Stifel Financial Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 10 speakers on the call.

Operator

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

Speaker 1

Thank you, operator. I'd like to welcome everyone to Stifel Financial's Q2 2024 Conference Call. I'm joined on the call today by our Chairman and CEO, Ron Krzyzewski Co Presidents, Victor Niesi 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.stipel.com. I would note that some of the numbers that we state throughout our presentation are presented on a non GAAP basis, and I would refer to our reconciliation of GAAP to non GAAP as disclosed in our press release.

Speaker 1

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

Speaker 2

Thanks, Joel. Good morning. Thanks to everyone for taking the time to listen to our Q2 2024 Earnings Conference Call. I'm pleased to be with my partners here this morning in New York and look forward to seeing them as well. Stifel's strong results in the Q2 reflected our operating leverage as market conditions improved, particularly in our institutional business.

Speaker 2

People's 2nd quarter net revenue totaled $1,220,000,000 up 16% from 2023 and represents the 2nd best quarter in our history. All revenue line items showed improvement except for our predicted decline in net interest income. Commissions and principal transactions increased 24% as a result of stronger client activity levels in both Wealth Management and our institutional group. Investment Banking increased 40% as advisory revenue was up 50% and capital raising rose 29%. Record asset management revenue was up 19%, reflecting organic growth and market appreciation.

Speaker 2

Net interest income declined $40,000,000 or 14%. However, although NII decreased both quarterly in the first both quarterly and in the first half of the year, the declines were within our guidance. The efficiency of our diversified business model is illustrated by our 2nd quarter pre tax margin of 21%, operating earnings per share of $1.60 which was a 33% increase from the prior year, as well as an annualized return on tangible common equity of 22%. We generated record first half net revenue of nearly 2,400,000,000 dollars an increase of 10% as improving institutional revenue more than offset the predicted decline in NII. Our consistent growth and significant cash generation also gives us increased financial flexibility.

Speaker 2

This is highlighted by our recent retirement of $500,000,000 in senior notes. We raised the $500,000,000 10 years ago to support our bank growth strategy. However, our bank is now of the size and scale that it can more than fund its own growth and therefore, in the current rate environment, we felt that retiring the debt makes sense financially. Retirement of these notes not only reduces our long term liabilities, but also eliminates $21,000,000 in annual interest expense. While comparison to the prior year are informative, we also like to review our results next to Street consensus estimate, which we do on Slide 2.

Speaker 2

Our EPS of $1.60 was 0 point 0 $6 higher than The Street estimate as net revenue came in above expectations by $34,000,000 Looking at the specific line items that drove our earnings beat, First, transactional revenue came in $14,000,000 above expectations, primarily driven from fixed income. Investment Banking came in $10,000,000 above consensus on stronger advisory revenue. I'd also note that underwriting revenue was stronger than consensus as the environment for capital raising has improved. The only revenue item that we fell short of 3 to estimates was net interest income. However, NII still came within our guidance range.

Speaker 2

We stated on last quarter's quarter that we believe NII may have hit a low point and the modest incremental decline in the 2nd quarter was the result of higher net interest margin, which I noticed positive, but this was more than offset by a slight decline in interest earning assets. On the expense side, we were essentially in line with the Street as our compensation ratio was 58%, same as consensus, while non comp operating expenses totaled 260,000,000 dollars 1,000,000 above consensus. We've used Slide 3 in recent earnings announcements to illustrate the benefits of our complementary businesses in various markets. Over the past 5 years, we've been able to offset much of the volatility of our institutional business with the stability of our fee based businesses and our increased net interest income. Looking at the most recent three quarters, you can see the rebound in institutional pre tax income that now has helped counter the decline in net interest income.

Speaker 2

Putting this into context, in the first half of the year, our pre tax income is up $58,000,000 as the improvement in institutional margins and growth in PCG revenues has more than offset the $85,000,000 decline in NII. As we look forward, expected continued improvement in wealth management and institutional revenue will help. Additionally, stable net interest income achieved by higher interest earning assets should offset incremental cash sorting and result in higher pre tax margins and return on tangible common equity. I know there are a lot of questions on sweep cash and advisory accounts for all firms. While Jim will address some of the specifics on how we view this at Stifel, let me just state that Stifel anticipated and prepared for this rate cycle, both on the asset side of our balance sheet as well as offering clients options for savings accounts, primarily our Smart Rate.

Speaker 2

As such, we do not see a material impact relating to this matter and to underscore this point, we are not changing our NII guidance for the remainder of this year. Before I turn the call over to Jim to discuss our financial results, I want to talk a little bit more about the long term success of our Global Wealth Management business. As I mentioned earlier, for the 2nd consecutive year, Stifel was ranked number 1 in the employee segment of the J. D. Power U.

Speaker 2

S. Financial Advisor Satisfaction study. In addition to ranking 1st overall, Stifel was also ranked number 1 in 3 of 6 categories: leadership and culture, products and marketing, and operational support. The results of this survey further proves our core values of respecting our advisors and continually improving the advisor experience, which in turn leads to better client experience. Focusing on these values enables people to continually attract and retain high quality advisors to our platform, provide exceptional client service and has been a foundation to our history of strong revenue growth.

Speaker 2

With that, our CFO, Jim Marishin will discuss our most recent quarter results.

Speaker 3

Thanks, Ron. Good morning, everyone. Looking at the details of our Q2 results on Slide 5, our quarterly net revenue of over $1,200,000,000 was up 16% year on year. For the first half of the year, revenue of $2,380,000,000 was up 10%. The increase was driven by stronger client facilitation, advisory, trading and underwriting revenue was partially offset by lower net interest income.

Speaker 3

Our EPS in the 2nd quarter was up 33% from the prior year and up 19% year to date. Higher revenues and a lower share count more than offset modest expense growth. Moving on to our segment results. Global Wealth Management revenue was a record $801,000,000 and our pre tax margins were more than 37% on record asset management revenue and strong growth in transactional revenue. We continue to add new advisors to our platform.

Speaker 3

During the quarter, we added a total of 42 advisors. This included 14 experienced advisors with trailing 12 month production of 12,200,000. Dollars We ended the quarter with record fee based assets and total client assets of $180,000,000,000 $474,000,000,000 respectively. The sequential increases were due to higher equity markets and organic growth as our net new assets grew in the low single digits. We highlight our longer term growth drivers for our Wealth Management business on Slide 7.

Speaker 3

We continue to be on track for our 22nd consecutive year of record revenue, our Global Wealth Management business as our recurring revenues continue to comprise the vast majority of this segment's revenue. Our recruiting continues to be solid as our commitment to the highest level of service for our advisors was once again recognized by J. D. Power. On the next slide, I'll discuss our institutional group, where the improvement in market conditions that began towards the end of 2023 continued.

Speaker 3

Total revenue for the segment was $391,000,000 in the quarter, up 41% year on year and year to date. Revenue of $742,000,000 was up 22% led by strong increases in capital raising and transactional revenue. Firm wide investment banking revenue totaled $233,000,000 while both capital raising and advisory revenue increased sequentially and year on year. As expected, underwriting revenue continues to lead the rebound in Investment Banking. Equity underwriting of $48,000,000 was up 19% from the Q1 and 59% over the same period in 2023 as healthcare and financials were strong contributors.

Speaker 3

Fixed income underwriting revenue increased 8% from 2Q 2023 as improved public finance revenue helped to offset lower taxable issuance. We continue to be a leader in the municipal underwriting business as we ranked number 1 in the number of negotiated transactions with nearly 15% market share. Advisory revenue was $131,000,000 and it was our strongest quarter since the Q1 in 2023 as we had solid results in our financials, gaming, industrials and industrials verticals. Equity transactional revenue totaled 53,000,000 dollars up 16% from the Q2 of 2023. We continue to gain traction in our electronic offerings as well as strong engagement with our high touch trading and best in class research.

Speaker 3

Fixed income transactional revenue of 107,000,000 dollars was up 58% year on year as our rate business continues to rebound from a very slow 2023 and activity in our corporate debt business remains solid. Additionally, we benefited from increased trading gains during the quarter. On Slide 9, I'll discuss our bank results and the recent industry focus on advisory sweep deposits. Net interest income of $251,000,000 was in the lower half of our range as average interest earning asset levels declined by nearly $1,000,000,000 and more than offset the improvement in our bank NIM. The primary driver of the decline in interest earning assets was a decline in cash on our balance sheet.

Speaker 3

The increase in NIM was a result of increased loan yield and a decline in deposit costs. Given our expectations for modest cash sorting and higher interest earning assets, as well as the interest savings obtained by paying off the $500,000,000 senior debt, we expect that NII in the 3rd quarter will be in the 250 dollars to $260,000,000 range. Our credit metrics and reserve profile remains strong. The non performing asset ratio stands at 29 basis points. Our credit loss provision totaled $3,000,000 for the quarter and our consolidated allowance to total loans ratio was 88 basis points, which was impacted by the growth in loan balances and fund banking, mortgage and C and I.

Speaker 3

Our balance sheet continues to be well capitalized. Tier 1 leverage capital increased 50 basis points sequentially to 11.1%. I'd also note that the unrealized losses in our bond portfolio continue to improve as credit spreads tightened in the CLO market. I also want to touch on the recent concerns regarding the potential for higher sweep deposit costs on advisory accounts. This has drawn significant interest as to the impact on the industry and consequently we felt it was important to address this issue as it relates to Stifel.

Speaker 3

Let me start by saying that Stifel has been at the forefront of industry trends for much of the cash sorting cycle. Our Smart Rate product was introduced before rates began to rise and offer clients a competitive savings account, which resulted in the retention of client cash within Stifel. In addition, we position our balance sheet to insulate us from interest rate risk and provide acceptable risk adjusted net interest margin. Before the onset of rate increases, steeple's sweep deposits totaled approximately $28,000,000,000 Today, Stifel has approximately $10,000,000,000 in sweep deposits and $16,000,000,000 of smart rate deposits. Said another way, 63% of Stifel's pre rate cycle sweep deposits have sorted into smart rate.

Speaker 3

Additionally, I'd point to the growth in our ticketed money market fund and short term treasury balances to highlight the additional cash alternatives that our advisors utilize to generate higher yields for their clients. Generally speaking, sweep deposits represent operational cash as the average firm wide balance per account is roughly $11,000 On the other hand, SmartRite is more representative of investment cash with an average account balance of $190,000 In terms of the sweep deposits within our advisory platform, the average deposit size is only $9,000 and represents 1.7% of fee based assets, which we disclosed in our slide deck. We believe that given the relatively low percentage of sweep deposits maintained in our advisory accounts as compared to total fee based assets in those accounts, our cash sweep product is being utilized as designed and intended, primarily as a source of account liquidity to pay fees and meet short term cash needs. Consequently, we believe that through our focused efforts to provide higher yielding alternatives to our clients, we have mitigated much of the potential impact of this issue and the incremental risk to Stifel are not material. To illustrate this, we are not changing our net interest income guidance.

Speaker 3

On the next slide, we go through expenses. Comp to revenue ratio in the 2nd quarter was 58%, which was again at the high end of our full year guidance that we gave at the beginning of the year. I would note that during the quarter, we incurred nearly $10,000,000 of severance costs tied to our efficiency initiatives in our international operations. Non compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately 248,000,000 dollars Non comp OpEx as a percentage of revenue was 20.4%. The effective tax rate during the quarter came in at 25.8%.

Speaker 3

Before I turn the call back over to Ron, let me discuss our capital position. On last quarter's call, Ian indicated the possibility of retiring $500,000,000 of senior notes that were maturing in July, given the growth in our bank and its ability to fund its growth. Last week, we paid off this debt. Given our conservative approach and the fact that this was the first time we've retired senior notes, we reduced our buyback activity in the quarter to ensure we had more than ample levels of excess liquidity. As a result, our share repurchases of 229,000 shares in the quarter was down significantly from the prior quarter.

Speaker 3

As of the end of the Q2, we have approximately 11,000,000 shares remaining on our authorization. We have more than $415,000,000 of excess capital based on a 10% Tier 1 leverage target. Additionally, we continue to generate substantial amounts of excess cash as illustrated by our 2nd quarter GAAP net income of $156,000,000 We remain focused on generating strong risk adjusted returns when deploying capital and have done this through reinvesting in the business, making acquisitions as well as through share repurchases. Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the Q3 fully diluted share count to be 111,000,000 shares. And with that, let me turn the call back over to Rod.

Speaker 2

Thanks, Jim. Let me conclude by talking about how we see the remainder of the year playing out and why we are optimistic about the future. Our annualized results for the first half of the year put us above the midpoint of our guidance and roughly in line with Street estimates for the full year. As I said last quarter, the outlook for the remainder of the year is certainly not without its risks. However, given the current trends we are seeing in the market and the operating leverage in our business, we believe that we are well positioned for a strong second half.

Speaker 2

Additionally, as we exit 2024, we believe that we will be on a trajectory to reach our near term milestones of over $5,000,000,000 in annual revenue and $8 per share, as well as our long term milestone of $1,000,000,000 in client assets and $10,000,000,000 in annual revenue. We have not changed our revenue guidance for 2024, but as you can see from the arrows on the right side of the slide, we believe that all of our revenue line items will at least match, if not exceed, our first half results as market conditions continue to improve. On the transactional side, Wealth Management is resilient and our rates business continues to improve as banks are seeing more opportunities to trade their securities portfolios. In Investment Banking, our results so far this year have been driven by increased underwriting activity both in equity and fixed income. As we look at the second half of the year, we anticipate continued solid results from capital raising, but also increased performance from advisory as activity levels continue to improve and closings pick up.

Speaker 2

Given that most of our asset management revenue is priced off trailing quarter asset levels, we've essentially locked in 3 quarters of revenue for 2024. In terms of net interest income, as Jim articulated, we're maintaining our previous guidance for NII. On the expense side, we've narrowed the range for our compensation ratio guidance to reflect the conservatism that we've had in the first half of the year. While we are optimistic for the second half, we are still building back to our 2021 revenue levels, particularly in our institutional segment. As such, we've tightened our guidance to 57.5% to 58%, which still reflects our optimism for stronger revenue results in the second half of the year.

Speaker 2

In addition to our expectation for a strong second half, we should see some benefit from some of the efficiency initiatives we have implemented. As Jim mentioned, we took a $10,000,000 severance charge in the quarter as we right sized our international operations. While these decisions are never easy, we believe it puts our business on a stronger path towards improved profitability without impacting our revenue growth. Let me finish by saying that I am optimistic about the future of our business really as much as I've ever met. We've built a world class diversified business that has proven its ability to generate strong returns despite ever changing market conditions.

Speaker 2

Investments we've made have resulted in increased operating leverage and the growth of our bank and asset management revenue has added to the stability of our results. Given the excess capital we generate, we'll continue to reinvest in our business and return capital to our shareholders with as always a focus on high risk adjusted returns. With that operator, please open up the lines for questions.

Operator

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

Speaker 4

Great. Good morning, Ron, Victor, Jim and Jim. Hi, Devin. First question just on some of the cash storage and commentary, Ron. So you spoke about the potential for more cash sorting.

Speaker 4

I'm just curious, do you think we're close to the end with transactional cash at such low levels and a little flavor on the difference between brokerage and fee base would be great. And then also really appreciate the comments about the Wirehouse moves over the past couple of weeks. I know you guys were probably getting questions there. Why do you think they did that? Was it a competitive move?

Speaker 4

Does it have any influence on Stifel at all?

Speaker 2

Well, let me take your last question first. I'm reading like you are what people are doing and I frankly don't know what or why or exactly what they're doing. You read comments that not all advisory cash is eligible for higher rates. If I read into that, that means that their transactional or operational cash is not, it's part of the platform. So I read that.

Speaker 2

I read other ones where they're increasing the rate, but just up a little bit and not the high yield. So there's a lot of the questions I don't really know. I just know what we're doing and what we have been doing. What I would say as it relates to that though, generally speaking, Stifel has been higher. We are our sweep deposits don't have a 0.01 and a lot of institutions still were at the very, very low end of paying on sweep deposits.

Speaker 2

And so I think that's where some of it's coming from. This pressure is people are really looking at it and say, wait a minute, 0.01. And so that's where I see some of it. But look, clients need the option to have alternatives for higher cash. We have to run our business and provide operational transactional cash, both in brokerage and advisory.

Speaker 2

That's what we've been doing. And we think that the products we've put in place have largely mitigated what suddenly became a hot topic for you all to talk about. So as it relates to I think we've managed this correctly prior to this even coming up. But what you'll see, as Jim mentioned, is when you look at what's happened, really a $9,000 average account is the operational cash that moves all around with an account sometimes, bonds mature and it's in sweep and it moves and it gets reallocated. Those are normal levels.

Speaker 2

In fact, I would say low levels of transactional cash because of the rate environment. And the metrics are very similar between brokerage and advisory. So I don't know that really answered all your questions. I took it in reverse, but that's just how we look.

Speaker 4

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

Speaker 4

Thanks.

Speaker 3

Yes. No, so obviously we have the capacity to generate additional loans on our balance sheet. I think if you look at this quarter, we grew loans a couple of $100,000,000 We grew investments in the normal categories we've talked about over the last several quarters. You look at the growth in fund banking, you look at

Speaker 2

the growth at mortgage, you look at

Speaker 3

the growth in the CLO portfolio, all those categories continue to be attractive risk adjusted returns for us. And obviously given the capacity to fund that with our liquidity as well as the excess capital we're carrying, I think we're going to continue to see growth there. If you look at the current quarter, most of that growth didn't result in pure asset numbers coming up because we were carrying over $2,000,000,000 of cash. So most of that was reallocating from cash into loans. So as you see going forward, as we bring on more deposits on balance sheet, that incremental pickup will be even more as we grow the loan portfolio as well as CLOs.

Speaker 2

Yes. And what I I'll go back to your I forgot one part of your first question, Devin, and I'll supplement it here. And that is that we have and we've said it now for almost two and a half years that we were going to limit the growth in the balance sheet. And that was primarily because we didn't want to get in a position of not understanding the dynamics of cash sort and getting in a position where we were generating loans and then suddenly looking at what we thought would be our perceived NIM being different than what we anticipated because as we know, it's been a highly volatile, not volatile, but straight up 500 basis points from 0. Today, our appetite to grow the balance sheet as it relates to that issue is increasing because frankly, I see the cash sorting issue becoming less and less and less.

Speaker 2

Certainly, the prospect of a rate increase based on recent numbers appears to be significantly lower. I'm not going to rule it out ever, but significantly lower. And in fact, we think you'll see some rate decreases. I'm not in the camp that says it happened in September. Yet overall, the stability of this dynamic has created an ability where we now are more confident about adding assets in a manner that we believe we can manage our risk and our

Operator

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

Speaker 5

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

Speaker 2

Good morning.

Speaker 5

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

Speaker 2

Again, your last question first, not really sure of all of the regulatory aspects. We need to recognize those. There's a lot of differences. First of all, you've got a broad question that impacts brokerage, non discretionary fee based accounts, discretionary fee based accounts. The long and the short of it is that we always have a lot of levers that we can pull as it relates to how we manage our platform for our various products.

Speaker 2

The wirehouses, for instance, charge account fees and we don't. And they have had lower interest on generally speaking than we have. So look, are we competitive? Yes, we're competitive. We have to be competitive.

Speaker 2

We wouldn't be recruiting people. We wouldn't be getting clients if we're not competitive. So of course, we're competitive and we will remain to be competitive. And we offer a competitive product for our clients when you consider all of the things that go into the client experience. So we're very, very confident confident and this issue has been laser focused on something that we've been laser focused on for a lot 2.5 years.

Speaker 2

And when

Speaker 3

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

Speaker 3

Stephen, one thing I'll just say that

Speaker 2

I doesn't we don't have the issue on and I'm not sure you whether you even listed it as an issue. But we don't we're not a platform offering our services to other parties as a platform. And I think there's I think that's an issue and people say, well, there's no pressure on rates if you do that. Well, yes, there is because you can't be subsidizing platform fees through low interest rates as your only option. So we I point that out because we don't really have that issue, but that does that seem to have gotten lost in some of the analysis, so to speak.

Speaker 2

So that's not all I have to say about that.

Speaker 5

Understood. Okay. Well, I'm sure others are going to have questions on this topic. So I'm just going to switch gears to Slide 12, really helpful mark to market of the guidance. It shows consensus revenues are at least near the higher end of the range, the NII guidance unchanged, the comp ratio also near the higher end.

Speaker 5

I was hoping you could just speak to the drivers of some upward pressure on comp. Is it simply due to mix or are there other factors? And where are we in the journey of some of the COVID recruiting packages potentially rolling off in the coming years?

Speaker 2

COVID recruiting packages?

Speaker 5

Yes. Just folks you've hired during 2020, 2021 where you are more aggressive in terms leaning into banker recruitment?

Speaker 2

I'm sorry, I thought you were talking about wealth management. Well, I haven't heard of COVID recruiting packages nor do I think we did that. We certainly didn't have a program that said that. And I feel that we built into 2021, I think the issue, not even the issue, the opportunity is that we have a platform that supports significantly more revenue from an ability to generate revenue. We did $2,200,000,000 in that business and we haven't materially changed staffing.

Speaker 2

So that answers the second question as well as the reason we're tightening our range a little bit is that we are on track to where we think we will be. We are rebuilding and retracing the decline. We went from $2,200,000,000 to 1 point $2,000,000,000 in revenue. And if you look at the annualized rates, we're retracing that back. We don't expect it to happen all this year.

Speaker 2

I don't really share all of the optimism of this being a hockey stick type recovery on that part of the business. And therefore, we're conservative in our just narrowing our comp to revenue range, which is kind of where we think we would be within that range if the year plays out as we see it here. Look, I think this is positive, not negative. We're maintaining our platform. We're generating high returns, high return on tangible capital equity, investing in our business and doing so with a realistic view of the forward curve of improvement of business.

Speaker 3

I'd add to that a little bit. Obviously, NII plays a big role in the comp leverage either up or down. And we were able to hold 58% comp to revenue last year in a challenging environment for our institutional group, but upward sloping NII results. This year, for the 1st 6 months, NII is down $85,000,000 year to date. So you think about that over the 1st 6 months, that equates to about 2 points of comp margin that we've absorbed and how we absorbed it.

Speaker 3

Some of that is the rebound and the decrease in subsidy and other businesses. And so there's obviously a lot of moving factors here, but I think I'd point to the stability of a diversified business model and how we're able to not see material swings up in a number of different business environments.

Speaker 6

Thanks for that. And just I'm going

Speaker 5

to squeeze in one more quick one. Just what drove lower deposit costs quarter on quarter? Certainly encouraging to see, but just given the decline in sweep deposits was a bit tough to reconcile.

Speaker 3

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

Speaker 2

We have that flexibility to do that.

Speaker 5

Understood. Well, thanks for taking my questions.

Operator

Thank you. And we'll take our next question from Alex Blostein So a couple

Speaker 7

of more questions on the So a couple of more questions on the topic of

Speaker 2

the I'm happy to assist you in the last call.

Speaker 7

Yes, I'm good. Thanks. It's been busy. So staying on the topic of the weeks or the week, I guess. First, just a clarification.

Speaker 7

So roughly the $3,000,000,000 of advisory sweep cash that you pointed to in the deck, you're saying you're already paying 2% rate on that and ultimately there's no plans to change that, but based on kind of regulatory dynamics and kind of how that evolves, you're thinking on that might evolve as well that I read the answer

Speaker 2

to the question. Let me stop you there Alex. I want to be sure if that's what you heard that's not what I meant you to heard here. What I said was that there's a portion of our sweep deposits that we view as operational cash, dollars 9,000 in average balances. And our view of operational cash goes into our normal sweep tiering.

Speaker 2

It's our normal sweep product. The highest rate of that tier is 2%, but not every balance is 2%. So I just let's be clear there. But we were already at where some people are saying they want to go on rates. Our sweep deposit pays up to 2% for everything, including brokerage.

Speaker 7

Got it. Okay. That's helpful clarification. So, and I guess just building on that. So, while the balances are obviously small and they're operational in nature as you described, but how does that insulate you guys and the industry from the fiduciary obligation under Reg Reg BI, right?

Speaker 7

Because operationally, it's having this transactional cash in smart rate deposit or money micro fund. Is that different? Does that preclude the customer from performing some of their normal way investment activity? I'm just trying to understand that like is there a red line between small operational sweep under fiduciary or not, right? And whether or not that could still fall under the Reg BI?

Speaker 2

Look, I'm cautious about ever making regulatory interpretation questions, okay. I know that we need to have a reasonable platform needs to be understood. Most advisory platforms will allocate a percentage, 2% to 3% into cash to pay fees and to have operational cash. That's part of the platform that's very reasonable As long as it's understood, then that's just what we do and that's there's nothing wrong with that. There is no law that says you have to have the highest rate or charge the lowest fee.

Speaker 2

I mean, let's just take your the whole thesis and says that Reg BI says that you the highest you can charge for advice is what the ETFs charge for it's just that's not what it says and we need to have a we need to be reasonable. And the biggest driver for us is competitive. It's the competitive putting a competitive product so that we can grow client assets and clients have a choice. And if you do not provide a competitive product, they leave or certainly the advisors aren't happy and they would leave. So I think when you boil it all in, we're very comfortable with where we are.

Speaker 7

I got you. Great. Okay. Thank you for that. Let's maybe move on.

Speaker 7

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

Speaker 2

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

Speaker 2

That will change the economics on that side of the industry, which we view will be beneficial to us competitively speaking.

Speaker 7

Great. Thanks so much.

Operator

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

Speaker 8

Okay. Thank you very much. I too have one more in cash sweep and excuse the maybe the elementary nature of this question. If you were to look outside of transactional cash and the rest of the sweep cash under the fiduciary account, how did the yields stack up? I guess 2% for cash makes sense if you just sort of keeping it there idle, but when rates are around 5% or so, I appreciate you have smart rate and fixed income and so forth.

Speaker 8

But does that put any kind of upward pressure either on 3rd party sweep yields or even sweep that sort of deposit excuse me that swept onto the bank? Just trying to get my hands around that a little bit better. Thank you.

Speaker 2

Bill, look, we tried to say that we put products in place to encourage cash sorting and to give those options. And we've watched 63% of our pre rate cycle sweep deposits move into the higher yielding savings and we've seen a tremendous increase in short term treasuries and we've seen an increase in ticketed money funds, all of which are part of the competitive dynamic. So as we look at it, as we if we would choose to raise yields, we'll do so with the eye of attracting more deposits that we feel that we can deploy on the asset side because we have a vast, vast liquidity pool from deposits sitting off balance sheet. So, the dynamic one of the dynamics of increasing rates will be to attract more cash onto the platform, all things being equal. So, I don't feel that look, I think that the regulatory aspects, what I do not all understand in what I can't know what's going on inside the four walls of some of the firms that have dealt with this.

Speaker 2

But again, we believe we have a competitive fair product that we offer on a platform that is very fair when you consider all costs that go into it and I'm comfortable. So it's hard to answer your question. It's not elementary. It's actually very complex with multiple facets, which is what I'm trying to convey here. And I think one of you all wrote something I read something where experienced management teams know how to do this and know how to manage the businesses.

Speaker 2

And I would like to think we're one of those management teams we've been doing it a long time and we've navigated through all kinds of market conditions and changes in the market and have gotten ahead of many of them. And I feel that's where we are today.

Speaker 8

All right. That's very helpful. And then maybe one for Jim. Just in terms of capital priorities, now that your debt is behind you, your Tier one leverage ratio and capital ratios are very good. How should we think about maybe the pace of buyback from here?

Speaker 8

Maybe you could put that in percentage or maybe payout of free cash flow and or any priorities between de novo versus inorganic opportunities?

Speaker 3

Yes. So as we mentioned on the call, we have $415,000,000 of excess capital today. So the capacity has increased in terms of our ability to deploy capital in terms of the buyback. That said, the buyback is going to be price dependent and it will not be linear. Obviously, we've talked a little bit about allocating some capital to bank growth within the loan portfolio.

Speaker 3

A lot of that can be done with just the capital generated in the bank. And so we don't have a formulaic process in terms of payouts or in terms of price. We will be opportunistic and you may see capital increase some over time, but we will be active in the buyback at some point in the future. Thank you.

Operator

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

Speaker 9

Good morning. Thanks for taking my question. I'm going to take the same option that all my peers did and have my first question on sweeps. And Ron, though, I got to give you props. 2 years ago, we spoke about this and you actually flagged the risk about sweep and the potential for some risk here.

Speaker 9

So tip of the cap there first. But on to my question, sorry?

Speaker 2

No, thank you. We did talk about this, I remember. And the only thing I'd add to it is not only did we talk about it, but we put in products to deal with it. So but thank you for remembering.

Speaker 9

Yes, yes, yes, of course. So, you had flagged the Smart Rate offering and certainly that's a compelling offering for your clients as evidenced by the take up rates that you've seen. But it's my understanding that Smart Rate cannot be held in advisory accounts And it's like a ticketed item sort of like buying a money market fund. So I'm not really sure I understand how that would address this issue, particularly given the fact that excluding the one that we have a press report overnight, they haven't actually made any changes yet, seems to be doing a lesser action. The other two wires have moved all advisory to a more compelling rate.

Speaker 9

It seems as though there's a distinction drawn between brokerage and advisory. And so therefore, this is really squarely a fiduciary issue. And in an employee model, the firm is a fiduciary. So how is it that you believe that it's the firm is putting the client's interest above their own and not maybe moving in a similar direction to some of these wires as far as the frictional cash and not bothering to draw a distinction when you have a fiduciary obligation?

Speaker 2

Look, you're conflating that fiduciary obligation the lowest possible cost everywhere. It's a reasonable we have an obligation. We meet that obligation. You don't you can take that to an extreme in terms of fees and everything else. The platform needs to be properly disclosed.

Speaker 2

I'm not sure that I have read that all advisory cash has been adjusted. In fact, I've read that a lot of advisory cash is not eligible for the same. That's what I've read, which to me is this reservoir cash used for operational and transaction, which is how the industry has been based anyway. So I haven't I don't really know if how they've done that. And again, there were press reports last night that suggests a large firm was not doing that.

Speaker 2

So again, I don't it doesn't really I'm trying I only trying to understand the competitive nature of that and making sure that we're competitive and we are, all right. And that's the thing. Now as it relates to Smart Rate, not an advisory account, that's one of the crazy things about some of these regulatory aspects. Smart Rate should be available and we would love to offer it in advisory, but there's some arcane rules about that specific rule that prevent us from doing that. So what has happened instead those move to money those are in ticket money funds.

Speaker 2

But if we had our choice, we would be offering smart rate to our advisory accounts. We just can't, which is sort of ridiculous when we start thinking about our producer obligation, yet we can offer a great product.

Speaker 3

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

Speaker 2

very to all everyone that's asking questions, everyone, this is the first question. I'm sure it's going to be the first question on every call. I would just encourage you to look at the various aspects of this and understand the platform side, the fiduciary side, the brokerage side, all of which have implications. We have 2 of those 3 buckets that we have to deal with. And we feel that we have done so appropriately and competitively.

Speaker 9

Great. Fully appreciate the situation is very fluid and we're getting data points very frequently. So thanks for providing your perspective on that. Shifting gears a little bit, I think, Jim, you had indicated that expectation for share count in the Q3 will be roughly flat with the end of period at $111,000,000 Does that mean that we should expect maybe limited buybacks in the Q3 even though the debt is already retired? Maybe you want to rebuild cash or am I misunderstanding?

Speaker 3

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

Speaker 2

Jim gives you the same number he gives me, okay. He says here's our base now an increase in the share price will increase our diluted shares outside and decrease and then lay over your stock purchases on it. So you can do the same thing that we do, okay. We start with a base of $111,000,000 and the two variables that will impact that base are share repurchases and stock price.

Speaker 9

Perfect. Thanks for clarifying.

Operator

Thank you. Our next question comes from Chris Allen with Citi.

Speaker 6

Good morning, everyone. I appreciate your take. How's it going Ron? I want to switch gears a little bit. I think we've talked about deposit rates enough at this point.

Speaker 6

Maybe if you could talk about the outlook for loan growth from here. You noted that cash sorting, the impact there is declining.

Speaker 2

Just wondering

Speaker 6

if there's any other constraining factors on loan growth from here. I know you've talked about in the past about aligning loans with deposit relationship with clients and kind of what's the appetite for loan growth going forward?

Speaker 2

I think that no, I mean, we've I've always said we have tremendous demand for loans. 1 of the constraining factors has been the foundational basis of funding, which is deposits and cash sorting and our uncertainty with that and the forward yield curve and the inversion of the yield curve. And all of that boiled together, we said again a couple of years ago, say, we're going to limit balance sheet growth here until we get a clearer picture of what we do on the asset side is properly has a proper foundation on how it's funded on the liability side. We are getting past that point of being able to see have some visibility into how we can build the balance sheet in a profitable risk adjusted way, which is what we always talk about. And I would say today that yes, no, we can grow.

Speaker 2

The constraining factor today, just to answer you will be if there is one is that where the entire industry got into a I think into a position of sort of running the balance sheet. And so you were lending almost on a spread basis to a variety of clients that might be the only relationship that you had was that and you were doing it because you were washing deposits and you were looking to just build spread income. We did a little bit of that as well And what but not a lot, but the constraining factor now is that we're not just a spread lender, we're relationship lenders. So when we're evaluating what we're putting on our balance sheet, it's going to have a lot more doors in terms of, if you will, ability to do other business, whether it's in wealth or treasury or banking and all of those things that are an overall relationship. So that's just how we talk about it internally and that's what I would say.

Speaker 2

But even that has a tremendous amount of ability for us to grow. The opportunities for growth is not a problem at all. It's us getting comfortable with the overall economic environment with which we're growing into.

Speaker 3

And when you think of some of those relationships, particularly with Venture Lending, Fund Banking, those produce additional deposits as Ron talked about. Last quarter, those were up another $200,000,000 and the pace of that has picked up already in the Q3. So we're seeing some of the fruits of the investments we've made there and that's going to continue to provide another source of liquidity, to fund overall balance sheet growth.

Speaker 2

Thank you for that color.

Speaker 6

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

Speaker 2

I think it's a lot of our rate trading is correlated to bank balance sheet and we see that activity picking up for the same reasons that I talk about on the asset side of trying to know what the forward environment might look like that allows us to make decisions on the line. That same thing is directly related to what banks are doing in their portfolios and trying to understand how to reposition their portfolios and the strategies around that, which is what we do. We help we advise on that, we help on strategy, we help on interest rate risk, we help on how those portfolios are positioned and stress test against various things. And what we see is that there in 2023, I think a lot of people were very cautious, A, because of the outflow deposits, the uncertainty in the marketplace and there was not a lot of trading going on. And we see that picking up and that trend expanding absent some big change in the economic environment.

Speaker 2

But the trend in that business is good.

Operator

For sure.

Speaker 3

But I would highlight, historically, we do typically see a bit of a season some seasonality in the 3rd quarter, some slowdown there and then that's kind of picked back up in the Q4. So as you're thinking of kind of your forward numbers, I would remind you to take that into consideration. And we did have some gains during the quarter that played into some of the results in 2Q as well. But just keep those things in mind as you look forward for the rest of the year.

Speaker 2

Always count on my CFO to put quarterly parameters on my overall viewpoint of the marketplace. So thank you, Jim.

Speaker 6

Thanks guys.

Operator

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

Speaker 2

Well, thank you for pronouncing my name perfectly. And what I would say is we're excited about the remainder of the year where we believe that as uncertainties come off the table, the markets will continue to improve. We still see exit velocity into 2025. I think we are on our way to both our mid and long term milestones that we've talked about. And I look forward to reporting back to you after the Q3 of this year.

Speaker 2

And thank you everyone for taking the time to listen to us and we will sign off. Thank you.

Operator

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

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Earnings Conference Call
Stifel Financial Q2 2024
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