Jim Zemlyak - CFO Ron Kruszewski - Chairman and CEO.

Devin Ryan - JMP Securites Chris Harris - Wells Fargo Steven Chubak - Nomura Securities Hugh Miller - Sidoti Douglas Sipkin - Susquehanna.

Good morning. My name is Shelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Second Quarter 2014 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Jim Zemlyak, you may begin your conference..

Thank you, operator. Good morning I’m Jim Zemlyak the CFO of Stifel. I’d like to welcome everyone to our conference call today to discuss our second quarter 2014 financial 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 the company’s website at www.stifel.com.

Before we begin today’s call, we’d 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 and regulatory market conditions, investment banking and brokerage industries, our objectives and results and also may include our belief regarding the effect of various legal proceedings, management’s expectations, our liquidity and funding sources, counterparty credit risks or other similar matters.

As such, they’re subject to risks, uncertainties and other factors that may cause actual future results to differ materially from those discussed in these 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 www.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 Form 10-K and MD&A of results in the company’s quarterly reports on Form 10-Q.

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

Thank you, Jim, good morning everyone. We are pleased with the performance of our private clients and investment banking groups who contributed nicely to our results in the second quarter, in what was otherwise what I believe is a challenging market environment.

Our global wealth management segment posted record net revenues and record pretax operating contributions in the quarter, investment banking benefited from strong equity capital raising and advisory activity and our institutional brokerage results reflect what was really significantly lower industry volume.

Through the second quarter we announced two acquisitions, Oriel Securities, a London-based stock brokering and investment banking firm, this will build out our institutional businesses already underway in London.

And in June we announced the acquisition of Legg Mason investment council, which will be complementary to our high network private client group. Before I turn to our results I’d like to add a little color on the operating environment during the quarter. The second quarter was in my opinion a quarter of market complacency.

While the S&P 500 hit new high, up 5% in the first quarter and 6% for the year the tenured yield decreased 19 basis points, volatility measured by the VIX declined 17% and equity average payment values declined 13% in the first quarter of 2014. Inflows to equity funds also slowed to $11 billion down from $56 billion in the first quarter.

However, this same complacency coupled with low volatility did help equity capital rate from both the dollar value as on the industry book dollar value and deal count was up year-over-year and quarter-over-quarter our result reflect this trend.

The reverse however was true for debt capital rate which was up and above comparable periods for the industry.

For the industry another bright spot was announced M&A, this bodes well for future period and you know looking at the yield on the S&P 500 and the look at the risk premium the yield on the S&P 500 was 551 and if you take away the tenure that equates to about a 3% risk premium. This compared to a risk premium of 396 last year.

Turning to our financial results for the quarter, Stifel reported GAAP net revenues of $560 million, which is our second best quarter in history, EPS from continuing operations totaled $0.58 per diluted share and on a non-GAAP basis which excludes our merger related expenses, diluted EPS was $0.68, on net income of $51.3 million.

This compares to net income of $45 million or $0.61 per diluted share last year which is up 11.5%. Core non-comp operating expenses came in above our estimated range, came in at a $122.8 million, I’ll provide some more details in a bit and our effective non-GAAP effective tax rate was 39.6.

Pre-tax margins, non-GAAP again hit our target at 15.1%, all-in-all a solid revenue quarter and first half of the year.

You know looking at the six months our net revenue for the first six months were a record 1.1 billion, earnings per share from continuing ops was $1.20 per share and on a non-GAAP basis, our diluted EPS was a $1.37, that was up 15% from the $1.19 in the comparable period with comparable six months last year.

For the first six months, our comp and benefits stood at 62.9% and our non-GAAP operating expenses were 21.8% for a pre-tax operating margin of 15.3%.

Looking at our revenues for the quarter, commission revenues decreased 1% to $153 million, principal transactions were up 13% to $126 million and that was due to an increase in, mostly an increase in fixed income institutional brokerage activity which was primarily helped by our Knight Capital fixed income business.

Investment banking had a very good quarter, increased 19% to a 142 million. The increase was a result of an increase in advisory revenues and equity and fixed income capital raising, it reflects really the results in investment banking reflects dividend that we’re now starting to get from our investments in this area.

Asset management service fees increased 24% to $94 million; this increase is due to higher value of fee-based accounts, as a result the market appreciation and net new client assets. Net interest income increased 84% to $37 million a result of continued growth and interest earning assets at Stifel Bank.

Turning to brokerage revenues, looking at the global wealth, brokerage revenues were essentially flat quarter-over-quarter and year-over-year, institutional equity brokerage declined 3% quarter over quarter but we’re up 13% for the six months against really a backdrop of flat average daily volumes ’14 versus ’13, so we’re pleased with those results.

Institutional fixed income increased 33% mainly due as I said before our contributions from, the team from Knight. Total institutional brokerage revenues in total increased 11% to $117 million and 4.6% for the six months.

Looking at investment banking equity capital raising increased 23%, while fixed income decreased 13% from the year ago quarter, the fixed income decrease reflects a difficult environment in public finance.

Advisory fees were up 25% and as a result total investment banking increased 19% a great quarter to $142 million is up 40% year-over-year to $274 million. We are very pleased with our banking quarter, which is our second best revenue quarter in our history. Our results show a balance between advisory and capital markets revenues.

We’re making progress in building our best-in-class capability. And as I said we’re starting to see payoffs from our investments of the past few years.

I should note that looking in our FIG business, KBW had its best quarter since the first quarter of 2011, KBW advised on 7 of the top 10 bank mergers in the first half of the year on the capital raising side, Investors Bancorp was the largest bank capital raised in the first half, it was $2.2 billion and KBW was both the conversion agent and joint book runner on that deal.

Looking forward our equity and M&A backlogs are strong and have increased from the start of the second quarter. The next slide reviews our core non-interest expenses excluding non-core expenses comp and benefits as the percentage of net revenues was within our stated goal at 63%.

Transition pay as a percentage of net revenue was 4.5% and core non-comp operating expense were a $122.8 million, which was higher than our stated quarterly range of $118 million to $120 million.

The difference or the increase is primarily the result of an increase in professional fees due to regulatory compliance work directly related to the growth of our businesses and also an increase in legal expenses. The next slide reviews our core non-interest expenses for the first six months of the year.

Again, core non-comp expenses were $242 million or 21.8% of revenue and the explanation for that increase and the reason it’s above our range are the same. Increased professional fees and increased legal.

The next slide reviews our non-core deal costs in the quarter we incurred $7.4 million pre-tax cost, that relates to our eight most recent acquisitions, on a go-forward basis, we expect to incur an additional $4 million in the third quarter and $2.5 million in the fourth quarter which should be, the balance really for Acacia, De La Rosa, Keefe, Knight, Ziegler Capital, and Miller Buckfire, but we also we just announced as I said Oriel and Legg Mason those costs are undermined at this time although we’ll either provide an update or we’ll discuss in the next call.

The next slide looks at our reporting segments. Global Wealth Management posted record net revenues $307 million, an increase of 9%. Our Institutional Group had their second best quarter with net revenues of $256 million, was up 19% year-over-year.

Global Wealth Management’s operating contribution increased 13% from the prior year to $89 million while our Institutional Group’s contribution was up 37% from the prior year to $43 million. The next slide looks at that I just wanted point out again the non-comp operating expenses by segment.

And you will see that we’ve leveraged in our reporting segment and non-comp that with Global Wealth Management Institutional segment but our other segment has some significant increase in non-comp OpEx as I said, we’ve been investing a lot in our infrastructure and in our regulatory compliance that we need to do.

And as it stands I think other expenses in future periods will remain somewhat elevated as we continue to invest in our systems to be compliant in today’s high-focused regulatory environment. Turning to segment, our Global Wealth Management had a great quarter, margins of 29%. Commission revenues were up 3% from the prior year.

Principal transactions were down slightly primarily to a decline in our fixed income business within Global Wealth Management. Asset management fees increased 24% as I said an increase in assets and our management for market performance and increase in client assets. Net interest revenues were up 46% due to our performance at Stifel Bank.

Investment banking within the segment declined to $10 million or down 36% and it was -- we didn’t do as much in the equity underwriting business within Global Wealth Management. Our other income decline due to a decrease in mortgage fees from loan origination at Stifel Bank, which is consistent and this has been going on in the industry.

Comp and benefits as a percentage of net revenues was well within our range at 56% for the quarter compared to 57.7% in the prior year. Non-comp operating expenses increased 14% that’s reflective of the growth in assets and the growth with what we’ve been doing Global Wealth Management.

Looking next Stifel Bank, assets increased compared to prior year ago quarter or just a year ago, assets are up 17% to $5.1 billion. Similarly, deposits increased 16% and retained loans grew 79% versus the year ago.

The balance of loan to bonds which is now stands at 39% to 61% is getting closer to our desire -- our goal of 50%-50% as loan origination capacity has increased at the bank. The transition to loans from investments has also increased our net interest margin from 230 basis points year ago to 257 basis points.

Asset quality remains very solid with only 0.1% nonperforming asset and 0.23% nonperforming loan. There was an increase in past to our nonperforming loans during the quarter. Most of the increase was comprised of residential mortgage loans acquired in Acacia transaction.

I just want to point out that these loans have approximately a 15% discount to the unpaid principal balance owed as a result of the fact that we bought these loans at a substantial discount. That discount represents a $42 million credit mark that is reported as a discount. So it’s not in our loan allowance.

And while this is required by purchase accounting rule that needs to be understood when looking at credit risk in the portfolio.

Loan servicing was also converted to the Stifel Systems during the quarter causing some of the increase in delinquencies due to payment, address changes, and resetting of automated payments was not unexpected when you change sub-servicer that you will have an increase in -- people will miss the payment.

But the 15% discount provides a very large cushion within our credit metrics. Net, net credit quality is very strong with limited loss history and we have a very strong credit metrics within the bank. Next slide looks at our Institutional Group. We’ve had, as I said, a very good quarter.

Net revenues of $256 million, up 19% from the year ago quarter, up 3% sequentially. The increase from last year compared to last year was due to an increase in activity across the Board as well as contributions from our acquisitions of KBW Miller Buckfire and Knight.

Comp and benefits as a percentage of net revenues in our Institutional Group was consistent at 61.6%, non-comp expense ratio was 21:7 and we had a pre-tax operating increase income of $43 million which was up 37%.

Margins for the quarter a little under 17%, 16.7% to be exact, which is an increase over the last year but down from the first quarter in still below our stated goal of the mid to low 20s for this growth. The next slide looks at our capital structure which we view as conservatively levered.

Total assets on a consolidated basis are $9.6 billion, total capitalization debt and equity is $2.9 billion. Our debt to -- that’s on a proforma basis for $2.9 billion I will come back to that. Our debt-to-equity ratio at the end of the quarter was 18.8%. On July 15th, we issued $300 million principal amount of 4.25 senior notes due 2024.

Interest on the notes accrue from July 18th and will be paid semi-annually. The notes are intended for general corporate purposes for life.

But I would like to point out that we maintained two debt positions $175 million of senior notes, bearing interest of 6.7% which is callable at par in January of 2015 and $115 million senior notes bearing interest at 5.38% which callable are in December of 2015.

Looking at our capital ratio, tier 1 leverage ratio was 15.4%; our tier 1 risk-based capital ratio remains high at 25.5%. Looking at financial data, total stockholder’s equity came in at 2.2 billion book value per share of 33.19.

Our total leverage ratio at the end of the quarter was 3.7 times, again its lower the broker dealer at two times and higher at Stifel Bank, which is our intention. Stifel Bank is little over 13 times. Client to assets reached a $173 billion which is up 15% from last year.

Before I conclude the call to take questions, I will give a brief update on our recently announced acquisition Legg Mason Investment Counsel is expected to close in the fourth quarter of the year. We are currently working through customary regulatory mutual fund conversion on account change processes.

Oriel Securities, the London-based stock brokering and investment bank closed on July 31. The Oriel team will conduct business as usual through the balance of the year as the integration of conversion efforts are scheduled for the first quarter of 2015.

From a financial perspective, their results will contribute to Stifel in the second half of the year. De la Rosa closed April 3rd, 2014 the results are part of our second quarter number and they are fully integrated now into Stifel’s public finance business. Ziegler closed on November 30 last year.

We've had strong asset and earnings growth since the acquisition. Assets have grown by 500 million since the end of 2013. Acacia closed October 31 last year. As I said Acacia furthers our goal of migrating our asset mix to a more balanced mix of securities and loans.

The single branch that Acacia has is now closed, cost saving targets have been fully achieved and our target of an annualized run rate of more than $10 million a year, we are on target with that. Knight closed on July 1st last year.

So when I look at the full year results, the group has within our revenue targets actually exceeded my expectations, it was a good first year for Knight.

And finally KBW closed on February 15 of last year as I mentioned the second quarter of this year was KBW’s best quarter since the first quarter of ’11 and this merger continues to exceed our expectation. Client facing and major system integrations are complete at KBW.

In conclusion, we had a solid start -- we’ve had a solid start to the year, I am very pleased with our revenues in the first half of the year which are up 19% to a record $1.1 billion.

Our business has performed well in a rising market albeit, the declining volumes and the VIX, the volatility and the complacency in the market is challenging for our flow business. As I look forward, the market feels strong as it relates to investment banking.

Retail engagement if I look at just July, July was strong compared to the first half of the year. I think revenues were about 9% above the monthly average. The market has a tone, I am just not sure that the market necessary the complacency in the market doesn’t seem to square my view with some of the -- what’s going on, the tensions in the world.

It just, it feels a little odd from that perspective from me. But from our perspective, given a continuing of these market conditions I expect to continue to perform well and continue our strong performance for the remainder of the year. So with that I will open up the call for questions..

(Operator Instructions) Your first question comes from the line of Devin Ryan from JMP Securities; your line is now open..

Just with respect to money market balances, just let me get some thoughts here, are you seeing cash moving back into the market, just given some of your comments that you just made and can you remind us where the money market fee waivers are today and then just more broadly how the bank is positioned for the potential of rates moving higher..

Now look I think the bank, all financial institutions I believe or most financial institutions including ours is we’ll benefit from rising interest rates.

We will benefit in the bank from rising interest rates for no other reason than that we financed a lot of our assets with equity and that will help, but we’re positioned in our queue as to some of the, what happens with the increase in interest rates.

We expect, I think our money fund balances have been, they haven’t decreased, they’ve been relatively consistent, they grow, you know as we grow the company and you know fee waivers, I don’t remember what fees were like that money funds to be honest with you.

I guess we used to get them and I almost quit talking about it, I think if I quit talking about the fact that we’ll get them back at some time, we may actually get them back if we quit talking about it..

Okay fair enough, you can go back to your last remarks when you did talk about it, maybe assumption there. So I guess moving on, with respect to the loan origination comments on the capacity, comments that you made about the bank kind of increasing capacity. You did have a nice step up in retained loans a few hundred million dollars in the quarter.

Want to get any more detail around what the drivers were there and then you’re overstating how big of an opportunity the bank is for the firm.

Should we expect further acceleration from here, just $300 million we saw this quarter was at, in your mind a very good quarter or is it still moving higher based on those comments of increasing capacity?.

Look, no, we’re definitely higher, increases in CNI, we’re building the capability in the bank prudently, I would say that, however, the overall growth in the bank was relatively muted for the quarter and it’s just a reflection of the environment, I’ve always said that we’ll -- we're not going to give -- add assets in the bank to increase pre-tax income and that we could do, but we’re not going to do it, if it’s going to significantly dilute our return on equity, we want to maintain and build our return on equity and it’s been a difficult environment with credit spreads where they are and this general interest rate environment to do that.

So we’ve been making loans, but we’ve also shrunk our investments portfolio as we’re not reinvesting at this point in the cycle. So again you note, Devin, if it’s about pre-tax income and earnings per share, we could lever the bank but I don’t want to do that. It seems that’s a good way to move our return on equity..

Great, understood and then just lastly, the increase in legal expenses it sounded like that is something that could be recorded moving forward I just want to make sure that I heard that correctly and then any additional detail on what may be driving. That would be helpful..

Look, we had a few legal items, I think hit acquire, I wouldn’t say that legal would increase and I didn’t mean to imply that if I did, I think legal was elevated for the quarter but I wouldn’t anticipate that going forward, we don’t have any real significant legal items, but we did lose an arbitration case and that impact is not significant but it did have a bit for the quarter.

What I do expect although it’ll come to an end in some point, is the amount of fees, in professional fees that we’re spending as we invest in our risk systems in the market risk world and in a lot of the requirements that you’ve all been reading about that is being imposed by the regulatory environment, and we’ve made some significant investments to be compliant with that and I see it, those are not permanent but they’re elevated in the quarter and probably for the remainder of the year..

Great, thanks for all the detail, thanks for taking my questions..

Sure..

Your next question comes from the line of Chris Harris from Wells Fargo; your line is now opened..

Thanks for the commentary Ron about the acquisitions just had a couple of follow ups on those, how should we be thinking about the revenue and pre-tax contribution for LMIC and Oriel. .

We haven’t really disclosed, or I guess I can on this call a little bit, you know the FMIC acquisition in terms of revenue is approximately 50 million in revenue and we think we’ll be nicely profitable. And so I would tell you in the 20% margin ranges is what we are thinking. As it relates to Oriel, I am not prepared at this point to talk about that.

Because what we are doing over there, we have now, to just give you some sense of the scale, we have I think on a pro-forma, we closed the deal. We have in excess of 200 people in London primarily and in Europe and we can see revenue from London in the $160 million to $200 million range. But we are spending some time integrating.

So I will give you more color on that either the next quarter or prior to the quarter if we have some estimates on the merger cost. But I am very optimistic about our growth aspect.

While we are going to continue to grow in the domestic U.S., the net result of some of the deals we’ve done between Knight, KBW what we had organically at Stifel in selling our U.S. research in Europe now plus Oriel. Oriel is an Umbrella that allows us to pull all this together and I see some significant growth opportunities in London and in Europe.

And I think we can make some nice profits there. So but I will have to get back to you with -- I’ll update probably next quarter on the outlook for that and the revenue and contributions from London. .

Maybe asking a different question then on your kind of Global Wealth Management business. This quarter, some of your peers seem to really accelerate the growth in advisor hiring and it looks like you guys only added a few advisors this quarter and I know everybody is different obviously.

But just wanted maybe to get your thoughts on how the pipeline for new advisors is looking.

And then if you guys are kind of benefitting from the concept of kind of retention packages rolling off for some of these guys that we put in place during the crisis year?.

I think we’ve been very disciplined on our assumptions about recruiting packages that we will offer. And so similar to the bank we’re not going to chase the market just to the purpose of meeting metrics. But to me return on invested capital is a very important metric and I want to continue to do that.

And while I thought that there was sort of a pullback in the competitive nature of bills that I don’t think get return on investment capital, frankly it hasn’t occurred. And so we have a lot of, we were seeing a lot of people than we hired 16, they do more than $1 million and we are being selective and we are recruiting on our terms.

And it’s not a numbers game in terms of gross numbers, it’s about net income. And I think you see that in our private client results. I expect to grow, I just think the environment is ultra-competitive right now and I would rather stay disciplined versus chase some growth targets which dilute our returns.

So I’ve been saying for a while it’s been very competitive but I think we are doing just fine there, we are just not going to throw caution to the wind from a recruiting perspective. .

And your next question comes from the line of Steven Chubak from Nomura. Your line is now open..

So just had wanted to dig into the banks a little bit. The net interest income growth given the robust growth we saw in your underlying loans was a little bit more modest and what we had anticipated.

And given the favorable mix shift, I was hoping you can clarify why after I suppose it’s a string of four consecutive quarters of double-digit sequential growth in NII that we see did the slowdown this quarter..

Well, wait a minute let me see if I understand your question. I mean net interest margins expanded, correct? I mean --.

NII on a dollar basis. .

I think it expanded..

It did, it was modest and there has been a robust growth rate..

Okay, look as I said on the call, this is the first quarter where we were not continuing to grow the investment portfolio and grow banks. What I was saying was that the quarter was marked by relatively limited asset growth on a consolidated basis and that the investments that mature rolled off and we increased loan.

But the market environment for the investment portfolio did not meet our return hurdles. So we weren’t growing the bank in total assets.

So what you really think as there was a muted growth in the bank assets and that’s not limited by our deposits capabilities or funding capabilities, we have got plenty of funding it’s limited by what we view is right time to be investing with respect to return on equity.

And which is our major metric here and so I think I answered that before and I am trying to answer now, but I just -- it’s been a challenging market from an investment perspective with where credit spreads are and just where the yield curve is, it was very, very difficult market to put money to work which would meet our return hurdles..

I understood. I appreciate the detail color on.

And switching gears just to the M&A business, you’ve noted the growth in the investment banking backlog which is consistent with the broader industry trend that we’re seeing and so maybe you could just provide some more detail commentary in terms of which sectors are exhibiting the strongest growth? And maybe given the strength in KBW’s result what’s your outlook for bank M&A more broadly?.

I think bank M&A has still been marked by -- we’ve got, we think excellent market share marked by small deals still primarily and I would expect that to continue. We don’t see that trend really changing any time I mean not in the next quarter or maybe for the remainder of this year.

The overall markets -- the markets hitting new high with low volatility while not good for flow business, does provide a good backdrop for equity capital raising and you’ve seen cost of Board in a number industries but specially healthcare and we’ve made some nice investments in healthcare and that’s paid dividends for us.

But technology and I would say across the Board, it’s been good.

When I look at our backlog absent a significant change in market dynamics, I am optimistic about the both M&A and capital raising although I’ve cautioned as always that that can be lumpy quarter-to-quarter, but I think we’ve said that, if we could do $500 million up from whatever it was last year 450 that’d be a good quarter.

And we’re certainly exceeding that pace on the first six months of this year. And so I think the environment remains favorable as I sit here today..

Your next question comes from Hugh Miller for Sidoti. Your line is now open..

I guess piggybacking off of the discussion on the equity capital markets segment, I was wondering if you could give us your sense of where I guess competition stands now and as we think about maybe risk on horizon.

We’ve seen kind of maybe a push of interest towards some competitors increasing the research staff through M&A and trying to be able to take more share of ECM by and expectations from maybe a strong operating environment to continue, but how do you view kind of the competitive landscape now? And what do you think will happen in the coming years or so?.

You’re talking about the most recently merger announced..

Yes, I mean we’ve seen a handful of them but obviously there was one that was larger in size with the focus on kind of growing the ECM business and just -- are you seeing any increase in competition? Do you anticipate the competition could meaningfully increase or is that not the case?.

Well, look, whenever just competition and I think what you saw that was consolidation and then consolidations occurring, I think it’s a difficult market environment. We have a 6 billion share a day average daily volume, which is really -- and that was sort of in the second quarter that was sort of a math for the fact that we had a pretty good April.

But May and June was significantly below that. July hasn’t really changed. So I am encouraged that market participants have invested in the flow business as it relates to the competitive landscape. I didn’t really see it change for us.

I mean we welcome competition let’s put it that way and we’re doing just fine and we’re going to continue to build best-in-class investment bank and I think my prior comments talk about my outlook..

Okay, I guess aside from the institutional equities business obviously the research fund leading to the potential to participate in underwriting activity, do you view any changes in competitive pressure from that standpoint, I know you commented that the backlog looks strong but pricing terms there and you anticipate that there could be risk there on the horizon..

No, I mean again I think it’s competitive but I don’t see, I really don’t see any, I don’t see any major changes in the competitive or the rest of the business other than I think the biggest risk to the capital raising front is the general market environment.

We have a lot of business to do, we have a strong backlog and we continue to win our share and we’re gaining, I know we’re gaining market share, but if you ask me what I’d be most worried about, it would be the general market conditions..

Okay, that’s helpful and you’ve given us some color on kind of the NIM expansion, some of that just being a function of the earning asset mix shift towards the long term securities, but you had commented as well about seeing CNI production improving.

And I suspect that that’s a higher yielding asset relative to the overall loan portfolio which has some residential lending exposure.

Can you just give us a sense of how we should be thinking about the yields on those CNI loans relative to the overall loan portfolio yield?.

They’re generally higher, right and but we’ve had an increase -- we focus on start loans, the yield on the Acacia loans considering where we bought it all right and the we’re accreting that that’s also very favorable, you can’t, certainly not going to discount the increase in residential, the yield on the residential, but you know the net, the loan portfolio including CNI is a significantly higher net interest margin and investments and we just want to make sure that we’re being compensated for credit, you know it’s net interest margin minus credit and I’ve been encouraged by our steady progress in that area, but as I’ve always said, if you, -- there just goes our underlying philosophy, it was just about increasing pre-tax income and driving some accretions to increased earnings, we could do that tomorrow, by just sweeping in deposits and investing them at sub 10% return on investments.

We’re just not interested in doing that and we want to build our return on equity and build our core franchise and do it by lending to a natural client, whether they be individuals or institutions of this company, not do wholesale asset generation to drive pre-tax income at sub return on equity thresholds..

Okay, and I appreciate the thoughts there and you had mentioned just a metric about the retail engagement being 9% above the average, was wondering if you could just, I didn’t catch exactly what it was pertaining to and the comparison period was it for the second quarter or the first quarter..

I should, I probably should, July on average was for the month, although it’s generally a longer month, so I should be a little cautious about that.

But the engagement was stronger, it sort of fell off and you can see we have flattish results so I saw that trend was slowing down, reverse itself somewhat in July, maybe I should say it that way, because I didn’t necessarily quote that number on a same day basis..

Right, okay so it’s for the month and not an average daily basis but is that commissioned….

Still stronger, the overall revenue for - you know that’s a combination of you know asset base fees which get booked based on June value versus March, so they’re going to be up naturally as you go into this quarter but activity was also better..

Okay, so that’s just for the retail segment engagement overall revenue and that’s relative to what you consider the first half of the year or the second quarter..

First half of the year..

And your next question comes from the line of Alex [indiscernible] from Goldman Sachs; your line is now open..

Quick question for you guys on expenses, just want to dissect the trends we’re seeing there, I guess when we look at compensation for the first six months of the year, it’s up roughly in line with overall revenues but when I look at the revenue mix it seems like it should have been a little more of a positive operating leverage, meaning your NII is significantly higher, investment banking significantly higher, so where does the incremental expense dollars go in, because I would I have thought we would see that operating leverage on the cut line..

I think, historically I mean I think that compensations an estimate, we pay a substantial amount through the firm we pay a substantial amount of our compensation and incentive based compensation at the end of the year and we are -- we tend to historically book compensation I believe on the conservative side of those estimates.

And if you look historically, you will see that as we get around to actually paying incentive but we want to make sure that we are properly accrued. And that’s the way I’d your question. It’s a big chunk of our compensation it is incentive based. And we actually finalize those numbers in February of next year..

Right. I guess I was trying to get to when I think about the expenses associated with growing things like NII, it feels like they should come with higher margin.

So I guess what you are saying it’s all kind of will flush itself out in the fourth quarter?.

That’s what I think I had said. I agree..

On the non-comp side, can you just go through one more time which part of regulatory compliance procedures you guys are investing in, how long do you think that’s going to be a drag on non-comp expenses and kind of overall how much incremental being to spend there?.

I don’t really have Alex that. In the quarter, on a comparative basis, I think what I’ve saw was we’ve taken -- we’ve been -- I’ve been saying that there is a number of merger type things, occupancy being one.

You will see leverage, operating leverage and occupancy and we’ve been looking at communications and we’ve been looking at our execution cost and a number of things we’ve realized some of the things that I was talking about but it was offset primarily by and as I said the professional fees that we’re spending to be compliant the market risk rule which were subject to is a significant investment in putting in those it bolstering our enterprise risk management systems, it is investments that we are making that we’ve been spending some time with consultants that I view as short-term albeit not short-term meeting in six week but probably through the end of the year.

At the end, net-net between that and the legal, if my estimate would be it’s about 1% of those operating expenses that I would say is elevated that we think if these revenue levels fall away..

And then just one last one to clarify comments around net interest income.

Did you guys see if there is some discount accretion that’s still being recognized through NII, and if so, I guess how much per quarter and when is that expected to run off?.

It goes on for years, I mean it’s not -- you will see, I think I -- I think I’ve said the numbers, I will say it again, I think it’s some we bought, we did a very attractive in our view financial transaction in Acacia and have 40 plus million dollars of discounts that is a combination of accretion and credit.

And that’s just; there was an attractive financial transaction. That sort of -- I don’t want to say it’s all accretion because what I was really trying to point to was the fact that that provides credit question that you don’t see in our allowances.

A lot of banks talk about this, maybe purchase accounting you have to do fair value accounting and you record loans at a discount not growth less than allowance. So we have very conservative marks and we’ve got that residential mortgage yield is over 5% is what I will tell you. And that’s going to continue for until it rolls off which is years.

So it’s not a short-term phenomenon. I was more Alex talking about the fact that I think that not only did that enhance our yield in the loan portfolio, it has -- it is very adequately accounted for if you will on a credit perspective..

And your final question comes from Douglas Sipkin from Susquehanna. Your line is now open..

So you guys put up a presentation I think last quarter talking about sort of how you are over capitalized and there was an opportunity to grow assets or shrink equity effectively given your low sort of straight leverage access to equity what have you.

It sounds like you guys are maybe a little bit more guarded about ramping of assets given the tough conditions or harder market in the loan market.

So I guess the flip side of that is -- and so it’s incremental more if your decision to lean more towards shrinking equity, I am just curious because that was interesting slide that you guys put up last quarter..

Hey, Doug look I would say the commentary is the same. I would say that I -- we think a lot about the fact that our return on equity is hampered by our overcapitalization and as I said then we’re not going to rush to just grow assets because we want to grow return on equity and so we’re going to be balanced about that.

All that said there is a numerator and there is a denominator component too dealing with this. And we’re considering everything appropriately and as the market conditions get paid. And I am not ignoring it. I didn’t forget about it. We’ve got a lot of comments about that slide. I will admit.

But the objectives remain the same and that is to properly capitalize and to provide proper shareholder returns whether that would be by growing assets or returning capital..

Great that’s helpful and maybe just to add onto that and I am doubt I’ll get answer, but I figured I tried.

I mean embedded in that obviously you’re weighing the growth of the assets versus equity, do you guys sort of have a framework where buying equity comes a little more attractive, I mean you actually have hard numbers valuation metrics that you guys look at where you say okay the stocks comes in to book value by X or trades it multiple to book value of some multiple then all of the sudden the equation shifts more to shrinking equity or is it more still strategic oriented completed versus movements in the stock?.

Well, I could answer that question. Doug, the answer is of course we do and I can tell you that there are points where the lines cross versus dealing with denominators versus numerator going assets versus doing that. But to say the next question I am not going to tell you where that is of course I do..

Okay, thanks a lot..

Don’t ask me where?.

There are no further questions. I will now turn the call back over to Mr. Kruszewski for closing remarks..

Well, thank you everyone. Thanks for your time and your interest in the company. As I have said, I am very pleased with our growth. We have challenges but we’re continuing to build a best-in-class investment banking and wealth management firm. I think this last quarter underscores our progress in that.

I am pleased with the both our integrations of our most deals, mergers of the last year and I am excited about Oriel which just closed and the addition of Legg Mason Investment Management to our fold. And I am optimistic about our ability to continue to create shareholder value for you, our shareholders.

So I look forward to reporting continued progress next quarter. Thank you. And have a great day..

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