Stifel Financial Corp (SF) 2015 Q1 法說會逐字稿

Good afternoon. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel first-quarter 2015 earnings call.

(Operator Instructions )

Mr. Jim Zemlyak, CFO of Stifel, you may begin your conference.

Thank you. Good afternoon. I am Jim Zemlyak, CFO of Stifel. I would like to welcome everyone to our conference call today to discuss our first-quarter 2015 financial results. Please note that this conference call is being recorded. If you would like a copy of today's presentation, obtain it at our website at www.stiflel.com.

Before we begin today's call I would like to remind the listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of fact or guarantees of performance. They may include statements regarding, among other things, our ability to successfully integrate acquired companies or branch offices of financial advisors, general economic, political, regulatory and market conditions, investment banking and brokerage industries, our objectives and results and also may include our belief regarding the effect of various regulatory matters, legal proceedings, Management expectations, our liquidity and funding sources, counter-party credit risk or other similar matters. As such, they are subject to risks, uncertainties and other factors that may cause actual and future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP, we may use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the Company's GAAP results. To the extent we discuss non-GAAP measures, the reconciliation to GAAP is available on our website at www.stifel.com. And finally, for a discussion of risk uncertainties in our business, please see the business factors affecting the Company and the financial services industry in the Company's annual report on Form 10-K and MD&A of results in the Company's quarterly reports on form 10-Q. I will now turn the call over to our Chairman and CEO of Stifel, Ron Kruszewski.

Thank you, Jim. Good afternoon to everyone. We are pleased with our first-quarter results, which represent our third-best revenue quarter in our history. That said, while investment banking was a good quarter, our results on this line item can and will be lumpy. Furthermore, we have incurred additional operating expenses specifically relating to enterprise risk management, audit and compliance relating to the build-out of our infrastructure and becoming a (inaudible) company. Looking forward, we are optimistic about the continued growth in our business. In today's environment, we see ample opportunities to continue to build the premier investment banking and wealth management firm.

Before reviewing our results, I would like to comment on the operating environment during the first quarter. The S&P and Dow were flat for the quarter. Equity volumes held close to 7 billion shares traded per day, essentially flat with the comparable period. The tenure continued it declined by 25 basis points to close the quarter at 192 basis points, although I would note that a substantial rise in the tenure has occurred, we are currently as yielding 227 basis points. Equity capital raising was strong, up 45%. I will comment on this in more detail in a minute. M&A announced and completed volumes were up 25% and 15% year over year and up a couple of points from year end.

In terms of equity flows, there two important mixes happening in the industry that I want to highlight. First, international funds appear to be growing while US domestic funds have been more than stagnant -- have been more stagnant. In the first quarter, domestic mutual funds saw outflow of $2.7 billion while international had inflows of $29 billion. Second, there's a growing trend of investment in the passive fund. Combining mutual funds and ETFs, active domestic funds experienced outflows of $38 billion while passive domestic funds had inflows of $57 billion.

Turning to our financial results for the quarter, non-GAAP net revenues were $564 million, increase of 2.8 % over prior year but down 2.5% from a record fourth quarter. GAAP revenues were $561 million. On a non-GAAP basis, excluding our merger related expenses, diluted EPS was $0.65 on net income -- or net income of $50 million. This compares to non-GAAP EPS of $0.68 and net income of $51.4 million in the first quarter last year. Non-GAAP pre-tax margin for the quarter fell about 1 point to 14.3%. About half of the 1-point decline relates to the increased infrastructure cost, which I will talk about in a moment.

Turning to the next slide, I want to provide some context around our results versus Street expectations. Our first-quarter results fell short of consensus on top-line revenues by $27 million. The miss versus expectations was mainly in investment banking, which was $28 million lower than the Street. As I stated on our last call, we had a terrific record fourth quarter in investment baking, but investment banking is going to be lumpy. I am pleased with our current quarter of $125 million and will give more color on this in a moment.

I also want to point out that the impact of (inaudible) both on revenue and expenses. As we stay below the $10 billion threshold, we generated less revenue from the bank or simply from the expansion of our balance sheet and the additional compliance and regulatory costs hit expenses. Those expenses were approximately $3 million higher in Q1 of 2014 as compared to Q1 of 2013 and $2 million more than the fourth quarter. As I said, this accounted for about 0.5 point of pretax margin.

Our core comp ratio of 62.5%, slightly less than the 62.8% estimated by the Street. Finally, our tax rate was 38.2%, was higher than the Street's estimate of about 37% and the result was $0.01 per share. Net-net, our revenue miss, net of compensation, accounted for $0.07 and a higher tax rate accounted for a $0.01, resulting in the $0.08 difference as compared to Street estimates.

I will now discuss our top-line activity during the quarter. Total brokerage revenues were down 1% to approximately $281 million, but up 4% sequentially. In the first quarter, we did not have the trading losses in our fixed-income portfolio that have dragged down these revenues in the preceding two quarters. Investment banking revenues decreased 8% to $125 million from $136 million in the first quarter of 2014 and decreased 28% from a record $175 million in the fourth quarter.

The decline in investment banking revenues is attributable to lower advisory fees, which decreased 16% from Q1 of last year and 52% from our record fourth quarter of 2014. In both comparable periods, we completed large deals, which makes the comparison favorable to the first quarter where we did not complete any large M&A deals. As I said, investment banking can be lumpy.

Asset management service fee revenues were a record $114 million. The increase is due to an increase in asset funded management in our fee-based accounts. The quarter was also positively impacted by the addition of 1919 Investment Counsel, which contributed approximately $14 million. Other revenues increased primarily as a result of an increase in gains realized on our investment. We had gains of approximately $5 million, which was frankly a reversal of mark-to-mark losses in the fourth quarter.

I will now discuss our brokerage and investment banking revenues. Total brokerage revenues increased 4% from the prior quarter to $281 million. Global wealth management brokerage revenues were down slightly, both sequentially and year over year while the equity brokerage, institutional equity, decreased 4% and 8%. These two items were offset, the declines were offset, by fixed income, which increased 5% and 45% from a weak quarter a year ago. Total investment banking revenues, as I said, were $125 million; a good quarter, but not reflective of the revenue power we can generate. As we continue to build this business, our results are lumpy as we get larger and move our business toward higher earning fees.

Equity capital raising decreased 19% to about $49 million. Activity was slower as compared with a very strong first quarter of 2014 where our strength in (FIG), tech, and healthcare were hitting on all cylinders. Overall market issuant level versus last year are larger amounts raised but smaller in number of deals. IPO issuance is nearly half of last year while follow-on levels are driven by large private equity modernization by either large bought deals, and that's area where we just simply don't have as much market share. However, our equity backlog levels are similar to last year, signalling a pickup in activity as the year progresses.

Fixed income benefited from an increase in public finance revenues and also from the efforts of our new colleagues, Emergence Capital. In the quarter we underwrote 193 issues, ranking us second in the nation in terms of number of issues versus 93 last year. Our advisory revenues decreased 16% year over year to 49%. It was down 52% from the fourth quarter, where we recognized a sizable fee for our Miller Buckfire work -- bankruptcy work for the city of Detroit. In our experience, it is not unusual to have a stronger fourth quarter relative to the first quarter, especially in M&A, as our clients focus on completing transactions prior to year end.

In the first quarter, as I've said, we did not close any large sizable deals. However, second-quarter visibility is good, with several larger transactions expected to close, including the BF System sale, Procera, MaxLinear, Buysight transaction, also the Susquehanna sale to BB&T is slated for early of third quarter of 2015. These are all large, notable transactions. In terms of US M&A, the dollar volume is being driven by a number of very large transactions, but the number of transactions is trending flat. Stifel continued to see a strong M&A pipeline of deals that are either in the closing process or mandated and slated for the second half of the year.

The next slide reviews our core non-interest expenses for the quarter. Excluding non-core expenses, comp and benefits as a percentage of net revenues was 62.5%, similar to a year ago. Transition pay as a percent of net revenue is still large at 4.1%. Core non-compensation operating expenses were $130.6 million, or 23.2% of net revenues. The increase in this line item over the year-ago quarter is related to first, an increase in rent due to an increase in our number of locations. Communication and quote equipment is up due to our continued expansion efforts and an increase in professional fees, due primarily to higher consultancies associated with maintaining compliance with regulatory requirements.

The next slide slows the results of our reporting segments. Global wealth management revenues increased 11% from the year-ago quarter and 6% from the fourth quarter to a record $329 million. The operating contribution increased 24% to $99 million. We are very pleased with the 30% margins in this segment. The institutional group posted net revenues of $239 million and the operating contribution declined to $32 million. Margins were 13.5%; 13.6%, to be precise.

Turning to the next slide on global wealth management, increase in net revenues for first quarter of 2014 is primarily attributable to growth in asset management service fees and commissions in net interest revenues. This was offset by a decrease in principal transactions and investment banking revenues. Comp and benefits came in at 55.6% in the quarter and non-comp operating expenses were 14.4% of net revenues.

At this time, I'll comment as we have received numerous questions on the Department of Labor's proposed fiduciary standard for retirement accounts and the impact on Stifel. First of all, the deal proposed was exceedingly complicated and, absent major modifications, would negatively impact investor choice, restrict investor acts authentication and increase cost for investors and the firms that serve them. In disrupting the market for retirement savings, the proposal's negative impact on investors would largely be borne by those who can least afford it, lower and middle income retirement savers.

This proposal incetivizes firms to move individuals to fee-based accounts which might not be their choice nor the best result for those investors. Today, investors can choose to work with fee-based investment advisors or commission-based broker dealers. The vast majority of investors, particularly with those with small account balances, choose to work with the non-managed broker dealers. 98% of IRA investments with account balances less than $25,000 are in brokerage relationships. For Stifel, 26% of our total AUM are in IRAs and of the IRA assets under managements, 80% of those are in non-managed IRAs.

The DOL's proposal in effect almost mandates that non-managed IRAs become managed. When I think about the impact on investors, primarily small investors, we would charge our non-managed account -- if we would charge our non-managed account the same rate as our managed IRA accounts, we would increase the fees on these investors -- fees and revenues by 75 %. I do not want to predict what investors will do, but the basic premise of this proposal limits choice and simply costs more. Again, from a pure business perspective, on it's face, this proposal will raise revenue. But again, from certainly my viewpoint, it really raises costs, not only on small investors but on firms that need to invest a lot to comply with this proposal. I expect the industry is going to view this proposal as unworkable and there's going to be a lot of comments about it.

Turning to the next slide on Stifel Bank, bank total assets are generally flat since year end and are up 5.5% year over year. However, loans to total assets, the ratio, grew to 47% from 32% a year ago and getting closer to our stated goal of getting to 50/50% loan to investment. Gross total loans grew by 9% in Q1 and 55%, or nearly $1 billion, year over year.

Net interest margin decreased to 2.46% in Q1 of 2015, mainly due to an increase in prepayments on the agency MBS portfolio. The bank continues to be positively exposed to rising interest rates, given the generally short effective duration of our bonds and loans. NPLs and NPAs were 29 basis points and 13 basis points, respectively. Past-due loans as a percentage of total loans at the end of Q1 was 56 basis points.

Security based loans drove the growth in our loan portfolio during the first quarter, increasing 17% and 61% year over year and now total $858 million. Commercial loans increased 2% in the quarter to approximately $1 billion. Non-redemptions and run off funded the loan growth, as we've held off crossing $10 billion in total consolidated assets, which would trigger (inaudible) requirements.

As I mentioned on our last call, we intend a standard $10 billion through the third quarter of this year and plan to resume our historical growth rate and our balance sheet in the fourth quarter and beyond. Given our lack of large debit charge revenues, the implications of crossing through $10 billion are mostly limited to the infrastructure being built for stress tests under risk management, which as I've said, we're incurring now and have been incurring. The Durbin Amend, which had passed a lot of banks across $10 billion, really has minimal impact of Stifel.

The next slide looks at our institutional group results for the quarter. The institutional group revenues were down 4.6%. It came in at $238.6 million. The decrease was due to declines in equity capital raising, advisory fees and equity brokerage revenues, offset by increases in fixed income. Comp and benefits as a percentage of net revenues was 62.6%, while non-comp expense ratio was 23.8%. This ratio remains elevated. It does reflect the investments we've made in this segment. However, travel, conferences, occupancy, and professional services were all up over last year and again, I think this much a revenue issue this quarter on a percentage basis as it is just expense. However, as a result lower profit margin was due to lower revenues and, obviously, higher non-comp operating expenses.

Next slide revues our capital structure. Total assets were $9.4 billion, a 2% decrease from March 31 last year and also from December 31 of 2014. The decrease is due to a decline in the investment portfolio, offset slightly by an increase in the loan portfolio. Our decade equity ratio at the end of the quarter was 22.5%, tier 1 leverage 17.5%, and our tier 1 risk-based capital ratio came in and it's high at nearly 30%. Let me discuss that in a moment.

The next slide looks at our balance sheet growth over time. We have grown our balance sheet. Since 2008, the beginning of the financial crisis, we have grown our balance sheet on a compound annual growth rate of 43%, and that's from 2008 through 2013, when we got to almost $9.5 billion. But since then, we have maintained assets below $10 billion level. In fact, really, no growth, or flat growth for 2013, 2014, and the first quarter of 2015.

To anticipate a question I regularly get regarding our capital plans, we continue to regularly review capital deployment matters with our Board, particularly so given the obvious very strong excess capital levels we currently enjoy. We consider all of our alternatives, including the institution of a regular dividend, utilization of our already-authorized stock repurchase program and, of course, future needs in our business. Our current thinking is that there are significant opportunities presented to Stifel through first, the acquisition of Sterne Agee, which is expected to close at the end of the month; second, the desire to grow the assets of the firm rapidly at the point when we cross the $10 billion asset regulatory threshold later this year; and finally, other opportunities that we see, currently see for business expansion.

Our current thinking, particularly as it relates to the institution of a dividend, is that this is a subject we should address at year end and not today. I assure you that we focused on these matters, including particularly the timing of instituting a dividend, keeping in mind that Stifel is first and foremost a growth Company and that we are optimistic about our ability to deploy our capital to execute on the various opportunities that present themselves to us.

Turning to other financial data, as of March 31, total stockholders of equity was $2.4 billion. Book value per share, $34.83. Our leverage ratio was 3.2 times. Advisor head count declined by a net 6 to 2,097. In first quarter, we deal mostly with retirement and low-end producers that don't meet our minimum requirements at the first quarter (inaudible) but we'd also hired 32 new FAs during the quarter. Total client assets reached $188.6 billion, up 12% from last year and 1% from the fourth quarter. 1919 Investment Counsel added about $9 billion in client assets in Q4.

Now some comments on our acquisitions and strategic vision. Simply put, our goal is to build a premier investment banking and wealth management firm. Our growth is both organic and via acquisition. When we look across our two segments, we strive to build on our capability, basically in three businesses -- under global wealth, three businesses, our private client business, our asset management business and Stifel Bank, and four broad businesses under institutional, which is equities and fixed income, sales and trading, investment banking, and research.

Turning to the next slide, I have been asked many times how much our organic growth versus acquisition contributes to our results, primarily top-line growth. As a way to illustrate this, if we compare our 2004 revenues prior to our 2005 transformational Legg Mason capital markets acquisitions to pro forma revenues today, acquisitions have contributed 55% to revenues and organic growth has contributed 45%. We've broken it out further by segment and business line. For example, Stifel Bank is mainly organic growth. First Service Revenues, the bank we bought, were negligible and Acacia, as an acquisition, was really minimal, whereas our institutional business is almost mostly a result of the professionals we've brought on board to Stifel via mergers.

As always, we will continue to position Stifel to take advantage of opportunities with the strategic objectives of first, ensuring the financial transactions accretive to our shareholders and to the partners that we are bringing on board and, second of all, that the business we do makes Stifel more relevant in the marketplace.

Now turning to our Sterne Agee acquisition, we expect to close the deal on or around the end of this month. We are very pleased to announce that 100% of Sterne Agee's traditional financial advisors have agreed and signed agreements to join Stifel. In my experience of doing transactions, we have never had 100%. We've had a lot, maybe 99%, but we've never had 100% of the people offered retention not only take a retention, but frankly, very excited to join us. I'm very pleased with what is going on with the private client group at Sterne Agee. We've also announced that Sterne Agee's institutional equities business, including equity sales, trading and research, will join CRT Capital Group. We accomplished our goal of keeping approximately 150 to 160 professionals together so they can continue their careers as a team.

We feel good about this transaction, and while I'm not updating the numbers at this point, the sale of these businesses exceeded our expectations. We were able to generate proceeds and eliminate significant expenses, i.e, a seven-year lease in New York, which we did not originally count at the time of the acquisition, or count on, frankly, that we would be able to do this deal. We also announced that Sterne Agee and Stephens, Inc. reached an agreement whereby five managing directors in the depository investment banking group of Sterne will join Stephens. And in connection with our merger, we've agreed to sell the mortgage business back to the founders.

One last point which I think highlights the merits of this deal are Sterne Agee's annualized revenues based on the last two months since we announced the merger. Global wealth management annual revenues -- or what I should say, the last two months annualized, are $190 million in fixed income annualized last two months is approximately $130 million, currently a $320 million run rate within our estimated range of revenues of approximately $320 million to $325 million. But frankly, also is as not really our experience. We generally see between announcement and closing a rather significant decline in historical revenues, both in the uncertainty and just what happens in mergers. The people in these two divisions have continued to work and talk to their clients and we are very pleased with the results of those business and are looking forward closing this transaction at the end of this month.

The next slide reviews our non-core deal costs. In the quarter we incurred $10.7 million in pretax expenses, $6.8 million after tax related to recent acquisition. These are -- it's how we look at acquisitions. A lot of our economic investment in acquisitions, the way we evaluate them, we run through the P&L because of accounting rules. We estimate it and disclose it. Also included in this number is $2.7 million which was incurred to refinance our growth debt. We refinanced our 6.75% bonds for at our 4.25% 10-year bonds, but when we refinanced that we had to write off issuance costs of $2.7 million. In connection with Sterne Agee, we expect the expense, the bulk of the core of the non-core expenses in the second quarter, this current quarter, comprised stock-based comp of $32 million and duplicate of expenses of approximately $20 million. The remainder is a quarterly estimate of the non-core expenses rolling off by the second quarter of 2016.

In conclusion, we had a good start to the year. We are well positioned to continue to gain market share in our businesses, we have excess capital to deploy and we will continue to evaluate all of our options. Our strategy at the bank remains to grow modestly until we've met all of our regulatory requirements and then accelerate growth. With that, I will open the call up for questions. Operator?

(Operator Instructions)

Steven [Truback], Nomura.

Good afternoon. I appreciate your comments that you provided on the fiduciary proposal. I've certainly seen strong views about the potential risk of creating an advice gap. I just want to get a better understanding as to what elements specifically do you believe are unworkable in the current format?

First of all, my comments were strong because it is a big market and a lot of investors rely on -- I think what is unworkable is that at first blush, if you read the preamble to the rule, there -- it appears that the model for small investors, who many of which can own a one-time commission-based product of, whether an ETF for mutual fund, they will continue to do that, but when you get into the rule, the ability to meet with -- it's called the best intra-standard exemption, is really unworkable. I can't go into all of the details. I'm not alone with the view points of the costs and everything that it comes with, including some litigation risk. If you're not exactly point on with some of these requirements, it's very detailed.

The simple -- my view of it is, and I think many in the industry echo this viewpoint, is that the rule -- the set of rules that would allow you to keep non-managed or non-fee-based IRAs is not workable, so most -- within our organization, we believe that if the rule would stand, most of our non-managed IRAs would have to become fee-based.

(Technical difficulty) that, that transition from a non-fee-based to a fee-based relationship, given the significant step up in fees, how are you thinking about that in the context of the potential risk of client attrition as well?

I think it is -- I can't predict behavior and I'm not exactly sure. But I would believe that with the relationships and the advisor relationships that there will be a lot of people who wouldn't like it but would take fee increases and there would be a lot of people who don't like it and would leave and maybe net-net, we end up in the same place, okay? Because were talking about a major increase in fees and it doesn't -- not everyone has to stay to keep us revenue neutral.

That's not the point, though. The point is about investor choice and cost and this proposal simply limits choice and costs more. Keep at that very simple level and that's why I oppose it.

Understood. One more for me on the expense side. Ron, you did cite the need for the additional infrastructure investment for regulatory and compliance spend. The last two quarters we have seen that step up somewhere closer to the low $130s million range versus a low $120s million baseline prior to that. Is that a reasonable jumping off point at this juncture going forward where that low $130s million level incorporates a lot of the incremental spend that's been required on the ERM side and the like?

I think we are spending probably -- we are at an elevated level of expense of Q1. We're really pushing to complete a number of initiatives that we want done because of our goal to have the, what I would say, regulatorily ready to be a [d-pass] company, so our spend is elevated

I want to be a little careful about the $130 million. I've said that the increase over Q1 of last year for risk management, compliance and internal audit, is about $3 million. We continue to grow by acquisition, so we had Merchant Capital in there. We had 1919 Investment Counsel.

These firms add revenue as well as expenses. So if we were $120 million last year, $7 million of it relates to new businesses. London, which we added in August of last year and then the increased regulatory spend. But that's not all of it. The increased regulatory spend quarter over quarter is $3 million.

How much of that is front-loaded cost that should abate over time versus those that will be reflected in the run rate going forward?

Good question. I would like to think that if we could stabilize the cost here that would be a good thing. I don't want to talk about reducing expenses in this environment. I think it's important that we get to where we want to be before we talk about reducing expenses.

We're spending at a rate, if I annualize the first quarter, that would not be an acceptable spend for us, but that's just the first quarter. I don't want to overplay it a little bit. That's how you get in trouble, annualizing numbers. I think we are getting into a run rate and maybe I update you more in the coming quarters as to what OpEx should be.

That would be extremely helpful, Ron.

But then again, we're going to be adding -- we're going to close on Sterne Agee, so it's going to add, like I said, at the current rate it would add gross revenues of $3 million to $3.25 million and with that comes non-comp OpEx, so I'll add that to the mix too.

Thank you for taking my questions, Ron. I'll hop back in the queue.

Devin Ryan, JMP Securities.

Thanks. Good afternoon. I had a question on GWM commissions in principal transactions. Looks like that line declined a bit year over year sequentially as well.

Trying to think about that. Should we take that as a view on retail investors being less engaged today or is it more products mix like annuities or some other commission products have been a bit softer?

We had record revenues but markets were generally flat. Not a lot of volatility. In general, fees and commissions lose market share to fee-based accounts. I wouldn't view that as necessarily less engagement, although I wouldn't characterize the quarter as robust engagement either.

Okay. That is helpful. With respect to net interest income, you highlighted the prepayment, but it looks like in the period, assets were roughly flat. So does that imply the loan growth occurred more toward the end of the quarter so it's just a function of timing? That's part one.

Also, interest expense was roughly flat and I thought you guys retired some debt in December, so just wanted to see if I was correct and why that's not reflected in the interest expense.

You answered your own question to the first one, which it is later in the quarter. As it relates to interest expense, we did retire some debt in the middle of January.

I am not sure how much the material impact that would had on net interest expense overall, so I can get back to you on that, because frankly I don't have that answer in front of me. If I get it, I'll ask someone to look and I'll answer it for you in a moment. Okay?

Absolutely. And lastly, within the other segment, is there any deal-related expense with Sterne Agee this quarter? Just trying to see if there's anything else that's kind of non-recurrent or lumpy that impacted the results.

In non-core? Or core?

Right. So I'm not sure if there was any -- if you guys didn't back out any legal fees or anything else merger related heading into the deal. Or was that all backed out?

The extent that we had some -- the legal, some of that goes into the cost of a transaction and what would've hit the income statement would've been backed out if it related to Sterne Agee.

(Multiple speakers) Thanks very much.

Chris Harris, Wells Fargo Securities.

Hey, Ron. Another follow-up on the DOL. Do you guys happen to know what percent of your advisors across the entire platform, so both IRA and taxable, are already acting as fiduciaries or operating under the fiduciary standard?

First of all, in any brokerage firm, you have advisors -- most of our advisors have, which is part of the -- actually one of the confusing things about the whole proposal. Most of our advisors have accounts that are traditional brokerage accounts and 40 Act advisor accounts, all right?

In fact, many customers have 40 Act advisory accounts and taxable trading accounts and bonds accounts and so it's across the board, that relationship. To the extent that you act under the 40 Act, there are certain rules. You got to be a little careful going all the way to the Arista standard of fiduciary and Arista account.

So it's a little technical. But most of our advisors operate under both models and most of our clients understand what they are doing and what they want.

An example, we have clients who have advised equity accounts and commission-based muni bond accounts because they simply don't want to pay a fee on a hold -- five hold muni bond account. They have it and they're going to reinvest proceeds.

They're not going to charge -- want to be charged a fee on the entire account balance yet. If it's an active asset allocation strategy, they may want a fee-based account. I

don't view this as any kind of a training issue in terms of our advisors at all. I think it's more a question of choice and frankly, one of the things that's really interesting about the DOL proposal is it is actually a third standard. It creates a standard that is somewhat unique to IRAs, separate apart from Arista accounts.

It is confusing but from a business perspective, I am not concerned about training issues, all right? I am concerned about a lot of the proposal. A lot of the things, just an example, the proposal wants broker terms to project forward returns and costs for 5 and 10 years. That is simply prohibited under SEC rules.

There's a lot of things that need to be worked on but overall, I just think that if a client wants a non-managed IRA and really doesn't want to be charged a fee and would rather just pay an episodic commission, that should be their choice. This rule pretty much mandates that we cannot do that. I always say it can't. This will probably be controversial, but the DOL says if you like your advisor you can keep them. I'm not sure that's the case here.

Okay. Another thing I am wondering about, the best interest contract exemption does permit certain compensation practices that we know about, one of those being revenue sharing payments from product manufacturer partners. Is there anyway you guys could quantify with those revenue payments are? And to the extent that an advisor migrated over to a fee-based model, what would be the impact on those payments to Stifel?

What I do know is that if you talk about revenue sharing being [12-B 1-C], I assume that's what you are referring to, and there's many, many sub-segments. But as I said, was we charge our non-managed accounts, because they tend to be smaller accounts, the non-managed versus managed IRAs, we charge nearly -- our realized revenue as a percentage of AUM is nearly half the rate that we charge an AUM -- I'm sorry, in managed accounts. And that includes trailers. Because you can't get a trailer in a fee-based account.

So it all comes out in the wash and even though were getting revenue sharing, even with revenue sharing, we are receiving significantly less as a percentage of AUM for non-managed IRAs versus managed IRAs. I actually think that, that's a fact that's true across the industry. I think it's one that is not very well understood and the industry is going to have to do a pretty job of saying that if you implement this rule, this set of investors, non-managed IRAs, people who choose not to have a fee-based relationship, if they want to stay in their current relationship, are going to have a substantial increase in cost with a reduction in choice. In investment choice, because this thing also has rules on prohibited transactions.

So it's just -- and that's at the top level. In terms of the best interest exemption and what it means, there are so many paragraph 3A2ii that just makes it very different to comply. The best interest exemption sounds good, as I said in the preamble, but in the details, is really unworkable.

Okay. Last question. With this proposal floating around, and we don't know what the final ruling query is going to look like, does that give you some pause to how you approach acquisitions at this point or is that really something that you're not really that focused on at this point. Or would this, in other words, give you --make you think twice about how you're approaching deals. You talked a little bit how much of the excess capital you guys have and certainly acquisitions is part of the mix. I just wanted to get your thoughts on that.

It's not going to give me pause. Again, I think I've said that on balanced, I would believe that our revenue would increase.

I think the problem is, is that I think the long-term effect, if -- and I don't know that we would do it. I think the industry would figure something out, but we have a lot of IRAs that are small that tend to get larger. You start with younger people, small IRAs that tend to build net worth and become investors. We don't want to lose a generation of potentially larger investors because we can't properly service them when they're a small IRA.

I think the impact can have a much longer tail than the short-term impact, which frankly could be positive from a financial point view. I'm not concerned the implementation of this rule is a negative from our Company from a financial perspective, in the immediate, snap your fingers and implement it.

Now again, investor behaviors, maybe people would say everyone leaves. It's not my belief, but I believe that retirement savings choice is important. So I'm more on a bandwagon for that than I am about the implications to Stifel -- I think there are implications that impact investors across the country.

I hope we will have a healthy debate on it and I think when investors understand the impact, there will be more of an outcry from them than there from me saying I think the rule's unworkable.

Okay. Thank you.

Hugh Miller, Macquarie Group.

Thanks for taking my questions. I guess just one in following up on the last discussion about the fiduciary standard and whether or not it's giving you pause as you look to deploy capital into growth opportunities. On the more organic recruiting side, are you seeing any chance in competition from some of your peers as they consider the ramifications of on where things are going to turn out? Is there any real change from a competitive standpoint for advisors?

No. Again, I think there is a viewpoint towards the preservation -- I sound like a broken record, but the preservation of choice. I think the industry should to come up with a workable best interest standard. I think that's something that clearly we need to do, because it keeps coming up, but if that best interest standard should be grounded in transparency, discloser of conflict, a number of things like that, but should preserve choice and not mandate what you can do.

Again, the rule is unclear. I'll give you an example. The question is, and many of you on this call may have this, but there's a question as to whether or not in a self-directed IRA you can own an IPO. There's a number of people who own initial public offerings and this has ramifications through a capital formation process and everything, and then you have a proposal that says, we don't think that's a good idea and limits that ability to invest in that product. It just doesn't seem like a good idea.

But from a competitive perspective, I think the industry can certainly modify its business practices in a manner -- this isn't some draconian measure. I think it's more draconian to small investors.

Okay. That's helpful. You gave a little bit of color on the very strong retention of Sterne Agee advisors. And as we look at the Sterne Agee production per rep relative to Stifel, it seems like it trails a bit. Can you give us color as to what some of the differences are and the business practices between those retail advisors and what you see as the opportunities to maybe narrow that gap over time?

First of all, I think the people I have met are first-class advisors and in many ways that's how people compute average production. Some of the larger firms compute all of the revenue and divide by advisors. We don't tend to do that.

I feel, in general, that the advisors in the locations -- adjusted for the locations where they are, are very productive. If there is any shortfall, it would be a product and on the ability to do muni bonds and capital market syndicates, things that we have more product on and I think that they will benefit form an increased product suite, but I don't have any sense that, that this is a relatively less productive group of people than the average person we have here, at all. I'm not exactly sure which numbers, and you've got to be careful because everyone computes these numbers differently.

Sure, that's helpful. It seems like from your comments around the Sterne Agee acquisition that the initial guidance that you guys had given, you seem to feel very confident of and that whether or not you could potentially exceed those expectations. Is that correct?

As I said, I think that we were hopeful that we could and we gave a revenue estimate of the business that we would retain and we said that we wanted to evaluate for sale, mortgage, and the equities business, both of which we've done and we've done in manners that combined, exceeded our expectations of time on the disposition of those business, both actually from a human perspective and a financial perspective, within those deals. I'm certainly pleased with -- and we will see when it gets here, but I generally make these estimates based upon trailing-12 revenue of the people that we are merging with and often have -- take pause in the time between announcing the closing when revenues fall off. That has not happened here, so generally pleased. Excuse my cough, I have a slight cold.

Sure. You also mentioned just about kind of the rapid growth for Stifel after you pass the $10 billion threshold. Can you talk to us about where, at this point, you guys see the most attractive opportunities? Is that primarily within the bank and if so, are there certain product areas that you guys are more excited about?

I think as a mathematical exercise, you can all do the math on growing assets in the bank at a 1% ROA or something and run what happens to (inaudible) capital. That is a mathematical exercise. And those returns are attractive as long as you manage credit. Certainly, I've talked about that in the past.

However, as I sit here, we have a lot of opportunities and are seeing a lot of opportunities to continue to build our franchise across many of our businesses that just isn't in the bank. And that's opportunity to the marketplace to continue to add to our capabilities and relevance.

Over the years, we have been very -- we have grown. And we have used our capital to grow. And at this point in time, because of our limitation on our growth and our balance sheet, our capital is elevated.

I don't want to limit the deployment of that capital to any one strategy. We will do what we think is in the best interest to shareholders and give the best return, whether that's capital deployment, stock repurchases, as I mentioned about the consideration of a dividend, all of those things are proper capital management and we take them very seriously. All of that said, we see a lot of opportunities today, I'll tell you that.

Okay. That's great color and then the question from me. As you think about the current state of the robo advisor movement, can you just give us your thoughts there? Are there any steps that you are taking at this point to address any foreseen risks that you see on the horizon?

A robo advisor is I guess is, I like to think of myself as tech savvy and I like to think of myself as doing all the latest tech things. The concept that a human writes a program so that some robo can do asset allocation based upon some other input, to me is looking backwards to try to predict the future and I think taking the human element out of investing is not a good thing, and it's really no different than a different spin on discount investment.

There is a lot to a financial advisory relationship in terms of planning, in terms of the courage to get people to invest and what to invest in. I don't see a robo advisor fulfilling that need. It's kind of like a web page and automated trading and all of these things.

To a certain segment of people who invest, that will have some appeal, but to the vast majority of people who are looking for sound personal advice, I don't view that as huge threat. I guess some computers can start to think, maybe. Maybe then, but they actually don't think right now, right?

I appreciate your insight. Thanks so much, Ron.

Michael Wong, Morningstar Equity.

Good afternoon. Institutional fixed-income trading was fairly good but specifically the principal transaction revenue line and wealth management was down sequentially from the previous year. Is there a different fixed-income dynamic in wealth management or can you remind me if there's something else material in there besides fixed income?

No, I think nothing in particular. I think it was, again, I think that we had more -- revenues were relatively flat. We had increase in advisory that was offset by a decrease in principle transactions. As much as I would like to explain that in great detail for you and to give you a succinct answer as to why it occurred, I think it's at that highest level, is the best answer.

Okay. Let's say going forward after the Sterne Agee expense synergies are done with, do you see your wealth management operating margin changing much from the current about 30% level due to the change in advisor mix to more independents?

Well, for sure. Absolutely, initially the independent advisor business is a lower-margin business and something that we will work on to improve those margins.

At first, certainly the margins are lower, the comp expense is higher. It'll make my non-comp operating expense finally start to look better, but that's not the answer you really want to hear, because that business is at this point a lower-margin business, although we do -- we have some thoughts around that.

Okay. Thank you.

There are no more questions at this time. I will turn the call back over to Mr. Kruszewski.

Well everyone, I again feel that we've completed a very successful quarter. The revenues were not as robust as the fourth quarter for reasons that I have explained, but still our third-best quarter.

As I sit here today and look at all the opportunities in front of us, including what I think is a very nicely accretive transaction with Sterne Agee, our ability at seeing light at the end of the tunnel as to our build out of infrastructure to support our future growth in the balance sheet, leveraging that capital and then driving higher relative earnings and earnings per share as a result of that, all of which we talked about, is something that I see coupled with an environment that while it's been sanguine, I believe, on balance over the next few years, is going to be generally positive. I'm very optimistic about where we stand.

Look forward to reporting back on our acquisition and close with Sterne Agee and look forward to continuing to delivering superior results for you, our shareholders. So with that, we will sign off and everyone have a great day. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.