STIFEL FINANCIAL CORP(SF)Q2 2026 法說會逐字稿

Good day, and welcome to the Stifel Financial Q2 '26 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joel Jeffrey, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Stifel Second Quarter 2026 Earnings Call. On behalf of Stifel Financial Corp., I will begin the call with the following information and disclaimers. This call is being recorded. During today's presentation, we will refer to our earnings release and financial supplement, copies of which are available at stifel.com. Today's presentation may include forward-looking statements that are subject to the risks and uncertainties that may cause actual results to differ materially. Stifel Financial Corp. does not undertake to update the forward-looking statements in this discussion. Please refer to our notices regarding forward-looking statements and non-GAAP measures that appear in our earnings release. I will now turn the call over to our Chairman and Chief Executive Officer, Ronald Kruszewski.

Thanks, Joel. Good morning, everyone, and thank you for joining us. We entered 2026 with a clear plan. At the beginning of the year, we said we would grow revenue, increase our loan book by up to $4 billion, increase treasury deposits, improve operating leverage and deploy our substantial excess capital where it would earn the best risk-adjusted returns. Six months into the year, we're doing what we said we would do. Our second quarter and first half results reflect the strength of our business and the momentum we're seeing across the firm. Second quarter net revenue of $1.45 billion increased 13% from a year ago, while non-GAAP earnings per share of $1.42 increased 25%. Both represented the second highest second quarter results in our history following our strongest first quarter ever. The result was our strongest first half in Stifel's history, generating record net revenue of $2.9 billion, 15% above our previous record and record earnings per share of $2.87, up 28% from our prior record. Return on tangible common equity was approximately 24% for both the quarter and the first half of the year, while tangible book value per share increased 15% over the prior year. Our top line growth was driven by another quarter of record Global Wealth Management revenue and continued growth in net interest income as we increased our loan book by $2.6 billion during the quarter, keeping us well on pace to achieve our full year guidance of up to $4 billion of balance sheet growth. Just as importantly, our strategy of putting advisers first continues to differentiate Stifel. Adviser recruiting remains as competitive as I've ever seen it. Client engagement remains strong. And earlier this month, Stifel was ranked #1 in employee adviser satisfaction by J.D. Power for the fourth consecutive year. I'll come back to why that's so important in just a moment. Our institutional business also continued its strong momentum, led by investment banking as the breadth of our platform continues to generate growth across ever-changing market environments. At the beginning of the year, we said we'd improve the profitability of our institutional business, and we've done just that. Institutional pretax margins improved to 19.5% in the first half of '26 compared to 11% a year ago through revenue growth and a lower expense ratio, reflecting the benefits of the efficiency initiatives we implemented in 2025. Our business continues to perform well, and we're generating significant capital. As I've often said, we have four levers for deploying capital. During the second quarter, we pulled three of them: reinvestment into the business, share repurchases and dividend payments, which combined for more than $0.5 billion of capital deployment in the second quarter alone. This illustrates our ability and willingness to opportunistically deploy our excess capital when we believe the risk-adjusted returns are compelling. Looking ahead, the broader market remains constructive, although volatility is likely to remain part of the landscape. The economy is healthy, client dialogue remains high and the capital markets continue to broaden. At the same time, we remain mindful of the secular forces shaping our industry, including artificial intelligence, expanding capital needs, private credit, changes in market structure and geopolitical uncertainty. In an environment like this, trusted advice becomes even more valuable. Given the breadth of our business and the depth of our client relationships, we believe Stifel is exceptionally well positioned to help clients navigate an increasingly complex world. Before turning the call over to Jim, I'd like to spend a few minutes talking about service, technology and why I believe they go hand in hand. As I mentioned earlier, Stifel was ranked #1 in employee adviser satisfaction by J.D. Power for the fourth consecutive year. I'm especially proud of that recognition because it comes directly from our advisers. It tells us we're executing on our mission of making Stifel the firm of choice for advisers. Our overall score was well above the employee adviser segment average, and we ranked #1 in leadership and culture, operational support and products and marketing. Look, awards don't define us, but four consecutive #1 rankings tell us we're doing something right. You don't earn the trust of advisers four years in a row by standing still. You earn it by listening, investing and continually improving. Our advisers are the foundation of our success, and that philosophy also shapes how we're thinking about artificial intelligence. Technology shouldn't ask advisers to adapt to software. Software should adapt to the way advisers work. That's the philosophy behind what we are building. In the first half of the year, market reactions have suggested that advances in AI will at least diminish the value of financial advice and at worst, eliminate the need for financial advisers altogether. This, however, is completely disconnected from what we are seeing in the market for financial advisers. Transaction packages are elevated and adviser recruiting remains as competitive as I've seen it for experienced trusted financial advisers. So either the largest wealth management firms in the world are increasing investments into a business that apparently is going away or as we see it, the industry will continue to evolve with more capable and efficient advisers using AI to benefit their productivity and their client service. I think markets sometimes confuse access to information with judgment. AI is making information more abundant. That only increases the value of judgment, trust and relationships. At Stifel, we always believed our people are our competitive advantage. AI simply raises the ceiling on what great people can accomplish. It is proving to be far more of a productivity accelerator than a replacement for talented people. It enables our bankers to evaluate more opportunities, our research analysts to uncover more insights, our advisers to spend more time with clients and our associates to focus on higher-value work. The result isn't less opportunity for our people, it's more. In short, we don't see AI as replacing human judgment. We see it as expanding human potential. In terms of the revenue potential for AI, look, by all indications, we're still in the early innings. AI is creating one of the most important secular investment opportunities of our time, and that opportunity runs directly through the middle market where Stifel lives. It creates meaningful opportunities for us to advise clients, support capital formation and provide insight as our clients evaluate how AI will shape their strategies, capital needs and competitive positioning. With that, I'll turn the call over to Jim.

Thanks, Ron, and good morning, everyone. Total non-GAAP revenues of $1.45 billion surpassed the consensus estimate by 2%. Investment banking was a primary upside driver, exceeding expectations by $23 million or 7% as we benefited from the close of a sizable transaction late in the quarter, which was the primary factor in our IB revenue coming in above our guidance. In comparison with the Street estimate, capital raising revenue was the primary driver of the beat. Transactional revenue came in 2% below expectation and decreased 3% from the prior year. I'll cover the components in more detail when we get to the Institutional segment. Asset management revenue was 1% above consensus and increased 13% from the prior year, driven by market appreciation and net new asset growth. Net interest income came in at the higher end of our guidance and $4 million above consensus, driven by higher interest-earning assets. Expenses were again well controlled, and we continue to see the benefits of the efficiency initiatives of the past few years. Our comp ratio of 57% was 60 basis points below consensus and down from 57.5% in the first quarter. The higher non-compensation expense was primarily the result of growth in our business. Excluding the more than $4 million of higher investment banking gross-ups and credit provisions, our non-comp expenses would have been relatively in line with estimates. The effective tax rate was 24.4%, slightly below consensus but within our guidance. Turning to Slide 4. Global Wealth Management generated record net revenue of $957 million, up 13% year-on-year. Results were driven by transactional revenue as well as growth in net interest income and asset management revenue. The record results are even more impressive given that this was the first full quarter following the sale of SIA, which reduced our asset management and transactional revenue run rate. We ended the quarter with record total client assets of $580 billion and fee-based assets of $240 billion, up 12% and 16%, respectively, as we benefited from stronger equity markets and net new asset growth. Excluding the impact of the assets associated with SIA, total client assets and fee-based assets increased more than 14% and 19%, respectively. On organic growth, net new assets in the low single digits were consistent with the first quarter. Our recruiting pipeline remains robust. The activity is episodic and dependent on changing competitive and market dynamics. As Ron mentioned earlier, we increased our loan book meaningfully in the quarter as we generated an incremental $2 billion in fund banking loans. Based on this incremental growth and a stable NIM, we expect the third quarter net interest income to be in a range of $290 million to $300 million. Over the past year, our combined wealth management and treasury deposits are up approximately $3.3 billion. This includes a more than $1 billion increase in sweep deposits and a $3.8 billion increase in treasury deposits, partially offset by a decline in Smart Rate. In the quarter, our sequential cash balances were impacted by seasonal tax payments as sweep and Smart Rate balances declined by $670 million and $930 million, respectively. Non-wealth client funding increased $410 million, reflecting strong momentum from our venture group. Within venture, we saw more than $700 million of deposit growth, but this was offset by some outflows within fund banking deposits. The second quarter illustrated our ability to fund our loan growth with off-balance sheet deposits. While we moved roughly $2.6 billion of venture deposits onto our balance sheet, we still have more than $3 billion available, and we continue to anticipate additional quarterly growth of $1 billion in venture deposits. Consequently, we are highly confident in our ability to reach our full year guidance of up to $4 billion of loan growth with ample funding flexibility beyond that. Turning to Slide 5. Our Institutional Group posted its second strongest second quarter in our history. Revenue was $481 million, up 15% year-over-year, driven by increased capital raising. In the first half of 2026, institutional revenue was up 21%, driven by an increase of more than 43% in investment banking. In the second quarter, firm-wide investment banking revenue totaled $332 million, up 42% year-over-year, coming in slightly above our recent guidance. Advisory revenue increased 24% to $157 million with continued strength in financials, industrials and technology. Capital raising revenue was $102 million, up 121% year-over-year and was our second strongest second quarter result with increased issuer engagement led by health care, industrials, energy and financials. Fixed income underwriting revenue of $64 million was up 18% year-over-year, driven by increased public finance activity and higher corporate issuance. We remain the #1 negotiated issue manager in public finance by deal count with a 14% market share year-to-date. Investment banking and advisory pipelines remain very strong. Strategic dialogue is active. The new issue market has reopened and financial sponsor activity, which remains below historical levels, represents a meaningful upside as it recovers. We continue to anticipate a strong 2026. Transactional revenue declined 19% year-over-year, primarily because of lower fixed income revenue as our second quarter 2025 results benefited from a roughly $30 million gain in our aircraft business. Excluding that gain, our results would have been relatively comparable to a year ago. Equity transactional revenue was down 4%, reflecting the impact of our European restructuring. The solid operating environment and benefits of our improved efficiency are evident in the Institutional Group's pretax margin, which was 19.5% in the first half of 2026, an 850 basis point improvement from the prior year. Moving on to expenses. We're able to recognize some of our improved operating efficiencies through a lower comp ratio in the quarter. We capitalized on the strong operating environment as well as the benefits of our European reorganization and the sale of SIA by lowering our comp ratio by 50 basis points sequentially to 57%. Assuming market conditions hold up for the remainder of 2026, we anticipate additional comp flexibility in the second half of the year. Non-compensation expenses totaled $309 million, up 11% year-over-year, with essentially all of the increases tied to growth in our business, including higher investment banking gross-ups, credit provisions, advertising and data processing. Our operating non-comp ratio was 19.6%, which was within our full year guidance of 18% to 20%. Turning to Slide 7. Our capital position remains strong and provides meaningful strategic flexibility. Tier 1 leverage ratio came in at 11.2%, while the Tier 1 risk-based capital ratio declined to 17.3%, reflecting the deliberate deployment of capital into loan growth. Based on a 10% Tier 1 leverage target, we ended the quarter with nearly $480 million of excess capital, and this is after funding $2.6 billion of loan growth and repurchasing 2.4 million shares of stock during the quarter. Finally, we have 7.8 million shares remaining under the current authorization. Assuming no additional repurchases and a stable stock price, our fully diluted share count for the third quarter is expected to be approximately 160.5 million shares. And with that, Ron, back to you.

Thanks, Jim. Before I turn the call over to the operator, let me come back to where I began. We entered 2026 with a clear plan and six months into the year, we've done what we said we would do. Revenue is growing, operating efficiency is improving. We're on pace to achieve our balance sheet growth objectives, and we're deploying capital with the same discipline that has guided this firm for decades. Let me also say a word about capital allocation because I suspect that question is coming. Our priorities haven't changed, and they're all measured against really one standard, return on invested capital. Our first priority has been and always will be organic growth. Investing in our advisers, our bankers, our technology and our balance sheet is how we built Stifel over the last 30 years, and it's how we'll continue to build it in the years ahead. Second, we'll continue to repurchase shares when we see a disconnect between our business outlook and the price of our stock. We were more active this quarter because in our judgment, buying back our own stock represented one of the highest risk-adjusted returns available to us. Growing our balance sheet substantially while increasing our share repurchase activity illustrates our ability and willingness to put our excess capital to work opportunistically. Third, we'll remain disciplined on opportunities regarding acquisitions. A key element of our long-term growth strategy has been strategic acquisitions, but we will not compromise our return standards simply to get a deal done. While we are always looking at potential deals, given today's valuations, one of the most attractive returns we see is investing in our own business and buying back our own stock. Markets never move in a straight line, but we've built this firm by taking disciplined decisions over many years, not by chasing the moment. That will not change. I know that everyone wants to know about what the second half will look like. Let me start by saying the second half is always seasonally strong. And as we enter the back half of the year, I feel very good about where we are. Asset management revenues are up. Our NII run rate is at the higher end of our full year guidance. Investment banking pipelines are robust. Client activity remains healthy. Our capital position is strong, and we're building a stronger, more valuable Stifel. So while we're proud of what we've accomplished in the first half of the year, we're even more excited about where we're headed. So with that, operator, let's open the line for questions.

And we'll take our first question from Steven Chubak with Wolfe Research.

So Ron, I was quite encouraged by some of the backlog commentary that you offered on the institutional side. Admittedly, I'm struggling to reconcile that versus some other commentary we've heard through this earnings season about bank M&A activity remaining fairly subdued. The middle market sponsor community is still on the sidelines. Recognize you have a diversified business, but I was hoping you could just unpack where you're seeing strength in terms of backlog momentum on the M&A or ECM side and just speak to the outlook for both middle market sponsors as well as your expectations for bank merger activity in the back half.

A lot of questions in that question. But sure. I mean, look, first of all, like a lot of people for valid reasons, highly correlate our advisory with bank depository M&A. And we just announced in July a nice transaction, which I think will close this year with a significant fee. But I would say that bank depository M&A relative to what we expect will happen is relatively muted. There's been a buyer strike. We've talked about a lot of uncertainty in the market. But the core fundamentals haven't changed. But that's not all that's driving my optimism. In fact, I would say it's not. It's across the other parts of the Stifel platform. And people forget that we have a diversified platform in health care, in industrials, in technology and in energy. And all of those are improving, and we're just seeing that. So we're not—you shouldn't correlate—although it's important, you shouldn't just correlate us as a bank depository investment bank. That would be a mistake. And so what's kind of interesting for us, Steven, is that—and I'll let Jim add some color—but from my perspective, the environment is strong. And while I'm optimistic, I see upside because sponsor activity, if it does pick up, is really going to help us because a lot of these companies we pick up are middle market. So the sponsor activity actually shows upside. I think bank M&A has upside from my remarks here. There's more upside potential. Capital raising has been strong, and we continue to see it outside of financials. It was really strong in health care, for example. So when I unpack it, what I'd like to say is that while I'm optimistic, sometimes I'll say I'm optimistic when I look out below because the market is overly optimistic. Today, I'm optimistic and I see upside.

I think you covered it very well, Ron. The only thing I would add related to bank M&A, as you sit here today and think about the opportunity for growth there, there's probably around 120 banks over $10 billion today. So you're seeing a little bit more of a measured pace in that M&A cycle. But the '28 presidential election still puts a focus on this open regulatory window and all the factors Ron talked about, in addition to the fact the economy is good and bank stocks have performed well. He mentioned the recent transaction we just announced. There's a lot of active dialogue there, but we're getting to the point in the year that anything we probably announced at this point is going to be a 2027 transaction, but there's a lot of active dialogue there, and it's a driver of what we—when we come out with our '27 guidance, it will certainly be a bright spot.

Did I cover all your questions?

Yes, you did. If I could squeeze in one more?

Yes. Sure.

It was a common thread I thought, but fair enough. I wanted to actually ask on operating leverage. You talked about some of the sources or drivers of revenue momentum. If I look at first half '26 versus first half '25, you grew revenues 15%, delivered incremental margins closer to 39%. So certainly reinforcing the power of the model and your ability to deliver sustained operating leverage as revenue scale. I was hoping you could just speak to whether you believe that a 39% incremental margin is something that's sustainable and whether your efforts on AI that you were alluding to earlier, how that informs your near- and medium-term expectations for operating leverage?

Yes, I'll take the second question first. I'll let Jim think about the incremental margin. I guess I haven't really thought of it that way, the 39% number you're talking about. But with respect to AI, it's interesting that my views have changed a little bit, Steven. And I think AI will have operational efficiencies across the board. But what I've seen and where my perspective has changed, I thought that it would be a replacement for human costs, okay? And what it really is turning out to be is an accelerator of our business. So I thought we don't need as many people. But what's happened is we—across all of our businesses in wealth and in fixed income and in equities and investment banking—we are becoming more skilled at uncovering opportunities, and that is leading to needing people. And I think about some of the efficiency things that we can do, and it's like the idea that with—and even in your space, Steven, you must be seeing this—the ability for analysts to cover more companies because a lot of the historical work can be done. But what we really want is your opinion: what do you think of the results? And I see productivity gains, and that's where I see it. So AI has—I've changed my view about thinking, 'oh, we don't need as many people.' That's not true. In fact, we need more talented people to take advantage of what I see is our ability to even compete and gain greater market share.

Yes. In terms of incremental margins, I think the answer is different when you look at each of our individual businesses. When you look at the Institutional Group, that incremental margin should be over 20% on higher revenues. In the Private Client Group, that's probably somewhere north of 20% as well. And then we look in the bank, that's obviously a much higher margin business. But when you look at the consolidated entity and you think about operating leverage and where we're getting that operating leverage, a lot of that is going to come through the compensation line item. And year-to-date basis, we've been able to take about 80 basis points off the comp to revenue ratio. And that's really a function of the things we hit on, the sale of SIA, the restructuring of European activities. But you also combine that with a higher net interest income, it produces a pretty strong lever there. On the last quarter call, we talked about taking somewhere between $70 million and $80 million of comp costs out of the business with the sale and restructuring transactions. And then you look at NII, we're up over $30 million year-to-date, and you can look at our guide for 3Q and then layer on kind of our growth assumptions for the full year, you can see we're going to have a pretty nice second half in terms of NII in our forecast. That comes at a much higher incremental margin. So you combine those two factors together, we should be getting more incremental comp leverage. And I think where we're at today, we feel pretty comfortable that if the operating environment holds, we'll be at the midpoint to the lower half of the overall comp guidance range of 56.5% to 57.5%.

Yes. That was—Steve, you get all the questions. The other people online are probably thinking, oh geez. But I'll say this, Jim just said a lot of words there. It's been a number of years since we adjusted our comp ratio in the second quarter, okay? You go back and look. And so this year, we did, which probably speaks to your question about incremental margin and how we're viewing the second half of the year. So thanks for your questions.

And we'll take our next question from Mike Brown with UBS.

Great. So I have a similar theme here. I'm going to maybe split it to two questions, though, two different focuses. So Ron, you brought up a really interesting point on the AI adviser threat concerns that are out there in the market. Given the market's fears, I figured there would maybe be greater uncertainty out in the recruitment market and maybe that there would be a little bit less competitive pressure there. It sounds like from your comments, that's not the case. Do you think that that holds? Or do you think that there may eventually be a bit of a wait-and-see moment and a little bit more maybe rational activity on the recruitment front?

Yes. Look, I think that maybe if there's a little bit of a wait-and-see, maybe it's us, okay? And it's me trying to say, well, wait a minute, it seems like I'll wake up one morning and read about some new AI productivity tool and all the wealth management stocks get hammered. And in the same day, I'll come in and Jim will tell me, 'Oh Ron, everyone's upping the recruiting packages.' And I'm like, wow, there's a disconnect here. And to me, what AI will do is it will actually increase the value of advice, just like it's doing in banking. Like I said, what we're seeing is—AI makes talented people more talented and less talented people less talented. And so it's an amplifier. And I see that with what we can do on the adviser front since you're talking about wealth; it just makes our advisers more productive, easier to communicate, easier to have meetings and increases the value of advice because as you get more information in the marketplace, which is what AI is doing, it's making it more abundant, the value of human judgment and advice and relationships increases. Everyone thinks, no, it doesn't. Someone will just use AI as their adviser. I don't see that, okay? And I'm just going to stick with that and nor does the market, okay? Otherwise, the market wouldn't be paying what they're paying for the last mile of advice. So that's how I see it.

Okay. Great color. And then sticking on the AI theme, kind of build on what you were just saying there. We've certainly heard stats and read studies about how adviser productivity can pick up— I think the numbers we've seen are about 10% to 30% pickup in productivity for advisers. I'd just be interested in your take on that. But how do you ensure that the advisers redeploy this freed up time to be more productive? I mean you talked about the equity research angle, there's an opportunity for analysts to perhaps expand coverage and focus more on the value-added aspects of the value chain. But in the advice space, just curious how you ensure that that productivity could drive better same-store sales growth over time? And is there a risk that the industry eventually starts to face some fee pressure there as advisers can do more and then perhaps competitors begin to compete that pricing lower to win share?

Well, your second question first. I mean, look, there's been fee pressure in this business since 1975, when commission deregulation occurred. And so you've seen that. But the least amount of fee pressure has been—the most has been in the building blocks of advice, so ETFs and all the products. And you've seen those fees get compressed because they're the wholesale side of advice. The relationship side, the advice—people value holistic financial advice. We don't just pick stocks anymore. We provide holistic financial advice. So of course, there will always be some fee pressure. But net, I see it improving overall because the markets generally go up over time, at least we hope so. With respect to how I ensure it, I think it speaks to Stifel's culture in that the way I know that it will be is because we leave it to the advisers. These are individuals who are building individual businesses, and I don't need to tell them how to allocate their time to more productive things. They just do it naturally. And in fact, the fact that I'm not sitting here browbeating people with how to be more productive is why people like Stifel. We give them the tools, they deploy them, and we have a highly incentivized system for advisers to be as productive as they see fit. So I'm very confident that if we put the tools on the table, our advisers will use them productively as each of them see fit, not as I see it fit in some homogenized fashion. On the institutional side, it will drive because these are all partners across the business, and they want to be more productive. So I say again, it's an amplifier, not a replacement. And I think that's going to be the new theme that's coming out. You're going to see firms not talk about reducing analyst-to-MD ratios; you're going to start seeing people saying, this makes us more competitive.

We'll take our next question from Devin Ryan with Citizens Bank.

So first question, I just want to ask about organic asset growth in wealth and kind of the algorithm. Specifically, I'd love to hear about client wallet and how that's been evolving just as you guys have added a lot more capabilities over the last five to ten years. Just are you winning more assets per client as we think about that part of the algorithm? And then on the adviser recruiting, Ron, you've mentioned some of the large firms are doing better. We see that as well. Do you think they found a new economic model or formula to make this work or maybe it's not sustainable? It would just be good to hear thoughts on both.

With respect to net new assets, it's the same answer every quarter. Obviously, we watch it closely. We believe that a lot of people report this number differently. I've always said measure revenue, not necessarily net new assets. I know you'd like looking at it that way to predict revenue, but we understand productive assets. And what I would say philosophically—and this is something we did about eight years ago—it was a philosophy that the advisers in the future and more and more so will not be limited to just what we have in custody at Stifel. We have been giving technology and tools that allow us to advise on assets held away and being able to consolidate and report not only assets but expenses in a holistic manner. And when you do that, you start seeing a client's full financial picture and then advisers, of course, going back to my comments about them being very entrepreneurial and productive, will ask about, well, who's managing this? Can I help you with this? Oh, you've got this loan, we can offer a better rate. Stifel's credit card is at 8%, while others are at 18%. Our clients don't borrow, by the way. So that's easy, but at least on a credit card. So all of this is a holistic view of understanding that technology will make firms not just focused on their custody stock record. They're going to have to look at and be able to look at a holistic view for clients. And that's what we—I think we were one of the first full-service firms to actually look at that and not just have it be a sidebar, but central to how we look at client assets. Devin, that's all your question?

No, I think that's great. Appreciate it. And then I'll ask a follow-up here just on lending and just the fund banking lending has obviously been a great growth story for the firm. I'd love to hear about how you're thinking about that from here and kind of relative capacity—supply/demand—and then your considerations from a risk perspective. I appreciate it's maybe lower risk. But just hear about that and other strategic elements in doing that, the multiplier that maybe you're seeing in other revenue lines across the firm you expect to see and just how that's helpful there as well.

Well, specifically as it points to venture, not only fund banking, but venture, we have a big funnel, and we just started competing in this business in a meaningful way. We've been in it for a while, but we really made an investment three years ago. And we're just getting started. We have things that we have to do. We have to be better on the technology front, providing venture clients with good treasury-type functions, and we've got a big investment in that. And what I see today is this isn't just about collecting deposits and making venture and fund banking loans. This is about broadening the scope and understanding that out of this comes wealth opportunities, investment banking opportunities and fixed income opportunities. As I have said on previous calls, I am very optimistic and bullish about the investments we've made in this business as I look forward. It's a great ecosystem. It is the new economy. And we—I don't think that any of you have really understood or at least haven't fully understood what we're doing and how we can grow that business. So we have a lot of investments that we need to make to be competitive. But I think we're one of the players in that business, and it's not just about deposits and loans, but a lot more.

One thing I'd add there, if you think about the loan growth in the second half to get to the $4 billion bogey for the entire year, our guide there—look at our current excess capital—we use less than half of that to fund that loan growth in the second half of the year. So we have the financial flexibility to do more than that as we look forward in the year if the demand is there for assets with the proper risk-adjusted returns. And obviously, fund banking, as Ron mentioned, is a very low-risk asset class. We feel very comfortable with it.

Yes. We'll take our next question from Bill Katz with TD Cowen.

Maybe pick up on your outlook for NII. I think the math is pretty straightforward. But I was intrigued by the notion of a flat NIM in there, maybe that's just sort of conservatism. But just thinking why would the margin potentially improve a little bit? My thinking is it seems like loan growth is picking up, probably has better yields relative to securities. A, is that fair? And b, given a bit more of a hawkish rate backdrop all else being equal, I would imagine the incremental reinvestment rates are a bit better. So how should we think about the NIM dynamic within that NII discussion?

I'll go ahead and start with that one. So obviously, you look at the assumption that everything we're growing here is going to be funded by fund and venture. And those are deposits that are priced a little bit more attractively than what you see in Smart Rate today. Smart Rate is at about 3.25%. And then you think about where are we investing? We're investing in fund banking loans. Those are yielding 6% to 6.5% today. Venture loans are yielding 6.5% to 7.5%. Then you also have mortgages that are probably in the mid-5s to mid-6s. So it kind of depends on the mix of those assets of where we go. And you combine that with the funding, and generally speaking, it results in around a flat NIM. There's certainly opportunity for NIM expansion if we see more growth in sweep or other cheaper alternative funding costs. But that's just a dynamic of the yields we're seeing on both the asset side as well as the cost of funds.

And my bank guys are generally conservative. I'll just say that. They don't usually tell me we're going to have expanding NIMs because that can lead to tougher conversations later. So I see the dynamic that you're talking about, but there's a lot of things that go into that pool, Bill: mix, the shape of the yield curve, all these things that can change, and we want to be comfortable with what we tell you.

Okay. That's helpful. And then, Ron, you mentioned a couple of times in your prepared comments that you remain disciplined on M&A and that your stock is still a good value. So is that still true here with today's price? And on the M&A side, putting the bid-ask spread to the side for a moment, where are you most focused relative to the momentum you have on the organic side?

I'm sorry. Let me before I respond, is this a question about our view of M&A or on our advisory side of M&A? My corporate side? Look, we look at a lot of deals. The deals we've done this year, we've been on the sell side. I'm rarely on the buy side historically. We will continue to evaluate transactions. At the end of the day, it's pretty simple. I would say that if I were to ballpark the market today for financial services or adviser businesses, it's 15 to 18 times adjusted EBITDA and we're trading at about 8, so there's a disconnect here. So the best acquisition I see is ourselves. And that's kind of what we've been doing. That doesn't mean that we'll shut the door. But when we look at these things, we're looking at return on invested capital. We're not looking at a headline print. We have grown this firm, and we have a 24% return on tangible equity. That's the number I look at. I'm not going to do a deal that has a return on invested capital of sub-10% just to show revenue growth. That's dilutive to value, in my opinion. Today, valuations are at the high end of ranges for many assets. We'll be disciplined. Sometimes I'm disappointed and wish I'd done something, but we're going to stay disciplined. But are we still an active participant? Absolutely.

And we'll take our next question from Brennan Hawken with BMO Capital Markets.

To start out, I'd love to drill down on part of Steve's question and some of your comments around the comp leverage. There's sort of two ways to get to comp leverage. But was the implication that you guys are optimistic about the revenue momentum in the back half of the year? And if so, is that optimism coming more from the institutional side or the wealth side?

Wealth is a little more predictable. We already know asset management for the third quarter because we bill in advance, so you can look at what the markets were on March 31 versus what they were on June 30, and extrapolate that. Jim and the team do a pretty good job on NII. Transactional revenues are a little more volatile, but we have a pretty good handle around that. So then it comes down to the more cyclical parts of the business, which tend to be investment banking. Our optimism is there and in NII: an increase in interest-bearing assets. We added $2.6 billion in the second quarter. We have a lot of loan demand. I don't think that if we wanted to increase more, we'd have a problem doing that. We set a target for $4 billion. That $4 billion will help drive efficiency ratios in comp. Productivity also does that. So to answer your question, I see a more constructive environment and a more constructive pipeline in the businesses that tend to be more cyclical for us, which is investment banking and institutional. The fact that we adjusted the comp ratio in the second quarter relative to what we've done in the past speaks to the pretty good environment. That said, I'll insert a caveat: the world can change pretty quickly. We are cognizant that we still are in a volatile environment, primarily on the geopolitical front. So I remain optimistic, but cautious.

Great. Okay. You touched on it a little bit in your response, Ron, and you spoke to the fund banking opportunity and venture being more than loans and deposits. I'd be interested to drill down there. It makes a ton of sense to integrate this with other parts of the institutional business and engage with this cohort of counterparties. Can you speak to how those efforts are progressing and where we would expect to see possible benefits manifest in other parts of the P&L beyond lending and deposit taking as you referenced?

We already see it. We measure what's coming—what clients we're getting in wealth, how we're integrating with investment banking, whether on advisory or in PIPEs and capital raising, private placements or debt. We are in the early innings of this. I'm not sure I can give you precise numbers, other than to say we've talked about it for a few quarters and it's an area where we're building out capabilities. I don't want to be just renting our balance sheet to increase assets. I want this to be an integral part of what we do—whether it's private credit to our wealth management clients or providing services to the venture community and the private equity and venture funds that our clients are involved with. It may not even be related to the company we made the loan to. I'm focused on ensuring we have the proper systems in place to capture those opportunities.

Certainly, it's also a funnel across the retail side in terms of net new assets as an opportunity to funnel assets outside of the traditional channel we have today. Anything we can do to create those new type of funnels to create net new assets is going to be a net positive for our overall business.

Would those net new assets be sourced from the sponsor where you have the banking relationship or maybe the private companies where there's some value creation in exits? What's the better way to think about that?

Probably the latter in many cases. It comes from all over when you have relationships. When you meet a founder, founders in this ecosystem often have significant stakes in their companies but their liquidity is limited early on. That provides opportunities for us to provide mortgages, other credit products and holistic advice. There is a definite linkage, and I'm focused on ensuring we capture those opportunities.

We'll take our next question from Michael Cho with JPMorgan.

I just wanted to touch back on Ron's comments on AI efficiencies or AI opportunities. It sounds like it's quickly becoming both an incremental cost as well as a source of some efficiencies. You provided some perspective in the past. If you could just talk through some of your biggest priority areas over the next 12 months or so, and any areas where you could talk to the pace and size of efforts behind these initiatives?

That's a great question. As the world is coming to understand it, I feel that some of the efficiencies we can get are operational. We're a regulated industry, so there are many compliance and regulatory workflows that are ripe for efficiency gains—where you can compare unstructured data to rules and have an agent flag exceptions for people to review. We don't need as many people doing low-value tasks, but we can free them up to do higher-value work. I also see incremental costs related to token usage for large models. It will be interesting to see how that plays out; I view token costs a bit like cell phone minutes—competition should drive prices down over time. How this plays out relative to human costs versus token costs is something we're measuring. Net net, with competitive pressures and the growth of open-source models, I see a big productivity and efficiency benefit for us. That said, the space is evolving quickly—what's true today could change—and we are watching it closely.

I appreciate all that color. More of an open-ended question in terms of advice and wealth: as these capabilities and AI initiatives come to fruition, is there a natural progression where the advisory business can take another step in evolving or transforming itself to fit the new normal? Are there particular areas that come to mind as incremental where the advisory business could take the next step?

I think it already has and continues to do so. If our business were simply asset allocation, the slide-bar solutions would have been more disruptive. But advisers do much more: holistic financial planning, behavioral coaching, estate and tax considerations and other high-value services. As information becomes more abundant, the demand for judgment and advice increases. There's evidence of this in surveys showing higher propensity for high-net-worth individuals to want financial advice over time. So I believe advice will increase in value, and technology will make advisers more effective at delivering it.

At this time, I will turn the conference back to Ron Kruszewski for any additional or closing remarks.

I'll make this brief. Thank you for joining us. I look at our results, and I told my partners, 'we just did what we said we would do.' That may sound boring, but it's not. We'll continue to build this firm from $100 million in revenue when I started as CEO to about $6 billion today, and we'll do it the way we've always done it. We're going to continue to build it with shareholder returns in mind, and we'll do it with a long-term view. We're not going to chase short-term revenue growth at the expense of returns. We'll keep our measure of return on invested capital. That's just what we're going to do. I look forward to talking to you in the third quarter and continuing to do what we say. So thank you.

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