Good evening. My name is Christy and I'll be your conference operator today. At this time, I would like to welcome everyone to the Stifel Financial Corp Second Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. [Operator Instructions] Thank you. I would now to turn the call over to Jim Zemlyak, you may begin.

Thank you, Christy. Good afternoon. This is Jim Zemlyak, CFO of Stifel. I would like to welcome everyone to our conference call today to discuss our second quarter 2016 financial results. Please note that this conference call is recorded. If you'd like a copy of today's presentation, you may download the slides from our website at www.stifel.com. Before we begin today's call, I'd like to remind the 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; the investment banking and brokerage industries; our objectives and results; and also may include our belief regarding the effects 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 GAAP results. To the extent we discuss non-GAAP measures; the reconciliation to GAAP is available on our website. 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 results of the quarterly reports on 10-Q. I will now turn the call over to the Chairman and CEO of Stifel, Ron Kruszewski.

Jim, you all right?

Fairly.

Thanks. Sit right next to me, I assure you as well. Thanks, Jim, and good afternoon, everyone – have some water. Thank you, everyone, and thank you for taking time to listen to our second quarter 2016 results. Earlier this afternoon we released our press release with our second quarter results and posted a slide deck on our website. First, I'll run through our financial results for the quarter, as well as the continued progress we made in growing our balance sheet. I will then discuss some of the key questions impacting our business such as non-core expense runoff, the Department of Labor Rule, our recent asset sale and capital rate before opening up the call to questions. So with that, let's start off with my opening comments and some of the highlights for the quarter. We're pleased with the results in the second quarter as we posted a second consecutive quarter of record revenue and increased adjusted EPS by 21% sequentially despite unless an ideal market environment. The diversity of our business model was again illustrated by a rebound in investment banking activity and growth in our bank which more than offset the sequential decline in brokerage revenue from the first quarter's record level. Although the market environment remains challenged at macro level advanced in the first half of 2016 led spikes and volatility that weighed on investor and corporate activity, we believe that Stifel remains well positioned to capitalize as markets improve. In the past month we have pulled off the lower margin legacy businesses from the Sterne Agee acquisition, raised preferred equity and refinanced higher cost debt. These actions have further strengthened our already strong balance sheet to facilitate our continuous efforts to optimize our capital base and increase shareholder returns. In terms of the results from…

[Operator Instructions] Your first question comes from the line of Christian Bolu from Credit Suisse. Your line is open.

Good afternoon, Ron. Thanks for taking my question.

Hey, Christian.

Just a couple of questions on the bank. On the investments securities line, I think you mentioned you're getting about 2% type yields on asset that have about two-year duration. Just give us a bit more detail on what you're invested in? And then just talk also about the credit dynamics in the loan book, really, really strong loan growth but I believe loan losses were actually down. So, just a bit of dynamics there and how should we think about progressing going forward?

I think, what we've been doing is what we've been doing in the past. We – our portfolio consists of agency MBS/CLO corporate bond. We've purchased some securities and we purchase some loans, all of which are at attractive risk adjusted returns. I think some of that question can be in some of the cases I believe that when you purchase loan, purchasing them at effectively fair value versus originating where you put some provision on. But that's not that material, but we have overall what you'll see is, what we've always said in the bank is that we believe that with our low funding base and our efficient model, we can generate 50% ROEs by not taking a lot of risk and that's evident in our NIM. So, I don't – there is nothing really that change in the quarter other than the fact that as I said previously, we had really throttled our growth for a few years and this is just indicating that we can grow and grow with acceptable return on equity.

Okay. I only ask because I guess, the yields a little higher than somewhat we have comparison, but I hear you. Maybe just on how you pay or how you compensate on bank related earnings? I guess, the comp ratio is higher year-over-year thus by the significant increase in interest revenues. So how do you think about compensation for that line?

I -- that's a fair question. I mean, compensation is all things being equal, if we were operating what I felt was more full capacity of the investment bank, which we're not. I mean, I'm very pleased with record revenue, but we'll tell you that in this environment all things being equal. I'm actually disappointed with where our revenue is. We've had – it's a very difficult environment and despite our record revenue, we can be higher. So, as we have left revenue, our expense ratio might otherwise be higher. Of course, net interest income, which carries a much lower comp rates will drive a bit lower. So I don't -- I can't give you the components, but I understand what you're asking and if we were operating at a more what I would view, robust environment on the non-interest income, the operating revenue side, our comp ratio would be lower.

Okay. And then just trying to understand how much more of the potential balance sheet side, we know you target on the 18 billion, but just -- can you just let us know how much client cash you still have off balance sheet today?

Well, at this point, without giving -- I would say that we have more than we can deploy right now, okay. I mean, to get to 18 billion and we've obviously looking forward, but we have customer deposit core's as I view with our – it's our clients sweep deposits. We have more than we can utilize right now, Christian.

Okay. And just my final question maybe just have taken a step back on acquisitions, when do you look at the contribution of maybe Sterne and Barclays post-acquisition, maybe any lessons learned or does it in any way change the way you think about M&A going forward?

No. I would say that, as I have said in the Sterne deal. As I have said at the time we did the deal. We wanted the traditional branch offices. We wanted the fixed income of businesses that really supplemented and improved our credit business. We did not want the mortgage business. We sold it. We did not want the institutional equity business. We sold it. And we looked at the independent clearing with optionality. Since we have done that deal some things have changed on the regulatory front that have changed our overall view towards those businesses. We sold them well within our models to how we value them. So I don't know that I am not sure what was learned. I think what you can take away and what our investors can take away from this is that we evaluate all of our businesses on risk-adjusted returns. We are not looking just to grow for growth's sake. If we don't think a business that fits our core objectives we will do what we have done in the past and that is in this case we divested of that business. As I have said, the potential of the Department of Labor of Rule I think has sort of a disproportionate impact potentially on the independent business and that certainly weighed into our thought process plus the business was needed restructuring with what we had was a low margin business. So we just felt that with everything we were doing we would be better to redeploy the capital and this transaction is accretive to what we're doing going forward. As it relates to Barclays, that's a great transaction. Almost all of that transaction is the purchase price is in compensation expense. Some people don't like that we transaction – do things by doing compensation expense instead of purchase price, but that's how we do it and we would do it again, so that effectively the purchase price is retentive over eight to nine years and the only thing that I've learned from that transaction as I would like to do it again.

Okay. I guess maybe just – do you have a number for what the – when you look at the contribution today of those deals what the risk adjusted returns are?

Of course we do and I think that while I don't have them here you can go back and when we did the Sterne Agee deal we showed the contribution and what we expected on our risk adjusted – return on investment, return on Investment including any non-GAAP charges that we had. We include that in our investment. I would say that as I said of Sterne Agee the fixed income and traditional wealth management businesses are performing very good on a relevant basis. The markets are difficult and obviously we divested the businesses that we did. We also disclosed our effective purchase price of Barclays which included what we paid to seller and what we paid for retention. In stock-based comp that's running through, you can go back and look at that slide. I would say that business is performing with the exception that there and elsewhere the, the calendar – the equity calendar, the last thereof of the syndicate has impacted the same-store sales that you will both in that business and overall on Stifel but that's more market driven than it is any client engagement or any other performance issues, I just that there are very little going on in equity capital market.

Okay. I appreciate the detail. That's it. Thank you.

You're welcome.

Our next question comes from the line of Steven Chubak from Nomura. Your line is open.

Hi, good afternoon.

Hey, Steven.

Ron, just had a follow-up relating to Christians earlier question about some of the NIM guidance and recognized there are a lot of different moving parts to this quarter. But I'm just wondering how we should think about the NIM outlook or trajectory based on the current forward curve given that the FHLB deposits have been repaid and assuming that some of the other variables you mentioned the 2% reinvestment yield and the targeted 50-50 mix of loans versus securities you talked about before is maintained.

Yeah. Well, I would think that – I would that as we continue to grow I would think that 50-50 as it becomes more loans and NIM will expand by definition and I would say that as it relates to this quarter, all I will really say is, I believe the NIM was compressed this quarter for the reasons I gave you, and looking forward, I would expect it to go back to what it was more historically and that historical NIM is reflective of our loan funding costs, our hedged strategy and our conservative viewpoint both on loans and on investment. But for the quarter they were factors which I have discussed that compressed the NIM by 13 basis points, if I remember what I said and as I said 6 of that was – that we had a lot of growth and we ended up funding to some of that growth with advanced, to Sweep deposits, although we did move those Sweep deposits towards the end of the quarter. Not an immediate switch but from funding perspective. So I think, look I think the NIM was compressed and it will go back to more historical levels and I think we will continue to grow our balance sheet.

Got it. And thinking about the capacity to onboard some additional deposit, I know you were speaking about that earlier, I noted that given some of the capital constraints that might preclude you from doing so, but thinking about optimizing your capital structure and the fact that you guys actually issued some qualifying preferreds in the quarter, how are you thinking about optimizing that mix of common versus preferred's? And would you may be use the additional preferred issuance as a vehicle for expanding balance sheet, possibly beyond that $18 billion interim target.

Look. First of all I don't think I said we were constrained. I want to be clear, I didn't mean to imply, if I did that we were constrained in balance sheet growth by our capital ratios. And in fact, we are not at our target level what happens with that is that, first of all as it relates to that growth we're generating a lot of cash. We are generating a lot of earnings and we have a lot of deposit. So I can see if you put all of those together, we are not constraint with balance sheet growth. The flipside of that is to the extent that we decide that a better use of capital as repurchase shares that obviously impacts our capital clearly. But we have been growing and I don't feel constrained by the capital ratios at this point, nor do I feel constrained by funding constraints. As it relates to the preferred it is really pretty simple math and that as we continue to leverage and if you look at it just from a perspective of whether or not we have repurchased shares or we use that preferred which is tier one capital, as you know, when we look at our capital structure, we just need to beat the hurdle rate of preferred interest rate. And so, we believe that that preferred with that coupon helps us leverage our ROE to come in. So, it is really just a component of tier one capital. And it is a way to trade, if you will returns on tier one capital which we believe will be above the fixed change yield on the preferred.

Got it. And just one more follow-up for me – actually maybe switching gears for a moment to the fixed income side. You managed to put together a string of two to three really solid quarters in a row, the fee is running in that $75 million to $85 million a quarter range. And I am just wondering whether that's – is a reasonable expectation going forward. But also, how we should think about seasonality in your business since, I know, it's quite a bit different just in terms of the mix and how much flow versus derivative compared to some of your ballots racket peers?

Yeah. Well first, we have never been really a manufacturer and a – where we are driving revenues through securitization and buying and packaging and doing that. Our business is a more traditional by servicing clients business. I view the fixed income market and a lot of people who question it the way I look at it. The fixed income market has expanded substantially. Just look at corporate issuance over the last four to five years. Corporate bond outstanding are what up 400% yet the industry is reducing capacity to service that. We have a talented group of people across the spectrum of both race and credit. And at one point sort of the tailwind of declining rates might be replaced and eventually hopefully will be replaced with rates rise. But the need for having what we built when the flow is reversed, the company is issuing bond fund buy that's easy, bond fund sell and you got to place that that's going to enhance what we have built on the sales and trading sites. So we like what we've done and we put some good quarters together. I think it's a highly fragmented market where people are pulling back and so we like our prospects. As it relates to muni finance, a little bit different story, muni finance because of their rates, muni finance is a business that many could argue if near cyclical high because of refinancing activity. I certainly wouldn't argue with that. But as I look forward, what I see is the potential for policy-decision at the Fed level which encourages to various means, infrastructures spend I think that's actually everyone saying that and so to the extent infrastructure spend may then help the muni finance business as refi by definition go away. So overall I think our fixed income business is in great shape. We have great business. We're gaining market share. We don't take a lot of risks.

Thanks Ron, for the helpful detail. Appreciate it.

You are welcome.

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

Good afternoon. Thanks for taking my questions. First, I appreciate the new breakdown you gave on the adjustments on the expense side, but hoping you can elaborate on a couple of items. One, just what exactly are the duplicate costs in compensation? And then on that same topic is why have duplicate costs for non-comp grown quarter-over-quarter, just appreciate some clarity on both of those?

Yes, well, as we disclosed the biggest item is the stock-based comp that the way we structure transactions is that when we determine a value for a deal, and you have to go back and look at our analysis of Barclays that I don't have it in front of me now. But we said that of that deal that they would stocks-based compensation of approximately $60 million that we would instead of giving to the seller, we would give to our new partners and then we run that through a fact-based comp as a charge. So that's the stock base comp. Let me look in the slide, are you asking on the slide about the duplicate comp, the $3.3 million?

Yes, $3.3 million.

Yes. That's really related to the Sterne business which we were converting. So we had duplicate comp for running to operations centers that we built in the purchase price, but then we expect it to go away. You won't see that going forward. You won't see that going forward anymore. We still that business so that's gone.

Okay. And then just that's what drove the increase in the non-comp, business line the 113? The same Sterne business?

Yes. Again, if you look, this is consistent and will be consistent, we projected these costs and those were the expenses that were acquisition related that we are intended to go away as we fully integrated those businesses and the fact that. In this case, we changed our mind as related to these last businesses and we sold them so they go back away.

Okay. Got it. And then maybe a two part question, maybe just help on the modeling. But could you give us a little bit sense of exactly better sense of exactly when you expect the Sterne correspondent business clearing, the sale to close in 3Q?

It closed.

Okay. So following up on that, if I back out some of the non-comp costs from that – you are saying that was not included in core? So your core 150 eight of the adjusted non-comp did not include anything from Q2 perspective from the correspondent business?

Well, no, again. What we do, what we do is that we look at, as I've said on a core basis with what we expected to keep after we eliminated the duplicate expenses, the Sterne business contributed about $100 million of revenue and was marginally profitable on a quarter basis. It was a low-margin business and so we haven't disclosed what the non-comp OpEx in that business was. But I'm telling you that it was marginally profitable. And we do disclose the non-comp expenses that primarily relates to the duplicate operating center that we were going to close. And so going forward I would say that you will be on a quarterly basis of about $25 million in revenue go away, a little bit, a very little core profitability, but more than offset by the fact that we had capital deployed down there and we will redeploy that capital net, net the sum of all of that's accretive .

Okay. Thanks, that's actually very helpful. And then just following up on the guidance for non-comp expenses on a quarter basis, next quarter to be in the -- I think if I heard you right 155 to 165 range. Can you just talk about what's driving the quarter-over-quarter increase?

Well, we are at 158, right and I think that if you look at these things and there are items, as I said, there is items that can fluctuate that are not is easily predictable. Take loan loss provisions depending on how and what you do in C&I loans and how that runs through non-core expenses or provision. So I am comfortable with a range. We have a little bit of downside because we do save some expenses on Sterne and we have an upside but, I would rather have a little bit more of range here than trying to have more precision where precision does not exist, and that's that. So I'm trying to give you the best I can.

Okay. Appreciate the color. Thanks for taking my questions.

Our next question comes from the line of Chris Harris from Wells Fargo. Your line is open.

Hey, good evening. Question about the bank, we haven't really seen a full credit cycle there yet. I think you guys had less than $200 million or so of loans there back in 2007. So really just wondering how you feel like the bank is positioned if we do get a turn and the cycle. And then in particular, I would like to hear how your C&I loan book is positioned for that kind of environment.

Well I think that as evidenced again by the NIM and where we take credit risks, I think we are well positioned. We went through a pretty severe energy cycle here as one, so it isn't that we haven't had any credit events since 2009. We positioned the bank to be very high quality both our investment portfolio is very heavily weighted toward agency type portfolios. So, you know, hopefully take great credit risk and the U.S. government is AAA, and then we hedged interest rate risk and so that's how we look at it and we have been consistent on that. The C&I book, as I look at it, we have grown, we have been over – we grow from 200 million to 9 billion, and we've had the bank for nearly eight years. So there is some history there. I think we are well positioned. I am not going to give out a prediction on that. I'll look at our NPLs and our nonperforming assets and look at it historically, and you know that's what we would like to believe, but I am not sure what the next credit cycle or credit crisis is going to look like, so I am not going to try to predict it. But I believe relatively we have a very conservative balance sheet.

Got you. Okay. And then in the advisory business, if we just look at your productivity ratios, they are down quite a lot year-on-year. And it is just not Stifel phenomenon, this is sort of happening everywhere, and a lot of the explanation we've getting is sort of market oriented reasons, but I'm wondering if you could expand on that? Whether you think that's the only reason or whether you think so the regulatory overhang with the DOL is having an impact on the advisor productivity business. You just look at the numbers and you have to go all the way back to 2009 to see this kind of productivity numbers. So it just seems like really a pretty big overhang just from recent market events, so maybe you could expand a little on that.

Look. Think that – I don't know what numbers you are looking at. I don't know how you are calculating it. But what I will say to you is that if you look at what we've disclosed, one of the things for us and one of the reasons we looked at it, is the average productivity in the independent business was significantly below the traditional business. So, you know, the increase that you saw as it related to the Sterne independence and the number of people we added, and then we have said that we sort of – we divested of relative to the $25 million quarterly revenue that I gave you is going to give you a big chunk of what you are talking about. DOL is really not having an impact. I think that that rule is still being digested. There's – as it relates to getting down to the advisor level, I doubt that there would be very many firms at all that would say that the DOL is impacting productivity at the advisor level, because they're not even know – knowing about some of the things that are going to be done. It's – we're like everyone, well along in our analysis and have plans. But I don't believe that impacted advisor productivity or client engagement in any measurable way at all. And overall, though, I would tell you that if the industry and maybe us, if you looked at it, if average production in traditional is down to 5% to 8%, 9%, that's reflective of the market. And know that's sort of year-over-year. I don't really know what it was back and I believe that productivity certainly up compared 2010. But I would look at your numbers after you exclude the independent contractor impact on productivity per advisor.

Okay. Helpful. Thank you.

Our last question comes from the line of Devin Ryan from JMP Securities. Your line is open.

Hey. Good evening, Ron. How are you?

Hey, Devin.

Maybe one here on Brexit. Obviously, the U.K. and Europe are smaller businesses for Stifel today, but you've done a couple acquisitions over there with Oriel and ISM in recent years. So just trying to think about – is that an area that as maybe your peers are not investing or retrenching where it kind of in your contrarian way may actually look to get bigger? Or is it just a backdrop where you say, we're actually happy that Europe, or U.K. is not a bigger driver of our overall business, usual account over the next year or couple of years?

Dev, I hesitate to even ever say that I like to grow when other people aren't growing. That doesn't seem to be path of the comment. But I do and we are contrarian. And I view – my view on Brexit is, first of all, is it even going to happened, and we can leave that for other people in terms of what it actually means in both, article – the article and actually do it, I think there's a lot going on over there. What it means for is interesting and that – what is means for us is that our business and one of which is ISM, Oriel, Knight and our distribution, primarily to a lot of U.K. accounts to the UK and to London in particular. So to the extent that Brexit overall causes a decline in economic activity in the UK in and of itself, that's our biggest impact is because we're focused on that but the other, the way I look at it and what I keep hearing from everyone and that would be really don't look at London as a passport into Europe and we don't have a bunch of people sitting in London that are really doing business elsewhere. What I think might happen is that there may be some real opportunity for us as people consider what they are going to do their. So it's not a big business for us. It's profitable but net-net I would look at that market as actually from where I sit today, I would look at it as more opportunity than something I would be concerned about.

Got it. That's helpful. And then just on the DOL, I understand complicated rule and still being digested and I know we're still waiting from some kind of follow-up clarification from the DOL, but you spoke to having plans. And so just trying to think about we're getting to a point where I suspect we're going to start to see real action from companies, we haven't seen heck a lot of yet. So I'm not sure if you can share anything else around kind of what you are thinking about is the next steps internally, and then if there is any you can share around what are those plans entail? That would be very helpful.

You know, Devin, I am not, I am really not prepared to at least discuss on an earnings call, you know, execution and implementation plans around DOL other than to say you know we've got teams looking at this. We're contact with many industry participants. You know more lawyers than I can count in some cases. It's a complicated rule that the devil is always in the details when you start looking at these things. And I think we in the industry are digesting it, I feel that we do have a plan that will provide our clients and our advisors the ability to properly navigate this rule when it's required to be done so which is you know April and then many of the rules in many ways in January of 2018. So I would tell you I am confident with our strategy. I'm confident with our position, but specifics, I am not prepared to talk about.

Okay. I figured I would try. Thanks a lot, Ron. Appreciate it.

There are no further questions in queue at this time. I will turn the call back over to our presenters for any closing remarks.

Okay, well, I would say that all things considered, what we have talked about at the end of last year which was that we would like all of our shareholders to look at us as we continued and levered our balance sheet. You will see the earnings potential that we have today, despite the fact that I still believe that the overall market environment is quite challenging, that our revenue potential for what we built is higher. I still believe that you will see the continued earnings power of the company as markets improve. And even as they are today, they certainly are acceptable. But we will continue to properly lever our balance sheet. We will continue to effectively look at our capital levels both from a share repurchase and leveraging perspective. We have shown how and we will continue to show how our core and our – I mean, our adjusted and our GAAP numbers come together. And we will continue to do what we've done for a long time which is to build a premier investment bank and wealth management firm and that is our strategy. And I thank you for your interest. And look forward to talking to you next quarter. Have a good evening.

Ladies and gentlemen this does conclude today's conference call. Thank you for joining us today. You may now disconnect you lines.