Q3 2024 Stifel Financial Corp Earnings Call
Good day and welcome to the Stifel Financial's third quarter 2024 financial results Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Joel Jeffrey Senior Vice President of Investor Relations. Please go ahead.
Joel Jeffrey: Thanks, operator, I'd like to welcome everyone to Stifel Financial's third quarter 2024 earnings Conference call I'm joined on the call today by our chairman and CEO, Ron Kruszewski are co presidents Victor Nathan.
Joel Jeffrey: And our CFO, Jim Morrison 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 Dot Stifel Dot Com I would note that for some of the numbers would be staged throughout our presentation are presented on a non-GAAP basis and I refer to our reconciliation of GAAP to non-GAAP.
Joel Jeffrey: Disclosed in our press release I would also remind listeners to refer to our earnings release financial supplement and other slide presentation and for information on forward looking statements and non-GAAP measures. This audio cast is copyrighted material of Stifel Financial Corp, and may not be duplicated reproduced or rebroadcast without the consent of Stifel financial.
Speaker Change: Now I'll turn the call over to our chairman and CEO Ron Kruszewski.
Ron Kruszewski: Thanks, Joe Good morning, and thanks to everyone for taking the time to listen to our third quarter 2024 earnings Conference call.
Ron Kruszewski: Looking at our third quarter results net revenue of 1.23 billion was in our history, our second highest quarterly revenue up 17% year on year the growth in our business was essentially across the board at fault.
Ron Kruszewski: <unk> and principal transactions increased 15% as both wealth management and our institutional group generated double digit increases.
Ron Kruszewski: That's my banking increased 66% that's capital raising revenue more than doubled while advisory revenue increased 41%.
Ron Kruszewski: Record asset management revenue was up 15%, reflecting organic growth and market appreciation.
Ron Kruszewski: As we noted earlier in the year, we thought net interest income had bottomed and providing evidence of deaths in the third quarter NII increased by 4% and reached the high end of our guidance I'd also highlight that our sweep deposit balances increased by nearly $370 million, which was the first quarterly increase since the first quarter of 2020.
Ron Kruszewski: To which by the way Collins coincided with the fed beginning to raise rates.
Ron Kruszewski: Third quarter earnings per share totaled $1 50.
Ron Kruszewski: Which increased to 150% from the same period last year.
Ron Kruszewski: Both this quarter and last year's third quarter were impacted by legal reserves, which Jim will address in greater detail later in the presentation. Excluding these reserves earnings per share would have been $1 16 in the third quarter, which represents a 36% increase over the adjusted EPS from the third quarter of last year.
Our results in the quarter and through the first nine months of the year illustrate the strength of our franchise and our ability to capitalize on the improving market conditions year to date, we've generated record net revenue of $3 6 billion up 13% driven by the continued growth of our wealth management franchise improvement in our institutional business.
Ron Kruszewski: And the stabilization of net interest income.
Ron Kruszewski: It's important to note that we generated strong results in an environment for our institutional business that while improving remains below historical norms. Additionally, net revenue increased sequentially in each of the first three quarters of this year and all of these quarters rank in the top four quarters in our history.
So looking forward to the fourth quarter and beyond we expect the momentum in our business to continue to build and we believe that there is further upside to our results as the operating environment improves and we capitalize on the investments we've made in our business.
Speaker Change: On slide two we compare our quarterly results to the street consensus estimates net revenue came in approximately 30 million or about 2% above the street forecast as all line items, except asset management surpassed expectations transactional revenue came in slightly above consensus due to strong.
Speaker Change: Or wealth management results investment banking revenue was 6% ahead of the street, driven by higher advisory and fixed income capital raising.
Speaker Change: Net interest income was $3 million above the street estimate and at the high end of our guidance is net interest margin came in above expectation.
Speaker Change: Asset management revenue was slightly below the street, primarily due to lower revenue from third party cash sweep, which Jim will give more detail on later in the presentation.
On the expense side, our compensation ratio was 58% above the street by seven basis points as we continue to conservatively accrue throughout 2024.
Speaker Change: Non comp expenses, excluding the aforementioned legal reserves were essentially in line with Street estimates.
Turning to slide three.
Speaker Change: We've used this slide a number of times to show, how our institutional business and net interest income provide natural hedges to each other and you can see from the chart. This inverse relationship has provided increased stability to our bottom line over the past five years.
Speaker Change: That said, we believe we've hit an inflection point in that both line items should grow as we go forward our confidence in this forecast is driven by the current composition of our balance sheet and continued improvement of the capital markets from their recent troughs.
Another way, we are entering a period, where both net interest income and our institutional business will add to our bottom line.
Speaker Change: Well, Jim will give more details on the specifics of our balance sheet. Let me just say that we we today are relatively insensitive to changes in interest rates and that we believe that in the current environment deploying excess capital in the asset growth provides.
Speaker Change: Track of risk adjusted returns as such we anticipate growing net interest income.
Speaker Change: Growth in our institutional pretax income will be driven by the return of more normalized market conditions and the increased scale of our business. We've seen a substantial improvement in this business in 2024 as pre tax income of nearly 130 million is up meaningfully meaningfully from the modest loss that we had over the same peer.
Speaker Change: Last year, however, our year to date pre tax margins of 11, 5% or well below the 20% we should generate in more normal market conditions and as such we see meaningful upside to this business.
Speaker Change: There's been a lot of focus on the potential upside at a rebound in our institutional business will generate as the environment improves and while we agree with its analysis I think it's important to recognize that our global wealth management business has and will continue to be our long term growth driver.
Speaker Change: Given our record revenue through the first nine months of the year to a record client asset levels global wealth is likely to reach its 22nd consecutive year of record net revenue the key to our growth has been both the retention and recruitment of highly productive advisors, while providing the products service and entrepreneurial culture.
Speaker Change: All taken together, which drive our advisers growth and productivity. Additionally, the investments we've made into our platform and service has been validated by people being named the number one wealth management firm in terms of employee advisor satisfaction by J D power for the second consecutive year.
Speaker Change: Looking forward, we will remain focused on our core values of respecting our advisers and continually improving their experience at Stifel. As we continue to strive for our target of one trillion in client assets. This approach has not only improved our advisor satisfaction levels, but just as importantly resulted in better client.
Speaker Change: Experience and now I'll turn the call over to our CFO, Jim Morrison to discuss our most recent.
Jim Morrison: Thanks, Ron and good morning, everyone.
Jim Morrison: Looking at the details of our third quarter results on slide five.
Our quarterly net revenue of one point to two 3 billion was up 17% year on year.
Jim Morrison: Year to date revenue of $3 6 billion was up 13%.
Jim Morrison: Each of our operating line item showed improvement from the same period in 2023 with the exception of NII.
Jim Morrison: Our EPS in the third quarter was up 150% from the prior year and up 43% year to date.
Jim Morrison: Other revenues and lower operating expenses drove the overall improvement.
Jim Morrison: Moving on to our segment results.
Jim Morrison: Global wealth management revenue was a record 827 million and pre tax margins totaled 37% on record asset management revenues and our highest transactional revenue.
Jim Morrison: Nearly three years.
Speaker Change: As Ron mentioned earlier asset management revenue came in below analyst estimates.
Speaker Change: This was due to lower third party bank sweep balances.
Speaker Change: As we move more of our lower cost sweep deposits back into the bank, which positively impacted net interest income.
Speaker Change: Excluding the effects of the charge in the third party I'm sorry, excluding the impact of the change in third party suites.
Speaker Change: Management revenue would have been in line with Street estimates.
Speaker Change: During the quarter, we added 28 total advisers to our platform.
Speaker Change: This included 13 experienced advisors, which were.
Speaker Change: 12 month production of $10 5 million.
Speaker Change: We ended the quarter with record fee based assets and total client assets of 191 billion and 496 billion respectively.
The sequential increases were due to higher equity markets and organic growth is net new assets grew in the low single digits.
Speaker Change: On slide seven I'll discuss our bank results.
Speaker Change: As Ron mentioned earlier client cash levels increased during the quarter and sweep cash balances increased for the first time since the beginning of 2022.
Speaker Change: While we're not going to say the cash sorting is done we feel that the trends continue to improve and that we'll be seeing more cash moving into the sweep program.
Speaker Change: As rates normalize.
Speaker Change: Net interest income of 260 million was at the high end of our range as average interest, earning asset levels increased by nearly $650 million and our net interest.
<unk> margin increased by five basis points to 3.09%.
Speaker Change: Primary driver of the increase in interest, earning assets was growth in residential mortgages, C&I and fund banking loans as well as CLO.
Speaker Change: The increase in NIM was a result of increased loan and security yields more than offset higher deposit costs.
Speaker Change: Additionally, based on the percentage of deposits in our smart rate product, we've essentially gone to a point, where we are a neutral.
Speaker Change: At this point rate movement, either up or down.
Speaker Change: Its lack of rate sensitivity, coupled with our expectation for balance sheet growth should result in stable to growing NII in future quarters.
Speaker Change: Even with our expectation for another rate cut in the fourth quarter, we expect NII to be in a range of $255 million to $265 million.
Speaker Change: Our credit metrics and reserve profile remains strong.
Speaker Change: Performing asset ratio stands at 47 basis points.
Speaker Change: Our credit loss provision totaled $5 3 million for the quarter and our consolidated allowance to total loans ratio was 83 basis points, which was impacted by growth in loan balances and fund banking and residential mortgages, which are lower risk loan types that carry lower relative to reserves.
Speaker Change: Moving on to the institutional group.
Speaker Change: Total revenue for that segment was $372 million in the quarter, which was up 45% year on year.
Speaker Change: Revenue of $1 1 billion was up 29% led by strong increases in capital raising and transactional revenue.
Speaker Change: Firm wide investment banking revenue totaled $243 million similar.
Speaker Change: Similar to last quarter, both capital raising and advisory revenue increased sequentially and year on year.
Speaker Change: Equity underwriting was 51 million was up 6% from the second quarter and 141% over the same period in 2023 is health care industrials and financials were our strongest contributors.
Speaker Change: Year to date, we continue to see strong improvement in capital raising the Stifel ranked number eight in terms of the number of Ipos.
Speaker Change: Fixed income underwriting revenue increased 3% sequentially and 100% from <unk> 23, as public finance revenue increased more than 73%.
Speaker Change: We continue to be a leader in the municipal underwriting business as we ranked number one and the number of negotiated transactions.
Speaker Change: 15% market share.
Speaker Change: Advisory revenue was $137 million, an increase of 41% from last year as activity levels continue to improve.
Speaker Change: We had solid results in our health care technology and industrial verticals.
Speaker Change: We're also seeing momentum build in our financials practice year to date <unk> has over 70% market share of announced bank and thrift M&A transactions.
Speaker Change: Just on deal value.
This is a good indication of the momentum we have heading into 2025 and our advisory practice as revenue from these announcements are likely to be realized next year.
Speaker Change: Equity transactional revenue totaled $49 million up 4% from the second quarter of 2023.
Speaker Change: We continue to gain traction in our electronic offerings and you see continued engagement with our high touch trading and best in class research.
Speaker Change: Fixed income transactional revenue of $79 million was up 17% year on year, because we continue to benefit from the rebound in our rates business as a result of the anticipated shift in fed policy, which has increased client activity.
Speaker Change: The next slide we go through expenses, our comp to revenue ratio in the third quarter was 58%, which is again at the high end of our full year guidance as we continue to accrue conservatively.
Speaker Change: Terms of expectations for the comp ratio in the fourth quarter, we estimate it will remain at 58%.
Speaker Change: As Ron mentioned earlier in the call non comp expenses came in at 279 million and were negatively impacted by additional legal accruals.
Speaker Change: Excluding the legal charge, our credit provision and investment banking gross ups are non comp operating ratio was essentially 20% at the midpoint of our full year range of 19% to 21%.
Speaker Change: I would also note that we expect to see the decline in our effective tax rate in the fourth quarter, given the excess tax benefit associated with stock based compensation.
Speaker Change: We are currently forecasting an effective tax rate between 16 and 18% for the fourth quarter.
Speaker Change: On Slide 10, I'll review, our capital position.
Our balance sheet continues to be well capitalized tier one leverage capital increased 20 basis points sequentially to 11, 3% and our tier one risk based capital ratio increased by 10 basis points to 17, 9%.
Based on what our targeted 10% tier one leverage ratio, we have nearly $500 million of excess capital and continue to generate significant levels of additional excess capital as illustrated by the $149 million of GAAP net income that we generated in the third quarter.
Speaker Change: In terms of capital deployment during the quarter I'd note that we've increased bank assets by $1 $1 billion to $30 4 billion.
Speaker Change: We repurchased roughly 250000 shares at an average price of $81 23, with roughly roughly $10 5 million shares remaining on our current authorization.
Speaker Change: And we paid quarterly dividends on our common preferred stock.
Speaker Change: I'd also highlight that we retired $500 million of long term debt in July.
Speaker Change: Although this doesn't impact capital levels. It helps us reduce annual interest expense by more than $20 million.
Speaker Change: Absolutely, absolutely and any assumption for additional share repurchases and assuming a stable stock price. We would expect the fourth quarter fully diluted share count to be 111, $111 9 million shares.
Speaker Change: And with that let me turn the call back to Ron.
Ron Kruszewski: Thanks, Jim Let me conclude by saying that we are on track to reach our near and longer term goals. We started 2024 with a more conservative outlook for the operating environment than the street forecast are guided to solid revenue growth and expense controls our market outlook turned out to be more accurate than the street.
Ron Kruszewski: And yet our net revenue is on pace to finish the year at the high end of our guidance and our expenses are also on track to come in within our within our initial guidance range to put the strength of our performance. So far in 2020 foreign context, our revenue run rate of $4 8 billion is just shy of the $5 billion, we've discussed as a realistic.
Ron Kruszewski: Level of revenue in a normalized environment.
Ron Kruszewski: Look it's important to note that.
Ron Kruszewski: That are $4 8 billion run rate does not factor in what we believe will be a good fourth quarter, we anticipate a strong fourth quarter as we continue to benefit from the growth trends, we've experienced in 2024 as well as the typical seasonality that we experienced in the fourth quarter.
Ron Kruszewski: That said there are still meaningful there's still meaningful uncertainty to the current operating environment, including the outcome of the upcoming elections and geopolitical risks as we typically do we will give our formal guidance for 2025 on our fourth quarter conference call.
Ron Kruszewski: However, let me just say this about how we see 2025 at this point given the strength of our results and what we considered a transition year our expectation for further revenue growth as markets continue to normalize in our and our anticipated increased operating leverage we feel confident in our ability to achieve our targets of five.
Ron Kruszewski: More than $5 billion in revenue and $8 of EPS and with that operator. Please open the line for questions.
Speaker Change: Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to retire equipment again that is star one to ask a question on pause for just a moment to allow everyone an opportunity to signal.
Speaker Change: And we can take our first question from Devin Ryan with citizens JMP.
Devin Ryan: Hey, good morning, Good morning, Jim how are you.
Jim Morrison: Good morning, everyone.
Yeah.
Devin Ryan: First question just on lending obviously, great loan growth in the quarter, Ron sounds like you still expect more from here or pretty good demand and I also appreciate youll be opportunistic if conditions change, but can you just.
Devin Ryan: Maybe help quantify the level of demand that youre, seeing and where it's coming from incrementally and then it sounds like you guys think you can still grow net interest income from here, even as rates come down. So just wanted to kind of get the interplay with that as well. Thanks.
Speaker Change: Oh, Yes, I'll, let Jim give some details are as we've said we've gotten to the position with.
With our deposits and smart rate in van versus sweep.
Speaker Change: Surely.
Speaker Change: Neutral to 100 basis point move in terms of.
Speaker Change: Our margin frankly and why.
Speaker Change: What we see going forward is the opportunity to build our balance sheet, we see great opportunity and as you know we have limited our balance sheet growth on purpose during a more uncertain rate environment and so as we look today, we have an ability.
Speaker Change: To.
Speaker Change: Grow.
Speaker Change: On a risk adjusted basis as we always do our net interest income, yes, I would say we are less dependent on a lot of the general loan market or the economy in general and the ability for us to put loans on our books, given our captive audience base, whether that mortgages and securities based loans or fund banking adventure.
Speaker Change: <unk> to generate a fair amount as Ron said risk adjusted returns that are very attractive.
Speaker Change: All of that with the liquidity and the sensitivity to interest rates that Ron talked about plus the $500 million of excess capital. We're essentially saying we have a fair amount of capacity with over $3 billion in sweep deposits that are available to the bank today to generate balance sheet growth at roughly a 3% NIM.
Speaker Change: Okay terrific and then just a follow up on fixed income brokerage.
Speaker Change: Appreciate our revenues there were up year over year, and I think the second quarter had roughly $20 million gain but still.
Speaker Change: Still seemed a little bit softer than we were looking for so just love to get any sense of whether there were losses. There and then just the outlook, particularly with deposit oriented as we look into kind of later this year and next year, there as well thanks.
Speaker Change: A little bit of seasonality.
Speaker Change: Always in the third quarter.
Speaker Change: I don't see any real slowing of that business you did mention that.
Speaker Change: The reason that it was down from the second quarter.
Speaker Change: But I'm I'm optimistic about that business.
Speaker Change: As rates normalize.
And and most of our depository clients continue to actively manage their portfolios, we sit here and talking about cash building because of the interest rate risk curve is normalizing. The same thing is happening to our clients and they are going to be more active in trading activity in an environment like that.
Speaker Change: Present.
Speaker Change: Great situation for fixed income rates group.
Speaker Change: Okay, Great I'll leave it there thanks guys.
Speaker Change: Thanks, Kevin.
Speaker Change: Thank you we'll take our next question from Alex Blaustein with Goldman Sachs.
Speaker Change: Hey, guys. This is Michael on for Alex maybe.
Michael: Maybe just a follow up to the $3 billion of third party deposits. So you guys have so.
Speaker Change: So it sounds like that would all be available to move over to the bank at your discretion I was wondering if we could just double click into the maybe the funding rate on those deposits and how that works.
Speaker Change: Yes, so the sweep deposits, obviously, that's very well known.
Speaker Change: Milling rates, we're at four 5% on smart rate and you can see the cheering on our sweep program. The remainder of that primarily treasury deposits I would say generally speaking they are closer to smart rate, but on a blended basis, a little bit less expensive and smart rate some of that will depend if it is a.
Speaker Change: <unk> lending relationship I'm, sorry, pure deposit relationship only or it also comes with a lending relationship, but again, it's going to be a little bit little bit lesson smart right.
Speaker Change: Thanks, that's helpful maybe.
Speaker Change: Maybe just moving on quickly to the comp right. So it sounds like.
You guys the guidance for the fourth quarter about 58%, it's been pretty range bound for the last two years.
Speaker Change: Obviously, the mix of revenues matters, but how would you frame the opportunity for leverage over time, and maybe you can kind of.
Speaker Change: Talk about how that would play into your early plans for 2025, both on the comp rate side, but also on the non comp.
Speaker Change: Yeah I think.
Speaker Change: We've been conservative in comp.
Speaker Change: As we have been keeping net interest income has been relatively flat because our interest earning assets have been relatively flat and as I said.
Speaker Change: We anticipate that line item and growing and that has a positive impact on our on our comp ratio couple that with a normalization of our institutional business, which is annualizing today at say a $1 billion five.
Speaker Change: And down from $2 $2 billion in 'twenty, one and up from $1 billion $2 50 ish last year on an annualized basis and we've talked about.
Speaker Change: Conservative normalization of $1 seven to 1 billion eight.
Speaker Change: As that occurs that also positively impacts the comp ratio so.
I would I would in this environment, let's say that 58% will be at the high end of our guidance range for 2025 to try to answer your question as.
Speaker Change: As I see the market environment, providing leverage to the comp ratio.
Speaker Change: Thank you.
Thank you. Our next question comes from Steven <unk> with Wolfe Research.
Steven: Hey, Steve Good morning, Hey, Ron how are you.
They're doing well also.
Steven: So I wanted to start off just a clarifying question Ron.
Speaker Change: You mentioned the a dollar earnings target, it's something you've alluded to before in a more normalized environment or is that something that you were speaking to in the context of a more normal operating backdrop or is that actually a 2025 expectation for where earnings could shake out.
I mean.
Speaker Change: I Love the question I understand what Youre, saying, let me go back to what I said, because I'm not really prepared to talk about at 2020, but what I did say back in 'twenty four.
Speaker Change: Was that as we as we look forward to 'twenty. Five then that we saw the ability to get to you know I think it was $5 2 billion and $8 of operating.
Speaker Change: In 'twenty five and that's what I said.
Speaker Change: And what I said today was that my view hasn't changed.
Speaker Change: Understood.
Speaker Change: To your question.
Devin Ryan: No I appreciate that Ron and I did also want to ask on the buyback just for my follow up I know historically, you've been a good tactical buyer of your stock we did see the moderation in share repurchases in the quarter, just trying to square that positive message on the outlook the earnings growth potential for next year that you outlined with that moderation.
Devin Ryan: And buyback and just how youre thinking about the relative attractiveness of repurchase versus other alternatives, whether it be bank growth or M&A.
Speaker Change: Again, we.
Speaker Change: Those three levers bank growth M&A.
Speaker Change: And stock buyback.
Speaker Change: Always on the table.
Speaker Change: Coupled with our dividends, which.
Speaker Change: Four primary lots of other levers that we do to two.
Speaker Change: To manage capital levels and provide the returns and make sure that our return on an investment is adequate.
Speaker Change: It looked at it we have that now.
Speaker Change: Purchase stock at an average of $80.
Speaker Change: Today.
Speaker Change: There's a lot of optimism in the market.
Speaker Change: In terms of financials I share that but when we when we look at deploying capital.
Speaker Change: The lever for bank growth appears.
Speaker Change: A little more attractive.
Speaker Change: To us or not not to say, we're not buying back stock. We are but we also repaid our our note and from a liquidity perspective.
Speaker Change: I was probably a little bit more saying hey.
Speaker Change: I never paid off a note like there's wiring $500 million of cash so I was a little more sanguine about our liquidity position.
Speaker Change: But look I think our we will continue to buy back stock.
Speaker Change: And we will continue to grow our balance sheet and we'll continue to look at acquisitions each are measured against each other as to which is the most attractive.
Speaker Change: If you tie this into your original questions about $8 of EPS, we probably had a little bit more of an emphasis on share repurchases at that point you got to remember if we're adding call it $1 billion of interest earning assets at a 3% NIM. That's roughly <unk> 20 of EPS. So there's obviously some give and take of the balance sheet growth versus.
Speaker Change: The buyback the impact on how we get to the $8 per share as well.
Unknown Executive: and those dynamics have changed since the beginning of the year, primarily our stock price.
Speaker Change: And those dynamics have changed since the beginning of the year, primarily in our stock price.
Ronald Kruszewski: No, of course, I appreciate that, Ron.
No of course, I appreciate that Ron I will hop back in the queue. Thanks, so much for taking my questions.
Unknown Attendee: I'll hop back in the queue. Thanks so much for taking my questions. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from Brennan Hawken with UBS.
Brennan Hawken: Our next question comes from Brennan Hawken with UBS. Good morning. Thank you for taking my questions.
Speaker Change: Hi, Good morning. Thank you for taking my questions. This is Ben Rubin filling in for Brandon.
Unknown Executive: This has been Ruben filling in for Brennan. I wanted to start on the cash trends and obviously positively inflecting with sweet deposits up, you know, by nearly 370 million; although small rate was up, you know, about 500 million as well. And you recently caught rates on the small rate. So I was just curious, what type of impact have you seen on client flows on the back of rate cuts? If any, and what does that mean as far as your expectations for cash growth towards the end of the year? Thank you. You know, we've actually seen the deposit inflows in both sweet and smart rate since we've cut rates, and we've also seen inflows in the quarter.
Speaker Change: I wanted to start on the cash trends and obviously positively inflect thing with sweep deposits up by nearly $370 million, although small rate was up about $500 million as well and you recently cut rates on the spot rate. So I was just curious what type of impact have you seen on client flows on the back of rate cuts, if any and what does that mean as far as your expectations for cash growth.
Speaker Change: Towards the end of the year. Thank you.
Speaker Change: Yeah, we've actually seen.
Speaker Change: Deposit inflows in both sweep of smart rate since we've cut rates and we've also seen inflows into ended the quarter again, we're not ready to say cash sorting is over.
Unknown Executive: Again, we're not ready to say cash sorting is over. I can, you know, as of yesterday, I'll say our sweet program is up another 100 million dollars in the fourth quarter thus far. So the impact of rate cuts has been, has been minimal. Again, the bigger impact on this one forward is the normalization of the yield curve and the competitiveness of various different alternatives.
Speaker Change: As of yesterday, I'll say, our sweep program is up another $100 million in the fourth quarter. Thus far so the impact of rate cuts is good it's been minimal again, the bigger impact on this going forward as maybe the normalization of the yield curve and the competitiveness of various different alternatives.
Unknown Attendee: Great. Thanks.
Speaker Change: Great. Thanks, and then I was hoping to ask about the recovery in sponsor M&A.
Unknown Executive: And then I was hoping to ask about the recovery and sponsor M&A. You're obviously your advisor. Results are trending in the right direction. So I was hoping if you can kind of just circle back on whether or not you see any improvement in the sponsor market as conditions improve and as, you know, bar and call us and rates come down. Thank you. Generally, yes, I mean, I would say that's across the street, and you'll see it in M&A results of certainly, you know, the market conditions are conducive for our that activity.
Youre obviously your advisory results are trending in the right direction. So I was hoping if you can kind of just circle back on whether or not you've seen any improvement in the sponsor market as.
Speaker Change: As conditions improve and our borrowing costs and rates come down. Thank you.
Speaker Change: Generally, yes, I mean, I would say that's across the street and Youll see it in M&A result, certainly.
Speaker Change: You know the market conditions are conducive for that activity if theres any.
Unknown Executive: If there's any, any governor on it, I think it is still the uncertainty around the election, which, you know, at least as it relates to M&A. Could the election to provide some real tailwinds to M&A, or, or maybe the more current environments I would say is, you know, more regulatory burdened would continue. But I don't see it getting worse. I can see it getting better from the regulatory perspective. But overall, the M&A environment on the sponsor side is good.
Speaker Change: Any governor on it I think it is still the uncertainty around the election, which and all of it at least as it relates to M&A.
Speaker Change: Could the election could provide some real.
Speaker Change: Tailwind to M&A or maybe the more current environment I would say is more regulatory burden would continue but I don't see it getting worse I can see it getting better from a regulatory perspective, but overall.
Speaker Change: The M&A environment on the sponsor side is good.
Speaker Change: Yeah.
Unknown Attendee: Great. Thank you for taking my questions. Thank you.
Speaker Change: Oh, great. Thank you for taking my questions.
Speaker Change: Thank you.
Bill Katz: And our next question will come from Bill Katz with TD Cowan. Okay. Thank you very much.
Speaker Change: And our next question will come from Bill Katz with TD Cowen.
Speaker Change: Okay.
Unknown Executive: Good morning, everybody. Thank you very much for taking the questions. Busy morning. So F.A. Count was relatively flat despite adding some more seasoned folks to the platform with good showing production.
Good morning, everybody. Thank you very much for taking the questions a busy morning.
Bill Katz: So F. A count was relatively flat despite adding some more seasoned folks to the platform with good trailing production can you step back a little bit and talk about how you sort of see the net growth and maybe the competitive backdrop.
Unknown Executive: Q step back a little bit and talk about how you saw see the net growth and maybe the competitive backdrop. What it means for incremental profit contribution for F.A. Thank you. Yeah. I think, you know, we've been, we've been dealing for a while with sort of the, balancing recruiting with generally retirement, and we've seen net growth although on a net base with if there is muted, what you see is increased productivity per visor, because we retain clients and we're adding more productive advisors. Now, look, I would say overall, I'm probably as optimistic about the recruiting landscape as I've been, both our relative position.
Bill Katz: It means for incremental profit contribution per F N. Thank you.
Bill Katz: Okay.
Speaker Change: Yeah I think.
Speaker Change: We've been we've been dealing for a while but with sort of the.
Speaker Change: Balancing.
Speaker Change: Recruiting with generally.
Speaker Change: Generally retirements and we've seen net growth although on a net basis with it appears muted what you see is increased productivity per advisor because we retain clients.
Speaker Change: And we're adding more productive advisors look I would say overall I'm, probably as optimistic about the recruiting landscape as I, if I've been both our relative position I have seen.
Unknown Executive: I've seen it being our relative offering, especially on the transition side, being more competitive. I think rates probably had something to do with that, or at least we're seeing that trend, and we're talking to as many productive teams as we ever have, and so I'm optimistic. You know, the fourth quarter is always a muted quarter because you really close the transition window in early December. But as I look at both the trends, primarily that number of people visiting us, we're talking to, I feel really good about our continued growth. Of that business, and in the additional high quality advisors from the platform.
Speaker Change: I've seen it being our our relative offering, especially on the transmission side.
Speaker Change: More competitive I think rates, probably had something to do with that or at least we're seeing that trend and we're talking to as many.
Speaker Change: Productive teams as we ever have and so I am optimistic the fourth quarter is always the intermediate.
Speaker Change: <unk>.
Speaker Change: You really close and transition window.
Speaker Change: In early December.
As I look at all the <unk>.
Speaker Change: And primarily the number of people visiting us who we're talking to.
Speaker Change: Feel really good about our continued growth.
Speaker Change: That business and the addition of high quality advisers to our platform.
Unknown Attendee: Okay, it's helpful, and then just follow up, Mayor, except for a question. Obviously, we haven't been here in a while.
Speaker Change: Okay. That's helpful. And then just a follow up maybe a conceptual question obviously, we haven't been here in a while.
Unknown Executive: At what level of rates do you think you need to get to, or we need to get to, for money to migrate out of smart? It sounds like both are up again into the fourth quarter, which is nice, but is there what level do you think you might actually start to see a migration back toward sort of balance sheet cash, or is it different this time? Was always a dangerous thing to say, in that higher rates, higher awareness, just would structurally change the mix of real short drop in rates, thank you. Yeah, well first of all, I'm not sure it's different this time in terms of that it was different in a zero rate environment, okay. I mean, the question has to be, you know, do will we get back, so that the effective spread between, you know, where, where sweet balances are and say the one year treasury narrow, so that you don't really have the incentive.
Speaker Change: At what level of rates do you think you need to get to where we need to get to for money to migrate out of smart. It sounds like both are up again into the fourth quarter, which is nice but is there at what level do you think you might actually start to see a migration back toward sort of balance sheet cash or is it different.
Speaker Change: This time, it's always a dangerous thing to say in that higher rates higher awareness, just with structurally changed the mix.
Speaker Change: X a real sharp drop in rates. Thank you.
Speaker Change: Yeah, well first of all I have.
Speaker Change: Not sure it's different this time in terms of.
Speaker Change: That it was different in a zero rate environment. Okay. I mean, the question has to be.
Speaker Change: Will we get back so that the effective spread between where.
Speaker Change: Where we're sweep balances are in say the one year treasury narrow so that you don't really have the incentive so to answer your question, even a normalization of rates, which to me would be fed fund settling at three to three 5% and I get the right thinking inflation is going to be.
Unknown Executive: So to answer your question, even normalization of rates was to me, would be, you know, fed fund settling at three to three and a half percent. And I get there by thinking inflation is going to be closer to three than two, and probably should have a real interest rate, so three and a quarter to three and a half. That's right, kind of see rates settling, and as you get a normal yield curve, what will happen was that will smart rate will still be there because, you know, the rate differential between transactional cash and savings cash will still provide clients with that choice in contrast to rates were zero and it didn't really matter.
Speaker Change: Closer to three than two and probably should have a real interest rates. So three in a quarter to three and a half that's where I kind of see rate settling in as you get a normal yield curve what will happen.
Speaker Change: That was smart rate will still be there because.
Speaker Change: The rate differential.
Speaker Change: Between transactional cash in savings cash will still provide.
Speaker Change: Clients with that choice in contrast to <unk>.
Speaker Change: Rates were zero.
Speaker Change: And it didn't really matter and so is it different this time, yet because I don't think we're going back to a zero rate environment I think we are well positioned.
Unknown Executive: And so, is it different this time? Yeah, I don't think we're going back to a zero rate environment. I think we are well positioned as evidence by our neutrality to, you know, changes, 100 basis point changes in that fund. And we've retained cash, and I actually see a growing cash and having a, a nim which drives appropriate return on investment on our, on our loans, which I don't feel we have to take excessive credit routes to do so.
Speaker Change: As evidenced by our neutrality to two changes 100 basis points changes in fed funds and we've retained cash and I actually see it growing cash and having a a NIM, which drives appropriate return on investment on our.
Speaker Change: Our loans, which I don't feel we have to take excess credit risk to do so so.
Unknown Executive: So I wouldn't be baking in. Something that says that are, you know, we're going to drive him because people are going to go back into sweep, sweep will always be there for transactional cash, but savings cash is the new normal. We've had roughly, you know, it was essentially a hundred percent data on smart rate, so at some point in, as rates start to decline, the attractiveness of that alternative decreases for the significant. You also have seen a fair amount of money come out of treasuries; if that becomes a less attractive alternative, more money coming back into smart rate and or sweep.
Speaker Change: I I wouldn't be baking in.
Speaker Change: Something that says that our you know.
Speaker Change: We're going to drive NIM, because people are going to go back into.
Speaker Change: Into sweep sweep will always be there for transactional cash, but savings cash as well.
Speaker Change: New normal.
Speaker Change: We've had roughly.
Speaker Change: Essentially 100% beta of smart rate so at some point in.
Speaker Change: As rates started to decline the attractiveness of that alternative.
Speaker Change: Decrease is fairly significantly you also seen a fair amount of money to come out of treasuries as that becomes a less attractive alternative more money coming back into smart <unk> suite and the other thing I would just say at a high level as we continue to increase recruiting recruiting is going to continue to add to the level of that operational cash balance as well.
Unknown Executive: Another thing I would just say at a high level, as we continue to increase recruiting, recruiting, and continue to add to the level of that operational cash balance as well.
Unknown Attendee: Great.
Unknown Attendee: Can I speak at a clarifying question? Those are my third questions. I apologize for them. Taxa was good.
Speaker Change: Great can I sneak in a clarifying question that was my third question. So I apologize for taxi it was goodwill.
Unknown Executive: Well, just in terms of the tax rate into the fourth quarter, is this a new development that we should now start baking in prospectively as we think about 25 million? Or is this more interesting credit just to this particular upcoming quarter? This happens every year. The impact is larger than normal because of the increase in the stock price. So basically, this is the excess tax benefit related to stock base compensation, the difference between granting fair value and the fair value of stock when it fast. And as your stock price increases, you get a larger benefit, which runs through the negative or decline in your effective tax rate.
Speaker Change: In terms of the tax rate into the fourth quarter is this a new development that we should now start baking in prospectively as we think about 'twenty five and beyond or is this more idiosyncratic just to this particular upcoming quarter.
Speaker Change: This happens every year.
Speaker Change: The impact is larger than normal because of the increase in the stock price. So basically this is the excess tax benefit related to stock based compensation. The difference between grant date fair value and the fair value of the stock when it fast and as your stock price and your stock price increases you get a larger benefit which runs through as a negative.
Speaker Change: The decline in your effective tax rate.
Unknown Executive: You'll see it in most quarters historically in the fourth quarter for us. This is just a larger impact than normal.
Speaker Change: You'll see it in most quarters historically in the fourth quarter for US. This is just a larger impact in a normal.
Unknown Attendee: Okay. Thank you very much. Take all the questions. Thank you.
Speaker Change: Okay. Thank you very much taking all the questions.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Thank you.
Unknown Executive: It appears there are no further questions at this time.
Speaker Change: It appears there are no further questions at this time, Mr. Kruszewski I will turn the call back to you for any additional or closing remarks.
Ronald Kruszewski: Mr. Krishesky, I'll turn the call back to you for any additional or closing remarks. Thank you. Great job on pronouncing the name. I appreciate that. And to all of our shareholders. We look forward to recapping 2024, talking about what we anticipate will be a good fourth quarter, and giving you some updates on our views in the 2025.
Ron Kruszewski: Thank you great job on pronouncing the name I appreciate that.
Ron Kruszewski: To all of our shareholders.
Ron Kruszewski: Look forward to recapping 2024.
Ron Kruszewski: Talking about what we anticipate will be a good fourth quarter and giving you some updates on our views into 2025 and with that I bet, everyone. A great day. Thank you for your time.
Ronald Kruszewski: And with that, I bet everyone a great day. Thank you for your time.
Unknown Executive: This concludes today's call. Thank you for your participation.
This concludes today's call. Thank you for your participation you may now disconnect.
Unknown Executive: You may now disconnect. Thank you very much.
Ron Kruszewski: Yeah.
Ron Kruszewski: Okay.
Ron Kruszewski: Yeah.
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