Stifel Financial Corp (SF) 2014 Q1 法說會逐字稿

Good afternoon. My name is Jamie and I will be your conference operator today. At this time I'd like to welcome everyone to the First Quarter Earnings Call 2014. 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).

Jim Zemlyak, CFO with Stifel, you may begin your conference.

Good afternoon. This is Jim Zemlyak, CFO of Stifel. I'd like to welcome everyone to our conference call today to discuss our first quarter 2014 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 listener's 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 industry, our objectives and results and also may include our belief regarding the effects of various legal proceedings, management expectations, our liquidity and funding sources, counter party, credit risks 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 statement 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.

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 results on 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.

Thanks, Jim, and welcome, everyone, to our call. As typical, I'd like to start with my overall statement on the quarter. During the first quarter we delivered solid results. Contributions from both operating segments, Institutional and Global Wealth Management, drove a 25% year-over-year increase in total net revenues.

We continue to attract experienced financial advisors and total client assets reached a record $168 billion. Investment banking produced very nice results driven by both advisory and capital raising transactions in the quarter. We continue to benefit from our expansion of the institutional group.

On April 3rd, 2014 we closed the previously announced acquisition of De La Rosa and Company, a California based public finance and investment banking boutique. We've integrated this impressive group into our current platform and we are excited about their contribution to Stifel's fixed income capabilities going forward.

Furthermore, today we announced the acquisition of Oriel Securities, which will significantly expand our Company's depth, expertise and reach in London, a vital global financial center. We are excited to partner with Oriel to grow our business internationally.

Before I turn to the results for the quarter let me provide some details on the acquisition that we announced today of Oriel. The rationale for this deal is basically twofold. First, we are broadening our research sales and trading and investment banking capabilities in London through an experienced team. This builds on the investments we've made in Europe through KBW and Knight and is frankly a great addition to Stifel's legacy platform. Through this combination there is very little overlap.

Second, we gain an experienced management team with extensive client relationships in a key economy. We currently have 160 associates in London. With the addition of Oriel we'll have more than 250. We expect combined annual revenues to be in the range of $160 million to $200 million in this market.

As with all of our deals, key management associates have agreed to continuation agreements with us. We're excited to welcome our new partners and finally, we expect closing in the third quarter of this year.

Now turning to our financial results for the quarter, GAAP net revenues for the quarter were $545 million, our second best revenue quarter behind our record results last quarter.

EPS from continuing operations was $0.63 per diluted share. On a non-GAAP basis diluted EPS was $0.69. These results came in a penny higher than consensus expectation that compares with net income of $40 million or $0.58 per diluted share last year.

Our non-comp operating results were within our estimated range of the totals at $119 million. Our effective tax rate was 38.6%. Our margins on a non-GAAP was 15.4%. That's in line with our goal, simply a solid straightforward start to the year.

As I mentioned, we closed our merge with De La Rosa at the start of the second quarter. We're excited about the combination of De La Rosa and Stone & Youngberg with respect to our California muni finance business.

I'll now discuss the sources of revenues for the quarter. Commission revenues were up 9% to $159 million from $146 million last year. This increase was due to higher over-the-counter mutual funds transactions.

Our principal transaction revenues were up 18%. It was primarily due to increase in equity and fixed income institutional brokerage activity as well as contributions from KBW and Knight Capital fixed income business. Businesses were not -- Knight was not with us last quarter and KBW was for half quarter last year.

Investment banking revenues increased 72% to $132 million from $77 million. Increase was the result of 116% increase in advisory revenues from a 48% increase in capital raising.

Asset management service fees were up 29% to $89 million. This increase was due to higher value of our fee-based accounts, both as a result of market appreciation and net new client assets.

Net interest income increased 78% to $34 million as a result of continued growth of interest-earning assets at Stifel Bank.

The next slide looks at our core non-interest expenses for the fourth quarter -- I'm sorry, for the first quarter. Comp and benefits as a percentage of net revenues was within our stated goal. It came in at 62.8% compared to 64.1% in the year ago quarter.

Transition pay as a percentage in net revenues was 4.3% compared to 4.7% last year and core non-comp operating expenses were within our targeted range, came in, as I said, at $119 million or 21.8% of net revenues. That ratio was the same as the year ago period.

The next slide shows the results of our reporting segments. Global Wealth Management posted record net revenues of $297 million, which was up 11% from the prior year. Our Institutional Group posted net revenues of $250 million, which was up 44% year-over-year. It was down sequentially from our record fourth quarter, down about 6.5% from we had a stellar fourth quarter, as I mentioned in the last call.

Global Wealth Management's operating contribution increased 15% to $80 million while our Institutional Group's operating contribution was up 62% from the prior year to $46 million.

Our Global Wealth Management segment had just another great quarter with margins of nearly 27%. They came in at 26.8%.

Commission revenues were up 6% from the prior year as a result in the increased agency transactions.

Principal transactions were down slightly and that was just primarily rotation from fixed income. Most of our fixed income transactions are done principle versus equity that are done agency in this segment so that's the reason that one is up and the other is down. It's a rotation into equities in the quarter.

Asset Management Service fees were up 29%, as I said, as a result in the increase in assets under management to market performance and increase in client assets. The fee-based assets increased 35% from the prior year to $28.4 billion.

Net interest revenues, up 64% as we continue to grow interest earning assets at Stifel Bank and I'd like to talk more about this strategy later in this presentation.

Other revenue declined due to a decrease in investment gains and our private equity investment and a decrease in mortgage fees from loan originations at Stifel Bank.

Comp and benefits as a percentage of net revenues was 58.6% in the quarter compared to 59% in the prior year and our non-comp operating expenses came in at 14.6% versus 15%, so again a very good quarter for our Global Wealth Management.

Looking at Stifel Bank, assets are up 30% to $5 billion for the year ago quarter. Similarly deposits were up 30% to $4.6 billion. Non-performing assets remained at three basis points. Stifel Bank's potential is still a growth opportunity for our Company and again I'll talk more about that in a moment.

The next slide looks at our Institutional Group for the quarter. Our Institutional Group segment had boasted net revenues of $250 million. It's down from our record quarter of $267 last quarter but it's up 44% year-over-year. The increase from last year was due to an increase in activity across the board as well as due to contribution from our acquisitions of KBW, Miller Buckfire and Knight Capital Fixed Income.

Comp and benefits as a percentage of net revenues held at 61.6% year-over-year. Our non-comp expense ratio came down to 20.1% versus 22.1% as a result of pre-tax operating income of $46 million is up 62% year-over-year.

Margins for the quarter were similar to our fourth quarter at 18.3% but still below our goal of mid to low 20s. That said it's still up 16.3% in the year ago quarter. So we're making progress in our margins as we rationalize and drive the synergies of our recent acquisitions in this segment.

Turning if you look the next slide our Institutional Group revenues for the quarter, our revenues came in as I said at $250 million and as our investments over the past few years are beginning to payoff.

Our equity brokerage revenue is up 34% year-over-year. Fixed income is up 29%. Both of these if you think about where we've come on this without giving guidance and I don't want to give guidance but if you look at the annualized quarter we're doing equity flow business of over $260 million and fixed income over $230 million. So these are nice businesses that we've built and have integrated. So as a result our total institutional brokerage revenues were up 31%, $224 million and I think compares well to what's been going on in the Street.

Our equity capital raising increased 93% and if you look at the difficulty in fixed income despite that our fixed income capital raising increased 24% and pull back the covers on that what you'll see is significant increases on our taxable capital raising. That's a result of our additions from Knight Capital. Those increases offset weakness in our muni finance capital raising. It was a weak quarter in muni finance.

Advisory fees were up 116% from last year but were down from the high mark in the fourth quarter of last year. Notably in the quarter we advised Centarus on its $2.6 billion merger with Salix Pharmaceuticals was announced late in 2013 but it closed early in 2014.

Our Institutional Investment Banking revenues increased 85% year-over-year to $122 million.

Looking forward out backlog remains strong. Of note I would say that we just -- we were just involved in the largest bank capital raise of 2,014. Investors Bank Corp was about a $2.2 billion deal. It was a mutual second step conversion. We are the sole advisor on the conversion which is about $1.2 billion to $1.3 billion and we're joint book runner on the offering of about $800 million to $900 million. That was a very nice deal. That occurred in the second quarter of 2014.

Next slide reviews our capital structure. We view this -- we view ourselves as conservatively levered. Our total assets are $9 billion. Our total capitalization equity and debt is $2.5 billion. Our debt to equity ratio is 12.3%. Tier one leverage ratio, 15.4%, our tier one risk-based capital ratio remains very conservative at 25.9%, more on this in a moment.

Looking at other financial data at March 31st, total stockholders' equity was $2.1 billion and book value per share was $32.09. Our total leverage ratio was 3.7 times. As I've said in the past, we're very conservatively levered in our broker dealer and we're two times levered in our broker dealer versus 14 times in Stifel Bank.

Total client assets totaled $168 billion, which is 15% up from last year.

So look, I'd like to maybe just spend a moment here talking about our excess capital and how we got here and before I get there I just want to talk a moment. I'm getting a lot of questions about our investments, especially our investments in the Institutional side of the business and why our focus has been there and I thought it would be instructive to look back to the beginning of the financial crisis.

And so if you look back again in 2007, our Global Wealth Management business was about a $440 million business. Our Institutional business was about a $300 million business. Today Global Wealth Management is about $1.2 billion so that business is up three times and our Institutional business is about $1 billion and it's up about three times.

So we've grown these businesses at the same pace. Our mix to revenues is about the same as it always has been. It's just then that the opportunities that we have seen recently have more been on the institutional side. In all simply we don't discriminate against good deals. We do good deals where we them and I get asked if we'll do any think in the Global Wealth side and my answer is of course we will if the right opportunity comes along.

But as I look back and I think about what we've done. With the benefit of hindsight, we financed a lot of these deals conservatively. We used equity because at the time it was difficult to do acquisitions in the dark, the dark period if you will, the financial crisis.

So as a result we have as we sit here today we have tier one risk-based capital of 26% and 15% tier one leverage. And we're over capitalized relative to our peers and to give you a benchmark there, the three primary peers in our industry, which are bank holding companies with significant broker-dealer operating companies, they average 17% tier one risk weighted and 10% tier one leverage.

And as I said we're, versus the 17% we're at 26% and versus the 10% peer average we're at 15% tier one leverage.

So I see three options that we can use to deploy excess capital. The first option is to grow the numerator or asset base by increasing assets and what this slide shows is that if we target tier one risk-based capital of 17% and tier one leverage of 10% which are still both, I believe, conservative assets could increase by $4.5 billion to $14 billion. This would result in approximately $0.59 in additional EPS earnings to about 21% accretion by leveraging our balance sheet to peer, to our peer levels, with no dilution of book value per share.

The second option would be to look at the denominator side of this and to repurchase stock. Assuming a buyback to reduce our tier one risk based capital to 17% and again our leverage to 10%, we would buy back a fair amount of stock. Our EPS accretion would be 10% but we would dilute book value per share by 8% and that's why we're looking at growing our asset base. It's financially we believe more attractive to grow into our capital base.

The third option would, of course, return capital via dividend. We're not currently evaluating that. We think about it but we think there's a lot of opportunity to leverage our capital in the manners that I'm talking about.

So finally, I want to briefly comment on the perceived notion that markets are unfair to the average investor. We don't buy into this view. We do believe market structure is something that needs to be looked at. I've commented on this but I've been asked on numerous occasions to quantify the revenue profit we generate from our customer order flow.

We'll state that we do not accept payment for order flow. Our orders are executed based on best price.

So in conclusion, we had a solid start to the year. It is my view that equities are now valued fairly in terms of the equity risk premium. As a result, future equity gains will be driven more by earnings growth than by multiple expansion.

And I will also say that retail engagement in April was strong. It came in approximately 8% above our first quarter monthly average.

With that, operator, I'll now open the call for questions.

(Operator Instructions). And your first question comes from the line of Devin Ryan with JMP Securities.

Appreciate the slide on the excess capital opportunities and I know that we've been discussing the substantial opportunity around bank expansion for some time and as you clearly you guys have been growing the bank and then so you already kind of started on that path but with kind of this view and how accretive it can be, is there any update around like in a time frame of getting from where we are today to kind of that fully levered level? Should we think of maybe the pace of growth could be accelerating over the next few quarters here? Just give an update there would be helpful.

Well look I think we can't -- well, I guess we could do it overnight if we chose to do a closed sale asset purchases. We could do it significantly. We're trying to do it in sort of a pace that's our general growth. I don't want to pile into any one credit cycle or any one interest rate cycle. I think today the credit markets are -- I mean the market is I would say extensive and so our growth is not as much. I want to just point out the way we're thinking about it. We're not going to do it overnight but we are, is our goal to grow into our capital base.

If we can't grow into it over time, then we're going to have to look at other ways to deploy or return capital. It is we continue to do it, Devin. Fortunately we also are making a lot of money so that adds to the issue but I just want to point it out because, as I look backwards, you know, and had a perfect compass or barometer of what we were doing I would have used less equity in some of our acquisitions but it's easier to say now versus at the time when things were a little more dicey so we're going to continue to do this.

We recognize the issue. We recognize that as we do this, we get to -- as we leverage the balance sheet to those levels our ROE approaches our targets which is 15%. We think a lot of things look a lot better as we leverage it but unfortunately I can't give you a time frame. That's a long-winded answer to not answer your question.

I still appreciate that detail and I guess just on the same topic, with respect to the deposits and I guess the cash and the broker/dealer, I mean how much more cash is there that could be freed up to be swept into the bank over time?

Plenty.

Okay thanks and then just with respect to that issuance, the revenues from fixed income, underwriting this quarter and very strong is there anything I guess one, was there anything lumpy there this quarter and then also, are you starting to maybe see the runway improving for some of the products like public finance, just anything -- is the environment actually getting better for that business?

Well look I think public finance has had a difficult and volumes were down last year. They certainly didn't improve in the first quarter. I like that, Devin, and continue to like that business. It tends to have its own cycles. It's in a lull cycle now and so [muni] finance business was down appreciably but offset appreciably by tax on by the investments that we have made and in areas where we had done very little capital raising on the taxable side and you're seeing and we're seeing nice contributions from our new partnership in that capital. So that's what we're seeing as at some of these investments. They made sense at the time and they make sense in the numbers today.

Okay great, thanks very much.

Patrick O'Shaughnessy, Raymond James.

So you commented that your April retail trading lines were up I believer 8% from first quarter levels and it's kind of interesting dichotomy because the big online brokers all had really strong first quarters and then they all commented that April volumes had kind of tailed off a little bit. What do you think explains the difference in trading behavior between your two different types of customer bases?

I don't know if it's all trading. I think we -- I view the darts as somewhat indicative but more leading and the following the volume again versus ours which I think tends to be a little bit more steady. We don't see as much volatility around trading but I still see it as we have a fair amount of asset base feeds and we continue to grow that so we bill those in arrears and so -- or at the end of the quarter four and that's not in arrears but I don't know. I mean, I'm not sure I understand all of the dart numbers. I just know what our numbers are. Can I explain it? I think it's not -- our activity is not as highly correlated. We're much more correlated to you than we are to the online guys. I mean you being Raymond James or Morgan Stanley.

Got you, okay I appreciate that. and then I guess touch on the capital question and as you grow a bank at this point, how much more capital do you think you needed downstream to the bank to support your -- the growth of the bank loan base and securities holdings? It looks like your tier one capital ratio has kind of held up pretty well or your leverage ratio in the bank and it feels like you have a fair amount of buffer room to grow that without actually having to downstream more capital. Is that a fair assumption?

Not really. I think that we manage the capital. The bank is well capitalized but the bank's ratios are not the holding company's ratios and so when we look at these numbers we look at liquidity and capital that we can move around between various scenario and it's something we do acquisitions and we need to when we move capital around but as we analyze it, the growth if we did all that growth in the bank we would deploy capital into the bank to support that growth. The bank is well capitalized but I would not say it's as over capitalized as our Holding Company or the consolidated Group is if you look at tier one, rest within tier one leverage.

So I guess what I am saying is that if we were going to do all of the growth, if we're going to grow the bank by $4 billion we're going to be downstreaming capital into the bank. We believe that we have that available capital without taking, without hindering our other subs. We have that capital to downstream to the bank. That's where the growth would occur. Remember that's an illustration that I did to try to make the point.

Got you, that makes sense and then as we look at your balance sheet cash equivalents about $717 million. How much of that is actually parent cash?

A lot of that, a fair amount of that cash is liquidity in our bank okay? There we have parent cash. I'm not sure that I disclose that and that moves around so I don't know what that is but I -- when we talk about that kind of cash, a fair amount of that cash is in liquidity that we end up with in the bank.

All right, thank you very much. I'll jump back in the queue.

Christopher Harris, Wells Fargo Security. So a couple questions, Ron, on institutional, one being fixed income. We look at the results there. I have to admit that I'm impressed that you guys look to have kind of really bucked the industry trends, which have been quite negative. JPMorgan is out already previewing a really, really bad second quarter in [FIC] and so, Ron, maybe you can help us understand a little bit what makes your business a little bit different than competitors. I notice there have been some acquisitions obviously that have helped the results but kind of the step back for a minute if you could maybe kind of contrast your platform with some of these other guys that seem to be struggling so much.

You know, it's hard for me, Chris, to look under the covers of some of the very large, fixed income. You know, it's FIC. It's fixed income commodities and currencies so how much of that is commodities and currencies that we're not doing a lot of? I don't know, right, but I suspect a fair amount of that is. The volatility is in the two Cs that we're not doing a lot of. But overall I think that we when we were doing the Knight deal and when I talk about at the time why that deal made a lot of sense is because it added the capabilities that we didn't have. It allows us to cross sell some of our other capabilities better so, as we've been building these capabilities, I think it's for us it's a little bit of a rising tide lifting all of our businesses.

That's not to say that we're immune from fixed income cycles because we're not but I've also obviously been reading about some of the woes of these that I've been reading about and I -- it's hard to contrast to what I don't see what's going on over there, just like you don't.

Understood, okay thanks for that. Maybe if I can ask a different question then, if you look at your institutional business a bit more broadly and you consider what's happening in the macro environment, what are you most optimistic about right now? Is it M&A, capital raising, sales and training, if you can give us a little bit of your thoughts on how you see the business performing over the next year or so?

Well look I think in general from a macro perspective the economy is getting better, all right albeit slower than I would like or maybe most economists or certainly policy makers would like, but as I look forward my view, our view, is that we want a balanced wealth management and investment banking firm and then I go back to my comments of building the firms from $700 million to $2.2 billion in a very balanced manner. The ratio between global wealth and institutional really haven't changed but during that time frame institutional business was frowned upon significantly. We didn't frown on it because we believe that capital -- and this is I'm trying to answer the question here -- the capital raising, the institutional, the M&A environment, all of these environments are going to generally get better and we can gain market share.

That's why we've made investments and while I can't control quarter-to-quarter, slowing or lumpiness in M&A, I do know that we'd gain significant market share and M&A and in capital raising and in IPOs because we have invested in this platform and we're investing this platform into what I believe is an improving capital markets environment and we're going to continue to do things prudently. That's we see the same thing.

I'll digress for a moment into London we announced that today but we see real opportunity there and where we're able to do things in a manner that makes sense to us, so when we look forward there we're opportunistic about our growth in that market.

Yes and on that, on that London deal, how does that change your outlook for the ISG margin? I know you've got the kind of the 20%i to 30%i target there and I know some of that is revenue based obviously but does that maybe change when you might be able to achieve that margin? I mean does it push it out a little bit, this acquisition?

Well, every acquisition pushes it out a little bit I mean but I don't know, I mean there the margin on one hand there is we're building into that margin but the corporate tax rates in London are what? 20% and US at 40%? There's a lot of ways to get margin. The biggest one is net income and so I'm not -- I'm optimistic about that but any time we do a deal we have consolidation and work to do and I think we've shown that we can do it. It takes time and this was no different but I'm optimistic based upon the people, first and foremost, and the business set second of all. And improvement, improving economy in Europe which well, it's behind the United States. I think it's improving and we see opportunity for a firm like ours over there.

Understood, thanks a lot.

Christian Bolu, Credit Suisse.

Just on advisor growth, it seems to be having a little muted over the last couple quarters. I'm just curious as to what you're seeing and hearing just on the competitive landscape for advisor recruitment.

I would say it's been muted for longer than a couple of quarters and we I think we're growing organically. I just was with a bunch of my peers and our recruiting performance was over the year in terms of net advisors without acquisitions was as good an anyone's. I would just say in general the environment existed in say 2009 and 2010 is not the same environment today and while we're going to continue to recruit and we'll look at every opportunity, I think that to think that we can have the kind of environment that we had in the midst of the financial crisis was not there .

We can grow this business. We have nice year-over-year growth organically and we'll continue to do that but we don't view it as a numbers game. We don't do it as just adding advisors. We can do that. We can deploy a lot of our excess capital in recruiting advisors but I don't think we'd get the same accretion in earnings per share that we're looking at. There's a lot of ways to deploy excess capital. And if we're going to recruit in a manner that allows us to drive accretion with excess capital, not [catch all] increases, so that's just how we think about it.

As a result, we're not overly aggressive in the recruiting but we still I think are one of the top recruiting firms, certainly on a percentage basis out there. But it's not robust today, I would say that.

I hear you on the point about excess capital but just on the did you see any reason for the environment to change the recruiting or you think we just stay at these levels like with you guys over the near term?

I generally the -- I think our recruiting gets better as markets become more challenged and so I don't really see any reason absent some geopolitical event for markets to become significantly challenged so I think recruiting can get better from here but is the environment going to double from here? I don't think so, I mean not absent some fundamental other issues that come up. I just think that we have to remember that when it was really good for firms like ours and that this isn't Stifel specific. This was across all firms that are recruiting.

The environments of 2009 and 2010 was a sort of a black swan event as it relates to recruiting and I don't see that environment returning anytime soon. That said, we could triple our recruiting or quadruple it if we just changed our financial deal. Our value proposition hasn't changed on why we're an attractive place but we're not -- I think we're very prudent and deployment of capital as it relates to recruitment.

Okay thanks, that's very helpful. Just on the deployment of excess capital, again thank you for the very helpful slide. It seems incredible opportunity for you guys. Maybe on the flip side just help us understand any risks around that. I'm just curious, especially as we move into the rising rate environment the risk of run on growing assets pretty quickly in that kind of environment. Also, any risk around things like liquidity if your growth strategy is to focus on growing the loan book. I'm just curious to see your thoughts on those two points.

I'll take liquidity first. I mean the reason we deploy a lot of our leverage in the bank is for liquidity reasons, right, a bank is funded much more stably. We're not funded in the capital markets. We're funded with what we define as core deposits and so we believe that our bank is very liquid and has a significant amount of our assets that could be liquidated if needed, you know, things that could be liquidated very quickly so we think the bank is very liquid and we manage it as such.

As to your first part of your question, I think that's sort of a dilemma is that as we want to grow and it's almost like doing a bond ladder. You want to layer in assets over time and in conjunction with the overall growth of the firm so that you're not betting on any one credit or interest rate cycle. So we have a lot of our investments we have principal repayments. We have to reinvest those and we're trying to grow. We're just trying to do it prudently is about as I've said our bank has grown nicely.

It's grown 30%i and if we grow 30%i again next year organically, that's $1.5 billion more in growth and that's on the asset side. On the numerator side we have earnings that go so we're not completely getting into this opportunity. So we look at the excess capital that's allowing us to take advantage of opportunity, both on the acquisition side and on the leverage side. I'm just pointing out the fact that we're very cognizant of the impact over capitalization on our shareholder returns.

Great, thank you so much for all the color.

Steven Chubak, Nomura.

So thanks again for slide 16. The disclosure is extremely helpful. I just wanted to clarify a couple of the assumptions of surrounding the incremental earnings at the bank. I know you talked about the 1%i ROA target roughly in the past and I just was hoping you could clarify what your assumptions are really regarding three core metrics; net interest margin, the pretax margin at the bank and then also the loan versus securities mix.

Well, I think look the short answer is that we took our current mix and we just expanded it at that so we took the same so if you look at it you'll -- we've assumed for purposes and it's illustrative again. I don't want to imply that our sole strategy is to grow in the manner that I showed on the slide. We can do it by acquisition if the right deal came along. That's one way to do it but to answer your question, we took our existing profile and we increased by that so we're approximately 1%i ROA.

The risk weighted assets versus total assets is the same ratio that we have today in the bank so we really layered. We've really taken our current bank profile and have grown it at the same basis so it would -- that would imply that whatever the bank's net interest margins today of the low twos, an investment portfolio of 60%i of assets, so we just we didn't make any assumptions as to saying we're slowly going to get into C&I or we're going to do something or we're going to take net interest margin from [two to 350]. We just took our existing business and just added $4.5 billion of assets or whatever the number is $4 billion. I hope that answers your question. It's not that complex but it's not a bunch of assumption indebtedness. It's our current profile grown.

Oh sure it's understood. I suppose just thinking about things in a long-term context in the past you have talked about the optimal mix of 50%i loans versus securities and clearly you're running below that level on the loan side so presumably there is some incremental margin opportunity there. I didn't know if you could update us in your thoughts in terms of whether that's still your target or whether that presumably has changed as well.

Look from a business, first of all, from a financial modeling perspective numbers change to the extent that you layer in more loans. You're not going to add as many assets because the risk weightings are different so it's you're triangulating between risk weighted tier one and tier one leverage so I'm not sure that mix really impacts as much as you would think. It's actually sort of a numbers anomaly that I've mused about to just tell you whether or not building investments or loans, you can have more low risk weighted assets you can leverage more but you don't have as much margin.

So the real question is that I believe that the highest leverage that comes out of our business is by doing more middle market lending that complements our global wealth management and our institutional clients so I would much rather be doing high quality of loans to that group than investments which are more wholesale if you will. So to the extent that we're able to do that, I'm not sure that the leverage metrics change but revenues and C income in our other segments I think are going to be much more positively impacted by an ability to do more middle market lending than by deploying it in the investment books. Does that make sense?

That actually makes sense and then in that same vein I suppose one loan category which receives very favorable RWA treatment is securities based lending and that's been exit stagnated somewhat in recent quarters. I didn't know if you can give us an update as to whether you're seeing any take up in margin lending in your clients.

Yes well, as things get very favorable capital treatments, they tend to get much more competitive so it tends to -- just funny how that works right? And but look, that's a business we know very, very well and as a business we will continue to focus on so long as we can get the net interest margins that allow us to drive the proper ROE to the capital. But those spreads get compressed pretty quick too so just markets worth that way we like security based lending for a lot of reasons and one of them is that that is a product that drives revenues in other segments, not just the bank.

And is that a focus of ours? It better be everyday because we like that business.

Okay that's it for me. Thank you for taking my questions.

Hugh Miller, Sidoti.

So I guess in following up on the last line of questioning with regards to kind of growing the bank, looking at different verticals that you're operating in, with that excess recorded you've seen out there we've been hearing about competition coming in and getting somewhat aggressive in certain areas that you guys are focusing in and some other areas like CRE and so forth. But as we think about growing the bank and you think about competition and maintaining asset quality, are you -- can you just talk about what you're seeing competitively within your different verticals and are you considering kind of expanding into other things in order to generate growth more opportunistically?

I'm not sure I understand your question here. Are you talking about the bank or are you talking about Europe or (inaudible)?

Talking about at the bank and as you consider kind of deploying the excess capital and growing the loan portfolio, we've just been hearing about a lot of competition coming in on the commercial banking side and what type of competition are you seeing in your current verticals? And are you considering kind of expanding into other lending products in order to kind of be more optimistic and still maintain asset quality?

Well, let me back up for a second. I don't want to give the impression that our only deployment of excess capital is in the bank. That would be the wrong impression. I did it for illustrative purposes. I also use it as a benchmark all right so if we're going to be deploying capital it needs to be in the vein of is it better to deploy it or give it back to our shareholders view? Is it better to deploy it in acquisition or put it in this kind of strategy?

So we just did two acquisitions that was in some ways deployment of capital, De La Rosa and this, the last deal that we did in London and net, net those have to exceed the capital returns that we can do this way but I don't want to imply that our entire strategy is focused on bank leverage because we can deploy it elsewhere. That said, we are going to grow the bank because we have not only do we have a lot of deposits and the real value in this equation are our deposits and we want to leverage those deposits and you do that in a banking context as well.

As to your question, yes I believe that where we would like to compete which or where we'd like to grow, which is in middle market lending, I view has gotten more difficult. I think spreads have narrowed; covenants are getting light if nonexistent and where we want to be cautious because this strategy whatever we're doing in terms of increasing assets and increasing leverage has to be done with a view toward credit and risk adjusted returns so I would say that today the ability to grow assets outside the investment book is not robust. We're not seeing the environment as being robust today. That can change but that's how we're viewing it today.

Okay so middle market lending, securities based lending are two areas of focus.

Absolutely.

And then I guess you'll leverage kind of your knowledge on these businesses to kind of maintain credit and try and look for areas, pockets of areas where it makes sense to lend to or where you're still getting compensated for the risk.

Said better than I could just say.

Great and then the other question I had was just with regards can you give some color on the incremental revenue range from the London acquisition. I was wondering if you could just give us a sense of kind the merger costs that you guys are anticipating and the timing of that that we should be thinking about?

Well, I haven't and I think I will. I'll update. We just announced it today and so we haven't had a call. I want to be careful of what you just said. I didn't give the incremental revenue right, I gave the total revenue but what we've done and the reason this made sense is that about a few years ago we were doing less than $25 million -- I'm not sure of the number of people -- and then since that time we've added and I include that in KBW and as we looked at it, we were -- we had a business there that we wanted to pull together with other verticals besides just FIG and Fixed Income and Oriel was a great fit.

And so in total what I was talking about was our total revenues now including all of those groups is $150 million to $200 million and we believe based we were taking businesses that a few years ago that we were breaking even on let's say yet today we believe that we can generate our targeted profit margins in these businesses. It will take a little bit of time but in the debt that was not incremental revenue that it talked about. That was total revenue. I had not -- disclosing incremental revenue though you could probably go find it if you wanted to.

Appreciate you pointing that out and then the last question I had was with regards to you obviously gave some good color on the advisor recruiting environment and how obviously it's not the way that ti was during the crisis and that you're being prudent in managing that business and as you think about the international expansion that you're accomplishing today through that acquisition, do you see the potential for maybe doing expansion on the retail side in Europe and that being opportunity or is that probably unlikely in the coming years?

I wouldn't say that we see that as an opportunity. We have looked at and studied models over there that we find attractive so if we can find an opportunity that meets our shareholder return objective, we would do that and I think it's an attractive business. It's attractive for some of our competitors and I think it would be attractive for us. But it's opportunity driven, not us going out and just bidding for someone we don't, we tend not to do that.

Okay thank you very much.

Michael Wong, Morningstar.

I would characterize your M&A philosophy as maybe buying firms are going through a tough period. Given that you bought Oriel Securities, are you seeing more attractive expansion opportunities outside of the US where economies haven't had as steady of a recovery maybe?

No that would probably be misstating. There's probably various parts of the world that you could make that argument. I would say the opportunistic thing about Oriel in London was the what we had, what we've done through other acquisitions and waking up one day and seeing critical mass suddenly and what we think is a vital financial center and one that's improving and so that was unique to that market.

Are we going to find another corner of the world and say this makes sense? Probably not, right; I think we're focused the London and maybe the continent but that's where we're focused right now and in many ways what -- we partner with firms that lack, that have a lot of capability but lack the cost scale. That's really when firms struggle, they're struggling with scale, not capability and that's what we add, scale, and many of our deals adds capability.

Okay and maybe just a quick question so while it's not overly material, bank deposits decreased sequentially, which is a change in trend. Was it just people maybe paying their taxes or pulling money out to investment perhaps?

I would -- you're talking about total deposits in our other assets?

Yes bank deposits.

I'm not sure that I know the number. I can tell you that this time of the year that bank deposits usually increased every time except March and April for the reasons you just stated. That is historically but I can ask someone to follow up or get a question. I don't know the answer as I sit here right now to that and I don't want to speculate.

Okay thank you.

Douglas Sipkin, Susquehanna.

So on your slide on page 16 you sort of outlined growing the assets or repurchasing stock, which is I think you alluded to that before in the call but the slide is helpful. I was wondering, have you considered as part of that asset growth maybe expanding in the fixed income business just given your results that look like pretty impressive on a comp basis and some of the challenges that the bigger firms face having to shrink their asset base. I mean is that potentially an area where you can grow your asset base but maybe not quite what everyone is thinking where it's we're just sort of thinking via the bank?

Absolutely. I mean, again, I think I asked -- I appreciate you asking the question because I'll state again that we see opportunities in our global wealth management business. We see opportunities in our fixed income, both slow business and our capital raising in fixed income. We definitely see opportunities and in our equity businesses and we've been growing into an industry which if you really look at what's going on with both the largest firms, not only do you have the tier one, the leverage ratio but the supplemental ratio and, as we look at this, we see a lot of firms needing to shed businesses and to -- that are more regulatorily capital constrained than we are and we see a lot of opportunity to deploy those capital.

Again, the slide on 16 if that's where it is is illustrative to make the point that we have a lot of capital to deploy to drive EPS without creating equity dilution and we use asset growth to illustrate the point but we can deploy that in every segment of the our business as long as it achieves the targeted returns.

Great and then just a follow-up on the bank. You know, one of your competitors whose had a bank business for longer than you guys and I don't know if the profiles are the same but in a subject to an annual review for a nationally syndicated credit and it usually comes June/July/August time frame. Given sort of the growth that you guys have experienced and now while I appreciate it's still more securities, loans are bigger contributor than they have been historically. Is that something that you would be subject to as well?

We're not big players at all in the [SNIC] market. Jim or Chris, are you guys on the phone?

They're not here, Ron.

Okay then I don't -- I'm not -- I don't have those. I don't have that report on the calendar as anything that I am focused on. We don't -- we're not big and I understand what you're asking but that's not been a big impact for us. I don't anticipate it being a big impact in that report as I should in terms of downgrades or adding the preserves or anything like that. We really don't play in that marketplace.

Got you.

To any significant degree, okay, and I'm sure we've a few.

No I appreciate that. I guess that just historically sometimes there's usually not material but some types of little [NIC] ups or downs when that comes, when the regulators come and say hey re-price this, don't re-price that, that type of thing, so I just thought maybe given the growth of the bank maybe that was something to at least be a little bit more relevant for you guys but--

Yes it's not. We certainly look at that. I mean you can look at the performance of some of these competitors that you didn't name but I think I know what you're talking about. Some of that strategy has worked out quite well even with that part of it and we're looking at it. It's just not a place where we've chosen to deploy assets in the nationally syndicated arena. So I don't view that as a significant impact when that -- and that comes out every year, right?

Correct. Okay great, thanks for answering the questions.

Devin Ryan, JMP Securities.

I just had one follow-up on the banking backlog and just some additional detail there if you could provide just kind of what you're expecting from an M&A and equity issue of perspective and I guess just with respect to equity issuance, the recent challenges in the IPO markets, is the expectation that new issuance could slow from here? I'm just curious kind of what the conversations are like internally and the outlook just given that the rest of the IPO markets had a little bit of a tough time in recent weeks?

Yes, yes well and I think in some of the healthcare segments have also maybe slowed from some torrid pace of and so look, yes I think you can see in certain segments slowing down on the capital raising funds and on the other hand I guess maybe also said we did a very large transaction in six days. But there are certainly -- our backlog is very robust but from backlog to revenue is a varied market. So it's hard for me to answer other than I would agree with you about the softness in the areas that you've just mentioned. I mean I look at the published data and looking forward I'm not going to comment on that. That's hard to do but we have a -- the environment in the first quarter was pretty good.

Yes I appreciate that and I guess with respect, M&A we've seen maybe a little more activity in the bank space but I mean it's still it can offer a pretty low level. I mean is the backlog there building as well?

Look I think the numbers, [Sara], what were we on our bank mergers? Are you on?

Yes I am here. Bank mergers, we were on five, on all five of the top bank mergers and 11 of top 15 bank mergers.

Yes I guess -- thanks, Sara. I didn't want to quote those without those being in front of me so we've definitely, certainly on the bank side in our share of the deals, I think it's tend to be small at this point and we certainly are optimistic about that business.

M&A for us and even the M&A specialty shops can be lumpy and I would caution investors that our investment banking results quarter-to-quarter can be lumpy if you look over a longer time period. You definitely see our increase in market share but each quarter can have some lumpiness and I would want to remind everyone of that. Longer term we like the growth aspects in that business for us over a long time. But you know, one of these quarters I will be saying to you guys say look do you remember I told you that it can be lumpy quarter-to-quarter.

Steven Chubak, Nomura.

Steven?

Can you hear me?

Yes sure.

Okay perfect, just one quick follow-up on the discussion relating to fixed income and trading, again the results have been quite resilient and probably the biggest surprise to me digging into the filings is that you're trading inventory has actually remained fairly steady and I didn't know if what we -- how we should be should be thinking about the potential for balance sheet expansion or are you simply running your core fixed income franchises as on a more agency oriented model if you will?

I think it's we're -- we look at we're trying to be efficient. Everything at the end of the day everything is return capital and there's capital that's allocated to everything and fixed income is not immune to that. I think we have our fixed income inventories properly sized and we've done a pretty good job with the integration.

Just because you add people doesn't mean you need to double the inventories and we didn't need to take all of De La Rosa's inventory so although initially you tend to do that. so I would say that I think we do a good job of capital management but we've also been, as we integrate and we get synergies from our mergers, you'll see that both in non-comp OpEx and capital deployed on the desk.

All right, great. It makes sense. Thanks for taking my follow-up.

There are no further questions at this time. I will turn the call over to Ron Kruszewski for closing remarks.

That was exhausting. Bunch of questions but which was good. Closing remarks are that we -- it was a solid quarter again. We continue to hopefully be good stewards of capital. We see opportunity to continue to build our franchise. We will do so and we will do so as always with an eye toward shareholder returns and that's been our message I think for 17 years and hopefully not changing today. It's not changing.

So with that, I would thank everyone for their interest in our Company and I look forward to reporting to you in August in the results of our second quarter. Thank you very much and good afternoon.

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