U.S. Markets closed

Edited Transcript of SF earnings conference call or presentation 30-Apr-19 12:00pm GMT

Q1 2019 Stifel Financial Corp Earnings Call

St. Louis May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Stifel Financial Corp earnings conference call or presentation Tuesday, April 30, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* James M. Marischen

Stifel Financial Corp. - CFO

* Ronald James Kruszewski

Stifel Financial Corp. - Co-Chairman of the Board & CEO

================================================================================

Conference Call Participants

================================================================================

* Alexander Blostein

Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Devin Patrick Ryan

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Steven Joseph Chubak

Wolfe Research, LLC - Director of Equity Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

I would like to welcome everyone to Stifel Financial's First Quarter 2019 Financial Results Conference Call.

At this time, I'd like remind everyone that today's call may include forward-looking statements. These statements represent the firm's belief regarding the future events that by their nature are uncertain and outside of the firm's control. The firm's actual results and financial condition may differ possibly materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm's future results, please see the description of risk factors in the current annual report on Form 10-K for the year ended December 2018.

I would also like to direct you to read the forward-looking disclaimers in Stifel's quarterly earnings release, particularly as it relates to the firm's ability to successfully integrate acquired companies or the branch offices and financial advisers, changes in the interest rate environment, changes in legislation and regulation. You should also read the information on the calculation of non-GAAP financial measures that's posted on the Investor Relations portion of the firm's website at www.stifel.com. This audiocast is copyrighted material of Stifel Financial Corp. and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial Corp.

I would now like to turn the call over to the Stifel's Chairman and Chief Executive Officer, Ron Kruszewski.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [2]

--------------------------------------------------------------------------------

Thank you, operator. Good morning, and thank you for taking the time to listen to our first quarter 2019 results. Earlier this morning, we issued an earnings release and posted a slide deck on our website. Joining me on the call today are our co-Presidents Jim Zemlyak and Victor Nesi; as well as our CFO, Jim Marischen. I'm going to run through our quarterly highlights and our business segments. Jim Marischen will then take you through our balance sheet, net interest income and expense lines, and then I'll come back with my concluding thoughts.

I'm very pleased with our first quarter results. Net revenue was a first quarter record and increased 3% over last year. The diversity of our business was highlighted by record global wealth management revenues, which offset a 3% decline in our institutional business. The decline in our Institutional Group was primarily due to the impact of the government shutdown on overall underwriting activity. In fact, excluding underwriting revenue, our Institutional Group revenue would have been up 7% from the prior year.

Net revenue totaled $770 million. Our revenue improvement was driven by a nearly 30% improvement in net interest income to $142 million. That was driven by a 28 basis point increase in our bank net interest margin. To achieve this result, we executed on our deposit optimization strategy in the quarter and grew our balance sheet year-on-year. Asset management revenues were essentially flat at $195 million due to the impact of our fee-based asset -- on our fee-based assets of the 14% decline in the S&P 500 in the fourth quarter. That said, given the improvement in the market here today, we expect a solid rebound in asset management revenues in our second quarter. Brokerage revenue of $260 million declined by 2% as strong results from our institutional fixed-income brokerage business was offset by declines in institutional equity and private client brokerage.

Investment banking revenue of $162 million was driven by strong advisory and public financed revenues that were offset by weak market conditions for equity underwriting in the U.S. and the U.K. In additional to our revenue growth, we continued our disciplined approach to expense management as declines in our compensation ratio to 59% and our noncomp ratio to 22% helped drive non-GAAP pretax margins of 19%, up 170 basis points over the prior year. Non-GAAP net income available to common shareholders, impacted by a slightly higher tax rate, totaled $105 million, and average fully diluted shares decreased to $79.2 million.

As a result, non-GAAP earnings per share totaled $1.32, up 15% over 2018. Quarterly non-GAAP return on equity and return on tangible common equity totaled 14% and 22%, respectfully. During the quarter, we repurchased 1 million shares at an average price of $53.25, utilized $29 million to net settle shares issued per compensation and increased our quarterly dividend.

In total, we returned more than $96 million to common shareholders in the quarter.

On the next couple of slides, I'll go over the results from our 2 primary segments. So starting with Global Wealth Management. We posted record quarterly net revenue of $511 million, up 5% from 2018. Brokerage revenue declined 6% due to lower levels of volatility in the first quarter and the continued trend for our fee-based accounts. Our asset management revenues were flat year-on-year, which, as previously discussed, was expected due to the impact on our fee-based assets from the fourth quarter market decline. On a combined basis, brokerage revenues and fees of $348 million decreased 3% year-on-year. Offsetting this decline, we continue to benefit from improvements in net interest income, which was up 23% year-on-year. Our wealth management compensation ratio in the quarter declined 130 basis points and the noncomp ratio also declined 40 basis points as the growth in bank revenue and our focus on expense management continue to generate positive results.

The improved revenue and lower expense ratios resulted in record pretax margin of 38.1%, up 170 basis points year-on-year. Total client assets increased 11% sequentially to $300 billion. Fee-based assets rose 10% to $100 billion. And private client fee-based assets rose also 11% to $74 billion. All records have all benefited from the rise in the markets as well as solid net new asset growth resulting from strong recruiting efforts.

As we pointed out on past calls, we build asset management fees based on prior quarter and asset level. Consequently, our second quarter asset management revenues will benefit from the first quarter's 13% rebound in the S&P 500. With respect to recruiting, we remain very optimistic about the outlook as we added 8 new -- net new advisers during the quarter, and we are up 65 financial advisers since the beginning of 2018. I would note that we changed the way we count advisers on a prospective basis, beginning at the start of 2019, by excluding nonproducing advisers and those that fall below production threshold. We believe this change better reflects the overall trends in our wealth management business and is more in line with industry norms. I'd also note that we are off to a strong start in the second quarter, and we expect 2019 to be another strong recruiting year.

Moving to the next slide. Our institutional business generated revenue of $261 million. Again, the diversity of our business is reflected by a 7% increase in advisory revenue and a 25% increase in fixed income revenue, nearly offsetting the 34% decline in our equity business. In terms of investment banking, our pipelines remain strong and are at levels above those at the same time a year ago and from the beginning of the year. While we have an integrated institutional business model, we examine this segment through basically 3 channels: advisory, equities and fixed income, the latter 2 combining brokerage and capital raising. Our advisory business generated fees of $105 million as the diversity of our business was underscored by a very strong quarter from our restructuring practice as Miller Buckfire recognized a significant fee from its work on the COFINA transaction. Additionally, we got another strong quarter from KBW's advisory practice and our technology vertical.

Our fixed income business generated $90 million of revenue, up 25% as both our brokerage and underwriting revenue improved by double digits from the first quarter of 2018. Fixed income brokerage revenue of $67 million was up nearly 60% sequentially, driven primarily by higher market activity as trade volumes increased 31% as compared to the fourth quarter of 2018. While the vast majority of our sequential improvement was organic, our acquisition of First Empire performed as expected, adding modestly to our revenue levels in the first quarter.

Given the speed of the market rebound in the first quarter and recent declines in industry-wide market volumes, we'd expect activity levels and trading gains to be lower in the second quarter. Debt underwriting of $21 million improved 14% year-on-year as industry-wide municipal issuance improved from the depressed levels in the first quarter of 2018 and continue to normalize following the impact that the tax law changes had on the past 2 years. For the first quarter of 2019, Stifel ranked #1 nationally in the number of senior-managed, negotiated new issues as we increased market share. Typically, Stifel's first quarter is the slowest for public finance, and based on our pipeline and this seasonality, we would expect the second quarter to be better than the first.

Moving on to our equity results. We had revenue of $67 million that was down 34% year-on-year. Similar to industry trends, our equity underwriting revenue was very slow, coming in at $28 million, in addition to the weaker issuance markets in the U.S., again impacted by the government shutdown. Brexit was a headwind for our European business as only 1 IPO was completed in Europe in the first quarter, which I am happy to say we were the book runner on. Overall underwriting activity improved later in the quarter, and given our current pipeline, we remain optimistic about the outlook for this business for the remainder of 2019.

In terms of our equity brokerage results, revenues totaled $39 million. Commission revenue declined as volatility fell from elevated levels in the fourth quarter, and industry-wide average daily volume fell 11%. We've also seen some change in seasonal revenue patterns that began last year, following the implementation of MiFID II as more activity early in the year is traded electronically with the bulge bracket firms than with the midsized firms such as Stifel. So, so far in the second quarter, we continue to see slower volumes in the equities markets; and at this point, we expect that equity brokerage revenues in the second quarter to be flattish versus the first quarter.

On the next few slides, our CFO, Jim Marischen, will review our balance sheet, net interest income and expenses, and then I'll return with my closing thoughts.

--------------------------------------------------------------------------------

James M. Marischen, Stifel Financial Corp. - CFO [3]

--------------------------------------------------------------------------------

Thanks, Ron, and good morning to everyone. So starting with our balance sheet. We finished the quarter with $24.2 billion of assets on our consolidated balance sheet. It was down $340 million from the prior quarter, but firm-wide interest-earning assets increased to more than $20.6 billion. The increase in interest-earning assets was due to higher bank interest-earning assets that I'll discuss in more detail later. We finished the quarter with a Tier 1 leverage ratio of 9.8%. and a Tier 1 risk-based capital ratio of 18.5%. Our Tier 1 ratios were impacted by strong growth in retained earnings, our share repurchase activity during the quarter and our preferred share offering. I would also note that the adoption of the new lease accounting standard added $680 million of 100% risk-weighted assets in our balance sheet. Excluding these assets, our Tier 1 risk-based capital would have been 19.6%. Book value per share of $43.18 increased by $0.56 in the quarter. I would note that we adjusted our fourth quarter book value per share number to $42.62 from $43.04 to exclude the impact of certain noncontrolling interests that are related to leasing activity that began in the fourth quarter.

Moving on net interest income. Our net interest income totaled $142 million, which represented a 27% increase from the first quarter of 2018. Our consolidated net interest margin was 2.75%, which was up 20 basis points sequentially due to a 28 basis point increase in our bank net interest margin to 3.17%.

As Ron mentioned earlier, the significant increase in our bank NIM was a result of our deposit optimization strategy as well as increasing yields on both our loan and investment portfolios. We came in above our guidance for the quarter as we anticipated increasing deposit rates as a result of the December increase in fed funds. But given the lack of movement in the industry on deposits, we maintained our existing rates.

During the quarter, our total bank assets declined by approximately $1 billion, which was primarily due to the expected decline in cash balances. Average yields on our loan portfolio increased by 4 basis points during the quarter, and our investment portfolio yield increased by 15 basis points as a result of the rise in the 90-day LIBOR rate from fourth quarter levels. The average yield in our liabilities decreased by 20 basis points sequentially as the impact of replacing higher-cost CDs and FHLB borrowings with lower-cost sweep deposits drove the decline. While the yield on our liabilities declined during the quarter, we continue to monitor the environment for deposit pricing, and we will remain competitive with peers.

On the next slide, we detail Stifel Bancorp. Total bank assets declined to $16.8 billion at quarter end, but average interest-earning assets increased sequentially to nearly $17 billion. We expected interest-earning assets to decline to levels closer to those in the third quarter of 2018. However, the timing of cash flowing onto our balance sheet resulted in higher than originally expected asset levels. This was essentially a timing issue as opposed to anything structural. Given our average interest-earning asset levels in March, we would expect the second quarter's average interest-earning assets to be between $16.2 billion and $16.4 billion, which is similar to third quarter 2018 levels. While interest-earning assets should pull back from first quarter levels, we now expect our net interest margin in the second quarter and for the full year to be between 310 to 320 basis points. Total bank loans increased 21% year-on-year to roughly $8.9 billion, driven by the 30% growth in commercial loans.

Total investments decreased by 5% year-on-year to $7.1 billion due to a 13% decline in mortgage-backed securities. This illustrates our strategy to use cash flow coming off our investment portfolio to reinvest into higher-yielding loans. We continue to see increased competition for deposits as cash as a percentage of client assets remains at historic lows. That said, we see a strong FA recruiting pipeline that will continue to add to client cash levels.

We're also implementing additional deposit-gathering capabilities such as direct treasury capabilities for corporate clients and other direct retail deposit relationships at Stifel Bank. Our provision for loan loss decreased sequentially to $2.3 million from $5.2 million. The provision expense declined due to slower loan growth because the growth in loans in the quarter was driven more by securities-based mortgage loans as opposed to C&I loans that carry a higher reserve. The allowance for loan loss as a percentage of loans remained at 100 basis points. Overall, our credit metrics remain solid as the nonperforming asset ratio was 13 basis points. Asset quality compares very favorably to the overall market and reflects our conservative approach to credit.

Moving on to the next slide. We review our expenses. Our comp ratio came in at 59% in the first quarter and was in line with the guidance of being at the high end of our annual targeted comp range of 57% to 59%. Given that the first quarter is typically our highest comp ratio due to seasonality, we would expect it to decline in the second quarter. Non-GAAP operating expenses, excluding the loan loss provision and expenses related to investment banking transactions, totaled $159 million and were at the high end of our guidance range for the quarter. Specifically, occupancy and equipment and communication expenses increased as we continue to invest in our business. While we remain focused on cost discipline, given our recent investments and the timing of revenues associated with them as well as further business development costs, we'd expect our targeted noncomp operating expenses in the second quarter to come in between $160 million and $165 million.

In terms of our share count, our average fully diluted share count was down roughly 1.5 million shares sequentially as a result of our share repurchase activity. I'd also note that while we repurchased 1 million shares during the quarter our ability to be in the market was limited by 2 factors: the first was that during the blackout period, our stock price ran well above the preset parameters of the repurchase plan we had in place; second, we were out of the market during a preferred share offering. All in, we're out of the market for approximately 5 weeks during the quarter.

In the second quarter, we expect our fully diluted average share count to be approximately 79.4 million shares. This includes the share repurchases that have already occurred during 2Q but excludes further repurchases in this guidance. While we continue to repurchase shares, the strong year-to-date performance of our stock has offset some of the impact of share repurchases, given the accounting treatment for restricted stock. That said, we have roughly 8 million shares remaining on our repurchase authorization and we continue to believe that our stock represents a good risk-adjusted return.

And now let me turn the call back to Ron for his closing thoughts.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [4]

--------------------------------------------------------------------------------

Thank, Jim. So we're off to a strong start in 2019, and our share price has improved approximately 40% year-to-date. As I said in my annual shareholder letter, 2018 was the greatest divergence between our financial performance and our stock price that I have ever experienced in my 22-year tenure as CEO. As a result of what we thought was a significant undervaluation of our stock, we repurchased 3.4 million shares in 2018 and other 1 million shares in the first quarter of 2019 based on our view that our stock was significantly undervalued. Additionally, we have repurchased 250,000 shares so far in April. Even at our current valuation, I believe we remain undervalued relative to our peers. We expect our growth will continue this year, and given the strength of our first quarter results, we continue to feel good about both our outlook and the full year guidance we gave last quarter.

To summarize, our wealth management business continues to benefit from the high-quality financial advisers we've added and our exceptionally strong pipeline. For reasons previously stated, we expect our asset management revenue to rebound in the second quarter. Stifel Bancorp had a very strong quarter as we execute our strategy of replacing higher-cost CDS with sweep deposits and reinvesting proceeds from maturing securities into higher-yielding loans. Also, I am excited about the technology initiatives that we will introduce in the second quarter of 2019.

We will continue to invest in our Institutional Group. The benefits of the diversity of this business continue to pay dividends in the first quarter as the strength of our advisory, fixed income trading and public finance businesses help to offset some of the impact of the declines in equity underwriting and trading businesses. In addition to our strong financial results in the quarter, we repurchased 1 million shares, raised $160 million in a preferred offering, increased our quarterly dividend by 25% and recently announced the acquisition of Mooreland Partners, a boutique advisory firm focused on the technology space.

Before I turn the call over to the operator for questions, let me conclude with another comment from my shareholder letter. As I look forward to the next quarter, next year and next decade for Stifel, I acknowledge that it's difficult to forecast the economic and market forces we will face. We will surely navigate political and regulatory developments along the way. However, our balanced business model and conservative risk profile, catalyzed by the talent and dedication of our people, will allow us to respond to the ever-changing business environment. I am highly optimistic that we will continue to grow and create value for our clients and shareholders in the future.

And with that, operator, please open the line for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Steven Chubak from Wolfe Research.

--------------------------------------------------------------------------------

Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [2]

--------------------------------------------------------------------------------

On the NIM guidance, lots of moving pieces driving the stronger NIM this quarter and was really hoping to unpack a few of those. And first, on the liability side, is there any additional room for continued roll-off of higher-cost FHLB and CDs? And on the asset side of the equation, how should we think about the asset yield trajectory in the absence of additional rate hikes? I'm just trying to understand in that guidance range of 310 to 320 given how strong the NIM was this quarter does that reflect conservatism? Or what are some of the moving pieces?

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [3]

--------------------------------------------------------------------------------

I'll let Jim -- I'll start. I think, on the deposits side we did what we said we were going to do by rolling those off. There might be a little bit left, but that was as a result of us getting the extra charter and, again, sweeping more cash deposits. And on the asset side, given that our projection is pretty much a static environment going forward, so I'm not sure that the fed is going to be doing much. I'm not exactly sure what the yield curve will do. But our guidance tries to say 310 to 317, and that's where we believe the NIM will come in. So I'm not sure there's much to unpack in that...

--------------------------------------------------------------------------------

James M. Marischen, Stifel Financial Corp. - CFO [4]

--------------------------------------------------------------------------------

The guidance of 310 to 321, obviously, we're already at the high end of that range. And I think we'll continue to monitor what our peers are doing from a deposit pricing perspective and continue to be competitive there. But again, the upside really is going to be continuing to reinvest proceeds from securities into higher-yielding loans, and I think you can see that play out in the quarter as well.

--------------------------------------------------------------------------------

Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [5]

--------------------------------------------------------------------------------

No, that's helpful. And then just a question on the capital outlook and future deployment plans. So the capital ratio has ticked up nicely in the quarter. I know on the last call, Ron, you had cited the $500 million of capital generation and really limited capital needs to support bank growth and the dividend, which implied a greater deployment or more aggressive deployment of the buyback. I know there were factors that kept you out of the market. But just given the share count guidance, which was a little bit higher than we expected for 2Q, what's your appetite at this point given how much the stock has run off to maybe continue to be more aggressive with share repurchase? I'm just trying to think about sizing that capacity in relation to your appetite?

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [6]

--------------------------------------------------------------------------------

Well, first of all, I mean, I -- share repurchases are all we've done here with an eye toward value, and the share repurchases should create value for remaining shareholders. So obviously, our stock price is up 40% for the year. We're going to continue to buy back shares, but I would say not as aggressively at the current price as we would have at the beginning of the year price. I think that's just obvious. We just announced an acquisition, and we continue to have opportunities in front of us. And we balance all of these opportunities along the lines of the best risk-adjusted returns. So today with the stock price higher, it's not as obvious. It certainly, we believe, is still a good return. I believe our stock is undervalued, trading at 10x earnings, give or take, but the -- we're going to continue to look at all of our alternatives to build the company.

--------------------------------------------------------------------------------

James M. Marischen, Stifel Financial Corp. - CFO [7]

--------------------------------------------------------------------------------

Another point to highlight here is the impact of the higher share price on that projected share count. So you have to remember the decent run in our stock over the year-to-date performance has had a fairly sizeable impact. You think about our guidance assuming around the price where we are today, call it about $59, if you were to go back, say, down to $50 a share, that's about 900,000 shares. That's a pretty material impact given the run of the stock and something to consider when you think about what's in that number.

--------------------------------------------------------------------------------

Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [8]

--------------------------------------------------------------------------------

Yes. That may be a pretty high-cost problem to have. Just one more for me on the IB outlook. Ron, your comments were actually quite encouraging as we hear -- think about the outlook for ECM and DCM, particularly following some of the challenges on the underwriting side this quarter. I'm just wondering the context of the full year guidance range you had given which -- understanding its relatively wide, but last quarter, you spoke of a low end with revenues down slightly year-on-year. I'm just wondering in the context of the full year how you're thinking about the potential for growth given some of the strength that you're seeing in the backlog.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [9]

--------------------------------------------------------------------------------

I would say that the low end of the guidance would have suggested our first decline in revenues in 24 years. So that -- I mean, you're talking about total guidance, right?

--------------------------------------------------------------------------------

Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [10]

--------------------------------------------------------------------------------

Total guidance.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [11]

--------------------------------------------------------------------------------

Yes. Total guidance. So I feel optimistic about the remainder of the year considering our pipeline, considering we don't see a recession looming. The fed seems to have -- certainly be in a pause mode. Decent GDP growth in the first quarter. Inflation is muted. These financial conditions will allow us to continue to, I believe, build our business through the end of the year.

--------------------------------------------------------------------------------

Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [12]

--------------------------------------------------------------------------------

All right. And one final cleanup for me. The $1.9 billion individual program balances, I'm just wondering what proportion of that is still available to be deployed to fund future bank growth.

--------------------------------------------------------------------------------

James M. Marischen, Stifel Financial Corp. - CFO [13]

--------------------------------------------------------------------------------

Yes. As of today, we have about $500 million of additional capacity within that program. I would also point out -- we made a comment on the call about additional deposit-generating capabilities that we are building out of the bank as additional means as we look out beyond 2019 to 2020 and beyond, and we feel pretty confident in the deposit capabilities we're building there.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Your next question comes from Devin Ryan from JMP Securities.

--------------------------------------------------------------------------------

Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [15]

--------------------------------------------------------------------------------

All right. Great. I guess first question here on the adviser recruiting backdrop, Ron. Appreciate some of your comments. And to your point, it looks like the second quarter has started on a strong note from the outside. From what we can see, it looks like April you've already brought in kind of the same number of assets as you did in the first quarter from what we can track. I'm just curious kind of what the themes that you're seeing are there in terms of what's helping momentum or attracting people to Stifel. And then you just think about kind of context for the full year 2019 based on the pipeline today and the amount of people you're talking to, if you can give us any context of maybe how you think that could look relative to last year.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [16]

--------------------------------------------------------------------------------

Today, in this environment and considering all that's going on, I would say that -- I would think that 2019 will exceed our recruiting in 2018. We're -- the number of people that are considering Stifel is the -- he number and the quality and the number of teams and rather large teams is the largest that I've seen since I've been here. It's just a lot of interest in what we're doing. I think it's a combination of other -- what other market participants are doing but also some of the investments that we have been making to make our clients and advisers more efficient in the ability to gather client assets. When you combine that all together, our recruiting is very stout right now. And we get them to come here and then that's always easy, but we've been converting a lot of them to join the firm. April is a good example of that.

--------------------------------------------------------------------------------

Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [17]

--------------------------------------------------------------------------------

Got it. Terrific. Okay. And then just, obviously, to the extent you continue to have success there, there is a cost to recruit both in terms of the infrastructure of the firm and then, yes, just thinking about the amortization on the compensation side, but you guys have also been managing expenses well. So I'm just curious how you think about just the trajectory of expenses tied to recruiting and whether, I guess, you have the infrastructure in place where there's not a lot of additional spend to kind of bring in the type of classes that you think you will over the next year or 2, or is there kind of another kind of big infrastructure, call it, investment that we need to think about just as you open a bunch of new offices and expand the footprint?

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [18]

--------------------------------------------------------------------------------

Well, we've been -- we have been making a fair amount of infrastructure and technology spends over the last 2 years. And so that's been in the numbers. The other big number that usually comes out of all of this is the amortization of the recruiting deals, so to speak. And what I would say about that is we were coming off of a period of tremendous recruiting back in the '09, '10 period. And like depreciation, that's rolling off significantly and is being replaced by new hires. But when I look at it, I don't see that number particularly going up because of what hits our income statement. And that's just because of, again, a lot of the recruits that we had of 8 or 9, 10 years ago when we went from 700 advisers to 1,400 in a short period, those transition deals are rolling off as well as that amortization expense.

--------------------------------------------------------------------------------

Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [19]

--------------------------------------------------------------------------------

Got it. Okay. I think last one here on, I guess, capital and M&A. Obviously, great to see the stock price move here and hopefully that continues. But just in terms of thinking about acquisitions as an outlet for capital deployment, you announced the Mooreland deal recently. I'm just curious kind of what you're seeing in the backdrop for M&A today, how the flow of opportunities have been in both kind of the institutional and wealth management side of the business and just your appetite there today.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [20]

--------------------------------------------------------------------------------

As always, I -- first of all, as you know and as our shareholders know, we have been both an active participant in M&A but, more importantly, an effective participant in M&A in that we have an ability to properly identify price and integrate deals. And as such, we see a lot of things. If something is potentially available, we get a call. We parse through it. And we execute on deals that we believe first add to our relevance, I've always said that, we believe are accretive. And we always compare that against alternative use of the capital, which could be either growing the balance sheet in the bank or buying back our stock. So that hasn't changed in 20 years, and it's not going to change today. As it relates to the current environment, I would say that there are some properties that are out there. There always are, but it feel like a little bit more. I always get a little concerned when I see that a deal at the top of the market type stuff, but we're active, and we'll do what we've always done.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Your next question comes from Chris Harris from Wells Fargo.

--------------------------------------------------------------------------------

Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [22]

--------------------------------------------------------------------------------

So customer cash balances are trending lower. That's not unique to you, obviously. It's a trend happening everywhere. It's going to put a little bit of pressure on your interest-earning assets. You're kind of guiding to a flattish NIM here but there's still some balance sheet growth you can potentially execute at the bank. So if rates stay flattish with where we are today, do you guys think you can still grow NII from the 1Q level as we proceed through the duration of 2019?

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [23]

--------------------------------------------------------------------------------

Jim, do you want to take that?

--------------------------------------------------------------------------------

James M. Marischen, Stifel Financial Corp. - CFO [24]

--------------------------------------------------------------------------------

Yes. It's early in the year, and we still feel comfortable with our NII guidance. With NIM coming in higher than we originally saw, it does give us some flexibility in the balance sheet. We continue to look at opportunities to manage asset levels, but we do feel confident with the NII guidance.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [25]

--------------------------------------------------------------------------------

That's on higher interest-earning assets. So it's not just the percentages, it's times the interest-earning assets, which means NII is going to be higher.

--------------------------------------------------------------------------------

Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [26]

--------------------------------------------------------------------------------

Yes, okay. With respect to the outlook for NIM, are you guys assuming within that guidance range that your deposit costs creep up a little bit from here?

--------------------------------------------------------------------------------

James M. Marischen, Stifel Financial Corp. - CFO [27]

--------------------------------------------------------------------------------

Obviously, we're looking at that, and we'll be responsive to the market, but we're not anticipating any further creep there in terms of what we're seeing.

--------------------------------------------------------------------------------

Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [28]

--------------------------------------------------------------------------------

Okay. Great. And just one question on the institutional business. Nice recovery in the fixed income brokerage side. Just a bigger picture. There's been a lot of volatility in that line item over the years. Clearly, a lot of things are impacting that. What do you think like a normalized run rate type of revenue number is for that business base on an annual basis? I guess that's part one of the question. And then part 2 is, is MiFID impacting that business the same way it's impacting the equity side?

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [29]

--------------------------------------------------------------------------------

Well, the last question first. I mean, MiFID is indiscriminate to equities, so our fixed income theoretically is not. The research component is different on fixed income. So the impact for us at least of MiFID on fixed income is not as apparent as it is on the equity side. And honestly, Steven (sic) [Chris], if I had a sustainable run rate and fixed income, I might even share it with you. But I don't, so I'm not going to make -- I mean, that business -- there's so many things that have been going on in that business from [senamith] to credit spreads to yield curve to place, they just -- it's just a difficult thing to see. I believe that we have in place a fixed income business that can do well. But it's going to have some volatility quarter-to-quarter, but it's always profitable, and we're certainly pleased with last quarter's results.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Alex Blostein from Goldman Sachs.

--------------------------------------------------------------------------------

Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [31]

--------------------------------------------------------------------------------

Question for you guys, another one on the Wealth Management side. So Ron, obviously, you talked about strong net new asset growth in the quarter. What was the net new asset number for you guys in Q1? And bigger picture question, I guess, when you think about some of the industry trends that we've been observing for a while with the move towards RIAs and the move towards independent channel, you guys are, obviously, participating much more in the employee channel side of things. What ultimately brings people to Stifel's wealth business given the sort of bigger picture industry trends where you don't seem to check a lot of the same boxes?

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [32]

--------------------------------------------------------------------------------

Where we -- I'm sorry, what was the last part of that question where we don't seem to check?

--------------------------------------------------------------------------------

Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [33]

--------------------------------------------------------------------------------

Well, you don't seem to check the RIA box or the independent broker dealer channel box, given the fact that it's largely an employee kind of FA channel.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [34]

--------------------------------------------------------------------------------

Yes. Well, I guess, first of all, we are dual registrant, okay? So we have advisers who act very similar to RIAs. In fact, we have RIA firms in the firm. So we don't market that directly as some of our competitors just -- you're right about that. In terms of capabilities, it's my view that as the landscape evolves that being able to offer both RIA services and brokerage services is right for the client. You should be able to provide client choice, use episodic advice. Building a bond ladder is much better done on an episodic commission basis than it is in charging an annual fee. And so that's been our view, and that's why we stick with the employee model. Our employee model has RIA capabilities without question.

Look, in terms of recruiting, I think I'll do this -- one, I want to give a sense for this, and we're thinking about -- and I think the industry should think about, frankly, providing a little bit more numbers around the flow of recruiting. I -- but for the quarter, I'll just -- I'll say this. We brought in approximately $32 million in net new production on people that we brought from other firms, $31 million to $32 million. We lost for people we didn't want to lose $2 million. And then we had people who retire primarily who had $7 million of production that we reassigned across the firm. So when you ask what we do in this quarter, I would say net new production expected for the quarter was $30 million. And we're trying to refine some of these is how we try to look at it versus the net new adviser number that everyone puts too much credence on. The numbers I just gave you are the numbers that matter, and we're looking at how we can, at least among our midsized peers, be a leader in providing that kind of information.

--------------------------------------------------------------------------------

Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [35]

--------------------------------------------------------------------------------

Great. No, that's perfect. Second question, speaking of new disclosure, great job, guys, on the average earning balance sheet, and that's definitely helpful to put that all in the release. So when we think about the NIM guidance for the bank, can you just update us on the same for the consolidated business? Again, assuming there's probably not a whole lot of deviation between the 2 directionally but just wanted to make sure. So relative to, I think it was like 2.70-something NIM in the quarter from the holdco.

--------------------------------------------------------------------------------

James M. Marischen, Stifel Financial Corp. - CFO [36]

--------------------------------------------------------------------------------

When we gave NIM guidance back in the third quarter, fourth quarter, everything's been specific to the bank. It's the vast majority of what we have, so we haven't really put out any guidance on a consolidated basis.

--------------------------------------------------------------------------------

Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [37]

--------------------------------------------------------------------------------

Got it. Sure. Fair enough. Last one for me. So on Mooreland Partners, it sounds like they have a handful of managing directors but less clear what the production level is there. Maybe help us understand kind of what the revenue and the contribution is to the business from that acquisition.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [38]

--------------------------------------------------------------------------------

We just haven't disclosed that. I mean, we just closed, and it's a nice transaction that fits nicely not only in our businesses but in our locations across both the U.S. and in London. So we're -- we certainly like the transaction. I believe that's going to not only add the revenues they bring in but help us achieve other revenues, but we didn't disclose that, so I can't do that on this call.

--------------------------------------------------------------------------------

James M. Marischen, Stifel Financial Corp. - CFO [39]

--------------------------------------------------------------------------------

We just announced it, and it'll close later this year.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [40]

--------------------------------------------------------------------------------

It will close later. Thank you.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

There are no further questions at this time. I turn the call back over to the presenters.

--------------------------------------------------------------------------------

Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [42]

--------------------------------------------------------------------------------

Well, I would want to thank everyone for listening to our call. I will say that I'm optimistic given the current market conditions and everything that's going on, that we continue to grow your company and add to shareholder value while serving our clients. Look forward to talking to everyone in early August. Have a -- maybe late July. But have a great day. Thank you.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect. Have a great day.