Stifel Financial Corp. (SF) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Full Year Results Conference Call for Stifel Financial Corporation. All lines are currently in 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. Please go ahead, sir.

Thank you, operator. I’d like to welcome everyone to Stifel Financial’s fourth quarter and full year 2020 financial results conference call. I’m joined on the call today by our Chairman and CEO, Ron Kruszewski; our Co-Presidents Victor Nesi and Jim Zemlyak; and our CFO, Jim Marischen. Earlier this morning, we issued an earnings release and posted a slide deck to our website, which can be found on the Investor Relations page at www.stifel.com. I would note some of the numbers we state throughout our presentation are presented on a non-GAAP basis. And I would refer to our reconciliation of GAAP to non-GAAP as disclosed in our press release. I would remind listeners to refer to our earnings release and our slide presentation for information on forward-looking statements and non-GAAP measures. This audio cast is copyrighted material by Stifel Financial Corp. and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial. I will now turn the call over to our Chairman and CEO, Ron Kruszewski. Ron?

Thanks, Joel. Good morning, and thank you for taking the time to listen to our fourth quarter and full year 2020 results. I’m going to start the call by running through the highlights of our results, before turning it over to our CFO, Jim Marischen will take you through our balance sheet and expenses. I’ll then come back to discuss our outlook for 2021 and my concluding thoughts. With that, let me turn to our results. 2020 marked Stifel’s 130th anniversary, and also the best year in our history. Stifel’s net revenue increased to a record $3.8 billion and earnings per share totaled $4.56, both up 12% while return on tangible equity was 25%. The company’s two operating segments, global wealth and institutional both achieved record revenue. We continued our strategic growth initiatives by integrating the six acquisitions we closed in 2019, while continuing to grow our business through investments in both talented individuals and technology. The fact that Stifel record its 25th consecutive year of record net revenue against the backdrop of rapidly changing and volatile market conditions illustrates the diversity and balance of our business. To illustration let’s look back on our 2020 results as compared to our original guidance issued in January of 2020. So turning to Slide 2, as you can see back in the beginning of 2020, we’ve forecasted net revenue of $3.5 billion to $3.7 billion, which at the time was driven by NII growth of approximately $50 million and $1255 million in incremental revenue from the acquisitions. Additionally, we expected revenue growth from investment banking driven largely by advisory revenue as KBW was anticipating another strong year of bank M&A. On the expense side, we targeted compensation of 57% to 59% with non-comp expenses of 19% to 21%, both as a percentage of net revenue. So what happened? Well, as we all know, the pandemic materially changed market conditions, while also presenting us with the challenge of protecting our employees, yet maintaining client service levels all while working remotely. Thus in March, market volatility increased significantly. The U.S. economy contracted. The government provided nearly $4 trillion of stimulus $2.9 trillion at the time, and the Federal Reserve cut interest rates to effectively zero with negative real rates also ramping up quantitative easing. How did this impact our 2020 results compared to what we thought at the beginning of the year? Let’s first look at the items that were negatively impacted. As a result of the zero rate environment, our net interest income came in below the midpoint of our forecast by approximately $140 million with our bank net interest margin more than 70 points below the low end of our guidance. Lower rates also weighed on our asset management fees as fees from our third-party bank program declined an additional $25 million. In addition, our asset management fees were negatively impacted by lower market levels. On the investment banking side, a surge in volatility and the significant contraction of economic activity negatively impacted our advisory business, particularly in financials and technology verticals, as well as our fund placement business. Taken alone, these factors should have led to a decline in 2020 from our 2019 revenue. However, the diversity of our business model enabled us not only to post another record year, but to surpass the high end of our guidance. How did this happen? Well, first on the revenue side, we were able to quickly transition our staff to remote locations, which allowed our traders to take advantage of the spike in volatility in the first and second quarters, which drove our record brokerage revenue. Second, the performance of our 2019 acquisition was slightly better than we expected. Third, our investment banking business benefited from the strength of our healthcare franchise, which more than offset the weakness in financials. On the expense side, the decline in net interest income did drive up a higher comp ratio, but our expense discipline drove down non-stop expenses below our guidance. So the diversity of our model to changes in market environment not only resulted in our 25th consecutive year of record revenue, but also our fifth consecutive year of record earnings per share. Moving onto our fourth quarter results, we had record net revenue as we surpassed $1 billion in quarterly revenue for the first time. This was driven by record investment banking revenue and our second strongest quarter in global wealth management. The growth in revenue and our focus on expense management resulted in record non-GAAP EPS of $1.67 and an annualized return on tangible common equity of more than 33%. As one way of expressing our confidence in our future, we announced a 32% increase in our quarterly dividend, as well as splitting our stock three for two. Turning to the next slide. As I stated, our fourth quarter net revenue totaled $1.60 billion, which was up 12%. Compensation as a percentage of net revenue came in at 57.9%, which was below our recent guidance range. I’ll let Jim speak about this in greater detail, but this was essentially due to the composition of our revenues. Our operating expense ratio, excluding credit provision and investment banking gross-ups totaled 16.9%, which came in below our guidance of expenses due to the strength of our revenue in strong expense management. So the second consecutive quarter, we had essentially no increase in our credit loss provisions. This was the result of continued improvement in the economic factors that drive our CECL models that was offset by additional provisions tied to loan growth. Altogether, compared with last year’s record fourth quarter earnings per share were up 33%, pretax margins nearly 24%, which increased 330 basis points. Annualized return on common equity as I said over 33%, which increased 340 basis points and our tangible book value per share increased 21%. Moving onto our segment results and starting with global wealth management, fourth quarter revenue totaled $575 million, up 9% sequentially. The increase in the quarter was driven by the expected strength and asset management fees, which increased 8% sequentially, as well as a 14% sequential increase in brokerage revenue due to growth in corporate debt, equities and private placement, commissions. For the full year, our wealth management revenue is up 3% to a record of nearly $2.2 billion. Again, these results were achieved despite the fact that our net interest income and sweep fee income declined approximately $96 million. Excluding this impact our full year wealth management revenue increased 9%, again driven by strong growth in our brokerage and asset management revenues, both which reflect strong recruiting end markets. We finished the year with record client assets, total assets and administration were more than $357 billion, an increase of $32 billion from the prior quarter and fee-based assets of $129 billion, which rose 12% sequentially, which should drive another strong quarter of asset management revenue in the first quarter. Before moving on to our recruiting, I want to highlight our year-on-year growth rates. Our assets under administration and fee-based assets were impacted by the sale of Ziegler Capital markets, specifically our fee-based assets, excluding the Ziegler sale increased 22%. The next slide highlights the strength of our recruiting and the investments we’ve made into our platform. We had another good quarter in terms of gross advisor additions, despite what is typically a seasonally slow period of the year. In the fourth quarter, we added 32 financial advisors with total trailing 12-month production of $22 million. Our recruiting performance this quarter is a continuation of our successful recruiting efforts. Since the beginning of 2019, we’ve added more than 280 new advisors that had trailing 12 months production of $221 million. Moving on to our institutional group, they also had an outstanding year. For the full year, we generated record net revenue of nearly $1.6 billion, which is up 30% from last year. Our results were driven by capital raising and brokerage, which were both up roughly 50% from last year. For the fourth quarter net revenue totaled $489 million, up 25% from last year and driven by more than a 35% growth in both capital raising and brokerage. 2020 underscored the value of the diversified business model we’ve built. As you can see from the chart and the bottom of this slide, our business model helps to provide more consistency to our revenue during changes in market conditions and we expect this to continue into 2021. Moving on to our institutional equities and fixed income businesses. I’ll focus my comments on this slide on the brokerage business and discuss capital raising on the investment banking side. Equity brokerage revenue in the fourth quarter was up 51% year-on-year as activity levels increased and we benefited from solid trading gains. For the full year, we generate a record revenue of $257 million, which increased $90 million from the prior year. While market volatility in 2021 will likely be lower than in 2020. We expect to see increased contributions from our electronic businesses, which include our ATS and Algo products. Fixed income brokerage revenue in the quarter was up 26% year-on-year and was our fourth highest quarterly revenue ever. All of the top four actually occurring in 2020. Our full year revenue of $405 million surpassed our prior records set in 2016 by 34%. Our results continue to be driven by activity and investment grade high yield rates and municipals. I would note that we are also seeing solid results from our non-CUSIP businesses as well, which we have been investing in for the past few years. On the following slide, we look at our firm-wide investment banking revenue. Revenue of $338 million surpassed our prior record from the fourth quarter last year by more than 22% driven by record capital raising and advisory revenue. Equity underwriting revenue of $111 million was up 58% year-on-year and surpassed our prior record by 20%. The record results in the quarter underscored the diversity of the business we built as healthcare technology and SPACs were strong contributors. Our fixed income underwriting revenue of $53 million was up modestly from the prior quarter as our public finance business had a strong quarter, despite what we saw as low activity levels in November, which we believe was due to the election. For the full year, we lead managed 929 issues, which is up 17% versus 2019. Given our market position and the possibility of an Infrastructure Bill from Congress in 2021, we believe that public finance should have another strong year. For advisory business revenue of $173 million more than doubled third quarter results. In terms of verticals, our top performers were technology and consumer as well as another solid quarter from our restructuring franchise. In terms of our overall pipelines, we entered 2021 at levels that were – that are above where we had pipelines in 2020 – at the beginning of 2020, and as such, I’m optimistic for our investment banking business overall. So with that, let me now turn the call over to Jim Marischen.

Thanks, Ron, and good morning, everyone. Let me begin my – let me begin by making a few comments regarding our GAAP earnings. In the quarter, we generated the highest GAAP EPS in our history at$1.55, which resulted in a return on equity of 20% and a return on tangible common equity of nearly 31%. Similar to last quarter, the strong GAAP earnings in the quarter, and the pause and our share buyback program resulted in fairly meaningful increases in our capital ratios, levels of excess capital, book value and tangible book value that I’ll describe in more detail in the following slides. And now let’s turn to net interest income. For the quarter, net interest income totaled $105 million, which is up $4 million sequentially and at the middle of our guidance. Our firm-wide net interest margin increased to just under 200 basis points and our bank’s net interest margin improved to 239 basis points. Both net interest income and net interest margin benefited from the remix of bank assets between our securities portfolio and our loan portfolio. Given our ability to continue to grow loans and the limited cash flow coming off of our securities portfolio, we continue to believe that we’ve reached a level of stabilizing them and have the ability to continue to grow net interest income. We will provide more detail on this topic later in the presentation. Moving on to the next slide, we review the bank’s loan and investment portfolios. We ended the period with total net loans of $11.2 billion, which was up 4% from the prior quarter. We saw growth of both the commercial and consumer portfolios. Our mortgage portfolio increased by $150 million sequentially as we continue to see demand for residential loans from our wealth management clients given the overall low interest rate environment. Our securities-based loan portfolio increased in the quarter by approximately $90 million. Growth in these loans continues to be strong as FA recruiting momentum continues to drive increased loan balances in this lending channel. Our commercial portfolio accounts for 46% of our total loan portfolio and is comprised primarily of C&I loans, which increased by 3% during the quarter. Our portfolio is well diversified with our highest sector exposure in financials at 8%. Moving on to the investment portfolio, which continues to be primarily comprised of AAA and AA CLOs. We’ve not seen any material change in the underlying credit subordination provided by these securities and continue to be pleased with their performance. We had a modest increase in the quarter in MBS and corporate securities, but this was driven more by our short-term liquidity management program rather than any change in our overall investment strategy. Turning to the allowance. During the fourth quarter, the allowance remained essentially unchanged as the impact of loan growth was offset by the overall improved economic outlook. Both our commercial and consumer allowances and coverage ratios did experience a decline on a sequential basis. That was partially offset by the overall increase in the allowance on construction and CRE loans, which did see an increase in the severity of the economic variables in our model during the quarter. That said, I will note, this is a relatively smaller exposure within our overall loan portfolio. In total, our commercial portfolio at a coverage ratio of 194 basis points, while our consumer coverage ratio totaled 32 basis points. We also continue to see strong credit metrics with non-performing assets and non-performing loans at 7 basis points. While we understand we are still in the early innings of the current credit cycle, we’ve yet to see anything but nominal charge-offs over the last several quarters. Moving on to capital and liquidity. Our capital ratios improved during the quarter. Our Tier 1 leverage ratio increased to 11.9%, primarily on the strength of earnings and the lack of share repurchases. Our Tier 1 risk-based capital ratio was 20.2% up from last quarter’s 19.2%. The improvement in our capital ratio since the first quarter has led to more than $500 million of excess capital. As we look forward to 2021, based on our guidance that Ron will discuss in greater detail later in the presentation, we estimate generating more than $600 million of incremental capital. Our $300 million five-year senior note matured on December 1 and resulted in a little under $1 million reduction in interest expense during the quarter. We estimate that the full quarter interest expense savings will be approximately $2.6 million. Our book value per share increased to $35.91, an increase of a $1.94 sequentially and our tangible book value per share increased to $23.58 up from $21.56. These increases were driven by strong quarterly earnings and improved marks on our securities portfolio. We continue to feel good about our financial position is our liquidity remains strong. In addition to the nearly $7 billion available in our 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 have access to nearly $2 billion of liquidity from cash, credit facilities that are committed and unsecured, as well as secured funding sources. I would also highlight that similar to what we saw in the third quarter, we continue to see an increase in client allocations to cash, despite the strong performance in the equity market. Within our Sweep Program, we saw balance has increased by nearly $2.5 billion in the fourth quarter. So far in the first quarter, client cash has grown another $300 million. On the next slide, we go through expenses. In the fourth quarter, our pre-tax margin improved 440 basis points sequentially to nearly 24%. The increase was the result of strong revenue growth, lower compensation accruals and our continued expense discipline. Specifically, our comp to revenue ratio of 57.9% was down sequentially and came in below our recent guidance of 58.5% to 59.5%, due to the strength and composition of revenues, primarily within the institutional group. Non-comp operating expenses, excluding the credit loss provision and expenses related to investment banking transactions totaled approximately $179 million and represented less than 17% of our net revenue. This was also below our recent guidance and similar to the lower comp ratio with due to stronger than expected revenue. In terms of our share count, our average fully diluted share count was up 3%, primarily as a result of the increase in our share price. And with that, I’ll turn the call back over to Ron to discuss our outlook for 2021.

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

[Operator Instructions] The first question will come from the line of Devin Ryan with JMP Securities.

Great. Good morning. How are you, Ron? So just – first question here, I want to dig in a little bit more on the expense guidance, you appreciate all the color that you provided. But if you can give us a little bit more color on how to think about maybe the absolute levels of non-compensation, because I know that if you apply the range, the revenues, it’s a pretty broad range. If you can help us maybe think about the absolute level, I know, did $193 million this past quarter. So how to think about that relative to maybe some acceleration post pandemic and then on the comp ratio, just the type of revenue environment that would put you towards the top end of that versus the bottom end.

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

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

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

I’ll let Jim come to the yield. I mean, we – as it relates to use of capital, we’ve always said that, we’ll use our capital in various buckets, depending on risk adjusted returns. We can – it’s our dividend, it’s returning capital versus just be a share repurchases. That’s allocating capital to grow the bank and it’s acquisitions. And we’ve always said we’re opportunistic. And Devin, I’d like to point that – to answer that question, over last year and the previous years, what we’ve done, our return on tangible equity is 25%. And I think that capital management strategy that we do is proven out in those numbers. And so we – I’m certainly always looking at the fact that we should buyback stock to buyback dilution from employee based grant. And that’s always on our list, but after that, it depends on the environment credit spreads, interest rates spreads, acquisition opportunities and all of those things, which we are – as we always are opportunistic to the market and what we think the risk adjusted returns are. Jim is related to the market…

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

Yes. That makes sense. Well, really appreciate it, guys. I’ll leave it there, but thanks for the comprehensive outlook. Very helpful.

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

I was wondering if you could comment on the competitive dynamic and the recruiting environment yesterday, the large competitor yesterday just noted how challenging it’s gotten on the employee side and their plans to kind of ramp up their transition assistance back. And just wondering, how are you thinking about that and expectations for future changes?

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

Got it. And just one quick follow-up, any thoughts on a potential for regulatory changes, obviously, new administration, new SEC had coming in and some craziness going on in say the direct retail world at the moment. So how are you thinking about the moving forward, any expected changes there? Thanks.

That’s a long question or long answer to a complicated question. I thought at the highest level, we do expect regulatory changes to occur. I would know that my 25 years of being CEO, I’ve dealt through two democratic administrations, two Republican administrations, the Dodd-Frank implementation and all the rules regarding viable about stuff and now we’re in what will be the third democratic administration. As I think about it, on the treasury secretary side, I know treasury secretary, Allen, I know her quite well. I think she’s a very bright from my perspective. She’s proven over time to be dovish. I think she’ll be supportive of higher spending. I think she said go big. And so we need to factor that into our view of market conditions with at least someone in that position being very supportive of big stimulus. That probably lead to over into the Federal Reserve that will continue quantitative easing that goes to my remarks as to why I think 2021, we’ll see a strong GDP growth. Of course, there’s trade eventually balances. And there’ll be some reckoning at some point. But I don’t think it’s in 2021. Gary Gensler, I don’t know that, well, I would say that the SEC is going to increase enforcement, look at a number of rules, probably including BI, BI is on the books that it needs to be changed to the administrative procedures act. That’s a relatively difficult and time consuming to do. So I expect that there’ll be some additional guidance and enforcement, but in the end, I think that BI is a good rule properly implemented. We’ll just see some more enforcement. Your last question about what can potentially happen. On this online trading, it’s – for some of its a phenomenon. I think it’s been going on for a 100 years. It’s a short squeeze happen. They’ve happened prior to the formation of the SEC, and they’ve been going on for some time. And when you see markets shutting down – extensively shutting down people saying, well, we can’t take buy orders. That’s not system problem. That’s the system working that’s declaring houses, primarily DTC and the Options Clearing Corp, calling these firms and saying, hey, we need more margin. The systems at risk. And firms, especially, maybe newer firms or with less capital, they will shut down whatever side of the trade is driving the margin requirement. That’s what I think is going on ultimately. There’s going to be some questions over time. I believe about the gamification of trading and whether or not using AI to encourage behavior triggers some best interest rule. And that will be a debate, I personally hope that we don’t try to curb short-selling or curb any kind of trading. We have the best and deep markets in the world. We just have to make sure that what’s going on is not front running or market manipulation. But I think the SEC will get to the bottom of that. So we’ll get through this, it’s classic short squeezing going on. I would note that this trade isn’t done over, it isn’t done yet either, when it’s all said and done. There’ll be a balance of winners and losers and the losers I can assure you will not just be the shorts. There are going to be some longs that bought the stock that are going to be I wonder what happened to their money, none for that.

Thanks guys.

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

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

First of all, I think one of the greater resiliencies in our business is, as I’ve said, a number of times is the diversification in our business. As I said, we started 2020, if you would have told me and I’m not saying our big vertical, you had a good year, but we thought it was going to be a much better year. We thought the net interest income was going to be much better. And on the banking side, we thought our fund business. And it turned around that those businesses underperformed relative to our expectations, and then other verticals such as healthcare capital raising as a segment of what we’re doing, certainly what was going on with SPACs, but that can also change type yields, a number of things. Those things all picked up. So the first thing I want to say, is that as we look forward one vertical could slow down and in fact, we expect financials to pick up as we look at backlog and activity. As it relates to the overall industry and what I see, I think it’s pretty clear that when you put assuming $1.09 trillion of stimulus gets put into the economy, assuming that the fed continues QA at some level that they’ve been doing. And it was quite substantial. That’s a recipe for very robust economic growth and when you throw into that, the reshuffling of the economy that’s occurred because of the digitization of many businesses. And that crosses all sectors. It’s just not technology. It crosses into transportation across as is the energy, across as in all these sectors and what we’re seeing is a tremendous amount of economic activity as firms restructure to what’s going to be. What’s going to be, what we thought it was going to be in five years, but we accelerated this within a year because of the pandemic. And that means the investment banks are very busy and I think are going to continue to be very busy, because there’s just a lot to do. And we are very busy. I expect my peers are also very busy. We benefit because we’re not monolithic when it comes to just a product. We have something can pick up. And we’re going to get our share of the wallet. So I’m optimistic. And I think that in general, people look at the short-term over the last six months of market activity as an aberration. And I think it’s sustainable in this kind of fiscal and monetary stimulus fed environment.

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

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

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

Yes, a lot of – I think a lot of – to me, a lot of the NIM resiliency that I see, I’m going to let Jim get into the details. And Jim, I think is our portfolio doesn’t have a level of prepayment, which has sort of locked our NIM. We said that two quarters ago, we said that last quarter. So we’re not facing tremendous repayments that we’re needing to reinvest into a flat-ish yield curve, which obviously would compress NIM. But that’s kind of what I look at. Do you want to add to that?

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

Jim, what about the curve simply state and because I think that’s most people’s base case that they’re underwriting at the moment. And what’s your sensitivity you have Sterling Zurich by 100 basis point incremental steepening in the curve.

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

But it gives us the steepening yield curve would give us flexibility to manage the portfolio, because of the reinvestment rate. So I mean we’re clearly asset sensitive as a financial protection.

Very fair point. Thank you so much for taking my questions.

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

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

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

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

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

I mean I expect recruiting to a salary. I now – I know you want to say how much, and then I have to say, I can’t tell you, but I affected took salary, so we can just kind of cut through that pretty quick, okay.

Okay, fair enough.

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

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

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

Yes, okay. Quick unrelated follow-up in equity underwriting, you did mentioned SPACs being a positive contributor. Maybe you guys can talk to us a little bit about how you’re positioned to capitalize on SPACs. And maybe give a little color about how big this is relative to the overall equity underwriting bucket.

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

Interesting, thanks.

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

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

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