Stifel Financial Corp (SF) 2014 Q3 法說會逐字稿

Good afternoon; my name is Chantelle and I will be your conference operator today. At this time I would like to welcome everyone to the Third Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions).

Jim Zemlyak, CFO of Stifel, you may begin your call.

Thank you, Chantelle. 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 2014 financial results. Please note that this conference call is being recorded. If you'd like a copy of today?s presentation, you may download slides from our Company website at www.stifel.com.

Before we begin today's call I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. These statements are not statements of fact or guarantees of performance. They may include statements regarding, among other things, our ability to successfully integrate acquired companies or branch offices and financial advisors, general economic, political, regulatory market conditions, investment banking and brokerage industries, our objectives and results and also may include our belief regarding the effect of various legal objectives, legal proceedings, 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 reconciliations to GAAP is available on our website at stifle.com.

And finally, for a discussion of risks and uncertainties in our business, please see the business factors affecting the Company in the financial services industry in the Company's annual report on Form 10-K and MD&A results in the Company's quarterly reports on Form 10Q.

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

Thank you, Jim. In the third quarter we had record results in Global Wealth Management and solid results in Investment Banking.

Our equity and fixed income brokerage businesses were impacted in the quarter by lower volumes, particularly in the month of August.

On the positive side, market volumes have strengthened in the month of October. Our results reflect two months of our partnership with Oriel Securities, our UK investment bank. The initial integration is going well and we look forward to their future contributions.

Looking ahead, we expect to close the acquisition of Legg Mason Investment Counsel in November, which will add $9 billion in client assets.

Before I turn to our results, I'd like to add a little color on the operating environment during the quarter. The markets were generally flat, up 1% sequentially. Volatility was low up until the last two weeks of the quarter and equity volumes were down 6% sequentially. Typical seasonal factors, particularly in August, were at play.

That said, we've all seen volumes and volatility come back in October which lifts our brokerage slow business.

The 10-year declined four basis points from the second quarter to close at 2.49%. Equity mutual fund flows turned negative in the quarter. Although flows are positive this year with about $56 billion of inflows year-to-date, this trailed last year's net inflows. I think it is important to note that equity inflows are down 43% year-over-year.

Equity and debt capital raising from both a dollar and deal count was lower in the third quarter compared to a strong second quarter. M&A announcements were down in the quarter but completed deals were up 18%.

Looking at the risk premium, the earnings yield on the S&P didn't change much from last quarter. Coupled with the decline in the 10-year, the equity risk premium was approximately 3% as of September 30th.

Turning to our financial results for the quarter, GAAP revenues for the quarter were $535 million and net revenues were $523 million, both up over 9% from the prior year, but they were down 6.5% -- 6% to 6.5% sequentially.

EPS from continuing operations was $0.52 per diluted share and on a non-GAAP basis, which excludes merger related expenses, diluted EPS was $0.64 on net income of $48.7 million, which compares to non-GAAP EPS of $0.53 last year.

Our GAAP effective tax rate was 39%. Our non-GAAP pretax margin for the quarter hit our target of 14.9%.

And I would note that on a GAAP basis when you look at our reported earnings have declined from last year's dollar per share which due to a tax benefit in Canada which totaled $58 million after tax. We excluded this tax benefit from our core results last year.

Turning to the next slide I thought it would be beneficial to comment on our results versus Street expectations. The largest variance is in principal transaction revenues, which missed Street consensus by $16.6 million.

Investment Banking was down $8 million versus Street estimates but that said, I am pleased with our banking results. I do want to note that as we grow our Investment Banking franchise, we are generating larger and larger M&A fees, which can and will produce lumpy quarterly results.

Net interest exceeded expectations by $4.3 million and I'll discuss that in a moment. Net-net these items resulted in a $23 million revenue shortfall versus Street expectations. Offsetting this comp came in at 61.8% versus expectations of 62.8%. Our non-GAAP tax rate was lower and shares were slightly higher, which taken all together resulted in a $0.02 diluted EPS miss versus Street expectations.

This quarter there were three items of significance that I would like to highlight and taken together they negatively impacted our earnings per share by a penny per share. First, we had $6.5 million accretion adjustment on acquired loans in connection with the Acacia transaction. This is a positive accretion and this explains the variance in net interest. This was offset by about a $2.5 million mark-to-market loss on investments and approximately $6.8 million in lower fixed income trading profits due to market conditions in the third quarter.

Looking at the next slide, our GAAP revenues for nine months were a record $1.66 billion, up approximately 15%. EPS from continuing operations totaled $1.76 a share and on a non-GAAP basis this was $2 a share compared to $1.71 for the first nine months of 2013.

For the nine months our non-GAAP comp and benefits was 62.5%; non-comp was 22.4% for pretax operating margin of 15.1%.

The next slide reviews are non-core deal costs. In the quarter we incurred $12.3 million in pretax expenses related to our acquisitions. On a go-forward basis we expect to incur an additional $8 million in the fourth quarter, $5 million of which is related to Oriel Securities.

This estimate does not include Legg Mason Investment Counsel expenses. We've not disclosed the LMIC expenses. We've not closed yet on that transaction but we expect to close any day. So as of now the merger charge is yet to be determined and I'll update you on this next quarter.

Keep in mind the primary expense that we will be expensing in LMIC is the expensing of stock-based comp with a corresponding increase in shares outstanding. We historically view stock granted at the time of the merger as purchase price and run the corresponding expense through the income statement because the majority of the awards we make in acquisitions are retirement eligible. And in accordance to the accounting rules, they require that we expense them immediately and that the shares are also included in diluted shares outstanding.

Looking at our sources of revenue during the quarter compared with the third quarter last year, our brokerage revenues decreased 2.8%, more on this in a minute.

Our Investment Banking revenues increased 29% to $120 million. The increase was the result of solid activity in both equity capital raising and muni debt issuance and frankly advisory revenues.

Asset management service fees increased 26% to a record $97 million. The increase is due to higher value of fee-based accounts as a result of market appreciation and new client assets.

Interest revenue increased 33% to $52 million and, as I've already explained, it's part of that is due to the $6.5 million pretax adjustment to the accretion related to Acacia and a growth in interest earning assets of Stifel Bank.

I will now discuss our Brokerage Investment Banking revenues. Global Wealth Brokerage revenues were up slightly, almost 1% year-over-year while Institutional Brokerage declined 8% year-over-year. That was driven by decline of fixed income brokerage which was down about 11% and a decrease in trading profits that I've already discussed. So therefore, our total brokerage revenues were down 2.8%.

Looking at Investment Banking, total Investment Banking increased 29% to $120 million and is up 36% for the nine-month period to $394 million.

Equity capital raising of revenues of 14% and fixed income increased 65% from the year-ago quarter.

Advisory fees are up 31%.

We are certainly pleased with the progress we're making in Investment Banking and we continue to see payoffs from our investments. Our results highlight a great mix between equity debt and advisory. We're seeing momentum in our debt business and for the first nine months of 2014 Stifel ranked number one in US M&A deals under $250 million year-to-date according to Bloomberg.

We announced a number of very good M&A transactions in Q3 including Viasystems $927 million; shared at TTM Technology, Hennessy Capital acquisition, Hennessy Capital $489 million purchase of Blue Bird Corp, Symmetry Medical's $450 million sale of its OEM solutions business to Tecomet and overall we are pleased with the trend line in this business. Our equity in M&A backlogs are strong and the fourth quarter is shaping up to be what for us is historically a strong quarter.

The next slide reviews our core non-interest expense for the quarter. Excluding non-core expenses, comp and benefits as a percentage of net revenues was at the low end of our stated goal. Of our stated goal it came in at 61.8%.

Transition pay as a percentage of net revenues was 5.1%. That increase is the result in an uptick in recruiting coupled with lower revenues.

Core non-comp operating expenses were $122.5 million. Oriel Securities added approximately $3.5 million in expenses in August and September. The increase in non-comp operating expenses from Oriel was offset by a decrease in our loan-loss provision, subscription, conference and travel expenses.

Next quarter, once we've closed LMIC, I'll be able to give a more accurate range of where we expect 2015 non-comp expenses, where they will fall.

The next slide reviews our core non-interest expenses for the nine months of the year. We're right on target in terms of comp and benefits as a percentage of net revenues at 52.5% and maintain our target goal of 62% to 64%. Core non-comp operating expenses were $365 million or 22.4% of net revenues.

The next slide shows the results of our reporting segments. Global Wealth Management posted record net revenues of $317 million, an increase of 15.5% from the prior year and record contribution of $94 million, which was up 30%.

Our Institutional Group posted net revenues of $215 million, an increase of 5% year-over-year while the operating contribution declined 16%.

Our Global Wealth Management segment simply had another great quarter with margins of 30%. Commission revenues increased 9% from prior years. Our principal transactions were down 13% and that's really due to a decrease in fixed income products as a result of lower trading volume and the current both low interest rate environment and the forecast of what might happen to interest rates has a negative impact on our fixed income volumes.

Asset Management Service fees had record quarter increasing 26% as a result of an increase in assets under management through market performance and an increase in client assets.

Fee-based assets increased 26% year-over-year to $32 billion. It is important to remember that fees are billed in arrears.

Investment Banking increased 24%; comp and benefits came in at 55.9% and non-comp operating expenses were 14.5%, therefore, again nearly 30% margins; in summary, a record quarterly performance for Global Wealth Management.

Turning to Stifel Bank, assets increased 9% to $5 billion from a year ago. Deposits increased 8% to $4.6 billion and loans grew 75% versus the year ago. We continue to move closer to our desired 50/50 mix as loan origination capacity increased.

And as you can see, this quarters NIM increased to 310 basis points from 259 basis points last quarter and, as I previously mentioned, this increase is due to the adjustment accretion to our accretion on acquired loans as part of our Acacia transaction. Excluding this adjustment NIM was approximately 260 basis points for the third quarter, which is what we expect going forward.

Asset quality remained very solid with only 0.07% non-performing assets.

Next slide looks at our Institutional Group results for the quarter. We posted net revenues of $215 million, up 5% from the year ago quarter but down 16% sequentially. Again, the sequential decline was primarily due to lower institutional flow of revenues and a decline in fixed income trading profit and a decline in Investment Banking revenues from a very strong second quarter of 2014.

Comp and benefits as a percentage of net revenue was 61.2% and as a result of lower revenues the non-comp expense ratio was 25.1% but that said, non-comp operating expenses, the actual dollar amount declined 2.6% sequentially.

Pretax operating income of $30 million decreased 16% year-over-year and the margins were about 14%, a decrease from both comparable periods. Last year we had an adjustment in the comp revenues so the comp revenue in last year's quarter was unusually low at 58% and that accounts for some of the reason for the year-over-year quarterly decline in contribution for institutional growth.

The next slide looks at our capital structure which as always we view as conservatively levered. Total assets are $9.3 billion. Capitalization is $2.9 billion. Our debt to equity at the end of the quarter was 18.2%.

Tier 1 leverage came in at 16% and our Tier 1 risk-based capital ratio is still high at 27.9%. We continually are annualizing our capital ratios. As we look forward we're reviewing all options to return capital to shareholders including share repurchases and/or instituting a dividend.

The next slide illustrates the impact of rising interest rates. Based on static balances as of September 30th and assuming a parallel shift in rates, no change in client behavior, competitive pricing, etcetera, we would expect to earn an incremental $60 million to $70 million or a 19% to 22% increase to pretax earnings. This incorporates both incremental net interest income and waived account service fees within our private client group.

With timing expectations constantly shifting, we wanted to provide this detail for further understanding but caution you that it involves various moving parts and hand full of assumptions.

I've been asked and we've been asked if adding leverage at the bank and the benefit from rising rates are mutually exclusive. They are not. As I previously stated, our Tier 1 risk-based capital at 28% is the constraining ratio that we looked at. With a ratio closer to 17%, which is where I would like to see us stay, our assets could increase by $6 billion. The combination of optimizing our capital structure and our leverage to rising rates provides a compelling earnings opportunity. To put numbers to this, the interest rate profile could add $0.55 a share while optimizing our capital structure by growing the balance sheet could add an additional $0.78 per share.

Turning to other financial data as of September 30th, stockholders equity was $2.3 billion. Book value per share increased to $33.92. Our total leverage ratio declined at 3.2 times with a broker-dealer at 1.7 times and Stifel Bank at 12.7 times.

Total client assets reached $173 billion which is up 12% from last year.

A few additional comments on our acquisitions; Oriel closed on July 31st and therefore is included in our numbers for two months. Oriel is a full service broker-dealer in London and provides the umbrella for our European businesses.

Oriel brings 20 analysts covering more than 260 UK companies in nine industries so the focus is broad based. After the integrations Stifel will be able to deliver both US and UK research to all of our clients globally and will be able to trade non-US securities for our clients. The integration and conversion is scheduled for the first of next year.

To give you some sense of expenses going forward, we incurred approximately $3.5 million of incremental non-comp expenses for the quarter relating to Oriel; and we also looking at Legg Mason Investment Counsel, we expect to close on that transaction any day, hopefully tomorrow. With the close we expect to add $9 billion in client assets and I will announce now we'll be changing Legg Mason Investment Counsel's name to 1919 Investment Management.

In conclusion, we've had a record start to the year with $1.6 billion in revenues, which is up 16% from last year. We're very pleased with the performance in our Global Wealth Management segment and the quarter institutional equity and fixed income flow was challenging.

So far in the fourth quarter, October has started off strong and was our best commission month in the history of the firm. The fourth is historically a strong quarter for Stifel with the October start it is shaping up to follow that trend.

With that, operator, I will now open up the call for questions.

(Operator Instructions). Your first question comes from the line of Christian Bolu with Credit Suisse.

Just a quick question on the balance sheet and I am just thinking is there a way to better optimize you balance sheet? I guess the bank assets are only $5 billion which is a fraction of the $9 billion total assets. So is there a way you could sort of free your balance capacity elsewhere just given how accretive bank growth is relative to the overall balance sheet?

I'm not sure I understand your question. I don't know that we -- first of all, whether we need to free up any -- we always look at return on our capital across our businesses. I think our challenge, if I understand your question, isn't to free up capital so that we can leverage the bank and the balance sheet and the accretion that comes out of that. Our challenge has been to invest and grow the balance sheet into our capital base.

I mean our capital base, our Tier 1 risk weighted is nearly 28% and we're challenged by the fact that we're growing earnings very fast, a lot of cash earnings and we've been a little more cautious on growing the balance sheet. So it sounds like a broken record because I've said that for probably a year now, but we don't need to free up capital. We need to deploy capital into productive assets.

Right, so I guess my question was really just around I guess the $10 billion threshold with your balance sheet and my assumption is you're probably going to stay under that for a little bit here. Hence the question around a remix from I guess the broker-dealer to the bank would be how I would have thought about that, but sounds like it's--

Look I think that the $10 billion is certainly something that you think about in terms of the marginal sides of that line. As we all know, there's implications to being over $10 billion in assets. But at the margin where we sit today, there's really no -- I don't really see a lot of benefits in shifting the balance sheet around among our operating units moving from one to the other.

And I would also say that it's not that we're not going to -- this organization will be over $10 billion in assets. We will grow. We are just doing so prudently. So I don't see a lot of benefit in reshuffling assets among operating units under $10 billion.

Okay, makes very clear. So just on our positions in Oriel, I believe the business was loss making last year. I'm just curious as to what the current operating margins for that business are, where they can get to over time and how you think it bringing on Simon Bragg could help grow the wider European franchise?

Yes, I think -- a lot of our -- well, first of all you say that you thought that when we looked at -- when we announced the deal they were profitable for one. But looking at them in isolation is not how we're looking at it. We have a number of operating businesses that are profitable over there.

As I've said, we distribute US research through an entity. We do KBW that was through KBW Limited. We did Knight fixed income and they we had Oriel and what we're doing is we're putting all that together. And as I've said, I believe that that could generate $170 million to $200 million revenue range, be profitable and be the foundation of future growth.

That's about all I've said about it and I'll continue to say that we're about two months into integration and we have some work to do on the foundation of our infrastructure. But I'm optimistic about the business, what it does sort of our global footprint, which has increasing importance, certainly in the equity flow business. And I'll leave it at that. We believe it will be profitable and it will grow and we believe there's a lot synergies to taking these four businesses and putting them together.

Okay that's fair and then lastly for me on the Wealth business, obviously very strong and you really exceeded your 25% operating margin target for a while now so I am curious as to where you see margins progressing over time and if you're in a position to actually raise that target. It's a nice problem but that's a problem nonetheless.

Yes I think the way we've been looking at it is we've reexamined some of our recruiting models and we want to deploy some of our excess capital into growth, which has been muted because of some serious competition on the recruiting front. We believe all else being equal we can have a significant up increase in our ability to both gain financial advisors and the resulting client assets that come with that. We've been competing at significantly below where the Street is and we've been examining our models as to return on investment by deploying some of the capital into that business. So what I would say is we want to invest in new businesses and that will -- I think we can increase profit, increase revenues. We may for a while decline that margin versus expand it because we see opportunities to invest in what is a business that we, I think, are very good at.

Okay that totally makes sense. Thank you very much.

Steven Chubak, Nomura.

So the sequential growth that we saw in NII was quite impressive, even after adjusting for the $6.5 million of accretion related fees. The loan yield by our estimation rose somewhere close to 15 basis points, give or take and I was hoping you could discuss what you're seeing in terms of the market and loan pricing dynamics that drove the improvement in yields and I suppose in light of that, what your appetite is to grow the loan book going forward recognizing at the same time there is that $10 billion asset constraint?

Again, I don't know that it's a constraint but I mean it's not how we see a constraint.

Consideration.

Yes it's a consideration but look I think the first and we've talked for a while about the going from -- you know, we built the bank initially by getting asset size and resulting capabilities and building the bank by investing in high grade investment portfolio with -- we were having minimal interest rate risk due to cash flow hedges and very limited credit risk because I think almost 70% of our investment portfolio is government.

And so but of course that comes with the expense of compressed [NIMs]. It's not -- you know, that's an investment portfolio and so as we have, and we've said this, as we move toward deploying more in what we believe our core competency is, which is to make quality loans to our clients, both wealth management clients through spot loans, institutional clients in both the Term A and Term B and in commercial loans, our NIM is going to naturally expand. And that's what you're seeing because our loans as a percentage of our assets are getting larger, so I think it is impressive and it will be more impressive if this NIM after losses increases more, which is our goal here, which I've always said.

It isn't just about NIM, it's NIM after credit and what I see now and I'm optimistic and I am very pleased with the progress that we've made, albeit to many people's eyes slow and I would say it's slow because we've generally shied away from wholesale asset generation. We want to do it with core competencies and core clients. But all that said, I agree with you. I think the NIM is expanding nicely and it's in accordance with our plans.

Okay, Richard, to summarize, it sounds like it's a function of the remixing of that loan base rather than actually seeing more favorable pricing improvements in the market.

We're not remixing the loan base, remixing of the asset base to more loans versus as a relative percentage of total than call it government securities.

Okay understood. And then just one more quick one for me on the brokerage side, I did appreciate the detail certainly on the some of the components contributing to the declines that we saw within fixed income in particular. That being said, it did feel as though your, the declines that you guys experienced, were a little bit greater than what we saw at some of your peers. I just wanted to get [a sense] as to -- I was hoping you could disaggregate or break down how much of declines were a function of weaker volumes versus actual mark-to-market hits?

Well I think as I said, I think sequentially fixed income flow business was a down about 9%, equities a little bit less than that but still down on a flow basis and that was for us was particularly so in the month of August. Now, I will say and you cover them, I read with impressiveness some of the results that I've seen but as I tear it apart I see the same thing in terms of flow. What I saw as a major difference for us is compared to some of the others is that our M&A volumes did not have the big M&A quarter that others on the Street have had.

So I don't feel, and I could be wrong here, but I don't feel that it was a robust flow quarter in the equity or fixed income institutional businesses across the street that we somehow missed on. That's certainly my sense and industry volumes don't suggest that that's what happened either. We had some pretty good M&A quarters in the first and second quarter and, as I've said, as we build this franchise out, our M&A revenues are going to be more lumpy but all that said Investment Banking revenues of $120 million was a good quarter for us so we just didn't have a big blockbuster M&A trade.

Understood, no that perspective is really helpful, Ron, and thank you for taking my questions.

Chris Harris, Wells Fargo.

The first question relates to October. You had mentioned things clearly getting a lot better, wondering if you can help us out with the kind of the order of magnitude of the change you're seeing in October relative to last quarter? And then related to that, is the recovery broad based? Are you getting in pickup in both equity and fixed income flow or has it been more biased toward one or the other?

Well, first of all, across the board we had a record month in our sort of our commission business, if you will, record in the history of the Firm, okay. In general, I would say that the volumes and the flows and the volatility has had a positive impact on flows, at least through the first month, resulting in a little muted activity certainly on the equity for us, the equity calendar and, as you would expect with volatility. But the fourth quarter is historically a strong quarter for us. It's our year-end and overall I would say that with the caveats I just said, the business across the board through October felt pretty good.

Okay maybe an unrelated question on expenses, more kind of bigger picture not really related to this quarter but clearly you guys have done a number of deals and we all know you've inherited some of those expenses, just kind of curious as you think about the outlook over the next year or two, do you think there's still kind of a meaningful opportunity to tighten the expense base a little bit and if you think that's possible any way to kind of share with us a roadmap on what you might see or examples of things you might be able to do?

Yes I think I want to be -- I want to answer this cautiously but tell you certainly what my thoughts and expectations are and then you can do the math yourself but certainly we want -- we see three things and I'll deal with everything and then come back to expenses. First we see the ability to leverage and our positive slope to rising interest rates. We certainly see that. We see the ability to continue to grow and invest in wealth management, which may increase overall expenses but revenue should increase more and profits will go. But when it comes to non-comp operating expenses and margins in general, I will reiterate what I've said before and that is that our focus and I believe accretive but our focus on building out our institutional businesses have resulted in margins that are in mid-teens and they should be in the low 20s and so you take a -- and that's a combination of expenses across the board, certainly two, three points in non-comp OpEx.

We certainly have that identified. We know where we're trying to get some of it that has longer tail than other things. But across the board to see five, six, seven points you can pick from where you want to start to the low 20s at this point and I -- my target is mid-twenties for businesses like this -- is where you're going to see the ability. So it's a billion dollar business and eight points is $80 million so that's what we're looking at and but I -- we've been saying that for a while. We've identified certain things but some of these expenses take a little bit longer to tackle to the ground.

Got it; thank you, Ron, helpful.

Devin Ryan, JMP Securities.

So just a follow-up here on the $10 billion threshold and the bank and maybe just to ask more directly, so clearly you guys have putting the controls in place for some time and we see how that's impacted expenses in recent quarters so with some of that preparation already done, I mean shall we think about to the extent the opportunity is there? Are you ready to move over it today or is it really just still more work to do on the preparation front?

Well, first of all, can I refuse to answer your question because you beat the Cardinals?

Absolutely.

Played (inaudible). Okay but I won't refuse to answer your question but congratulations to your Giants out there. The look, the $10 billion threshold is something that we want to just be mindful of and we believe that we understand what it takes. It's primarily the stress test of the CCAR or DFAST, DFAST actually rules, and so the idea to go from without being ready to go from $9.9 billion to $10.1 billion is not something that you just want to do lightly. You want to get more meaningfully through that and timing is important so I feel that we are in a position.

We certainly want to make sure that all our ducks in a row with respect to that. It is -- it's not something you go through by $50 million in my opinion okay and that doesn't necessarily mean that you have to have an acquisition to do it. It's just that we want to be prepared to do it. What's really the constraining aspect for us is still the -- we can add loans and not grow the balance sheet by just letting a security mature off and improve our NIM that way so it's not just necessarily passing opportunities by, it's remixing the balance sheet.

All that said, we're either going -- we're going to grow through that $10 billion or we're going to have a lot to do on the denominator side of our leverage ratios, which is all this equity and excess capital we have. So I don't know if I really answered your question. I don't want to leave the impression that we're somehow have put a hard ceiling on our growth because of the $10 billion DFAST line.

Absolutely, no that's helpful. We're just trying to get some perspective around where you are just in that process so (inaudible) that's all just--

I think we've got a lot of work and we certainly understand how to do the stress test and where the models would come from and we're not waiting to get to $10 billion to go through the exercise of stress tests.

Absolutely okay and on similar lines, so you kind of correctly brought out buybacks, dividends and I know historically the view has been that the best opportunities are to invest in the business but then the comment around the business is just generating so much cash. I mean is there maybe a change in view here where there might be a better balance of capital utilization and deploying capital into buybacks or thinking about dividends moving forward?

Yes well look, I made that comment that had forethought in it in terms of what we're evaluating. I have -- when we look at our earnings capability and what happens as you continue to grow the balance sheet and the earnings that come off of that coupled with what could happen in a rising rate environment, we see the potential for a lot of earnings. And the idea that we see a lot of opportunity but deploying those earnings and starting at a 28% risk weight to capital coupled with the fact that at least right now the risk weighting on security based loans will go down, which impacts, positively impacts our risk weighted ratio, all of those things point us to the fact that we're one of the largest financial institutions that hasn't considered or has not talked about a dividend.

So I raised the spectrum today because we have to examine from a prudent capital strategy not only growing the balance sheet but potentially returning capital through either share repurchases or dividends. I have previously said that share repurchases in the dilution to tangible that happens there versus dividends which are more across the board, we'd rather grow than -- we thought it more accretive and better to grow into our over capitalization but when we look at it, all three levers, which is growth, share repurchases and dividend considerations that we're thinking about are all on the table.

Great, that's actually really helpful and then just lastly following back up on ORIEL here, so I'm just trying to get some perspective around the revenues this quarter. I think that expectation was this business could be an $80 million to $100 million run rate type of business and I know within the greater construct of Europe overall the numbers would be bigger or the hope it would be bigger. But having that in the quarter for two months of just -- it's not looking like there was much contribution in the equities, at least commission wise so could we try and get some perspective around where the contribution was and maybe we're not kind of at that run rate yet I would assume and then maybe some other perspective around brokerage versus banking mix there.

Yes well I think that -- I mean the answer, reason why I don't disclose is I will say that I sort of felt that the flow business and banking to a certain extent hit an air pocket in August and it's common and certainly it was reflected in our results. I would say that the European markets and the London markets were not immune to that and so while I have not said or I think what I've said is in London our combination of our business is it can do $170 million to $200 million, I would say that the starting with Oriel has been slower than we would maybe expect on a run rate basis but that's not unexpected considering we just closed the thing August 1st. So you always have a ramp up as people get used to signing on to their new computer system so but the combination of integration plus market would explain why you haven't seen the contribution you might otherwise have thought you would have seen.

Got it and just thinking about the mix of activities and I am assuming probably the majority is brokerage. Is that fair or is there bigger chunk comes from bank and then we--

Having -- well look, I think on a go forward basis I think that there's a fair amount of corporate brokering and banking that can occur as well. We're going to -- I may and I think I will because of some of the investments we've over there I've been thinking about breaking out London for this call on a combined basis but we've put all of our pieces together and then talk about where we are to our revenue projections and the profitability and what we're doing and I think it will also -- you'll see some of the investments that we're making over there. So in that said, it's going to be hard when you combine what we do in KBW and Oriel and some of the loan sale and activity that we have in Knight, all of that together will begin to quickly talk about London as London, not as Oriel.

Got it, appreciate the details.

You're welcome, thank you and congratulations.

Alex Blostein, Goldman Sachs.

So a question for you guys on fixed income trading, so I hear you on the kind of commission comment but I was wondering how the rest of the trading businesses performed and again, particularly fixed income in October given the fact there was a fair amount of (inaudible) but more importantly, I just kind of wanted, Ron, to hear your thoughts broadly. What do you guys view as a sort of a ideal environment for your fixed income business? Clearly you have got you guys have grown it quite significantly so, as we're looking on into next year and the year after with prospects of maybe slightly higher interest rates but maybe a flatter curve, how does that all kind of play into what the fixed income business could look like for you?

Well, first of all I'll -- I think that although I don't have it at my fingertips, again I think October was pretty good across the board, okay and relatively it's always hard to talk about how trading comes in but not anything significant that I -- that got to my level certainly and so I think that business was good. As we think about fixed income, I've said for since we started building this business back when it was a $25 million business for Stifel and that's about maybe nine years ago, that this business was a business that we could grow, gain market share and increase profits in light of a market that was otherwise shrinking.

And that's how I view it today. I think that to a certain extent we've grown and we've added capabilities. It probably masks and people have been surprised at our resiliency of our fixed income business and I would say that it isn't really the resiliency of our fixed income business, it's us gaining market share through various ways of just hiring talented people and while the business is -- we're not immune to the Street pressures of the fixed income business, we are growing and we see significant opportunities to continue to build revenues even if same store sales are down. And that's exactly what's happened here. Our same store business, so to speak if you look at it, has declined as the Street has while we were showing increase in revenues and profitability.

So looking forward I think that it will -- I personally believe that interest rates will remain longer, lower longer than people think, and when they do rise I don't see them -- I personally don't see the 10-year at 8% but I think that the fixed income business is a good business, albeit the wind is at your back when you go from 5% to 2% on the 10-year versus even 2% to 4%, so I don't know if I am really answering your question other than to say we believe we're going to gain market share and show increases even if the market has, can have some declines. Now, trading profits can adjust that in any quarter, as you know.

Got you, okay helpful. And then I appreciate the disclosure around rates. I think that's definitely something that I think many of us have asked so thanks for putting it in there. When we think about the projection I guess of from now to that kind of $60 million, $70 million incremental pretax earnings, can you give us a sense how much of that comes from the first 100 basis points of -- I'm assuming most of that but I just wanted to confirm?

I think -- oh shoot, Alex, I have to look here. I mean I believe that I think that what on the -- I think as it relates to clients, we were expected -- I think what we're expecting on the client side, which is a big piece of it, is that we would keep 40 basis points of the first 100 basis points of an increase and that's all we really modeled here okay. So when we -- I think this is conservative because if you get a bigger increase in said funds we've only modeled keeping 40 of 100 and we're trying to be conservative and I think other firms may have been more aggressive as to what -- now I'm talking about the ability to recapture some of your fee income so I will say that.

When you get past that I guess I want to be consistent with what people are saying. I personally believe that the variables that move around once you get more than 100 basis points and in how behavior will change and the shape of the yield curve and all of those things is something I would rather not speculate. But I'm pretty comfortable with this 100 basis points. The 100 basis points as it relates to shift, as it relates to our bank, you can almost apply that to our equity and because we finance a lot of our business with tangible equity and obviously as assets increase by 100 basis points, the corresponding cost of equity does not increase. So we keep most of that increase on that part of the slide and we keep 40% of the increase of sort of the deposit waiver is what we've modeled and then of course you add on top of that our ability to leverage our balance sheet.

Understood, thanks a lot.

Douglas Sipkin, Susquehanna.

This is [Justin Terigen] filling in for Doug. A real quick question for you, just regarding the Bank, I wanted to drill down a little bit more on the investment securities line. I notice there's been a decline there over the last several quarters and just I just wanted to see if there's anything notable going on there or if you might be able to give a little more color on the trends. Thank you.

Well, you know, I think you're asking the same question a different way and what it is is it's our recycling investment into loans while sort of muting our growth towards the $10 billion DFAST threshold and again, I somehow feel like I'm cowardly about this $10 billion. I'm not and it's not but if anyone takes away from this that we're not going to exceed that, then I am misspeaking because we will. We're just going to do so as we always do, prudently.

But what you see is an ability to manage our balance sheet by taking proceeds from investment maturities and recycling them into loans and that's what you see. That has the impact of changing the mix, changing the NIM but not increasing the footings of the Bank.

Got it, okay that's my question. Thank you so much for the detail, Ron, appreciate it.

Michael Wong, Morningstar.

So not looking year-over-year but in contrast to last several quarters, I was wondering if there was anything unusual in the Institutional Group's compensation ratio as the compensation ratio decreased besides revenue going lower or is that just a function of what you said earlier of progress to low to mid-twenties operating margin for the segment?

Yes I think if you look in general and I think as compensation we pay the majority of our compensation at year-end and compensation is an estimate. I have said in the past with all due respect to estimates and trying to do the best we can, that we tend to have higher compensation ratios at the beginning of the year due in many ways due to benefits and payroll taxes and a number of things that then taper down and that ratio will tend to start higher and end lower and we always end up in the same place firm wide or not always but we try to. And that that philosophy and those dynamics play out not only at the firm level but in the segment level, institutional and private clients as well. So that's how you can -- there's always a few vagaries that can occur but that's the general answer.

Okay and you expressed your personal view on interest rates but I was wondering if that influenced your fixed income brokerage positioning or hedging of that business.

Well, I mean certainly from the Bank's perspective we try to hedge and we're -- and I think we're very mindful of our [ALCO] responsibilities and how we manage interest rate risk from the investment portfolio. Most of the investment portfolio is held in the Bank and so that's where we take duration risk, if you will, and we hedge it appropriately. As it relates to our flow business, I think we in our flow business in many ways dictate it by our clients and we just try to move that stuff. We're in the -- you know, in the Bank side we're in the storage business and we hold it and in the brokerage side we're in the moving business and we don't endeavor to hold any kind of positions or take any kind of risk past certain defined holding periods so it's over we're really facilitating client flows.

So my view of interest rates has some influence on what do in the Bank and how we hedge in the Bank and not a lot as to what goes on in the flow business on the brokerage side because that's more dictated by what our clients are doing.

Okay thank you.

Patrick Miller, DTCC.

Mine is really quick, if we could just look at on the slide 10, Global Wealth Management, and I see it broken down as 159, 372, if you could just give me the breakdown of that? I'm trying to just reconcile it with your overall total revenues.

Let me see if I can find the slide.

Slide 10.

Here we go. You want the breakdown of the 159, 372?

Yes the Global Wealth Management, I am just trying to reconcile it with slide nine where you have your total revenues of 534,683. I see the 260. I see the 120 and I am just wondering if you'd just give me a breakdown of the 159?

I don't often get stumped on these calls but if I can find the slide you're talking about, I will try to -- I'll tell you what. I'm trying to look here. I mean the 159 I believe is 108.2 in commission, 108.2 commissions plus 51.2 in principal transactions, which equals 159.4, which is think is the--

Slide 14.

Okay.

Yes, hey that wasn't bad.

Excellent, thank you so much.

There are no further questions at this time. I'll turn the call back over to Ron Kruszewski.

Okay always good to end with a math question so thank you, everyone. As I've said, we are pleased with our progress in the quarter, albeit do acknowledge the softness in the revenue, which I said was really, for us at least, a result of what was a pretty slow August across our general flow business and but looking forward we see certainly for us historically a much more robust quarter going forward and looking forward to 2015 we see no reason we won't continue to grow our franchise pretty much across the board. So to our shareholders thank you; to the analysts that follow, thank you for your time and we will look forward to talking to you and report our full-year results in February.

That's it; everyone have a great evening. Thank you.

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