Stifel Financial Corp. (SF) Q2 2015 Earnings Report, Transcript and Summary

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

Thank you, Mike. Good afternoon everyone. This is Jim Zemlyak, CFO of Stifel Financial. I would like to welcome everyone to our conference call today to discuss our second quarter 2015 financial results. Please note that this conference call is being recorded. If you’d like a copy of today’s presentation and our earnings release, you may download slides and get the earnings release from www.stifel.com. Before we begin today’s call, I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of 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 advisors, general economic, political, regulatory and market conditions, investment banking and brokerage industries, our objectives and results, and also may include our belief regarding the effect of various regulatory matters, legal proceedings, management expectations, our liquidity and funding sources, 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 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 10-K and MD&A results in the company’s quarterly reports on 10-Q. I will now return the call over to the Chairman and CEO of Stifel, Ron Kruszewski.

Thank you, Jim. Good afternoon, everyone. A record second quarter results demonstrates the strength of our platform, on June 5, 2015 we completed the acquisition of Stern Agee and a result of the second quarter results include approximately one month of Stern Agee's results we’re pleased to welcome our new partners at Stifel. We remain excited about partnering with the professionals that Barclay's Wealth Management continue to grow our global wealth management business, we’re committed to investing and helping grow the Barclay's franchise over the long term and creating investment class platform to serve our clients. We remain attractive both the transactions in the fourth quarter of 2015. Before reviewing our results I would like to comment on the operating environment during the second quarter. The S&P and Dow continue to trade in a tight range, flat for the S&P and down 1% for Dow. Equity average daily volumes decreased 4% in the quarter to 6.6 billion shares despite an increase in the mix from 15.3 to 18.2. On a fixed income side corporate bond volumes declined 10% sequentially although it is up 5% compared to a year ago. The 10 year yield reversal declined rising 43 basis points to close the quarter at 2.35%, today however the yield is that approximately 2.24%. Equity capital raising was soft down 12% sequentially and debt capital raising was up slightly. U.S. M&A announcements continue to dominate the news were up 59% were completions was down 18%. In terms of equity flows the trends to international funds and into passive funds [ph] continue. In the second quarter domestic equity mutual funds outflows of 37.8 billion while international had inflows of 46.3 billion. If you look at combining mutual funds and ETFs active domestic funds experienced outflows of 45.8 billion after experiencing 36.7 billion of outflows in the first quarter. Passive domestic funds had inflows of 17 billion which is down from 56 billion in Q1. Overall I would say that the market in the second quarter was just rather flat for the most part that I would describe the environment. Now turning to our financial results for the quarter, net revenues were a record 598 million, an increase of 6.5% for the prior and 6% from the first quarter. On a non-GAAP basis excluding merger related expenses net income of 55 million in and diluted EPS was $0.71, this compares with non-GAAP net income of 49 million in the second quarter last year an EPS of $0.65. Non-GAAP pretax margin for the quarter was 15.5% up from 14.6%. Turning to the next slide, I'm going to provide some context around our results versus street expectation. Our second quarter results missed consensus by $0.01. In short pretax income beat consensus by one penny while our tax rate was 220 basis points higher than annual assessment resulting in a $0.02 negative variance in our taxes taking together therefore we missed expectations by a penny. Top line revenues missed by analyst expectations by 700,000. Our balance, investment banking was strong driven by debt advisory revenues and commissions and asset management were better than expectations while principle transaction missed. The compensation ratio came in at 62% versus the analyst expectation of 62.3, noncomp expenses came in at 1 million higher and as stated above our tax rate was higher at 40.7%. This was due to losses recognized in our foreign subsidiaries that are taxed at different rates in our U.S. subsidiaries. Again overall net results was $0.71 versus analyst expectations of $0.72. Turning to our financial results for the six months for the year, net revenues were a record 1.2 billion, an increase of 4.6% over the prior year period and a non-GAAP basis net income was a 105 million and diluted EPS was a $1.35 versus a $1.33 for the first six months of 2014. Our non-GAAP pretax margins came in at 14.9%. I will now discuss our top line activity during the quarter. Total brokerage revenues were down 2%, 269 million and down 4% sequentially. Commissions increased 12% year-over-year and 2% sequentially but we’re offset by principle transactions were down 23% year-over-year, this was due to a decline in trading profits were approximately 14.5 million for the prior year quarter. I will note that the prior year quarter we had a large gain of approximately $6 million. Sequentially our trading profits declined approximately 4.5 million primarily due to tampered [ph] results in our bond and inventory [indiscernible]. Investment banking revenues increased 11% year-over-year and increased 29% sequentially to a 161 million from a 145 million in the second quarter of 2014 and from a 125 million in the first quarter. The increase is attributable primarily to higher fixed income capital rates with the contributions from [indiscernible] and merchant capital possibly impacting results as well as an increase in advisory fee with a number of larger transactions closing. After management's service fees were record 120 million, the increase is due to an increase in assets under management, our fee based account the contribution from 1999 investment council. Other revenues increased primarily due to higher loan origination fees at Stifel Bank. I will now discuss our brokerage and investment banking revenues. Total brokerage revenue decreased 2.1% from the prior year quarter to 269 million, global wealth brokerage revenues were down 1% year-over-year but equity brokerage decreased 4% and fixed income brokerage decreased 3%. Looking at investment banking total investment banking revenues were a 161 million which represents a good quarter. As I have reiterated on other calls, investment banking results are lumpy and in this quarter it was on the plus side of being lumpy. Looking at capital raising our equity capital raising declined approximately 16% versus the prior year which was more than offset by a 124% increase fixed income capital raising. Looking at fixed income capital raising it was 42 million benefiting from an increase primarily in our public finance revenue. I'm very pleased with our performance in public finance which reflects the investments we have made over the past several years. Off particular note during the first half, I think these numbers are impressive, we were sole or lead manager on 452 negotiated issues raising over 10 billion. This more than doubled the 213 issues raised to 4.4 billion during the same timeframe in 2014. Through June we were ranked sixth in par value underwritten and first a number of issues nation-wide. We continue to maintain a strong case [indiscernible] business in the NAV [ph] sector we ranked first in both number of issues and par value underwritten far off distancing our closest competitor in both categories. Equity capital raise offset the increase in fixed income with a decline of 16% to 55 million versus the same quarter last year but is up 13% from the first quarter. As I talked about last earnings call, we had a slower first quarter and at the end that was offset by more active second quarter which was largely driven by activity in the healthcare sector. Revenues year-to-date are down 17% to 104 million. Year-to-date the overall equity market activity is roughly flat while Stifel our revenues are down the reason is that the pick has been slower than expected in the tech media space from our view, more companies have private capital and taking longer to go public. However for the same reason our outlook for tech and media in 2016 has improved due to the really the current delay now since we’re pushing some business forward. Our equity backlog levels are somewhat elastic this time and vary sector to sector. We expect [indiscernible] to be unbalanced for the first half, TMT a little slower and in healthcare we’re very busy with new mandates. Energy and BDCs are more volatile and difficult to cost given the effect of commodity prices and overall interest rates. Looking at advisory, advisory revenue increases 5% year-over-year to 64 million in the second quarter, and increased 29% from the first quarter. In the second quarter we completed several larger transaction that we expected to close including BS Systems, Procera and several other transactions. Q3 is already off to a good start notably with the closing of the sale of Susquehanna to BB&T which was a signature transaction of thick space, but not just reported for the year. We continue to see strength probably within our M&A business with a strong pipeline of mandated assignments expected to announce a close to the balance of 2015. The next slide reviews our core non-interest expense for the quarter. Excluding adjustments comp and benefits as a percentage of net revenues was at 62% down 63% year ago quarter. Transition pay as a percentage of net revenue stood at 4.2%, non-GAAP non-comp operating expenses were a 135 million or 22.5% of net revenue. The increase over the year ago quarter is related to first an increase in rent due to the increase in number of vocation, second, communication and forward equipment which again is due to our continued expansion efforts and we have significant increase of professional fees due to higher consulting fees of maintaining compliance of regulatory requirements. To give some numbers around these costs for the three months ended June, I'm talking about the regulatory cost primarily in enterprise risk management, internal audit compliance. For the three months ended June 2015 these costs increased 4.1 million for the quarter over the comparable quarter of June 2014, for the six months these costs are up 7.5 million that’s an increase, the delta over 2014. So our number compared to a year ago, we’re spending about $15 million annually in increased cost in risk management, internal audit compliance. Next slide reviews our non-GAAP expenses for the first six months of 2015. Comp benefits was at 62.2% low end of our target of 52 to 64, transition pay was 4.1%, and non-comp OpEx totaled 265 million or 22.8% of net revenue. The next slide shows a result of our reporting segment, while the wealth management revenue increased 12% from the year ago quarter and 4% from the first quarter to a record 343 million. The operating contribution increased 5.5% year-over-year to 94 million but was down 5% in the first quarter. Margins in this sub-segment declined they stood at 27.4, the margins were negatively impacted by the independent contractors from Stern Agee who at this time offer at lower margins than our traditional business, the traditional wealth management business at Stifel. The institutional group hosted net revenues of 259 million and the operating contribution declined 1% last year to 42 million, margins stood at 16.2% and we continue to work through our goal to get those margins into the low 20s. Looking at global wealth management on the next slide, the increase in net revenues from the second quarter of 2014 is primarily attributable to growth in asset management service fees and an increased commissions of investment banking and other revenue. This is offset by a decrease of principle transaction revenues, comp and benefits stood at 57.1 and non-comp operating expenses were 15.5% of net revenue. Looking at Stifel Bank, bank total assets decreased by approximately 500 million quarter-over-quarter and 250 million year-over-year to a total of 5 billion. The decrease was primarily related to the sale of AFS Securities [ph] part of our management of firm wide assets around 10 billion level that triggered DFAs requirements. Gross total loan balances were 2.6 billion up 36% year-over-year, loans to total assets ratio grew at 51% from 35% the same time last year. Net interest margin is stable at 2.5%, 2% compared to 2.46% in the first quarter of 2015. So our NIM is lower than many traditional banks, our aftertax ROA in the bank of 1.40% benefits the efficiencies of being funded by brokerage suites of ops instead of traditional brick and mortar branch network. The bank continues to be possibly exposed to rising interest rates given the generally short effective duration of our bonds and loans, asset quality remained strong. NDLs and NDA were 26 basis points, 13 basis points respectfully, past two loans as a percent of total loans at the end of June were 45 basis points. Looking at our shared national credit review for 2015 more than 70% of the portfolio was reviewed, two of the banks credit were criticized as sub-standard, these loans represented approximately $3 million less than one-half of 1% of the banks shared national credit balances. Security based loans grow the growth in the loan portfolio during the second quarter increased to 12% and 54% year-over-year and stand today at nearly $1 billion that’s 963 million. The security based loans are floating rate with attractive spread at approximately zero risk weighted less than 3% of client AUMs is currently utilizing security based loans we believe provides a lot of runways that has been flat [ph]. Commercial loans increased 1% in the quarter and 34% year-over-year approximately 1.05 billion. Investment portfolio contracted by 693 million in the quarter as a result of 556 million in sales, 80 million in maturities and 54 million in principle paid out. Bond redemptions have run-off funded the loan growth. With respect to Barclay's we believe that the Barclay's impact the bank will include nearly $1 billion of bank loan that will replace some of the banks contracts -- we expect the Barclay's transaction to close before the quarter of this year. The next slide, our institutional group results, for the quarter institutional group revenues were up 1% year-over-year and up 8% sequentially for 259 million. As I have mentioned this increase was due to more robust banking led by fixed income offset by headwinds primarily in trade. Compensation of benefits as a percentage of net revenue was 61.9% the non-comp expense ratio remains high at 21.9 or nearly 22%, this reflects investments we have made in the -- travel, conferences, occupancy, professional services all over last year as we worked through our integrations we expect to bring the staff -- the results of all this is a pretax profit margin of a little over 16%. Looking at our capital structure, total assets at June 30, were 10.1 billion increase from both comparable period above the level that, is not above the level that triggered DFAs because DFAs is based upon average quarterly trailing quarterly revenue. So average consolidated average assets for the quarter were 9.54 billion which was flat with comparable quarter. As we have stated in the past, the finding of total consolidated assets below 10 billion as of the end of the third quarter 2015 beginning in the fourth quarter we will begin to personally grow our balance sheet with an emphasis on risk adjusted return. As such our consolidated trailing fourth quarter average assets may exceed 10 billion as of March 2016 which would require a DFAs stress test submission in 2017 all of which we’re prepared for. Our debt to equity ratio at the end of the quarter was 21.1%, Tier 1 leverage 18.3% and Tier 1 risk based capital ratio is 29.4%. Looking at other financial data at June 30, total stock holders' equity was 2.5 billion and book value per share increased to 36.35. Book value was positively impacted by stock issued for the Stern Agee deal and net income recognized during the quarter offset by the increased in outstanding shares due to the Stern deal, our leverage ratio remained conservative at 3.3 times, advisor headcounts stands at 2823 which reflects new advisors who joined us from Stern Agee both traditional and independent contract. The next slide reviews our deal integration cost, as we have stated on numerous calls these adjustments consists primarily of acquisition related expenses which we believe are duplicative and will be eliminated, stock based compensation and other expenses which we view are not representative of our ongoing business. In the quarter as expected we incurred 23 million in pretax expenses relating to stock based comp, connection with the Stern Agee acquisition as I’ve stated in many calls and in our analysis we view this part of purchase price but it does run through the income statement, as required by GAAP. We had 32 million pretax related to duplicative expenses of which Sterna Agee accounted for 24 million, the remainder of the quarterly estimate was expenses expected to roll off by the second quarter of '16. Now for an update of our recent acquisitions, we completed the Stern deal on June 5th. This deal has exceeded our expectations already, Eric Needleman and his team are leading along with Billy Heinzerling, are leading our integration fixed income and expanding our capabilities to include Stern's Tier 1 buying base with Stifel more traditional middle markets or more historical middle market. With respect to the Barclay's transactions I would say that considering all the circumstances surrounding the Barclay's situation and the various news report prior we announced the deal, we expected a mild advisor attrition which is why our purchase price adjust was the ultimate revenue we achieve. I would say that we have given some ranges for revenue, our expected attrition is expected to be at the high-end of our range but we are very excited about the value we create with the Barclay's addition. We remain on target to close in the mid fourth quarter and will update you on final advisors of revenue projection on our third quarter earnings call. In conclusion we had a record revenue for both the quarter and the first six months of the year, we’re well positioned and continue to gain market share. We remain on track with our acquisition of Barclay's U.S. Wealth Management franchise which will add nicely to our wealth management business. We have work to do on our elevated expense pace and we will continue to deal with that non-comp expenses in appropriate manner. And we will now open up the call for questions, Operator.

[Operator Instructions]. Your first question comes from Chris Harris from Wells Fargo.

So couple of questions on the quarter, one relates to the fixed income business just trying to get a handle on why the decline, I know you have cited a few examples but I also thought you would have a nice contribution from Stern Agee one month results from those guys. So if you can walk through again on the quarter on quarter change decline you saw taking into account the contribution from Stern?

Well I think that first of all we didn’t have quite a month to think it was, missed the first week and I'm not sure that relates to trading days but the fixed income business in general has been rather slow, I mean they are relatively slow and I think that that it actually picked up. In June, we had a nice June -- won't give all the numbers, we had a record revenue month in the month of June which included the Stern Agee Wealth Management and Fixed Income business. But in general I would say that fixed income due to a number of factors with outlook for interest with the feds doing many macro type has resulted in classic summer doldrums, the price starts little early.

Okay, some more of a macro situation and anything really negative going on in one of your units?

Yes, I would not say that it's anything that was there, you know look second quarter versus the first quarter corporate bond, average daily buying is down 10%.

Okay. Then the outlook for capital markets, it sounds like that there is a variety of puts and takes there, I think you decided challenges for BDCs and MLPs [ph] but maybe FIG and tech getting a little bit better as we approach the end of the year. How should we take all that stuff together for trying to think about what year-over-year growth might look like, you mentioned a pipeline gained similar to the prior year, does that mean that very modest growth we should be thinking about in the second half or is it too early to call there, just to know the magnitude of the sort of the BDC MLPs being down versus the other stuff you have kind of building in the pipeline.

I told about yield equity in general are down, MLPs and anything and it will be well-related it's obviously in some flux and for our business I think that the FIG was comparatively slower but I think all businesses, but healthcare is doing well and I would say that if I look at and I would say the results are not par. I don’t see significant growth, it's sector by sector but I would say that our projections are in-line with last year. I don’t see other than it does in healthcare. Any markets that are -- enter the cap race.

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

I think that the message really is is that the Department of Labor's proposal is just broad [indiscernible] on non-managed brokerage economics and that non-managed brokerage accounts generally service the best -- was very well at a lower cost, there is no significant, there is really no discernible difference in performance. I know based on my experience in Stifel and across many firms that I know that brokerage IRAs are path to cost and managed IRAs so I think the message really is is that there is some comp, now people talk about is comp, if it doesn’t come out in the evening chart and it's not informant so where does it add -- the rule is very illuminatus and is going to add significant cost and in many ways I think at this rate, the traditional brokerage model serves small investors so well over so many years and that’s the message deaf ears or open ears I don’t know but I feel that this is important enough that I want to participate in the debate.

The next question is from Hugh Miller from Macquarie.

Hi, good afternoon, thanks for taking my questions. So I guess one on, you commented about the rising in compliance and monitoring type of cost at about $4 million a quarter. Can you give us a sense as that how much of that is really driven by preliminary steps and actions that are being taken that consider the world under the new fiduciary standard? Is that really playing a factor in that increase?

No, look those are completely different topics Hugh. We comply with – we have managed arrays that are subject to the fiduciary standard, we're talking about what happens to traditional brokerage accounts and what would happen if they were either transferred. If every transferred to a model, our revenues would go up but I suspect there is a lot more to that analysis than just that. But that has nothing to do with our elevated cost, our elevated cost are because we want to be regulatory compliant across risk management, internal audit, compliance and all those functions and the requirements as being a bank holding company under Frank [ph] versus what they were as a traditional brokerage firm, they didn't have a bank are invented themselves significantly higher of – and coupled with that when you cross $10 million you get the deal task requirements. The long and the short of it is, that I feel that we have been a purposely being preparing this organizations infrastructure so that we do not have any issues there and we've been spending the money first so that we can build the balance sheet coming. And I feel good about that but I don't – what I did – what I understand is that getting all the audits and the outsourcing of the consultant from IT across the Board and significant, we're not alone in that and then I would think that our annual expenses per $10 billion banks being in $10 million to $15 million is in line with that. But one thing we don't have to deal with that the other financial situations just – we don't have a big impact resulting from debt but our cost are inline and we'll need to grow into our infrastructure in terms of balance sheet, starting in the fourth quarter.

Okay, that's very helpful and I guess sticking with the theme of the bank, and as we consider some of the security sales you guys made during the quarter, how should we think about the impact on the asset sensitivity of the overall company just given the new composition of the interest earning asset mix?

I think – I don't think it really changed that much in way – to the extent that we looked at the overall mix, our growth was then security based loans which are primarily floating rate in and other sales. And we were, our asset good growth because of what came despite the asset sales. I would say that across the Board the interest rate sensitivity really has changed.

Okay, that's helpful. And then you kind of attenuated some of the discussion about the margins in the global off management segment and how it's been impacted a lit bit by the addition of the Sterne Agee independent reps, can you talk to us about how you're viewing their productivity levels and how you envision – maybe an enhancement of those production overtime, and how your – what the plan of attack is in order to enhance the margins there with the acquisition?

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

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

Look, I'm always reluctant taking results that doubled last year's results and then annualizing notes for whatever reason, maybe just carve – which you should use on earnings probably but the point is, I don't want to look forward, we had a great six months, what it reflects is the investments that we've made in stoning young bird in deal overall, in merging capital and hiring of the number of people that we did in Pulp Net [ph]. Our public finance business is a great business and I can see us continuing to gain market share but we had a very good six months and I'm not – I don't want to try to predict the next months or so much that is rate and in so many variables that go into that.

Sure. I completely understand, thanks for your time.

The next question is from Devin Ryan from JMP Securities.

Thanks, good afternoon, Ron.

Hey, Devin.

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

Well, I think we've been consistent as to our commentary regarding the asset growth at consolidated level and that we consistently targeted that we would look toward the fourth quarter of this year as something that would do that. Now that growth will be dependent upon market conditions at that time, and spreads and a number of things, we're not just going to grow just to grow, we'd like to – I always want to be the caveat that the assets that we put on the banks balance sheet have appropriate risk adjusted return characteristics. But with that we experienced significant 20% to 30% growth in the bank, uptill this point we went a holding pattern and what I see is opportunities to grow bank assets, if it were there are meaningful and good. And so we're not building out this infrastructure in this uncontrolled environment to stay at $10 billion, I can tell you that, that's not the plan. So I think past comments are true today and I'm not modifying those and nor am I modifying the timeframe. With respect to your question about the dividend, there has been a number of things that have presented themselves, obviously the Sterne Agee deal and in mid-south to Barclays deal which is a large transaction which will have cash component of the fourth quarter, all of which are part of our plan to properly leverage the company, a 29% Tier 1 risk rating is not an appropriate amount of leverage and we've talked about to leveraging that appropriately. And with what we have today, I'll stay with my comment that we'll always look at both, numerator and denominator of a leverage equation but are focusing on the growth that we're seeing We have a lot of growth initiatives, maybe now it's many years ever that have seen that can bode properly, use capital employed, poper returns on capital, and that certainly has to be more excited about growing shareholder value than dealing with reducing the capital base, either through share repurchases or otherwise with the landscapes changed and what we view as our opportunities to better.

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

Yes, look, I think we – I don't know if it was that material we did have some gains, some loan origination because of growth in the loan but really we were attempting to manage our average assets for the quarter and manage that in the guidelines that we've said and we had to model bringing on Sterne Agee onto a balance sheet which was near $10 billion. So looking at the securities which are the most liquid part of the bank was the way we looked at that.

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

This seals the sufficient side that the margins would be consistent. Obviously like the same margins on more revenue, and we're looking at – but as people don't come, you don't pay the transition pay, there is a number of moving parts but I'm excited about the Barclays transaction, I'm excited about the people, I'm really excited about what it does for overall wealth platform from a competition perspective as to our ability to compete in the advisory space. I've said before and I'll say again, I don't – I'm not elaborately discuss necessarily detail parts of the agreement but I fully expect this transaction – see no reason why this transaction would not close in the fourth quarter of this year.

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

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

Got it, I appreciate it, I understand it's a moving target. Thanks for taking my questions, Ron.

Sure.

The next question is from Christian Bold [ph] with Credit Suisse.

Good afternoon. Just another question on fixed income trading. You've taken a contrarian view in building that business despite some of the macro headwinds. Just curious, any changes to that view and moreover so like to get from you is, maybe sort of quantitative revenue targets you have for that business in a more normal quarter?

I don't know that I provided those kind of numbers Christian, I think you can look at our historical numbers, I – it's not my practice and that's what I want to start now with providing revenue guidance if you will. To be – fixed income business is his day, get businesses here to stay and it's going to a cyclical option down as we like to build all businesses sales and contrarian manner and will continue to do that. I feel that the business for a variety of macro reasons is muted relative to what we believe it can be when there is more clarity as to interest rate policy, both in the U.S. and in the world and frankly, what might be the result of the shape of the yield curve. I think right now there is a lot of uncertainty and I think that's pointing out in the general flow business which I think is subdued offset by lot of debt issuance by corporation. So – look I like the business, we're going to continue to invest in the business, we think it's a great business to be in but like all businesses in the capital markets are in wealth management, general it tends to be cyclical and driven by factors that are not always in our control.

Okay, that's helpful. And then maybe on wealth management, you mentioned some of the lengthened products underpenetrated by 30% of AUM. I'm curious as to maybe what you think is a more normal level for penetration how you're going to about increasing that penetration and then what kind of yields you're getting on that product relative to against overall bank?

First of all, security banks loans are an attractive product from a risk weighting perspective, but generally zero based risk weighting. They are quarter of our business and that we're dealing with clients and we believe that as we continue to market this and we're not – we've not been aggressively marketing it again because of our limitations around overall balance sheet which have been in place for couple of years. But overall, a 3% penetration on security based loans into our overall assets under management I feel and have stated in the past provides a lot of runway for growth in that asset class. And it's an asset class we both like, understand and provides very attractive risk adjusted returns. So, I again believe that we have a lot of – what I would term organic growth capabilities within security based lending.

Okay but there is no current level you're aiming to achieve or any kind of numbers around how much it will grow?

Well, there is no numbers that I'm going to give on this call that has anything to do with any kind of projection because I haven't done that in 30 years and don't attempt to start now. I just – I'm not trying to be difficult about it, I just – we don't like doing forward projections.

Okay. Thanks for taking my questions.

And the next question is from Dan Paris from Goldman Sachs.

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

Look, we're a month and a half in to it or maybe two months into it, and I think that the revenue contribution that we have seen is within the range that we provided in, so we've been pleased with it, we've had tremendous acceptance of the platform on the wealth management side, and the fixed income business I think is as previously stated is tapped but not tapped because of the acquisition tapped, because of macro events in the marketplace. So I'm pleased with where we are in the Sterne Agee integration, all of the wealth management offices were fully converted onto our platform as with fixed income, the traditional wealth management. Fixed income was done right on the date of close frankly and wealth management in early July. So the integration has gone well, the technology has gone well, and the revenue to this point has been within our range of expectations. So that's good because normally, Dan, at this time revenues in the initial stages are below where you think that will ultimately shake out because of the training and uncertainty and just general – what happens when you bring people on this one. In this case the revenue transfer, at least to today has been pleasing on the upside.

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

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

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

You're talking on the institutional side?

Yes.

Yes, I mean the institutional side is – if you go back before we started making all of our investments, starting with Thomas Wiesel and then Stone & Young, all the things that have impacted the institutional side of the business – we continue to invest, we end up with many duplicative expenses that we've run to non-corporate period of time but then we don't. At some point they are part of your floor and it just continue to growth in that area, we've made a lot of investments. I would say that we need to look hard at trading cost and some of our marketing costs as we try to build that brand, we have made significant investments in conferences and a number of things that make the non-comp operating expenses high. I would say that at some point in time when you could investing in that brand and what we've been doing there which I'm pleased with, you can – the non-comp operating expenses are more – you can kind of ease your – it's kind of like cutting advertising on, I want to be careful because we're doing very well in gaining market share in a business which now – and the institutional business is in access of $1 billion, and we want to continue to gain market share. So part of it is investment, and part of it is the cost that creep with doing acquisitions. All that said and done, longer term, our target is not 16% margins in the institutional business.

Understood, that's helpful. Thanks for taking my questions.

The next question is from Michael Wong from Morningstar.

Good afternoon.

Hey, Michael.

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

No, I would say that as I said – and I don't like to characterize what happened in the trading accounts, onetime either way, we want to be part of the business but the trading gains and losses in our – through our principal transactions quarter-over-quarter, so the second quarter of 2015 versus the second quarter of 2014 were down $14.5 million and that is significant, and you see it in the line item called principal transactions. And is it onetime, no. Is it below what I believe a normal run rate is for that line item, yes. I'll leave you to do the math.

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

Well, we've gone from – I forget back in the time, 15% to 20% loan to assets over 2015, now which is what we've said we were going to do. I would like to believe that at a minimum, we can grow loans and investments at least the pro forma rate which is 50-50. Again, it's going to be dependent on market conditions and what if you can put investments on, because we do have cash, we can sweep to the bank but can you put investments on, hedge the interest rate risk and achieve acceptable returns on allocated capital, that's market dependent at the time but I would – I see today our capabilities for originating loans and underwriting loans much more than what it was even a few years ago. So, I would like to – as I said, between C&I and security based loans that should be part of our bank growth strategy. Investments will play their part too but we're not going to look at doing a wholesale investment portfolio.

Okay, thank you.

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

Well, I would say that we've been busy and I believe that we continue on our long state of mission of building a premier wealth management investment banking firm. The opportunities that our firm is seeing today are robust and provide a sample opportunity. The sort of counter balancing factor is the world at some uncertainty, abroad, China, still deflationary risks and what's going to happen in the U.S. in terms of policy and interest rates are something that we're mindful of but through it all, I appreciate the interest people have, excited about our prospects. And look forward to updating everyone on our third quarter, and congratulations to all my partners for a record second quarter. Thank you and have a good day.

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