Stifel Financial Corp Q1 FY2021 Earnings Call

Thank you for standing by, and welcome to Stifel Financial’s First Quarter 2021 Earnings Conference Call. All lines are currently in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. 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 Nesi and Jim Zemlyak; and our CFO, Jim Marischen. 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 note some of the numbers that we state throughout our presentation are presented on a non-GAAP basis. And I would refer 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 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 CEO, Ron Kruszewski. Ron?

Thanks, Joel, and good morning. Thank you for taking the time to listen to our first quarter 2021 results. I’m going to start this 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. Let me give some highlights of our quarter. Have Jim Marischen review our balance sheet and expenses, and I will wrap up with our outlook before our Q&A. As you can see on Slide 1, the first quarter of 2021 was another record for Stifel as we continued to benefit from our ongoing investment in our firm, as well as 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 quarter's record by more than $75 million driven by record revenue in both our global wealth management and institutional groups. The growth in revenue and our focus on expense management resulted in non-GAAP earnings per share of $1.50, 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. Our record results were driven by our past recruiting success, the growth in our balance sheet, and robust capital markets. Other highlights for the quarter include pre-tax margins of more than 21%, an annualized return on tangible common equity of over 28%, and tangible book value which increased by 32%. Moving to our 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 60.9%, which was just above the high end of our annual range yet is consistent with our policy of calling for compensation conservatively early in the year. Our operating expense ratio was about 18%, but excluding credit provisions and investment banking gross-ups, our operating expense ratio totaled 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, like other banks, we have updated our economic model. This, coupled with strong credit performance in our loan portfolio, resulted in the release of $5 million of our credit provisions during the quarter. As you recall, our provision expense last year was driven by the adoption of CECL, and more specifically the negative economic outlook that was a key input into the calculation. Neutralizing the impact of credit provisions, Stifel’s pre-tax, pre-provision income totaled $238 million, which increased 61% from the first quarter of 2020. Moving on to our segment results 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 bank NII, our private client business improved 13% driven by the strength in asset management and growth in brokerage revenue as we've benefited from enhanced client activity levels and continued success in recruiting. We again finished the quarter with record client asset levels, with total assets under administration of nearly $380 billion increasing $21 billion from the prior quarter. Additionally, fee-based assets of $138 billion rose 7% sequentially, which should drive further growth in the asset management service fees line item in the second quarter of this year. The next slide highlights the strength of our recruiting and the growth drivers of our platform. We had a solid quarter in terms of advisor additions as we added 15 advisors with total trailing 12-month production of $13 million. While this was fewer than those we’ve typically recruited in recent quarters, I’d remind you that recruiting is cyclical and it needs to be examined over a longer time frame. Since the beginning of 2019, we’ve added 300 financial advisors with cumulative production of approximately $233 million. As I look at the reminder of the year, our recruiting pipelines remain at robust levels and I anticipate another strong year. As you probably saw from a 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 1990 as 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 our renewed focus on this market channel. Moving on to our Institutional Group; this quarter represented our second consecutive record quarter for Institutional Group. Net revenue totaled $506 million, which was up 52% from the prior year and surpassed last quarter's record by approximately $15 million. Our performance was strong across 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% pre-tax operating margin, which was up more than 1,000 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 totaled $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 businesses, we generated record equity brokerage revenue in the first quarter, surpassing our prior record set a year ago by 13%, as strong activity levels continued and trading gains increased. Additionally, I'd note that our electronic brokerage businesses, which include our ATS and Algo products, are now fully launched and we would expect to see increased contributions from these products as the year progresses. Fixed income brokerage revenue in the quarter was up 12% sequentially and represented our third highest quarterly revenue trailing only the first and second quarters 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 as non-CUSIP businesses. On Slide 7, 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 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 during the quarter. Our strongest verticals were healthcare, technology, financials, and consumers. As widely reported, there was an incredible amount of SPAC-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 SPAC activity represents a pause or a saturation point, we are confident 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 manage 236 municipal issues which represented an increase of 42%. While we are off to a strong start for the year, we believe that if Congress were to pass an infrastructure bill, we would see additional tailwinds to our public finance business. We also continue to see solid contributions from our growing corporate debt issuance 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 history. In terms of verticals, we've benefited from the expected pickup in financials and continue to see broad-based results from technology, consumer, and healthcare. Looking forward to our second quarter, based upon anticipated closings of some larger previously announced transactions, and of course barring a substantial change in the market or 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. 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 Marischen.

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 ROTCE 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 equity in the first quarter. 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 increased to 200 basis points, and our bank's 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 would also note that we did see some more episodic loan fees earned during the quarter that contributed to NII. We expect this contribution to decline somewhat in the second quarter. But the loan and securities growth that occurred in the first quarter will more than offset this decline. In terms of the second quarter, we'd expect net interest income to be in a range of $110 million to $120 million, with a similar NIM to the first quarter. Further, while we have produced a 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 will continue to be driven by the competitive environment. But for this analysis, we used a 30% deposit beta. This represents an estimate from what actually happened at Stifel over the entire last rate cycle, but I would highlight that data was very much weighted to the later 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 saw growth in both the consumer and commercial portfolios. Our 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 as FA 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 in fund banking and PPP loans, each representing approximately 5% of the portfolio. PPP loans accounted for more than $400 million of C&I growth, while 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, has been classified within financials in past presentations, but given its size, we felt it made sense to break this out as an 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 AA CLOs. We've not seen any material change in the underlying credit subordination provided by these 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 payoffs expected to occur in the second quarter. Turning to the allowance, we had a $5 million reversal of our allowance through a negative provision expense, as additional reserves tied to loan growth were more than offset by the improved economic scenario and our CECL calculation. As a result of the reserve release and the composition of our loan growth during the quarter, the ratio of 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 their relative levels of inherent risk. At quarter end, 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 non-performing loans remaining at 7 basis points. Furthermore, we did take the opportunity to de-risk from our commercial book by selling or reducing positions by $83 million on five C&I loans, which resulted in less than $1 million of charge-offs. This equates to roughly a 1% discount to par. All five of these loans were in sectors more impacted by COVID and carried reserves well in excess of where we sold them. Moving on to capital and liquidity, our risk-based and leverage capital ratios came in at 19.4% and 11.5%. The decline in our capital ratios was driven by balance sheet growth and the $68 million impact in 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 195,000 shares at an average price of $61.79 per share. Our book value per share increased to $35.96, up 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 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 that S&P recently improved Stifel Financial’s outlook to positive based on our strong operating results and overall financial position. On the next slide, we walk through expenses. In the first quarter, our pre-tax margin improved by 730 basis points year-on-year to more than 21%. The increase was the result of strong revenue growth, lower compensation accruals, and our continued expense discipline. Our compensation to revenue ratio of 60.9% was down 160 basis points from the prior year. That ratio came in above our full-year range of 58.5% to 60.5%, 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. That 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 operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $184 million and 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%, 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 share 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 to total 118.7 million shares. With that, I'll turn the call back over to Ron.

Thanks, Jim. As I’ve 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 have 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 economy continues its recovery, we continue to expect a very strong operating environment for the remainder of 2021. Additionally looking forward to our second quarter, for many of the same factors already cited, our business is off to a good start. With respect to our full-year revenue guidance of $3.8 billion 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 if 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 the midpoint of our NII guidance is above first quarter levels, and we continue to see client engagement. For the institutional group, our investment banking pipelines remain at robust levels. While 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 financials. Additionally, as I look forward, we have a number of large transactions that are scheduled to close, which increases my confidence for the remainder of the year. In terms of underwriting activity levels, the pace so far in the quarter has pulled back from the torrid pace experienced in the first quarter, but still remains strong. Moving on to expenses, our full-year compensation guidance remains in place, and we would expect 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, we will continue to focus on risk-adjusted returns. In the first quarter, we took advantage of good credit conditions to deploy capital into growing our balance sheet. The $1.5 billion increase in balance sheet represents 75% 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'll likely continue to be opportunistic with our repurchase activity. Lastly, we will continue to look at acquisition opportunities and investments into our business, as Stifel is and always has been a growth company and investing in our franchise has historically generated strong returns. So, let me sum all this up by saying our business is in a great position to not only capitalize on the current strength of the operating environment but is proven to have the flexibility to successfully adapt to changes that could occur. And with that, operator, please open the line for questions.

The first question will come from Chris Allen with Compass.

Nice quarter. Maybe you can just dig in a little bit more on the outflow of the balance sheet. Obviously, I know that you can grow more if the credit looks good. Maybe can you talk about where you're seeing the better growth opportunities right now, it's within C&I, what industries, what sectors, and any color just in terms of how much the CLO reduction will be achieved? Can you just kind of think about what it looks like?

Yes, I’ll - Jim, do you want to take that?

Yes, I can start off. So, I think in terms of opportunities for loan growth, the thing you’ve continued to see is that we've seen a lot of opportunity on the consumer side. The increase in Q1 compared to Q4 on the consumer side was up almost 50% or a little over 50%. We continue to see strong demand on the residential real estate side, as well as securities-based side, given relatively where interest rates are. On the C&I side, we will continue to emphasize the growth we've seen and the opportunity with fund banking. It'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 CLOs, a good portion of that was anticipation of the prefunding, in anticipation of a payoff that will occur in Q2, so we'd expect those balances to be relatively flat after those payoffs.

I think what I would say just in general is that you read a lot about demand being tepid, believes that the larger banks are long on demand. And I will say what I've always said is that we're an organization first and foremost a wealth management investment banking firm with $380 billion of AUM and our bank is $20-ish billion, and so there's just a lot of demand that’s a lot of demand. 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.

Understood. And then maybe on the brokerage side, obviously we're seeing industry trends slow in Q2, kind of pointed out versus the first quarter. Any color in terms of how you guys feel about maybe the incremental opportunity around the electronic products in the equity side? What can help us frame out what's been environmentally driven and of course versus taking share, anything on those fronts would be helpful. Thanks.

I think it's - as we've built out our capabilities, the build-out of our electronic suite, which is both our algos and ETFs, just has enhanced the reason that buy-side clients transact with us. We've needed those products to supplement our research-driven offerings. And I’m optimistic that those products will help us increase market share, because in years past, that was an area of the execution institution. We can see that over to where we white-labeled in some cases. We’ll see how that plays out. But those products are up and running, and we're seeing investors adapt to using them.

The next question will come from Devin Ryan with JMP Securities.

Maybe you can start, Ron, on the Independent Advisor Initiative and just give a bit more color on kind of the expectations for that business. Clearly you guys have been in the independent side before but never really made a big push there. So I'm kind of curious what is going to be different in the strategy moving forward? What type of advisers you'll be targeting? And then just kind of thoughts around will this be an outlet for potential employee advisors with Stifel to migrate to, and are there any kind of market considerations? So just a little bit more color would be helpful.

Well, look, we've had an independent channel since 1990, so it's not like we're starting something from scratch in terms of legal structure, a separate broker-dealer supervisory structure, all of that is in place. When we looked at the way we built our platform and our structures, it was evident to us that we had a very competitive offering for the independent space. Frankly, just as a space I and Jim really just never focused on. We have a number of advisors that would want to talk to us about potentially an independent space, either two different advisors or service advisor with a different mindset. But we often just told them to go to competitors; we're not going to do that anymore. We have a very compelling offering, one that’s up and running. We're just going to put some focus on it. So, it's a growth channel. I believe that our future recruiting will now include independent advisors that we previously didn't engage with, so that's how I would see it. It’s early in the game; we’re not running out and saying we do have any goals to do anything like that, but we're already hosting visits for that market channel.

Yes. Okay. Thanks, Ron. Helpful color. And maybe just a follow-up on just kind of where you're making incremental investments in the business right now, and what's most compelling. Clearly, you're starting the year with tremendous momentum. Business is creating a lot of excess cash, and there's a good period here to reinvest back into the business. So I’d love to just talk about some of the priorities for you guys in terms of investing for growth, where you're focused, and then also from an M&A perspective, the types of transactions that are more prevalent in the market right now, the types of stuff you guys are seeing come across, and maybe where you’d have appetite?

Look, in terms of investment, I wouldn’t say we are always investing. If you’re looking for specific areas, we do invest in our people, but we also invest in technology; that's probably the table stakes in the business today, and/or our digital technology to help our advisors deliver their advice proposition. That's an ongoing investment. The market's ever-evolving; certainly, technology is always evolving. I think we have a very good foundation that we've built that allows us to continue to invest in technology and help our clients get organized and communicate with them. That's an ongoing thing; it's not that we did a lot, and we're going to do it in the future, and it's not the percentage of our ongoing operating expenses. And on the acquisition front, it again is a market where asset values are high. Yet, as we have always done, we’re always looking for anything that can help improve our relevance in any market that we serve or any clients that we serve. As I will take this moment to say what I said in the press release, which is that had we not made some of the investments via acquisition that we’ve made in the previous five years, we’d be nowhere near the level of revenues that we are today. So that past is prologue. So we're going to continue to do that, but there’s no need to absolutely have to do something.

The next question comes from Craig Siegenthaler with Credit Suisse.

This is Gautam Sawant filling in for Craig. Can you please just expand on some of the advisory recruitment dynamics? And how should we think about the pipeline and pace of advisory onboardings 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 trended so far?

For your second question first, I mean I said that we just announced that not even 30 days ago, so from - I will say that from having zero conversations to a number of conversations we've had with a huge percent of increase. So we've had a number of visits from really not having those conversations. We expect that to continue. There is a competitive landscape in the independent channel. There are some established players. We feel that we land on the playing field with a very compelling offering. 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 said, recruiting has some ebb and flow to it, both seasonal; some things that are going on. If I would have any commentary, I would say that the end of sort of the pandemic has probably had more of an impact on recruiting than the beginning. What I mean by that is at the beginning of the pandemic, people who were 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, as we were able to do that with Zoom and onboard clients. There was really no hiccup. As I look at it over the last couple of months, I would say that people not being able to go to the office, not being able to maybe properly prepare, have slowed it down. Our pipeline is very strong. We're talking to a lot of people, but the pace at which people are moving, I do think is being impacted by the fact that many people have not been able to go to the office. That's just my gut instinct. When I look at it and talk to people, but I see no change in the trajectory of our recruiting or in our pipeline. I think it’s very robust. I will also say that the competitive landscape has increased, but that ebbs and flows; we're at a pendulum swinging where it's more competitive now than average. So all those things put together, normal times, I would say the pandemic as we come out of it will see recruiting pick up.

And as a follow-up, can you speak to the compensation ratio? You mentioned conservative recruiting for 1Q 2021. How should we expect the ratio to decline in future quarters if revenue normalizes down?

I guess that's a great question. I mean, if revenue normalized and was down, I mean we've got 25 consecutive years of record revenue. And I tend not to think of revenue normalizing. One of these areas I'd be wrong, hopefully not this one. But not this year. I think if you look historically, just go back and look at the last four years and chart our comp to revenue by quarter, and then where it ends up, and what you'll see is what we've always said. We're conservative in the first quarter, and then with the comp ratio we’ll generally trend down, and at this point we’ll be within our range of guidance as we see it today. And I think the best way to understand that is just to look at history, look at what happened last year, the year before, and the year before that. And you'll see what we tend to do. Normally in our firm, revenue picks up in the back half of the year. That has to do with the seasonality of our business, our public finance business is always strong 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 and people wanting to get deals done. I suspect that may be true this year with the tax changes, a 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 a historical basis.

And maybe just to add one thing there is in the prepared remarks, we talked a little bit. If revenue does remain strong, we do see a path for more flexibility in the guidance we put out there. We've not updated our guidance yet. But again, we do see a path to exceed that if revenue remains at these strong levels. Just wanted to highlight that point as well.

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

Jim, you kind of headed on with your last point on my question, but I guess bigger picture as we think about the operating leverage in the business. You know Ron clearly expressed a lot of confidence on the momentum you guys are seeing on the revenue front, potentially exceeding the $4 billion revenue number for the year. I guess that would imply high single-digit revenue growth in a year like that. What should be kind of the operating leverage in the model given the fact that you guys are not quite ready to lower your comp rate guidance for the full year?

Well again, I think you're going to see operating leverage just despite what I just said about how we accrue comps. I think we've been able to manage our comp ratio, as I look forward, the comp ratio is going to come down as the year goes on. I think we've been pretty efficient on the operating expense level. I think we've done a really, really good job of integrating. Remember we did a few acquisitions back in 2019, and we’ve been great at those and have operating expenses that are below our guidance at this point as a percentage of revenue. So I would think that you can see operating leverage both in increased revenue. And as Jim said that will even give us more flexibility on the comp side. So that's I don't think you're seeing huge expansions in margins 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 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 and excluding the ID gross ups. But we do have a number of expenses that are tied to revenue. We had a very strong revenue quarter. As we look forward, we don't really see any material change in any of these numbers until really the latter half of the year where we do see T&E and conferences picking up. That being said, similar, we said with the comp ratio, we do see a potential ability of revenues remaining strong to come in below the low end of our guidance range here.

I feel like our history is as big as that when we see it we'll know it. We don't go out and look for acquisition write these things down. We're opportunistic. If I have three factors and they're done, they're not going to change. I want something to make us more relevant and that we're in a lot of businesses. When you think about wealth management, our institutional equity and fixed income, our European operations, Canada, all of those, anything that can make us more relevant, we will look at as long as it meets financial hurdles. It needs to be accretive to our shareholders and importantly it needs to be accretive to the people joining us. If those meet, then we very well may execute. To pick a specific area would sort of trunk our historical practice, which is we want to be opportunistic as opportunities present themselves.

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

So Ron, 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? Given the strength of your capital position, just as a follow-up to the earlier question, does it make more sense to actually buy versus build as we think about your efforts to scale in this area?

Well I didn’t mean to say that our offering was better or more competitive. What the point I was trying to make was that we're not starting from ground zero, okay. We're not sitting here saying let's have an independent channel, and someone said well, you need another broker dealer, which you do, and you need capital and you need to get approvals - but we have all of that, okay? That's what I'm trying to say. As we've built out our technology platform and have more cloud-based applications, we've learned from working remotely that our ability to service an independent channel we recognized that we could do it. So, we're just, we’re another participant in that marketplace, and we believe we have a competitive offering. That's what I mean to say. As I think - there are some established players in the space, but we believe that we will be competitive.

Right and thanks regarding this one.

You were saying buying versus scaling, well you know again if an opportunity came that offered an attractive way to scale into the business we've built Stifel that way over the years. So that's not something that we would be against. The difference here is I don't believe we need to buy the capability, right? We have the capability, so we can just hire into this. It’s no different to me looking at traditional wealth management, which we have the capability and we're adding to it or adding to this space again, we have the capability. Sometimes we've done deals where we've not really had the product offering, and we've made acquisitions because of that reason. In this particular case, I don't think that's the case. We have the product covered on the scale. The independent space is scalable with wealth management, so same clearance system, same technology base - in many cases the same supervisory structure. We see opportunity just to play in other space, but look our growth driver is our employee channel, and we’re going to continue to be very competitive in that space.

Thanks for that perspective, Ron. And just a follow-up on the buyback; 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 2019 buyback run rate but - especially in relation to the strength of your capital position and just a 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 remains somewhat tepid? I know you’ve been very focused on your valuation gap versus peers. I was hoping to get some perspective on that as well.

Well, I have been focused on the valuation gap. I'm glad you brought that up; it's still significant. If you look at it, I’d be interested in your viewpoints as you actually really look at that gap because it’s - look in my opinion it's material. But like always, we're opportunistic on that, and we will deploy capital as we have. We buy back stock. Our comment now is certainly buying it back for dilution, but we see also opportunities to deploy capital elsewhere. So, you certainly acquiring our stock is an attractive return. But on balance, I'm interested - that's a financial transaction to me on balance I'm always looking at building our franchise and building our ability to grow and then putting 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, and we look at balance sheet growth. We are constantly trying to enhance our shareholder returns by pulling the right lever at the right time, and we'll continue to do so.

Thanks, Ron. If I could squeeze in one more just on the NII dynamic quickly, and I just had a couple of imbalance asking on the resiliency in the asset yields on both the loans and securities. You flagged the episodic loan fees. I'm wondering how much did that contribute to the expansion in the loan yield, if you could size that. Maybe just speak to what drove the higher securities yields as well, that clearly buck the industry trend, and where you're reinvesting today?

Yes, so obviously we didn't size it, and what we said in our 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 yield on C&I to call almost 350 basis points. Obviously, that was pretty significantly aided by the PPP fees as well as some early loan payoffs. It’s somewhere between what you saw last quarter, call it around 311 basis points and where you see it today. Some of those fees will continue into Q2. I think we definitely highlighted that as well. But they meet to a little bit lesser extent; however, some of that will definitely continue. That being said, I think when you think about NII, whether it's in the securities portfolio or whether it's in the loan portfolio, I think we have proven that we've been able to reach a stabilized NIM. We have opportunities for additional balance sheet growth and we remain very asset-sensitive. Those are the key takeaways without getting into all the minutia of a specific loan fee; I think those are the points that we would really want to highlight when you think about NII and the outlook there.

Yes, and I’ll just add the final color on that. I think there is a remixing factor to that. As I have said, we have a lot of demand, and we remix our balance sheet. I just feel that where we've built the balance sheet, our conservative nature towards credit, we're in a very good position right now of strength. We feel that we've certainly talked about terminal NIM, but we also talked about how asset-sensitive we are going forward. We feel we're in a pretty good spot if rates stay lower for longer, and we're very well positioned if we have an uptick in rates. I do believe during my career, we will have an uptick in rates, so we'll see. Anyway, I feel very good about the position of the balance sheet at this point in time.

Just one other comment, all of those factors we just described are in our current guidance of the $110 million to $120 million in terms of 2Q NII.

Yes.

We are no longer accepting audio questions. Do the presenters have any final remarks?

I’ll close as I always do, which is to thank you, our participants, for listening to our first quarter results. We are off to a strong start. We see our momentum continuing under these financial conditions. I look forward to reporting to you for our second quarter results 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 lines.