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Edited Transcript of SF earnings conference call or presentation 1-May-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Stifel Financial Corp Earnings Call

St. Louis May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Stifel Financial Corp earnings conference call or presentation Monday, May 1, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James M. Zemlyak

Stifel Financial Corp. - President, CFO and Director

* Ronald J. Kruszewski

Stifel Financial Corp. - Chairman of the Board, CEO and Director

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Conference Call Participants

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* Christian Bolu

* Christopher Meo Harris

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

* Conor Burke Fitzgerald

Goldman Sachs Group Inc., Research Division - VP

* Devin Patrick Ryan

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

* Steven Joseph Chubak

Nomura Securities Co. Ltd., Research Division - VP

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Presentation

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Operator [1]

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Good afternoon. My name is Heidi, and I will be your conference operator today. At this time, I'd like to welcome everyone to the first quarter 2017 earnings conference call. (Operator Instructions) Thank you. It is now my pleasure to turn the call over to Mr. James Zemlyak, CFO. You may begin your conference, sir.

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James M. Zemlyak, Stifel Financial Corp. - President, CFO and Director [2]

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Thank you, Heidi. Good afternoon. I'm Jim Zemlyak, CFO of Stifel. I would like to welcome everyone to our conference call today to discuss our first quarter 2017 financial results.

Please note that this conference call is being recorded. If you'd like a copy of today's presentation, you may download slides from our website at stifel.com.

Before we begin today's call, I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of '95. These statements are not statements of fact or guarantees of performance. They may include statements regarding, among other things, our ability to successfully integrate acquired companies or branch offices and financial advisers; general economic, political, regulatory and market conditions; the investment banking and brokerage industries; our objectives and results; and they may include our beliefs regarding the effects of various regulatory matters, legal proceedings, management expectations, our liquidity and funding sources, counterparty credit risks or other similar matters. As such, they are subjects to risks, uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP, we may use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the company's GAAP results. To the extent we discuss non-GAAP measures, the reconciliation to GAAP is available on our website at stifel.com. And finally, for a discussion of risks and uncertainties in our business, please see the business factors affecting the company and the financial services industry in the company's annual report on Form 10-K and MD&A results in the company's quarterly reports on Form 10-Q.

I will now turn the call over to our Chairman and CEO, Ron Kruszewski.

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [3]

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Thanks, Jim. Good afternoon to everyone, and thank you for taking the time to listen to our first quarter 2017 results. This afternoon, we issued a press release on our first quarter results and also posted a slide deck on our website. I'll be referring to slides as is our custom on this call.

So with that, look, I'm pleased with our results. Stifel generated a second consecutive quarter of record net revenue, and non-GAAP pretax margins came in just under 15%, which is the highest level since the fourth quarter of 2014. Our continued growth on both the top and bottom line is a testament to Stifel's diversified business strategy as well as our effort to improve our expense efficiencies.

In the first quarter, our net revenue was driven by record results in our Global Wealth Management segment that was due to further increases in fee-based revenue and improved net interest income at Stifel Bank. The growth in these recurring revenue streams over the past 1.5 years has helped to offset the volatility in our more transactions-driven institutional businesses.

In terms of expense discipline, we continue to make progress on our cost-reduction initiatives as the first quarter represented the lowest noncomp ratio at the firm in 11 quarters. Looking at our first quarter results, you can see from the table on this slide that our total net revenue was a record of $676 million, as I said, driven by Global Wealth Management. Our bank continues to be a driver of a lot of this growth as net interest margin rebounded as expected from last year -- last quarter's subdued levels to 256 basis points. That does not include what I think -- what I know is the impact of the March rate increase.

For the quarter, our GAAP EPS was $0.78, but our EPS was impacted by a couple of items. First, we had nearly $17 million in anticipated merger-related pretax charges related primarily to our Barclays acquisition. We also had severance expense of approximately $5 million. Offsetting that, we had a tax benefit of nearly $17 million associated with the change in accounting rules regarding equity-based compensation. Therefore, the tax benefit which relates to 2016 compensation offset merger-related and other expenses, resulting in non-GAAP EPS of $0.74, which was in line with consensus.

Moving to our primary revenue lines, I'll start with brokerage revenue. Brokerage revenues were $292 million, which was up slightly sequentially but down 8% from the year-ago quarter. We do -- I want to point out that we should exclude the brokerage revenues generated by the independent Sterne business that we sold on July 1, 2016. Now looking at it, global wealth management brokerage revenue came in at $172 million, up sequentially due to increased productivity. Excluding the revenue from these aforementioned Sterne businesses we sold, our wealth managed brokerage revenue increased 9% in the prior year.

Institutional equity brokerage revenues were $54 million, which were down 14% year-over-year and 16% sequentially. Our results were impacted by the declines in industry-wide equity average daily volumes that were down 20% compared to last year and 3% sequentially. While equity trading revenue declined more sequentially than market volumes, I would point out that we had a 26% increase in sequential revenues last quarter when market volumes were only up 7%. So I really believe there's just some averaging that went on here between those numbers, but the institutional business is challenged by many -- what people believe are secular trends, and I think we're seeing that as well.

Fixed income brokerage revenues were $67 million, up modestly on a sequential basis but down 20% year-over-year. Commission and principal transaction, while they were down, we experienced a rebound in trading profit fund last quarter's weakness due to the market pullback in municipal securities. Taxable revenues in the first quarter were negatively impacted by market conditions, and industry-wide secondary volumes were dictated by the new issue calendar, which increased the concentration of secondary volumes with the underwriters. Additionally, our rates business was negatively impacted by lower activity levels at depositories given the market environment, and our institutional tax-free flow revenues declined slightly as well.

Investment banking revenues were $127 million as equity capital raising remained healthy but advisory and ECM slowed sequentially. Total equity capital raising revenues totaled $49 million, up 91% year-over-year and in line with last quarter's improved results. As I noted last quarter, we certainly expected our capital raising to improve meaningly from the first quarter of last year, given last year's frankly lack of activity in capital raising. Industry-wide equity capital proceeds increased almost 100% year-over-year. Our results were driven by improved activity in financials and in health care.

Fixed income capital raising has revenue of $25 million, which was down sequentially and year-over-year. Recall that our public finance business was the primary driver of our fixed income capital market business. Although a number of issues we underwrote were actually up year-over-year, the dollar value of deals declined. If looking at it industrywide, new issue volume was down 13% year-over-year, but Stifel remained #1 in terms of the number of new issues underwritten in the country.

Advisory revenues were $56 million in the quarter. The modest sequential decline was primarily the result of seasonality, but we did see a nearly 12% increase year-over-year. Overall activity was relatively steady, and in certain sectors such as financials and technology, we are seeing some positive momentum with an uptick in stock prices.

Next few slides, we'll touch on the quarterly results from our 2 primary segments. Let's start with Global Wealth Management. It was a strong quarter for wealth management as net revenue grew 9% sequentially, 17% year-over-year. The $35 million sequential increase in net revenue was frankly barely evenly split between brokerage, asset management and net interest income.

Let me give a little more color. Asset Management revenues improved as a result of higher fee-based revenues and the positive impact of the December rate hike of money market deposits and third-party bank deposits. In terms of net interest income, it was up 14% sequentially, and net interest margin at the bank increased to 266 basis points for the quarter versus 224 basis points in the fourth quarter of 2016. This more than offset a modest pullback in average interest earning assets at the bank, which I will discuss in a moment, a little bit about what happened there.

Advisers, we totaled 2,299 at the end of the quarter, which was up from 2,282 at the end of 2016. Client assets reached $252 billion. Growth in fee-based assets, which reached -- which are now more than $75 billion, continues to outpace total client asset growth and should provide a tailwind for fee-based revenue in the second quarter.

The year-on-year growth in revenues in the wealth management segment that resulted -- did result from increased revenues at Stifel Bank, and that did have an impact on the segment expense-to-profitability ratio.

The comp ratio came in at 51.6. Our noncomp ratio came in at 16.3%, resulting in pretax margins of about 32%. Again, a lot of this is the result of the growth in net interest income at Stifel Bank and Trust.

For the next slide, we'll look at the results of Stifel Bank. As we stated last quarter, total asset growth slowed sequentially as we surpassed our targeted asset levels in the fourth quarter. And as we've stated, future asset growth of the bank would be in line with the incremental capital generated from earnings at the bank. Total bank assets increased roughly $440 million in the quarter and now total a little over $13 billion. Bank loans of nearly $6 billion increased 5% sequentially and 69% year-over-year. The majority of the loan growth in the quarter was from commercial and security-based loans, while mortgages accounted for the fall of our year-over-year growth.

Looking on the investment side, investment securities of $6.6 billion increased 58% year-over-year. Investment portfolios growth in the quarter was consistent with our long-term strategy of emphasizing high credit quality, short duration issues that provide attractive risk-adjusted returns. As such, the portfolio's average yield was 254 basis points, and the duration was approximately 2 years. The provision for loan loss expense in the quarter was relatively flat at $6.1 million, and that was again due primarily to the loan growth and our allowance for loan losses. If you look at our allowance for loan loss, it increased sequentially to 87 basis points from 81 basis points.

All that said, our credit metrics remained strong as the nonperforming asset ratio in the quarter was 21 basis points, flat with the previous quarter and down from last year from 28 basis points.

Moving to the next slide, we'll look at our institutional business. Institutional net revenue was $237 million, down 6% sequentially and 2% year-over-year. On a sequential basis, revenues were down really due to a 6% decline in investment banking and a 7% decline in brokerage. Year-over-year though, the revenues did decline, but again, it was primarily the weakness in brokerage, both equity and fixed income, that was almost offset by a 25% increase in investment banking. Given the lower revenues, pretax income in this segment decreased by 16% to $40 million, sequentially.

In terms of specific revenue line, I'll add just a few incremental comments as I discussed these in earlier slides. Institutional equity underwriting revenue in our institutional group came in at $37 million, which was nearly double from last year, and it was roughly in line with the growth of the overall industry-wide equity issuance. We continue to take market share in a number of managed equity deals in the first quarter, and while our pipeline remains healthy, increased market volatility could negatively impact the issuance market.

In terms of our advisory revenues, the $53 million in the first quarter was down 5% from the fourth quarter due to lower private placement fees. Given that our traditional corporate advisory fees increased sequentially, and that we generated 12% year-over-year increase in total advisory revenue, we were generally pleased with the results. Our current pipeline remains ahead of last year's levels as the improved sentiment around financials has been the primary driver of this pickup. That said, we would expect our full year results to be more weighted to the second half of the year.

Institutional equity brokerage experienced the largest decline of our business line items in the quarter. I comment on last quarter's call that activity in the early part of the first quarter had moderated from our strong results, primarily post-election in the fourth quarter. And this moderation continued through the end of the quarter as volatility frankly remained low.

Our quarterly institutional fixed income brokerage revenue was $67 million for the quarter, relatively consistent with last quarter but down 20% year-over-year. As I mentioned earlier, our quarterly revenues were negatively impacted by the current market conditions.

Looking ahead, if these market conditions remain in play, we would expect our quarterly run rate for our institutional fixed income brokerage to be similar to the revenues of the past 2 quarters.

Moving on to the balance sheet. As you can see on Slide 10, we finished the quarter at -- on a consolidated basis, a little over 19, actually $19.14 billion in assets, which was essentially flat with the prior quarter level. The lack of sequential growth was due to some specific circumstances in the quarter. What it really was -- what happened was that, while Stifel Bank grew, the activity that we saw in the brokerage, in the investment bank, actually expanded our balance sheet at the end of the year. So customer receivables, a number of the things that just drive our brokerage balance sheet elevated at the end of the year, and that turned around in the first quarter. So our assets were up in the bank, down in the brokerage, relatively flat consolidate is the best way to say that.

We continue to believe that our overall asset growth will be driven by the amount of incremental capital generated at the bank while maintaining our targeted capital ratios of 10% leveraged and 20% risk-weighted. On the bank balance sheet, this should equate to approximately $2 billion in asset growth.

As you can see on the slide, we have a $21 billion forecast, and we're showing it for 2018, while in the last call, I showed it as guidance for the fourth quarter of 2017. Given the dynamics that occurred in our balance sheet in the first quarter, we felt that 2018, and I would say the early part of 2018, was a more likely time frame for our consolidated asset levels to reach $21 billion. As I said before, this doesn't really impact the expected $2 billion of growth on our balance sheet, which is the driver of our net interest income growth. So this should not materially impact overall NII growth expectation.

At the end of the quarter, as expected, our capital ratios were 10.1 for Tier 1 leverage and 20.9 for Tier 1 risk-based capital, very consistent with what we've told you. Given the high ROEs that we generate, the bank thus remains an attractive way for us to deploy our excess capital as we continue to focus on generating the best returns on a risk-adjusted basis.

The next slide focused on the drivers of our growth in net interest income. Of our $19.1 billion of assets, our total interest earning assets averaged $15.2 billion during the quarter. Bank interest earning assets, which are really, again, the driver of our balance sheet growth, were down slightly on average for the quarter. And this was really due to the money market reform. And what we did in money market reform is we set -- swept a large number of cash balances to the bank for the end of the year. And then frankly, we invested a lot of that. We swept some of those bank balances away because we didn't see the reinvestment trying to do it very quickly. So we just swept them away. Those are funding for future growth. That increase in cash is -- was why our net interest assets are relatively flat for the quarter. Sweeping them away of course did improve our net interest margin at the bank which improved to 266 basis points from 224 basis points in the fourth quarter of '16. The lower average NIM last quarter again was the increase in these cash balances. So if you look at it, all through this, led by the bank, firm-wide NIM increased 33 basis points to 224 basis points. Net interest income as a result, up 14% sequentially.

Looking to the second quarter of 2017, we expect the net interest income will benefit from the impact of the March increase that -- which really didn't have much of an impact on first quarter's NII, plus a full quarter's impact from the December rate increase. Book value came in at $38.40, declined slightly as a result in the first quarter when we issue our share grants. That's also what drove some of our -- not some of it, drove the tax [benefit] , and I'll come to that in a moment. We did not repurchase any shares in the first quarter, and we continue to have existing authorization of 7.4 million shares.

Let's look next at the reconciliation of our GAAP and non-GAAP revenues. This is Slide 13. Last quarter, I said we expected full year non-GAAP pretax merger-related charges to be approximately $30 million. In the first quarter, we incurred about $5 million in severance as well as some incremental, merger-related expense tied to our City Securities acquisition. By the way, I would like to welcome that, that's a deal that was integrated very seamlessly. And I would like to take the opportunity to welcome our new partners from City Securities to the firm. But as a result of all of this, our total non-GAAP charges for the quarter came in a little under $22 million. We estimate at this point, going forward and looking forward to the remainder of the year to be approximately $23 million in these. And as you can see, these have come down significantly as we had integrated our deals of recent years.

In terms of our non-GAAP expense results, they were better than expected. Our comp ratio of 62.3 was at the high end of our annual range that we've given guidance which is now 60.5 to 62.5. You'll recall that, that's down from 62 to 64. And we're at the higher range, generally, it's what happens in the first quarter, there's an impact primarily of payroll taxes that occurred in the first quarter for us.

Noncomp expenses excluding the loan loss provision, which I've said you should kind of look at it without loan loss provision, those tend to jump around with our growth of loan. But noncomp expenses were just under $149 million, which is below our guidance of $151 million to $158 million as we benefited, frankly, from some of our initiatives on our expense [base]. Loan loss provision was $6 million, roughly in line, elevated over last year. But again, this is really tied to our loan growth.

For the second quarter, we're maintaining our first quarter guidance for noncomp expenses, excluding loan loss provisions, of $151 million to $158 million. I would also note that our diluted share count came in slightly above the range we gave for our full year. The impact to diluted shares outstanding is front-loaded during the year due to the timing of the vesting of our past grants and the issuance of new grants. We anticipate the year-end diluted share count to be approximately 81 million shares barring any repurchase or issuance of our common stock.

I also want to spend just a moment here on our lower effective tax rate for the quarter, which as you can see came in at 17% on a GAAP basis. This lowered our provision for income taxes by nearly $17 million in the quarter and positively impacted our GAAP EPS by $0.21, which more than offset the after-tax impact of our non-GAAP merger-related charges.

What this really is, is the accounting rules, if you vest stock higher than what you granted it at, we used -- we've got more of a tax deduction. We ran that through capital. We now run that through earnings. I would note that, that can both be an increase to earnings and a decrease to earnings, depending on where the stock is. To give some people -- I've had a few questions about this, our average grant price this year was $35, and we vested it at $50, and that's what drove this income tax benefit. So a little bit more on that. I do think we thought it appropriate to just pull that out of how we look at our business and look at our business at an effective tax rate, which is approximately 38.5%. We feel that's the way you should look at it. And I think going forward, this is going to be noise around earnings for many firms that, depending on what happens with stock price, just like the old debt adjustments that occurred. And I think -- I'm not exactly sure how we'll handle it going forward, but I suspect we're going to be pointing it out as to its impact on [our] earnings.

So let me give a brief update on the DOL and our interest rate sensitivity. Regarding DOL, no. Look, I know you're all looking for further insight into the time and implementation of the rule. I really wish I knew more than I know. I don't really have much to add to the comments I've made in the past. We certainly were happy that the administration pushed back the effective date by 60 days to June 9. Not really happy with the way the interim rule came out, which implies an implementation date could actually be on June 9. For part of the rule, which would really be the impartial conduct standard, I personally believe that, that would be very disruptive to the market. We'll continue to monitor development from Washington. We do have the new Director of DOL, and I'm confident that the Department will follow the administration's directive to study and update financial impact. But if not, if the rule becomes effective in June, we will be complying.

In terms of rate sensitivity, we generated approximately $7 million in incremental pretax income from the December rate hike. We would expect incremental benefits from the December rate hike in the second quarter because that's -- we repriced some of the securities in our bank balance sheet, there's a lag. Additionally, we expect the March rate hike to have a similar impact in the second quarter as the December rate had on the first quarter of '17. One of the things that's going on is really not getting material increase in deposit yields that we or the industry pay. I think that although the competitive environment will continue to be the primary factor of deposit yields, the way we look at it is, historically, the spread between the fed fund rate and the deposit yields has been 110 to 130 basis points. Today, we're at about 90 basis points. To me, that implies that if you would look forward competitively, we'll start to see some increase in deposit yields and less of a benefit from the increase in rate, as you get into that historical range of 110 to 130. But competitive markets being what they are, we'll just -- we'll see how this plays out. We're certainly not going to lean one way or another on this. We're going to watch and see what happens as we continue to do this.

With GDP, there can -- there may be a stall in the expected rate increases when you saw what I actually thought was a dismal first quarter report in GDP. That must cause some pause on some of the thoughts as it relates to increasing the short-term rate.

So before I open it to questions, let me just comment on the operating environment. As I just said, I thought GDP was certainly disappointing. I said on our last call, it appears that in general, optimism and confidence is good. And it was good. I also cautioned that a lot needed to be accomplished in Washington before the potential benefits of a more pro-growth environment could be realized. Frankly, in the first quarter, we saw some of that optimism fade, and the increased uncertainty negatively impacted some of our businesses, primarily our institutional businesses. That said, we still generated record net revenue and posted our strongest pretax margins since the first quarter of '15. We also posted record client assets, fee-based assets, and we think that will benefit revenue in the second quarter.

As we continue to improve our operating leverage and look for attractive risk-adjusted opportunities to expand our businesses, I believe that our company, Stifel, is well positioned for further top and bottom line growth.

So with that, operator, I would be pleased to take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Steven Chubak with Nomura Instinet.

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Steven Joseph Chubak, Nomura Securities Co. Ltd., Research Division - VP [2]

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Just want to kick off. I've had a couple of questions from folks that have just come in. Just trying to clarify some of the guidance that you've given around NII. So you did note that you should see a comparable benefit next quarter from the March rate hike. And I was hoping you can give some insight into whether that's in terms of NIM expansion or NII uplift. If you can just give more specifics around how we should think about that benefit, that would be helpful.

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [3]

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I think I said that the -- that you would -- a couple of things happened in sort of the lag effect here, okay? I mean we -- you get -- you do get some immediacy when you have a rate increase, but assets take a while to reprice, okay? You also have a lag effect on the deposit yields. So I think what I've said is that you'd see a similar impact in the second quarter as we saw in the first, and if I would give you a number, I would say it's 10 to 12 basis points.

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Steven Joseph Chubak, Nomura Securities Co. Ltd., Research Division - VP [4]

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Okay. Got it. And in terms of the benefit that you saw from -- on some of the off-balance sheet cash and the asset management fee line, since you had really strong growth in fee-based assets, I'm just trying to parse how much of the benefit we saw this quarter was from higher rate on cash balances or off-balance sheet cash versus the benefit from stronger fee-based conversions that you guys continue to see?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [5]

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Yes. Well, look, it was -- part of it is -- the answer is it's about equally split. Just so if you're trying to model it, like I say, part of it, our asset fees have both our deposit fee income plus our asset management fees. So about 50-50 to answer your question directly.

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Steven Joseph Chubak, Nomura Securities Co. Ltd., Research Division - VP [6]

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Perfect. And just one more from me. I was hoping you could speak to some of the secular headwinds you alluded to for the equities business. What factors are at least most concerning to you, and any thoughts you can provide on MiFID II, which continues to garner more attention?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [7]

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Yes. When we were talking, I was in a meeting earlier, Steven, and the secular headwinds in the equity brokerage business, I think, is celebrating its 4-year anniversary, same with May Day? And it's a continual, we've always -- buying to sort of bail this out. I'm not prepared really to talk about MiFID. I understand where it is. It's European, it impacts the global firm. A lot of questions about how it impacts '40 Act and a number of things. So I don't expect it to be a net positive, I can say that. But I don't know that I can really quantify it for you. I do believe that the trend which has just been continuing toward passive investing at some point will -- that pendulum will swing back. We'll see. I've said that consistently. I think I put it in the annual report. Maybe we can be the last active investor in a passive world, which would be interesting. But I think that right now there are clearly secular headwinds to that business.

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Operator [8]

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Your next question comes from the line of Gavin Ryan (sic) [Devin Ryan] with JMP Securities.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [9]

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So a couple of quick ones here. So I guess, first, financial adviser headcount stepped up. I suspect that's from City Financial. But I'm just curious, seems like we've been kind of flatlining a little bit in kind of maybe the core financial adviser workforce. I know that's a little bit of an industry dynamic. But I'm just curious how focused you are right now on growing financial advisers in this backdrop. Is it a high priority? Or is there maybe some reason that I'm not seeing that you'd be less interested, like competitive dynamics or just waiting for DOL to get resolved?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [10]

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Look, it's a combination of a lot of those things. I mean, we're always every day trying to bring people that believe in our business model and believe in our culture and in the way we do things. Those people, we're trying to bring in every single day. There have been a number of trends, the DOL has had 2 impacts. One, it does create some questions about, even frankly, the legality of the structure of some of the recruiting deals that caused some pause. But on the other hand, it's also caused, I would say, frankly, an uptick in just retirement, in people that have looked at how they've done business, and can you just conform with this. And so a lot of people just say, well, I was going to retire anyway. I just think they've accelerated it. So we're seeing a combination of that. I would say that it's never a numbers game for us. We don't have a target to hire x number of people. We don't have a budget to say we're going to have this kind of money at recruiting. We believe that we're going to continue to recruit. I think when DOL does get resolved here, one way or the other, it will change the environment. At least for us, it will be a more conducive recruiting environment once that uncertainty gets off the table. Or we don't -- there's a lot of question about that, at least to me.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [11]

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Okay. That's great color. And then, GWM, commissions, principal transactions, obviously, a nice step up this quarter. I'm not sure if you look at it like this. But can you give us any sense of how much of that increase was driven by just higher billings on trailing commissions, just with the higher markets versus how much was -- assuming maybe more or a better retail investor engagement or customer engagement and then if any was City Financial?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [12]

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Well, look, first of all, asset-based fees don't fall in those line items, okay? So asset-based fees fall in asset and service fee, all right? So I would say that the commission and principal transaction, which is primarily our transactional business and equities and fixed income, is a result of higher engagement. We've seen a pickup in that business in our Barclays. They've gotten more acclimated to Stifel. They certainly have improved numbers over a year ago when they were just with the firm for the first quarter. And City Securities was not a big impact on that. We just -- we closed on that, and that's in the early stages of acclimation. So it really probably is a little bit of productivity and engagement is what I would say is the reason for that.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [13]

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Okay. Okay. Great. And last quick one here, just on the fixed commentary, that was for fixed income brokerage. I mean, what's the biggest driver of just maybe more subdued activity? Is it tax uncertainty or the yield curve? I'm just trying to think about it before -- thinking for what could make it change and maybe break back up to something that's a little bit more active? What might that be?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [14]

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Well, first of all, in our business, it's a growth area for us. And we are -- we're focused on increasing our debt underwriting capabilities, all right? And that is something that we believe we can have strong growth in, and that has benefits across that business just as equity underwriting has businesses -- has benefits for equity brokerage. So we're in the early stages of fixed income on the taxable side, and that will help. But I would really say that we really were looking at a very, very strong quarter in the first quarter of last year. As I've said in my remarks that in these market conditions, which is a flattening of the yield curve a little bit, the depository, which is a big part of our business, and the rate business is a little -- just more subdued and -- in this environment. So some color on tax policy that never -- that uncertainty does -- it certainly doesn't help the tax-free business. So I think as we get some of these policy, tax reform, this infrastructure, is it going to be public, private, a form of [that], what's it going to be? A lot of questions out there. I think we're well positioned for that right now. But as I've said in this current environment, I would encourage you to look at our results, which I'm very pleased with, to look at our results of the last few quarters as you try to think about where we are going forward.

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Operator [15]

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Your next question comes from the line of Christian Bolu with Crédit Suisse.

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Christian Bolu, [16]

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I apologize for the [nitty] question here, but following up on Steven's earlier question. Is it possible just to break out of the $163 million in asset management fees, how much of that came from kind of cash balances fees on that? And then what kind of yields are you getting on that?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [17]

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I think that probably, depending on how we can do this under FD and all of that, we'll try to get these numbers out. I'm not prepared today to sit there, and I would want to think about there's average impacts on this, and there's things that have happened. We've had 2 rate increases. So I need to dodge your question a little bit here, and I'd like to -- now that I've gotten it twice, we'll try to provide a little more color on what is flowing through that because it is primarily our -- many of the discounters, that's where their -- or people that don't have banks, the increase in rates is flowing through that line item. For us, it's also true, but less so as we continue to grow the bank because we'll sweep both deposits into the bank. But all that said, Christian, I think that I would prefer not to just wing some numbers at you, and I want to look at the average balance here, okay? The average...

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Christian Bolu, [18]

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Yes. No worries. Just for modeling purposes for us. And then just on the $7 million you mentioned, those benefits from the December hike, I believe you said there were still some left to come in the second quarter. So how much is left from the December hike?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [19]

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Some. I didn't give you a number. Our asset side reprices over time, okay? It doesn't immediately reprice on the asset side. So I think I gave the 10 to 12 basis points. I think I would focus on that right now as what's the impact on the second quarter, and then we'll get a little bit more color. I'm often -- I just tend to be cautious about this because the dynamics around the NII, the dynamics around what the deposit rate pass-through is, there's a number of things here that I think are going to come into a little bit more clarity as we normalize a little bit higher in rate. I would caution all of our shareholders -- I personally believe that the equilibrium interest rate, which is what everyone's trying to get to, a lot of people think it's 3% to 4%. I personally think it's more than half. But I don't know how much further we have to go on this. And I think we'll see some normalization of pass-through rates to clients in the balance sheet.

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Christian Bolu, [20]

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Okay, got it. And then maybe just on the comp ratio, given most of the growth is now coming from your higher margin wealth management businesses, should we expect the full year comp ratio to trend towards the lower end of that 60.5 to 62.5 guidance range?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [21]

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A lot of the growth -- as I've said in the past, a lot of the growth, if you're -- the higher, if you will, margin business is actually in the bank, its net interest income. The -- to answer your question, we changed our guidance from 62 to 64 to 60.5 to 62.5, and we're at the high end of that range right now. So I think it's fair to think that we might -- there's more room to the downside than there is the upside. But so much of this, Christian, is market-dependent. And we want to do -- we want to make sure that in times like this, that we retain the optionality for business improvement. And that means that we're just not -- we don't want to be -- cut comp and cut our business capabilities when I believe that there's still high optionality to business improvement if we get tax reform, if we get infrastructure reform and if we get some of these pro-growth things done in Washington, we're well positioned. Frankly today, the promise is greater than the reality, and we want to maintain that. So our comp ratio, I would think, could come down. But I'm not going to give you guidance to that.

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Christian Bolu, [22]

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Okay. But just to be clear, the guidance range of 60.5 to 62.5 still stands?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [23]

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Yes. Absolutely.

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Christian Bolu, [24]

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Okay. And then, just a longer term, I want to know -- I know we've had this one back and forth here, but ROE target. Just given the integration of your major acquisitions, we've now had 3 rate hikes, you've grown the balance sheet. Just curious how you're thinking of where long-term ROEs ultimately shake out for Stifel?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [25]

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Well, that's a great question, Christian. I think you -- there's 2 numbers -- our tangible ROE is 14, which is very competitive. Our ROE is a little under 10, not where I certainly would want it to be, and there are structural changes that will do that. I will tell you this, in a very broad comment, Christian, and that is that we are -- as a company, we are relatively more levered to the equity market, okay? And the capital raise and the advice on the institutional side and some of our recent deal focused on that, Thomas Weisel Partners, KBW, these were equity-based shops. And as I look at it, the amount of capability that we have in the existing footprint to do a lot more revenue in better market condition will be a big driver to this ROE problem, which I acknowledge. So we'll continue to focus on ROE, but we'll need some -- I'm hoping for some little bit of tailwind from economic growth.

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Christian Bolu, [26]

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Just maybe -- just to follow up on your point about equity. So as we sit here with, I guess, near record high in most indices, above trend on a P basis, I guess what sort of equity backdrop would you want to get those equity businesses firing on all cylinders?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [27]

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I would like to see the uncertainty of potential tax reform taken off the table. I mean -- meaning, what is it going to be? How are we going to do, where is long-term rates going to settle? Are there going to be any border adjustment type thing? A lot of questions now about passthrough rates versus personal rates. All of these things, the uncertainty especially around tax policy, in general, is not conducive to robust markets. That's been my experience in the past. The equity levels, you're right on a PE basis. But you cut the corporate tax rates to where they're talking about, those PE ratios are going to look a little different. So that's right. And we're levered to the equity markets. We like our position. I believe that GDP growth is not going to average less than 1%, which is what it was in the first quarter. And we're going to try to maintain some of the optionality that we have to improving markets.

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Operator [28]

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Your next question comes from the line of Conor Fitzgerald, Goldman Sachs.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [29]

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I just want to -- and I appreciate the color on the deposit rates. But just want to kind of get a little more, dive a little deeper on those comments, where you talked about trying to be competitive on the deposit rate but necessarily the leader. When you think about your deposit rates, who do you consider your peer group that you'll try to match?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [30]

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Well, we're going to keep -- we're going to watch full service investment firms. Much of our client cash is very mobile. It moves in and out of securities, fast, mature, it sits for a while. It's very -- it's not as if we have $19 billion in cash that is sitting there, or $20 billion. It moves around. So our clients aren't with us because they're looking for the highest Internet money market rate, we've never been there. But we'll look at, frankly, the Morgan Stanleys and the Raymond James and the various firms that are similarly situated to us, with clients similar to ours, and we'll be competitive.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [31]

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And then maybe just asking Christian's question on the comp ratio another way, I think you had almost $60 million of revenue growth year-over-year, the majority of which was net interest income and compensation expenses were up almost $30 million year-over-year, so you had a marginal comp ratio approaching 50%. Just wondering is that the fair way to think about the operating leverage from the revenue growth?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [32]

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Fair question. I think that -- I think, as I've said in the past, I think there is leverage potentially in those numbers but also in some of those numbers is us preserving optionality in our businesses.

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Operator [33]

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(Operator Instructions) Your next question comes from the line of Chris Harris with Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [34]

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Another question on the expenses. Noncomp, you guys did better than you thought this quarter. Can you talk a little bit about what drove the small surprise there? And then related to that, you mentioned that you were making progress on some of your cost initiatives. Wondering where you are in the evolution of your kind of expense management focus at this point?

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [35]

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To your second question first, I mean, it's continuous. I don't want to -- don't want to be in a position where we just decide every few years that we're going to do expense look at. We have taken a look at a number of our deals and our infrastructure build and where it resides and how it resides across all disciplines of expense, communication to occupancy to client engagement type things that we're looking to make sure that our expenses are in line with our business expectations. So I think we have focus that's been going on for a while. And we're going to continue to focus on that. It was -- you do see some of the fruits of that this quarter. But I still had our guidance at $151 million to $158 million. So if we missed it on the high side, you'll have to remember at one point we beat it on the low side. But we won't. It's $151 million to $158 million is where we think we are. But I don't want to -- we're not trying to guide that lower is what I'm trying to say.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [36]

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Got you. Okay. And then I guess the other question I have was sort of a bigger picture question on DOL, Ron. There was a view in some circles that this rule was going to lead to some consolidation among wealth managers in order to achieve a little bit better scale. Hoping you can give us your updated thoughts on that, whether you actually think that view is still valid, and whether you guys are sort of assessing any opportunities or if there are really any opportunities that are presenting themselves to you at this point.

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [37]

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Yes. I believe that when some of this comes out and we actually understand, the rule is so complex. And I do not -- I, for one, am not in the camp that the potential for the rule will drive consolidation. I do believe that if the rule is implemented as written, it would become effective June 9th with the full implementation date of 1/1 of '18, that, that rule, to comply with that rule, will require some scale and will require investments, will require incremental dollars and will frankly lead to some increased litigation expense. All of which, you could argue, would tend towards some consolidation. But I think that, that's true. I don't think that, with respect to the rule, if delayed, if not repealed, I think we're going to have to see how that plays out before we start speculating on the consolidating impact of it.

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Operator [38]

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

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Ronald J. Kruszewski, Stifel Financial Corp. - Chairman of the Board, CEO and Director [39]

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Thank you very much, everyone. Thank you. Always appreciate being able to update you, certainly appreciate the questions. We'll try to follow up with the couple that we did not answer on this call. And I look forward to improved economic conditions and talking to you next quarter. So thank you, and good evening.

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Operator [40]

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Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.