Stifel Financial Corporation

Good day and thank you for standing by. Welcome to the first quarter earnings call 2022. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's call is being recorded. If you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today, Mr. Joel Jeffrey, Head of Investor Relations. Please go ahead.

Thank you, operator. I'd like to welcome everyone to Stiefel Financial's first quarter financial results conference call. I'm joined on the call today by our chairman and CEO, Ron Krzyzewski, our co-presidents, Victor Nisi and Jim Zemlack, and our CFO, Jim Marishen. 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.stiefel.com. I would note that some of the numbers that we state throughout our presentation are presented on a non-GAAP basis, and I would refer to our reconciliation of GAAP to non-GAAP as disclosed in our press release. 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 audio cast is copyrighted material of Stiefel Financial Corp. and may not be duplicated, reproduced, or rebroadcast without the consent of Stiefel Financial Corp. I will now turn the call over to our chairman and CEO, Ron Krzyzewski.

Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our first quarter results. 2022 is off to an interesting start, to say the least. The war in Ukraine, surging inflation, and the post-COVID reopening have resulted in increased volatility, higher rates, lower equity markets, and a fear of a recession in the United States. This contrasts markedly with 2021 when the yield on the 10-year Treasury was 1.6%, oil was $60 a barrel, The VIX was 18, and the Fed's dot plot forecasted zero rate hikes in 2022. Last year, we generated record revenue and earnings per share led by our institutional business, and more specifically, our investment banking businesses. Fast forward today, and the environment couldn't be more different. Ten-year treasury yields are around 2.8%. Oil is above $100 a barrel. The VIX, as of this morning, is above 30%. and the market is forecasting the Fed to raise short-term rates to 2.5% by year-end. One of the objectives of this call is to highlight the diversity and balance of our business model, which has proven over time to generate consistent growth despite ever-changing market conditions. Simply, all else being equal, rising short-term rates are good for most banks and very good for Stifel. As I look to the remainder of 2022, The expected benefits from increases in short-term interest rates will be substantial to our net interest income. As Jim Marison will elaborate, our net interest income is now expected to increase by $300 to $400 million over 2021. This, coupled with the growth in other global wealth management revenues and our fixed income businesses can help to offset the impact of some of our more market-sensitive revenue lines. In short, We expect 2022 to be another strong year for Stiefel. So with that said, let's look at our first quarter results. Stiefel recorded our second highest net revenue and EPS for a first quarter, which is no small feat considering the difficult market environment, especially for our equities business. Much like our forecast for the full year, excuse me, 2022, our results in the first quarter illustrate why it's important to have a diversified business model that can provide balance. To illustrate, global wealth management revenue increased 8% to a record $682 million as our fee-based revenue and net interest income had record quarters. On the other hand, our institutional revenue declined 15% to $431 million, yet we are also balanced within our institutional business as the strength of our advisory and fixed income revenues helped offset a roughly 80% decline in industry-wide equity issuance. Taken together, Stifel's first quarter revenue totaled $1.12 billion, only slightly down from the prior year. This underscores the balance of our businesses. The next slide contains more detail on our quarterly results. As I said, our revenues were down modestly. However, our bottom line benefited from our variable expense model that resulted in pre-tax margins of 22%, and return on tangible common equity of 24%. A measure of our profitability as compared to the same period last year is to compare pre-tax, pre-provision income. So let's compare. Our pre-tax, pre-provision income of 250 million was up 5%. Excluding the impact of our credit provisions, which I would note are related to loan growth, our earnings per share would have increased by 10 cents per share this quarter. Driving this improvement in operating margin, our compensation ratio declined from the first quarter of last year to 59.5% as our operating leverage continues to improve. Additionally, our operating expense ratio was 18.1%, and excluding the investment banking growth ups, totaled 17.7%, which was just above our full-year guidance. Taken together, Our EPS of $1.49 represented our sixth best quarterly result and second strongest first quarter. Moving on to our operating segments and starting with global wealth management. Our record net revenue increased 8% and was driven by the addition of productive financial advisors as well as the growth in our balance sheet, coupled with improving net interest margin. Asset management revenue was up 7% sequentially and 23% from last year. When we discussed our 2022 outlook back in January, we projected that the market would be down in the first quarter. And I guess we were proven right as the S&P 500 finished the quarter off about 5%. However, the impact of the decline in equity valuation was partially offset by continued strong inflows as our fee-based assets ended the quarter at $158 billion and total client assets were $421 billion. On the next slide, we highlight our strong recruiting activity, client asset growth, and an increased loan portfolio. For the quarter, we added 39 advisors with total trailing 12-month production of $18 million. This includes 16 recruits with trailing 12-month production of $18 million. The remaining advisors were added through Stiefel's training program as well as advisors that achieved minimum productivity standards. Although market volatility was a bit of a headwind in terms of overall recruiting, we continue to see extremely strong interest in our platform, and we anticipate increased conditions as the year goes on. The consistency of our revenue continues to benefit from our growth in fee-based revenue and net interest income. This resulted in nearly 75% of wealth management revenue coming from recurring sources during the quarter. Lastly, we grew our loan portfolio by $1.1 billion during the quarter, up 6% sequentially. And if you annualize our first quarter, it would represent a 25% increase in loan balances from the end of 2021. Our growth was driven by both commercial and consumer lending. The commercial growth was spread across a number of verticals as we continue to invest in people and capabilities across multiple commercial lending channels. including fund and venture banking, sponsor finance, CRE, and broadly syndicated lending. Our consumer growth continued to be the result of increases in our retained mortgage portfolio, and while we anticipate that the second quarter will be strong, we also expect higher interest rates will moderate the pace of growth in our retained mortgage book in the second half of the year. The increase in our loan portfolio helped drive the 13% sequential increase in net interest income. As Jim will discuss, our projections for net interest income are strong and highlight the asset sensitivity of our balance sheet. Moving on to our institutional group. Let me start by saying that at Stiefel, we view this segment, our institutional segment, as a growth business, albeit with some cyclicalities. As you can see from the chart on the bottom of the slide, we have consistently grown our institutional revenue. Through 2021, our five and ten year compound annual growth rate were 18 and 15% respectively, despite some minor down years. While our first quarter net revenue of $431 million was down 15% versus last year's record first quarter, We are still on track to generate the second highest institutional revenue in our history. Our advisory and transactional revenue increased year over year, but the decline in underwriting activity resulted in lower net revenue. Our institutional business generated pre-tax margin of 22.4%, reflecting the operating leverage in this business. Moving on to the components of the institutional group, our fixed income business generated net revenue of $161 million of 15 million or 10% from last year, helping to offset the fact that our equities business was down 140 million or 62% and came in at 86 million. As I've done in the past, I will speak to our transactional revenue on this slide and leave the capital raising discussion for the next one. In terms of the trading businesses, combining equity and fixed income, we had the second strongest quarter in our history as record fixed income revenue offset declines in our equity business. Fixed income trading revenues was a record 122 million, up 24% driven primarily by the addition of binding sparks and increased overall activity in our rates business. Equity trading revenue was down 29%. Remember that last year's first quarter benefited from strong global volumes tied to increased retail activity and strong issuance markets. In addition, the S&P 500 was up 6% in the first quarter of 2021, compared to a 5% decline in 2022, which impacted our trading gain. On slide seven, we look at our investment banking business. For the quarter, we posted revenue of $255 million, which was down 25% as record first quarter advisory revenue was more than offset by the weakest equity underwriting markets we've seen in some time. We continue to be pleased with the strength of our advisory business as our revenue of 181 million was up 40%. Our advisory business is diverse across business segments as KBW, a proxy for financials, posted a record quarter while we also got strong contributions from industrial, consumer, technology, as well as our Miller-Buckfire restructuring practice. We continue to see strength in public backlogs, and we're also benefiting from the investments we've made in our ability to do private transactions. Overall, while timing can always impact deal closings, we feel very good about the outlook for our advisory business. In terms of underwriting, despite our 62% decline in equity underwriting, according to our internal calculations, Steve will gain market share. This was, again, a result of the investments we've made in the business. Our fixed income underwriting business posted $40 million of revenue, a decline of 17% from last year. But again, our market share in the municipal finance business, in terms of number of transactions, increased to 15.8% from 12.9% and helped to partially offset the impact of a greater than 20% decline in industry-wide activities. Overall, we experienced the cyclicality of our institutional business this quarter. As primarily a transactional business, this is to be expected from time to time as market conditions can be volatile. However, the diversity of our revenues within the institutional business mitigated that volatility. We've demonstrated our ability to consistently grow this business over the past 10 years, and we anticipate that to continue to grow as markets stabilize. in the coming period. And with that, let me turn the call over to our CFO, Jim Marishen.

Thanks, Ron, and good morning, everyone. I'll start by addressing net interest income. Our NII came in above our guidance at $156 million, which is up 13% sequentially. The growth was driven by an 8% increase in our interest-earning assets as we continue to grow our loan portfolio and from an increase in bank NIM to 244 basis points. We've benefited from the recent rate increase in March, but we anticipate the majority of the impact from this rate hike to occur in the second quarter. With that said, assuming we see two 50 basis point rate hikes in the second quarter, we would project net interest income in the second quarter in a range of $190 to $200 million and a bank MIM of 285 to 295 basis points. As you recall, our full year guidance for NII was in a range of $650 to $750 million. This was based on balance sheet growth of $4 to $6 billion and zero to three increases in the Fed funds rate beginning in March. Well, after one quarter's results and market expectations for significantly more rate increases, our initial guidance appears to be conservative. Given our current asset composition, total balance sheet growth of $4 billion for the year, an additional 100 basis point of rate hikes expected in the second quarter, and a 50% deposit beta, the low end of our guidance range will increase to $800 million. When we model in the impact of an incremental eight rate hikes, $6 billion of asset growth, and a 25% deposit beta, this would drive the high end of our NII range for the year to $900 million. Moving on to the next slide, I'll highlight the bank's loan and investment portfolios. We ended the quarter with total net loans of $17.8 billion, which was up approximately $1.1 billion from the prior quarter. Our commercial portfolio increased by $430 million, with particular strength in the industrial and financial sectors. On the consumer side, our mortgage portfolio increased by $500 million, and our securities-based loan portfolio was up modestly as recruiting remained strong. Moving to the investment portfolio, Total investments decreased by $220 million sequentially as a result of lower agency MBS and CLO holdings. That said, we are beginning to see increased opportunities in CLOs given the increased rate environment and current yields. Turning to credit metrics, the low-moss provision totaled $8.2 million due to the aforementioned loan growth, and the allowance to total loans ratio remained at 75 basis points. Our non-performing assets as a percentage of total assets remained at seven basis points, indicating continued strength in our credit metrics. Moving on to capital and liquidity, our risk-based and leveraged capital ratios declined to 18.6% and 11.3% respectively. The modest decreases in our capital ratios were the result of loan growth and the seasonal impact on equity from stock-based compensation. During the first quarter, Through the net settlement of vested shares, we repurchased $87 million of shares from employees. Our book value and tangible book value per share experienced slight declines as our quarterly earnings were offset by the aforementioned impact of stock-based compensation, as well as the impact of an unrealized loss recorded in accumulated other comprehensive income. This unrealized loss was due to relatively modest-sized positions in our agency MBS and corporate bond holdings. Given our plans to continue to grow our loan portfolio, we received a number of questions about our bank funding capabilities. As you can see, we've added a chart to illustrate the funding that is not only utilized by the bank currently, but also available to our bank. At quarter end, Stiefel Bancorp was utilizing $22.2 billion of deposits from the suite program, with an additional $5.5 billion available that is currently swept to third-party banks. Through deposit generation efforts outside of the SWEEP program, the bank has grown $2 billion of other direct commercial and retail deposits from clients over just the past few years. These deposits are primarily generated through our fund and venture banking groups, as well as through other retail deposit programs. Further, our PCG clients hold an additional $6.2 billion in money fund balances The bank has access to other secured borrowing facilities, totaling $4.5 billion. Lastly, we wanted to highlight that our recent doubling of our annual dividend from $0.60 per share to $1.20 per share resulted in a 20% payout ratio in the quarter. On the next slide, we'll go through expenses. Our comp to revenue ratio of 59.5% was down 140 basis points from last year, but above the high end of our full year guidance. As we stated in the past, we typically accrue compensation expense conservatively earlier in the year. Later in the presentation, Ron will comment on our updated comp ratio guidance. Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment bank transactions, totaled approximately $197 million and represented 17.7% of our net revenue. The effective tax rate during the quarter came in at 23.6%, and we expect the second quarter effective rate to be between 25 and 26%. Finally, our average fully diluted share count was in line with our guidance. Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the second quarter fully diluted share count to be 118.3 million shares. And with that, I'll turn the call back over to Rod.

Thanks, Jim. So far in 2022, we're off to a strong start as we generated record wealth management institutional fixed income revenue that drove our second strongest first quarter in our history. That said, it's also fair to say that the market environment has not been exactly what we had initially projected, and 2022 is shaping up to be very different from 2021. This is why we've consistently emphasized the importance of the diversification of our business models. You can see from the top of the slide, we have a long track record of consistent growth through various market conditions, much of which is due to the diversity of our revenue lines. As such, we believe that we are well positioned to weather the market volatility and potential economic headwinds that could emerge in 2022. As such, we are maintaining our full-year revenue guidance of $4.9 to $5.2 billion. Looking at our global wealth management segment, revenues will be driven by a number of factors that include increased net interest income, continued strength in recruiting, and solid asset management revenue. In terms of net interest income, as Jim mentioned earlier, we've raised our guidance to account for increases in the Fed funds rate. The lower end of our guidance is based on rates only increasing 100 basis points, as we believe the Federal Reserve may be limited in how much they can increase rates that the economy begins to slow. That said, our revised low end of our guidance is still 50 million above the high end of our prior guidance, and the revised high end would represent an 80% increase in NII from 2021. The increase in our guidance underscores the meaningful asset sensitivity in our business, which I believe has been underappreciated by the market. Our institutional group revenues are more volatile and our results in the first quarter illustrated how they can be impacted by changes in the market. That said, we continue to believe that 2022 will be a solid year for our institutional group. Our investment banking revenue should improve as we expect consistent contributions from our advisory practice as our pipelines are robust and improvement from our capital raising business from the low levels in the first quarter. Additionally, transactional revenue should increase due to seasonal improvements in volume, as well as increased training gains. Lastly, we lowered our guidance for our compensation ratio to 56 to 58 percent, primarily due to the additional revenue from NII. While we try to be conservative in how we accrue compensation early in the year, we anticipate that the additional expected revenue from this relatively low compensatory revenue source will allow us to enhance our already increasing operating leverage. So in conclusion, we do not expect 2022 to resemble 2021, especially considering the war in Ukraine and the increase of inflation, the latter of which requires a tightening of monetary policy and a reduction of fiscal stimulus. You know, with respect to inflation, its emergence reflects too much money created through the combination of vast federal spending and easy monetary policy, chasing too few goods. U.S. economist Milton Friedman succinctly observed that inflation can only be produced by a more rapid increase in the quantity of money than in output. I think it is safe to say that the increase in broad U.S. M2 money supply in 2020 to 2021 to a growth rate that peaked at over four times the rate that existed during the pre-COVID-19 years laid the foundation for inflation in 2022. With respect to the current war in Ukraine, above all, it's a humanitarian tragedy, and our thoughts are with the people of Ukraine. Regardless of a diplomatic solution, it is hard to imagine that these events do not impact the world order, the global economy, free trade, and the position of the U.S. dollar in that hierarchy. Taken together, these factors introduce significant uncertainty and, as a result, more inherent risk. That said, as Stifel has demonstrated for over 25 years, we are a company that is both well-positioned and capable of adapting to changing environments. The balance of our business model, augmented by acquisitions, creates continued opportunities for growth and gives us confidence in our ability to generate strong results. With that, operator, please open the line for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the bound key. Again, if you would like to ask a question, press star then the number 1 on your telephone keypad. Please stand by while we compile the Q&A roster. The first question comes from the line of Steven Schubeck from Wolf Research. Your line is open.

Hi. Good morning, Ron. Good morning, Jim. Morning, Steve. Morning. I wanted to start off with what's admittedly a hot topic at the moment, cash sorting. Last cycle, you had very low deposit betas on the first 100 BIPs of hikes. That ran pretty significantly, and you even started to raise some CDs as cash sorting headwinds started to manifest. This time, it does feel admittedly different just because you're coming into the cycle with better organic growth. You noted there's a larger pool of available funding of roughly $16 billion in But I wanted to get a sense as to how much of that $16 billion can be readily swept to steeple bank to support growth. And how do you see cash sorting impacting cash balances? And is there a credible case for growing sustainably from here even beyond 2022?

A lot of questions in that, Steve.

I would consider it a heavy two-parter.

It's having two-parter, yeah. First of all, when we have and will continue to source deposits through recruiting, I mean, we've done it consistently as we've grown AUM. I've talked about our AUM targets and the way we can grow both through organic recruiting and acquisition. And, you know, when I look at it, we're going to continue to build our funding base. We've also, instead of just looking at retail, we've been building funding through our commercial build-outs too in fund banking, and you've seen that. So I believe we have adequate funding. You know, we're talking this year about $4 billion to $6 billion of growth. Plus, you know, if you take that into next year, we have funding to easily do that. So I think that was the first part. And Segment, I'll let Jim jump in here a little bit. I think you were talking a little bit about deposit beta.

Yeah, from a cash sorting perspective, I think one thing that's different this time around, maybe there's a couple things. We're starting from a higher yield on our asset base. So we can be more competitive on a deposit beta and still make an acceptable return. That said, we've also put in some deposit programs to deal with more rate-sensitive deposits to hold on to more of the cash that sorts, you know, searching for a higher-yielding deposit. And so I think those factors put us in a vastly different position. And then when you think about some of the guidance we put out on our net interest income, you know, we're talking about on the low end a 50% deposit beta, which is significantly higher than what we experienced in the last cycle. So even under those types of deposit betas, these are the types of NII and net interest margin that we can produce. And I think, you know, it's kind of inherent at the beginning of your question, you talked about how things are a little bit different this time.

Thanks for that color, Jim. And maybe just one on the fee guidance, you know, certainly more conservative fee guidance. I don't think it's taking anyone by surprise given the tougher backdrop for the market sensitive businesses. I was hoping you could provide just some granularity on what you're assuming for equity markets for full year 22, as we think about that mark-to-market of the guidance. And just speak to your outlook for the advisory and ECM businesses over the next few quarters. The macro is challenging, admittedly, but you also cited a record backlog in advisory, which should convert at least over the next couple of quarters from here.

Yeah, look, I'll take – I mean, if you – our advisory business and all of the – the things that drive that business are still in place. We see the environment as something we need to monitor, but the overall environment is in place, and so we're optimistic about our advisory business. So that said, we had a good first quarter as well of $180 million. As it respects to the fee-based, You know, I think our base case was we had expected a decline in the first quarter, and then, Jim, what was the... In terms of asset management, it was, you know, low mid-single-digit increases in the S&P 500 through the end of the year. Yeah, and so that's the basis on which we, that we were forecasting asset management. So, you know, this recent pullback isn't in the top, but it is recent, so...

Fair enough. And if I could just squeeze in one more just on the organic growth outlook. Despite the volatility in the quarter, certainly nice to see the advisor ads and even a large client win for the nascent independent platform. I was hoping you could disclose the level of organic growth that you saw in the quarter, recognizing it was a challenging recruitment backdrop. And over the long term, what do you see as a sustainable level of organic growth and whether that contribution from the independent channel, while still early, whether that could help buoy the long-term algorithm.

Organic growth, you're talking about assets or advisors?

Assets.

Yeah, no, I would say, you know, obviously the first quarter is probably a little bit more challenging in terms of net new assets. It's probably low mid-single digits. But I still think the dynamics for growth there mirror more that 6% or 7% or 8% that we've experienced historically. over kind of multiple operating cycles, and I think that's what we would guide to.

Yeah, and look, our recruiting is historically, I mean, years-long successful. The independent channel has green shoots. We see it. We're approaching the business a little bit different in what we're looking at in terms of recruiting into that channel, but it's certainly something that, that we are optimistic about in terms of augmenting our historical employee channel recruiting.

Very helpful, Collar. Thanks so much for taking my questions.

The next question comes from the line of Kevin Ryan. Your line is open.

Hey, thanks. Hey, Devin. Devin Ryan. I get that one. How are you guys?

I didn't know if your middle name was Kevin Ryan.

Exactly. Yeah. I think Steven asked all the questions with his three-parters there, but let me try to take a different route. So I want to dig in a little bit about the bank growth and appreciate the capacity there, and you guys have had a lot of success. Can you maybe just parse through a little bit more around kind of competitive dynamics. Obviously, as rates are going up, you know, there's more interest in, you know, other firms, obviously, expanding bank capacity as well. And, Jim, you mentioned CLOs. Obviously, you guys have been in that market a long time. I'm curious kind of what you're seeing there, what type of yields and how attractive that is as well. So just kind of a high level on competitive dynamics in the bank and then where you're looking.

Yeah, look, first of all, you know, we've not seen the rapid increase in money supply that we saw last year, you know, 25% in M2. And that factor, you know, makes me believe that as much as people want to say there's going to be a lot of demand for deposits, that would argue against that. The unknown factor here a little bit, Devin, is we've also not seen a scenario where the Fed's shrinking its balance sheet to the tune that they're being talked about. And, you know, that could, you know, be a factor that goes the other way. But, you know, the world's a wash in liquidity. There's deposits all over the place. I think it's, I am not sure how much different it'll be this time.

Yeah, and maybe pivoting a little bit back, you know, specific to the categories of growth, I think the reason that we feel confident in our ability to grow is that we've diversified into a number of different lending channels. And Ron kind of spoke to that, you know, whether it's residential lending, securities-based, fund banking, venture, private banking, CRE. There's been a number of teams and people and capabilities we've invested in over the last few years that are really helping us diversify that growth. And then, you know, the comment about the CLO portfolio, that's just additional capacity there. You know, we're seeing, you know, CLOs yielding in the 260 range, you know, and so, you know, that's an attractive floating rate asset as we continue to see rates rise that we would happily add as part of our kind of overall asset mix.

So, you know, and I just want to say, as it goes to funding, we're going to continue to grow. We'll grow our funding sources. We We've shown our funding, but if you look at $4 billion to $6 billion of growth, do it again, $4 billion to $6 billion, I don't see us constrained by funding while we're growing our balance sheet 15% a year. That's kind of what I think is sometimes underappreciated also, Devin, is our ability to organically generate loans and the deposits. funding for that. We've grown the bank, I think, 30% a year for the last five years, and we're going to continue to grow the bank. And the building blocks to do that, both to generate loan demand and fund it, are in place.

Okay, great. Thanks for all that color. And then maybe to round out from Stephen's question earlier on the institutional side, you hit on kind of the advisory outlook and ECM to some degree. I'm curious, you know, it's been a pretty healthy backdrop for fixed income. And as rates go up, You know, just maybe talk a little bit about the kind of implications on, and I appreciate your rate outlook isn't that we're going to some new high level, but what the implications are on either fixed income capital raising or the fixed income brokerage business, particularly obviously now you have Binding Sparks in there as well. So just some of the puts and takes as we transition a bit maybe in that business as well.

I'll comment both fixed income and equity. Fixed income trading, as we look forward, both, as I've said, some seasonal factors and the additions that we've put in, we see that business as positive and improving from the first quarter, just to give a sense. The public finance business is It's also been challenged by just what's been happening in the high-yield market in public finance, and that's a market that's been under some stress. Overall, we think that public finance is relatively flat to last year, which is a very good year, but also up from the first quarter. You know, our advisory on the equity side is very, very good backlog. And as I said, the factors, you know, the PE has a lot, the PE firms have a lot of firepower. And that's going to, that'll help the advisory business and we'll benefit from that. Equity capital markets, you know, the first quarter was, you know, that was, 80% decline in equity-linked issuance. And the volatility that we're seeing in the market, and what I mentioned in the VIX, that's going to certainly impact new issue, but the volatility also will help our trading businesses. So, you know, overall, I'm trying to paint a picture of improvement in our institutional business as we sit here today going forward.

Great. I appreciate it, Ron. Thanks, Jim, as well. Appreciate it. Thanks.

Our next question comes from the line of Alex Bloistein with Goldman Sachs. Your line is open.

Hey, guys. Good morning.

Good morning.

Coming up. But I'll probably add to the multi-potters on top of the multi-potters. So we'll keep talking about the bank for a second. So I guess I was hoping maybe you could frame out of the $28 billion of customer cash that you guys have right now, is there a way to frame sort of a stress level in terms of what's sort of truly operational, right? So things that are set aside to pay fees for some kind of exhaust cash in the accounts versus something that could ultimately chase higher yields, given the fact that money market fund yields here will yield a pretty attractive alternative shortly. So that's kind of the first part. And then on the deposit beta side of things, I just want to make sure that we're talking that 25% to 50% is really kind of the average over the course of 2022. So potentially we could be entering 2023 and north of 50% deposit beta. Is that potentially the message?

Maybe I'll take the first one first. And so in terms of operational cash, obviously we're not in a regulatory regime where we're classifying those cash balances in the manner that you're talking about. That's, you know, significantly larger bank classification to get there. But I will say the vast majority of that cash in the sweep program is is operational in nature. The average balances are relatively small. There's million plus clients in that group. And so there's a lot of money movement going back and forth. But what you'll see over time is there's a lot of consistency in that balance. And so You know, I think the bigger item to focus on there is just the continued growth in the overall program based upon the continued success in recruiting. And that's going to continue to drive that balance higher. And we're going to have access to the vast majority of the cash available held by clients. Second item on the beta, again, this was just for pure illustrative purposes. We were talking about a 50% beta for the full cycle on the low end, so that $800 million NII guide includes a 50% beta. The 900, we were talking about 25%. We were just trying to frame up what the impact of the beta could be on the overall NII guide. But at the end of the day, we're going to be competitive, and we're going to be moving with the market, and we're going to be competitive in our deposits. and we'll see where the, you know, actual betas end up going.

Yeah, and I mean, I would just add that based on, you know, any, within any range of the betas, the impact on our NII, which I think you've actually modeled pretty well, Alex, is significant.

Yep, makes sense. Thanks, guys. The other question, you know, comes up obviously every call, but the stock had a rough go here. Earnings power is improving. I think you guys are trading sub eight times earnings at this point. Any updated thoughts around ramping up the buyback?

You know, we're always mindful of that. I would... The weakness in the stock historically will, at these levels and these pricing levels, will result in us, historically speaking, to be when we buy back stocks. So we're always looking at the utilization of capital to the highest returns. Obviously, as the stock price decreases, that return, the way we look at it, increases. So, you know, we're not out of the market.

The other thing I would highlight, there's always the seasonal impact of 1Q, which I referenced. You know, we net settled $87 million of shares, and that's a 1Q phenomenon. And so that, you know, that won't continue going forward. And so you'll see, you know, probably a little bit more appetite in terms of just, you know, open market share purchases.

Understood. Thanks so much.

Again, everyone, if you'd like to ask a question, press star then the number one on your telephone keypad. The next question comes from the line of Chris Allen from Campus Point. Your line is open.

Morning, guys. Thanks for taking my question. Maybe some cleanup questions. In your trading books, were there any negative marks during the quarter? Obviously, you talked about the potential for seasonal improvement moving forward and the backdrop in certain areas looks pretty decent. I was wondering if the market movements resulted in any negative marks out there in the first quarter.

There were no negative marks. I think when you look back a year ago, there were some positive trading gains and some warrants that we took. And that's really causing some of the fluctuation from a trading P&L perspective, not necessarily losses this quarter, but the gains from the first quarter of 2021.

And it's been, on a comparative basis, it's been a difficult fixed income market as well, but not, you know, not material in terms of losses, but, you know, a significant one when you look year over year.

Understood. And then just maybe if you could provide some color in the output for securities-based loans here. If I recall correctly, I think they typically see some headwinds in just in the higher rates and obviously more volatile environment. So how are you thinking about that component of the loan book? You know, I'm going to drive growth there.

I think there's still definitely growth there. A lot of that's going to be driven by recruiting. I will say we generated new loan balances of $275 million. We just experienced some paydowns in the first quarter, and that's really what led to kind of a modest increase in this quarter. But we still see a lot of activity there and a lot of potential capacity to use that vertical to continue to grow the loan book.

Understood. And the last one for me, just looking at the other operating expense line, down sequentially and down year-over-year. Just any color there. It was pretty decent declines.

Total expenses, you're saying?

No, other operating expenses. The $66.6 million on adjusted basis.

Might have us there.

Are you saying in the other segment? Are you saying on the consolidated?

The total P&L.

Yeah, and on the total basis, it's going to be the investment banking gross ups are down significantly. You know, obviously, given the decline in the ECM activity, you saw investment banking growth was probably down about $10 million. And so that was the biggest driver there. And I would say also year over year, obviously, the T&E did decline a little bit in the first quarter when the Omicron variant kind of came out. And so those are the two main factors there. I thought you were talking about the other segment when you were saying that. And so I wasn't seeing that fluctuation.

That's it for me, guys. Thank you.

Is there no further question at this time? I would like to turn the conference back to Mr. Ron Krasowski.

Well, I want to thank everyone for joining us, and we look forward to delivering on our growth as we have over the years. Look forward to seeing everyone on the next call. Thank you.

This concludes today's conference call. Thank you for participating. You may now