Stifel Financial Corp. (SF) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Stifel Financial Corporation's 2Q 2021 Earnings Conference Call. [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.

Thank you, operator. I'd like to welcome everyone to Stifel Financial's Second Quarter 2021 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 Zemlek; 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 our Investor Relations page at www.stifel.com. I would note that some of the numbers that we stated 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 also remind listeners to refer to our earnings release, financial supplement and our slide presentation for information on forward-looking statements and non-GAAP measures. This audiocast is copyrighted material of Stifel Financial and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial Corp. I will now turn the call over to our Chairman and CEO, Ron Kruszewski.

Thanks, Joel. To our guests, good morning, and thank you for taking the time to listen to our second quarter 2021 results. I'll start the call with some highlights from our quarterly and first half results, and I'll discuss our revised outlook for the full year. Jim Marischen will review our balance sheet and expenses, and then I'll wrap up with some concluding thoughts. Before I get into the specifics of our quarterly results, let me start by saying that overall, Stifel business in the first half of 2021 has surpassed any 6-month stretch by a wide margin and rival some of our most recent full year results. Our record 6-month net revenue was the result of records in both of our major operating segments. The strength of our top line and our continued focus on operating efficiency resulted in record quarterly and 6-month revenue as well as record earnings per share. As we head into the back half of this year, we are well positioned to continue our strong performance, which is illustrated by our increased full year guidance, which I'll discuss in greater detail in a few minutes. So looking at our quarterly and year-to-date snapshot, the numbers really speak for themselves and are the result of the investments over the last several years and a strong operating environment, especially for our investment bank. Revenue in the second quarter was a record of more than $1.15 billion, an increase of 29%. For the 6-month period, revenue was nearly $2.3 billion, up 27% and further illustrating our growth was roughly as much as our 2015 full year revenue. The growth in revenue and lower expense ratios resulted in record non-GAAP EPS of $1.70, which was up 65% year-on-year and $3.20 year-to-date, which is up 75%. And when compared to our past full year results, would rank as the fourth best in our history. I'm also pleased with our operating leverage as we generated a record pretax margin of 24% and our annualized return on tangible common equity was nearly 31%. Tangible book value per share increased 29% in the last year. Turning to the next slide. our record second quarter net revenue was driven by Global Wealth Management that increased 26% and our Institutional business, which posted a 31% improvement. Compensation as a percentage of net revenue declined sequentially to 59.5%, which was in line with our guidance on last quarter's call. Our operating expense ratio was 17%, and excluding credit provision and investment banking gross subs our operating ratio totaled 16%. This was again well below our full year guidance due to the strength of our revenue and expense management. As the economic outlook improves, we, like other banks, have updated our economic models. This, coupled with a strong credit performance in our loan portfolio resulted in a reversal of more than $9 million of credit provisions during the quarter. I would note that this was comprised of a $4 million release of credit provisions due to improving economic outlook and approximately $5 million relating to loan sales. As it relates to the loan sales, Jim Marischen will provide more color in his remarks. Neutralizing the impact of credit provisions, Stifel's pretax pre-provision income totaled $270 million, which increased 31% year-on-year and 13% sequentially. While the strength of the operating environment, particularly in investment banking has been a primary driver of our results I do not want to understate the importance of the investments we've made in our business as a meaningful contributor to our performance. Stifel is and will continue to be a growth company. Our focus on investing in our business and making us more relevant to our clients has resulted in not only impressive top line growth with significant operating leverage. As you can see from the numbers on this slide, our total net revenue on an annualized basis in 2021 has doubled since 2015 and was driven by both our wealth management and Institutional Business is essentially doubling in that time frame. What's particularly interesting is not only as our revenue growth doubled but our growth rate has accelerated. To illustrate some of the numbers, at the end of 2015, our net revenue totaled approximately $2.3 billion with nearly $1.4 billion from wealth management and roughly $1 billion from our Institutional Group. Since that time, we've grown our Wealth Management business by hiring experienced financial advisers and more than doubling our balance sheet. This has led to a more than 70% increase in total client assets and annualized global wealth revenue that would surpass 2015 results by 84%. Our Institutional business, we've made 6 acquisitions and our total managing directors have increased 67% in our investment banking business, contributing to a 111% increase in our Institutional revenue since 2015. While our revenues are on an impressive trajectory, our ability to generate operating leverage, I think, is even more outstanding. In the first half of 2021, our pretax margin increased to 23% from 10% in 2015, while our return on tangible common equity improved to 30% from 10% in that same time period. Looking at our operating leverage another way, our EPS has quadrupled i.e. doubling of revenue since 2015. This increase in our scale and the fact that we continue to be more relevant to our clients are the primary drivers behind my optimism for the back half of this year. Now before I go into details of our updated guidance, I want to note that our revised outlook is based on continued favorable market conditions. There are always risks, such as market corrections or geopolitical crisis that could negatively impact the operating environment and particularly our investment banking business. But given the strength of our results in the first half of the year, the current strength of our pipelines and my visibility into the beginning of this quarter, we believe that it is appropriate to increase our full year guidance at this time. We now expect net revenue to be in the range of $4.5 billion to $4.7 billion, up 13% to 18% from the high end of our prior guidance. This is a reflection of the strength of our investment banking and Wealth Management businesses. We are tightening our net interest income guidance to $465 million to $485 million as the benefits of the growth in our balance sheet has helped to offset the decline in short-term rates. In the second half of 2021, we anticipate an additional $2 billion of asset growth at our bank. As a result of our increased revenue expectations, we are lowering our expense ratio guidance. Our comp ratio is lowered to 58% to 60%, given our expected NII results and strong investment banking. Our operating noncomp expense ratio expectation has declined to 16.5% to 18.5% as we continue to see improved operating leverage in our business. I would note that the midpoint of our revenue guidance would suggest that Stifel achieved second half revenue essentially equal to our first 6 months of revenue. The current market environment, our pipelines clearly support this guidance and further historically, the second half of the year, especially the fourth quarter, our strong seasonal period for Stifel. I would also note that not only is our updated guidance significantly above our original expectations, but also well above the current 2021 Street expectations of $4.3 billion in revenue and $5.57 of earnings per share. And with that, let me move on to the results of our operating segments, starting with Global Wealth Management. Second quarter revenue totaled a record of $638 million, up 26% year-on-year and with 6-month revenue of $1.3 billion, also a record and up 17%. Our growth was driven by increased asset management, revenue and net interest income. The continued growth in our asset management revenue was driven by higher market valuations and increased client assets. which finished the quarter at record levels. Total assets under administration were $402 billion and fee-based assets of $149 billion rose 8% sequentially. These asset levels should drive further growth in asset management revenue in the current quarter. Net interest income increased 3% year-over-year, primarily given our continued ability to grow loans and produce a stable net interest margin. Jim will touch on this further later in the presentation. The next slide highlights the strength of recruiting and the growth drivers of our platform. We added 26 advisers, including 14 experienced advisers with total trailing 12-month production of $12 million. The gross number of recruits is down compared to last year as the return of advisers to their offices, has slowed recruiting. In addition, there is increased competition from larger firms offering what is, in our opinion, very high transition packages. That said, as our inflation experts in Washington like to say, we view this situation as transitory as our pipeline remains robust. Additionally, we definitely are seeing activity within Stifel independent advisers and look forward to recruiting to pick up in this channel. Moving on to our Institutional Group. We posted our third consecutive record quarter in our Institutional business as we continue to benefit from increased activity levels and the scale of our business. Our quarterly net revenues totaled a record $521 million, which was up 31% from the prior year. 6 months revenue increased 41% to over $1 billion. Quarterly advisory revenues more than doubled to $207 million while capital raising posted revenue of $158 million, which was up 42%. These results more than offset a 17% decline in our trading revenue, while the decline in trading revenue was expected as compared to the robust activity in the second quarter of 2020, I am pleased with our results relative to The Street, at least to the reported numbers that I have seen. As noted on previous earnings calls, we've been investing in our Institutional business with the objective of becoming more relevant to our clients and the market as a whole. The leverage in these investments was on display this quarter as our pretax margin improved by 630 basis points to 27%. Looking at the revenue components of our Institutional business, our equities business posted record first half results of $391 million, up 52%, while our second quarter revenue totaled $163 million up 29% year-on-year. Our fixed income business posted quarterly revenue of $147 million, while down 13% year-over-year was up sequentially. On this slide, I'll focus on the trading businesses of these segments and discuss capital raising on the next slide when I talk about Investment Banking. With respect to our trading businesses, equity quarterly revenue totaled $61 million, down 22% from record levels in the first quarter, which was slightly better than the overall market volume declines, which we witnessed. 6-month revenue was $141 million, which was up 5% from 2020. Fixed income trading revenue of $92 million was down 7% sequentially. Similar to my comments regarding institutional equities, our fixed income trading was impacted by lower industry volumes. While an industry-wide slowdown in credit trading was the primary driver of our revenue decline, I want to say that our rates and muni revenue experienced solid improvement. On Slide 9, Investment Banking revenue of $376 million was our third consecutive quarterly record, an increase of 73%, driven primarily by record advisory revenues. First half revenue of $716 million increased 81%, as we generated record capital raising in the first quarter and record advisory revenue in the second quarter of this year. I noted on last quarter's call that we expected a strong second quarter for our advisory business, and that is exactly what we got. Record revenue of $207 million surpassed our prior quarterly record by 19%. In terms of verticals, financials was a standout as KBW had its best quarter since our merger back in 2013. Since the beginning of 2020, KBW has advised on 8 of the 10 largest bank mergers and has the highest market share in the firm's illustrious history. Additionally, we saw a strong contributions technology, consumer and diversified services as well as in the fund placement business from Eaton Partners. Looking at our third quarter, barring a substantial change in the market or economy we expect to see continued strength in advisory revenue. Moving on to capital raising. Our equity underwriting business posted revenue of $112 million, up 61% and our second best quarter in history, trailing only in the first quarter of this year. Strongest verticals were consumer, health care, technology and financials. In addition to the strength of our equity business, we generated record results in our fixed income underwriting business of $57 million, which was up 16%. Our municipal finance business posted another great quarter as we lead managed 244 municipal issues. For the first 6 months, our market share in terms of number of transactions increased to 12.5% from 10.9% in the first half of 2020. I think it's noteworthy that in the first half of 2021, nonpublic finance revenue, which was minimal just a few years ago, now accounts for nearly 20% of our fixed income underwriting. This is the result of our efforts to diversify both domestically and internationally. In terms of our overall pipeline, they continue to build and remain at record levels. We expect strong performance from all of our major verticals. And as our updated guidance indicates, I am very optimistic for our investment banking business in 2021. With that, let me turn off the call over to our CFO, Jim Marischen.

Thanks, Ron, and good morning, everyone. Before getting into our net interest income and balance sheet, I want to make a few comments on our GAAP earnings and non-GAAP charges. In the quarter, we saw a $0.10 differential between our GAAP and non-GAAP results. To add some color to these items. The differential was entirely related to 3 basic deal-related expenses, including stock-based compensation, intangible amortization expense and an additional true-up on an earn-out from an acquisition that's performed better than our original projections. And now let's turn to net interest income. For the quarter, net interest income totaled $119 million, which was up $6 million sequentially. Our firm-wide and bank net interest margins remained at 200 basis points and 240 basis points, respectively. As expected, our NIM did not change from the prior quarter, while net interest income benefited from a 6% increase in interest-earning assets. I'll touch on this growth in more detail in the next slide. In terms of our third quarter expectations, we see a net interest income in a range of $115 million to $125 million and with a similar NIM to the second quarter. We noted last quarter, the significant improvement in our asset sensitivity when compared to just a few years ago. We are maintaining our prior guidance of $150 million to $175 million of incremental pretax income as a result of a 100 basis point increase in rates. This assumes the same set of assumptions discussed last quarter applied to our quarter end balance sheet. Further, the additional balance sheet growth guidance that Ron described earlier in the presentation, would be additive to this rate sensitivity guidance. Moving on to the next slide. I'll go into more detail on the bank's loan and investment portfolios. We ended the quarter with total net loans of $12.9 billion, which was up approximately $700 million from the prior quarter and was primarily driven by growth in our consumer channel. Our mortgage portfolio increased by $400 million sequentially as we continue to see demand for residential loans from our wealth management clients. Our securities-based loan portfolio increased by approximately $240 million. Growth in these loans continues to be strong as FA recruiting momentum continues to drive increased loan balances. Our commercial portfolio accounts for 37% of our total loan portfolio is primarily comprised of C&I loans, which were up slightly from the prior quarter. Our portfolio is well diversified with our highest sector exposure in fund banking, which increased outstanding balances by $325 million during the quarter. We believe these loans continue to represent an attractive risk-adjusted return, and we expect to continue to be active in this space. I also want to note that we had a nearly $200 million reduction in our PPP loans during the quarter. This was expected as a good portion of these loans were originated as part of a third-party origination platform. We also expect to see further reduction of PPP loans in the third quarter. Moving to the investment portfolio, which increased by $300 million sequentially. About 2/3 of this increase was seen within CLOs, while the remainder of their growth was primarily in shorter duration corporate bonds. Turning to the allowance. For the second straight quarter, we recorded a reserve release. In the second quarter, we had a $9 million reversal of our allowance through a negative provision expense as additional reserves tied to loan growth were more than offset by the improved economic scenario in our CECL model. I would also highlight that approximately $5 million of the negative provision expense was tied to $200 million of loans that are being sold at a premium. As we entered into an agreement to sell these loans at a premium, the accounting guidance dictates that these loans be reclassified to held for sale and the allowance tied to these loans reversed. We continually look at our retained loan portfolio and determined this specific pool of loans was not a core area of growth for the bank. And as such, we made the decision to sell. As a result of the reserve release and the composition of our loan growth during the quarter, our ratio of allowance to total loans declined to 99 basis points, excluding PPP loans. As I stated last quarter, it's important to look at the level of reserves between our consumer and commercial portfolios given the relative levels of inherent risk. At quarter end, the consumer allowance to total loans was 35 basis points, while the commercial portfolio was 142 basis points. We also continue to see strong credit metrics with the nonperforming assets and nonperforming loans declining to 5 basis points. Moving on to capital and liquidity. Our risk-based and leverage capital ratios came in at 18.9% and 11.7%, respectively. The increase in leverage ratio was driven by the strength of our retained earnings and was offset by loan growth in the quarter. During July, we also closed on a $300 million, 4.5% noncumulative perpetual preferred stock offering and announced the redemption of our 6.25% Series A preferred. We continued our share repurchase program in the second quarter by buying back 440,000 shares at an average price of $65.85. We continue to feel good about our financial position as our liquidity remains strong. In addition to the $6 billion available in our Suite 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 Fitch recently affirmed our credit ratings and improved our outlook to positive based on our strong operating results and overall financial position. On the next slide, we go through expenses. In the second quarter, our pretax margin improved 650 basis points year-on-year to a record 24%. The increase was a result of strong revenue growth, lower compensation accruals and our continued expense discipline. Our comp-to-revenue ratio of 59.5% was down 50 basis points from the prior year. The ratio came in at the midpoint of our previous full year guidance range. For the first 6 months of this year, our comp ratio was 60.2% and given our updated guidance, it is safe to assume that we expect the comp ratio in the second half of the year to be below the first half. Noncomp operating expenses, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $185 million and represented approximately 16% of net revenue. This is also below our prior guidance, primarily due to stronger-than-expected revenue. We expect the travel and entertainment related expenses will pick up in the second half of the year, but will likely have a larger impact in the fourth quarter than the third. The effective tax rate during the quarter came in at 25%, which is at the lower end of the range and in line with our commentary on last quarter's call. Absent any other discrete items, we expect to see an effective rate to be between 24% and 26% in the second half of the year. In terms of our share count, our average fully diluted share count was up 1%, primarily as a result of normal stock-based compensation offset by share repurchases, absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the third quarter fully diluted share count to total 118.5 million shares. And with that, I'll turn the call back over to Rob.

Thanks, Jim. As you can see from our record first half results and the significant increase in our guidance, 2021 is shaping up to be a far better year than we had originally forecast. Given our performance to date and our outlook for the second half of the year, we should again generate significant levels of excess capital. In addition to the excess capital we generate from operations, as Jim noted, we raised an additional $300 million in preferred shares during July. After redeeming our Series A preferred, we netted an incremental $150 million to capital. I mentioned this to illustrate just how well positioned we are to take advantage of opportunities that come our way. I think it's pretty clear from our results and my comments about the benefits of our increased scale that reinvestment into our business is my preferred use of capital. As our updated guidance illustrates, we believe that we can grow our balance sheet by an additional $2 billion in the second half of the year. Many bulge bracket firms and smaller regional banks have had muted loan growth rates given their sheer size or geographic limitations. By contrast, our loan portfolio is relatively small compared to the national footprint of our Wealth Management and Institutional businesses. Security based and mortgage loans have grown primarily through retail demand and new adviser recruiting. And in recent years, we have expanded our capabilities in new commercial lending businesses. The combination of these growth channels has enabled us to generate and the average annual loan growth rate of 30% in the last 7 years while maintaining a strong credit profile. In terms of growth in our other business lines, we continue to focus on both hiring and acquisitions. While we haven't done an acquisition in 18 months, we continue to believe this is an attractive use of capital and a key element to our growth strategy. That said, we'll always focus on deploying capital based on where we can generate the best risk-adjusted returns, and we'll continue to deploy capital to dividends and share repurchases. However, as a growth company, I believe that Stifel and our shareholders have and will continue to see the greatest upside from growth in our franchise. And with that, operator, let's open the line for questions.

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

So I wanted to start off with a question on capital. I have a very high-class problem. You're running with far too much excess at the moment, especially after the preferred issuance that you cited. It does feel like you're struggling to make a dent in those ratios given the current pace of capital return, really strong earnings. I was hoping you could speak, Ron, just to your appetite to accelerate buybacks to more than offset some of that continued capital build. And whether there's any appetite to deploy some of the $6 billion of third-party cash given very tepid demand for deposits from third-party banks at the moment?

As I said, we're always going to look to deploy our capital in the best -- where we see the best returns for our shareholders, dividends, share repurchases acquisitions, or growth in our balance sheet. And all 4 of those are on the table as we continue to grow. I see a lot of opportunity to grow our franchise. I have found that, that is the highest return to our shareholders, and we'll continue to do that. But we're mindful of our capital build, of course, and don't intend to just sit highly by and let capital accumulate. We will address it in an appropriate manner. And again, what -- as a shareholder myself, the best returns to our shareholders.

And maybe just to add to that in regards to the $6 million of additional Suite balances, and we -- we're essentially 2 quarters into the year, and we've doubled our balance sheet growth projections. So I think we have been able to deploy deposits in that manner and utilize some of that excess. And then in terms of the buyback, we have also talked about trying to offset dilution and to put some numbers to that. for the full year, that would be about 2.5 million shares.

Got it. But is there any appetite to accelerate that $6 billion of migration, if you will, away from third-party banks just given that those actions would be very NII accretive. Especially given some willingness to how best deploy it into credit-sensitive securities where the yield pickup would be pretty substantial.

Look, I think it's -- I think the growth in any bank and in our bank, as I said, we've grown 30% a year. I think we need to have balanced growth. So we flip a switch and try to both through loans and investments increase the size of the balance sheet significantly, of course, we could. But we believe in balanced growth. It layers into the market in a measured manner. And again, we said that we would grow our balance sheet at the beginning of the year by $2 billion. We're projecting $4 million now. And we see, as I said in my prepared remarks, that we see the ability to grow our loans as -- in a real asset of this company. Our bank is undersized relative to our footprint in other businesses. So we're going to continue to grow, not looking at just flipping a switch and taking NIM compression for the benefit of NII. I think there's risk in that we want to be more measured on.

Fair enough, Ron. And maybe just switching gears to the Institutional side. You talked about the fact that you weren't getting enough respect for the share gains that you were posting, I mean it's certainly evident this quarter in the results, and you mentioned the record backlog as well. At the same time, we do have the executive order that was just issued by Biden, which specifically highlighted greater scrutiny of financial services M&A, where you do have heavier gearing. Do you expect any direct impact on financial services M&A or bank M&A specifically in the coming months and quarters? And what are you hearing from the bankers and corporates that are on the ground?

We announced the deal this morning, if you saw that, which also speaks to what we've been doing, the investment deal where we advise them and that was a nice transaction. I think certainly, the sentiment coming out of Washington is an increased sort of antitrust sentiment, if you will. I believe that's what I'm hearing, we haven't seen anything as it relates to the midsized banks. I think that primarily would focus on the [indiscernible] on the big banks where I would see it. But we haven't seen anything yet. It doesn't mean it won't happen. But I believe that for the health of the industry, consolidation is going to continue to occur, especially where we are most dominant and have the greatest market share as I sit here today, I don't see that being impacted.

And just 1 final 1 for me. Just on the independent platform on the wealth side and your efforts to scale that. I was hoping you could speak, Ron, just to some of the early feedback you've gotten from advisers on the offering, how you're going to differentiate the value prop versus peers? And whether it makes strategic sense for you to scale that inorganically, just given the strength of your capital position.

I think that we -- I'm pleased with our initial feedback. It's -- we're starting from, frankly, a dead stop. We weren't recruiting in that area. We've just announced that in the last effectively 3 months. But our initial feedback is that we have a very competitive offering. As I've said when we did it, we weren't starting this business from scrap, we've had this business for almost 3 decades, and we have all the tools and the foundation to build this business. And I would say that we expect to show increased recruiting as this channel picks up and my initial feedback is very positive on this, not only the platform, but our competitive positioning.

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

Maybe to hit the question Steven asked on the Institutional business slightly differently. So obviously, heading into 2021, I think some people felt like the bar was pretty high after a great 2020 in the institutional side, and so it might be tough to grow revenues in that business. Clearly, based on what you've done in the first half and the outlook, your revenue should be up quite a bit on the institutional side. So I'd love to maybe kind of try to strip through if we can how the business is scaling in terms of people. Obviously, you're gaining market share in businesses. And just trying to understand how much of the momentum feels like it's just the cycle benefiting versus Stifel is actually expanding the footprint over the past year. And then expectations for that heading into next year, kind of where the bar maybe feels a little bit high and where you still feel like there's really good growth momentum whether because of the cycle or because of where you've added to the footprint.

I mean it's -- this seems like it's a never-ended question, right? And let me just give some numbers to talk about what we've built. And again, we're all benefiting from increased market activity. So myself and all of our peers, whether you're a large bulk cracker of middle market or independent adviser terms were all benefiting from a favorable market environment. I feel that when I talk about not having an understanding, it's that we need to do a better job of explaining how much investment and what we've done to our footprint. So for example, we've doubled the business in terms of revenue since 2015 and we've also doubled our managing directors. So we have 205 to 210 managing directors today, which is double what it was. We participate in a much broader slot of the economy in terms of verticals, and we do it across a much greater array of product offerings than we did even a few years ago. So we're in the fund placement business, we are in financing business on the corporate debt side and our M&A you can see. So the question always does that I hear this is about sustainability, is it sustainable? And I answer well, not only is it sustainable, it's growing. And what I sometimes take not exception, but I throw my brain, it's how The Street and the analysts we'll look at our peers and say that banking revenues will be up, but at Stifel they're not sustainable, they might be down because the bar is too high. And I think we've proven and will continue to prove that we're a growth business, and that business is going to grow with the same cyclical ups and downs that our peers will experience. But for me, it's been higher highs and higher lows. And I've been listening to sustainability for 25 years, some had 25 consecutive years of record revenue. So the business is sustainable because our platform is so much greater than it was even a few years ago. And we'll just keep putting up the numbers and keep answering the sustainability question every quarter.

Well, we'll probably keep getting it, but I appreciate the [indiscernible].

At the end I just hope you don't keep underestimating it. But okay.

Exactly. So maybe to switch gears to acquisitions for Stifel, obviously, 18 months without a deal is quite some time, but I also understand and appreciate that acquisition remains an important part of the growth strategy over the long term. Maybe just thinking about the market right now, is -- the fact that we haven't seen anything. Is that a function of just the expectations in the market are as high as kind of broad valuations. And so there's just not a lot of compelling things to do? Or is it just the areas of where there's opportunity in the market just aren't as interesting? Or obviously, you guys have added so many capabilities that there's not maybe quite as much white space in certain parts of the business. So I want to maybe just think about why there hasn't been anything. And then just what may be the backlog today of how active are conversations, how much is out there that maybe is interesting, but we'll have to just see if something happens.

Yes. Well, first of all, I mean, we have spent 18 months and us, that's a while. We are -- we have been a firm that's growing both organically and acquisitions. A good point that out that our growth in the last 18 months has done significant that you can say that's organic. If you really think about it, we haven't layered any acquisitions into that. The -- I think it's hard to say that you're disciplined in the marketplace when the way you prove that is by not doing deals. And so you don't know about what we haven't done because our #1 criteria for doing an acquisition is that it makes us. But importantly, it's accretive and it adds to our returns. So with our return on equity and tangible equity, it's a high bar and you measure acquisitions against building the balance sheet or, frankly, buying back stock, and that adds a level of discipline. So we haven't had anything that has met our return objectives in this time. And you -- but you also have to couple that with the fact that it's 1 thing to announce an acquisition, it's another thing to integrate and execute and bring everyone on board, which has been 1 of our real successes. And so during the pandemic and working remotely and all the technology challenges that come with that, we raise our own bar on the risk of execution. When we can't even for a while from those people that would be -- that would raise our risk of doing deals because culturally, that's been getting in all the people is a very important part of what we do. So we put all that together, it's been slow. But as I sit here today, we're very well capitalized, we see opportunities. And if we can continue to grow as we have for 20-plus years, we will do so.

Yes. Okay. Great. And maybe just last 1 here on the recruiting environment in Wealth Management. I just want to make sure I have kind of the right messaging. So obviously, it sounds like competition is very high right now, very high TA packages. How should we be thinking about kind of the push-pull between the -- you said there's a good pipeline. So there's -- it still sounds like quite a bit to do on the other side is quite expensive. So is the expectation that recruiting may slow a bit or that if prices or costs go up more than maybe you would pull back or is it just more a function of, it is expensive, but it's still very economic to do. And so just getting that additional context, I'm trying to just make sure I understand what is the bottom line of the message is.

Yes. I think, look, recruiting is somewhat cyclical. I think you have to look at recruiting overall longer period than just quarter-to-quarter. I've always said that. Just we're -- we are a strong recruiter. We have proven that over not just the last few quarters, but the last few decades. And so we're going to adjust to the marketplace. It's a -- and the business always gets competitive. What I see, and this is somewhat instinctive when I talk to people, we were surprised at the depth that we were able to maintain recruiting going into the pandemic for people that were in the pipeline. And it was -- I was surprised at our ability to onboard and even open offices during that time. What I'm really seeing besides competition is that the fact that many people don't get to their office has slowed the recruiting on the employee channel, it just have. We have a number of people in the pipeline, but getting through that in this environment has now extended. That's really what we're saying. But as I look at it and talk to people and see what's coming. I am very optimistic about our recruiting. And then the other thing, as I said earlier, when you talk -- at least compared to peers, we're recruiting in just 1 channel historically, which is the employee channel. And now we're going to be adding the independent channel and that will show a ramp in our just recruited numbers growth. So I think the recruiting business is fine. I think it's always cyclical, and we adjust accordingly. I generally probably on balance recruit less when markets are really crazy. They've been that way, same with acquisitions, and we recruit more when we think the returns are higher. But no change.

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

Maybe just a couple of quick follow-ups on Devin's question. I guess, first, you mentioned you raised your own bar on the risk of execution for deals because you couldn't see people. Has that been removed now that the economy is reopening, you're able to kind of travel and get out and see companies right now?

Yes, I think so. I mean based on the last couple of days, we might be seeing with masks on again, but I think that, yes, for sure, we -- this economy is opening up, people are planning on having return to the office as are we. We think that's important. But look, we're all ever diligent as to the updates as it relates to the pandemic and the virus and the delta and all things COVID-19 related. But in general, we believe that people are going back to the office, and that on balance will help our recruiting.

Got it. Good. And then just on the adviser recruiting environment, you mentioned it got more competitive. Is it broad-based across kind of the larger firms of wirehouses or just maybe 1 or 2 players that are kind of really pushing the envelope here?

I think both. It's broad based and -- there's always -- you always have leaders in the -- and who's doing what they never always the same. But I would say, in general, it's very competitive. It does also track as you might expect, it tracks the perception or at least short-term rates. And with rates near 0, there might be some models that are discounting that longer than we might be. And so that just results in different IRR type numbers, which might be causing higher transition. That's a guess again, I can't speak for what other people are doing. But again, we're -- I feel very good about where we are and our value proposition. The most important thing is not necessarily are we competing on the money front at the very short-term saying it's important. The most important thing is do we have a competitive platform and the right culture and are we attracting -- because that's the most important. And on that front, I am very pleased with the improvements we've made in our platform, the technology. This is a great place to come and people know that. So I feel really good about that.

Got it. And then just on the increased asset growth outlook. I wonder if you could provide the granularity in terms of where you see the biggest opportunities that continue to be in mortgages insect-based line? Is that being driven by your adviser/client base? Or is it more balanced between C&I right now? Or are there other opportunities to kind of grow balances from here?

Yes. Let me have Jim take that.

Yes. I mean I think if you look back over the last 2 or 3 quarters, the vast majority of the growth that you've seen has been in fund banking, mortgage lending and securities-based lending. I think those all provide an attractive risk-adjusted return today in terms of balance of credit risk and yield. And I think going forward, those are going to be our main areas of growth.

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

Just another maybe follow-up on the independent adviser channel. Obviously, I heard your comments around pickup in TA packages on the employee side. But as you reenter the independent channel. Are you seeing similar pressures there as well? And then just curious to get your updated thoughts on sort of Stifel's relative value proposition versus some of the larger independent players like Ray Jim Enterprise LPL, they have been doing that for a while.

Yes. Well, well, I must say, in some cases, if you're asking about the cost of recruiting on the independent side. I would say that I have a -- I would say that's even gotten to be almost more competitive on the employee side. It's all -- everything is relative to expected cash flows. And so that is a competitive also channel for sure. Yet we believe that our model allows us to compete. We can do that and get adequate returns. I would say that the independent model is more dependent upon rates, than the employee channel in terms of achieving returns. So this rate environment doesn't necessarily support some of the things that at least what I see going on. But -- so yes, we can -- we have to get our message out and our platform out. As it relates to the platform, which I think is the most relevant or more relevant in your question. We have -- we've run our independent channel in many ways as almost a branch or a couple of branches within our employee channel. So what that means is that all the integration, the ability to transact and to provide support is in place. And I think that the people come to see our platform have been very surprised as to our capabilities to provide a foundation for independent advisers.

Great. And then just another 1 around M&A. I think in the past, Ron, you talked about adding maybe some of the asset management capabilities as well, particularly around private markets. Is that still a priority as you guys obviously have a significant amount of excess capital to deploy? Or as we think about the opportunity set for M&A for Stifel it will largely be centered around kind of the core channels, whether it's the wealth or the independent or the -- sorry, the institutional channel?

Well, I think that I've said, and I'll continue to say that on the asset management side, the asset management in terms of alternative space versus a index space, broadly speaking, we -- that's where we would be -- would have interest I'm not sure that an acquisition is ever a priority here. It's always -- does the right situation come along that we believe is not something that will be add to our relevance in the marketplace and to our earnings. So we don't have anything to prioritize. I think the firm has developed to the point where we have a pretty broad-base offering have set. That's where a lot of our acquisitions in the last 5 years have build out our institutional offering. But I think that we will -- we see opportunity and we will add to our product set appropriately. It's -- it is -- it's about being relevant and accretive.

With that we are showing no further audio questions at this time. I'll now hand the conference back over for closing remarks.

Well, I would like to thanks our shareholders and analyst community for participating on the call. Some very good questions. And I will end by saying as I did on my call that the investments that we've made over the number of years is certainly paying dividends in this marketplace. I am optimistic about not only the rest of this year, but frankly, into 2022 based on what I'm seeing today. And look forward to reporting to our shareholders after our third quarter, which ends in September. So with that, everyone have a great day and stay well. Thank you.

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