Stifel Financial Corp (SF) 2013 Q4 法說會逐字稿

Good afternoon. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the fourth-quarter earnings call 2013. 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).

I will now turn the call over to Jim Zemlyak, CFO with Stifel. You may begin your conference.

This is Jim Zemlyak, CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss our fourth-quarter and full-year 2013 results. Please note that this conference call is being recorded. If you'd like to follow along with today slide presentation, you may download slides from our website, www.Stifel.com.

Before we begin today's call, I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act from 1995. Slide number 1 of today's presentation covers this in greater detail. Forward-looking statements are not statements of facts or guarantees of performance, so they are subject to risks, uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the Company's GAAP results. And finally for a discussion of risk and uncertainties in our business, please see the Business Factors Affecting the Company and the Financial Services Industry in the MD&A section of the Company's Annual Report on Form 10-K.

Within that, I would like to turn the call over to our Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Thank you Jim. I'd like to start off today's call with overall comments, which are that we are very pleased to post our 18th consecutive year of record net revenues at Stifel. These results speak to the dedication of our over 5800 professionals as well as to our balanced business model.

Non-GAAP net income from continuing operations for the year improved over the prior year as a result of both better market conditions and the benefit of our recent acquisitions. Looking forward we will continue to take advantage of opportunities in the marketplace that add to shareholder value.

Now turning toward looking at the market overview, client activity in the last quarter of the year was active. Both equity and corporate bond average daily volume was up 4% sequentially. US Equity Capital Markets finished the year strong, up in terms of both number of transactions; they were up 14% in dollar [volume], which was up 55%. This was reflected in our strong investment banking results for the quarter.

Muni bond activity was up 8% sequentially, although debt capital market activity declined. Domestic equity flows and mutual funds were positive for all four quarters of 2013.

My current outlook of the markets can be summed up with a word which I believe is going to be choppy. The year ended -- 2013 ended with great optimism, reflected in the strong market rally, and the handoff to 2014 was expected to be strong. However, the handoff at this point appears to be at best a limp handshake.

Many of the economic indicators, housing, manufacturing, retail sales, are coming in weak and below expectations. Common explanation is weather and an increase in inventories in the second half of 2013. Although while certainly an impact, my belief is that the general economic conditions are not as strong as anticipated at the end of 2013.

This is reflected in the fact that they are talking about revising downward GDP growth for the fourth quarter. I think it was anticipated to be maybe 3.5%; they are talking to revising it to 2.5%, and our belief is that the first quarter GDP is tracking more in the 1.5% range. So, again, I think overall economic activity is certainly below expectations. And I would characterize economic conditions as being sort of in a malaise after the strong market rally, although being mostly multiple expansions that occurred in 2013.

On the other hand, the end of QE can result in capital inflows into the United States, i.e. a stronger dollar, and which can result in the proverbial risk entree. I think that's what you're seeing today. So while we have difficulties here, the end of QE is causing capital to exit many countries. You'll see it in many ways in what's going on in the Ukraine today and those capital -- that capital is coming in the United States and it certainly helping our markets. However, I believe equity markets today are fairly valued and will probably be choppy, certainly in the short run.

Turning to the next slide, as I said 2013 represents Stifel's 18th consecutive year of record net revenues. For the full year and fourth-quarter 2013 we posted record revenues and pretax operating contribution -- record pretax operating contribution for both our global wealth and institutional operating segments; a great year overall. We continue to realize the potential of our recently closed acquisitions as well as our recently announced two new additions.

We successfully completed the merger and integration with KBW, and I believe instead of playing defense in an integration year, which in many respects is what 2013 was, we look forward to playing offense in 2014 and believe we will continue to gain market share.

We acquired and integrated the fixed income business of Knight Capital in July of 2013, which added to our already impressive fixed income capabilities. Our institutional group achieved record flow levels and record investment banking revenues. We continued to gain market share in the year and completed a number of unique and high profile financings for our clients.

We completed the acquisition of Acacia Federal Savings Bank in the fourth quarter. Stifel's bank assets reached $5.1 billion while our risk profile at the bank remains conservative. We welcomed Ziegler Lotsoff Capital Management for the firm's asset management efforts. We added 138 new financial advisors to our private client group.

We opened 11 new offices in 2013.

And finally our stock performed very well ending the year at $47.92, which was up 50% from the start of 2013. In the last 15 years our stock is up over 1300%. The next slide looks at our stock performance overall.

Our stock is a top performer over the past year, six years and 13 years. However, I do want to comment on our five-year performance, which is what many people will use, where Stifel stock has apparently lagged, certainly as the numbers would be.

So while our growth since 12/31 has lagged many of our peers in the S&P 500, if you go back one year, which is what this chart attempts to do, if you go back one year to 12/31/07 you will note that our Company's performance is almost double from our closest peer and is over four times performance of the S&P 500 Index. And this is really due to the fact that the 2008 during that year, our Company's stock was up 30% while nearly every financial services stock was down in 2008.

While it's always interesting to play with numbers, I think the strong performance of our Company in 2008, i.e. we are up almost 31%, creates a tough base year for comparison when you look at five-year numbers.

Now turning to our financial results for the quarter, record net revenues for the quarter of $563 million, which was a 37% increase over the prior year. EPS from continuing operations totaled $0.69 per diluted share, and after discontinued operations was $0.64 per diluted share.

As you know because of our numerous acquisitions and our discontinued operations in Canada, we do talk about earnings on a non-GAAP basis where we exclude merger-related expenses and discontinued ops. And on this basis our diluted EPS was $0.79. This compares to net income of $40 million or $0.74 per diluted share last year. Our non-GAAP pretax margins for the quarter were 16%.

So I'd also like to point out a few items in our core numbers for the quarter. So in the $0.79 for the quarter, first we booked about $7 million gain on Acacia. Second, we had about $10 million in unusual non-comp operating expenses which accounts for the difference above our stated quarterly goal of $115 million to $120 million.

And finally our tax rate was positively impacted by Acacia by about 5 points. So, if you net the gain on Acacia with our non-comp OpEx and normalize the tax rate for the quarter at about 38.5%, I would note that that impact is about $0.03 a share.

I would be remiss if I didn't point out the fourth quarter of 2012 also benefited from a lower tax rate. If I use that same normalize tax rate of 38.5% for both periods, and taking into account the items I just mentioned, you could argue that fourth quarter non-GAAP operating EPS would be $0.76 compared to $0.64 in the year-ago quarter.

Looking at the financial results for the year, we posted record net revenues of nearly $2 billion, which is up 24% year-over-year. Our non-GAAP net income from continuing operations was $185 million or $2.51 per diluted share. That compares to net income from continuing operations of $145 million or $2.31 per diluted share.

Our non-GAAP pretax margin was 14.9% which is on target with our goal of 15%. Comp and benefits came in at 62.5% of net revenue.

But I will note, and I feel like I am saying this every quarter, our non-comp OpEx of 22.6% of revenue, I believe is a challenge. We continue to make progress but we continue to grow the Company. Last year we did five deals and we continue to work on that number, because I believe there's room for improvement in our non-comp OpEx.

Our loss from discontinued operations net of tax was $11 million compared to $6.7 million during 2012. If I look at our sources of revenues for the quarter, our commission revenues increased 16%. The increase was due to higher OTC and mutual fund transactions.

Principal transaction revenues was up 22% to $119 million. That's due to an increase in equity and fixed income institutional brokerage revenue that's a result of higher trading volumes and the contributions of both KBW and Knight Capital fixed income.

Investment banking revenues increased 118% to $159 million, and that is up from the prior year quarter of $73 million. The year-over-year increase was a result of a 54% increase in capital-raising, and a 229% increase in advisory revenues over the prior year. Our investment banking revenues were positively impacted by the strong year-end activity as well as our acquisitions of KBW and Miller Buckfire. I'll go into more detail [on investment] in a minute.

Asset management service fee revenues were up 22%. This increase was due to higher value of fee-based accounts as a result of market appreciation and new client assets. And finally net interest income increased 36% to $29 million as a result of the continued growth of interest-earning assets at Stifel Bank, offset by the increase in interest expense on senior notes that were issued in December of 2012.

Looking at brokerage revenues, as I stated in the past, we reviewed the impact of commissions and principal transactions on a combined basis. We call that brokerage revenues. Brokerage revenues for the quarter were up 19% from the prior-year quarter and up 1% from the third quarter of 2013.

For the quarter, private client group was up 9.1%. Equity brokerage -- our equity brokerage revenues institutionally increased 56% year-over-year while fixed income institutionally increased 17%. Both equity and fixed income trading was solid in both segments other than the loss that we took in fixed income in the second quarter of 2013.

The next slide looks at our core noninterest expenses for the fourth quarter. Comp and benefits as a percentage of net revenues was 61.5% in the fourth quarter compared with 62.8% in the year ago quarter and 62% in the third quarter of 2013. Our stated goal is to maintain comp as a percentage of net revenues in the targeted range of 62% to 64%. We were within that range and at the low end of that range, frankly, for both the quarter and the full year.

Transition pay, which is significant, although as a percentage of net revenues is declining, it was 4% compared to 5% a year ago. Core non-comp operating expenses were $127 million, as I said; about $10 million above the middle of our range of $115 million to $120 million. And that compared with 22.6% in the fourth quarter of last year and 24% in the third quarter of 2013.

As I look forward, I do expect non-comp operating expenses -- as a range I give, I expect it on a quarterly basis to be in the range of $118 million to $120 million on a quarterly basis.

Next slide reviews our core noninterest expenses for the full year. As I stated again, comp and benefits, 62.5% for the year versus 63.4%; transition pay, 4.4% versus 4.6%; and non-comp operating expenses as a percentage of net revenues, 22.6% versus 22.2% in 2012.

The next slide shows the results of our reporting segments for the fourth quarter. Global wealth management posted record net revenues of $293 million, up 15% from the prior year and 7% sequentially. Our institutional group posted record net revenues of $266 million for the quarter. That was up 66% year-over-year and 30% from the third quarter of 2013.

The revenue mix and the firm -- we do like our balanced revenue mix with 52% from global wealth management, 48% from institutional group. For the year the mix was 56% to global wealth management and the balance from our institutional group. Our global wealth management's operating contribution increased 15% to $79 million. It was up 10% in the third quarter of 2013, while our institutional group's operating contribution was up 124% from the prior year to $49 million, up 39% sequentially.

Looking at Global Wealth Management, it continued to perform well with margins of 27% for the fourth quarter and 26.8% for the full year. Commission revenues increased 12%. Our asset management service fees were up 21%, as I said as a result of an increase of the assets under management.

Both the market performance and net inflows of client assets, our fee-based assets increased 24% from the prior year to $26.2 billion.

Net interest revenues increased 47% from the prior year. This is the result of increased net interest revenues as we continue to execute our strategy of prudently growing the interest-earning assets of Stifel Bank.

Comp and benefits in Global Wealth Management increased to $168 million, just again due strictly to our growth. More importantly, looking at it as a percentage of net revenues, it was 57.4% for the quarter compared to 57.7% in the prior year.

Turning to the next slide on Stifel Bank, as I mentioned in our last call the strategy within the bank has remained consistent, and that's to monetize deposits from our broker-dealer clients and to provide complementary services to clients of both the private client and our institutional group. Stifel Bank is an extension of and complementary to our businesses.

For the quarter, at the Bank, the noteworthy items in nonperforming assets improved to 3 basis points. That's down from 32 basis points at the end of the third quarter. Total assets are slightly over $5 billion at the end of the year.

I do want to provide some additional comments on the acquisition of Acacia, which was completed in October. That transaction added assets of $534 million prior to any purchased accounting marks. $150 million of that was in cash. $377 million was in loans, but we sold pretty quickly $75 million of CRE -- commercial real estate loans that didn't meet with our strategy. And we recorded purchase accounting marks of $44 million.

So net loans added was about $258 million. This portfolio would yield on a mark basis of between say 6% and 7%. Within a year nearly all of their funding will be replaced with our deposits, so we will significantly reduce the cost of funding. And net-net this will result in approximately $17 million to $18 million of net interest income with no material additional overhead costs incurred. Therefore, as I stated previously, we expect a net impact of this to be about $10 million after-tax.

The next slide looks at our institutional group results for the quarter. Our institutional segment had record net revenues of $267 million for the quarter. The increase was mainly due to higher institutional equity flow business, higher equity capital-raising, and advisory M&A, primarily investment banking revenues.

This quarter was positively impacted by our recent mergers with KBW, Miller Buckfire and the Knight Capital fixed income business. Comp and benefits expense, you know, certainly increased as revenue increased. But if you look at it as a percentage of net revenue, it was 62% for the quarter compared to 65.4% in the prior year quarter.

Non-comp operating expenses also increased significantly as revenues. There's been a lot of activity going on for mergers here. But you'll see that our margins, our pretax contributions for the quarter improved to 18.2%, and while it still below our goal of the mid-to low 20%s, it's up from 13.5% at the last -- the quarter ending 12/31/2012 and up from 17% in the third quarter of 2013.

If you look at institutional group revenues for the quarter, again we had a great quarter which reflects the investments we've made in the past. Our equity business continued to show significant year-over-year growth. To illustrate, equity brokerage is up 56% year-over-year, equity capital-raising up 175% and advisory fees up 230%.

Fixed income -- our institutional fixed income flow business has been positively impacted by our acquisition of Knight, offset by weaker public finance revenues, which is consistent with the industry. And I want to comment that we are very pleased with our investment banking quarter, but as you all know or should know, investment banking results are cyclical and lumpy. I would caution against annualizing our fourth-quarter results.

The next slide illustrates the progress we've made in building our investment banking capabilities. In order to look forward, I think we should look backward to review our historical results.

With the midyear acquisition of Thomas Weisel Partners in 2010, our total investment banking revenues in that year increased to $218 million from $125 million. Since then we've added professionals from Stone & Youngberg, Miller Buckfire, and KBW, and as a result have grown investment banking revenues to $450 million in 2013. And while results can be choppy, I believe we can continue to build our investment banking revenues from here.

The next slide reviews our capital structure, which we view as conservatively levered. Total capitalization was 2.4 -- almost $2.5 billion. The debt to equity was 12.5%. Our Tier 1 leverage ratio came in at 15.5%.

And I'll comment on this. Our tier 1 risk-based capital ratio was 26.8%, which is higher than many of our peers and presents an opportunity to conservatively grow EPS in the future.

To give you an idea of the potential earnings impact of this, and I'll use the bank as an example to make this. If we took our tier 1 risk-based capital ratio from 26.8% today to say 18%, which is where many of our peers are, and if we do that by growing assets in the bank using the bank's current asset mix, we could nearly double the assets of the bank, which would provide approximately 20% EPS accretion without raising any capital.

And that is the runway that we have and the ability to grow our bank, or frankly leverage our balance sheet from a very conservative nearly 27% Tier 1 risk-based capital ratio.

Turning to other financial data, at December 31 our stockholders' equity was $2.1 billion, book value per share of $32.38. Leverage ratio, which we look at simply as assets into equity of 3.6 times, at the broker-dealer it's 1.9 times, very conservative. Stifel Bank is 15 times.

We, as I said, we look at -- when we add to leverage, we add it within the bank, utilizing core deposits. We continue to recruit established financial advisors; recently brought on an eastern region director which we think will be impactful. In 2013 as a firm we added over 500 net new associates.

Our total client assets reached nearly $166 billion, up 20% from last year, and up 7.6% from the prior quarter.

I'll give you an update on our recently announced acquisition of De La Rosa, which is an investment bank in California. They are highly regarded bond underwriter in California, with a 25-year operating history. The deal was announced January 30 of this year, is expected to close during this first quarter towards the end of this quarter.

We plan to integrate this within our Company. As a result Stifel will become, on a pro forma basis, the number one underwriter in California negotiated in terms of both par value and number of issues. We become number one in California in K-12, lease revenue bonds, tax increment, economic development and water and sewer. And substantially all of the senior leadership has executed what is our norm of continuation agreements with Stifel.

I am very excited. I know my new partners are excited to welcome our new Associates and build on our commitment we've made in California with the merger of Stone & Youngberg in 2011.

In conclusion, last year was a record year. The markets were up, our businesses performed very well. We continued on our growth trajectory and we will work to fine-tune our expense base. We believe our recent mergers KBW, Miller Buckfire, Knight, Acacia, Ziegler, De La Rosa will contribute nicely in 2014.

I will now, operator, open up the call for questions.

(Operator Instructions). Hugh Miller, Sidoti & Company.

Good afternoon. So I guess I wanted to start off a little bit on some of -- the investment banking side of the business, and obviously you guys commented about not annualizing this number on a go forward basis. But I realize that advisory revenue can sometimes benefit from the year-end push.

But do you feel as though any of the business kind of possibly got pulled forward and closed during the quarter, business that you have expected was going to close in 1Q? Or -- how should we be thinking about that?

Well, as I said, I think that the fourth quarter historically for us, being a year-end, and for whatever reason some years it's tax-motivated. Other reasons is just people trying to get things done within a calendar year. The fourth quarter is historically a quarter that -- where business is the strongest.

And my comment is that, yes, I don't think if you take $160 million annualized, $750 million -- that's a lot. And it was a great quarter. I just -- I'm just trying to show that we consistently built this segment, and I believe that we can build it from here. But investment banking is historically more cyclical and could be lumpy.

I'm not sure if that answered your question. It was a strong quarter, but reflects in many ways the investments we've made in the past, primarily KBW and Miller Buckfire, along with some strong additions we've made on the historical Stifel platform.

Sure, okay. And I appreciate some of the color you gave about the overall market environment, and it kind of seems like you give a balanced assessment there. I realize that some of the online brokerage companies aren't the best measure for your firm, but some of them were seeing strong returns in January and commenting kind of that the level of client engagement had been substantially stronger than what we've seen in some time and kind of growing appetite for risk. I was wondering if you could talk to us about what your financial advisors are seeing with their clients, and whether or not there is an increase in the retail investor with a risk appetite.

I think that -- look, I think a lot of what I see, and I only see what you see in many of these firms, but when the markets are up as much as they are and you have activity and the press, etc., etc., it's not surprising for me to see the darts, the daily trades at the discounters go up. I think that's more reflective of maybe the day traders in many ways.

I think engagement has never -- has always been strong here. It's been more fixed income than equity. And we are seeing more equity engagement. But I wouldn't say that we are seeing the increase here, in terms of equity engagement, that maybe is indicative of what you are seeing in some of the discount brokers' DARTs. But I'm also not surprised by that.

I appreciate the insight there.

And as we turn to kind of the advisor recruiting, we've been hearing a little bit about some of your peers that are starting to get excited a bit more about the environment. It's been a little bit more challenging than it was during the credit crisis. But I guess the distancing of retention awards does create some opportunity.

I was wondering if you can talk about what you are seeing with advisor recruiting interest, and also on the potential for Wealth Management M&A for your firm on that basis as well.

First question, you have two questions there. On the first, our recruiting is based upon our financial models, which are not always in line with the competitive environment of recruiting. If we don't see an increase to shareholder value through recruiting, we won't adjust our deals accordingly.

And that's really been the case for the past, actually, several years now as I think that there has been stabilization efforts with the largest firms, defined by keeping headcount constant, defined by recruiting as many people as you are losing, which there has been a lot of shuffling going on between major firms and big deals. And we don't play there.

Has that gotten better? I think it has, but I would say marginally. I'm not -- don't feel we are going to see a return to the recruiting that we saw in 2009 and 2010, both because environment is a lot more stable, for one. And for us, we are still not going to play in a dilutive recruiting environment, dilutive to earnings.

So -- that's my overall view. I forget what was your second question? (multiple speakers)

The other was just with regards to M&A on that landscape.

The M&A for us is very opportunistic. And when I look back at our M&A and global wealth management, the reasons that they all occurred are as numerous as the deals themselves. So I generally would say that in strong equity markets, M&A is not as prevalent as it is in weaker markets. And we just went through a market that was up 30%, and as -- at least is keeping it going here.

I would not say that this market is conducive to M&A, which is generally -- will be mostly driven because one factor, it will be weak markets and people having fear, which we don't have today. So, not something that I must say is robust global wealth management M&A market, (multiple speakers) not at the prices we want to pay.

Sure, appreciate that. And last question, just with regards to the [tic size] pilot program that the SEC is testing, is potentially look at the kind of small caps with wider spreads, and wanted to get your thoughts there and whether or not you view that as an opportunity for the institutional commissions for your business.

Look, a lot of the institutional flow business for the most part is in the high -- the liquid main and the flow. That's the way the business has evolved, primarily because spreads in the tics have narrowed to sub-pennies.

What has then happened has, in my opinion, been almost the destruction of the ecosystem for small-cap companies in that it is very difficult to support, both through research and trading, companies that have small market caps. So to answer your question, I am encouraged by the fact that we have policymakers that recognize that to encourage capital formation and to encourage an environment that allows small-cap companies to grow through the capital markets and not to sell, that there is some minimum spread that can be almost an opt-in system.

So what does it mean to the flow business? I don't think it means much. What does it mean to the potential for capital-raising and capital formation? I think a lot, if you couple this with some of the other things that you've seen like the confidential process that you can file IPOs has helped.

And so the pendulum appears to be swinging towards re-creating of an ecosystem which can allow companies with post-IPO market caps of [$2 million to $250 million] to get the market support required so they can be relevant. And in the end, that will be positive for a firm like ours that has a lot more influence, a lot more focus in that market.

We talked about wanting to be, and in many ways are, the top investment banker to that segment. And so the supporting of that ecosystem is important to us and I am encouraged by it.

Appreciate your thoughts, thank you.

Devin Ryan, JMP Securities.

Hey Ron, how are you doing?

Good.

I just have a question on excess capital and capital return. Obviously it still seems there's a lot of attractive areas to put capital back in the businesses, and the bank is an example that you guys have talked about.

Trying to think about, are there areas where you can actually return capital? Or is there just so many attractive areas to put capital back into the business that that's the more compelling use right now?

Well, if I understand your question, in its simplest answer, we can deploy excess leverage by adding assets to the balance sheet, i.e. deal with the numerator of the equation, and/or look at the denominator, which is equity. And as an example, buy back stock or look at ways to reduce the denominator, which is the equity base.

And my view on it has been certainly if you look at it very simplistically, the -- leveraging the balance sheet is much more accretive to shareholders than, say, buying back stock. In terms of what we can do, you have got book dilution, and you have a number of things.

So we are looking at leveraging our balance sheet to what we believe are significant growth opportunities. I think that's been our past, and as I look forward, I think it's our future.

Not to say there's no more growth opportunities, though; since the beginning of financial crisis, we've tripled revenues. You can look at all of our numbers. I won't bore you with them. But that was opportunities that we see to deploy capital versus return it.

And I would say that my mindset today is to deploy capital with the appropriate return hurdles. We are not looking to dilute shareholder value; we are looking to accrete shareholder value. And we see opportunities to deploy capital in our businesses versus dealing with the denominator.

Yes, I appreciate the update; just wanted to get the current thoughts there. Then, just with respect to the fixed income business, love to get maybe your view of how the Knight Group has been performing relative to expectations when you made the acquisition, (multiple speakers) if there's additional upside in that group relative to the run rate.

I think I had said that I thought my expectations -- shoot. I'll correct this if I'm wrong because I don't have in front of me, but I think I said $70 million to $100 million in revenue. And I would say that it's within that range.

As any business, you've got to get traction and get going. That business is not unlike any deal we've done, and that capability leads to other opportunities to leverage revenue. So I am pleased with where that's gone, and it has opened other doors and we are evaluating other opportunities as a result of that.

I would say that it is performing well within our initial expectations. But frankly, for the six months, I would tell you it probably exceeded my expectations as to what -- it always takes time to start a business up and/or transfer business to a new platform. So I am pleased with our results thus far.

Okay. Great. Just lastly, on the expense base and the opportunity to reduce the non-comp ratio over time, is there any low-hanging fruit there that you feel like is easier than others to kind of take out of the expense base? And maybe what are some of the areas where you feel like there's still some wood to chop there?

Again, we talk about -- I think you have to look at the fact that we have done a very good job of integrating businesses. If you look historically, after we get through our merger-related expenses, our margins have remained consistent at about 15%.

I see, though, I see the ability to even have more leverage to an overall cost basis. And while we continue to make progress on that front, we also continue to grow.

And so, while I can point to numerous cost reductions in numerous places where we've consolidated rent and saved millions here and a couple million there, we also did KBW, Knight, Acacia, and Ziegler is all deals we did last year. And those all in and of themselves increased the expense rate and inefficiency in the short front.

So, look, at the end of the day, 22.5% in my way of thinking about the business, all else being equal, we can reduce and we will continue to leverage. But I want to compliment our team at also doing all of these and maintaining 15% margin. So do I see opportunity? Yes.

I am often frustrated that I see all these cost savings initiatives come through, yet that ratio stays stubbornly in the 22%, mid-22% range. And I've looked at it a number of times, and I have decided that our acquisition appetite has something to do with that.

Got it. Appreciate the color and congrats again on the nice quarter.

Thanks.

Michael Wong, Morningstar.

Good afternoon. I believe that you said previously that you're trying to get your bank assets to 50% loans and 50% securities. Will this be more via penetration with your retail corporate clients, general growth with the recovering economy, buying loan portfolios or something else?

All of the above. (multiple speakers) Look, I think what we've said is that we always look -- I don't mean to have a flip answer at you; I don't really know, because Acacia was an opportunity we took advantage of. I will say that our approach at loan growth has been what I would characterize more as natural to our client versus wholesale.

I am not -- I don't want to say we are going to get to 50% loans to investments by doing shared national credit and selling our investment portfolio. That we could do, but that has not been -- that's not been our strategy to date.

What we do want to do is increase our loans almost organically and naturally. And as I see it, we will -- the bank has gotten to sufficient scale where we are focusing on increasing our net interest margin and also increasing the loan book relative to the investment book. How it gets there is through our global wealth management business, our institutional business, and potentially through acquisitions if they so arise.

Okay. Just following up on that a little bit, I believe you also mentioned before, maybe more asset-based lending. And with regards to that program, how much of those securities-based loans in the bank would be, let's say, incremental as opposed to substitution for margin loans?

I think most of the substitutions occur to the extent that it has, I would like to think that that growth, certainly security-based lending is incremental. And I certainly look at it combined. Margins, Reg P, Reg U in my mind, the location might be separate, but as part of the loan book. We manage it that way.

But you know, I think I would just be repeating my answer to your previous question if I went much further on that.

Okay, thanks.

(Operator Instructions). Patrick O'Shaughnessy, Raymond James.

So I guess my question is with the global wealth management segment at this point, you're growing your advisor base 1%, 2% a year for the last couple of years. It sounds like you don't really think that's going to dramatically accelerate from here. So kind of putting the bank growth aside, what is your framework or your growth model for the global wealth management segment at this point?

Despite all of that, we've probably been at the top of the recruiting list of anyone in terms of growing net advisors. I think I'm not saying we're accepting 1%, 2% or 3% net growth. Many people have net declines. I'm not accepting that, I'm saying that our -- we are going to recruit on an economic model that makes sense.

If I -- if you -- if I was to say I wanted to grow our advisor base by 15% and took our deal up significantly, we would far exceed that in our ability to recruit. We recruit at -- as a significant discount, which has been the case the last few years. I am not -- I believe that pendulums have a way of swinging both ways, and been in business a long time and I'd rather keep our powder dry.

There will come a time, either through a potential acquisition or by a change in the environment or a change in the competitive landscape of recruiting that we will be able to go back to 10%, 15% growth. But we are not going to have that as a target and sacrifice that at the altar of financial returns.

That's helpful. Kind of building off of a point that you mentioned, a lot of your -- most of your recent acquisitions have been in the institutional space. What sort of opportunity is out there for acquisitions in the global wealth management space at this point?

I think, again, you look at what really has happened in the last few years is you have had a significant increase in the equity valuation from the crisis slowing. We all know the numbers. And the equity valuations -- multiple expansions last year, they were up 30%. And so the overall environment in the global wealth management business was that kind of business has been -- it's been a very strong market to be talking about whether or not that's conducive to global wealth acquisition or what have you.

On the other hand, in that same environment, you have had the institutional volume, institutional equity volume go from $10 billion a day to $5 billion a day, right, and fixed income go from the securitization money machine to -- that business model got broke. And so what happened was that all of our opportunity that we saw that we could add shareholder value have been on the institutional space.

It's not that I suddenly have become myopic in the institutional space. It's because that's where we saw value opportunity. And I think frankly the last quarter is proving that out, that we've made the right deals at the right times.

So the past, the opportunities have been to do mergers with the Stone & Youngbergs and the KBWs and the Thomas Weisel Partners and the Miller Buckfires, all of which are exceeding where they would've been before we did the deal with them. And we have not seen the same opportunities in global wealth management. If we do, we will execute.

Got you. That's helpful. On KBW, now that you've had a few quarters under your belt with that being integrated, how's it going in particular on your institutional equities business, trying to make sure that you're still getting, I guess, two separate checks from your clients -- the KBW check, the Stifel check. What kind of push back are you getting from them?

And I guess just in general, how is the kind of a separate carve-out of the KBW folks? How is that going?

I couldn't be more pleased. Our volumes -- almost any way that you measure it, our market share is up. And the answer is that while The Street in general, both the buy and sell side, maybe questioned our strategy, what came out of it was an underscoring of the fact that if you provide service in effect to a marketplace, you will get paid.

The KBW brand and where they trade and where they research is so strong in Financial Services, that the fact that we left it alone and didn't talk about all the things everyone else was talking about, is not a testament necessarily to the fact that there's two different brands. It's a testament that they provide value in the Financial Services sector that no one else really does. And we kept that value in terms of sales, trading, and research. And the market did what they should've done, which is reward us for doing that.

I think the integration has gone exceedingly well, both from a people and a market acceptance. If I have any disappointments, it's the fact that in any year of integration you play defense instead of offense. We played a lot of defense last year and I am looking forward to some nice market share gains in that space.

And I couldn't be more pleased with the integration of the KBW brand under the Stifel umbrella. Both -- you name it; from investment banking, equity flow business, research, our trading volumes, I could bore you with statistics. But they are all up.

Okay. Great. And one last question from me. In your commentary about the earnings this quarter I think you kind of alluded to a normalized tax rate of 38.5%. Is that a reasonable rate to kind of be using to model you guys going forward?

Yes. Look, I often say 39%, and I always say 39% and always comes in at 38.5%. If I go talk to my tax get guys, they would say 39%, I always say whatever. So in that range, 38.5%, 39%, you can pick a number. I thought 38.5% was appropriate, certainly for this quarter.

Going forward there's a lot of things. We've been more impacted by our international operations in our tax rate than -- and as we've made investments. Both the discontinuing of Canada, plus the investments we've made in Europe, I think will make 38.5% more achievable. But look, it's like interest rates. I don't like predicting tax rates.

Understood, thank you.

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

My closing remarks is that I would like to congratulate my partners at Stifel on a great year. We've been busy building this Company from $100 million of revenue back in the late 1990s to $2 billion today. And I believe that as the shareholders of this organization, we continue to look forward to opportunity and continue to provide above-market shareholder returns.

I look forward to reporting first-quarter 2014 results, and thank you for your interest in our Company. With that we will say goodbye.

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