Stifel Financial - Q2 2024
July 24, 2024
Transcript
Operator (participant)
Good day, and welcome to the Stifel Financial second quarter financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joel Jeffrey, Head of Investor Relations. Please go ahead.
Joel Jeffrey (Head of Investor Relations)
Thank you, operator. I'd like to welcome everyone to Stifel Financial's second quarter 2024 conference call. I'm joined on the call today by our chairman and CEO, Ron Kruszewski, our co-presidents, Victor Nesi and Jim Zemlyak, and our CFO, Jim Marischen. 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.stifel.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 audiocast is copyrighted material of Stifel Financial and may not be duplicated, reproduced, or rebroadcast without the consent of Stifel Financial Corp. I will now turn the call over to our Chairman and CEO, Ron Kruszewski. Ron?
Ron Kruszewski (Chairman and CEO)
Thanks, Joel. Good morning. Thanks to everyone for taking the time to listen to our second quarter 2024 earnings conference call. Pleased to be with my partners here this morning in New York and look forward to seeing them as well. Stifel's strong results in the second quarter reflected our operating leverage as market conditions improved, particularly in our institutional business. Stifel's second quarter net revenue totaled $1.22 billion, up 16% from 2023, and represents the second-best quarter in our history. All revenue line items showed improvement, except for our predicted decline in Net Interest Income. Commissions and principal transactions increased 24% as a result of stronger client activity levels in both wealth management and our institutional group. Investment banking increased 40% as advisory revenue was up 50% and capital raising rose 29%.
Record asset management revenue was up 19%, reflecting organic growth and market appreciation. Net Interest Income declined $40 million or 14%. However, although NII decreased both quarterly and in the first half of the year, the declines were within our guidance. The efficiency of our diversified business model is illustrated by our second quarter pre-tax margin of 21%, operating earnings per share of $1.60, which was a 33% increase from the prior year, as well as an annualized return on tangible common equity of 22%. We generated record first half net revenue of nearly $2.4 billion, an increase of 10% as improving institutional revenue more than offset the predicted decline in NII. Our consistent growth and significant cash generation also gives us increased financial flexibility.
This is highlighted by our recent retirement of $500 million in senior notes. We raised the $500 million 10 years ago to support our bank growth strategy. However, our bank is now of the size and scale that it can more than fund its own growth, and therefore, in the current rate environment, we felt that retiring the debt made sense financially. Retirement of these notes not only reduces our long-term liability, but also eliminates $21 million in annual interest expense. While comparison to the prior year are informative, we also like to review our results next to Street consensus estimates, which we do on slide 2. Our EPS of $1.60 was $0.06 higher than the Street estimate, as net revenue came in above expectations by $34 million.
Looking at the specific line items that drove our earnings fee, first, transactional revenue came in $14 million above expectations, primarily driven from fixed income. Investment banking came in $10 million above consensus on stronger advisory revenue. I'd also note that underwriting revenue was stronger than consensus as the environment for capital raising has improved. The only revenue item that we fell short of Street estimates was Net Interest Income. However, NII still came within our guidance range. We stated on last quarter's quarter that we believed NII may have hit a low point, and the modest incremental decline in the second quarter was the result of higher net interest margin, which I note is positive, but this was more than offset by a slight decline in interest-earning assets.
On the expense side, we were essentially in line with the Street as our compensation ratio was 58%, same as consensus, while non-comp operating expenses totaled $260 million, $1 million above consensus. We've used slide 3 in recent earnings announcements to illustrate the benefits of our complementary businesses in various markets. Over the past 5 years, we've been able to offset much of the volatility of our institutional business with the stability of our fee-based businesses and our increased Net Interest Income. Looking at the most recent 3 quarters, you can see the rebound in institutional pre-tax income that now has helped counter the decline in Net Interest Income.
Putting this into context, in the first half of the year, our pre-tax income is up $58 million, as the improvement in institutional margins and growth in PCG revenues has more than offset the $85 million decline in NII. As we look forward, expected continued improvement in wealth management and institutional revenue will help. Additionally, stable Net Interest Income achieved by higher interest earning assets should offset incremental cash sorting and result in higher pre-tax margins and return on tangible common equity. I know there are a lot of questions on sweep cash and advisory accounts for all firms. While Jim will address some of the specifics, specifics on how we view this at Stifel, let me just state that Stifel anticipated and prepared for this rate cycle, both on the asset side of our balance sheet, as well as offering clients options for savings accounts, primarily our Smart Rate.
As such, we do not see a material impact relating to this matter, and to underscore this point, we are not changing our NII guidance for the remainder of this year. Before I turn the call over to Jim to discuss our financial results, I want to talk a little bit more about the long-term success of our global wealth management business. As I mentioned earlier, for the second consecutive year, Stifel was ranked number one in the employee segment of the J.D. Power US Financial Advisor Satisfaction Study. In addition to ranking first overall, Stifel was also ranked number one in three of six categories: leadership and culture, products and marketing, and operational support. The results of this survey further proves our core values of respecting our advisors and continually improving the advisor experience, which in turn leads to better client experience.
Focusing on these values enables people to continually attract and retain high-quality advisors to our platform, provide exceptional client service, and has been a foundation to our history of strong revenue growth. With that, our CFO, Jim Marischen, will discuss our most recent quarter results.
Jim Marischen (CFO)
Thanks, Ron. Good morning, everyone. Looking at the details of our second quarter results on slide 5, our quarterly net revenue of over $1.2 billion was up 16% year-on-year. For the first half of the year, revenue of $2.38 billion was up 10%. The increase was driven by stronger client facilitation, advisory, trading, and underwriting revenue, that was partially offset by lower Net Interest Income. Our EPS in the second quarter was up 33% from the prior year and up 19% year to date. Higher revenues and a lower share count more than offset modest expense growth. Moving on to our segment results. Global Wealth Management revenue was a record $801 million, and our pre-tax margins were more than 37% on record Asset Management revenue and strong growth in transactional revenue.
We continue to add new advisors to our platform. During the quarter, we added a total of 42 advisors. This included 14 experienced advisors with trailing twelve-month production of $12.2 million. We ended the quarter with record fee-based assets and total client assets of $180 billion and $474 billion, respectively. The sequential increases were due to higher equity markets and organic growth, as our net new assets grew in the low single digits. We highlight our longer-term growth drivers for our wealth management business on slide 7. We continue to be on track for our 22nd consecutive year of record revenue, our global wealth management business, as our recurring revenues continue to comprise the vast majority of this segment's revenue.
Our recruiting continues to be solid, as our commitment to the highest level of service for our advisors was once again recognized by J.D. Power. On the next slide, I'll discuss our institutional group, where the improvement in market conditions that began towards the end of 2023 continued. Total revenue for the segment was $391 million in the quarter, up 41% year-over-year and year-to-date. Revenue of $742 million was up 22%, led by strong increases in capital raising and transactional revenue. Firm-wide investment banking revenue totaled $233 million, while both capital raising and advisory revenue increased sequentially and year-over-year. As expected, underwriting revenue continues to lead the rebound in investment banking.
Equity underwriting of $48 million was up 19% from the first quarter, and 59% over the same period in 2023, as healthcare and financials were strong contributors. Fixed income underwriting revenue increased 8% from Q2 2023, as improved public finance revenue helped to offset slower taxable issuance. We continue to be a leader in the municipal underwriting business, as we ranked number one in the number of negotiated transactions with nearly 15% market share. Advisory revenue was $131 million, and it was our strongest quarter since the first quarter in 2023, as we had solid results in our financials, gaming, industrials, and industrials verticals. Equity transactional revenue totaled $53 million, up 16% from the second quarter of 2023.
We continue to gain traction in our electronic offerings, as well as strong engagement with our high touch trading and best-in-class research. Fixed income transactional revenue of $107 million was up 58% year-over-year, as our rate business continues to rebound from a very slow 2023, and activity in our corporate debt business remains solid. Additionally, we benefited from increased trading gains during the quarter. On slide 9, I'll discuss our bank results and the recent industry focus on advisory sweep deposits. Net Interest Income of $251 million was in the lower half of our range, as average interest earning asset levels declined by nearly $1 billion and more than offset the improvement in our bank NIM. The primary driver of the decline in interest-earning assets was a decline in cash on our balance sheet.
The increase in NIM was a result of increased loan yields and a decline in deposit costs. Given our expectations for modest cash sorting and higher interest earning assets, as well as the interest savings obtained by paying off the $500 million senior debt. We expect that NII in the third quarter will be in the $250 million-$260 million range. Our credit metrics and reserve profile remain strong. The non-performing asset ratio stands at 29 basis points. Our credit loss provision totaled $3 million for the quarter, and our consolidated allowance to total loans ratio was 88 basis points, which was impacted by the growth in loan balances and fund banking, mortgage, and C&I. Our balance sheet continues to be well capitalized. Tier One Leverage Capital increased 50 basis points sequentially to 11.1%.
I'd also note that the unrealized losses in our bond portfolio continue to improve as credit spreads tightened in the CLO market. I also want to touch on the recent concerns regarding the potential for higher sweep deposit costs on advisory accounts. This has drawn significant interest as to the impact on the industry, and consequently, we felt it was important to address this issue as it relates to Stifel. Let me start by saying that Stifel has been at the forefront of industry trends for much of the cash sorting cycle. Our Smart Rate product was introduced before rates began to rise and offered clients a competitive savings account, which resulted in the retention of client cash within Stifel. In addition, we positioned our balance sheet to insulate us from interest rate risk and provide acceptable risk-adjusted net interest margins.
Before the onset of rate increases, Stifel's sweep deposits totaled approximately $28 billion. Today, Stifel has approximately $10 billion in sweep deposits and $16 billion of Smart Rate deposits. Said another way, 63% of Stifel's pre-rate cycle sweep deposits have sorted into Smart Rate. Additionally, I'd point to the growth in our ticketed money market fund and short-term treasury balances to highlight the additional cash alternatives that our advisors utilize to generate higher yields for their clients. Generally speaking, sweep deposits represent operational cash, as the average firm-wide balance per account is roughly $11,000. On the other hand, Smart Rate is more representative of investment cash, with an average account balance of $190,000.
In terms of the sweep deposits within our advisory platform, the average deposit size is only $9,000 and represents 1.7% of fee-based assets, which we disclosed in our slide deck. We believe that given the relatively low percentage of sweep deposits maintained in our advisory accounts as compared to total fee-based assets in those accounts, our cash sweep product is being utilized as designed and intended, primarily as a source of account liquidity to pay fees and meet short-term cash needs. Consequently, we believe that through our focused efforts to provide higher yielding alternatives to our clients, we have mitigated much of the potential impact of this issue, and the incremental risk to Stifel are not material. To illustrate this, we are not changing our Net Interest Income guidance. On the next slide, we go through expenses.
Comp to revenue ratio in the second quarter was 58%, which was again at the high end of our full year guidance that we gave at the beginning of the year. I would note that during the quarter, we incurred nearly $10 million of severance costs tied to our efficiency initiatives and our international operations. Non-compensation operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $248 million. The non-comp OpEx, as a percentage of revenue, was 20.4%. The effective tax rate during the quarter came in at 25.8%. Before I turn the call back over to Ron, let me discuss our capital position.
On last quarter's call, we indicated the possibility of retiring $500 million of senior notes that were maturing in July, given the growth in our bank and its ability to fund its growth. Last week, we paid off this debt. Given our conservative approach and the fact that this was the first time we've retired senior notes, we reduced our buyback activity in the quarter to ensure we had more than ample levels of excess liquidity. As a result, our share repurchases of 229,000 shares in the quarter was down significantly from the prior quarter. As of the end of the second quarter, we have approximately 11 million shares remaining on our authorization. We have more than $415 million of excess capital based on a 10% Tier One leverage target.
Additionally, we continue to generate substantial amounts of excess cash, as illustrated by our second quarter GAAP net income of $156 million. We remain focused on generating strong risk-adjusted returns when deploying capital and have done this through reinvesting in the business, making acquisitions, as well as through share repurchases. Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the third quarter fully diluted share count to be 111 million shares. And with that, let me turn the call back over to Rod.
Ron Kruszewski (Chairman and CEO)
Thanks, Jim. Let me conclude by talking about how we see the remainder of the year playing out and why we are optimistic about the future. Our annualized results for the first half of the year put us above the midpoint of our guidance and roughly in line with Street estimates for the full year. As I said last quarter, the outlook for the remainder of the year is certainly not without its risks. However, given the current trends we are seeing in the market and the operating leverage in our business, we believe that we are well positioned for a strong second half.
Additionally, as we exit 2024, we believe that we will be on a trajectory to reach our near-term milestones of over $5 billion in annual revenue and $8 per share, as well as our long-term milestone of $1 trillion in client assets and $10 billion in annual revenue. We have not changed our revenue guidance for 2024, but as you can see from the arrows on the right side of the slide, we believe that all of our revenue line items will at least match, if not exceed, our first half results as market conditions continue to improve. On the transactional side, wealth management is resilient, and our rates business continues to improve as banks are seeing more opportunities to trade their securities portfolio. In investment banking, our results so far this year have been driven by increased underwriting activity, both in equity and fixed income.
As we look at the second half of the year, we anticipate continued solid results from capital raising, but also increased performance from advisory as activity levels continue to improve and closings pick up. Given that most of our asset management revenue is priced off trailing quarter, asset levels, we've essentially locked in three quarters of revenue for 2024. In terms of Net Interest Income, as Jim articulated, we're maintaining our previous guidance for NII. On the expense side, we've narrowed the range for our compensation ratio guidance to reflect the conservatism that we've had in the first half of the year. While we are optimistic for the second half, we are still building back to our 2021 revenue levels, particularly in our institutional segment.
As such, we've tightened our guidance to 57.5%-58%, which still reflects our optimism for stronger revenue results in the second half of the year. In addition to our expectation for a strong second half, we should see some benefit from some of the efficiency initiatives we have implemented. As Jim mentioned, we took a $10 million severance charge in the quarter as we right-sized our international operations. While these decisions are never easy, we believe it puts our business on a stronger path towards improved profitability without impacting our revenue growth. Let me finish by saying that I am optimistic about the future of our business, really as much as I've ever been. We've built a world-class, diversified business that has proven its ability to generate strong returns despite ever-changing market conditions.
Investments we've made have resulted in increased operating leverage, and the growth of our bank and asset management revenue has added to the stability of our results. Given the excess capital we generate, we'll continue to reinvest in our business and return capital to our shareholders with, as always, a focus on high-risk-adjusted returns. With that, operator, please open up the lines for questions.
Operator (participant)
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal. We can take our first question from Devin Ryan with Citizens JMP.
Devin Ryan (Analyst)
Great. Good morning, Ron, Victor, Jim and Jim.
Ron Kruszewski (Chairman and CEO)
Hey, Devin.
Devin Ryan (Analyst)
First question. Hey. First, just on some of the cash sorting commentary, Ron. So you spoke about the potential for more cash sorting. I'm just curious, do you think we're close to the end with transactional cash at such low levels? And, you know, a little flavor on the difference between brokerage and fee-based would be great. And then also, I really appreciate the comments about the wirehouse moves over the past couple of weeks. I know you guys were probably getting questions there. Why do you think they did that? You know, was it a competitive move? Does it have any influence on Stifel at all?
Ron Kruszewski (Chairman and CEO)
Well, let me take your last question first. I, you know, I'm reading like you are what people are doing, and I frankly don't know, you know, what or why or exactly what they're doing. You know, you'll read comments that not all advisory cash is eligible for higher rates. So if I read into that, that means that their transactional or operational cash is not. It's part of the, you know, the platform. So I read that. I read other ones where they're increasing the rate, but just up a little bit and, you know, not to the high yield. So, you know, there's a lot of questions. I don't really know. I just know what we're doing and what we have been doing.
What I would say as it relates to that, though, generally speaking, Stifel has been higher. You know, we are our sweep deposits, you know, don't have a 0.01, you know, and a lot of, a lot of institutions still were at the very, very low end of paying on sweep deposits. And so I think that's where some of it's coming from. This pressure is people are really looking at it and say, "Wait a minute, 0.01?" And so, that's where I see some of it. But look, clients need the option to have, alternatives for higher cash. We have to run our business and, and provide operational, transactional cash, both in brokerage and advisory. That's what we've been doing.
You know, we think that the products we've put in place have largely mitigated what, you know, suddenly became a hot topic for you all to talk about. So as it relates to, I think we've managed this correctly prior to this even coming up. But what you'll see, as Jim mentioned, is when you look at what's happened, really a $9,000 average account is the, you know, the operational cash. That moves all around with an account. Sometimes, you know, bonds mature, and it's in sweep, and it moves, and it gets reallocated. Those are normal levels. In fact, I would say low levels of transactional cash because of the rate environment. And the metrics are very similar between brokerage and advisory.
I don't know, you know, if that really answered all your questions. I took it in reverse, but, you know, that's just how we look.
Devin Ryan (Analyst)
Yeah, I know. Thank you, Ron. That's really helpful. I have a question for Jim, just on the balance sheet and, you know, just thinking about just potential growth in the balance sheet and appetite for, you know, new loans and maybe where you guys would want to lean in. It would just be great to get a bit of an update on what you're seeing in the market spreads, and then just the ability to expand the balance sheet into that market. Thanks.
Jim Marischen (CFO)
Yeah. No, so obviously, we have the capacity to generate additional loans on our balance sheet. I think if you look at this quarter, we grew loans $200 million. We grew investments in the normal categories we've talked about over the last several quarters. If you look at the growth in fund banking, you look at the growth in mortgage, you look at the growth in the CLO portfolio, all those categories continue to be attractive risk-adjusted returns for us. And obviously, given the capacity to fund that with our liquidity as well as the excess capital we're carrying, I think we're going to continue to see growth there.
If you look at the current quarter, most of that growth didn't result in, you know, pure asset numbers coming up because we were carrying over $2 billion of cash, so most of that was reallocating from cash into loans. So as you see going forward, as we bring on more deposits on balance sheet, that incremental pickup will be even more as we grow the loan portfolio as well as CLOs.
Ron Kruszewski (Chairman and CEO)
Yeah, and, you know, what I-- I'll go back to your. I forgot one part of your first question, Devin, and I'll supplement it here. And that is that we have, and we've said it now for almost two and a half years, that we were going to limit the growth in the balance sheet, and that was primarily because we didn't want to get in a position of not understanding the dynamics of cash sorting, and getting in a position where we were generating loans, and then suddenly looking at what we thought would be our perceived NIM being different than what we anticipated. Because as we know, it's been a highly volatile, not volatile, but straight up 500 basis points from zero.
Today, our appetite to grow the balance sheet as it relates to that issue is increasing because frankly, I see the cash sorting issue you know, becoming less and less and less. The, you know, certainly, the prospect of a rate increase based on recent numbers, you know, appears to be significantly lower. I'm not going to rule it out ever, but significantly lower. In fact, you know, we think, you know, you'll you'll see some rate decreases. I'm not in the camp that says it happens, you know, in September. Yet overall, the stability of this dynamic has created an ability where we now are more confident about adding assets in a manner that we believe we can manage our risk and our NIM.
Devin Ryan (Analyst)
That's great color. Thank you so much.
Ron Kruszewski (Chairman and CEO)
Sure.
Operator (participant)
Thank you. We'll take our next question from Steven Chubak with Wolfe Research.
Steven Chubak (Analyst)
Hi, good morning, Ron. Good morning, Jim.
Jim Marischen (CFO)
Good morning.
Ron Kruszewski (Chairman and CEO)
Good morning.
Steven Chubak (Analyst)
Yeah, really appreciate the thoughts on the sweep deposit dynamics, certainly the topic du jour at the moment. Now, one of the questions that we've been getting, following your remarks is just folks trying to understand the competitiveness of the sweep offering in the context of, I guess, your overall offering to the advisor. Are you confident that a deficient sweep yield is not a competitive disadvantage, at least relative to the recent moves at the wires for Stifel? And just to put this issue, hopefully, at least to bed for the time being, are you comfortable maintaining sweep pricing does not expose you to potential regulatory scrutiny?
Ron Kruszewski (Chairman and CEO)
Again, your last question first, not really sure of all of the regulatory aspects. You know, we need to, we need to, recognize those. There's a lot of differences. First of all, you've got a broad question that impacts brokerage, non-discretionary, fee-based accounts, discretionary fee-based accounts. The long and the short of it is, that we always have a lot of levers that we can pull as it relates to how we manage our platform, you know, for our various products. We, you know, the wirehouses, for instance, charge account fees, and we don't. And they have had lower interest on, you know, generally speaking, than we have. So look, are we competitive? Yes, we're competitive. We have to be competitive. We wouldn't be recruiting people, we wouldn't be getting clients if we're not competitive.
Of course, we're competitive, and we'll remain to be competitive. We offer a competitive product for our clients when you consider all of the things that go into, you know, the client's experience. We're very, very confident, and this issue has been laser-focused on something that we've been laser-focused on for the last two and a half years.
Jim Marischen (CFO)
When you think of the competitiveness of the rates, if you look at some of the news reports from the, you know, the larger peer that came out yesterday, the idea that they're moving certain accounts up to 2%. We're already offering 2% on our Sweep Program. And you know, in terms of competitiveness, I think that's indicative of where we were already at. In addition to the number of products we have on our platform across alternatives, particularly money market mutual funds.
Ron Kruszewski (Chairman and CEO)
Yeah. You know, Steven, and one thing I'll just say that it doesn't-- we don't have the issue on, and I'm not sure whether you even listed it as an issue. But, you know, we don't-- we're not a platform offering our services to other parties as a platform. And I think there's-- I think that's an issue, and people say, "Well, there's no pressure on rates if you do that." Well, yes, there is, because you know, you can't be subsidizing you know, platform fees through low interest rates as your only option. So we-- I point that out because we don't really have that issue. But, you know, that does-- that seemed to have gotten lost in some of the analysis, so to speak. So that's about all I have to say about that.
Steven Chubak (Analyst)
Understood. Okay. Well, you know, I, I'm sure others are going to have questions on this topic, so I'm just going to switch gears to slide 12. You know, really helpful mark-to-market of the guidance. You know, it shows consensus revenues are at least near the higher end of the range, the NII guidance unchanged, the comp ratio also near the higher end. I was hoping you could just speak to the drivers of some upward pressure on comp. Is it simply due to mix, or are there other factors? And where are we in the journey of some of the re-COVID recruiting packages potentially rolling off in the coming years?
Ron Kruszewski (Chairman and CEO)
COVID recruiting packages?
Steven Chubak (Analyst)
Yeah, just folks you've hired during 2020, 2021, where you were more aggressive in terms of leaning into banker recruitment.
Ron Kruszewski (Chairman and CEO)
Oh, I'm sorry, I thought you were talking about wealth management. Well, you know, I haven't heard COVID recruiting packages, nor do I think we did that. We certainly didn't have a program that did that. And I feel that, you know, we built into 2021. The issue - not even the issue, the opportunity is that we have a platform that supports, you know, significantly more revenue from an ability to generate revenue. We did $2.2 billion in that business, and we haven't, you know, materially changed staffing. So, that answers the second question as well, is that the reason we're tightening our range a little bit is that we are on track as to where we think we will be. We are rebuilding and retracing the decline.
We went from $2.2 billion to $1.2 billion in revenue, and if you look at the annualized re-rates, we're retracing that back. We don't expect it to happen all this year. I don't really share all of the optimism of this being a hockey stick type recovery on that part of the business. And therefore, we're conservative in our just narrowing our comp to revenue range, which is kind of where we think we would be within that range if the year plays out as we see it here. Look, I think this is positive, not negative. We're maintaining our platform. We're generating high returns, high return on tangible common equity, investing in our business, and doing so with a you know, a realistic view of the forward curve of improvement of business.
Jim Marischen (CFO)
I'd add to that a little bit. Obviously, NII plays a big role in the comp leverage, either up or down, and we were able to hold 58% comp to revenue last year in a challenging environment for our institutional group, but, you know, upward sloping NII results. This year, for the first six months, NII is down $85 million year to date. So you think about that, over the first six months, that equates to about two points of comp margin that we've absorbed. And how have we absorbed it? Some of that is the rebound and the decrease in subsidy in other businesses.
And so there's obviously a lot of moving factors here, but I think I'd point to the stability of a diversified business model and how we're able to not see material swings up in a number of different business environments.
Steven Chubak (Analyst)
Thanks for that. Just, I'm going to squeeze in one more quick one. Just, what drove lower deposit costs quarter-over-quarter? Certainly encouraging to see, but just given the decline in sweep deposits was a bit tough to reconcile.
Jim Marischen (CFO)
Yeah, it was not related to sweep. It was all related to ICS-type deposit, reciprocal-type deposits that are higher costing deposits that we moved off balance sheet. We basically used more sweep deposits in the quarter, and so, you know, it's a couple basis points of a change, but that's what drove that fluctuation on a sequential basis.
Ron Kruszewski (Chairman and CEO)
Yeah, we have that flexibility to, to do that, so.
Steven Chubak (Analyst)
Understood. Well, thanks for taking my questions.
Operator (participant)
Thank you. And we'll take our next question from Alex Blostein with Goldman Sachs.
Ron Kruszewski (Chairman and CEO)
Hello, Alex.
Alex Blostein (Analyst)
Hey, guys. Hello, Ron. Good morning, everybody. So a couple of more questions on, of the topic of the-
Ron Kruszewski (Chairman and CEO)
It's been a long time. How are you?
Alex Blostein (Analyst)
Yeah, I'm good. Thanks. It's been busy. So staying on the topic of the week or, you know, the week, I guess. You know, first, just a clarification. So roughly the $3 billion of advisory sweep cash that you pointed to in the deck, you're saying you're already paying 2% rate on that, and ultimately, there's no plans to change that, but based on kind of regulatory dynamics and kind of how that evolves, your thinking on that might evolve as well. Did I read the answer correctly?
Ron Kruszewski (Chairman and CEO)
Let me stop you there, Alex. I want to be sure if that's what you heard, that's not what I meant you to hear. What I said was that, you know, there's a portion of our sweep deposits that we view as operational cash, at, you know, $9,000 in average balances. And our view of operational cash goes into our normal sweep tiering. It's our normal sweep product. The highest rate of that tier is 2%, but not every balance is 2%. So let's be clear there. But we're already at where some people are saying, you know, they want to go on rates. So our sweep deposit pays up to 2% for everything, including brokers.
Alex Blostein (Analyst)
Got it. Okay. That's helpful clarification. I guess just building on that, you know, while the balances are obviously small and they're operational in nature as you described, but how does that insulate you guys and the industry from the fiduciary obligation under Reg BI, right? Because, look, operationally, is having this transactional cash in Smart Rate deposit or money market fund, is that different? Does that preclude the customer from performing kind of some of their normal way investment activity? I'm just trying to understand that, like, is there a red line, you know, between small operational sweep under fiduciary or not, right? And whether or not that could still fall under the Reg BI.
Ron Kruszewski (Chairman and CEO)
Look, I'm cautious about ever making regulatory, interpretation, you know, questions, okay? I, I know that we need to have a reasonable platform, needs to be understood. Most, most, advisory platforms will allocate, you know, a percentage, 2%-3%, into cash for, to pay fees and to have operational cash. That's part of the platform that's very reasonable. You know, as long as it's, you know, understood, then that's, that's just, you know, that's just what we do, and that's, there's nothing wrong with that. There is no, you know, law that says you have to have the highest rate or charge the lowest fee.
I mean, let's, let's just take this whole thesis and says that, you know, Reg BI says that you, the highest you can charge for advice is, is what, you know, the ETFs charge for. It, it just. That's not what it says, and we need to have a, we need to be reasonable. And the, the biggest driver for us is competitive. It's the competitive, putting a competitive product so that we can grow client assets, and clients have a choice, and if you do not provide a competitive product, they, they leave, or, you know, or, or certainly the advisors aren't happy, and they, they would leave. So I think when you boil it all in, we're very comfortable with where we are.
Alex Blostein (Analyst)
I got you. Great. Okay, thank you for that. Let's maybe move on. Maybe just talk a little bit about recruiting environment. I know it's been a bit tougher for the industry as a whole over the last couple of quarters, with perhaps more competition from some of the higher paying kind of providers out there. If this whole cash dynamic results in more pressure relatively to, you know, relative to some of the more aggressively priced packages, particularly from some of the private firms, I guess, what opportunity, if at all, do you see for Stifel to kind of lean into that market, either from aggressively recruiting, perhaps a bit more, or doing something inorganically?
Ron Kruszewski (Chairman and CEO)
Well, like, look, there's always dynamics that impact recruiting. They're ever-changing and always there. This is just one, it will change. Just broadly speaking, you know, I think that I've said for a long time that that part of the competition was the migration from employee advisor full service to independent, that there was a lot of competition because in my view, you were supplementing from a platform perspective. You could supplement higher recruiting cost and maybe ongoing compensation by subsidizing it with very low options for client cash.
As that dynamic changes, which I think it will change from the very low 0.01 to 0.4, for that platform, that will change the economics on that side of the industry, which we view will be beneficial to us, competitively speaking.
Alex Blostein (Analyst)
Great. Thanks so much.
Operator (participant)
Thank you. And we'll take our next question from Bill Katz with TD Cowen.
Bill Katz (Analyst)
Okay, thank you very much. I too, have one more on cash sweep, and excuse the, maybe the elementary nature of this question. If you were to look outside of transactional cash and the rest of the sweep cash under the fiduciary account, how did the yields stack up? I guess 2% for cash makes sense if you're just sort of keeping it there idle, but when rates are around 5% or so, appreciate you have Smart Rate and, and fixed income and so forth. But does that put any kind of upward pressure either on third-party sweep yields or even sweep that sort of, deposit, excuse me, that swept onto the bank? Just trying to get my hands around that a little bit better. Thank you.
Ron Kruszewski (Chairman and CEO)
Well, Bill, we tried to say that, you know, we put products in place to encourage cash sorting and to give those options. And we, you know, we've watched 63% of our pre-rate cycle sweep deposits move into the higher-yielding savings. And we've seen a tremendous increase in short-term treasuries, and we've seen an increase in ticketed money funds, all of which are part of the competitive dynamic. So, you know, as we look at it, if we would, you know, choose to raise yields, we'll do so with the eye of attracting more deposits that we feel that we can, you know, deploy on the asset side. Because we have a vast, vast liquidity pool from deposits sitting off balance sheet.
So, you know, the dynamic, one of the dynamics of increasing rates will be to attract more cash onto the platform, all things being equal. So, I don't feel that. You know, look, I think that the regulatory aspects, which I do not all understand, I can't know what's going on, you know, inside the four walls of some of the firms that have dealt with this. But, again, we believe we have a competitive, fair product that we offer on a platform that is very fair when you consider all costs that go into it, and I'm comfortable. So, it's hard to answer your question. It's not elementary. It's actually very complex with multiple facets, which is what I'm trying to convey here.
And I think, you know, one of y'all wrote, you know, something. I read something where, you know, experienced management teams know how to do this and know how to manage the businesses. And I would like to think we're one of those management teams. We've been doing it a long time, and we've navigated through all kinds of market conditions and changes in the market and have gotten ahead of many of them. And I feel that's where we are today.
Bill Katz (Analyst)
I hope that's very helpful. And then maybe one for Jim. Just in terms of capital priorities, now that the debt is behind you, your Tier One leverage ratio and capital ratios are very good. Excuse me. How should we think about maybe the pace of buyback from here? Maybe you could put that in percentage of maybe payout of free cash flow, and/or any priorities between de novo versus inorganic opportunities.
Jim Marischen (CFO)
Yeah. So as we mentioned on the call, we have, you know, $415 million of excess capital today. So the capacity has increased in terms of our ability to deploy capital in terms of the buyback. That said, the buyback is going to be price dependent, and it will not be linear. Obviously, we've talked a little bit about allocating some capital to bank growth within the loan portfolio. A lot of that can be done with just the capital generated in the bank. And so we don't have a formulaic process in terms of payouts or in terms of price. We will be opportunistic, and, you know, you may see capital increase some over time, but we will be active in the buyback at some point in the future.
Bill Katz (Analyst)
Thank you.
Operator (participant)
Thank you. We'll take our next question from Brennan Hawken with UBS.
Brennan Hawken (Analyst)
Morning. Thanks for taking my question. I'm gonna take the same option that all my peers did and have my first question on sweeps. Ron, though, I got to give you props. Two years ago, we spoke about this, and you actually flagged the risk about sweep and the potential for some risk here. So, tip of the cap there first. But, you know, onto my question. Sorry?
Bill Katz (Analyst)
No, thank you. We did talk about this, I remember, and, the only thing I'd add to it is, not only did we talk about it, but we put in products to, to deal with it. So but thank you.
Ron Kruszewski (Chairman and CEO)
Right. For remembering.
Yeah. Yeah, yeah, yeah, of course. So, you know, you had flagged the Smart Rate offering, and certainly that's a compelling offering for your clients, as evidenced by the take-up rates that you've seen. But it's my understanding that Smart Rate, you know, cannot be held in advisory accounts, and it's like a ticketed item, you know, sort of like buying a money market fund. So I, you know, I'm not really sure I understand how that would address this issue, particularly given the fact that, excluding the one that, you know, we had a press report overnight, they haven't actually made any changes yet, seems to be doing a lesser action. The other two wires have moved all advisory to a more compelling rate.
It seems as though this, there's a distinction drawn between brokerage and advisory, and so therefore, this is really squarely a fiduciary issue. And in an employee model, the firm is a fiduciary. So how is it that you believe that it's the firm is putting the client's interest above their own and not maybe, you know, moving in a similar direction to some of these wires, as far as the frictional cash, and not, not bothering to draw distinction when you have a fiduciary obligation?
Bill Katz (Analyst)
Look, you're conflating the, you know, fiduciary obligation is, you know, the lowest possible cost, you know, everywhere. It's reasonable. We have an obligation. We meet that obligation. You don't. You can take that to an extreme in terms of, you know, fees and everything else. The platform needs to be properly disclosed.
Ron Kruszewski (Chairman and CEO)
I'm not sure that I have read that all advisory cash has been adjusted. In fact, I've read that a lot of advisory cash is not eligible for the same. That's what I've read, which to me, you know, is this reservoir of cash used for operational and transaction, which is how the industry's been based anyway. So, I haven't. I don't really know if how they've done that. And again, there were press reports last night that suggest a large firm was not doing that. So again, I don't. It doesn't really. I'm trying. I'm only trying to understand the competitive nature of this and making sure that we're competitive. And we are, all right? And that's the thing.
Now, as it relates to Smart Rate, not in advisory accounts, that's one of the crazy things about some of these regulatory aspects. You know, Smart Rate should be available, and we would love to offer it in advisory, but there's some arcane rules about that, specific rules, that prevent us from doing that. So what has happened instead, those move to money. Those are in ticketed money funds. But you know, if we had our choice, we would be offering Smart Rate to our advisory accounts. We just can't, which is, you know, sort of ridiculous when we start thinking about, you know our fiduciary obligation, yet we can't offer a great product, so yeah.
Jim Marischen (CFO)
The ticketed money funds are yielding at roughly equivalent-
Ron Kruszewski (Chairman and CEO)
Right.
Jim Marischen (CFO)
-what Smart Rate is. What's interesting is the balance of ticketed money funds in advisory accounts is almost identical to the balance of advisory sweep cash accounts. You can see some of that cash is already sorted over there, as Ron indicated.
Ron Kruszewski (Chairman and CEO)
Yeah. So Hey, look, these are, these are very, to all, everyone that's asking questions, everyone, this is the first question, I'm sure it's going to be the first question on every, call. I would just encourage you to look at the various aspects of this and, and understand, you know, the platform side, the fiduciary side, the brokerage side, all of which, have implications. We have two of those three, buckets that we have to deal with, and, we feel that we, we have done so, appropriately and, and competitively.
Brennan Hawken (Analyst)
Great. Well, I fully appreciate the situation's very fluid, and we're getting data points very frequently. So thanks for, thanks for providing your perspective on that. Shifting gears a little bit. I think, Jim, you had indicated that expectation for share count in the third quarter will be roughly flat with the end of period at 111. Does that mean that we should expect maybe limited buybacks in the third quarter, even though the debt's already retired? Maybe you want to rebuild cash, or-
Ron Kruszewski (Chairman and CEO)
Yeah.
Brennan Hawken (Analyst)
Am I misunderstanding?
Jim Marischen (CFO)
What we include in our prepared remarks assumes no change in stock price and no additional repurchases. That is not indicating what our plans are for repurchases. We've not said anything specific about what the buyback would look like. That's just to give you an idea of what the number would be absent those two fluctuations, and you could put your assumption in there.
Ron Kruszewski (Chairman and CEO)
Right. Jim, Jim gives you the same number he gives me, okay? He says, "Here's our base. Now, an increase in the share price will, you know, increase our diluted shares outstanding. A decrease will decrease it, and then layer your stock purchases on it." So you can do the same thing that we do, okay? We start with a base of 111 million, and the two variables that'll impact that base are share repurchases and stock price.
Brennan Hawken (Analyst)
Perfect. Thanks for clarifying.
Jim Marischen (CFO)
No problem.
Operator (participant)
Thank you. Before we take our next question, one more reminder to our audience, star one, if you'd like to join the queue. Our next question comes from Chris Allen with Citi.
Chris Allen (Analyst)
Good morning, everyone.
Ron Kruszewski (Chairman and CEO)
Hi, Chris.
Chris Allen (Analyst)
Appreciate it. How's it going, Ron? I want to switch gears a little bit. I think we've talked about deposit rates enough at this point. Maybe if you could talk about the-
Ron Kruszewski (Chairman and CEO)
Thank you.
Chris Allen (Analyst)
The outlook for loan growth from here. You noted that cash sorting, the impact there is declining. Just wondering if there's any other constraining factors on loan growth from here. I know you've talked about, in the past about, aligning loans with deposit relationship with clients and kind of what's the appetite for loan growth going forward?
Ron Kruszewski (Chairman and CEO)
I think that, no. I mean we, I've always said we have tremendous demand for loans. One of the constraining factors has been the foundational basis of funding, which is deposits and cash sorting, and our uncertainty with that and the forward yield curve and the inversion of the yield curve.
And all of that boiled together, we said, again, a couple of years ago, said, "Whoops, we're going to, we're going to limit balance sheet growth here until we get a clearer picture of what we do on the asset side is properly, has a proper foundation on how it's funded on the liability side." We are getting past that point of being able to see, have some visibility into how we can build a balance sheet in a, in a profitable, risk-adjusted way, which is what we always talk about. And I would say today that, yeah, no, we can, we can grow.
The constraining factor today, just to answer you, will be, if there is one, is that we're the entire industry got into, I think, into a position of sort of running the balance sheet, and so you were lending almost on a spread basis to, to, you know, a variety of clients that that might be the only relationship that you had was that, and you were doing it because you were washing deposits, and you were, you know, looking to just build spread income. We did a little bit of that as well, and, but not a lot. But the constraining factor now is that we're not just a spread lender, we're a relationship lender.
So when we're evaluating what we're putting on our balance sheet, it's gonna have a lot more dollars in terms of, or, if you will, ability to do other business, whether it's in wealth or, or, you know, treasury or, you know, banking and all of those things that are, that are an overall relationship. So that's, that's just how we talk about it internally, and, that's what I would say. But even that has a tremendous amount of ability for us to grow. That-- The opportunities for growth is not a problem at all. It's us getting comfortable with the overall economic environment with which we're grow- we're growing into.
Jim Marischen (CFO)
And when you think of some of those relationships, particularly with venture lending, fund banking, you know, those produce additional deposits. As Ron talked about, you know, last quarter, those were up probably another $200 million, and the pace of that has picked up already in the third quarter. So we're seeing-
Ron Kruszewski (Chairman and CEO)
Mm-hmm
Jim Marischen (CFO)
Some of the fruits of the investments we've made there, and that's gonna continue to provide another source of liquidity, to fund overall balance sheet growth.
Ron Kruszewski (Chairman and CEO)
Thank you for the question.
Chris Allen (Analyst)
Thanks. And just on another one, just on a different topic. Just on FICC trading, any color on the marks during the quarter? And how do you think about the environment moving forward? We know credit trading activity slowed down a little bit, but rate trading outlook continues to look pretty robust from here.
Ron Kruszewski (Chairman and CEO)
I think it's a lot of our rate trading is, you know, is correlated to bank balance sheets. And we see that activity picking up for the same reasons that I talk about on the asset side of trying to know, you know, what the forward environment might look like that allows us to, you know, make decisions on the line. That same thing is directly related to what banks are doing in their portfolios and trying to understand how to reposition their portfolios and the strategies around them, which is what we do. We advise on that, we help on strategy, we help on, you know, interest rate risk. We help on, you know, how those portfolios are positioned and stress tested against various things.
What we see is that there in 2023, I think a lot of people were very cautious because of the outflow of deposits, the uncertainty in the marketplace, and there was not a lot of trading going on. We see that picking up and that trend expanding, you know, absent some, you know, big change in the economic environment. But the trend in that business is good.
Jim Marischen (CFO)
For sure, but I would highlight, we historically do typically see a bit of seasonality in the third quarter, some slowdown there, and then that's kind of picked back up in the fourth quarter. So as you're thinking of your forward numbers, I would remind you to take that into consideration. And, you know, we did have some gains during the quarter that played into some of the results in 2Q as well. But, you know, just keep those things in mind as you look forward for the rest of the year.
Ron Kruszewski (Chairman and CEO)
Always count on my CFO to put quarterly parameters on my overall viewpoint of the marketplace. So thank you, Jim.
Chris Allen (Analyst)
Thanks, guys.
Operator (participant)
Thank you. It appears we have no further questions at this time. Mr. Kruszewski, I'll turn the conference back to you for any additional or closing remarks.
Ron Kruszewski (Chairman and CEO)
Well, thank you for pronouncing my name perfectly. And what I would say is, we, you know, we're excited about the remainder of the year, where we believe that as uncertainties come off the table, the markets will continue to improve. We still see exit velocity into 2025. I think we are on our way to both our mid- and long-term milestones that we've talked about. And I look forward to reporting back to you after the third quarter this year. And thank you, everyone, for taking the time to listen to us, and we will sign off. Thank you.
Operator (participant)
This concludes today's call. Thank you for your participation. You may now disconnect.