Stifel Financial Corp (SF) 2011 Q1 法說會逐字稿

Good afternoon. My name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to the first-quarter earnings 2011 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mister Jim Zemlyak, Chief Financial Officer, you may begin your conference.

Thank you, Melissa. Good afternoon, everyone. This is Jim Zemlyak, the CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss the first-quarter 2011 results. Please note that this conference call is being recorded. If you would like a copy of today's presentation you may download slides from www.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 1995. These statements are not statements of fact or guarantees of performance. They are subject 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 use certain non-GAAP measures of the financial performance and liquidity. These non-GAAP measures should only be considered together with the Company's GAAP results.

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 of results from the Company's Quarterly Reports on Form 10-Q.

With that, I would like to turn the call over to the Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Thanks, Jim. Good afternoon, everyone. As is our tradition, I'll start with my quote from the press release. I will assume that everyone has our slides. As Jim mentioned they are on www.Stifel.com, but I will be addressing my comments to our slide presentation on the earnings.

So, following our record fourth-quarter results, the first quarter of 2011 proved to be our second best quarter in terms of net revenues, net income and diluted earnings per share. We achieved our pretax margin goal of 15% on a non-GAAP basis. These results highlight our Company's continued ability to capitalize on opportunities in serving both our growing private client base and middle market companies.

Consistent with industry trends, our investment banking results in the quarter were separately lower, primarily impacted by a decline in advisory and municipal underwriting activity, particularly when compared to our record fourth-quarter revenues. However, our pipeline remained promising with a significant weighting in the technology sector.

Turning to our financial results, if you look at the table here where we show the three months both for 3/31 compared to the prior year and the sequential quarter. And again I would like to reiterate that this quarter was our second best in terms of revenue, net income and EPS. However, two factors contributed to our results being lower than Street estimates, the first of which is our comp to revenue ratio which was at the higher end of what we've stated for 2011. I think last year, last quarter I talked about that our comp to revenue would be 62% to 63%. This quarter it came in at 63%, a little over 63%.

But this ratio was lower than our historical first quarter. If you look at historically for a lot of reasons, including the impact of payroll taxes and a number of things we do, the first quarter is historically our highest comp to revenue quarter for the year.

The second factor that impacted our results was lighter investment banking compared to the Street estimate, primarily in advisory and municipal activity. I'll address more of that shortly.

For the quarter, we achieved net revenues of $367 million, which was an 18% increase over the first quarter of 2010. Our Global Wealth Management grew, posted record quarterly net revenues of $238 million, up 20% from the first quarter of 2010. Our Institutional Group posted net revenues of $127 million, which was up 12% over the first quarter of 2010. If you exclude the merger-related charges that we've talked about relating to the Thomas Weisel merger, non-GAAP net income was approximately $33 million or $0.52 per diluted share compared to net income of $24 million or $0.45 per diluted share for the first quarter of 2010.

On a GAAP basis, our net income was approximately $31 million or $0.50 per diluted share. Non-GAAP pretax margins were 15% compared to 13% for the first quarter of 2010. If you look at our source of revenues, our revenue growth was primarily attributable to the following and I will compare this in the first quarter of 2010.

Commission revenues increased 48% as a result of increased client assets and higher productivity, which was offset by principal transactions. I'll discuss that as I did last quarter, I'll discuss the reasons that those appear one, significantly increased while the other is decreased on the next slide.

Asset management service fees increased 40% as a result of an increase in assets under management through both market performance, net inflows also and the merger with TWPG. And equity capital-raising revenues increased 20% over the prior year first quarter as a result of equity capital market conditions and the merger with TWPG.

The increase in revenue was offset by a decline in fixed income institutional brokerage revenues, which was negatively impacted by challenging market conditions especially as compared to the first quarter of 2010. Although as I will again comment in a while I am pleased that our fixed income revenues were up sequentially from the fourth quarter.

If you look at principal transaction revenues, our principal transactions are down for the current quarter compared to the first quarter of 2010, but as I discussed on last quarter's call as a result of regulatory changes primarily relating to reg show, certain equity trades that historically were recorded as principal transactions are now being recorded as commission revenues. Therefore the comparison represented for principal transactions is really apples to apples, if you will 3/31 compared to the prior quarter of 12/31, but you have this geography difference as it relates to last year's comparison.

I would now like to provide some details on our investment banking revenues and outlooks. Total investment banking revenues increased 21% from the first quarter of 2010 to $41.4 million due to an increase in equity financing also due to contributions from the legacy Thomas Weisel team who were integrated into our platform in July of last year and, therefore, were not represented in our first-quarter revenues of last year.

As I mentioned on our fourth-quarter call, I caution against annualizing our record investment banking revenues in that quarter and, again, I'll caution you against annualizing our first-quarter revenues but for different reasons. I felt that the fourth quarter was extraordinarily strong and I do not feel that the first quarter also adequately represents our ability and our activity to generate these revenues something in between those.

So you can, as I said do not annualize either the fourth quarter or the first quarter and I won't answer any questions as to what you should annualize when I get to that point.

You know, as I said, our goal is to build an investment bank that has the capabilities of generating consistently strong results and realizing our full potential will take some time without -- it will be difficult to take all the lumpiness out of our investment banking. Our investment banking revenue compared to our record fourth quarter represents a decline across all products. The largest sequential decline was in advisory revenues which were down over 75%.

The 4th quarter, as I talked about then, was a tough comparison given that approximately 50% of our advisory revenues were generated from three significant transactions. I'd like to remind everyone that the advisory business is lumpy and results are inherently inconsistent from quarter to quarter.

However our pipeline of mandated transactions continues to build and we are competing for more exclusive sell- and buyside assignments that are larger in nature, but, frankly, that are also more competitive. From where we stand in the second quarter, our advisory activity has picked up from the levels in the first quarter. And I would like to point out also that the municipal market was challenged, very challenging as evident by our muni result showing a 51% sequential decline from the fourth quarter which was generally consistent with the industry. The muni business continued to be challenging this quarter.

In our equity business, our pipeline is promising in terms of both publicly filed transactions and those we have won mandate time and given that the market will hold, I am particularly encouraged by our IPO pipeline, which has increased since the beginning of the year. Mostly IPO activities represent in the technology sector, but we were also seen activity within financial institutions and industrial.

As part of our strategy, we are working toward enhancing our lead manager position, and we have made progress. As a frame of reference, of the 36 IPOs we completed on a pro forma basis in 2010, we book managed 11%. Today our pipeline of files and mandated book-managed IPLs, book-managed, has increased to 24%.

So overall I am optimistic about our ability to win mandates and build the Institutional segment of our business.

Turning to non-interest expenses, in total non-interest for the quarter, compensation and benefits were $231 million which was up 12%, increase in costs and benefits was primarily just due frankly to an increased revenue production. Excluding merger-related expenses in the first quarter of 2011, comp and benefits was 63% to net revenues as compared to 66% in the first quarter of 2010. Transition pay, which consists of amortization of upfront notes, signing bonuses and retention awards, as a percentage of net revenues were 5% compared to 6% in the first quarter of 2010.

Non-comp operating expenses, excluding approximately $2.7 million in merger-related expenses, was $82.1 million for the first quarter in 2011 which compares to our estimate of $82 million to $84 million per quarter that we talked about on our last call. The increase in non-compensation operating expenses over a year ago is primarily due to the increase primarily increased variable expenses associated with revenue growth, increases in rent, and increase with expenses due to the merger with TWPG.

Excluding the merger-related expenses non-comp operating expenses as a percentage of net revenues was 22% compared to 21%. That is somewhat a nagging number and I have said many times on this call that I don't --. I think operating expenses should be closer to 20%, but in many ways that ratio is driven by the fact of our revenue shortfall, primarily in our advisory business. The effective income tax rate for the quarter was 38%.

If you look at merger-related expenses just for the past couple of quarters, we are updating you on our progress on this. Our estimate of merger-related expenses has taken longer due to the fact of terminating contracts and realizing the benefit and, frankly, being able to book the accounting expense.

Therefore we had estimated for the third -- for the first quarter about $5 million, which we just didn't get everything done and so a little bit of that is going to fall into the second quarter approximately $3 million in, I guess, what we didn't get done in the first quarter. I do promise that I won't talk about these things in the third quarter of 2011 except potentially we hope to get this done. As I said on the last call, we expect to incur an additional $8 million to $10 million non-cash charge in occupancy, primarily related as we do -- to our New York office space as we become more efficient in that marketplace.

If you look at segments, we realized revenue growth in both of our operating segments from the first quarter of 2010, those segments being Global Wealth Management and our Institutional Group. Our Global Wealth Management segment contributed 75% of our contribution margin for our institutional growth, contributing 24%, but in a more favorable environment, I expect that to be more in the 60-40 range and in fact last quarter it was closer to 50-50.

Looking at Global Wealth Management, I'm on slide 11 for those of you following along, I am pleased with the contribution from our Global Wealth Management segment. For the quarter, for the March quarter of 2011, this segment generated pretax operating income of $61.5 million, up almost 57% from the $39 million of the prior first quarter in 2010. Net revenues for the quarter were $238 million compared to about $199 million. That is almost a 20% increase in revenue.

So this business has and continues to do well. The increase in net revenues over 2010 are primarily attributable to higher commission revenues as a result of increased client assets and higher productivity, growth in asset management and service fees and increased equity underwriting sales credits [running] to our private client group.

Our Global Wealth Management segment does consist of our branch system which we call our private client group and Stifel Bank. Our private client group reported record net revenues up 21% compared to the first quarter of 2010, while Stifel Bank had revenues of about $9 million.

If you turn to next to our -- sorry, to the bank. As I said Stifel Bank and Trust is an operating unit of Global Wealth Management. Net interest income or interest income increased 39% from the first quarter of 2011, which is a result of an increase in interest earning assets. Interest expense increased $3.8 million from the first quarter of 2010 and that is a result of --. I'm going to be a little technical. We reclassed interest expense associated with our cash flow hedges to other operating expenses. So it's sort of a geography thing.

And we also had an increase in deposits at Stifel Bank. As I said our strategy in the bank is to maintain very good credit quality and minimize interest-rate risk. So, we do have cash hedges in the bank.

Looking at asset quality, we continues to maintain solid ratios with nonperforming loans, as a percentage of growth loans at 0.19% and nonperforming assets to total assets of 0.12%. Those are fantastic asset quality ratios.

In the last 12 months, we've had net recoveries. Stifel Bank continued to facilitate our Private client business, assets continued to grow, they stand at $1.8 billion of which $1.6 billion are interest-earning assets, a 68% increase over the prior quarter in 2010. And our strategy at the bank remains so we will look at increasing our credit risk profile with a corresponding increase in net interest margin after allowance for losses. But we will do all of this on a prudent risk-adjusted basis.

Turning to our Institutional Group for the quarter ending this quarter, this group generated pretax operating income of $21.4 million which was down slightly for the first quarter of 2010 and down almost 50% sequentially.

Net revenues were $127 million, which was up slightly -- well up from $113 million in the first quarter of 2010. The growth in revenue over the comparable quarter was driven primarily by an increase in equity commissions and to lesser extent equity capital-raising, again relating to our merger with TWPG.

The increase in this activity was offset by a decline as again compared to the first quarter and fixed income institutional brokerage revenues which I will talk to.

If you look at the detail on the next slide of Institutional Growth, our institutional group revenues, the institutional brokerage or our flow revenues were $90.7 million which was up 9% compared to the first quarter of 2010. And that was the result of improved equity sales and trading activity offset by lower fixed income.

As you will see, our equity institutional brokerage revenues were $52.4 million which was up 36% compared to the first quarter of 2010 and up 13% compared to the fourth quarter. From what I've seen on the street and what I've seen on trading volumes and a number of ways that I look at it, you know, a lot of this business has been flat to down. So increases of 36% year over year and 13% sequentially tells me that we are gaining traction in both our integration efforts of Thomas Weisel Partners and our -- just gaining market share in our business, which is primarily driven by research.

I think investment banking side, investment banking revenues within the Institutional Group were $35 million, which was up 21% from the prior first quarter. Equity capital raising revenues were $23 million, up 63% compared to the first quarter, fixed income capital raising revenues were down 50%. Advisory fees were $8.4 million, which were down about 1%.

But again, I think a lot of people might be looking at the sequential where our advisory fees were down 78% on the equity side and 76% on the fixed income side. So that's a lot of the variance in our revenue estimates.

Looking at financial conditions, I'm on 16, we chart our capital structure. We have a strong balance sheet. Today it's $4.5 billion of total assets with $1.4 billion in total capitalization, resulting in book value per share, split adjusted of $24.35. We continue to manage our business utilizing a low leverage model.

If you look at our capital structure, you can again see the equity of about $1.3 billion. We have our $82 million in trust preferred. We are very well capitalized. Our bank is levered about 11 to 1 while our broker dealers lever 2 to 1.

In looking forward, I believe we need to examine strategies which we're doing to increase the leverage of our Company and as a result, a return on equity again will execute this plan on a prudent risk-adjusted basis. If you look at our Level 3 assets, which consists primarily of auction rate securities, those have decreased primarily as a result of issue or redemption.

Level 3 assets at the bank consists of a municipal holding that was sold in April 2011, trading securities of Level 3 assets consists primarily of Airplane Trusts of about $7.5 million which we sold in April 2011, and other investments which we classify as Level 3 to about $31 million is -- consists primarily held in our TWPG subsidiaries.

Turning to other financial data, financial advisor growth remains relatively muted due to the very competitive environment where we chose -- where we choose not to be aggressive. I see that environment beginning to change. I see our ability to add more than we've had over the last year to year and a half, I actually see that improving. But again we are not going to grow just for growth's sake. We will continue to seek opportunities to recruit top-notch advisors. We just -- we did just recently open an office in Irvine, California, which sort of underscores the strategy.

Our total client assets increased 21% to $115 billion. So in summary, I am optimistic about our prospects, our ability to grow our Global Wealth Management and Institutional Group businesses.

And with that, Operator, I will turn it over to questions.

(Operator Instructions). Devin Ryan from Sandler O'Neill.

I just want to make sure I'm understanding the principal transactions correctly. So in Institutional, it looked like they were just $1 million higher this quarter than last quarter's spike. I think last quarter you had about $10 million in trading losses. So just wanted to get a sense of if there were any trading losses this quarter or if it was just a function of lower volumes?

I think -- I don't think that we had $10 million of trading losses and you are going to tax my memory, Devin, but I think the variance was $10 million as I remember. And I am having Neal check the numbers as we speak.

But, no, I think that our trading is lower compared to last year. We don't disclose those numbers, but it is lower than last year, but we didn't have losses. We just had a $10 million variance from the prior year fourth quarter when the markets and credit spreads and overall spreads were generally much more conducive to the fixed income business. I mean, not only the fixed income business to slow business down, but the spreads are much different today than they were a year ago.

But overall, the main reason I think that when you look at this and going forward, as you adjust the way you look at our business, I think you should look at the fourth quarter and the first quarter with respect to principal transactions and the commission line items from the fourth quarter and the first quarter not looking at comparison. We'll have this sort of odd year-over-year comparison for two more quarters, the second and third quarter. And again that's geography primarily on the equity side.

Right, yes, I get that, thanks. Just on the, I guess on the equity side, it looks like your results are maybe better than some, but I'd just like to get some more color on what you guys are seeing. It just seems like Institutional, the cash equities activity just continues to trend a depressed levels just for the industry and just get some color there and then, just on the retail side, how much is the reengagement of retail investors helping and do you see that momentum continuing to pick up?

Yes, well, first on the Institutional. I am very pleased. I mean very pleased with our Institutional equity flow business and our Institutional fixed income business sequentially. So when you look at [38] and basically 10% increases because on the Institutional equity side, considering where trading volumes were and considering what I've seen on the Street, I'm pleased with the progress that we've made in that area.

That said, you know the -- it feels -- the market has a certain malaise to it right now that you're seeing on the Street, more into the second quarter than we saw in the first quarter. And it just has that feeling of either directional or -- I am not going to speculate. The end of QE2, whatever it is, but the market feels to be somewhat trading-bound and we are seeing that. I'm not quite sure how it's going across the industry.

I do know that we have gained market share and our integration of the Thomas Weisel research into ours is one of the reasons our focus is up.

Fixed income, I mean you saw an increase from the fourth quarter. We had maybe four consecutive sequential declines or something like that, three. So that's nice.

And on the Private Client side, I would say the same thing. I would -- the market in general had a feel, some buoyancy today, a little bit more muted but certainly higher than what it was last year. But I don't sense this tremendous re-engaging of the investor certainly not by looking at our numbers or anyone's numbers. I think there's -- it gets -- the market is today somewhat benign.

All right. That's helpful. And then, just digging into expenses a little bit, I appreciate all the color. Just looking at occupancy expenses for example. Is that -- is this quarter's level a pretty good run rate going forward? And then just in the other operating expenses are there any meaningful one-time items other than the merger expenses?

No. I mean, I think that as we told you last quarter we would like to see $80 million to $84 million. As I said we will have, we could have a one-time charge that will actually be beneficial to our run rate and rent going forward. But I've talked about on the consolidation of our New York space as it relates to our merger, which again is taking longer than we thought. But I think that the expenses came in where we thought they would.

Okay. Thanks a lot.

Daniel Harris from Goldman Sachs.

Good afternoon. I wanted to sort of touch on expenses here, but also maybe make it a little more broad. So revenues were up around 17% year over year. Operating expenses up around 16%. So not a ton of operating leverage here. I mean, is that something that you see increasing more with a different market environment? Or do you think that is sort of how we should think about things when revenues go higher?

Let me think about how to answer that. I mean, the answer really in a lot of ways compared to the first quarter of last year, this quarter is not showing the inherent operating leverage that we have that you saw last quarter. So frankly when you look at our investment banking revenues being at $40 million versus certainly as I said, don't annualize that number, don't annualize the fourth quarter. You know, I think that you -- you're -- you have the ability in conducive markets for higher operating margins.

So this quarter saw -- you look at it, what really happened in this quarter was that we continued our build out and our -- we have really enjoyed the investments and beginning to harvest the investments we've made in our Private Client group and increased activity and all the things that we've been talking about offset by rather muted return on the Institutional side, which had higher operating expenses. So as you look forward and think that you can think about as I like to think about is our Institutional business is rebounding and the operating leverage. That is the high margin business when it's operating.

And not that it operated badly this quarter. I'm just saying that to answer your question, I think you put your finger on exactly what happened. But all that said I'm very pleased that with all the expenses we had on our most recent merger, that we ended up actually expanding margins by a point.

And is that all there is in the comp ratio, Ron? I know you said it was a little bit higher than you guided it to, so it looks like the Securities business was higher than first quarter last year, the Global walk was a little lower. And that's just a function of the Securities line item being, I guess, much smaller than you guys would have probably otherwise expected or wanted. And so therefore the comp issue was a little bit higher than you would think and that is where the leverage would come from, down the road.

Not quite sure if I understood what you said. I'll say it my way.

You know, historically, the first quarter is our highest comp to revenue quarter for various reasons, primarily it's benefits that we run [through]. You know, we pay for a traditional firm that pays year end comp, a big chunk of it in February and that front loads a lot of those benefits, and that is historically the case. So when -- I don't give guidance. I can't really just say guidance. But I guess I did, [62 to 63]. So we are at the high end of that. So I would like to think that if revenues come in where I think they should that that ratio should trend down. Does that answer your question?

Yes. Fair enough. And then lastly, since the quarter end in March, we've seen a pretty substantial shift lower in a lot of yields on the treasury curve. Was wondering how that is going to impact you guys in the Private Wealth business in the second quarter, all else equal, assuming rates stay where they are right now?

I haven't seen -- I haven't really seen the impact you're talking about the decline in rates?

Yes. We've lost about 25 basis points or so on the five- and 10-year and the Fed funds obviously has dropped. So I just, from a reinvestment rate perspective whether it's in the bank for what you're earning on brokerage cash, I was wondering how that actually hits your NIM going into the next quarter?

Yes, I don't think that --. Certainly on the Bank side, we lock a lot of that in. If anything, the fact that we locked those rates in, we're somewhat underhedged at the short end. So that will improve our NIM just on our funding side.

25 basis points on the Private Client side really doesn't have that much of an impact. We've seen a general shift from fixed income assets to equity assets, but I don't think that that's enough of a move.

Go ask the average person on the street with the yield on the 10-year and they are not even going to be close. And I just don't think that you're going to see really any impact in what the Global Wealth Management is doing as it relates to that. It [can] have more of an impact on activity in Institutional fixed income. But as it relates our net interest margins, I think the impact is minimal.

Okay, thanks, I'll hop back in the queue.

Hugh Miller from Sidoti & Company.

Good afternoon. I was wondering, I guess obviously we've talked about really nice improvement in the last couple of quarters in broker production. In taking a look, I guess, relative to the 4th quarter, it seemed like advisor production was somewhat similar on par with the fourth quarter.

And I just wanted to get a sense of what -- do you have a feel historically when we get to a normalized IPO and underwriting environment, the percentage of advisor production that kind of is with the syndicate, what type of benefit that could potentially be on the commissions?

On the Global Wealth side?

Yes. On the -- yes exactly. Global Wealth side.

Yes. Certainly somewhat on the margin, but when you are talking about a global wealth management business that has revenues of nearly $1 billion, not that much to move the needle. I mean unfortunately as it relates to the Global Wealth Management business, most of the equity raising and certainly on the IPOs, I tend to be primarily dominated by the Institutional side of the business. And so, on the margin and certainly within the scope of Global Wealth Management, I don't think I would notice any significant change although it certainly would be there, but not something you're going to see a 20% increase in productivity or something.

Okay. That's good color there. And I guess, can we take a look? Obviously you guys were able to expand the advisor count a little bit and you guys have opened up a number of branches and so forth. Was wondering when we take a look at the slower increase in headcount, do you view that more as a function of aggressive upfront money by competitors, or with where we are right now in the economic cycle, there's just maybe a lack of urgency for advisors to make a change and make a move in their business?

It's a combination. And the last thing would be our hesitancy to have -- to be as aggressive in terms of both recruiting everything we've done. As I said in the third and fourth quarter, we have grown his company at 40% per year in revenue for five years.

And as I've talked to the team, we have great opportunities to continue to grow. We are a place that people are going to want to work for various reasons and I talked about at conferences, I'll continue to talk about it.

But when you look at what we had accomplished with our most recent merger, couple that with the fact that the large -- the recruiting environment got very competitive, primarily because the turmoil has sort of subsided. We took the viewpoint -- I certainly did -- to consolidate and systems and all the things that were doing because we want to take a leg up from here to our next level of growth.

And they're -- I'm not going to do it at recruiting levels that don't generate return on equity. So I think in some ways it's sort of fortunate that we wanted to take a breath and the market got very competitive. So we've just sat back and said, Okay, we'll wait. And that is going on and as I said on my earlier remarks, I see that changing.

And that's a good thing because we -- our integration, everything we've done, a lot of the systems we've put in place to frankly double this firm again are in place. And it's -- it will be good to get going again. But we've certainly been muted for about the last, certainly, nine months.

Okay Great color there. I do appreciate that. And the last question I had, if memory serves me correctly, I think that when you guys had done the TWPG deal that you guys were benefiting from the last segment of IPO for them, kind of being held around until sometime this summer. And was wondering do you have any concern at all about the ability to retain the talent there now that you've had the combined company for a few quarters now? Any thoughts there on being able to maintain and be the talent there?

I'm always concerned about having an environment that people want to work in and maintaining. We have that environment today and I am not concerned that that's changing.

As it relates to, specifically, to our new partners from Thomas Weisel, I couldn't be more pleased with the integration. And I had this question as it related to Legg Mason and when their three-year deal comes up, it is everyone going to leave. They didn't leave. Ryan Beck and all of our deals, I think that we have a platform where people enjoy it work -- work in, plus a platform where they can compete and win.

So I have -- that does not keep me up at night and hope it won't going forward. But I think integration has gone as well as anything. I look at the people that I deal with and that Tom Weisel and I deal with and how we deal together and I feel like we've been partners for years, not nine months. So I feel pretty good about it.

And that said, we still have a lot of unvested stock. So I get all [vested]. Okay, so not only am I confident, but I -- there's certainly still some financial setups, so stick around.

That's it. Point well taken. And last question was just a housekeeping one. I know you guys said in the press release, had given the total client assets. I know that sometimes you will put out the fee-based asset level. I know it's in the [2Q]. I was wondering if you have to have that number handy?

I tell you what, if you -- if I move to the next question I'll answer that in the next question so we don't keep people around, but let me look it up and see what fee-based assets quarter over quarter, I will answer that in the next question.

Thank you so much.

David Trone from JMP Securities.

I've got a quick question for you on the banking. I heard all your color. Is it -- does it sounds like 2Q pretty much tracking about 1Q levels or maybe a little better?

No, I think we have Q2 levels are better. Certainly on the advisory site both on announced and what we think can be done. So I think Q2 is better. And I also believe that's the case in our equity financing. So it's just, I think a lot of it was, a lot of it was -- I mean it happens every year and this firm and firms like ours, the fourth quarter tends to be a quarter where a lot of stuff gets done. And we end up building backlog in the first quarter instead of realizing it.

That's why, (multiple speakers) David, that's why I kept going. I don't, I didn't want to get overly -- I saw what happened in the fourth and $90 million in investment banking which was basically 50% higher than what people were thinking. And I said, They don't annualize that. And I'm telling you the same thing today. Because I think that's certainly lower.

Okay, good. Switching to the Private Client side. I heard your comments on the last question. Do you have any kind of ballpark on staff growth over 2011? On the Private Client side?

Say that again. Do I have any projections?

Yes, like are you thinking 5% increase in the headcount, 10%, something like that?

Going forward. David, how long have I known you (multiple speakers). If I knew that number, I wouldn't tell you. I mean, come on. I mean, first of all, I don't know the number but if I knew I wouldn't tell you and my philosophy hasn't really changed.

I mean and you know I'll take 30 seconds to tell you why. I do not like incenting my partners to make quantitative goals. And if I say entire 10% and they do so without regard to the economic environment, we will end up overpaying and doing things that are not natural. So the year we hired 600 or 700 people I didn't have that projection and we have no projections now.

I will tell you that I am confident in our ability to continue our growth.

Okay, sounds good. And sticking with Private Client, and this is just a little nitpicky housekeeping thing, but the, what is in -- speaking of Private Client, what is in Other income and there was a big delta there from the fourth quarter?

Delta down?

Yes, it was like [5.5 and it was 13.1; of course a year ago it was only 2.7]. So it's lumpier than -- it's kind of lumpy. So what --?

Yes, you know what a lot of that is is it's our asset management in TWPG. And as I think I talked about last quarter, we marked an investment in Private Equity, a couple million bucks. I don't know if I (multiple speakers). I talked about it so that it -- buried in that line item is some of the private investments that we have from TWPG.

Okay. And then one last one, maybe you touched on this, but on page 13 when you talked about the Bank, the non-agency went up a lot. Is that just by default?

You mean as a percentage?

No, I know that it's a -- we grew, we saw opportunities. The spreads really tightened on the agency which was Primary Government. So that is some of the things that we saw in Corporate and Other. We think is still high quality, highly rated stuff. We just saw an opportunity to invest there versus in some of the mortgage backs. And some diversification. So that was actually conscious.

Okay. I think that's all I have. Thanks.

All right. Before we go to the next question, let me answer the fee-based question and just to give you the numbers, the -- as of March 31, 2010, our value on our fee-based accounts was about $11,000,052,000, almost $11,000,053,000 account. And as of March 31, 2011, our value is $16.7 billion in 61,500 account. So we had tremendous growth, and again this is where -- you know I'd sort of going to keep going here. I look at these numbers and these projections and I get a little backwards about thinking that we don't need projections.

But our growth has been phenomenal. And especially in the Global Wealth side. Anyway, I'll take another question.

Joel Jeffrey from KBW.

You had mentioned before that you are thinking about increasing the leverage of the Company overall. But thinking specifically about the broker-dealer, is there any areas you are specifically focusing on?

Well, listen, there are a lot of ways to talk about that, but there was a period of time where capital was king. And we [accorded] capital and we didn't do a lot of things. We didn't buy back stock. We didn't do a number of things because the ability to have capital ratios which was a fortresslike balance sheet was very important.

But as I sit here today, as a shareholder, and as a lot of you on this call are shareholders, you know, to have a leverage ratio of under 3 in a broker-dealer is not necessarily optimal to driving return on equity. So in the end, it's a combination of looking at our equity base and looking at the ability to leverage assets.

I say this cautiously, because everyone saw what happened in 2008. I'm certainly not talking like getting about getting 30 to 1. But I mean 2.5 to 1 leverage in our primarily advice-driven model would -- will be difficult to generate the kind of ROEs we want. To drive shareholder value. So, it's a combination and I'm just trying to tell all of you on the call that that's on our mind and that is what we are thinking about.

Okay. Great. And then, just switching over to the bank. It looks like the commercial lending side of the business picked up nicely quarter on quarter. Is that the way we should think about it trending? I mean are you going to -- is it sort of a $20 million pickup going forward? Or was this just an exceptional quarter?

Well, again, I think that can be lumpy. But as I said last quarter and I as I am going to say going forward, we will continue to grow the bank, but overall you are going to see an increase as a percentage of total assets, or at least in absolute terms you are going to see an increase in our commercial portfolio.

We see a lot of opportunities. We see risk-adjusted returns that are very good and we think that we can drive a lot more profitability with a much wider -- even adjusted for losses -- much wider spread in that area. Again, that market has sort of, and my thought has gotten to a point where we can make some money.

Unfortunately, there is not a lot of loan demand, but going forward, I would see that line item continuing to grow.

Okay. Great. And then just lastly, I know in the past you said you really focused on just building out the domestics business, but is there any change in plans or thoughts about international expansion outside of North America?

Not -- we have done some things and we've done small things in China and we've built out some more institutional businesses in London and in Europe. But I just want to say that while I also say it doesn't move the needle at all in what we've been doing and it's not a focus today. Doesn't mean it won't be in the future. As I have always said, our ability to gain market shares within the confines of the United States is plenty for us to do without venturing into markets and cultures and a number of things that we really don't understand.

So we will do it judiciously, but that's certainly not going to be suddenly a new strategy for this Company.

Thanks for taking my questions.

Daniel Harris from Goldman Sachs.

Just a couple of quick follow-ups here. So book value per share dropped a little bit, looks like $0.10 sequentially. Looks like that is on a higher share count. Assuming that that is accurate, what do you guys plan for excess capital? I mean, do you plan at some point to do a repurchase to try and offset, I'm guessing, grants from RSUs?

I think that that dovetails into the whole discussion about how we are looking at leverage and equity. All right, so I don't have a specific plan that I'm going to talk about today, but I can tell you that we have allowed, we've allowed some dilution as we have built our balance sheet. It was, as you know it was a very difficult time. And so, when we issued our equity grants, we haven't been in the market buying back that dilution.

And I'll just reiterate what I said before which is that's on our radar. That, we need to examine our leverage ratios and that is all that that entails. Including the equity base.

Okay. Thanks and then one last one. You did note in the Stifel Bank that the loan portfolio itself -- while assets were growing -- but the loan portfolio dropped about 10% sequentially. I mean, was that just some paydowns in the mortgage loan business or -- and how competitive is it in -- to grow the loans versus just the assets?

I would have to look at that. I believe, and let me look at this. I think that, on a sequential basis, what primarily the decline on that will be in the -- warehouses is not a term I want to necessarily use because we don't warehouse. But our mortgage banking business is down, as it is across the industry. And therefore, the loans that we hold for sale is down. And that is what you are really seeing there.

Okay (multiple speakers).

We have -- we've had less, in fact that's one of the things. Our net interest margins at the bank is higher but that's offset by lower mortgage banking revenues. Those lower mortgage banking revenues results in lower loans held for sale.

Right, yes, we have deftly heard that across a lot of the banks this quarter. And then just, so lastly and maybe coming back to my first question here, if you guys had to say how much excess cash you have on your balance sheet versus what you need to run the business, I mean do you try and qualify that at all?

Sure.

And what do you think that number would be?

You know I don't -- I'm not -- I mean there's a lot of things that we look at and I don't want to suggest that there is excess cash that we are going to deploy in other areas. So I am not going to really answer your questions. I think it might lead to the wrong impression.

But we do look at liquidity. One of the things that is -- . I will tell you this on this call, I don't know whether I've talked about this before, we have a significant amount of liquidity that is going to be coming our way and we realize for tax assets. And that's a non-allowable capital item. If you look on our balance sheet, it is significant and turns to liquidity fairly quickly.

And so we are looking at that coupled with the fact of our overall liquidity. And I will go back to my comment that we are looking at our overall leverage ratio.

To give you an excess cash position, I'm just not comfortable doing, Dan. Because I know what you're going to do with that or what you're going to think about it. I don't want to give you the wrong

Fair enough. Thanks a lot for taking my questions.

Steve Stelmach from FBR.

Just to sort of beat a dead horse on the leverage side, and maybe to look at it a different way. You talked about current leverage not commensurate with the ROE of the business. You know, what -- and I don't want to pin you down to an exact number and assuming leverage you do take on some of the incremental and over time, but are we talking about a couple of turns of leverage here? Are we talking maybe low double digits over time, which is still below peers at least your large debt peers, but higher, significantly higher than you are today?

Again, again, we -- there's a lot of ways to achieve leverage by looking at what you can do, but what I don't want to do is necessarily just load up on assets in the broker-dealer. We can definitely leverage the bank and for the bank to go from $2 billion in assets to $3 billion to $4 billion which would be levered 10 to 11 to 1, is something that will -- we will -- if we can get done and I think we can, that will be prudent.

And that is going to provide overall leverage today without raising (multiple speakers). So you can run that number by just saying the Bank doubled.

I think the other side of that equation is primarily looking at -- look at our cap structure. I mean, we have -- there is secured debt which is close up and down with our inventories. Then you drop straight to trust preferred which is only $80 million. And then you have equity. And so there's a lot of ways to do that.

I think that at the end of the day, as I look at it, we have allowed our equity base and our share count to increase as we build capital. And we are going to be looking at that. Because I want to drive -- to me, one of the most important measures in opening financial institutions are return on equity.

Right. When you do your analysis, I mean are you thinking more in terms of what the ROA environment looks like today or is it more of a just a function of what your funding costs are going to be on those extra terms of leverage? What's sort of the sticking point at this point?

It's all the above. The return on equity as I think we all learned in school is a function of return on assets plus leverage plus turn. And so you've got to look at all of those things and make sure that -- I mean I don't think it would necessarily -- that you all would be very pleased on the call if I showed up next quarter with $11 billion in assets that I'd bought to leverage the balance sheet. I think that I'm just going to hold.

So I think it's a combination of all of those things and -- if I told all of you of my intentions, I'm not going to give you any color on it, I don't care how many times you ask me. Because I frankly, I don't know, but I do know that to achieve our long-term return on equity, we are going to look at our leverage ratios.

I appreciate that. Thanks.

Are there any other questions, Operator?

There are no further questions at this time.

All right, well, let me end with this. I again am very pleased with our quarter, especially pleased with our growth in the Global Wealth Management and all the numbers that that entails. As I look forward, I continue to see that as a substantial driver of our growth and profitability.

I felt our Institutional business on the banking side was certainly lower than what I would expect, but that was to be expected following a tremendous fourth quarter. So I would ask everyone to understand my comments as it relates to that.

That said I'm very pleased with our flow business on that side. I like our prospects for the Bank and we are going to be looking at our leverage ratios going forward.

So it's a --. It was a great quarter in our -- certainly in my viewpoint -- and we continue on our quest to build a premier middle market investment banking firm. And with that I look forward to -- I'll be presenting at another conference, one of the conferences on Wednesday and I look forward to seeing all of you. And if not, we will touch base next quarter. Thank you very much.

This concludes today's conference call. You may now disconnect.