Stifel Financial Corp. (SF) Q4 2011 Earnings Report, Transcript and Summary

Good afternoon, my name is Mimi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings 2011 Conference Call. [Operator Instructions] Chief Financial Officer Zemlyak, you may begin your conference.

Thank you, operator. Good afternoon, everyone. This is Jim Zemlyak, CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss the fourth quarter 2011 and year end results. Please note that this conference call is being recorded. If you'd like a copy of today's presentation, you may download slides from www.stifel.com. Before we begin today's call, I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of fact or guarantees of performance. They 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 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. 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 MD&A of results in the company's quarterly reports on 10-Q. With that, I would like to turn the call over to the Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Thank you, Jim. Welcome to everyone on the call, and thank you for your continued interest and support in Stifel Financial. As is our practice, we will supplement our call with slides that Jim told you that are downloadable from our website or that you may be following if you called in to the service that provides the slides. So starting with the chairman's comments, we are pleased to report that 2011 represented our 16th consecutive year of record net revenues. This is significant given continued headwinds and the uncertainty in the marketplace, particularly in the second half of the year. We thank our clients for their support and our dedicated associates who strive to distinguish Stifel by providing superior service and execution. Our fourth quarter results mark an improvement from the prior quarter, but are tough in comparison with the record year ago fourth quarter. Stifel Bank's assets continue to grow, contributing to our overall results, and investment banking rebounded, particularly in advisory due to increased activity at year end. Financial advisor recruiting has picked up, and we welcomed the Stone & Youngberg associates to our platform during the quarter, who made an accretive impact. Looking forward, we remain committed to growing our businesses and are well positioned to take advantage of opportunities. The next slide looks at our quarterly results. The second half of 2011 proved to be a challenging period for the markets, businesses and frankly, the overall economy. Our results reflect this challenge. While we are pleased with the contributions from our global wealth segment, our institutional group was not immune to the lower volumes, cautious risk taking and frankly, many of the issuers remaining on the sidelines during a volatile second half of the year. Turning to our result. As compared with the year ago quarter, it is important to keep in mind, as I stated, that the fourth quarter of 2010 was an all-time record in terms of revenues and net income. On a comparative basis, net revenues, which totaled $356.9 million this quarter, represented an 11% decrease from the fourth quarter of 2010. GAAP net income was $27 million, or $0.43 per diluted share, and that compared with GAAP net income of $41.4 million, or $0.65 per diluted share. And last quarter we did report non-GAAP EPS, which was $0.74 per diluted share. GAAP pre-tax margin for the most recent quarter was 13% compared to a year-ago quarterly margin of 17%. On a sequential basis, in other words comparing with the third quarter of 2011, we saw an improvement. Net revenues increased 7%, our net income increased 21%, and our operating margins improved from 12% to 13%. Overall, our results were in line with Street expectations. Our net revenues were 4% higher, mainly attributable to an upside in investment banking from expectations, while total noninterest expenses were 4% higher as a result of higher compensation expenses, offset by lower noncomp operating expense. Turning to our annual results. For the year, net revenues of $1.4 billion represented 2% increase over the full year of 2010. Again, we are pleased to report that 2011 represented our 16th consecutive year of record net revenue. As we move forward, we'll look for opportunities to grow both organically and through acquisitions to continue this record pace. Excluding noncore charges, our non-GAAP net income was a $113.6 million, or $1.80 per diluted share, compared with non-GAAP net income of $124.8 million, or $2.16 per diluted share in 2010. This represents a 9% decrease in net income and a 17% decrease in earnings per share year-over-year. We recorded a GAAP net income of $84.1 million, or $1.33 per diluted share in 2011, compared to $1.9 million, or $0.03 on a GAAP basis in 2010. Putting our noncore charges into context, last year we modified our deferred compensation plan to conform with the plan with the Thomas Weisel Partners, and this year we recorded litigation-related expenses. Both years include merger-related expenses. Non-GAAP pre-tax margin was 13% compared to the GAAP margin of 15% in 2010. Turning to the next slide looks at our source of revenues, comparing our year-over-year results. Commission revenues decreased 11% in the fourth quarter to $123.7 million. This decrease is primarily attributable to lower volumes, particularly in our institutional equity business, which is consistent with the market given the elevated uncertainty and the high volatility. Principal transactions increased 4% to $94 million. Investment banking revenues declined 38% to $56.1 million from a record $91 million in the fourth quarter of 2010. The year-over-year decrease is primarily attributable to lower volumes, contrary to what we typically experience in the fourth quarter, and uncertainty in the market that affected both equity and capital raising and M&A advisory. Asset management fees for the 3 months ended December 31, 2011 decreased 2% to $55.9 million. This decrease was due to 2 factors. First, fees are billed in advance and were off lower assets as of the beginning of the quarter in 2011, and second, we continued to have a result in the decrease in rates on the management of our money funds. On a sequential basis, commissions decreased 14% and principal transactions increased 23%, while asset management fees decreased 4%, investment banking increased nearly 50%. Now as we look on an annual basis, commissions, which were up 26% and principal transactions, which were down 24%, as you can see, almost offset each other. This was the result of the reclassification of Reg SHO between the 2. Asset management and service fees increased 19%, while as I've said, the environment impacted investment banking, which was down 9% for the year. Now turning to brokerage revenues and we define brokerage revenues as commissions and principal transactions. We look at them separately but together. Our business model is not a proprietary trading model, so you do not see the distinction that much between principal and commissions. It's more impact of our institutional business, fixed income, which tends to be principal and in equities, which tends to be commissions, or an agency basis. Looking at this table, on a year-over-year basis, our Muni business increased 39% year-over-year and taxable debt increased 4%, which was offset by a decline in equities of 31%. The increase in Muni and tax was attributable to better performance, and also from the contributions of Stone & Youngberg. Commissions and principal transaction on a combined basis were down 5%. Sequentially, principal transactions increased 23% as a result of an increase in all categories, and that was offset by a 14% decline in commissions. And again, underscoring what I've said in the past, that also you will see that our fixed income institutional business was up for the quarter, while our institutional business was down. We basically strive in both businesses to be a liquidity, just a provider of choice, and believe we are gaining market share. Actually, an execution provider of choice. When you look at our next slide, a look at our compensation and benefits results, comp and benefits as a percentage of net revenues were 64% for the fourth quarter of 2011, compared to 59%. And that's a significant change in the quarter, and I'll explain that in a moment. And it was 63% in the third quarter. In many ways, this increase was the result of lower revenues, but also by a decision for us to protect some of our businesses on the compensation front in the light of lower revenues. Said another way, the shareholders contributed to protect the franchise that we've built in the last couple of years, and that frankly we added to some of our compensation accruals, albeit slightly, where in years past we had been able to take back some of the accruals that we made during the year, and that did not happen this year. In 2011, we targeted our ratio also to more of a stated goal in the range of 63% on a quarterly basis, but again, we saw the need to increase that in the fourth quarter. Transition pay, which is also significant. It consists primarily of the amortization of upfront notes. It's our recruiting expense. As a percentage of net revenues it was 5% in the fourth quarter of '11, compared to 3% in the year ago quarter. For the full year, our comp and benefits was effectively 63% of net revenues, which was in line with our stated goal for the year, and on par with last year's ratio. Looking forward, we targeted a comp ratio in the range of 62% to 64%, the mean of course being 63%. This ratio will ultimately be dependent on market conditions and on our level of revenue. Looking at noncomp operating expenses for the quarter, they were $83.1 million, which is a 7% decrease compared to the fourth quarter of 2010. That's on a core basis. Operating expenses as a percentage of net revenues was 23% compared to 22% in the fourth quarter of 2010. The decrease in noncomp expenses is primarily related to recoveries in certain legal matters as well as lower commission and floor brokerage charges as a result, frankly, of slower business. And on a sequential basis, our noncomp expenses decreased 2%. For the full year, core noncomp expenses were about $332 million, which was an 8% increase compared to 2010. This was in line with the lower end of our stated target between $328 million and $336 million in noncomp OpEx on an annual basis. However, regardless, the increase was due to building out of our platform and gaining additional capabilities, namely through acquisitions. Part of the increase is in occupancy, equipment, communication, all of which are simply investments in building our business. I will now turn to segment comparisons. Before we get to the detail and the numbers, overall results for the quarter were down year-over-year, but increased sequentially. The year was marked by strong performance in Global Wealth Management, offset by weakness in our Institutional group. Excluding the other segments, during the quarter our Global Wealth segment operating contribution was 86% of our profits, while our Institutional group's contribution was 14%. And that's really out of what I consider the norm to be more 60-40. So that will explain some of our results. Just in general, as a result of the operating environment, the stability of our Global Wealth Management segment buffered the decline generated from our Institutional group, which frankly is at the core of our business model. We have a more stable Global Wealth Management and the profit margins in the Institutional group can be higher, yet they're more volatile. Looking at Global Wealth Management, first of all, we are pleased to welcome approximately a little over 30 Stone & Youngberg advisors who joined us in the fourth quarter. They've hit the ground nearly seamlessly, and I want to welcome them to the team. Compared to the fourth quarter of 2010, operating income was generally flat. Net revenues were decreased 5% really due to a decline in lower trading volumes, but net interest revenues due to the growth in our net interest earnings assets at Stifel Bank offset that decline. The Private Client Group reported net revenues in total of $205 million, which was 10% lower than the fourth quarter of 2010. Sequentially, operating income increased 13%, revenues increased 2%, and while fee-based assets were down 7%, as I stated earlier, the number of fee-based accounts increased 3% sequentially. Our clients have continued, or they've actually started, to borrow more at Stifel and at the bank as those assets -- those loans are up 13%. For the year, for Global Wealth Management, revenues were up 8% to a record $908 million, and we generated -- we account for on an operating basis, $235 million in income before taxes and overhead charges. Client assets were up 8%. That helped the 19% increase in asset management service fees. Broker productivity increased 5%. Commissions were up 15%. It was a good year for our Global Wealth Management business, especially considering the volatile environment. Turning to Stifel Bank and Trust. Stifel Bank reported strong net revenues for the quarter of $19.4 million, actually double the fourth quarter of 2010. This increase is due to a 28% increase in assets, investment gains on available for sale securities and an increase in mortgage origination revenues. Interest expense increased $1 million from the fourth quarter of '10, primarily due to just that we swept more balances to the bank. So sequentially, net revenues and income both increased 11%, and on an annual basis the bank contributed nicely to earnings, increasing revenues 50%. And income before taxes, as I said, nearly doubled at the bank. Turning to the next slide on the bank, with respect to asset quality we continued to maintain solid ratio as Stifel Bank facilitates our Private Client business. Our assets totaled $2.3 billion at the end of the year, up 28%. Our investment portfolio is $1.4 billion, which increased 32%. It consists primarily of investment grade securities, of which almost 65% were government sponsored, guaranteed MBS or AAA-rated instruments. The loan portfolio totaled $773 million, which increased 59% from the prior year. Deposits of $2.1 billion were up 28%. We maintain solid asset quality, as demonstrated by nonperforming loans to gross loans of 0.39%, nonperforming assets to total assets of 0.14% and during the year we had $0.1 million of trailing 12 net recovery. So asset quality is very strong. The next slide looks at our Institutional group. Year-over-year comparisons are down. It was a challenging year. Pre-tax operating income for the year for Institutional was $10.8 million compared to $43.7 million -- that's quarter-over-quarter. Net revenues declined 19% to $134 million, and the decline of revenues was mostly attributable to lower investment banking revenues compared to the prior quarter, particularly equity capital rates. And that's not dissimilar to what's going on industry wide, and to a lesser degree, by just a decline in our flow business, our equity sales and trading. Sequentially, though, revenues increased 19% from what was a very difficult third quarter, and that was primarily due to an increase in investment banking of 53%. Income, our contribution also increased 18% sequentially. For the year, net revenues were $507 million, which was down 6%, but our contribution was $63 million, which was a 51% decline from 2010. Effectively it was a tough year across the street in that segment as marked by the volatility in the market. The problems in Europe and the uncertainty, frankly, in regulatory policy and tax policy emanating out of Washington, that all had an impact on our business. If you look at our revenues, the heightened uncertainty, particularly the second half of the year, led to inactivity with many of our clients, while many of our clients really sat on the sidelines. Our brokerage revenues were $80.3 million, which was a 3% decrease compared to the fourth quarter of 2010. It was more marked in our equity flow business, which was $40.6 million, which declined 13%, offset, frankly, by our fixed income business, which was up 10%. These are all compared to the fourth quarter. As I previously mentioned, again, fourth quarter: record investment banking quarter. Revenues from that quarter decreased 36% to $52 million. Capital raising revenues declined 43% while advisory fees declined 30%. But of course, advisory improved significantly over the third quarter. On an annual basis, our institutional brokerage revenues declined 5% and investment banking declined 7%. I will now provide additional color on our investment banking results in the quarter. Fixed income capital raising and advisory revenues contributed to our results. In terms of fixed income, the increase was primarily due to an increase in Muni bond originations and the addition of Stone & Youngberg added to our fixed income results. M&A activity last year can be divided into 2 segments, frankly. From January to July, monthly volumes and values increased year-over-year while the macro events in the summer weighed on the August through December levels. This frankly, impacted Board and our clients, CEO confidence as well as the financing markets, which got very difficult in the third quarter. However, our deal activity picked up at year end and finished strong, a trend that has continued into the start of this year. The level of interest and focus on strategic combinations is high right now and we're seeing this across our platform on multiple sectors. In the first 6 weeks of the year, our team has completed or announced 11 transactions including 7 new announced deals across several multiple sectors. As we're all aware, it was a weak environment for equity issuance in the fourth quarter. The market volatility in the second half of '11 raised the bar for quality-only issuers and the macro events drove performance versus fundamentals. Last quarter we priced 8 IPOs. January and February started strong, and so far in the first quarter we've priced 6, of which 33% are book-managed, which is a focus of this firm in the IPO market. We're seeing a similar trend with follow-ons. Last quarter we priced 9, and quarter-to-date we've priced 14, of which 36 are book-managed. Simply, we are winning more book-managed mandates. To put this in the context, last year our completed equity and equity-linked deals, we book-managed 27%. This activity is encouraging and a nice trend thus far. It's something that we've focused on, and I'm pleased to report to you is being accomplished. Our backlog of filed and mandated IPOs is currently very solid, with 55 deals, which is close to our all-time high, and building as deals not only get priced, but we add new deals to our price line. I think that given the, sort of the -- despite the market volatility of the last couple of days, I still think that the improvement in Europe and the improvement in the economic fundamentals in the United States bodes to a better year in 2012 than we saw in 2011. Turning to other financial data. We have a strong balance sheet, $5 billion in total assets, $1.3 billion of shareholders' equity. Book value per share of $25.10. While we continue to manage our business utilizing low leverage, in the current environment, and what we see as opportunities, we raised net proceeds of approximately $169 million from 6.7% senior notes -- 10-year notes, frankly. The proceeds will be used really for general growth purposes and growth opportunities that we see. Therefore, at December 31, 2011, our leverage ratio was 2.2 at the parent broker dealer and including the bank, the total leverage was 3.6%. On a pro forma basis, our leverage ratio, now taking that into account, was 3.3%. But if you look at our note offering, our debt to equity will go from 6% to 20%. I believe these ratios are reasonable and a more appropriate capital structure to fund future growth. Simply I felt that our equity levels were high, impacting our ROE, and as we said in the second quarter last year, we were looking to add leverage to our balance sheet. Financial advisor growth was relatively muted in 2011. We did add the Stone & Youngberg advisors and opened several new offices, but I will tell you we are experiencing a marked improvement in what we're seeing in recruiting and we'll continue to seek opportunities to recruit top advisors. Client assets increased 8% to nearly $120 billion at the end of the year. The final slide that we'll look at is our level 3 assets. These assets primarily consist of ARS for $181 million at December 31, 2011. Included in these are -- almost $67 million of the ARS are held at Stifel Bank in their investment portfolio. Other investments consist primarily of about $31 million in private investments held by our former TWPG, private equities and asset management subsidiaries. In conclusion, I continue to believe that we are in a solid competitive position to execute on our growth strategy and gain share in our core areas of focus. We remain committed to our strategy of taking advantage of opportunities, but only those opportunities that we believe will, in the long term, add to our per-share valuations. We are well-positioned to continue to do this. With the equity markets higher, and really some momentum thus far in 2012, we're looking forward to a better year. I will now open the call for questions.

[Operator Instructions] Your first question comes from the line of Patrick Davitt from Bank of America Merrill Lynch.

It looks like retail investor activity was pretty weak in the fourth quarter. Have you seen any improving trends there given the market rally and a little bit better economic data?

Yes. It was muted, of course. I mean, yes. But the market still seems to be marked by events, which kick sentiment it bounces like a bobber on either side of positive or negative. But overall, we've had a nice start to 2012.

And you mentioned the comp kind of true up to protect the franchise. I wouldn't imagine there would be that much pressure this year, though. What kind of drove that decision? Can you parse that out a little? From a competitive standpoint.

I think at times you have to be able to smooth some of the compensation over years. It was only difficult from the perspective of how much contribution was down. Our contribution was down 50%, and while that will often yield lower comp ratios and then it even declines more than that in comp, and so we just had the viewpoint that we needed to balance and smooth some of that. It was a difficult year regardless of what we did. There's nothing we could do. But I wasn't so much focused on the fact that, hey, you can't go anywhere, than trying to be fair. I mean just, yes, from what I've seen on the Street, the amount of cash compensation paid was next to nothing. Patrick, we want to be fair, and we want to take a viewpoint not on an annual basis, but we want to take it across market cycles. So I think we did the right thing, and it wasn't crazy, but it certainly on a quarterly comparison basis it's significant -- 6 points.

And the loan book grew 59% last year. It looks like you still have a lot of capacity there. Do you think that pace can continue?

I do. It's on a risk-adjusted basis. We do not set out with any quantitative goals to add x number of loans, but as our franchise grows, as we grow our capabilities and we get better at having the bank look at some of our corporate opportunities on the investment banking side, each day that goes by we get better at that, and frankly the landscape of opportunity is very large compared to what we're doing. And all that said, we try to always grow -- especially when you're building your balance sheet and your leverage. We grow on a balanced and measured basis.

Your next question comes from the line of Patrick O'Shaughnessy from Raymond James.

First question, I guess following up on the last question, in the fourth quarter Stifel Bank's assets were flat, actually slightly down a little bit from the third quarter. Your deposits were slightly down from the third quarter. Was that just basically a function of not sweeping cash from the brokerage into the bank and taking a breath for the quarter?

I'd say part of it is -- can be prepayments, and you have to reinvest proceeds and opportunities the way we were looking at it, whether or not we were willing to contribute more capital in that timeframe to the bank. A number of factors went into that, but again, we have no stated goals to grow the bank. As I've said many times, if we wanted to grow the footings in the bank 50% next quarter, we could do it, subject to regulatory approval of course, but it's merely a factor of us -- how many deposits do we want to sweep into the bank. So there was no underlying trend to the fourth quarter being relatively flat.

And then following up on that, on Slide 13 you talk about your mix of interest earning assets in the bank, and nonagencies were basically flat, agencies were down quarter-over-quarter, commercial loans were up. Can we view that as maybe a little bit of risk on within the bank, or what specifically was taking place that would explain that mix shift this quarter?

I think overall, as I look forward, the thought that -- the percentage of our increase in the bank, that would come from agency MBS type investments, versus what will hopefully come from commercial C&I type lending. I would think, no I would hope, that the C&I lending portion will be a bigger percentage than it has in the past. Is that a risk on trade? Well, certainly compared to a AAA investment. At least I hope it is. I mean, our -- on a risk-adjusted basis, we believe that it's a better use of our capital. So I think that's a long-winded answer to agree with you.

Fair enough, and then one last, if I could. At the start of the quarter, you guys authorized another 3 million shares in your repurchase authorization, if I recall correctly. According to my math, it looks like you guys did not repurchase any shares during the quarter. If you could just kind of talk about your capital return plans for 2012, I think that would be helpful.

Again, there's a lot of factors that go into whether or not you're in market for your shares. And I'm really not going to comment on those though. We did purchase a number of shares in the third quarter. Overall, we seek to have a capital structure where we believe, given normal markets and our operating margins, that we can achieve 15% ROE across market cycles. So our capital plan is evidenced by the fact that we did -- we raised debt instead of equity, and we used that debt -- we'll use that debt in various manners. But on balance, we're funding our growth, or managing our cap structure with an eye toward reducing equity, increasing leverage, albeit still one of the most conservative balance sheets in the industry. But you can't achieve 15% ROEs levered 1:1. You need to have some leverage. So I think as we go forward we have recognized that we need to manage our equity base. Through the crisis we husbanded capital and we grew it faster than maybe we were growing our business. But going forward, we're certainly cognizant -- associates own over 40% this firm and we understand the importance of return on equity.

Your next question comes from the line of Devin Ryan.

So you spoke a little bit about FA recruiting picking up. Just love to get your thoughts on what you see driving that, and what channels you're seeing, or what type of firms you're seeing the most interest from.

I think in general it's picking up, okay? To get into details on which firms and all of that probably not appropriate at any time, especially on this call. So I'll politely duck that portion of your question. But it's been a competitive and difficult market, and it has certainly, in my experience in this business -- I understand the ingredients, which contribute to muted recruiting, which was certainly there in the latter half of '10 and throughout 2011. What I can say is that the environment for recruiting is improving. And that is -- there's many fathers to an increase in recruiting environment, but I'll leave it that the recruiting environment is improving.

Got it. And then just on Stone & Youngberg, you gave us a little bit of details there, but I'd just love to get a sense of how that business is trending, maybe relative to your original expectations when you guys did the acquisition. I think the original range was somewhere in the $4 million to $6 million a quarter pretax based on I think that's what they had been generating previously. So would just love any color there. And then also, I was just a bit surprised the noncomp expenses declined sequentially despite Stone & Youngberg, so any additional comments there would also be appreciated.

Well listen, Stone & Youngberg we closed in October. It's hard to immediately snap your fingers and have productivity in everything immediately though. It took us -- which was I think a yeoman's job on behalf of everyone, it took us about 30 days to get them fully integrated. But that 30 days also impacts productivity and a number of things. It was -- Stone & Youngberg was accretive. Based on what we issued, I'll say that. But I'm not going to comment yet on run rate, because I don't think it would be -- I don't think it's fair, and I just don't want to comment on it other than I'm pleased with the start to Stone & Youngberg. Noncomp, I think I said noncomp, we did -- I think we were looking at our expenses. We did have a recovery of a litigation accrual that -- but not necessarily all the explanation of that. But noncomp expenses were there. I think going forward I'll probably give some thoughts as to what we see going forward. And we said -- in fact, I'll kind of do it now, I think, and we'll update it. But we had said 332 to 335. I would say 340-ish, 340 to 345 going forward. Some of this is volume related, so you've got to understand that if volumes go up more than we think then you could see an increase in that. But hopefully that gives you some idea. Versus we had said 328 million to 335 million, I think I said last year.

Your next question comes from David Trone from JMP Securities.

I had a quick question related to a previous one, and if this is overly sensitive then I apologize in advance. But we all know that you were looking at Morgan Keegan. Are you legally allowed to pick up any other folks, or do you have some kind of a nonsolicit?

David, the way those agreements work, if they even exist, is that you can't even talk about whether they even exist, and so overly sensitive question. In general, I don't feel any real restraints to any recruiting.

And then kind of an antithesis question here. Equity volumes on the cash equity side are continuing to be pretty weak, and I know you guys have a pretty big footprint. You're one of the biggest research footprints in America. And so have you ever looked at that and thought, gee, do we need to maybe rethink our size?

I often look at Jim Zemlyak and wonder if I need CFO. So -- he's sitting here. Come on, David, you always look at your relative size, without looking at people, in difficult markets. And that's not limited to research. That's across the firm. My general experience and where I grew up and our success and sort of my Pavlovian response to difficult markets is to hold the course and to be -- to continue to invest appropriately. I believe that the future for our business is brighter -- and maybe my viewpoints are more bright than what other people think. I believe that we are well positioned to gain market share and I am not in any mindset to dismantle what we've built over the last 15 years, primarily the last 5 years, at the altar of what I believe to be relatively short-term market dislocations.

Okay, sounds good. And then 1 more question. This has been about a year since -- a little bit more, than you closed on Thomas Weisel, and looking back, how happy are you with the cultural integration and efficiency and those types of things?

Well, the cultural integration I am thrilled with. I mean, I just spent a few days at our tech conference, which was well attended, spent a lot of time with our tech experts, a lot of which are my partners from TWP. Just spent time at a board meeting with members of their board and management team. I think culturally that integration has been as good as any integration that we have done. In terms of the business, I was dead in love with the entire investment banking business a quarter ago, and this quarter -- the one just ended was -- I liked them a lot. The point being that it's a tough business, but we have a fantastic franchise, which is well positioned to do a lot of business if we get a decent market. So long and short, that Weisel transaction was fantastic from a business perspective, better from a cultural fit and I don't think we've yet to see the power of that franchise.

Your next question comes from Alim Shaikh from KBW.

As you mentioned we've seen the market stabilize in recent months, with lower volatility, and I was just wondering, in your conversations with companies, are you starting to see improved confidence, or maybe a change in sentiment in terms of issuing equity versus debt, which has been pretty attractive?

Certainly the debt markets have been very attractive. That said, there's a lot of sort of re-equitizing of many industry sectors that has to occur. So has there been improved sentiment? Sure, in many ways led by the confidence in the debt markets. But there has been. The question is last year at this time I would have said kind of the same thing. We got off to a good start and things kind of came to a halt that April timeframe or whenever it was. So today, yes, I'm encouraged by the start, but not does a start equal a finish, right? But certainly the sentiment's better.

Your next question comes from Hugh Miller from Sidoti & Company.

I guess a bit of a follow-up on, color on so far you guys had mentioned in the first quarter you are seeing, on the retail side of the business, a little bit of a pickup. I guess we've yet to kind of see positive inflows for the industry in equities. I just was wondering if you could give some color on kind of where you're seeing the strength from the retail business, and I guess what you think has to happen in order for us to get to an environment where retail clients are a little bit more interested in putting money to work in equities.

We saw that at the beginning of last year. I think it's an overall -- the inflows plus -- I think, that we have had inflows. I mean, the market's up a fair amount from the October lows. And we have seen an increase certainly on our Global Wealth Management in the percentage of equity business versus fixed, etc. I need to see some increased flows in the overall equity flows of the institutional business, which I guess I haven't seen the recent data so I don't want to comment. But I think that where we need to see a little more confidence is for the institutional business to believe that there's a consistent inflow, where they can allocate capital not around existing positions but to new positions and have some conviction. And that uncertainty, I see in sort of the malaise that's occurring in the equity flow business, that coupled with some of the shift in trading platforms. But I certainly don't see what I would deem a significant conviction to the equity side. I think there's a lot of protection around redemptions, frankly. So I think that needs to change.

And just another question on the recruiting side. Obviously you've mentioned how things are picking up here, you're getting a little bit more excited. Are discussions over upfront money changing at all from what you're talking about? And any adjustments you're seeing from peers? Is anyone getting a little bit more aggressive or less aggressive on upfront money?

I would say in general that while we haven't really changed what we've offered, I think that what we have offered has become relatively more attractive for a variety of reasons. So that's what we're seeing. I mean, some of things got crazy, and while there's pockets of craziness out there, there's also a -- there's segments of FAs that are becoming more and more disfranchised every day. And so that's what we're seeing. I hopeful that -- we didn't have a bad recruiting year last year. On many firms, I think, we've hired 180 some people or something like that. A lot of firms would -- our side would think that that was good, but for us and our historical recruiting, that was low. And while we don't have numerical targets, I'd like to see, and I believe the recruiting will pick up.

And I guess as you've obviously raised the debt at this point, you're talking about the deployment of capital, are there areas in the business right now with what you see the environment shaping up that you get a little bit more excited about deploying that capital into?

I think the capital can be used to sort of increase our overall leverage. Again, I say that always guarded, because I don't want to sound like we're just betting the farm. We're talking 3:1 leverage going somewhat higher than that, which I think we need to do. You do that by utilizing leverage and sort of double-leveraging it into the bank. We have very, very high capital ratios, but within the bank you need equity in the holding company. Obviously you've got ratios. So I can see that being utilized partially to increase what we're doing in the bank, and I can see it being used to appropriately change our capitalization structure. And I can also see it certainly being used to take advantage of opportunities and recruiting opportunities. The mix of all of that is undetermined at this time and it will depend on what opportunities present themselves.

And then last question I had is just more of a housekeeping one. It seems as though in the quarter within the GWM business that the other income revenue line item just seemed exceptionally strong, at about $10 million in the quarter. I was just wondering if you had any color on what was kind of driving that.

I think relatively, there's a number of things, but probably the single biggest item there might have been loan originations in terms of fee income. It was a strong quarter.

Primarily at the bank, got you.

It's not that big relative to all the numbers, but I understand that line item it might be.

Your last question comes from the line of John Masi from Rudman Capital.

Two quick questions. The first, can you talk about staffing level trends in your senior bankers, both at Thomas Weisel and then across the business? And then secondly, synergies from Thomas Weisel maybe relative to your initial targets? I know this is similar to something that's been asked, but just looking for a little bit more color.

Well, I mean, I think our staffing among MDs is consistent. We've hired some nice hires, both here and on the continent a little bit. I think we're obviously somewhat guarded considering the environment. Synergies, I think first of all on the deal front the synergies are we're simply doing deals we never would have done before without Weisel, and vice versa. We sit in meetings and we say we're doing this deal and some of the Weisel guys will say, well, we never did a deal like that sector. And say, financial institutions, and we're doing deals with them that we've never did before, because we weren't in it. So the synergies on the deals, on that side are -- they were evident the day we did the deal, they're evident every day we do deals, they're evident today. The synergies in terms of culture I've already talked about. They're phenomenal. And the synergies as it related to cost, we've achieved all of our cost synergies and have met all of our expectations. It's just been a nice transaction that the results of which are difficult to measure in this kind of environment, or at least the environment we had in '11. I hope that answers your question. I don't really even -- I guess the best way I can talk about the synergies of Thomas Weisel is I don't even think about the separates of Thomas Weisel and Stifel. It's one firm.

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

Well, you can turn it back to me. I feel like I've been talking for an hour. So listen, thanks everyone. Thanks for your confidence and all that you've done in terms of the associates on this call and our shareholders. I look forward to a better 2012, better clarity on economic policy and tax policy and things that can provide a foundation for some not only economic growth, but some stock market growth that we really over a 10-year period really haven't had except volatility. And I think that if we get those things our company, your company, is well-positioned to not only deliver shareholder value but gain market share. With that, I'll talk to everyone next quarter and thank you for your time and attention. Goodbye.