Stifel Financial Corp (SF) 2013 Q2 法說會逐字稿

Good afternoon. My name is Laurel and I will be your conference Operator today. At this time I would like to welcome everyone to the second quarter earnings call for 2013. (Operator Instructions). I will now turn the call over to Jim Zemlyak, CFO. Please go ahead, sir.

Thank you, Laurel. Good afternoon. I am Jim Zemlyak, CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss Stifel Financial's second quarter 2013 financial 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 our website at 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 may include statements regarding among other things, our ability to successfully integrate acquired companies or branch offices and financial advisors.

General economic, political regulatory and market conditions, investment banking and brokerage industries are objectives and results and also may include our belief regarding the effect of various legal proceedings, management's expectations, our liquidity and funding sources, counter-party credit risk or similar matters. As such, they are subject to risks and uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP, we may use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the Company's GAAP results.

To the extent we discuss non-GAAP measures the reconciliation to GAAP is available on our website at www.stifel.com. And finally, for discussion of risks and uncertainties in our business please see the business factors affecting the Company and the financial services industry and the Company's Annual Report on Form 10-K and MD&A of results in the Company's quarterly reports on Form 10-Q. I will now turn the call over to the Chairman and CEO of Stifel, Ron Kruszewski.

Thank you, Jim. We are very pleased to announce record revenues for the second quarter and the six months of 2013 in both Global Wealth Management and our Institutional Group. We're pleased especially against the challenging market conditions which existed in the quarter.

We are very encouraged with our investment banking results which demonstrates the breadth of our capabilities. Our merger with KBW continues to exceed our expectations and we are gaining market share in the financial institution space.

This quarter we look forward to the contributions from the institutional Fixed Income sales and training professionals who joined us from Knight Capital group. I would like to start with an overview of the market.

Market indices continue to push to new with the S&P 500 trading close to 1700 and the Dow at 15-15 five and while equity volumes in the quarter rose 3% sequentially, I believe volumes still remain weakened and continue to decline at what I would view a typical summer pattern. Capital raising activity increased from the first quarter a trend which is reflected in our results with respect to M&A the number of completed M&A transactions was down 19% sequentially.

Our results, however, benefited from M&A activity in the financial institution space. As everyone is aware, the ten year rose 32 basis points in June from 216 at the start of the month to close at 248, but reached a high June 25th of 259.

This move in rates caused us to experience some trading losses in our Fixed Income inventories and this translated into approximately $0.08 per share versus what I would characterize as normalized trading.

Looking at the equity markets, as many of you know, I've been bullish since August of 2011. Mostly because equity markets were fundamentally undervalued if one took away the risk of deflation.

However, I believe we are approaching fair value in equity markets and we're going to need to see more than 2% trend growth in GDP to drive these markets significantly higher. So I think there will be a challenge of these markets have plowed through at very a disrespectable mark but that's because it's what I characterize as an equilibrium rally back to fair value, but I think going forward we're going to now need to see some more fundamental reasons to drive equity markets higher.

The next slide is an update on the KBW merger which as I stated has exceeded our expectation. KBW is number one by a number of big mergers and number one of by a number of bank mergers.

Through June we represented the Acquirer/seller on seven out of ten largest bank deals. In fairness there have been a couple deals since June that we have not been involved with so some of those rankings will change but I am pleased with our overall market share. On the capital market side of the business, we were book runner on all four of the bank IPO's in the first half. We have achieved superior recognition in the Greenwich Associates rankings for research sales and trading. We're gaining equity, trading market share.

Our market share and average daily volume for the KBW regional bank index components was 4.6% in the first half of 2013, which was up from 3.1% in the first half of 2012. Our market share average daily value for small cap banks stocks was 8.4% in the first half of 2013 compared to 5.2% in the first half of 2012.

We had record attendance in our July community bank conference. We're making progress in integrating Stifel and KBW's fixed income platforms which will drive future revenue growth, and overall we're very pleased with the progress of this merger and the integration thereof.

Turning to our financial results for the quarter we posted record quarterly revenues of $511 million, 33.5% increase from a year-ago and up 13% from the first quarter. Non-GAAP net income of $44 million or $0.60 per diluted share compared to net income of $26 million or $0.42 per diluted share, GAAP and core were the same in the second quarter last year. Non core merger-related items impacted earnings by 20% per diluted share and I will discuss this more on the next slide.

Our non-GAAP pre-tax margin for the quarter was 14..8%, which is acceptable. The next slide is an update of the merger-related, what I view, are duplicate expenses that we have and expect to eliminate from the business.

This schedule includes KBW, Miller Buckfire, and the Fixed Income business from Knight Capital. Actual non-core non-comp operating expenses for the second quarter were $15 million which was $8.2 million higher than our best guess last quarter and it was really due to two matters that I will explain.

First of all, $5.5 million was our purchase of Knight, the Knight Fixed Income business we structured as a settlement which caused us to run the purchase price effectively through P&L. And that was not something that we had anticipated, but it's still purchase price and $2.3 million related to consolidating of New York real estate which we didn't think would be done as quickly as we got that done.

The impact looking forward in the third quarter of $7.5 million will be related to our continuing elimination of duplicative expense of KBW and then where we forecast when we talked about this last earnings call approximately $22 million for the retention of Knight Capital employees.

So we look at next quarter $29.5 million in non-core expenses. We are very excited to welcome the knight Fixed Income team. We see this team adding between $70 million to $100 million in annual revenues.

Now, turning to our financial results for the first six months. Revenues of $965 million were up 22% from a year-ago, non-GAAP net income was $1.18 per diluted share which compares to $0.97 per diluted share last year. The next slide reviews our source of revenues commission revenues were up 23% to $157 million, the increase was due to higher mutual fund and OTC transactions.

Principal transaction revenues up 22% is really due to an increase in corporate equity market making. I'm very pleased with our investment banking revenues increased 81% to $122 million from $67 million.

The year-over-year increase was a result of an 80% increase in both capital raising and advisory revenues. Asset management service fee revenues up 17%.

This increase was due to higher value of fee based accounts. Turning to brokerage revenues, total second quarter brokerage revenues which, the way we look at we combine commissions and principal transactions, increased 23% versus the year-ago quarter and we're up 5% sequentially. This increase was driven largely by our equity commissions. On a segment basis private client brokerage revenues increased 12% compared to last year at 2% sequentially.

Equity brokerage was higher over the comparable period but Fixed Income was down sequentially as expected due to the difficult trading conditions in June. As I previously mentioned, trading losses do occur and the net impact of our June trade loss versus what I would normalized results was as I previously stated approximately $0.08 per share.

The next slide reviews our non-core interest expenses. Comp and benefits as a percentage of net revenues was 63% in the second quarter compared to 63.9% in the year-ago quarter and 63.8% in the first quarter of 2013.

Our goal is to maintain comp as a percentage of revenues and our targeted range of 62% to 64%. Transition pay, which is included in this number as a percentage of net revenues was 4.2%. Core non-comp operating expenses were $111.2 million or 22.2% of net revenues.

This was slightly above our run-rate estimate of $107 million to $110 million. For the third quarter, with the inclusion of the Fixed Income team from Knight, we expect core non-comp operating expenses to be in the range of $115 million to $120 million.

Our other expense increased mainly due to an increase in advertising, a provision for loan losses reflecting the growth of loan and in our bank, and travel and promotion. The next slide reviews our core non-interest expenses for the first six months of 2013.

Comp and benefits as a percentage of net revenues is 63.4%versus 63.8% in the previous year, non-comp operating expenses 22% of net revenues versus 22.9% for the first six months of 2012.

Looking at our segments we posted record revenues in both global wealth management and the Institutional Group for the quarter and first six months of 2013. For the quarter global wealth revenues increased 18% year-over-year and 6% sequentially in the Institutional Group increased 62% year-over-year and 25% sequentially.

The revenue mix in the first quarter was 56% from global wealth and 44% from the Institutional Group. Our global wealth operating contribution was up 14% sequentially to $79 million which was another all time quarterly record.

The Institutional Group's operating contribution was $30 million, which was up 7% sequentially, but I want to note that the Institutional Group's operating margin of 13.6% is below our target of in the low to mid 20's. However, this is a reflection of the investments we've made in the Institutional Group and our goal is to increase both revenues and expand our operating margin as we take advantage of both the scale and bringing up to profitability some of the investments we have made in our Institutional Group.

Turning to Global Wealth Management, this segment continues to perform well with margins of 28% in the second quarter and 27% for the first six months of the year. Net revenues for the quarter of $283 million increased 18% compared to 2012.

Agency transactions and mutual funds and equities increased, fee-based assets were $21.6 billion, up almost 4.5%. Of that about half is due to net inflows and half is from market appreciation.

Net interest revenues increased as a result of the growth of interest earnings assets of Stifel Bank sales credit from investment banking underwriting increased. Comp and benefits also increased due to adding financial advisors in the associated fixed compensation for support while the comp ratio actually came down due to higher revenues.

In the first six months of 2013 I know there's been a lot of questions on this so I thought I would just share with you that we waived approximately $29 million in money market fees. It's also important to note that as rates rise Stifel Bank will benefit.

We estimate that for the 200 basis points increase it's sort of an instantaneous and parallel rate shock. We would expect net interest at the bank to expand by 8.2% over a 24 month timeframe. Turning to Stifel Bank, asset quality remains high.

This is evident by only three basis points of non-performing assets. Assets totalled $4.3 billion as of June 30th, which was up 41% from last year. We have significant on-balance sheet liquidity.

Our investment securities are approximately $3 billion, up 60%. Portfolio is short with an average life of three years. The total loan portfolio is now over $1 billion. We continue to grow security based and corporate loans.

We anticipate future growth in loans will be greater than in bonds in order to get closer to what our target which would be a 50/50 earning interest earnings asset mix between our bonds and our loans. Deposits were $4 billion, which was up 44%, but we have access to total cash balances in excess of $11 billion. The bank continues to prudently grow assets on a risk adjusted basis capitalizing on the access to our Stifel platform.

As previously announced we are expanding our bank to the acquisition of Acacia Federal. It's a one branch community bank. Acacia has assets of approximately $745 million but I want to note that approximately $200 million of that is cash, which a lot of that is from deposits that we are going to allow to run off.

Therefore, at close I think we're going to add about $450 million of performing loans to the bank's portfolio holdings, not $740 million as some people have been asking. So, again, hopefully that will clarify that. The next slide looks at our institutional group results. I just will say again this as quarter of records.

It's been a very good quarter and I'm just as a tangents here I'm pleased to see some of the investments that we have made, especially in our institutional business beginning to not only bear fruit but the forecast for what it can do is improving almost daily. We posted record net revenues for the quarter which was up 62% to $220 million. Our non-comp expenses also increased, which is again due to our growth.

Pre-tax operating margin was $30 million it was up 68%. But, again, I believe that we will see margin expansion in this business as we begin to scale and take advantage of our previous investments. If you look at Institutional Group revenues institutional brokerage revenues were $108 million, up 43% from a year-ago.

Equity brokerage revenues increased 74% to $67 million due to an increase in trading volume. A lot of this is also our merger with KBW which I've been very pleased with our trading revenues on both platforms.

Fixed Income brokerage revenues were up 11%, but they were down 10% sequentially because of the June months which I've already talked about. Investment banking revenues within our Institutional Group increased 81% to $107 million.

Advisory fee revenues were $48 million, which was 80% higher than last year and 77% higher than the first quarter. Stifel/KBW closed 26 M&A and advisory transactions in the second quarter with the full quarter of the KBW integration contributing to the results versus in the 26 is versus 17 in the first quarter.

From a fee perspective by sector, FIG represented 49% and tech represented 29% to get in both of those a nod to our mergers with both KBW and Thomas Weisel. We continue to see improvement in our pipeline and remain optimistic that M&A revenue will grow this year driven by results in the second half.

Second quarter new issue environment improved substantially with overall equity markets and continued low volatility levels. For the total market second quarter fees were up over 50% year-over-year and 15% sequentially.

The sequential results were driven by growth equities while the yield area remained consistent with the first quarter. Our capital raising revenues were $59 million, which was 82% increase from last year at 47% sequentially.

Stifel improved in the most important metrics, number of book run transactions and total transactions, and saw increased deal activity and increased inquiry for the fall.

The IPO calendar remains steady and we believe it will continue after the August break. Our backlog continues to build with this trend. The next slide looks at our capital structure as of June 30th total assets were $8.5 billion driven by growth in assets at Stifel Bank. Shareholder's equity was $1.9 billion.

Total capitalization was $2.4 billion. Tier 1 capital risk weighted assets was 20.7%. Book value per share came in at $30.05, which was slightly down from $30.13 last quarters due to two factors.

First, OCI marks and our bank's bonds portfolio and, two, share repurchases in the quarter which drive down book value. Other financial data as of June 30th our total leverage ratio was 3.6 times at the broker-dealer it's two times at the bank it increased to 15.1 times. As I've said the bank is where we plan to continue to add leverage or where we will add leverage.

Our marketing efforts are paying off recruiting remains active. In the quarter we hired senior advisors in Idaho, Tampa, Florida, Elkhart, Indiana, and Austin, Texas. Full time associates are up 11% from the year-ago. That also includes approximately 400 new associates from KBW and Miller Buckfire.

Total client assets are a new record at $151 billion, up 15% from last year. And up 2.5% from the first quarter. In conclusion, the investments we've made in our institutional group to add to our capabilities are evident and improving equity market conditions. This quarter demonstrated the leverage we are building.

We are always focused on growing our advisor business, market fundamentals are improving, and we, therefore, remain optimistic for the outlook of our business. I will now open the call-up for questions.

(Operator Instructions). Your first question comes from the line of Alex Blostein, with Goldman Sachs. Your line is open.

Hey. Good evening guys. How are you?

Hello, Alex.

First question, on the Knight business. Ron, you mentioned the $100 million or something, of revenues contributing annually. Can you talk about the profitability of the business and whether or not you expect it to add actually to the bottom-line in the next couple of quarters?

First of all, I think I said $70 million to $100 million, and that there is some transition time in that, but, we don't do deals that don't add to the bottom-line. So, if we can and we will take a hundred million dollars of revenue we do not pay a lot for the business and it will add to, we didn't issue any shares, and I'm confident of our ability to take that revenue into profitability very quickly. Like day one.

Got you. And any sense like what the margin of the business is right now, though?

I'll talk about our targets okay and our targets are mid 20% to 30%. It takes some time to integrate and new things, but all of our businesses we target in the mid 50's comp to revenue. Our operating businesses and OpEx in the 20's so that leaves 25% margins. It is a new business and there is some ramp time as I'm sure you can appreciate.

Right. And I guess taking step back and just looking at the Fixed Income franchise for you guys the way it stands right now plus the new business if I look at the second quarter results just back a little math seems like there's maybe $10 million or so of trading losses so you're Fixed Income trading run-rate I guess is somewhere in the 50's. That's actually quite higher than relative to where you guys were in the past. Curious to hear what that business looks like today?

I didn't understand your 50's.

I'm just saying when you add back the potential the losses on the trading profits you said $0.08, I think that probably amounts to, I don't know, $10 million or so, of revenue hit. That's like 100% margin. So when you normalize your reported number $40 million in Fixed Income trading revenues by that amount, like a $50 million run-rate for the quarter. I guess A, is that fair? And B, when you think about the business any sense to understand what product composition you have in that business today, who are the clients in the business today to better help us understand what that business would look like going forward?

Let me take your second question first, I'm not sure I understood your first. What I was trying to say was that versus what we would normally do on a normalized trading I think it's well documented at least within the regional community that there was some trading losses that occurred in June and I was just comparing the fact that the delta was about $0.08 a share. Okay? So I will leave it at that because I'm not quite sure how you're getting to the $50 million.

So let's just leave that alone for now, but as it relates to the business in whole, I believe that our Fixed Income franchise is poised for some growth both from the additions of the KBW and the investments that we've made to attack the depository space, the fact that our equity franchise is much more developed than our debt origination franchise. I think that the Knight capabilities in both loan sales and high yield is going to help all of those businesses.

So when I look at what we're doing in Fixed Income, I'm optimistic of our ability to gain market share by just leveraging other capabilities within the firm. I'm also saying and I'm already seeing dead deals and leading dead deals. We let our first high yield deal. A lot of positive things going, but we're starting at a very low base and I expect that business to grow nicely in the future.

Got you. And just a last one for me. Any Knight related gains for you guys this quarter?

It was not significant. We marked it earlier. I think Knight relatively flat in the third quarter. I think it was closed at $3.59 pre the reverse split. You know, sold and got rid of some above $3.75 but now it's obviously down. I think net-net, it's not a big gain in the second quarter and probably as we sit here today a little bit of a mark-to-market loss because the stock has taken a hit here, but we've been reducing our exposure in that investment. We reduced it by almost by two-thirds by cashing out at $3.75 a share.

Got you. Great. Thanks.

You got it.

Your next question comes from the line of Chris Harris. Your line is now open.

Thanks. Hello, guys.

Hello Chris.

So really good quarter for investment banking. Ron, I'm just wondering how sustainable do you think the revenues that you achieved this quarter are going forward? I know we've got a bit a of a seasonal slowdown coming up, but it does sound like your pipeline is shaping up nicely. Can you comment how you see things shaping up for rest of the year for that part of the business?

You know, Chris, that's so market dependent. We provide the same volatility market fundamentals that everyone else does. What I will say is that we've made a lot of investments that I believe not only in normalized market you could tell me what that is, that not only is sustainable we're going to grow it. So, the metrics that I look at, book run transactions, lead managed deals, M&A mandates, the size of deals, inquiries coming in, we have been building this business and building it when many others have been retrenching I believe that results in market share gains. We've had a lot of capability and I expect that to continue.

Now, run into a bad market? Sure. Everyone else, but I believe that overall I believe the fundamentals for capital raising in this country and M&A in this country over the next few years despite the volatilities up and downs of markets is going to improve and that improvement is going to show that the investments we've made in this area are going to bear fruit.

Okay. On that last point it's kind of an interesting phenomenon not just happening with you guys but really everybody. It seems like M&A investment banking is recovering or doing pretty good and the other piece that the trading the sales and trading piece really hasn't. Do you think there's a catch-up that needs to occur there? What can actually transpire to help improve the results in the trading side, commission side of the business, do you think?

Well, I mean first of all I think our trading results were very good. Go back and look at my comments, alright? So that said, if I would point to one factor that will improve trading volumes and I do believe trading volumes will improve it's going to be the equity flows. We are witnessing a rotation from fixed income to equity. I've got a slide in here that shows it somewhat slowed in the quarter but as you see, and I believe you will, as you see a reallocation from Fixed Income into equities that will result in new positions being added blah, blah, blah. You know, we witnessed $500 billion of equity outflows and people are surprised that equity volumes are down. I'm not. If that reverses and we see $500 billion into equity funds, guess what, volumes are going to go up.

Yes. It certainly seems like that's heading in the right direction. No doubt about it.

I think so.

Okay. Alright. Ron, you had mentioned a target for the institutional business of low to mid 20% margins. Curious what kind of revenue you think you need to hit that target?

First of all we've been at that target before. Okay?

Right, right.

And I would point to the fact that when we made significant investments in our Global Wealth Management business in 2008 and 2009, our margins went from 27% to 16% and I told people then that those investments would take time, but you would see revenue increase and an expansion in margins and you have seen that. I am saying that's what we expect to happen in the institutional business. We have added a lot of capabilities because our belief is that we can gain market share if we're willing to invest in people and in capabilities and in businesses. I.E. KBW, Miller Buckfire, Knight, Stone & Youngberg, we've made a lot of investments. I believe that as we bring those integrations and hiring don't hit the ground running you crawl, walk and then run. But a combination of people coming up to speed, us right-sizing some expenses, and some revenue growth we'll see those margins expand and both revenue and margin expansion is good for that business and good for the overall firm.

Yes. Definitely looks like you're positioned if we get a snap back in volumes. Okay. Alright. Thanks a lot, Ron.

Yes.

Your next question comes from the line of Hugh Miller. Your line is now open.

Good afternoon. I wanted to start off with a question with regards to the bank M&A segment. It seems like obviously we're more in the summer months but from what I've been reading it appears that interest in bank M&A activity has just continued to build momentum and was wondering if you could just give us some color on what you've been seeing in those discussions since the June month has ended?

I think overall volumes, I'm very pleased with our market shares results and where we are. I've often commented that it's like being the tallest midget in the circus because there's been not a lot of business going on overall. I believe that the business in the fixed space and bank M&A and all of that is going to increase. The tremendous market rally of 2012, which was predicted in 2011 will occur at some point and I just think we're well positioned. The integration has gone very well, we're clients facing and things are good. Overall, a lot of it is just getting stocks above tangible book and you don't see a lot of interest one way or another unless it's stressful where some of these banks trade but as markets improve, that activity almost by definition will improve because there is some consolidation that needs to occur.

Sure. Transitioning to your bank and your lending opportunities, obviously with the steepening of the yield curve that can be certainly a positive for profitability. Was wondering, if that changes your outlook? Obviously you had strong outlook just with regards to lending and your efforts there and are there any particular lending products that you see more opportunity in order to grow the loan portfolio.

Again, I think our opportunities in the loan portfolio exceed our willingness to grow that fast and so. We want to grow on a balanced basis just because I think that's prudent in the bank. The fundamentals and the business are improving and the way I characterize it is that we have not gone into the share national credit and pick up a lot of yield. At one point we've been more in the bonds market but the way I would look at it would be that I think our average spread in the bond portfolio is, $1.90 190 basis points and in the loan portfolio is in the three's, three and a half maybe so what we're looking to do is to go from say $3 billion in investments and $1 billion in loans to 50/50 and you can see what that will do to our net interest margins, but that takes time. I've said before and I will say it again that the bank will continue to be a growing contributor to our earnings. We just want to do it on a risk-adjusted basis.

Right and do you see the opportunity more on the commercial lending side for institutions or looking more at lending towards the retail side or are there any particular products that you see growing faster than the others?

Yes. Look, we have $151 billion of client assets and $500 million of security based loans so there's a big opportunity there and we see a big opportunity in the C&I market. I just see a big opportunity everywhere I look there.

Okay. Okay. That's great color. You obviously talked about the beginnings of the signs of a shift maybe away from Fixed Income and towards equities but given I guess where we have come from and how high the markets have run here, the flows haven't been all that bowling people over. Can you give a sense of what your hearing from your brokers about overall retail clients sentiment and activity levels and are we seeing investors becoming more bullish on the market and that we should anticipate further allocation shift away?

That's how I started the call and so what I will say is I think the retail engagement has remained strong, and resilient through volatilities and world events and blah, blah. What is really going on is that as you know this is not the kind of bull market where everyone is excited and talking about at cocktail parties, people getting excited about equities. This has been a rebound. People are getting back to 2007 levels. People seeing unrealized gains turning into some realized gains.

As I have said, if you really want to see this market go and what I am concerned about is we've had a nice run, but if we can get some fundamentals GDP growth to 3%, four quarters in a row that add up to 3% and maybe more, that you can see a real shift away because that means interest rates, tapering, interest rates will begin to rise everyone is worried about it, I happen to think it will be a good thing. And you will have more engagement in the equity markets and that will bode well for what we've been doing. Have I seen that? I'm seeing the beginning of it, not the end of it. So it doesn't feel like the end of a bull market where everyone is rushing in. That's what's interesting about this market.

I would definitely agree. And then last question I had you gave us some color on the money market fees waived and then the shock influence on the bank for 200 basis points, but are those the two major drivers of interest rate changes for the Company or, do you have any sense as to overall on the pre-tax income on what, for example, like a hundred basis point rise in rates would do inclusive of those fees and the bank and any other type of major influence on the Company?

Look, I believe overall it's positive. The money market is easy to quantify. The rest of this is so model driven that I get nervous talking about it too much because the variables change. Pre-payments change, activity changes. There's just so many changes and these are static models so I will say that like most financial institutions we would benefit from a rise in interest rates.

We would not benefit from a flattening of the yield curve but we would benefit from an overall upward shift in interest rates. If for no other reason than we fund a lot of interest earning assets with equity. So that in and of itself if you think about it we've got $2 billion of equity and take tangible and raise rates a hundred basis points and understand that we've financed those assets with equity plus money markets fee waivers, plus then the big unknown is what happens to activity levels, what happens to M&A. We're well-positioned for that. I think the biggest impact would come from improving economic conditions, which would result in upward shift in interest rates.

Okay. And then I guess the last question I have is any chance you want to take a stab at when you think those rates are going to head higher?

Only fools predict interest rates. I will end with that.

That sounds good. Thank you.

Yes.

Your next question comes from the line of Douglas Sipkin. Your line is now open.

Yes. Thank you and good afternoon. Just two questions. One, maybe drill down a little bit more on specifically the municipal market. Just curious to get you guys' outlook on it. Obviously Detroit happened, we have seen pretty consistent alpha's our of muni and I guess it hasn't weighed as much on your results but it is a factor for the industry. I'm just curious what are you guys thinking for the second half of 2013? Has there been some serious damage done to investor's psyche or do you guys see that market stabilizing?

If the status quo stays, I see it stabilizing. I mean, there might be some more unique or unprecedented events that come out of the Detroit situation, which could impact that, but also you get risk premiums widening, you get an upward shift in interest rates it's going to impact refunding, it impacts the business just like it does on the taxable side. I have seen this before in the muni market and I may temper my expectations for a muni business but long-term the muni business is a very good business and there's going to be a need for a bunch of restructurings and a bunch of infrastructure investments and I don't see it changing. Now, if you do something with the federal tax code, that can obviously change some things, but as I sit here today, I'm not overly concerned.

Great. On the last couple of years you guys have been building on the institutional side a little bit more than on the retail side. What would it take for you to re-engage and a little bit more aggressive in either recruiting or doing straight up retail type acquisitions like you did a couple years back?

There's no reason we wouldn't do any of that, okay? We are a firm that our stated business is to be in a position it take advantage of opportunities and do deals that we believe add to shareholder value that we can integrate effectively. Most of those opportunities have presented themselves on the institutional side of the business because it's been frankly on its rear that business. We're looking across the abyss and making investments. The opportunities we've seen on the retail side have not been plentiful and have to the been as price attractive. This is not about getting larger. It's about increasing, shareholder value. I would not want you to characterize that we have somehow put down our growth initiatives within global wealth management. Not at all. It's just that the opportunities have not been there for us or anyone frankly. You have not seen a lot of activity there. Our recruiting is strong. And we see that continuing.

And then just last question with respect to capital. Obviously you guys are over capitalized still and you have been making acquisitions and growing the bank. Given the vulnerability of the securities portfolio to a rise in rates and we saw a bit of that this quarter, would you think about maybe doing something else? Maybe more buy backs, I mean I know the stock is above book value, but I don't know. It just seems like the securities portfolio is a bit more vulnerable in a rising rate environment at least on a balance sheet basis. Maybe there's a better use of capital?

Well, we look at that all the time, okay? We are over capitalized and you can either increase the numerator which is increasing your assets, or decrease the denominator, which is buying back shares, both work. We run numbers both ways and we do what we is prudent and the bigger point that you come out of your question is the fact that we are over capitalized. We have run way. If you compare to some of our peers our banks' earnings as a percentage of our total earnings are not anywhere near where other people have them and we have the capital to increase our bank's earnings. Now, I appreciate your comment about whether or not it's prudent to do that versus buy back stock. I can tell you rest assured, we have sharp pencils.

Great. Well, thanks for taking my questions.

You're welcome.

Your next question comes from the line of Chris Harris. Your line is now open.

Just a few follow-ups on the bank. Your net interest margin, there's a lot of moving part going on. I know you guys are cycling out of securities and into loans, but then we all obviously have lower rates now than we had a few years ago. What do you think the outlook is for the net interest margin? I know that your interest earning assets will go up but do you think in addition to that we could see net interest margin expansion over the next year or two?

Absolutely. I mean that's what the plan is that. It comes down to credit and managing credit. If we wanted to sell all of our agency positions and rotate that into mix, then our net interest margins expand overnight. But we want to be prudent as it relates to credit. We believe if we grow our loan portfolio at a prudent pace and in line with market cycles, that we will achieve the right risk adjusted returns, but I would say that based on what we're looking at our net interest margin is going to expand.

Okay. Because it has been coming down. If you look at where you were a year ago or so but maybe we're at a point now where you're bottoming out.

Well, it's come down because I think that our overall we've seen opportunities so we could achieve our ROE hurdles by investing in the bottom market so we've increased our bond portfolio faster than our loan portfolio because we have seen that opportunity on a risk adjusted so of course your margins are going to contract as more of your growth comes from investing in bonds and in loans. But our loan were is over a billion and as that gets to our target of 50/50 by pure math, Chris, our nims have to expand.

Okay. That makes perfect sense. On Acacia, according to the filings at least what we took a look at it looks like bank has negative earnings and I don't know if you can comment on whether that's the case? And then just curious to hear about what you guys can maybe bring to the table to operate that bank a bit more efficiently?

We haven't disclosed a lot. Just think of it as an asset purchase of buying a cleansed loan portfolio of about $450 million. Maybe a little bit more. A cleansed loan portfolio that we're adding to our balance sheet. Without many of the attendant costs that there is to run and independent separately regulated bank.

So you think maybe similar margins to the loans that you're buying that the bank currently has?

Well, no. These are loans and so the interest rate and the net interest margins on this is much wider than what we currently have in the bank.

No. I'm sorry I meant on an operating basis.

Look, Chris I don't want to get into projecting. I said the way we look at this in many ways this is financial transaction and the combination of the considerations given, plus our view of credit whatever, it's and accretive transaction.

Yes. I mean it sounds like it's going to be significantly accretive. I just want to make sure we are off the mark here, but okay. Fair enough. Thank you, Ron.

You're welcome.

There are no further questions on the telephone. Mr Kruszewski, I will return the call back to you.

I would like to thank everyone for joining us. I will conclude by saying that our integration with KBW is going well. I'm excited to welcome our new associates from Knight both here in the US, and in London. We continue to invest in building the premiere investment banking company and financial services company and we believe that the investments we've made in the past will bear fruit and we look forward too to sharing our progress with you on future calls. Thank you very much. Good-bye.

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