Q1 2020 Earnings Call
Yeah.
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Ladies and gentlemen, thank you for standing by welcome to Stifel Financial first quarter 2020 financial results Conference call.
All lines are currently on the listen only mode. After the speakers presentation. There will be a question and answer session. If you ask the question at that time, you may do so by pressing star in the number one on your telephone keypad.
As a reminder, todays conference is being recorded.
Now my pleasure to hit the conference over to Mr., Joel Jeffrey People's Head of Investor Relations. Please go ahead Sir.
Thank you operator like to welcome everyone to steeple Financial's first quarter 2020 financial results conference call today, we will rough French earnings presentation, which can be found on the Investor Relations page on our website Www Dot Stifel Dot com new information on forward looking statements been non-GAAP measures appear in the earnings release and in our presentation.
There's audiocast is copyrighted material Stifel Financial Corp, and may not be duplicated reproduced rebroadcast without the consent Stifel financial I will now turn the call over to our chairman and Chief Executive Officer, Ron Kruszewski.
Thank you Joel.
Good morning, and thank you for taking the time to listen to our first quarter 2020 result.
Earlier. This morning, we issued an earnings release imposed to slide deck on our website.
I'm joined on the call today from various locations by co President Jim Zemlyak convict an easy as well as our CFO Jim Ericsson.
I'm going to start the call by briefly talking about the steps we've taken as an organization over the past few months to deal with this unprecedented health care and economic crisis. I'll, then briefly run through the highlights of our first quarter before turning the call over to Jim Morrison, who will take you through our balance sheet inexpensive I'll then come back with my concluding thoughts.
[noise] as you probably noticed we revised our earnings slides most of the changes or just format, but given the current uncertainty in the market. We've included a number of new disclosures, particularly on our long book in Securities Holdings, We believed that the new disclosures increased transparency and illustrate the conservative nature.
Sure up our balance sheet and our strong liquidity.
First of all I would like to express gratitude to healthcare workers. The next and best wishes to everyone. All of US that's people hope that you and your loved ones are safe and healthy responded the responding to cobot 19 Stifel is committed to supporting and protecting our associates, serving our clients communities.
As well, a small businesses commercial and institutional clients.
Slide outlined some of the actions we've taken regarding these constituents.
I'm also proud of my people apartments in associates, who have shown resolve creativity and teamwork to achieve the dual objectives of promoting the safety of our people, while delivering a central and exceptional service to our clients.
I'd like to highlight steeples infrastructure in response management as well.
As our shareholders know Stifel has been acquisitive I'm often asked if we have fully integrated our infrastructure I believe the past month underscores the fact that well people have multiple client facing brand KBW Miller Buckfire eat due just to name a few we're fully integrated in our support punch.
Funds, including risk trading technology clearing and settlement a couple of points.
Over the last month more than 90% of Stifel Associates have worked remotely speaking to our infrastructure I can think of no. Better example than the fact that pre crisis Stifel globally maintained eight primary trading floors, which because of social distance thing and the need to operate remotely.
Well redeployed to 183 separate trading locations.
It was a cheap without interruption and during a time of elevated trading volumes and volatility.
I also believe that the fiscal policies undertaken and the federal reserve.
I have done well to address the financial uncertainty and these have been needed an effective.
The economy has been through many crisis during my nearly four decades in this doesn't the lesson I've learned is that risk as omni present.
I, often say that I'm, most anxious when things appear relatively calm and it's hard to predict the next crisis such as my anxiety. Unlike 2019, all seemed as if 2020 would be another record year, how quickly things change with this context I will turn of the quarter on page three of earnings present.
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In Q1, net revenues were 913 million up 19% from the prior year simply we had a great quarter that highlighted the diversity of our business.
As we look at the quarter. There are two issues that are particularly noteworthy. The first was adoption of peaceful and resulting they would be resulting loan loss provision given market conditions at the end of the quarter. The second was our conservative approach to compensation that resulted in a higher comp to revenue ratio than we.
Had originally guided to.
After considering these items both of which we will discuss in greater detail later in this presentation non-GAAP earnings totaled 92 million, but non-GAAP earnings per share of $1.20.
Annualized return on tangible common equity even after the aforementioned loan loss and comp accruals totaled 19%.
We achieved record revenue and global well maintained a strong and liquid balance sheet and due to the diversity of our business delivered our second best quarterly revenue in our institutional business.
Turning to page four I'd like to share how we thought about our results given the current environment and uncertain economic outlook first as I stated our record first quarter revenues increased 19%.
For comparative purposes to 2019, as I said two items significantly impacted the quarter. So to get started I want to know that earnings before loan loss provision and additional compensation accrual would have been 179 million up 21% year over year.
I believe this illustrates the earning power of Stifel wealth management had its strongest quarter and our institutional business its second strongest.
Now as I said, the two items impacting our quarterly results total about $50 million pretax. The first was the adoption of Cecil which as you know requires current estimate of all future losses.
Based on this new accounting standard we increased our loan loss allowance by approximately 27 million, which included a 19 million provision for loan loss.
As we implement a t. so I want to say that we have thoroughly reviewed our loan book, Jim will give more detail on the risk characteristics.
A moment I would also note that when you look at our bond of loan portfolios together.
72% that total are comprised of residential mortgages security based loans and investments Securities. We also did not have a credit card portfolio again, Jim will provide more color on.
That said, we will continue to monitor economic conditions and adjust our loan loss provisions accordingly.
The second item, we've given a lot of thought to as our people there was and there's a lot of uncertainty regarding the economic outlook, which makes a growing for compensation even more challenging.
Member Steeples not just the bank, we have a lot of human capital that produces transaction and fee based revenue. So that we looked at our franchise and recognize that it is driven by our people. We felt it was appropriate to take a conservative approach to compensation.
Therefore, we booked in additional compensation accrual of 32 million, which was 350 basis points higher than the top end of our previous guidance range. So taken altogether, our non-GAAP EPS was $1.20 and stated previously the still resulted in a 19% return on tangible common equity.
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Moving onto our segment results and starting with global wealth management, we had another great quarter with record results across almost all private client line items when net revenue increased 14%.
Client assets under administration totaled 277 billion down 8% from the prior year on a sequential basis, our client <unk> assets were down 16% during a period when the S&P 500 declined 20%.
I want to point out that our decline and client assets include a 9 billion reduction that resulted from the sale of Ziegler management at the end of the quarter.
Excluding these assets client assets would have declined by 13% sequentially.
The primary driver the difference between the decline in the market in a drop of our asset levels was the impact of our recruiting efforts.
The following slide give some additional color on wealth management.
We continue to see positive recruiting momentum in the first quarter as we added 26 advisors with average trailing 12 month production of nearly 20 million.
Well home office does it's basically came to halt following the Alpro Cup Cobot 19, we have continued to recruit remotely.
We remain in contact with prospective recruits as interesting steeples platform remains strong, but we anticipate recruiting activity to remain subdued until travel restrictions the.
That said as you can see from the chart on the upper left of the slide we have had a lot of recruiting success since the beginning of 2019, bringing on 176, new advisors that had trailing 12.
Month production of roughly 140 million. Additionally, over the past 10 years, 85% of the outpaced that of joints people come through organic recruiting, but the remainder coming from acquisitions.
Moving onto our institutional segment, we had our second strongest quarter ever as revenue top 330 million.
I'm, especially pleased with our capital raising a brokerage revenue advisory revenue is lumpy and in this case compares against a strong period, a year ago and 2019, we call. It six acquisitions first Empire Morlan partners being now George K bomb Mainfirst and GMP all of these.
Acquisitions are fully integrated and all have operated smoothly and this remote operating environment.
On slide seven we look at our institutional equities and fixed income business.
Lets striking about the flight as the balance between the two businesses that both generated roughly $130 million revenue during the quarter, which again underscores the diversity of our business.
Although these segments are comprised of brokerage and capital raising I'll focus on the brokerage business here and address capital raising when I talk about investment banking.
Equity brokerage revenue of 70 million was up more than 80% year on year. The strong improvement was a combination of the spike in volatility in March as well a solid contributions from our European business as well as our acquisitions.
Including main person GMP.
It's worth noting that excluding the additions of main person GMP, our equities business was up significantly more than what we've seen from other firms.
Fixed income brokerage revenue was a record 100 million up 48%.
The increase was driven by increased activity in both investment grade and high yield I would also note that we effectively managed our portfolio risk during the market upheaval upheaval with trading gains in investment grade more than offsetting losses, and you know I suppose.
Both equity and fixed income benefited from increased market share and spike in volatility and given the decline in volatility in April we would caution against Annualizing, our first quarter brokerage Robyn.
On the following slide we look at our firm wide investment banking revenue.
In terms of our investment banking business, let me start off by congratulating my colleagues on being named Middle market investment bank of the year by mergers and acquisitions magazine. This award helps validity validate the effort that's gone into building our investment banking franchise.
Looking at the quarter through February we were likely on track for record results in investment banking business slowed significantly in March and our total investment banking revenue came in just under 180 million, which was still up 11%.
So good quarter, but well below where we were tracking.
We showed significant performance improvement over last year, particularly in capital raising our capital raising businesses accounted for seven of our top 10 fees during the quarter compared to just one.
Of our top 10 in the first quarter 2019, we not only doubled our revenue year on year in equity capital raising but also increased our market share in terms of fees on managed equity deal I do note and do remember that a year ago.
We did have the government shutdown, but I would say that that said we have gained market share in our equity business on a debt capital raising business. We also generate substantial year on year growth. We had a strong first two months of the year in our public finance business.
Municipal issuance in the last three main weeks of March was negligible, we continue to benefit from the acquisition and integration of George K bomb as we lead managed 167 negotiated municipal issues up 33% year on year and Steve will remain number one by number of issues magnets.
I also want to mentioned that we generated solid contribution from our taxable debt capital markets business in the quarter.
Moving to advisory revenue declined 28% due to the slowdown of activity levels in March and the fact that the first quarter of 2019 had a significant restructuring the from Miller Buckfire as work on the COFINA transaction.
Some of our capital raising our advisory business was well on its way to a very strong first quarter prior to March.
Performance of our advisory business well similar yeah as I would note that the business was distributed across most of our verticals.
As I look forward against a challenging M&A market backdrop, our pipelines remained strong but the timing of announcements in closings, obviously remain uncertain in this market.
We would expect relatively subdued markets for dish traditional M&A and the second and possibly into the third quarter that said financial sponsors no strategic buyers are well positioned to make opportunistic purchases and we could see an up tick in M&A activity as buyers look to acquire firms with their press share prices or liquidity.
The issue.
Although traditional M&A comprises the majority of our advisory revenue our business is built to produce revenue during various market condition.
Specifically, we're seeing significant increase client a gate engagement with our restructuring team and Miller Buckfire, our industry bankers are helping their clients understand all the options that are available to them and the current environment, including restructuring leveraged finance public and private equity capital raising this is just another.
Example of how steeple has become more relevant to our clients.
And with that let me now turn the call over to our CFO get married.
Thanks, Ron and good morning, everyone.
The next few slides I'll concentrate on her bank and the balance sheet.
Focus on credit capital liquidity and the associated impact the Corona virus has had on us.
So starting with net interest income.
It came in at 137 million during the quarter, which was similar to prior quarter levels and within our previous guidance range.
Our first quarter net interest margin declined to 266 basis points, primarily as a result at the bank's net interest margin declined to 309 basis points.
This was just below the low end of her guidance range. It was impacted by the fed rate cuts during March.
Firm wide average interest, earning assets were essentially flat.
As a growth in the bank's loan portfolio was offset by the decline in the banks bond portfolio.
In terms of our expectations for the second quarter, we'd expect the bank's net interest margin to come in between 255, and 265 basis points due to the decline in interest rates and for net interest income to be between 115 and 125 million.
Moving onto the next slide.
We will review the banks investment portfolio, which is short term in duration and comprised of highly rated bonds.
As you can see in the table the majority of our portfolio is comprised of close.
Is important to note that we only will double way and AAA seal lows.
I think it's helpful to illustrate some of the reasons. These bonds have the credit ratings they do.
On average this portfolio has credit enhancement of nearly 29%.
We performed various stress tests on this portfolio over a number of different economic scenarios, including what it would take to incur a dollar of principal loss.
To put this into perspective, it will take a constant default rate on the underlying commercial loans more than 15% annually over the bonds five to seven year life with the loss severity of more than 50% to lose a single dollar principal.
If you compare this back to the 2008 financial crisis, specifically looking at 2008 to 2010 annual defaults averaged just under 5%.
We also ruined the underlying loans through various credit stress events within our seasonal model.
What are the most severe scenario our credit enhancement decreases to approximately 17%.
And this severely adverse scenario all of the credit losses are absorbed by the lower traunches in the celo structure.
Given these results our COO model did not produce any reserves to be recorded against our bond portfolio.
Moving onto the next slot.
In terms of loan portfolio. We ended the period with total net loans of 10.6 billion, which was up 600 million sequentially due to growth in cnine and residential mortgages.
As you can see from the table in the top left within half of our portfolio is comprised of residential mortgages and securities based loans to our wealth management clients.
Our mortgage portfolio is comprised of adjustable rate mortgages have varying duration of three to 10 years.
These loans have an average loan amount of nearly 700000 and average FICO score of 765 and average loan to value of 65% and the average borrower has approximately a million dollars of liquid assets.
Our securities based loans or demand notes from our <unk> for our goal global wealth management clients to carry a zero percent risk weighting.
There are supported by well diversified portfolios of equities fixed income procedure securities and cash.
As we hold the collateral securing these loans they represent more operational risk then credit risk.
Since we started originating securities based loans in 2008, we've not had any credit losses.
I would also point out some consumer lending channels that we do not participate in.
We're not active in the credit card business do not hold any other direct consumer loans such as autos.
In total nearly 100% of our consumer portfolio is done on a secured basis.
On the table in the bottom right of the slide we break down or seen I portfolio by industry type.
So you know portfolio is all senior secured loans are selected based on modest leverage have strong defensible market positions and our sensitize as part of our independent underwriting process.
We have a well diversified portfolio of loans with no single industry group, representing more than 8% of total loans outstanding.
Additionally, as you can see very limited exposure to energy Hotel leisure entertainment in restaurant industries, which in total or less than 5% of bank loans.
The majority of are seeing eye portfolio is comprised of large corporate broadly syndicated loans.
These loans are primarily rated double b or better have senior leverage of less than two times EBITDA at origination or agented by large money center banks.
Our CRB and construction portfolios are entirely comprised of senior debt with a weighted average loan to cost of 67% in a 51% loan to value and are sourced from well established sponsors and developers.
Yes.
Moving onto the next slide we discuss Cecil, which we adopted we adopted the new accounting standard on January one 2020.
As a result of this adoption our allowance for credit loss increased by $27 million.
In this slide we provide a roll forward of our allowance from credit.
We provide a roll forward of our allowance for credit loss balance from December 30, Onest to March 30, Onest, we break out the specific components of the increase.
It also provides you with more detail some of the material assumptions the form the basis for our first quarter provision for credit losses under seasonal.
We utilize the most recent data from Moodys for macroeconomic assumptions about popular model, which included an additional update of scenarios right at quarter end.
And for Cecil we employed a combination of scenarios, which is primarily driven by Moody's baseline forecast, which assumes a critical pandemic set of economic assumptions. We then blend into more severe double dip recession, and a slightly more optimistic scenario.
These scenarios includes dresses up to a negative 25% decrease in GDP in Twoq 20, and then on unemployment rate that peaks at 13%.
I also want to point out that under Cecil.
Not appropriate to assume that our first quarter of 2020 provision for credit loss is indicative of provision losses for the balance of the year.
Intent of Cecil is to capture an estimate of the expected future losses that exist in our books as of quarter end.
Going forward the provision will fluctuate with the change in forward looking economic assumptions and the financial performance of our borrowers.
Moving on to the next slide.
We generated a pretax pre provision margin of 16.1% there was down 310 basis points year over year.
The decline was the result of a higher compensation accrual provision expense was discussed earlier in the presentation.
Specifically the comp to revenue ratio of 62.5 was above our previous guidance range. This is primarily a function of our conservative outlook and the corresponding comp accrual given the current economic environment and the wide range of potential outcomes as we project forward for 2020.
Non-GAAP operating expenses, excluding the loan loss provision and expenses related investment banking transactions totaled approximately 186 million and was within our previous guidance range of 19% to 21% of net revenues.
In terms of our share count per average fully diluted share count was down by nearly 2% as a result of our share price and repurchase activity.
Assuming no share repurchases and the constant share price, we expect our fully diluted average share count in the second quarter to be approximately 74 million shares.
Moving onto capital and liquidity.
Given the growth in the balance sheet as well as the one Q seasonal impact of ours, you conversions, we did see our tier one leverage ratio declined to 9.6%.
I would expect to see that ratio back above 10% in future quarters, as we're no longer projecting balance sheet growth. This year, given the current economic environment.
I would also highlight that market volatility did increase client allocations to cash within our sweep program. We saw balances increased by nearly 2.5 billion.
We've seen the trend continue thus far in the second quarter, who was we'd expect to see that continue given the current environment.
Liquidity remains strong across our various legal entities. In addition to the sweep program. The bank has access to off balance sheet funding of $4 billion within our primary broker dealer and holding company, we have access to more than a billion dollars of liquidity from cash credit facilities that are committed an unsecured as well secured funding sources.
Finally book value per share of $46 in 13 cents decreased by $2.24 as a function of the marks in our bond portfolio through OCI.
Yes, you conversions and the shares repurchased during the quarter.
And with that I'll turn the call back over to Ron.
Thanks, Jim.
So we had a great quarter, but that seems like ages ago. So let me end the call with what I said in the press release.
The next few months have a high level of uncertainty, which can drive a wide range of economic outcome.
Longer term, we believe the world and our economy will overcome this pandemic looking forward steeple as well position because of its diversified business model solid liquid balance sheet and our associates commitment to excellence with that operator. Please open the line for questions.
At this time, if he would like to ask an audio question. Please press star one on your telephone keypad again that is star. One. Your first question comes from the line of Devin Ryan with JMP Securities.
Hey, good morning, guys how are you.
Evan.
First question just on.
I guess the compensation and just overall expenses actually just just thinking about the.
Accrual here I appreciate that you guys tend to start the year more conservatively and there's more uncertainty.
Today, and there has been but how should we think about kind of the.
Puts and takes on compensation throughout the year, just given that we are kind of in a lower interest rate in equity market.
Backdrop them when we started the year and then just on kind of non compensation costs. Just how you guys were thinking about potential levers there.
You know kind of the push pull between investing for growth and taking advantage of opportunities versus.
You know, obviously dropping more revenue bottom line.
So now than I am first of all first of all going out to be clear when I when I talked about guidance, we have withdrawn our guidance as while saying that they go through these peak comments going forward other than what Jim said about net interest income, but you know we were a previous there's always the compensation we were pre.
Hi, good bye.
87, a 59% we are conservative.
We would have been normally at the high end of that range historically.
And what we're really talking about our unknown and the unknown so the future and how we're trying to look at that.
Considering those unknown, we took the opportunity we thought it was prudent conservative to to take an increase of 350 basis points to our compensation accrual that it provides us flexibility and add to it just conservative.
I other than that I, it's hard for me to draw you a picture of what that means for the rest of the air because frankly, I'm not sure, but I know what the rest of the year brain.
But we feel it's conservative.
That is not in a normal operating environment I would not be saying that our compensation range would have changed because it wasn't up so thats, what I can do it that as it relates to non comp operating expenses I think that were within the range and and we're looking at.
At maintaining our business and were.
You know, we're not going to jump at anything until we understand.
More what's going to happen with reopening the economy.
Frankly across many of our businesses were quite busy.
And you know there's a couple of business, we'd like banking that obviously are slow but at this point.
Or just maintaining business and doing business in Asia, and maybe down a little color and Noncomp Opex. There were a few things in the quarter I'd highlight obviously with despite volatility in trading volumes you did see pickup commission for brokers that pulls back some you'll see that flex with those revenues.
As well with the transition to work from home. We did have some connectivity costs. Some hardware costs, we made investments in during the quarter that are repeatable expenses as well some of the other operating expenses. There was probably about $4 million kind of onetime tax matter that was above the line as well there's a handful of things you can point to that.
Our non repeating items as we look forward into Twoq and Threeq, you that help plus that number down so.
Okay terrific, great color and just a follow up year on the bank.
Guys give some great color just on the overall portfolio and.
CLL book as well and appreciate that.
Yeah, the expectation is not to grow the balance sheet, but if you think about the mix of the balance sheet from here are there opportunities to the kind of re shift that I don't know filos would become even more attractive or or how you guys have you're thinking about the overall the mix and then some of the puts and takes within that on what the.
I could do to.
The NIM, maybe beyond the next quarter too.
Okay.
Well a couple of questions in there Devin I mean first of all.
At this point.
We're comfortable with our mix we have of about a.
In the bank $18 billion into bank.
You got to remember RCN I portfolio of about 4 billion. So you can take percentages that generally lower than what you're going to see across banks that side.
Investment portfolio is about 4 billion.
And.
And then the.
The balance Jim.
As what am I missing.
I'm sorry, yes.
Commercial so consumer commercial and our investment portfolio are all about the same so I think that mix is fine uncomfortable, especially.
When you think about mix, what I'd like to point out is that what we said on the call, which as a lot of our loans are recipe and security based loans, which we're very comfortable with the look through risk characteristics of that portfolio very very comfortable we talked about the COO.
That we're very comfortable with any stress environment that we've been able to do and were banned we've we've done all very.
Very thorough review of our Cnine book, So we're comfortable with our walls were comfortable with the Max at this point and I don't see any real major changes maybe one other comment on NIM. When you talked about kind of beyond Twoq is our guidance was specific just in Twoq you 20, as we look forward to Threeq and Fourq you.
You see LIBOR come down a fair amount in the last series of weeks here our guidance on Twoq twenties, incorporating that but as we think about 90 day lifepoint reset and some other things. If you look beyond that you could see that terminal rate a little bit maybe closer to 50, what we've talked about you know we've had conversations historically in a zero percent an interest rate environment.
So just a little clarification there.
Yeah got it Okay I will hop back in the queue, but appreciate you guys taking my questions. Thanks.
Your next question.
Chris Harris with Wells Fargo.
Great. Thanks, just firstly a clarification on the Eni in NIM guidance is the Eni guidance.
For two Q is that is that just the bank or is that on a consolidated basis, that's on a consolidated basis.
Okay.
All right and.
Your next question.
Alex Blostein with Goldman Sachs.
Hey, good morning, guys. Thanks for taking the question. So maybe another one to surround the comp accrual I guess, given the fact that the risk to revenues as to the downside I guess I'm still not particularly clear why accrue more in the first quarter and then should we take this 63.5% comp rate.
As your best guess for where the total comp rate look like for the full year.
Well the second question I think I said that no I'm not projecting the total comp rate I'm not.
Trying to to do that there's just a wide range of outcomes. Alice we had we had a good quarter when we look forward.
We're trying to for Jack.
Ill and understand compensation on a wide range of outcome and we were two things that we were looking at is the as a backdrop of what was otherwise the great quarter. One we talked about which was peaceful and no provision for loan losses on the economic factors and then what could potentially.
Happen.
To a compensation in the short Ron if we feel that we need to protect the franchise, even though revenue and mix of revenues may change. So you put all that together and we felt that it was appropriate to take an additional compensation accrual we want to show what are they have what it was again above.
Our guidance in this kind of an environment and.
And that's where it.
So.
I have really no other crystal ball as I look into the future.
Okay.
And second question just around the cash sweep and sounds like a cash balances continue to build in April that aren't you guys. Right is that are the cash balance actually above where they ended the first quarter or they're at around the same level and then can you give us a sense for you know the the third party Bang sweep rate that you guys are running on the.
Bounces now as we're sort of jumping into the you know April may dynamic.
And I guess, just broadly speaking on any common around demand from start pretty banks for cash sweep balances.
Yeah sort of spreads they're paying et cetera. Thanks. So in regards this we have seen that continue to increase since quarter end, we havent given that number I wouldn't say that there is an opportunity for that to accelerate it we particularly look at the ticket is money funds, there's still over $7 billion over there and as that product continues to converge down from or.
Perspective, more more equivalent with the Sweet program, you'll see more funds come in there.
Total, we're making around 30 basis points on the Sweet program that shows up in the asset management line item I would say there still is very strong demand from third party banks to.
Step in and take those deposits, we have a lot of relationships.
With the number of banks from a treasury perspective that are very interested and stepping up and seven in this program. Yeah. You know now it's the one one thing just to point out.
Well it was sort of a negative for us as rates were going up which was on a relative basis, we don't sweep that many deposits to third party bank.
And so that was that was not as much of a tailwind as you saw back those those rates getting as high as a 150 basis points.
Conversely, if it's not as big of a down chip for us.
As we just don't have as many balances down 30 basis points most of the impact of what we're seeing will be in our now.
Is it versus the combination of NIM and a reduction in in deposits swept away.
Yeah that makes sense great. Thank you.
Yes.
Your next question comes from the line of Steven Chubak with Wolfe Research.
Hi, good morning.
Thanks, David though.
Hey, Ron So I wanted to start off with a question on capital a tier one leverage ratio declined by 40 bips in the quarter, you're a little bit below 10% you alluded to X efforts to get back to that 10% gradually I'm just wondering given no plans for balance sheet growth an expectation.
Can you to generate capital how should we be thinking about your priorities today, yet given we're operating in a brave new world and just your appetite for buybacks in this environment specifically.
Well I.
I mean buybacks or have gotten a lot of a lot of discussion.
We like most firms have not been doing buybacks.
Yes, and I think that that will depend on on future, our future evaluation or thoughts on on the recovery and the volatility of the recovery as it relates to what we saw primarily as a relates.
To our leverage ratio on our capital ratios one of one of the things that that I want to talk about is that we are our activity in the non bank. The the actual balances relating to all of our flow business clearing deposits. These are all very liquid but they go on your balance sheet.
Clearing deposits receivables from customers a number of things both were up significantly and those impact our leverage ratio. There also quite fluid they turnover very fast. So one of the one of the benefit was we did a lot of a brokerage business.
One of the byproduct of that is.
Short term.
Assets that go on your balance sheet as your as your flow and all that business through the system, but we believe that a that that that plus a few other events said usually happen in the first quarter, our conversion of our askew, there's number of things that happen.
That causes that ratio to prosper, we believe both our leverage in our risk based we'll be back at our targets this year.
Hey.
Brian just to clarify Schafer from your remarks that the buybacks on pause until we have some.
Better clarity on the economic environment and the impact the coded stress.
I think that's a fair comment I think kits.
You know that and.
No. There's other factors as well besides financial best that we have to consider.
On a you know on anything that says buyback tends to.
Generate many many more paragraphs of discussion so at this point Oh, we're just we're taking a pause.
Okay. Thanks for clarifying that Ron maybe there's a question for Jim very helpful detail on this United portfolios of thanks for laying that out.
Slide low levels of exposure to some higher risk categories, like energy and hospitality and travel.
That said there are two large sector exposure is financials in consumer discretionary each represent more than 5% in the book and both have come under increased scrutiny. Just in light of Covitz grass was hoping you could speak to the quality of the underlying exposures on the consumer discretionary side and maybe within the financials most specifically.
How much of that portfolio reflects exposure to nonbank financials.
Yes, so I would say I started on the consumer discretionary again I'd reiterate the fact that we're all senior secured.
We're in a relatively low senior leverage.
Low low senior leverage to EBITDA levels.
The consumer discretionary is probably slightly below what we saw in the overall portfolio of the you know kind of two times senior EBITDA.
On the financials were pretty fairly well diverse in that portfolio I.
I wouldn't say when we've done our review there that there is anything that stood out as being under particular levels of stress today, we feel pretty comfortable about where we're at.
Okay.
Thats Great then if I go to squeeze in one more no asking the expense question, maybe a slightly different way.
As I look back over history, you given your diversified model historically, you've done a good job of defending the pre tax margin were effectively that's floored somewhere in the zone of call. It the low teen so 13, 14% I know you're reluctant to give any guidance I'm just wondering if we can use.
As a baseline if the environment remains challenging that that's the appropriate way to potentially think about a pretax margin floor and.
Contemplate obese more resiliency.
In terms of your profitability levels.
I appreciate the question.
And.
I'm not going to answer directly because we're not going to give guidance my answer to your would be that what you can look at as a baseline is our ability to manage and protect margins throughout.
Years uneven decades of Oh disruptions in the marketplace. So not in go back even further.
Than 2013 and go back.
20, plus years and our company has.
Sean inability to properly manage and protect profitability through various scenarios and and.
Im hopeful and believe that passes proa.
Great. Thanks for taking the questions.
Your next question is a follow up from the line of Chris Harris with Wells Fargo.
I didn't hanging up by new for us.
Yes, no worries at all.
Just real quick on the on the advisor recruiting backdrop.
Yeah, I get that that things are challenged right now because of a lock downs.
The only get to the other side of coded.
What do you think the competitive environment will be like do you think it'll be.
Less than 10, just because you know a lot of firms will still be sort of in and conservatism mode or do you think that's a kind of very much TBD at this point.
You know, Chris I think that.
I think that it is.
TBD I mean, I would I don't think that you are.
The reasons that our success of recruiting I think actually are getting higher I see a lot of a lot of the factors that occur. They usually drive advisers are way have increased in this environment.
Our ability to operate in this environment they have that no systems down no issues.
Has underscored.
People believe both of our firm in our technology and what we've gone side.
Thanks, Pat recruiting is going to.
It's going to.
The fine for US one of if there is a negative have we do very well with.
With our home office meetings that is we get people here. We are rate a winning is very high. So you know, we'll look forward to being able to gather again that that's that's a negative for us to the extent that were not able to put the human touch on our recruiting.
Well the one the one thing I'd say, maybe just has a little bit of aside as one side of that for financial services and then for companies like people that have fully integrated.
Banking and wealth management products I.
I think it's going to be a real strategic advantage for us because the one thing that's going on today. Besides all the things that we've learned from remote working at home and all all of those factors is that our clients. We have had a crash course in digital digitalization, including digital banking digital access at.
And all of back and so I am very comfortable.
And we're rolling out our digital offerings on aggregation non banking and so I feel that the investments that we have made and technology in the last few years.
It's going to really pay dividends because.
What has happened to the customer base as they as they have learned and our learning to use the products that were developing so I I am I'm I'm optimistic about that.
Okay. Thank you.
Yeah, I guess to ask an audio question. Please press star one I'm just telephone keypad.
You do have a question.
Personal line Collier information did not record. Please state your name and company and ask your question.
More do you think this might be Chris Allen just coming through.
That Chris is that whole yes.
Can you hear me, Okay, sorry, yes.
Yes, I guess, just following up little bit on Chris is question.
You did the current environment may create crushers.
For for some competitors may create opportunities around M&A.
I realize you're digestion desma deals from last year, which sells into producing pretty well.
But typically in terms of disruption like we're seeing now valuations and the it lowered thinking and create opportunities for scale players such as yourselves.
So that your question is how are we viewing M&A.
Yes, the environment right now, whether it's creating opportunities.
Well sure I think I think the different says is that you know when we when we were.
When we were in the financial crisis.
And the bad put in park.
We there was a pretty clear path a once we got through the liquidity at the market and put a floor on asset values. There was a pretty clear path to see.
Where the light was at the end of tunnel, so to speak and we did acquisitions.
Based upon some you know some what I felt I was pretty confident about that Oh. This is a completely different situation.
And frankly.
The the how we come out of business is going to depend on a lot of government response and a lot of.
How we get back the economy back at work and what that May look like and what that May look like depends on what government says its going to look like and those are so uncertain right now, but I think it may be M&A environment, not only in financials, but almost across almost any industry.
Somewhat difficult to get any kind of visibility, which is why I think M&A at least in a short Ron it's going it's going to be challenged we affirm our opportunistic we've grown in times like this.
And if the opportunity in the visibility become.
More apparent.
Ben.
I would expect us to do what we've always done.
Thanks look I suppose.
There are no other audio questions I'll now turn call back to the speakers.
Well, let me, let me conclude by saying that first of all I'm hopeful and I do believe that the world and our economy will recover.
I would like to see industries that are severely impacted.
Like the restaurants and get back to work I would also just like to say that as it relates to financial services and as it relates to the firm like Steve pulling affirm that we've built we're well positioned there is a lot of things to be got municipalities have to restructure what they've done this a lot of issuance in the muni side.
Corporations are going to restructure or you're going to see a lot of capital raising debt debt restructuring tremendous opportunities for advisors to to properly pick stock so to speak of versus just being in the index has a lot. There's a lot that's going to go on with money in motion and I think our firm.
He is well positioned to to get our share and to gain market share so with that.
I look forward to but will hopefully be a much better economic outlook when we reconvene in the second quarter I hope everyone.
As a great day, and it's Dave Spade. Thank you.
Ladies and gentlemen that does conclude today's conference call you may now disconnect.
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