STIFEL FINANCIAL CORP (SFB) Q4 2024 Earnings Call Transcript

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

Thank you, operator. I'd like to welcome everyone to Stifel Financial's Fourth Quarter and Full Year 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’d note that some of the numbers that we state throughout our presentation are presented on a non-GAAP basis, and I would refer to our reconciliation of GAAP to non-GAAP as disclosed in our press release. I would also remind listeners to refer to our earnings release, financial supplement and our slide presentation for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material of Stifel Financial Corp and cannot be duplicated, reproduced or rebroadcast without the consent of Stifel Financial. I’ll now turn the call over to our Chairman and CEO, Ron Kruszewski. Ron?

Thanks, Joel. Good morning, and thanks to everyone for taking the time to listen to our fourth quarter and full year 2024 earnings conference call. Before I get into our results and our outlook, I do want to take a minute to send our thoughts and prayers to the people of Los Angeles who have been dealing with the ongoing tragedy. Along with our colleagues and clients, we join everyone in thanking the first responders for their efforts for many of the devastated communities. Now on to our call. As you can see from our results on Slide 1, 2024 was an exceptionally strong year at Stifel, as we generated record net revenue driven by another record year in Global Wealth Management. And within our institutional segment, we generated our second-highest annual revenue as this business continues to rebound from the very difficult operating environment we experienced in 2023. The increase in institutional revenue of more than $360 million was an important factor in our ability to realize the operating leverage in our business model as it more than offset the decline of $110 million in net interest income, which was due in large part to the Federal Reserve rate cut.

Overall, we generated a pretax margin of more than 20%, a return on tangible common equity of nearly 23% and a 46% increase in our earnings per share. I'm pleased with our 2024 results, given the fact that we are still not back to what we believe is a normalized operating environment, particularly in our institutional equities business. I stated on our call last year that we view 2024 as a transition year to 2025, and we were not expecting our institutional group to return to normalized productivity levels. Well, this is pretty much how the year played out. And yet, I'd like to highlight a few noteworthy achievements. First, Global Wealth Management recorded another record year as record client assets and growth in transactional activity more than offset declines in net interest income. Second, 2024 was our second strongest year as we had substantial improvement in capital raising advisory and transactional revenue.

Third, our 2024 results highlight the strength of our long-term approach to how we manage our bank. The early implementation of our Smart Rate product, as well as the growth in commercial deposits, enabled us to maintain deposit levels and avoid the impact of cash story that plagued many in our industry. And finally, by keeping most of our assets in floating-rate instruments, we saw our net interest margin stabilize in 2024, and we remain well insulated against further rate changes, which we believe will help us increase NII through balance sheet growth. The bottom line is that we exited 2024 in a much stronger position than we entered the year. Looking forward, our global wealth franchise is well-positioned to capitalize on the continued optimism in the market, and recruiting pipelines are very strong. Our investment banking pipelines have increased due to improving market conditions and pent-up demand for M&A and capital raising.

We believe that there are tailwinds to this business, particularly as the new administration is focused on growth and de-regulation. Unleashing the strength of the U.S. economy will drive increased business investment and result in financing requirements, whether debt or equity. Additionally, from a regulatory standpoint, it shouldn't be lost that the new administration will appoint eight new regulators within the FDIC, SEC, OCC, and other agencies. This should benefit the capital market and in particular, the M&A environment, especially for banks. With increased levels of wealth management client cash and commercial deposits, we will look to grow our bank assets, which comprise the majority of our consolidated interest-earning assets. Frankly, the combination of a favorable regulatory framework, the normalization of the interest rate curve, and our outlook for both increased NII and institutional revenue should be a very strong operating environment for Stifel as we enter 2025.

We will continue to deploy our excess capital with a focus on generating the best risk-adjusted returns as we always do. On that note, I want to mention that our Board recently authorized a 10% increase in our common stock dividend to $1.84 per share. Moving on to Slide 2. Stifel has been and always will be a growth company and a growth stock. In this chart, we look at our business performance since the beginning of 2005, which is when we became the diversified financial services company that we are today with the acquisition of Legg Mason Capital Markets. However, from a share price perspective, Stifel has been going back to the time when I joined the firm, as you can see from our performance compared to the S&P 500 and Microsoft. Of note, since January of 1997, Stifel's share price has increased nearly 7,000%, which has well outpaced the growth in the share price of Microsoft at less than 3,300% and the S&P 500 at around 660%, and that represents 27 years of growth.

But what about the last 5 years? While the shares of Stifel have increased 163%, this again compares favorably to Microsoft, which is my tech proxy here, which was up 152% and the S&P 500, 86% increase during this time frame. Our strategy of reinvesting in our business and increasing our capabilities through acquisitions have resulted in substantial top and bottom-line growth over the past 20-plus years. It's important to understand our history of successfully executing on our growth strategy to understand our confidence in achieving the longer-term goals we've targeted. Over the past year, I've stated our objective to essentially double both revenue and client assets to $10 billion and $1 trillion, respectively. So it should come as no surprise that I've received more than a few questions about how we expect to achieve these targets. Well, I will go back to a comment you've probably heard me say quite a few times.

When I'm asked about our business and how we are going to achieve these targets, I'd say, 'past is prologue.' And as you can see from the charts on Slide 2, we have an impressive history of growing our business. Our revenue over the past 20 years has increased at a compound annual rate of 17%, as both our global wealth management and institutional group segments have grown significantly. To minimize the impact of year-to-year volatility, we illustrated our revenue in five-year periods, which better demonstrates the consistency of our growth. Over the most recent five years, our average net revenue increased 5.5 times from the 2005 to 2009 time frame and is up nearly 60% from the five years 2015 to 2019. While we've experienced meaningful growth in both our operating segments, our Global Wealth segment has been the largest consistent historical driver of our business. In fact, the average revenue in Global Wealth Management in the past five years was roughly equal to the average firm-wide revenue in the prior period, and this trend is consistent with each of the time periods we highlighted.

This is a function of successful recruiting as well as offering our financial advisers the highest level of service available, a great culture, and combined results in compound annual growth in client assets of 17%, which is equal to our overall revenue growth over the same time period. Our average institutional revenues increased more than 550% over this 20-year period. We have invested heavily in the growth of our investment banking franchise, as well as our transactional businesses. The number of investment banking managing directors has increased more than 1,300% to 212, and we've made several acquisitions to improve our relevance to clients in both our fixed income and equities franchises. While the reinvestment into the franchise has been a key factor in our revenue growth, it is equally, if not more important to highlight our ability to generate increased operating leverage as revenues have grown.

The increased depth and breadth of our business has driven efficiencies within our operations that are illustrated by the average pre-tax margin and return on tangible common equity of 20.5% and 23.4%, respectively, over the past five years. This is an increase of nearly 700 basis points in pretax margin and 400 basis points in return on tangible common equity from the period 2005 to 2009. Given our track record, I'm confident in our ability to achieve our growth targets. As such, we will continue to hire or acquire world-class talent, we will deploy our substantial excess capital with a focus on risk-adjusted returns, and we will continue to seek efficiencies within our businesses. Lastly, to preempt the question I'm sure will come up in Q&A, I'm not going to put a specific time frame on our longer-term revenue and client asset target. However, I think it is clear from our history of growth and our ability to successfully manage our businesses that we believe these targets are within our reach in a reasonable time frame. And with that, I'll turn the call over to our CFO, Jim Marischen, to go over our quarterly numbers.

Thanks, Ron. Looking at our fourth quarter results, we generated record net revenue of $1.36 billion which surpassed our prior record set in the fourth quarter of 2021 by 5%. The strength of our performance was widespread as each of our revenue line items generated meaningful growth from the prior year. Commissions and principal transactions increased 15%, as both wealth management and our institutional group once again generated double-digit increases. Investment banking increased by nearly 50%, driven by strong increases in both capital raising and advisory revenue. Record asset management revenue was up 23%, reflecting organic growth and market appreciation. Net interest income was essentially flat with the same period a year ago but increased 5% from the third quarter and came in above our quarterly guidance. I'd also note that our cash sweep balances increased by $1.3 billion during the quarter, which is the second consecutive quarter we've seen these balances grow.

Fourth-quarter earnings per share totaled $2.23, which increased nearly 50% from the same period last year. On Slide 4, you can see our results changed from the fourth quarter of 2023 and how they compare to consensus estimates. In terms of net revenue, we beat on every line item as revenue came in nearly $80 million, or 6% above the Street forecast. Investment banking revenue was the largest contributor, accounting for more than half the total revenue beat. While higher advisory revenue was the primary driver, we also surpassed expectations for both equity and fixed income underwriting revenue. Transactional revenue was 10% ahead of the Street due to a significant beat in fixed income. Asset Management revenue was 1% higher than the Street primarily due to a higher fee capture rate, as well as increased third-party sweep deposits. Net interest income was 3% above the Street estimate and above the high end of our guidance as net interest margin came in above expectations.

On the expense side, our compensation ratio was 58%, which was slightly above the Street and in line with our prior guidance. Non-comp expenses came in 9% higher than the Street due to higher provision and legal expenses, which I'll touch on later. The provision for income taxes came in below the consensus number, as well as our initial guidance on last quarter's call which provided a positive variance for our results. Turning to Slide 5. Global Wealth Management revenue was a record $865 million and pretax margins totaled 37% on record asset management revenue and was our second highest quarterly transactional revenue. We continue to see investors engage in the market, which has led to increased transactional cash. During the quarter, we added eight total advisers; this included four experienced advisers with trailing 12-month production of $8 million. As we've noted in the past, the fourth quarter is typically seasonally slow for recruiting.

However, we entered 2025 strong pipelines and anticipate continued success recruiting highly productive advisers to our platform. We ended the quarter with record fee-based assets of $193 billion and total client assets of $501 billion. The sequential increases were due to higher equity markets and organic growth as our net new assets grew in the low single digits. Moving on to Slide 6. Our Wealth Management platform generated its 22nd consecutive year of record net revenue. Our long-term success has been the result of our ability to attract and retain highly productive advisers and give them the support they need to most effectively manage their business to best serve their clients. Over the past five years, we've added more than 450 experienced advisers with cumulative trailing 12-month production of more than $350 million. This has driven our steady revenue growth and has been a significant factor in the shift in our revenues to more recurring sources, such as asset management fees and net interest income, which now account for more than 75% of segment revenues.

On Slide 7, I'll discuss our bank results. Client cash levels increased during the quarter, led by a $1.3 billion increase in client sweep deposits, and a $800 million increase in smart rate balances. I'd also note that total third-party deposits available to Stifel Bancorp increased to total $5 billion from $3.1 billion as we continue to see increases in both Wealth Management and Commercial Deposits. Net interest income of $272 million came in above our guidance as firm-wide average interest-earning asset levels increased by $1.3 billion, and our net interest margin increased by 3 basis points to 3.12%. The increase in NIM was primarily due to lower funding costs. As I noted on last quarter's call, our bank balance sheet is relatively rate-neutral. However, we could see some modest pressure on our bank NIM in the first quarter of 2025 due to the timing of assets repricing following the last rate cut.

We anticipate NII in the first quarter to be in the range of $260 million to $270 million as we expect to continue to grow our balance sheet. Our credit metrics and reserve profile remain strong. The nonperforming asset ratio stands at 51 basis points. Our credit loss provision totaled $12 million for the quarter, was negatively impacted by the macroeconomic forecast and increased reserves on C&I loans and unfunded commitments. Our consolidated allowance to total loans ratio was 85 basis points. Moving on to the Institutional group. Total revenue for the segment was $478 million in the quarter, which is up 33% year-on-year. Full-year revenue of $1.6 billion was up 30%, and led by strong increases in each of our revenue lines. Firmwide Investment banking revenue totaled $304 million, as we again experienced sequential and year-on-year increases in advisory and capital raising revenue. Advisory revenue was $190 million, an increase of 47% from last year and 39% sequentially.

We had a strong quarter in our financials, healthcare, and consumer verticals. We are continuing to see activity levels build in our advisory channel, particularly within financials, as the backlog at KBW continues to improve given the pent-up demand for transactions and the market's expectation for a more M&A-friendly administration. I note that KBW ranked #1 in M&A market share in 2024 based on deal value and their announced pipelines are up significantly compared to the same time last year. Fixed income underwriting revenue increased 24% sequentially and 53% from the fourth quarter of 2023, driven by strong public finance revenue that increased 40% year-on-year. Stifel's public finance team ranked #1 by the number of negotiated issues led as sole or senior manager for the 11th consecutive year and had more than a 15% market share. Equity underwriting of $48 million was up 50% over the same period in 2023 as financials, health care, and technology were our strongest contributors.

Equity transactional revenue totaled $59 million, which is up 20% sequentially driven by increased market activity and seasonality. Fixed income transactional revenue of $119 million was up 50% sequentially as we continue to benefit from the rebound in our rates due to the shift in Fed policy, which has increased customer activity with our depository and credit union clients. I'd also note that we had a roughly $20 million trading gain during the quarter. On the next slide, we go through expenses. Our comp-to-revenue ratio in the fourth quarter was 58% which was in line with our quarterly guidance that we gave on our third quarter call. Our full-year comp ratio was also at 58%, which was at the high end of our full-year guidance due to the mix of revenue. As I mentioned earlier in the call, non-comp expenses came in above Street expectations at $291 million. The higher number was the result of higher revenues, leading to increased variable costs, as well as higher credit provisions and legal costs.

Despite the increase, our non-comp operating expense ratio was 19.8% for the quarter. It was 20.6% for the full year, which was down from 21.2% in 2023. Our tax rate for the quarter was 8.3%. As I noted on last quarter's call, we anticipated a lower tax rate in the quarter, given the excess tax benefit associated with stock-based compensation. This came in better than our original guidance due to the additional share price increase we experienced after the election in November. On Slide 10, I'll review our capital position. Our balance sheet continues to be well capitalized. Tier 1 leverage capital increased 10 basis points sequentially to 11.4%, and our Tier 1 risk-based capital ratio increased by 30 basis points to 18.2%. Based on a 10% Tier 1 leverage ratio target, we have approximately $525 million of excess capital. We also continue to generate significant levels of additional excess capital, as illustrated by the $235 million of GAAP net income that we generated in the fourth quarter.

In terms of capital deployment during the quarter, I note that we increased bank assets by $1 billion to $31.4 billion. We repurchased roughly 410,000 shares at an average price of approximately $111 with roughly 10 million shares remaining on our current authorization. As Ron mentioned earlier, our Board also authorized a 10% increase in the common stock dividend. Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the first quarter fully diluted share count to be 111 million shares. And with that, let me turn the call back over to Ron.

Thanks, Jim. Let me conclude by going over our guidance for 2025. As I said earlier, we entered 2025 well-positioned to capitalize on what appears to be a stronger operating environment than we've had in the past few years. In terms of revenue, we are guiding to total net revenue of $5.25 billion to $5.75 billion as we anticipate growth in both operating revenue and net interest income. In terms of operating revenue, we are targeting a range of $4.15 billion to $4.55 billion. We expect Wealth Management revenues to grow as investors continue to redeploy cash into the market along with client assets growth and recruiting, as well as market appreciation. Institutional revenues are expected to benefit from increased investment banking activity, as well as continued growth in transactional revenues, particularly in our fixed income business. As we stated before, we believe that we are relatively agnostic to further rate changes due to the mix of our assets and deposits.

As such, we anticipate net interest income growth to be driven by balance sheet growth. Our NII guidance for the year is $1.1 billion to $1.2 billion. We estimate that every $1 billion of balance sheet growth results in approximately $0.20 to $0.25 of earnings per share. Currently, we are forecasting balance sheet growth of $3 billion to $4 billion in 2025. In terms of expenses, we are keeping the same guidance we had for 2024. We estimate that the compensation ratio will be 56% to 58%, and the non-compensation operating revenue will be 19% to 21%. In 2024, our improved pretax margin was a result of a lower non-comp operating ratio as the compensation ratio remained flat. Given our assumption that all our revenue line items will increase in 2025, we would anticipate some leverage on the compensation ratio. So if you do the math, you can see how we can generate $8 of earnings per share, which was a target that we gave all of you a few years ago.

Now the interesting thing about giving guidance is that once you appear to be enriching your target, everyone wants to know what your next target will be. This is pretty much what happened to us since we've started talking about $8 of earnings per share. Once we appear to be within reach of our target, I started getting questions from all of our investors on this call about how we get to $10 of EPS. Look, I don't want this to be perceived as incremental guidance. Let me just say that we view $10 of EPS as a milestone on our way to generating $10 billion of net revenue. Much like how we got to $8 of EPS, the math behind it is relatively straightforward. Essentially we should generate earnings per share with $10 per share with a revenue range of $6 billion to $6.5 billion, pretax margins of around 22%, and some assumption for incremental share repurchases. Now there are clearly a lot of variables that can impact our performance.

But given the track record of our growth company and our commitment to reinvest in our business, we feel confident in our ability to execute on our long-term goals and reaching these types of milestones in the not-too-distant future. So as we start 2025, we believe we are well-positioned to capitalize on the improving market environment as we continue to drive growth by reinvesting in our business. And with that, operator, let's open the line for questions.

We can take our first question from Mike Brown with Wells Fargo Securities.

Good morning. Thanks for taking my questions. Ron, I wanted to start on the wealth side. I guess organic growth has been a little bit soft in 2024 for the industry. And you guys mentioned that the pipeline is strong. So you expect the organic growth here to increase in '25 versus '24? And I guess what's the catalyst that's going to get some of these advisers to make the move? What's going to get them off the sidelines?

Yes, it's a great question. I think that, as I've said many times, we are recruiting the long-term game. We've been doing it a long time, and it has ebbs and flows dealing with lots of factors, some of which include compensation, transition packages, client engagement, and frankly, good markets. In times like this, we've seen two years of 20% increases in the markets and fee-based assets increasing. Bottom line is that recruiting, in my experience, generally slows during those times because transition packages are based on trailing 12, and trailing 12 is going up pretty consistently. So that's where it is. But look, as I look forward, I think if I had to say today, '25 will be a better recruiting year in terms of numbers when I look at our pipeline and the people we are talking to. And so I'm optimistic. But if you look long term, what the success of the long term and the foundational aspects that we've done to support our recruiting growth are stronger today. So look, I'm confident, but there's ebbs and flows. That's why we don't give any specific guidance.

One thing I'd add to that, as you think about 2025, we'll also be closing the B. Riley transaction probably in the first half of the year. And that could add somewhere between 30 and 35 advisers, somewhere around $18 million to $20 million of trailing 12-month production. So something to consider in your forecast as well.

Okay. Great. Thanks for that color. I just judge gears to the 2025 guidance, one of the things that stood out to me is the bottom end of the comp range, the 56%. When I look back, 58% has kind of been the historical spot for Stifel. And just given the momentum across the franchise, it does make sense that you could certainly get to that level. I guess curious what would drive you towards the bottom-end of that range in '25? And then if you play this forward and the capital markets recovery continues into '26 and markets remain supportive, is there enough comp leverage to eventually go below 56%?

It's a great question. I wish it were as simple as just putting a few numbers into a calculator to get an answer. Unfortunately, it's not that straightforward due to various factors we've discussed throughout this call, especially the need to be competitive in the market. In times like these, recruiting and protecting our franchise is crucial. One example is that last year, we maintained a consistent 58% comp to revenue, which I consider effective management. Even though NII, which positively affects our comp ratio, has declined, we expect it to grow moving forward. As NII increases, we should have more flexibility within our comp ratio, and productivity will also improve, contributing to that flexibility. We also account for a lot of our investments in this metric. Overall, I'm comfortable with a range of 56% to 58%. I'm confident that as we increase NII, we can leverage it to lower the comp ratio, while always being aware of our competitive position.

Okay, great. Thanks for taking my question.

Thank you. Our next question comes from Devin Ryan with Citizens JMP.

Hey, good morning, Ron, Jim. How are you?

Good morning.

Question about operating leverage in the institutional segment as the business continues to recover. Does the 2025 revenue and margin guidance reflect a more normalized environment, Ron? Are we moving toward a significantly improved situation compared to where we have been? Regarding margins in that business, you had 0% in 2023, 14% this year, 20% in 2020, and 26% in 2021. I’d like to understand what the normalized revenue number might look like in 2025, and what margins might return to when the business fully normalizes, even if that's not expected to happen by 2025. Thank you.

Yes. Look, Devin, I'll say I'll let Jim, he can add color to what I'm about to say. We've been pretty conservative even getting to talking about $8 and talking about rebounding and what's the earnings power. And we talked about a retracement from say, $2.2 billion in institutional revenue that dropped to $1.2 billion with no margin, as you said, to about $1.6 billion, which is pretty much what we said that we thought would happen. And we talked about that getting to $1.8 billion that would begin to normalize. Okay, 2021 was an extraordinary time, pulled forward a lot of business into that timeframe. I didn't view that as a normalized operating environment, I viewed it as having a lot of factors that doesn’t mean it is our ceiling. It just means that that's not necessarily normalized. So look, what I would say would be that we are looking towards those margins in institutional, which, by the way institutional business does not get any credit for NII for the most part.

We keep that in the bank and wealth, and there are some benefits. But look, I target in my mind as we normalize as that margin should get around 20%. And in good markets, it can be higher. The real question is going to be, how does 2025 play out? We have an economy. We have a set of factors, including a normalization of the rate curve, a deregulatory environment, an administration that appears to encourage M&A versus discourage M&A, a huge pent-up amount of supply, if you will, of companies and private equity that need to return money to limited partners. That's going to drive capital raising that's going to drive M&A. So if this plays out, absent some geopolitical or some extraneous event that certainly can happen, then 2025 can be a pretty good year, and we can exceed what I'm laying out now. But as we forecast, we are having the same conservativeness that we always have.

As you think about the normalized environment in 2025, in essence, we would be guiding to, call it, $200 million of additional revenues. And so we would be able to theoretically get to that 20% margin. Any enhancement from there is really going to be a function of some of the efficiencies we are trying to obtain with our international operations, both across Europe and Canada. Obviously, we recently announced the acquisition of Bryan, Garnier which will close at some point in 2025. There's various steps we are taking there to improve profitability. And it really takes achieving the efficiencies we're talking about there internationally, to see any upside to the 20%.

Yes. Okay. That's great color, guys. I appreciate it. And then net interest income obviously, very good outlook there as well, relatively resilient NIM outlook, healthy loan demand. Let me dig into kind of where you are seeing the loan demand come from? And then more broadly, how you would frame just loan demand today? You've obviously widened the funnel within kind of your channels? And then just what current capacity looks like for lending as well? Thanks.

Jim?

Yes. So you look back to 2024, we grew loans in a similar defensive posture more than $1 billion. And I think as we look to 2025, it would be more of the same. I think you're going to see a focus on both fund banking and venture lending, as well as retail lending. The retail lending is a little harder to predict. We grew several hundred million dollars in our mortgage portfolio in the past year. So I think you can see continued growth there. And from an SBL perspective, our securities-based lending, we saw some tick up recently in loan growth there. But again, that was a little bit harder to determine. But those are the areas where we are going to see most of the capital allocated to in terms of loan growth as we look forward to 2025.

All right. Thanks a lot. Thanks, Ron.

Loan demand is strong.

Thank you. And we will take our next question from Bill Katz with TD Cowen.

Thank you very much. Good morning everyone, and I appreciate your guidance and insights. I have a few questions about some items you haven't specifically forecasted. You mentioned in your press release that there has been some erosion in the credit book. Could you share your thoughts on the normalized provision for 2025? Additionally, Jim, I'm curious about the tax rate for the year. It seems like you're assuming a flat share count, but how should we consider capital deployment? Is it focused solely on bank lending at this stage, or are there other opportunities we should be aware of? Thank you.

Before Jim answers that, are you asking us to expand our guidance? But other than that, Jim, you answer.

I will discuss the provision expense for the quarter, which serves as a guide for future expectations. In this quarter, the provision was slightly elevated due to the macroeconomic forecast. This reflects a prolonged higher interest rate environment and widening credit spreads projected for late 2025. These factors contribute to increased provision expense within the CECL model. It's challenging to predict where this forecast might lead us in 2025, as the CECL calculation is influenced by it. Therefore, we won't speculate on future forecasts, but they were significant in the fourth quarter. Regarding the tax rate, it came in at just over 8% for the quarter, which is much lower than we initially anticipated. If we maintain the current stock price, which is difficult to estimate, we could see a substantial benefit next year. Historically, we've indicated a full-year effective tax rate between 25% and 26%. However, this year, it was around 21%, and unless there's a significant change in the stock price, I expect an effective tax rate of approximately 20% to 21%. This will mostly materialize in the fourth quarter, considering how the accounting for that specific item works. A stable stock price suggests that a 20% to 21% rate is a reasonable expectation.

We don't typically disclose specifics, but I will mention that our stock-based compensation generally has longer deferrals of five to seven years. We are distributing stock for tax purposes from grants issued several years ago. As long as there is an increase in stock price, this pattern remains consistent. Our performance last year was particularly notable. Even if the price remains steady, we have historical stock grants issued at lower prices that can be deducted for tax purposes at higher prices. Therefore, at these levels, we can look ahead to next year and see it as a positive situation.

Okay. I was wondering if you might comment on sort of how you think about capital allocation. It seems like maybe bank growth is the primary focus for '25, or maybe incorrect on that. And then relatedly, as a follow-up, just sort of curious, you mentioned the client cash has improved a little bit. I think wanting to get unpack the seasonal dynamic to the end of the year and how things are trending in the early part of 2025 in terms of client cash trends? Thanks.

Yes, I'll let Jim discuss the trends and provide a bit more detail. In addressing the first part of your question, I believe that if you analyze the numbers regarding our balance sheet growth, consider our capital investments, and factor in our 10% dividend increase alongside some stock buybacks, it becomes clear that we are accumulating capital. This indicates that we have surplus capital which we will evaluate for optimal deployment based on available opportunities. Concerning our capital build, I've been quite satisfied, especially when I reflect on the past few years. Several years ago, we had minimal commercial deposits, but now, due to our investments in venture lending, we've witnessed significant growth. I believe we are just beginning to tap into our potential in commercial deposits related to our venture business. Jim, if you want to add to this, but I wouldn't categorize it as a seasonal issue; rather, it's about us establishing that business.

You think about the growth in the fourth quarter, obviously we talked about the increase in the suite program, and that was nice to see for a second consecutive quarter. We have seen that pull back a little bit in the last week or two. Some of that kind of moves around from a day-to-day basis. You could see $100 million swings in and out on a day-to-day basis there, but it has pulled back some. We have seen continued strong growth, as Ron mentioned, within the venture deposits. If you go back to the fourth quarter, we had over $700 million of additional venture deposits we brought onto the platform during the quarter. We've been more in line of, call it, $300 million or $400 million a quarter. I think as we look forward, if you're trying to run rate that, that $300 million to $400 million might be a slightly better number. But we just had a strong end of the year in terms of bringing deposits on. So I think that kind of gives you an update through at least yesterday of where we stand in terms of cash balances.

Thank you.

Thank you. Our next question comes from Alex Blostein with Goldman Sachs.

Hey, good morning guys. Thanks for the question. I mean I think it's pretty widely expected for the capital markets dynamics to improve in 2025 and into '26. We've talked about for a little while. I guess if you look at your investment banking business and definitely not asking you to put an explicit number on this. But if you look at where that peak back in 2021, with the forces in play, how do you think about the peak revenues for this business? In this current cycle, any KPIs you can provide us to think about either in terms of Senior MDs in the banking division or anything else to kind of help us frame the opportunity set in this business for the next couple of years.

Yes. It began at the product level and then at the segment level, and as we evaluate the situation today, I believe conditions are improving significantly. It's important to note that in the past, many banks of our size benefited from the SPAC phenomenon, which was essentially a reverse IPO. One thing I hope to see is the administration advancing the capital raising jobs act, which I believe could revitalize the markets. I'm not going to limit our projections, and I prefer to let Jim discuss his views on our numbers. Growth will be influenced by areas where we've seen significant progress, particularly in financials, healthcare, consumer, and technology. Based on my perspective today, the financial markets appear strong, as do consumer and industrial sectors. Healthcare is currently pausing to assess developments with the new Secretary and other matters. Overall, it will be a favorable environment. We believe we have greater capabilities now compared to 2021, but I'm hesitant to assign specific numbers. Nonetheless, I can say with confidence that we anticipate a better year than 2024.

So specifically to some of your questions related to MDs, we did disclose the number at 212 in terms of MDs at the end of the year. And with the Bryan-Garnier transaction, we'll be bringing on an additional 33. But I would just say, Ron talked about ECM and SPACs and whatnot leading to some of the pretty substantial levels of revenues for banking in 2021. But we've made a lot of investments in M&A bankers. And I think as we sit here today, we do see the M&A levels reaching similar to what we saw in 2021, given all those investments we've made across our platform across various industries, as we sit here today and think about the financial vertical, our announced pipeline is three times what it was a year ago. So it gives you some idea of what we are looking at today.

Announced. And I think that's a fair point that I focus on the ECM, the capital raising of 2021. But I think what Jim just said, I want to just underline which is that, that was a little bit more market-driven, capability-driven when you look at our team we are putting on the field. You can look at M&A. And M&A is reaching those levels of peak markets. So that's just underscoring what Jim just said. And look, Alex, I do think it is going to be a good environment for ECM.

Yes. That's really helpful color. Second question, just around non-comp expense growth. When you normalize for investment banking gross-ups and loan reserves, it looks like you guys have been pretty consistently in sort of 10-ish percent year-over-year growth for the last couple of years and not comp expense. Your guidance implies, I think, something similar to that for 2025. Any framework to think about how you can sort of bend this cost curve for a little? What's driving sort of this pace of expense growth? So anything else you guys could provide to help us think through sort of the longer-term expectations for that expense?

In many respects, there are advantages in the fixed aspects of non-comp rent and some related communications and quotes. However, the significant factors are the variable components, which we believe are crucial for driving current and future revenue. We remain consistent in our analysis of these elements. The most noticeable change occurred during the pandemic when travel and conferences ceased. While we could observe a downturn for a year, we also noted potential declines in revenue. Overall, we have maintained consistency and have effectively managed margins in non-comp while balancing our investments in client acquisition revenues. This balance is vital and something we closely monitor.

And if you drill down into the 4Q numbers and what we reported, we had, call it, $12 million of legal expenses. Those are very episodic. They are very hard to predict. If you exclude that from that number and you look at that from an op ratio perspective, you'd be right at 19.0%. And so again, it is hard to predict when those types of costs that are going to hit our P&L. And over time, they periodically show up. But if you look at the core kind of operating expenses, essentially was at the bottom of our range in the fourth quarter, and that shows some of the potential op leverage absent some of those episodic costs.

Awesome. Great. Thank you guys.

Thank you. Our next question comes from Steven Chubak with Wolfe Research.

Hi, good morning Ron. Good morning Jim. Hope you’re both well.

Thank you Steven.

I wanted to ask on the FIG business. The performance has really started to improve. That full year revenue number of $390 million, it's approaching a previous record as we look at an environment with the recent steepening in the curve, potentially sparking some increased engagement from the depositories in particular, just how you're thinking about the revenue potential for the FIG business especially since we haven't seen a normal environment with the contribution from Vining Sparks, and just what it can generate in the absence of further trading gains?

I will let Jim provide more details, but I believe he mentioned there has been growth in that business, particularly in fixed income, and he quantified it. We've made several investments in our structured and securitization businesses, as well as in the SBA sector and the Jenny-type business, all focused on the origination of products for Vining Sparks and our depository operations. We're experiencing a favorable environment with the normalization of the yield curve and credit spreads, which is promising for fixed income. Although our timing with Vining Sparks faced challenges due to market conditions concerning rates and bank balance sheets, we successfully integrated the team and retained all the talent, which is now yielding positive results. I think part of our success is due to the favorable environment and the capabilities we've established, which the market wasn't able to fully recognize prior to this better context. I'm confident you'll see the positive outcome of that.

I'd just supplement that by saying, obviously, the rates is our biggest business, right? And if you see banks start to engage in trading activity, I think that bodes well for an environment for us. The other thing I would say, just generally speaking, is we did have some trading gains throughout this past year. And so as you think about the growth potential, I think we are talking about the core business, but some of those lumpier trading gains are a little episodic in nature, and I wouldn't necessarily run rate those.

Yes. When we examine our businesses and how we manage them, particularly regarding risk, it's important to note that we are encountering various challenges, yet we are not increasing the risk on our balance sheet. We do not engage in transactions simply to incorporate a portion of them into our balance sheet. The principal risk and the risk-adjusted returns on our fixed income business are quite significant. Additionally, I want to highlight that we had an excellent year in public finance. Our public finance team should be recognized for achieving the top market share in the number of transactions. We have become quite relevant, particularly in financing schools and housing across America, even if not in the largest deals. Our team has performed exceptionally well, and the outlook for this segment remains very positive.

That's really great color. And for my follow-up, I have to ask on sweep cash, Jim, and I'm really trying to help you here since you noted that sweep cash balances so far in January are down just given the magnitude of the growth that we saw in 4Q. I was hoping you could explicitly quantify the reduction that you've seen in January? And what level of sweep deposit growth is actually underpinning the NII guidance for the coming year?

So I won't give you an exact number, but the sweep balances are down probably a couple of hundred million dollars in January. Two weeks ago, they were up a couple of hundred million dollars. That number fluctuates quite a bit. I'm not going to predict where they'll be reported at the end of January. Generally, we feel positive about a gradual increase in some of those balances over 2025.

Jim, January, in my experience, is for investor dynamics, a number of things that happen, reallocation, people re-getting into the market if they did tax loss selling. In January, generally, sees a decline in balances, as investors start engaging in the new year. So I wouldn't put too much into that, Steve.

Okay. And the other question you talked about is kind of the underpinning for the '25 forecast. And I'll just say we are including in our forecast that all of the loan growth we are talking about of $3 billion to $4 billion is fully funded by smart rate and venture deposits. If we were to see more of a build across the suite balances, that would be incremental performance in terms of NII that we could predict.

That’s great color, Jim and Ron. Thanks so much for taking my questions.

Thank you. Our next question comes from Brennan Hawken with UBS.

Good morning, Ron and Jim. Thanks for taking my question. Ron, you referenced the expectation of comp leverage moving forward, which makes a lot of sense given your outlook for revenue growth. I'm hoping you could maybe help me unpack what happened though in the fourth quarter because both segments actually sort of beat us on the comp ratio, but the firm wide missed by a bit. So could you maybe unpack what caused that disconnect?

I could jump in there, Ron, and jump in as you want to supplement that. But generally speaking, you see more of a fill of the admin accrual late in the year, right? So you are filling the buckets across the models for the commission base, the formulaic, more based institutional folks and a good portion of that kind of what's left over fills admin in that pool. And that just historically is back-end loaded in the year, and that's what's reflected in that segment.

Jim mentioned that our senior bonuses have finally been funded. I had the same question myself. I believed we indicated we would reach 58%, and it’s challenging to interpret that in a straightforward manner. While I appreciate your question and recognize your point, it seems to be somewhat expected. Historically, we tend to see a bit more compensation leverage in the fourth quarter. It's a reasonable question, but I wouldn’t try to identify any specific trend in that regard.

Fair enough. And cheers on that accrual.

I would say to Jim, what if we had a bad December and he kind of found at me. So I'm not sure what he was saying, okay, but fair enough.

For my second question, I would like to discuss the institutional aspect. Firstly, your fourth-quarter advisory was significantly stronger than what the public data usually indicates. Were there more private or smaller deals included in the advisory this quarter? Do you expect this trend to continue based on your current pipeline? Additionally, we've heard concerns from investors regarding the recent poor performance of IPOs, with a few having broken prices. What do you believe the potential implications of that could be?

I always try to track the correlation between our reported results and the activity I observe. We focus more on the middle market, and I feel that the services relied upon to generate insights often fall short compared to our actual performance, especially in strong times. We’re processing a lot of transactions, and some might not get captured. I don’t have a definitive answer for that, but it doesn't surprise me because I share the same goal of trying to understand the market. I often wonder about the origin of the reported numbers. I'm not certain if that fully addresses your question, but I don't see a strong correlation; it tends to be nuanced.

It's under the radar, right? Like just got it. Fair enough.

We also do more private deals, which tend just not to get picked up.

Yes, that's what I meant by that. So that makes a lot of sense. Then any thoughts on implications of the broken IPOs?

Overall, the situation is not particularly positive. There are several factors that are influencing some of the valuations at this time. This progression is normal and can be beneficial as it allows for price discovery. Ideally, we would prefer to see better performance, but there is still a significant amount of business to conduct in private equity and a substantial need for capital to be raised in a supportive environment for capital raising and mergers and acquisitions. I believe this is something to monitor, but I don't have any specific concerns regarding a few deals that did not meet price expectations. Perhaps I should be concerned, but I’m not.

Fair. And I mean, could make M&A a more viable option if it is a sponsor looking to sell versus the public.

Yes. I hope not, but I believe that the overall process of raising capital for young companies to grow into larger entities and for investors to engage in the IPO market is crucial. At a fundamental level, this issue needs to be addressed for the United States, our government, and our capital markets. I feel strongly about this.

Fair enough. Thanks a lot.

Thank you.

This concludes our question-and-answer session. Mr. Kruszewski, I will turn the conference back to you for any closing remarks.

I want to commend all the analysts for their thorough and lengthy questions, and while we might have surpassed an hour on this call, I appreciate the interest. I am looking forward to the upcoming calls into 2025 and possibly even 2026. We have a positive environment, as do all my competitors. We are positioned between individuals with savings and those who require capital, and I believe the investment climate, corporate activity, mergers and acquisitions, and capital raising will all improve. We plan not only to capture our fair market share but also to expand it. I look forward to updating you next quarter. Thank you all for your time and attention.

This concludes today's call. Thank you for your participation. You may now disconnect.