Stifel Financial Corp (SF) 2012 Q3 法說會逐字稿

Good morning, my name is Sarah, and I will be your conference operator today. At this time I would like to welcome everyone to the Stifel Financial third-quarter earnings and merger announcement with KBW 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). I would now like to turn the call over to Mr. James Zemlyak, CFO. You may begin your conference.

Thank you. And good morning, operator. Good morning, everyone; this is Jim Zemlyak, CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss two items of importance -- number one, our third-quarter results; and secondly, our merger agreement with KBW, Inc.

Please note that this conference call is being recorded. If you would like to follow along with today's presentation you may download slides from our website, www.stifle.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. Slide number 1 of today's presentation covers this in greater detail.

Forward-looking 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 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 in the Company's quarterly report on Form 10-Q. With that I would like to turn the call over to our Chairman, CEO and President of Stifel Financial Corp., Ron Kruszewski.

Thank you, Jim. Good morning, everyone. First of all, I would like to apologize for the delay. We have literally hundreds of people that were calling in and we wanted to have some time to allow people to get out of the queue and onto the call. So we did delay for a moment. But I want to be respectful of all of your time and we will get going.

A very, very exciting day for Stifel and I think KBW. With me is Tom Michaud who is CEO of KBW. Tom and I are going to talk about what I think is the real exciting news, which is our strategic merger with KBW.

But before we get to that, I also -- we released earnings this morning. And so, I thought I would do sort of an abbreviated call on our earnings. I am very pleased with our third-quarter results -- included record net revenues as well as record net revenues and net income for the first nine months of 2012.

Our results highlight the soundness of our balanced business model, particularly against the challenging economic backdrop. In the quarter both Global Wealth Management and the Institutional Group segment performed well. And as you will see today, we continue to invest in businesses that expand our client services and which we believe will return shareholder value.

Opportunity to drive our growth and today's announcement of our merger with KBW furthers our goal of creating the premier Middle Market Investment Bank with a specialized focus certainly on the financial services industry today.

In the third quarter the major indices moved higher and the Fed announced their much-anticipated QE3 program and investors gained confidence with what is happening in Europe. However, the global growth prospects, pending election, fiscal cliff, concerns all crept back into the market towards the end of the third quarter and have continued to today.

Given that backdrop, I am very pleased with our results for the three months -- the third quarter. We had a record net revenue of $420 million -- was up 26% compared to last year. Results for the quarter include realized and unrealized gains on our investment in Knight Capital of $25.6 million pre-tax or $0.09 per diluted share after tax. Excluding Knight revenues of $395 million were 18% above last year's third quarter.

We recorded net income of $37.7 million or $0.60 per diluted share compared to net income of $22.3 million or $0.35 per diluted share last year. Excluding Knight EPS of $0.51 is 46% above the third quarter of last year. Pre-tax margin improved to 15% and was 13% excluding Knight and compares to 12% a year ago.

For the nine months ended September 30, we posted again record net revenues and net income. Net revenues of 1. -- nearly $1.2 billion increased 13% as compared to the first nine months of last year. Net income of $98.6 million or $1.57 per diluted share compared with net income of $57.1 million or $0.90 per diluted share in the year ago period.

Results for the nine months last year, if you recall, included a $0.47 per diluted share after-tax charge related to previously disclosed litigation and merger expenses. Pre-tax margins for the first nine months were 14%.

The next slide breaks out our sources of revenues. Comparing year-over-year results, lower industry volumes have continued to put pressure on our commission revenues which declined 11% to $128 million. Principal transaction revenues increased 34% to $103 million; that was really due to our strong fixed income trading volumes which were further helped by tightening credit spreads.

Investment banking had a great quarter; investment banking revenues increased 94% to nearly $73 million, up from $37.7 million. The year-over-year increase was a result of an increase in both equity and fixed income capital raising as well as strong advisory revenues due to completing more transactions.

I would like to comment that the merger that we announced about this time last year with Stone & Youngberg has contributed nicely to our results and fixed income origination. And I am also pleased to tell you that that merger is fully integrated, everyone is on board and we are doing a lot of business with respect to that merger. Asset management service fees increased 8% to $62.9 million.

I will now provide details on our segment comparison for the quarter. Results in both our Global Wealth Management and Institutional Group were solid. Revenues compared with year ago quarter increased in both segments, Global Wealth was up 15%, our Institutional Group was up 50%. The revenue mix was split 60% from global, the balance of 40% from the Institutional Group.

That is an improvement again from the Institutional Group. We did record our Knight gain in our Institutional Group, so that did help. Our Global Wealth operating contribution increased 23% and our Institutional Group contribution was $33.4 million, which was up significantly over 250% compared to the third quarter of 2011.

On our last earnings call I walked through the impact of our year-to-date investments which we view as a key component of our strategy to grow the business. I want to update this chart to show both the impact and future potential.

Through October 31 we've hired 132 financial advisors and 65 fixed income sales and trading professionals. In the nine months ended September 30, our core business, which excludes these investments that I talked about last quarter, generated diluted EPS of $1.73 with a compensation ratio of 62.9 and pre-tax margins of 15.5. The revenue generated by our new investments was approximately $29 million while total expenses were $45 million. This impacted earnings per share by 15% reducing our margins by 170 basis points.

I just want to highlight that we worked -- not really that we worked to reduce the negative impact, it's the fact that these investments are coming online. And you can see that in the third quarter the impact was $0.02 versus $0.07 and $0.06 for the first two quarters. And as our investments mature a lot of it is new offices that we open. We expect them not to really be a drag on earnings, but to increase our earnings.

We have not veered. As you are going to see in a moment -- we're going to talk about, we certainly have not veered from our strategy of investing in down cycles. We continue to position the Company to take advantage of opportunities.

And with that I want to turn to our strategic merger with KBW. And I, again, cannot tell you how excited I am to be able to partner with the preeminent brand in financial services, a 50-year-old firm that has been a good and tough competitor and one that I am pleased to be able to now say is a good tough competitor but my partner.

So, Tom -- so let's take a look at -- I'll try to get through this pretty quick, give you a sense of how we have looked at this and then open this all up to some questions.

So why does this combination make sense? Look, we create the dominant force in financial services, includes equity research, equity and fixed income sales and trading and investment banking. Highly complementary on the investment banking, research sales and trading platforms. We do have significant synergies, but we are going to maintain KBW's premier brand.

The financial institutions, Tom has assured me, is poised to benefit from improving fundamentals. This will also leverage are Global Wealth Management and Capital Markets platform. And this deal is expected to be accretive to Stifel in many ways, not just financially, but across many ways that you can measure accretion to the overall value of our franchise.

So looking at Stifel and KBW today I thought I would sort of introduce KBW and then I will introduce Tom and tell me what he saw in Stifel. But when we looked at this transaction with KBW, it is a leading -- it is the leading global investment bank focused exclusively on the financial services industry, approximately 448 associates in 10 locations, celebrating your 50th year, so congratulations.

But what I like about all this is all the number ones -- number one advisor to US financial institutions; number one manager of equity offerings for financial institutions; only boutique with comprehensive research coverage with financial services globally; 390 stocks covered in the US; number two best financial sector research firm by Bloomberg.

It has the largest FIG specialist sales force globally, one that we intend to keep and to -- the clients are going to see no change from the service that they have had. It is a top 10 trader on the NASDAQ Financial 100. It is a great firm, Tom.

Well, thank you, Ron. Thank you very much for all those nice words about our firm and thank you as well to everybody who is on the call with us this morning.

I have to tell you that we are very excited about partnering with Stifel Financial. We believe that this is the right deal for our shareholders, for our clients and for our employees. And like Ron said, I would like to tell you a couple things about Stifel that got us very interested in partnering with them.

I think number one is the fact that they have been very successful. One of the things we do quite often around KBW is studied stock performance. And if you go back since the time that we went public back in 2006, there is one standout in terms of stock performance and that is Stifel Financial. And I think that the Company has done right by their shareholders and we have been very supportive of the strategy and we are delighted to be joining them.

When you look at Stifel I think something that stands out is their financial consultants where they have over 2,000 financial consultants generating over $1 billion of revenue. That is a great stable base for an investment banking company.

Also we love the vision of the company which is to be the leading Middle Market Investment Banking firm in the country. When you think about our expertise, when you get into the mid- and small-cap level of financial services it still is very unconsolidated.

And those companies are very much in need of services that now the combined piece at Stifel are going to offer when you think about fixed income, merger advisory services, capital raising as well as just trading their stocks. And many of those mid- and small-cap companies also have very heavy retail ownership and we are very much looking forward to being able to work with those clients and trading the shares of those companies.

Also too, Keith and Stifel have shared a passion for the old-fashioned approach to research, which we think that it is very valuable. And we are excited about the platform at Stifel, which is so broad. Combined we are going to have one of the largest research platforms in the nation.

Also too, we are very excited about all the capabilities that have been built in fixed income. We have some fantastic relationships around the financial services industry and we think that we are going to have a great opportunity to plug into that platform.

Well, thanks, Tom. If you look -- as I've said on many calls, I think that our work business model -- turning to the next slide, is based on balance. We would like to have that balance be 55% to 60% Global Wealth Management. It will change as opportunities come. This slide just shows that we will go from about 62%, 38% Institutional about 54%/46%. And the Firm is certainly achieving scale in revenues.

Our annualized net revenue base on the nine months is over $1.8 billion and, again, I think the combination from a balanced perspective makes a lot of sense to us. So let's go over the summary of the key transaction terms.

Stifel will acquire 100% of KBW's common stock. And importantly, and we will talk about this, we looked at the valuation, $250 million of KBW's excess capital is estimated to be available to us at closing. As it relates to consideration, the KBW shareholders will receive $17.50 per share or for the shareholders, that will be $10 in cash and $7.50 in Stifel stock.

You can read the press release; the stock is collared between -- meaning as a floating exchange rate you will get $7.50 per share. If our weighted average volume preceding the merger is between $29 and $35, under $29 and over $35, the exchange ratio becomes fixed. But more of that detail is in the press release.

Restricted stock, that is -- will be really exchanged for the most part for Stifel stock at $17.50. Our significant synergies, we have already identified them as we do, but there will be very few clients facing changes and our cost savings are principally from redundancies. We have got -- we've assumed no revenue enhancements in our financial modeling.

Although I do agree with Tom that I think that there is a lot of capability that we will bring together and I am looking forward to really building up together our fixed income model where we have been investing.

I'm pleased to welcome Tom to the team; he will be joining the Board with another KBW outside director. Tom will be Chairman and CEO of the KBW division -- he'll actually be a separate legal entity within Stifel.

And I think importantly, and this is a point that I want to emphasize on the -- to the investors and people that have looked at our deal. And that is for those of you who have followed us; you know that I have always said that our philosophy is that we only want to do transactions with people that want to do them with us.

And so, in every case we have always asked key people to agree by signing retention agreements that have -- that really commit them to the combined platform. In this case for I think it is almost 14 months assuming we close. And here, Tom, I haven't heard the update yet, but I know we went out to a number of people and --.

Yes, 85 of our top colleagues have signed on and have guaranteed the fact that they will be with us for the next 14 months.

Longer than that, but we have kept that to agree to (multiple speakers) that point.

Absolutely.

And again, that speaks to the fact that the top people here today are not listening to people say well, what is going on here. They already understand the benefits of this, we have explained the benefits of this merger and we are going after it today. And I am thrilled that is nearly everyone that we asked and congratulations on that.

Again, the approvals are -- customary regulatory approval, this will require obviously KBW shareholder approval. And finally, Tom, I want to say that we are honored to partner with you in continuing your commitment to 9/11. I know the importance that is to your firm and I am certainly honored to partner with you on that.

We appreciate that, thank you very much.

So looking at the transaction's financials. The way you looked at this, and Tom and I have talked about this -- I mean frankly KBW is over capitalized. And so, we have identified, as I said, $250 million really in excess liquidity. So what we have done is we have looked at the purchase price growth, but then we are taking out excess capital of $250 million that is really being financed off of their balance sheet.

If you look at it that way then you will see that all the pricing multiples make a lot of sense in deals that have been successful for us in the past. The price to average three year net revenues in both cases is well within what we have done in the past. The purchase price to stated tangible and adjusted tangible are all very reasonable and this transaction is accretive both to EPS and book value per share. And I will talk more about that.

But it's important to understand the over capitalization when we look at valuation. If you look at how we looked at this, we have attractive returns based on conservative modeling. We look at our equity investment. We take our purchase price, we add in our after-tax, we test it, we deduct out our excess capital.

And then we look at what we are going to use off of our balance sheet to right size the equity investment, which we believe is in the $262 million range. It is about -- we think our incremental shares will be about 8.9 million shares that we will put out. We believe that we have looked at revenues of between $250 million and $325 million.

We are just trying to be conservative; it's been a difficult year, a trough the year for you. And I think you are -- near the $250 million level, but in a difficult year. And we believe that we will have estimated non-comp operating expenses of about $64 million.

So if you look at all of that, what we believe is that our expected return on equity -- in equity will be between 10% and 16% and we believe that it is approximately 5% to 7% of accretive to EPS. As we have done in the past, we identify the costs that need to be eliminated. We will tell you what those are. But once those costs are eliminated we believe that on a core basis this deal is accretive to earnings per share.

You know, Tom, you have told me a number of times that this is the time to invest in financial services. I would like you to -- it's probably too late for me to change my mind (multiple speakers).

Yes, well -- A, we do think there are opportunities, but frankly in most markets there always are good stocks to buy. But we are excited about some of the trends that are happening in financial services. If you look at the top right part of this chart you will see that for the first time since 2006 financial services stocks are starting to outperform the market and we think that that is a positive opportunity for us.

As you look over at the left part of this slide you can see some of the trends that we continue to monitor and to follow. Number one is that the nation still has 7,200 depository institutions and we feel there still is a lot of consolidation ahead of us.

The operating environment is quite tough for many banks. Most banks did not think that interest rates were going to be this low for this along and we think that that could be a real strategic catalyst going forward.

The credit quality in the industry continues to improve. We've had 10 straight quarters of improving non-accrual loans and typically when credit quality is improving in the banking industry that is a leader for more consolidation activity.

And also too, the Basel III changes in particular where banks down as low as $500 million in assets are now being required to follow many of the Basel requirements which I think was a surprise to most of the industry.

And then on the bottom right of this chart you can see what financial investment banking fees typically mean to Wall Street. And like the weighting in the stocks where, for example, 22% of the Russell 2000 is a weighting in financials, financial services investment banking fees are quite substantial. And we believe on this new platform we are going to have an enhanced ability to go after many of those fees.

I believe you, Tom. And I am excited to do this. I believe the financial services sector is going to significantly rebound and provide tremendous opportunities in investment banking and as an investment sleeve for many of our investors.

So the next slide just looks at our combined platform -- we'll be the dominant force in the financial services vertical. And what I'm most struck about this slides is just the number of ones -- I mean, in investment banking number one depository book runner, number one conversion advisor, number one FIG M&A advisor. We will be the most trusted adviser to financial institutions.

And then in equity research the combined firm is going to have the largest platform for equity research which, again, both of us share the vision that that is very important, as well as the number one depository equity research coverage. We are going to have a footprint of 427 companies under coverage.

And then in terms of sales and trading, we have invested a lot in developing a specialist sales force which is going to continue to operate under its own brand. And we've also invested a lot in trading and market making. We are going to continue make a market in a very broad range of stocks which I think is going to marry up very nicely with the private client business of Stifel.

And as I said, and I will say again, we see significant growth opportunities in fixed income. We have -- it's been a major growth initiative for us. We have hired, as I said, 65 professionals this year and we have a focus before we did this on I think it is highly fragmented in the depository space and I am looking forward to being a major provider of fixed income services to depositories.

So if you look -- I think -- turn now to our operating strategy. The addition of KBW adheres to our philosophy of building out highly focused specialized businesses but within an integrated platform. And we are looking at how -- and it's very important that I explain on this call that -- how much we respect the KBW brand and the specialized sales force and your research.

And so, what we are looking at here -- and we are trying to show a slide that's somewhat busy. But we look at how we look at our businesses. And first of all, our Global Wealth Management business, we've talked about at Stifel, private client in our Bank & Trust; our bank today is almost $3.5 billion. But that is revenue of about $1 billion.

And then if you look at the way we will look at our institutional growth, you can think of it in two ways. Our Middle Market experts that Stifel has in all of our research but not at FIG. And it is a $600 million business between Fixed Income and Equity.

It will continue doing what it has always done and what we are now going to add to that and we are going to combine the best of Stifel's -- and we have very good research in FIG and investment banking and in trading -- we are going to combine that and merge that into what will be the KBW brand within Stifel.

And so, it will have a separate sales force, we'll frankly have two morning calls that will be separate and you will be servicing your clients and we will -- we are going to run very hard together in FIG. We will be one integrated -- tightly integrated firm on the -- obviously on the back office. But from a client facing perspective, we are going to maintain your brand and what you have built over 50 years and we are very excited.

And we -- as we said, we see that as a $250 million to $325 million. This deal simply leverages our platform. We think we are approaching integration right. We think that we are not going to integrate away the best of what KBW is about.

So we think that maintaining the culture and brand of KBW is important. KBW will become, as I said, the financial institutions brand for Stifel; the best performers of both teams joined together to drive our future growth. We will keep KBW research separate and the equity sales force will be maintained.

The KBW existing sales force will be responsible for all FIG sales coverage and we will integrate KBW fixed income expertise, which is impressive, into our substantial platform. And I think that we have thought a lot about this and, as you know, we at Stifel take integration very seriously. And we have thought about it.

I will quickly go through these. Again, we are -- we will be the largest provider of research on a combined basis and we are number one provider of research in technology, transportation, REIT and now we are number one in FIG. We are the number two provider of small-cap equities, the FIG research coverage is very impressive, 427 companies, number one in FIG equities, number one in depositories. You can see in the pie chart.

Looking at trading, again, we combined and we are now distancing ourselves in the Middle Market banks as number two in trading volume and this affirms our equity research platform, it is -- again we are not only writing research, we are trading very well.

If you look at our Investment Bank, we in all managed equity offerings since 2005, we moved from 12th to 7th. And impressively on book run equity offerings in our sort of what we focused on was just the Middle Market, we have defined as less than $500 million in market cap since 2005, we go from 9th to 2nd. We share that focus on small-cap stocks and that is impressive.

And you know, Tom, you are going to be CEO of what I think is the dominant force in financial services. And walk us through a couple of these rankings.

Sure, Ron. What you showed in that prior slide is how the Firm is going to be moving up into the book runner position. And typically when you are in the book runner position your opportunity for fees is three to five times the size as if you are in a co-manager position, plus the opportunity to trade the shares and the aftermarket grows.

And so, we are excited about this transaction because we think with the broader capabilities and in particular the private client business we are going to have a chance to continue to move up. And also, when you look at the combined efforts in our banking department, which include some of the Ryan Beck staff, historic Ryan Beck staff and the Stifel staff, we are going to have a very broad coverage effort.

And then with the skills that we have, we think we are also going to be more competitive in the higher end mid-cap space as well to compete for league managed business. And as you can see, we have a very good footprint together, whether it has been the Bank IPO book runner space where we had had the number one position and now you can see Stifel had a very strong position as well and combined we have had -- we have a great league table standing.

When you look at FIG IPO and follow on book runners since 2005, not just the depositories, you will see that we also have a very good footprint there. So it is not just banks in financial. And then when you look at advisory work on the top right, KBW had been the number one advisor and now with the folks who have contributed to Stifel's effort we think we are going to be able to have an even stronger presence there.

And then both firms are very committed to the conversion business. Our firm had been the number one firm in terms of number of conversions, yet Stifel had been the number one firm in terms of dollar amount of proceeds. And so, when you put the two firms together, and both teams are going to continue to work on this for us, we think we are going to have a very credible effort.

We also continue to pay attention to the credit union industry, which I don't believe has started its conversion activity yet like it may in the future. So that is another opportunity for the two firms combined.

On the next page you can just see the mix between the two firms, both in terms of M&A and capital markets. And what you will find is in the M&A business, consolidation in the banking industry has been more popular than it has been in the other areas of FIG. But sure enough, we do complement each other.

And we are very excited about what we can do together on the capital markets. The banking industry has very much recapitalized itself, and so we think that maybe from a mix perspective there will be a lot more capital raising in other sectors of financials. And we think given the track record of both firms, we are going to have a great footprint in that business as well.

Again, fixed income I said their expertise will be integrated under our platform. This has been a major growth initiative. Our platform has client trade volumes approaching $300 billion, widespread coverage with a sales team of over 200 professionals. We have the core of products and, again, combining with your expertise and your relationships on the depository side, this is going to -- while we haven't built in any revenue enhancements, this is one that I certainly believe is one that we will achieve.

Also, this will leverage our Global Wealth Management platform, as we've said, 2000 advisors, $130 billion in client assets. This helps with their research, what they can do, all the deals. This is very, very nice.

So last is I believe Tom and with you, and I can just tell the way we have worked together, put this deal together, that we are going to integrate this in a manner that we have integrated other deals as evidenced by the fact that you have had all of the people who have signed onto this deal.

And if you look at our transactions over the past, starting with Legg Mason Capital Markets, Ryan Beck, our Bank, Butler Wick, UBS branches, Thomas Weisel, last year Stone & Youngberg, and today KBW, each merger prior to this one has been accretive to Stifel, retention extremely high. You can see that we have integrated these while increasing our stock price. And you can see that when you started this the revenues have grown from $250 million to nearly $1.6 billion without counting you in.

And what -- not only does the integration help, but, importantly, half of our growth has been through acquisition, the other half has been organic because the mergers in and of themselves create opportunity to have organic growth.

I believe that the way we have operated to this point KBW will equal the success that we have had in integration and that this will be a successful deal and we are going to be a dominant player in the marketplace. And I look forward to that.

So with that, it was pretty long, but we are excited about it. And we hopeful all of you on the call are excited about it and we will take some questions.

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

So you guys are obviously very experienced acquirers and historically have bought businesses that I would say are not hitting at their full revenue potential when you do.

So in the revenue assumptions that you gave of $250 million to $325 million that you are calling conservative and based on trough years, can you speak a little bit to why you are doing the deal now kind of with the business hitting kind of at trough revenues?

And then if that does represent something closer to trough in your view, can you give us a sense of what you think is maybe a more normal level or how we should think about that?

Well, Devin, I think some slide -- answer is we are not going to go and -- to Tom, there are years when you did over $400 million of revenue --

Correct.

-- recently as 2010. Look, I don't think there is any question that it has been a difficult capital markets environment -- not just in FIG but across the board. Why now? This is the premier brand of financial services. You know, it is not like there are 10 KBWs. There is one KBW. This opportunity presented itself, it presented itself in a manner which is like other transactions that we have done and now is a good time.

Okay, thank you. And then, just love to get a little more color on the cost saves. If I am looking at the detail that you provided correctly, the $64 million of incremental operating costs mentioned in the slide deck, that would seem to imply that you are cutting KBW's current non-comp expense base in half.

So would just love to get a better sense of what the big areas of the reductions are going to come from, if you have a time line for extracting those. And then any additional color on maybe the size of the charges that would be taken between now and then?

Well, we are working it the other way because I think it is difficult to say what cost bases are since there has been a lot of reductions that Tom has done to right size the cost base to the lower revenue. So we are giving it to you a different way -- we are telling you that you can take your estimate for our non-comp operating expenses and add $64 million.

That is across a broad swath of areas, communications, all the public company expenses that you have which are tremendous. Obviously back office clearing is a big number in terms of that. There is -- there are some charges and duplicate contracts, leases that there will be, I think we will update more of that in future calls as to what exactly that is. But I am confident on the $64 million of incremental OpEx, Devin.

Okay, great. And then just lastly, did you guys give a closing date yet? I may have missed that.

Soon as we can. But, you know, it requires things that are out of our hands in terms of -- we need a shareholder vote and we have other documents we need to file. But I am looking forward to getting this thing closed and having a great 2013 together.

Okay, great. Thanks for answering my questions. I will hop back into the queue.

Hugh Miller, Sidoti & Company.

I just had a question about the rationale for I guess keeping the franchise as an independent subsidiary, which I think is a little bit different than how you guys have structured things in the past.

Absolutely different. It just -- we've -- I'm not sure that any of our integrations have been cookie-cutter; we look at each of them individually with an eye toward maintaining client service. And in this case it should be clear certainly to anyone that has -- that does business with KBW, the importance of maintaining the brand and the specialized sales force and the sales and trading.

It was obvious to me. And so to integrate sales force, for example, would really have not been very smart. So, we are not going to do that. In other cases FIG is a very unique vertical. I think we know that and we have been thinking -- and I know a number of firms have tried to establish a FIG vertical. But the way to do it is the way we are going to do it.

Okay. And I guess KBW also had announced that they are exiting their Asian operations. I was wondering how much of a factor I guess this particular transaction had on that decision. I guess as it does add a little bit of stability with the retail segment, which reduces some of the volatility in the business environment. I was just wondering kind of the thought process for now deciding to kind of move away from that expansion?

I think there were two reasons for that. I think the first is how challenging the cash equity market is in the Asian market. We had -- we were the only specialist firm to be executing that strategy there and while we were launching volumes really declined significantly. And it was our judgment that this was not going to be a short turn.

Now we were very, very excited about the quality of the product we had, but the activity frankly just wasn't there and we felt that it was going to remain in a loss position for the near-term horizon and that that wasn't acceptable at this time.

We are very excited about other parts of our international operations in Europe where we have been there since 2004, we have got scale there, we have some very highly rated analysts in that market. And so we are going to be more focused on that market as well as on our home market where we think there is a lot of opportunity as well.

Okay. And last question I had, Tom, on the earnings that you guys did announce for the third quarter, obviously showing some challenges in the core business and both the commissions but also the investment banking area -- I was just wondering what the conversation of the clients are about what kind of gets things kick started for consolidation within the regional banking space for M&A.

And also seeing that underwriting -- the potential for underwriting to really pick up, where do we stand now with the cycle and what kind of gets that ball rolling here in the near term?

M&A activity is definitely picking up. We can see it -- all of our bankers are busy in the depository space, the number of deals that we have announced year over year is up.

And I think really what it is, like I said earlier, it's the length of time that we are in this low interest-rate environment and a lot of banks are really being squeezed in their net interest income, which is typically two-thirds of their revenue. And I think that is causing a lot of banks to think about taking cost savings out and combining with potentially a larger institution.

And also what is really interesting is that we have been studying where is the sweet spot in banking right now and we have found that the $5 billion to $10 billion thanks are the most profitable banks in the industry right now and they are the also the most highly valued. And so, we think in that sweet spot you can see banks around that asset size executing a lot of consolidation.

With regards to capital raising, there still is -- I think there is about 290 banks that still have TARP preferred or some type of TARP instrument. And we are getting closer to the recast moment in the interest rates in those preferreds. And so, we are seeing more activity.

We just announced a deal a couple of weeks ago for a client in North Carolina where they did an exchange, the raised capital, they sold that asset. And so, there still is going to be a lot of that restructuring work going on.

But where I am getting more excited is away from the depositories and its capital raising in the specialty finance space where you still have the $10 trillion of mortgages in the country, $7 trillion of them are in some capacity backed by the government. And that is going to have to change over time and there is going to be a lot of evolution in the mortgage industry.

So we are spending a lot of time outside of depositories thinking that there's going to be a lot of capital raising there. And I think with our combination, with the private client business that we are now going to have access to in some of the other products as a combined company we are eager to participate more in that space.

Great, thank you for the color.

Chris Harris, Wells Fargo Securities.

I want to come back to the expense synergies we are expecting here. Just to get a little bit more detail, can you guys give us the actual dollar amount of costs you expect to come out of the combined business both comp and non-comp?

Well, again, come out of -- add $64 million to our expense base, okay. If you want a sense of comp to revenue you can use 57% or 58%. And so, when you do that you can back into your own whatever base you want to start with as to what the cost base are. I don't approach it that way because you never know from where you start.

I look at what is it going to cost to maintain this business on our platform and what comp to revenue including -- that includes the fixed comp that we are going to need above the professional comp so to speak. So, it is a backwards way of answering your question, but I gave you the two numbers.

Okay, so just to make sure I am understanding here fully, it doesn't sound like there is going to be really a tremendous amount of, if any, headcount reduction as a result of this deal, is that a fair assumption to be made?

Certainly, look, there are always some redundancies, all right. But KBW today is not operating under a 58% comp to revenue model, they are not operating at $64 million of non-comp OpEx. So I think there are significant savings and, as I said, when you run those numbers we believe our return on equity investment is from 10% to 16%.

Okay, so with the headcount reduction where do you guys see the most redundancy, where do you think we will see some staff reductions, what areas of the firm? And then is it going to be more concentrated on the KBW side or is it going to be potentially Stifel headcount reduction as well?

I think it is going to be less so on the customer facing side when you look at the mix over time. I mean I feel comfortable saying that. And we have already done a lot of work together at thinking about who is going to be customer facing and what particular spots. So we think that there will be less there.

Okay. Last question then for me, really for you, Tom. Wondering why do this deal from a KBW perspective at only a 7% premium if we are at a trough level of revenues right now for you guys?

Well, I think there are two things to that. I think number one is our Board voted unanimously in favor of this transaction because we believe it is fair to the shareholders. And I think that that's the first reason.

The second reason is that we think there is more to come. We are excited about this combination and it is interesting because we do think there are Catalysts around the corner and the question is we have just expanded our product suite of things that we can do and I think our market share is going to go up.

And the more time we spent with Ron the more we felt that we were stronger and better off together than KBW approaching those opportunities by their selves with a smaller product set than we now have.

Yes, I -- if we are going to be, again, answering that question from my perspective, we are better together and I look forward to that.

Okay, guys, thanks.

Patrick O'Shaughnessy, Raymond James.

Can you kind of walk me through the process, if you are able to talk about it, about how the merger came to be? Have you guys been talking about this for a few quarters, did it just come up recently? And if you can, if there is any sort of competitive bidding process.

Look, at this point that will all be disclosed in the proxy. I don't think we are in a position to talk about that now. Fair enough?

Okay, fair enough. A second question I have is, Ron, for the cash component that you guys are paying for the deal, I think from slide 16 it suggests that some of that is coming from cash borrowings. Can you just walk me through how much of that cash is coming from your balance sheet, if you are going to have to take on additional debt to pay for this or how you are thinking about that?

Yes, look, I think we are well capitalized and we believe that between the cash on KBW's balance sheet and our excess liquidity that we have on Stifel we don't think we really have to do anything to fund this deal in terms of accessing the capital market.

Okay, that's helpful, thanks. And then the last one, if I could. So, Ron, you talked about kind of your ideal business mix is probably 55% retail, 45% institutional and you are kind of at that with this deal on a pro forma basis. Do we expect that you guys will still look for (inaudible) for this? Or do you kind of say, you know what, this is what we want to look like and now we are just going to try to execute it?

Well, look, this is what we look like and we are going to execute. And I have always said that 60-40, what tends to happen is opportunities come along and it changes that mix. So we have a vision to build, and I think we are getting there, the premier Middle Market Investment Bank. This was an opportunity that we felt we had to do if we are going to achieve that goal.

We are going to make this work. The integration will obviously consume some of our time and energy and maybe our looking around for the next opportunity. But we expect to get this done; I don't think this integration is really that difficult at all, especially considering how we are approaching it.

And we will either do something or we will do nothing depending on the next opportunity, how it presents itself and how it fits into our goal of doing this. I have always said we are not looking to just get larger, we are looking to get better. This deal makes us better.

Great, thank you.

Alex Blostein, Goldman Sachs.

Ron, wanted to follow up just one more on expenses, because it just feels like it's -- there are just still some outstanding questions here. On the comp rate that you provided, so 57% to 58%, you are talking about the overall firm comp rate, right, that includes Wealth Management business?

No, I am saying -- what I said was, I was trying to answer the question that if you look at how I looked at KBW across the revenue spectrum and you applied that comp ratio and $64 million of OpEx you can kind of get -- you can figure out how I get to a 10% to 16% ROE. And that should allow you, based on whatever your models are, to determine what the level of assumed cost saves are both in comp and in non-comp -- just approaching it bottoms up and instead of top down.

Got it, okay. Yes, because you guys and capital markets right now are running a little bit north of a 60% comp rate, KBW is 65% to 66%, so that's I guess -- okay, I guess that answers the question.

Second point is I guess on the strategy part, you guys have been quite successful growing the Bank and that has been a very accretive way for you guys to add to earnings. What does this deal do I guess to your ability to deploy capital and to the growth of the Bank? Do you think it is going to slow over time or what is kind of the decent run rate for growth there now?

I don't think this does anything to the balanced approach that we have done with building the Bank. We understand, we have capital plans, we are generating earnings, we create earnings both through the way we compensate people with equity -- I mean we create capital and earnings and looking forward we -- even with this transaction we are well capitalized.

And so, I don't see that -- this certainly doesn't make me think we can't continue to build the Bank. But we have built the Bank in a balanced fashion and that will continue.

Okay. And then I guess going along the lines of strategy here. This deal certainly puts you I guess a little bit more in the institutional Investment Banking camp versus more of a Wealth Management camp. A great business but clearly a more volatile business. So from a multiple perspective, the way you guys think about the stock, how did that I guess play into your decision to do this deal since it feels like the blended multiple in the business probably should be a little less than the Stifel multiple pre-deal?

Well, that's your opinion, and I expect that. But we are building a firm to -- that we'll look back and we want to be a firm that emerged from the meltdown in financial services in 2008 and 2009. And that firm is a balanced investment bank with private clients and investment banking. And this deal and this ability to partner with the premier financial institutions boutique is what is compelling.

I think institutional business is poised to rebound. And when it rebounds I think you are going to see significant additions to our earnings and to our margins. The business is cyclical, but when it is good it is very good.

So we just looked at it and said, this fits the vision of the firm we are trying to build and therefore we executed. It certainly wasn't (technical difficulty) but what does it mean to my earnings multiple. I think it adds value and I don't think that -- I don't necessarily agree with the fact that it is a lower multiple.

Got it, fair enough. And then sorry just last one on the timing. I guess you guys don't have the certain date for closing but do you have an expected date just so that we can start thinking about these numbers flowing through in the models?

Yes, look, I would like to think it would be early 2013.

Great, thanks so much.

Your next question --

Yes, I kind of (multiple speakers) Joel Jeffrey from KBW asking a question. Go ahead, operator.

Glenn Schorr, Nomura.

A couple of quickies. In the 85 people in the retention that have signed retention agreements, I just want to make sure I got the understanding. So that would take care of comp for 2012 and 2013. I'm just curious what the total dollar amount is and was that included in the purchase price?

Yes, I mean, we did retention with stock, the way we also look at this, there were some things that needed to do, you will see some charges that go through with respect to that.

But we always view that as purchase price and that therefore when you look at the way we looked at our return on equity investment you will see a line where we add the after-tax cost of retention to purchase price. Those shares we then build into our -- the 8.9 million incremental shares that we will have outstanding. And we throw it all in as purchase price. And so, that is all baked into these numbers.

Perfect, thank you. On that slide 17 where you talked about the financials always being a big part of the [IV] revenue share. And I agree it is going to go up. I'm curious if you have done a cross-section to see what is produced by say the big parts of financial services versus the small/medium part that you tend to dominate? And if that has an impact on the acquisition, if you are able to as a larger firm stream -- go upstream, if you will. And I have a follow-on on that one.

Part of our strategy had been to move up stream and -- but that doesn't mean for the nation's biggest banks. That is a very competitive space, particularly for underwriting, particularly for debt capital markets. But there still are some very large regional banks that are below the big universal banks or the biggest super regional banks. And I think that we are going to be more competitive in that space now because of this partnership.

But I think we can see it upstream if (multiple speakers).

That's right, yes, definitely. We will be more competitive together than individually.

But, look, also -- look, credit conditions are improving, you are going to see -- I believe you are going to see catalysts to drive a lot of capital markets and [advised] transactions with the overall -- as we come out of this crisis. And I believe that that in general is the rising tide that is going to raise all ships including this. But with our additional capabilities combined with KBW I believe that our ability -- sort of our target range is bigger.

I appreciate it. Last one is -- and I agree with most of your points, low rates and everything else you mentioned driving activity. The one question I have, I don't know if this is for Tom or not, but how important would certain SIFI buffers and certain asset level cut offs be or has it been in getting banks to transact and get larger if they don't know what kind of capital charge comes along with being let's just call it the next size up?

Yes, I think first of all I think the nation's biggest banks are probably not going to be the banks involved in consolidation. In particular you've got a lot of the universal banks that are already above the deposit cap. So I don't think they will be buyers of depositories.

But it is interesting because what we are finding is that at the $10 billion market there is an additional level of regulation that kicks in. And what we hear a lot from these managements is that if they are going to go through $10 billion their belief is that leveraging that additional regulatory cost over a bigger footprint and asset base and earnings stream is a worthy thing to do.

So we have seen some banks when they pierce these levels that they want to keep going. And I think that that $5 billion to $10 billion range that I spoke about earlier, what we believe is happening is that you are big enough to leverage your regulatory costs when you get into that space and you are also big enough to have a broader range of products.

And when you are below that space it is harder to do both of those things. So I think that this regulatory transition that we are in is going to play an important role in consolidation. I hope that answers your question.

It does, it does, thank you.

Judy Delgado, Alpine Associates.

Most of our questions have been answered. Could you detail what regulatory approvals in particular are required for merger closing?

For us we obviously -- it is more a notice, not that regulators don't approve everything, but the regulatory -- we have FINRA and we have the Fed, but those are -- we will get those. We obviously have Hart-Scott, which we don't anticipate any problem, and probably the biggest thing is the shareholder approval.

Thank you. And can you also just detail the stock collar for shareholders, the expectation perhaps, if there are any, walk away prices or protection for Stifel in this transaction?

There is a collar and I -- there's not any other than customary merger provisions as it relates to termination. But it -- our shares float between 29 and 35 and then they become fixed after that. So the deal value fluctuates above 35 and below 29. And so, some of the volatility in the share count is within the range -- if that makes sense to you.

Yes, thank you.

Tony Reiner, Cantor Fitzgerald.

Congrats on the deal, guys, another good deal. Can you just go through -- I was just asked as far as regulatory approvals, what exact states do you need to get approval to get [waived] before you close this thing -- if any?

What's that, sorry. You broke up.

What individual states do you need as far as regulatory approvals, if any?

None. None that I am aware of. I mean --.

Okay. FINRA approval, stuff like that?

FINRA approval -- look, I don't want to in any way discount the need for anyone that can ask any questions, but my understanding is no state specific -- FINRA will obviously review this transaction and they can approve it. But we don't see anything here unusual at all.

And what about any foreign approvals -- UK, Hong Kong, anything?

We have the FSA and all of the regulators will look at our combined and they will look at our capital plans. But again, I think we have done this conservatively and I don't anticipate any issues.

Okay, I appreciate it. Thanks so much.

Chris Harris, Wells Fargo Securities.

Just two quick ones. One on the revenue range for KBW, $250 million to $325 million that you guys lay out on slide 16. Is that -- I assume those numbers that you have there, that kind of takes into account potential staffing reductions we might see? And then I am just kind of curious as to how -- or how you think you can maintain that level of revenue at KBW if there are some headcount reductions.

Well, we see no -- look, with the client facing businesses, the people that generate revenue at KBW and the people at Stifel in the FIG practice are -- we are keeping those people. We are not talking about any reductions for the people that face our clients and provide that service. So -- I never view cuts that cut revenue as synergistic.

So you might -- after this deal is done you could conceivably have, just take the world of analysts for instance, you could conceivably have two analysts covering the exact same stocks just because one is on the KBW side and the other is on the Stifel side?

Well, no, that is a good question to clarify that. We obviously have a plan to have a research product that combines the best of what we are doing. But I'm glad you pointed that out because I don't want there to be confusion on that.

On the Stifel side, and we cover 1,000 -- we will have 1,000 names anyway or close to that outside of FIG, we will not have FIG coverage. So there will not be a Stifel analyst that is covering a FIG name. All of the FIG business will be done under the KBW banner and brand, and the KBW sales force will be the specialized sales force that markets that research product.

So we are not going to have two analyst -- imagine that, what if we even had conflicting opinions? That would be interesting. But we are not doing that.

Okay, thank you.

And with no further questions in queue I turn the call back over to Mr. Kruszewski for closing remarks.

Well, I would like to close by, again, I am pleased with our quarter. I think that while that was very good news it is overshadowed by the great news of welcoming our new partners from KBW. We look forward to getting out and seeing our clients and talking to people. Tom?

Yes. Thank you, Ron. We are delighted to be partnering with Stifel and we think that -- like I said earlier, we think this is the right deal for our shareholders, for our clients and for our employees and we look forward to working with Ron to build the premier Middle Market Investment Bank.

With that, thank you for your time, your questions and participation and we look forward to updating you in the future. Thank you.

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