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Edited Transcript of SF earnings conference call or presentation 30-Oct-18 9:00pm GMT

Q3 2018 Stifel Financial Corp Earnings Call

St. Louis Nov 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Stifel Financial Corp earnings conference call or presentation Tuesday, October 30, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James M. Marischen

Stifel Financial Corp. - CFO

* Ronald James Kruszewski

Stifel Financial Corp. - Chairman & CEO

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Conference Call Participants

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* 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

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Presentation

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Operator [1]

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I would like to welcome everyone to the Stifel Financial Third Quarter 2018 Financial Results Conference Call. At this time, I'd like to 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 these 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 2017. 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 audio cast is copyrighted material of Stifel Financial Corp., and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial Corp.

I will now turn the call over to the Stifel's Chairman and Chief Executive Officer, Ron Kruszewski. Sir, you may begin.

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [2]

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Thank you, operator. Good afternoon to everyone and thank you for taking the time to listen to our third quarter 2018 results. Today, we issued a press release with our results and posted the slide deck on our website. Joining me on the call today is our Co-president, Jim Zemlyak; and our newly appointed CFO, Jim Marischen. I'm going to run through our quarterly and year-to-date highlights, our guidance for the fourth quarter and 2019 in our business segments. Jim will take you through our revenue expense lines as well as our balance sheet. Then I'll come back with my concluding thoughts.

The third quarter was very solid with record wealth management revenue, driven by record asset management and net interest income more than offsetting a modest decline in our institutional business, caused primarily by industry-wide weakness in sales and trading revenue. Investment banking revenues increased 5% sequentially with strong capital market -- capital raising offsetting a decline in advisory fees.

Overall, third quarter revenue totaled $738 million. I am pleased with our expense management, which drove non-GAAP pretax margins of 20.6%, up nearly 400 basis points year over -- over the prior year. As a result, non-GAAP earnings per share were $1.35, up 52% over 2017.

Quarterly non-GAAP return on equity and return on tangible common equity totaled 15.5% and 25.2%, respectively. I'm also pleased with the addition of 31 net new advisers during the quarter, which was our best quarterly recruiting total in roughly 10 years, excluding acquisitions.

We continue to see gross adviser additions translate into strong net additions, as the number of -- as the gross number of advisers added in the third quarter exceeded those in the second quarter. Additionally, the number of retirements and nonregrettable departures declined from the previous quarter.

While recruiting levels can vary from quarter-to-quarter, we are building momentum as we continue to see elevated levels of on-site visits by recruits, and we are succeeding in turning an increasing number of them into Stifel advisers.

Finally, as we indicated on our last call, we continue to repurchase shares. Since the end of the second quarter, we've repurchased approximately 1.2 million shares at an average price of $50.90.

Looking at our 9-month results. Total net revenue increased 5%, as the investments we've made in our global wealth management business, primarily the banks, small acquisitions and recruiting, along with investment banking, have more than compensated for the market-driven headwinds in our institutional trading business and the expected slowdown in the public finance markets. In terms of non-GAAP operating leverage, our focus on expense discipline has resulted in year-to-date comp ratio of 58.7%, down 290 basis points from the same period in 2017, while we have continued to invest in people to drive our business.

Total noncomp expenses are relatively flat year-on-year after adjusting for investment banking gross-up. As a result, our year-to-date pretax margins are 18.8% and our EPS growth is up 48%. Even if you remove the impact of the lower corporate tax rate in 2018, our EPS is up more than 23% and illustrates the overall strength in our business. Additionally, we've returned nearly $140 million to our common shareholders this year through share repurchases and dividends, which is in addition to growing our balance sheet by $2.4 billion.

Moving to the next slide. I'm very optimistic about our business. Despite the recent market volatility, the U.S. economy remains strong. We are gaining traction in our recruiting efforts. Our investment banking pipelines are growing, and we continue to generate significant excess capital.

With that in mind, we're providing some guidance for the fourth quarter and for 2019. Starting with the fourth quarter. We expect total net revenue of $760 million to $800 million, which includes net interest income of $123 million to $127 million, as we expect our bank net interest margin to be between 288 and 292 basis points. On the expense side, we believe that the total annual comp ratio will be 58%. Year-to-date, our comp ratio is 58.7%, which implies a 56% comp ratio in the fourth quarter. We project non-comp expenses of $154 million to $160 million, excluding investment banking gross-ups and provision expense.

As you can see, we expect solid results from the fourth quarter despite the recent market volatility.

Moving on to our 2019 expectation. We're focusing total net revenue of $3 billion to $3.4 billion, which represents an annual growth of flat to up approximately 11%, based on our expectations for the fourth quarter of 2018.

I would note that this revenue range is rather wide of $400 million, but it also has taken into account the varying market conditions, which can occur. So I would note that at the low end of our guidance, we do not anticipate a recession in 2019, but this incorporates higher net interest income, offsetting what could be slower institutional revenue and flat wealth management revenue. The upper end of our range is primarily the result of a projected increased client engagement, stronger investment banking revenue and, to a lesser extent, improved flow business in both the institutional and wealth management segments. The interesting aspect of our forecast is how we view net interest income. Assuming no balance sheet growth, we forecast net interest income to increase $55 million in 2019. The higher end of the range for net interest income assumes just $1 billion of asset growth. In terms of net interest margin, we estimate that average net interest margin at our bank will increase to between 300 and 310 basis points as a result of the reinvestment of maturing securities into higher current rates and our ability to replace higher-cost CDs with lower-cost sweep deposits as a result of the additional bank charter we acquired in The Business Bank transaction.

Our net interest income growth will also benefit our comp ratio. Barring a dramatic change to revenues in 2019, we'd expect our full year comp ratio to be in the range of 57% to 59%. Additionally, we expect the noncomp expense ratio will be 20% to 22%, again, excluding investment banking gross-ups and provision expense.

I want to also point out that given the operating leverage in our business, the lower end of the revenue range does not necessarily mean higher expense ratios, as we do have flexibility in our expense base.

Lastly, we anticipate generating capital more than $500 million in 2019. We'll continue to pursue the best risk-adjusted returns for our capital, which could include investments in our business, acquisitions and increased dividends. However, as I said last quarter, I am not happy with our share price, and I don't believe it reflects the strength of our operating performance or our future growth. We continue to trade below our historical averages and at a discount to our peers. And given these conditions, I believe that we will continue to actively repurchase our stock as we have 5.7 million shares remaining in our repurchase authorization.

On the next couple of slides, I'll go over the results from our 2 primary segments. Starting with global wealth management. We recorded record quarterly net revenue of $498 million, up 10% year-on-year. As previously noted, the revenue growth was again driven by record asset management revenue and net interest income. Total client assets were a record $289 billion and were up 9% year-on-year. And fee-based assets totaled a record $96 billion, up 5%, sequentially, which should provide a tailwind to asset management revenues in the fourth quarter.

With respect to net interest income, firm-wide net interest margin declined 1 basis point to 246 basis points, despite a 10 basis points sequential decline in our bank net interest margin. Jim will provide more detail later in the presentation, but the decline in bank net interest margin was primarily the result of a tighter spread between our LIBOR-based assets and our Fed fund-based liabilities as well as increased amortization expense in our securities portfolio.

Our comp ratio in global wealth management for the third quarter declined 60 basis points year-on-year and our noncomp ratio also declined 60 basis points as the growth in bank revenue and our focus on expense management continued to generate positive results. Improved revenue and lower expense ratios resulted in a pretax margin of 36.8%, that was up 110 basis points year-on-year.

Moving on to the next slide. The institutional business generated year-to-date revenue of $769 million, which was essentially flat; and quarterly revenue of $246 million, down 3%, sequentially. In terms of our quarterly results, equity net revenue increased by 7% sequentially, as strong underwriting revenue more than offset decline in brokerage and advisory. The strong equity results were more than offset by a sequential decline in our fixed income business due to lower brokerage and underwriting revenue.

Our institutional business was impacted by the typical seasonality, i.e. the summer months in the third quarter. We would expect improvement in the fourth quarter. In terms of our advisory business, our pipelines remain strong. And assuming no material change in the market environment, we expect the fourth quarter to be stronger than the third quarter, despite the fact that we had a significant fee that we had expected to close in the fourth quarter, which will likely slip into the first quarter of 2019.

In the third quarter, we saw equity underwriting activity pick up across a number of verticals, including financials, energy and health care.

Debt underwriting declined 7% sequentially, as industry-wide municipal issuance fell by 16%. Despite the weaker market environment year-to-date, Stifel ranked #1 nationally in the number of senior managed negotiated new issues. Our backlog indicates a sequential improvement in public finance revenues but far less than our record quarter, fourth quarter of 2017.

In terms of our institutional brokerage results. We expect the challenging market conditions we've experienced year-to-date to continue, but we'd expect a modest sequential improvement in the fourth quarter. We continue to adjust our institutional brokerage business to the evolving operating environment and we'll continue to roll out new products and services that differentiate us from our peers, as we better align our existing businesses to ensure that we are compensated for the value we create.

Before I turn the call over to Jim, I want to comment on the year-to-date results of our investment banking business. In 2017, we generated record investment banking revenues of $727 million, as we benefited from a significant pickup in our financials verticals and in public finance, as activity accelerated in anticipation of the changes of the tax law. So we entered 2018 with the expectation that 2 significant drivers of our 2017 results would face some difficult comparables. Yet, year-to-date, our investment banking revenue is relatively flat with 2017, as equity underwriting is up 18%, advisory is up 7%, yet debt underwriting is down approximately 45%, excluding the gross-ups.

Our 2018 performance is a testament to the breadth of our investment banking franchise as improvements in businesses, such as fund placement and nonfinancial advisory, have offset the expected pullback in the record results from KBW and public finance in 2017.

As we look to the remainder of the year, I'll reiterate my comments from earlier this year that we expect the fourth quarter to be better than the third and for the second half of 2018 to be stronger than the first.

On the next few slides, our CFO, Jim Marischen, will review specific revenue and expense lines as well as our balance sheet. And then I'll return with my closing thoughts before taking questions.

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

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Thanks, Ron, and good afternoon to everyone. So starting with brokerage and asset management revenues. Despite market conditions and the impact of the summer slowdown, we generated total firm-wide brokerage revenues of $241 million and asset management fees reached a record $201 million. Global wealth management, brokerage revenues and fees of $360 million increased 6% year-on-year, driven by our record asset management results and relatively stable brokerage revenues.

Regarding our institutional business, brokerage revenues were negatively impacted by seasonality as well as continued headwinds in our fixed income business. Our institutional equity trading revenues totaled $44 million. Commission revenues declined sequentially, primarily due to seasonality. But this was partially offset by improved trading gains in the quarter. While we would expect to see improvements in the fourth quarter in terms of client activity due to increased volatility and seasonality, we continue to face headwinds, including MiFID II.

Our fixed income brokerage business continues to face market headwinds that were compounded in the third quarter by the seasonally slow summer months, as trade volumes were down 13%, sequentially. These market conditions were a significant factor in our third quarter revenues of $38 million, which was a sequential decline of 25%.

Moving on to the next slide, we take a closer look in our investment banking revenue. Year-to-date, we are essentially flat with the same period in 2017, as stronger equity underwriting offset the expected decline in fixed income underwriting. In terms of our third quarter results, our investment banking revenues totaled $169 million, which was up 5%, sequentially. We generated advisory fees of $76 million in the quarter as lower revenues in our fund placement and European advisory businesses, which both had a very strong first half of the year, were partially offset by stronger revenue in our financials vertical.

Our capital raising revenue of $93 million was up 26% sequentially, as strong activity in our equity underwriting business more than offset continued weakness in the issuance markets for public finance, which were down sequentially 16% industry-wide.

Equity underwriting revenues were $65 million, as we continued to see solid activity in our financials, energy and health care verticals in the third quarter.

The next slide focuses on our growth in net interest income, which totaled $121 million. This represented a 21% increase from the third quarter of 2017, as we continue to grow our bank balance sheet and expand our net interest margin. As Ron mentioned earlier, our consolidated net interest margin was 246 basis points, which was down 1 basis point, primarily due to a 10 basis points sequential decline in our bank net interest margin. This was the result of LIBOR rates being relatively flat compared to fed funds during the quarter, coupled with higher yields and extended duration associated with CDs. These items combined reduced net interest margin by roughly 7 basis points.

Additionally, our SBA securities portfolio had higher levels of amortization expense, approximately $2 million, which reduced net interest margin by another 3 basis points. Outside of the bank, we saw a pickup in net interest margin as we're able to move more of our funding of firm inventories away from higher-cost bank loans to lower-cost securities lendings, repo and internal funding sources. We grew our total bank assets by approximately $1.2 billion, with nearly half of the growth from the acquisition of Business Bancshares, which closed on August 31. This transaction primarily impacted our commercial loan portfolio.

Average yields on our loan book increased by 20 basis points during the quarter and our investment portfolio yield increased by 5 basis points. I'd note that nearly 65% of our bank assets are variable rates. And if you include our adjustable-rate mortgage portfolio, as some of our peers do, 96% of our bank assets would be variable rate.

The average yield on the liabilities increased 23 basis points, sequentially. The deposit beta on our Sweep Program was 64% in the third quarter and was in line with our competitors. Although we continue to benefit from deposit betas at these levels, we expect competitive pressures will continue to push deposit betas higher industry-wide as the spread between yields in money market funds and cash sweeps is providing investors flexibility to move their cash to higher-yielding products.

On the next slide, we detail Stifel Bancorp, which now includes Stifel Bank & Trust and the recently acquired Business Bancshares. The 3% growth in net interest income was the result of growth in average interest-earning bank assets that more than offset the sequential decline in bank net interest margin. Total bank assets increased to nearly $17 billion, as average interest-earning assets increased sequentially to $16.4 billion. Total bank loans increased 23% year-on-year to roughly $8.5 billion, as commercial loans increased 31%, mortgage loans increased 11% and securities-based loans were essentially flat.

The higher growth rate in the commercial loan portfolio was due in part to approximately $500 million of loans added from the Business Bancshares acquisition. Investment securities totaled $8 billion and increased roughly 9% year-on-year, as growth in asset-backed securities again more than offset declines in most other investment security classifications.

Majority of our asset-backed securities are CLOs. As we've said before, we've invested in the AAA and AA tranches, which have short relative duration. Additionally, we stress test our holdings to scenarios significantly more challenging than the financial crisis without any projected losses. So overall, we remain comfortable with our current CLO exposure.

The provision for loan loss expense increased sequentially to $6.9 million from $4.3 million due to loan growth, primarily within our commercial loan portfolio. Despite a rise in the provision expense, the allowance for loan losses as a percentage of loans decreased sequentially to 97 basis points.

Overall, our credit metrics remain solid, as the nonperforming asset ratio is 14 basis points. The asset quality metrics compare very favorably to the overall market, which reflects our conservative approach to credit as reflected in the yields on assets within our bank as well as the very strong asset quality developed by our new colleagues from The Business Bank.

In the next slide, we review our expenses. Before I review our quarterly expenses, let me just highlight our expense control so far this year. In the past few years, we focused on cost discipline within our business. And so far this year, our results illustrate our success, as total year-to-date expenses are essentially flat with the same period in the prior year, after adjusting for the gross-up for investment banking expenses.

In terms of our quarterly non-GAAP expense results, we came in below Street estimates. As Ron indicated earlier, our comp ratio is 56.5%, as we move to our annual target of 58% for the full year 2018.

Non-GAAP operating expenses, excluding the loan loss provision and expenses related to investment banking transactions, are roughly $153 million or below the lower end of our quarterly guidance. In terms of our share count. Our fully diluted share count was essentially flat, sequentially. The lower-than-expected share count in the quarter was due to the decline in our share price as well as our repurchase activity, which essentially offset the dilution from The Business Bank acquisition.

Moving on to our balance sheet. On this slide, we look at our consolidated balance sheet and our capital ratios. We finished the quarter with $23.8 billion of assets on our consolidated balance sheet, which is up $1.2 billion from the prior quarter. This was above our guidance of $800 million due to approximately $300 million of additional organic loan growth. Our firm-wide average interest-earning assets increased by $700 million to more than $19.7 billion, primarily due to growth in the average bank assets during the quarter.

We finished the quarter with a Tier 1 leverage ratio of 9.6% and a Tier 1 risk-based capital ratio of 17.9%. Our Tier 1 ratios were impacted by our share repurchase activity during the quarter, the phase-out of our trust preferred securities and continued balance sheet growth. Book value per share of $41.25 increased by nearly $2 during the quarter.

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

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [4]

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Thanks, Jim. So in conclusion, let me reiterate how pleased I am with both our quarterly and year-to-date results and my optimism for the future. Investments we've made in our wealth management and institutional businesses have resulted in revenues that are tracking above 2017 levels and, coupled with the cost efficiencies we've implemented, have driven a more than 50% increase in our year-to-date earnings per share and 25% return on tangible common equity.

Also, I'm happy to announce a small acquisition today. We agreed to acquire New York-based fixed income broker, First Empire. This acquisition fills out strategic needs in our fixed income business. And after careful analysis, it was determined that an acquisition was preferable to the time, cost and execution risk associated with building organically. We did not disclose the terms of the transaction, as it was not material.

Looking forward, we believe that Stifel is well positioned to capitalize on a strong U.S. economy. We're gaining momentum in our private client recruiting efforts and translating increased interest in Stifel through net new advisers. The pipelines in our investment banking business remain strong and our bank will continue to provide us with substantial excess capital that we can deploy to generate the best risk-adjusted returns for our shareholders.

So with that, operator, please open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Devin Ryan with JMP Securities.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

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So first question here, 2 parts. Thanks for the perspective on the outlook range for next year. And I just want to make sure I'm clear here. It sounds like the high end of the range would suggest lower net interest income or the lower end of the net interest income range, just given stronger customer engagement, which I think makes sense given the ongoing dynamic with customer cash currently. I heard the comments higher reinvestments rates today should benefit the NIM. But I would assume that in that kind of positive scenario, rates are also moving higher from here. So what are you assuming on kind of incremental interest rates, either on the front or back end of the curve, kind of benefiting NII in that kind of more positive scenario? And then the second part of the question is, kind of in that strong engagement scenario where there might be less balance sheet growth, given the customer cash dynamic we just mentioned. With over $500 million of kind of free cash creation, even after paying your dividend, I'm calculating you'd have the capacity to buy well over 10% of your stock here. So I'm just kind of curious around the capital targets and how you're thinking about those relative to being opportunistic on the stock, just given that it would seem you have a lot of capacity, if you were just to even hold the capital targets flat?

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [3]

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Let's see, Devin. You had about 5 questions in there. So let me try to...

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [4]

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It's a 2-part.

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [5]

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It was a 2-part. 2-part with 3 subparts. But I got you. Look, first of all, as it relates to our forward-looking guidance, I want to be clear that when I talk about client engagement, I'm not talking about our deposit levels. I'm just talking about the difference between next year being, what I would say, I don't expect a recession, but you could have a choppy market that doesn't go anywhere. Clients aren't engaged on the wealth management side. Banking might be slower. So we're looking at, absent a recession, a tepid year at the low end, which could have flat revenue; would have increased net interest income, flat revenue. And then the high end of the range, which would be revenues up 11%, would be just increased client engagement, increased banking. The important thing that I think, to get to your question, is net interest income. And as you look forward, what we did was we just assumed no change in anything other than a roll of our investment securities in the higher rates. And then how our liabilities would roll as well. And it really shows the interest -- the asset sensitivity of our balance sheet. Everything being the same and just roll the investments, our net interest income will be up $55 million next year. That's -- now you flip the curve around, you do a bunch of things, those assumptions can change. But that's how we sit today. And it's a function of 2 things, really: one, if we have some rather low-interest investments in our investment portfolio that we'll roll to higher rates; and we have a bank charter that allows us to increase our Bank Sweep Program in our share deposits. So the combination of those 2 things with no balance sheet growth, no change in the yield curve, just rolling of both assets and liabilities, results in a $55 million increase in net interest income.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [6]

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Got it. Yes, that's very reasonable. I appreciate that. And then, yes, the follow-up was just on the capacity really for repurchases, just given, I guess, one; where your stock is, I heard your comments pretty loud and clear; and then two, obviously, we'll kind of see as the year evolves what the opportunities with excess capital are. But to the scenario that customers are quite engaged in the markets and so -- and maybe the balance sheet, potentially could be growing less, you'd have more excess cash, at least in my calculations, for repurchases. And so I'm just trying to get a sense of how important kind of getting back up to those targets are versus the opportunity with the stock at this moment and still being well capitalized?

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [7]

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Yes, well, look, again, I don't want to confuse $500 million of capital generation to customer deposits. And I'm not sure that, that's what you're suggesting. But let me separate them, okay? In this particular environment, what we're saying is we will generate $500 million of capital. We could grow the balance sheet. We have deposits to grow the balance sheet. We could use -- I'm just saying what our various options could be. And I guess, if you wanted to put color on my comments, what I'm trying to say is that, today, where our stock price is, we'll be focused on repurchasing shares with excess capital, as we think that, that provides the best risk-adjusted returns for our shareholders at these levels. So we have dividends you can pay, you can repurchase stock, you can make acquisitions or you can grow your balance sheet. That's -- 4 possible uses for an estimated $500 million of capital generation in 2019. We'll see where the markets take us. But I'm not going to project which of those 4 levers we will use in terms of capital deployment.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [8]

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Got it. Okay. And I really appreciate the color, Ron. And then a follow-up here just on the recruiting. So great to see the momentum here this quarter. I know you've kind of been alluding to it. And one thing that it affected, I guess the net number, had been retirements. And so I'm just curious if we were to kind of look at the gross number versus the net number, have we seen kind of the retirements slow? I did see kind of more gross come in the door, so that's obviously the bigger driver. But just curious on that front. And then I know -- or I believe you guys increased your offer in the market. And so I'm just curious kind of what you feel like is driving the more recent success and just any other flavor around kind of the pipeline or kind of where people are coming from and what makes you feel constructive about the outlook because it sounds like you are.

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [9]

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Well, I am constructive about recruiting. I mean, Jim is sitting here. We have a -- Jim Zemlyak, that is. We have a strong pipeline. We've always had a very attractive platform offer and culture. Frankly, as I've said many times, we definitely scaled back during the DOL time frame because of our view of what potentially could happen in retirement assets, and our view of structuring offers that may or may not have been permissible under the DOL's proposed rules as related to incentive comp. And so frankly, we slowed down recruiting. And like everything else, pipelines have to get refilled, and you have to get more engaged. We did that starting in the second quarter when we saw where things were going to go. And we've -- and look, we've been -- I think this year, if you look on various websites, we're the #1 recruiter of net new assets in the industry. So I've been optimistic. I am optimistic. Our gross additions have always been good. We have been dealing with a lot of retirements and what we call nonregrettable attrition. But in the quarter, both our -- that went down a little bit. But our gross advisers joining went up and went up significantly. So like I said, look, this is lumpy. Generally, people don't move at the end of the year and will do a number of things. But I am optimistic about the value proposition. And based on our current pipeline and people that I am seeing, I am confident about our growth in net new advisers going forward.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [10]

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Got it. Very helpful, Ron. And then just last real quick one for Jim, just on the model. Any -- just early kind of thought on the tax rate for next year, just any puts and takes to think about, whether it be kind of the FDIC deduction available or anything else to think about that would push it up or down or -- just getting the model cleaned up here.

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James M. Marischen, Stifel Financial Corp. - CFO [11]

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Yes, there's definitely some puts and takes there. I would say that we are still forecasting very similar to what we've done this year, around a total 26% effective tax rate for the year.

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Operator [12]

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Your next question comes from Chris Harris with Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [13]

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On the funding side, I guess the commentary around having the bank now, you can shift some of the client deposits out of CDs and move them into lower-cost funding sources. To the extent that you're doing that, might you run the risk of potentially losing the deposits? I guess that's where I'm a little bit confused. If they're getting a lower rate, might that not be there?

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [14]

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That's not really the way you should look at it. I think that we have a multibank program. And we sweep based upon insurance levels. And we now have 2 bank charters. So whatever our limit by client was, it's now doubled because we have 2 -- Stifel Bank has 2 bank charters that we can provide insured deposits on. So the insured bank program pays the same rate to clients. It's just in this particular case, we'll sweep more to Stifel Bank than we will to our outside bank partners in our multibank program.

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James M. Marischen, Stifel Financial Corp. - CFO [15]

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And they're not the exact same client. We'll have clients that we can place CDs outside of our own bank. We place multiple billions of dollars a year in CDs through our brokered CD desk. These are just different sets of clients here.

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [16]

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Yes. But the biggest thing I want you to understand is our ability in the same deposit base, with the parameters that we've set, to sweep more deposits to our own banks than sweeping away.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [17]

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Got you. Okay. That makes sense. Now with respect to the institutional business on the brokerage side. You had mentioned that you're hopeful things pick up in the fourth quarter. But bigger picture, what's the outlook for this part of your business? I mean, should we continue to expect gradual grind down based on MiFID and some other headwinds? Or are we potentially getting closer to a bottom for this part of your business? Any incremental color you can share there would be helpful.

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [18]

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Well, I want to see how the fourth quarter shakes out. The sequential quarter, even through the summer months, in our equity business was encouraging. And so as I look at it, I -- we're beginning to get more clarity on how MiFID impacts the equity business. And I'd like to think that we -- '19 is going to tell us more and so we will see. But that has fared out pretty well this year, certainly better than I would have anticipated if you asked me this question at the beginning of the year. I think that, on the other hand, fixed income continues to be challenged for all the reasons that a lot of people are talking about, including not only cyclical changes but secular changes in that business. And I would -- I believe that the fourth quarter will be better. But those challenges will continue. I'm not in a position to predict how that's going to shake out one way or another other than to say that we're evaluating and talking to clients about how we best serve them and continue to add value. The business isn't going away. I would think that the third quarter might, for at least the time being, be a low point in that business. It was a combination of events that caused that to be a very difficult quarter on fixed income flow.

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Operator [19]

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(Operator Instructions) Your next question comes from the line of Steven Chubak with Wolfe Research.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [20]

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So Ron, I wanted to ask a follow-up question on capital management. I just want to understand your prioritization a little bit better. You very clearly outlined the multiple paths that you could pursue. I guess from our perspective, looking at the trends at the bank, you're growing securities, which carry some credit risk, like CLOs in the relatively late part of the cycle; deposit betas, giving you need to raise; some CDs are running above 100, at least in the most recent quarter. I recognize the additional charter is going to provide some funding relief. But just taking a step back, why is raising high-cost CDs to fund bank expansion a better trade-off than buying your stock at 8x?

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [21]

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Well, I don't think I said that at all. I mean, I -- what I said was no growth in the bank, okay, in terms of guidance. And not that we're looking -- we can grow the bank. But let's be clear here, our NII expansion of $55 million has no change in the balance sheet, repricing of assets and utilizing our new bank charter to lower overall cost of deposits. And that's in a no-growth scenario. Look, I would tell you that we'll see what market conditions are. We've said that the bank balance sheet growth next year could be flat to up $1 billion, that's significantly less than what we had been doing over the last few years. And I would say, that, that alternative today, is certainly of growing a bank would be less attractive than buying our stock at the levels where our stock is trading today. And I think that's what I said. So -- and when you look at our NIM guidance, obviously when you back into some of these numbers, you can tell that the use of CDs is not going to be a prevalent source of funding going forward. And the capacity to sweep additional deposits in can help offset your runoffs then with those CDs. And as you kind of work through your model, you'll be able to kind of see some of that come through with the NIM guidance of 300 to 310 basis points. And look, when we put on CDs, we're also putting on duration. So we're not completely looking at -- our deposits also had hedge costs in there too, which you have to look at. You don't always see that, but we're not just borrowing short and lending long. We're hedging out our deposit cost. So CDs aren't necessarily a straight comparison between a 3-year CD and an overnight money market. We don't look at it that way.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [22]

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Understood. And just given some of the guidance or commentary around more muted bank expansion, certainly, clarifying that 0 to $1 billion range is quite helpful. That does suggest that, and this alludes to Devin's earlier remark, that you would only really need to allocate up to about $100 million or so to support that bank growth, leaving certainly a substantial amount for share repurchase. Does any of that need to go towards replenishing the capital to get back to 10%? Or do you feel like you're comfortable with the ratios at which you're currently operating?

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [23]

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Look, first of all, let me -- as it relates to the 10%, that was a target that we use. There's no absolute in that. I used that 10% and 20%, when we were 15% and 30%, all right? And I used that to try to illustrate where we should get to. We're comfortable with our capital ratios here. There's nothing magical about 10%, it should be a range. I think in these levels, you could see us rebuilding our capital levels a little bit, but it's not -- it's not a binding constraint, 10% and 20%. It is something that we look at generally. I'm comfortable with where we sit today, and we will generate a lot of capital next year. So I'm not sure that I answered your question, but I think overall -- if I have any caution as I sit here today, it would be that we want -- we're short duration and we want to be mindful of the fact that we're long in the credit cycle. And I just think that's a prudent viewpoint to take.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [24]

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So how should we think about the binding constraint from here? I know you wouldn't commit to an explicit target, but the 10% is well above the regulatory minimums. I think the rating agencies historically had dictated a rough target as to where you guys would manage to. Just curious what the binding constraint is in your minds, given where we stand right now?

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [25]

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Well, the binding constraint is the regulatory limits. Then the second is, well, our discussions with the regulatory agencies. I mean, I'll give you an example of what happened this quarter is when we acquired Business Bancshares, even though our capital position did not change at all, we had to remove trust preferred securities, almost $60 million, from our capital calculation. Nothing -- the only thing that changed in that entire transaction was the math of our capital ratios. A lot of people understand that. And we understand that. So that's why you got to be a little careful about having these hard constraints. We still have that -- those trust preferreds are still on our balance sheet. They have the same capital considerations. They're just not considered Tier 1 eligible because we got another bank.

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James M. Marischen, Stifel Financial Corp. - CFO [26]

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Yes. And to quantify that, that took off about 60 basis points from Tier 1 risk-based capital and about 30 basis points from Tier 1 leverage capital.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [27]

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Got it. Now it's very helpful. Ron, just one question on the First Empire acquisition. You spoke of some verticals that you were looking to fill in fixed income, that there may be some gaps that existed. I was hoping you can just clarify what some of those gaps are, given the fixed income brokerage environment has been pretty challenging. Just surprised that you would pursue an acquisition in that space.

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [28]

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Look, it's an opportunity. It's a business that's been around a long time. They have a very niche space in -- with primarily credit unions and institutions like that. Very nice fit with what we're doing in KBW, a business that we think is -- have a big moat around it in terms of the relationship and how they've done business. So we're pleased with it. It's small. And obviously, I didn't disclose the purchase price. But let me say, look, I don't think fixed income is going to 0. We're going to continue to invest in fixed income. We'll invest in solutions that we believe will best serve our clients. And we're going to be in that business. It's going through a rough patch. But if we abandon every business that ever went through a rough patch, we wouldn't -- there wouldn't be much to do. So I'm optimistic about it despite the secular changes that are occurring in that business. We're in the fixed income business. We're in it to stay.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [29]

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Well said, Ron. I appreciate that sentiment. Last question from me on the guidance. I just wanted to clarify one item. The noncomp guidance, I know, excludes the impact of the IB gross-up. Does the revenue guidance exclude that same impact as well or not?

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [30]

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It does not. No.

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Operator [31]

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Sir, I'm showing there are no further questions at this time.

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Ronald James Kruszewski, Stifel Financial Corp. - Chairman & CEO [32]

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Okay. Well, we look forward to a good end of the year. We appreciate everyone's comments and questions, and look forward to recapping a great year with you when we meet on our fourth quarter call. Thank you very much.

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Operator [33]

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Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.