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Stifel Financial Corp  (NYSE:SF)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

I would like to welcome everyone to the Stifel Financial's Third Quarter 2018 Financial Results Conference Call.

At this time I'd like to remind everyone that today's call may include forward-looking statements. These statements represent the firm's belief regarding the future events that by their nature are uncertain and outside of the firm's control. The firm's actual results and financial condition may differ, possibly materially from what is indicated in these forward-looking statements. For a discussion of some of the risks and factors that could affect the firm's future results, please see the description of risk factors in the current annual report on Form 10-K for the year ended December 2017.

I would also like to direct you to read the forward-looking disclaimers and Stifel's quarterly earnings release, particularly as it relates to the firm's ability to successfully integrate acquired companies or the branch offices and financial advisors, changes in the interest rate environment, changes in legislation and regulation.

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

I will now turn the call over to Stifel's Chairman and Chief Executive Officer, Ron Kruszewski. Sir, you may begin.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Thank you, operator. Good afternoon to everyone, and thank you for taking the time to listen to our third quarter 2018 results. Today we issued a press release with our results and posted a slide deck on our website.

Joining me on the call today is our Co-President, Jim Zemlyak, and our newly appointed CFO, Jim Marischen. I'm going to run through our quarterly and year-to-date highlights, our guidance for the fourth quarter and 2019, then our business segments. Jim will take you through our revenue expense lines as well as our balance sheet, and then I'll come back with my concluding thoughts.

The third quarter was very solid with record wealth management revenue, driven by record asset management, and net interest income more than offsetting a modest decline in our institutional business, caused primarily by industrywide weakness in sales and trading revenue. Investment banking revenues increased 5% sequentially with strong capital mark -- capital raising, offsetting a decline in advisory fees. Overall third quarter revenue totaled $738 million. I'm pleased with our expense management, which drove non-GAAP pre-tax margins of 20.6%, up nearly 400 basis points year over -- over the prior year. As a result, non-GAAP earnings per share were $1.35, up 52% over 2017. Quarterly non-GAAP return on equity, and return on tangible common equity totaled 15.5% and 25.2% respectively.

I'm also pleased with the addition of 31 net new advisors during the quarter, which was our best quarterly recruiting total in roughly 10 years, excluding acquisition. We continue to see growth advisor additions translate into strong net additions of the number of -- as the growth number advisors added in the third quarter exceeded those in the second quarter, and displace (ph) the number of retirements and non-regrettable departures declined from the previous quarter. While recruiting levels can vary from quarter-to-quarter, we are building momentum as we continue to see elevated levels of on-site visits by recruits, and we are succeeding and turning an increasing number of them into Stifel advisors.

Finally, as we indicated on our last call, we continue to repurchase shares. Since the end of the second quarter, we have repurchased approximately 1.2 million shares at an average price of $50.90.

Looking at our nine-month results, total net revenue increased 5% of the investments we've made in our Global Wealth Management business, primarily the bank, small acquisitions and recruiting along with investment banking have more than compensated for the market driven headwinds in our institutional trading business, and the expected slowdown in the public finance markets. In terms of non-GAAP operating leverage, our focus on expense discipline has resulted in year-to-date comp ratio of 58.7%, down 290 basis points in the same period in 2017, while we have continued to invest in people to drive our business.

Total non-comp expenses are relatively flat year-on-year after adjusting for investment banking growth. As a result, our year-to-date pre-tax margins are 18.8%, and our EPS growth is up 48%. Even if you remove the impact of the lower corporate tax rate in 2018, our EPS is up more than 23%, and illustrates the overall strength in our business. Additionally, we've returned nearly $140 million to our common shareholders this year through share repurchases and dividends, which is in addition to growing our balance sheet by $2.4 billion.

Moving to the next slide, I'm very optimistic about our business. Despite the recent market volatility, the US economy remains strong. We are gaining traction in our recruiting efforts. Our investment banking pipelines are growing, and we continue to generate significant excess capital. With that in mind, we're providing some guidance for the fourth quarter and for 2019.

Starting with the fourth quarter, we expect total net revenue of $760 million to $800 million, which includes net interest income of $123 million to $127 million as we expect our bank net interest margin to be between 288 basis points to 292 basis points. On the expense side, we believe that the total annual comp ratio will be 58%. Year-to-date our comp ratio is 58.7%, which implies a 56% comp ratio in the fourth quarter. We project non-comp expenses of $154 million to $160 million, excluding investment banking gross ups and provision expense. As you can see, we expect solid results in the fourth quarter despite the recent market volatility.

Moving on to our 2019 expectation, we're focusing total net revenue of $3 billion to $3.4 billion, which represents an annual growth of flat to up approximately 11% based on our expectations for the fourth quarter of 2018. I would note that this revenue range is rather wide of $400 million, but it also has to take into account the bearing market conditions which can occur. So I would note that, at the low end of our guidance, we do not anticipate a recession in 2019, but this incorporates higher net interest income, offsetting what could be slower institutional revenue and flat wealth management revenue. The upper end of our range is primarily the result of a projected increased client engagement, stronger investment banking revenue, and to a lesser extent, improved flow business in both the Institutional and Wealth Management segments.

The interesting aspect of our forecast is how we view net interest income. Assuming no balance sheet growth, we forecast net interest income to increase $55 million in 2019. The higher end of the range for net interest income assumes just $1 billion of asset growth. In terms of net interest margin, we estimate that average net interest margin at our bank will increase to between 300 basis points and 310 basis points, as a result of the reinvestment of maturing securities in the higher current rate and our ability to replace higher cost CDs to lower cost weak deposits as a result of the additional bank charter we acquired in the business bank transaction.

Our net interest income growth will also benefit our comp ratio. Following a dramatic change to revenues in 2019, we would expect our full-year comp ratio to be in the range of 57% to 59%. Additionally, we expect the non-comp expense ratio to be 20% to 22%, again excluding investment banking gross and provision expense. I want to also point out that given the operating leverage in our business, the lower end of the revenue range does not necessarily mean higher expense ratios as we do have that flexibility in our expense base.

Lastly, we anticipate generating capital of more than $500 million in 2019. We'll continue to pursue the best risk adjusted returns for our capital, which could include investments in our business, acquisitions and increased dividends. However, as I said last quarter, I am not happy with our share price, and I don't believe it reflects the strength of our operating performance or our future growth. We continue to trade below our historical averages and at a discount to our peers. And given these conditions, I believe that we will continue to actively repurchase our stock as we have 5.7 million shares remaining in our repurchase authorization.

On the next couple of slides I'll go over the results from our two primary segments, starting with Global Wealth Management. We recorded record quarterly net revenue of $498 million, up 10% year-on-year. As previously noted, the revenue growth was again driven by record asset management revenue and net interest income. Total client assets were a record $289 billion, and were up 9% year-on-year, and fee-based assets totaled a record $96 billion, up 5% sequentially, which should provide a tailwind to asset management revenues in the fourth quarter.

With respect to net interest income, firmwide net interest margin declined 1 basis points to 246 basis points, despite a 10 basis point sequential decline in our bank net interest margin. Jim will provide more detail later in the presentation, but the decline in bank net interest margin was primarily the result of a tighter spread between our LIBOR-based asset, and our fund based liabilities, as well as increased amortization expense in our security portfolio. Our comp ratio in Global Wealth Management for the third quarter declined 60 basis points year-on-year, and our non-comp ratio also declined 60 basis points. 60 basis points of the growth in bank revenue and our focus on expense management continued to generate positive results. Improved revenue and lower expense ratios resulted in a pre-tax margin of 36.8%, that was up 110 basis points year-on-year.

Moving on to the next slide, the institutional business generated year-to-date revenue of $769 million, which was essentially flat, and quarterly revenue of $246 million, down 3% sequentially. In terms of our quarterly results, equity net revenue increased by 7% sequentially as strong underwriting revenue more than offset decline in brokerage and advisory. A strong equity results were more than offset by a sequential decline in our fixed income business due to lower brokerage and underwriting revenue. Our institutional business was impacted by the typical seasonality, i.e., the summer months in the third quarter, we would expect improvement in the fourth quarter.

In terms of our advisory business, our pipelines remained strong. And assuming no material changes in the market environment, we expect the fourth quarter to be stronger than the third quarter, despite the fact that we have a significant fee that we had expected to close in the fourth quarter, which will likely slip into the first quarter of 2019.

In the third quarter we saw equity underwriting activity pick up across the number of verticals, including financials, energy and healthcare. Debt underwriting declined 7% sequentially as industrywide municipal issuance fell by 16%. Despite the weaker market environment year-to-date, Stifel ranked number one nationally in the number of senior managed negotiated new issues. Our backlog indicates a sequential improvement in public finance revenues, but far less than our record quarter -- fourth quarter of 2017.

In terms of our institutional brokerage results, we expect the challenging market conditions we've experienced year-to-date to continue, but we would expect a modest sequential improvement in the fourth quarter. We continue to adjust our institutional brokerage business to be evolving operating environment, while continue to roll-out new products and services that differentiate us from our peers as we better align our existing businesses to ensure here we are compensated for the value we create.

Before I turn the call over to Jim, I want to comment on the year-to-date results of our investment banking business. In 2017, we generated record investment banking revenues of $727 million as we benefited from a significant pickup in our financials vertical, and in public finance as activity accelerated in anticipation of the changes of the tax laws. So we entered 2018 with the expectation that two significant drivers of our 2017 results, which faced some difficult comparable. Yet, year-to-date, our investment banking revenue was relatively flat with 2017 as equity underwriting is up 18%, advisory is up 7%, yet, debt underwriting is down approximately 45%, excluding the gross ups. Our 2018 performance is a testament to the breadth of our investment banking franchise, as improvements in businesses such as fund placement and non-financial advisory have offset their expected pullback in the record results from KBW and Public Finance in 2017. As we look to the remainder of the year, I'll reiterate my comments from earlier this year, that we expect the fourth quarter to be better than the third, and for the second half of 2018 to be stronger than the first.

On the next few slides our CFO, Jim Marischen, will review specific revenue and expense line, as well as our balance sheet, and I'll return with my closing thoughts before taking questions.

James Marischen -- Chief Financial Officer

Thanks, Ron and good afternoon everyone.

So starting with brokerage and asset management revenues. Despite market conditions and the impact of the summer slowdown, we generated total firmwide brokerage revenues of $241 million, and asset management fees reached a record $201 million. Global Wealth Management brokerage revenues and fees of $360 million, increased 6% year-on-year, driven by our record asset management results and relatively stable brokerage revenues. Regarding our Institutional Business, brokerage revenues were negatively impacted by seasonality, as well as continued headwinds in our fixed income business. Our institutional equity trading revenues totaled $44 million. Commission revenues declined sequentially, primarily due to seasonality, but this was partially offset by improved trading gains in the quarter. While we would expect to see improvements in the fourth quarter in terms of client activity, due to increased volatility and seasonality, we continue to face headwinds, including MiFID II. Our fixed income brokerage business continues to face market headwinds that were compounded in the third quarter by the seasonally slow summer months as trade volumes were down 13% sequentially. These market conditions were a significant factor in our third quarter revenues of $38 million, which was a sequential decline of 25%.

Moving on to the next slide, we take a closer look at our Investment Banking revenue. Year-to-date, we are essentially flat with the same period in 2017 as stronger equity underwriting offset the expected decline in fixed income underwriting. In terms of our third quarter results, our Investment Banking revenues totaled $169 million, which was up 5% sequentially. We generated advisory fees of $76 million in the quarter as lower revenues in our fund placement and European advisory businesses, reported (ph) a very strong first half of the year, were partially offset by stronger revenue in our financials vertical. Our capital raising revenue of $93 million was up 26% sequentially, as strong activity in our equity underwriting business more than offset continued weakness in the issuance markets for public finance, which were down sequentially 16% industrywide. Equity underwriting revenues were $65 million as we continue to see solid activity in our financials, energy and healthcare verticals in the third quarter.

The next slide focuses on our growth in net interest income, which totaled $121 million. This represented a 21% increase from the third quarter of 2017 as we continue to grow our bank balance sheet and expand our net interest margin. As Ron mentioned earlier, our consolidated net interest margin was 246 basis points, which was down 1 basis point, primarily due to a 10 basis points sequential decline in our bank net interest margin. This was a result of LIBOR rates being relatively flat compared to Fed funds during the quarter, coupled with higher yields and extended duration associated with CDs. These items combined reduced net interest margin by roughly 7 basis points. Additionally, our FCA securities portfolio at higher levels of amortization expense, approximately $2 million, which reduced net interest margin by another 3 basis points. Outside of the bank we saw a pickup in net interest margin as we are able to move more of our funding of firm inventories away from higher cost bank loans to lower cost securities lending, repo, and internal funding sources. We grew our total bank assets by approximately $1.2 billion, with nearly half of the growth from the acquisition of Business Bancshares, which closed on August 31st. This transaction primarily impacted our commercial loan portfolio.

Average yields on our loan book increased by 20 basis points during the quarter, and our investment portfolio yield increased by 5 basis points. I note the nearly 65% of our bank assets are variable rates, and if you include our adjustable rate mortgage portfolio as some of our peers do, 96% of our bank assets would be variable rate. The average yield on the liabilities increased 23 basis points sequentially. The deposit beta on our sweep program was 64% in the third quarter, and was in line with our competitors. Although we continue to benefit from deposit betas at these levels, we expect competitive pressures will continue to push deposit betas higher industrywide as the spread between yields on money market funds and cash sweeps is providing investors flexibility to move their cash to higher yielding products.

On the next slide we detail Stifel Bancorp, which now includes Stifel Bank & Trust and recently acquired Business Bancshares. The 3% growth in net interest income was a result of growth in average interest earning bank assets that more than offset sequential decline in bank net interest margin. Total bank assets increased to nearly $17 billion, and the average interest earning assets increased sequentially to $16.4 billion. Total bank loans increased 23% year-on-year to roughly $8.5 billion. As commercial loans increased 31%, mortgage loans increased 11%, and securities base loans were essentially flat. The higher growth rate in the commercial loan portfolio was due in part to approximately $500 million of loans added from the Business Bancshares' acquisition. Investment securities totaled $8 billion and increased roughly 9% year-on-year as growth in asset-backed securities again more than offset declines in most other investment security classifications. Majority of our asset-backed securities are CLOs, and as we said before, we've invested in the AAA and AA tranches, which have short relative duration. Additionally, we stress test our holdings to scenario, significantly more challenging the financial crisis without any projected losses. So overall, we remain comfortable with our current CLO exposure.

The provision for loan loss expense increased sequentially to $6.9 million from $4.3 million due to loan growth, primarily within our commercial loan portfolio. Despite a rise in the provision expense, the allowance for loan losses as a percentage of loans decreased sequentially to 97 basis points. Overall, our credit metrics remain solid as the nonperforming asset ratio was 14 basis points. The asset quality metrics compared very favorably to the overall market, which reflects our conservative approach to credit as reflected in the yields on assets within our bank as well as a very strong asset quality developed by our new colleagues from the Business Bank.

In the next slide we will review our expenses. Before I review our quarterly expenses, let me just highlight our expense control so far this year. In the past few years we focused on cost discipline within our business, and so far this year our results illustrate the success as total year-to-date expenses are essentially flat for the same period in the prior year after adjusting for the gross up for investment banking expenses.

In terms of our quarterly non-GAAP expense results, we came in below street estimates. As Ron indicated earlier, our comp ratio was 56.5% as we move to our annual target of 58% for the full year 2018. Non-GAAP operating expenses, excluding the loan loss provision and expenses related to investment banking transactions of roughly $153 million were below the lower end of our quarterly guidance. In terms of our share count, our fully diluted share count was essentially flat sequentially. The lower than expected share count in the quarter was due to decline in our share price as well as our repurchase activity, which essentially offset the dilution from the Business Bank acquisition.

Moving onto our balance sheet. On this slide we look at our consolidated balance sheet and our capital ratios. We finished the quarter with $23.8 billion of assets on our consolidated balance sheet, which was up $1.2 billion from the prior quarter. This was above our guidance of $800 million due to approximately $300 million of additional organic loan growth. Our firmwide average interest earning assets increased by $700 million to more than $19.7 billion, primarily due to growth in the average base assets during the quarter. We finished the quarter with Tier 1 leverage ratio of 9.6% and a Tier 1 risk-based capital ratio of 17.9%. Our Tier 1 ratios were impacted by our share repurchase activity during the quarter, the phase-out of our trust preferred securities, and continued balance sheet growth. Book value per share of $41.25 increased by nearly $2 during the quarter.

And now let me turn the call back to Ron for his closing remarks.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Thanks, Jim. So in conclusion, let me reiterate how pleased I am with both our quarterly and year-to-date results and my optimism for the future. Investments we've made in our wealth management and institutional businesses have resulted in revenues that are tracking above 2017 levels and coupled with the cost efficiencies we've implemented, have driven a more than 50% increase in our year-to-date earnings per share, and 25% return on tangible common equity. Also, I'm happy to announce the small acquisitions today. We agreed to acquire New York-based fixed income broker First Empire. This acquisition fills out strategic needs in our fixed income business, and after careful analysis it was determined that an acquisition was preferable to the time, cost and execution risks associated with building organically. We did not disclose the terms of the transaction as it was not material.

Looking forward, we believe the Stifel is well positioned to capitalize on a strong US economy. We're gaining momentum in our private client recruiting efforts and translating increased interest in Stifel to net new advisors. The pipelines in our investment banking business remained strong, and our bank will continue to provide a substantial excess capital that we can deploy to generate the best risk adjusted returns for our shareholders.

So with that, operator, please open the line for questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Devin Ryan with JMP Securities.

Devin Ryan -- JMP Securities -- Analyst

Great. Good afternoon guys.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Hey, Devin.

Devin Ryan -- JMP Securities -- Analyst

Hey. So first question here, two parts. Thanks for the perspective on the outlook range for next year, and I just want to make sure I'm clear here. It sounds like the high-end of the range would suggest lower net interest income or the lower end of the net interest income range just given stronger customer engagement, which I think makes sense given the ongoing dynamic with customer cash currently. I heard the comments higher reinvestment rates today, you should benefit the NIM, but I would assume that in that kind of positive scenario rates are also moving higher from here. So what are you assuming on kind of incremental interest rates on the front or back end of the curve kind of benefiting NII in that kind of more positive scenario.

And then the second part of the question is, kind of, in that strong engagement scenario where there might be less balance sheet growth given the customer cash dynamic we just mentioned, with over $500 million of free cash creation even after paying your dividend, I'm calculating you'd have the capacity to buy well over 10% of your stock here. So I'm just kind of curious around the capital targets and how you're thinking about those relative to being opportunistic on the stock just given that would seem you have a lot of capacity, if you were just even to hold the capital targets flat.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Let's see, Devin, you have five questions in there. So let me try to --

Devin Ryan -- JMP Securities -- Analyst

It's two part.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Yes, there were two part, two part with three, four part. But I got you. Look, first of all, as it relates to our forward-looking guidance, I want to be clear that when I talk about client engagement, I'm not talking about our deposit levels, I'm just talking about the difference between next year being what I would say, I don't expect a recession, but you could have a choppy market that doesn't go anywhere. Clients aren't engaged on the wealth management side, banking might be slower. So we're looking at, absent a recession, a tepid year at the low end which would have flat revenue, we would have increased net interest income, flat revenue and then the high end of the range which would be revenues up 11% would be just increased client engagement, increased banking.

The important thing that I think to get your question is net interest income. And as you look forward, what we did was we just assume no change in anything other than a role of our investment securities into higher rates, and then how our liability would roll as well. And it really shows the interest, the asset sensitivity of our balance sheet. Everything being the same and just roll the investments, our net interest income will be up $55 million next year. Now, you flip the curve around, you do a bunch of things, those assumptions can change, but that's how we sit today, and it's a function of two things really. One is, we have some rather low interest investments in our investment portfolio that will grow to higher rates, and we have a bank charter that allows us to increase our Bank Sweep Program in our churn deposits. So the combination of those two things with no balance sheet growth, no change in the yield curve, just rolling of both assets and liabilities, results in a $55 million increase in net interest income.

Devin Ryan -- JMP Securities -- Analyst

Got it. Yeah, that's very reasonable. Appreciate that. And then, the follow-up was just on the capacity, really for repurchases, just given, I guess, one where your stock is, I heard your comments pretty loud and clear, and then two, obviously we'll see as the year evolves, what the opportunities with excess capital are? But to the scenario that customers are quite engaged in the markets, and so maybe the balance sheet potentially could be growing less, you'd have more excess cash at least in my calculations for repurchases. And so I'm just trying to get a sense of how important kind of getting back up to those targets are versus the opportunity with the stock at this moment, and still being well capitalized?

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Yeah. Well, look, again, I don't want to confuse $500 million of capital generation to customer deposits, so I'm not sure that that's what you're suggesting. But let me separate them OK. In this particular environment what we're saying is, we will generate $500 million of capital. We could grow the balance sheet. We have deposits to grow the balance sheet. We could use -- I'm just saying what our various options could be. And I guess what, if you want to put color on my comments, but I'm trying to say is that, today where our stock prices will be focused on repurchasing shares with excess capital as we think that that provides the best risk-adjusted returns for our shareholders at these levels. So we have dividends you can pay, you can repurchase stock, you can make acquisitions or you can grow your balance sheet, that's all -- four possible uses for an estimated $500 million of capital generation in 2019. We will see where the markets take us. I'm not going to -- I'm not going to project which of those four levers we will use in terms of capital deployment.

Devin Ryan -- JMP Securities -- Analyst

Got it, OK. And really appreciate the color, Ron. And then a follow-up here just on the recruiting, so great to see the momentum here this quarter, I know you've kind of been alluding to it. And one thing that it affected, I guess the net number had been retirements. And so I'm just curious if you were to kind of look at a gross number versus the net number, are we seeing kind of the retirements slow? I did see kind of more growths come in the door, so that's obviously the bigger driver, but just curious on that front. And then I know or I believe you guys increased your offer in the market. And so I'm just curious kind of what you feel like is driving the more recent success? And just any other flavor around kind of the pipeline or kind of where people are coming from, and what makes you feel constructive about the outlook as it sounds like you are.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Well, I am constructive about recruiting. I mean, Jim sitting here, we have Jim Zemlyak with us. We have a strong pipeline. We've always had a very attractive platform offer and culture. Frankly, as I've said many times, we definitely scaled back during the DOL time frame, because of our view of what potentially could happen in retirement assets. And our view of structuring offers that may or may not have been permissible under the DOL's proposed rules as it related to incentive comp. And so frankly we slowed down recruiting, and like everything else, pipelines have to get refilled and you have to get more engaged. We did that starting in the second quarter when we saw the things we're going to go. And we've mostly been -- I think this year if you look on various websites, we're the number one recruiter of net new assets in the industry. So I've been optimistic, I am optimistic, our gross additions have always been good. We have been dealing with a lot of retirements and what we call non-regrettable attrition. But in the quarter, both are -- that went down a little bit, but our growth advisors joining went up, and went up significantly. So as I said, look, this is lumpy, generally people don't move at the end of the year, and we'll do a number of things, but I am optimistic about the value proposition. And based on our current pipeline and people that I'm seeing, I am confident about our growth in net new advisors going forward.

Devin Ryan -- JMP Securities -- Analyst

Got it. Very helpful, Ron. And then just last real quick one for Jim, just on the model. Any -- just early kind of thought on the tax rate for next year. Just any puts and takes to think about whether it'd be kind of the FDIC deduction available or anything else to think about that would push up or down as we're just getting the model setting up here.

James Marischen -- Chief Financial Officer

Yeah, definitely some puts and takes there. I would say, we are still forecasting very similar what have done this year, around a total of 26% effective tax rate for the year.

Devin Ryan -- JMP Securities -- Analyst

Got it, OK. All right. Thank you guys.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Thanks, Devin.

Operator

Your next question comes from Chris Harris with Wells Fargo.

Chris Harris -- Wells Fargo -- Analyst

Thanks. Hi guys.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Hey, Chris.

Chris Harris -- Wells Fargo -- Analyst

Yeah. On the funding side, I guess the commentary around having the bank now, you can shift some of the client deposits out of CDs and move them into lower costs funding sources. To the extent that you're doing that, might you run the risk of potentially losing those deposits, I guess, that's where I'm a little bit confused. If they're getting a lower rate, might that you not be available there (Multiple Speakers).

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

That's not really the way you should look at it. I think that we have a multi-bank program, and we sweep-based upon insurance levels. And we now have two bank charters. So whatever our limit by client was, it's now doubled, because we have two Stifel Banks, and have two bank charters that we can provide insured deposits on. So the insured bank program pays the same rate to clients. It's just in this particular case we'll sweep more than Stifel Bank than we will to our outside bank partners on our multi-bank program.

James Marischen -- Chief Financial Officer

It is not the exact same client, we will have clients we can play CDs outside of our own bank. We place multiple billions of dollars a year in CDs through our brokered CD desks. These are just different set of clients here.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

But the biggest thing I want you to understand is our ability in the same deposit base with the parameters that we set to sweep more deposits to our own banks than sweeping away.

Chris Harris -- Wells Fargo -- Analyst

Got you, OK. That makes sense. Then with respect to the institutional business on the brokerage side, you mentioned that you're hopeful things pickup in the fourth quarter. But bigger picture, what's the outlook for this part of your business? I mean, should we continue to expect gradual grind down based on this and some other headwinds or are we potentially getting closer to a bottom for this part of your business? Any incremental color you can share there would be helpful.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Well, I want to see how the fourth quarter shakes out. The sequential quarter even through the summer months in our equity business was encouraging. And so as I look at it, we're beginning to get more clarity on how MiFID impacts the equity business. And I'd like to think that we -- '19 that tells more, and so we will see, but that is fade-out (ph) pretty well this year certainly better than I would have anticipated, if you're asking this question in the beginning of the year.

I think that on the other hand, fixed income continues to be challenged for all the reasons that a lot of people are talking about, including not only cyclical changes, but secular changes in that business, that would -- I believe that the fourth quarter will be better, but those challenges will continue. I'm not in a position to predict how that's going to shake out one way or another. Other than to say that we're evaluating and talking to clients about how we best serve them and continue to add value. The business isn't going away. I would think that the third quarter might for at least for the time being be a low point in that business. It was a combination of events that caused that to be a very difficult quarter on fixed income flow.

Chris Harris -- Wells Fargo -- Analyst

Got it. Thank you, Ron.

Operator

(Operator Instructions) Your next question comes from the line of Steven Chubak with Wolfe Research.

Steven Chubak -- Wolfe Research -- Analyst

Hey, good afternoon.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Hi, Steven.

Steven Chubak -- Wolfe Research -- Analyst

So, Ron, I wanted to ask a follow-up question on capital management. I just want to understand your prioritization a little bit better. You very clearly outlined the multiple paths that you can pursue. I guess from our perspective, looking at the trends of the bank, you're growing securities which carries some credit risk like CLOs in a relatively late part of the cycle, deposit betas given you need to raise some CDs are running above 100 at least in the most recent quarter. I recognize the additional charter is going to provide some funding relief, but just taking a step back, why is raising high cost CDs to fund bank expansion a better trade off and buying your stock at eight times?

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Well, I don't think I said that at all. I mean what I said was no growth in the bank, OK, in terms of guidance and not that we're looking. We can grow the bank, but let's be clear here, our NII expansion of $55 million has no change in the balance sheet, repricing of assets and utilizing our new bank charter to lower overall cost of deposits, and that's an a no-growth scenario. Look, I would tell you that we will see what market conditions are. We've said that the bank balance sheet growth next year could be flat to up $1 billion, that's significantly less than what we have been doing over the last few years. And I would say that that alternative today is certainly of growing the bank would be less attractive than buying our stock at the levels where our stock is trading today. And I think that's what I said. So --

James Marischen -- Chief Financial Officer

And when you look at our NIM guidance, obviously, view back into some of these numbers, you can tell that the use of CDs is not going to be a prevalent source of funding going forward, and the capacity to sweep additional deposited can help offset the run-off some of those CDs. And as you kind of work through your model, you would be able to kind of see some of that come through with the NIM guidance of 3 to 3.10.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

And then, look, when we put on CDs, we are also putting on duration. So we're not completely looking at our deposits also had hedge costs in there too, which you have to look at. You don't always see that, but we're not just borrowing short lending loan. We are hedging out our deposit cost. So CDs aren't necessarily a straight comparison between a three year CD and an overnight money market. We don't look at it that way.

Steven Chubak -- Wolfe Research -- Analyst

Understood. And just given some of the guidance or commentary around more muted bank expansion, certainly clarifying that $0 billion to $1 billion range is quite helpful, that does suggest that, and this alludes to Devin's earlier remark that, you would only really need to allocate up to about $100 million or so to support that bank growth, leaving certainly a substantial amount for share repurchase. Does any of that need to go toward replenishing the capital to get back to 10%? Or do you feel like you're comfortable with the ratios at which we are currently operating?

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Well, first of all let me -- as it relates to the 10%, that was a target that we use. There's is no absolute in that. I used the 10 and 20 when we were 15 and 30, all right. I used that to try to illustrate where we should get to. We're comfortable with our capital ratios here. There's nothing magical about 10, it should be a range. I think in these levels you could see us rebuilding our capital levels a little bip (ph), but it's not a binding constraint 10 and 20, it is something that we look at generally. I'm comfortable where we sit today and we will generate a lot of capital next year. So I'm not sure that answered your question, but I think overall -- if I have any caution as I sit here today, it would be that we want -- we were short duration and we want to be mindful of the fact that we're long in the credit cycle, and I just think that's a prudent view point to take.

Steven Chubak -- Wolfe Research -- Analyst

So how should we think about the binding constraint from here? I know you wouldn't commit to an explicit target, but the 10% is well above the regulatory minimums. I think the rating agencies historically had dictated a rough target as to where you guys were managed here. Just curious what the binding constraint is in your minds, given where we stand right now?

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Well, the binding constraints the regulatory limits. Then the second is, what are our discussions with the regulatory agencies? I mean, I'll give you an example of what happened this quarter as when we acquired Business Bancshares. Even though our capital position did not change at all, we had to remove trust preferred securities, almost $60 million from our capital calculation. Nothing -- the only thing that changed the entire transaction was the map of our capital ratios. A lot of people understand that and we understand that. So that's why they will be a little careful, but having these hard constraints. We still have that -- those trust preferred just on our balance sheet. They have the same capital considerations. They're just not considered Tier 1 eligible, because we got another bank.

James Marischen -- Chief Financial Officer

And to quantify that, that took off about 60 basis points from Tier 1 risk-based capital, and about 30 basis points from Tier 1 leverage capital.

Steven Chubak -- Wolfe Research -- Analyst

Got it, and that's very helpful. Ron, just one question on the First Empire acquisition. You spoke of some vertical as that you're looking to fill in fixed income that there may be some gaps that existed. I was hoping you can just clarify what some of those gaps are, given the fixed income brokerage environment has been pretty challenging just surprised that you would pursue an acquisition in that space.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Look, it's an opportunity. It's a business that's been run a long time. They have a very knit space, and it was primarily credit unions and institutions like that. Very nice fit with what we're doing in KBW business that we think have a big mode (ph) around it in terms of the relationship and how they've done business. So we're pleased with that. It's small and obviously didn't disclose the purchase price. But let me say, look, I don't think fixed income going to zero. We're going to continue to invest in fixed income, we will invest in solutions that we believe will best serve our clients and we're going to be in that business. So it's going through a rough patch, but if we abandon every business that ever went through a rough patch, we wouldn't -- there wouldn't be much to do. So I'm optimistic about it despite the secular changes that are occurring in that business. We are in the fixed income business, we wanted to stay.

Steven Chubak -- Wolfe Research -- Analyst

Well said Ron, I appreciate that sentiment. Last question from me on the guidance. I just wanted to clarify one item. Does the non-comp guidance I know excludes the impact of the IV gross out. Does the revenue guidance exclude that same impact as well or not?

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

It does not. No.

Steven Chubak -- Wolfe Research -- Analyst

Okay. Understood. Thanks very much for taking my questions.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

No, very good. Good to have you back. Operator?

Operator

And I'm showing there are no further questions at this time.

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

Okay. Well, we look forward to a good end of the year. We appreciate everyone's comments and questions and look forward to recapping a great year with you when we meet on our fourth quarter call. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.

Duration: 47 minutes

Call participants:

Ronald Kruszewski -- Chairman of the Board and Chief Executive Officer

James Marischen -- Chief Financial Officer

Devin Ryan -- JMP Securities -- Analyst

Chris Harris -- Wells Fargo -- Analyst

Steven Chubak -- Wolfe Research -- Analyst

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