Stifel Financial Corporation

Welcome to the Stifel Financial First Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joel Jeffrey, Head of Investor Relations. Please go ahead.

Thank you, Operator. I'd like to welcome everyone to Stifel Financial's First Quarter 2023 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 Marish. 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.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 you 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. I will now turn the call over to our Chairman and CEO, Ron Krashevsky.

Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our first quarter conference call. We had a strong first quarter. Stiefel generated our third highest first quarter revenue as record global wealth management revenues continue to drive our business, and offset the market headwinds in our institutional group. Revenue came in a little over $1.1 billion with non-GAAP earnings per share of $1.40. We generated pre-tax margin of 21% and return on tangible common equity of 20%. All things considered, these are solid numbers. I would also note that these results include the impact of a loss on sub-debt we held in the bank bond portfolio that equated to $0.05 of earnings per share. I believe this quarter's performance once again demonstrated our ability to generate strong returns in light of ever-changing market conditions. This is the direct result of the diversity of our business and our long-term growth strategy. Overall, I am pleased with the continued growth in wealth management, our recruiting, and the performance of our bank. Frankly, the banking crisis had a bigger impact on our institutional business because of increased volatility and uncertainty than its impact on our bank, which frankly saw deposit inflows, although the events did put a higher focus on cash sorting. When the operating environment improves, and I believe it will, there's a lot of business to do in our institutional segment, whether in private markets, capital raising, or strategic advisory. We are well positioned for this outcome. That said, All anyone wants to talk about is bank metrics and trends, so let's do. Over the past few years, we've deployed significant capital into growing our bank, yet although we've grown our assets, we have also effectively managed both credit risk and interest rate risk. As you can see on slide two, Stifo compares favorably to other regional banks. Stifo Bank is designed to efficiently manage and redeploy client cash by providing banking products, primarily loans, to our global wealth management and institutional clients. Because our bank has a favorable efficiency ratio, we do not need to take additional risk to generate acceptable returns on invested capital. As you can see, we generate superior returns as compared to the average regional bank. Look, I would describe our business as follows. Stifel has balanced earnings power across multiple business lines. Simply, Stifel's mix of business is both synergistic and balanced. The stability of the wealth management and consistency of net interest income provides balance to the more cyclical institutional business. Next point is we have a well-structured balance sheet. Our balance sheet has 85% of its assets loading rate, 82% of our securities portfolio, which includes available for sale and held to maturity, repriced within a year. Approximately 60% of our loans repriced and mature in under three months. As a result, the yield on our assets has increased to 5.43% from 2.26% a year ago. Over that same period, consolidated net interest margin has increased to 3.57% from 2.13%. Before I move on to the next point, I want to note that with all the turbulence in the market and balance sheet concerns at regional banks, I believe the fact that we are able to reaffirm our NII guidance for the full year, albeit at the low end of our prior guidance, demonstrates just how well we've managed our balance sheet. Jim will give more details around this later in the presentation. Our next point highlights TIFO's strong capital levels, which are significantly in excess of regulatory requirements. Our Tier 1 and Common Equity Tier 1 ratios rank in the top percentiles when compared to the banks that comprise the KRX. Even when factoring potential unrealized losses from our securities holdings, DEPO's common equity Tier 1 ratio declines just 120 basis points to a still robust 12.7%. For comparison purposes, Silicon Valley Bank's CET1 ratio of 12.1% declined to a negative 0.2% when factoring in mark-to-market losses. Besides a well-structured balance sheet, our assets demonstrate superior credit quality. The majority of our securities portfolio, besides being floating rate, are rated AA or AAA. Equally important is the fact that our loan book has strong credit metrics as our non-performing assets to total assets ratio is just four basis points. Charge-offs, essentially zero. Finally, it's noteworthy what our loan book does not have. One, our CRE office exposure is less than 2%. We have no consumer, no autos. Frankly, we have nothing that we would want to exit by reclassifying to available for sale. Lastly, we have a robust liquidity profile with abundant cash levels and low-cost borrowing capacity, as well as high-quality relationship-oriented deposits, all of this with low levels of uninsured deposits, which leads to our next slide. Much like the assets in our balance sheet or funding sources are equally important to our success. We have a highly diversified funding base. We are focused on providing our clients with the necessary products to help them best manage their financial situation. 90% of our deposits are generated by wealth management clients and more specifically the cash they generate from their investment accounts. Transactional cash consists of more than 1 million accounts with an average balance of $15,000. It is also important to note that our clients' cash through all of this has remained at steeple. As shown, we've managed to keep the vast majority of client cash at steeple through programs like SmartRate, our commercial lending products, and our ability to offer enhanced levels of deposit insurance. SmartRate balances increased from less than $500 million a year ago to nearly $11 billion as yield-seeking client cash stayed at steeple due to our competitive yields. I believe it noteworthy that we anticipate the need for SmartRate as we introduced this product over three years ago. Commercial deposits have more than doubled in the past year as we've invested in our VC banking business and more traditional commercial banking services. 85% of our deposits are insured as the benefits of our four bank charters and access to ICS have enabled clients and corporations with larger cash balances to keep their deposits with us. In terms of liquidity, we have about three times coverage for our uninsured. As indicated, cash sorting has been the biggest driver of our deposit betas. The most significant pressure on our funding costs have come from moves out of client transactional cash and into smart rates. Look, in times of low interest rates, deposits that are considered savings versus those considered transactional were essentially indistinguishable. However, over the past year, The difference between the two has become clear as transactional balances have decreased by $8 billion and savings balances have increased by more than $10 billion. Given the difference in yield on these deposits, it's apparent what has driven our deposit betas. As we sit here today, we believe that this cash sorting process is slowing and getting closer to its end point. At that point, this process may reverse to a stage where bank balance sheet cash begins to grow as a result of our organic net new asset growth, as well as new accounts that we attract. Next, I'm consistently asked about the impact of 100 basis point increase or decrease on our projected NII. Forward curve is calling for the potential for interest rate cuts in the near future. I am not as confident in this outcome as I see the Fed pausing here. That said, 100 basis point reduction would reduce yield on our assets, obviously, but we would also see a benefit on deposit costs. We would anticipate that 100 basis point rate cut would result in a 65 million annual decline in our NII as we anticipate very high deposit betas on our smart rate product, and we don't see significant additional cash sortings. On the other hand, a 100 basis point increase in rates would add approximately $100 million to NII. Next, let's examine what has happened to client cash. It's important to note the following. We offer client choices for how they deploy their assets and manage their cash. This is illustrated by increased client holdings in money market funds and treasuries. Third-party money market funds are up $1.5 billion in the past year, and while these funds didn't go into smart rate, they stayed within steeple. Similarly, some of the decline in transactional cash has moved into short-term treasuries. This is something I first highlighted in 2022 as a strategy our advisors advised on for generating the best yields. T-bills, maturing in less than one year, have grown from $1.5 billion to nearly $7 billion. The bottom line is that client cash has moved geography but remains with Stiefel. The growth and structure of our balance sheet has resulted in Stifel being a significant beneficiary of the rise in interest rates. Our increased scale and asset sensitivity resulted in our projected net interest income more than doubling since 2021. So what happens if the Fed begins to cut short-term rates? As I indicated, NII will be modestly impacted by 100 basis point decline in rates. I also get asked why we don't hedge against this possibility. What I think is overlooked is the highly complementary nature of our other revenue lines, particularly our institutional group. As you can see on the chart, higher rates had a positive impact on our net interest income, yet arguably negatively impacted market conditions that drive our institutional group. Specifically, the increase in market volatility and higher financing costs have weighed on both the M&A and underwriting markets. However, in periods when rates were either lower or just stable, our institutional group revenues were a primary driver of growth. In fact, our record return on tangible common equity and pre-tax margins occurred in 2021 when the Fed funds rate was essentially zero and investment banking activity soared. So the belief that our margins will significantly decline as rates are cut seems a little misplaced to me. The bottom line is that we have built a diversified business in order to succeed in ever-changing market environments. And given our past performance, we believe that our business will continue to prosper despite the potential for lower interest rates. As we think about our long-term strategic objectives, I go back to a statement I've made a number of times. Past is prologue. We've built a diversified business in order to succeed in ever-changing market conditions. As you saw on the previous slide, our net interest income and institutional group revenue are highly complementary and essentially act as a hedge to each other. With this in mind, we'll continue to do what we've always done, which is to reinvest our considerable excess capital into the business with a focus on generating the best risk-adjusted returns and becoming more relevant to our clients. In wealth management, We'll continue to recruit high-quality financial advisors that choose to make Stifel their firm of choice due to our advisor-friendly culture, expansive products, excellent technology, and industry-leading yet simple and fair compensation plan. With this approach, we believe that our target of $1 trillion of assets under management is attainable. As our client assets increase, we'll experience corresponding growth in our bank deposits, which will further enhance our ability to grow our bank balance sheet in the same conservative way as we always have. We will continue to build out additional capabilities on the commercial side of the business. For example, in the first quarter, we hired a number of high-quality individuals from Silicon Valley Bank. This again illustrates our strategy of taking advantage of market disruptions to make opportunistic hires that enhance our long-term growth. Although we believe that our global wealth management segment will continue to represent an increasing percentage of our total revenue, our institutional group is a vital component to our strategy, and we will continue to opportunistically invest in this segment. In the first quarter, we added a number of talented individuals from credit suites and continue to invest in our fixed income trading technology. Now let me turn the call over to Jim Marish to discuss our most recent quarter results.

Thanks, Ron, and good morning, everyone. Looking at the details of our first quarter results on slide six, our revenue of $1.11 billion represented our third strongest first quarter and was essentially in line with our average revenue during the prior four quarters. The consistency of our revenue over the past year was the result of the diversity of our business and primarily the investments we've made in our global wealth management segment and particularly in our banks. This has resulted in our 10th consecutive quarter of pre-tax margins above 20%, despite headwinds to some of our businesses, as you can see from the revenue bridge on the slide. All this produced earnings per share of $1.40. Moving on to our segment results, the global wealth management revenue increased 11% to a record $757 million, and our pre-tax margins were 42%, an increase of 860 basis points from a year ago. During the quarter, we added a total of 49 advisors, including 20 experienced advisors with trailing 12-month production of more than $12 million. Our recruiting pipeline remains robust, and we believe that the stability of our platform will further enhance our position as a premier destination for high-caliber financial advisors. We ended the quarter with fee-based assets of $150 billion and total client assets of $406 billion. as our net new asset growth in the quarter was in the mid single digits. We highlight our long-term growth drivers of our wealth management business on slide eight. The continued growth in the contribution from our asset management revenue and net interest income further drove our wealth management revenues towards more recurring sources. In the first quarter, our recurring revenue reached a record 78%, which continues to drive greater stability in our results. Moving on to slide nine, our net interest income totaled 297 million, which came in within our guidance range. The sequential decline was attributable to a one-time $5 million benefit in the fourth quarter related to our mortgage portfolio that we highlighted on our last earnings call. Bank NIM of 3.74% was below our guidance due to an additional $1 billion of cash that we carried on our balance sheet in response to the market volatility that occurred in March. Further, we experienced more cash sorting than anticipated, which we also attribute to March market environment. As we look forward through the rest of 2023, we continue to see a widening range of possible outcomes when projecting NII given changing market dynamics. Based upon the forward curve and our assumption for additional cash sorting, we are now projecting two Q consolidated NII to be approximately flat compared to one Q NII. As Ron referenced earlier in the presentation, assuming that we do not see any further material cash sorting in the second half of 2023, we would project the full-year consolidated NII to be approximately $1.2 billion. Given market dynamics today, we are pleased to be projecting results within the lower band of our original full-year guidance. Moving on to the next slide, I'll quickly review the bank's loan and investment portfolios. We ended the quarter with total loans of approximately $21 billion. which is up modestly from the prior quarter due to growth in our residential mortgage portfolio and our fund banking business, and more than offset sequential declines in our CNI and securities-based loan portfolios. But also note, as Ron mentioned earlier, the bank realized a five-cent-a-share loss on a bank's sub-debt position. This roughly $7.5 million loss was recognized within other revenues and was the reason we reported negative $2 million of other revenues during the first quarter. Turning to credit metrics. Our credit loss provision totaled $4.9 million, and our consolidated allowance to total loan ratio was 75 basis points. Overall, our credit metrics remain very strong. Our non-performing assets as a percentage of total assets were four basis points, while our non-performing loans were five basis points. On the next couple of slides, I'll discuss our institutional group. Total revenue for the segment was $333 million in the first quarter. Firm-wide, investment banking revenue totaled $212 million, which was in line with a high end of our guidance noted in our February metrics release. Advisory revenue was $151 million. The quarter benefited from a couple of larger fees that helped to offset some of the seasonal decline we typically experience in the first quarter. That said, the increased volatility in March further delayed some transactions. While new M&A announcements have slowed, our engagement with our clients remains robust. Given the increased scale of our business, we are well positioned to capitalize on the rebound and advisory activity when markets stabilize. The remainder of our institutional group is comprised of our equity and fixed income businesses. Equity's revenues totaled $77 million in the quarter, which is a slight increase from the fourth quarter as both transactional and capital raising revenue increased modestly. Equity transactional revenue totaled $52 million, which is up 1% sequentially, as increased flow of business more than offset declines in trading profits. As I noted last quarter, we see increased engagement in electronic trading as we continue to gain market share as our clients embrace our electronic offerings and value our best-in-class research. In terms of equity underwriting, revenues were up 2% sequentially. We began to see some signs of improvements early in the quarter, but given the volatility in markets in March, activity levels have slowed again. Fixed income generated net revenue of $103 million during the quarter, which was roughly in line with the prior quarter, as increased capital raising activity was more than offset by a decline in transactional revenue. Transactional revenue declined by 8% sequentially. As we continued to experience difficult operating conditions for our rates business, we did see some market share growth in our credit business. Fixed income capital raising improved 15% sequentially. We continue to be a leader in the municipal underwriting business as we rank number one in the number of negotiated transactions, and our market share was 15%. That said, the number of transactions in the first quarter, industry-wide, was well below normal levels. We've started to see increased activity levels in the past two months, but it's hard to say how sustainable this momentum is given current market conditions. On the next slide, we go through expenses. Our comp-to-revenue ratio in the first quarter was 58%, 150 basis point decline year-on-year as we continue to benefit from increased NII contributions. Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $227 million. Our non-comp op X as a percentage of revenue was 20.5%. The increase over the prior year was driven by the normalization of travel, entertainment, and conference expenses, in addition to certain legal and compliance-related costs incurred during the court. The effective tax rate during the quarter came in at 24.9% as we benefited from the excess tax benefit related to the vesting of deferred stock-based compensation. Finally, our average fully diluted share count came in at $115.4 million. We repurchased 1.5 million shares during the quarter through March 8th. We have 7.6 million shares remaining on our current authorization. Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the second quarter fully diluted share count be 114.7 million shares. Before I turn the call back over to Ron, let me discuss our capital position. We have approximately 330 million of excess capital based on our current capital ratios. Additionally, if you simply run rate our first quarter net income, we would generate an additional 600 million in 2023. As Ron noted earlier, Our strategy of opportunistically acquiring new businesses in times of market stress is a direct result of our focus on carrying sizable amounts of excess capital that resulted in much of our growth. While we continue to carry excess capital, we also look to redeploy it through share of purchases. With that, let me turn the call back over to Ron.

Thanks, Jim. As I stated last quarter, there's a significant amount of uncertainty in the operating environment so far in 2023. and I don't think anything we saw in the first quarter has changed my opinion. However, as we detail through our earnings call, Stiefel is well positioned to perform through these economic cycles. While the markets remain uncertain, I remain optimistic. We will benefit from strong net interest income, and our asset management revenue continues to benefit from our recruiting efforts and market appreciation. The cyclicality of our institutional business remains well positioned, to benefit from increased market stability and will provide a hedge against any decline in interest rates. And with that, operator, please open the line for questions.

Thank you very much, sir. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypads. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And again, that is star 1 to ask a question. We'll take our very first question from Steven Chewbacca from Wolf Research.

Please go ahead.

Steven, you cut out a little bit.

We didn't hear what you first said there.

Sorry. Can you hear me now?

Yes.

Okay, perfect. Well, first off, I'm trying to give you guys a compliment. Really, just the best cash deposit disclosure We've come across this earnings season, so really appreciate you guys taking the time to provide that. The piece I did want to dig into was unpacking the NII guidance. The fact that you're expecting NII to come in at the lower end of the range, it's definitely a better outcome than we and many investors were anticipating. At the same time, annualizing that one QNII and actually the first half, it's below the guidance. And NII declined sequentially, just suggesting a less favorable trend. So I was hoping you could spend some time unpacking your assumptions across a whole host of variables, just in terms of Fed policy actions, loan growth, deposit beta, sweep remixing that supports that higher NII run rate over the course of the year.

You know, Steven, you know, there are a lot of factors that you just pointed out, and a lot of people are trying to avoid that. We're not. You know, we're trying to just give our best look at this. I think we came in, Jim, and I have 297.

Correct.

And, you know, look, one of the things that happened in the quarter was in the last part of March, I'll just tell you, we got a lot of cash coming our way. And because of the uncertainty, we held some cash in. in the quarter, which would probably account for some of that shortfall from $300 million. So if we're at $300 million and we think that for the first half we're going to be at $600 million, based on everything we're saying, that supports the low end of our range of $1.2 billion. Now, there's many things that can happen in terms of policy. But our best guess is that today, our best estimate is that we would be at the low end of our guidance range for NII.

And to add a little bit to that, obviously we talked a little bit about our thoughts in terms of cash sorting. You know, we've kind of broken through historical lows in terms of transactional cash as a percentage AUM. We're still assuming some additional sorting in 2Q, but basically saying from there forward, we've kind of reached near the end of it, no material further sorting. And then another thing to think about is we were a little bit early when we moved the smart rate to 4.5%. I think with the potential for the next rate hikes, given the forward curve, you're not going to see nearly as high of a beta on those. If we do get to the point where you do see rate cuts, you're going to see a higher beta on the way down, particularly on the smart rate program. The other piece I would highlight is is our original guidance came out before we hired the individuals from SVB. They're going to provide additional liquidity and some loans. That's going to have an impact on this. Then I'd say as well is we have come in a little bit higher than we originally were projecting in some of the non-bank NII, particularly in our broker-dealer, than we originally expected. So you combine all those factors together, that's really what's driving it to the $1.2 billion.

The last thing I'll add is that You know, as I said in my remarks, Stephen, that we were really early with SmartRate thinking about having that product. As I said, we did it three years ago. And if you look at our consolidated interest-bearing deposits, that's about 202, 2.02, which is higher than if you benchmark that. And the reason for that is because we got ahead of the cash sorting. So no matter where we are, We think we're farther along than whatever is going on across the mass of client cash.

No, it makes complete sense. And for my follow-up, just a broader question on capital management. Certainly active in terms of buyback, which is great to see. Given the strength of your excess capital position that you cited, expectations for more tepid balance sheet growth, is this $170 million... a reasonable cadence or run rate for us to be contemplating at least for the near term. And as far as M&A opportunities are concerned, do you see the recent bank fallout as providing some attractive opportunities to be more active on the M&A front?

The M&A for banks specifically?

For banks, yes. What you have done with that.

You know, the bank environment is clearly uncertain, and the fallout in many ways is reflecting some holes in banks' capital positions, especially if you try to do an acquisition. That becomes crystallized. So I'm not sure that I would – obviously, if the right opportunity comes along, we always look at everything, but it's a tough environment to assume someone else's liquidity or capital shortfall issues in this environment. And certainly the accounting doesn't help. So I would say that. And as it relates to buybacks, yeah, it's an effective tool for returning capital. We've always said it's a lever. The fact remains is that in terms of uncertainty like this, in times of uncertainty, you know, the board and everyone, husbands their capital a little bit. And that's what we've been doing.

But we haven't suspended our buyback.

Great, Collar. Thanks for taking my questions.

Sure, Stephen. Thank you. Our next question comes from Alex from Goldman Sachs.

Hey, guys. Good morning. Thanks for the question. So maybe just picking up on the topic of sorting again, it's encouraging to hear your comments that you're starting to see maybe a little bit of a slowdown. And I think the general market convention is that most people anticipate things sort of to trough out in the middle of the year, kind of consistent with your comments. But I guess one, maybe just give us an update on where SWE deposits stand today and where the smart deposits, smart rate deposits stand today. And more of a, I guess, philosophical question, when organic growth resumes or where the organic deposit growth resumes, call it in the back half of the year, why would they go into the suite program and not remain in a higher rate option? So I understand new client money comes in, but what kind of gives you confidence that all of that effectively will accrue to the suite program at a lower rate when the underlying kind of market rates will continue to be at a pretty widespread to that?

Well, take your last person first. You know, there's no really no better environment if you will for cash sorting than what we're sitting in today all right we we have the yield curve you know inverted uh and just a tremendous amount of focus uh when you can get short-term rates near five percent in the ten years where it is it's just it's just a lot of focus on that and frankly it's a pretty good investment uh uh uh alternative for clients that just aren't sure what to do. And so all of that leads to a lot of cash sorting. If you normalize, say, get to a 3% Fed funds in a deepening yield curve, that will take some of that focus off of that, just historically speaking. So I think it's a unique environment. We are at historical lows of transactional cash to our AUM. I don't think we're alone. But I believe that as the yield curve normalizes, you'll actually see the transactional cash, which is, you know, dividends and liquidity and all the things that have been historical. I believe that it will begin to normalize back.

The other thing to note there is we are seeing increased inflows in other bank deposits, not necessarily within the wealth channel, but within VC and other traditional commercial banks. And that's supplementing the liquidity of the bank when you think forward. Obviously, there's a differential in the cost there relative to sweep, but it's cheaper than smart rate in general. And so I think you need to keep that in mind as you think about the potential liquidity for bank growth.

Great. Thanks for that, Jim. You actually saved me my follow-up on that other bank deposit. So I'll pivot a little bit maybe to lending. You guys, I think, previously talked about slowing down the bank growth. We've seen that for the last couple of quarters. On the fund finance side of things, there's been definitely capacity that's come out of that market, and it may be somewhat concentrated in parts of the private equity and VC world. So how are you thinking about growth in the fund finance space? I don't know if you could break down between subscription lines and now blending, kind of what does that business look like for you today? And could that change sort of your view on the overall loan growth for the rest of the year if that business continues to pick up?

Sure.

I think in terms of fund bank on the bilateral lines, we're doing more of that activity. We're participating less in some of the larger transactions, but more of the direct transactions. We see opportunities. And we also see terms tightening there and the overall return prospects of that improving relative to where we were before March.

Yeah, and look, I think if we look at fund banking and what we're doing in venture banking, by the way, we were in these businesses, Alex. We just, you know, we see obviously opportunity with, you know, a lot of the players obviously have exited. And this business is highly integrated with our investment bank. And so we just see opportunity on both the fund banking and on the... you know, on the venture side. But, boy, there's been some capacity brought out of this business. So from my perspective, kind of a good time to get in.

Yeah, for sure. No, that's why I asked. Great. All right. Thank you, guys.

Yeah. Thank you. And we'll take our next question from Devin Ryan from JMP Securities.

Good morning, Devin. Good morning, Ron and Jim. Morning.

But I just want to dig in a little more on kind of intermediate term out, DBW, and just whether things are becoming better or more challenged in March. And then also interrelated, the fixed income program, where you're helping banks manage their securities portfolios.

How do you see that environment evolving, and does that improve from here as well?

Yeah, well, look, I think the environment, there's a lot to do in the bank. I'll take the fixed income side first. Clearly, that really slowed down as everyone just almost froze a little bit with looking at their portfolios and trying to understand the available for sale, the marks and the HTM. But there's a lot of restructuring going that needs to be done in bank portfolios, and we see that activity certainly picking up from here. With respect to KBW, there's a lot to do on bank line, too. In M&A, I think we're in one of those periods where we're completing our backlog from prior deals and a little bit of a lull, and then we'll pick up on strategic advisory activities in the banking space. I don't think there's any question that the recent events is going to spur strategic activity in the banking space.

Yep.

I got it. Thanks, Ron. Makes sense.

And at some level, capital. Go ahead.

Yep. Yeah, no, appreciate that.

Thanks, Ron. Yeah, I guess a follow-up for Jim just on expense management and just given some of the shifting in the revenue environment here, anything you guys are looking to do differently on expenses and then also how the AI kind of evolution is impacting your comp ratio leverage and expectations for the full year would be appreciated.

So in regards to expenses, we originally guided to an adjusted non-cop OPEX of 18% to 19%, and obviously we're higher than that at 20.5%. A lot of that is a higher ratio within the institutional business given some of the challenges from a revenue perspective. Now, when we talked about original guides, we were talking roughly flat operating revenues. And so if you think about extrapolating out the first quarter for the institutional group, that would be more like a $1.3 billion run rate. 15-ish percent decline. And we're not managing the business with that expectation. And so I think some of these things will normalize as we pick up some revenues through the back half of the year, particularly on the institutional group. In terms of the comp ratio, we still feel very comfortable with the numbers we talked about for the full year guidance. Obviously, we've brought down our starting point. You can go back over time and look how we've kind of stair-stepped down the comp ratio throughout first quarter through fourth quarter on an annual basis. And I think You know, given the affirmation of, you know, still being in the range of NII, it should give some confidence in what we can do from a comp ratio expectation.

Yeah, let me just supplement that by saying, and I agree with all of that, obviously, yet it's times like this over certainly my career that we have been able to add talented individuals and businesses. I've mentioned the people we've hired. Just this disruption creates opportunity. And I am focused on adding to our historical growth. And I just do not want to leave an impression that we're just going to manage to accomplish without taking advantage of what we see, some real, real opportunity to build our client franchise here.

Yeah, totally get that Ron. You guys are very opportunistic over the years.

So appreciate that. And maybe if I can put one in that's interrelated, just since you touched on it, you know, the financial advisor movement, you know, the, the environment, you had a kind of nice quarter there. Sounds like the pipeline is still good. You know, is this an environment for people to move? What are you seeing in that part of the business? And, kind of the outlook for the ability to continue to recruit financial advisors?

Look, I think it's good. Our pipeline is good. I've always, I always say that our, you know, our recruiting, if anything mutes our recruiting, it's our discipline on how we view cash on cash returns. So, you know, it'll generally be more, you know, related to how the competitive market for transition deals. Again, now's the time, frankly, with some of the upheaval and some of the players that have exited that were some of the higher payers in this, it's going to be an opportunity for us to pick up recruiting.

Okay, perfect. Okay, thanks so much.

Thank you. And our next question comes from Brennan Hawken from UBS.

Good morning. Thanks for taking my question. Hey, how are you? I'd actually like to reiterate Stephen's comments. Thanks a lot for the additional deposit disclosure. I guess one question is, is that going to be a one-off disclosure or are we going to see it regularly? And then how should we think about the 3.5% of that sweep deposits represent of client assets? I believe you said it's below trough, but How far below trough? Where was the prior trough for that metric?

Now, that is the new trough. Okay. That's not – that is.

So to take them in order a little bit, yes, the deposit disclosure will continue. When you're calculating that number out, you need to separate out PCG assets. That number is actually a little bit higher than that. I can point you to the supplement where you can see kind of the bifurcation of those assets. It's higher than 3.5%. But obviously, you know, we had talked historically at 5-ish, 4.5%. and we've gotten now below four. And so, again, we're reiterating that we're taking additional cash sorting from here in our guidance and still able to get to the NII levels we're talking about.

Okay, great. Thank you. And just to follow up on that point, Jim, when you said you're taking a little bit of additional sorting here in 2Q, Ron referenced some expectation for a reversal of sorting. Is there a reversal of some of that embedded in the back half, given that the forward curve is calling for some cuts?

No, we're not talking about reversal of sorting in the back half. More so the potential cuts resulting in a higher beta on the way down. I think that's the point we're trying to get across there.

Yeah, and I will. I mean, what I was saying, Brian, I'm just saying that we're at this focus, this inversion of the yield curve, everything today – that makes one of the great investment opportunities here to just invest in the short end of the curve. When that changes, we'll get back to a more traditional mix of transactional cash and AUM. That's all I'm trying to say. And I think that's just the most wealth management firms would say that in a more normalized yield curve environment.

Okay. Thanks for clarifying that. Appreciate it. And then one on the point around the institutional business and it being a counterbalance with rates. I hear that. I think that's an important point to make. One of the things that I've been trying to think about is we probably – it seems as though regional banks are a big constituent around your client base in the fixed income business. Given that there's likely to be changes in the capital rules – what would you, if you end up seeing less of an ability to hold longer duration and buy, purchase longer duration securities and they end up shorter and the types of impacts that would happen if they're subject to the OCR, what kind of a headwind do you think that could represent to the institutional revenue? Obviously not headwind from current levels because they're very, very low. But when we think about the chance of it normalizing How do you think we should factor that in considering that as a potential to limit a full normalization? Thanks.

You know, Brandon, I'm not sitting on the desk, but just if you talk about the need for bank management to suddenly manage more liquidity and shorter-term liquidity and reexamine their portfolios and how they're structured, and potentially with new regulatory things that might be similar to LCR and liquidity, that's a tailwind. That's not a headwind. That's absolutely going to be a lot of activity for a tailwind. And again, all of those things as well are going to be a tailwind for what's going on in KBW, certainly from this point. And I'd note also that one of the other big things that's going on and has been going on that we have made an investment in is FinTech. So FinTech's not far removed from all of our expertise in the depositories, and we see a fair amount of activity there. So that portion of our business, I think, is going to have some tailwinds coming versus headwinds.

I think I would also say that you're probably never going to see banks use HTM as much as they have historically. And the more securities in AFS, the more trading you're going to see. So that's helpful. And I think there's also probably going to be a lot more active hedging of these books. And that's an opportunity as well.

And as it relates to, yeah, Grant, I also want to say, because I think this is important as to our market share, you know, we're just not order takers on the fixed income desk. Our business, is primarily and significantly as balance sheet advisors to banks and CFOs. And we do a lot of their reporting, and we do a lot of their ALCO, and then we help them position their balance sheet. So we not only have sales and traders, we have analysts and balance sheet strategists. So we have a pretty holistic approach to a business which, frankly, has been really, really slow.

Yeah, no, the premise of the question was more around the idea that maybe shorter duration, you know, the economics aren't as good as trading it. But it's really good points about AFS and the hedging. Thanks for that.

Yep.

And we have no further questions at this time.

Well, very good. Those were very good questions from our analysts. I appreciate those, and I appreciate everyone taking the time to listen to our results. And we look forward to reporting to you, I believe, in August for our second quarter results. Actually, July, as Joel was reminding me.

So thank you very much, and have a great day. Thank you, ladies and gentlemen. That does conclude today's conference. We appreciate your participation. Have a wonderful day.