Stifel Financial Corp. (SF) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Stifel Financial's Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to hand the conference over to Mr. Joel Jeffrey, Head of Investor Relations at Stifel.

Thank you, Operator. I'd like to welcome everyone to Stifel Financial's Third Quarter 2020 Financial Results Conference Call. Yesterday, we issued an earnings release and posted a slide deck to our website, which can be found on the Investor Relations page at www.stifel.com. I would remind listeners to refer to our earnings release and our slide presentation for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material of Stifel Financial Corp. and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial. I will now turn the call over to our Chairman and Chief Executive Officer, Ron Kruszewski.

Thanks, Joel. Good morning, and thank everyone for taking the time to listen to our third quarter 2020 results. I'm joined on the call today by Co-Presidents, Jim Zemlyak and Victor Nesi; as well as our CFO, Jim Marischen. I'm going to start the call by running through the highlights of our third quarter, before turning it over to Jim, who will take you through our balance sheet and expenses. I'll then come back with my concluding thoughts. Before I discuss our results, let me begin by thanking all Stifel associates for their dedication to client service. The COVID pandemic has impacted millions of people worldwide and resulted in ever-changing challenges for both our health care system and our economy. Despite this backdrop, it's the focus of my partners and associates at Stifel that has enabled us to provide the high-quality financial advice that our clients have come to rely on over the past 20-plus years as we've grown into a premier wealth management and middle market investment bank. So again, to my more than 8,000 partners at Stifel, I want to say thank you. With that, let's look at our results. Simply, we had another great quarter. Stifel benefited from strong capital raising and trading activity as well as continued growth in fee-based assets. This more than offset the expected pullback in advisory revenue and net interest. Noteworthy, we had one of our strongest recruiting quarters in recent history as we've been able to successfully implement a virtual recruiting strategy. Our pipeline remains strong and despite the uncertainty of the U.S. economy resulting from the pandemic, Stifel remains well positioned for continued growth. I want to highlight the strength of our business for both the quarter and year-to-date. We generated record third quarter revenue and our second best quarterly earnings per share. For the first 9 months of the year, we achieved record revenue and earnings per share. Capital raising revenue achieved a quarterly record, trading volumes are up year-over-year and credit quality remains strong at Stifel Bank. Additionally, wealth adviser recruiting accelerated, which built on the momentum we achieved during the first 6 months. The financial performance during the quarter and frankly, the past few years is driven by a diverse business mix that's enabled both our Institutional Group and Wealth Management segment to generate strong growth. This diversification is illustrated by record 9-month wealth management revenue despite significant declines in net interest income and deposit sweep fees, both a result of the Fed's implementation of a 0 rate environment. Likewise, we achieved record 9-month institutional revenue as record capital raising and brokerage more than compensated for a 13% decline in advisory revenue. Simply, Stifel is a growth company with diversified, balanced and synergistic businesses. Over the last 12 months, Wealth Management, under both brokerage and fee models has contributed 46% of net revenue. Institutional revenues, comprised of equity and fixed income, investment banking and trading, made up 41%, while net interest income comprised the remaining 13%. The synergy and complementary nature of these businesses is reflected in our return on tangible common equity, which is 23.2% over the past 12 months. Let's turn to Slide 2. I would note that some of the numbers we state throughout this 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. For the third quarter, Stifel's net revenues were $883 million, up 8% from the prior year, representing the fourth highest quarterly revenue in our history. In fact, for the 12 months ending September 30, 2020, Stifel generated revenue of more than $3.6 billion, up 14% from the 12 months ending September 30, 2019. Compensation as a percentage of net revenue came in at 59.6%, while operating expenses totaled 21%. I would note that our compensation ratio is higher for both the quarter and year-to-date as compared to the full year 2019, primarily as a result of the decline in NII. Relatively modest loan growth and the stabilization of economic factors, coupled with our management overlay, resulted in essentially no provision for loan losses. To give a sense of the range of outcomes under our CECL economic models, assuming our base case scenario, we are approximately $40 million over accrued. On our most severe scenario, we would be approximately $60 million under accrued. Altogether, earnings per share were $1.59, up 6%. Pretax margins were 19.4%, annualized return on tangible common equity was 22.2% and tangible book value per share increased 13% over last year to $32.34. Moving on to our segment results. And starting with our Global Wealth Management group. Third quarter wealth management revenue totaled $527 million, up 4% sequentially. The third quarter benefited from the expected rebound in asset management and service fees, which increased by 16% sequentially as well as improved brokerage revenue both offsetting an 11% decline in NII. Through the first 9 months of the year, our wealth management revenue was up 2% to a record of more than $1.6 billion. Again, these results were achieved despite the fact that our NII and deposit fee income declined approximately $65 million. Excluding this impact, our year-to-date wealth management revenue increased 18%, driven by strong growth in our brokerage and asset management revenues, both of which reflect strong recruiting end markets. In the fourth quarter, we expect another strong quarter for our asset management revenue due to the 8% sequential increase in fee-based client assets, which totaled $115 billion at September 30. I would also note that total client assets reached $326 billion at the end of the quarter and are just $3 billion below the record level set in the fourth quarter of 2019. As you can see on the wealth management metrics slide, we had another outstanding recruiting quarter as our virtual recruiting strategies continue to produce significant growth in our adviser headcount. To put numbers to this, we recruited 45 financial advisers with total trailing 12-month production of $38 million. Our recruiting performance this quarter is a continuation of our successful recruiting efforts since the beginning of 2019, as we've added nearly 250 new advisers who had trailing 12-month production of roughly $200 million. This will continue to drive future revenue growth in wealth management as the new advisers transition their clients onto our platform. Looking forward, we have a lot of momentum behind our recruiting efforts. And while there is some seasonality in the fourth quarter, primarily due to the holidays, our pipeline remains extremely strong, as Stifel remains a very attractive destination for high-quality advisers. Moving on to our Institutional Group. Through 9 months, we generated record net revenue of $1.1 billion, which is up 33% from last year. Reflecting our growth in investments, the first 9 months of 2020 would represent our third highest annual revenue. These results were driven by capital raising and brokerage, both up more than 50% from last year. For the third quarter, net revenue totaled $363 million, up 25% from last year. Similar to our year-to-date results, capital raising and brokerage increases of approximately 50% drove the increase in the quarter and more than offset the expected softness in advisory revenue. Before I go into the details of this segment's performance on the next few slides, I want to take a minute to talk about the general perception of our institutional business. I'm sure you remember that on last quarter's call, I commented that this segment is continually underappreciated by analysts. In general, institutional businesses tend to be transactional in nature. And consequently, there are persistent concerns that strong results in any given quarter are not sustainable. While it's true that we're not likely to generate record results every quarter, we believe that performance in this business is better judged by annual results. As you can see by the chart on the bottom half of the slide, not only have our results been sustainable, they've grown substantially. In fact, if you annualize our results for the first 3 months of 2020, our institutional revenues have grown at a compound annual rate of nearly 11% since 2009 despite substantial changes in the operating environment. This growth is a direct result of the investments we've made into our business that has enabled us to pick up market share and become more relevant to our clients, which will help to drive continued growth in the future. With that said, let's move on to our institutional equities and fixed income businesses. While this slide depicts brokerage and capital raising for both equities and fixed income, I'll focus on the brokerage business now and address capital raising on the investment banking slide. Fixed income brokerage revenue was $97 million, up 60% year-on-year and was our third highest quarterly revenue ever, with the top 2 quarters occurring in the first half of the year. As such, we are having a record year in fixed income brokerage, as the first 3 quarters are not only up 70% from 2019, but already surpassed our previous full year record in 2016 by 5%. The strength of our results continues to be driven by activity in investment-grade, high-yield rates as well as municipals. Equity brokerage revenue of $54 million was up 32% year-on-year as activity levels slowed from the record levels in the second quarter as market volatility slowed. Like our fixed income businesses, we are also having a record year in our institutional equity brokerage business, as through the first 9 months, revenues are up 23% from our previous 9-month high recorded in 2014. I would also note that I'm pleased with the contributions from our international businesses. On the following slide, we look at our firm-wide investment banking revenue. Revenue of $218 million was relatively flat with the prior quarter and up 10% year-on-year, driven by record revenue and capital raising. Overall, the third quarter was our third strongest investment banking quarter. Much like my comments about our overall institutional business, our investment banking business has not only been sustainable on an annual basis, but has grown at a compound annual rate of 20% since 2009 and has more than offset industry headwinds in our institutional brokerage business. We will continue to invest in this business as we believe that we can continue to take market share and grow as a premier middle market investment bank. Looking at our capital raising business in the quarter, we generated record revenues in both our equity and fixed income issuance. Equity underwriting revenue of $85 million was up 41% year-on-year and surpassed our prior record by 20% as IPO activity was up significantly from the prior quarter. The record results in the quarter underscore the diversity of the business we've built as health care and technology were our strongest contributors, while our largest vertical, financials, slowed as clients looked to raise capital in the debt markets. Our fixed income underwriting revenue of $53 million was also a record as our public finance business had a strong quarter and the issuance market continued to improve. Stifel lead managed 264 negotiated municipal issues and 1 -- was again ranked #1 nationally in terms of the number of issues managed. Through the first 9 months, we have lead managed 632 municipal issues, which is up 17% compared to the combined volume of Stifel and George K. Baum for the same period in 2019. I would also note that although our corporate debt issuance revenues were down from the prior quarter, we continued to benefit from our bankers' ability to cross-sell services. As I mentioned earlier, KBW's clients continue to benefit from our expertise in the debt issuance markets. This again highlights the benefits of our model. For our advisory business, revenue of $81 million decreased by 23% year-on-year as we were negatively impacted by the slowdown in bank M&A following a very strong year in 2019. In terms of verticals, the performance of our advisory business was driven by technology, industrials and restructuring. The decline in advisory was expected as the market had been impacted by the slowdown in deal announcements earlier this year following the pandemic. That said, we continue to see our clients reengage and our pipelines continue to pick up. While bank M&A activity continues to lag the robust levels we saw in 2019, we are starting to see some green shoots as we recently advised CIT on their announced sale of First Citizens, which will create a bank with $100 billion in assets. Additionally in the fourth quarter, we advised Eastern Bank on the largest ever first step mutual conversion. In terms of our overall pipelines, they continue to build, and I'm optimistic for our investment banking business overall. I would note that the capital raising business is robust yet highly market dependent. And with that, let me now turn the call over to our CFO, Jim Marischen.

Thanks, Ron, and good morning, everyone. Before I discuss net interest income, I'll make a few brief comments regarding our GAAP earnings. I would note that as we successfully integrated all of our recent acquisitions, we've seen the continued convergence of our GAAP and non-GAAP results. This can be seen in what was our second highest quarterly GAAP EPS in our history, which resulted in an ROE of nearly 13%, an ROTCE of more than 20%. Similar to last quarter, the strong GAAP earnings and the pause in our share buyback program resulted in fairly meaningful increases in 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 $101 million, which was down $14 million sequentially. Our results were impacted by the 0% interest rate environment and elevated levels of cash on our balance sheet. Our firm-wide net interest margin declined to 190 basis points, which was consistent with the bank's net interest margin declining to 237 basis points. Firm-wide, average interest-earning assets were relatively flat due to a modest increase in our loan portfolio, primarily due to mortgage loan originations and an 80% increase in our cash position as a result of the debt and preferred equity issuances earlier this year as well as the elevated cash position held at the bank. Moving on to the next slide, we review the bank's Loan and Investment portfolios. We ended the period with total net loans of $10.9 billion, which was flat sequentially. The breakdown of our portfolio skewed to a greater percentage of consumer loans through the end of the third quarter. Our mortgage portfolio increased by $100 million sequentially as we continue to see demand for residential loans and refinancings from wealth management clients given the decline in interest rates. Our securities-based loans increased in the quarter by approximately $120 million. Growth in securities-based loans continues to be strong as FA recruiting momentum continues to grow. Our commercial portfolio accounts for just less than half of our total loan portfolio and is comprised of C&I loans, which declined by 2% during the quarter. Our portfolio is well diversified with our highest concentration in any one sector at less than 7%. While the size of our portfolio declined in the quarter, we continue to focus our lending efforts on credits that have been less negatively impacted by the pandemic and typically have access to the capital markets, including such sectors as manufacturing, technology, health care and homebuilding supplies. While we remain cautious in our approach to loan growth, we continue to look for opportunities to grow our balance sheet with limited credit risk. Moving to the investment portfolio. As you can see, the vast majority of our securities continue to be comprised of AA and AAA CLOs. We've provided granular detail on the credit risk profile of this portfolio over the last few quarters and have not seen any material change in the underlying credit subordination provided by the securities. We continue to view these securities as an attractive risk-adjusted return and an opportunity to have exposure to the underlying loans with structural credit protection. We've not incurred any losses in this portfolio, and even under the most severe stress testing we deploy, we do not anticipate incurring any losses. Turning to the allowance. We adopted CECL earlier this year, and in the first half of the year, we incurred $35 million of credit loss provisions through the P&L, which doesn't include the $11 million opening adjustment that ran through equity. Much of the increase in the first half of the year was driven by changes in macroeconomic scenarios based on the Moody's model, which estimated increasingly severe declines in GDP as well as increasing unemployment. As you can see on the slide, while the allowance for credit loss was essentially unchanged, we did see an increase in the allowance and our coverage ratio on our commercial portfolio, which increased to 2.03% as a result of additional management overlays. We continue to see strong credit metrics with nonperforming assets and nonperforming loans at 8 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 to capital and liquidity. Our capital ratios were relatively stable during the quarter. Our Tier 1 leverage ratio increased to 11.3%, primarily on the strength of our earnings and a lack of share repurchases. Our Tier 1 risk-based capital ratio was 19.2%, a slight decline from last quarter's 19.3%, as we had elevated risk-weighted asset density in our trading portfolio, given some of the volatility we saw earlier in the year. This decreased risk-based capital by approximately 90 basis points. Looking forward to the fourth quarter, we would not anticipate any material changes in our balance sheet. As I mentioned earlier, we will pay off our $300 million, 5-year senior notes when they mature in December. Given the timing of the maturity, we anticipate that interest expenses will be modestly lower in the fourth quarter. Our book value per share increased to $50.95, an increase of $2.11 sequentially and our tangible book value per share increased to $32.34, up from $30.16. These increases were driven by strong quarterly earnings and improved marks on our AFS portfolio. As I noted last quarter, our liquidity position remains strong. In addition to the Sweep Program, the bank has access to off-balance sheet funding of more than $4 billion. Within our primary broker-dealer and holding company, we've access to nearly $2 billion of liquidity from cash, credit facilities that are committed and unsecured as well as secured funding sources. I would also highlight that despite another quarter -- another strong quarter in the equities market, we continue to see an increase in client allocations to cash. Within our Sweep Program, we saw balances increase by $1.7 billion in the third quarter. So far in the fourth quarter, client cash has grown another $400 million. On the next slide, we provide 4Q guidance and go through our expenses. In terms of our outlook for the fourth quarter, we would expect net revenues to be in the range of $870 million to $920 million based on strong growth in fee-based assets and the robust investment banking pipelines that Ron described earlier. We forecast the bank's net interest margin to come in between 235 and 245 basis points, which is in line with our third quarter guidance. Barring a meaningful decline in LIBOR, we estimate that our current guidance represents a good estimate for where we see bank NIM stabilizing. This is based on the fact that our assets are predominantly floating rate, and we have limited reinvestment of cash flows from our bond portfolio in an environment with limited options for yield and fixed income. We expect our firm-wide net interest margin in the fourth quarter to come in between 190 and 200 basis points given the impact of the maturity of our 5-year debt in December. Given NIM expectations, we expect our NII in the fourth quarter to be between $100 million and $110 million, which is in line with our third quarter guidance. In the third quarter, our pretax margin improved 160 basis points sequentially to 19.4%. This increase was a result of lower compensation accruals and a decline in our reserve for credit losses. Specifically, the comp-to-revenue ratio of 59.6% was down sequentially as we accrued conservatively in the first half of the year. And given our clear outlook for the remainder of the year, we feel more comfortable with our overall comp accruals. As such, we are forecasting a comp ratio of between 57.5% and 59.5% in the fourth quarter. Non-comp operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $173 million and represented less than 20% of our net revenue. We estimate that non-comp operating expenses in the fourth quarter will represent between 19% and 21% of net revenue. In terms of our share count, our average fully diluted share count was up by 2% as a result of the increased share price and some modest issuance related to normal stock compensation practices. In the fourth quarter, assuming a stable share price and no repurchases, we estimate our average fully diluted share count will be 77.4 million shares. And with that, I'll turn the call back over to Ron.

Thanks, Jim. Before I turn the call over to the operator for questions, I want to reiterate what I've said more than once on this call, which is the diversification of our business. Unlike some of our peers that have more mono line business models, we are not solely reliant on strategies such as balance sheet growth or advisory growth. Underscoring this, we've generated 3 of our top 4 strongest revenue quarters and are on pace to record our 25th consecutive year of record net revenue. The strength of our performance was not limited to the top line as we also generated 2 of our top 4 earnings per share quarters, and our annualized EPS in the first 3 quarters would result in our second strongest annual earnings despite significantly lower NII and a substantial increase in our credit provision as a result of the implementation of CECL. As we move toward 2021, I feel there is numerous questions about the impact of the elections, now less than a week away, and the impact on our outlook. Regardless of the outcome, the short-term environment should be favorable for our various businesses. As pundits often say, don't fight the Fed. And in this case, you shouldn't fight an accommodative Fed coupled with huge additional stimulus package. In conclusion, the diversified business model we've built continues to prove that it can generate substantial and sustainable revenue growth. While the market and the economy remain uncertain given the pandemic and the presidential election, the business we've built over the past 20-plus years will continue to generate strong growth and solid returns over the long term. And with that, operator, please open the line for questions.

[Operator Instructions]. Our first question will come from the line of Steven Chubak with Wolfe Research.

So maybe we'll just start off with a question of -- on capital. Leverage ratio, it's ticked up nicely. Your Tier 1 risk-based capital, it's still running a little bit below 20%, but we've seen pretty steady capital builds, especially with the buyback shut off. I'm just curious if you can update us on what's your binding constraint at the moment? What level you're comfortable operating at on both the leverage and risk-based measures? And then, Ron, if you -- maybe you can just update us on your capital management priorities given the business momentum that you're seeing and the fact that you continue to create substantial capital?

Steve, well, first of all, we're comfortable in our capital position today. I think we've often said that as a range, 10% leverage ratio, 18%, 17% to 18% risk-based capital. Now that can fluctuate, those aren't hard guardrails, those are guidelines that we use to manage the business. And I think we are generating substantial capital. You have to look both at your adjusted earnings and your GAAP earnings when you look at that. And I'm comfortable with where we sit. I think that maybe what's changed for us is the opportunities that we are beginning to see across the landscape that will support our growth. And so we haven't been for a lot of reasons, many of them almost national best practices within banks not to be buying back stock. But we're seeing opportunities that to deploy our capital at good -- with good returns, including recruiting and then including a number of things across our investment opportunities. So that's how I would answer it. We'll certainly look at dividends, and we'll always be mindful of our return on invested capital and the best way to do it with our shareholders.

And you, I guess, finished off those remarks talking about recruitment. And I was hoping to get some more color on the recruiting pipeline. We saw a nice pickup this quarter. I know you highlighted some of the seasonal factors that could weigh on 4Q. But just bigger picture, what's your outlook for the recruitment landscape? And more specifically, Ron, we've had some remarks hit the tape or press releases hit the tape suggesting that you're going to have some bigger entrants like JPMorgan enter the space. Curious if you can give some perspective on what you're seeing competitively? And how you're looking to combat potentially some disruptors entering that retail space and competing for some of those same advisers.

Jumping in, in the water is great, okay? Let's come on in. We look for all and every competitor. I'm not -- we have combination of a culture. We're a wealth management firm that owns a bank. We're not a bank that owns a wealth management firm. That will explain most of the difference of our advantage. And I think that as I look forward, our recruiting is going to accelerate from here, not decline, regardless of who's entering the fray. So welcome the competition.

All right. Okay. Well said. And then just one final one for me, Ron. Just on some of the comments you ended with -- around the election. Obviously, we'll have to wait a week just to see what the outcome ultimately is. But I was hoping to get your thoughts on, one, how the changes in the tax regime and capital gains more specifically could impact both institutional M&A, but even retail activity or behavior as well. And then just some final thoughts on what an infrastructure bill could mean for your muni business? And then lastly, steeper yield curve. So tax regime, infrastructure bill impact on munis and then just a steeper yield curve.

Well, first of all, let's hope we have some fancy election within a week. I think it's -- I think, as I said in the short run, regardless of who wins, there's an accommodative Fed and clearly, the need for some more stimulus, and that's going to help in the short run. As it would take a blue wave, so to speak, meaning the presidency and the senate as well as the house, but that's foregone if you get the first 2 to implement tax change. I'm a little skeptical even though the people said that would be done on day 1, a little skeptical that you would do tax reform that quickly in the midst of what hopefully a new present wants, which is a recovering economy, not one where some pundits would argue that, that could stall any recovery and increase in taxes. But I think it's clear that sometimes in the administration, there would be an increase in taxes. And I think that, that's a negative -- the stimulus is a positive, but incremental taxes, especially taxes on capital is not good, in my opinion, for long-term economic growth. And these are not just small increases in capital, we're talking about double the rate of taxes on capital formation. And so I think that, that is negative to the overall economy. Clearly, it will change M&A valuation, that's just math. You tax higher, your free cash flow goes down, your IRRs go down, your M&A prices go down. And so I think the market will adjust to that as it always does, but that would take a period if that does happen. So overall, these taxes can be interesting. And I find some of the incremental rates in some of the states that are very important to the economic activity in this country, even cities like New York and in California. These incremental rates with the 12% over 400, an increase in the margin losing deduction. Some of these rates get really -- well, I don't live there, but I would think some of the -- those residents are concerned about those marginal interest rates. So that can't be good in the long run. As it relates to infrastructure, I feel that, that is a bipartisan, something that one of maybe only the few items that could get bipartisan support, regardless of whether it's a blue wave of a split government or a red wave, which I don't anticipate. But I think that can happen, and we are well positioned because you're talking about a whole menu of items, which can support rebuilding the infrastructure, which is mostly done at the state level through state issuance of debt with public-private partnerships and a whole menu of that. And as you can see from our results, our number of issues and the number of clients that we have across the country, we're the largest. We're not the largest in terms of volume because we don't do the big state issues, but I see a lot of activity if we get an infrastructure bill. And again, we have one of the largest public finance departments in the nation. So that was -- that would be bullish. And your last one...

Is a steeper yield.

I'm smiling. A cheaper yield curve for every financial institution, not only -- we need two things. We need to get out of a 0 rate environment because we all have equity, and we're not earning anything on our equity. That's kind of a simple way to think of a financial institution. But certainly, what's compressing NIMs at all -- many, many banks today is the cash flow they're getting. And then the inability to reinvest that cash flow at almost any kind of yield that has steepened us to their cost of funding. So that would help. That would certainly have us rethinking about how we're managing our bond portfolio. But I want to note that we're in a good position there because we believe that our NIM has reached sort of a bottom or a base here without substantial changes in LIBOR because our assets are, a, substantially floating rate; and b, we're not seeing a lot of cash flow off of that and that they're a little bit longer to raise duration in terms of cash flow. So I think all three of those questions, I hope I gave you the answer, but all three of them would be positive for Stifel if -- except, I think, for tax rates.

And maybe just to supplement the steeper yield curve comments, I'd also point to the growth in client cash allocations that you've seen over the last few quarters. Obviously, we have a lot of dry powder there that we could put to work. In an environment with a steeper yield curve, you'd see some opportunities for us to drive some additional NII.

The next question will come from the line of Alex Blostein.

This is Daniel Jacoby filling in for Alex. Maybe just on the expense side. Thinking about the non-comp guidance that you guys have given for the fourth quarter of 19% to 21%, how run ratable is that type of level as we think about it jumping off point into 2021?

So we'll come back next quarter with some more specific guidance on how we think about non-comp in terms of 2021. But we've done a pretty good job of controlling expenses so far this year. When you exclude some of the items we've talked about, we've been around or just under 20% of net revenues both in the quarter and on a year-to-date basis. I think until you really get to a point where you pick up to a normal operating environment in terms of travel and conferences, et cetera, you really won't see a material change in our expense base. And so again, we'll come back in the fourth quarter with some additional guidance on how we're thinking about that for next year.

Got it. That's helpful. And then I guess maybe similarly, just on the comp side. Anything to glean from the trajectory of this year's comp rate as it relates to kind of a jumping off point into next year? Or maybe just bigger picture of kind of what the 2020 comp rate suggests for kind of the overall comp rate going forward with rates where they are?

Just with the calculator, if you calculate with and without the NII impact, you take the 60, we said between deposit sweep rates and our reduction in NII. I think for the 9 months, it's $65 million. So if you annualize that and then -- and recognize that those are low compensable revenues and take out -- take that reduction in, you will see that, that can drive 1.7 to 2 points of comp ratio depending on what level of comp-to-revenue you want to put on those revenues. And so that's the biggest impact on our comp-to-revenue is the reduction in NII. And with that, we've had -- we had -- we said we weren't going to grow the balance sheet through this pandemic, which we have and although we're kind of a wash on cash right now. But the biggest impact is the mix between compensable revenues and NII.

Got it. And can I sneak in one more here on the NII.

Sure.

I guess, just on the guidance for the fourth quarter. So at the midpoint, that's suggesting a bit of a step-up quarter-over-quarter in the NII dollars. Just in terms of kind of the mechanics of how you're getting there, is there anything else going on besides kind of less interest expense as it relates to the debt extinguishment or debt maturity? Or is there something else that's going on that's helping push that higher?

Yes, two main points. You obviously hit on the first one with the extinguishment of the senior debt. The second one I would talk about. We referenced excess cash held at the bank, which has since been moved off to the Sweep Program. That really compressed NIM in 3Q by about 3 or 4 basis points. So you think about the combination of those 2 factors in the impact on 4Q that if you hold everything constant from 3Q, you'd be about at the midpoint. The other thing I would just say, in general, our guidance assumes no balance sheet growth. And if you think back some of the comments, some of the things we were able to do in the quarter, we saw some pretty good momentum in terms of consumer loan growth, up over $200 million in the quarter, and that was offset by some declines in the C&I book. But if you think if we can continue some of that momentum that would be accretive to NII and NIM on top of what we've talked about here.

And I would just add that I think the big takeaway from this call should be -- there's always a lot of focus on NIM, and there should be focus on NIM if it's continually declining. Because you're trying to find out where our NIM is going to settle. What we've said on this call, we think that, that's where we are with the current yield curve and where LIBOR is or [indiscernible] going forward. And so that -- you can sort of do that. What I focus on at this point is NII, okay? I want to -- we're focused on how to generate and use our capital and our clients and effectively increase NII even in this NIM environment. So I think NIM is finding some stabilization. I don't like where it is, but I think it's upside from here on NIM, and we'll be looking at increasing NII.

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

First one here, just bigger picture around some of the technology initiatives, and I appreciate you guys have been very active kind of launching new reforms over the past couple of years. And additional capabilities, some of the capabilities around aggregating outside accounts and really getting a more holistic picture of your clients' wealth. And..

Did we lose you, Devin? Darn it, I wanted to answer that question. Come back. Operator?

His line is still showing connected. [Operator Instructions]. Our next question will come from the line of Craig Siegenthaler with Crédit Suisse.

So following the Morgan Stanley Eaton Vance announcement, it's looking like proprietary product maybe making a comeback on captive distribution channels. So Ron, I just wanted to get your perspective on this trend? And does it make sense for Stifel to go out there and start looking at and maybe purchase an asset manager?

Well, I think that -- those are the kind of things -- those comments, and I'm not talking about Morgan Stanley's strategy, but captive asset management, being our captive advisers selling proprietary asset management is what drives a lot of advisers to come to Stifel when we offer an open platform and choice and the best products for the client, not necessarily trying to cross-sell to our own proprietary products. That said, I mean, we see opportunities in the asset management space. We'd probably be less inclined to be getting into the part of the asset management space that seems to be disintermediated by ETFs and the move from active to passive than maybe focusing more in the alternative spaces where we see some opportunities. So I think, look, I applaud Morgan Stanley for showing faith in our business and faith in the advice model and purchasing Eaton Vance. They're a great, great company. But I don't feel that we're at any disadvantage not being able to distribute to our own proprietary product. In fact, I feel that's an advantage for us when we're bringing advisers to our firm. So we don't do that.

Got it. And for my second one, and listen, I apologize in advance if you covered this, but I was jumping back and forth between this call and another one. But this was your strongest adviser recruiting quarter in 3 years. I wanted to see if you could elaborate a little more on what is contributing to this result. And also more importantly, perspective on the sustainability. And maybe you could provide some onboarding activity comments based on what you're seeing right now, too.

It was a strong quarter. I think that, in hindsight, we probably tapped the brakes a little too hard during the whole DOL discussion. If you remember and go back, we were very concerned about how to recruit and structure and comply with DOL. We probably took a harder read of that looking back now. And so we tapped the brakes. And recruiting is like everything you need to build back your pipeline than have people in the pipeline. So yes, it was a good recruiting quarter. And I expect that to continue and even accelerate. There's going to be -- like M&A advisory, it sometimes gets lumpy. I said the fourth quarter is generally slower, not as an excuse, but they actually shut down the transfer system for most of the month of December, you can't even transfer your license at FINRA, I don't know a lot of people know that. So it tends to be a month where you only have a 2-month recruiting quarter in the fourth quarter. So I believe that our recruiting is going to be strong, and I think it was Devin that was going to ask the question about our technology, and maybe I'll see if he gets back on the line, but what we're putting in front of advisers and the strategies that we are doing to enforce our adviser-centric model and communicating that in an effective manner -- today, primarily virtually, bodes well for our recruiting success in the future, and I'm optimistic.

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

Right. And you touched on the virtual recruiting, which is great. I guess I really want to focus more on some of the capabilities you've added around aggregating outside accounts and just getting more of a holistic picture around a client's wealth. And just the opportunity to potentially compete for a higher percentage of their wallet. And what type of, I guess, early results, and I get it that this will take time, but early results are you seeing? And how are you thinking about kind of the organic growth that exists within existing customers just based on the fact that you can do a lot more with them, I think, moving forward, on the backbone of technology, before you even start to think about other means of growth like recruiting?

Look, Devin, I think that some of the things that you're talking about -- it's a broad subject, but some of the things that you're talking about are really table stakes going forward for financial firms in the wealth management business. Aggregation and holistic views of clients, overall portfolios, including assets, liabilities, net worth or cash flow, not only at Stifel, but across all the retirement accounts and where they may have assets and trust accounts, et cetera, is a foundation of what we're doing here at Stifel. We believe that it's just not your assets that you hold at Stifel. It's your assets and liabilities that you hold everywhere, and that is the basis for Stifel Wealth Tracker. I feel like I'm doing an ad right now. You can go to www.stifel.com and downloads Stifel Wealth Tracker, you don't need the account to do it. And you can, if you're not breaking any rules, anyone on this call, go download it and try it. It's a very simple way to build a balance sheet and track your cash flow. And that becomes the basis of our digitalization of advice where our advisers are going to give advice, and we're going to deliver it in a very efficient manner. The other thing that technology is very important is going to be on banking services. Our clients have had a crash course in everything from exercise in Peloton to InstaCart and Netflix. They do all things digital. I wonder how many people have stepped foot in a physical branch in the last 9 months. So remote deposit capture, transferring money, moving money to friends and your bank branch being your mobile phone has accelerated in the last 9 months. We're already there. We don't have any branches. We don't have any tellers. We don't operate that way. So our investment is in technology and we just had our annual meeting last night with all our advisers. And I can tell you, they're excited about what we're putting on the table, and it's going to not only help us in recruiting but it's going to help us gather AUM from new and existing clients.

Terrific. That's great. A follow-up.

Thank you for the question. Devin, any other questions you want to ask? That's good.

Let me squeeze another one in here on topic of regulatory potential changes. And just thinking about the potential for change in a change of administration or even if it's a blue wave altogether. And your question that we get, and I'd love to just get your perspective on is, whether the DOL could reenter the picture in any scenario? Or is the SEC just so far along in what they've proposed and is out there that they're really driving the bus now as the industry regulator. And so that's unlikely. And that's kind of part 1. Part 2, which is, are there other regulatory items that you're watching closely that are being proposed that just could affect the business one way or another?

Well, anytime there's a change in administration, you have to look at regulatory impacts. Often, you can start with what could follow under CRA, which is a Congressional Review Act, that has the ability to basically overturn any executive branch regulatory item, I think enacted within 180 days, can just be overturned. The Reg BI is outside that window. Reg BI, I think, is on the books for a while. It's a good rule. It's being implemented. I think that there's going to be any changes depending on who sits at the SEC will be the enforcement of Reg BI. There are some interpretive things that could just change the way you enforce it. And as it relates to the DOL, that's such a political football now I believe that it's almost -- I don't want to say it gets much fervor as the Supreme Court, but it gets a lot of fervor about whether or not you're a fiduciary under the '40 Act or Reg BI. I could see potentially some changes to the DOL. But then with Reg BI in place, I think there'll be a lot of pressure to harmonize the deliverance of service. The Department of Labor is not the securities regulator. So we'll see. I certainly believe that we're in a better place. The things that -- there's other things that are going to be coming regulatorily, direct listings, the ability to -- the debate to raise capital without an underwriter is kind of what the argument is -- is one that we have to watch closely. I don't think that really impacts our middle market clients. I think it's more of a really big client thing. But those are things that, obviously, as an intermediary of capital under the '33 Act. We don't want to see that go away. But again, relatively small. And so I think the bigger issue that's going to impact financial institutions in the next year is going to be actually the amount of business that we have to do, restructuring, doing M&A and potentially doing an infrastructure bill because of what I think is going to be a lot of stimulus. And then more of a 2022, 2023 issue on some of these regulatory fronts.

Our next question comes from a participant whose information did not record. Please state your name and your company followed by your question.

Can you guys hear me?

Yes. Who's this?

Sorry, this is Chris Allen of Compass Point. Excuse me. I had technological issues. I wanted to ask a little bit just about on the fourth quarter guidance, you noticed strong investment banking pipeline, tailwinds from the fee-based side. Any color just in terms of how you're thinking about the brokerage business? Maybe color on the environment, competitive positioning? And is that the key input in terms of the high and the low end of the fourth quarter revenue guide?

Let me just start by, we wanted to provide some guidance and working a little bit with The Street sell-side analysts here. I mean a lot of the lowest ends of our guidance are higher than what everyone is doing. And so part of it is to -- just try to level set where we sit today. And I think that was the purpose of that and hopefully -- and I know everyone will take note of that. As it relates to the gives and takes, I believe that, that's a good estimate. We see investment banking pipeline as strong, capital raising as strong. But as I said in my prepared remarks that capital raising is happening very fast and it's very market dependent. Same with brokerage and wealth management. And so why I don't want to go much further than that is I believe that the back half of the quarter, i.e., after November 3, is really highly uncertain right now as to how the markets would react to the various outcomes that could occur on the election and not including and I certainly hope it doesn't happen, but any social unrest or chaos at some contest of election could really potentially put the markets in a position where you stall some of this activity that's going on. So I have a strong window if everything stays the same today, as things look good. But I want to be cautious about what could change very quickly effectively a week from today. So that's probably the best I can give for you on that. But I'd be very confident about what we're doing if there's no change in the environment as we sit here today. In fact, I'm very optimistic.

And with that, we are showing no further audio questions. I will now hand the conference back for closing remarks.

Yes. I think that, first of all thanks. I guess my last closing remark is I've had a few questions about the momentum in our stock. I feel that Stifel's stock and our shareholders appreciate it, we've narrowed the gap in our earnings multiple discount. But even there, I would note that on a trailing 12 basis, our earnings are about -- you can add them up, are $6.22, and that's after taking a nearly $40 million credit provision. So we still trade under 10x earnings, and it's more than 2 turns below. And I'm hoping that we all look at relative valuations relative to our return on capital and relative to our growth that we've demonstrated, frankly, over the last two decades. And so with that, I'm pleased with our progress. I wish everyone a safe everything and go vote. Thank you.

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