasting an effective tax rate between 16% 18% for the Q4. 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%.

Speaker 3

Based on our target 10% Tier 1 leverage ratio, we have nearly $500,000,000 of excess capital and continue to generate significant levels of additional excess capital as illustrated by the $149,000,000 of GAAP net income that we generated in the Q3. In terms of capital deployment during the quarter, I note that we've increased bank assets by $1,100,000,000 to $30,400,000,000 We repurchased roughly 250,000 shares at an average price of $81.23 with roughly 10,500,000 shares remaining on our current authorization. And we paid quarterly dividends in our common deferred stock. I'd also highlight that we retired $500,000,000 of long term debt in July. Although this doesn't impact capital levels, it helps us reduce annual interest expense by more than $20,000,000 Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the 4th quarter fully diluted share count to be 111,900,000 shares.

Speaker 3

And with that, let me turn the call back to Ron.

Speaker 2

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, but 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 in context, our revenue run rate of $4,800,000,000 is just shy of the $5,000,000,000 we've discussed as a realistic level of revenue in a normalized environment.

Speaker 2

Look, it's important to note that our $4,800,000,000 run rate does not factor in what we believe will be a good Q4. We anticipate a strong Q4 as we continue to benefit from the growth trends we've experienced in 2024 as well as the typical seasonality that we experienced in the Q4. That said, there is still meaningful uncertainty to the current operating environment, including the outcome of the upcoming elections and geopolitical risks. As we typically do, we will give our formal guidance for 2025 on our Q4 conference call. However, let me just say this about how we see 2025 at this point.

Speaker 2

Given the strength of our results and what we considered 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 $5,000,000,000 of revenue $8 of EPS. With that operator, please open the line for questions.

Operator

Thank you. And we can take our first question from Devin Ryan with Citizen JMP.

Speaker 4

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

Speaker 1

Good morning, Devin.

Speaker 4

First question just on lending, obviously, great loan growth in the quarter. Ron, 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.

Speaker 4

So I just want to kind of get the interplay with that as well. Thanks.

Speaker 2

Yes. I'll let Jim give some details. As we've said, we've gotten to the position with our deposits in Smart Rate and versus sweep that we're essentially neutral to 100 basis point move in terms of our margin, frankly. And what we see going forward is the opportunity to build our balance sheet. We see great opportunity.

Speaker 2

And 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 in a risk adjusted basis as we always do our net interest income.

Speaker 3

Yes. And I would say we are less dependent on a lot of the general loan market for the economy in general and ability for us to put loans in 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 $500,000,000 of excess capital, we're essentially saying we have a fair amount of capacity with over $3,000,000,000 in suite deposits that are available to the bank today to generate balance sheet growth at roughly a 3% NIM.

Speaker 4

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 Q2 had roughly $20,000,000 gain, but 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?

Speaker 4

Thanks.

Speaker 2

A little bit of seasonality always in the Q3. I don't see any real slowing of that business. You did mention the reason that it was down from the Q2. But I'm optimistic about that business, both as rates normalize and most of our depository clients continue to actively manage their portfolios.

Speaker 3

We sit here and talk about cash building because the interest rate risk curve is normalizing. The same thing is happening to our clients and they're going to be more active in trading activity in an environment like that. And that presents a great situation for a fixed income rates group.

Speaker 4

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

Speaker 2

Thanks

Operator

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

Speaker 5

Hey, guys. This is Michael on for Alex. Maybe just a follow-up to the $3,000,000,000 of third party deposits that you guys have. So 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 maybe the funding rate on those deposits and then how that works?

Speaker 3

Yes. So the sweep deposits, obviously, that's very well known rates. We're at 4.5% on Smart Rate and you can see the tiering on our sweep program. The remainder of that are primarily treasury deposits. I will say, generally speaking, they are closer to Smart Rate, but on a blended basis, a little bit less expensive than Smart Rate.

Speaker 3

Some of that will depend if it is a lending relationship I'm sorry, a pure deposit relationship only or it also comes with a lending relationship. But again, it's going to be a little bit less than Smart Rate.

Speaker 5

Thanks. That's helpful. Maybe just moving on quickly to the comp rate. So it sounds like you guys guided for the Q4 about 58%. It's been pretty range bound for the last 2 years.

Speaker 5

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?

Speaker 2

Yes. I think we've been conservative in comp as we have been keeping net interest income has been relatively flat because our interest earning assets have been relatively flat. And 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 $1,500,000,000 down from $2,200,000,000 in $21,000,000 and up from $1,250,000,000 ish last year on an annualized basis. And we've talked about a conservative normalization of $1,700,000,000 to $1,800,000,000 As that occurs, that also positively impacts the comp ratio.

Speaker 2

So I would, in this environment, 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.

Speaker 6

Thank you.

Operator

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

Speaker 1

Hey, Steven. Good morning.

Speaker 7

Hey, Ron. How are you? Good morning. Jim, hope you're doing well also. So wanted to start off just it's a clarifying question, Ron.

Speaker 7

You mentioned the $8 earnings target. It's something you've alluded to before in a more normalized environment. Was that something that you were speaking to in the context of a more normal operating backdrop? Or is that actually a 2025 expectation for where earnings could shake out?

Speaker 2

I mean, I love the question. I understand what you're saying. Let me go back to what I said, because I'm not really prepared to talk about that 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

Speaker 3

it was

Speaker 2

$5,200,000,000 $8 of operating in 'twenty five. That's what I said. And what I said today was that my view hasn't changed.

Speaker 7

Understood. So Ron,

Speaker 3

I appreciate that. So Ron, why did I answer your question?

Speaker 7

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.

Speaker 7

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 be bank growth or M and A?

Speaker 2

Again, we those three levers, bank growth, M and A, and stock buyback are always on the table, coupled with our dividends, which are the 4 primary levers that we do to manage capital levels and provide the returns and make sure that our return on investment is adequate. Look, we have been, I mean, we purchased stock at an average of $80 Today, there's a lot of optimism in the market in terms of financials, I share that. But when we look at deploying capital, the lever for bank growth appears a little more attractive to us. And to say we're not buying back stock, we are, but we also repaid our note. And from a liquidity perspective, I was probably a little bit more saying, hey, I never paid off a note by just wiring $500,000,000 of cash.

Speaker 2

So I was a little more sanguine about our liquidity position. But look, I think we'll continue to buy back stock and we'll continue to grow our balance sheet and we'll continue to look at acquisitions. Each are measured against each other as to which is

Speaker 3

the most attractive. And if you tie this into your original question about $8 of EPS, we probably had a little bit more emphasis on share repurchases at that point. You got to remember, if we're adding, call it, dollars 1,000,000,000 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, the impact on how we get to the $8 per share as well.

Speaker 2

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

Speaker 7

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

Speaker 2

Okay.

Operator

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

Speaker 6

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 sweet deposits up by nearly $370,000,000 although smart rate was up about $500,000,000 as well. And you recently cut rates on the smart rate.

Speaker 6

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 as far as your expectations for cash growth towards the end of the year? Thank you.

Speaker 3

We've actually seen deposit inflows in both sweep and smart rates 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 say our sweep program is up another $100,000,000 in the 4th quarter thus far. So the impact of rate cuts has been minimal.

Speaker 3

Again, the bigger impact on this going forward is going to be the normalization of the yield curve and the competitiveness of various different alternatives.

Speaker 6

Great. Thanks. And then I was hoping to ask about the recovery in sponsor M and A. Obviously, your advisory results are trending in the right direction. So I was hoping if you can kind of just 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?

Speaker 6

Thank you.

Speaker 2

Generally, yes. I mean, I would say that's across the street and you'll see it in M and A results. Certainly, the market conditions are conducive for that activity. If there's any governor on it, I think it is still the uncertainty around the election, which at least as it relates to M and A, could the election could provide some real tailwinds to M and A or maybe the more current environments, I would say, is more regulatory burdened would continue. But I don't see it getting worse.

Speaker 2

I can see it getting better from a regulatory perspective. But overall, the M and A environment on the sponsor side is good.

Speaker 6

Great. Thank you for taking my questions.

Operator

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

Speaker 8

Okay. Thanks very much. Good morning, everybody. Thank you very much for taking the questions. Busy morning.

Speaker 8

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 sort of see the net growth and maybe the competitive backdrop and what it means for incremental profit contribution for FA? Thank you.

Speaker 2

Yes. I think we've been dealing for a while with sort of the 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. Look, I would say overall, I'm probably as optimistic about the recruiting landscape as I've been, both our relative position.

Speaker 3

I've

Speaker 2

seen it being our relative offering, especially on the transition side being more competitive. I think rates probably had something to do with that or at least we're seeing that trend. And we're talking to as many productive teams as we ever have. And so I'm optimistic. The Q4 is always is a muted quarter because you really close the transition window in early December.

Speaker 2

But 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.

Speaker 8

Okay. It's helpful. And then 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?

Speaker 8

It sounds like both are up again into the Q4, which is nice. But is there at what level do you think you might actually start to see a migration back toward sort of balance sheet cash? Or is it different this time, it's always a dangerous thing to say, in that higher rates, higher awareness just would structurally change the mix ex a real sharp drop in rates? Thank you.

Speaker 2

Yes. Well, first of all, I'm not sure it's different this time in terms of that it was different in a zero rate environment, okay? I mean, the question has to be, will we get back so that the effective spread between where sweep balances are and say the 1 year treasury narrow so that you don't really have the incentive. So to answer your question, even a normalization of rates, which to me would be Fed funds settling at 3% to 3.5%. And I get there by thinking inflation is going to be closer to 3% than 2% and price should have a real interest rate.

Speaker 2

So 3.25% to 3.5%, that's where I kind of see rates settling. And as you get a normal yield curve, what will happen was that will smart rate will still be there because the rate differential between transactional cash and savings cash will still provide clients with that choice in contrast to when rates were 0 and it didn't really matter. And so is it different this time? Yes, I don't think we're going back to a 0 rate environment. I think we are well positioned as evidenced by our neutrality to changes, 100 basis point changes in Fed funds and we've retained cash and I actually see 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.

Speaker 2

So, I wouldn't be baking in something that says that, we're going to drive NIM because people are going to go back into sweep. Sweep will always be there for transactional cash, but savings cash is the new normal.

Speaker 3

We've had roughly it was essentially 100% beta on SmartRates. So at some point in as rates start to decline, the attractiveness of that alternative decreases fairly significantly. You also have seen a fair amount of money come out of treasuries as that becomes a less attractive alternative, more money coming back into SmartLink and or sweep. And the other thing I would just say at a high level, as we continue to increase recruiting, recruiting is going to continue to add to the level of that operational cash balance as well.

Speaker 8

Great. Can I sneak in a clarifying question? That was my third question. So I apologize for taxing everyone's goodwill. That's fine.

Speaker 8

Just in terms of the tax rate into the Q4, 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?

Speaker 3

This happens every year. The impact is larger than normal because of the increase in the stock price. So basically this is the excess tax benefit related to stock based compensation. The difference between grant date fair value and the fair value of stock when it vests. And as your stock price increases, you get a larger benefit, which runs through as a negative or a decline in your effective tax rate.

Speaker 3

You'll see it in most quarters historically in the Q4 for us. This is just a larger impact than normal.

Speaker 8

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

Operator

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.

Speaker 2

Thank you. Great job on pronouncing the name. I appreciate that. And to all of our shareholders, we look forward to recapping 2024, talking about what we anticipate will be a good Q4 and giving you some updates on our views into 2025. And with that, I bid everyone a great day.

Speaker 2

Thank you for your time.

Operator

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

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