Q2 2020 Stifel Financial Corp Earnings Call
After 2020 earnings conference call at that time, all participants are to listen only mode. After the speaker presentation. There will be a question answer session swaps. Good question during the session you'll need to press star one of your telephone. Please be advised to today's conference is being recorded if you require any further systems. Please press star zero.
Now, let's say the conference over to your Speaker today, Mr. Joel Jeffrey head of Investor Relations. Thank you. Please go ahead Sir.
Thank you operator like to welcome everyone to Stifel Financial second quarter 2020 financial results Conference call earlier. This morning, we issued an earnings release opposed to slide deck to our website, which can be found on the investor Relations page at Www Dot Stifel Dot com.
Remind listeners to refer to our earnings release, and our slide presentation for information about forward looking statements and non-GAAP measures. This audiocast is copyrighted material Stifel Financial Corp, and may not be duplicated reproduced or rebroadcast without the consent Stifel financial I will now turn the call indoor Chairman and Chief Executive Officer, Ron Kruszewski.
Thank you Joe Good morning, and thank you for taking the time to listen to our second quarter 2020 result, I'm joined on the call today from various locations by co presidents, Jim Zemlyak, Indictor Neesy as well as our CFO Jim Marisha.
I'm going to start the call by running through the highlights of our second quarter before turning the call over to Jim Marish and will take you through our balance sheet inexpensive I will then come back with my concluding thoughts.
Before I review, our Companys financial results I want to comment on the events affecting the black community and all minorities. These recent a bounce which have too many historical kinda feed and.
Require us as Americans and associates to take informed action to confront these challenges head on.
People had committed to improving diversity within its workforce as you can see from this year's annual report the words written in my annual shareholder letter or a worthy principle, but to make progress we must take an honest look at ourselves and recognize that our company can do better we must increase our commitment to accepting diversity.
And all those forms that are promoting diversity as a priority in a responsibility and that's regard we must and will do better.
We have several initiatives at Stifel to improve our diversity, starting with listening to our associates I had been conducting sessions calls listen an act to hear from the diverse population at Stifel.
I am confident these and other steps will prove beneficial and I've committed to the steeple Board to regular report regularly report on these initiatives.
So now let's take a look at our results.
First of all people had a great quarter cobot have certainly presented significant operational and safety challenges, but frankly, the amount of activity, resulting from increased volatility and the capital requirements of our clients has both bolstered activity levels at Stifel and across our industry does.
Quarter and in reality the last several years demonstrate the diversity of Stifel business model banking in general has been negatively impacted by zero interest rates and increased loan loss provisions, while our wealth management business had reduced quarterly fee income, resulting from the first quarter market sell off these factors.
<unk>, specifically asset management and net interest income relatively in line with analyst expectations. However, the institutional business. We have built has consistently been underestimated by analyst. This quarter is no exception.
In the second quarter, we continue to successfully execute our business strategy, while navigating the challenges of cold it.
I've talked a lot in the past about the value of our diversified business model as we are able to generate strong operating results in a variety of operating environments. Our results from the second quarter of 2020 and quite frankly over the past 12 month underscore the value of the Stifel franchise.
On an adjusted or non-GAAP basis, net revenues were 896 million up 12% from the prior year, representing our third highest quarterly net revenues in fact for the 12 months ending June Thirtyth 2020 people generated revenue of 3.6 billion.
15% from the same period ending June Thirtyth 2019.
Reflecting the uncertain economic outlook, our results were again impacted by both in the elevated credit loss reserve and compensation accrual.
After considering these items both of which we will discuss in greater detail later in the presentation. I am pleased to report earnings per share of $1.55, reflecting earnings available to common of 115 million annualized return on tangible common equity even after the aforementioned credit loss from comp accruals.
Total 23%. In addition, we strengthen our already roll Boston liquid balance sheet and increased our book value to $48. An 84 cents in short this was another excellent quarter that highlighted the benefits of the investments we've made over the last 20 years, the diversity of our platform as illustrate.
By record institutional revenue driven by increases across the board, which balance the expected declines in asset management revenue due to lower equity valuations at the end of the first quarter and lower not in net interest income driven by the zero rate environment.
Turning to slide three steeper recorded a 12% increase in net revenue and a 10% increase in earnings per share.
As I stated earlier, our institutional segment posted record revenue driven by double digit growth in essentially all our business lines when compared to a year ago.
Although our expenses increase from a year ago, primarily due to acquisitions and revenue growth. They declined significantly from the first quarter, reflecting expense discipline and the impact of lower travel and conference calls costs due to the pandemic that sat in the second quarter, we were again impacted by both elevated credit.
Loss provisions as well as an elevated compensation ratio.
Loan loss provision was driven by the 2020 adoption of Cecil as we are required to estimate all potential future loan losses take into account the current and projected economic outlook.
Much like last quarter, our provision expense was driven mostly by a decline in the economic outlook as loan growth was relatively modest and credit remains solid.
In terms of compensation expense, we believe it remains a prudent to be conservative and how we accrue for compensation expense. This is particularly important given the uncertainty surrounding the at the economy in the back half of the year. Some under what we did in the first quarter. We took advantage of the strengthen our revenue base to accrue compensation at all.
Higher level than we typically what this resulted in an additional 9 million in compensation expense this quarter.
Total of 41 million in the first half for the year. We believe this puts us in a very strong position a managed to any substantial changes in the operating environment in the second half of the year.
Well these expenses, especially the credit loss provision are in line with what is being experienced in our industry. I do believe it is noteworthy that earnings per share increased 10%, even after recording the credit loss and additional compensation accrual, which represented approximately 28 cents per share. Excluding these two.
Two items are pre tax income totaled 187 million up 18% year over year.
For the first six months of 2020. These items accounted for nearly 76 million of increased provision in compensation accruals or 76 cents per share again. After absorbing these increases earnings per share was essentially flat with the comparable prior year period.
Moving onto our segment results and starting with our global wealth management revenues of 506 million declined on a quarter, but year to date is up 4% to nearly 1.1 billion, which matches the strongest six month stretch in our history. In addition, after a slow start to the quarter as a result of the travel.
Restrictions associated with coal that our recruiting active ramped up nicely during the quarter, which I'll discuss in greater detail on the next slide we entered the quarter. Knowing this would be a tough comparison, both sequentially and year over year due to lower client asset levels at the end of last quarter, which negatively impacted fee income.
As was the impact of lower rates on our net interest income. However, we expect our asset management revenue to benefit in a third quarter from the 13% sequential increase in fee based client assets, which totaled 106 billion at June Thirtyth Twentytwenty I would also note that total client assets.
Reached 306 billion finally, we continue to invest in our technology, especially digital and mobile applications people wealth tracker was formally introduced in the quarter and I am excited about its capabilities.
Turning to the next slide in in terms of wealth management metrics I want to focus on recruiting as we had a very strong quarter. Despite the issues surrounding cobot 19.
We recorded 28 out phase with total trailing 12 month production of 23 million I'm pleased with I'm pleased that we've adjusted our recruiting to the current environment simply the historic strength of our recruiting is centered around home office does a switch by their nature highlight the cultural advantage enjoyed by.
Steeple of course, the pandemic has changed that get our activity levels improved throughout the quarter as we became more adept at recruiting remotely and April we added one adviser and May we added five and in June. We added 22 I would also highlight that the average production level. These advisors is our.
Hi, its since the first quarter of 2019, so not only did we add meaningful number of advisors to our platform, but they are also accretive to our productivity per advisor.
As you can see from the chart on the upper left at the slide our recruiting success since the beginning of 2019 has been meaningful as we brought on 204, new advisors that have trailing 12 month production of roughly 161 million. Additionally over the past 10 years, 85% of the phase that of Joy.
Thanks, Steve have come through organic recruiting with the remainder coming from acquisitions. So overall I feel very good about our wealth management franchise, a steeper remains a very attractive but destination for high quality advisors, and our continued growth and client assets will drive future revenue growth.
Moving onto our institutional group as I stated earlier, we had a record quarter in our institutional segment as revenue reached nearly 400 million noteworthy was the performance of our fixed income business, which posted record quarterly revenue of 169 million up 96% advisory.
Revenues were 98 million up 18%, all our equity businesses generated 126 million up 26%.
Well the second quarter was a record the strength of our institutional business has been apparent for sometime now for the first six months of 2020, we've generated 730 million in revenue, which is up 37% from the same period in 2019, which I would remind was also a record year. Additionally over.
Our last three quarters, we generated annualized net revenue of approximately 1.5 billion 10 years ago that number was just under 500 million.
The point as we have built a balanced institutional business and despite the substantial change the markets over the past decade, the diversification of our business enables us to generate generate relatively consistent revenue and positions us well to continue to gain market share.
On slide seven we look at our institutional equities and fixed income business as well this slide depicts brokerage and capital raising for both equities and fixed income I'll focus on the brokerage business now and address capital raising on the investment banking flight fixed income brokerage revenue was a record at 121 mill.
Okay and up 107% year on year. The increase was driven by increased activity in investment grade high yield mortgages as well as me not suppose well I believe this deep these record results what I believe makes these record results even more impressive is that we've generated at lower risk level.
As our inventories are roughly 50% of what we've carried in the past this illustrates a talent of our people and investments we made into the business over the past few years equity brokerage revenue of 63 million was up 55% year on year. The improvement was a combination of the rebound in the markets.
The S&P 500 bounce back from the sell off in the first quarter as well a solid contributions from our European business as well as our acquisitions, primarily Mainfirst GMP.
Both equity and fixed income benefited from increased market share and the rebalancing the market from the March lows looking forward. We do not expect these levels to continue into the third quarter as market volumes have slowed and the third quarter has historically been wider due to seasonality that said, we do expect brokerage revenues to be above.
Oh goals that were recorded in the third quarter of 2019.
The following slide we look at our firm wide investment banking revenue.
Revenue of 217 million almost a third highest in our history and was up more than 20% year on year as activity levels and capital raising and advisory improved from the first quarter level from first quarter levels capital raising again displayed impressive growth, especially in the fixed income business our public finance.
As a set of strong quarter as the issuance market rebounded from a very slow March stiefel lead managed 211 negotiate a municipal issues and was again ranked number one in the nation in terms of number of issues managed.
Additionally, we generated solid nonpublic.
Fixed income revenues during the quarter, particularly from KBW has a number of financial companies look to raise capital through debt issuance.
Moving onto our equity capital raising business revenue of 70 mine was up 4% year on year.
Absolutely flat, what the first quarter compared to the first quarter of this year, we managed modest revenue growth.
We got modest revenue growth. Despite the fact that we generated two large piece from 144 a offerings in the first quarter. Additionally.
The contribution from our largest vertical financials was down meaningfully compared to the first quarter as more financial firms S access to debt markets as such our growth was driven by increased activity levels and verticals such as technology in health care.
For our advisory business revenue of 98 million increase nearly 20, 20% year on year as we benefited from the closing of some large the transactions, particularly from KBW in terms of verticals. The performance of our advisory business was driven by financials industrials restructuring and are you.
<unk> P.M. business.
Well the market environment remains challenging for our advisory business and our pipelines are down modestly from where they were in the first quarter. We are starting to see business pick up as clients are reengaging given the time. It takes from deal announcement to closing the near term for advisory could remain subdued. However, we continue to add new assignments.
Our pipeline and businesses such as restructuring continued to be very strong. So overall, we remain cautiously optimistic foreign investment banking business overall as the diversity of our business can help us sustain activity levels through challenging market conditions and with that let me now turn the call over to our CFO.
Oh kept merriman.
Thanks, Ron and good morning, everyone.
Before I turn to the next slide to cover net interest income let me make a few brief comments regarding our GAAP earnings.
Based on the 896 million of net revenues that Ron detailed earlier, we produced pretax margins of 16% and net earnings available to common shareholders of 103 million. This resulted in EPS of $1.39 per share, which is the second highest quarterly GAAP EPS that we produced in our history. This also resulted in an ROI.
We have nearly 13% anoro Tc of nearly 21%.
Given the strong GAAP earnings in the quarter and the Posner share buyback program, we saw fairly meaningful increases in book value tangible book value and our capital ratios that will describe in more detail in the following slides and now let's turn to net interest income.
For the quarter net interest net interest income totaled 115 million drew down more than 20 million sequentially and at the low end of our guidance range or results were impacted by the decline in short term rates as well as our senior debt issuance that added roughly 2 million an additional interest expense.
Our firmwide net interest margin declined to 218 basis points, primarily as a result at the bank's net interest margin declining to 259 basis points, which was near the midpoint of our guidance.
Firm wide average interest, earning assets were up slightly due to a modest increase in our loan portfolio, primarily due to PPP and mortgage loans and in 80% increase in our cash position as a result of the debt and preferred equity issuances.
In terms of our outlook for the third quarter, we would expect the bank's net interest margin to come in between 235 in 245 basis points.
This updated guidance as compared to last quarter is a direct result of lower LIBOR rates and we saw in previous zero percent interest rate environments.
Given the lower bank NIM, we anticipate Firmwide net interest income to be between 100, and 110 million in the third quarter.
Moving onto the next slide we review the banks investment portfolio, which remain short term in duration and comprised of highly rated bonds.
This is an update of the slide we introduced last quarter as a way to help investors better understand the securities in our portfolio to why we believe they are relatively conservative that might sound counterintuitive given the majority of our portfolio is comprised of solos and given some of the recent focus regarding the leverage loan market as you can see on this slide.
We believe that the tranches of the Siloed that we invested our of high credit quality as they have average credit enhancement of 29%.
Additionally, we stress test these securities over a number of different economic scenarios, including what it would take to incur a dollar of principal loss.
To reiterate to reiterate what I said on last quarter's call. It would take a concert default rate on the underlying commercial loans of more than 15% annually over the bonds five to seven year life with loss severity of more than 50% to lose a single dollar of principal this level of lost six is significantly more than what we're seeing.
During the global financial crisis in 2008.
Before moving on to the loan portfolio I also want to address a question that I get frequently which is if these securities are so safe why don't more banks on them.
Well you have to understand that the market for these securities is dominated by the bulge bracket and large international banks that old the vast majority of the double and triple a slow market.
So the availability so the available securities outside of that as rather small and given the cash flow structure ups HEALOS. The analysis of these securities is more appropriate for an institutional fixed income group than your typical banks credit Department.
We believe that our build out of the fixed income department has given us the capability to assess each structure prior to purchasing and throughout the life the deal.
That discipline provides us the risk management framework to lean upon when assessing and monitoring to see a little portfolio.
As a result of our overall approach to risk management and this asset class. We believe seal those continue to represent an attractive opportunity for us.
Moving on to the next slide we cover our loan portfolio.
We ended the period would total net loans of 10.9 billion, which is up 300 million sequentially due to growth in PPP loans and residential mortgages.
Our portfolio continues to be essentially evenly split between consumer loans to our wealth management clients and commercial loans.
Our mortgage portfolio increased by 220 million sequentially as we continue to see demand for residential loans given the decline in interest rates.
These loans continued to meet the underwriting characteristics that I referenced on last quarter's call.
Our securities based loans declined in the quarter by approximately 230 million.
Growth in Securities based loans is driven by part private client demand and we continue to see these as attractive low risk loans. They carry limited credit risk and are fully collateralized against the securities portfolios of our wealth management clients.
Our commercial portfolio accounts for just less than half of our total loan portfolio is comprised primarily of seeing islands.
I see an eye loans are seen I won't portfolio is entirely comprised of senior secured loans.
As you can see from the table in the bottom right, we have a well diversified portfolio of loans with the highest concentration in any one sector at a little more than 7%.
Additionally, as you can see we have a very limited exposure to some of the industrys most impacted by the pandemic.
When you combine our exposure to energy hotel leisure entertainment in restaurant industries, our exposure remains at less than 3% of bank loans.
Moving on to Cecil looking at the credit provision, we adapt to see so last quarter and our allowance for credit losses increased by 11 by the $11 million opening adjustment that ran through equity the $16 million provision for credit losses that ran through the PNM and the first quarter and then additional 19 million that ran through the piano in the second quarter.
We've updated the slide from last quarter to incorporate the additional allowance in the second quarter. As you can see much of the increase was the result of the changes to the macroeconomic variables as we use Moody's model from June which was more severe than the assumptions in the model from March in the March economic variables. We saw the most severe quarterly decline in GDP of negative.
25% in an unemployment rate that peaked at 13%.
This compares to juice for cash which includes the most severe quarterly decline of GDP of negative, 33% and then unemployment rate that peaks at 15% remains elevated through 2021.
While we acknowledge that we have yet to see the full impact of the pandemic on our portfolio.
Our credit metrics of remains strong with net charge offs at less than one basis point and NPS at eight basis points.
I would also note that the nearly 6 million dollar increase in our credit provision tied to portfolio changes was primarily the result of the inclusion of qualitative overlays due to economic uncertainty and the potential for negative financial performance within our customer, but a customer base that is yet to be shown in the financial results.
In short we continue to take a conservative approach to our credit provision.
All of this results in our ratio of the allowance for credit loss reserves to total loans, excluding PPP loans of 1.39%, which represent an increase from 1.22% in the first quarter.
On the next slide we look at our expense base, we generated pretax pre provision margins of 19.9%. There was up 380 basis points sequentially. The increase was result of lower compensation accruals and lower Noncomp expenses as travel Entertainment and conference expenses declined as anticipated so.
Specifically the comp to revenue ratio of 60% was down sequentially as we continue to accrue conservatively.
Well the revenue outlook for the full year remains volatile we're more comfortable with our expectations for the full year than we were earlier in here.
Non-GAAP operating expenses, excluding the loan loss provision and expenses related to investment banking transactions totaled approximately 167 million and represented less than 19% of net revenues.
Well, we pulled our full year guidance last quarter I would note that this is below the percentage range, we guided to prior to the cobot outbreak as we continue to focus on expense management.
In terms of our share count our average fully diluted share count was down by 3% as a result, with the timing of the prior quarters repurchase activity and was slightly above our guidance of 74 million shares as our share price increase modestly from the end of last quarter.
Moving on to capital liquidity.
Our capital ratios increased significantly during the quarter as a result of the number of factors, including the impact of our preferred equity issuance the strength of earnings.
The lack of share repurchases and the modest decline in our balance sheet.
Consequently, our tier one leverage ratio reached 11%, which was the first time since the third quarter of 2016 that it was above 11%.
Our tier one risk based capital ratio was 19.3%, which was its highest level since the third quarter of 2017.
While we continue to be conservative in how we deploy capital environment. We believe that we're in a very strong put it position to capitalize on future opportunities.
During the quarter, we issued 400 million of senior secured notes and 225 million a preferred equity as we look to opportunistically access the capital markets.
We have 300 million of a five year senior note that is maturing in December of this year and we anticipate using the proceeds from our debt raise to pay that off when it matures.
As such we would expect our interest expense to be elevated for the next two quarters.
In terms of or preferred issuance, we felt that we had the opportunity to raise incremental capital at a rate lower than our previous preferred offerings.
Our book value per share increased to $40.84, an increase of $2, a 71 cents sequentially and our tangible book value per share increased to $30.16 up from $27.29.
Liquidity remains strong across our various legal entities. In addition to the Sweet program. The bank has access to off balance sheet funding of $4 billion within our primary broker dealer in the holding company. We have access to nearly $2 billion of liquidity from cash credit facilities that are committed and unsecured as well secured funding sources I would all.
I will highlight that despite the strong performance in the equities markets. We did see increases in client allocations to cash within our sweep program. We saw balances increased by nearly 1.4 billion.
So far the third quarter, we've seen some additional modest increases continue.
With that I'll turn it back over to Ron Thanks, Jim Let me conclude by saying, we had a great quarter and I believe Stifel is well positioned for continued success. Despite uncertainty as I stated earlier over the last 12 months, we generated 3.6 billion in revenue $6 on 13 cents of earnings per share in our return.
On tangible book value was over 23%.
And this is after increased credit provisions and comp accruals, which totaled 76 cents per share that we absorbed absent these two items.
Trailing 12 month PPS would have a total 689 I want to point out using $6 on 13 cents and our current share price. We're trading at 7.6 times, which has a significant discount to pairs now I realize that trailing multiples are not terribly important to investors pud.
Typically in times of increased uncertainty, but I raise the point to highlight my belief that we have not received the credit for the business we've built.
Looking forward I'm reluctant to forecast the economic and market environment for the second half of 2020, the resurgence of coal, but in many states adds to the uncertainty of the shape of the an economic recovery as you know from earlier comments, we are seeing lower sequential trading volumes in July and we anticipate lower net interest.
Income as a zero rate environment fully impacts our loan and securities book that said I remain cautiously optimistic that the diversity of our business will help us offset some of these headwinds we expect our asset management revenues to rebound following the S&P strong performance in the second quarter and our investment banker.
Activity continues to generate solid results, we have a strong and liquid balance sheet and we will continue to look way look for ways to deploy our increased capital in order to generate the best risk adjusted returns.
That operator, please open the line for questions.
As a reminder to ask your question you will need to press star one and your telephone.
Question press the pound.
Please stand by what we can probably came in a roster.
Your first question will come from Devin Ryan with JMP Securities. Please proceed with your question.
Alright, great good morning, everyone.
Good morning, Devon.
First one here just wanted to dig a little bit more on the NIM guide, maybe if possible just to think about some of the moving parts beyond Threeq you.
Appreciate the color there but.
If we hope balances steady.
How should we think about maybe the longer term trajectory here. If we are the view that rates will remain.
Quite low for some period of time, so just the thought that im assuming that the vast majority.
Reset is kind of getting reflected immediately but what are some of the other areas that could influence kind of the.
The NIM beyond just through Q.
Yes, Oh, I'll, let Jim maybe give some more detailed data and I think that what we saw.
In the quarter was primarily driven by the level of LIBOR and the relative level of Weibo are.
In prior euro rate environment being being lower and.
It's hard to project that going forward, but that clearly impacts the repricing of some of our asset base law Securities. So again, I think that's exactly right whether deposits. It essentially five basis points today, there's not a whole lot we'll be doing liability side, you'll be other factor really impacting this is any structural change.
Page on the asset in the balance sheet, which you don't slides, we know we don't anticipate any material change there.
That's really the only other lever we have at this point so when we think of terminal in today. It really is down little bit from the 250, we talked about last quarter subordinate to 35 to 245 range incurred environment.
And again Thats.
The substantial.
Page is if the level of correct. Okay. So that can change.
Sure Yeah I was just as if you just held that constant just trying to think about any additional pressure.
I would maybe be on a lag okay. That's helpful. And then Ron I guess for you on the financial advisor recruiting.
Commentary, obviously, good to see kind of things ramping back up in June tend to like a very active month I'm just curious is that.
Understanding it's not going to be the same every month, but are we kind of getting back to something that is more of a normal run rate and.
Yeah that 22 in June.
Just a little bit more elevated so I'm curious if there is maybe a little bit pent up in that and then just bigger picture or the ability to recruit and do.
Im office visit and some of things you would always do in person and doing some of those things remotely and digitally how that's going.
And just I guess, maybe some of the things that potentially could be lasting coming out of this pandemic where people more comfortable doing the types of things.
Virtually that they historically no. It didnt person I'm just kind of curious what you guys are learning about that and then the ability to kind of keep up the pace that you saw in June.
Yeah, I mean, it's a great question Devin I.
I always believed that as I said in my remarks that one of the strengths of what's depot home office visits and bringing people into home office than spending that time and I felt that that underscore. The you know that cultural advantage in that steeple had and I was concerned.
When we started the quarter back that we had to cancel all these home office visits and that that was going to significantly and may be materially change our recruiting profile.
Yes.
It doesn't the case.
Maybe people don't really may we recruit better by don't meet them.
I do me them over the fall, but the point that we.
We have been very efficient at being able to get the same methods. The same capabilities display everything we're doing in a remote and in a more webex environment.
Which frankly has been more efficient and allows us to.
Just a touch more people and while I think we'll get back to home office business I think that we.
I believe that we.
We found that this works, we supplemented that with.
Better.
Materials, we have a recruiting video that's been very well received all in all.
The that transition from more of high touch personal recruiting to a.
Two.
Remote recruiting has been.
Very good and I would expect.
Our recruiting to.
Absolutely be higher than where we were high touch.
That's what I'm, saying today, yes interesting okay.
We should that Ron just last quick clarification, one here that.
41 million incremental and the compensation accrual it wouldn't make sure im understanding kind of what the messages here, obviously, you've been conservative to start the year. So there maybe.
Some some kind of recovery in the back half if the revenue environment remains strong as kind of the take away that I read is there a view on how the full year range now because you have more clarity is I think you mentioned I'm trying to understand what the the end takeaway here is.
Well again, a good question I'm not sure I have the answer completely let in the first quarter R.R.R.
Our outlook was more uncertain.
And we accrued at 62.5% above what the high end of our range would have been at 59.
Obviously, when a strong second quarter.
And we reduced that.
Level.
Accrual, 60% now 62 and half, but still elevated from the high end of our range would lets you know should.
Which doesnt mean that we're halfway through the year and therefore, we're more.
At least confident of what full year results.
Well look like we have half the year recorded.
And as we look forward, we have a higher level of confidence about.
Where the year will shake out so therefore.
We accrued at 60 versus what 62 and a half in the first quarter.
Look we have.
Business continues that I can come back to that in the end about why even though for many industries. The economic outlook is very uncertain in this progress to the fact remain that financial especially investment banks and be very busy for awhile and more than just six months because of all the activity that.
Come down, though what's happened to this pandemic. So you know as I look forward Devin I, we're more confident than we were and frankly.
If revenues.
Continue to be strong I could see the comp.
Level as a percent of that revenue coming down.
But look.
I said I'm reluctant to forecast and soft stop there.
Appreciate it Ron I understand there's theres.
A lot crystal ball in there so I'll leave it there, but thanks for taking my questions.
Sure Kevin Great question.
Your next question will come from Alex benign with Goldman Sachs. Please proceed.
Hi, Good morning foods that energy koby filling in for Alex. Thanks. Thanks for taking my question, maybe just take it.
The comp discussion a little bit different end goal, maybe more from a margin perspective, which is to say.
How should we think about pre tax margins.
It's the kind of the outlook for this year and maybe just bigger picture when we think about a lower on a on a run rate.
You know, obviously with rates being a zero.
How should we start to think about kind of what normalized margins could look like going through a kind of beyond this year, which obviously is.
You know a little bit atypical in the attributed to kind of think about.
Normal margins in a normal years, given where rates are.
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Thanks.
Well again, I'll I'll, let Jim Dolan around the around.
The fringe about this but our margins our guidance has has generally been.
From 50, 759 Dot com.
All things being equal we would have been at the higher end of that range. This year, primarily because of the reduction of that I would not basketball. So we would have.
Everything else being equal we'd have seen margin compression of call. It 100 basis points, primarily resulting from higher cost of revenue.
And.
That in the course, that's been offset a little bit by.
Reduction and travel conferences.
But the other major impact our margin. This this year as a provision for loan loss.
Which is highly.
The elevated.
So you know Peru through all of this in more normal time, we we wouldn't be back to where we say 50 759.
Yes, so should we think about the operating environment in Twoq to Threeq you, we don't see any material change from a non comp perspective at any change the provision like Ron talked about we're whatever the assumption you have is on our I'm, sorry or investment banking gross ups. So when you think about that you do have some leverage that we.
Obtained in Twoq, you that we expect to continue in Threeq you in terms of non now so you put that together with Ron talked about when you can put together your assumption for pre tax margins.
Got it that's helpful and then.
Maybe just on capital.
How should we think about kind of or.
Ladies we think about.
No buybacks being momentarily on pause.
And maybe that's not the case, but then also you kind of guided to no meaningful growth in the size of the balance sheet.
So buybacks on pause in its good balance sheet size is fairly constant.
How should we think about your deployments its capital over the next I don't know 12 publish months.
Well.
You know Dan that's again one of those.
But that I need a little bit better a crystal ball I would say that generally speaking where practicing what we tell our clients and that right now.
Capitalist king.
You saw that we were opportunistic and raising a preferred we went out in sort of pre refunded so to speak our our 10 year, which which is due in December and and we're being cautious on extending new credit.
In.
In this environment.
What.
Though they'll need to be a little more certainty.
While the level of the into shape of the economic recovery because until then I think.
We're going to build capital and we're going to remain conservative.
And then be in a position as we always are to take advantage of whatever opportunities shake out of all this stuff. So if you're you know.
Certainly say for at least the next quarter probably.
We ended the year, which obviously includes election, we're going to.
Yes.
Retain our capital remain.
Barry, but wed add and be very selective about balance sheet world.
And that they'll come a time, when we're going to be able to deploy that capital as has been our history.
Got it that's helpful. Thank you very much.
Your next question will come from Steven Chubak with Wolfe Research. Please proceed.
Hi, Good morning, Ron Good morning Jan.
So.
Ron look recognizing that you don't have a crystal ball, but since you took not so much of that the analyst community for underestimated the revenue generation empower the institutional business.
Here I just.
Try and get some context from you just given everything you've seen in terms of market share gains that you cited.
Coupled with the fact that you've done some deals recently prior to 2020, the brokerage business was consistently running within a pretty tight range 380 million to about 420 million.
This year, you click you're clearly running well above that similar to what we're seeing from other industry peers are just given the deals just given the fact that you cited some share gains are evidence of share gains now as you look ahead. What do you think is an achievable run rate for the brokerage business.
In a more normalized environment, recognizing that they're going to be various puts and takes to consider.
Yeah.
If I didn't think hot shot but.
Yes.
No I mean.
I would say that I would say look I would say that year that that our institutional business has been consistently I think you would agree with that can fairly consistently underestimated and I'm not going to provide you know.
Guidance on that number I haven't but what I would say is that we keep.
Adding and doing things that I think getting forgotten in the mess, okay and so we we added this year.
You know GMP in Canada, we had mainfirst in Europe, we're growing our institutional business, we grow it in a profitable manner I think we know what we're doing in terms of what our overall goal as which is to build the premier middle market investment bank, both in the United States, but also globally.
In the markets that we operate.
And so when you look at these numbers if you look.
Two years ago, you're just missing all the things that we've done I think I said at the beginning in the air which showed where we thought that.
Steady state basis, our revenues were going to be over 3.6 billion up from three three and we laid out I think we gave a bread as to why that would occur. So look I don't have a crystal ball I do believe that that are our fixed income and equity.
The brokerage sales and trading business. If you will certainly has been positively impact by the volatility that that's been going on but Theres also buried in that increase the investments that we've made over the years.
And.
And I think that you know most of these model. If you want me to continue my my critique if you will.
And the need to be adjusted.
You are.
That would make.
Well I won't speak for the other analysts Ron but guilty as charged so make sure it.
Duration at the other piece I wanted to.
Ask about at least on institutional side is Miller Buckfire no investors tend not to focus very much. The fact that you do have a pretty strong restructuring practice within your advisory business and just wanted to get a sense in terms of orders of magnitude.
How much of business contributes to advisory today, and how is the business performing in the current environment, just given that what is a much more constructive restructuring backdrop.
As we look ahead.
You know again I think I've said in the past first of all Miller Buckfire is.
Strong brand in a strong practice there is.
Unfortunately, or Fortunately I guess capacity you want to look at it.
A lot of demand for for this business we have.
We've increased the.
The side than minimum, but what we're going to do because we're very busy.
So I.
I believe that is an open what portion of our advisory business in times like this we don't and we haven't nor am I going to provide any.
Percentage.
Revenue, what I have said and I'll continue to say is that.
Even though it is good and bad I I think our by partners in that business are very talented and they're very busy.
They're not going to make up with make up for a.
Nipigon decline in traditional M&A.
So you know, but all that again, we have a lot of factors and a lot of grow.
It goes in to.
Our advisory practice, if not all just traditional M&A, we have cap rate partners. We have we have interest rate management are being out we have technology.
More led.
And I could go on and not in a lot of those are all again, new in the last couple of years Thats close to back to my Recalibration of the model Tom.
Understood and this one follow up for me on capital Management I know you gave some color regarding the prioritization and just given the growth that you cited.
In cash on the private client side I was hoping to get some context as to how you're thinking about the relative attractiveness of maybe taking that cash in deploying it into CLS securities, which are clearly comfortable underwriting some of those credits versus just sweeping that that third parties.
Recognizing that relative attractiveness of the returns you can around the securities book or maybe not quite as high just given the shape it occurred.
Well.
I mean I think.
Certainly certainly in terms of guess absolute and I were better off.
The advantage of having a bank I mean sweeping away is going to be a significant issue for many financial institutions that that weve dollars to third party banks those speeds are.
Pretty fast going to zero up from what was 150 basis points and so that that alternative is not is not something that's going to add significantly to our anti.
Question always as is.
The amount of balance sheet and credit risk that you're willing to take.
To deploy and grow your balance sheet and there's a few factors that that will look at one we're very comfortable with RCR low position, we get an outsized number questions about it so.
We're trying to be much more transparent and tell how we're doing that because I do think thats very asset at very attractive asset class considering.
You know where where yields are versus the rest skin in the AAA and double A. tribes that we're very comfortable we think we have a real expertise and underwriting wall securities.
But but you know the other the other thing that way or were somewhat at the be mindful of his cecil as it relates to growing our balance sheet I've made comments over the time that thought Cecil would be counter cyclical.
What we've said that seasonal sito mobile's conceived and I think tank and implemented in the crisis and that's what's going on right now and so we you know the Cecil.
Provisions in these economic forecast.
You take a pause about putting on new law.
The only thing on settlement there is obviously credit spreads tighten a fair amount of Zillow space, you're looking at current book you, they're less than 2%, obviously the market moves around a lot there in on a selective basis as we you attractive entry points. It may make more sense, but the returns today or is it attractive as they once were I think last year.
Even more selective as we go forward can pick our spots in regards to close in terms of purchases.
All right that's great great color. Thanks, so much for taking my questions.
Your next question will come from Craig Siegenthaler with Credit Suisse. Please proceed.
Thanks, Good morning, everyone.
First just more of a CFO type question, but other operating expenses were lower as expected I think mainly due to meet a key any.
But I wanted your perspective on what you think is a good run rate for Threeq Yelp and then as we think out to a more normal environment beyond that pandemic.
How should we think about a good run rate for this for this line item.
So I'm, just a little bit earlier, but as I look at Threeq, you compared to Twoq you I don't see any material change in our operating expense base X provision in X investment banking group. So I think that as a decent run rate now obviously, there's some puts and takes there they're going to moving in opposite directions, but I think as we look forward to Threeq you that's a pretty good start.
Endpoints to just think through that as we look beyond say the end of this year I think theres a lot of factors variable to get to make various assumptions on on where that could go I think historically, what we've talked about is non comp operating expenses of 19% to 21%. If we were to return to normal environment or even.
It's kind of a subdued zero percent interest rate environment, I think in a little bit little bit more normal environment, I'd say that would be a good guide going forwards.
Got it and then just a follow up on the securities portfolio on the ABS deal was 2.7% in the quarter what is the new money yield blend today for ABS as you reinvest that cash flow and also are you, making any changes to the securities portfolio, just given where.
We had very low rate backdrop here and I want to see if you're sort of resetting.
The portfolio, specifically, calling for it so.
So obviously, that's baked into when we talk about the net interest margin at 235 to 245 and I just mentioned the question or two ago that the current you book yields on C. lows are just just under is up 2%. So do you think about it that number has come down considerably those are based on 90 day LIBOR. So there is a bit of a lag before that comes from OEM.
But that's what really is driving that toward getting guidance.
Great very helpful. Thank you.
Your final question in queue will come from Chris Harris with Wells Fargo. Please proceed.
Thanks, guys.
Hey, Ron how are you feeling about.
Acquisition the acquisition environment currently.
Mike you want to take advantage of some dislocations to kind of lean into that a little bit.
Would you prefer to be a little bit more cautious given.
Economic backdrop is pretty uncertain.
You know Chris.
Are we bill steeple, both organically and through acquisitions that I think that weve.
We've implemented timed and price.
Very effectively over the years.
So we're always looking at things and.
And I believe that there will be opportunities.
Our our level of enthusiasm will.
Always driven by we want we want it to be accretive to our new partners that we do a deal we wanted to be accretive to us as well shareholders and now that that latter won by being accretive to the ball has a wide range of outcome, today's and buyer, which impacts valuation and a number of things I would I wouldn't say.
That that our enthusiasm to pursue things that can add people's relevance has waned as much as the.
Those spread or the cone of which we view.
Ill.
Why I mean, it's gotten more difficult to to be able to be more confident about.
Turn and what's happening and then you back for a lot of things into that.
Including potential changes in the tax code that we've got an election coming up there just so much uncertainty that that are.
Sort of bar discount rate, if you will have higher.
And so but you know we're.
I think you know me and my team we.
I will be like.
Adding to our relevance to our clients and we like adding quality people and that's not going to change.
At all just environment desktop.
Got it that makes sense.
Got it maybe a quick follow up on on investment banking.
You mentioned that.
Yes that backdrop for advisory is a little bit soft and that makes sense I mean, that's happening everywhere.
How are you feeling about the outlook for equity and debt underwriting at this point.
You know I think I think it's.
Yeah, good opportunity, let me just step back for a moment and say again that we have.
And I want to have calls and follow up with.
With the investment community on.
The diversification of our revenue source, both in banking and an advisory.
And because I do believe that that's a little bit misunderstood now that said.
My My view is about these various item is somewhat clouded in the next say maybe up to the election, the third quarter and early into the fourth quarter.
Of course of cloud in the first quarter, and we had a very good quarter.
I think that I think that what I'm trying to say is that financial services and investment banking in particular.
While we've had to deal with many issue primarily safety and working remotely and.
Of course loan loss credit provisions.
When I look forward I see what we have built which is primarily our institutional business wealth management is going to do great. I think our bank is very conservative, but our institutional business business as well well positioned to to capitalize on what I believe is going to be a lot of activity.
The U.S. economy sort of recalibrate to sell to all the stimulus to all of the debt that was put on the refinancing raising of equity units go on and on an I. I believe that you're going to see an elevated level of activity in corporate America, that's not going to be Justin.
The next quarter might be muted for three months, but if you asked me to look forward a few years, we're going to be very busy and I.
And I have a lot of.
You know I feel good about the investments that we've made in the past years, which are going to allow us to take it to capitalize.
All that's going to be done and relatively outperform when it comes to looking at comparative numbers.
Interesting. Thank you.
And this concludes our Q1 day session I would now like to turn it back over to the panel for closing remarks at this time.
Well on behalf of my partners.
At Stifel.
Good.
Everyone is working very very hard and.
And remotely and coming back to work a little bit but I.
Just want to thank everyone for their diligence and for our investors for their confidence in Stifel.
I look forward to continuing to.
You know report to you on on a quarterly basis, and hopefully continue to show the grow.
In the company, so with that I wish everyone, a great day and please state say thank you bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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