Stifel Financial Corp (SF) 2018 Q1 法說會逐字稿

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the first quarter earnings call 2018. (Operator Instructions) Thank you. James Zemlyak, you may begin the conference.

Thank you, operator. Good afternoon. I'm Jim Zemlyak, CFO of Stifel. I'd like to welcome everyone to our conference call to discuss our first quarter 2018 results.

Before we discuss our results, I'd like to remind everyone that today's call may include forward-looking statements. These statements represent the firm's belief regarding future events that, by their nature, are uncertain and outside of the firm's control. The firm's actual results and financial conditions may differ, possibly material, from what is indicated in those forward-looking statements. For a discussion on some of the risks and factors that could affect the firm's future results, please see the description of risk factors in our current annual report on Form 10-K for the year ended December 2017. I would also direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our ability to successfully integrate acquired companies or the branch offices and financial advisers, changes in the interest rate environment, changes in legislation and regulation.

You should also read the information on the calculation of non-GAAP financial measures that is posted on the Investor Relations portion of our website at stifel.com. This audio cast is copyrighted material of Stifel Financial Corp. and may not be duplicated, reproduced or rebroadcast without our consent.

Our Chairman and CEO, Ron Kruszewski, will now review the firm's results. Ron?

Thanks, Jim, and good afternoon, everyone, and thank you for taking the time to listen to our first quarter 2018 results. Earlier today, we issued a press release with our quarterly results, and we posted a slide deck on our website.

As you can see from the highlights in the table on Slide 2, we're off to a good start in 2018 as our business continued to build on the momentum we've generated over the past few years. Our total revenue came in just above $750 million, which was up more than 11% from the first quarter of 2017. And our expense ratios declined year-on-year. We generated non-GAAP pretax margins of 17.3%, which was a 240 basis point improvement from the first quarter of 2017; and non-GAAP EPS of $1.15, which was up 55% year-on-year. I'd note that while our EPS growth benefited from a lower tax rate, if you applied our current tax rate to our first quarter 2017 results, our EPS would still have increased by $0.25 or 28%.

I'm particularly pleased with this quarter's results as we're coming off record results in the fourth quarter of 2017. We had expected a sequential pullback in the first quarter due to seasonality and some pull-forward of public finance activity. But I believe that our year-on-year growth underscores the diversity and strength of the business that we are building.

Our recurring revenue lines represented 41% of total net revenues as both asset management and net interest income generated record results. Additionally, we continue to generate strong growth in investment banking revenue as our advisory revenues increased 85% year-on-year and equity underwriting revenue was up 47%. This more than offset the continued headwinds facing our institutional brokerage business and the expected slowdown in debt underwriting revenue.

Moving on to the next slide. Let's take a close look at our brokerage and asset management revenues. Global wealth management revenue and fees increased 7% year-on-year due to continued growth in our asset management fee revenue, that was up 20% year-on-year and up 5% sequentially as a result of continued migration to fee-based accounts. This more than offset the 5% year-on-year decline in global wealth management brokerage revenue, which was negatively impacted by declines in fixed income trading. As asset management becomes a more significant portion of total revenue, we've been asked to provide greater detail on what comprises this revenue line. In our press release this quarter, we included a breakout of the assets, revenues and fee capture rates for fee-based accounts, asset management and our third-party bank programs.

Moving on to the institutional side of our business. Our institutional equity trading declined 3% sequentially and 11% from the same period a year ago. We didn't see the benefit of increased industry-wide average daily volumes or the spike in volatility during the quarter as much of this was generated -- or much of the increases were generated by higher volumes from quant and high-frequency traders as well as increased option trading.

Given the implementation of MiFID II at the beginning of the year, I'm sure most of you will want to note this was also responsible for the declines in our institutional revenue. Generally, I would say that MiFID did have some negative implications for our institutional business as some of our larger global clients attempt to deal with this new regulation. However, I think it is still too early to draw any long-term conclusions from just one quarter's results on some of the changes in client activity as I believe that some of the changes in client activity may be timing-related. My guess is we'll have a better understanding of MiFID in the second half of the year. As I said before, while MiFID won't be good for the industry, Stifel's business has enough breadth and depth to remain relevant to our clients and will continue to adapt our business to any long-term trends in the operating environment.

The market environment remains challenging for our fixed income business as market conditions in the first quarter were similar to those in the fourth quarter. As such, fixed income revenue was down slightly from the fourth quarter, which was relatively in line with the guidance we gave on our last earnings call. We continue to see a flattening yield curve in the first quarter with the spread between the 2- and 10-year Treasury notes well below historical average. This resulted in clients moving to short-end paper and floating rate products that generate lower margins for our trading business. Consequently, taking all these factors into consideration, firm-wide brokerage revenues of $264 million were essentially flat sequentially but down 10% year-on-year.

Moving on to the next slide. We take a close look at our investment banking revenue. We generated another strong quarter in investment banking despite an industry-wide slowdown in municipal issuance. Our investment banking revenue of $176 million in the first quarter was up 39% year-on-year as the investments we've made into our franchise continue to generate strong returns across a number of verticals as the operating environment remains generally receptive to transactions.

I'd also note that our first quarter revenues were positively impacted by an accounting change to investment banking revenue. As a result, firms must now break out investment banking deal expenses as opposed to previously netting them against revenue. From an apples-to-apples basis, excluding the impact of this accounting change, our investment banking revenue would have been up 32% year-over-year. In addition, this accounting change impacted the financial ratios of our institutional segment, which I will address in the segment results later in the presentation.

Moving on, we generated advisory fees of $98 million in the quarter, which was up 85% from the first quarter last year and represented our strongest first quarter advisory results in history. FIG continued to be our strongest vertical in advisory and was responsible for the majority of our 10 largest fees. We also saw solid results from technology and health care, which are historically some of our larger verticals. And we're getting traction in energy and industrial, which are verticals that we've been investing in.

Capital raising revenue of $79 million increased 6% from the prior year quarter as a 47% increase in equity underwriting revenue more than offset a 30% decline in debt underwriting. The increase in market volatility and decline in the S&P 500 did not have a material impact on our underwriting business in the quarter, and the strength of our equity underwriting revenue was broad-based. In the U.S., health care and FIG were our strongest verticals, but we also generated meaningful fees in tech gaming and industrial.

I would also like to highlight the contribution of our United Kingdom team as Stifel was the #1 equity underwriter in terms of United Kingdom bookrun deal value in the first quarter. This is a significant accomplishment for Stifel and particularly for our team in London as it underscores the returns we are seeing in the investments we've made in this market as our revenue in our London-based business has increased by more than 400% versus the first quarter of 2013 while our headcount there has risen from 68 to 272. We are optimistic about the future of this business, and I want to congratulate our London team on their efforts.

As I mentioned on our fourth quarter call, we expected public finance to be relatively weak in the first quarter due to the pull-forward of activity into the fourth quarter as a result of concerns regarding changes to the tax code. We generated a little more than $18 million in debt underwriting, which was down 57% sequentially and 30% year-on-year. The declines in debt underwriting revenue were pretty much in line with industry-wide declines in total municipal bond issuance, which were down 59% sequentially and 31% from the first quarter of 2017 based on SIFMA data.

The next slide focuses on our growth in net interest income, which totaled $111 million and increased nearly 31% from the first quarter of 2017 as we continued to grow our bank balance sheet and expand our net interest margin. Our consolidated net interest margin continued to improve, reaching 243 basis points, up 7 basis points sequentially as a result of increases in the Fed funds rate as well as improvements in the yields of our loan portfolio. The increases to the yields in our loan and securities book were driven by an increase in the 90-day LIBOR during the quarter as most of our assets are tied to this benchmark. On the liabilities side, the average yield on deposits increased by 12 basis points sequentially, primarily as a result of deposit betas from the most recent Fed funds increase.

Last quarter, we commented that our bank interest margin was expected to be flat to down 5 basis points from the first quarter due to 2 less trading days in the fourth quarter of 2017 as well as the impact of a full quarter of higher deposit yields. However, the bank NIM was up 4 basis points. The stronger-than-expected net interest margin was due to the increase in LIBOR rates, which essentially offset the impact of fewer calendar days and increased deposit rates. Bank NIM also benefited sequentially by approximately 5 basis points due to CLO accretion and loan fees from early prepayments.

In terms of our expectations for bank net interest margin in the second quarter of 2018, we expect each to be up 5 to 10 basis points as we continue to benefit from the increase in LIBOR, the March increase in Fed funds as well as an additional day in our interest calculation as compared to the first quarter.

In the next few slides, I'll touch on the quarterly results from our 2 primary segments. So starting with global wealth management, net revenue of $486 million was up 3% from the prior quarter's record results and increased 10% from the 2017 comparable quarter. Wealth management continues to benefit from the shift to fee-based accounts as well as growth in Stifel Bank. These trends drove record asset management service fee revenue as well as record net interest income.

We ended the quarter with record total fee-based assets of $89 billion, up 2% sequentially, and record total client assets that were up 1% sequentially to $275 billion. I'd note that the strong growth in private client fee-based assets, which were up 22% year-on-year to $66 billion, was the primary driver of our asset management revenue growth as private client fee-based revenues rose 27% to $147 million in the quarter and accounted for 75% of total asset management and fee revenue. As a reminder, our private client fee-based revenues are priced off the trailing quarter and asset levels. So the 3% increase in private client fee-based assets last quarter should provide a tailwind for our second quarter asset management revenues.

Our comp ratio in the first quarter of 49.8% was down 180 basis points from the first quarter of 2017. And our noncomp ratio of 13.8% declined 250 basis points as the growth in bank revenue and our focus on expense management continues to generate positive results. Improved revenue on lower expense ratios resulted in pretax margins of 36.4%, that was up 430 basis points year-on-year.

Our adviser headcount increased by 22 net advisers sequentially. While our recruiting efforts have increased over the past year, as concerns regarding the impact of the fiduciary rule have subsided, we continue to see elevated levels of retirement negatively impact our adviser headcount totals. That said, Stifel was able to retain most of the client assets from retiring advisers. We would expect the number of retirements to decline in the next few quarters, and our recruiting efforts should result in improved adviser growth.

The quality of our wealth management franchise is illustrated by the fact that J.D. Power ranked Stifel third in their 2018 U.S. Full Service Investor Satisfaction Study. Stifel has long fostered a culture that emphasizes the importance of the adviser-client relationship. As we look forward, we believe it is critically important to combine digital and mobile technologies with great relationships and human goals-based advice.

Against this backdrop, we are enhancing the client experience by investing in state-of-the-art technology, including integrated e-signature capabilities, enhanced mobile technology and client reporting as well as the introduction of [Inties], our proprietary client wealth management tool that allows investors to aggregate assets from multiple sources and use custom tools to better understand their financial situation and plan for the future using customized advice.

Before moving on to the bank, let me comment on the recent development regarding the fiduciary rule. We were pleased to see the SEC's recent proposal regarding enhancements to the best interest standard and uniform account opening procedures and several new disclosure requirements. Our initial review indicates that the proposed rule is relatively in line with the idea we put forth in our comment letter last July and will strengthen all levels of care in the industry while protecting client choice. Early next month, we expect to see whether the Fifth Circuit's repeal of the DOL's regulation stands, so we could focus on the SEC's more balanced approach. All in all, this appears to be headed in the direction that preserves investor choice as well as both the '34 and '40 Act business models and will enhance client protection.

On the next slide, we take a closer look at the Stifel Bank & Trust, which drove our 6% sequential increase in global wealth management and net interest income as net interest margin and average interest earning assets for the bank increased from the fourth quarter. Total bank assets increased to approximately $15.2 billion as average interest earning assets increased $330 million sequentially to $14.9 billion. Stifel Bank is where most of our balance sheet resides. To put this in perspective, total bank assets comprise 70% of Stifel's consolidated assets and 84% of average interest earning assets.

Bank loans increased 2% sequentially, driven by strong growth in commercial and mortgage lending. I'd also note that security-based lending increased modestly year-over-year. Investment securities increased 1% sequentially as growth in CLOS and corporates offset modest declines in other investment securities.

We continue to focus on high-quality, short-duration assets that provide attractive risk-adjusted returns. The increase in CLOS as well as the interest accretion led to a book yield of 327 basis points, up 38 basis points sequentially, while duration remains flat at 1.6 years.

The provision for loan loss expense in the quarter decreased sequentially to $2 million from $5.4 million due to relatively modest loan growth. Our allowance for loan loss as a percentage of loans increased sequentially to 97 basis points. Overall, our credit metrics remained solid as the nonperforming asset ratio was 14 basis points, which was down 4 basis points sequentially due to a decrease in our nonperforming assets.

During the quarter, we raised the yields in our deposit by an average of 16 basis points, which equates to a 64% deposit beta. This was up from the 40% deposit beta in the prior Fed increase. Future deposit betas will be determined by competitive forces in the market, but we believe that our current deposit price is in line -- pricing is in line with the broker-dealer insured bank sweep programs of our competitors.

Moving to the next slide. Institutional business generated quarterly revenue of $270 million, up 14% from the same period a year ago. Our growth was driven by continued strength in our investment banking business as the environment for our advisory and equity underwriting remains strong. As you can see from the table on the right of the slide, revenue in our equity business was strong as total revenues improved 40% from the first quarter of 2017.

Our advisory business, as I've said, continues to benefit from solid demand and improved operating environment as well as investments we've made over the last few years. These factors resulted in an 85% year-on-year increase in revenue despite the increased volatility and a decline in equity markets during the quarter. As we look forward, the environment for advisory remains solid as our pipelines remained consistent with those at the end of last quarter and the end of the first quarter of 2017 as we are seeing solid demand in FIG, industrials, health care, technology as well as energy.

For equity underwriting, our outlook is similar to our advisory business as our pipeline remains healthy across a number of verticals. And again, it includes financials, health care, technology as well as natural resources. We're also seeing continued momentum from our United Kingdom business as activity levels there remains solid.

Our fixed income business slowed as a result of the continued headwinds in fixed income trading as well as the expected pullback in public finance issuance. Debt capital raising weakened both sequentially and from the same period a year ago, due to the expected industry-wide decline in municipal issuance following the surge in activity in the fourth quarter. Although the volume decline negatively impacted our business, nevertheless, Stifel ranked #1 nationally in the number of senior managed negotiated new issues, and our market share was 11.5%.

Following 2017's strong results, we expected revenue to be down as 2018 is likely to be a year of transition due to rising rates, the prohibition of advance refundings and the pull-forward of activity into 2017. That said, we expect the second quarter to be an improvement from the first quarter and that the second half of 2018 will be stronger than the first half.

I've already addressed the headwinds in our institutional brokerage business in the quarter, and we expect that those conditions will likely impact our results in the second quarter of '18 as well. In terms of equity trading, we are continuing to adjust our business to reflect the changing operating environment. But barring a significant improvement in this environment, we would expect the second quarter to be roughly in line with first quarter results.

For fixed income trading, our revenues were essentially flat sequentially as our decline in flow-based revenues was partially offset by trading gains. While still early in the quarter, we would expect our fixed income brokerage business to be marginally weaker in the second quarter compared to the first quarter.

As I mentioned earlier, the change in the accounting treatment of certain deal-related investment banking expenses impacted our institutional business in the quarter by roughly $9 million on both the revenue and expense line. The table on the right side of this slide illustrates our reported results as well as the impact that the new accounting rules had on some of our major operating metrics. So excluding the new rule, net revenue would have been up 10%; our comp ratio of 59% would have been 61%, which would have been up 50 basis points year-on-year as we continue to invest in this business; our noncomp ratio of 24.5% would have been 22%, which was down 70 basis points year-over-year; and our pretax margin of 16.5% would have been 17% in the quarter.

Now moving to the balance sheet. I've already discussed our bank and the asset growth we've generated there, but on this slide, we'll look at our consolidated balance sheet and our capital ratios. We finished the quarter with $21.7 billion of assets on our consolidated balance sheet, which was up $330 million from the prior quarter and up nearly $2.6 billion from the first quarter of 2017. Our firm-wide average interest earning assets increased by only $35 million to roughly $18.1 billion as the growth in average bank assets during the quarter was offset by a decline in client brokerage activity and in corporate cash, due primarily to the timing of annual compensation payments.

We target $2 billion to $2.5 billion of asset growth for the year for a quarterly growth lag on a run-rate basis. However, as we have said before, our quarterly asset growth will not be linear and that we will be opportunistic in adding assets to our balance sheet as we look for the best risk-adjusted returns. That said, we expect asset growth of the bank in the second quarter to exceed asset growth in the first quarter.

We finished the quarter with Tier 1 leverage of 9.6% and Tier 1 risk-based capital of 18.7%. Our Tier 1 ratios were impacted by the fully phased-in U.S. Basel III rules. Excluding the fully phased-in rule, our Tier 1 leverage would have been 9.8% and our Tier 1 capital ratio would have been 18.8%.

As I said in our last call, following the moves we made in the fourth quarter to take advantage of the tax law changes, we will continue to rebuild our capital ratios back to our historical targets of 10% and 20%. While we believe that we will get back to these levels relatively quickly, we will then continue to deploy our excess capital to generate the best risk-adjusted returns.

Book value of $38.49 increased by $0.23 in the quarter. We also took advantage of the pullback in the price of our stock to repurchase shares. So far in 2018, we repurchased 381,000 shares at an average price of $57.24. We have 6.7 million shares remaining on our current authorization. And as we've always said, we will look to opportunistically repurchase shares when we feel it is appropriate.

Next, we move on to the reconciliation of our GAAP and non-GAAP results. On Slide 13, we'll review our expenses for the quarter and the impact of our non-GAAP adjustments. Before I get into the details of our expense, I want to touch on the convergence between our GAAP and non-GAAP results.

For the past 2 years, I've been telling you that the difference will significantly narrow beginning in 2018. And you can see from our first quarter results, the difference is only $0.09 per share between our GAAP and non-GAAP results. To put that into perspective, in the fourth quarter of 2015, our GAAP EPS was 42% of our non-GAAP total. In the first quarter of '18, GAAP EPS equated to 92% of non-GAAP. We expect that the non-GAAP charges will continue to diminish throughout 2018.

In terms of our non-GAAP expense results, they were roughly in line with Street estimates. Our comp ratio of 60.5% declined by 180 basis points from the first quarter of last year. It was in line with our guidance of the high end of our annual range of 59% to 61% but was below Street expectations. Our annual guidance range for the year remains appropriate, barring any significant change in our revenue levels or composition of revenues. But we would expect our quarterly comp ratio to trend downward during the year.

Non-GAAP operating expenses, excluding the loan loss provisions, were just under $165 million, and we're just above the high end of our guidance. While there were a number of factors that contributed to the elevated noncomp levels in the quarter, the primary driver was the impact of the previously discussed $9 million of investment banking deal expense that's now incorporated in our noncomp line due to the change in accounting. In our guidance on the last call, we estimated the impact of accounting change would be approximately $3 million. So this accounted for approximately $6 million of elevated expenses. We also had a catch-up in an acquisition-related expense of $1 million. Excluding these factors, our noncomp expense would have been approximately $158 million, which was around the midpoint of our guidance.

For the second quarter of 2018, we adjusted our noncomp guidance to exclude both loan loss provisions and investment banking deal expenses. I'd note that historically, we estimate that our investment banking-related expenses represent approximately 5% of quarterly investment banking revenue. So that being said, we're guiding to noncomp expenses between $154 million and $160 million in the second quarter. While we continue to focus on expense discipline, the growth in our business has resulted in additional expenses tied to technology, bank growth and market that will add some increased expenses versus recent quarters.

Lastly, in terms of share count, fully diluted share count came in below our forecast and decreased by nearly 500,000 shares during the quarter due to a decline in our share price. Barring any additional share repurchases or material fluctuations in our share price, we would expect our fully diluted share count to be approximately 82 million and 83 million shares by the end of the second quarter of 2018.

So before I open the call for questions, let me conclude by saying that our strong performance in the first quarter was a result of our long-term focus of becoming a premier middle market investment bank and wealth management firm. We've invested heavily in products and talent in order to be able to offer our clients a wide array of services on an international scale. And our revenue and EPS growth reflects the success of that strategy. Our diversified business model was evident as our growth in investment banking, asset management and our bank produced double-digit revenue and earnings growth in the quarter.

As I look forward into the second quarter, I continue to feel good about our business despite some increased volatility in the equities market. Our investment banking pipeline remains strong. We continue to grow our bank balance sheet, and growth in our private client business should continue to drive increased revenues. We have also taken significant steps to improve our margins by focusing on cost efficiency. And we will continue to reinvest in the growth of our business, but we will also maintain our expense discipline that has helped to contribute to earnings growth over the past few years.

So with that, operator, I would open up the line for questions.

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

This actually Sharon Leung filling in for Steven. So I guess the first question is, could you just elaborate a bit on the FIG impact from what you noted, the higher activity in shorter-duration bonds? Should we expect that to continue? So like is that kind of built in to your guidance [first like] in 2Q as rates move higher? Or do you think that was something unique to 1Q?

It was more looking at what happened in 1Q. I'm not sure I can predict what's going to happen in Q2. But as rates increase, there's been a tendency to stay on the shorter end of the curve. I would expect that to continue. But overall, it's built into our view into the second quarter.

Okay, and then just one on market sensitivity. One other concern that we've had heard some clients is the historical relationship between IB and trading revenues, such as that some of your businesses may be more impacted if the market choppiness persists. Like what is your outlook if that happens? And do you believe there are any offsets?

First of all, pipelines are strong. Any time you have volatility that increases, I would say that volatility tends to impact the equity underwriting more than the advisory line item. But overall, we are not seeing -- we've had such historically low volatility that the recent increase in volatility has not really impacted our business, and frankly, doesn't really impact my viewpoint as I sit here today.

Okay, and then one last one, if I can. Really appreciate the new disclosure on the off-balance sheet cash. Should we expect that $3.7 billion to go to 0 as you continue to fund bank growth? And then also, what's a reasonable pace of organic cash build that we should expect in wealth management?

Again, I think that first of all, that is -- those are balances that are swept away. So you don't see all of our balances that we sweep internally. I wouldn't expect it to go to 0. But we're always looking at being the most effective considering a number of factors, including insurance levels and various factors that impact cash levels. But as we said here, I think our funding sources are solid, and we'll continue to disclose the number, but we'll see where it goes.

Your next question comes from Devin Ryan with JMP Securities.

So a question here just on kind of the flow of the client assets to fee-based. So it's been a really good story now. Looks like 1/3 of client assets are fee-based. And so I'm trying to get a sense of kind of this migration and kind of where maybe we are for Stifel. Is there a level, as you're thinking about this, where it could start to level out or the growth could slow? Or do you still think we're kind of early days for Stifel of migrating this kind of brokerage assets over to fee-based?

Well again, you've got to remember, look at it in terms of our agility. 61% of our wealth management revenues are recurring. And so I think you -- remember, we're half -- not half. 40% of our revenues are institutional. So you've got to look at overall what's going on in wealth management. I think there certainly was an impact by the DOL rule as to accelerate across the industry of migration to fee-based accounts. We certainly saw it. Depending on how all of this shakes out, I would think that the historical trend line as to migration would slow because there's a lot of reasons to do that. But overall, we'll continue, I believe, to see more fee-based account. From my perspective, it's a client choice, and we'll continue to provide options for our clients. We don't skew anything, including our compensation systems, to encourage any kind of activity, including fee-based. So as I usually say, water will find its own level with that. But I would expect the trend line with the DOL rule now being reproposed by the SEC, there won't be as much of a need for fee-based accounts to comply with what otherwise the DOL was prescribing.

Got it. Okay, very helpful. And then you mentioned a proprietary kind of technology and technology being a theme of investment. And I guess the one proprietary element sounds interesting. I mean, how are you thinking about building some of these technology capabilities that may be differentiated versus partnering or kind of using outside vendors? And how does that affect kind of the thought of cost, I guess, as you're -- obviously, it's a little bit of an inflationary element within expenses?

Well, first of all, I think that we're in a great position as I look forward in that technology. Combined with human goals-based advisers, it's going to be a winning model. And that certainly has been our thought, and we're investing in that. With respect to what we're doing, in many ways, we're taking a variety of outside vendors. We're not a software company and don't pretend to be a software company. But I think we're pretty good at melding various technologies that are available into something that will be proprietary without it -- without developing proprietary. So we have -- with our current endeavor, I think in the broadest sense, is melding together 6 vendors, which are best in class in what we do. And we believe we'll have a best-in-class end product.

Okay, terrific. And then just last one here just around the recruiting outlook. So it sounds like the hope here is the next few quarters, things pick up a bit. And I'm just curious as I'm getting questions just around broker protocol. It's been a little bit quiet recently. Does that not seem to be having much effect on broker mentality, either within firms that have exited or firms that are still in it? And as you're just looking at the people that you're seeing, maybe the most flow from in terms of the home office visits and having conversations with, is it firms or individuals that are with protocol firms or nonprotocol firms? Or just I guess where are they coming from?

Look, any time you have a change in anything, you're going to impact activity. And the initial coming out of the gate, certainly there was a chilling on the recruiting aspects in the firms that have elected to remove themselves from protocol. But that sort of hit bottom and then it improves because people are not indentured, they're going to work where they want to work. And the industry will adjust. As I've said before, I find that leaving protocol is not a good thing for clients. I made that argument. It has put a damper on recruiting. But the trend line will improve from here. You're not -- people are going to be where they want to be. And clients have a right to choose where they want to do business. Hence, there shouldn't be any -- at least I don't believe that you should be using the courts to prevent client choice.

Your next question comes from Chris Harris with Wells Fargo.

So I think you mentioned that most of your $7 billion loan portfolio is tied to LIBOR. So curious to get your thoughts about the pace of increases we're seeing with respect to LIBOR and at what level might that be a bit of a problem for your borrowers in terms of higher cost of borrowing.

Well, you did have a little bit of [like almost] basis spreads between LIBOR and Fed funds. I don't think that, that will continue unabated. LIBOR is going to get replaced here. And I think that if the general question is -- if you're talking about LIBOR relative to Fed funds and that spread, are you just talking about, in general, increasing rates? I'm not sure...

Yes, just increasing rates and the impact on your borrowers.

Our borrowers, I believe, we are -- our loans are very conservative, well-capitalized, where a lot of them are -- no one likes to pay more on interest rates, but I believe our underwriting standards are very, very strong in that regard. As you move down the credit cycle, in terms of what I would call leveraged loans and some of that, that remains to be seen as to the rolling of some of the debt. That's not a big impact for us, all right. But for the market, you can read a lot about the impact on the leveraged loan market. LIBOR would be up 200 or 300 basis points, which I don't see any time soon but...

All right. And capital markets, I appreciate your commentary as it relates to the fixed income business. Just wondering, what kind of environment do you think this business needs to really start to improve? Is it all about the yield curve? Or are there other factors at play that need to kind of fall on the line?

You're talking about fixed income?

Yes.

There's factors, both secular and circular -- cyclical, impacting fixed income. Certainly, the flattening of the yield curve is cyclical, yet the trend towards more electronic trading is secular. I believe -- I personally believe that we're bouncing around at the low end of activity in fixed income. And I believe that there's a lot of activity that needs to be done once the yield curve sort of stabilizes and people get off the stuck process of exactly what the Fed is going to do and what the 10-year's going to do. I think there'll be a lot of restructuring of portfolios from short end to move out on the yield curve. And I think in the end, our fixed income business will improve. But that's just my opinion. Looking forward, I'm not sure that the activity levels -- I mean, it's been a tough environment. Can it get worse? Of course, it can, but I believe it will get better.

(Operator Instructions) Your next question comes from Conor Fitzgerald with Goldman Sachs.

Just a couple of questions on the NIM. I wondered if you could just give us a little color on where your new money yield is on your securities book. Just trying to think about how we should think about that yield tracking. And then second, kind of a follow-up to Chris' question. But if I look at your NIM outlook for plus 5 to 10 basis points quarter-over-quarter, if you can just elaborate what you're assuming for LIBOR to do in that scenario. Just want to see if you're assuming the spreads stay wide or if LIBOR tightens versus Fed funds when you're thinking about that 5 to 10 basis point number.

Look, there are a lot of moving parts in that question, Conor. I mean, I think we're taking our environment today and just projecting it forward. I mean, if Fed funds would -- if LIBOR would significantly tighten compared to Fed funds, then that would impact our NIM negatively and vice versa. But I would say that I'm confident with what we said for the first quarter -- I mean, for our NIM in the second quarter, but obviously, that's based on today's environment. And it would be hard for me to try to project what could happen. There's a lot of things that obviously could change that. But I'm fairly confident you'll see an expansion in our NIM in the second quarter.

And just the new money yields on your securities portfolio?

I mean, what yield are we buying securities at today?

Yes.

You got me on that one. 3%, 3.5% rate or 4%. 3.4%, 3.5%, something like that. I'll have someone get back to you on that one. Is that all right?

Yes, no, no, no, no rush. And then just want to ask on your client money market and your product just declining a little bit, the trend we've seen across the industry. Just want to get your view on how much of that is your clients rotating into equities or other markets just given some of the longer-term, anyway, trend we've seen in an upward market or how much of that is your clients were maybe a little yield-sensitive, seeking alternative cash-like products like purchase money market funds. Would just love to get a little color there.

Look, I think it's a little of both, okay. I think that we certainly see clients that are investing, rotating on cash and other products. And I believe that the industry, across all financial institutions, will be dealing with these deposit betas and what the rates need to be. Personally, I haven't gotten any discussions on what would be competitive forward on rates. I think we're near the end of -- or I should say deposit betas are going to get close to 1. If you look at our capture rates in our press release, I think that's at the historical pre-easy money policies. So I think the industry across the board is going to be looking at -- probably looking at today people are becoming more sensitive to rate, as they should, and we're cognizant of that. So we'll see how it goes. I think the trends in the industry -- if we're not passing more of the [sun], I think you'll see more migration away. So my personal belief is that our deposit betas are getting close to 1 going forward.

That's helpful. And then just on the outlook for M&A, maybe specifically on financials. When you're looking to your clients, do you think that they have enough certainty on the regulatory outlook to maybe see a resurgence in deal activity? Or do you think we're still in somewhat of a wait-and-see mode for somebody's deals until we get certainty, whether it's around stress testing or the $50 billion threshold or a host of other regulatory issues?

Well look, I think the regulatory environment certainly is more conducive to bank mergers almost any way you want to look at it. But the bill, Crapo's bill, and this $50 billion is huge in terms of -- in my -- in terms of perception, what it means to the stress test, what it does. I think that's big. So there's a lot of factors, but I think that's a big one.

This concludes the Q&A session for the conference. I'd now like to turn it back to Ron Kruszewski for closing remarks.

Well, I would like to say that I'm pleased with our quarter. It was a very strong start to 2018. I'm optimistic about our future and look forward to reporting to you on our second quarter results. Have a great day. Thank you.

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