Stifel Financial Corp (SF) 2015 Q2 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Stifel Second Quarter 2015 Financial Results Earnings Call. (Operator instructions.) I will now turn the call over to Jim Zemlyak, CFO of Stifel. You may begin your conference.

Thank you, Mike. Good afternoon, everyone. This is Jim Zemlyak, CFO of Stifel Financial. I would like to welcome everyone to our conference call today to discuss our second quarter 2015 financial results. Please note that this conference call is being recorded. If you'd like a copy of today's presentations and our earnings release, you may download the slides and get the earnings release from 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 facts or guarantees of performance. They may include statements regarding, among other things, our ability to successfully integrate acquired companies or branch offices and financial advisors, general economic, political, regulatory, and market conditions, the investment banking and brokerage industries, our objectives and results, and also may include our belief regarding the effect of various legal proceedings, management expectations, our liquidity and funding sources, counterparty credit risk, or other similar matters. As such, they are subject to risks, uncertainties, and other factors that may cause actual future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP, we may use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the Company's GAAP results. To the extent we discuss non-GAAP measures, the reconciliation to GAAP is available on our website at www.stifel.com.

And finally, for a discussion of risks and uncertainties in our business, please see the Business Factors Affecting the Company and the Financial Services Industry in the Company's Annual Report on Form 10-K and the MD&A results in the Quarterly Report on 10-Q.

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

Thank you, Jim. Good afternoon, everyone. Our record second quarter results demonstrate the strength of our platform. On June 5, 2015, we completed the acquisition of Sterne Agee, and as a result, our second quarter results include approximately one month of Sterne Agee's results. We are pleased to welcome our new [partners] to Stifel.

We remain excited about partnering with the professionals at Barclays Wealth Management to continue to grow our global wealth management business. We are committed to investing and helping grow the Barclays franchise over the long-term and creating a best-in-class platform to serve our clients. We remain on track to close the transaction in the fourth quarter of 2015.

Before reviewing our results, I'd like to comment on the operating environment during the second quarter. The S&P and Dow continued to trade in a tight range, flat for the S&P and down 1% for the Dow. Equity average daily volumes decreased 4% in the quarter to 6.6 billion shares despite an increase in the VIX from 15.3 to 18.2.

On the fixed income side, corporate bond volumes declined 10% sequentially, although it is up 5% compared to a year ago. The 10-year yield reversed its decline, rising 43 basis points to close the quarter at 2.35%. Today, however, the yield is at approximately 2.24%.

Equity capital raising was soft, down 12% sequentially and debt capital raising was up slightly. US M&A announcements continued to dominate the news, were up 59%, while completions lagged, down 18%.

In terms of equity flows, the trends to international funds and [into] passive funds continue. In the second quarter, domestic equity mutual funds saw outflows of $37.8 billion, while international had inflows of $46.3 billion. If you look at combining mutual funds and ETFs, active domestic funds experienced outflows of $45.8 billion after experiencing $36.7 billion of outflows in the first quarter. Passive domestic funds had inflows of $17 billion, which is down from $56 billion in Q1. Overall, I would say that the market in the second quarter was just rather flat and tepid for the most art, would be the way I would describe the environment.

Now, turning to our financial results for the quarter, net revenues were a record $598 million, an increase of 6.5% over the prior year and 6% from the first quarter. On a non-GAAP basis, excluding merger-related expenses, net income was $55 million, and diluted EPS was $0.71. This compares with non-GAAP net income of $49 million in the second quarter last year and EPS of $0.65. Non-GAAP pretax margin for the quarter was 15.5%, up from 14.6%.

Turning to the next slide, I want to provide some context around our results versus Street expectation. Our second quarter results missed consensus by $0.01. In short, pretax income beat consensus by $0.01, while our tax rate was 220 basis points higher than analyst estimates, resulting in a $0.02 negative variance in our taxes. Taken together, we therefore missed expectations by $0.01. Top line revenues missed by analyst expectations by $700,000.

On balance, investment banking was strong, driven by debt and advisory revenues, and commissions and asset management were better than expectations, while principal transaction missed. The compensation ratio came in at 62% versus the analyst expectation of 62.3%. Non-comp expenses came in $1 million higher. And as stated above, our tax rate was higher at 40.7%. And this was due to losses recognized in our foreign subsidiaries that are taxed at different rate than our US subsidiaries. Again, overall net result was $0.71 versus analyst expectations of $0.72.

Turning to our financial results for the six months [for] the year, net revenues were a record $1.2 billion, an increase of 4.6% over the prior year period. On a non-GAAP basis, net income was $105 million, and diluted EPS was $1.35 versus $1.33 for the first six months of 2014. Our non-GAAP pretax margins came in at 14.9%.

I will now discuss our top line activity during the quarter. Total brokerage revenues were down 2% to $269 million, and down 4% sequentially. Commissions increased 12% year-over-year [at] 2% sequentially, but were offset by principal transactions which were down 23% year-over-year. This was due to a decline in trading profits of approximately $14.5 million from the prior year quarter. I will note, in the prior year quarter, we had a large gain of approximately $6 million.

Sequentially, our trading profits declined approximately $4.5 million, primarily due to tepid results in our bond inventories, both tax, [non-tax] exempt. Investment banking revenues increased 11% year-over-year and increased 29% sequentially to $161 million from $145 million in the second quarter of 2014, and from $125 million in the first quarter. The increase is attributable primarily to higher fixed income capital raising, with the contributions from De La Rosa and Merchant Capital positively impacting results, as well as an increase in advisory fees, with a number of larger transactions closing.

Asset management service fees were a record $120 million. The increase is due to an increase in assets under management, our fee based accounts, and contributions from 1919 Investment Council. Other revenues increased primarily due to higher loan origination fees at Stifel Bank.

I will now discuss our brokerage and investment banking revenues. Total brokerage revenues decreased 2.1% from the prior year quarter to $269 million. Global wealth brokerage revenues were down 1% year-over-year, while equity brokerage decreased 4% and fixed income brokerage decreased 3%.

Looking at investment banking, total investment banking revenues were $161 million, which represents a good quarter. As I've reiterated on other calls, investment banking results are lumpy, and this quarter it was on the plus side of being lumpy. Looking at capital raising, our equity capital raising declined approximately 16% versus the prior year, which was more than offset by 124% increase in fixed income capital raising.

Looking at fixed income capital raising, it was $42 million, benefiting from an increase primarily in our public finance revenues. I'm very pleased with our performance in public finance, which reflects investments we've made over the past several years. Of particular note, during the first half, and I think these numbers are impressive, we were sole or lead manager on 452 negotiated issues, raising over $10 billion. This more than doubled the 213 issues raising $4.4 billion during the same timeframe in 2014.

Through June, we were ranked sixth in par value underwritten and first in number of issues nationwide. We continue to maintain a strong K-12 school business, and in that sector we ranked first in both number of issues and par value underwritten, far outdistancing our closest competitor in both categories.

Equity capital raising offset the increase in fixed income with a decline of 16% to $55 million versus the same quarter last year, but is up from 13% from the first quarter. As I talked about last earnings call, we had a slower first quarter, and that was offset by a more active second quarter, which was largely driven by activity in the healthcare sector.

Revenues year-to-date are down 17% to $104 million. Year-to-date, the overall equity market activity is roughly flat, while at Stifel our revenues are down. The reason is is that [FIG] has been slower than expected, and that, in the tech media space, from our view, more companies have taken private capital and taking longer to go public. However, for the same reason, our outlook for tech and media in 2016 has improved due to really the current delay now, [and] since we're pushing some business forward.

Our equity capital -- our equity backlog levels are similar to last year at this time and vary sector to sector. We expect FIG to be on balance with the first half, TMT a little slower, and in healthcare we're very busy with new mandates. Energy and BBTs are more volatile and difficult to call, given the effect of commodity prices and overall interest rates.

Looking at advisory, advisory revenues increased 5% year-over-year to $64 million in the second quarter, and increased 29% from the first quarter. In the second quarter, we completed several larger transactions that we expected to close, including [ViaSystem], Procera, and several other transactions. Q3 is already off to a good start, notably with the closing of the sale of Susquehanna to BB&T, which was a signature transaction in the FIG space, not only this quarter but for the year. We continue to see strength broadly within our M&A business with a strong pipeline of mandated assignments expected to announce or close through the balance of 2015.

The next slide reviews our core non-interest expenses for the quarter. Excluding adjustments, comp and benefits as a percentage of net revenues was at 62%, down from 63% in year-ago quarter. Transition pay as a percentage of net revenue stood at 4.2%. Non-GAAP, non-comp operating expenses were $135 million, or 22.5% of net revenues.

The increase over the year-ago quarter is related to, first, an increase in rent through the increase in a number of locations. Second, communication and, quote, "equipment," which again is due to our continued expansion efforts, and we have a significant increase in professional fees due to higher consultant fees associated with maintaining compliance with regulatory requirements.

To give some numbers around these costs, for the three months ended June -- I'm talking about the regulatory costs primarily in enterprise risk management, internal audit, and compliance -- for the three months ended June 2015, these costs increased $4.1 million for the quarter over the comparable quarter of June of 2014. And for the six months, these costs are up $7.5 million. That's an increase, the delta, over 2014. So, on round numbers compared to a year ago, we're spending about $15 million annually in increased costs in risk management, internal audit, and compliance.

The next slide reviews our non-GAAP expenses for the first six months of 2015. Comp and benefits was at 62.2%, the low end of our target of 62% to 64%. Transition pay was 4.1%, and non-comp OpEx totaled $265 million, or 22.8% of net revenues.

The next slide shows the results of our reporting segments. Global wealth management revenues increased 12% from the year-ago quarter and 4% from the first quarter to a record $343 million. The operating contribution increased 5.5% year-over-year to $94 million, but was down 5% from the first quarter. Margins in this segment declined. They stood at 27.4%. The margins were negatively impacted by the independent contractors from Sterne Agee who, at this time, operate at lower margins than our traditional business, the traditional wealth management business at Stifel.

The institutional group posted net revenues of $259 million, and the operating contribution declined 1% last year to $42 million. Margins stood at 16.2%, and we continue to work through our [vol] to get those margins into the low 20s.

Looking at global wealth management on the next slide, the increase in net revenues from the second quarter of 2014 is primarily attributable to growth in asset management and service fees, and an increase in commissions, investment banking, and other revenues. This was offset by a decrease in principal transaction revenues. Comp and benefits stood at 57.1%, and non-comp operating expenses were 15.5% of net revenues.

Looking at Stifel Bank, bank total assets decreased by approximately $500 million quarter-over-quarter and $250 million year-over-year to below $5 billion. The decrease was primarily related to the sale of AFS Securities, part of our management of firm-wide assets around the $10 billion level that triggered DFAST requirements.

Gross total loan balances were $2.6 billion, up 36% year-over-year, and the loans to total assets ratio grew to 51% from 35% the same time last year. Net interest margin is stable at 2.52% compared to 2.46% in the first quarter of 2015. Though our NIM is lower than many traditional banks, our after-tax ROA in the bank of 1.48% benefits from the efficiencies of being funded by brokerage sweep deposits instead of a traditional bricks-and-mortar branch network.

The bank continues to be positively exposed to rising interest rates, given the generally short effective duration of our bonds and loans. Asset quality remains strong. MPLs and MPAs were 26 basis points and 13 basis points [respectfully]. Past due loans as a percentage of total loans at the end of June were 45 basis points.

Looking at our shared national credit review for 2015, more than 70% of the portfolio was reviewed. Two of the bank's credits were criticized as substandard. These loans represented approximately $3 million, less than .5% of the bank's shared national credit balances. Security-based loans drove the growth in the loan portfolio during the second quarter, increasing 12%, and 54% year-over-year, and stand today at nearly $1 billion. It's actually $963 million.

These security-based loans are floating rate, with attractive spread and carry approximately a zero risk weighting. Less than 3% of client AUM is currently utilizing security-based loans, which we believe provides a lot of runway in this asset class. Commercial loans increased 1% in the quarter and 34% year-over-year to approximately $1.05 billion. The investment portfolio contracted by $693 million during the quarter as a result of $556 million in sales, $80 million in maturities, and $54 million in principal paid out. Bond redemptions and runoff funded the loan growth.

With respect to Barclays, we believe that the Barclays impact to the bank will include nearly $1 billion in bank loans that will replace some of the bank contraction, as we've said, and we expect the Barclays transaction to close in the fourth quarter of this year.

The next slide looks at our institutional group results. For the quarter, institutional group revenues were up 1% year-over-year and up 8% sequentially to $259 million. As I mentioned, this increase was due to more robust investment banking, led by fixed income, offset by headwinds primarily in trading. Compensation and benefits as a percentage of net revenues was 61.9%. The non-comp expense ratio remains high at 21.9%, or nearly 22%. This reflects the investments we've made in this segment. Travel, conferences, occupancy, professional services, all up over last year. As we work through our integrations, we expect to bring this down. The result of all this is a pretax profit margin of a little over [16%].

Looking at our capital structure, total assets at June 30 were $10.1 billion, an increase from both comparable periods and above the level that -- it's not above the level that triggers DFAST, because DFAST is based upon average quarterly, trailing quarterly revenues. So, average -- consolidated average assets for the quarter were $9.54 billion, which was flat with comparable quarters.

As we've stated in the past, [we plan] to have total consolidated assets below $10 billion as of the end of the third quarter 2015. Beginning in the fourth quarter, we'll begin to prudently grow the balance sheet, with an emphasis on risk-adjusted returns. As such, our consolidated trailing four-quarter average assets may exceed $10 billion as of March 2016, which would require a DFAST stress test submission in 2017, all of which we are prepared for. Our debt to equity ratio at the end of the quarter was 21.1%, tier one leverage, 18.3%, and tier one risk-based capital ratio is 29.4%.

Looking at other financial data, at June 30, total stockholders' equity was $2.5 billion, and book value per share increased to $36.35. Book value was positively impacted by stock issued for the Sterne Agee deal and net income recognized during the quarter, offset by the increase in outstanding shares due to the Stern deal. Our leverage ratio remains conservative at 3.3 times. Advisor headcount stands at 2,823, which reflects new advisors who've joined us from Sterne Agee, both traditional and independent contractors.

The next slide reviews our deal integration costs. As we've stated on numerous calls, these adjustments consist primarily of acquisition-related expenses which we believe are duplicative and will be eliminated, stock-based compensation and other expenses, which we view are not representative of our ongoing business.

In the quarter, as expected, we incurred $23 million in pretax expenses related to stock-based comp in connection with the Sterne Agee acquisition. As I stated in many calls and in our analysis, we view this as part of purchase price, but it does run through the income statement as required by GAAP. We had $32 million pretax related to duplicative expenses, of which Sterne Agee accounted for $24 million. The remainder is a quarterly estimate with expenses expected to roll off by the second quarter of 2016.

Now, for an update of our recent acquisitions, we completed the Sterne deal on June 5th. This deal has exceeded our expectations already. Eric Needleman and his team are leading, along with [Billy Hizinger], are leading our integration fixed income and expanding our capabilities to include Sterne's tier one client base with Stifels' more traditional middle market, or more historical middle market focus.

With respect to the Barclays transaction, I would say that, considering all the circumstances surrounding the Barclays situation and the various news reports prior to our announcing the deal, we expected and modeled advisor attrition, which is why our purchase price adjusts with the ultimate revenue we achieve. I would say that we've given some ranges for revenue. Our expected attrition is expected to be at the high end of our range, but we are very excited about the value we create with the Barclays addition. We remain on target to close in the mid fourth quarter, and we'll update you on final advisors and revenue projections on our third quarter earnings call.

In conclusion, we had a record revenue quarter for the -- we had record revenue for both the quarter and the first six months of the year. We're well positioned to continue to gain market share. We remain on track with our acquisition of Barclays US wealth management franchise, which will add nicely to our wealth management business. We have work to do on our [elevated] expense base, and we'll continue to deal with non-comp expenses in an appropriate manner.

I will now open up the call for questions. Operator?

(Operator instructions.) Chris Harris, Wells Fargo.

Thank you. Hey, Ron.

Hey, Chris.

So, a couple questions on the quarter. One relates to the fixed income business. Just trying to get a handle on why did a client -- I know you cited a few examples, but I also thought you would have a nice contribution from Sterne Agee, one month results from those guys. So, maybe if you could walk through again the quarter-on-quarter change, the client you saw, taking into account the contribution from Sterne?

Well, I think that, first of all, we didn't have quite a month. I think it was missed the first week, and I'm not sure how that relates into trading days. But, the fixed income business in general has been rather slow. I mean, [they're] relatively slow, and I think that it actually picked up in June. We had a nice June. We had a -- won't give all the numbers. We had a record revenue month in the month of June for Stifel, which included the Sterne Agee wealth management and fixed income business.

But, in general, I would say that fixed income, due to a number of factors with (inaudible) interest rate, what the Fed's doing, many, many macro-type events, has resulted in classic summer doldrums that probably started a little early.

Okay, so more of a macro situation than anything really negative going on in one of your units.

Yes. I don't -- yes, I would not say that it's anything that was there. I mean, look, second quarter versus the first quarter, corporate bond average daily volume was down 10%.

Yes, okay. Then, the outlook for capital markets, it sounds like there's a variety of puts and takes there. I think you cited challenges for BDCs and MLPs, but maybe FIG and tech getting a little bit better as we approach the end of the year. How should we take all that stuff together if we're trying to think about what year-on-year growth might look like? You mentioned the pipeline being similar to the prior year. Does that mean that very modest growth we should be thinking about in the second half, or is it too early to call there? Just didn't know the magnitude of sort of the BDC MLPs being down versus the other stuff you have kind of building in the pipeline.

Yes. Well, look, yield equities in general are down. MLPs and anything oil-related is obviously in some flux. And for our business, I think that FIG was comparatively smaller, but I think all businesses -- healthcare is doing well, and I would say that, as I look at it, I would say the results are on par. I don't see significant growth. It's sector-by-sector, but I would say that our projections are in line with last year. I don't see, other than healthcare, any markets that are flying in terms of capital raising.

Okay. And then, I guess that one question I wanted to ask you on the regulatory front, I believe you're going to be participating in a panel that the DOL is holding later this week. What message do you hope to get across in that panel, Ron, and any other updated thoughts you might have on the Department of Labor proposal?

Yes. I think that the message really is, is that the Department of Labor's proposal is just a broad side on non-managed brokerage accounts, and that non-managed brokerage accounts generally service investors very well at a lower cost. There's no significant -- there's really no discernable difference in performance I know of, based on my experience at Stifel and across many firms that I know that brokerage IRAs are half the cost of managed IRAs.

So, I think the message really is, is that if there is some conflict, and all people talk about is conflict, it doesn't come out in the fees being charged, and it's not in performance, so where is it? And the rule is very voluminous, and is going to add significant costs. And in many ways, I think at this rate, the traditional brokerage model which serves small investors so well over so many years, and that's the message. Deaf ears or open ears, I don't know, but I feel that this is important enough that I want to participate in the debate.

Okay, thank you.

Hugh Miller, Macquarie.

Hi, good afternoon. Thanks for taking my questions.

Hey, Hugh.

Hi. So, I guess one on -- you commented about kind of the rise in compliance and monitoring type of costs at about $4 million a quarter. Can you give us a sense as to how much of that is really driven by kind of preliminary steps and actions that are being taken to consider a world under the new fiduciary standard? Is that really playing a factor in that increase?

No. Look, those are completely different topics, Hugh. We comply with -- we have managed IRAs that are subject to the fiduciary standard. We're talking about what happens to traditional brokerage accounts and what would happen if they were either transferred -- if everyone transferred to an advisory model, our revenues would go up, but I suspect there's a lot more to that analysis than just that.

But, that has nothing to do with our elevated costs. Our elevated costs are because we want to be regulatory compliant across risk management, internal audit, compliance, and all of those functions. And the requirements as being a bank holding company under Dodd-Frank versus what they were as a traditional brokerage that didn't have a bank are, in and of themselves, significantly higher. And couple with that, when you cross $10 billion, you get the DFAST requirements.

The long and the short of it is, is that I feel that we have been purposefully [being] -- preparing this organization's infrastructure so that we do not have any issues there. And we've been spending the money first so that we can build the balance sheet coming. And I feel good about that. What I don't -- what I understand is that getting all of the audits and the outsourcing, the consultants from IT across the board is significant.

We're not alone in that, and that I would think that our annual expenses for $10 billion banks being in the $10 million to $15 million range is in line with that. The one thing we don't have to deal with that other financial institutions do is we don't have a big impact resulting from Durbin. But, our costs are in line, and we'll need to grow into our infrastructure in terms of balance sheet starting in the fourth quarter.

Okay, that's very helpful. And I guess sticking with the theme of the bank, as we consider kind of some of these security sales that you guys made during the quarter, how should we be thinking about the impact on the asset sensitivity of the overall Company, just given the new composition of the interest-earning asset mix?

I don't think it really changed that much. To the extent that we looked at the overall mix, our growth was in security-based loans, which are primarily floating rate in and of themselves. And our assets did grow because of what [came] despite the asset sale. So, I would say that, across the board, the interest rate sensitivity really hasn't changed.

Okay, that's helpful. And then, you kind of insinuated in some of the discussion about the margins in the global wealth management segment and how it's been impacted a little bit by the addition of the Sterne Agee independent reps. Can you talk to us about how you're viewing their productivity levels and how you envision maybe an enhancement of those production, over time, and what the plan of attack is in order to enhance the margins there [from what] the acquisition?

Hugh, I don't know that I'm prepared on this call to do that. I think that we're just into it, and that is a different business that has different -- obviously higher comp, but lower non-comp operating expenses. So, suffice it to say any business that we're in, we're going to achieve risk-adjusted returns, and I think it's early into our getting into that for me to comment at this point.

Okay, that's fair enough. Last question from me is just with regards to you gave us a little bit of color on some of the strength you were seeing in the fixed income underwriting side. Are you seeing that carry forward, so far, into 3Q? And any color there would be [appreciative].

Well, look, I'm always reluctant taking results that doubled last year's results and then annualizing those, okay, for whatever reason, okay? Maybe just karma, which you shouldn't use on an earnings call, probably.

But, the point is I don't want to look forward. We had a great six months. What it reflects is the investments that we've made in Stone & Youngberg and De La Rosa, in Merchant Capital, in hiring of the number of people that we did in (inaudible). Our public finance business is a great business, and I can see us continuing to gain market share. But, we had a very good six months, and I don't want to try to predict the next six months. There's so much that is rate, and so many variables that go into that.

Sure, completely understand. Thanks for your time.

Devin Ryan, JMP.

Hey, thanks. Good afternoon, Ron.

Hey, Devin.

Maybe just coming back to the conversation around excess capital and priorities, still very high excess capital levels. It sounds like the bank expansion schedule really hasn't changed, so we're in a little bit of a holding pattern. But, is the expectation there still that we should see some pretty good acceleration in asset growth once you formally break that $10 billion to better leverage the infrastructure, as you put it? And then also, how are you thinking about a dividend? I know it's something that it sounded like was being contemplated. Haven't seen anything on that front at this point.

Well, I mean, I think we've been consistent as to our commentary regarding the asset growth at the consolidated level in that we've consistently targeted that we would look toward the fourth quarter of this year as something that would do that. Now, that growth will be dependent upon market conditions at the time, and spreads, and there's a number of things. We're not just going to grow just to grow. We'd like to -- I always want to be the caveat that the assets that we put on the bank's balance sheet have appropriate risk-adjusted return characteristics.

But, with that, we experienced significant 20%, 30% growth in the bank up till this point where we went into a holding pattern. And what I see as opportunities to grow bank assets, if it were today, are meaningful and good. And so, we're not building out this infrastructure and this [in-control] environment to stay at $10 billion, I can tell you that. That's not the plan. So, I think past comments are true today, and I'm not modifying those, and nor am I modifying the timeframe.

With respect to your question about the dividend, there's been a number of things that have presented themselves. Obviously the Sterne Agee deal in and of itself, the Barclays deal, which is a large transaction which will have a cash component in the fourth quarter, all of which are part of our plan to properly leverage the Company. 29% tier one risk weighting is not an appropriate amount of leverage, and we've talked about leveraging that appropriately.

And with what we have today, I'll stay with my comment that we'll always look at both the numerator and the denominator of a leverage equation, but are focusing on the growth that we're seeing. We have a lot of growth in (inaudible), maybe now as many as ever that I have seen that can [vote] properly, use capital and put proper returns on capital, and that certainly has me more excited about growing shareholder value than dealing with reducing the capital base, either through share repurchases or otherwise. The landscape's changed in what we view as our opportunities, to the better. To the better.

Great. That's very helpful. And then, sorry if I missed this, but just the security sales, was there anything else driving that beyond just attempting to stay below the $10 billion threshold? And then, just to intertwine, other revenues and wealth management were elevated, so not sure how much of that was driven by security schemes. And I know that that can impact -- or loan origination gains. Any color there would be helpful.

Yes. Look, I don't know that it was that [materially]. We did have some gains and some loan origination fees because of growth in the loan. But really, we were attempting to manage our average assets for the quarter and manage that in the guidelines that -- what we've said. And we had to model bringing on Sterne Agee onto a balance sheet which was near $10 billion. So, looking at the securities, which are the most liquid part on the bank, was the way we looked at that.

Yes. Okay, that makes sense. Just wanted to make sure I understood. And then, lastly, on the Barclays commentary, appreciate the update. Just on that, is there a breakup fee with the deal, so if something were to maybe not go as you guys see here, what would that be if there is? And then, with respect to the revenue expectation, so to the extent it does come in toward the low end, just based on advisor attrition, is that 20% to 25% margin range still a pretty good way to think about it, or does something change in there, as well?

Look, [there's DLs] of sufficient size that the margins would be consistent, obviously like the same margins on more revenue, and we're looking at. But, as people don't come, you don't pay the transition pay, there's a number of moving parts. But, I'm excited about the Barclays transaction. I'm excited about the people. I'm really excited about what it does for our overall wealth platform from a competition perspective as to our ability to compete in the advisory space.

I've said before, and I'll say again, I'm not at liberty to discuss necessarily detailed parts of the agreement, but I fully expect this transaction -- see no reason why this transaction will not close in the fourth quarter of this year.

Got it. And when that does, will we have more details around the consideration? I'm assuming that'll all be disclosed at that point?

Well, look, I think that we'll -- my goal is to be able to provide a better, maybe, model as to the revenue and the contribution on the third quarter earnings call. I feel that I don't want to be updating this all the time, but this is a nice transaction. And the purchase price, as I said at the time, is an accordion based upon really kind of what we end up with. So, this deal, again, will be a mid fourth quarter call, and we'll provide a little more color as we get closer.

Got it. Appreciate it. I understand it's a moving target, so thanks for taking my questions, Ron.

Sure.

Christian Bolu, Credit Suisse.

Good afternoon.

Christian, how are you?

Hi. Another question on fixed income [treaty]. And you've taken the contrarian view in building that business just by some of the macro headwinds. I'm just curious, any changes to the view, and would also like to get from you maybe any sort of quantitative revenue targets you have for that business in a more normal quarter.

I don't know that I provide those kind of numbers, Christian. I think you can look at our historical numbers. It's not my practice, nor do I want to start now, with providing revenue guidance, if you will. The fixed income business is a -- that business is here to stay, and it's going to go through its cyclical ups and downs. We like to build all businesses in a contrarian manner, and we'll continue to do that.

I feel that the business, for a variety of macro reasons, is muted relative to what we believe it can be when there's more clarity as to interest rate policy, both in the US and in the world, and frankly what might be the result of the shape of the yield curve. I think right now there's a lot of uncertainty, and I think that's playing out in the general flow business, which I think is subdued, offset by a lot of debt issuance by corporations.

So, look, I like the business. We're going to continue to invest in the business. We think it's a great business to be in. But, like all businesses in the capital markets or in wealth management in general, it tends to be cyclical and driven by factors that are not always in our control.

Okay, that's helpful. And then, maybe on wealth management, you mentioned some of the lending products are under-penetrated at 3% of AUM. (Inaudible) us to maybe what you think is a more normal level for penetration, how you're going about increasing that penetration, and then what kind of yields you're getting on that product relative to, I guess, the overall bank NIM.

Well, first of all, security-based loans are an attractive product from a risk weighting perspective. They're generally zero-based risk weighting. They are core to our business in that we're dealing with clients. And we believe that, as we continue to market this, and we've not been aggressively marketing it, again because of our limitations around overall balance sheet which have been in place for a couple of years.

But, overall, a 3% penetration on security-based loans into our overall assets under management I feel, and have stated in the past, provides a lot of runway for growth in that asset class. And it's an asset class we both like, understand, and provides very attractive risk-adjusted returns. So, I again believe that we have a lot of what I would term organic growth capabilities within security-based lending.

Okay, but there's no current level you're aiming to achieve, or kind of any kind of numbers around how much you can grow?

Well, there's no numbers that I'm going to give on this call that have anything to do with any kind of projections or growth rates, because I haven't done that in 30 years, and don't intend to start now. I'm not trying to be difficult about it. We don't like doing forward projections.

No, I hear you. Thanks for taking my questions.

Dan Harris, Goldman Sachs.

Hey, good afternoon, Ron. I was just trying to separate some of the legacy Stifel performance from the Sterne Agee contribution this quarter, to the extent that's possible. Any color you can give us in terms of the revenue contribution from Sterne Agee in the quarter? And I guess based on limited performance you've seen so far, does the kind of $300 million to $325 million in revenue contribution still feel about right?

Well, look, we're what, a month and a half into it, or maybe two months into it, and I think that the revenue contribution that we have seen is within the range that we provided. And so, we've been pleased with it. We had tremendous acceptance of the platform on the wealth management side. And the fixed income business I think is, as previously stated, is tepid, but not tepid because of the acquisition, tepid because of macro events in the marketplace.

So, I am pleased with where we are in the Sterne Agee integration. All of the wealth management offices were fully converted onto our platform, as was fixed income. The traditional wealth management-fixed income was done on the date of close, frankly, and wealth management in early July. So, the integration has gone well. The technology's gone well. And the revenue to this point have been within our range of expectations.

So, that's good because normally, Dan, at this time revenues in the initial stages are below where you think they'll ultimately shake out because of the training and uncertainty and just general what happens when you bring people on. This one, in this case, the revenue transfer, at least to today, has been pleasing on the up side.

Okay, that's helpful. And similar question. I know this one's even earlier days, but I know you mentioned attrition being at the higher end of expectations for the Barclay deal. Does that pose risk to the revenue range that you laid out earlier, kind of fall even below the lower part of that range, or you're still comfortable there?

No. I mean, I think that it depends on -- look, the competition in that space is fierce, fierce, and our models are such that we're comfortable with where we are. Is there risk at the lower end of the range? I would say that there could be. As I said, I think I modeled this. I think my comments were that the attrition that we modeled would be at the higher end of the range, which I guess means we're at the lower end of our revenue range, or sort of inverse. And yes, that's possible, but even below that range it's a wonderful deal from a shareholder perspective.

Okay. And maybe just last one from me, I know you kind of continue to target a low 20s margin target relative to kind of the mid-teens today. I was just hoping you could walk us through maybe what's the bridge there, how much help do we need from [REITs], how much help do we need from a more normalized trading environment? And then, what can you kind of control on the expense side absent the revenue picture?

You're talking on the institutional side?

Yes.

Yes. I mean, the institutional side is a -- if you go back before we started making all of our investments, starting with Thomas Weisel and then Stone & Youngberg and all the things that have impacted the institutional side of the business, we continue to invest. We end up with many duplicative expenses that we run through non-core for a period of time, but then we don't. At some point, they're a part of your core. And it's just continued growth in that area. We've made a lot of investments. I would say that we need to look hard at trading costs and some of our marketing costs as we try to build that brand. We have made significant investments in conferences and a number of things that make the non-comp operating expenses high.

I would say that, at some point in time when you quit investing in that brand and what we've been doing there, which I'm pleased with, you can -- the non-comp operating expenses are more -- you can cut them easier. It's kind of like cutting advertising, though, and I want to be careful because we're doing, I think, a very good -- we're doing very well in gaining market share in a business which now, in the institutional business, is in excess of $1 billion. And we want to continue to gain market share.

So, part of it's investment, and part of it is the costs that creep with doing acquisitions. All that said and done, longer-term, our target is not 16% margins in the institutional business.

Understood. That's helpful. Thanks for taking my questions.

Yes.

Michael Wong, Morningstar.

Good afternoon.

Hey, Michael.

So, related to the security sales to bring down the bank balance sheet, were there related losses that flowed into the principal transactions line of wealth management that should be considered one-time?

No. No. I would say that -- as I said, and I don't like to characterize what happened in the trading accounts one-time either way, we want to be -- that's part of the business. But, the trading gains and losses in our -- through our principal transactions quarter-over-quarter, so the second quarter of 2015 versus the second quarter of 2014, were down $14.5 million. And that is significant, and you see it in the line item called Principal Transactions.

And is it one-time? No. Is it below what I believe a normal run rate is for that line item? Yes. I'll leave you to do the math.

Okay. And then, just going back to the bank, how easily can you funnel deposits back into the bank? And would you expect your bank portfolio to be 50% loans and 50% securities in, let's say, two years, even after the $1 billion or so of loans that you expect to get from Barclays?

Well, look, we've gone from -- I forget, back in the time -- 15% to 20% loan to assets to over 50% now, which is what we said we were going to do. I would like to believe that, at a minimum, we can grow loans and investments at at least the pro forma rate, which is 50-50.

Now, again, it's going to be dependent on market conditions and what -- if you can put investments on, because we do have cash we can sweep to the bank, but can you put investments on, hedge the interest rate risk, and achieve acceptable returns on allocated capital? That's market-dependent at the time. But, I see today our capabilities for originating loans and underwriting loans much more than what it was even a few years ago. So, as I said, between C&I and security-based loans, that should be part of our bank growth strategy. Investments will play a part, too, but we're not going to look at doing a wholesale investment portfolio.

Okay, thank you.

There are no further questions at this time. I will now turn the call back over to you, Mr. Kruszewski, for final remarks.

Well, I would say that we've been busy, and I believe that we continue on our long long-stated mission of building a premiere wealth management and investment banking firm. The opportunities that our firm is seeing today are robust and provide us ample opportunity. Sort of the counter-balancing factor is the world has some uncertainty abroad, China, still deflationary risks, and what's going to happen in the US in terms of policy, and interest rates are something that we're mindful of.

But, through it all, I appreciate the interest people have. Excited about our prospects, and look forward to updating everyone on our third quarter. And congratulations to my partners for a record second quarter. Thank you, and have a good day.

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