Stifel Financial Corporation

Welcome to the Stiefel Financial Fourth Quarter Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Mr. Joel Jeffrey, Head of Investor Relations at Stiefel Financial. Please go ahead.

Thank you, Operator. I'd like to welcome everyone to Stiefel Financial's Fourth Quarter and Full Year 2023 Conference Call. I'm joined on the call today by our Chairman and CEO, Ron Kruszewski. 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 disclosures 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 by Stiefel Financial and may not be duplicated, reproduced, or rebroadcast without the consent of Stiefel Financial. 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 fourth quarter and full year 2023 conference call. Let's begin by discussing our year in 2023, whereby Stiefel generated strong results in an operating environment that was less than ideal. The benefits of our diversified business model enabled us to successfully navigate market conditions that included increased geopolitical risks, tightening of financial conditions, primarily due to significant increases in short-term rates and quantitative tightening by the Federal Reserve, both implemented to corral inflation. and the failure of three major banks in the United States. Led by record results in global wealth management, which produced its 21st consecutive year of record net revenue, driven by record asset management revenue and net interest income, Stifel overall generated net revenue of approximately $4.4 billion. This was essentially in line with 2022, despite a significant industry-wide slowdown in investment banking activity. As we'll discuss later, these results are directly correlated to our consistent reinvestment in our business, our focus on servicing our clients, as well as our strategy of deploying our substantial excess capital in ways that generate strong risk-adjusted returns. Taken together, we generated operating pre-tax margins and returns on tangible common equity of approximately 19%, excluding the impact of the non-recurring legal charge in the third quarter. With respect to capital deployment, we typically deploy the excess capital we generate each year, and 2023 was no different. Last year, we generated 630 million of excess capital and deployed it as follows. The repurchase of 7.2 million shares, totaling approximately 440 million, 211 million in common and preferred dividends, and a modest amount of balance sheet and acquisition activities. Underscoring our confidence in improving market conditions, I'm happy to announce that our board has authorized a 17% increase in our annual dividend on common shares from $1.44 to $1.68 per share. On slide two, we look back at the growth of our business since 2015 and 2019. Despite constantly changing market conditions, the investments we've made in our business results in substantial growth. Net interest income is up more than 760% since 2015 as a strategy to grow our balance sheet enables Stiefel to capitalize on the increase in short-term interest rates over the past two years. Importantly, we've achieved this growth without taking excessive interest or credit risk. Additionally, the investments we've made in recruiting on both the wealth management and institutional segments have led both segments to more than double revenue over the past eight years. The operating leverage from these investments resulted in earnings per share increasing 270% over this timeframe. The comparison of 2023 to 2019 is also important as it illustrates the benefits we've seen from recent acquisitions, recruiting, and balance sheet growth. Total revenue is up 30% in the past four years as wealth management growth of 40% more than offset relatively flat institutional revenue. What should not be lost here is the potential upside we see in our institutional business. Specifically, the average number of investment banking managers and directors has increased by 33% since 2019, but our advisory revenue was relatively flat due to the market conditions. If our production per MD returns to historical levels, we would experience substantial growth for both our top and bottom lines. Looking at our quarterly results, we had a strong rebound from the third quarter. Net revenue of nearly $1.15 billion was our third highest quarterly revenue as a combination of a pickup in institutional revenue and continued strong wealth management revenue drove this improvement. Given the flexibility of our operating model, we were able to maintain our compensation ratio at 58% and generate $1.50 of EPS. which was a 27% sequential quarterly increase in operating EPS, which excludes a significant one-time legal reserve taken in the third quarter. Moving on to slide four, we look at the variance table to consensus estimates. Total net revenue beat the street by 60 million as each of our primary revenue lines surpassed expectations. Transactional revenue came in 30 million above the street on stronger fixed income revenue as our rates business has begun to rebound from the weakness tied to bank failures, higher rates, and an inverted yield curve. Investment banking came in 21 million above expectations, driven by higher advisory and fixed income capital markets, primarily public finance. Total expenses were higher than forecast, but much of that was reflected in compensation expense due to higher revenue in the quarter, as the comp ratio remained consistent at 58%. and was in line with street consensus. Non-comp expenses were $10 million higher than expectations as a result of higher occupancy costs and higher legal expenses that was partially offset by a lower loan loss provision. Before I turn the call over to Jim to go through our quarterly results, I wanted to talk about our wealth management business. While much of the discussion of our near-term upside is focused on our institutional business, I want to emphasize that our global wealth segment has been the long-term growth engine of our firm and is a cornerstone of default success. As stated previously, our wealth management segment has posted 21 consecutive years of record revenue, as our focus on recruiting, serving our clients, respecting the entrepreneurial spirit of our advisors, and growing client assets has been fundamental to our success. Slide 8 illustrates these points. Since 2014, global wealth management revenue has increased 150%, while the percentage of recurring revenue has increased from 44% to 78%. Again, this level of growth has been the result of our strategy to recruit high-quality advisors and provide them with extraordinary level of service. In this effort, we have continually invested in resources, support, and technology to reduce bureaucracy and enable our advisors to thrive. Our recruiting efforts have been one of the key elements of our growth efforts. Since the end of 2018, we've added more than 700 financial advisors with cumulative trailing 12 production of approximately 435 million. We continue to see increased momentum in our recruiting efforts as the number of advisors we added to our platform increased by nearly 30% in 23 as compared to 2022. So while we see significant upside in revenue and margins, As our institutional segment gets back to historical norms, our long-term growth and success has been and continues to be driven by our wealth management franchise. With that, let me turn the call over to Jim Marish to discuss our most recent quarter results.

Thanks, Ron, and good morning, everyone. Look at the details of our fourth quarter results on slide six. Our quarterly net revenue of $1.15 billion was up 2% year-on-year. The increase was driven by stronger client facilitation, trading, and underwriting revenue that was partially offset by lower net interest income and advisory revenue. Our EPS was up 150% sequentially due to higher revenues as well as lower non-cop operating expenses, which Ron addressed earlier. Moving on to our segment results, global wealth management revenue was $766 million, and our pre-tax margins were 39%. For the full year, record net revenue of $3.05 billion was up 8% from 2022. This was driven by record asset management revenue and net interest income, as well as strong transactional revenues. Primary driver of our growth has been our ability to recruit advisors and increase our client assets. During the quarter, we added a total of 40 advisors. This included 13 experienced advisors with trailing 12-month production of more than $8.1 million. We ended the quarter with fee-based assets of $165 billion and total client assets of $444 billion. The sequential increases were due to higher equity markets and organic growth as net new assets grew in the mid-single digits. Moving on to slide eight, where we highlight the solid trends at the bank. Net interest income of $273 million was in the lower half of our guidance, as Bank NIM was impacted by higher deposit costs, larger average cash balances, and the movement of sweep deposits back into third-party banks. The movement of cash back into the sweep program resulted in a few million dollars being recognized in asset management revenue rather than NII, This is simply changing the geography of where the revenue is recognized on the income statement. While we are not ready to say cash sorting is behind us, outflows from sweep accounts were essentially flat in the quarter as compared to outflows of more than $3.6 billion just two quarters earlier. I'd also note that the sweep program now has $2.1 billion in balances with third-party banks. That said, we typically see some cash outflows early in the year, given the timing of tax payments. In terms of our expectations for the first quarter, we project net interest income to be in a range of $250 to $260 million. Our credit metrics and reserve profile remain strong. Non-performing asset ratio stands at only 15 basis points. Our credit loss provision totaled $2.3 million for the quarter, and our consolidated allowance to total loans ratio was 86 basis points. During the quarter, charge-offs were primarily tied to an individual CNI credit that was fully reserved for previously. I would also note that we saw an approximate $800 million reduction in CNI balances during the quarter as we opportunistically sold certain broadly syndicated loan exposure as we continue to focus balance sheet allocations to portfolios that also provide other deposit or fee income opportunities. Lastly, our balance sheet continues to be well capitalized. Tier 1 leverage capital decreased 30 basis points sequentially to 10.5%. I'd also like to highlight the improvement in unrealized losses in the bond portfolio. To put numbers to this, and reflecting on the rally in the 10-year Treasury bond and tightening of credit spreads, our unrealized losses declined by $127 million or nearly 40% during the quarter. On the next slide, I'll discuss our institutional group, which had its strongest quarter in a year and a half. Total revenue from the segment was $359 million in the fourth quarter, which represented a 40% sequential increase, as both investment banking and our transactional business had strong quarters. Firm-wide investment banking revenue totaled $206 million, as both capital raising and advisory revenue experienced significant increases from the third quarter. Advisory revenue was $129 million, which was up 33% sequentially, as we had solid results in our industrial, healthcare, and technology verticals. I highlight that although we benefited from year-end seasonality, the quarter was again negatively impacted by continued delays and closings. We continue to expect these deals to close, but timing remains uncertain. However, Our pipelines remain strong, and we are seeing momentum begin to build in our activity levels, but the timing of the sustained rebound in the business remains very much market dependent. Equity revenues totaled $89 million in the quarter, which was our strongest quarter since the fourth quarter of 2021. Equity transactional revenue totaled $57 million, up 20% from the prior quarter, and represented our highest quarterly revenue in two years. We continue to gain traction in our electronic offerings and see strong engagement with our high-touch trading and best-in-class research. Fixed income generated net revenue of $142 million, an increase of 50 million from the third quarter. Much of the increase was driven by the $35 million increase in transactional revenue. We are starting to see the rates market open up as banks are beginning to trade their investment portfolios given the more dovish Fed outlook and more stable deposits. Underwriting revenues increased 60% sequentially as we continue to be a leader in the municipal underwriting business as activity increased and we continue to be ranked number one in the number of negotiated transactions as our market share was nearly 15% in 2023. On the next slide, we go through expenses. Our comp to revenue ratio in the fourth quarter was 58%, which was in line with our forecast. Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $249 million. Our non-comp-up X as a percentage of revenue was 21.8%. The effective tax rate during the quarter came in at 21.6%. The lower tax rate was primarily due to the impact of the increase in our share price and related excess tax benefit on stock-based compensations. Before I turn the call back over to Ron, let me discuss our capital position. In the third quarter, we repurchased more than 2.3 million shares. We have nearly 12 million remaining on our authorization. We have approximately 170 million of excess capital based on a 10% Tier 1 leverage target. Additionally, we continue to generate substantial amounts of excess cash, as illustrated by our 2023 net income of $530 million. We remain focused, generating strong risk-adjusted returns when deploying capital, and we've done this through reinvesting in the business, making acquisitions, as well as through share repurchases and our recently increased dividend. Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the first quarter fully diluted share count to be 110 million shares. And with that, let me turn the call back over to Ron.

Thanks, Jim. Let me conclude by discussing our outlook for 2024 in terms of the current street estimate. The current consensus estimates for net revenue for 2024 is 4.7 billion, which is up about 320 million from 2023. The primary driver of the increase is the expectation that our wealth management and institutional revenue will increase by a combined 400 million, which will be which will more than offset the roughly $80 million expected decline in net interest income. As you can see from the table, we are guiding to total net revenue of $4.55 to $4.9 billion in 2024. This includes our expectation that net interest income will be in the range of $1 to $1.1 billion. Overall, we believe that the pressure on net interest margin can be offset by an increase in interest-bearing assets. Simply, considering the multiple factors impacting the banking industry, we see the current period as an opportunity to make great loans. While we anticipate an improvement in our operating revenue, particularly in institutional, we remain conservative given the recent industry-wide weakness in investment banking. Considering this, we expect our compensation ratio will be in the range of 56% to 58%, and that operating non-comp will be 19 to 21%. I've heard the term transition year applied to 2024, and I believe that's a relatively accurate description of the environment. We don't believe that 2024 will be a, quote, normalized operating environment, as there remains uncertainty regarding the number of rate cuts that the Federal Reserve will make, the timing of the pickup in investment banking revenue, the presidential elections, and how the equity markets will react to these changes. Personally, I believe that the street estimate of 11% EPS growth for the S&P 500 in five to six rate cuts is optimistic. We believe that earnings will grow for the S&P of 6% in approximately two to three rate cuts is more realistic. But I wouldn't be upset with the consensus that would likely have a meaningful positive effect on our operating results. While I'm not giving guidance beyond 2024, I did want to touch on how we are looking at the next few years. I must say that while we are cautiously optimistic for 2024, we see the potential for significant exit velocity into 2025. Last quarter, we discussed the potential results of $5 billion in revenue and $8 in earnings per share in a more normalized market environment. Could 2025 be such a year? It's certainly possible if the markets cooperate as we don't believe that reaching these numbers would require significant outperformance in any of our businesses. What we need is the return to historical productivity levels in banking, continued growth in wealth management, and some future balance sheet growth. The bottom line is that as the operating environment improves, Stiefel is well positioned to continue our legacy of profitable growth, which we believe will continue to drive shareholder value. This is consistent with our strategy of continuing to build our market-leading wealth management franchise with an achievable goal of $1 trillion of client assets while also being a premier middle market investment bank. With that, operator, please open the line for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off. to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Devin Ryan with JMP Securities.

Great. Good morning, Ron and Jim. How are you?

Good morning, Devin. Great, by the way.

First question, just want to... Good. We want to start just on deposit betas and assuming interest rates do move on, at least with the current forward curve. How you guys are thinking about kind of the movement over the first and second 100 basis points? And I guess the question is, obviously, we know smart rate is over half of the cash X money markets, and so that should be one for one. And so really kind of what are you expecting just for the sweep deposit piece of the equation? Thanks.

Well, I think half of our approximately are in smart rate, and that is highly correlated to effective Fed funds. I think the question on deposit betas on the way down are going to be driven by competitive factors, just as they were sort of on the way up.

Jim, I don't know if you want to... No, I mean, the correlation effect of Fed funds is essentially because of the competition. The competitions are money market, mutual funds, and treasury bonds. And so that, by its nature, is tied to the short end of the curve. And so you'll see near 100% beta on the way down on the first couple cuts and probably beyond that.

Yeah, for smart rate. I think, Devin, I think you're trying to get to what will happen with sweep balances, which is more, you know, transactional balances versus savings balances. And, you know, we expect them to decline. I'm not sure that I would be comfortable giving you a deposit beta on those balances. But it would be modest, like it was modest on the way up. It was modest both ways, actually.

Yeah. Okay. That's fair. I figured I'd see what you guys would say there. And then I guess on the financial advisor evolution of the firm, I get this question a fair amount. Independent contractors still – very small, you know, less than 5% of overall financial advisor headcount. And I just love to get your thoughts, Ron, around what you think that looks like, you know, maybe five years from now. You know, how much of an objective of the firm is it to grow independent relative to employee, if it is at all? And if it is, kind of some of the steps you're taking to either drive that growth, whether it's organic or inorganic, or just make the platform more compelling for independents as well as employees. Thanks.

Yeah, I think to answer your question, it would be what you finished that with, which is we would like to provide an opportunity and a compelling platform for independents to utilize simply our platform, our technology, and our capabilities. There's no particular focus on growing the independent channel relative to the employee channel. There just hasn't been. We will deal with that as supply and demand sort of dictates. We have the platform, and it's a good alternative. What you'll see, though, is our focus has been historically, and this is nothing against the independent channel, I just want to say our focus over the years has been on the employee channel And that's simply because we are a diversified firm with a lot of capabilities that, you know, the employee model, it's been tailored over the last 25 years to the employee model. So, you know, I can see both growing. I'm frankly indifferent the way we look at the business.

Okay. Appreciate it. I'll leave it there. Thanks, guys.

We'll take our next question from Alex Blaustein with Goldman Sachs.

Hey, thanks, guys. Good morning. First question around NNA, I heard you talk about a mid-single-digit NNA rate for the quarter. Can you talk a little bit broader kind of what it's been for the year and what's been the contribution from same-store sales and UFA recruiting and maybe your outlook for organic growth in that business for 24 years?

I would say the results we saw in the fourth quarter were consistent with what we saw over the full year. The net new asset number was relatively consistent in the mid-single digits across each of the quarters in 2023. I think it's a fairly even mix between existing advisors and recruiting. I wouldn't say either side is particularly driving the addition of net new assets there, and I think it's fairly balanced.

And, you know, look, I think I don't have in front of me, Alex, the same store sales. And, you know, certainly the last, you know, half of the year helped the overall slow business in the wealth management sector. If you ask me just to look forward, though, I would say, generally speaking, that I would expect the increase in same-store sales to be higher in 2024 than it was in 2023. You know, we got off to a rocky start in 2023. And, you know, with the equity markets where they are today and our outlook, I see some relatively good performance over 23 for 24 versus 23 versus 22.

I got you. That's helpful. My second question just wanted to dig into the interplay on capital management as well as you look out into next year. So it sounded like your appetite for long growth perhaps was a little bit better as you look out versus maybe what we've seen over the course of 2023. So maybe just expand on that a little bit and just tease out what that means for share repurchases for 2024 as well.

Well, we have, first of all, we've been repositioning the balance sheet, all right, as we have, you know, adapted to a new environment where, you know, deposits aren't just free-flowing all over the place. And, you know, trying to keep an eye on various sectors and credit considerations of loans, you'll see, as Jim mentioned, We sold nearly, you know, three-quarters of a billion dollars in syndicated, broadly syndicated loans, which, you know, were really put on almost as just a spread lending type strategy. And we intend to deploy that much more focused to more of a relationship type, you know, relationship, deposits, other opportunities that we can provide for the firm. And with all that said, we really haven't had a diminishing loan demand. We've just muted it. So I see today this is a good time to be in the lending business. And so that's just what I would say relative to before. And And we see now, as it relates to stock repurchases and the interplay on that, we'll grow from relatively flat to $2 billion. If we're up $2 billion, that's call it $200 million of capital plus our dividend leaves ample room for additional share repurchases, ample.

The other thing I'd add to that is the additional liquidity we have available today to fund some of that loan growth. you'll see we have over $2 billion in third-party sweep banks. And on top of that, we added another $336 million in venture deposits. And so, you know, Ron made the comment, the capacity and our ability to generate loans and the investments we've made across fund and venture and our continued ability to service our clients with securities-based lending and mortgage is fairly significant. And now there's a little bit more liquidity supporting that growth as we look forward.

Got it. Very helpful. Thank you, guys. Thanks, Alex.

We will take our next question from Bill Katz with TD Cohen.

Okay, thank you very much. So appreciate the financial guidance and looks like there's some margin opportunity as we look ahead into 24 and probably again into 25. Just looking through some of the supplement disclosure you have, which is terrific, so thank you for that. And looking at the incremental margin in the institutional group, If I did the math correctly, it looks like there's about a 55% incremental margin in the fourth quarter. And just as you look out into 24 and again into 25, into that sort of aspirational sort of normalization of $8, how should we be thinking about the incremental margin maybe for Stiefel overall and then specifically to the institutional group along that path?

Yeah, I think that, you know, our margins –

will improve, obviously. You can almost start with the institutional side of the business. As you can see, we essentially broke even on revenues of about $1.3 billion. In contrast, that was 2021, which we may always look back and say that was a really phenomenal year. But that said, it was $2.2 billion and profitability of $400 million plus. So you can almost draw a line between the $1.3 and $2.2 billion and see the leverage in earnings that we would expect. And that will drive our margins, you know, best laid plans of mice and men. But if the markets cooperate, you know, we'll see margins that can get back into the mid-20s. because we see our growth in wealth management continuing. The offset being that we offset a lot of the weakness in the institutional business by growing NII up to almost $1.2 billion. As you can see in our guidance, we would expect some modest declines in net interest income be more than offset by the potential that you're referring to in our institutional business?

And maybe a little bit more color on the consolidated level. If you back off the legal accruals from the third quarter, year to date, we're a little over 19% pre-tax margins today. And that's including the fact that we were essentially breakeven on the institutional side in 2023. So you think about back to previous times, Ron talked about 2021, kind of the mid 20% range. We have a higher starting point today, given some of the base, the NII that Rana talked about. So you have some potential for incremental margin as the market recovers and normalizes. And if you were to catch kind of, you know, a good market, if you will, it could go higher from what we saw in the previous cycle.

Okay, that's helpful. And just as a follow-up, not to get too far in the weeds, but I was wondering if you could expand a little bit on the legal charge in the quarterly And maybe, Ron, to zoom out, you have a pretty good view of this, how you sort of see the regulatory landscape in 2024. Obviously, a lot of moving parts, including election year. But anything to be mindful on in terms of the alloc here?

Yeah, I'll let Jim talk about legal, and then I'll answer your question.

The legal charges we were talking about, the accrual was in the third quarter. There was a $67 million accrual that was booked last quarter. It was not something that occurred in the fourth quarter.

Yeah, and what I said in my prepared remarks was the fourth quarter had, I think, a 27% increase if we sort of excluded that legal charge. I was just trying to point we had a pretty good quarter, and we're seeing that now. That was to illustrate that. You know, the regulatory environment, I'm not sure that really is changing. I feel that maybe as a headwind for the industry, you know, the level of regulatory resolutions seems to be markedly higher than what it's been in the past. But, you know, we'll see as this plays out. Hard to predict that, but certainly the off-channel communications was a significant factor for not only Stifel, but frankly everyone that's been dealing with that.

All right. Thanks for the clarification. Thank you.

We'll take our next question from Steven Chubak with Wolf Research.

Hi. Good morning, Ron. Good morning, Jim. Morning, Steven. So I wanted to start off just unpacking some of the assumptions underpinning the 24 fee guidance. Didn't catch if you had, and so I'm sorry if I missed this, if you alluded to the equity market appreciation that you're assuming in the coming year. And specifically for FIC brokerage, is this $100 million, Jim, a reasonable jumping off point given the tailwinds from bull steepening that you cited in the repair remarks?

So specific to fixed income, I think the conversations we're having with the people that run that business is they continue to see increased levels of activities. Obviously, with the Fed's change in stance, the unwinding of some of the unrealized losses on bank balance sheets, going forward, you'll probably see banks use and rely on HTM on a lesser basis. You're starting to see that on Thaw. You're starting to see more activity, and we do anticipate that to continue. We do feel like at this point we're being a little bit conservative, but it's a reasonable jumping-off point to look at what happened in the fourth quarter and maybe discounted that a little bit. But we are seeing some very positive trends across the fixed-income area.

And I would add that, you know, as I think we talked about in previous calls, we've made some meaningful hires in that space, both in the SBA and in the GENI space, which – you know, deals with origination and provides product to many of our end buyers. And so that's just getting ramped up. And that's a, you know, not less than material opportunity for us with the hires we've made there.

So I think that just underscores that I think it is a reasonable jumping off place.

That's right. And the equity market appreciation that you guys are assuming?

For asset management fees?

Yeah, I mean, I think we just took some of our internal expectations, some of our internal – I forget what the exact percentage increase in market appreciation is, but I can follow up on that.

Okay, great. And just on the non-comp implied guidance, I know that you have the legal charge that there was a fair amount of noise this past year. But just looking at the core non-comp trends – Ex-legal, those have been growing roughly at about a high single-digit CAGR since 19. The 24 non-comp guide actually implies a bit of contraction from what we can tell. So I just want to understand what's driving the better expense control in the coming year, at least relative to recent history?

Well, we're talking about percentage of net revenue, okay? And so first of all, There's always some noise in our fourth quarter. If you look, you'll always see that is historically higher. I mean, we really push a cutoff on all of our expenses to make sure that they're in. If you go back over years, you'll see that the fourth quarter tends to be above trend for the year. And You know, there's leverage in the model. So while I expect non-comp expense to increase as we raise revenues, that's for the leverage in the model. That's why we see our margins getting into the mid-20s because that percentage will come down as revenues rebound.

Okay, so the expectation, though, is that the dollars will at least increase in non-comps, but the ratio will improve with some of the operating leverage.

Yeah, and if you look specifically at the fourth quarter, there's some seasonality in there. When you think about the fourth quarter, you typically see elevated levels of travel entertainment as well as some statement-related expenses. We also had some third-party legal expenses that were somewhat elevated in the fourth quarter. Those are lumpy. Those are hard to predict. And you think about those in a normalized run rate when you're comparing kind of the results in the fourth quarter, normalizing some of those things on an annual basis, in addition to the revenue increases that Ron talked about, is really what's getting you to the levels in our guidance range.

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

We'll take our next question from Chris Allen with Citi.

Yeah, morning, guys. Maybe you can just dig in a little bit on the investment banking pipeline. Just wondering if you're seeing the improvement across all verticals or specific verticals. Maybe give us some color just whether you're starting to see any signals that bank activity specifically is picking up. I mean, obviously, you're starting to see some activity on the fixed income trading side. I wonder if that's filtering through at all on the banking side.

Well, for sure. I mean, the engagement and the tone and, frankly, some deals getting done is definitely improving. You know, I'm cautious, Chris, just because we've been talking about improvements in green shoots and all of that for quite a while here. So, you know, the... I just see the tone being much better. We asked about where it's certainly healthcare, industrials, FIG, and tech. So it's kind of broad-based when we look at our pipelines. And I just want to make a more generalized comment here, which is we've been through pretty much a recession in this business with you know, equity capital raising down like 70% over, you know, almost whatever timeframe you want to compare it to as it relates to 2021 and M&A down 50%. And that environment's not going to continue. So we, I definitely see improved business. I don't want to try to comment as to how steep the curve of the improvement will be, but certainly as we start the year, we're seeing, improved engagement. Our pipelines and our engagements are improving. And simply, there's a lot to do. There's been a lot of strategic and financial considerations and decisions that have been delayed in the face of, you know, inflation at 8% and the Fed rising 500 basis points very quickly. That certainly puts a damper on the timing of activity. And now as we see that stabilizing and, in fact, you know, the consensus is that that's going to go down, you're going to see improved activity. Just I think that's pretty clear.

Thanks, guys. That was it for me.

We will take our next question from Brennan Hawken with UPS.

Good morning. Thanks for taking my questions. I'm curious, it was a pretty nice growth in the third-party bank balances. So curious whether or not that was driven by client action, such as seeking out of excess FDIC, or was this more like an asset decision where you guys sold the loan and didn't see loan growth, so allocated to capture the yield?

You know, I think there's, as I read and listened, looking at some of your questions, comments on this, I'd like to take a moment just to clarify how we look at that, all right? I view third-party bank suite balances to be part and parcel part of our suite program, all right? We control the, if you will, the valve on what we want to do. So it's just where we're allocating our deposits. So that is just deposits that we're choosing now not to have on the balance sheet of Stifel they're, if you will, diverted to third-party banks. No one's making that decision other than us is the best way to say that. And we could turn around and bring those back on balance sheet as needed or increase it. So you need to look at, in my opinion, you have to look at sweep deposits and third-party combined.

Yeah, and the decision to push some of that sweep, some of those sweep dollars back was based upon some of the loan sales we talked about on the prepared remarks, as well as just, you know, general elevated cash balances of the bank. So, again, the revenue associated with that just moves on the income statement. It's showing up in asset management revenues rather than NII, but you're getting a similar return in either location.

Yep. Thanks for clarifying that. Appreciate it. And then Ron, you made reference to some of the hires that you all have made in the bond trading business, and I know you guys have referenced recruiting through much of the past year, but we noticed that the institutional MDs were actually down a bit, not by much, just by one, but would have thought that that would have been growing just given the focus, right? So what drove that to be sort of flattish? And was there some movement under the surface that maybe we can't appreciate just by looking at the number in and of itself?

Yeah, I mean, look, it could have been up one, okay? And then I would, you've had the same question. It's a down one. I think that we see, since 2019, we see, you know, our MDs are up some, what did we say, 33%, okay? And most of those MDs that there's been is in banking in terms of leveling it out. And, you know, look, we have a lot of capability here. I think that our viewpoint is that we're not quickly going back to 2021 levels. And we not only want market share, we want to make money. And so, you know, we're balancing those. You can, it becomes, You know, it's a big strategic decision to really hire into what you think is going to be a very robust market. And if that doesn't happen, that causes other problems. So we're being balanced, as we always are. But we have very capable bankers, very capable services, and we are well positioned as we sit here today for rather significant improvement in the market. Everyone will do well, including our shareholders.

we need to drop this activity down in DPS.

Thanks, Ron. And for the record, you know, the symbol wasn't what matters, plus or minus. It was, you know, the flattish.

I know. I know. But it's, you know, look, one of the things that just, yeah, but go back to the other question also. Remember, and we see this on the wealth management side, and I think this drives activity, and a lot of our clients that have invested in alternatives in the private equity, you know, private equity needs to return money to limited partners, okay? They want to raise new funds. but you also need to have realizations and return capital. And that's been on pause a little bit. So as, you know, I can see a lot of things that are requiring some transactions to get done so that private equity can sort of recycle the capital back. You can't sit there on these investments for 15 years. And so we definitely have to see a lot of discussions around the broad topic of returning capital

capital to limit it You know on that Ron since you mentioned that I'd love to throw in another question here Like have you we've seen the volumes pick up on the announcements, but it's mostly been on the strategic side You know when you look at your backlog are you starting to see? financial sponsors getting more active and preparing to monetize as well or was that more a prospective expectation of you know, just based upon some of the dynamics that you laid out? Like, are you seeing the early signs, the leading indicators of the activity pick up?

Definitely.

Great.

Thanks, Robert. I can understand that if you want me to.

Yeah, please. I'd love to if you don't mind.

No, no. Again, as markets, as interest rates go up and, you know, The spread widens between bid-offer expectations in M&A, not just strategic, but the ability to have realizations in private equity. One of the drivers is returning capital. It's hard to raise a new fund when you haven't consummated your last one. And so that is driving bid-offer expectations tighter. And there's a lot of discussion going on on this. And that's, again, just speaking to the overall tone in that market, which is an improved market environment in that and, frankly, across the markets. So, you know, absent any external shock to the system, that's why we see improvement here. Great.

Thanks for that, Culler.

We do not have any further questions in the queue.

Well, very good. I want to thank everyone for taking the time to listen to our results. Look forward to talking to you about what I believe will be an improving environment in 2024 as we go through the year and into 2025. So thank you, everyone, for your time. And we look forward to communicating again next quarter.

Have a good day.