Q1 2021 Stifel Financial Corp Earnings Call
Thank you for standing by and welcome to Stifel Financial's first quarter 2021 earnings conference call.
All lines of currently in a listen only mode.
After the speaker's presentation, there will be a question and answer session. If you'd like to ask a question. During that time, you may do so by pressing star and the number one on your telephone keypad.
As a reminder, today's conference is being recorded it is now my pleasure to hand, the conference over to Mr. Joel Jeffrey head of Investor Relations.
Thank you operator, I'd like to welcome everyone to Stifel Financial's first quarter 2021 financial results Conference call.
I'm joined on the call today by our chairman and CEO, Ron Kruszewski, our co presidents, Victor Niecy, and Jim's, Denmark, and our CFO Jim margin.
Earlier. This morning, we issued an earnings release and posted a slide deck to our website, which can be found on the investor Relations page at Www Dot Stifel Dot com.
I would note that some of the numbers that we state throughout our presentation are presented on a non-GAAP basis and I would refer you to our reconciliation of GAAP to non-GAAP as disclosed in our press release I would also remind listeners to refer to our earnings release and our slide presentation for information on forward looking statements and our non-GAAP measures.
Cash is copyrighted material of Stifel Financial Corp, and may not be duplicated reproduced or rebroadcast without the consent of Stifel financial I will now turn the call over to our chairman and CEO Ron Kruszewski Ron.
Thanks, Joe and good morning, and thank you for taking the time to listen to our first quarter 2021 results I want to start the call by thanking all of my partners at Stifel for delivering record results our value as a company is and always will be our people. So let me give some highlights of our quarter.
Have Jim Marish and review, our balance sheet and expenses and I will wrap up with our outlook before Q&A.
As you can see on slide one the first quarter of 2021 was another record for Stifel. As we continue to benefit from our ongoing investment in our firm as well of the strength of the operating environment.
Our revenue in the first quarter was a record of nearly 1.14 billion, an increase of 24% and surpassed last quarters record by more than $75 million driven by record revenue in both of our global wealth management and institutional groups. The.
The growth in revenue and our focus on expense management resulted in non-GAAP earnings per share of the dollar 50, which was up 88% year on year and represented the second highest quarterly EPS in our history.
The investments that we've made in our business have enabled us to participate to a far greater magnitude than we would have had we not invested in the business. Most of our record results were driven by our paths for recruiting success the growth in our balance sheet and robust capital markets.
The other highlights for the quarter pretax margins of more than 21% annualized return on tangible common equity of over 28% and tangible book value, which increased 32%.
Turning to the next slide as I stated, our first quarter net revenue increased 24% to a record surpassing $1 1 billion.
Compensation as a percentage of net revenue came in at 69%, which was just above the high end of our annual range yet is consistent with our policy of of calling for compensation conservatively early in the year.
Our operating expense ratio was about 18%, but excluding credit provision in investment banking gross ups, our operating expense ratio total of approximately 16%.
This came in below our full year guidance due to the strength of our revenue and strong expense management.
As the economic outlook improves we like other banks have updated our economic models. This coupled with strong credit performance of our loan portfolio resulted in a release of $5 million of our credit provisions during the quarter as you recall our provision expense last year was driven by the adopt.
<unk> of Cecil and more specifically the negative economic outlook that was a key input into the calculation.
So neutralizing the impact of credit provisions Stifel pretax pre provision income totaled $238 million, which increased 61% from the first quarter of 2020.
Moving on to our segment results and starting with global wealth management.
First quarter revenue totaled a record $631 million up 8% year on year. While this increase is impressive I believe it understates the strength of our business as it includes a nearly $24 million decline in net interest income at our bank subsidiary, excluding the impact of lower of banking.
<unk>, our private client business improved 13% driven by the strength in asset management as well as growth in brokerage revenue as we benefited from enhanced client activity levels and continued success in recruiting.
We again finished the quarter with record client asset levels total assets under administration of nearly 380 billion increased 21 billion from the prior quarter. Additionally fee based assets of 138 billion rose, 7% sequentially, which which should drive further growth in the asset.
Management and service fees line item in the second quarter of this year the.
The next slide highlights the strength of our recruiting and the growth drivers of our platform.
We had a solid quarter in terms of adviser additions as we added 15 advisors. The total trailing 12 month production of $13 million well this was fewer advisors than we.
Typically we recruited in recent quarters I'd remind you that recruiting of cyclical and it's best examined over a longer timeframe. Since the beginning of 2019, we've added 300 financial advisors with cumulative production of approximately $233 million.
As I look at the remainder of the year, our recruiting pipelines remain at robust levels and I anticipate another strong year.
As you've probably seen from our recent press release, we announced our intention to begin actively recruiting in the independent channel in the first quarter, we announced that we were rebranding century securities, which we've operated since $19 90 of Stifel Independent advisors.
Given the growth in this industry channel and the fact that we already have the legal and supervisory structure in place plus an outstanding platform. We believe that our overall recruiting efforts will be enhanced by a renewed focus on this market channel.
Moving onto our institutional growth this quarter represented our second consecutive record quarter for institutional group net revenue totaled $506 million, which was up 52% the prior year and surpassed last quarters record by approximately $15 million our performance was strong across all.
All of our major revenue lines as our business continues to benefit from strong market activity. The recent investments in our business and contributions from both Canada and Europe, we generated a 23% pretax operating margin, which was up more than 1000 basis points from the same period a year ago.
Looking at the revenue components of our institutional business I would note that our equities business total $226 million up 74%, while fixed income totaled $146 million, which increased 10% from the comparable first quarter of 2020 with respect to our trading business.
We generated record equity brokerage revenue in the first quarter, surpassing our prior record set a year ago by 13% of strong activity levels continued and trading gains increased. Additionally, I'd note that our electronic brokerage businesses, which include our ATF and alcohol products are now.
The fully launched and we would expect to see increased contributions from these products as the year progresses.
Fixed income brokerage revenue of the quarter was up 12% sequentially and represented our third highest quarterly revenue trailing only the first and second quarter of last year similar to my comments last quarter. Our fixed income trading continues to be driven by increased activity across the board as well.
The non CUSIP businesses.
On slide seven investment banking revenue of $339 million was our second consecutive quarterly record surpassing last quarter's record by a few million dollars driven primarily by record capital raising revenue.
Equity underwriting revenue was the standout in the quarter coming in at $160 million and surpassing the record we set last quarter by nearly $50 million.
This is a good example of how by investing in our business over the last several years, we've become a more significant player as we were book runner on more than 50% of the Ipos. We participated in the quarter, our strongest verticals were health care technology financials of consumers as widely reported.
There was a there was an incredible amount of spec related activity within our industry. During the first quarter. However, spacs accounted for a little more than 15% of our equity underwriting revenue in the quarter. So whether the recent slowdown in spec activity represents a pause for a saturation point where copper.
About the strength of our more traditional pipeline.
While our equity business was quite robust. We also recorded great results in fixed income our fixed income underwriting revenue of $49 million was a record for the first quarter and was up 43% year on year.
Our municipal finance business rebounded from challenging market conditions in the first quarter of 2020 as we lead managed 236 minutes of bullish issues, which represented an increase of 42%.
Well, we are off to a strong start for the year. We believe that of Congress word of Paas and infrastructure Bill we would see additional tailwind to our public finance business. We also continue to see solid contributions from our growing corporate debt issuance of business.
Regarding our advisory business revenue of 130 million represented our third highest quarterly revenue and a record by almost 25% for any first quarter in terms of verticals. We benefited from the expected pickup in financials and continue to see broad based results from technology consumer and health care.
Looking forward to our second quarter based upon anticipated closings of the of some larger previously announced transactions and of course barring a substantial change in the market of the economy, we expect to see a solid increase in our advisory revenue.
In terms of our overall pipelines they are up double digits compared to where we began the year and I remain very optimistic for our investment banking business in 2021.
And with that let me now turn the call over to our CFO Jim Ericson.
Thanks, Ron and good morning, everyone.
Let me begin by making a few comments regarding our GAAP earnings in the quarter, we generated the second highest GAAP EPS in our history at $1 40.
Which was only surpassed by the results generated last quarter. We again generated strong returns on equity with an ROE of 18% and ROE TCE of nearly 27%.
Similar to last quarter, the strong GAAP earnings resulted in increases in our book value and tangible book value. This was accomplished while increasing assets by $1 5 billion resuming our open market share buyback program and given the seasonal impact of stock compensation on the equity in the first quarter and now let's turn to net interest income.
For the quarter net interest income totaled $113 million, which was up $8 million sequentially.
Our firm wide net interest margin increase of 200 basis points and our banks net interest margin improved to 240 basis points.
Both NII and NIM benefited from the remix of bank assets out of our securities portfolio and into our loan portfolio as well as growth in our average interest, earning asset levels by 6% during the quarter I.
I would also note that we did see some more episodic loan fees earned during the quarter the contributed to NII.
We expect this contribution of declined somewhat in the second quarter, but the loan and securities growth that occurred in the first quarter were more than offset this decline.
As such in terms of the second quarter, we would expect net interest income to be in a range of $110 million to $120 million and with the similar NIM for the first quarter.
Further while we have produced the stabilized NIM over the last few quarters, we continue to be very asset sensitive.
As an update to what we discussed last quarter, assuming a 100 basis point increase in rates across the curve and a 30% deposit beta we would generate an additional $150 million to $175 million of pre tax earnings.
I would note that our deposit betas have been and what can you continue to be driven by the competitive environment, but for this analysis, we used the 30% deposit beta this.
This represents an estimate for what actually happened to Stifel over the entire last rate cycle, but I would highlight that beta was very much weighted to the latter portion of the cycle.
Moving onto the next slide I'll go into more detail on the bank's loan and investment portfolios.
We ended the period with total net loans of $12 2 billion up approximately $1 billion from the prior quarter we.
We saw growth in both the consumer and commercial portfolios.
The mortgage portfolio increased by $200 million sequentially as we continue to see demand for residential loans from our wealth management clients. Despite the increase in interest rates during the quarter.
Our securities based loan portfolio increased by approximately $170 million.
Growth in these loans continues to be strong is that the recruiting momentum continues to drive increased loan balances.
Our commercial portfolio accounts for 39% of our total loan portfolio and is primarily comprised of C&I loans, which increased by 15% during the quarter.
Our portfolio is well diversified with our highest sector exposure and fund banking and PPP loans, each representing approximately 5% of the portfolio.
PPP loans accounted for more than $400 million of C&I growth of fund banking accounted for $260 million.
I would note that fund banking, which is comprised of capital call lines for venture capital and private equity funds had been classified within financials in past presentations, but given its size. We felt it made sense to break. This out is in the individual line item. We will look to continue to be active in the fund banking space as we view this as an attractive risk adjusted return.
Moving to the investment portfolio, which continues to be dominated by AAA and double of icos.
Not seeing any material change in the underlying credit subordination provided by the securities and continue to be pleased with the performance.
This can be seen in the fair value of the portfolio, which was at an average price of 99, 9% of amortized cost at quarter end.
We increased our CLO holdings by 7% from last quarter in anticipation of some pay offs expected to occur in the second quarter.
Turning to the allowance, we had of $5 million of reversal of or reversal of our allowance through of negative provision expense as additional reserves tied to loan growth for more than offset by the improved economic scenario and our seasonal calculation.
As a result of the reserve release and the composition of our loan growth during the quarter our ratio of the allowance to total loans declined to 118 basis points, excluding PPP loans.
It is important to look at the level of reserves between our consumer and commercial portfolios given the relative levels of inherent risk.
The quarter in the consumer allowance to total loans was 31 basis points, while the commercial portfolio was at 174 basis points.
We also continue to see strong credit metrics with non performing assets and nonperforming loans remaining at seven basis points.
Further we did take the opportunity to Derisk from a commercial book by selling or reducing positions by $83 million on five of C&I loans, which resulted in less than $1 million of charge offs.
This equates to a roughly 1% discount of bar.
All five of these loans weren't sector is more impacted by COVID-19 and carried reserves well in excess of where we sold them.
Moving on to capital and liquidity.
Our risk base and leverage capital ratios came in at 19, 4% of 11, 5%.
The decline in our capital ratios was driven by balance sheet growth and the $68 million impacting equity to net settle taxes on our issues in the first quarter.
This was offset by the strength of our retained earnings.
We also resumed our open market share repurchase program late in the first quarter, we repurchased approximately 195000 shares at an average price of $61 79 per share.
Our book value per share increased to $35.96 of <unk>.
Modestly from the prior quarter as the impact of net income on equity was offset by the aforementioned vesting of restricted stock.
Our tangible book value per share increased to $23 93.
We continue to feel good about our financial position as our liquidity remains strong the.
The total third party cash sweep program increased by approximately 5% during the quarter, which was used to fund the aforementioned bank growth.
I would also highlight the S&P recently improved Stifel financials outlook the positive based on our strong operating results and overall financial position.
On the next slide we go through expenses.
In the first quarter, our pre tax margin improved 730 basis points year on year to more than 21% the <unk>.
Increase was the was the result of strong revenue growth lower compensation accruals and our continued expense discipline.
Our comp to revenue ratio of 69% was down 160 basis points from the prior year.
That ratio came in above our full year range of 58, 5% to 65% and is consistent with our strategy to be conservative in our compensation accruals early in the year given the transactional nature of a large portion of our business.
It said assuming market conditions stay strong we anticipate that our conservative accruals early in the year could lead to added flexibility in the back half of the year.
Non comp opex, excluding the credit loss provision and expenses related to investment banking transactions total approximately $184 million represented approximately 16% of net revenue.
This was also below our recent guidance, primarily due to stronger than expected revenue.
The effective tax rate during the quarter came in at 24, 1%, which was driven by the impact of the excess tax benefit related to stock compensation.
Absent any other discrete items, we would expect to see the effective rate to be in the 25% to 26% range in the second and third quarters as we've limited our issue vesting that occurs before the fourth quarter.
In terms of our share count our average fully diluted share count was up 1%, primarily as a result of the increase in our share price.
Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the second quarter fully diluted average share count of total $118 7 million shares.
That I will turn the call back over to Ron.
Thanks, Jim.
As I said at the beginning of the call. This year is off to a very strong start.
Looking back at our guidance for 2021, many of the expectations for economic and market conditions that we then highlighted have not only played out as we expected but in some cases has happened much faster our business is benefiting from past recruiting success higher equity markets increased.
Levels of interest bearing assets robust trading activity for debt and equity record equity issuance solid credit metrics and a strong investment banking pipeline.
As vaccinations increase and the economics and the economy continues its recovery. We continue to expect the very strong operating environment for the remainder of 2021. Additionally, looking forward to our second quarter for many of the same factors already sided our business is off to a good start.
With respect to our full year revenue guidance of three 8% to 4 billion based on what I'm seeing in our outlook. We are tracking above the high end of our full year guidance and a favorable market conditions continue we see a path to exceed our full year revenue guidance.
With that said I'll make some comments about what we're seeing so far in the second quarter and our expectations Global wealth management is off to a strong start our asset management fees will benefit from the 7% increase in fee based assets.
Last quarter, and then the midpoint of our NII guidance is above first quarter levels and we continue to see client engagement for institutional group, our investment banking pipelines remain at robust levels of <unk>.
Timing will always play a factor in our investment banking revenue in any given quarter, we'd expect to see a greater contribution from our advisory business given the expectation for increased M&A, particularly in financial. Additionally, as I look forward. We are of a number of large transactions are scheduled to close.
And this increases my confidence for the remainder of the year in terms of underwriting activity activity levels. So part of the quarter have pulled back for them. The torrid pace experienced in the first quarter, but still remain strong moving out of expenses, our full year compensation guidance remains in place and we would.
Back to see the typical sequential decline in the compensation ratio in the second quarter, assuming market conditions remain stable, our non comp operating expenses should be similar to those in the first quarter as we continue to see relatively modest increases in travel and entertainment expenses.
In terms of capital deployment as always we will continue the focus on risk adjusted returns in the first quarter. We took advantage of good credit conditions to deploy capital and the growing our balance sheet. The one in the half billion in balance sheet increase represents 75% of.
Of our full year guidance, if we continue to see similar credit conditions, we could grow our balance sheet more than our initial guidance as we see solid returns from this use of capital we will continue to repurchase shares to offset dilution, but otherwise we will likely to continue to be opportunistic with our repurchase activity.
Lastly, we will continue to look at acquisition opportunities and investments into our business at Stifel is and always has been a growth company and investing in our franchise has historically generated strong returns.
So let me sum all of the Sop by saying our business is in a great position to not only capitalize on the current strength of the operating environment, but has proven to have the flexibility to successfully adapt to changes that could occur.
And with that operator, please open the line for questions.
As a reminder, you can ask an audio question by pressing star and the number one on your telephone keypad again net of Star one we'll pause for just a moment.
The first question will come from the line of Chris Allen with Compass.
Nice quarter.
Maybe we could just dig in a little bit more.
The the outlook for the balance sheet. Obviously, you know the you can grow up more of the credit looks good maybe can you talk.
Talk about where you're seeing the the better growth opportunities right now within C&I.
All of the industries what sectors.
And any color just in terms of how much the CLO of reduction will be the payoff will be the <unk>. Just we can kind of think about what it looks like ex that.
All of Kim you want them for what I'll take that.
So I think in terms of opportunities for loan growth I think the thing you've continued to see is that we've seen a lot of opportunity on the consumer side the increase in <unk> compared to for key on the consumer side was up almost six for a little over 50%. We continue to see strong demand on the residential real estate side as well of the security based side, given relatively where inter.
Rates are on the C&I side I think we will continue to emphasize the growth we've seen in the opportunity with.
Fund banking, that's obviously the largest individual exposure we have within the C&I space. The growth that we saw within PPP. Some of that is going to be transitory as those loans are forgiven or we are kind of warehousing. Some of those types of loans on a temporary basis.
In regards to the Clo's a good portion of that was anticipation of the pre funding.
Sorry, not the pre I'm sorry.
Anticipation of the payoffs that will occur in <unk>. So we'd expect those balances to be relatively flat after those payoffs.
I think of what I would say just in general is that you read a lot about.
Demand being tepid.
At least at the at the larger banks of loan loan demand and I will say, what I've always said of that Werent organization first and foremost of wealth management investment banking firm of $380 billion of.
AUM and our bank as you know of.
20 ish.
Of the billion dollars and so there's just a lot of demand.
That's a lot of demand and we grow our balance sheet. When we see good risk adjusted returns, which we saw in the first quarter and I would say right now likewise.
Yeah.
Understood and then.
Maybe on the on the brokerage side.
Obviously, we're seeing industry trends slow in <unk>, and you kind of pointed out versus the first quarter.
Any color in terms of how you guys think about maybe the incremental opportunity around the electronic products in the equity side, what helped us kind of frame out whats been environmentally driven the recent quarters versus the taking share anything on the those fronts would be helpful. Thanks.
I think it's.
We've built out our capabilities of the.
The build out of bar of electronic suite, which is both our algo.
Ats Joe.
Just have enhanced the.
The reason that the buy side clients transact with us and we needed those products too.
To supplement our research driven.
Offerings and I am.
Im optimistic that those products will help us increase market share because in years past.
That was an area of the execution of the institutional brokerage front that we sort of considered or what.
Where are we white label for in some cases.
We will see how that plays out.
Those products are up and running and we are seeing.
We're seeing investors adapt to using them.
Okay. Thank you guys.
The next question will come from the line of Devin Ryan with JMP Securities.
Thanks, Good morning, everyone.
Good morning Devin.
Maybe start Ron on the the independent advisor of initiative, and just get a little bit more color on kind of the expectations for that business clearly.
Do you guys have been in the independent side before but never really.
The big push there so I'm kind of curious what.
Yeah, it's going to be different than the strategy.
Moving forward what type of advisors, you'll be targeting.
And then just kind of thoughts around you know will this be an outlet for potential employee advisors with the Stifel migrate to and are there any kind of margin considerations just for a little more color would be helpful.
Well look we've had in the independent channel since 1990, so it's not like we're starting something from scratch in terms of legal structure.
For broker dealer of supervisory structure all of that is in place when we looked at.
Our the way, we built our platform and our structures.
It was evident to us probably we had a very competitive.
<unk> offering for the independent space and frankly, it's just the space that I and Jim really just never focus Tom we have a number of advisors that would want to talk to us about potentially in the independent space. It's a different advisor. Then then of course service adviser of different mindset.
But we often just the.
Tell them to go to competitors.
I can do that anymore, we have a very.
Compelling offering and one that's up and running we're just kind of put some focus on it so it's a growth channel.
I think as I said that I believe that our future recruiting will now include.
Independent advisers that we previously really didn't engage with.
So.
That's how I would say it's early in the game we're not.
Not.
And all of that.
Running out in the same when do you have any goals are to do anything like that but we're already hosting visits.
The for for that market channel.
Yeah, Okay. Thanks, Ron helpful color and then.
Maybe just a follow up on.
Just kind of where you are making incremental investments in the business right now and what's the most compelling you clearly you're starting the year with tremendous momentum.
Business is creating a lot of <unk>.
Excess cash in there so I think of a.
The good period here to be able to kind of reinvest back into the business. So I'd love to just maybe talk about some of the kind of priorities for you guys in terms of investing for growth kind of where you're focused and then also from an M&A perspective kind of of the types of transactions that are maybe more prevalent in the market right now of the types of stuff for you guys.
Seeing come across and maybe where you didn't you would have appetite.
Well look in terms of investment.
I would say that we always are investing Devin always high.
Yeah.
If you if you are looking for specific areas.
To invest in our people, but we all are busting and technology, that's probably the table stakes in the business today.
Are you now are digital.
The technology to help our advisors deliver their advice proposition. So that's an ongoing investment the other markets.
Ever evolving certainly technology is always evolving I think we have a very.
Very good foundation that we built that allows us to continue to invest.
And technology, helping our clients get organized on communicating with them. That's an ongoing thing it's never we get a lot and we're going to do it in the future of and it's not the.
The percentage of our ongoing operating expenses on the acquisition front.
Again as a as the.
The.
Market, where assets asset values are high yet we're always.
We have half of what they were always.
You know looking for anything.
Anything that can help improve our relevance in any market.
We serve our clients that we serve.
I will take the small but to say what I've said in the press release, which is that.
When I look back and I look at our revenue in the business that we did highlight of this quarter had we not made of some of the investments via acquisition that we've made in the previous five years, we'd be nowhere near the level of revenue that we are today, so that the past is prologue.
So we're going to continue to do that but there's.
No need to.
Absolutely have to do something.
Yes.
Okay, Great I'll leave it there thanks Ron.
Yes.
Okay.
The next question comes from the line of Craig Siegenthaler.
Okay.
Good morning, this is <unk> filling in for Craig.
Can you. Please just expand on some of the advisor recruitment dynamics and how we should think about the pipeline and pace of advisor onboarding through the rest of the year and I also just wanted to follow up on the commentary on the independent channel how have your initial conversations with advisors, there kind of trended so far.
For the second question first.
<unk> said that we just announced that non event.
30 days ago.
So from I will say that from having zero conversations of the number of conversations we've had with the huge percentage increase so.
We've had a number but thats from really not having those conversations and we expect that to continue their say there is the competitive landscape in the independent channel. There's some of established players.
Feel that we land on the playing field, where the very compelling.
So we will see our share of people and we will hire our share or 30 days into it with respect to recruiting as I've said of recruiting of.
Have some ebb and flow to it both seasonal some of the things that are going on actually the first Ben.
That would have any commentary I would say that.
The the end of.
Sort of the pandemic has probably had more of an impact on recruiting them, the beginning and what I mean by that is.
Even at the beginning of the pandemic people or in the pipeline. They had prepared to move and we found the ability to continue to hire people out of the pipeline to be compelling that we were able to do it we're able to do it with zoom and onboard clients.
There was really no hiccup as I look at it over the the.
The last.
The couple of months I would say that people not being able to go to the off of not being able to.
Maybe properly prepare has slowed it down our pipeline of very strong we're talking about a lot of people, but the pace of which people are moving I do think it is being impacted by the fact that many people have not paying for both of the Opex. That's just my gut instinct on them when I look at it and talk to people.
But there is no.
I see no change in the trajectory of of our recruiting and our pipeline I think is very robust.
And I will also say that the competitive landscape has it has increased but that ebbs and flows but where we're at the top.
Pendulum swinging where its more competitive now of an average.
So all of those things put together normal times I would say of the pandemic.
As we come out of it.
The recording will pick up.
Yeah.
Got it and as a follow up can you speak of the compensation ratio and you mentioned conservator of recruiting for one.
Sorry could sort of accruing in <unk> 'twenty, one how should we expect the ratio was the decline in future quarters, if revenue normalizes down.
I think it.
Lots of great questions.
Of.
Revenue of normalized was down.
Remember, we've got 25 consecutive years of record revenue and.
I.
Tend not to think of revenue normalizing now I think of note revenue normalizing up.
One of the chairs I'll be wrong, hopefully not this one but.
Not this year I think if you look historically just go back and look at the last for years and.
The chart our comp to revenue.
By quarter, and then where it ends up and what Youll see is what we've always said we're conservative in the first quarter and then the comp ratio will generally trend down.
And we get to will be at this point will be within our range of guidance as we see it today and I think the best way to understand that and just look at history look of what happened last year, but the year before and the year before that and you'll see.
What we what we tend to do and normally in our firm.
The revenue picks up the back half of the year that has to do with the seasonality of our business. Our public finance business was always stronger in the second half of the year and historically M&A is stronger in the second half of the year that just goes to timing of people what deals done.
I suspect that may be true this year, but the tax change of the number of things coming so.
To answer your question I would just look at the past as to how we have.
Accrued our compensation on the historical basis.
And maybe just add one thing there is in the prepared remarks, we talked a little bit of if revenue does remain strong we do see a path for more flexibility than the guidance. We put out there we have not updated our guidance yet, but again, we do see a path to exceed that if revenue remains at the strong levels just wanted to highlight that point as well.
Thank you that's very helpful.
The next question will come from the line of Alex <unk> with Goldman Sachs.
Great. Thanks, guys. Good morning, Jim you kind of hit on that last that with your last point on my question, but I guess.
Bigger picture as we think about the operating leverage in the business.
Ron you clearly expressed a lot of confidence on the momentum you guys seen on the revenue front potentially exceeding the $4 billion revenue number for the year I guess now would imply of high single digit revenue growth.
In a year like that which should be kind of the operating leverage in the model. Given the fact that you guys are not quite ready to kind of lower your comp rate guidance for the full year.
Well again, I think youre going to see operating level of guests.
The what I, just said about how we accrue comp okay for the next being able the comp ratio is as I look for the comp ratio is going to come down as the.
The year of goes on.
I think we've been pretty efficient on the operating expense.
Level.
We've done a really really good job of integrating remember we get a few acquisitions back in 19, and we've integrated those in.
And have operating expenses.
It is below our guidance at this point as of <unk>.
The size of revenue. So I would think that you can see operating leverage both increased revenue and as Jim said.
That will even give us more flexibility.
On the comp side so.
Yes.
That said I don't think youre not seeing huge expansion in margin because compensation is bounded by competitive factors.
Maybe just to add specific a little bit more specific color. There I would point out that we were a full two percentage points below the low end of our guidance in terms of non comp obviously, the absolute dollar of non comp opex was up at $184 million, excluding the provision excluding the IV growth. So we do of a number of expenses that are tied to revenue and we had a very strong <unk>.
Revenue quarter.
As we look forward, we don't really see any material change in any of these numbers until really the last half of the year, where we do see any <unk> conference is picking up that being said similar to what we said with the comp ratio of we do see a potential ability of revenues remained strong to come in below the low end of our guidance range here.
Got it okay that makes sense.
And then in the.
The other one for you guys, Ron M&A I heard your kind of broader strokes comments about kind of.
Are always on the lookout for things, but any particular areas, where you guys think inorganic expansion makes it makes sense for Stifel at these levels.
Yeah.
Yes.
Sure.
I feel like.
Our history of that when we see it we'll know at the end.
We don't we don't go out and.
Look for acquisition.
These things down we were opportunistic and.
Three factors in there of adult and Theyre not going to change the bonds of one <unk>.
And to make us more relevant and that we're in a lot of businesses. So when you think about wealth management of our institutional equity and fixed income.
Our European operations, Canada, all of those anything that can make us more of all of that.
We will look at as long as it meets the financial hurdles it needs to be accretive to our shareholders of importantly, the need.
It needs to be accretive to the people joining us and if those meet and then we will.
We very well may execute.
Two to pick a specific area.
What sort of Trump our historical practice, which is.
We wanted the opportunistic as opportunities present themselves.
Alright fair enough thanks, guys.
As a reminder to ask him out of your question you may do so by pressing star and the number one on your telephone keypad.
The next question will come from the line of Stephens ship, how quick one's for research.
Hi, good morning.
Steven.
So Ron I'm, sorry, I'm going to have to ask some follow ups on the independent advisory strategy. The one thing I'm trying to understand a little bit better is what makes your value prop more compelling or at least I think you said that you have a more competitive offering than some of the incumbents and given just the strength of your cash.
But all of position and just as a follow up on the earlier question does it make more sense to actually buy versus build as we think about your efforts the scale in this area.
Well first of all of it in.
I didn't mean to say that our offering was better or more competitive.
Point I was trying to make was that we're not starting from ground zero. Okay. We're not we're not sitting here, saying lets out by the independent channel and someone says why do you need another broker dealer what you do.
And you need in the capital and you need to get approvals in the news we have all of that okay. That's what I'm trying to say and as we've built out of our technology platform and a more cloud based applications.
Learned from working remotely.
That that our ability.
To the service.
And the independent channel, we recognize that we could do it so.
We're just we're another participant in that marketplace.
We believe we have of competitive.
Offering.
So that's.
That's what I said I think there are some established players in the space.
We believe that.
We will be competitive.
Great. Thanks for color.
When you were saying buying versus <unk>.
Scale.
Again.
If the if the.
If an opportunity came that debt offered.
Okay.
And the attractive way to scale into the business, we built Stifel that way over the year. So that's not something that we would be against the difference here is I don't believe we need to buy the capability.
Alright, we have the capabilities. So we can dose higher end of the us and so it would be no different to me looking at of traditional wealth management, which we have the capability and we're adding to it or adding.
To the space again, where we have the capability, sometimes we've done deals where we've not we're really not had the product offering.
And we've made acquisitions because of that reason in this particular case I don't I don't think Thats. The case, we have the product off of what all of the scale.
But.
It's effectively the independent space of scalable with wealth management.
Same same Clarence system, the same technology base.
In many cases the same supervisory.
The structure so.
That's just what we say, we'd see an opportunity just to play and in other space.
Our still our growth driver is our.
Our employee channel and.
Or.
We're going to continue to be very competitive in that space.
Okay.
No. Thanks for that perspective, Ron and just the follow up on the buyback you know, it's certainly encouraging to see you reinstituted this quarter, but admittedly, it's still relatively light in relation to not just the 2018 or 19 buyback run rate but.
Especially in relation to the strength of your capital position and just the higher earnings run rate in general. So just trying to reconcile your bullish outlook commentary that you deliver on the call with buyback appetite that still remain somewhat tepid I know you've been very focused on your valuation gap versus peers was hoping to get some perspective.
On that as well.
Well I.
I have been focused on the valuation GAAP, but I'm glad you brought that up but it's still significant.
If you look at it.
The interested in your your viewpoints more of the excellent really looked at that GAAP because it's in my opinion it's material.
But like always we're opportunistic on that and we and we will deploy capital as we have we buyback stock or comment now for certainly buying it back for dilution, but we see also opportunities to deploy capital elsewhere.
And so.
Well certainly acquiring our stock is an attractive return.
But on balance I am interested if that's the financial transactions for me on <unk>.
Balance I'm always looking at building our franchise and building our ability to to grow and then put some kind of multiplier on our revenue growth by making investment not just shrinking the capital base. So we understand dilution we understand.
The need for capital deployment through dividends and share repurchases, we look at acquisitions, when you look of balance sheet growth and.
We are constantly trying to enhance our shareholder returns by pulling the right lever at the right time, and we will continue to do so.
Thanks, Ron if I could squeeze in one more just on the NII dynamics quickly and I just had a couple of inbounds asking on the the resiliency of the asset yields on both the loans and securities you flagged the episodic loan fees I'm wondering how much of that contribute to the expansion of the loan yield if you could size that.
Debt and maybe just speak to what drove the higher securities yields as well that clearly bucked the industry trend and where are you reinvesting today.
Yes, so obviously, we didn't side of this and what we said in her prepared remarks.
If you look at the yield table in the earnings release, specifically within the C&I portfolio, you saw a pretty substantial increase in the yield on C&I to cash.
All of it almost 350 basis points, obviously that is that was pretty significantly aided by the PPP fees as well as some early loan payoffs.
It's somewhere between where you saw last quarter, you know call it around 311 basis points, and where you see it today. Some of those fees will continue into <unk> I think we definitely highlighted that as well, but they need for a little bit of lesser extent, but some of that will definitely continue.
That being said I think when you think about NII, whether it's in the securities portfolio, whether it's in the loan portfolio. I think we have proven out that we've been able to reach of stabilized NIM.
We have opportunities for additional balance sheet growth.
And we remain very asset sensitive and I think those of really the key takeaways without getting into all of the minutia of the specific loan for you or not I think those of the things that we would really want to highlight when you think about NII in the outlook there yes.
Yeah, and I'll just I'll just add the final color on that I think theres of Remixing factor to that debt.
We have a lot of demand and we remix our balance sheet I just scale that debt, where we built the balance sheet, our conservative nature towards credit.
We're in a we're in a very good position right now of strength.
We feel that.
We've certainly talked about terminal in them, but.
We also talked about how asset sensitive we are.
Forward. So we feel we're in a pretty good spot if rates.
Stay stay below lower for longer.
And we're very well positioned.
If we have an uptick in rates, which I do believe during my career, we will have an uptick of range.
But we'll see but anyway.
I feel very good about the position of.
All of the balance sheet.
At this point in time.
One other comment all of those factors. We just described are in our current guidance of the 110th of $1 20 in terms of the <unk> NII.
Right. Thanks for that color on the new additional price.
Thank you for asking out of your question you may do so by pressing star and the number one on your telephone keypad.
The volume we're sparing no further audio questions does the presenters have any closing remarks.
I'll close as I always do which is the thank you Joe.
Participants for listening to our first quarter results.
We.
We're off to a strong start we see our momentum continuing in.
In these financial conditions, and I look forward to reporting to you for our second quarter results I'll probably in late July so thank you and have a great day.
This does conclude today's conference call. We thank you for your participation and ask that you. Please disconnect your line.
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