Q4 2022 Stifel Financial Corp Earnings Call
Please standby.
Good day and welcome to the Stifel Financial fourth quarter 2022 financial results Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Joel Jeffrey. Please go ahead.
Thank you Jonathan and.
Welcome everyone to Stifel Financial's fourth quarter and full year financial results Conference call I'm joined on the call today by our chairman and CEO , Ron Kruszewski, our co presidents, Victor <unk>, and our CFO , Jim Merrigan earlier.
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 people Dot com.
I would note that some of the numbers that we state throughout our presentation are presented on a non-GAAP basis I'd refer to our reconciliation of GAAP to non-GAAP as disclosed in our press release.
I would also remind listeners to refer to our earnings release financial supplement and our slide presentation for information on forward looking statements and non-GAAP measures. This audiocast is copyrighted material of Stifel financial you may not be duplicated reproduced or rebroadcast without the consent of Stifel Financial Corp. I will now turn the call over to our chairman and CEO Ron Kruszewski.
Thanks, Joe tore yeah. Good morning, and thank you for taking the time to listen to our fourth quarter and full year results conference call.
22 represented staples, 132nd year in business and represented our second best annual result, because our balanced business model enabled us to deliver return on tangible common equity of 22% simply stated people performed as we expected with our more stable book Global.
Wealth management business offsetting declines in our institutional segment.
As is well reported 2022 represented a difficult operating environment characterized by persistent inflation and rapid central bank tightening, which put pressure on equity valuations.
Illustrated by a 19% decline in the S&P 500, the pressure on asset valuations was broad based and in the case of high growth technology companies dramatic.
The complex and volatile environment, including the highest inflation in 40 years of significant geopolitical turmoil had a chilling effect on capital raising and related strategic activity impacting our institutional business worldwide.
Right. This volatility people revenues totaled $4 4 billion with earnings per share of $5.74. Additionally, we increased our book value by 6% and our tangible book value by 9%.
Global wealth recorded record revenue and record profitability in our institutional business. Despite a difficult year when compared to 2021 was approximately the same as 2020, which represented record revenue at that time again. These results are a testament to the diversity of our business model and our long term strategy.
A continually reinvesting for growth.
On the basis of our 2022 results and our belief and consistently increasing our dividend and happy to announce that our board of directors has approved a 20% increase to our common dividend, which will now total annually $1 44 per share or <unk> 36 per quarter.
Moving to slide two we review the significant growth in our business since 2015, even with the difficult operating environment in 2022, our growth has been stellar net revenue is up 86% net interest income up nearly 600% advisory revenue up 300% in earnings per share.
<unk> more than 350%.
Further comparing our 2022 results to 2020, our growth story is equally clear we have increased net revenue by 17% net interest income nearly doubled advisory revenue was up 67% and earnings per share grew 26%.
<unk> heard me say it a thousand times, but I remind you again Stifel as a growth company and we will continue to reinvest in our business as it has been instrumental in our long history of consistent profitable growth.
Our focus on long term growth is a key factor in reaching our strategic objectives over the past 25 years of Stifel has grown from a small regional wealth management firm to a premier global wealth management and investment bank as I look to the future. We will continue to grow both our business segments by redeploying our substantial excess capital.
With the goal of generating the best risk adjusted returns.
For our wealth management franchise. This means continuing to recruit high quality financial advisers that choose to make Stifel. Their firm of choice due to our advisor friendly culture expansive product suite excellent technology and industry, leading yet simple and fair compensation systems.
Since 2018, we've added more than 500 financial advisers with trailing 12 month production levels that total more than $350 million.
As you've heard me say before we believe that we can reach one trillion and total client assets through a combination of strong recruiting net new asset growth and market appreciation.
This growth will not only help us grow our private client asset base, but increase our deposit base at our bank and further expand our bank balance sheet, which has been a significant contributor to our top and Bottomline growth.
Speaking of the bank, we are pleased with both our net interest income and expanding net interest margin.
As Jim will expand on later in this presentation. We believe our net interest will increase nearly 40% next year with our net interest margin expanding to between four 5% and 4.25%.
We've accomplished this because of our focus on building an asset sensitive balance sheet over the past several years of near zero short term rates.
Asset strategy has allowed people to offer competitive savings type accounts and pass more of the rate increases to our clients.
A particular note is our bank smart rate program. This high yield savings account has enabled Stifel to increase its client deposits over the past few quarters, while many in our industry have been dealing with the impact of cash sorting by clients looking for higher yields on their cash.
Also we will continue to pursue deposits from our corporate clients as our expansion in the fund banking and other corporate banking services has further expanded our deposit base.
Our institutional group has grown from essentially zero, a little less than 20 years ago into a global business that generated average total revenue in the past three years of $1 75 billion.
This was accomplished through both organic growth as well as a number of strategic acquisitions. Our growth has been focused on increasing our relevance to our clients as we look forward. This will continue to be a driving principle.
In terms of our overall business outlook, we believe that we will achieve our objective of one trillion in assets under management, which coupled with loan growth with more than double the revenue generated from wealth management as such even considering the substantial growth we expect from our institutional business we expect.
<unk> management to comprise a greater percentage of our revenue in the years ahead.
In addition, given our strategic objectives for our business, we anticipate that our excess capital levels will continue to grow meaningfully.
We will continue our longstanding policy of focusing on generating the best risk adjusted returns, which I'll discuss in greater detail on the next slide.
As you can see from the chart on slide four at year end, we have approximately $400 million of excess capital and based on consensus analyst estimates, we could generate an additional $800 million in 2023.
It is strategic that we have the capital to be able to take advantage of opportunities in the market, particularly in Dallas cycles.
As you can see from the chart on the lower left we have a history of deploying our excess capital.
Both grow our business and return it to shareholders. Our approach in either case has been and will be based again.
Risk adjusted returns.
Over the past two years, we are focused on growing our balance sheet and as such we've deployed more than $1 8 billion in capital supporting balance sheet growth of nearly $11 billion of course. This asset growth has been funded by deposits, which have grown since 2017 by 16 billion attributable to strong Ricky.
Routing as well as an increase in retail and commercial deposit gathering gathered capabilities.
Well balance sheet growth has been the recent focus of our capital deployment strategy. We have also paid out $275 million in common and preferred dividends, we purchased nearly $280 million of common stock and allocated $136 million to acquisitions.
As we enter 2023, we have stated our intention to slow our bank growth, which effectively increases capital available for other users further we believe in consistently growing our dividend and as we get again today reinvesting.
Our dividends, we did today and reinvesting in our franchise for future growth.
That said, we also feel that given our current share price our stock is attractively valued compared to others in our peer group and we currently have eight 7 million shares remaining on our current repurchase authorization during the quarter, we repurchased about $1 3 million shares or about $75 million.
I suspect many in the analyst community had expectations for a higher level of share repurchases I would know two factors impacting the level of buyback first we're only in the market two months and second we are working on an acquisition during late December .
One should not read too much into this and we will continue to utilize share repurchases as a tool for capital utilization.
Speaking of valuation on slide five we illustrate how Stifel compares to two high quality peers, Raymond James and Morgan Stanley .
I respect these firms I would note that our business models, which combined wealth management institutional and a bank are quite similar.
These firms we run our company to be recognized as a consistent high quality performer.
Look when we compare our evaluation metrics to these companies, we see that we trade at a 25% to 33% discount based on pace or price to tangible book.
However, since 2017, our growth in EPS and tangible book value is considerably higher than these two quality companies as is our trailing 12 month return on tangible common equity.
Simply our team's goal is to continue to perform consistently consistently and as a natural result, close the valuation gap.
Finally on the next slide I'll discuss our outlook for 2023 in terms of current street analysts estimates. The current consensus consensus estimate for net revenue for 2023 is $4 8 billion, which is up about 425 billion from 2022, the primary driver of the increase.
Is the expectation that our net interest income will grow 212, 5 billion about a $360 million increase.
Of note, our fourth quarter NII total about $300 million, which of course annualize at $1 2 billion for 2023 and does not take into account any increase in net interest margin.
Or interest earning assets.
Taking out NII. The street is essentially predicting that our operating net revenue will be flat to up slightly said another way the street consensus implies the overall market conditions for 2023 will be similar to 2022 of course market can turn very quickly and <unk>.
Moving market conditions will positively impact revenues, while a recession is also possible.
Considering both possibilities we are guiding to total net revenue of $4 $6 5 billion. In 2023. This includes our expectation that net interest income will be in the range of one two to one 3 billion op.
Operating revenue has little as a little less clarity as the environment for our institutional business remains challenging.
While we expect the capital raising activity will improve M&A announcements will pick up the overall market environment will play an important role in 2020 revenue.
I forget the wider range of net revenue guidance.
Note that given the expected.
Increased contribution from NII in 2023, and our revenue guidance, we expect that our compensation ratio will decline to 56% to 58% and that operating non cap will be in the range of 18% to 19% of net revenue.
Now, let me turn the call over to Jim Harrison to discuss our most recent quarterly results.
Thanks, Ron and good morning, everyone.
Stifel generated quarterly net revenue surpassed $1, one 2 billion.
Our second strongest fourth quarter in our history and our.
Our focus on managing expenses resulted in pre tax margins of 23% and non-GAAP EPS of $1 58.
This drove an annualized return on tangible common equity of 23%.
Looking at the details of our fourth quarter results on slide eight we showed solid sequential improvement as revenue increased 7% and earnings per share improved 23%.
I would highlight that the fourth quarter marked the ninth consecutive quarter with a pretax margin of greater than 20%.
This is of note is prior to the beginning of this streak, we only had five quarters with pretax margins above 20% since 1993.
Moving on to our segment results.
Wealth management revenue increased 10% to a record $744 million and a pre tax margins were 43%.
This is an increase of 810 basis points from a year ago.
For the year, we posted record revenue driven by net interest income and asset management revenue that both reached all time highs in 2022.
During the quarter, we added a total of 36 advisers and 152 for the full year, despite an environment that was less than ideal.
As market conditions normalize we anticipate a strong pickup in the number of advisers coming to Stifel as our pipelines remain robust.
The markets have also influenced our transactional and asset management revenues.
Regardless, we ended the quarter with fee based assets of $145 billion.
And total client assets of 390 billion.
Speaking of growth, our net new assets increased 5% in the fourth quarter and 4% over the trailing 12 months.
On the next slide we illustrate some of the longer term drivers in our wealth management business.
Our newer to our new recruits typically brings substantial client assets to our platform and generate a large percentage of the revenue and advisory fees.
This combined with our increasing NII contribution has increased our percentage of recurring revenue.
Greater stability and predictability of results.
Our recurring revenue reached 76% for the full year 2022, which surpassed previous years, Paul Im sorry surpassed our previous full year high by 1000 basis points.
Moving on to the institutional group in the quarter revenue was $354 million and for the full year institutional revenue totaled more than one 5 billion.
In the fourth quarter firm wide investment banking revenue totaled $224 million.
As you can see by the chart on the bottom right of this slide we've significantly grown the number of investment banking managing directors.
At the end of 2020 too many direct managing directors totaled 229, which is up more than two five times. The number we had in 2012.
While market conditions have weighed on this business our increased scale enabled us to generate $971 million of investment banking revenue in 2022, which was our second strongest year ever.
As market conditions normalize we believe our increased scale will continue to drive revenue in this segment.
Advisory revenue in the quarter was $167 million.
We were once again negatively impacted by the delay in deal closings, particularly in our financials vertical.
Ed one of our larger deals was recently approved by the FDIC and we anticipate that it will close in March which should result in higher than seasonal norms for advisory revenue in the first quarter.
We continue to see positive signs in our business as client engagement remains high and our investment banking pipelines remain solid.
We've seen in the second half of 2022 closings have slowed.
Yes.
On the next slide we look at the remainder of our institutional equities and fixed income business.
First income generated net revenue of $105 million in the quarter and $504 million for the year.
Our equities business was down approximately 50% for both the quarter and full year again, due primarily due to the industry wide drought and capital raising.
Our full year fixed income transactional revenue increased 3% and was the second highest in our history.
Our business benefited from the higher activity levels earlier in the year, particularly in our rates business. As a result of the addition of Vining Sparks.
Fixed income capital raising for the year was $134 million or.
Our business was negatively impacted by lower industry wide issuance activity in both the municipal and credit markets.
I would highlight that our market share for the number of negotiated transactions increased to 15, 3% in 2022, which was 710 basis points ahead of the next highest firm.
For the quarter revenue came in at $28 million, which is up 3% sequentially and compares favorably with the 25% industry wide decline in public finance issuance.
Equity transactional revenue totaled $52 million up 13% sequentially.
This increase compares favorably to industry wide volumes that were down 3%.
Overall, we see increased engagement and electronic trading as we continue to gain market share as our clients embrace our electronic offerings and value are best in class research.
In terms of equity underwriting the market continues to face headwinds from increased volatility, we anticipate that as markets stabilize.
Activity levels will begin to return to historical norms.
Moving on to slide 13.
Our net interest income has been a standout in 2022 as we benefited from the growth in our balance sheet and the impact of higher interest rates for the year NII totaled nearly $900 million.
Which came in slightly above our full year guidance.
For the quarter NII was up 24% sequentially to $302 million and also came above the high end of our guidance.
I would note that NII in the quarter was positively impacted by a benefit in the mortgage portfolio as a result of higher interest rates, increasing the duration of that portfolio, which which result in deferred cost being amortized over a longer timeframe.
This accounted for approximately $5 million of the increase in NII during the quarter.
We project net interest income in the first quarter and a range of $295 million to $305 million and bank NIM of 380 to 390 basis points.
For the full year NII guidance mentioned earlier for 2023 I would note that this is based on loan growth of up to $2 billion Bank.
Our bank NIM of 405 to 425 basis points and a full cycle deposit beta of 40% to 50%.
I would add that we ended the year with $8 7 billion and the smart rate program.
The range of our NIM guidance reflects our assumptions for various levels of additional cash sorting throughout the year.
One on the next slide I'll quickly review, the bank's loan and investment portfolios.
Ended the quarter with total loans of just under $21 billion, which.
Which was down approximately $200 million from the prior quarter.
Our commercial portfolio decreased by $300 million primarily.
Primarily due to the decline in broadly syndicated C&I loans.
On the consumer side, our mortgage portfolio increased by more than $300 million, while our securities based loan portfolio fell by $60 million.
Moving to the investment portfolio, we continue to see improved marks on the available for sale and held to maturity portfolios, which improved $4 million and $75 million respectively. During the quarter.
Turning to credit metrics, our credit loss provision totaled $6 million.
Our consolidated allowance to total loans ratio was 74 basis points, which is up slightly due to the provision expense and the decrease in the loan portfolio.
Overall.
Metrics remain very strong our nonperforming assets as a percentage of total assets were four basis points, while our nonperforming loans were five basis points.
On the next slide we go through expenses.
Our comp to revenue ratio in the fourth quarter was 56, 5% and 150 basis points sequential decline as we continue to benefit from the NII contribution.
For the year, we came in at 58%, which was in line with the high end of our updated guidance.
Non compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $219 million, which is up $10 million from the prior quarter due to seasonal increases in travel and entertainment expenses.
For the full year, our non comp operating expenses as a percentage of revenue were 19%.
The core effective tax rate during the quarter came in at 24, 5%.
Finally, our average fully diluted share count came in above our guidance as the benefit of our share repurchases were more than offset by the increase in our share price.
Absent any assumption for additional share repurchases and assuming a stable stock price.
We would expect the first quarter fully diluted share count to be $115 9 million shares.
And with that let me turn the call back over to Ron for his closing remarks.
Thanks, Jim.
As you can tell from our guidance there is still a significant amount of uncertainty in the operating environment in 2023 U S economy faces the prospect of a recession the impact of the war in Ukraine continues to be a drag on the global economy, and China reopening could further impact the global supply chain just to name a few.
However, our staples down time and time again, our business is built to perform throughout economic cycles.
<unk> in 2022, we generated our second highest net revenue and EPS in an environment, where our institutional revenues were down 30% our focus on reinvesting in our business resulted in record global wealth management revenue and a 79% increase in net interest income the growth in our investment banking managing directors enabled us to offer.
Set the 64% decline in capital raising with strong advisory results, we generated pre tax margins and return on tangible common equity of nearly 22% while growing our tangible book value.
Her share by 9%.
As I look into the current year I am optimistic in our global wealth segment, we anticipate further NII growth. Despite the slower growth rate of our balance sheet. Our strong recruiting efforts will lead to further net new asset growth in our private client business. Our institutional business is more cyclical, but remains well positioned to benefit from any pick.
The capital raising activity and we will continue to focus on increasing our relevance to our clients.
Lastly, we continue to generate significant excess capital and given our expectations for significantly less balance sheet growth in 2023, we anticipate additional available capital through share repurchases dividend increases as we just did and potential acquisition and considering all of the above I look forward.
To closing people valuation gap and with that operator, please open the lines for questions.
Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone if you're joining US today, you say speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that will be star. One if you would like to signal questions Star one.
Our first question will come from Devin Ryan with JMP Securities.
Hey, good morning, guys how are you.
Good morning, Devin good morning.
Maybe just start on the guidance I appreciate.
Heading into 2023, there is a lot of uncertainty, but I am assuming kind of a big.
Input here, just trying to understand what.
What happens in investment banking and thats going to be pretty big toggle and so let me just maybe think about some of the underlying assumptions that you guys have in that revenue guidance around equity market movements.
Movements kind of on the plus and minus side and then just overall kind of how youre thinking about the guardrails for investment banking for 2023.
Devin I think I tried to address that in the call. Let me let me just state it again.
Our guidance started with consensus guide.
Guidance on the street, which is about $4 8 billion and as I said.
Other than an increase in NII, which which we can forecast pretty well with what we've shown and we're confident in that number on the street is effectively having flat operating revenues. So 2022 on the institutional side was a difficult year as well.
Across the street so that.
$4 8 billion, which is the middle of our revenue guidance.
Assumes for US basically the same kind of environment I would say that.
If you if you looked at investment banking I would say that capital raising would be up advisory would be down.
Maybe offsetting each other but operating revenues flat in an environment.
That will.
Be similar to 2022.
As the fed figures out what it's going to do on the economy.
Either has a soft landing or a recession.
So the middle is sort of like the port stayed the same as 2022 now if the market gets better which it can turn on a dime and we've seen and I expect at some point it well when you get to the higher end of our guidance, which would be driven by improved asset management fees and improved investment banking the loan.
By end of our range would say that the market environment worsens from 2022.
And therefore.
It may be a recession and therefore, you get to the lower end of our guidance, which would which would be EBIT more difficult institutional markets and asset management fees that would be down because equity markets would correct even more so.
The give and take on that Jim you have anything to add no. The only thing I would emphasize there is the comment on some of the advisory fees that slipped out of the fourth quarter and into the first and just emphasize the fact that thats going to result in some seasonal seasonality differences.
In advisory in the first quarter, particularly the large financial deal. There's been a couple of other deals that slipped out of the fourth quarter into the first and just would emphasize that as well, yes, we got a little bit of a head start on the advisory.
Okay.
Hopefully that gives some color again.
We are using the street.
And then commenting from there Kevin.
Yes, I appreciate that context.
Maybe just a big picture question, Ron I would like to slide five where you frame out kind of the growth of the company and the valuation.
Just at a high level, you talked a lot about kind of wealth management and that becoming bigger and getting to a trillion in assets.
Just as you look out over the next handful of years. So you grew earnings of 142% over the last five years is that type of growth.
As a firm is obviously the larger scale today, you think you can do that over the next five and just what are some of the if you were to kind of highlight a couple of the biggest drivers or opportunities for Stifel. Right. Now what are you most excited about.
Well.
Certainly on the wealth management side, we see.
We see very strong recruiting pipeline.
We're always we're always looking.
King for accretive acquisitions are not saying that we see that now I'm, just saying that we will do this.
But but on the wealth management side, both our view of the recruiting landscape and the investments that we've made to be an attractive destination.
It makes me optimistic about that business and you can look Devin I get I get this question a lot and it's hard to sit here today, and just say Oh, we can do that but go back over any five year period and look at our growth over any five year period over the last 20 years and add your Youll see.
Similar characteristics, but I would say past is prologue, we're a firm that makes investments accretive investments and we grow our returns.
And I see as the firm has.
As become.
More relevant to clients and has a has more product suites, we are better positioned today to grow.
Our wealth management, but also our institutional business I don't want to lose sight of how difficult 2022 was across the street and the institutional business and we've built quite a franchise there and that's going to rebound.
So you take the combination of those two and I'm optimistic about our growth and I think we as a management team have shown the ability to bring revenue growth to the bottom line.
Can you just maybe to add to that just a bit we have more financial flexibility today than we've had historically just given the excess capital we had the stability in the revenues and the earnings were generating in that excess capital, we're generating so the ability to support the growth and invest in the growth whether it's in people acquisitions et cetera buybacks you name. It we have a lot more financial flexibility today than we've had.
Yeah.
We also we just announced <unk>.
The deal that we expect to be accretive.
And our recruiting.
Has been has been strong in the first half or the first part of the year. So again I sort of say past is prologue and.
And let's just go from there.
Okay great.
Sure I'll get some questions on the excess capital, but I'll, let someone else ask I'll hop back in the queue. Thank you.
[laughter].
And our next question will come from Steven <unk> with Wolfe Research.
Hey, good morning, Ron and Jim Michael we're not going to start this on for Stephen.
Just starting off maybe on the topic of comp leverage the midpoint of your guidance suggests absolute comp dollars will grow roughly $200 million in 2023, while NII is growing 300, FTE with fees roughly flat given much of that revenue growth is coming from NII why wouldn't we see better comp lever.
In 2023.
Just any help understanding the drivers there would be helpful. Thank you.
Well just to based on numbers alone you're your observation is correct.
That.
Everything being equal.
We could.
You have an improvement.
Our comp to revenue ratio based on that look I think we're conservative we always have been as it relates to this.
And our range is.
Reflective of many possible outcomes that can occur.
Always start the year conservative and our compensation assumptions, we'll adjust as the year goes on but I won't dispute the math that you're doing here, okay, which which would imply that we would have further leverage in our comp.
Ratio.
All else being equal that said, we gave you our guidance.
Yeah, and I would also point out that over the last two years, we've been able to knock almost 200 basis points off the comp.
The comp ratio and so I think the conservative nature of the guidance. We are intending to basically show that we're continuing to get comp leverage there, but there is a wide range of scenarios in that forecast, which makes it difficult to exactly pin down yes.
The other the other thing that we do.
We pay our when we recruit that those recruiting costs run through our comp ratio, we don't exclude those as some.
<unk> form of non operating those numbers, so as we anticipate and we do grow.
Our recruiting which which obviously drives our future growth those initial costs, which can be.
They are certainly higher than what the comp ratio would suggest for that individual that we hire.
Those are absorbed in our comp to revenue.
Guidance.
Great. Yes, that's helpful color for sure for my follow up I, just wanted to dig into capital management of the excess capital top topic, a little bit more.
You gave some detail on the drivers behind the $75 million during the quarter, how should we think about the magnitude and cadence of buyback.
Given that $800 million of capacity you had cited after dividend and bank growth. Thank you.
Well, if I actually answered that question I'll be the first time in the <unk>.
History that have actually.
Given a future view.
Our buybacks, which for us are dependent on market conditions and other opportunities and so I don't.
I do not.
And we will not.
Provide.
Some number we don't we don't look at it that way that said that said youre right about.
The $400 million of access plus 800 potentials.
Two.
When you what I will say is that we have.
Cause of the market and some of the uncertainty we want to see where the fed land a whole bunch of reasons that we've we've decided to slow our balance sheet growth in this environment.
That.
That's taken a lot of capital over the last couple of years. So we just increased our dividend.
And you naturally will have left.
The ability to <unk>.
Make acquisitions.
Our make another acquisition, which is called buying our own stock.
And.
Today, when I look at it and I showed on page five.
That's a compelling use of capital.
To to make an investment ourselves.
So you take that as you will but we are increasing at this point, we believe that our available capital.
Will it will be less as it has been years into balance sheet growth and more into capital return.
Shut ins yet.
Always considering accretive acquisitions.
Maybe just one more comment on the share count as you think about repurchases last quarter. The vast majority of those repurchases happened in the back half of the quarter and obviously thats based on an average count for the quarter and so when you see our guidance for next quarter absent any additional share repurchases.
The guidance going down to $115 9 million shares you see the benefit of last quarter showing up more in that number and we will continue to bring that down over time with additional purchases that Rob discussed.
And look I think it's a great question.
And something that people can look at because we are gen.
Generating substantial capital in and are well capitalized going into this.
Great. Thanks, so much for taking my questions.
And our next question will come from Alex <unk> with Goldman Sachs.
Good morning, guys. Good morning, Hey, Ron Good morning, guys.
So just.
Kind of following up on your last comments around utilization of <unk> capital.
It sounds like the discussion around M&A may be picking up a little bit more if I'm kind of reading your body language correctly.
Any particular area that you think you will participate more and whether its institutional wealth when it comes to deploying excess capital if youre not going aggressive on the buyback.
Well I certainly didn't want to imply that we would be aggressive on the buyback Alex site, what I. What I said is that we that the amount all things being equal we got a lot more available.
To point toward a buyback so I'm not trying to say that.
I'd just like to say, we're going to buy X number of shares at any price come Hell or high water. We just we don't approach it that way.
But one of the best acquisitions out there.
As our own stock alright.
I always want to put the caveat out there that we're we've been an opportunistic firm we've got over 30 acquisitions.
And when we see a deal transaction then it will increase our relevance and build our franchise we.
We will do that as well.
Well.
So I don't I didn't want to imply I am glad you asked the question that we.
We have some acquisitions.
Around obviously couldn't talk about it anyway, but.
Sure.
Let me just say that while we have a lot of capital as I look forward I would say that we're going to.
We're always looking at wealth management and asset management and in what I would say more capital light.
Businesses too.
Leverage our <unk>.
Extensive platform.
So I would I would.
Favre.
That over over other transaction I think our goal in the institutional group.
As to us too.
Consolidate based on market conditions and improve profitability back to 2020 levels.
But look we just did a nice acquisition and the advisory side and institutional and.
Something like that would appear that was a very nice fit we would we would highly considered.
No.
Again, maybe a roundabout way of saying it but do not assume that I was.
I was saying, we're not going to do buybacks.
Okay.
Because we have the acquisition.
Got it alright that is that that is helpful.
Second question for you guys just wanted to dig in into the funding mix a little more.
I think I caught it right from Jim the Smart grid program was at $8 7 billion as of the end of the quarter I think it's up about 4 billion sequentially.
Maybe talk a little bit about within your <unk> assumptions. How are you thinking about further kind of client utilization and how significant do you think those balances will be in your center 'twenty three outlook and just a clarification. When you talk about 40% to 50% deposit beta that's not accounting for the mix right.
This is just the rate increase in various programs you have.
I think it is accounting for the mix okay.
Today or through the end of the year I would say that our total deposit beta is around 40.
1%.
Yes, that's total and that includes the remixing into smart right.
And so and our effective interest cost Jem, which is.
First Margaret is at 4% today.
Total interest cost was about 100, and whereas the 142 basis points fourth quarter, yes, So thats a mix then.
Although I will say that one of the things that that.
Pleased with because because we anticipated.
At some point rates were going to arise.
We didn't necessarily anticipate.
How rapidly they would be in 2022, but we built the balance sheet, we actually sort of.
Gave up some NIM to build an asset sensitive balance sheet. So what we've been able to do is watch our nims expand while we have been what I think is fairly.
Dealing with cash sorting and deposit betas.
So we feel we're in a good position as we continue to to provide a product to keep deposits on the platform attract new deposits, which is important.
I'll also forecasting NIM expansion next year so.
I think that the sort of our plan came together and thought about it and now we are.
We're we're trying to maintain a deposit franchise, what I see across the street in many instances is NIM is being driven by by lower net interest costs because deposit betas are lower.
Our deposit beta is.
What we originally anticipated at the beginning of the cycle. If you remember we said it will be 25 to 50.
Through the cycle, we're at 41, including $8 7 billion and a nice high yielding savings accounts, yes.
And just maybe to add that our bid we didn't we gave some pretty granular expectations of the assumptions.
Our full year NIM of 405 to 425 basis points and that data between 40, and 50% now we didn't give specific mix composition.
Composition between smart rate and the sweep program, but I would say is the higher deposit data assumes a pretty aggressive amount of remixing and a lower deposit beta more along the lines of what we've seen over the last few months and I think that that should kind of be able to get you. Some some of the detail on.
How we came to that calculation.
Got it great. Thanks, so much guys.
Good question.
And our next question will come from Brennan Hawken with UBS.
Good morning, Ron Good morning, Jim.
Good morning.
The question sort of a high level you've touched on it a couple of different ways from a couple of different directions here.
Slide five.
Ron.
When you think about.
The.
Recent history institutional deals you've been active there and they have been accretive and.
And so they certainly helped drive returns and they helped drive earnings growth.
But I think they also could end up keeping investors focused on the institutional business at Stifel, which might impact perception. Despite the case that you lay out on the slide So how do you plan to strike a balance in thinking about where youre going to be.
Allocating growth capital to each of these businesses.
Well again.
We.
I pick these two pairs for high quality Paris and.
One one.
One has a little bit more wealth management and institutional but still have significant institutional the other has more institutional wealth.
Wealth management today.
Bob.
And so they are very similar in terms of their mix.
<unk>.
We will focus and continue to focus on building wealth management.
That's that's what investors want to hear and we certainly have the platform to scale that doesn't us and we will we will do that.
We will not do that at all costs.
One of the things that we focused on is our return on tangible common equity, which you can see here so despite.
Even our focus that we've had on institutional.
We have great returns here and great returns across.
What was just a difficult market cycle. So.
I think that.
<unk>.
Maybe the perception that.
Perception, if it was true when we would've had in off of 2022. Okay. It would have been is off we had a really across the street and the institutional is very difficult our business down over 30%, yet we had our second best year ever and very good results because our model balances.
The stability of wealth management with the cyclical aspects of the institutional business.
We will focus.
Well, we always have.
We will also do.
Accretive transactions.
In the institutional space, because we believe that's a business, especially where we're positioned as a middle market firm.
And so many firms are exiting they're either not big enough to get there or they are large enough, they're focusing up there is a huge market for us and we're going to we're going to take advantage of that.
I'd also reiterate one of Ron's comments from the prepared remarks, we expect wealth management to comprise a greater percentage of our revenues in the years ahead, I think that's indicative of the investments and the growth we expect to.
See occur in that segment.
Yeah, Okay I appreciate it.
I appreciate you sharing your thoughts on that.
That's helpful.
Another thing to consider you guys might be disclosing the net new asset figure and writing too that might help with the other two that you flagged there do that as well so that might help.
A couple of just follow up items, maybe probably for Jim you spoke to premium am.
At 5 million tailwind, where does that stand versus the prior cycle trough at this point and as far as thinking about the NII guide was there any specific rate assumptions that underpin that or.
Deposit balance and balance expectation.
Yes, so the comment I made related to $5 million impact on net interest income was specific to the mortgage portfolio and basically as rates rise. The duration extends and you have to re cash youre expected period of time in which those deferred origination costs are amortized and so that kind of true up or catch up entry was kind of a one time of that $5 million in the <unk>.
Fourth quarter, unless you see a dramatic change in rates from here forward, you Wouldnt expect that to change materially.
In terms of forward rates I think essentially what we're seeing in our forecast is consistent with the fed fund future curve almost everything we have on balance sheet is tied to the short end of the curve and we're just following fed fund future expectations.
Okay, Great, Yes, the 5 million that was used.
Premium amortization adjustment on the mortgage book right I, just want to make sure. It does.
So theres origination costs right.
Over the life.
Our premium amortization, but so cost debt.
Incurred originate those loans that are now being cast over a longer period of time, it's somewhat.
So that premium amortization topic, but it's just origination costs got it okay.
Okay.
And our next question will come from Steven <unk> with Wolfe Research.
You bet.
Yes, Michael on again.
I just I wanted to ask one quick follow up on the balance sheet, given some of the volatility out in the long end and thus forward kind of implying that kind of fed cuts in the back half how is your thinking evolving around managing duration here is there any greater desire to have remixed the balance sheet to lock in some higher yields or is the strategy to remain predominantly.
Here to the short Ed Thanks, Ken.
Look I think the strategy is to remain what we've been doing okay.
I will get a lot of questions I think it's a great question about locking in rate that always gets me nervous just to tell you that that has that embedded in that.
As an interest rate bet.
And.
The way, we look at as we're kind of naturally hedged.
If the rates do get cut at some point they will.
Not sure the market might might be anticipating that sooner than what we think I think that it'll be a little bit longer and maintaining rates Thats my personal view.
But when it comes to saying that we're going to remix the balance sheet to try to predict.
The future yield curve.
No, we're not thinking that way if rates do.
Get cut that will that will compress NIM naturally not as much as you would think of deposit betas or are near 100 on the way down.
So we.
We would see that but the other thing that happens is that in that kind of environment cash goes up our cash balances go up and our short term cash available goes up so what we think is even though we might get some NIM compression will increase NII. So thats, how we think about it.
Bat of locking in rates.
I've listened to that over decades and such.
Sometimes it works and sometimes it doesn't.
Maybe one other thing to add there too is if we did see some stability in rates and even a declining rate environment that could also be a catalyst for our institutional group obviously the rapid rise in rates over the last year has not been helpful for origination.
Activity and I think that Laura activity in general in the depository and yet so that could help as well.
Great. Thanks again.
Thank you and that does conclude the question and answer session I will now hand, it back over to you.
Well that was a very productive are very good questions I appreciate that thoughtful.
We want to thank everyone for listening, we we feel we had a very successful 2022, we look forward to continuing to build this franchise in 2023 and the years beyond and look forward to reporting.
To our shareholders after our first quarter, so have a great day and thank you.
Thank you that does conclude today's conference. We thank you for your participation and have an excellent day.
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Yes.
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Okay.
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