Stifel Financial Corp (SF) 2017 Q2 法說會逐字稿

Good morning. My name is Phyllis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Second Quarter Earnings Conference call. (Operator Instructions) Thank you.

I would now like to turn the call over to Jim Zemlyak. Please go ahead.

Thank you, Phyllis. Good morning. I'm Jim Zemlyak, CFO of Stifel. I would like to welcome everyone to our conference call to discuss our second quarter 2017 financial results.

Please note that this call is being recorded. If you'd like a copy of today's presentation, you may download slides 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 '95. These statements are not statements of fact or guarantees of performance. They may include statements regarding, among other things, our ability to successfully integrate acquired companies or branch offices and financial advisers; general economic, political, regulatory and market conditions; the investment banking and brokerage industries; our objectives and results; and they may include our beliefs regarding the effects of various regulatory matters, legal proceedings, management's expectations, our liquidity and funding sources, counterparty credit risks or other similar matters. As such, they are subject to risks, uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statements.

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

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

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

Thanks, Jim, and good morning to everyone, and thank you for taking the time to listen to our second quarter 2017 results. As Jim said, this morning, we issued a press release with our second quarter results, and we posted a slide deck on our website. I'll start with a high-level review of our results and then go through our business line and segment results in greater detail. But given the detail contained in both our press release and slide deck, I'll focus my comments on supporting details as opposed to just repeating our published numbers.

So with that said, I'm very pleased with the strength of our quarter. We generated record net revenue of $726 million, and after adjusting for roughly $35 million in nonrecurring or deal-related charges, we generated, on a non-GAAP basis, record pretax income of $118 million, record net income of $74 million, and record earnings per share of $0.90, as all of our business segments showed sequential improvement. Also, on a non-GAAP basis, annualized returns on common equity and tangible common equity were 11% and 19%, respectively. GAAP diluted EPS came in at $0.63.

This quarter's results illustrate the benefits of the investments we've been making into our business over the past few years as we are able to post record results despite significant headwinds to some of our businesses. Strength in global wealth management, particularly in the growth in net interest income and record investment banking in our Institutional Group, offset declines in both institutional equity and fixed income sales and trading. The improvement in our revenue and our continued focus on expenses resulted in a non-GAAP comp ratio of 61.4% and an operating ratio of 22.3%, both down nicely from the prior quarter. As a result, non-GAAP pretax margins improved to 16.3%, the highest level since the fourth quarter of 2010. With that, let me go through in more detail our business line and segment results.

In terms of primary revenue lines, I'll start with investment banking. Stifel generated record investment banking revenue of more than $185 million, driven by $102 million in capital raising and $83 million in advisory revenue.

Advisory revenues of $83 million were our third strongest ever and represented a 56% sequential increase as almost all of our advisory businesses experienced significant growth. We previously said that the advisory revenue may be more back half weighted in 2017, but we had a strong first half of 2017, generating approximately $135 million of advisory revenue. Given the strength of our pipeline, if the market environment cooperates and our current transactions close in the back half of the year, we expect that advisory revenues in the second half of the year could be stronger than the first half, and overall, we expect 2017 will be a strong year for our advisory business.

Moving on to capital raising. As you know, our fixed income capital raising revenues are dominated by our strong public finance business, which helped to generate a 62% sequential increase in revenues due primarily to market share gains. On the equity side, capital raising revenue grew 24% sequentially as increased activity from technology and healthcare more than offset the sequential decline in our largest vertical, which is financial institutions. I would note that fixed capital raising in the first quarter was robust.

Now I'm sure I'll get the question asking if investment banking results are sustainable. What I would say is that, while this was a record quarter, I got the same questions in 2012 and 2013 when we did $293 million and $457 million in investment banking revenue. This quarter's investment banking represents approximately 25% of total net revenue. In 2013, for the full year, investment banking was 23% of revenue. While banking is notoriously lumpy, we've made significant investments since 2013 that are beginning to pay off.

Moving on to our brokerage revenues. After adjusting for the sale of the independent Sterne business, which we did last year, we experienced a year-over-year decline of 9% due primarily to a challenging secondary market in institutional fixed income. Our global wealth brokerage revenue declined 2% sequentially, primarily due to a shift to fee-based accounts and lower principal transaction revenue in fixed income. On a year-over-year basis, wealth management brokerage revenue was up 6% if you exclude the brokerage revenues from the Sterne business. To illustrate the movement to fee-based, asset management service fees increased nearly 20% year-on-year.

On the institutional side, as you have heard from a number of our peers, the environment for both equities and fixed income continues to be challenged. Institutional equity brokerage revenues declined 6% year-over-year. Results were impacted by the decline in industry-wide equity average daily volume, which was also down 6% year-over-year. Institutional fixed income brokerage revenue declined 27% sequentially, which was below our recent guidance of down 18% to 22%, as market conditions continue to disappoint and negatively impacted our taxable fixed income, credit and rates businesses.

In the next few slides, I'll touch on the quarterly results from our 2 primary segments. So starting with global wealth management. We are pleased to report another quarter for wealth management as net revenue grew 25% year-over-year after excluding revenue from the Sterne business.

Looking at the quarter sequentially, net revenue growth was driven by record asset management and service fees as well as record net interest income. These line items more than offset sequential declines in brokerage sales, credits and other revenues. I should note that primarily because of DOL and general market appreciation, we are seeing a shift from brokerage revenue to asset management revenue in this segment, wealth management.

And as a result of this shift, we continue to be pleased with the growth in asset management revenues, which was driven by continued growth in fee-based assets that began the quarter at $75 billion. We ended the quarter with fee-based assets of more than $79 billion as growth continues to outpace that of total client assets. This should give us a solid base for third quarter asset management revenues.

I should mention that this line item also benefited from the impact of the March rate hike on our money market funds and third-party bank deposits. However, some of the benefit was mitigated by a roughly $1.6 billion sequential decline in total class client cash balances as investors move money into the market as well as other higher-yielding cash products and the impact from seasonal declines due to tax payments made by our clients.

Our record net interest income rose 7% sequentially as net interest margins of banks increased to 277 basis points and averaged interest earning assets grew, as planned, by nearly $500 million during the quarter.

Total advisers were 2,277 at the end of the quarter. As I've said before, we've slowed down our recruiting efforts in light of the uncertainty regarding the impact of the DOL Fiduciary Rule. Although sequentially we had a decline in net advisers, the new recruits we added were significantly more productive than those that left. We feel good about where we are in terms of our recruiting pipeline, and we expect to be more active as clarity around the DOL Fiduciary Rule improves, coupled with changes in the competitive recruiting landscape, which we believe makes our recruiting deals more competitive.

Additionally, we continue to generate positive growth in total client assets, which totaled more than $258 billion at quarter end and are up 14% year-over-year. The continued growth in revenues and asset management in the bank continued to benefit the segment's comp and operating expense ratio. The comp ratio in global wealth management declined by nearly 600 basis points year-over-year, and our operating expense ratio declined 80 basis points year-over-year, which resulted in pretax margins for global wealth management of nearly 34%.

The next slide presents the results of Stifel Bank & Trust. Total bank assets increased to approximately $13.5 billion as average interest earning assets increased nearly $500 million. Bank loans increased 5% sequentially. The majority of the sequential loan growth was from C&I lending, but our year-on-year growth continued to be driven by mortgage loans.

Investment securities increased 3% from the first quarter and the growth in the quarter was consistent with our long-term strategy of emphasizing high credit quality, short duration assets that provide attractive risk-adjusted returns. As such, the portfolio's average yield was 258 basis points and the duration was approximately 1.5 years.

The provision for loan loss expense in the quarter was relatively flat as compared to the first quarter at approximately $6 million. The provision was primarily due to loan growth. Our allowance for loan loss as a percentage of loans increased sequentially to 88 basis points, again, due to growth in C&I lending. Overall, our credit metrics remained strong as the nonperforming asset ratio was 15 basis points, down 6 basis points sequentially.

Net interest margin improved to 277 basis points from 266 basis points in the first quarter as we benefited from the impact of both the March and some remainder of the December rate increases.

In terms of the outlook for the bank, I want to make a few comments about the market environment. Over the past 4 quarters, we have increased net interest income by 90% primarily as a result of a 60% increase in average bank interest earning assets and a 41 basis point increase in the bank's net interest margin. While we will continue to grow net interest income, the current market conditions have become more challenging. We are seeing tighter credit spreads in our commercial-related loans and securities portfolios as well as a flatter yield curve. This environment has resulted in yield compression as we reinvest in short duration, high-quality assets. That said, we continue to generate meaningful asset tax returns on assets of approximately 130 basis points.

Another change impacting our bank is that we are finally beginning to see increased costs on our deposits as yields on money market funds increase and deposit pace has picked up. As a result, we increased the yields we pay on client deposits, on average, by approximately 10 basis points at the end of June. The net impact of these changes is that we expect our absolute, net interest income to continue to increase as we grow the size of our bank's balance sheet. But in the near term, incremental net interest margin expansion could be challenging as we continue to be careful about extending on credit or duration. So as we think about our bank net interest margin in the third quarter, we would expect it to be relatively flat from a sequential basis.

Moving on to the next slide. In our institutional business, we generated a record quarterly net revenue as record investment banking results more than offset declines in brokerage revenues. Overall, institutional net revenue increased 16% sequentially.

On this slide, we've adjusted our commentary to break out the performance of our equity and fixed income businesses. We made the change to provide more clarity into our institutional business, looking at equity and fixed income as each includes investment banking and brokerage.

As I mentioned earlier, both equity and fixed income had sequential growth in revenue despite tough conditions for secondary trading. This growth, in light of current market headwinds, illustrates the benefits of the recent build-out of both our equity and fixed income platforms as the broad spectrum of services we provide helps to mitigate swings in market cyclicality. Thus, we believe we are able to generate more consistent revenues despite the transactional nature of the institutional growth.

As I have stated, our equities business benefited from strong advisory revenues, up 58%, coupled with a 27% sequential increase in equity underwriting. Taken together, the strong investment banking results more than offset a 6% sequential decline in equity brokerage revenue. Our advisory business was very strong in the second quarter and remains healthy. We have solid results from a number of verticals, including financial institutions and technology as well as a number of private placement closings.

Revenue from our FIG vertical more than doubled sequentially and nearly tripled year-over-year. So far, this year, KBW, which represents our FIG vertical, advised on 8 of the top 10 deals in the banking space. Technology had its best advisory quarter since the first quarter of 2016 and more than doubled revenue sequentially.

For equity underwriting, industry-wide, the business continues to rebound from the pretty anemic levels in 2016, and the second quarter had the largest number of IPOs since the second quarter of 2015. Our quarter was characterized by a slowdown in our financial institution space, but that was from very high activity levels in the previous 2 quarters. The slowdown, however, was more than offset by improved activity in our other large verticals, primarily technology and healthcare. Our quarterly results illustrate the benefit of our diversified platform.

In equity brokerage, the business continues to be negatively impacted by the historic lows and volatility, low volume, the trends toward passive investing and lack of clarity from Washington on deregulation and tax policy.

Our fixed income business overall improved due to strength in public finance. The strong growth in fixed income underwriting was driven by our increased market share in a number of senior managed negotiated issues. In the first half of 2017, this improved to almost 13% of all negotiated issues nationwide from 11% in the first half of 2016.

To illustrate, while industry-wide number of issues declined 20% and par value declined 12% industry-wide, Stifel again led the nation in the number of transactions and increased par value raised by 12% over 2016. I also note that this revenue line benefited from a meaningful contribution from our London operations.

In fixed income brokerage, we were negatively impacted by challenging market conditions that included low interest rates, a flattening yield curve and low volatility. That's why we reported we are not alone in dealing with a challenging market environment that will continue to impact our results, but we would expect some improvement in this business in the second half of 2017.

In terms of expenses in the institutional segment, the improvement in total revenue positively impacted the segment comp ratio that came in at 59.6%. Additionally, the operating expense ratio was 21.2%, the lowest level since the fourth quarter of 2013. These lower expense ratios resulted in the institutional operating margins of more than 19% in the quarter, up 240 basis points from the first quarter of 2017.

Moving on to our balance sheet. As you can see on Slide 10, we finished the quarter at $19.5 billion in assets on our consolidated balance sheet, up nearly $400 million from the prior quarter's levels, due primarily to the growth of Stifel Bank. We continue to believe that our overall asset growth will be driven by the amount of incremental capital generated at the bank while maintaining our targeted consolidated capital ratios of 10% leverage and 20% risk-based. On the bank balance sheet, this should equate to approximately $2 billion in asset growth and will be the primary driver of net interest income.

However, as I've commented recently, this does not necessarily mean that our growth will be linear. We will continue to deploy our capital opportunistically in an attempt to generate the best risk-adjusted returns. This could mean that in certain quarters when credit spreads tighten and yields on new loans and securities don't look attractive, we may be less active in growing the bank's balance sheet. In other quarters, we may be more aggressive. But the point I'm trying to make is that we will not grow our balance sheet just for growth's sake, we will always be prudent stewards of capital.

At the end of June 2017, our capital ratios were 10.3% for Tier 1 leverage and 20.5% for Tier 1 risk-based capital. Our leverage ratio was up modestly from first quarter levels and above our target level as asset growth has been slightly lower in the first half of the year due to market conditions. Given the high ROE at the bank, this remains an attractive way to deploy our excess capital as we continue to focus on generating the best returns on a risk-adjusted basis.

The next slide focuses on the drivers of our growth in net interest income, which are growth in interest earning assets and net interest margin. Of our $19.5 billion in assets, our total interest earning assets averaged $15.4 billion during the quarter. This was up 3% sequentially. Bank interest earning assets were up roughly $500 million sequentially, split relatively evenly between our securities portfolio and our loan portfolio. As a result of the pickup in net interest margins at the bank, the firm-wide NIM increased 11 basis points to 235 basis points.

Book value of $39.47, $39.47, increased by $1.07 in the quarter. The growth was a result of a more than $67 million sequential increase in equity offset by our repurchase of nearly 300,000 shares in the quarter at an average price of just under $44. We currently have just over 7 million shares remaining on our existing authorization.

Next, we move on to the reconciliation of our GAAP and non-GAAP results. On Slide 13, we reviewed expenses for the quarter and the impact of our non-GAAP adjustments. In the second quarter, we incurred approximately $15 million in merger-related charges, primarily related to Barclays, contract terminations, lease write-downs and severance.

Lastly, based on recent developments in a previously disclosed litigation matter, we've increased our legal reserve by $20 million. I should note that we believe we're appropriately reserved for that matter in accordance with GAAP. As a result, our total non-GAAP charges for the quarter came in just under $35 million. At this point, we estimate that barring additional legal or unexpected charges, our remaining pretax non-GAAP charges for 2017 will be approximately $20 million. After these charges -- and as we have said, these charges, which primarily represent the last of the Barclays acquisition cost, we expect any non-GAAP charges in 2018 to be minimal.

In terms of our non-GAAP expense results, they were better than consensus expectations. Our comp ratio of 61.4% was below the midpoint of our previously disclosed annual comp ratio range and below the Street estimate, as the growth in our revenue was driven by our institutional segment in our bank. At this time, we are maintaining our full year comp ratio guidance.

Operating expenses, excluding the loan loss provision, were just under $155 million, within our guidance of $151 million to $158 million. The sequential increase was due to higher legal, travel and professional fees. For the third quarter, we are maintaining our quarterly operating expense guidance of $151 million to $158 million.

Lastly, in terms of share count, fully diluted share count declined by nearly 675,000 shares during the quarter as we repurchased nearly 300,000 shares. The lower average share price in the quarter also decreased the diluted impact of the unvested stock unit brands. We anticipate that the year-end diluted share count will be slightly below 81 million shares, barring any repurchase or issuance of material fluctuations in our stock price.

Now let me give you a brief update on some of the regulatory issues and our interest rate sensitivity. We've had a lot of inquiries about MiFID, and while there aren't a lot of specifics that I can give you, I can say that in general, this is not a positive for the industry. This is a European regulation that could negatively impact U.S. capital markets despite the fact the U.S. regulators are not likely to implement it. We've been actively studying the potential impact of the regulation, reaching out to our client base as we get closer to the implementation date, which is scheduled for the beginning of 2018.

Unfortunately, there is still a lot of uncertainty regarding how, both the buy side and the sell side, will ultimately address this issue, but I believe that Stifel has both the depth and flexibility to adapt to the impact of this new regulation. I hope to be able to give you more specifics on our approach in the coming months.

In terms of the DOL Fiduciary Rule, as you know, part of the rule became effective on June 9th and full implementation is scheduled for 1/1/18. We will prepare for the partial implementation, and we'll continue to prepare for the full implementation. However, it is my belief that the 1/1/18 implementation date will be delayed as both agencies continue to study the potential impact of the new rule. Stifel has always believed in the best interest standard under the supervision of the SEC, so I continue to be optimistic that the 2 agencies will come together with a harmonized rule for the industry. I recently wrote a letter to Secretary Acosta and Chairman Clayton expressing our view of a harmonized solution. You can view our comments on both the DOL and SEC comment portals.

In terms of rate sensitivity, I said on our last call that we would likely begin to pass along the benefit of higher rates to customers within the next 2 Fed fund increases. At the end of June, we raised the yield on our bank deposits by approximately 10 basis points. Our increased yield was more in line with our original estimate of a 40-60 split of the benefit from the heightened Fed funds that we typically model for our rate sensitivity. And going forward, we would expect that increased sharing of future rates to be very likely.

In terms of our benefit from higher rates in the second quarter, we generated approximately $5 million of incremental pretax income from the December and March rate hikes. Given lower reinvestment rates in securities and loans, increased yields on money market funds and increased deposit rates that we are paying at our bank, we expect the benefits of the most recent rate increase will likely be limited to the incremental fees from third party banks we've programmed, which we estimate to be between $2 million and $3 million for the coming quarter.

So before I open it up to questions, let me conclude with some thoughts on our business in the current operating environment. I'm very pleased with not only our current quarter's results but how the firm is positioned going forward. We generated our third consecutive record quarter for net revenue and posted records for non-GAAP pretax income, net income and EPS. This is the result of the investments we've made in growing and diversifying our business in recent years. Not only have we been able to grow our revenue base, but our investments on our bank and our private client business have increased the stability of our revenue stream.

The percentage of total net revenue generated from asset management revenue and net interest income in the first half of 2017 was 37%, which is up from just 20% in the first half of 2011. Although we are less transaction-dependent today than in the past, our transaction-based businesses remain a key element to the success of our company. This was highlighted by our second quarter results as record investment banking results easily offset the challenging market conditions in our institutional brokerage business.

However, if you look just back at last year's first half, you would see the opposite as the increased market volatility benefited our brokerage business but with a headwind to our investment banking unit. The point I'm trying to make is we are in a stronger position as a company than we were in just a few years ago. I remain very positive about the outlook for Stifel as the investments we've made in the past few years should continue to generate growth opportunities in both our global wealth management and institutional businesses. And lastly, we will pursue future growth with a focus on effectively managing costs and generating the best risk-adjusted returns of our capital.

And with that, operator, please open up the line for questions.

(Operator Instructions) Your first question comes from the line of Steven Chubak with Nomura Instinet.

So I appreciated all the details you had provided on the investment banking performance. It sounded like as related to some of the guidance for second half versus first half that, that was applicable to the advisory business only. I'm just wondering, if you could speak to your outlook for the IV segment overall, just given the very strong underwriting results we saw the quarter, whether any of that strength could be sustained into the second half as well?

Well, you know, Steven, that's market dependent. I think it can be. I think we -- you're seeing the results of our investments -- and I've said all along that we're well positioned once the economy starts picking up and market conditions improve for capital raising. I, for one, am optimistic, not only by some of what I'm hearing out of Washington with respect to regulations and the importance that the current administration and frankly, the SEC is putting on capital raising. So it's market dependent, as always. But if conditions remain favorable or even improve, then I think we're well positioned.

Got it. And just one more from me on the comp ratio. So you reaffirmed the guidance for the full year of 60.5% to 62.5%. As we look to the second half, it looks like, as you noted, there's a lot of, at least, constructive trends that you're seeing on the investment banking side, and even though you gave some more measured NIM guidance, certainly, you're seeing continued growth from NII from higher earning assets as well as fee-based AUM. I'm just wondering, given some of those revenue tailwinds, should we expect for the back half that the comp ratio should run at least towards the lower end of that target range?

About -- if all the things you've just said, all those positives occur, then I would say, yes, that you should expect that comp ratio to get to the lower end of the range.

Your next question comes from the line of Devin Ryan with JMP Securities.

Question here on financial adviser recruiting. You've got your commentary that things have slowed a little bit with the DOL uncertainty, so I'm just curious, and I know you've recently spoken about the backlog being reasonable there. And so I'm just trying to think about what drives the change in maybe kind of being proactive there and just expectations for recruiting over the next 12 months if the backlog is good and kind of what the strategy is to kind of get that financial adviser headcount number up.

Well, the strategy is, as always, to -- we want to build businesses on a profitable basis. And we want to be able to add people to our firm efficiently. The -- as I said, the -- a number of things about the DOL Fiduciary Rule raised a lot of questions from the way you structure deals to what has to happen when accounts join your firms, especially if advisors would come in with a higher percentage of brokerage IRAs and, say, advisory IRAs. So all of those questions caused us just to take this opportunity, as I've said, was that this was going to be a period of consolidation of all the things that we've done, focus on our return on equity, focus on our margins and focus on our business and allow certain of these uncertainties to become more clear. And so I -- look, we've grown from 200 advisors to nearly 2,300 advisors. So we've grown significantly in periods of time when we believe that the environment is correct, and I see that coming again. And we'll be prepared for that. So it's not as if we haven't grown in the past. It's just that at this time and for the last almost a year now, we have been cautious in our recruiting approach.

Okay. Okay. With respect to the balance sheet in the bank, appreciate the near-term comments around the competitive dynamics there. But when you think about just the mix longer term and the opportunity to, I guess, maybe optimize the balance sheet to maybe bring that NIM closer toward where some peers are and kind of regional banks are more broadly, how are you thinking about that still as an opportunity? And just kind of going about that, what buckets would you look to grow to do that, longer term?

Well, look, as we've said all along, we would depending upon -- at first, I'm not sure I agree with the competitive comment. I would say it's the market conditions that are causing us to look at things as both a flattening yield curve and credit spreads, which are very tight, have us thinking these market conditions aren't necessarily conducive to taking on credit or extending duration. But, if you would look at things overall, what you're going to see and we've said is you'll see the percentage of our balance sheet that are loans versus investments will continue to increase. The pace of that increase is going to be dependent on market conditions and not something that we're just going to lay a number out and just go do it regardless of market conditions. So I believe that our bank is very conservative. Look at our NIM, look at our average duration, look at our asset quality metrics, and you will see a very strong albeit conservative bank. And when market conditions improve, where we believe we're getting the appropriate level of return for taking credit risk, then you'll see that increase.

Okay. Got it. Okay, just last one here on expenses. I'm just curious how the expense initiatives are going. I understand that the expense rate is -- kind of remained in that same level, but there's a lot kind of puts and takes in expenses. So I'm just curious if you've found anything as you've kind of gone through your process and anything else to update us on there?

Look, we're coming in within our guidance range. We're driving -- our margins, now, are north of 16%. We're looking at and optimizing several of our recent acquisitions. I'm pleased with where we are. I'm never sure that process is ever done. But where we are today is -- I think has been a good job by the members of the team that have been driving that result.

Your next question comes from the line of Chris Harris with Wells Fargo.

Ron, can you remind us what the legal matter is related to? And why you had to increase the reserve there this quarter?

Well, as I've said -- first of all, we don't, as a policy, don't talk about open litigation matters, okay? But there've been developments. And as I've said, it was on the item that's disclosed in our Q. And we had previously had 3 items. We're down to this item that's in the Q, and it was developments in that matter, which I really can't talk about open items, Chris. So I'll point you to that item, and that's what it's regarding.

Okay. I understand, we'll check out the Q. As it relates to growth in advisory, can you talk a little bit about the breadth you are seeing there? Is this just a handful of deals that are driving the growth? Or are you seeing something more broad than that? And maybe talk a little bit about the competition in M&A today.

Well, first of all, I'm pleased with the breadth. I mean, it's not as if there was some 1, 2, or 3 huge deals that drove that. So I am pleased with the breadth of that business. So let's leave it at that. In terms of competition, I mean, there's always plenty of competition. And we think that, as I've said in the fixed space, we advised in 8 of the 10 largest deals, and I believe that we are competing every day in all of our sectors and have won and hopefully will continue to win our fair share of mandates.

Your next question comes from the line of Conor Fitzgerald with Goldman Sachs.

Thanks for the update on MiFID II. I just wanted to get -- I guess, kind of 2 questions on that. One, how quickly do you think that's going to start to impact your business? Do you think this is kind of January of next year? And then two, I know it's difficult for you to kind of quantify, given where we are now, but just how are you thinking about rightsizing the business, given the revenue uncertainty?

Well, I think you've got some unanswered questions within your questions, Conor. I mean, I would like a little more clarity myself, and we're talking to a number of clients. I'm -- on one hand, I think there's going to be some clarity on hard payments coming out, but the real question is the ongoing trading. It's not as if you're not going to be continuing to trade with clients. And I think some of the uncertainty is there. So I believe that -- I believe we have the sufficient amount of connectivity and trading volume, how we trade with the Street, that we'll be able to adapt on one side. MiFID is uncertain, but what I think will come out of this is the ability to measure value and where your value is, at least, as perceived by the buy side. And we'll adjust our model accordingly. So I'd like to give you more, as I said, and I'd like to be able to say, here's how all of this is coming down. But there really is -- even for something that's going to take effect in less than 6 months, there still is not a lot of clarity. And it doesn't impact all accounts. It impacts global accounts. There's a number of accounts that aren't even going to be looking at this, and that's a number of our clients. So when I get more, I'll tell you more. If you get more, give me a call, will you?

I'll be sure to pick up the phone if I get more. And then, just on the balance sheet, is it as simple as if the yield curve steepens and credit spreads widen, some of those stuff that you were talking about in your prepared remarks, if that happens, should we think about you pretty quickly deploying the 30 basis points of excess capital you've built here?

Well, I don't know that we're trying to time markets like that. I would say that market conditions would improve if the yield curve -- for us, in the way we're situated, we would like to see a steepening of the yield curve for a lot of reasons. I just -- the economic activity would -- I believe would drive a lot of our institutional businesses and capital that would -- and that might be portending higher GDP growth. There's a -- those would all be financial conditions that would make loans and credit loans more attractive because again, you're lending into improving credit or improving economic conditions. So I guess I just feel that with the -- how tight credit spreads are and with where the yield curve is, we want to be cautious before we extend on credit and duration. And I'll leave it at that. And if market conditions improve then yes, you can see some growth in our loan portfolio or a shifting as our securities, which have very short duration as they mature, we may put some of those maturities into loans. So that's on ongoing daily evaluation of opportunities, and we're going to continue to do it. But we're not trying to drive earnings through credit and duration risk.

Got it, that's helpful. And sorry, just one last quick clean up from me. Did the legal matter you talked about have any dampening impact on your compensation expense this quarter?

I mean, it wasn't that big of an item. I would say, not really.

Your next question comes from the line of Devin Ryan with JMP Securities.

Ron, just a follow-up here on the fixed income underwriting strength. You mentioned the market share gains and just how things came together this quarter. I'm just curious, I mean, obviously, just the orders of magnitude of how strong it was, is there anything else that occurred here? This just seemed kind of like a perfect storm quarter. So I'm not sure if there's anything else in the environment or just where you guys focused in that business that led to such a strong result because it was just so outsized.

Well, I wouldn't call it a perfect storm. It always looks that way until you back up and realize that we've invested in this business. We did Stone & Youngberg, we did De La Rosa, we did Merchant. And just recently, we did City Securities. We're the #1 underwriter now in the state of Indiana when we weren't the #1 underwriter. So the market, par issuance in the market is down 20% and our par issuance is up 12%. So I characterize that as market share gains in a otherwise more tepid -- we're not in a tepid, it's a declining market for muni-finance across the country. We made investments in this business that are paying off.

Got it, okay. All right. Good, I just wanted to dig in there. And the within fixed income brokerage, just thinking about kind of that business and being a little bit softer over the past several quarters, and clearly, the business has gone through some hot and cold patches over time, so this isn't unusual. But how are you thinking about just maintaining the platform? Is the -- do you kind of make selective reductions here in this kind of softer backdrop? Or, do you just kind of keep the platform where it is with the expectation that we're just in a little bit of a cold patch and that things will get back to hopefully, more normal soon?

Look, I'm very pleased with our fixed income team, and I believe that as, again, economic conditions improve, the same thing, a little -- Get some credit spread widening and changes in the yield curve, I believe that our fixed income team is well positioned to gain market share and do better. It has -- it's been a difficult environment, as you know, all over the Street. And we're not going to do anything drastic here at all. We're -- these markets, I believe will improve, and we're going to maintain what we've built.

At this time, there are no further questions.

Well, I would thank everyone for the early morning call. We look forward to continuing to build our franchise, and look forward to communicating with you next quarter. Have a great day.

Thank you. That does conclude today's conference. You may now disconnect.