Stifel Financial Corp (SF) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Stifel Financial's First Quarter 2020 Financial Results 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, Stifel's Head of Investor Relations. Please go ahead, sir.

Thank you, operator. I'd like to welcome everyone to Stifel Financial's First Quarter 2020 Financial Results Conference Call. Today, we will reference our earnings presentation, which can be found on the Investor Relations page on our website at www.stifel.com. New information on forward-looking statements and non-GAAP measures appear in the earnings release and in our presentation. This audio cast is copyrighted material of Stifel Financial Corp. and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial.

I will now turn the call over to our Chairman and Chief Executive Officer, Ron Kruszewski.

Thank you, Joel. Good morning, and thank you for taking the time to listen to our first quarter 2020 results. Earlier this morning, we issued an earnings release and posted a slide deck on our website.

I'm joined on the call today from various locations by Co-Presidents, Jim Zemlyak and Victor Nesi; as well as our CFO, Jim Marischen. I'm going to start the call by briefly talking about the steps we've taken as an organization over the past few months to deal with this unprecedented health care and economic crisis. I'll then briefly run through the highlights of our first quarter before turning the call over to Jim Marischen who will take you through our balance sheet and expenses. I'll then come back with my concluding thoughts.

As you probably noticed, we revised our earnings slides. Most of the changes are just formatting, but given the current uncertainty in the market, we've included a number of new disclosures, particularly on our loan book and securities holdings. We believe that the new disclosures increase transparency and illustrate the conservative nature of our balance sheet and our strong liquidity.

First of all, I would like to express gratitude to healthcare workers and extend best wishes to everyone. All of us at Stifel hope that you and your loved ones are safe and healthy. Responding to COVID-19, Stifel is committed to supporting and protecting our associates, serving our clients and communities as well as small businesses, commercial and institutional clients.

This slide outlines some of the actions we've taken regarding these constituents. I'm also proud of my Stifel partners and associates who have shown resolve, creativity and teamwork to achieve the dual objectives of promoting the safety of our people while delivering essential and exceptional service to our clients.

I would like to highlight Stifel's infrastructure and response management as well. As our shareholders know, Stifel has been acquisitive. I'm often asked if we have fully integrated our infrastructure. I believe the past month underscores the fact that while Stifel has multiple client-facing brands, KBW, Miller Buckfire, Eaton, to just name a few, we are fully integrated in our support functions, including risk, trading, technology, clearing and settlement.

A couple of points. Over the last month, more than 90% of Stifel associates have worked remotely. Speaking to our infrastructure, I can think of no better example than the fact that pre-crisis, Stifel globally maintained 8 primary trading floors, which because of social distancing and the need to operate remotely, were redeployed to 183 separate trading locations. This was achieved without interruption and during a time of elevated trading volumes and volatility. I also believe that the fiscal policies undertaken and the Federal Reserve have done well to address the financial uncertainty, and these have been needed and effective.

The economy has been through many crises during my nearly 4 decades in this business. The lesson I've learned is that risk is omnipresent. I often say that I'm most anxious when things appear relatively calm, and it's hard to predict the next crisis. Such was my anxiety in late 2019, all seemed as if 2020 would be another record year. How quickly things change.

With this context, I will turn to the quarter on Page 3 of our earnings presentation. In Q1, net revenues were $913 million, up 19% from the prior year. Simply, we had a great quarter that highlighted the diversity of our business. As we look at the quarter, there are 2 issues that are particularly noteworthy.

The first was adoption of CECL and resulting -- the resulting loan loss provision given market conditions at the end of the quarter. The second was our conservative approach to compensation that resulted in a higher comp-to-revenue ratio than we had originally guided to.

After considering these items, both of which we will discuss in greater detail later in this presentation, non-GAAP earnings totaled $92 million, with non-GAAP earnings per share of $1.20. Annualized return on tangible common equity, even after the aforementioned loan loss and comp accruals, totaled 19%. We achieved record revenue in Global Wealth, maintained a strong and liquid balance sheet, and due to the diversity of our business, delivered our second best quarterly revenue in our institutional business.

Turning to Page 4. I'd like to share how we thought about our results given the current environment and uncertain economic outlook. First, as I stated, our record first quarter revenues increased 19%. For comparative purposes to 2019, as I said, 2 items significantly impacted the quarter. So to get started, I want to note that earnings before loan loss provision and additional compensation accrual would have been $179 million, up 21% year-over-year. I believe this illustrates the earnings power of Stifel. Wealth management had its strongest quarter and our institutional business, its second strongest.

Now as I said, the 2 items impacting our quarterly results total about $50 million pretax. The first was the adoption of CECL, which, as you know, requires current estimate of all future losses. Based on this new accounting standard, we increased our loan loss allowance by approximately $27 million, which included a $19 million provision for loan loss. As we implemented CECL, I want to say that we have thoroughly reviewed our loan book. Jim will give more detail on the risk characteristics in a moment.

I would also note that when you look at our bond and loan portfolios together, 72% of that total are comprised of residential mortgages, security-based loans and investment securities. We also do not have a credit card portfolio. Again, Jim will provide more color on this. That said, we will continue to monitor economic conditions and adjust our loan loss provisions accordingly.

The second item we've given a lot of thought to is our people. There was and there's a lot of uncertainty regarding the economic outlook, which makes accruing for compensation even more challenging. Remember, Stifel is not just a bank. We have a lot of human capital that produces transaction and fee-based revenue. So as we looked at our franchise and recognized that it is driven by our people, we felt it was appropriate to take a conservative approach to compensation. Therefore, we booked an additional compensation accrual of $32 million, which was 350 basis points higher than the top end of our previous guidance range. So taken all together, our non-GAAP EPS was $1.20. And stated previously, this still resulted in a 19% return on tangible common equity.

Moving on to our segment results and starting with Global Wealth Management. We had another great quarter with record results across almost all private client line items when net revenue increased 14%. Client assets under administration totaled $277 billion, down 8% from the prior year. On a sequential basis, our client assets were down 16% during a period when the S&P 500 declined 20%.

I want to point out that our decline in client assets includes a $9 billion reduction that resulted from the sale of Ziegler Management at the end of the quarter. So excluding these assets, client assets would have declined by 13% sequentially. A primary driver of the difference between the decline in the market and the drop of our asset levels was the impact of our recruiting efforts.

The following slide gives some additional color on Wealth Management. We continue to see positive recruiting momentum in the first quarter as we added 26 advisors with average trailing 12-month production of nearly $20 million. While home office visits basically came to a halt following the outbreak of COVID-19, we have continued to recruit remotely. We remain in contact with prospective recruits as interest in Stifel's platform remains strong, but we anticipate recruiting activity to remain subdued until travel restrictions ease.

That said, as you can see from the chart on the upper left of the slide, we have had a lot of recruiting success since the beginning of 2019, bringing on 176 new advisors that had trailing 12-month production of roughly $140 million. Additionally, over the past 10 years, 85% of the FAs that have joined Stifel have come through organic recruiting, with the remainder coming from acquisitions.

Moving on to our Institutional segment. We had our second strongest quarter ever as revenue topped $330 million. I'm especially pleased with our capital raising and brokerage revenue. Advisory revenue is lumpy, and in this case, compares against a strong period 1 year ago.

In 2019, we closed 6 acquisitions: First Empire, Mooreland Partners, B&F, George K. Baum, MainFirst and GMP. All of these acquisitions are fully integrated and all have operated smoothly in this remote operating environment.

On Slide 7, we look at our Institutional Equities and Fixed Income businesses. What's striking about this slide is the balance between the 2 businesses that both generated roughly $130 million in revenue during the quarter, which again underscores the diversity of our business. Although these segments are comprised of brokerage and capital raising, I'll focus on the brokerage business here and address capital raising when I talk about Investment Banking.

Equity brokerage revenue of $70 million was up more than 80% year-on-year. The strong improvement was a combination of the spike in volatility in March as well as solid contributions from our European business as well as our acquisitions, including MainFirst and GMP. It's worth noting that excluding the additions of MainFirst and GMP, our equities business was up significantly more than what we've seen from other firms.

Fixed income brokerage revenue was a record $100 million, up 48%. The increase was driven by increased activity in both investment-grade and high yield. I would also note that we effectively managed our portfolio risk during the market upheaval, with trading gains and investment-grade more than offsetting losses in municipals. Both equity and Fixed Income benefited from increased market share and spike in volatility. And given the decline in volatility in April, we would caution against annualizing our first quarter brokerage revenues.

On the following slide, we look at our firm-wide Investment Banking revenue. In terms of our Investment Banking business, let me start off by congratulating my colleagues on being named the Middle Market Investment Bank of the Year by Mergers & Acquisitions magazine. This award helps validate the effort that's gone into building our Investment Banking franchise.

Looking at the quarter, through February, we were likely on track for record results in Investment Banking. The business slowed significantly in March, and our total Investment Banking revenue came in just under $180 million, which was still up 11%. So a good quarter, but well below where we were tracking.

We showed significant performance improvement over last year, particularly in capital raising. Our capital raising business accounted for 7 of our top 10 fees during the quarter compared to just 1 of our top 10 in the first quarter of 2019. We not only doubled our revenue year-on-year in equity capital raising, but also increased our market share in terms of fees on managed equity deals. I do know and do remember that 1 year ago, we did have the government shutdown. But I would say that, that said, we have gained market share in our equity business.

On a debt capital raising business, we also generate substantial year-on-year growth. We had a strong first 2 months of the year in our public finance business, but municipal issuance in the last 3 weeks of March was negligible.

We continue to benefit from the acquisition and integration of George K. Baum as we lead-managed 167 negotiated municipal issues, up 33% year-on-year. And Stifel remained #1 by number of issues managed. I also want to mention that we generated a solid contribution from our taxable debt capital markets business in the quarter.

Moving to Advisory. Revenue declined 28% due to the slowdown of activity levels in March and the fact that the first quarter of 2019 had a significant restructuring fee from Miller Buckfire's work on the COFINA transaction. Similar, capital raising, our Advisory business, was well on its way to a very strong first quarter prior to March. The performance of our Advisory business was similar as I would note that the business was distributed across most of our verticals.

As I look forward against a challenging M&A market backdrop, our pipelines remain strong, but the timing of announcements and closings obviously remain uncertain in this market. We would expect relatively subdued markets traditional M&A in the second and possibly into the third quarter. That said, financial sponsors and strategic buyers are well positioned to make opportunistic purchases, and we could see an uptick in M&A activity as buyers look to acquire firms with depressed share prices or liquidity issues. Although traditional M&A comprises the majority of our Advisory revenue, our business is built to produce revenue during various market conditions.

Specifically, we're seeing significant increased client engagement with our restructuring team at Miller Buckfire. Our industry bankers are helping their clients understand all the options that are available to them in the current environment, including restructuring, leverage finance, public and private equity capital raising. This is just another example of how Stifel has become more relevant to our clients.

And with that, let me now turn the call over to our CFO, Jim Marischen.

Thanks, Ron, and good morning, everyone. On the next few slides, I'll concentrate on our bank and the balance sheet, with a focus on credit, capital and liquidity and the associated impact that the coronavirus has had on us.

So starting with net interest income. It came in at $137 million during the quarter, which was similar to prior quarter levels and within our previous guidance range. Our first quarter net interest margin declined to 266 basis points primarily as a result of the bank's net interest margin declining to 309 basis points. This was just below the low end of our guidance range and was impacted by the Fed's rate cuts during March.

Firm-wide, average interest-earning assets were essentially flat as the growth in the bank's loan portfolio was offset by the decline in the bank's bond portfolio. In terms of our expectations for the second quarter, we'd expect the bank's net interest margin to come in between 255 and 265 basis points due to the decline in interest rates and for net interest income to be between $115 million and $125 million.

Moving on to the next slide. We will review the bank's investment portfolio, which is short-term in duration and comprised of highly rated bonds. As you can see in the table, the majority of our portfolio is comprised of CLOs. It is important to note that we only hold AA and AAA CLOs. I think it's helpful to illustrate some of the reasons these bonds have the credit ratings they do. On average, this portfolio has credit enhancement of nearly 29%. We performed various stress tests on this portfolio over a number of different economic scenarios, including what it would take to incur $1 of principal loss.

To put this into perspective, it would take a constant default rate on the underlying commercial loans of more than 15% annually over the bonds' 5 to 7-year life with a loss severity of more than 50% to lose a single dollar of principal.

If you compare this back to the 2008 financial crisis, specifically looking at 2008 to 2010, annual defaults averaged just under 5%. We also run the underlying loans through various credit stress events within our CECL model. Under the most severe scenario, our credit enhancement decreases to approximately 17%. In this severely adverse scenario, all of the credit losses are absorbed by the lower tranches in the CLO structure. Given these results, our CLO model did not produce any reserves to be recorded against our bond portfolio.

Moving on to the next slide. In terms of our loan portfolio, we ended the period with total net loans of $10.6 billion, which is up $600 million sequentially due to growth in C&I and residential mortgages. As you can see from the table in the top left, more than half of our portfolio is comprised of residential mortgages and securities-based loans to our Wealth Management clients.

Our mortgage portfolio is comprised of adjustable rate mortgages of varying duration of 3 to 10 years. These loans have an average loan amount of nearly $700,000, an average FICO score of 765, an average loan-to-value of 65%, and the average borrower has approximately $1 million of liquid assets.

Our securities-based loans or demand notes from our -- for our Global Wealth Management clients can carry a 0% risk weighting. They are supported by well-diversified portfolios of equities, fixed income securities and cash. As we hold the collateral securing these loans, they represent more operational risk than credit risk. Since we started originating securities-based loans in 2008, we have not had any credit losses.

I would also point out some consumer lending channels that we do not participate in. We are not active in the credit card business and do not hold any other direct consumer loans, such as autos. In total, nearly 100% of our consumer portfolio is done on a secured basis.

On the table on the bottom right of the slide, we break down our C&I portfolio by industry type. Our C&I portfolio is all senior secured and loans are selected based on modest leverage, have strong and defensible market positions and are sensitized as part of our independent underwriting process. We have a well-diversified portfolio of loans, with no single industry group representing more than 8% of total loans outstanding. Additionally, as you can see, we have very limited exposure to energy, hotel, leisure, entertainment and restaurant industries, which, in total, are less than 5% of bank loans.

The majority of our C&I portfolio is comprised of large corporate, broadly syndicated loans. These loans are primarily rated BB or better, have senior leverage of less than 2x EBITDA at origination and are agented by large money center banks. Our CRE and construction portfolios are entirely comprised of senior debt, with a weighted average loan-to-cost of 67% and a 51% loan-to-value and are sourced from well-established sponsors and developers.

Moving on to the next slide, we discuss CECL, which we adopted -- we adopted a new accounting standard on January 1, 2020. As a result of this adoption, our allowance for credit loss increased by $27 million. In this slide, we provide a roll-forward of our allowance from credit -- we provide a roll-forward of our allowance for credit loss balance from December 31 to March 31, and we break out the specific components of the increase. It also provides you with more detail on some of the material assumptions that formed the basis for our first quarter provision for credit losses under CECL. We utilized the most recent data from Moody's for macroeconomic assumptions that populate our model, which included an additional update of scenarios right at quarter-end.

And for CECL, we employed a combination of scenarios, which is primarily driven by Moody's baseline forecast, which assumes a critical pandemic set of economic assumptions. We then blend in a more severe double-dip recession and a slightly more optimistic scenario. These scenarios include stresses up to a negative 25% decrease in GDP in 2Q '20 and an unemployment rate that peaks at 13%.

I also want to point out that under CECL, it's not appropriate to assume that our first quarter of 2020 provision for credit loss is indicative of provision losses for the balance of the year. The intent of CECL is to capture an estimate of expected future losses that exist in our books as of quarter-end. Going forward, the provision will fluctuate with the change in forward-looking economic assumptions and the financial performance of our borrowers.

Moving on to the next slide. We generated a pretax pre-provision margin of 16.1% that was down 310 basis points year-over-year. The decline was the result of a higher compensation accrual and provision expense that was discussed earlier in the presentation. Specifically, the comp-to-revenue ratio of 62.5% was above our previous guidance range. This is primarily a function of our conservative outlook and the corresponding comp accrual given the current economic environment and a wide range of potential outcomes as we project forward for 2020.

Non-GAAP operating expenses, excluding the loan loss provision and expenses related to Investment Banking transactions, totaled approximately $186 million and was within our previous guidance range of 19% to 21% of net revenues.

In terms of our share count. Our average fully diluted share count was down by nearly 2% as a result of our share price and repurchase activity. Assuming no share repurchases and a constant share price, we expect our fully diluted average share count in the second quarter to be approximately 74 million shares.

Moving on to capital and liquidity. Given the growth in the balance sheet as well as the 1Q seasonal impact of RSU conversions, we did see our Tier 1 leverage ratio decline to 9.6%. We'd expect to see that ratio back above 10% in future quarters as we are no longer projecting balance sheet growth this year given the current economic environment.

I would also highlight that market volatility did increase client allocations to cash. Within our Sweep Program, we saw balances increase by nearly $2.5 billion. We have seen the trend continue thus far in the second quarter and would expect to see that continue given the current environment.

Liquidity remains strong across our various legal entities. In addition to the Sweep Program, the bank had access to off-balance sheet funding of $4 billion. Within our primary broker-dealer and holding company, we have access to more than $1 billion of liquidity from cash, credit facilities that have committed an unsecured as well as secured funding sources.

Finally, book value per share of $46.13 decreased by $2.24 as a function of the marks in our bond portfolio through OCI, RSU conversions and the shares repurchased during the quarter.

And with that, I'll turn the call back over to Ron.

Thanks, Jim. So we had a great quarter, but that seems like ages ago. So let me end this call with what I said in the press release.

The next few months have a high level of uncertainty, which can drive a wide range of economic outcomes. Longer term, we believe the world and our economy will overcome this pandemic. Looking forward, Stifel is well-positioned because of its diversified business model, solid and liquid balance sheet and our associates' commitment to excellence.

With that, operator, please open the line for questions.

(Operator Instructions) Your first question comes from the line of Devin Ryan with JMP Securities.

First question just on, I guess, the compensation and just overall expenses actually. Just thinking about the accrual here. I appreciate that you guys tend to start the year more conservatively. And there's more uncertainty today than there has been. But how should we think about kind of the puts and takes on compensation throughout the year, just given that we're kind of in a lower interest rate and equity market backdrop than when we started the year?

And then just on kind of noncompensation costs, just how you guys are thinking about potential levers there and kind of the push-pull between investing for growth and taking advantage of opportunities versus obviously dropping more revenue to the bottom line.

Devin, first of all, I want to be clear when I talked about guidance. We've withdrawn our guidance, just want to say that as I go through these comments, going forward other than what Jim had said about net interest income.

But we were previously -- as it relates to compensation, we were previously at 57% to 59%. We are conservative. We would have been normally at the high end of that range historically. And what we're really talking about are unknown and the unknowns of the future and how we're trying to look at that.

Considering those unknowns, we took the opportunity. We thought it was prudent and conservative to take an increase of 350 basis points to our compensation accrual. It provides us flexibility and it's just conservative.

Other than that, it's hard for me to draw you a picture of what that means for the rest of the year because, frankly, I'm not sure that I know what the rest of the year brings. But we feel it's conservative. That is not -- in a normal operating environment, I would not be saying that our compensation range would have changed because it wouldn't have. So that's what I can do with that.

As it relates to noncomp operating expenses, I think that we're within the range, and we're looking at maintaining our business. And we're not going to jump at anything until we understand more what's going to happen with reopening the economy. Frankly, across many of our businesses, we're quite busy. And there's a couple of businesses like banking that obviously are slow. But at this point, we're just maintaining business and doing business.

And Jim...

And maybe to add a little color on noncomp OpEx. There were a few things in the quarter I'd highlight. Obviously, with the spike in volatility in trading volumes, you did see a pick-up in commission and floor brokerage. That pulls back some. You'll see that flex with those revenues.

As well, with the transition to work from home, we did have some connectivity costs, some hardware costs that we made investments in during the quarter that aren't repeatable expenses as well as some of the other operating expenses. There was probably about a $4 million kind of onetime tax matter that was above the line as well. There's a handful of things that you can point to that are nonrepeating items as we look forward into 2Q and 3Q that help flex that number down some.

Okay, terrific. Great color. And just a follow-up here on the bank. You guys gave some great color just on the overall portfolio and the CLO book as well. And appreciate that the expectation is not to grow the balance sheet.

But as you think about the mix of the balance sheet from here, are there opportunities to kind of reshift that? I don't know if CLOs have become even more attractive. Or how you guys are just thinking about the overall, the mix and then some of the puts and takes within that on what that could do to the NIM maybe beyond the next quarter or 2?

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

The commercial.

Yes. I'm sorry. Yes, the commercial. So consumer, commercial and -- in our investment portfolio are all about the same. So I think that mix is fine and comfortable, especially when you think about mix.

What I'd like to point out is what we said on the call, which is the lot of our loans are resi and security-based loans, which we are very comfortable with the look-through risk characteristics of that portfolio, very, very comfortable. We talked about the CLOs that we're very comfortable with in any stress environment that we've been able to do. And we've done a very thorough review of our C&I book. So we're comfortable with our loans. We're comfortable with the mix at this point, and I don't see any real major changes.

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

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

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

That's on a consolidated basis.

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

So maybe another one just around the comp accrual. I guess given the fact that the risk to revenues is to the downside, I guess, I'm still not particularly clear why accrue more in the first quarter.

And then should we take the 63.5% comp rate as your best guess for where the total comp rate should look like for the full year?

Well, to your second question, I think I said that, no, I'm not projecting the total comp rate. I'm not trying to do that. There's just a wide range of outcomes, Alex. We had a good quarter. When we look forward, we're trying to project and understand compensation on a wide range of outcomes. And we were -- two things that we were looking at is -- as a backdrop of what was otherwise a great quarter, one we talked about, which was CECL and the provision for loan losses and the economic factors and then what could potentially happen to compensation in the short run if we feel that we need to protect the franchise even though revenue and mix of revenues may change.

So you put all that together, and we felt that it was appropriate to take an additional compensation accrual. We want to show what it is, what it was against -- above our guidance in this kind of an environment. And that's where it is. So I have really no other crystal ball as I look into the future.

Okay. And then second question just around the cash sweep. And it sounds like cash balances continue to build in April if I heard you guys, right? Is that -- are the cash balance actually above where they ended the first quarter or they're at around the same level? And then can you give us a sense for the third-party bank sweep rate that you guys are earning on those balances now as we're sort of jumping into the April-May dynamic?

And I guess, just broadly speaking, any comment around demand from third-party banks for cash sweep balances, sort of spreads that they're paying, et cetera?

So in regards to the sweep, we have seen that continue to increase since quarter-end. We haven't given that number. I would say that there is an opportunity for that to accelerate if we particularly look at the ticketed money funds. There's still almost $7 billion over there. And as that product continues to converge down from a rate perspective, more equivalent with the Sweep Program, you'll see more funds come in there.

In total, we're making around 30 basis points on the Sweep Program. That shows up in the asset management line item. And I would say there still is very strong demand from third-party banks to step in and take those deposits. We have a lot of relationships with a number of banks from a treasury perspective that are very interested in stepping up and stepping into the program.

Yes. And Alex, one thing just to point out, it was sort of a negative for us as rates were going up, which was, on a relative basis, we don't sweep that many deposits to third-party banks. And so that was not as much of a tailwind as you saw those rates getting as high as 150 basis points.

Conversely, it's not as big of a downshift for us because we just don't have as many balances down to 30 basis points. Most of the impact of what we're seeing will be in our NIM versus the combination of NIM and reduction in deposits swept away.

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

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

Well, I mean, buybacks have gotten a lot of discussion. We, like most firms, have not been doing buybacks. And I think that, that will depend on future -- our future evaluations or thoughts on the recovery and the volatility of the recovery. As it relates to what we saw primarily as it relates to our leverage ratio and our capital ratios.

One of the things that I want to talk about is that we -- our activity in the nonbank, the actual balances relating to all of our flow business, clearing deposits. These are all very liquid, but they go on your balance sheet. Clearing deposits, receivables from customers, a number of things, those were up significantly and those impact our leverage ratio. They're also quite fluid. They turn over very fast.

So one of the benefits was we did a lot of brokerage business. One of the byproducts of that is short-term assets that go on your balance sheet as you're flowing all that business through the system. But we believe that, that plus a few other events that usually happen in the first quarter -- our conversion of RSUs, there's a number of things that happened that causes that ratio to depress. But we believe both our leverage and our risk base will be back at our targets this year.

And Ron, just to clarify, shall I infer from your remarks that the buyback's on pause until we have some better clarity on the economic environment and the impact of COVID stress?

I think that's a fair comment. I think it's that and a number of other factors as well besides financial that we have to consider on anything that says buyback tends to generate many, many more paragraphs of discussions. So at this point, we're just -- we're taking a pause.

Okay. Maybe just a question for Jim. Very helpful detail on the C&I portfolio, so thanks for laying that out. You flagged low levels of exposure to some higher risk categories like energy and hospitality and travel. Now that said, there are 2 large sector exposures, financials and consumer discretionary, each represent more than 5% of the book and both have come under increased scrutiny just in the light of COVID stress. I was hoping you could speak to the quality of the underlying exposures on the consumer discretionary side. And maybe within the financials book specifically, how much of that portfolio reflects exposure to nonbank financials?

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

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

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

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

I didn't hang up on you Chris.

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

Chris, I think that it is TBD. I mean, I would -- I don't think that if our -- the reasons that our success of recruiting, I think, actually are getting higher. I see a lot of the factors that occur that usually drive advisors our way have increased in this environment. Our ability to operate in this environment, they have -- no systems down, no issues, has underscored I think people's belief of our firm and our technology and what we've done. So I think that recruiting is going to be fine for us.

One of -- if there is a negative, we do very well with our home office meetings. That is, we get people here. We -- our rate of winning is very high. So we'll look forward to being able to gather again. That's a negative for us to the extent that we're not able to put the human touch on our recruiting factors as well.

The one thing I'd say, maybe just as a little bit of aside, I just want to say that, that -- for financial services and then for companies like Stifel that have fully integrated Banking and Wealth Management products, I think it's going to be a real strategic advantage for us because the one thing that's going on today, besides all the things that we've learned from remote, working at home and all of those factors, is that our clients have had a crash course in digital -- digitalization, including digital banking, digital access and all of that.

And so I am very comfortable, and we are rolling out our digital offerings on aggregation and on banking. And so I feel that the investments that we have made in technology in the last few years is going to really pay dividends because of what has happened to the customer base as they have learned and are learning to use the products that we're developing. So I'm optimistic about that.

(Operator Instructions) You do have a question from the line of -- caller, your information did not record. (Operator Instructions)

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

Can you hear me?

Yes.

Yes. I guess just following up a little bit on Chris' question. Do you think the current environment may create pressures for some competitors and may create opportunities around M&A? I realize you're digesting these kind of deals from last year, which some of them, they're producing pretty well. But typically in times of disruption like we're seeing now, valuations tend to get lowered and I was thinking it can create opportunities for scale players such as yourselves.

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

With the environment right now, whether it's creating opportunities.

Well, sure. I think the difference is, is that when we were in the financial crisis and the Fed put in TARP, we -- there was a pretty clear path once we got through the liquidity of the market and put a floor on asset values. There was a pretty clear path to see where the light was at the end of the tunnel, so to speak. And we did acquisitions based upon some -- what I felt, I was pretty confident about that.

This is a completely different situation. And frankly, the -- how we come out of this is going to depend on a lot of government response and a lot of how we get back the economy back at work and what that may look like. And what that may look like depends on what government says it's going to look like. And those are so uncertain right now that I think it makes the M&A environment, not only in financials, but almost across almost any industry, somewhat difficult to get any kind of visibility, which is why I think M&A, at least in the short run, is going to be challenged.

We, as a firm, are opportunistic. We've grown in times like this. And if the opportunity and the visibility become more apparent, then I would expect us to do what we've always done.

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

Well, let me conclude by saying that, first of all, I'm hopeful, and I do believe that the world and our economy will recover. I would like to see industries that are severely impacted like the restaurants and -- get back to work. I would also just like to say that as it relates to financial services and as it relates to the firm like Stifel and the firm that we've built, we are well-positioned. There is a lot of things to be done.

Municipalities have to restructure what they've done. There's a lot of issuance in the muni side. Corporations are going to restructure. You're going to see a lot of capital raising. Debt, debt restructuring, tremendous opportunities for advisors to properly pick stocks so to speak versus just being in the indexes a lot.

There's a lot that's going to go on with money in motion. And I think our firm is well-positioned to get our share and to gain market share.

So with that, I look forward to what will hopefully be a much better economic outlook when we reconvene on the second quarter. I hope everyone have a great day and stay safe. Thank you.

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