Ladies and gentlemen, thank you for standing by and welcome to Stifel Financial’s First Quarter 2020 Financial Results Conference Call. All lines are currently on a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s conference is being recorded. It is now my pleasure to hand the conference over to Mr. Joel Jeffrey, Stifel’s Head of Investor Relations. Please go ahead, sir.

Thank you, operator. I’d like to welcome everyone to Stifel Financial’s first quarter 2020 financial results conference call. Today, we will reference our earnings presentation, which can be found on the Investor Relations page on our website at www.stifel.com. New information on forward-looking statements and non-GAAP measures appear in the earnings release and in our presentation. This audio cast is copyrighted material of Stifel Financial Corp. and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial. I will now turn the call over to our Chairman and Chief Executive Officer, Ron Kruszewski.

Thank you, Joel. Good morning and thank you for taking the time to listen to our first quarter 2020 results. Earlier this morning, we issued an earnings release and posted a slide deck on our website. I’m joined on the call today from various locations by Co-Presidents, Jim Zemlyak and Victor Nesi; as well as our CFO, Jim Marischen. I’m going to start the call by briefly talking about the steps we’ve taken as an organization over the past few months to deal with this unprecedented healthcare and economic crisis. I’ll then briefly run through the highlights of our first quarter before turning the call over to Jim Marischen, who will take you through our balance sheet and expenses. I’ll then come back with my concluding thoughts. As you probably noticed, we’ve revised our earnings slides. Most of the changes are just formatting. But given the current uncertainty in the market, we’ve included a number of new disclosures, particularly on our loan book and securities holdings. We believe that the new disclosures increase transparency and illustrate the conservative nature of our balance sheet and our strong liquidity. First of all, I would like to express gratitude to healthcare workers and extend best wishes to everyone. All of us at Stifel hope that you and your loved ones are safe and healthy. Responding to COVID-19, Stifel has committed to supporting and protecting our associates, serving our clients and communities as well as small businesses, commercial and institutional clients. This slide outlines some of the actions we’ve taken regarding these constituents. I’m also proud of my Stifel partners and associates who have shown resolve, creativity and teamwork to achieve the dual objectives of promoting the safety of our people, while delivering essential and exceptional service to our clients. I would like to…

Thanks, Ron and good morning, everyone. On the next few slides, I’ll concentrate on our bank and the balance sheet, with a focus on credit, capital and liquidity and the associated impact that the coronavirus has had on us. So starting with net interest income, it came in at $137 million during the quarter, which was similar to prior quarter levels and within our previous guidance range. Our first quarter net interest margin declined to 266 basis points, primarily as a result of the bank’s net interest margin declining to 309 basis points. This was just below the low end of our guidance range and was impacted by the Fed’s rate cuts during March. Firm-wide, average interest-earning assets were essentially flat as the growth in the bank’s loan portfolio was offset by the decline in the bank’s bond portfolio. In terms of our expectations for the second quarter, we’d expect the bank’s net interest margin to come in between 255 basis points and 265 basis points due to the decline in interest rates and for net interest income to be between $115 million and $125 million. Moving on to the next slide, we will review the bank’s investment portfolio, which is short-term in duration and comprised of highly rated bonds. As you can see in the table, the majority of our portfolio is comprised of CLOs. It is important to note that we only hold AA and AAA CLOs. I think it’s helpful to illustrate some of the reasons these bonds have the credit ratings they do. On average, this portfolio has credit enhancement of nearly 29%. We performed various stress tests on this portfolio over a number of different economic scenarios, including what it would take to incur $1 of principal loss. To put this into perspective, it would…

Thanks, Jim. So we had a great quarter, but that seems like ages ago. So let me end this call with what I said in the press release. The next few months have a high level of uncertainty, which can drive a wide range of economic outcomes. Longer-term, we believe the world and our economy will overcome this pandemic. Looking forward, Stifel is well positioned because of its diversified business model, solid and liquid balance sheet and our associates’ commitment to excellence. With that operator, please open the line for questions.

[Operator Instructions] And your first question comes from the line of Devin Ryan with JMP Securities.

Hey, good morning guys. How are you?

Devin.

The first question, just on, I guess the compensation and just overall expenses actually. Just thinking about the accrual here, I appreciate that you guys tend to start the year more conservatively, and there’s more uncertainty today and there has been. But you know, how should we think about kind of the puts and takes on compensation throughout the year, just given that we are kind of in a lower interest rate and equity market backdrop than when we started the year? And then just on kind of non-compensation costs, just how you guys are thinking about potential levers there and kind of the push-pull between investing for growth and taking advantage of opportunities versus obviously you know, obviously dropping more revenues at bottom line?

Devin First of all, I want to you know, be clear when I talked about guidance, you know, we’ve withdrawn our guidance just want to say as I go through these comments going forward other than what Jim had said about net interest income. But you know, as it relates to compensation, we were previously at 57% to 59%. We are conservative. You know we would have been normally at the high end of that range historically. And what we’re really talking about are unknown and the unknowns of the future and how we’re trying to look at that. Considering those unknowns, we took the opportunity. We thought it was prudent and conservative to take an increase of 350 basis points to our compensation accrual. It provides us flexibility and I mean it’s just conservative. Other than that, it’s hard for me to draw you a picture of what that means for the rest of the year, because frankly, I’m not sure that I know what the rest of the year brings, but we feel it’s conservative. That is not in a normal operating environment, I would not be saying that our compensation range would have changed, because it wouldn’t have. So you know that’s what I can do with that as it relates to non-comp operating expenses, I think that we’re within the range and we’re looking at maintaining our business. And you know, we’re not going to jump at anything until we understand more what’s going to happen with reopening the economy frankly, across many of our businesses, we’re quite busy. And you know, there’s a couple of businesses like banking that obviously are slow. But at this point, we’re just maintaining business in doing business. And Jim?

And maybe to add a little color on non-comp OpEx. There were a few things in the quarter I’d highlight. Obviously, with the spike in volatility in trading volumes, you did see a pickup in commission of floor brokers. That pulls back some. You’ll see that flex with those revenues. As well with the transition of work from home, we did have some connectivity costs, some hardware costs. We made investments in during the quarter that aren’t repeatable expenses as well as some of the other operating expenses. There was probably about a $4 million kind of one-time tax matter that was above the line as well. There’s a handful of things that you can point to that are non-repeating items as we look forward into 2Q and 3Q that help flex that number down so.

Okay, terrific, great color. And just a follow-up here on the bank. You guys gave some great color just on the overall portfolio and the CLO book as well. And appreciate that you know, the expectation is not to grow the balance sheet. But as you think about the mix of the balance sheet from here, are there opportunities to kind of reshift that? I don’t know if CLOs have become even more attractive or how you guys are just thinking about with the overall the mix and then some of the puts and takes within that on what that could do to you know, the NIM maybe beyond the next quarter or two?

Well a couple of questions in there, Devin. I mean, first of all, you know at this point, you know, we’re comfortable with our mix. We have of about $18 billion in the bank. You got to remember, our C&I portfolio is about $4 billion. So you can take percentages that’s generally lower than what you’re going to see across banks that size. The investment portfolio is about $4 billion. And then the balance, Jim, is what am I missing?

The [consumer] [ph].

Yeah, I’m sorry yeah, the commercial. So consumer commercial and our investment portfolio are all about the same. So I think that mix is fine and comfortable, especially when you think about mix, what I’d like to point out is that what we said on the call, which is the, lot of our loans are resi and security-based loans, which we are very comfortable with the look through risk characteristics of that portfolio, very, very comfortable. We talked about the CLOs that we’re very comfortable with in any stress environment that we’ve been able to do. And we’ve done a very thorough review of our C&I book. So we’re comfortable with our loans. We’re comfortable with the mix at this point, and I don’t see any real major changes.

Maybe one other comment on NIM when you talked about kind of beyond 2Q, because our guidance was specific just to 2Q ‘20. As we look forward to 3Q and 4Q, you know, you’ve seen LIBOR come down a fair amount in the last series of weeks here. Our guidance on 2Q ‘20 is incorporating that. But as we think about 90-day LIBOR resets and some other things, if you look beyond that, you could see that terminal rate a little bit maybe closer to 250 what we’ve talked about when we’ve had conversations historically in a 0% interest rate environment. So just a little clarification there.

Yeah, got it, Okay I will hop back in the queue. But I appreciate you guys taking my questions.

Thanks, Devin.

Your next question comes from the line of Chris Harris with Wells Fargo.

Great, thanks. Just firstly, a clarification on the NII and NIM guidance. Is the NII guidance for 2Q, is that just the bank or is that on a consolidated basis?

That’s on a consolidated basis.

Okay, all right. And –

Your next question comes from the line of Alex Blostein with Goldman Sachs.

Hey, good morning guys. Thanks for taking the question. So maybe another one just around the comp accrual. I guess given the fact that the risk to revenues is to the downside, I guess, I’m still not particularly clear, why accrue more in the first quarter? And then should we take the 63.5% comp rate as your best guess for where the total comp rate should look like for the full year?

Well, the second question, I think I said that, no, I’m not projecting the total comp rate. I’m not trying to do that, that’s just a wide range of outcomes, Alex. We had a good quarter, when we look forward we’re trying to project you know, and understand compensation on a wide range of outcomes. And you know, two things that we were looking at as a backdrop of what was otherwise a great quarter. One we talked about, which was CECL and the provision for loan losses and the economic factors. And then what could potentially happen to compensation in the short run, if we feel that we need to protect the franchise even though revenue and mix of revenues may change. So we put all that together, and we felt that it was appropriate to take an additional compensation accrual. We want to show what it is, what it was against above our guidance in this kind of an environment. And that’s where it is. So I have really no other crystal ball as I look into the future.

Okay. And then second question just around the cash sweep. And it sounds like cash balances continue to build in April. I heard you guys are right? Is that the cash balance actually above where they ended the first quarter or they’re around the same level? And then can you give us a sense for you know, the third-party bank sweep rate that you guys are earning on those balances now as we’re sort of jumping into the April-May dynamic? And I guess, just broadly speaking, any comment around demand from third-party banks for cash sweep balances sort of spreads that they’re paying, et cetera? Thanks.

So in regards to the sweep, we have seen that continue to increase since quarter end. We haven’t given that number. I would say that there is an opportunity for that to accelerate, if we particularly look at the ticketed money funds. There’s still almost $7 billion over there and if that product continues to converge down from a rate perspective, more equivalent with the sweep program, you’ll see more funds come in there. In total, we’re making around 30 basis points on the Sweep Program that shows up in the asset management line item. And I would say there still is very strong demand from third-party banks to step in and take those deposits. We have a lot of relationships with a number of banks from a treasury perspective that are very interested in stepping up and stepping into the program.

Yes. You know, Alex the one thing just to point out, it was sort of a negative for us as rates were going up, which was on a relative basis, we don’t sweep that many deposits to third-party banks. And so that was not as much of a tailwind as you saw those rates you know, getting as high as 150 basis points. Conversely, it’s not as big of a downshift for us, because we just don’t have as many balances down to 30 basis points. Most of the impact of what we’re seeing will be in our NIM is versus the combination of NIM and reduction in deposits swept away.

Yeah, that makes sense. Great, thank you.

Your next question comes from the line of Steven Chubak with Wolfe Research.

Hi, good morning.

Hi, Steven.

Hi, Ron. So I wanted to start off with a question on capital. Tier 1 leverage ratio declined by 40 bps in the quarter. You’re a little bit below 10%. Now you alluded to efforts to get back to that 10% gradually. I’m just wondering given no plans for balance sheet growth and expectations that you’ll continue to generate capital, you know, how should we be thinking about your priorities today given we’re operating in a brave new world and just your appetite for buybacks in this environment specifically?

Well I mean, buybacks have gotten a lot of discussion. We, like most firms have not been doing buybacks. And I think that, that will depend on future of our future evaluation or thoughts on the recovery and the volatility of the recovery. As it relates to what we saw primarily as it relates to our leverage ratio and our capital ratios, one of the things that I want to talk about is that our activity in the non-bank, the actual balances relating to all of our floor business, clearing deposits. These are all very illiquid, but they go on your balance sheet, clearing deposits, receivables from customers, a number of things. Those were up significantly and those impact our leverage ratio. They’re also quite fluid. They turn over very fast. So one of the benefits was, we did a lot of brokerage business. One of the byproducts of that is you know, short-term assets that go on your balance sheet, as you’re flowing all that business through the system. But we believe that, that was a few other events that usually happen in the first quarter. Our conversion of RSUs as number of things that happen that causes that ratio to depress. But you know, we believe both our leverage and our risk base will be back at our targets this year.

Okay, but and Ron, just to clarify as shown from your remarks that the buybacks on pause until we have some better clarity on the economic environment and the impact of COVID stress?

I think that’s a fair comment. I think it’s you know that and now there’s other factors as well besides financial that we have to consider on you know on anything that says buyback tends to generate many, many more paragraph of discussions. So at this point, we’re taking a pause.

Okay, thanks for clarifying that, Ron. Maybe there’s a question for Jim. You know, very helpful detail on the C&I portfolio, so thanks for laying that out. You flagged low levels of exposure to some higher risk categories like energy and hospitality and travel. Now that said, there are two large sector exposures, financials and consumer discretionary, each represent more than 5% in the book. And both have come under increased scrutiny just in the light of COVID stress. I was hoping you could speak to the quality of the underlying exposures on the consumer discretionary side. And maybe within the financials more specifically, how much of that portfolio reflects exposure to non-bank financials?

Yes. So I would say, I’d start on the consumer discretionary. Again, I’d reiterate the fact that we’re all senior secured. We’re in a relatively more senior leveraged to EBITDA levels. And the consumer discretionary is probably slightly below what we saw in the overall portfolio of kind of 2 times senior EBITDA. On the financials, we’re pretty fairly well diverse in that portfolio. I wouldn’t say when we’ve done our review there that there’s anything that stood out as being under particular levels of stress today. We feel pretty comfortable about where we’re at.

Okay, that’s great. Then if I could just squeeze in one more you know, asking the expense question maybe a slightly different way. You know, as I look back over history, given your diversified model historically, you’ve done a good job of defending the pre-tax margin where effectively that’s floored somewhere in the zone of, call it, the low-teens, so 13%, 14%. I know you’re reluctant to give any guidance. I’m just wondering if we can use that as a baseline, if the environment remains challenging, that that’s the appropriate way to potentially think about a pre-tax margin floor and contemplate at least more resiliency in terms of your profitability levels?

I appreciate the question. And I’m not going to answer it directly, because we’re not going to give guidance. My answer to you would be that what you can look at as a baseline is our ability to manage and protect margins throughout years and even decades of disruptions in the marketplace. Not, and you can go back even further than 2013. You can go back 20-plus years and our company has shown an ability to properly manage and protect profitability through various scenarios and I’m hopeful and believe that past is prologue.

Great, thanks for taking my questions.

Your next question is a follow-up from the line of Chris Harris with Wells Fargo.

I didn’t hang up on you Chris.

Yeah, no worries at all. Just real quick on the advisor recruiting backdrop. You know, I get that, that things are challenged right now because of the lockdowns. But when we get to the other side of COVID, what do you think the competitive environment will be like? Do you think it’ll be you know, less intense just because a lot of firms will still be sort of in a conservatism mode or do you think that’s you know, kind of very much TBD at this point?

Chris, I think that it is TBD. I mean, I don’t think that if our – the reasons that our success of recruiting, I think, actually are getting higher. I see a lot of the factors that occur that usually drive advisors our way have increased in this environment. Our ability to operate in this environment. They had no systems down, no issues has underscored. I think people’s belief of our firm and our technology and what we’ve done. So you know, I think that recruiting is going to be fine for us. You know one, if there is a negative, we do very well with our home office meetings, that is, we get people here. Our rate of winning is very high. So you know, we’ll look forward to being able to gather again. That’s a negative for us to the extent that we’re not able to put the human touch on our recruiting factors as well. The one thing I’d say, maybe just as a little bit of a side just want to say is that for financial services and then for companies like Stifel that have fully integrated banking and wealth management products, I think it’s going to be a real strategic advantage for us, because the one thing that’s going on today besides all the things that we’ve learned from remote working at home and all of those factors is that our clients have had a crash course in digitalization, including digital banking, digital access and all of that. And so I am very comfortable, and we’re rolling out our digital offerings on aggregation and on banking. And so I feel that the investments that we have made in technology in the last few years is going to really pay dividends, because of what has happened to the customer base as they have learned and are learning to use the products that we’re developing. So I’m optimistic about that.

Okay, thank you.

[Operator Instructions] You do have a question from the line – caller your information did not record. Please state your name and company and ask your question.

Sorry I think this might be Chris Allen, just coming through.

Hey, Chris is that who – yes.

Can you hear me? Okay, sorry.

Yes.

Yeah, I guess just following up a little bit on Chris’ question. Do you think the current environment may create pressures for some competitors may create opportunities around M&A? I realize you’re digesting these kind of deals from last year, which sounds like they’re producing pretty well. But typically in terms of disruption like we’re seeing now, valuations can be lowered and thinking to create opportunities for scale players with yourselves?

So that your question is how are we viewing M&A?

The environment right now, whether it’s creating an opportunity as well?

Well, sure. I think the difference is that you know, when we were in the financial crisis and the Fed put in TARP. There was a pretty clear path once we got through the liquidity of the market and put a floor on asset values. There was a pretty clear path to see you know, where the light was at the end of the tunnel, so to speak. And we did acquisitions based upon some that you know, some what I felt, I was pretty confident about that. Now this is a completely different situation. And frankly, how we come out of this is going to you know, depend on a lot of government response and a lot of how we get back the economy back at work and what that may look like depends on what government says it’s going to look like. And those are so uncertain right now that I think it makes the M&A environment, not only in financials, but almost across almost any industry, somewhat difficult to get any kind of visibility, which is why I think you know, M&A, at least in the short run is going to be challenged. We, as a firm are opportunistic. We’ve grown in times like this and if the opportunity and the visibility become more apparent, then I would expect us to do what we’ve always done.

Thanks a lot guys. That is it.

And there are no other audio questions. I will now turn the call back to the speakers for closing remarks.

Well, let me conclude by saying that, first of all, I’m hopeful and I do believe that the world and our economy will recover. I would like to see industries that are severely impacted like the restaurants and get back to work. I would also just like to say that as it relates to financial services and as it relates to the firm like Stifel and the firm that we’ve built, we are well positioned. There is a lot of things to be done. Municipalities have to restructure. What they’ve done there’s a lot of issuance in the muni side, corporations are going to restructure. You’re going to see a lot of capital raising debt restructuring, tremendous opportunities for advisors to properly pick stock, so to speak, versus just being in the index is a lot. There’s a lot that’s going to go on with money emotion and I think our firm is well positioned to get our share and to gain market share. So with that, I look forward to what hopefully be a much better economic outlook when we reconvene on the second quarter. I hope everyone have a great day and stay safe. Thank you.

Ladies and gentlemen, that does conclude today’s conference call. You may now disconnect.