Stifel Financial Corp (SF) 2013 Q3 法說會逐字稿

Good afternoon. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the third-quarter earnings call 2013 for Stifel Financial. (Operator Instructions)

Thank you. I will now turn the call over to Jim Zemlyak. You may begin your conference.

Thank you, Mike. Good afternoon. This is Jim Zemlyak, CFO of Stifel Financial. I would like to welcome everyone to our conference call today to discuss our third-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 of financial advisors; general economic, political, regulatory, and market conditions; the investment banking and brokerage industries; our objectives and results; and also may include our belief regarding the effect of various legal proceedings and management's expectations; our liquidity and funding sources; counterparty credit risk; or other similar matters. As such 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 may use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the Company's GAAP results. To the extent we discuss non-GAAP measures, the reconciliation to GAAP is available on our website at Stifel.com.

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 reports on Form 10-Q.

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

Thank you, Jim. Welcome, everyone, and thank you for joining us on our call. I would like to start with an overview of the market.

And I will say this a couple of times -- our results primarily were impacted by the fact that client activity was muted during the summer months, and I will underscore that by the following statistics. And all of these are as compared to the second quarter of 2013.

Equity average daily volumes were down 13%; corporate bond average daily volumes down 15%; US equity capital markets in terms of proceeds raised down 20%; and muni bond debt capital markets business was down 23%. So as you can see, certainly as compared to the second quarter, the third quarter in terms of client activity was certainly tepid at best.

That provides the foundation for my comment in our press release, which stated that despite the fact that the industry reflected muted client activity during the summer months we are pleased with our third-quarter results. Year-over-year revenues are up 19%, and core net income from continuing operations is up 18%, both reflecting the strength of our balanced business model.

We have a very encouraging start to our fourth quarter. We remain focused on serving our clients and are well positioned to capitalize on the opportunities ahead.

So turning to our financial results for the quarter, net revenues for the quarter were $478 million, which represents a 16% increase over the prior year's quarter. Earnings per share from continuing operations totaled $1.00 per diluted share; and after discontinued operations earnings per share was $0.93 per diluted share.

From a financial viewpoint we had a noisy quarter. Items which impacted our results included merger-related expenses, a loss from discontinued operations, and a significant US tax benefit. These items collectively added approximately $30 million to net income or $0.40 per diluted share.

But again, we look at many of those items, even the tax benefit, as non-core. So therefore non-GAAP net income or our core net income totaled $40 million or $0.53 per diluted share; and that compares with net income of $37 million or $0.60 per diluted share last year.

But I will remind you that last year we had a significant impact from Knight, our investment in Knight. That was $0.09 a share. So excluding that it would have been $0.51 last year.

Our non-GAAP pretax margin for the quarter was 13.6%.

I will now update you on the non-core items that impacted our results for the third quarter. We believe that the exclusion of these nonrecurring and in some cases duplicative expenses will allow for a better evaluation of the operating performance of the business, and it facilitates a meaningful comparison of our Company's results in the current period to those in prior and future periods.

Our non-core expenses include merger-related expenses of KBW, Miller Buckfire, and the Fixed Income Business from Knight Capital. It also includes the results of SN Canada, which are presented as discontinued operations, and a US tax benefit.

Looking at merger-related expenses they totaled approximately $20 million, and that compares to our estimate of $29.5 million that we gave you last quarter.

With respect to discontinued operations, that is the result of our decision to cease business operations in Canada. Therefore we are showing those results as discontinued operations below the line, net of tax; and that totaled $5.2 million.

In connection with discontinuing the business operations of Canada, which we did in the quarter, we recorded a $58 million US tax benefit due to the realized lost on our investment in Canada. What it really is saying is that we believe that in the next 12 months our investment in Canada will become worthless; and therefore we will record a benefit on our investment in Canada.

Finally we recorded a $5 million compensation accrual, which is related to that US tax benefit. Thus, taken together the above items added $30 million to net income during the quarter or $0.40 per diluted share.

Looking forward we reiterate our previous estimate of $8 million to $10 million in merger-related expenses for the fourth quarter of 2013.

Looking at discontinued operations, we announced the cessation of business in Canada. The results of this business, previously reported in our Institutional Group, have been classified as discontinued operations for all periods presented. We will continue to report the results from SN Canada as discontinued operations, net of tax, as we wind down the business operations.

I have already gotten several questions as to whether or not we will provide prior results showing discontinued operations, and we will look to meet that request.

During the third quarter, therefore, if you look at this we incurred a loss from discontinued operations, net of tax, of $5 million. And that is compared to a relative breakeven in the prior year. Included in the results in this quarter are restructuring expenses of $5 million related primarily to severance benefits.

So looking forward, a good question would be -- if it is going to be worthless, what is the remaining equity in Canada? And it's our way of estimating future losses relating to discontinued operations.

So as we look at it, our Canadian subsidiary will have an estimated $7 million to $10 million in liquid capitalization. So we estimate that this entity will be worthless; and therefore you can expect another $7 million to $10 million of additional loss from discontinued operations over approximately the next 12 months.

Now turning to the financial results for the first nine months of 2013, we posted record net revenues of $1.4 billion, which was up 19%; non-GAAP net income from continuing operations of $125 million or $1.71 a diluted share. That compared to net income from continuing operations of $102 million or $1.62 per diluted share, including the $0.09 of the diluted share related to Knight last year. Our non-GAAP pretax margin was 14.5%.

If I look at our sources of revenues for the quarter, commission revenues increased 16%; the increase was due really again to, in our private client group, higher mutual fund and OTC transactions. Principal transactions were up 20% due to an increase in equity and fixed-income institutional brokerage revenues. That is really the bringing on both KBW on the equities side and Knight on the fixed-income side.

Investment banking revenues were up 29% to $93 million from $72 million. The year-over-year increase was a result of a 20% increase in capital raising and 44% increase in advisory revenues. Our investment banking revenues obviously were positively impacted by our mergers with KBW and Miller Buckfire.

However, I would be remiss if I did not point out that looking sequentially our investment banking revenues declined 22%, which was a result of the tepid client activity in the quarter. I will discuss what has been going on in the fourth quarter in this line item in a bit.

Asset management service fee revenues increased 22% to $77 million. Other income decreased 58% to $13 million compared to $31 million last year; and again last year included a $26 million realized and unrealized gain from our investment in Knight Capital.

Net interest income, up 35% as a result of the continued growth of the net earning assets of Stifel Bank, offset by the increase in interest expense due to the senior notes that were issued in December of 2012.

Looking at brokerage revenues, I've stated in the past that we look at the impact of commissions and principal transactions sort of on a combined basis. Brokerage revenues for the quarter were up 18% compared to the prior-year quarter and up slightly compared to the second quarter of 2013. Looking sequentially we had declines in brokerage revenues in our private client institutional equity businesses, which were offset -- actually more than offset, by increased fixed-income brokerage revenues, primarily the result of our Knight acquisition.

The next slide reviews our core noninterest expenses for the third quarter. Comp and benefits as a percentage of net revenues was 62% in the third quarter compared to 63.9% in the year-ago quarter and 62.8% in the second quarter of 2013. Our goal is to maintain comps within our targeted range of 62% to 64%.

Transition pay as a percentage of net revenues was 4.6% compared to 4.3% last year. Core non-comp operating expenses were $117 million or 24.4% of net revenues, compared with 21.4% in the third quarter of last year. While this is within the range of $115 million to $120 million I discussed during last quarter's call, I will say that the percentage of non-comp expense to net revenue is high at 24.4%, and we look to drive this ratio closer to 21% through leveraging of expenses, through increased revenue, and more stringent cost controls.

The next slide looks at our core noninterest expenses for the first nine months of 2013. My only real comment is that comp and benefits as a percentage of net revenues is now at 62.9%, which is right in the middle of our range of 62% to 64% for comp and benefits.

The next slide shows the results of our reporting segments for the third-quarter. Global Wealth Management posted net revenues of $275 million, up 10% from the prior year, but it was down 3% from the second quarter. The private client group's net revenues increased 9% from the prior year and Stifel Bank's net revenues were up 27%.

Our Institutional Group posted net revenues of $205 million. It was up 25% year-over-year but down 5% from the second quarter.

The revenue mix in the third quarter was 57% from our Global Wealth Management and 43% from our Institutional Group. As I said, I like this mix and I like our balanced business model.

Global Wealth Management's operating contribution was up 6% from the prior year to $72 million, but down 9% from the second quarter. Our Institutional Group's operating contribution is up 5% from the prior year and increased 13% sequentially.

I will discuss the results of our reporting segments in the next few slides here.

First, Global Wealth Management. It continues to perform well with margins of 26.3% for the third quarter and 26.8% for the first nine months. Commission revenues were up 11%. Asset management service fees up 22%. Our fee-based assets increased 17% from the prior year; they now stand at just over $24 billion.

Net interest revenues were up 25% as a result of increased net interest revenues, as we continue to execute our strategy of prudently growing the interest-earning assets at Stifel Bank. Comp and benefits in this segment increased 12%, but as a percentage of net revenues remained really fairly constant at a little over 58% of net revenues. And non-comp operating expense increased 17%; but again we have maintained our margins in our Global Wealth Management business.

I often get asked about our strategy with respect to our Global Wealth Management business, and my answer is that I view past as prolog. This next slide compares our 2005 network, which consisted of 92 branches of 644 financial advisors, to today's network of 316 branches and 2,075 advisors.

We like the Global Wealth business. We will continue to invest in it. But our growth in this business will be tempered by the fact that we want to have our investments equate to increased shareholder value.

So we will not just have growth at any cost. We will continue to invest in this business prudently and invest in a manner that will increase shareholder value.

Turning to the next slide on Stifel Bank, I just want to say I have had a few comments on this, that the strategy within our Bank has remained consistent since we added the Bank. And that is, we are effectively monetizing deposits from our broker-dealer and providing complementary services to the clients of both our private client, our Global Wealth business, and our Institutional business.

This is not a wholesale bank. It is an extension of and is complementary to our businesses.

A couple of items of note during the third quarter. We were not immune to the marketwide decline in mortgage banking, which negatively impacted Bank earnings. We also had an increase in nonperforming loans, all of which consisted of exactly one loan relationship of $14 million, a number that still is relatively immaterial to the Bank's balance sheet, as can be seen, with nonperforming assets of 32 basis points.

As the Bank migrates, though, the mix between loans and bonds closer to 50-50 you will see some loans migrate to nonperforming status. But we believe you will also see higher margins through basically a higher net interest margin.

The Bank also closed on the Acacia transaction in October, which will be immediately accretive and discussed in more detail later in this presentation.

The next slide looks at our Institutional Group results for the third quarter. Our Institutional Group segment posted net revenues of $205 million in the quarter. It was an increase of 5% compared to the third quarter of 2012 and as I -- I am sorry it is actually net revenues are up 25% compared to that, but down 5% sequentially.

As I previously mentioned the increase is due primarily because of the impact of our acquisitions of KBW, Miller Buckfire, and our Knight Fixed Income Business. Our comp and benefits expense up 17%, but as a percentage of net revenues it is more in line with our target of the high 50%s, at 58.4% compared to 62% in the prior year. We were making investments in the prior year that are beginning to show revenue.

But I will say that our margin of 17% is well below our stated range of the low 20%s, 22% to 25%. And that is due primarily to the fact that our non-comp expenses is running at almost 25%. We need to leverage those non-comp expenses. We made investments, and we will continue to drive those margins higher in our Institutional Group.

If you look at our Institutional Group revenues for the quarter, which is the next slide, I will say that our equity business -- which includes equity brokerage, capital raising, and advisory -- all show significant year-over-year growth which is driven primarily by two factors. First is our merger with KBW and second is that many of our investments from prior years are beginning to show revenue.

To illustrate, equity brokerage revenues up 68%; equity capital-raising revenues up 88%; and advisory fees are up 44% year-over-year. However, on a sequential basis we like many others experienced a slow environment. Result was a decline in equity brokerage of 9%, decline in capital raising of 27%, and advisory fees declined 18%.

Looking at fixed income, our Institutional fixed income brokerage business has been positively impacted by our acquisition of Knight, offset by weaker muni public finance revenues. Taken all together I don't view our total Institutional quarterly revenues of $205 million to be representative of the revenue potential of our Institutional business.

The next slide details our capital structure. When looking at our capital structure you can see we are conservatively levered. Our Tier 1 risk-based capital ratio was greater than 23% at quarter end.

If we were to operate closer to 18%, which is really our goal and which is more in line with our peers, we could add $4 billion in assets. For illustrative purposes, if we added those assets in our Bank and had our Tier 1 leverage more in line with what many of our peers are today, and you apply some conservative earning assumptions on that growth, you would have EPS accretion of more than 20%.

We understand that we are overcapitalized and we understand that we need to properly lever this Company. But we will do so on a risk-adjusted basis.

Turning to other financial data. As of September 30, our total leverage ratio as we define it was 3.6%. As we have said in the past we deploy that leverage not in the broker-dealer where it is 1.9 times, but we do so at Stifel Bank, which is at 15 times. Our focus will be that our leverage is within the Bank.

Our marketing efforts are paying off. Our recruiting remains active. Although last year we have added over 500 net new people to our Firm, our total associate number today is nearly 5,800. Total client assets total $154 billion which is up 13% from last year.

I want to give an update on our recent mergers. We have been very active. As I was looking and preparing for this call I had to remind ourselves of what we have been doing.

First, the KBW transaction. We announced that transaction almost exactly a year ago today, November 5 of 2012; it closed on February 15. I want to say the integration has gone very well.

But not only has integration gone well, our year-to-date advisory, our business is showing a success by the fact that we are number one by number of bank mergers, number one by number of insurance mergers, and number two by number of FIG mergers, and number three by bank deal volume.

So we have done well. We see increased market share in common equity FIG deals and equity trading volumes. This deal has -- the best way to say it is that on a combined basis, looking at as if we were combined in 2012 and in 2013, we have gained market share and increased revenues both in equity flow business and in investment banking.

So in this deal our strategy and our execution has proven to have worked in that 1 and 1 equals more than 2. We are pleased with that.

But I will say integration takes time. People focus inward during integration time. And I look forward to 2014 where we are going to play a little more offense with this platform, and we look to continue to gain market share with our KBW brand.

Looking at Knight, our Knight fixed income transaction closed July 1, 2013. We welcomed approximately 90 professionals to the firm. Our third-quarter revenues were in line with our expectation.

Sales and trading integration has gone very well, complementing our existing capabilities. We have added significantly to our investment grade high-yield and low trading focus.

This group is primarily located in Greenwich and in London, with also some people in New York. And I would say that the Knight business is fully integrated and is beginning to find its way around Stifel.

The Miller Buckfire transaction was completed at the beginning -- or right at the end of last year. The transaction has already resulted in nine completed or ongoing transactions. A number of those were won by leveraging and including our other capabilities across Stifel, which was the strategic rationale for this deal.

Won assignments on a number of high-profile advisory. Includes the city of Detroit, Lehman Brothers, UniTek, Furniture Brands, Excel Maritime, and Encore. So we have been pleased with Miller Buckfire.

With respect to the Acacia deal we previously announced the acquisition of Acacia Federal Savings Bank. It will be $525 million in assets. That deal closed on October 31 at an attractive discount to tangible book value.

We expect significant synergies in connection with a single branch closing, which will occur in the first quarter of 2014. It is immediately accretive to our tangible book value. And we expect, if you want to model this, we expect it to add $10 million to core earnings in each of the next few years.

It is consistent with our asset-generation strategy within the Bank. And in addition to that we will probably -- I believe we will have a few tax benefits and probably bargain purchase gain, also which we will talk about in the fourth quarter.

We also announced the merger or acquisition of Zeigler Lotsoff Capital Management on October 16. This is a Chicago and Milwaukee based asset management company currently managing a little over $4 billion in assets.

This team brings additional expertise and capabilities to Stifel's asset management efforts. It is the opportunity to bring together Stifel asset management under one umbrella. So in total assets under management for this entity will exceed $9 billion.

We expect to close this in the fourth quarter. And I will just say that I often get asked about our view toward the asset management business. And when we can -- and we look at it -- when we can add to this business again in a manner that we believe is accretive, we will do so. We see some opportunities even today to really build our asset management capabilities.

So in conclusion, the diversification of our mix of business has contributed to our solid performance for the quarter. Looking forward we haven't had much time to lament about the tepid environment, especially in August during our third quarter.

Of note so far in the fourth quarter, I will say that we recorded record brokerage revenues in the month of October. Our equity business has been strong, evidenced by the fact that fourth quarter to today we have completed 38 -- on capital raising we have completed 38 deals, 15 of which were book run, which compares to 43 transactions, 16 book run, for all of the third quarter.

Of note, in 2010 it was an aspiration to be a lead book runner alongside the bulge bracket firms. Today I can state we have accomplished that goal.

Of note, on a single day in October we book managed four equity deals.

On the advisory side we announce our largest advisory transaction in the Firm's history in October, the sale by Consol Energy of certain mines to Murray Energy for 2approximately $4 billion. Equally impressive we announced today a multibillion sale of a specialty pharmaceutical company, Santarus, to Salix Pharmaceuticals.

These two transactions underscore exactly where we are taking our banking franchise. Our banking teams include senior bankers, industry experts, M&A professionals, and debt and equity specialists. We expect the Consol deal to close this quarter and the Santarus deal to close early in 2014; and both transactions individually represent the largest M&A fees in our history.

The increase in rates and uncertainty surrounding the muni markets have negatively impacted our public finance business, but we see that business stabilizing. And finally we believe that our recent mergers -- KBW, Miller Buckfire, Knight, Acacia, and Zeigler -- will all add to our business in 2014.

So with that I would be pleased to take questions.

(Operator Instructions) Patrick O'Shaughnessy, Raymond James.

Good afternoon. My first question is on Stifel Bank. To get to your targeted 50-50 mix between loans and securities, do you envision more deals like the Acacia deal? Or do you plan on just organically growing Stifel Bank's assets by sourcing loans to your Global Wealth Management clients?

And if it is the latter, how do you accelerate the growth of your loans to the Global Wealth Management clients?

Look, I would say our goal is to organically grow, and we will do that by just continuing to build our capabilities. It just goes to how we have built the Bank. It was easier to build the Bank on the investment side versus the loan side, and we have been continuing to build our loan [origin] capabilities.

We just want to do so prudently. That is a business you have got to be careful about from a credit perspective.

So the goal is to increase our loans as a percentage of total assets, and we will do so. And our primary way to do that will be organically, although I am not going to sneeze at -- these are -- the transaction we just did because it was financially a very attractive transaction.

Is there anything specific you can do in terms of training your advisors to try to encourage them to source loans to their clients?

Sure. There is a number of things that we can do. Again, as I have always said, Patrick, our goal is to grow our loan -- i.e., our credit book -- prudently and we will do so with prudence. And that loan growth has been accelerating and will continue to accelerate, but I don't have any targets.

All right. I appreciate that. Then my follow-up question, at this point can you maybe just recap what your asset management strategy is? Obviously you did the deal that closed after the quarter -- or you announced it after the quarter and it is going to close in November. But can you just give a high-level view of what your asset management strategy is at this point?

Look, we have a number of asset management units, many of which we have gotten through our mergers. We have a $1 billion small-cap manager that is doing exceptionally well and growing. We have internally managed programs that have in excess of $1 billion.

We have large-cap. We have a traditional asset management group that has performance and [we're] compliant in businesses that we are marketing. They have been pretty -- they've been more individual units and we are going to pull them together and put them under an umbrella and drive some of the synergies that come out of things that you can do in terms of marketing -- not investment process, but other back-office synergies.

So we have always liked the asset management business. We just haven't liked the return on investment of being in those businesses from an acquisition perspective. So we will continue to build that and I believe the future is going to present some opportunities for us in that business.

All right, that is helpful. Thank you.

Devin Ryan, JMP Securities.

Good afternoon, Ron. So in the fixed-income business, last quarter you had about $0.08 of, I think, trading-related losses. So just want to see if it is reasonable to assume that the base was admittedly higher this quarter. I am assuming that didn't recur.

Then just with respect to Knight, you mentioned in your remarks that revenues were in line with expectations. So I am assuming you're not referring to the fully ramped $70 million to $100 million run rate. I guess if that is true, any sense of where that business is and a timeline to getting to fully ramped?

Well, let me answer your question. I will be a little less -- I am going to try to provide a little more color. I don't want to really give the number.

But it was within our range, okay? It would be fully ramped. I am pleased with how they have started, all right?

So on an annualized basis it would be within my expectations, if that answers your question.

What I would say is that the overall business -- I think you see in the Street. Our fixed-income business we did not experience a losses. But that business was also impacted by the slow client activity, masked by the additional business that we got from Knight.

So I think our Institutional business in general faced a tough environment in the third quarter, which dovetails back to my remarks where I believe that our overall revenue in that business is not a run rate.

Okay, got it. Helpful. Then just coming back to the thought of increasing leverage at the parent to maybe more in line with some of your peers, which you have spoken about; and then using that to expand the Bank's balance sheet. I guess obviously expanding the loan portfolio is one of the stated goals, and then that will happen over time, but that is maybe a little bit slower process.

How fast can you increase the securities portfolio? Or how fast can you do it that you are comfortable with, I guess, increasing it?

It is a good question. I think we don't -- we want to -- we look at things in terms of ROE hurdles. So we are not -- obviously there's two ways to deal with your leverage ratio. One is to increase assets; two is to buy back shares to deal with the denominator of that.

So we believe that -- right now we believe the way we want to do this is to increase the assets where we do it prudently and as quick as we can, subject to achieving an acceptable return on equity on incremental capital.

So how fast? Look, I don't like ever growing a bank too fast, in any method, because I think you are making a bit at the current credit cycle and the current interest rate curve. So what we will continue to do so -- so I recognize the challenge of leveraging this. I just want to point out that we know that and we have runway in our leverage ratios to support growth.

That is really my point. And I think on a comparative basis you should be looking at our ability to grow without dilution and the earnings power that is associated with that.

Thank you. Just lastly you mentioned in your remarks and I think it is pretty clear from the industry data, equity issuance has been very strong quarter-to-date. Stifel has been clearly participating in that.

Is there anything that you are seeing that could change the pace? Does it feel like we are just seeing a pent-up phenomenon just of deals that maybe weren't able to occur in the third quarter? Just any sense of how strong it maybe has been and expectations for the foreseeable future in that business.

Look, business has been robust. So I guess that in the past periods like this have not been that long-lived, and so I probably am cautious because of the last few years.

That said, we revised GDP growth up to 2.8% this year. You don't see significant Fed policy changes. I don't see any real -- hopefully nothing in Washington, the normal things that can curtail issuance.

So I certainly believe that there is a lot to be done and a lot of people are looking to get it done. And I expect this quarter to remain relatively robust absent some external event.

I think valuations are reasonable and things are getting done. I really am not going to project anything into 2014. I can't see that forward. But from the trend line of the last few years, I think overall, everything being equal, 2014 will be a better year.

Okay, great. Thanks for all of the color.

Chris Harris, Wells Fargo.

Just to follow up on that last point on ISG, maybe to help us frame up how good October was, maybe you guys don't have this information; but if you were to run-rate October for the full quarter, what could we be looking at in terms of revenues?

Chris, I -- no.

(laughter) All right. I thought I would ask.

That is all right. I appreciate you asking.

Okay. So maybe switching gears a little bit, talking about the cost side of the equation. Ron, you did mention that target for you is to get the non-comp down to 21% of revenue. Curious if you maybe can expand on that a little bit for us.

What areas do you think you could potentially wring out additional expense saves? And what kind of timeline do you think you might be thinking about?

I think it has been -- I would think that our self grade on this is that our ability to do mergers and integrate and maximize revenue has been very good. And part of that has been that we tend to be less strong on the cuttingboard of expenses. We try to bring things together nicely, and that works.

So what has happened is that just keeps compounding itself. And as I look at it, to answer your question, is that 24% comp, non-comp to revenue is maybe half -- to get to my goal it's probably half just generating revenues for what we think. We don't think that this is a typical revenue quarter, the third quarter.

But the other half is in stringent cost controls. We need to now be going and looking at some of our overlaps in occupancies. Some are -- there is a lot of areas, and communications; there is a number of things that are duplicative of the 17 deals that we have done.

And I think we have done a good job, but I will not live with 24% noncomp to revenue, because that almost by definition will not allow us to achieve our goal of 15% pretax margin. So it is work to do, but we have a plan, if that answers your question.

Okay. No, excellent. It does. Then last question for me. There has been a few other questions on the Bank already; I will try to maybe ask in a different way.

If you grow your Bank materially from here, I am just wondering how you feel about the team that you have got at the Bank today. Do you feel like you need more bodies there to handle perhaps the higher rate of loan growth you might be getting? Or do you feel pretty good about the infrastructure you have got in place?

Look, I have a great team, an absolutely great team. But both to deal with the volume of business, and to do so prudently, and frankly to deal with the increased regulatory burden that occurs as you grow larger and you cross certain thresholds, we will be adding to our already talented team.

But again, we have run the Bank at very efficient ratios and high ROEs, and that doesn't have to change. But we are not going to materially expand our return on assets by growing, because we have to add people and capabilities as you do that. And the regulatory burdens are not insignificant.

Got it. Okay. Thanks, Ron.

(Operator Instructions) Douglas Sipkin, Susquehanna.

Thank you. Good afternoon. I just had two questions.

One first, relating to municipals, I think it has been addressed a little bit. But maybe trying to think about it from a different perspective, I think you indicated last quarter it was a trading loss which maybe took away $0.06, $0.07, $0.08, something like that. Just checking on some of your competitors; obviously there was a sharp snapback.

I am just wondering if you could categorize if you had any significant trading gains from municipals this quarter, comparative to the big loss you had last quarter. And that was just my first question.

I would say that I wouldn't say it was a snapback. I would say that we reported our loss last quarter in many ways as (technical difficulty) from normal, all right, and not just the absolute loss. So I would say that even last quarter our trading profits compared to our run rate was below norm. But it was not as significant as it was in June.

So did we a significant -- like was it -- did we reverse some previously book -- and I am sure we did some. But nothing worth talking about, if that answers your question.

Okay, no, that is helpful. Then secondly just drilling down a little bit on the Bank, I'm just trying to understand. I know the pickup in the non-performers, I guess it is the first of the kind for you guys. And I guess as a percentage of the total assets it is not too big of a deal.

But I guess if you look at it more on a percentage of commercial loans, and you take out the resi-s because I think that is where the jump was, it is about 3%. And it is surprising considering how good credit has been for regional banks in the United States for some time now.

So I am just wondering. It is just strange. I mean, was there one unique event there?

Yes, I think I said on the call. I mean, it is one loan. Okay? It was one loan.

We think we understand it, we think we have our arms around it, but it went nonperforming. When you start with zero non-performers and you add one -- in this case it was a $14 million relationship -- it does look significant. But I don't believe it is a trend.

It is not like a whole bunch when it is one relationship. So I believe, I certainly would not extrapolate a trend out of that, Doug. I know what the loan relationship is.

That said, I wouldn't also expect that we were going to have zero non-performers, which is what we have had. So we are going to see an increase in non-performers, and we are going to see increases in our net interest margins. And we believe that net-net our increase in NIM minus our credit is going to be greater than where we have been doing investments.

But if you are going to be doing C&I loans, you are going to run into non-performers.

Okay, great. No, that is helpful. Thank you for all of the color, particularly on the fixed income.

No problem.

There are no further questions. I will turn the call back over to the presenters.

Okay. Well, I will again thank everyone for their time. I would look forward to be reporting to you on hopefully a quarter where business continues apace as it has for the first half of the quarter. Thank you very much and take care.

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