Stifel Financial Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter and full year results conference call for Siebel Financial Corporation. All lines are currently in a listen-only mode. After the speaker's presentation, there will be a question and answer session. If you would like to ask a question at that time, you may do so by pressing star and the number one on your telephone keypad. As a reminder, today's conference is being recorded. It is now my pleasure to hand the conference over to Mr. Joel Jeffrey. Please go ahead, sir.

Thank you, Operator. I'd like to welcome everyone to Stiefel Financial's fourth quarter and full year 2020 Financial Results Conference Call. I'm joined on the call today by our Chairman and CEO, Ron Krzyzewski, our co-presidents, Victor Nisi and Jim Zemlack, and our CFO, Jim Marishen. 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.stiefel.com. I would note that some of the numbers 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 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 by Stiefel Financial Corp. and may not be duplicated, reproduced, or rebroadcast without the consent of Stiefel Financial. I will now turn the call over to our Chairman and CEO, Ron Krzyzewski. Ron?

Thanks, Joel. Good morning, and thank you for taking the time to listen to our fourth quarter and full year 2020 results. I'm going to start the call by running through the highlights of our results before turning it over to our CFO, Jim Marishen, who will take you through our balance sheet and expenses. I'll then come back to discuss our outlook for 2021 and my concluding thoughts. With that, let me turn to our results. marked Stiefel's 130th anniversary and also the best year in our history. Stiefel's net revenue increased to a record $3.8 billion, and earnings per share totaled $4.56, both up 12%, while return on tangible equity was 25%. The company's two operating segments, global wealth and institutional, both achieved record revenue. We continued our strategic growth initiatives by integrating the six acquisitions we closed in 2019, while continuing to grow our business through investments in both talented individuals and technology. The fact that Stiefel recorded its 25th consecutive year of record net revenue against the backdrop of rapidly changing and volatile market conditions illustrates the diversity and balance of our business. To illustrate, let's look back on our 2020 results as compared to our original guidance issued in January of 2020. So turning to slide two, as you can see, back in the beginning of 2020, we forecasted net revenue of $3.5 to $3.7 billion, which at the time was driven by NII growth of approximately $50 million and $125 million in incremental revenue from the acquisitions. Additionally, we expected revenue growth from investment banking, driven largely by advisory revenue, as KBW was anticipating another strong year of bank M&A. On the expense side, we targeted compensation of 57% to 59%, with non-comp expenses of 19% to 21%, both as a percentage of net revenue. So what happened? Well, as we all know, the pandemic materially changed market conditions, while also presenting us with the challenge of protecting our employees, yet maintaining client service levels, all while working remotely. Thus, in March, market volatility increased significantly. The U.S. economy contracted. The government provided nearly $4 trillion of stimulus, $2.9 at the time, and the Federal Reserve cut interest rates to effectively zero, with negative real rates, also ramping up quantitative easing. How did this impact our 2020 results compared to what we thought at the beginning of the year? Let's first look at the items that were negatively impacted. As a result of the zero-rate environment, our net interest income came in below the midpoint of our forecast by approximately $140 million, with our bank net interest margin more than 70 points below the low end of our guidance. Lower rates also weighed on our asset management fees as fees from our third-party bank program declined an additional $25 million. In addition, our asset management fees were negatively impacted by lower market levels. On the investment banking side, a surge in volatility and the significant contraction of economic activity negatively impacted our advisory business, particularly in financials and technology verticals, as well as our fund placement business. Taken alone, These factors should have led to a decline in 2020 from our 2019 revenue. However, the diversity of our business model enabled us not only to post another record year, but to surpass the high end of our guidance. How did this happen? Well, first on the revenue side, we were able to quickly transition our staff to remote locations, which allowed our traders to take advantage of the spike in volatility in the first and second quarters. which drove our record brokerage revenue. Second, the performance of our 2019 acquisitions was slightly better than we expected. Third, our investment banking business benefited from the strength of our healthcare franchise, which more than offset the weakness in financials. On the expense side, the decline in net interest income did drive up a higher comp ratio, but our expense discipline drove down non-comp expenses below our guidance. So, the diversity of our model to changes in market environment not only resulted in our 25th consecutive year of record revenue, but also our fifth consecutive year of record earnings per share. Moving on to our fourth quarter results, we had record net revenue as we surpassed $1 billion in quarterly revenue for the first time. This was driven by record investment banking revenue and our second strongest quarter in global wealth management. The growth in revenue and our focus on expense management resulted in record non-GAAP EPS of $1.67 and an annualized return on tangible common equity of more than 33%. As one way of expressing our confidence in our future, we announced a 32% increase in our quarterly dividend, as well as splitting our stock three for two. Turning to the next slide, as I stated, our fourth quarter net revenue totaled $1.6 billion, which was up 12%. Compensation as a percentage of net revenue came in at 57.9%, which was below our recent guidance range. I'll let Jim speak about this in greater detail, but this was essentially due to the composition of our revenues. Our operating expense ratio, excluding credit provision and investment banking gross-ups, totaled 16.9%. which came in below our guidance of expenses due to the strength of our revenue and strong expense management. For the second consecutive quarter, we had essentially no increase in our credit loss provisions. This was the result of continued improvement in the economic factors that drive our CISO models that was offset by additional provisions tied to loan growth. Altogether, compared with last year's record fourth quarter, earnings per share were up 33%. Pre-tax margins, nearly 24%, which increased 330 basis points. Annualized return on common equity, as I said, over 33%, which increased 340 basis points. And our tangible book value per share increased 21%. Moving on to our segment results and starting with global wealth management. Fourth quarter revenue totaled $575 million, up 9% sequentially. The increase in the quarterly was driven by the expected strength in asset management fees, which increased 8% sequentially, as well as a 14% sequential increase in brokerage revenue due to growth in corporate debt, equities, and private placement commissions. For the full year, our wealth management revenue is up 3% to a record of nearly $2.2 billion. Again, these results were achieved despite the fact that our net interest income and sweep fee income declined significantly. approximately $96 million. Excluding this impact, our full year wealth management revenue increased 9%, again driven by strong growth in our brokerage and asset management revenues, both which reflect strong recruiting and markets. We finished the year with record client assets. Total assets under administration were more than $357 billion, an increase of $32 billion from the prior quarter, and fee-based assets of $129 billion, which rose 12% sequentially, which should drive another strong quarter of asset management revenue in the first quarter. Before moving on to our recruiting, I want to highlight our year-on-year growth rates. Our assets under administration and fee-based assets were impacted by the sale of Ziegler Capital Markets. Specifically, our fee-based assets, excluding the Ziegler sale, increased 22%. The next slide highlights the strength of our recruiting and the investments we've made into our platform. We had another good quarter in terms of gross advisor additions, despite what is typically a seasonally slow period of the year. In the fourth quarter, we added 32 financial advisors with total trailing 12-month production of $22 million. Our recruiting performance this quarter is a continuation of our successful recruiting efforts. Since the beginning of 2019, we've added more than 280 new advisors that had trailing 12-month production of $221 million. Moving on to our institutional group, they also had an outstanding year. For the full year, we generated record net revenue of nearly $1.6 billion, which is up 30% from last year. Our results were driven by capital raising and brokerage, which were both up roughly 50% from last year. For the fourth quarter, net revenue totaled $489 million, up 25% from last year and driven by more than a 35% growth in both capital raising and brokerage. 2020 underscored the value of the diversified business model we've built. As you can see from the chart at the bottom of this slide, our business model helps to provide more consistency to our revenue during changes in market conditions, and we expect this to continue into 2021. Moving on to our institutional equities and fixed income businesses, I'll focus my comments on this slide on the brokerage business and discuss capital raising on the investment banking slide. Equity brokerage revenue in the fourth quarter was up 51% year on year as activity levels increased, and we benefited from solid trading gains. For the full year, we generated a record revenue of $257 million, which increased 90 million from the prior year. While market volatility in 2021 will likely be lower than in 2020, we expect to see increased contributions from our electronic businesses, which include our ATS and Algo products. Fixed income brokerage revenue in the quarter was up 26% year on year and was our fourth highest quarterly revenue ever. All of the top four actually occurring in 2020. Our full-year revenue of $405 million surpassed our prior record set in 2016 by 34%. Our results continue to be driven by activity in investment-grade high-yield rates in municipalities. I would note that we are also seeing solid results from our non-QCIP businesses as well, which we have been investing in for the past few years. On the following slide, we look at our firm-wide investment banking revenue. Revenue of $338 million surpassed our prior record from the fourth quarter last year by more than 22%, driven by record capital raising and advisory revenue. Equity underwriting revenue of $111 million was up 58% year-on-year and surpassed our prior record by 20%. The record results in the quarter underscored the diversity of the business we built as healthcare technology and SPACs were strong contributors. Our fixed income underwriting revenue of $53 million was up modestly from the prior quarter as our public finance business had a strong quarter, despite what we saw as low activity levels in November, which we believe was due to the election. For the full year, we lead managed 929 issues, which is up 17% versus 2019. Given our market position and the possibility of an infrastructure bill from Congress in 2021, we believe that public finance should have another strong year. For our advisory business, revenue of 173 million more than doubled third quarter results. In terms of verticals, our top performers were technology and consumer, as well as another solid quarter from our restructuring franchise. In terms of our overall pipelines, we entered 2021 at levels that are above where we had pipelines in 2020, at the beginning of 2020. And as such, I'm optimistic for our investment banking business overall. So with that, let me now turn the call over to Jim Marashin.

Thanks, Ron, and good morning, everyone. Let me begin by making a few comments regarding our GAAP earnings. In the quarter, we generated the highest GAAP EPS in our history at $1.55, which resulted in a return on equity of 20% and a return on tangible common equity of nearly 31%. Similar to last quarter, the strong gap earnings in the quarter and the pause in our share buyback program resulted in fairly meaningful increases in our capital ratios, levels of excess capital, book value, and tangible book value 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 $105 million, which was up $4 million sequentially and at the middle of our guidance. Our firm-wide net interest margin increased to just under 200 basis points, and our bank's net interest margin improved to 239 basis points. Both net interest income and net interest margin benefited from the remix of bank assets between our securities portfolio and our loan portfolio. Given our ability to continue to grow loans, and the limited cash flow coming off of our securities portfolio, we continue to believe that we've reached a level of stabilized NIM and have the ability to continue to grow net interest income. We will provide more detail on this topic later in the presentation. Moving on to the next slide, we reviewed the bank's loan and investment portfolios. We ended the period with total net loans of $11.2 billion, which was up 4% from the prior quarter. We saw growth on both the commercial and consumer portfolios. Our mortgage portfolio increased by $150 million sequentially as we continue to see demand for residential loans from our wealth management clients given the overall low interest rate environment. Our securities-based loan portfolio increased in the quarter by approximately $90 million. Growth in these loans continues to be strong as FAA recruiting momentum continues to drive increased loan balances in this lending channel. Our commercial portfolio accounts for 46% of our total loan portfolio and is comprised primarily of CNI loans, which increased by 3% during the quarter. Our portfolio is well diversified, with our highest sector exposure in financials at 8%. Moving on to the investment portfolio, which continues to be primarily comprised of 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 their performance. We had a modest increase in the quarter in MBS and corporate securities, but this was driven more by our short-term liquidity management program rather than any change in our overall investment strategy. Turning to the allowance. During the fourth quarter, the allowance remained essentially unchanged as the impact of loan growth was offset by the overall improved economic outlook. Both our commercial and consumer allowances and coverage ratios did experience a decline on a sequential basis. That was partially offset by the overall increase in the allowance on construction and CRE loans, which did see an increase in the severity of the economic variables in our model during the quarter. That said, I would note this is a relatively smaller exposure within our overall loan portfolio. In total, our commercial portfolio had a coverage ratio of 194 basis points, while our consumer coverage ratio totaled 32 basis points. We also continue to see strong credit metrics with non-performing assets and non-performing loans at seven basis points. While we understand we are still in the early innings of the current credit cycle, We've yet to see anything but nominal charge-offs over the last several quarters. Moving on to capital and liquidity. Our capital ratios improved during the quarter. Our Tier 1 leverage ratio increased to 11.9%, primarily on the strength of earnings and the lack of share repurchases. Our Tier 1 risk-based capital ratio was 20.2%, up from last quarter's 19.2%. The improvement in our capital ratio since the first quarter has led to more than $500 million of excess capital. As we look forward to 2021, based on our guidance that Ron will discuss in greater detail later in the presentation, we estimate generating more than $600 million of incremental capital. Our $300 million five-year senior note matured on December 1st and resulted in a little under $1 million reduction in interest expense during the quarter. We estimate that the full quarter interest expense savings will be approximately $2.6 million. Our book value per share increased to $35.91, an increase of $1.94 sequentially, and our tangible book value per share increased to $23.58, up from $21.56. These increases were driven by strong quarterly earnings and improved marks on our securities portfolio. We continue to feel good about our financial position as our liquidity remains strong. In addition to the nearly $7 billion available in our SWE program, the bank has access to off-balance sheet funding of more than $4 billion. Within our primary broker dealer and 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 similar to what we saw in the third quarter, we continue to see an increase in client allocations to cash, despite the strong performance in the equity market. Within our SWE program, we saw balances increase by nearly $2.5 billion in the fourth quarter. So far in the first quarter, client cash has grown another $300 million. On the next slide, we go through expenses. In the fourth quarter, our pre-tax margin improved 440 basis points sequentially to nearly 24%. The increase was the result of strong revenue growth, lower compensation accruals, and our continued expense discipline. Specifically, our comp to revenue ratio of 57.9% was down sequentially and came in below our recent guidance of 58.5% to 59.5% due to the strength and composition of revenues, primarily within the institutional group. Non-comp operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $179 million and represented less than 17% of our net revenue. This was also below our recent guidance and similar to the lower comp ratio was due to stronger than expected revenue. In terms of our share count, our average fully diluted share count was up 3%, primarily as a result of the increase in our share price. And with that, I'll turn the call back over to Ron to discuss our outlook for 2021.

Thanks, Jim. So what drives our growth in 2021? Look, 2020 was nothing short of a remarkable year considering all the challenges and, frankly, the value of our diversified business model was proven as we generated record results despite a very different operating environment than the one we had forecast. Our success in 2020 and our history of profitable growth gives us increased optimism for 2021 as our guidance implies another record year for Stiefel. Obviously, any forecast has assumptions about economic activity and market conditions. We believe that equity markets in terms of the S&P 500 will generally trade between $3,600 and $4,000 in trading activity, both equity and debt, to remain robust. Overall, the fiscal and monetary stimulus is good for economic activity. Couple this with the diminishing drag of the pandemic resulting from vaccinations, And one has a recipe for strong, possibly very strong, GDP growth in 2021. Something to consider would be an increase in inflation and bond yields, which would moderate valuations. Of course, an increase in bond yields or a steepening of the yield curve would be beneficial to financials like Stifel. On the wealth management side, we enter the year with record fee-based assets, a very strong recruiting pipeline, and substantial excess capital. Assuming equity markets stay at current levels, we expect growth in asset management revenues and continued solid contribution from our brokerage business. Additionally, we are more comfortable with the credit environment and we believe that we have opportunity to grow our bank balance sheet by up to $2 billion in 2021. Recruiting has been and will continue to be a key driver in the growth of our wealth management franchise. A key aspect of our recruiting success is the investments that we've made in technology and improving our digital platform. Two years ago, we set out to significantly improve our client-facing technology with investments in our reporting capabilities and our own client app called WealthTracker. The strategy is working by continuously connecting our advisors and their clients. We are now better able to help families organize and track their financial matters exactly the way they want to, Looking ahead, we have plans to deliver even more convenience by allowing clients to seamlessly interact with all their wealth management, banking, and borrowing capabilities. On the financial advisor front, we've also been making investments to deliver the next generation of wealth management capabilities. Our workflow tools help deliver efficiency and convenient e-sign integration. Robust remote capabilities allow us to extend the full branch toolbox to wherever our advisors work. Our leading portfolio reporting platform allows advisors to deliver family office level insight and analysis. We've recently rolled out fully integrated video conferencing capabilities to meet the new demand. New text message collaboration tools are in the works. And this year we will implement a CRM platform that will further enhance the branch experience in the office or via mobile. One area of technology that we are not focusing on is free online trading. Stifel is an advice-driven business, and we are confident that the combination of Stifel's advisor-centric model and culture combined with leading-edge technology will drive recruiting and net asset growth. That said, I believe the introduction of millions of new investors to the use of free trading apps bodes well for the advice model in years to come. In our institutional segment, we anticipate our results in 2021 should be relatively similar to our 2020 results. We've spent the last several years improving the diversity of our institutional investment bank, along with adding best-in-class talent, and on the tail of last year's record results, 2021 is off to a good start. We expect there will be some rotation in the verticals that drive the market this year, and our diversified model is well-positioned to capitalize on changes in the market environment. We expect to see continued strength in underwriting activity as demand for capital raising remains strong. We also expect our advisory revenue to improve as we forecast improved results in some of our largest verticals, such as financials and technology. In terms of bank M&A specifically, I would note that KBW advised on three of the top four bank mergers in 2020, and two of them are scheduled to close in 2021. We also expect improved advisory revenue from our fund advisory business as well as our restructuring practice, which should see some of its long-dated mandates close in 2021. In terms of institutional trading, while we're off to a strong start to the year, we don't expect the same level of market volatility in 2021 that we saw in 2020. which could result in lower market volumes. That said, we have a number of new products in both equities and fixed income that are gaining momentum, and we anticipate another solid year for our trading business. Additionally, I'd note that the investments we've made in our fixed income business have resulted in our ability to offer a bulge bracket level product. The value of our services has been recognized by our clients, as Stiefel is the only non-bulge bracket firm ranked by institutional investor top 10 globally, and more impressively, within credit research, we ranked in the top five for both investment grade and high yield research. So while market volatility may impact overall trading activity, we believe our product offering will enable us to generate strong results. Before moving on to expenses, I want to highlight our expectation for improved contributions from our international businesses. We have been investing in greater international capabilities for the past few years, and while they have been essentially breakeven as we improve scale, we expect our international business to be contributors to our bottom line in 2021. On the expense side, we believe that our disciplined approach to expense management will enable us to hold our ratios at relatively stable levels. We do expect to see some comp benefit in terms of our comp to revenue ratio from an increase in our net interest income and some increase in non-comp expenses as we see travel and entertainment costs picking up in the back half of 2021. That brings us to our guidance for 2021 on slide 16. We expect net revenue to come in between 3.8 and 4 billion. This is approximately 100 to 300 million above the current street estimate. as we believe the growth drivers I referenced will produce another record year of net revenue. We are forecasting balance sheet growth of up to $2 billion in 2021 and stable to increasing net interest margin, which should result in net interest income of between $450 and $500 million. On the expense side, we believe that our disciplined approach will enable us to hold our ratios at relatively stable levels. In terms of compensation expense, we estimate a range of 58.5 to 60.5. On our non-comp operating ratio, forecasted at 18 to 20% should benefit from our expected growth in revenue. The last thing I want to underscore is that Stifel is a growth company, and our confidence and our outlook is not only based on current market conditions, but our track record of consistent and profitable growth. As you can see from the table on the bottom of the slide, we have a proven track record of substantial revenue and earnings per share growth that surpasses that of our peers. While our revenue growth has been better than our peer group, I'd highlight the fact that our 259% earnings per share increase is more than double the average of our peers. Despite significant absolute growth in both revenue and earnings per share, I'd note that the current consensus revenue estimate for next year is down compared to 2020 actual results. Now, I don't want to jinx it, but if that is the case, it would be the first time in 26 years that our revenue declined. Additionally, as a result of the decline in forward revenue estimates, our consensus EPS is down 3% from 2020 expectations and actually down 10% from our actual results, while our peer group is expected to see an average increase of 12%. This doesn't make much sense to me, given that we are all generally impacted by similar market environments, as well as Stiefel's track record of strong long-term performance. Given our record of growth and the relatively modest expectations for us, I believe our current valuation remains attractive. Now, before I turn the call over to the operator for questions, let me just close by saying that I believe the outlook for Stiefel is as strong as I've seen in my 25 years as CEO. The investments we've made have generated increased scale in our business and made us more relevant and makes us more relevant to our clients. Our pipelines for investment banking and recruiting are robust and will continue to drive growth. And lastly, we enter 2021 with substantial excess capital that will allow us to not only continue to return capital to our shareholders, but to continue to invest in growing our business and always be in a position to take advantage of opportunities. And with that, operator, please open the line for questions.

As a reminder, you may ask an audio question by pressing star and the number one on your telephone keypad. Again, that is star one. We'll pause for just a moment. The first question will come from the line of Devin Ryan with JMP Securities.

Great. Good morning. How are you, Ron? So just first question here, I want to dig in a little bit more on... the expense guidance. You appreciate all the color that you provided. But if you can give us a little bit more color on how to think about maybe the absolute levels of non-compensation, because I know that if you apply the range to revenues, it's a pretty broad range. I don't know if you can help us maybe think about the absolute level. I know you did $193 million this past quarter. So how to think about that relative to maybe some acceleration post pandemic, and then, uh, you know, on the comp ratio, just the type of revenue environment that would put you towards the top end of that versus the bottom end.

I'll let Jim, um, get into a little bit of details on the comp to revenue. It is, it is mixing and level of business. Uh, So, obviously, as we increase net interest income, and conversely, if we drive the kind of operating revenues that we believe is possible, that's going to drive that comp ratio lower. The same thing sort of applies to fixed expenses, you know, to the extent that they're over the, you know, they're spread over a higher revenue base. So, I mean, to me, it's take 18 to 20 percent times the low end of our range. the middle end of our range and the high end of our range, and you would get our absolute estimate of non-comp assets. Jim?

Yeah, you know, I think Ron touched on a few of the details in his prepared remarks. Obviously, we're anticipating some pickup and more of a return to normalized levels for conferences, T&E-type expenses, really in the back half of 2021. And I think as well as we continue to recruit financial advisors and investment professionals or professionals within the institutional group, you are going to see some growth on the occupancy line as well as the communication expense line item. That said, we should see some benefit on the commission floor brokerage line as well if we are projecting some declines in that associated revenue line item as well as some of the cost savings that we're going to see with the ATS product. So I think that kind of summarizes some of the puts and takes there.

Yeah. Okay. That's helpful. Thanks, Jim. Um, and then just to follow up here, um, a couple of parts in terms of the, um, the 2 billion or up to 2 billion in bank growth, what type of incremental yields are you seeing, um, in, in the market across some of the products, um, that you may, um, look to expand here, just trying to think about, and maybe the stabilization or potential uplift on the NIM. Uh, and then, um, obviously if we apply capital to, that type of growth based on the amount of capital or excess capital you have today and the capital expected to be generated over the next year, bank growth will only absorb a small portion of that. So just trying to think about other uses of capital and maybe, Ron, your comment about the stock, how that may play in as well.

Well, I'll let Jim come to the yield. I mean, we, as it relates to use of capital, we've always said that we'll use our capital in various buckets depending on risk-adjusted returns. It's our dividend. It's returning capital versus via share repurchases. It's allocating capital to grow the bank. And it's acquisitions. And we've always said we're opportunistic. Devin, I'd like to point that to answer that question over last year and the previous years, what we've done, you know, our return on tangible equity is 25%. And I think that that capital management strategy that we do is proven out in those numbers. And so we, you know, I'm certainly always looking at the fact that we should buy back stock to buy back dilution from employee-based grants. And that's always, you know, on our list. But after that, it depends on the environment, credit spreads, interest rate spreads, acquisition opportunities, and all of those things, which, you know, we are, as we always are, opportunistic to the market and what we think the risk-adjusted returns are. Jim, it's related to the market.

Jim Collins- Yeah, in terms of yield and the opportunity with NIM, you know, in the prepared remarks, we talked a little bit about the remix, you know, bonds to loans. And I think the real simple math there is, if you look at the yield table, our loan portfolio is yielding about 100 basis points north of the bond portfolio. So call it a little over 280 versus, you know, around 180 basis points. And then if you kind of drill down further, some of those are, you know, a larger opportunity for yield expansion. You know, the CNI book is north of 3%. I think it was around 3.11% in the current quarter. So with, you know, a funding cost of a couple basis points, I think you kind of get a sense for what that could mean in terms of, you know, additional $2 billion of balance sheet growth. That could involve some additional growth within the bond portfolio. And today I'd say, you know, the CLO book would be yielding around 2% or just under 2%. So you could kind of take a mix of those different asset classes and apply, you know, roughly speaking, that $2 billion of growth.

Yep, that makes sense. Well, really appreciate it, guys. I'll leave it there. But thanks for the comprehensive outlook. Very helpful.

The next question will come from the line of Chris Allen with CompassPoint.

I was wondering if you could comment on the competitive dynamic in the recruiting environment yesterday. A large competitor yesterday just noted how challenging it's gotten on the employee side and their plans to kind of ramp up their transition assistance packages. So I'm wondering how you're thinking about that and expectations for future changes.

Well, recruiting is always competitive. So not sure who you're referring to, and I don't want to get in other management discussions. I would like to think that one of the reasons it's gotten very competitive is that we've gotten very active. So I think we're adding to that competition, not on the financial transition aspects of it, but just on our overall offering. You know, we hired a very large team this morning, and that will be announced. You can see that. So our recruiting is robust. And, you know, my perspective is that I hear a lot of times, you know, I never hear about anyone who's saying they're playing above market. I only hear about everyone, and a lot of people saying they're paying below market. Yeah, when we're in competitive situations, it seems like everyone's paying the same. So that everyone paying the same is sort of competitive. I would say it's elevated today versus maybe a historical average. But the overall, you know, I'm not going to say that that's negatively impacting our recruiting. It sometimes, you know, impacts our expected results. return on investment over 10 years. But there's a whole bunch of factors that go into that. So, look, recruiting is competitive. We welcome the competition. It makes us a better firm. And I would just leave it at that.

Got it. And just one quick, Bob, any thoughts on potential for regulatory changes? Obviously, new administration, new SEC head coming in and Some craziness going on in the direct retail world at the moment. So how are you thinking about the regulatory movement forward and any expected changes there? Thanks.

That's a long question or a long answer to a complicated question. You know, at the highest levels, you know, we do expect regulatory changes to occur. I would note that in my 25 years of Being CEO, I've dealt through two Democratic administrations, two Republican administrations, the Dodd-Frank implementation and all the rules regarding Basel, all that stuff. And now we're in what will be the third Democratic administration. As I think about it, on the Treasury Secretary side, I know Treasury Secretary Yellen. I know her quite well. I think she's very bright from my perspective. She's proven over time to be dovish. I think she'll be supportive of higher spending. I think she said go big. And so we need to factor that into our view of market conditions with at least someone in that position being very supportive of big stimulus. That probably bleeds over to the Federal Reserve that will continue quantitative easing. That goes to my remarks as to why I think 2021 will see a strong GDP growth. Of course, this trade eventually balances, and there will be some reckoning at some point, but I don't think it's in 2021. You know, Gary Gensler, I don't know that well. I would say that the SEC is going to increase enforcement, look at a number of rules, probably including BI. BI is on the books. It needs to be changed to the Administrative Procedures Act. That's relatively difficult and time-consuming to do, so I expect that there will be some additional guidance and enforcement. But in the end, I think that BI is a good rule, properly implemented, and we'll just see some more enforcement. Your last question about what can potentially happen, you know, On this online trading, first of all, I don't think it's a phenomenon. I think it's been going on for 100 years. Short squeezes happen. They've happened prior to the formation of the SEC, and they've been going on for some time. And when you see markets shutting down, ostensibly shutting down, people saying we can't take buy orders, That's not system problems. That's the system working. The clearinghouse is primarily DTC and the options clearing corp calling these firms and saying, hey, we need more margin. The system's at risk. And firms, especially maybe newer firms or with less capital, they will shut down whatever side of the trade is driving the margin requirement. That's what I think is going on. Ultimately, There's going to be some questions over time, I believe, about the gamification of trading and whether or not using AI to encourage behavior triggers some best interest rule. And that will be a debate. I personally hope that we don't try to curb short selling or curb any kind of trading. We have the best and deep markets in the world. We just have to make sure that what's going on is not front running or market manipulation. But I think the SEC will get to the bottom of that. So we'll get through this. It's classic short squeezing going on. I would note that this trade isn't done over. It isn't done yet either. When this all gets said and done, there'll be a balance of winners and losers. And the losers, I can assure you, will not just be the shorts. There are going to be some longs that bought the stock that are going to be wondering what happened to their money. But, enough of that.

Thanks, Gus.

The next question will come from the line of Steven Chubak with Wolf Research.

Hey, good morning, Ron. So, I wanted to start off with a question just on the feed pool outlook. You talked about the fact that you're coming into this year with higher backlogs than you did in the year-ago period. So certainly would support a more constructive outlook just in terms of investment banking revenue. But curious what you're underwriting just in terms of like industry fee pool growth expectations. I mean, just given the sheer degree of strength that we saw in ECM in particular, I think expectations are that as that normalizes, there could be a pretty meaningful reset. So I was hoping you can give us some perspective in terms of what your expectations are for the broader industry and maybe some idiosyncratic factors that could drive greater resiliency in your particular business?

Well, first of all, I think one of the greater resiliencies in our business is, as I've said a number of times, is the diversification in our business. As I said, we started 2020, if you would have told me, and I'm not saying our big vertical had a good year, but we thought it was going to be a much better year. We thought the net interest income was going to be much better, and on the banking side, we thought our fund business and it turned around that those businesses underperformed relative to our expectations, and then other verticals, such as healthcare, capital raising as a segment of what we're doing, certainly what's going on with SPACs, but that can also change to IPOs, and those things all picked up. So, the first thing I want to say is that if we look forward, one vertical could slow down, and in fact, we expect financials to pick up as we look at backlog and activity. As it relates to the overall industry and what I see, I think it's pretty clear that when you put, assuming a trillion nine of stimulus gets put into the economy, assuming that the Fed continues QE at some level that they've been doing, and it was quite substantial, that's a recipe for very robust economic growth, and when you throw into that the reshuffling of the economy that's occurred because of the digitization of many businesses, and that crosses all sectors. It's just not technology. It crosses into transportation. It crosses into energy. It crosses into all these sectors, and what we're seeing is a tremendous amount of economic activity as firms restructure to what's going to be what's going to be what we thought it was going to be in five years, but we accelerated it within a year because of the pandemic. And that means the investment banks are very busy and I think are going to continue to be very busy because there's just a lot to do. And we are very busy. I expect my peers are also very busy. We benefit because we're not monolithic when it comes to just a product. We have something can pick up and we're going to get our share of the wallet. So I'm optimistic, and I think that, in general, people look at the short-term or the last six months of market activity as an aberration, and I think it's sustainable in this kind of fiscal and monetary stimulus bed environment.

Thanks for those insights, Ron. And just one follow-up I had is just on capital management priorities. I know you had touched on this in the response to Devin's earlier question, but just given the fact that your recent acquisitions are punching above your initial guidance, how has your thinking evolved around M&A opportunities and your appetite to do more deals here, recognizing that you just integrated six and then the Just separately, in terms of the excess capital position, you talked about the $500 million. Should we infer that 9% Tier 1 leverage, 18% total capital? Those are targets that you guys are comfortable managing to over the long term?

I think that we're always going to manage our capital to appropriate levels. It's hard to just pick a number and say it's 9 and 18. I think that those are all things being equal, you know, those are targets that we say, you know, can keep us well capitalized, keep us right by our credit, and provide, you know, market clearing returns on invested capital. And that's what we do, and we run those numbers. But at any point in time, our viewpoint is changing. At this point, we believe there's going to be some opportunities. We believe that holding some capital is appropriate because we think the opportunity we have could exceed, you know, just either doing a special dividend or buying back stock. Again, we will be buying back stock. I do have a philosophy of buying back dilution. But, you know, I know everyone wants me to say you've got X amount of excess capital and how much are you going to do in buybacks and how much are you going to do in dividends. And I would actually tell you if I knew. But I don't. So I do know what our fixed dividend is. I do know that we'll buy back some dilution. And after that, it's going to be opportunistic and based on market conditions. And I will say again that I believe that our track record of being stewards of capital and getting, you know, returning capital yet earning the proper return on equity has proven out.

Thanks. And one final one for me, if you'll indulge me, just on the NII guidance. So it certainly came in quite a bit better than both we and just Consentus more broadly was forecasting for this year. Arguably both a combination of better volume growth, and you can certainly see the cash build and the balance sheet growth you've seen so far, but also greater NIM resiliency. On the NIM specifically, You talked about financials benefiting from a steeper yield curve. You guys have heightened sensitivity to the short end specifically and wanted to better understand what's driving greater NIM resiliency. Are you going to take more duration risk? Is it simply higher reinvestment yields on the CLO portfolio? Because that's the one piece that we're still struggling to reconcile a bit.

I think a lot of, to me, a lot of the NIM resiliency that I see I'm going to let Jim get into the details, and Jim, I think, is our portfolio doesn't have a level of prepayments, which has sort of locked our NIM. We said that two quarters ago, and we said that last quarter. So we're not facing tremendous repayments that we're needing to reinvest into a flattish yield curve, which obviously would compress NIM. But that's kind of what I look at.

Maybe expanding a little bit on what we talked about earlier, I think the remix is a good portion of that as well. When you think about the 100-plus basis point pickup when we were able to grow loans, that's fairly significant. And I think that's something that can drive quite a bit of what we're projecting in terms of NII. I think there's also some opportunities with some of the things we're doing around the PPP program that's going to help that. And I would say, you know, the other thing I would just say, when we think of interest rate sensitivity, in this base case, we're assuming essentially flat rates. But, you know, we often get questions about what our rate sensitivity is. And I would say, when we put that disclosure into our quarterly documents, we've historically been very conservative with kind of what that deposit data would look like. We've typically shown about a 75 percent deposit data. In reality, in the last rate cycle, that was really about a 30 percent deposit data. And so, and it was very back-end loaded. So just, you know, on a hypothetical 100 basis point increase in rates here, you would see NII and suite fees increase about $150 million. And I think that's, you know, that's not in our base case, but that is another opportunity here with our rate sensitivity.

And Jim, what about the curve simply steepens? Because I think that's most people's base case that they're underwriting at the moment. And what's your sensitivity where you have you know, still in zero, but 100 basis point incremental steepening in the curve.

Yeah, so that's going to have less of an impact on us. I think I'd go back to it's just the remix out of your proportion in your bond portfolio into the loan portfolio because that's 100 to 100 plus basis point difference right there.

But again, the steepening yield curve would give us flexibility to manage the portfolio also because of the reinvestment rate. So, I mean, we're clearly asset sensitive as a financial institution.

No, very fair point. Thank you so much for taking my questions.

The next question will come from the line of Alex with Goldman Sachs.

Hi, good morning. This is Daniel Jacobi filling in for Alex. Thanks for taking our questions. Just a bigger picture margin question. If I solve for the margins based on the guidance you guys provided, I should go to slightly north of something in the 20% range. How representative is that of the run rate margin, you know, assuming no rate hikes? And, you know, obviously we had your NIA guidance for the year, but assuming that that, you know, doesn't, you know, appreciate materially into 2022. So I guess I'm saying kind of no significant changes to the balance sheet kind of beyond 2021. How representative is that kind of 20-ish percent margin implied by the guidance of kind of the longer-term runway?

Well, I mean, I think it's very representative within the guidance we gave. So if you want to take net interest income to zero, and I'm not suggesting you're saying that, but that margin number would change. And so we think it's realistic as to whatever numbers you ran, I don't know where you ran them at the midpoint or whatever, but if you take our guidance and apply our guidance across the board, we believe that that is certainly representative. Now, if you want to eventually talk about inverted yield curves and things that are not in our base case of thought, negative rates, then that I think margins can change. Jim, do you?

I just point to where we've been the last two years as well. We've been in the mid-19% pre-tax margin range. So that's not a material pickup from what we've produced the last series of years here.

Got it. That makes sense. And then maybe just kind of circling back to the recruiting discussion and just putting some numbers around it. If I take a look at the annual trailing 12-month production that you guys have recruited, Over the last two years, it looks like that number has been somewhere within the $100 to $120 million of production recruited a year. Any thoughts? And I expect that to trend over the next couple of years.

I mean, I expect recruiting to accelerate. I know. I know you want to say how much, and then I have to say I can't tell you. But, you know, I expect it to accelerate so we can just kind of cut through that pretty quick, okay?

The next question will come from the line of Chris Harris with Wells Fargo.

Thanks, guys. So the outlook for 2021, gosh, sounds really good. I guess the one area that's a little uncertain is brokerage. And, you know, you mentioned the prospect for lower volatility. How do you think we should be sort of thinking about, like, the normalized run rate for that part of your business in a lower volatility environment? I mean, it feels like it should be, you know, quite a bit north of where you were in 2019, right? But, you know, curious to get your thoughts on that.

You know, again, we don't give guidance as to brokerage and trading. What we've said is that within our overall guidance and as we look at it, you know, we have assumed that the trading volumes will not have the volatility. And so you can read into that as to what you think we're doing, you know, with our brokerage line item. We don't give you that line item, but But we talk about volumes being down. We also talk about having new products on fixed income and equity that we're seeing market share gains on. So, you know, certainly we're not sitting here thinking that brokerage trading revenues are going to, you know, significantly increase in the industry, let alone its default at levels above that. But those factors are built into our guidance. trading volumes could end up being very good. There's a lot going on. But I would say overall, the other thing that we're, even though we see strength and we see strength across other verticals, our institutional business, as we've said, is relatively, you know, flat in our guidance. And if I look over the years and I look at the investments we've made, we've consistently grown that business throughout a series of market cycles. So, You know, as we've tried and as you've looked in the last few years, you know, we try to provide appropriate guidance and we believe that our outlook is within those. And of course, you know, I hope we exceed these guidance as we did last year.

Yeah, okay. Quick unrelated follow-up. In equity underwriting, You did mention SPACs being a positive contributor. Maybe you guys can talk to us a little bit about how you're positioned to capitalize on SPACs, and maybe if you have a little color about how big this is relative to the overall equity underwriting bucket.

I don't know that we disclose the percentage of our underwriting that are SPACs, so I guess I can't answer that. I think you can look at industry totals and look at what's going on with SPACs. I feel that we looked at SPACs back when they were getting started, and we made an investment believing that the ability for what we would think would be a rush of companies, the old maybe unicorns or for years sitting in private equity, we believed that the SPAC merging into a public company and going public that way would be an attractive alternative. I think that the business is going to evolve in terms of, you know, the whole structure over time. It always does. And I believe that, you know, SPACs are, you know, around. They may change. and, again, in the warrants and the coverage and, you know, how you de-SPAC. But it's a business that we're part of, and we see it as part of making us more relevant to clients. We can also do a traditional IPO, and we can do a traditional M&A transaction, and we can do a traditional 144A transaction, or we can raise debt for a company. So I look at it and say, okay, If SPACs decline, we'll do more IPOs, or we can do more 144As. And I say that because I just want to illustrate that that capability that we have that allows us to be resilient through market conditions is not capabilities that we had four years ago. I wouldn't have been able to say that. And I say that to underscore that. what we've built and why we have some resiliency to changing market conditions.

Interesting. Thanks.

With that, we are showing no further audio questions at this time. Do you have any closing remarks?

My closing remarks is that I would like to thank our investors, shareholders, our analyst community, for participating on our calls. To my associates, to congratulate them on a good but challenging year. And to everyone on the call, I wish everyone to stay safe and healthy and may 2021 prove to be the year that we can look in our rear view mirror at the negative impacts of this pandemic. With that, I'm excited to talk to you in the first quarter of 2021, and I hope that everyone has a great day. Thank you.

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.