Stifel Financial Corp (SF) 2014 Q4 法說會逐字稿

Good afternoon, my name is Courtney and I will be your conference operator today. At this time I would like to welcome everyone to the conference call to discuss Stifel's fourth-quarter and full-year 2014 financial results and today's announcement of Sterne Agee.

(Operator Instructions)

Jim Zemlyak, CFO of Stifel, you may begin your conference.

Thank you, Courtney. Good afternoon. This is Jim Zemlyak, CFO of Stifel. I would like to welcome everyone to our conference call today to discuss our fourth-quarter and full-year 2014 financial results, as well as today's announcement of our acquisition of Sterne Agee.

Please note that this conference call is being recorded. If you'd like to copy of today's presentation you may download slides from our website at www.stifel.com.

Before we begin today's call I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of fact or guarantees of performance. They may include statements regarding, among other things, our ability to successfully integrate acquired companies or branch offices of financial advisors, general economic, political, regulatory, and market conditions, investment banking and brokerage industries, our objectives and results, and also may include our belief regarding the effect of various regulatory matters, legal proceedings, management expectations, our liquidity and funding sources, counterparty credit risk, or other similar matters. As such, they are subject to risks, uncertainties, and other factors that may cause actual future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP, we may use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the Company's GAAP results. To the extent we discuss non-GAAP measures, the reconciliation to GAAP is available on our website at www.stifel.com.

And finally, for discussions of risks and uncertainties in our business, please see the business factors affecting the Company and financial services industry in the Company's annual report on Form 10-K and MD&A results in the Company's quarterly reports on Form 10-Q.

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

Thank you, Jim. Good afternoon, everyone. An exciting times here at your Company and I'm pleased to welcome you to our call.

We had a strong finish to the year and are excited to report that 2014 was our 19th consecutive year of record revenue. Both the Global Wealth Management and Institutional Group, both of them generated record revenues and record pretax operating income for 2014. We continue to add capabilities and talented professionals in our pursuit of building the preeminent brokerage and investment banking firm.

Today, I'm very pleased to announce the acquisition of Sterne Agee, which bolsters our Global Wealth Management segment with the addition of more than 700 financial advisors and independent representatives nationwide managing over $20 billion in client assets. And this acquisition also complements and significantly enhance our fixed income platform, which will generate significant scale. So I will discuss the Sterne Agee deal after we review earnings.

Before I turn to our [act far] results I'd like add a little color on the operating environment during the fourth quarter. For the quarter, the S&P was up 4% and the Dow was up 5%. As measured by the VIX, volatility increased 21% which helped equity volumes, which finished up 23% with an average of 7 billion shares traded per day, and this corresponded also to a solid quarter for our equity commissions.

The 10-year declined 32 basis points to close the year at 217 basis points. Interestingly, equity mutual fund flows were negative despite the positive market. And inflows were down 73% for the year.

Equity capital raising from a dollar value was down 25% in the fourth quarter and debt capital raising was essentially flat. M&A announcements were down in the quarter but completed deal values were up about 50%. And with the decline in the 10-year, the equity risk premium was approximately 300 basis points as compared to 250 basis points at the end of 2013.

So against that somewhat mixed operating environment I'm very pleased with our Company's results. Looking at our results, we had a GAAP net revenues were a record quarterly revenues of $578 million, up 2.5% over the prior-year and up 10% sequentially. GAAP EPS from continuing operations was $0.59. As you know, we do exclude merger-related chargers, so on a non-GAAP basis diluted EPS was $0.75 on net income of $58.4 million.

Our GAAP effective tax rate was 34.5% and was impacted really by the release of a valuation allowance, primarily on foreign net operating losses that we now believe are more likely than not to be realizable in the future. Our non-GAAP pretax margin for the quarter actually exceed our target, came in at 15.5%.

Turning to the next slide, it's going to be beneficial to comment on our results versus street expectations. You know we've been trying to do this. As I've said, we had a great quarter to finish the year. Our investment banking revenues were strong, coming in $18 million higher than estimates. It's important to note that I always do when we have a great investment banking quarter, that investment banking revenues and especially advisory revenues are lumpy. So I always encourage people not to annualize those numbers, either when they're high or when they are low, which they can tend to be both.

Two items of note, on the other side, while banking was very positive, on the negative side, principal transactions -- principal revenues missed reconsensus by $26 million and the significant part of that is what's frankly in trading. Our trading accounts for trading losses produced a $7 million delta in the quarter. So it was $7 million versus what we would normally expect an on-average to be.

And other revenues were negatively impacted by losses recorded in investments. Significantly one investment that had a large mark-to-market loss; that totaled, in combination, a little over $7 million.

I would note that the investment has rebounded, it's a publicly traded investment in the first quarter. But the combination of those two items was, on the revenue side, was $14 million that were somewhat unusual.

Comp, turning to expenses, comp came in at 61.5% versus expectations of 62.3%, so that was positive. However this was offset by higher non-comp expenses. The primary drivers of the miss, if you will, or the reason our non-comp was higher was that we incurred a $2.2 million legal settlement in a manner which I'm pleased to have behind us, and we also had at year-end a charitable contribution of $3 million; which was more than -- which would have driven, those two items together pretty much account for the $5 million over-expectation of non-comp OPEX.

Our non-GAAP tax rate was lower and shares were slightly higher, so net net net, these items resulted in a $1 million net income shortfall or $0.02 in EPS versus expectations. But in my opinion when I look at all of this, I think that the unusual items are more unusual on the negative side than the fact that we had a very good banking quarter. So I'm just very pleased with our results and feel that it shows the kind of firm that we've been building through the investments that we've made.

Looking at the next slide, as I said, record revenues for 2014; $2.2 billion, up 12% for the year. On a non-GAAP basis our EPS was a record $2.76 compared to $2.51. On a GAAP basis that was $2.35 a share; for the year our non-comp -- our non-GAAP comp on benefits was 62.3% and non-comp operating actually 22.5%. So all in all, to add 15% margins with what our target is; with all that we've been doing, I'm pleased with those results.

I will now discuss our top-line activity during the quarter. Brokerage revenues were flat at $269 million and up 4% sequentially. As I said we had trading losses compared to where we normally have trading gains, but I've already addressed that.

Investment banking revenues increased 8% to a record $175 million from $161 million, but also increased 42% sequentially. The increase was the result of a very strong advisory quarter which increased 18% from the prior year. In the quarter, as an example, we received our final payment for the advisory work that we performed for city of Detroit by Miller Buckfire and that was a very positive event.

Overall I want to comment that I've been especially pleased with our growth in investment banking. As way of backdrop, in 2008 we recorded total investment banking revenues of $84 million. In 2014 our investment banking revenues totaled $579 million. That's almost a sevenfold increase, and it underscores the investments that we've made to bolster this business.

Asset management service fees increased 26% to a record $106 million. As always, it's due to an increase in assets under management, our fee-based accounts, and some market performance. The quarter was also positively impacted by the addition of 1919 Investment Counsel and Zeigler, which both contributed nicely to the quarter.

Our other item was negatively impacted, again, by the losses recorded on our investments of $7.2 million, compared to a gain of $1.5 million in 2013. So the other thing I would note is, that when you look at net interest income it appears to be down sequentially. We had -- there were some accounting entries in the third quarter that positively impacted that, so I think that's most of the top-line results.

I'll turn now to our brokerage and investment banking revenues. Global Wealth brokerage revenues were up slightly, 1% year over year while Institutional brokerage revenues were flat. Equity brokerage, on one hand, was up 14% but was offset by a decline in fixed income of 18%.

And so total, brokerage was up 3.3% and exceeded for the first time over $1 billion. Investment banking at a record fourth quarter with, as I've said, $175 million in revenue and a record year. For the year, equity capital raising increased 27% to $232 million, and our advisory increased 36% to $273 million in advisory fees.

Our investment banking results highlight the diverse capabilities we're building at Stifel. For example, Stifel ranked number one as the most active 2014 mid-market investment bank in terms of M&A with 62 completed transactions totaling $8.7 billion. We continue to build a leading middle-market M&A franchise by consistently ranking in the top three for completed transactions under $1 billion.

Miller Buckfire ranked number two in the fourth quarter with [$702] billion, of the way we measure their business in volume for investment banks. In 2014 Miller Buckfire completed a number of notable assignments, including the city of Detroit. Almost $17 billion municipal restructuring and a $975 million out-of-court restructuring for iPayment.

Stifel's public finance group, including our acquired firms, led the nation in number of negotiated issues in 2014, serving as soul or senior manager for 586 transactions with a total par value of over $11 billion. We were also number one in national K-12 financing, number one in assessment district, number one in multifamily housing, and number one in national TIF financing. So that business is also showing the growth, and as you know at the end of the year, and I'll come to it, we had completed a merger with Merchant Capital which will bolster our abilities in the southeastern section of the United States.

Looking forward with backlog, our equity capital markets business, issuance levels are below last year's level and that's true for IPOs and follow-ons, and our backlog generally mirrors this. Our market share is steady but market volumes are lower. In terms of M&A, while the broader M&A markets have moderated slightly from their hectic pace in 2014, we continue to see a very robust pipeline of M&A mandates across the board.

The next slide reviews our core non-interest expenses for the quarter. Excluding non-core expenses, comp and benefits as a percentage of net revenues was at the low end of our stated goal; it came in at 61.5%, it was the same as the year-ago quarter.

Transition pay, which is our investments over the past, that's where we pay above our model for people that we bring on board, as a percentage of net revenues was 4%. Core non-comp operating expenses were $132.8 million, and I've already given the reasons for the increase in the quarterly non-comp, again, being a legal settlement and charitable.

The next slide reviews for the full year our non-interest expenses. We came in on target in terms of comp and benefit as a percentage of net revenues, that's 62.3%, and we maintain our target goal of 62% to 64%. Core non-comp operating expenses were $498 million or 22.5% of net revenues.

After we review and update our projections, I will provide guidance on forward non-comp operating expenses. We'll probably have a call to update some of the numbers for forward-looking on things like that prior to the first-quarter earnings. But I'm not prepared at this point to provide a projection for non-comp operating expenses in 2015.

The next slide shows the results of our reporting segments for the year. Global Wealth Management, record net revenues of $1.2 billion, up 10% from the prior year and operating contribution of $347 million. At our Institutional Group, record net revenues of nearly $1 billion, an increase of 16%, and operating contributions increased 7%.

Global Wealth Management has been steady and growing, another great quarter, margins of 27%. The increase in net revenues as compared to the prior-year fourth quarter is primarily attributable to the growth in asset management service fees and increased cash flows as well as the contributions from Ziegler and 1919.

We have increased net interest revenues due to the change in mix between investments and loans at Stifel Bank, primarily that's the reason. And an increase in commission revenues offset by a decline in other income and principal transaction.

Turning to the next slide of Stifel Bank, bank total assets stayed consistent of around $5 billion. However, as I previously mentioned, our strategy is to increase loans as a percentage of our total assets. And loans as a percentage of total assets grew to 43% of interest earning assets from 31% at the end of 2013. Loan balances grew 11% in the quarter and 47% for the year.

This transition, as we've talked about as we transition from loans out of the investment account, would result in an increase in our NIM or net interest margin, and that's true here in that our NIMs stood that 2.87 versus 2.34 at the end of 2013. The bank is asset-sensitive and will benefit from rising rates. Looking at asset quality, nonperforming loans and nonperforming assets were 25 basis points and 11 basis points, respectively. Trailing 12 month charge-offs were zero and reserves now covering NPL are at 373%. So very robust credit statistics.

Security-based loans increased 17% for the quarter and 44% for the year to almost $750 million, $733 million to be exact. We like this business, security-based loans, this asset class is highly complimentary with our Global Wealth Management business, has attractive spreads, and carries a zero risk weighting, in terms of the new risk weighting rules. And frankly, this business has a lot of runway for us in that I think we've only tapped about 3% of the assets that could be there to support security-based lending or lines of credit. So that's a business that we like and will continue to grow.

The mortgage portfolio increased $60 million to $433 million. We believe these are high-quality loans sourced in the Acacia acquisition, and we do source loans and portfolio loans through our private client group.

Commercial loans increased 8% in the quarter and 62% for the year, they stand at $900 million. These are primarily variable rate senior secured term loans and revolvers. They're generally rated credits, nearly half of which are investment grade. Loans continue be sourced through large syndication banks, and on the commercial side secondary market purchase, and to a lesser extent through investment banking and St. Louis-based credit facilities. Loan underwriting is traditional in nature with all credits individually researched, underwritten, and reviewed and approved by the bank's loan committee. I will say it's fully independent of the investment bank.

Also, if you look at the SNC review, more than 80% of the portfolios reviewed in the interagency shared national credit process, none of the banks' credits are criticized. And as a comparison, in the nationwide review about 10% of credits are criticized. Again I'm pointing to the asset quality.

We have a diversified portfolio, security-based loans, mortgages, and C&I loans are diversified geographically and by industry. Financial services is 17%, consumer and retail 16%, diversified industries 12%, technology 8%, and healthcare at 7%.

So bond redemptions and runoff, when you look -- turn the loan portfolio, it's the bond redemption in runoff has funded loan growth as we've held off crossing $10 billion in total consolidated assets, which would trigger DFAST requirements. To looking forward, it's our plan to stay under $10 billion through the third quarter of 2015. I believe that we'll be over $10 billion in the fourth quarter and then we will then, at that point, with the infrastructure and all the things that we believe we need to do that meets all of the requirements and does not put any limitations on our growth, frankly, we will then prudently grow the bank in excess of that $10 billion number.

The next slide looks at our Institutional Group results. For the full year, Institutional Group revenues were up 15% to a record $994 million. Comp and benefits was 62.4%, non-comp came in at 22%. Pretax operating income increased 7% to $153 million.

Turning to our capital structure, total assets are $9.5 billion. It's just up 6% from the end of the year. Our debt to equity ratio at the end of the quarter was 30.5%.

Pro forma debt to equity, which excludes, as I've told you before, we called our 6.7% senior notes on January 15, so we're now at 22.9%. Our tier 1 risk-based capital ratio remains robust at 25%. And we continue to analyze our use of capital through various strategies that I've discussed in the past.

Looking at other financial data, stockholders' equities $2.3 billion, book value per share stands at $35. Our leverage ratio, very conservative, 3.1 times the way we define leverage. So again we're very conservatively levered as a company. At the end of the year we had 2,103 financial advisors, during the quarter we hired 25 advisors, and for the full year we hired 122.

Client assets totaled $186 billion, almost $187 billion, 13 % increase from last year. So again, all in all a very, very good year.

Turning to Sterne Agee, we've identified a great firm in Sterne Agee to bolster our Global Wealth Management group with the addition of more than 700 financial advisors and independent representatives, increasing our advisor professional by 35%. And importantly, Sterne Agee's fixed income platform is highly complimentary to our existing products and services, and together will catapult this business to a new level, continuing the momentum we've established with the addition of Knight's fixed income sales and trading business. This acquisition furthers our goal of creating a balanced, well-diversified business mix with both wealth management and institutional -- our institutional business.

So I also want to -- I would like to thank Eric Needleman, who's chairman of Sterne Agee Group and CEO of Sterne Agee Leach. Eric is a consummate financial services professional and has been a tremendous leader of the Sterne Agee businesses during a difficult transition period. We at Stifel recognize Eric's skills as a leader, and at least as importantly, recognize his outstanding talents in building and guiding a world-class fixed income business.

He has attracted and led one of the most experienced and talented teams in our industry. We and he are excited by his desire to join with his new Stifel colleagues to lead and build our combined fixed-income franchise to one of the premier ones on Wall Street. Eric has more than 20 years of experience in the financial services industry, including co-head of US market making and head of high yield sales, trading, and research at KBC Financial Products.

He also served in executive positions at Lehman Brothers, and Grantchester Securities, which is the high yield division of Wasserstein Perella. Eric's leadership has been critical in bringing our two companies together, and we look forward to his contributions as we move forward as one company.

And I think Eric is on the call with me, and Eric welcome and (multiple speakers).

Thanks Ron, appreciate it. So Sterne Agee's been fortunate to experience growth and success for more than a century driven by an entrepreneurial spirit. We're excited to take this important step in the evolution of our company as we merge with the Stifel [to Stifel] organization.

The merger with us and Stifel frankly allows our shareholders, clients, and employees the opportunity to continue to prosper in the ever-challenging financial services arena. We're really delighted to join forces. Together I know that we are stronger and more flexible.

Sterne Agee shares Stifel's goal of becoming the preeminent diversified financial services organization, and we're pleased to partner with a like-minded company with similar legacy and culture. Our future looks bright.

Frankly, on a personal level I'm very excited about this opportunity. The world-class talent and resources of Stifel and the clear potential ahead of us really has me excited. And on a personal note, I'm looking very much forward to working with Billy Heisinger (sic - Heinzerling) in terms of co-running Fixed Income together and I'm looking forward to the opportunity.

You know, Eric, Heinzerling is -- can you say Kruszewski yet? We've only been working together -- You can't say Kruszewski either, right?

I can say Heinzerling but I -- Kruszewski I can't say yet.

Look, I think that Sterne Agee is one of the oldest and largest privately-owned financial services firms in the nation, not just in the Southeast. And this combination makes sense for multiple reasons.

First, it leverages both our Global Wealth Management and our Institutional platform. Sterne Agee significantly increases our financial advisors and independent representatives by 35% in a challenging recruiting environment.

And I'm also looking at what it does, this investment in the independent advisor business provides Stifel a platform to grow this channel. This channel is an important one, one that we've studied and looked at, you need some scale. We think we're going to grow and compete in this channel.

I also think this channel's also asset-sensitive, I mean it really benefits from rising rates. And we look forward to putting some resources toward a channel that we really have, frankly, ignored for the past, frankly, decade. Our highly complimentary fixed income platforms have very little overlap; I'll come back to that in a minute and I'll ask Eric to comment too.

Net-net, Sterne Agee is focused on larger tier 1 accounts. We generally focus on more middle-market accounts. It's highly complimentary with Knight in the sectors of high yield that they deal with, so we're very excited. And importantly, this merger is expected to generate long-term earnings growth and is accretive to Stifel when fully integrated, which I'll discuss in a minute.

Looking at the next slide, I'm going to turn to Sterne Agee's business lines. We intend, and I want to look at this, we intend to acquire and integrate five of Sterne Agee's businesses. We group them under, what I call Global Wealth Management, four of them, which is the private client business traditional, independent advisors trust and clearing, and fixed income.

First of all, as we look at it, the private client, in total Sterne Agee did about $500 million in revenue. And what we're looking at is the private client business traditional 130 financial advisors in 23 branches, highly complimentary with us. $10 billion of AUM, that business is about $85 million in revenue.

The independent advisor channel, about $90 million in revenue, 600 independent reps in 40 states, again, $10 billion in AUM. They have a trust company that we will -- that we're building trust capabilities now, both between Stifel trust, 1919's trust, and now this trust company. We will all put together as a trust company and it will have -- trust companies are hard to build, so this will have the revenue and the scale to be profitable in something that we look forward to growing significantly.

And Sterne Agee is a top 10 clearing firm in the US with over $27 billion in assets under custody, and $5 million to $6 million in revenue but also a very important net interest. That's just fee revenue, that does not include net interest and other things that are driven from that business. So we're looking hard and believe that we will integrate that.

Turning to the institutional business and fixed income, we have -- there's over 200 professionals with minimal overlap. And I'll come back to that fixed income when we get into it a little bit in detail.

But also today I want to talk about what businesses that we're looking at in terms of what I want to call strategic evaluation. Stifel, their a mortgage company, a very high-quality mortgage origination company, and then their equity business. And I will deal with them, I want to talk about them separately and together.

First it's important to note that Stifel and Sterne Agee have agreed with the founders of the FTC mortgage business to sell this business back to them. Very entrepreneurial group of people and versus where it fit with us and with their long-term objectives were, we signed an agreement today which sells the business back to them. And that's all encompassed, I'm not going to talk anything about those terms because it's baked into all of our overall deal, but part of this was actually selling back to the people who had founded that business, FTC mortgage. So that deal is signed and will close in the near future, frankly.

In addition to that, Sterne Agee is both a leading institutional equity and investment banking business. And I'll tell you, not only do I know the people and I've met the people, this is a quality people with quality individuals and they've built a really, a very nice scalable businesses. We've thought hard about it, we felt that the integration of that business into our robust equity business would be difficult. It would just be difficult in the number of overlaps and the things that would make the personal toll difficult. And on top of that, from our perspective, we think that the individuals there have built a very nice business.

So we are committed, Stifel is committed, and we have committed to Sterne Agee and the professionals in Sterne Agee's institutional equity and investment banking business to either operate it on a standalone independent basis -- we believe there's significant value in this business, we've been approached by a number of suitable partners for them for this business and its professionals; working together with these employees, we're committed to finding the right partner, or alternatively considering all strategic alternatives.

We will consider spinning off, we will consider merging it. We have a number of people that are interested. Bottom line is, as I've said in a number of the deals we've done, this is a quality business.

The people, anyone on the street, and I will say this, that thinks that this business in going to atrophy because it's not part of a larger Stifel, could not be farther from certainly, where my viewpoint is on this business. My viewpoint is that this business can continue to grow and flourish. Yes, they will still be a competitor and maybe I will look back and think we helped a great competitor but it's the right thing to do.

And I look forward to them all staying together and continuing to build on what they have built on. So that's the valuation. It's farther along than many people would think, and I'm hopeful for a good outcome for that high-quality group of people.

Let's look at the transaction now in general. And again, when you look at this, you'll see how we're evaluating.

The transaction value is approximately $150 million, which is priced on the basis of a premium to tangible book value. The tangible book value will be based upon actual tangible book value at close, so we'll have an adjustment for any up or down changes in tangible book value at close.

Included in this value is our best estimate of what we estimate to be $12 million that Stifel may pay to the Sterne Agee shareholders subject to the ultimate resolution of existing contingent liabilities of Sterne Agee. This payment would be scheduled to be paid at the end of years two and three.

And what we did effectively, was that we wanted to make sure that we were able to protect -- or not to protect but the deal structure that the Stifel shareholders have adequate reserves. In fact, as you can see by our estimate, in the purchase price, more than adequate reserves, to cover the potential liabilities; but anything that can be returned out of those reserves will be returned to the Sterne Agee shareholders. We also put in a cash election merger, so that will allow the shareholders of Sterne to elect either cash or stock or some percentage.

We've -- to help with what may be of interest to having more stock, we've reserved an additional 200,000 shares if there's more interest in the stock. Right now this deal is based that we will issue 1.42 million shares of the Stifel that is valued at $51.55 which was Friday's close, but we could go to a maximum of 1.62 million shares that would of course reduce cash. The balance of approximately $77 million based on the minimum number of shares issued, again, will be subject to adjustments at closing.

There's a retention component to this deal which consists of expected payments of $58 million comprised of cash and RSUs. The deal is subject to customary regulatory approvals and Sterne Agee shareholder approval. We have a number of voting agreements and we, as is our custom, we have a number of continuation agreements and we're getting more from the key people. This deal makes a lot of sense and the people at Sterne Agee see that and so I'm confident about the combination of all of us together, that we'll move forward together as we have on our prior deals. In terms of closing, would expect this transaction to close in the second quarter of 2015.

This combination is also financially compelling. I want to share with you how we look at Stifel's investment in acquiring the Sterne's business, which is based on conservative assumptions. The initial -- the way we look at it is, and the way I look at things like go through what the accounting is and just look at economic investment versus what we believe we're getting.

And so the economic investment, sort of the uses of capital, consist of the purchase price of $150 million plus, and I state these others on an after-tax basis, $35 million of retention. We think that there's restructuring and one-time expenses after tax of $15 million, and we believe that there's duplicate overhead of $32 million.

And what we look at is we have income [taped] statement expenses after tax of $81 million. We look at -- after purchase accounting we believe that tangible equity would be $40 million, and we look at our total economic investment to be $191 million. And that's -- we run some of this through non-core as you know and has been our case. But the way we evaluate these is our economic investment's $191 million. We will fund that by using $73 million of equity, that's at the low end of the range, and retention, there's a stock portion after tax of retention of $18 million. That makes an equity investment of $91 million, and then $100 million of on-balance sheet debt.

As you know, we just issued a 10-year note so the sources are $191 million. We look at the potential gross revenue range for the acquired businesses of $300 million to $325 million. Expected after-tax net income of between $28 million and $38 million, including full realization of the cost savings and net of the cost of financing.

These expenses that I've said before, they, on a pre-tax basis, are $136 million or $81 million. They will flow through our non-core portion. But as I've always said, we view that as investment, it's just that accounting that makes us expense it.

So when you cut through all of it, the returns are attractive. Our return on economic investment, unlevered, is 15% to 20%. Our return on equity investment is 30% to 40% and approximately, at the end of the day, only one wants me tell you what I think it is accretive,; and it will be approximately 6% to 8% accretive to core EPS with full implementation of cost savings.

That coupled with the fact that we've adequately reserved the balance sheet, we think we have a very, very nice transaction. Looking at the businesses individually, significant private client, they built an impressive private client group. As I've said, they will increase us 35%; it's a great addition to our Global Wealth Management and these slides show you some of the numbers.

If you look, looking at firms where Global Wealth is in a full service investment bank, and that's how we look at our rankings, is where we compete and where we sit, this makes us the sixth largest now, with advisors and reps, in terms of the brokers include investment banks as well. So it's a significant step forward and it's a nice addition in the southeastern part of the United States.

Sterne Agee, looking next, has a great trust company and clearing business. They -- it, again, on the clearing side, it's the ninth largest in the country, they have $27 billion in assets under custody and 85 broker-dealers cleared from this. It's a nice add-on business for us.

Just as important, and frankly, where I was somewhat surprised, is what -- and really what got us excited to do this transaction in the first place, was the complimentary fixed income business. Our combined fixed income capabilities simply will take this business to the new level.

Sterne Agee adds over 200 individuals to Stifel's platform. There is limited overlap in this business across accounts, primarily because Sterne Agee built a tier 1 account base. Their high-yield team matches up nicely with our Knight team, so on a pro forma basis this group will have over 700 professionals generating an estimated $450 million in annual revenues. And I really believe that it will accelerate what we've been doing in our debt capital markets and our leverage finance capabilities.

So I'm really excited about it, and Eric, I will ask you, I think that when you and I first started talking, I think we said, look, we can't do anything if one and one equals one in fixed income. And I have said, this reminds me of when did the Thomas Weisel transaction; when we looked at the overlap there was no overlap on investment banking.

We had virtually no overlap with Weisel. They did technology, we did more industrial. And that's been a perfect fit and a great addition going back now five years. And Eric, I'll let you -- I've been talking a lot here, just give your thoughts (multiple speakers).

I don't have much to add. You hit the nail on the head in terms of, you know, fixed income businesses aren't all the same. When you look at Knight's high yield team, what was called their high yield team, really it was very distress-focused, really was very hedge fund-focused.

When you look at the Sterne high yield team it's very institutionally-focused and it's very on-the-run single [B], double [B] type names. When you look at, within fixed income on the Stifel side, the general of sales force in the middle market sales force was talking more to insurance companies and money managers. When you look at the general sales force on the Sterne side, it was very depository-focused; that was also going to be very complimentary to KBW.

So we were amazed at how little overlap there was in terms of accounts and in terms of direct products. And so this one plus one is definitively not one. It's a heck of a lot closer to two.

In fact I would just give them -- when we looked at it we were amazed at the fact that it's amazing how much we didn't have overlap at all. But I think the number -- I think when we looked at it and we modeled it, and looking at it not only on account level but a product by account level and then a salesmen level, were talking about the fact that the business is 93% complimentary. And that doesn't build into what I think is going to be significant synergies in being able to go after and compete for business.

So as I said, there's no overlap. I think Eric made the comment to me, I thought was -- I will repeat it on this call, he said, well there's no overlap in the business. There's significant overlap in culture, in the way people approach the business.

And again, we've spent a lot of time. We've spent a lot of time with our team and Eric's team on the fixed income side, have sat down and have had multiple meetings planning out the pro forma organization. I believe that that integration is ready to go and it's exciting. So I am really pleased with what we have to do there. And I hope you're still pleased, Eric, that we've announced this.

I couldn't be more excited. I think that the entire Sterne team is excited.

Well look, Eric, I will let you sign off here, I know you've got a lot of people that want to talk to you.

Thank you, sir.

So I will be in touch, and thank you and welcome to the Stifel team and welcome to all of your associates. We couldn't be more pleased.

Were looking forward to it. Thanks again, Ron.

So look, some comments on our recent acquisitions. Merchant closed on December 31, 2014 this transaction as a great public finance team in the Southeast. We've underwritten already a dozen issues through Friday as a result of the addition of this group.

And among the issues the Merchant Capital Group was responsible for a $252 million Gwinnett County School District, I hope I pronounced that right. We believe this is the largest sole managed municipal issue that Stifel has ever underwritten. Again, speaks to their capability.

1919 we closed in early November. Team just hit the ground running. As a new discipline we didn't previously have It's a high-touch business and it has -- that integration has gone very, very well.

Oriel closed July 31. In the fourth quarter they contributed $10.6 million to the top-line, it was about $5 million in brokerage, $7 million advisory. The integration and conversion is underway. There are -- that's something we have to focus on because it's, again, it's in Europe.

We have a strong management team in Oriel, and between Oriel and our high yield and KBW and the Stifel teams have come together nicely and I'm excited by our prospects. As I said earlier, we reversed our NOL in Europe and I think we're going to make money in Europe, and we reversed our valuation allowance on the losses that we had incurred in Europe. So I think that that's going to go well.

De La Rosa closed in April of last year, helped our muni group, as I said, rank number one in municipal negotiations issues across everything I talked about. As I previously mentioned, Stifel KBW, you can see Stifel KBW ranked number one M&A advisor in the mid-market 2014. It was ranked number one in bank M&A in 2014 and ranked number one in bank and script IPOs in 2014.

It's hard to believe that that deal is just over a year and a half into it, as to how smoothly that has gone. And Miller Buckfire, as I said, ranked number two in the fourth quarter 2014. So how have our acquisitions gone? Pretty well.

So finally, I'll just say I want to look at how we're going to look at non-core deal quote costs. This just rolls forward what we think is going to happen, this is the way we look at it and I won't belabor the point as to how we look at economic investment. We look through accounting and we look at cash-on-cash returns, whether it resides as good will on the balance sheet or incremental expenses that we have to incur in order to get a business that then fits within our model.

That's the economic investment, but to help everyone, this slide shows our estimate of the expenses that we will occur and run through non-core -- they also, for Sterne Agee, they tie back to our economic investment analysis. I won't belabor it, but wanted to give some color on what we're thinking and we will actually update this when we get a better sense of what's going on.

So in conclusion, look, I could never be more excited than I am about today's announcement with Sterne Agee. I believe there are numerous, numerous merits to this deal and it's going to be highly complimentary, and I believe accretive. We ended the year with our 19th consecutive year of record revenue, we see market opportunities and corporate levers to deploy to continue our growth trajectory.

We're positioned to continue gain market share in the verticals and products specialize in. We have excess capital to deploy in three main avenues: strategic acquisitions, share repurchases, and/or dividends; we will continue to also look at leveraging our balance sheet, we'll evaluate all three of those options against what is the best return for shareholder value. As I said, our strategy at the bank is to grow modestly until we've met all regulatory -- what we define as the regulatory requirements to be a robust bank holding company and then we will accelerate our growth.

Our analysis on interest rate sensitivity has not changed from our prior disclosure of adding an incremental $60 million to $70 million of pretax earnings. I will note that that's prior to Sterne Agee. Sterne Agee will add -- they are also interest rate-sensitive so this number will get larger when we incorporate their numbers into that. So when rates increase we will benefit.

So with that, long call, a lot going on. Maybe there are no questions. Operator?

(Operator Instructions)

Chris Harris, Wells Fargo.

A couple of questions on the synergies. One just on the expense side, what is the dollar amount of expense synergies you guys are thinking about here? And what kind of timeframe do think you can bring those out?

You know Chris, I was wondering how long it would take that question to come out at first. So look, I gave it to in reverse. I always give it to you in reverse.

What I start with is our economic investment, and I show that as part of that investment what we're going to run through duplicate type expenses that we run through non-core and I gave you that estimate. So if you look you'll see that the way we look at it is that our economic investment will generate that unlevered and levered returns that were noted on that slide, and the question is when will those non-core expenses go away?

So we do it in reverse. And we talk about what the business looks like and now it's our job to right-size the business and the overhead for that business. So just look at those two slides that I gave you and you can answer your question in reverse.

Okay.

Does that make sense?

Yes, alright. I was wondering kind of what Sterne Agee is making here pre-cost savings, but I guess we can go through these numbers and try to back into it.

What does it matter? Look, the question is what are we going to make when we put them on our overhead? So all of our deals are based on the fact that we have a robust platform that we add revenue-producing things to.

And so what I'm showing you on the slide is where we think the businesses will settle. $300 million to $325 million in revenue, what was it, $28 after financing, $35 million in net income, and then expenses that we're going to run through non-core.

You could just take the non-core expenses and apply it against that and then you can run it the other way. But we do it this way.

Okay, fair enough. Maybe you can talk a little bit about what kind of revenue synergies might be created as a result of this deal? It would seem like there are some interesting ones that could be fleshed out.

But perhaps you can comment on that. And then maybe if you think back at all these other transactions you've done, whether were you positively surprised on revenue synergies that were created as result of those?

Absolutely. We do not model revenue synergies. We -- it's hard enough to think about revenue, period, because we are so -- we're in a market that is cyclical; even the wealth management side is cyclical.

But in each of our transactions we have done -- we do bridge financings now, Miller Buckfire with Stifel provided synergies that we would hope we didn't model at the time. The number of synergies between what we've added in debt capital markets, which is we're in the early innings of that ballgame. What we've seen has surprised us, the synergies that came with Knight have been very good and helped us in other areas that we've been trying to build.

And so in this case, we see the ability to, especially when you look at the credit side of what we're bringing on board and the credit expertise in fixed income, we see significant synergy potential to drive our very large footprint in research, our very large equity footprint. And frankly our fixed income business is undersized compared to the size and relevance of our firm.

So I'm very excited about the potential that this brings the wealth management side, the independent channel and potentially clearing and looking at what we can do in the RIA space, and in that channel it's not something that a lot of growth in that area that we've not participated in, and so that's another lever in growth and synergies.

Look, I could go on and on and on. The answer is we haven't modeled any of them and we're hopeful we're there. When I look backwards at all the deals we've done, I've always been surprised at how as you increase relevance, your ability to get revenue synergies increases almost exponentially.

Interesting. One last one then, just on the entities here that are kind of under strategic review, if you will.

The mortgage business, I know we don't want to get into the terms, but is it safe to assume then that that's all baked into the terms we're looking at here today? And you guys aren't going to get like an incremental cash payment that flows through after the fact as a result of that business being sold?

That's a fair assumption.

Okay, alright. Thank you.

Devin Ryan, JMP Securities.

So just a quick follow-up here on Chris' question. And clearly the returns from Sterne Agee look pretty compelling. But I'm just trying to get some sense around the revenues and how stable they've been, because some of the businesses seem more stable, maybe retail and then fixed income can be a bit more volatile.

So I'm just trying to think about that band of $300 million to $325 million. Is that a pretty tight level or have revenues kind of been bouncing around quite a bit within that view?

Look, I wouldn't say any more than the street levels. Fixed income has been more volatile and maybe a little more challenged across the street. I think that they certainly didn't have the challenges that you've been reading about.

But I think their business, considering the rumors that have been going on for a while and how distracting that can be, I've been really -- their business has been fine. That, going forward, talk to any investment bank and equity underwriting and fixed income and those things tend to be more cyclical, and I would think that that's true on the street at Stifel and at Sterne Agee, and now combined Stifel Sterne Agee.

Okay, got it, great.

And then on the retail side, Sterne Agee's advisor force is much more independent in nature than the overall Stifel mix previously. So I'm just trying to think about, does that open the door, maybe, to making a bigger effort to expand the independent channel for Stifel as a firm? I guess essentially changing some of the recruiting strategies or offering a more balanced platform to people who want to go one way or the other. Because I know independent was a small piece for the firm previously.

We have an independent channel. So we're not -- it's not like we don't know the business. And as I previously stated, I think that in any businesses that we want to get into, and this is a wealth management business, it's the same systems, it's the same system of records and controls, it's just a different channel.

I think [ray jay] does it very well, for example, and for us it provides us the ability to have some scale and be able to really focus and compete in that business. So there's a new player in town in that business and we look forward to investing in that business.

Great. And then just lastly, on the same lines here, I think you guys have been taking up the packages a bit on FA recruiting, and I know you've been talking about the past quarter or so. So just curious kind of where the backlog stands there and if you are seeing more success as the comp packages have gone up and you've changed your philosophy a bit on recruiting side.

I think it has gone up and we continue to recruit. That said we've also been a little busy and so there's only 24 hours in a day. But the group has been recruiting.

And I would say that this year, especially the second half of this year, for all of the things that are going on with deals that occurred in 2007 and 2008 and 2009, the second half of this year and 2016 are going to be interesting. We intend to be prepared and be a player in those markets.

Great. Congratulations on the record year and on the deal.

Chris Allen, Evercore.

So I was wondering if you could maybe talk about retention, attrition trends for FAs at Sterne Agee over the past year or two? And how long a timeframe it's going to be to transition those FAs onto your platform once the deal closes?

Sterne Agee has got a strong culture. They have -- there's things that always happen when you go through transition periods like they have.

But our history and the way we look at things is that we believe, and we're going to meet a lot of people and talk to them, that when you look at what we provide and the way we value financial advisors, the way we value their independence and their client relationships, and everything that we do -- so does Sterne Agee, our cultures are very similar that way. And I'm hopeful that our new partners will -- are going to join and be part of what I think is the best firm to work at on the street for a financial advisor.

And so I never want to predict because people make their own decisions, but if past is prologue, people find the way we approach this business to be very attractive. We have attractive retention as we built into deals and I'm confident that we will do well. I'm sure I have never of competitors that are going to try to prove me wrong. but we'll see.

Got it. And any color in terms of the length of the retention packages you guys are going to be offering to the Sterne Agee employees?

No, no color.

(Technical difficulties) thanks for the update on the $10 billion when you expect to surpass that. Any color just in terms of how much you see the potential to accelerate the loan growth right now relative to what we see in maybe a couple of prior quarters and which channel you see the best opportunity for growth in the near term?

I think that we've taken the opportunity with all of the talk about the raise in -- rise in rates and what's going to happen, and my own personal viewpoint that the yield curve could flatten a little bit, I think it's been an opportunity for us to focus inside in terms of our infrastructure and not be driving growth into a market that I feel is rich on the loan side. And it becomes to more covenant [light], there's been a lot of things that have been going on that the ability to say we're going to keep our powder dry, and from a loan growth perspective yet built our capabilities. It seems to me -- no one knows the future but it feels right.

If we were out there just competing for loans we could be growing significantly on the loan book. I personally don't view it as the best environment today based upon risk-adjusted returns. But I think that we are well-positioned when we do grow and hopefully that will be into a rate and spread environment that can be even more attractive than today.

That's it for me, guys. Thanks.

Hugh Miller, Macquarie Group.

I guess in following up on the bank, a couple of questions there. You guys had mentioned that there was kind of an unusual benefit in the third quarter that enhanced the NIM. I was wondering if you could give us a little bit more of a flavor as to what that -- was driving that?

And you also mentioned that the security-based lending penetration is extremely low at this point. And what's the strategy to improve that and what's the yield on that asset relative to the overall loan yield?

I think the yield on this -- I'll take the second question first. It's relatively similar but we're very comfortable with the collateral on how we monitor. Look, security-based lending is marginal lending under Reg U and we are very comfortable with that.

And our approach is always not to push but to provide product, we don't push advisors to do anything, we make our products available. But as the capabilities broaden it generally accelerates growth. I always like to say water finds its own level and that level of water in our Firm is a lot more Reg U loans than we have today.

And so we see significant ability to grow that book of business and we are excited. And again I think Sterne Agee even adds to that capability because we're going to be able to offer our product. They didn't really have liability products so I'm looking forward to introducing them to this as well. As well as our mortgage product.

We bought -- your first question, we bought Acacia at a substantial discount. There's some estimates about how that substantial discount comes through vis-a-vis prepayments and a number of things that you've got to adjust. And it's sort of purchase accounting adjustments.

The net economics is that we bought a group of high-quality loans we bought, we believe, at a substantial discount, and how we run that discount back to par, effectively, can create some lumps based upon what happens to prepayment fees and all of that. And that's what happened in the third quarter.

Okay that's helpful color there. And another housekeeping question on the asset management fees just running up a bit higher, and I know guys had mentioned the earning of some performance fees. Can you just give us a sense of what in the fourth quarter from those performance fees might be considered nonrecurring and how we should be thinking about that as a run rate?

I'm not sure I understood the question. I'm not sure that's what I said.

Performance fees -- what I said was that we had investments -- we have some investments that we've been making as we think about what we're doing in leverage finance, and we have some investments that they're liquid investments. But with what happened in the fourth quarter there was some significant write-downs on a mark-to-market value which in many cases is recovered, but that was a $7 million loss and that's what I was referring to.

Our asset management business is pretty traditional. Not a lot of 20 plus incentive type businesses in our asset management offering.

Okay. So that the jump from call it $97 million in asset management service fees up to $106 million quarter-over-quarter was based on market appreciation and flow and that type of (multiple speakers)?

Well, and 1919. 1919 is, I think I've said, is a $50 million business and that runs through that line item. We only closed them in November so we didn't even have a full quarter of them.

Okay. And then just a couple of questions with regard to the acquisition.

You guys obviously talking about $300 million to $325 million revenue run rate. I assume that that's inconclusive of the -- of at this point retaining the Sterne ECM business. That's correct?

No.

Okay.

Look at the slide that I think I showed it's conclusive of what it's conclusive of and it does not include ECM or mortgage.

Okay, I thought the other ones totalled up to a lot less than that but I'll run through the figures again. And on the fixed income capital market side, obviously about $130 million business and you had mentioned that it has been a little bit more volatile than some of the other business lines. Can you just give us a sense of where that was at peak in the past couple of years?

I don't know that I know the answer to that. I could, but I can't as I sit here. I would, but --

Sure, and then on the retail side business, obviously as someone else mentioned, a lot more on the independent financial advisors side. Can you just talk to us about what you guys are assuming with regard to retention of the overall advisor? And if you view -- there seems to be a lot of technology out there that's allowing for independent advisors to kind of break away. Do you see that channel as a little bit more approachable from a recruiting standpoint?

Look, I think if you look at it, and you look at what's been going on, it's one of the areas that Sterne is good at. And I will tell you that I looked at their technology and some of this breakaway technology that you're talking about, they own it. Sterne, it was developed at Sterne.

And when I saw it I was excited about it and they have people who know what they're doing in that business. So we think that they've got a significant business and a well-run business and we are excited to have them part of the team.

Okay, and my last question, just with regard to the assumption of 6% to 8% accretion post the synergy realization, it looks like according to your slides that you guys are anticipating a duplicate of costs running into mid 2016. Is that a safe assumption to assume at that point, call it mid 2016-ish, that you guys should be able to start to achieve that type of EPS accretion?

Well look, again it's the same question that always comes back to me. It's going -- the fact that we charge all the stock-based comp upfront and the fact that we charge all of what I view as acquisition-related investment through the income statement, it won't -- the GAAP results will be negatively impacted by all of those charges. I look at it as that those are -- that's just accounting.

I'm showing you what we believe our economic investment is. We're showing what we believe the -- how that economic investment runs through the income statement, when think it will run off. And then ultimately what we're talking about is a $300 million to $325 million business that generates $30 million of profit and you could run accretion dilution on that. Look at the shares we're issuing, add it together, and it's going to come to 6% to 8% or whatever it is.

Yes.

So it's fully integrated after we run off these expenses, but again that's how we have done 22 deals.

Okay, I appreciate your time, it's helpful in the insight. You overlooked the Sidoti partnership.

I'm very excited about that. I did overlook that, I hope that Peter does not feel neglected, there's probably a lot going on. But the Sidoti partnership is an ability for us to expand our investment banking into a number, almost 300, I forget the number, of company small cap that we don't follow and research, we have the ability to provide that research to our advisors.

And partnerships are always challenging. But they are good people there and we have good people here and we think we're going to generate some business out of that.

So thanks for bringing it up. And I'm excited about it. It's just -- kind of forgot about it.

I appreciate the color. There's a lot going on there. But thank you for your time.

Christian Bolu, Credit Suisse.

As we grow the independent broker-dealer business, just curious to get your thoughts on possible compliance burden or an increase in compliance burden at a time when we're seeing increasing scrutiny from the regulators on things like commissions.

Well, the independent doesn't necessarily equal commissions. And I think the scrutiny might be today's news with the deal well and that impacts the entire industry. But I think that the wealth management, in fact many of the wealth management, the RIAs, would argue that that scrutiny is going to improve that business. And that business will gain market share on the RIA side.

So I think it's more -- you've got to certainly be very cognizant of AML and BSA issues of any business that you do. And as you grow a business that you have to make sure that you have robust systems on that. But I don't view that that business is standard deviations apart from what we otherwise do at any of our businesses.

Okay. Trying to get a sense of how much interest sensitivity Sterne should add. So of the $20 billion in client assets how much of that is cash and how is that currently monetized today?

I have to update those slides. I was not prepared to do that in terms of updating our interest rate sensitivity with them.

And so you're going to have to wait on that one because I actually don't know the answer. I do know that it makes our numbers better but I can't tell you how much.

Okay, that's fair. Just a couple of cleanup items.

In terms of deposit cost at a bank, that fell pretty significantly in the quarter. I'm just curious in what's going on there?

I think it's really -- we have swaps, have interest rate swaps, so we have to amortize those interest -- we try not to take interest rate risks. So I don't know that it's -- if we compare to fed funds our what it would look higher, but it's just that we try to match fund, we do cash flow hedges and that we have to run those -- that cost through our deposit expense. I guess it would look large compared to someone that wasn't hedging, but we don't want to take that kind of risk.

Okay, that's fair. And then just lastly, just pro forma for the acquisition, what does the balance sheet look like?

We believe that it's not two and two equals four. We have not completely done all of that. We're doing some work, but it's the trading inventories and we believe that we don't have to have a significant increase in the amount of trading that we have to do.

There's a certain amount that you have to be in the flow; we get synergies out of that. But we haven't -- I don't have a pro forma balance sheet for you at this time.

(Multiple speakers) Okay, that's what I was trying to get at. Thanks for taking my questions and congrats on the deal.

Steven Chubak, Nomura.

So just wanted to ask a follow-up relating to the strategy to cross the $10 billion asset threshold. And I do appreciate the additional color that you provided there. But I just want to get a sense as to how we should be thinking about that incremental cost or margin impact associated with becoming a DFAST bank?

We're doing it now. The point is that it's in our expenses now. We don't have the Durbin Amendment that is a big -- that's a big item when you cross. And that doesn't really impact us, we don't have that kind of fee income a traditional bank would have.

I think it's just that you need -- it's a line in the sand, arbitrary as it may be, that requires that you have a certain robustness to your risk management and all of the systems that we have. And so we're making those investments now. And you've seen elevated expenses that we have on consultants and all the things that we're doing.

Some days it's frustrating for me, but I will tell you it's made us a stronger firm, a stronger risk firm because of the disciplines that we're putting in place. But we're making those investments today because I think that if you ask anyone on the regulatory front they look at you differently if you're $10 billion and $1 than if you're $9.9 billion.

Okay, so based on the commentary which suggests that the incremental -- we're not going to see an incremental build in terms of that investment pertaining to investments in systems specifically? That a lot of that's already reflected in the run rate? I just want to make sure (multiple speakers) the expense trajectory appropriately.

A lot of that is built into our run rate. We will probably have a better -- we're pulling a lot of this hopefully to some completion in the first half of 2015, but a lot of it's in our run rate. And again, the reason I said that we will probably look at Q4 as when we'll cross $10 billion. I think we have a little bit of work to do here with the deal we just announced.

And I think that we will focus on that integration. We'll focus on our systems. We'll focus on what we need to do from a regulatory front, and this is a marathon, not a sprint.

And when we are ready to deploy that capital we will. It's fortunate in that I don't feel like we're missing some robust credit cycle here. It's okay to do all of the things we're doing, but the fact remains that we have a significant runway to build our net interest margin and our ROEs by deploying excess tier 1 risk-weighted capital.

Okay, understood. And then just one final one for me.

Just looking at the fixed income trading results over the course of the past year, even after we adjust for some prorated contributions from Knight, I suppose, midway through 2013 that the implied performance fell just short of some of the pretax income guidance you had given previously.

I just want to get a better sense as to given some of the recent challenges that we've seen in that business, while the deal terms are certainly attractive, as it pertains to the Sterne Agee acquisition, that it does suggest that you're doubling down in that area. And I just wanted to get a sense as to how you're viewing the industry landscape on the fixed income trading side specifically, since it's one that certainly some of the larger players are deemphasizing.

Look, I'm glad to you asked that question because if you had told me that it looked like a perfect time to invest then I would have gotten nervous. I think the markets have been challenged, and I think it's probably people are shrinking and that's when we invest. And that's when we add good capabilities and that's when we gain market share; that's what we do.

Could we be wrong? Yes, we can be wrong, but I would rather be wrong at what is viewed as a trough than be wrong at what is proven to be a peak. So I believe that fixed income markets are fine. They're not going away, for sure.

And we'll look back and just like we made investments in banking back when people said it's a tough business, we've grown investment banking from $80 million to nearly $600 million. And we're going to -- fixed income is going to be -- at some point it will be a billion dollar business for us and we'll be glad that we made these investments. I never know about timing; I'm very comfortable with our entry point here.

That's really helpful. And congrats on the deal and thanks again for taking my questions.

Douglas Sipkin, Susquehanna.

Just wanted to focus a little bit on -- I guess a little bit more on the independent channel. I'm just trying to see the transaction -- was it driven because you guys are feeling that that's a channel you want to embrace? Or was this sort of like an opportunistic time for you guys to get bigger in fixed income in independence?

So I'm basically saying has your viewpoint around the independent channel changed? Has it gotten more attractive for you?

Look, it's a fair question. But I think that our approach to growth via acquisitions has not changed and that we never go out and look for anything based upon a view of the marketplace. As you can see, there's divestitures as part of this deal. And independent is not one of them.

I guess it could have been if you want to -- if you look at how we've evaluated this. As we went through this, we believe that we are doing an opportunistic deal, bringing good people on, and when we look at that business, we feel it's a good time to invest in that business.

If we didn't, we either wouldn't have done the deal, or we would have looked at the strategic alternatives to that business. So I think our approach sort of answers your question.

Okay, that's fair. Shifting gears a little bit, you didn't focus on potentially what maybe the added distribution could do for you on the investment banking side. Obviously a larger FA count.

Have you guys thought through that yet? Is that some potential revenue synergy that may manifest over time just having 35% more advisors? Is that something that could potentially lead to a better underwriting franchise? You guys have obviously done well recently so just curious your thoughts on that.

I hope so. I think. Again, as I said I don't mean to be flippant about it, I don't -- relevance matters.

The ability to say that you have, wherever we end up here, 2,800 going to 3,000 advisors, that distribution, high-yield -- that ability to, on the high-yield side, all of those capabilities make our Firm more relevant to clients and as we are more relevant to clients we get more business. That is the revenue synergy that comes out of building a relevant firm. It's just hard to measure.

I know it instinctively, I've been in the business a long time. And we will win more business that we would have -- on the margin than we would have prior to doing this deal or certainly prior to the Knight deal, certainly prior to the Thomas Weisel deal. All of those deals made us more relevant and drove revenue synergies. I don't know how to model it so I don't.

Got you, okay, that's fair. And then just finally, and I think you touched on it briefly, what can acquiring the clearing business of Sterne provide for you guys? Obviously on the face of it, it's not a tremendous amount of revenues, but it sounds like you feel like there's leverage points there.

I think that the traditional clearing is one thing, but I think also this whole space and clearing and the clearing for the RIA space is attractive. I think it's a very attractive business that certain of the larger discounters make a lot of money in, it's a money flow business. It's a money balance business and that the risk adjustment returns are high, and so you have a team, an experienced team there that knows the clearing business.

We might -- I might make suggestions as we look for new clients maybe to point toward more the asset management space. But it's interesting and it has been interesting to us for a while. And now we have some people who we think can drive that business.

Great, thank you for answering all my questions. And congrats, it looks like it's a good deal.

Michael Wong, Morningstar.

After all of the recent announced acquisitions, I was hoping to get your updated thoughts on how much excess capital you think you have? And maybe why you didn't use more cash in debt instead of equity for the Sterne Agee acquisition that potentially just increased your excess capital position.

That's fair. We can always -- there 's two sides to every deal and our new partners wanted a tax-free reorg and a cash election merger. And I think that we can do our capital planning in the market, we don't need to hoist it on our new partners just because I have new capital so I'm sorry you don't get a tax-free -- that's not a good way to start a new relationship. So they had input into what they wanted and we certainly wanted to do a friendly-type deal.

But on paper I agree with you. We could have used cash, more cash, but there's tax rules.

Makes sense. And I guess last question, was there any particular reason for the large sequential uptick in retained loans?

Well, we're focusing on it. We're focusing, we were focusing on building out our loan capability. We've been funding that by just taking it out of our investment portfolio.

But what I like about it is that it's not wholesale and it's not just running a mortgage REIT or an investment REIT inside the Firm. It's really underwriting and real capabilities to generate higher spread high-quality retained loans.

And so the fact that we're watching our growth at the top-line doesn't mean that the mix underneath isn't changing as we said it would. I think I said our goal was to, at a point to get to 50% retained loans to investments and we're nearly there today. And so I'm pleased with that and our capabilities and we've done it slow. But when we go to get over -- as we grow the bank, I believe that our capabilities to do high-quality underwritings is getting better every day.

Yes, I was just wondering if you went out and bought a loan portfolio.

No.

No. Okay.

I'm sorry, I didn't know that was your question. I'd have announced that, I think, to that side. But no.

Okay, thank you.

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

Goodbye. That was a long call.

Look, I'm very excited by not only -- I'll start with our capabilities of the firm, our record revenues, and everything we're doing, and I want to thank all of my partners at Stifel for all of their efforts, and I want to welcome our new partners from Sterne Agee. And I look forward to, with all of my partners who have done a great job here to reporting to all of you, our shareholders, as we continue our goal of building the premier brokerage and investment banking. And increasing shareholder value for all of our shareholders and our associates who happen to be significant shareholders as well.

So with that, a long call, thank you for your attention, and I look forward to updating you in the future. Take care.

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