Stifel Financial Corporation

that time, you may do so by pressing star and the number one on your telephone keypad. As a reminder, today's conference is being recorded. It is now my pleasure to hand the conference over to Mr. Joel Jeffrey, head of investor relations.

Thank you, operator. I'd like to welcome everyone to Stiefel Financial's first quarter 2021 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 Marish. 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 that we state throughout our presentation are presented on a non-GAAP basis, and I would refer you to our reconciliation of GAAP to non-GAAP as disclosed in our press release. I would also remind listeners to refer to our earnings release and our slide presentation for information on forward-looking statements and our non-GAAP measures. This audio cast is copyrighted material of 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 Kruszewski. Ron?

Thanks, Joel, and good morning, and thank you for taking the time to listen to our first quarter 2021 results. I want to start this call by thanking all of my partners at Stiefel for delivering record results. Our value as a company is and always will be our people. So let me give some highlights of our quarter, have Jim Marishin review our balance sheet and expenses, and I will wrap up with our outlook before Q&A. As you can see on slide one, the first quarter of 2021 was another record for Stiefel as we continue 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, pre-tax margins of more than 21%. annualized return on tangible common equity of over 28 percent, and tangible book value, which increased 32 percent. Turning to the next slide, as I stated, our first quarter net revenue increased 24 percent to a record surpassing 1.1 billion. Compensation as a percentage of net revenue came in at 60.9 percent, which was just above the high end of our annual range, yet is consistent with our policy. of accruing for compensation conservatively early in the year. Our operating expense ratio was about 18%, but excluding credit provision 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, we, like other banks, have updated our economic models. coupled with strong credit performance in our loan portfolio, resulted in a release of $5 million of our credit provisions during the quarter. As you recall, our provision expense last year was driven by the adoption of CECL, and more specifically, the negative economic outlook that was a key input into the calculation. So, neutralizing the impact of credit provisions Stiefel's pre-tax, pre-provision income totaled $238 million, which increased 61% from the first quarter of 2020. Moving on to our segment results and starting with global wealth management. First quarter revenue totaled a record $631 million, up 8% year-on-year. While this increase is impressive, I believe it understates the strength of our business as it includes a nearly $24 million decline in net interest income at our bank subsidiary. Excluding the impact of lower bank NII, our private client business improved 13%, driven by the strength in asset management as well as growth in brokerage revenue, as we benefited from enhanced client activity levels and continued success in recruiting. We again finished the quarter with record client asset levels, Total assets under administration of nearly $380 billion increased $21 billion from the prior quarter. Additionally, fee-based assets of $138 billion rose 7% sequentially, which should drive further growth in the asset management and 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 advisors than we've typically recruited in recent quarters, I'd remind you that recruiting is cyclical and it's best examined over a longer timeframe. Since the beginning of 2019, we've added 300 financial advisors with cumulative production of approximately $233 million. As I look at the remainder of the year, our recruiting pipelines remain at robust levels, and I anticipate another strong year. As you've probably seen from our recent press release, we announced our intention to begin actively recruiting in the independent channel. In the first quarter, we announced that we were rebranding Century Securities, which we've operated since 1990, as Stiefel 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 our 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 percent, while fixed income totaled $146 million, which increased 10 percent 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 quarter of last year. Similar to my comments last quarter, our fixed income trading continues to be driven by increased activity across the board, as well as non-QCIP businesses. On slide seven, investment banking revenue of $339 million was our second consecutive quarterly record, surpassing last quarter's record by a few million dollars. driven primarily by record capital-raising revenue. Equity underwriting revenue will stand out 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 a book runner on more than 50% of the IPOs we participated in 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 managed 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 percent for any first quarter. In terms of verticals, we benefited from the expected pickup in financials and continue to see broad-based results from technology, consumer, and 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, and I remain very optimistic for our investment banking business in 2021. And with that, let me now turn the call over to our CFO, Jim Marichan.

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. And now let's turn to net interest income. For the quarter, net interest income totaled $113 million, which was up $8 million sequentially. Our firm-wide net interest margin 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. As such, in terms of the second quarter, we'd expect net interest income to be in a range of $110 to $120 million, and 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 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 to Stiefel over the entire last rate cycle, but I would highlight that beta was very much weighted to the latter portion of the cycle. Moving on to the next slide, I'll go into more detail on the bank's loan and investment portfolios. We ended a 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 CNI growth, while fund banking accounted for $260 million. I would note that fund banking, which is comprised of Capital Call Alliance for venture capital and private equity funds, had been classified within financials in past presentations. 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 support nation provided by these securities and continue to be pleased with their 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 in our CECL calculations. As a result of the reserve release and the composition of our loan growth during the quarter, our 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 seven basis points. Further, 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 a roughly 1% discount to bar. 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 base 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 settled 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 suite 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 Stiefel Financial's outlook to positive based on our strong operating results and overall financial position. On the next slide, we go through expenses. In the first quarter, our pre-tax margin improved 730 basis points year on year to more than 21 percent. The increase was the result of strong revenue growth, lower compensation accruals, and our continued expense discipline. Our comp to revenue ratio of 60.9 percent 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 it's 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 OpEx, 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%, which was driven by the impact of the excess tax benefit related to stock compensation. Absent any other discrete items, we would expect to see the effective rate to be in the 25 to 26% range in the second and third quarters, as we have limited RSU 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 purchases 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 said at the beginning of the call, this year is off to a very strong start. Looking back at our guidance for 2021, many of the expectations for economic and market conditions that we then highlighted have not only played out as we expected, but in some cases has happened much faster. Our business is benefiting from past recruiting success, higher equity markets, increased levels of interest-bearing assets, robust trading activity for debt and equity, record equity issuance, solid credit metrics, and a strong investment banking pipeline. As vaccinations increase and the 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 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 our 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, and this increases my confidence for the remainder of the year. In terms of underwriting, activity levels so far in the quarter have pulled back from the torrid pace experienced in the first quarter, but still remain 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, as always, 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 in balance sheet increase represents 75 percent 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 to 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 has proven to have the flexibility to successfully adapt to changes that could occur. And with that, operator, please open the line for questions.

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

Nice quarter. Maybe we could just dig in a little bit more on the outlook for the balance sheet. Obviously, you noted it can grow up more if the credit looks good. Maybe could you talk about where you're seeing the better growth opportunities right now within CNI, what industries, what sectors, and any color just in terms of how much the CLL reduction, the payoff will be in 2Q, just so we can kind of think about what it looks like X that quarter.

Jim, do you want to take that? Yeah, I'll get started.

So I think in terms of opportunities for loan growth, I think the thing you continue to see is that we've seen a lot of opportunity on the consumer side. The increase in 1Q compared to 4Q on the consumer side was up a little over 50%. We continue to see strong demand on the residential real estate side as well as the security-based side, given relatively where interest rates are. On the CNI side, I think we'll continue to emphasize the growth we've seen and the opportunity with fund banking. That's obviously the largest individual exposure we have within the CNI 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 pre-funding. I'm sorry, not the pre, I'm sorry, in anticipation of some payoffs that will occur in 2Q. So we'd expect those balances to be relatively flat after those payoffs.

You know, I think, yeah, and what I would say just in general is that you read a lot about bank demand being, you know, tepid, at least at the larger banks, their loan demand. And I will say what I've always said is that You know, we're an organization, first and foremost, a wealth management investment banking firm. We have 380 billion of AUM, and our bank is, you know, 20-ish, you know, billion. And so, there's just a lot of demand. That's a lot of demand, and we grow our balance sheet when we see good risk-adjusted returns, which we saw in the first quarter, and I would say right now, likewise.

Understood. And then maybe on the brokerage side, obviously we're seeing industry trends slow in 2Q, as you kind of pointed out, versus the first quarter. Any color in terms of how you guys think about maybe the incremental opportunity around the electronic products and the equity side? What helped us kind of frame out what's been environmentally driven in the recent quarters versus taking share? Anything on those fronts would be helpful. Thanks.

I think it's, you know, as we've built up our capabilities, the build-out of our electronic suite, which is both our ALGOs and ATS, just have enhanced the reason that buy-side clients transact with us. And we've needed those products to supplement our, you know, 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, the institutional brokerage front that we sort of conceded, or we white-labeled in some cases. So we'll see how that plays out, but those products are up and running, and we're seeing investors adapt to using them.

Thank you, guys.

The next question will come from the line of Devin Ryan with J&P Securities.

Thanks. Good morning, everyone. Morning, Devin. Maybe start, Ron, on the independent advisor initiative and just get a little 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, you know, is going to be different in the strategy kind of moving forward, what type of advisors you'll be targeting, and then just kind of thoughts around, you know, will this be an outlet for potential, you know, employee advisors within Stifel to migrate to, and are there any kind of marketing considerations? Just a little bit more color would be helpful.

Well, look, we've had an independent channel since 1998 It's not like we're starting something from scratch in terms of legal structure, 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, it's just a space that 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. It's a different advisor than a full-service advisor, different mindset. But we'd often just tell them to go to competitors. Well, we're not going to do that anymore. We have a very compelling offering and one that's up and running. We're just going to put some focus on it. So It's a growth channel, and I think, as I said, that I believe that our future recruiting will now include independent advisors that we previously really 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 have any goals or to do anything like that, but we're already hosting visits for that market channel.

Yeah. Okay. Thanks, Ron. Helpful color. And maybe just to 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, I think, a a good period here to be able to kind of reinvest back into the business. So I'd love to just maybe talk about some of the kind of priorities for you guys in terms of, um, investing for growth, kind of where you're focused. And then also, you know, from an M and a perspective, kind of the types of transactions that are, you know, maybe more prevalent in the market right now, the types of stuff you guys are seeing come across, um, and maybe where even you'd have appetite.

Well, look, in terms of investment, um, I would say that we always are investing, Devon, always. If you're looking for specific areas, we do invest in our people, but we're busting in technology. That's probably the table stakes in the business today and 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, helping our clients get organized and communicating with them. That's an ongoing thing. We did it a lot, and we're going to do it in the future, and it's not a percentage of our ongoing operating expenses. On the acquisition front, it again is a market where asset values are high, yet we're always, as we always have, 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 When I look back and I look at our revenue in the business that we did highlighted this quarter, 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 revenue that we are today. So that passes prologue. So we're going to continue to do that, but there's no need to absolutely have to do something.

Yeah. Okay. Great. I'll leave it there. Thanks, Ron. Yep.

The next question comes from the line of Craig Siegenthaler with Credit Suisse.

Good morning. This is Gautam Samant filling in for Craig. Can you please just expand on some of the advisor recruitment dynamics and how we should think about the pipeline and pace of advisor 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 kind of trended so far?

Well, your second question first. I mean, I said that we just announced that not even, you know, 30 days ago. So from, I will say this, that from Having zero conversations is a number of conversations we've had. It's a huge percentage increase. So we've had a number, but it's from really not having those conversations. And we expect that to continue. There's a competitive landscape in the independent channel. There's 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 is, you know, has some ebb and flow to it, both seasonal, some of the things that are going on. Actually, if there's been, 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. And what I mean by that is even at the beginning of the pandemic, people 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, that we were able to do it with Zoom and onboard clients, that 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 has 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. I don't want to look at it and talk to people, but there's no, I see no change in the trajectory of our recruiting or in our pipeline. I think it's very robust. And I will also say that the competitive landscape has increased, but that ebbs and flows. But we're at the 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, recruiting will pick up.

Got it. And as a follow-up, can you speak to the compensation ratio? And you mentioned conservative accruing in 1Q21. How should we expect the ratio to decline in future quarters if revenue normalizes down?

I think that's a great question. If revenue normalizes down, I Remember, we've had 25 consecutive years of record revenue, and I tend not to think of revenue normalizing down. I think of revenue normalizing up. One of these years I'll be wrong, hopefully not this one, or 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 the top ratio will 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 look at history. look at what happened last year, but the year before and the year before that, and you'll see what we tend to do. And normally in our firm, revenue picks up the back half of the year. That has to do with the seasonality of our business. Our public finance business is always stronger in the second half of the year. And historically, M&A is stronger in the second half of the year. That just goes to timing and people want deals done. I suspect that may be true this year with tax changes and 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 about, if revenue does remain strong, we do see a path for more flexibility than 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.

Thank you. That's very helpful.

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

Great. Thanks, guys. Good morning. Jim, you kind of hit on that last 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 seen on the revenue front, potentially exceeding the $4 billion revenue number for the year. I guess that would imply a 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 kind of lower your comp rate guidance for the full year?

Well, again, I think you're going to see operating level just by what I just said about how we accrue comp, okay? Everything's being made with a comp ratio, you know, is, as I look forward, the comp ratio is going to come down as the year goes on. You know, I think we've been pretty efficient on the operating expense. I think we've done a really, really good job of integrating. Remember, we did a few acquisitions back in 19, and we've integrated those and have operating expenses that is 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, you know, that said, I don't think, you know, you're not seeing huge expansions and 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 a full two percentage points below the low end of our guidance in terms of non-comp. Obviously, the absolute dollar of non-comp OpEx was up at $184 million, excluding the provision. and excluding the EIB gross-ups, but we do have a number of expenses that are tied to revenue, and 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 to what we said with the copper issue, we do see a potential ability, if revenues remain strong, to come in below the low end of our guidance range here.

Got it. All right, that makes sense. And then another one for you guys around M&A. I heard your kind of broader strokes comments about kind of what, you know, you guys are always on the lookout for things. But any particular areas where you guys think an organic expansion makes sense for Stiefel at these levels?

You know, I feel like our history is big, is that when we see it, we'll know it. And, you know, we don't. We don't go out and look for acquisitions. We don't write these things down. We're opportunistic. And three factors, and they're not going to change. I want something to make us more relevant. We're in a lot of businesses. So when you think about wealth management or 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 the financial hurdles, it needs to be accretive to our shareholders. And importantly, we think it needs to be accretive to the people joining us. And if those meet, then we will, you know, we very well may execute. To pick a specific area would sort of trump our historical practice, which is, we want to be opportunistic as opportunities present themselves.

Yeah. All righty. Fair enough. Thanks, guys.

As a reminder, to ask an audio question, you may do so by pressing star and the number one on your telephone keypad. The next question will come from the line of Steven Schubach with Wolf Research.

Hey, good morning. Good morning, Steven. 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. And given just 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, first of all, I didn't mean to say that our offering was better or more competitive. The point I was trying to make was that we're not starting from ground zero. We're not sitting here saying, let's have an independent channel, and someone says, well, you need another broker-dealer, which you do, and you need capital, and you need to get approvals. We have all that. That's what I'm trying to say, and 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 recognize that we could do it. So we're just another participant in that marketplace, and we believe we have a competitive offering. That's what I mean to say. I think there's some established players in this space, but we believe that we will be competitive. When you were saying buying versus scaling, again, if an opportunity came that that offered an attractive way to scale into the business. We've built Steeple 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. So it would be no different to me looking at a traditional wealth management, which we have the capability and we're adding to it, or adding to this space, again, where we have the capability. Sometimes we've done deals where we've not, where we've really not 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 offering on the scale, but it's effectively the independent space is scalable with wealth management. Same clearance system, same technology base, many cases the same supervisory structure. So that's just what we see. We see an opportunity just to play in another space. But look, still our growth driver is our employee channel, and we're going to continue to be very competitive in that space.

No, thanks for that perspective, Ron, and just a follow up on the buyback. You know, it's certainly encouraging to see you reinstitute it this quarter, but admittedly it's still relatively light in relation to not just the 2018 or 19 buyback run rate, but especially in relation to the strength of your capital position and just the higher earnings run rate in general. So just trying to reconcile your bullish outlook commentary that you deliver on the call. With buyback appetite, that still 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 your viewpoints more if you actually really looked at that gap, because it's, in my opinion, it's material. But like always, you know, we're opportunistic on that, and we will deploy capital as we have. We buy back stock. Our comment now is we're certainly buying it back for dilution. But we see also opportunities to deploy capital elsewhere. And so, you know, 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 put some kind of multiplier on our revenue growth by making investment, not just shrinking the capital base. 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. And 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. I can squeeze in one more just on the NII dynamics quickly. I just had a couple of inbounds asking on the resiliency and 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 and maybe just speak to what drove the higher securities yields as well that clearly bucked the industry trend and where are you reinvesting to that?

Yes, so obviously we didn't cite it in what we said in our prepared remarks. If you look at the yield table in the earnings release, specifically within the CNI portfolio, you saw a pretty substantial increase in the yield on CNI to, you know, call it 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 where you saw last quarter, you know, call it around 311 basis points and where you see it today. Some of those fees will continue into 2Q. I think we definitely highlighted that as well, but maybe to a little bit lesser extent, but some of that will definitely continue. That being said, I think when you think about NII, whether it's in the securities portfolio or whether it's in the loan portfolio, I think we have proven out that we've been able to reach a stabilized NIM We have opportunities for additional balance sheet growth, and we remain very asset sensitive. And I think those are really the key takeaways without getting into all the minutiae of a specific loan fee or not. I think those are the things that we would really want to highlight when you think about NII and the outlook there.

Yeah, and I'll just add the final color on that. I think there's a remixing factor, too, that, as I've said, we have a lot of demand, and we remix our balance sheet. I just feel that that where we 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. So we feel we're in a pretty good spot of rates you know, stay lower for longer. And we're very well positioned if we have an uptick in rates, which, you know, I do believe during my career we will have an uptick in rates. So we'll see. But 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 to 120 in terms of 2QNII. Yeah.

Right. Thanks for that, Collar.

Again, to ask an audio question, you may do so by pressing star and the number one on your telephone keypad. With that, we are showing no further audio questions. Do the presenters have any closing remarks?

I'll close as I always do, which is to thank you participants for listening to our first quarter results. We're off to a strong start. We see our momentum continuing in these financial conditions, and 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 line.