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Edited Transcript of SF earnings conference call or presentation 30-Jan-20 1:00pm GMT

Q4 2019 Stifel Financial Corp Earnings Call

St. Louis Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Stifel Financial Corp earnings conference call or presentation Thursday, January 30, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James M. Marischen

Stifel Financial Corp. - CFO

* Joel Michael Jeffrey

Stifel Financial Corp. - SVP of IR

* Ronald James Kruszewski

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

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Conference Call Participants

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* Alexander Blostein

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

* Christopher John Allen

Compass Point Research & Trading, LLC, Research Division - Analyst

* Christopher Meo Harris

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

* Devin Patrick Ryan

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

* Steven Joseph Chubak

Wolfe Research, LLC - Director of Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Stifel Financial Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions)

Mr. Joel Jeffrey, Senior Vice President of Investor Relations for Stifel Financial, you may begin.

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Joel Michael Jeffrey, Stifel Financial Corp. - SVP of IR [2]

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Thank you, operator. I'd like to welcome everyone to Stifel Financial's Fourth Quarter and Full Year 2019 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 future events that may, by their nature, be uncertain and outside of the firm's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm's future results, please see the description of risk factors in the current annual report Form 10-K for the year ended December 2018.

I would also direct you to read the forward-looking disclaimers in our 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 and 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 our website at www.stifel.com.

This audiocast is copyrighted material of Stifel Financial Corp. and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial.

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

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

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Thank you, Joel. Good morning, and thank you for taking the time to listen to our fourth quarter and full year 2019 results. Earlier this morning, we issued an earnings release and posted a slide deck on our website.

Joining me on the call today are co-presidents, Jim Zemlyak and Victor Nesi as well as our CFO, Jim Marischen.

I'm going to run through the highlights of our full year and quarterly results as well as our segment results. Jim will take you through our net interest income, expenses and our balance sheet. I'll then come back with our guidance for 2020 and my concluding thoughts.

So by home of any measure, 2019 was a fantastic year for Stifel, as the combination of the investments we've made into our business and the market environment contributed to our very strong performance. 2019 was a year for the record books, as we achieved the following record annual milestones: Our 24th consecutive year of record revenue, which totaled more than $3.3 billion, up 10%. Please note that we define revenue as gross revenue less interest expense. We achieved non-GAAP earnings per share of $6.10, up 16%. Investment banking revenue totaled $817 million, up 16%. Asset management service fees $848 million, up 5%. Net interest income of $547 million, up 15%; client assets of $330 billion, up 22%; and record fee-based assets of $117 billion, up 30%. Again, all of these metrics are annual records.

Of course, top line records are less meaningful unless they translate into bottom line results. We are a growth-oriented company that also displays expense discipline, and this was illustrated by our pretax margin of nearly 20% in 2019. We also believe in maximizing returns on invested capital, focusing on risk-adjusted returns. As such, I believe it is noteworthy that Stifel's 2019 annual return on tangible equity was 25%.

Our impressive results enabled us to deploy significant amounts of capital through investments in our business as well as share repurchase and dividends. In 2019, we closed 6 acquisitions in addition to the investments we made in our people and technology. We also returned $300 million to common shareholders through the repurchase and net settlement of 4.7 million shares and common stock dividend. Given our investment in the business, a solid market backdrop and the fact that our backlog of both recruiting investment advisers and investment banking is as strong as it has ever been during my tenure as CEO. Therefore, I am optimistic about our outlook for 2020. Reflecting our continued growth and optimism, we are increasing our quarterly stock dividend to $0.17 per share, an increase of 13%.

Before I move on to our quarterly results, I want to take a minute to review the growth of our business since 2015. As you can see from this slide, our record results in 2019 were not a onetime event, as we've shown substantial growth in operating improvement, frankly over 2 decades. But as indicated on this chart, significant growth and improving profitability since 2015. Our revenue increased nearly $1 billion since 2015 primarily driven by a significant increase in wealth management as strategy of growing our bank and recruiting highly productive advisers resulted in an 81% increase in assets on our balance sheet and a more than 85% increase in fee-based assets. The growth of these revenue-generating assets resulted in a more than 70% increase in asset management revenues and a more than 300% increase in net interest income.

The growth in our business is not confined solely to wealth management as revenues in our institutional group have improved since 2015 led by a 70% increase in investment banking. I'd highlight that our focus on expanding our advisory practice was a key factor in this growth, as our advisory revenues have increased by nearly 130%. I'd also note that while our brokerage business has been challenged by regulatory and other structural changes, the investments we've made in fixed income has helped to partially offset the decline in equities.

In addition to the success of our revenue growth strategies, we also focused on expense discipline in generating increased operating leverage. The meaningful improvement of our comp and noncomp ratios resulted in pretax margins increasing from 10% in 2015 to nearly 20%. Additionally, our net income increased by $330 million, earnings per share rose by $4.20, and our return on tangible common equity improved by nearly 1,500 basis points.

Finally, Stifel has completed 12 acquisitions since 2015, and it pays its employees in part with equity. With this level of activity, I believe it's noteworthy that our diluted shares outstanding in 2015 and 2019 are essentially unchanged.

Improvements of this magnitude are nothing short of remarkable, and I would like to take this time to thank all my partners at Stifel for their hard work in successfully executing our growth strategies. I believe that our results last year and over the past 5 years show that Stifel is a growth company. In fact, we continually demonstrate an ability to grow both organically and through acquisitions, while improving our profitability ratios as we have gained market share and improved our operating leverage. This is -- this, again, is illustrated by the fact that over this time frame, we have averaged an annual increase in revenue of 9%, while our non-GAAP EPS growth has averaged 35%.

It is clear that this level of growth is not reflected in our valuation multiples. And while I believe our numbers should speak for themselves, I wanted to address this issue because I'm regularly asked when Stifel's stock price trades at an earnings discount to both the market and our peers. Clearly, I do not believe this should be the case based on our 5-year history, our 2019 results, and maybe most importantly, our future outlook.

Turning to our quarterly results. Our record year was closed out by our best-ever quarter with record results as follows: revenue of $944 million, up 19%; asset management service fees of $224 million, up 7%; and investment banking revenue of $278 million, up 38%. On a non-GAAP basis, net income available to common shareholders of $147 million, up 16%; earnings per share of $1.88, up 20%; pretax margin of 20.5%, which was up 30 basis points quarter-over-quarter and a return on common tangible equity -- I'm sorry, return on common equity of 18% and a return on tangible common equity of 31%. In addition, we repurchased approximately 600,000 shares at an average price of $54.15 of closing on our acquisitions of MainFirst and GMP Capital.

Moving on to our segment results and starting with Global Wealth Management. We posted record revenue for both the year and the quarter. Annual revenue increased 7% to more than $2.1 billion, while quarterly revenue increased 9% to $553 million. I am pleased with the profitability of wealth management as operating contribution totaled $786 million, which was a record, with operating margins of approximately 37%.

We had another strong recruiting quarter as total advisers increased to 2,222 at year-end. For the year, we added 150 advisers with annual production of nearly $119 million and client assets of more than $17 billion, which includes 45 advisers with annual production of $36 million during the fourth quarter of 2019. The success of our recruiting and continued solid market performance resulted in record client assets of $330 billion, including record fee-based assets of $117 billion in the fourth quarter that were up 30% from 2018.

We will also continue to invest in our technology platform as we firmly believe in combining digital and mobile capabilities with trusted human advice. Recognizing the importance of the adviser-client relationship, we are working on advance is aimed to help clients organize and manage their financial affairs, while staying in constant contact with an adviser who is helping deliver a sound goal-based investment strategy. These investments include digitization of client records, improvements in client reporting, mobile banking applications and leading-edge aggregation of client assets, liabilities and net worth. With each advancement mentioned, we aim to help our clients understand their individual situations and see the value of the trusted advice our advisers bring. We know that one-size-fit-all solutions do not best serve client interest. Technology is helping us do better.

Turning to our institutional group. For the year, this group had record revenue of more than $1.2 billion, a 9% increase from our previous record set in 2017 due to record investment banking revenue and a 14% increase in brokerage revenue from 2018. The fourth quarter results were equally impressive with record revenue of $392 million, which increased 37%. We generally examine our institutional revenue through the lens of advisory fixed income and equity. Annual advisory revenue of $448 million increased 21%. This is a business where revenue is typically weighted toward the second half of the year and particularly towards the fourth quarter.

2019 results fit this pattern as we've generated a record $155 million in the fourth quarter, up 40% from 2018, and our fourth quarter accounted for 35% of our full year's advisory revenue. For the year, fixed income revenue totaled $383 million, up 39%. For the quarter, we generated record revenue of $118 million, up 62% year-on-year, driven by a 59% increase in underwriting revenue and a 64% increase in brokerage.

Looking at equities, annual equities revenue came in at $371 million, which was down 7% from 2018. For the quarter, equity revenue of $110 million, increased 9% as underwriting rose 24%, offsetting a 6% decline in brokerage revenue. Quarterly pretax margin of 14.2%, declined 50 basis points from 2018 as a result of a comp ratio that increased to 63.7%. This was primarily due to an elevated international comp ratio as a result of our acquisitions. This was partially offset by an improvement in noncomp ratio to 22.1%, which declined 120 basis points.

Turning to brokerage and asset management service fees. These fees totaled $1.1 billion in 2019 that -- which were up 6% and $290 million in the quarter, a 17% increase from 2018. Wealth management revenue and fees totaled $1.5 billion, up 4% for the year and quarterly revenues of $398 million, which were up 8%. We continue to benefit from strong recruiting activity that is increasing both fee-based and brokerage activity levels. As I've said in the past, we believe that the best analysis of our activity levels in wealth management is represented by the combination of brokerage and asset management revenues, given the trends in the industry.

Our institutional equities revenues of $167 million were down 10% in 2019. Yet, fourth quarter revenues of $46 million were up 12% sequentially. While no one likes declines in annual numbers, I believe that our performance in this challenging regulatory and operating environment is at least in line, but likely superior to our peers' reported results.

Fixed income brokerage of $256 million was up 38% from 2018, and fourth quarter revenues were an impressive $70 million, up 64% from last year. The improvement was a result of the addition of First Empire as well as the growth in our non-CUSIP business as TRACE volumes were essentially flat year-on-year.

I'm especially pleased with our continued growth in investment banking. For the year, our banking revenues were $817 million, up 16%, and fourth quarter revenues were $277 million, up nearly 40% from 2018. Over the past several years, we have built our capabilities through the addition of talented individuals, coupled with strategic acquisitions. In turn, we have become more relevant to clients as the size and complexities of our mandates has increased. As we successfully execute these transactions, our expertise becomes recognized, leading to more mandates. In short, the definition of a virtuous circle.

In particular, our investments were a primary driver of our 21% increase in advisory revenue to $448 million. As for our long-term growth of advisory, these revenues have grown 130% since 2015. This year saw strong contributions from a number of verticals. Some notable transactions include: In the technology space, we advised on the sale of Electro Scientific Industries to MKS; and in restructuring, we advised the COFINA Puerto Rican Senior Bondholder Coalition.

Looking at financials, we advised on 3 of the most notable merger of equals: Chemical Financial and TCF Financial; IBERIABANK and First Horizon; and Independent Bank and Texas Capital. KBW, in particular, had a strongest year as they advised on 10 of the top 15 bank deals in the year. Additionally, KBW's backlog at the end of the year was nearly double that at the end of 2018. And our pipelines for the remainder of our advisory business are also significantly above their year-ago level.

Fourth quarter advisory revenue of $155 million increased nearly 40% as our strongest results came from the financials, technology and industrial verticals as well as strong performance from Eaton Partners and our new colleagues from Mooreland Partners and B&F Capital Markets.

Debt underwriting revenues of $138 million, increased 37% in 2019, and quarterly revenue of $51 million, was up 53% from 2018. As this business is primarily public finance, we benefited from the improvement in municipal issuance volumes during the year, in particular during the quarter, in addition to the benefit we got from our recent acquisition of George K. Baum. Our public finance business continues to rank #1 nationally, and the number of senior-managed negotiated new issues was roughly a 14% market share during the fourth quarter of 2019.

Equity capital-raising revenue of $231 million, declined modestly from 2018 levels. Despite the slight decline, I am pleased with these results as the number of equity offerings industry-wide declined 8% in 2019 as the market was negatively impacted by the government shutdown in the first quarter. During the year, we had strong contributions from our real estate, technology, health care and financial verticals, notably, KBW ranked #1 in bank IPO.

Lastly, for the full year, I'd be remiss if I didn't mention our success in London, as Stifel ranked #2 in terms of investment banks by the volume of U.K. deals in 2019. Our quarterly equity underwriting revenue of $71 million was up 25% from '18 as we had a very strong quarter from financials as well as strong performance from our real estate and health care verticals. I would highlight our real estate practice, in particular, as this was driven by our successful 144A offering for Net Street. With the closing of this deal and 2 more 144A offerings in the first quarter of 2020, we have now raised over $1 billion to 144A offerings.

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

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

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Thanks, Ron, and good morning, everyone.

On this slide, we examine our net interest income of $136 million, which was similar to prior quarter levels and just above the midpoint of our guidance. Our firm-wide net interest margin increased to 274 basis points primarily as a result of the increase of Stifel Bank's net interest margin to 319 basis points, which was at the high end of our guidance. The improvement was due to our ability to remix our assets and liabilities that more than offset the impact of the October rate cut as well as relatively flat average interest-earning asset levels.

Moving on to the next slide. In terms of Stifel Bancorp, total assets were $16.9 billion, a sequential increase of approximately $500 million, as loan growth towards the end of the year led by a nearly $300 million increase in residential mortgage lending as well as an increase of $100 million in both C&I and securities-based loans. Total investments decreased by 3% sequentially to $6.1 billion due to declines in asset-backed and mortgage-backed securities. Client cash balances increased by nearly $600 million sequentially to $14.8 billion, as we continue to benefit from strong FA recruiting and additional deposit gathering initiatives at Stifel Bank. While the absolute level of client cash increased, it declined to 4.5% of total client assets due to continued strength in equity markets.

Our provision for loan loss was $4.4 million, which was primarily a result of new loan originations. The allowance for loan loss, as a percentage of loans, decreased to 98 basis points. Overall, our credit metrics remained solid as the nonperforming asset ratio was 9 basis points, which was down modestly on a sequential basis due to the sale of an OREO property. We continue to see strong asset quality metrics that compare favorably to the overall market.

Moving on to the next slide. We generated a pretax margin of 20.5% that was up 30 basis points from the prior quarter. The sequential improvement was the result of a 50 basis-point decrease in our noncomp ratio that was partially offset by a slight increase in our comp ratio, which came in at 58.3% in the fourth quarter and for the full year. This was above our guidance of 58% as growth in our institutional revenues and the impact of our acquisitions led to higher-than-expected compensation costs in our institutional segment that drove the higher firm-wide comp ratio.

Non-GAAP operating expenses, excluding the loan loss provision and expenses related to investment banking transactions, totaled approximately $180 million and were $5 million above our guidance. The higher-than-expected expenses were the result of a combination of factors tied to the very strong revenue results in the quarter as well as small increases in the number of expense line items.

In terms of our share count, our average fully diluted share count was down by more than 300,000 shares as a result of our share repurchase activity that was partially offset by the improvement in our share price. While we've not been in the market so far in the first quarter, we anticipate repurchasing at least 800,000 shares during the first quarter. Assuming no additional share repurchases to those anticipated and a constant share price, we expect our fully diluted average share count in the first quarter to be approximately 77.5 million shares.

Moving on to the balance sheet. Total assets increased sequentially to $24.6 billion. Total consolidated average interest-earning assets were $19.8 billion, which were down roughly $100 million sequentially due to lower corporate cash, trading securities and other investment balances, as average loan balances increased nearly $500 million during the quarter and as we reduced our securities portfolio by more than $200 million.

Average yields on our loan portfolio decreased by 21 basis points and our investment portfolio yield decreased by 27 basis points as both were negatively impacted by lower LIBOR rates. The average yield on our liabilities decreased by 28 basis points sequentially due to the impact of the cut in fed funds as our deposit beta on the October rate cut was roughly 60%. Additionally, we continued our liability optimization strategy by replacing higher-yielding CDs with lower-yielding sweep deposits.

While we closed 2 acquisitions and continued our share repurchase program, the strong earnings performance during the quarter resulted in an essentially flat Tier 1 leverage ratio of 10%. Our Tier 1 risk-based capital ratio declined to 17.6% as a result of the acquisitions closed during the quarter and associated goodwill and due to the growth in our loan portfolio. Book value per share of $48.37 increased by $2.03 as a result of the aforementioned strong earnings growth and acquisitions, partially offset by repurchase activity.

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

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Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [5]

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Thanks, Jim. So as you can see from this next slide, our 2019 results came in at the high end of the guidance that we provided last year at this time. Frankly, as our fee-based revenue and net interest income have increased, in both absolute and relative terms, our ability to forecast revenue has improved. In 2019, we continue to execute our growth strategy as we augmented our organic growth with acquisitions, which led to revenue of more than $3.3 billion, a 10% increase that was at the top of our guidance.

For 2020, we are guiding to a revenue range of $3.5 billion to $3.7 billion, which would represent an increase of $200 million to $400 million or 6% to 12%. How will we achieve this? Given the market conditions -- the current market conditions, we anticipate continued revenue growth in our Global Wealth Management and Institutional Group segments. Wealth management growth will be driven by continued growth in fee-based assets and from improvements in the markets as well as continued strength in recruiting and a resumption of growth at Stifel Bank.

Our net interest income growth expectations are based on a $2 billion to $3 billion -- on $2 billion to $3 billion of growth in interest-earning assets and bank net interest margin of 310 to 320 basis points. We expect our institutional business to benefit from continued strength in investment banking and fixed income brokerage. Our deal pipelines are very strong, and we also expect to see incremental revenue benefits from acquisitions we made during 2019. As you can see on this slide, we had generated an additional $84 million in revenues from these transactions in 2019. And in 2020, we anticipate an incremental $120 million to $135 million from these deals.

We are guiding to a compensation ratio of between 57% and 59%, which is the same as last year's range as the benefits from growth in net interest income will be offset by the investments we'll make in our business. Given that our comp ratio came in at the low end of our range last year at 20.1%, we are now guiding to a range of 19% to 21% in 2020. We are maintaining our tax rate guidance of 25% to 27%.

Our full year tax rate for 2019 came in at the low end of the range due to a lower tax rate in the fourth quarter, which was related to tax benefits from our equity-based comp and an acquisition that we made in Canada. So based on our guidance, you can see that I am optimistic about 2020. While the market environment is not without risk, we believe, even in the low -- even the low end of our revenue forecast, that we will have another year of record revenue as the investments we've made continue to generate incremental benefits.

With that said, those of you who follow Stifel for any period of time know that our business typically is more back-half weighted as seasonality typically impacts businesses, such as investment banking and institutional brokerage, especially in the first quarter of any new year. However, the increased contribution from our asset management and net interest income revenues continue to provide offset to typical seasonality. So as I look at the first quarter, I'd note that our first quarter asset management revenue will benefit from the more than 8% increase in fee-based assets during the fourth quarter.

In terms of net interest income, we would expect average interest-earning bank assets to increase sequentially as much of our growth in assets occurred late in the fourth quarter, and we expect to continue to grow our loan and securities portfolio in 2020.

In terms of net interest margin, we're maintaining our guidance from last quarter of 310 to 320 basis points. Based on this guidance, we would expect net interest income to be in the range of $135 million to $145 million.

In terms of expenses, we'd expect the ranges we gave for the full year to be applicable to the first quarter as well. That said, given typical seasonality, we would expect our comp ratio to come in at the higher end of our annual range in the first quarter.

So in conclusion, I am obviously pleased with our record results as they validate the strategic investments we've made over the past several years. Additionally, as you can see from our 2020 guidance, I remain optimistic about our future as our strategy of building a diversified financial services franchise continues to consistently generate strong performance despite ever-changing market conditions.

In 2020, our business will continue to generate significant levels of excess capital, and we will deploy our capital with a focus on growth and, as always, the best risk-adjusted returns. We would anticipate again generating in excess of $500 million of capital this year. Our recent history illustrates our flexibility in deploying capital. In 2018, we saw the best returns in bank growth, share repurchases and dividend growth. In 2019, we reduced the size of our bank and focused our capital deployment on acquisitions, share repurchase -- repurchases and dividends. While we continue to focus on maintaining flexibility and being opportunistic with our capital, we would anticipate 2020's capital deployment to focus more on bank growth than acquisitions. Additionally, we will continue to repurchase shares. And as I noted earlier, we have again increased our quarterly dividend on our common shares.

The bottom line is that Stifel has been and continues to be a growth company, and the substantial excess capital that we generate will continue to be put to use where we see the best risk-adjusted return.

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 on the line of Alex Blostein of Goldman Sachs.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [2]

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So maybe we'll just start with unpacking some of the guidance. Thanks for the NIR, NII color, $2 billion to $3 billion growth in assets, 310 to 320 NIM at the bank. Maybe talk a little bit about the rate assumptions that you guys have baked into this guidance for 2020 sources of the $2 billion to $3 billion of incremental asset growth that you anticipate at the bank, and how much capital you expect that growth to consume for the company overall?

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

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The first assumption is that we are assuming no changes in Fed policy or rates for purposes of doing this guidance, Alex. And I mean the capital requirements of that are 7% to 8% of the incremental asset growth. So that you can understand where some of our excess capital would go if we pursue the strategy of growing the bank.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [4]

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Right. And just in terms of the sources -- funding sources where you guys expect it to come, is that all essentially sweep from brokerage on the global wealth side that's going to come into that or something else?

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James M. Marischen, Stifel Financial Corp. - CFO [5]

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Yes. So this is Jim. It would be a mixture of both the sweep deposit and some of the other deposit initiatives that we have been working through really over the past year. So combination of both.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [6]

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Great. Second question around just the operating leverage in the business. Obviously, good margins for you guys this year. But I guess if I go through the guidance, the pretax margin implied in your 2020 is around 20%, which is, call it, flattish with what you guys have done this year despite the fact that NIR is forecasted to grow at 10%, and your fee businesses are growing quite nicely as well. So I guess why would we see better operating leverage, if your revenue assumptions are correct? And is there a wiggle room I guess in those numbers?

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Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [7]

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I've said over the years, Alex, that I feel that 20% margins are a place that are good margins in good markets. And we take -- we continue -- we will continue to make investments in people and in products and in things that we do. And so we reinvest profits, and we anticipate continuing to do so. I mean if we stood still and didn't do any of that, then I do think we'd have a margin expansion for sure. But we continue to want to add capabilities, which usually means adding people, different product lines, different verticals as we continue to grow Stifel. So net-net, we see stability in our margins, which are pretty good at 20%.

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James M. Marischen, Stifel Financial Corp. - CFO [8]

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Another thing to think about there is if we were resuming growth in the bank of $2 billion to $3 billion, just the normal provision of growing the loan portfolio is going to add to noncomp OpEx, where that was a relatively nominal number in 2019.

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Operator [9]

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And our next question comes from the line of Steven Chubak of Wolfe Research.

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

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So Ron, I just wanted to try and understand or unpacks what you spoke of in terms of capital management priorities. I think everyone on the call recognizes the attractiveness of growing the bank. You also started off the call talking about the fact that despite the really strong revenue growth you've produced over the last 5 years, you're not really getting credit for that in the valuation. And I'm just wondering why not lean in, in terms of share repurchase and focus more of the excess capital generation, the $500 million plus, on buyback in lieu of growing the bank, just given the attractiveness of the returns and where your shares are currently trading?

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

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It's always a question of capital allocation, Steven. And when we look at this, we always balance the returns that we can get buying our stock, growing the bank or making acquisitions. And they're all -- they all can be attractive. I personally believe, and I've said this a long time that given our choice, if we've gone back 5 years ago and just had been buying back our stock, I do not believe that we would be where we are today as a company. Buying back stock is not a growth strategy, per se, and building the bank and adding people is a growth strategy. So we're a growth company, and we're not as focused on buying back our stock. That said, our stock hits a certain level, we're buying it back, and we will be buying it back. But as a primary strategy, no, that's not the way we're thinking.

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

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Got it. And in terms of the excess capital that you're generating and how that's going to be deployed, one of the things that you did note, Jim, was the fact that the total capital ratio has been contracting. I know that in the past, you've alluded to a 10% Tier 1 leverage, 20% total capital target, so all of those have been admittedly moving targets. How should we think about how you're managing to those targets going forward? Are you going to look to build back to 20%? Or do you feel comfortable with where you're currently operating, and maybe even look to reduce those targets further?

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

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I would say that you're probably going to see a little bit of a build in the Tier 1 risk-based capital ratio in that 19% to 18% range as we look out over this year based on kind of what we're seeing from a balance sheet growth perspective. I will say, though, you do see some compression between the risk-based ratio and the Tier 1 leverage ratio as we continue to build the loan portfolio and kind of grow the overall balance sheet.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [14]

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And any explicit targets that you guys might look to manage to? Or how we should think about it just as we start to build out the model?

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

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I would say they've been relatively consistent over the past 2 years, and I'd say they could continue along those lines.

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

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Yes. They -- one often plays against the other. But as Jim said, 10% leverage, 18% to 19%, we can be below 17.5% to 19% on risk-based is within a range that you can model with it.

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Operator [17]

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And our next question comes from the line of Chris Allen of Compass Point.

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Christopher John Allen, Compass Point Research & Trading, LLC, Research Division - Analyst [18]

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I wanted to again dig into the guidance a little bit. You talked about market improvements helping the guy in FA recruiting. What kind of market assumptions are you building in? And on the recruiting front, what's the competitive environment right now for recruiting? Where the -- where is the opportunity set?

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Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [19]

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Well, with your first question, our market assumptions is not to have a recession in the year. We're not -- we think the equity markets in terms of our modeling is single digits. And so not a tremendous increase in equity valuations. Obviously, that drives asset management. So in terms of assumptions, that is just modest increases in equity valuations, continued activity in our bank and a relatively -- gently uptick in our overall economic activity this year for -- as to our economic backdrop and forecast.

Recruiting. Recruiting is a tough competitive business, and it has been for as long as I can remember being in this business, and it's just as tough today as ever. The difference is that we -- what we've done and are -- as we've grown the company and grown the products and invested in technology, we're just winning a lot of recruiting, whatever you want to call them. But a lot of people coming in the door as much as I've ever seen. And importantly, a lot of enthusiasm for the model that we're putting on the table, which is adviser-centric. We continue to talk about the importance of advisers and that they're centric to our model, and that's resonating. And we're doing well on the recruiting front. And I expect that to continue.

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Christopher John Allen, Compass Point Research & Trading, LLC, Research Division - Analyst [20]

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And just a quick one. In the institutional segment, you noted pressure in the European -- from Europe on the comp ratio, assuming some of that -- some of the recent deals. Any color on what it would have looked like adjusting for that in a maybe a more normal environment? And what was the revenue contribution during the quarter from those -- the European segment from the deals?

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Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [21]

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We haven't -- we don't disclose the revenue, at least we haven't. So I'm reluctant to do that on this call. I mean I can look at doing that for you. What I would say is that as we've looked at building out our practice, both in Europe and now in Canada, like every deal that we've done over the past, those businesses' margins are below what we're doing in the domestic market, certainly on a consolidated basis. But also our institutional business' margins are compressed by the investments that we're making in Europe. And again, it goes to an earlier question, which said if we weren't making investments, our margins would be expanding. But we believe the investments that we're making in the markets in Europe, in particular, are going to pay dividends.

It was a very, very tough year with all the Brexit chatter and speculation that went on. It was a very difficult year. But we've got a nice business over there. I said, if you look at our U.K. rankings, from nonexistent to #2, in the way we measured it against a very difficult market, we're optimistic about what we're doing over there. That said, right now, it's to drive our margins as most of our investments initially start out to be. So if anything, I believe that international will lead to overall margin expansion as those investments begin to pay dividends.

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Operator [22]

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And our next question comes from the line of Devin Ryan at JMP Securities.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [23]

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Just to come back on the recruiting and some of the inputs. So great year in 2019, and good to hear that the outlook there is still very good. If we were to just roll forward a view that you're going to have a strong couple of years here for recruiting moving forward, does that have an uplift on the comp ratio? Or is it another way to get near-term downward pressure on margins? Because it seems like you're absorbing it very well at the moment. And I know sometimes there could be step functions as you increase the infrastructure or a few years of investment compound. So I'm just trying to think about if the view is, on a forward basis, you're going to look more like 2019 for adviser recruiting, what are the puts and takes on the margins?

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Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [24]

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It's a great question, Devin. And in general, I'm going to give you a general comment, I've looked at this. But what -- the recruiting that we're doing today is replacing the roll-off of some significant recruiting we did 10 years ago. If you remember, we added some 400 people 10 years ago. We went from 700 people to 1,100 people during that big recruiting push that we had back then. And as those sort of roll-off, they're replaced by new ones. And net-net, I would not see pressure on margins just because of the -- there's some roll-off as well. So that's the easiest way to try to tell you. We've been recruiting a lot for a long number of years.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [25]

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Yes. Okay. And maybe just a quick one for Jim. The ROA on fee-based assets has been coming down in private client, and I know there's a little bit of noise last quarter to push it down. So if we look at this quarter and the ROA there, is that decline a function of just the inputs as the mix, this shifting as the market -- the higher equity markets pushed certain buckets higher? Or are there other pricing implications there? I'm just trying to think about kind of some of the moving parts, and effectively, just how we should think about modeling that?

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

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Yes, a lot of that is mix of product within that group. We saw an influx of a lot of fixed income and short fixed income-type product, which carries lower rates. I think specific to that that was driving that down somewhat. I think on a go-forward basis, it's going to be in that range or kind of that 83.5, 86 basis point range is kind of what we're anticipating. But some of that, again, will be driven by the allocation and mix of products.

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Operator [27]

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And our next question comes from the line of Chris Harris from Wells Fargo.

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

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First question on net interest margin. Really good result for 2019, and you talked about the benefit from the remixing of assets and liabilities. Is there more opportunity to do incremental remixing as we think about 2020 and beyond?

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James M. Marischen, Stifel Financial Corp. - CFO [29]

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Yes is the short answer there. There's still around $500 million of CDs on our balance sheet today. And so that's an opportunity to remix on the liability side. Then on the asset side, when you look at the bond portfolio, it was about $6 billion. In total, about $2 billion of that is outside the CLO portfolio. So you have about $2 billion there that you could remix into higher-yielding loan products.

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Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [30]

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That's baked into our NIM guidance of 310 to 320. I mean that's why we're able to maintain that where you're seeing a number of other institutions, in general, lowering their NIM.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [31]

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That's true. Okay. I know this isn't part of your forecast, but any thoughts on what the impact would be if we were to see another 25 basis point reduction in Fed funds rate. You talked about 60% deposit beta. I imagine it would be potentially lower for the next one. But any color you can share there would be great.

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James M. Marischen, Stifel Financial Corp. - CFO [32]

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Yes. Kind of based on where we're at today, and you can -- I mean our -- the pricing is out there. It's publicly available. There's not going to be much left in terms of reducing the cost of funds. So you are going to see the deposit beta adjust accordingly.

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Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [33]

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That means it would be a slight negative.

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Operator [34]

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At this time, I turn the call back to the presenter for any closing remarks they might like to share.

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Ronald James Kruszewski, Stifel Financial Corp. - Co-Chairman of the Board & CEO [35]

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Well, as we close out 2019, it was a very good year. In fact, one for the record books. I want to close by, again, thanking my partners at Stifel for their dedication and certainly efforts. So we have a great group of people here. I want to thank our shareholders for their continued investment and confidence in Stifel, and we look forward to continuing to build the premier diversified financial services, wealth management, investment banking firm and look forward to reporting to you in the first quarter of 2020. Have a good day, everyone, and thank you.

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Operator [36]

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And this concludes today's conference call. You may now disconnect.