Stifel Financial - Earnings Call - Q2 2025

Executive Summary

• Best second quarter in company history with record second‑quarter net revenues and strong core EPS; management highlighted late‑quarter improvement after a weak April and expressed confidence for 2H25 given recruiting momentum and Institutional strength.
• Revenue and EPS beat S&P Global consensus; CFO cited stronger investment banking (late closes), higher institutional transactional revenue, and higher NII as key upside drivers versus the Street.
• Segment performance was balanced: Global Wealth Management delivered record 2Q revenue on higher asset management and NII; Institutional saw record fixed income transactional revenue and better pre‑tax margin YoY.
• Near‑term catalysts: accelerating bank M&A (KBW share leadership), strongest FA recruiting quarter since 4Q15, and Q3 guidance for bank NII ($265–$275mm) with stable comp/non‑comp ratios; tax rate expected to fall to 20%–22% for FY25.

What Went Well and What Went Wrong

• What Went Well

  • “Best second quarter in our history” with non‑GAAP EPS of $1.71 and strong ROTCE; CEO emphasized diversified, advice‑driven model and momentum into 2H25.
  • Street beat: revenue roughly 4% (~$50mm) above consensus on stronger IB (six end‑of‑quarter closings), higher institutional transactional revenue, and higher NII; fixed income underwriting notably above Street.
  • Record fixed income transactional revenue (+21% YoY) and stronger equity transactional revenue (+16% YoY) on higher client activity and volatility; GWM asset management and NII both up YoY.

• What Went Wrong

  • Advisory revenue down 3% YoY; overall IB roughly flat YoY, reflecting a slow April and uneven ECM (healthcare soft) before late‑quarter recovery.
  • Expense mix headwinds: GAAP comp ratio rose to 60.3% (vs. 59.3% LY); provision for credit losses increased (specific reserves and loan growth); non‑comp ratio up YoY.
  • Non‑GAAP adjustments elevated by $27mm severance tied to European restructuring and $20mm merger‑related costs, partially offset by tax effects; management is pivoting Europe toward advisory and away from day‑to‑day trading.

Transcript

Operator (participant)

Good day and welcome to the Stifel Financial Second Quarter 2025 Financial Results Conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joel Jeffrey, Head of Investor Relations. Please go ahead.

Joel Jeffrey (SVP and Head of Investor Relations)

Thank you operator. I'd like to welcome everyone to Stifel Financial's second quarter 2025 conference call. I'm joined on the call today by our Chairman and CEO Ronald J. Kruszewski, our President James Zemlak, and our CFO James 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 you to our reconciliation of GAAP to non-GAAP as disclosed in our press release. I would also remind listeners to refer to our earnings release, financial supplement, and our slide presentation for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material of Stifel Financial Corp.

and may not be duplicated, reproduced, or rebroadcast without the consent of Stifel Financial. I will now turn the call over to our Chairman and CEO Ronald J. Kruszewski.

Ronald Kruszewski (Chairman and CEO)

Thanks, Joel. Good morning and thanks to everyone for taking the time to listen to our second quarter earnings conference call. On our last earnings call back in April, I noted that uncertainty around tariffs and the so-called big beautiful bill had created headwinds for the market. I said then that if we got clarity on these issues, conditions could improve quickly. That's exactly what happened. Investor sentiment improved significantly in the last two months of the quarter as greater clarity on tariff and tax policy emerged. The S&P 500 rallied 1,000 points since our last call, fueling record client assets in wealth management and sparking a rebound in M&A and capital markets activity. As a result, we exited the quarter with far more momentum than we started the quarter with. If conditions hold, we're positioned for a strong second half.

Our second quarter results included a very challenging April, yet we still delivered over $1.28 billion of net revenue and $1.71 in core EPS, which was the best second quarter in our history, and return on tangible common equity of 22%. Our balanced model continues to deliver across market cycles. Global Wealth Management posted its strongest second quarter ever with record client asset levels and higher net interest income. Our institutional business was resilient with a 7% year-over-year revenue increase, record fixed income revenue, and a late quarter pickup in investment banking. In global wealth, Stifel ranked number one overall in the J.D. Power advisor satisfaction study for the third straight year and was ranked number one in five of the six categories measured: compensation, leadership and culture, operational support, products and marketing, and technology. That recognition reflects our commitment to advisor support.

It's not just a cultural point, it's a recruiting advantage. This was our strongest recruiting quarter since Q4 of 2015 with 82 new advisors added, including 36 through B. Riley and 21 experienced advisors representing $51 million in trailing twelve-month production. Strategically, we completed our acquisition of Brian Garnier, a European boutique investment bank with deep expertise in health care and technology. As Jim will discuss later, this acquisition supports our broader effort to reposition our European operations, deemphasizing sales and trading while expanding our focus on advisory and investment banking. Combined with ongoing efficiency initiatives, this positions Europe to contribute more meaningfully to the firm's long term profitability. Moving on to the numbers, our record second quarter net revenue grew 6% year over year with gains across the board except for a modest decline in advisory.

Commissions and principal transactions rose 11% with gains in both global wealth and institutional. With respect to investment banking, the quarter started very slowly in April but ended strongly. Asset management revenue rose 6% reflecting both market appreciation and improved organic growth. Net interest income was up 8% on higher interest earning assets and lower funding cost. Our compensation ratio was 58%, consistent with the high end of our full year guidance as we continue to compensate conservatively. Operating pre-tax margin was 20.3% and operating EPS was $1.71, up 7% from last year. Before I turn the call over to Jim, I'll walk through our two core business segments and why we're optimistic about the rest of 2025 and beyond. In wealth management, we continue to gain momentum. Ranking number one overall in J.D. Power isn't just a badge, it's a recognition of our foundation which drives results.

Since 2020 we've added nearly 800 financial advisors with $420 million in trailing twelve-month production. Recruiting accelerated in 2025. In the first half alone we brought in 66 experienced advisors with $63 million in production. That includes a major team from B. Riley and 30 organic recruits with $43 million in production, many in the million dollar plus category. For perspective, in all of 2024 we added 50 experienced advisors with $37 million in production. These highly productive advisors bring more client assets and those assets are increasingly fee based which drives more stable recurring revenue from asset management and net interest income. We ended the quarter with record total client and fee based assets of $517 billion and $206 billion respectively. The sequential increases were due to stronger equity markets and strong asset inflows including the advisors from B. Riley.

I'd note that our net new assets improved each month during the quarter with annualized June net new assets coming in around 5%. Looking ahead, we're confident in continued growth. While recruiting can vary from quarter to quarter, we expect a strong second half with new advisors transitioning clients to our platform. Our clients continue to hold over $15 billion in Money Market Funds and $6 billion in Short-Term Treasuries, providing potential liquidity source for Stifel deposits. Now let me move to the Institutional Group. Total revenue for the segment was $420 million, which was up 7% from the prior year. Firm wide investment banking revenues totaled $233 million, driven by year-on-year and sequential increases. Capital raising revenue. Fixed income underwriting revenue was $54 million and increased 18% sequentially, driven by a solid increase in public finance activity.

Stifel continues to rank number one by the number of negotiated issues led as sole or senior manager. Equity capital raising totaled $46 million in the quarter. The market effectively shut down for six weeks following Liberation Day with only a handful of pipes and advisory linked deals. Activity returned mid May alongside tariff relief and we enter the third quarter with meaningfully stronger conditions. While industry wide ECM fees were in line with the first half of 2024, the mix shifted. Financials and Fintech were strong. Healthcare was down more than 50%. We're seeing early signs of a broader IPO recovery and follow-on activity remain sponsor driven with private equity continuing to lead issuance. As M&A paths narrow, late stage private placements, continuation vehicles, and IPOs are increasingly being used to create liquidity. Advisory revenue was $127 million.

We continue to get strong contribution from financials despite the increased volatility early in the quarter. In the second quarter, we also got solid contributions from industrials and industrial services. We are also seeing improvement in healthcare and technology, and overall the accelerating activity levels bode well for the second half of the year and into 2026. Now taking a step back and looking back at our acquisition of KBW now more than 10 years ago. We made a deliberate decision then to preserve the KBW brand within Stifel. That integration has been a resounding success with nearly all of the original KBW investment banking managing directors still with KBW Stifel, the sustained focus and successful integration have helped us build a franchise with deep expertise and long-standing client trust. That commitment is now paying off.

In 2025 we vied on 84% of total disclosed bank and thrift deal value, an extraordinary market share and a testament to the strength of our platform and positions us as the first call in Bank M&A. Bank M&A frankly is accelerating and the strategic needs for larger banks to combine is also increasing given the improved market dynamics. We expect the trend to continue and I'm confident in our ability to participate and lead at every level. As to our trading businesses, equity transactional revenue totaled $61 million which was up 16% year on year driven by increased market volatility. Fixed income revenue of $129 million was up 21% year on year with increased contributions from our rate, aircraft, and municipal businesses during the quarter. Before I turn the call over to Jim, I want to briefly comment on AI, particularly the promise of agent-based models.

We view AI not just as a tool for back office automation, but as a platform to enhance how we serve clients, manage data, and accelerate insights. We are systemically reviewing workflows across the firm where intelligent agents can amplify our professionals' productivity and decision making. We've already seen early wins in areas like investment banking, analytics, and advisor support, examples where the right AI tools can create real leverage. That said, we're clear eyed about the role of technology. It enhances what our people do, it doesn't replace them. Our business is built on trust, relationships, and judgment. AI will help us work faster and smarter, but should not replace the human side of Stifel. Now let me turn the call over to Jim to walk you through the details of our second quarter results.

James Marischen (CFO)

Jim, thanks Ron, and good morning everyone. Our operating results exceeded street expectations, driven by stronger than anticipated revenue, while expenses remained roughly in line with consensus. Looking at our quarterly revenue, we beat the street estimate by 4% or $50 million on stronger investment banking and transactional revenue as well as higher net interest income. Investment banking revenue came in at $233 million, which is more than $20 million above the guidance we gave in our June operating metrics as we had six transactions that closed right at the end of the quarter that were not in our second quarter forecast. I'd also highlight that fixed income underwriting beat the street estimate by more than 18% on strong public finance activity. Transactional revenue was 9% above the street primarily because of higher institutional fixed income and equity revenue.

I note that our fixed income revenue benefited from a gain in our aircraft leasing business. Net interest income was 2% above the street and at the high end of our guidance as we benefited from approximately $4 million of fee income mainly tied to success fees within our venture banking group. Asset management revenue was 1% below consensus primarily due to lower third party suite fees. On the expense side, our compensation ratio was 58%, which was slightly above the street and in line with the high end of our initial annual guidance. Non-compensation expenses were roughly in line with the consensus and were at the midpoint of our adjusted non-comp operating expense guidance range at roughly 20% of revenues. The provision for income taxes came in above the consensus number but was within our expected level of 25%-26% due to non-deductible foreign losses.

Global wealth management revenue of $846 million was a second quarter record as each line item improved from the same period a year ago. Pre-tax margins were 36%, which was in line with our performance over the past year. During the quarter, we added a total of 82 advisors to our platform. This included 57 experienced advisors with trailing twelve-month production of $51 million. The 36 FAAs acquired from B. Riley were included in the experienced hire total on slide eight. I'll discuss our bank results. Net interest income of $270 million came in at the high end of our guidance. Firm-wide net interest margin increased on higher asset yields and lower deposit costs, which more than offset a modest decline in average interest earning assets.

The 12 basis point increase in bank NIM was a function of lower cash balances, higher yields on our loan book as well as lower deposit costs. As I mentioned earlier, we generated $4 million of fee income. Excluding these fees, we still would have been at the higher end of our guidance for the third quarter. We estimate net interest income will be $265 million-$275 million. Our bank balance sheet remains relatively rate neutral though we experienced some modest benefit from lower funding costs as we had a slight mix shift in our deposits towards lower cost funding. I'd also note that we anticipate an incremental $1 billion of loan growth in the second half of 2025. Client cash levels decreased during the quarter due to a $1.4 billion decline in SmartRate Balances and a nearly $460 million decrease in suite balances.

In terms of the decline in SmartRate Balances, roughly two thirds of the decline occurred in April and I note that suite balances improved late in the quarter as June Sweep balances increased $300 million. Since quarter end we've seen client cash balances essentially flat as you can see in the chart. We've also included non wealth deposits which primarily include our venture and fund channels. While these are commercial deposits that provide us with an important funding source and reduce the potential impact of the fluctuations within wealth management cash in the second quarter, these deposits increased $1.1 billion and have increased more than $2.2 billion year to date. As these growth initiatives continue to accelerate, our credit metrics and reserve profile remain strong. The non-performing asset ratio stands at 51 basis points.

Our credit loss provision totaled $8 million for the quarter and our consolidated allowance to total loan ratio was 83 basis points. Moving on to our expenses, as we noted earlier, our comp to revenue ratio in the second quarter was 58% and based on our current forecast, we anticipate our third quarter comp ratio to come in at 58%. Our non comp expenses totaled $278 million, a 7% increase from the same period last year and our non comp operating ratio was 20.3%. We would expect a similar non comp ratio for the third quarter. I'd also note that we incurred $28 million in severance and other restructuring charges during 2Q in our European operations. As Ron mentioned earlier, this is part of the plan to shift our European focus more towards investment banking. These costs represented the majority of the non-GAAP expenses incurred during the quarter.

Our tax rate for the quarter was 25.4%. I would note that we expect to see a similar effective tax rate for the third quarter, but then see a decline in this rate during Q4. If the stock price holds at current levels, we'd expect the full year effective tax rate to be between 20%-22% for 2025. On slide 10, I'll review our capital position. Our balance sheet continues to be well capitalized. Tier 1 leverage capital was in line with first quarter levels at 10.8%. Our Tier 1 risk-based capital ratio declined by 10 basis points to 17.5%. Based on a 10% Tier 1 leverage ratio target, we have approximately $315 million of excess capital. In terms of capital deployment during the quarter, we completed the acquisitions of B. Riley and Brian Garnier.

This added approximately $90 million to goodwill and intangible assets and we repurchased roughly 970,000 shares with 8.2 million shares remaining on our current authorization. Absent any assumption of additional share repurchases and assuming a stable stock price, we'd expect the third quarter fully diluted share count to be 110.2 million shares. With that, let me turn the call back over to Rob.

Ronald Kruszewski (Chairman and CEO)

Thanks Jim. Let me turn to our full year guidance. Despite market volatility in March and April, our annualized net revenue is on track for another record year. We are seeing momentum build across our businesses which we believe will translate into a strong second half, and we remain confident that our full year 2025 results will come in within our guidance range. In addition, while our tax rate expectations are not shown on the slide, as Jim said, we continue to anticipate a full year effective tax rate in the 20%-22% range. From a capital allocation standpoint, we remain focused on generating strong risk adjusted returns and reinvesting in our business.

We anticipate additional bank growth in the second half and have more than 8.2 million shares remaining under our repurchase authorization and will continue to pursue both organic and inorganic growth opportunities in global wealth management and the institutional group. We are also mindful of what is happening at the edges of the market. From a macro perspective, there is still a lot of uncertainty about the overall impact that tariffs will have on the economy. In terms of the market, we have seen a reemergence of meme stock behavior, a sharp rise in margin debt, and pockets of speculation that feel disconnected from fundamentals. Certainly, in my view, valuations are now pricing in near perfect outcomes.

While we are not in the business of predicting pullbacks, we do believe in staying disciplined. We have been through enough market cycles to know that strong markets can be fragile, especially when momentum overtakes fundamentals. A brief pullback would not surprise us. In fact, we would welcome it as a sign of healthy price discovery. Either way, we will keep doing what we have always done serving clients, underwriting growth and allocating capital with a long term lens. Taking it all together we are very optimistic about the second half of the year. Market conditions have clearly improved since April. Deal activity is up, investor sentiment has turned constructive and key macro risks like tariffs and inflation appear better contained than many feared just a few months ago.

Additionally, our recruiting activity year to date has been extremely strong and we have built the platform to support it, reflected in our third consecutive number one ranking in J.D. Power Advisor satisfaction. That recognition is not just about today. It positions us for continued recruiting success going forward. In institutional, we're leading in Bank M&A and believe that the current environment creates even more opportunity. In venture lending, we're making meaningful progress deepening relationships with venture funds, founders, and emerging growth companies across innovation-driven sectors. These are early wins, but they're strategic and they're building real momentum for the future. Overall, I'm confident in our positioning and I look forward to a strong second half. Before I close out the call, I want to take a moment to recognize Victor Neece.

As many of you know, Victor recently stepped down from his day-to-day responsibilities as Co-President and Head of our Institutional Group after 16 years of extraordinary leadership. At the same time, I'm pleased to share that Victor has joined the Board of Directors of Stifel Financial Corp. His contributions to our firm, particularly in building one of the industry's leading middle market investment banks, are hard to overstate and I look forward to his continued insight and guidance as a Stifel Director. With that, operator, please open the call for questions.

Operator (participant)

Thank you. If you'd like to ask a question, please signal by pressing STAR 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is STAR 1 to signal for a question and we will take our first question from Devin Ryan with Citizens. Please go ahead.

Devin Ryan (Head of Financial Technology Research)

Great. Hey Ron. Hi Jim and Jim, how are you?

Ronald Kruszewski (Chairman and CEO)

Morning.

Devin Ryan (Head of Financial Technology Research)

Hi Devin, want to start with a question just on KBW and I appreciate financials, investment banking, KBW has already been, I think, pretty strong just from the non-depository subsectors. With bank M&A seemingly reaccelerating here and probably picking up more into the back half and you had a nice deal that KBW was advising on last week, what are you expecting there in terms of activity and if you can maybe just frame out a bit more around the opportunity in order of magnitude of kind of revenue potential or maybe what you've maybe been missing because there's been such a dearth of depository M&A over the past four years.

Ronald Kruszewski (Chairman and CEO)

Part of your question answers your question, Devin, in that the dearth of activity over the last several years, driven by many factors, you know, the economic, the rate environment, a certain amount certainly of uncertainty, the regulatory, you know, backdrop was not, shall we say, conducive, certainly not conducive to timely M&A approval. As those things, all of them, have improved, hence the environment for M&A, and you couple that with a need for banks and certainly some of the mid regional banks to probably combine to be able to compete, whether it is technology or market share or just frankly sheer growth of the SIFI, it bodes well, I think, or speaks to the need for some consolidation. We have been talking about this for years, but the environment today is conducive to that. Certainly, boardroom talks, they understand the benefits of doing smart strategic as it relates.

You know, so that is—the environment is good. That is a long answer to say the environment is good. You know, with respect to, you know, we do not talk about our share or whatever, we have done very well. I think KBW Stifel has, you know, shown that it is the way we have approached that deal and the way we have maintained the culture and the brand and the research and the sales and the trading and everything that goes with that has paid some dividends here. I never am, you know, expecting a business at all. We have earned it, but we are well positioned. That is, you know, I am not going to give you any revenue numbers. Heck, I do not know. I just expect to get our fair, our fair share.

Devin Ryan (Head of Financial Technology Research)

Yeah.

James Marischen (CFO)

KBW is hosting a depository conference in New York right now. Hopefully they're signing up deals as we speak.

Devin Ryan (Head of Financial Technology Research)

We'll keep an eye out. Thanks for that. Just as a follow up on the wealth business, nice to see the strong financial advisor recruiting. Ron, I heard the comment about net new assets kind of increasing through the quarter and ending June around 5%. If you're seeing an acceleration in advisor recruiting and there's often a bit of a lag of assets relative to when advisors join, could we expect further acceleration in net new assets from kind of a mid single digit or just more broadly, what are some of the puts and takes you're seeing in the formula for net new assets? Thanks.

Ronald Kruszewski (Chairman and CEO)

We're in the business of getting net new assets. That's just what our business is. You know, it's always somewhat hard to understand what's really going on because we're not a custody firm and so, you know, sometimes net new assets will appear while you're custodying assets. That's relatively lower margin in terms of what happens with net new assets. I'm very pleased with our recruiting, especially high end big teams and the net new assets bodes very well. Stepping back and looking at what we've been doing, looking at our momentum, I've been pleased. Devin, we've been doing this a long time and this is. I think we're doing very well on this front.

Devin Ryan (Head of Financial Technology Research)

Okay, appreciate it. Good catching up.

Ronald Kruszewski (Chairman and CEO)

Yeah. Hey, have a good day.

James Marischen (CFO)

Thanks, Devin.

Steven Chubak (Equity Research Analyst)

Thanks.

Operator (participant)

If you find that your question has been answered, you may remove yourself from the queue by pressing Star two. We'll go next to the line of Stephen Schuback with Wolf Research.

Steven Chubak (Equity Research Analyst)

Good morning, Ron. Good morning, Jim. Hi. How are you guys doing?

James Marischen (CFO)

Morning. Great.

Steven Chubak (Equity Research Analyst)

Wanted to start off with a question on the NII outlook. Just looking at slide 11 in the deck, you noted that you expect to see a meaningful ramp across the majority of fee and revenue categories. Second half versus first half. It looks like for the first half full year NII, you expect the second half run rate to roughly approximate the first half. I want to know if that's the right interpretation and whether there is a credible path to at least reaching the low end of the guidance range that you offered up for NII at the start of the year.

James Marischen (CFO)

I think that's a fair way to think about it. It is the right interpretation, I'd say. If you take a step back and think about 2Q, we certainly benefited from some of the features. Fee income we talked about in terms of NIM, that probably equates to about 4 basis points. And then you think about some of the deposit mix shift. Given the fact that typically the non-wealth deposits, so venture fund, banking or commercial, are typically a lower cost funding mechanism. The SmartRate, that's been about 10 basis points cheaper. There's not necessarily a rate sheet we can point to, but that average is probably the best way to think about it. We really benefited from that. Now the fee income is hard to extrapolate going forward, but any potential mix shift is a benefit there. You think about our guidance for 3Q is $265 million-$275 million.

That equates somewhere around a 310-320 NIM. That being said, we did sell probably about $500 million of middle market CNI loans which carried higher yields. It's a bit of a headwind going forward, but that will be offset as we continue to grow the balance sheet. A billion dollars is the guidance we gave. Certainly that number can move up from here. We could see more additional growth in the back half. Really then it's going to come down to what happens with the funding mix. I think you're reading the chart right, we're not ready to change our full year NII guidance. There is a path with more loan growth, with more deposit mix shift and those various different components to get to the bottom of that as well.

Ronald Kruszewski (Chairman and CEO)

Yeah, look, I'm really, I'm pleased with where we are, you know, always trying to look forward and discern trends, you know, in NII, as if there's some long term, you know, health trend is not how I look at it. I just want to tell you we've done some balance sheet shifts, for instance, selling some portions of our loan portfolio that were higher yielding, but we did not view as necessarily as strategic and as to where we're placing other assets. That has a short term impact on NII. Look, what do I like? I like the fact that our deposits have grown, our liquidity source for deposits have grown. We do not have a problem generating loans here. All right? It is a matter of doing it right.

I think that you're reading the chart right, but I'd tell you to be careful not to read that as some, you know, limiter on growth. It's just as we're remixing things, you know, you're seeing us not, you know, trying just to hit a target. We're trying to build a high earning, stable, risk adjusted NII and that, that's just where we're going here. I, we're in on that path. We're, we're doing really well.

Steven Chubak (Equity Research Analyst)

No, I appreciate all that detail. Maybe just a follow up on Devin's earlier question around bank M&A and some of the structural tailwinds that you outlined. I think it's consensus, but I think there's a strong case to be had that we're poised to see a meaningful ramp in bank consolidation activity. Certainly we're seeing a meaningful uptick in deal activity in recent months. One of the concerns that has started to emerge is just some of the weaker performance in the share prices of both the acquirer bank as well as the target. I was hoping to get some perspective on whether you view some of that price action as being somewhat anomalous or whether that could actually disrupt some of the recent momentum in bank consolidation activity.

Ronald Kruszewski (Chairman and CEO)

Great question. You know, it's so deal specific that that's hard to answer. Generally, you know, when you take, you know, potentially, you know, two high performing banks in the middle, you know, middle market whose stock is discounting growth as they gain market share and combine them, you're going to take that growth premium initially out of those stock prices. That's what we just saw in my opinion. You know, it's just, but what came out of that will be, is a stronger bank, a stronger competing bank and a bank that can deliver returns. I think that the bigger question is putting deals together that are sustainable and that are competitive over the next number of years. I think boards and management teams are clear eyed about that is the goal. Not necessarily worrying about taking a little growth premium out of stock.

Stocks are highly valued here in my opinion, you know, in terms of historical valuations. I don't think that that's a concern regarding the long term rationale. Therefore the under penning a future bank consolidation. That makes sense to you?

Steven Chubak (Equity Research Analyst)

That makes perfect sense.

Appreciate that overall.

Ronald Kruszewski (Chairman and CEO)

These are being done for strategic questions. You need to grow and some of these banks need to grow. They need technology, their deposits. All of the things that are driving this strategic underpinnings are there. That is what I think these companies are focusing on, which is the right thing. I do not really share that concern.

Steven Chubak (Equity Research Analyst)

Great. If I could just squeeze in one more tici tack modeling question. Was hoping you could quantify the aircraft leasing gain just so we could gauge what's the right jumping off point for that core FICC brokerage number.

James Marischen (CFO)

I think that's a good question. The gain in the quarter was about $28 million. As we sit here and think about this going forward, you know, $100 million is a good run rate as we look at probably the fourth quarter. I would say you have to remember that there is some seasonal slowness that we typically see in the third quarter in terms of fixed income transactional. That's a good way to think about it. That group is still active. You will see additional gains in the future. That's a good way to think about the normalized run rate.

Ronald Kruszewski (Chairman and CEO)

Yeah. You know, Jim's been pointing this out as a one-time item for about five times now. I just want to point that out. Okay. Anyway, it is a little more lumpy than you know, but it's to take it. That's a fair question.

Steven Chubak (Equity Research Analyst)

We'll be mindful of the recurring one timers. Thanks so much to both of you.

Ronald Kruszewski (Chairman and CEO)

Thank you. Thank you.

Operator (participant)

We go next to Alex Blaustein with Goldman Sachs. Please go ahead.

Alex Blostein (Managing Director)

Hey guys, good morning. I have a two-part question but we can lump it into one and you guys can take it in parts. It is related to the overall profitability of the franchise. On the cyclical part, as you think about recovery in investment banking, I think that is pretty well expected by the market at this point. How do you think the incremental margins from higher investment banking revenues will come through the P and L both in terms of the impact on institutional margins, but also firm wide. The second question, and I have to ask the AI, since you guys put the slide out there, as you think about what profitability and efficiencies that could create to the organization over time, how that would show up and how we could measure that from the outside looking. That would be helpful, thanks.

Ronald Kruszewski (Chairman and CEO)

Yeah, look, I'll take the second question first and then talk about the other one. Although they are kind of related too. I'm glad you put them together as it relates to AI. You know, probably the thing that we see is an ability to use a lot of these AI agent models on things that in our business, so much of what we do administratively is comparing inputs to rule books, whether it's advertising, supervisory analyst type stuff, a lot of things that I can go on and on through our workflows and identify productivity not unlike what the personal computer did in many areas. What I see happening is productivity increases where we, you know, we can continue to grow and not, you know, driving profitability by reducing workforce but by, you know, being able to be much more efficient and reassign people to other tasks.

Whether it's in, again, onboarding, marketing, compliance, you know, AML, investment banking, analytics, all of these things which I frankly, you know, I read what you're doing over at Goldman as well, and I see it. The key is to train people and to make sure that, you know, my concern would be that we somehow work to a lowest common denominator which can be AI. I mean, my goal is that AI is an amplifier, not a, you know, not just something that you just plug in and people can, you know, work from home. That's not the viewpoint here. I personally see big efficiencies, not just at Stifel, but across the industry, primarily in productivity. As it relates to your first part of your question, look, I think we've, you know, we're restructuring in Europe. Our fixed income margins this quarter were very good.

Our equity margins were less than optimal. We have a clear path toward improving our equity business. Both our focus shift in Europe, plus some of the productivity things that we have been putting into place, we see meaningful improvement in the margins in that business and that'll impact overall the margin capability of the business. You know, when we talked about getting, you know, I hate to bring it up because no one's brought it up, but you know, we did have a talking about $8 a share, you know that differential versus where we are to that is simply some of that low hanging fruit and margin improvement in the institutional, primarily equity part of our business. I'm optimistic about that.

James Marischen (CFO)

Alex, to put some simple math behind that, when you look at the institutional group, we were sub 15% pre-tax margins this quarter. That number really should be north of 20%. You can look at a normalized operating environment in terms of revenue and that kind of margin capability. That is the kind of lift we are talking about here in terms of the operating leverage, particularly within equities.

Ronald Kruszewski (Chairman and CEO)

Yeah, and we have a. This isn't just, you know, looking at a number and saying oh it should be higher. We have a clear path to how to get there. We know exactly what, where, what we need to do. Okay, thanks.

Operator (participant)

We'll move next to Bill Katz with TD Cowen. Please go ahead.

William Katz (Senior Equity Analyst)

Hey Bill. Great.

Thank you very much. Good morning everybody. Thank you so much for taking the questions. Just circling back to the NNA discussion. Net new assets coming in the door. I was wondering if we could click maybe a level deeper. You mentioned that things are going well, which is great to hear and certainly appreciate the accelerating momentum into the second half of the year. Could you unpack a little bit about what is actually going well? Is it just better recruitment? Is it better packages? Is there a pickup of market share? Just given what's going on with some larger scale transactions out there? I'm sort of curious if you could just speak to what's driving that good growth.

Ronald Kruszewski (Chairman and CEO)

You know, I think it's overall the platform of what we do. As we always say, you know, what does business is net new assets. Okay. And we are in the business of getting net new assets. It's a core basis of what we do. I don't know, Bill, that it's necessarily quarter to quarter. You can get a couple nice accounts but across a firm now with some scale, and we have some scale, you know, we just need to put in place the culture and the systems and the technology. All of the things that you see in, you know, that you saw come through the J.D. Power. I know I said it a couple of times, but that underscores what we're doing in terms of recruitment and the fact that we're bringing in some very large teams now and they're quite productive.

You know, we're going to continue to grow and when I say we're going to grow and we've grown for, you know, shoot, 28 years. You go back, we've had record. I can't remember when last time we didn't have a record year in wealth management. It's because we have a culture and a system to grow our business, which means growing net new assets. It moves around and you gotta. Sometimes there's noise in those numbers, mostly around the custody side is what I would say. Anyway, I want to just tell you that I'm not sure how much I can unpack it. We're pleased with the growth. You see it in recruiting first and NAA later.

William Katz (Senior Equity Analyst)

Okay, thank you. Just maybe a follow up on capital allocation. It has not come up yet on the call. Just wondering if you could sort of speak to priorities. Appreciate you might grow the bank a little bit net of the loan sales into the third quarter, I presume. How should we be thinking about maybe buyback versus bank growth versus maybe where you are in terms of the pipeline of potential deals?

Ronald Kruszewski (Chairman and CEO)

Yeah, I feel like we've come full circle here. You know, we talked about, you know, we started the year and when our, when you know, our equity values, including financials, you know, were at this level, we said we would focus on, on bank growth because we view the risk adjusted returns and the franchise value that we get by, you know, allocating, it's just turning the dial. It's not like we're going to do one or the other but you know, we're going to do bank growth and then, you know, we run into liberation day and our stock in the whole industry, you know, corrects down a significant amount really. We got on the call and said, hey, we're going to focus on buying back our stock and not do bank growth.

Now we're sort of all the way back to where we were beginning of the year and we're going to look at bank growth. You might not see it in the numbers because we're restructuring the bank a little bit in our loan mix, but we're going to focus relatively compared to the first quarter. We'll focus more, more on bank growth. We'll still do stock buybacks but we see the numbers being more accretive in bank growth and it's just a function of where the market is from an equity valuation perspective.

William Katz (Senior Equity Analyst)

Thank you, guys.

Ronald Kruszewski (Chairman and CEO)

Thank you.

Operator (participant)

We'll turn next to Michael Cho with JP Morgan. Please go ahead.

Michael Cho (VP and Equity Research Analyst)

Hi, good morning.

Thanks for taking my question. I'm going to just go ahead and ask an AI question as well. Ron, you know, you kind of laid out the various areas you're looking to improve. You're clear that it's not just a profitability kind of focus. I'm just kind of curious, you know, with dozens or even hundreds of things that are out there in terms of how AI can improve your own business and your own client experience, I mean, how are you prioritizing some of these initiatives? Maybe you can kind of talk through the pace of focus or pace of investment that you're thinking about when it comes to AI. Are you doing this all in house or using vendors? I'm just kind of, again, just curious about the magnitude and pace as you're thinking through these AI initiatives.

Ronald Kruszewski (Chairman and CEO)

Yeah, that's a great question. I mean, we, you know, we're starting, I would say, with basics across the firm. You know, AI, you've got to, you've got to train people. I keep saying, I say it all the time, that AI is an amplifier. It makes smarter people smarter. On the converse side, if you're not so smart, it makes you look really organized, not so smart. You know, we have to, you know, we obviously are doing the basics that are in our system copilot, you know, all of the things, we've rolled that out, very high productivity for people that are using that. We're focusing on training and then scaling that up. We've implemented a number of seats on LLMs that are much more sophisticated.

What I would say is that in our business, the regulatory aspect does not say that AI can sign off on, on series 24, certain things that require human elements. We are being a little careful to make sure that our workflows have human interaction at the end. The point is there's so much to do on basic, basic things that AI is very good at, which is summarizing, comparing, contrasting, looking at fixed rules and being able to make people much more product, you know, productivity. I personally sat down and our workflows and I identified like 70 of them. I just said there was like 70, me, I'm sitting in my office, I'm not getting into some of the stuff and going, oh my gosh, we can do this, this, this and this. A lot of that is off the shelf type stuff.

This is moving so fast that I'm concerned, if you will, that we do not need to be trying to write our own models when it's evolving so fast that we can get so much lift off of doing stuff that's pretty much off the shelf. Then we customize it a little bit, we do not need to be developing our own or competing with some of these firms. Let them give it to us. There is so much we can do on the productivity front. That's what we're doing. I think the difference is, you know, from my perspective, the biggest impediment to AI is bureaucracy. I mean, bureaucracies have a way of protecting bureaucracies. Here at Stifel, I'm taking the lead on, on pushing through what I think are relatively simple productivity enhancements utilizing AI.

Michael Cho (VP and Equity Research Analyst)

That's great. Appreciate all that color.

Just.

I want to touch on Europe for my second question. You've talked through the business mix shifts there a couple of times and certainly in the past as well. I recognize you just closed the deal. Going from here, where do you see the kind of the incremental focus from here as it relates to expansion and mix shift there, whether in terms of an industry perspective or geography focus? Kind of curious where you think the next incremental focus is at, given where you're at. Thanks.

Ronald Kruszewski (Chairman and CEO)

I wouldn't call it incremental. I'd call it a shift in focus a little bit. What we learned, if you will, the sales trading, anytime you touch markets, in any market but in Europe, the overhead associated with that from a legal compliance, market structure, making sure, you know, settlement risk, all of those things on the sales and trading side is, you know, it's a scale business in the U.S., it's really a scale business in Europe. As we've looked at it, we decided that we would de-emphasize that and then focus on where we see real synergies, which is in banking. We'll still have sales and trading. You need to have it because we're going to take, you know, we're going to help companies access the U.S. markets or underwrite as we have in the past. We're not going to be as much in the day-to-day trading businesses.

We're going to focus on advisory and banking, which is a natural extension of what we do in the U.S. Anything we do in Europe will be, if you will, linked to what we do in the U.S., and that focus and that shift will improve our profitability because we were not nearly as efficient as we should have been over there. We're addressing it.

Michael Cho (VP and Equity Research Analyst)

Thanks, Ron.

Ronald Kruszewski (Chairman and CEO)

Yeah, thank you.

Operator (participant)

We have no further questions at this time. I'd like to turn the floor back to our speakers for any additional or closing remarks.

Ronald Kruszewski (Chairman and CEO)

I would just say that certainly as I sit here today, I am optimistic and feel good about how things are positioning for the second half of the year. It's amazing how things have changed even since the first quarter in terms of perception and a lot of the things that are happening. We may have always talked about 2025 being a transition year, and I think maybe it will be the back half of 2025 transitioning into 2026, because the first half was certainly slower. I am excited about that. I appreciate everyone getting on for the call. I look forward to reporting back to you in the third quarter. Thanks for your interest in Stifel. We will be in touch. Thank you.

Operator (participant)

This concludes today's conference. We thank you for your participation. You may disconnect at this time.