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Text: I'm joined on the call today by our Chairman and Chief Executive Officer, Ron Kruszewski; our Co-Presidents, Victor Nesi and Jim Zemlyak; and our Chief Financial Officer, Jim Marischen.
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Our value as a company is and always will be our people.
So let me give some highlights of our quarter, have Jim Marischen review our balance sheet and expenses, and I will wrap up with our outlook before Q&A.
As you can see on Slide one, the first quarter of 2021 was another record for Stifel as we continue to benefit from our ongoing investment in our firm as well as the strength of the operating environment.
Our revenue in the first quarter was a record of nearly $1.14 billion, an increase of 24% and surpassed last quarter's record by more than $75 million, driven by record revenue in both our Global Wealth Management and Institutional Groups.
The growth in revenue and our focus on expense management resulted in non-GAAP earnings per share of $1.50, which was up 88% year-on-year and represented the second highest quarterly earnings per share in our history.
The investments that we've made in our business have enabled us to participate to a far greater magnitude than we would have had we not invested in the business.
Our record results were driven by our past recruiting success to growth in our balance sheet and robust capital markets.
Other highlights for the quarter.
Pretax margins of more than 21%, annualized return on tangible common equity of over 28% and tangible book value, which increased 32%.
Turning to the next slide.
As I stated, our first quarter net revenue increased 24% to a record surpassing $1.1 billion.
Compensation as a percentage of net revenue came in at 60.9%, which was just above the high end of our annual range, yet is consistent with our policy of accruing for compensation conservatively early in the year.
Our operating expense ratio was about 18%.
But excluding credit provision and investment banking gross-ups, our operating expense ratio totaled approximately 16%.
This came in below our full year guidance due to the strength of our revenue and strong expense management.
As the economic outlook improves, we, like other banks, have updated our economic models.
This, coupled with strong credit performance in our loan portfolio, resulted in a relief of $5 million of our credit provisions during the quarter.
As you recall, our provision expense last year was driven by the adoption of CECL, and more specifically, the negative economic outlook that was a key input into the calculation.
So neutralizing the impact of credit provisions, Stifel's pre-tax pre-provision income totaled $238 million, which increased 61% from the first quarter of 2020.
Moving on to our segment results and starting with Global Wealth Management.
First quarter revenue totaled a record $631 million, up 8% year-on-year.
While this increase is impressive, I believe it understates the strength of our business as it includes a nearly $24 million decline in net interest income at our bank subsidiary.
Excluding the impact of lower bank NII, our private client business improved 13%, driven by the strength in asset management as well as growth in brokerage revenue, as we benefited from enhanced client activity levels and continued success in recruiting.
We again finished the quarter with record client asset levels.
Total assets under administration of nearly $380 billion increased $21 billion from the prior quarter.
Additionally, fee-based assets of $138 billion rose 7% sequentially, which should drive further growth in the asset management and service fees line item in the second quarter of this year.
The next slide highlights the strength of our recruiting and the growth drivers of our platform.
We had a solid quarter in terms of advisor additions as we added 15 advisors with total trailing 12-month production of $13 million.
While this was fewer advisors than we've typically recruited in recent quarters, I'd remind you that recruiting is cyclical and is best examined over a longer time frame.
Since the beginning of 2019, we've added 300 financial advisors with cumulative production of approximately $233 million.
As I look at the remainder of the year, our recruiting pipelines remain at robust levels and I anticipate another strong year.
In the first quarter, we announced that we were rebranding Century Securities, which we've operated since 1990 as Stifel Independent Advisors.
Given the growth in this industry channel and the fact that we already have the legal and supervised restructure in place plus an outstanding platform, we believe that our overall recruiting efforts will be enhanced by our renewed focus on this market channel.
Moving on to our Institutional Group.
This quarter represented our second consecutive record quarter for Institutional Group.
Net revenue totaled $506 million, which was up 52% from the prior year and surpassed last quarter's record by approximately $15 million.
Our performance was strong across all of our major revenue lines as our business continues to benefit from strong market activity, the recent investments in our business and contributions from both Canada and Europe.
We generated a 23% pre-tax operating margin, which was up more than 1,000 basis points from the same period a year ago.
Looking at the revenue components of our institutional business, I would note that our equities business totaled $226 million, up 74%; while fixed income totaled $146 million, which increased 10% from the comparable first quarter of 2020.
With respect to our trading businesses, we generated record equity brokerage revenue in the first quarter, surpassing our prior record set a year ago by 13% as strong activity levels continued and trading gains increased.
Additionally, I'd note that our electronic brokerage businesses, which include our ATS and algo products are now fully launched, and we would expect to see increased contributions from these products as the year progresses.
Fixed income brokerage revenue in the quarter was up 12% sequentially and represented our third highest quarterly revenue, trailing only the first and second quarter of last year.
Similar to my comments last quarter, our fixed income trading continues to be driven by increased activity across the board as well as non-CUSIP businesses.
On Slide seven, investment banking revenue of $339 million was our second consecutive quarterly record, surpassing last quarter's record by a few million dollars, driven primarily by record capital raising revenue.
Equity underwriting revenue was standout in the quarter, coming in at $160 million and surpassing the record we set last quarter by nearly $50 million.
This is a good example of how, by investing in our business over the last several years, we've become a more significant player as we were a book runner on more than 50% of the IPOs we participated in the quarter.
Our strongest verticals were healthcare, technology, financials and consumers.
As widely reported, there was an incredible amount of SPAC-related activity within our industry during the first quarter.
However, SPACs accounted for a little more than 15% of our equity underwriting revenue in the quarter.
So whether the recent slowdown in SPAC activity represents a pause or a saturation point, we are confident about the strength of our more traditional pipeline.
While our equity business was quite robust, we also recorded great results in fixed income.
Our fixed income underwriting revenue of $49 million was a record for the first quarter and was up 43% year-on-year.
Our municipal finance business rebounded from challenging market conditions in the first quarter of 2020 as we lead manage 236 municipal issues, which represented an increase of 42%.
While we are off to a strong start for the year, we believe that if Congress were to pass an infrastructure bill, we would see additional tailwinds to our public finance business.
We also continue to see solid contributions from our growing corporate debt issuance business.
Regarding our advisory business, revenue of $130 million represented our third highest quarterly revenue and a record by almost 25% for any first quarter.
In terms of verticals, we benefited from the expected pickup in financials and continue to see broad-based results from technology, consumer and healthcare.
Looking forward to our second quarter, based upon anticipated closings of some larger previously announced transactions and of course, barring a substantial change in the market or the economy, we expect to see a solid increase in our advisory revenue.
In terms of our overall pipelines, they are up double digits compared to where we began the year, and I remain very optimistic for our investment banking business in 2021.
Let me begin by making a few comments regarding our GAAP earnings.
In the quarter, we generated the second highest GAAP earnings per share in our history at $1.40, which was only surpassed by the results generated last quarter.
We again generated strong returns on equity with an ROE of 18% and ROTCE of nearly 27%.
Similar to last quarter, the strong GAAP earnings resulted in increases in our book value and tangible book value.
This was accomplished while increasing assets by $1.5 billion, resuming our open market share buyback program and given the seasonal impact of stock compensation on equity in the first quarter.
And now let's turn to net interest income.
For the quarter, net interest income totaled $113 million, which was up $8 million sequentially.
Our firmwide net interest margin increased to 200 basis points, and our bank's net interest margin improved to 240 basis points.
Both NII and NIM benefited from the remix of bank assets out of our securities portfolio and into our loan portfolio as well as growth in our average interest-earning asset levels by 6% during the quarter.
I would also note that we did see some more episodic loan fees earned during the quarter that contributed to NII.
We expect this contribution to decline somewhat in the second quarter, but the loan and securities growth that occurred in the first quarter will more than offset this decline.
As such, in terms of the second quarter, we expect net interest income to be in a range of $110 million to $120 million and with a similar NIM to the first quarter.
Further, while we have produced a stabilized NIM over the last few quarters, we continue to be very asset sensitive.
As an update to what we discussed last quarter, assuming a 100 basis point increase in rates across the curve and a 30% deposit beta, we would generate an additional $150 million to $175 million of pre-tax earnings.
I would note that our deposit betas have been and will continue to be driven by the competitive environment.
But for this analysis, we used a 30% deposit beta.
This represents an estimate from what actually happened to Stifel over the entire last rate cycle, but I would highlight that beta was very much weighted to the latter portion of the cycle.
Moving on to the next slide.
I'll go into more detail on the bank's loan and investment portfolios.
We ended the period with total net loans of $12.2 billion, up approximately $1 billion from the prior quarter.
We saw growth in both the consumer and commercial portfolios.
Our mortgage portfolio increased by $200 million sequentially, and as we continue to see demand for residential loans from our wealth management clients despite the increase in interest rates during the quarter.
Our securities-based loan portfolio increased by approximately $170 million.
Growth in these loans continues to be strong as FA recruiting momentum continues to drive increased loan balances.
Our commercial portfolio accounts for 39% of our total loan portfolio and is primarily comprised of C&I loans, which increased by 15% during the quarter.
Our portfolio is well diversified with our highest sector exposure in fund banking and PPP loans, each representing approximately 5% of the portfolio.
PPP loans accounted for more than $400 million of C&I growth, while fund banking accounted for $260 million.
But given its size, we felt it made sense to break this out as an individual line item.
We will look to continue to be active in the fund banking space as we view this as an attractive risk-adjusted return.
Moving to the investment portfolio, which continues to be dominated by 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.
This can be seen in the fair value of the portfolio, which was at an average price of 99.9% of amortized cost at quarter end.
We increased our CLO holdings by 7% from last quarter in anticipation of some payoffs expected to occur in the second quarter.
Turning to the allowance.
We had a $5 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 calculation.
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 118 basis points, excluding PPP loans.
It is important to look at the level of reserves between our consumer and commercial portfolios given their relative levels of inherent risk.
At quarter end, the consumer allowance to total loans was 31 basis points, while the commercial portfolio was at 174 basis points.
We also continue to see strong credit metrics with nonperforming assets and nonperforming loans remaining at seven basis points.
Further, we did take the opportunity to derisk from our commercial book by selling or reducing positions by $83 million on five C&I loans, which resulted in less than $1 million of charge-offs.
This equates to a roughly 1% discount to bar.
All five of these loans were in sectors more impacted by COVID and carried reserves well in excess of where we sold them.
Moving on to capital and liquidity.
Our risk base and leverage capital ratios came in at 19.4% and 11.5%.
The decline in our capital ratios was driven by balance sheet growth and the $68 million impact in equity to net settle taxes on our issues in the first quarter.
This was offset by the strength of our retained earnings.
We also resumed our open market share repurchase program late in the first quarter.
We repurchased approximately 195,000 shares at an average price of $61.79 per share.
Our book value per share increased to $35.96, up modestly from the prior quarter as the impact of net income on equity was offset by the aforementioned vesting of restricted stock.
Our tangible book value per share increased to $23.93.
We continue to feel good about our financial position as our liquidity remains strong.
The total third-party cash REIT program increased by approximately 5% during the quarter, which was used to fund the aforementioned bank growth.
I would also highlight that S&P recently improved Stifel Financial's outlook to positive based on our strong operating results and overall financial position.
On the next slide, we go through expenses.
In the first quarter, our pre-tax margin improved 730 basis points year-on-year to more than 21%.
The increase was the result of strong revenue growth, lower compensation accruals and our continued expense discipline.
Our comp-to-revenue ratio of 60.9% was down 160 basis points from the prior year.
That ratio came in above our full year range of 58.5% to 60.5% and is consistent with our strategy to be conservative in our compensation accruals early in the year given the transactional nature of a large portion of our business.
That said, assuming market conditions stay strong, we anticipate that our conservative accruals early in the year could lead to added flexibility in the back half of the year.
Noncomp opex, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $184 million and represented approximately 16% of net revenue.
This was also below our recent guidance, primarily due to stronger-than-expected revenue.
The effective tax rate during the quarter came in at 24.1%, which was driven by the impact of the excess tax benefit related to stock compensation.
Absent any other discrete items, we would expect to see the effective rate to be in the 25% to 26% range in the second and third quarters as we have limited RSU vesting that occurs before the fourth quarter.
In terms of our share count, our average fully diluted share count was up 1% primarily as a result of the increase in our share price.
Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the second quarter fully diluted average share count to total 118.7 million shares.
As I said at the beginning of the call, this year is off to a very strong start.
Looking back at our guidance for 2021, many of the expectations for economic and market conditions that we then highlighted have not only played out as we expected but in some cases, has happened much faster.
Our business is benefiting from past recruiting success, higher equity markets, increased levels of interest-bearing assets, robust trading activity for debt and equity, record equity issuance, solid credit metrics and a strong investment banking pipeline.
As vaccinations increase and the economy continues its recovery, we continue to expect a very strong operating environment for the remainder of 2021.
Additionally, looking forward to our second quarter, for many of the same factors already cited, our business is off to a good start.
With respect to our full year revenue guidance of $3.8 billion to $4 billion, based on what I'm seeing in our outlook, we are tracking above the high end of our full year guidance.
And if favorable market conditions continue, we see a path to exceed our full year revenue guidance.
With that said, I'll make some comments about what we're seeing so far in the second quarter and our expectations.
Global Wealth Management is off to a strong start.
Our asset management fees will benefit from the 7% increase in fee-based assets last quarter.
And the midpoint of our NII guidance is above first quarter levels, and we continue to see client engagement.
For Institutional Group, our investment banking pipelines remain at robust levels.
While timing will always play a factor in our investment banking revenue in any given quarter, we'd expect to see a greater contribution from our advisory business given the expectation for increased M&A, particularly in financials.
Additionally, as I look forward, we have a number of large transactions that are scheduled to close, and this increases my confidence for the remainder of the year.
In terms of underwriting, activity levels so far in the quarter have pulled back from the torrid pace experienced in the first quarter but still remains strong.
Moving on to expenses.
Our full year compensation guidance remains in place, and we would expect to see the typical sequential decline in the compensation ratio in the second quarter, assuming market conditions remain stable.
Our noncomp operating expenses should be similar to those in the first quarter as we continue to see relatively modest increases in travel and entertainment expenses.
In terms of capital deployment, as always, we will continue to focus on risk-adjusted returns.
In the first quarter, we took advantage of good credit conditions to deploy capital into growing our balance sheet.
The $1.5 billion in balance sheet increase represents 75% of our full year guidance.
If we continue to see similar credit conditions, we could grow our balance sheet more than our initial guidance as we see solid returns from this use of capital.
We will continue to repurchase shares to offset dilution, but otherwise, we're likely to continue to be opportunistic with our repurchase activity.
Lastly, we will continue to look at acquisition opportunities and investments into our business as Stifel is and always has been a growth company and investing in our franchise has historically generated strong returns.
So let me sum all this up by saying our business is in a great position to not only capitalize on the current strength of the operating environment but has proven to have the flexibility to successfully adapt to changes that could occur.

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q1 non-gaap earnings per share $1.50.
q1 earnings per share $1.40.
q1 revenue rose 24.3 percent to $1.1 billion.

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