Ladies and gentlemen, thank you for standing by, and welcome to the Stifel Financial Corporation Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Joel Jeffrey, Head of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Operator. I'd like to welcome everyone to Stifel Financial's Second Quarter 2020 Financial Results Conference Call. 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.stifel.com. I would remind listeners to refer to our earnings release and our slide presentation for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material of Stifel Financial Corp. and may not be duplicated, reproduced, or rebroadcast without the consent of Stifel Financial. I will now turn the call over to our Chairman and Chief Executive Officer, Ron Kruszewski.

Thank you, Joel. Good morning, and thank you for taking the time to listen to our second quarter 2020 results. I'm joined on the call today from various locations by co-presidents, Jim Zemlyak and Victor Nesi; as well as our CFO, Jim Marischen. I'm going to start the call by running through the highlights of our second quarter before turning the call over to Jim Marischen, who will take you through our balance sheet and expenses. I will then come back with my concluding thoughts. But before I review our company's financial results, I want to comment on the events affecting the Black community and all minorities. These recent events, which have too many historical antecedents, require us as Americans and associates to take informed action to confront these challenges head-on. Stifel has 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 are 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 in all its forms and to promoting diversity as a priority and a responsibility. In this regard, we must and will do better. We have several initiatives at Stifel to improve our diversity, starting with listening to our associates. I've been conducting sessions, called Listen and 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 Stifel Board to regularly report on these initiatives. So now let's take a look at our results. First of all, Stifel had a great quarter. COVID has 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 bolstered activity levels at Stifel and across our industry. This quarter, and in reality, the last several years, demonstrate the diversity of Stifel's 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, specifically asset management and net interest income, were relatively in line with analyst expectations. However, the institutional business we have built has consistently been underestimated by analysts. This quarter is no exception. In the second quarter, we continue to successfully execute our business strategy while navigating the challenges of COVID. 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 in the second quarter of 2020, and quite frankly, over the past 12 months, 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 30, 2020, Stifel generated revenue of $3.6 billion, up 15% from the same period ending June 30, 2019. Reflecting the uncertain economic outlook, our results were again impacted by both an 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 and compensation accruals, totaled 23%. In addition, we strengthened our already robust and liquid balance sheet and increased our book value to $48.84. 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 is illustrated 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 net interest income driven by the zero-rate environment. Turning to Slide 3. Stifel 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 increased 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 costs due to the pandemic. That said, in the second quarter, we were again impacted by both elevated credit loss provisions as well as an elevated compensation ratio. Our loan loss provision was driven by the 2020 adoption of CECL, as we are required to estimate all potential future loan losses, taking 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 remained solid. In terms of compensation expense, we believe it remains prudent to be conservative in how we accrue for compensation expense. This is particularly important given the uncertainty surrounding the economy in the back half of the year. Similar to what we did in the first quarter, we took advantage of the strength in our revenue base to accrue compensation at a higher level than we typically would. This resulted in an additional $9 million in compensation expense this quarter and a total of $41 million in the first half of the year. We believe this puts us in a very strong position to manage through any substantial changes in the operating environment in the second half of the year. While 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 our earnings per share increased 10% even after recording the credit loss and additional compensation accrual, which represented approximately $0.28 per share. Excluding these two items, our pretax income totaled $187 million, up 18% year-over-year. For the first 6 months of 2020, these items accounted for nearly $76 million of increased provision and compensation accruals or $0.76 per share. Again, after absorbing these increases, earnings per share was essentially flat with the comparable prior year period. Moving on to our segment results and starting with our global wealth management. Revenues of $506 million declined in the quarter, but year-to-date is up 4% to nearly $1.1 billion, which matches the strongest 6-month stretch in our history. In addition, after a slow start to the quarter as a result of the travel restrictions associated with COVID, our recruiting activity 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 well as the impact of lower rates on our net interest income. However, we expect our asset management revenue to benefit in the third quarter from the 13% sequential increase in fee-based client assets, which totaled $106 billion at June 30, 2020. I would also note that total client assets reached $306 billion. Finally, we continue to invest in our technology, especially digital and mobile applications. Stifel Wealth Tracker was formally introduced in the quarter, and I am excited about its capabilities. Turning to the next slide and in terms of wealth management metrics. I want to focus on recruiting, as we had a very strong quarter despite the issues surrounding COVID-19. We recruited 28 financial advisers with total trailing 12-month production of $23 million. I am pleased that we have adjusted our recruiting to the current environment. Simply, the historic strength of our recruiting is centered around home-office visits, which, by their nature, highlight the cultural advantage enjoyed by Stifel. Of course, the pandemic has changed that. Yet our activity levels improved throughout the quarter as we became more adept at recruiting remotely. In April, we added 1 adviser. In May, we added 5. And in June, we added 22. I would also highlight that the average production level of these advisers is our highest since the first quarter of 2019. So not only did we add a meaningful number of advisers to our platform, but they are also accretive to our productivity per adviser. As you can see from the chart on the upper left of the slide, our recruiting success since the beginning of 2019 has been meaningful as we brought on 204 new advisers that have trailing 12-month production of roughly $161 million. Additionally, over the past 10 years, 85% of the financial advisers that have joined Stifel come through organic recruiting, with the remainder coming from acquisitions. So overall, I feel very good about our wealth management franchise, and Stifel remains a very attractive destination for high-quality advisers, and our continued growth in client assets will drive future revenue growth. Moving on to 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%, while our equity businesses generated $126 million, up 26%. While the second quarter was a record, the strength of our institutional business has been apparent for some time now. For the first 6 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 3 quarters, we've generated annualized net revenue of approximately $1.5 billion. Ten years ago, that number was just under $500 million. The point is we have built a balanced institutional business. Despite a substantial change in the markets over the past decade, the diversification of our business enables us to generate relatively consistent revenue and positions us well to continue to gain market share. On Slide 7, we look at our institutional equities and fixed income businesses. While 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 slide. Fixed income brokerage revenue was a record at $121 million, up 107% year-on-year. The increase was driven by increased activity in investment grade, high yield, mortgages, as well as municipals. While I believe these record results, what I believe makes these record results even more impressive is that we've generated them at lower risk levels, as our inventories are roughly 50% of what we've carried in the past. This illustrates the talent of our people and the 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 as the S&P 500 bounced back from the sell-off in the first quarter, as well as solid contributions from our European business and our acquisitions, primarily MainFirst and GMP. Both equity and fixed income benefited from increased market share and the rebounds in 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 lighter due to seasonality. That said, we do expect brokerage revenues to be above those that were recorded in the third quarter of 2019. On the following slide, we look at our firm-wide investment banking revenue. Revenue of $217 million was the third highest in our history and was up more than 20% year-on-year, as activity levels in capital raising and advisory improved from the first-quarter levels. Capital raising again displayed impressive growth, especially in the fixed income business. Our public finance business had a strong quarter, as the issuance market rebounded from a very slow March. Stifel lead managed 211 negotiated municipal issues and was again ranked #1 in the nation in terms of the number of issues managed. Additionally, we generated solid nonpublic fixed income revenues during the quarter, particularly from KBW, as a number of financial companies looked to raise capital through debt issuance. Moving on to our equity capital raising business, revenue of $70 million was up 4% year-on-year and essentially flat with the first quarter. Compared to the first quarter of this year, we achieved modest revenue growth despite the fact that we generated 2 large fees from 144A 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 accessed the debt markets. As such, our growth was driven by increased activity levels in verticals such as technology and health care. For our advisory business, revenue of $98 million increased nearly 20% year-on-year, as we benefited from the closing of some large fee transactions, particularly from KBW. In terms of verticals, the performance of our advisory business was driven by financials, industrials, restructuring, and our European business. While 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 reengage. 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 to our pipeline, and businesses such as restructuring continue to be very strong. So overall, I remain cautiously optimistic for our 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, Jim Marischen.

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 ROE of nearly 13% and RoTCE of nearly 21%. Given the strong GAAP earnings in the quarter and the pause in our share buyback program, we saw fairly meaningful increases in book value, tangible book value, and capital ratios that I'll describe in more detail in the following slides. And now let's turn to net interest income. For the quarter, net interest income totaled $115 million, which was down more than $20 million sequentially and at the low end of our guidance range. Our results were impacted by the decline in short-term rates as well as our senior debt issuance that added roughly $2 million in additional interest expense. Our firm-wide net interest margin declined to 218 basis points, primarily as a result of 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 an 18% 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 between 235 and 245 basis points. This updated guidance, as compared to last quarter, is a direct result of lower LIBOR rates we saw in the prior zero-rate environment. Given the lower bank NIM, we anticipate firm-wide net interest income to be between $100 million and $110 million in the third quarter. Moving on to the next slide. We review the bank's investment portfolio, which remains 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 and why we believe they are relatively conservative. That might sound counterintuitive given the majority of our portfolio is comprised of CLOs and given some of the recent focus regarding the leveraged loan market. As you can see on this slide, we believe that the tranches of the CLOs that we invest in are 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 $1 of principal loss. To reiterate what I said on last quarter's call, it would take a constant default rate on the underlying commercial loans of more than 15% annually over the bond's 5- to 7-year life with a loss severity of more than 50% to lose a single dollar of principal. This level of loss is significantly more than what was seen during the global financial crisis in 2008. Before moving onto 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 own them? Well, you have to understand that the market for these securities is dominated by the bulge bracket and large international banks that hold the vast majority of the AA and AAA CLO market. So the available securities outside of that is rather small. And given the cash flow structure of CLOs, the analysis of these securities is more appropriate for an institutional fixed income group than your typical bank's 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 of the deal. That discipline provides us the risk management framework to lean upon when assessing and monitoring the CLO portfolio. As a result of our overall approach to risk management in this asset class, we believe CLOs continue to represent an attractive opportunity for us. Moving on to the next slide, we cover our loan portfolio. We ended the period with 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 continue 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 private client demand, and we continue to see these as attractive, low-risk loans, as 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 and is comprised primarily of C&I loans. Our C&I loan portfolio is entirely comprised of senior secured loans. As you can see from the table on 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 industries most impacted by the pandemic. When you combine our exposure to energy, hotel, leisure, entertainment, and restaurant industries, our exposure remains at less than 3% of bank loans. Moving on to CECL. Looking at the credit provision, we adopted CECL last quarter, and our allowance for credit losses increased by the $11 million opening adjustment that ran through equity, the $16 million provision for credit losses that ran through the P&L in the first quarter, and an additional $19 million that ran through the P&L 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 a 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% and an unemployment rate that peaked at 13%. This compares to June's forecast, which includes the most severe quarterly decline of GDP of negative 33% and an unemployment rate that peaks at 15% and 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 have remained strong, with net charge-offs at less than 1 basis point and NPAs at 8 basis points. I would also note that the nearly $6 million 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 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 represented 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% that was up 380 basis points sequentially. The increase was a result of lower compensation accruals and lower non-comp expenses, as travel, entertainment, and conference expenses declined as anticipated. Specifically, the comp-to-revenue ratio of 60% was down sequentially, as we continue to accrue conservatively. While the revenue outlook for the full year remains volatile, we are more comfortable with our expectations for the full year than we were earlier in the year. 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. While we pooled our full year guidance last quarter, I would note that this is below the percentage range we guided to prior to the COVID 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 of the timing of the prior quarter's repurchase activity and was slightly above our guidance of 74 million shares as our share price increased modestly from the end of last quarter. Moving on to capital liquidity. Our capital ratios increased significantly during the quarter as a result of a number of factors, including the impact of our preferred equity issuance, the strength of our earnings, the lack of share repurchases, and the modest decline in our balance sheet. Consequently, our Tier 1 leverage ratio reached 11%, which was the first time since the third quarter of 2016 that was above 11%. Our Tier 1 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 in this environment, we believe that we are in a very strong position to capitalize on future opportunities. During the quarter, we issued $400 million of senior secured notes and $225 million of preferred equity, as we look to opportunistically access the capital markets. We have $300 million of a 5-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 2 quarters. In terms of our 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 $48.84, an increase of $2.71 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 suite program, the bank has access to off-balance sheet funding of $4 billion. Within our primary broker-dealer and the holding company, we have access to nearly $2 billion of liquidity from cash, credit facilities that are committed and unsecured, as well as secured funding sources. I would also highlight that despite the strong performance in the equities markets, we did see increases in client allocations to cash. Within our suite program, we saw balances increase by nearly $1.4 billion. So far in the third quarter, we have seen some additional modest increases continue. And 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, $6.13 of earnings per share, and our return on tangible book value was over 23%. And this is after increased credit provisions and compensation accruals, which totaled $0.76 per share that we absorbed. Absent these two items, trailing 12-month EPS would have totaled $6.89. I want to point out, using $6.13 and our current share price, we are trading at 7.6x, which is a significant discount to peers. Now I realize that trailing multiples are not terribly important to investors, particularly in times of increased uncertainty, but I raised 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 COVID in many states adds to the uncertainty of the shape of an economic recovery. As you know from our earlier comments, we are seeing lower sequential trading volumes in July, and we anticipate lower net interest income as the 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's strong performance in the second quarter, and our investment banking activity continues to generate solid results. We have a strong and liquid balance sheet, and we will continue to look for ways to deploy our increased capital in order to generate the best risk-adjusted returns. And with that, operator, please open the line for questions.

[Operator Instructions]. Your first question will come from Devin Ryan with JMP Securities.

First one here, I just want to dig in a little bit more on the net interest margin guide. Maybe if possible, just to think about some of the moving parts beyond the third quarter, appreciate the color there. But if we hold balances steady, how should we think about maybe the longer-term trajectory here if we have the view that rates will remain quite low for some period of time? So just the thought that -- I mean I'm assuming that the vast majority of the reset is kind of getting reflected immediately. But what are some of the other areas that could influence kind of the net interest margin beyond just the third quarter?

Yes. I'll let Jim maybe give some more detail, Devin. I think that what we saw in the quarter was primarily driven by the level of LIBOR and the relative level of LIBOR in the prior zero-rate environment. So it being lower. And so it's hard to project that going forward, but that clearly impacts the repricing of some of our asset base, loan and securities. So Jim?

Yes. No, I think that's exactly right. And with our deposits at essentially 5 basis points today, there's not a whole lot we can do on the liability side. The only other factor really impacting this is any structural change on the asset side of the balance sheet, which on the slides, we know, we don't anticipate any material change there. And that's really the only other lever we have at this point. So when we think of terminal NIM today, it really is down a little bit from the 250 we talked about last quarter to more in that 235 to 245 range in the current environment.

And again, that's -- the substantial change is the level of LIBOR, okay. So that can change, Devin.

Sure. Yes. I was just -- if you just held that constant, just trying to think about any additional pressure that would maybe be on a lag. Okay. That's helpful. And then, Ron, I guess for you on the financial adviser recruiting. Your commentary, obviously, good to see kind of things ramping back up, and June kind of 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 that 22 in June is obviously a little bit more elevated. So I'm curious if there was maybe a little bit of pent-up demand in that. And then just a bigger picture, the ability to recruit and do kind of the home-office visits and some of the 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 are more comfortable doing the types of things virtually that they historically would have done in 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?

Yes. I mean that's a great question, Devin. I always believe that -- as I said in my remarks, that one of the strengths with Stifel was home-office visits and bringing people to home office and spending that time and felt that, that underscored the cultural advantages that Stifel had. And I was concerned when we started the quarter that we had to cancel all these home-office visits and that, that was going to significantly and maybe materially change our recruiting profile. Yes, that just isn't the case. Maybe people don't really -- maybe we recruit better, but don't meet them. I do meet them over the phone. But the point is that we've been very efficient at being able to get the same message, the same capabilities, display everything we're doing in a remote and in a Zoom or Webex environment, which, frankly, has been more efficient and allows us to just touch more people. And while I think we'll get back to home office visits, I think that we -- and I believe that we have found that this works, we've supplemented it with some better materials. We have a recruiting video that's been very well received. So all in all, the transition from more of a high-touch personal recruiting to remote recruiting has been very good. And I would expect our recruiting to possibly be higher than where we were high touch. That's what I'm saying today.

Yes. Interesting. Okay. I appreciate that, Ron. And just last quick clarification here that $41 million incremental on the compensation accrual. I just want to make sure I'm understanding kind of what the message is here. Obviously, you've been conservative to start the year. So there may be some kind of recovery in the back half if the revenue environment remains strong. It's kind of the takeaway at least that I read. Is there a view on kind of the full-year range now because you have more clarity, as I think if you mentioned? I'm just trying to understand what the end takeaway here is?

Well, again, a good question. I'm not sure I have the answer completely. But in the first quarter, 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, we had a strong second quarter. And we reduced that level of accrual to 60% down from 62.5%, but still elevated from the high end of our range, which should -- which does mean that we're halfway through the year. And therefore, we're more at least confident of what full-year results will 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, 62.5% in the first quarter. Look, if we have -- if business continues, and I can come back to that in the end about why, even though for many industries, the economic outlook is very uncertain, it is for ours too. The fact remains that financials, and especially, investment banks are going to be very busy for a while and more than just 6 months because of all the activity that comes out of what's happened to this pandemic. So as I look forward, Devin, we're more confident than we were. And frankly, if revenues continue to be strong, I could see the comp levels as a percentage of revenue coming down. But look, I said I'm reluctant to forecast, and so I'll stop there.

Your next question will come from Alex Blostein with Goldman Sachs.

This is Daniel Jacoby filling in for Alex. Maybe just to comment the compensation discussion from a different angle, maybe more from a margin perspective, which is to say, how should we think about pretax margins as it relates to kind of the outlook for this year? And maybe just bigger picture, when we think about a lower net interest revenue run rate, obviously, with rates being at zero, how should we start to think about kind of what normalized margins could look like? Is it kind of beyond this year, which obviously is a little bit atypical in nature, but just to kind of think about normal margins in a normal year given where rates are, that would be really helpful.

Again, I'll let Jim fill in around the fringes of this. But our margins, our guidance has generally been from 57% to 59% on comp. All things being equal, we would have been at the higher end of that range this year, primarily because of the reduction of NII, which is non-compensable. So we would have -- everything else being equal, we'd have seen margin compression of, call it, 100 basis points, primarily resulting from higher comp-to-revenue and that -- and of course, that's been offset a little bit by the reduction in travel and conferences. But the other major impact to our margins this year is a provision for loan loss, which is highly elevated due to CECL. So through all of this in more normal times, we would be back to where we'd say 57% to 59%. And where would it be in expenses, Jim?

So when we think about the operating environment in the second quarter compared to the third quarter, we don't see any material change from a non-comp perspective, ex any change in the provision like Ron talked about or whatever the assumption you have is for investment banking growth. So when you think about that, you do have some leverage that we've obtained in the second quarter that we expect to continue in the third quarter in terms of non-comp. So you put that together with what Ron talked about, comp, and you can put together your assumption for pretax margins.

Got it. That's helpful. And then maybe just on capital. How should we think about kind of your priorities when we think about buybacks being momentarily on pause, and maybe that's not the case, but then also you've kind of guided to no meaningful growth in the size of the balance sheet. So buybacks are on pause, and if the balance sheet size is fairly constant, how should we think about your deployment of capital over the next, I don't know, 12-ish months?

Well, Dan, that's again one of those questions that I need a little bit better of a crystal ball. I would say that generally speaking, we're practicing what we tell our clients. And that right now, capital is king. You saw that we were opportunistic in raising a preferred. We went out and sort of pre-refunded, so to speak, our tenure, which is due in December. And we're being cautious on extending new credit in this environment, what they'll need to be a little more certainty about the level of the -- and the 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 of this stuff. So if you're -- I would certainly say for at least the next quarter and probably through the end of the year, which obviously includes the election, we're going to retain our capital, remain very liquid, and be very selective about balance sheet growth. And then there will come a time when we're going to be able to deploy that capital, as has been our history.

Your next question will come from Steven Chubak with Wolfe Research.

So Ron, look, recognizing that you don't have a crystal ball, but since you took a not-so-subtle shot at the analyst community for underestimating the revenue generation and power of the institutional business, I figure 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 of $380 million to about $420 million. This year, you're clearly running well above that, similar to what we're seeing from other industry peers. But just given the deals, just given the fact that you've cited some share gains, as you look ahead, what do you think is an achievable run rate for the brokerage business in a more normalized environment, recognizing that there are going to be various puts and takes to consider?

First of all, I didn't think it was a shot, but I mean I would say that -- I would say, look, I would say that our institutional business has been consistently -- and I think you would agree with that, fairly consistently underestimated. And I'm not going to provide guidance on that number, I haven't. But what I would say is that we keep adding and doing things that, I think, get forgotten in the mix, okay? And so we added this year 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 is, which is to build the premier middle-market investment bank, both in the United States but also globally to the -- in the markets that we operate. And so when you look at these numbers, if you look 2 years ago, you're just missing all the things that we've done. I think I said at the beginning of the year, and we showed where we thought that on a steady-state basis, our revenues were going to be over $3.6 billion, up from the $3.3 billion. And we laid out -- I think we gave a bridge as to why that would occur. So look, I don't have a crystal ball. I do believe that our fixed income and equity brokerage sales and trading business, if you will, certainly has been positively impacted by the volatility that's been going on. But there's also buried in that increase, the investments that we've made over the years. And I think that most of these models, if you want me to continue my critique, if you will, needs to be adjusted for the investments we’d made.

All right. Well, I won't speak for the other analysts, Ron, but guilty as charged. So make sure to take that into consideration. The other piece I wanted to ask about, at least on the institutional side, is Miller Buckfire. Investors tend not to focus very much on the fact that you do have a pretty strong restructuring practice within your advisory business. I just wanted to get a sense in terms of orders of magnitude, how much business contributes to advisory today? And how is the business performing in the current environment, just given what is a much more constructive restructuring backdrop as we look ahead?

Again, I think I've said in the past, first of all, Miller Buckfire is a strong brand and a strong practice. There is unfortunately or fortunately, I guess it depends how you want to look at it, a lot of demand for this business. We've increased the size and minimums of what we're going to do because we're very busy. So I believe that is an overlook portion of our advisory business in times like this. We don't -- and we haven't nor am I going to provide any percentage of revenue. What I have said, and I'll continue to say is that even though it is good? And I think my partners in that business are very talented, and they're very busy. They're not going to make up for a significant decline in traditional M&A. But all said, again, we have a lot of factors and a lot of growth that goes into our advisory practice. It's not all just traditional M&A. We have capital raising to REIT and partners. We have interest rate management for B&F. We have technology through Mooreland, and I could go on and on. And a lot of those are all, again, new in the last couple of years, which goes back to my recalibration of the model comment.

Understood. And just one follow-up for me on capital management. I know you gave some color regarding the prioritization. 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 and deploying it into CLO securities, which are clearly comfortable underwriting some of those credits versus just sweeping that to third parties, recognizing that the relative attractiveness of the returns you can earn on the securities book or maybe not quite as high just given the shape of the curve?

Well, I mean I think it's -- certainly, in terms of just absolute NII, we're better off -- it's the advantage of having a bank. I mean sweeping away is going to be a significant issue for many financial institutions that sweep dollars to third-party banks. Those fees are pretty fast going to zero, up from what was 150 basis points. And so that alternative is not something that's going to add significantly to our NII. And the question always is, 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 we'll look at. One, we're very comfortable with our CLO position. We get an outside number of questions about it. So we're trying to be much more transparent and tell how we're doing this because I do think that's a very attractive asset class, considering where the yields are versus the risk in the AAA and AA tranches of that. We're very comfortable. We think we have a real expertise in underwriting those securities. But the other thing that we're somewhat have to be mindful of is CECL, as it relates to growing our balance sheet. I've made comments over time that I thought CECL would be countercyclical. We've said that CECL was conceived in a think tank and implemented in a crisis. And that's what's going on right now. And so we -- the CECL provisions in these economic forecasts make you take pause about putting on new loans.

And the only other thing I would supplement there is, obviously, credit spreads have tightened a fair amount in the CLO space. You're looking at current book yields there, less than 2%. Obviously, the market moves around a lot there. And on a selective basis, as we view attractive entry points, it may make more sense. But the returns today aren't as attractive as they once were. And I think we'll have to be a little bit more selective as we go forward and pick our spots in regards to CLOs in terms of purchases.

Your next question will come from Craig Siegenthaler with Crédit Suisse.

First, just more of a CFO-type question, but other operating expenses were lower as expected, I think mainly due to muted travel and entertainment. But I wanted your perspective on what you think is a good run rate for the third quarter? And then as we think out to a more normal environment beyond the pandemic, how should we think about a good run rate for this line item?

So I referenced this a little bit earlier, but as I look at the third quarter compared to the second quarter, I don't see any material change in our operating expense base ex provision and ex investment banking gross-up. So I think that is a decent run rate. Now obviously, there's some puts and takes there that are going to move in opposite directions. But I think as we look forward to the third quarter, that's a pretty good starting point to think through that. As we look beyond the end of this year, I think there's a lot of factors and variables that you have 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 a normal environment or even in a kind of subdued zero percent interest rate environment, I think a little bit more normal environment, I'd say that would be a good guide going forward.

Got it. And then just a follow-up on the securities portfolio. The ABS yield was 2.7% in the quarter. What is the new money yield blend today for ABS as you reinvest the cash flow? And also, are you making any changes to the securities portfolio, just given where we have a very low rate backdrop here? And I want to see if you're sort of resetting how the portfolio is positioned going forward.

So obviously, that's baked into when we talk about the net interest margin of 235 to 245. And I just mentioned a question or two ago, that the current book yields on the CLOs are just under sub-2%. And so when 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 fully in. But that's what really is driving that toward NIM guidance.

Your final question in queue will come from Chris Harris with Wells Fargo.

Ron, how are you feeling about acquisitions, the acquisition environment currently? Might you want to take advantage of some dislocations to lean into that a little bit? Or would you prefer to be a little bit more cautious given the economic backdrop is pretty uncertain?

Chris, we've built Stifel both organically and through acquisitions that I think that we've implemented timed and priced very effectively over the years. So we're always looking at things, and I believe that there will be opportunities. Our level of enthusiasm is always driven by we want it to be accretive to our new partners. When we do a deal, we want it to be accretive to us as well as shareholders. And that latter one by being accretive to Stifel has a wide range of outcomes in today's environment, which impacts valuations and a number of things. So I wouldn't say that our enthusiasm to pursue things that can add to Stifel's relevance has waned as much as the spread or the cone of which we view as it's wide. I mean it's gotten more difficult to be able to be more confident about returns and what's happening. And then you factor a lot of things into that, including potential changes in the tax code. We've got an election coming up. There's just so much uncertainty that’s sort of our discount rate, if you will, is higher. And so -- but we're -- I think you know me and my team. We like adding to our relevance to our clients, and we like adding quality people, and that's not going to change at all. It's just the environment is tough.

Got it. That makes sense. Guys, maybe a quick follow-up on investment banking. You mentioned that the 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?

I think it's -- it would be a 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 the investment community on the diversification of our revenue source, both in banking and in advisory and because I do believe that it's a little bit misunderstood. Now that said, my view is about these various items is somewhat clouded in the next, say, maybe up to the election of the third quarter and early into the fourth quarter. Of course, it was clouded in the first quarter, and we had a very good quarter. 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 issues, primarily safety and working remotely, and of course, loan loss and 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. And I think our bank is very conservative. But our institutional business is well positioned to capitalize on what I believe is going to be a lot of activity as the U.S. economy sort of recalibrates itself to all the stimulus, to all of the debt that was put on, the refinancing, the raising of equity, you just go on and on. And I believe that you're going to see an elevated level of activity in Corporate America that's not going to be just in the next quarter, it might be muted for 3 months. But if you ask me to look forward a few years, we're going to be very busy. And I have a lot of -- I feel good about the investments that we've made in the past years, which are going to allow us to take -- to capitalize on all that's going to be done and relatively outperform when it comes to looking at comparative numbers.

And this concludes our Q&A 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, I would -- everyone is working very, very hard 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. And I look forward to continuing to report to you on a quarterly basis and hopefully, continue to show the growth in the company. So with that, I wish everyone a great day, and please stay safe. Thank you. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.