Stifel Financial Corp (SF) 2015 Q4 法說會逐字稿

Good afternoon. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel fourth-quarter and full-year 2015 financial results conference call.

(Operator Instructions)

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

Thank you. Good afternoon. I'm Jim Zemlyak, CFO of Stifel. I would like to welcome everyone to our conference call today to discuss our fourth-quarter and full-year 2015 financial results. Please note this conference call is being recorded. If you would like a copy of today's presentation, you may download the slides from our website at www.stifel.com.

Before we begin today's call, I would like to remind the listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of fact or guarantees of performance.

They may include statements regarding, among other things, our ability to successfully integrate acquired companies or branch offices and financial advisors; general economic, political, regulatory and market conditions; the investment banking and brokerage industries; our objectives and results; and also may include our belief regarding the effects of various regulatory matters, legal proceedings, management expectations, our liquidity and funding sources, counter-party 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 stifel.com.

And finally, for a discussion of risks and uncertainties in our business, please see the business factors affecting the Company and the financial services industry in the Company's annual report on Form 10-K and MD&A of results in the Company's quarterly reports on Form 10-Q. I will now turn the call over to the Chairman and CEO of Stifel, Ron Kruszewski.

Thanks, Jim. I would like to start today's call with my opening comments. First, we are proud to report that 2015 represented our 20th consecutive year of record net revenue. We completed two acquisitions: Sterne Agee in June, which added financial guidance and fixed-income capabilities, and Barclays Wealth and Investment Management, Americas, in December, which significantly expanded our high net worth advisory business.

While the challenging market environment impacted fourth-quarter activity, we are committed to optimizing our current capital base, managing our expense base and taking the necessary steps to achieve our key financial targets. We will continue to selectively add capabilities and evaluate opportunities that further our strategic objectives. With a balanced business model, we believe we are well positioned to take advantage of future opportunity.

The market stats are presented on this next slide, and, look, I don't need to go through these numbers with everyone here. I'm sure everyone was aware of the challenging market environment during the fourth quarter of 2015, which was frankly continued to this day, so I'm going to pass through that slide.

Now on today's call, I will address our quarter and annual results, and then I will turn to updates on acquisitions, our approach to acquisitions, our balance sheet growth, and finally, I will take some questions. Before I turn to the quarterly results, I wanted to mentioned that the firm has made significant progress in building our wealth management and institutional businesses. We have grown organically and through acquisitions in both businesses.

With regard to the Institutional Group, we have added a tremendous amount of talent, products and capabilities to our franchise. Following a highly successful 2014, the Institutional Group was not able to outrun many of the significant headwinds in both its brokerage and investment banking business. These headwinds were building as the year unfolded and directly impacted our results in the fourth quarter. However, our mission has not changed.

We continue to take advantage of opportunities and invest for future growth. Our delivered strategy of conservatively increasing bank and bounty leverage is underway, and our execution of acquisitions and our integrations is on track. We are a growth company and will continue to build into the premier investment banking and wealth management firm.

Now let's turn to our financial results. Net revenues for the quarter were $581 million, an increase of 1% over the prior year, and a decline of 1.6% from the third quarter. On a non-GAAP basis, net income was $40 million, diluted EPS $0.51, which compares with non-GAAP EPS of $0.75 last year.

Comp to revenue for the quarter, I think it's noteworthy, was elevated at 64.8%. It was up both over last year and last quarter, reflecting increased comp costs associated with the build out of our infrastructure. However, for the year, the compensation ratio was 63% of net revenue, directly in the range of our stated goal of 62% to 64%.

Non-comp operating expenses increased 11% over the prior-year quarter, yet were flat with the last quarter. The combination of increased comp to revenue and increased operating expenses resulted in a decline of our pre-tax margin to 9.8%, far below our goal of 15%. I would note that those two items, while they depressed our earnings, we did have a lower-than-expected tax rate in the quarter, which was also was positively impacted our results. But net net, the tax rate did not offset the increased operating expenses and the increase in compensation.

Turning to the results for the full year, as I mentioned, 2015 represented our 20th consecutive year of record net revenues. These revenues totaled $2.3 billion, up 5.5% over 2014. On a non-GAAP basis, net income was $193 million, diluted EPS was $2.46. Our non-GAAP pre-tax margin was 13% in 2015, again below our stated goal of 15%, and below the 15.2% achieved in 2014.

Let's shift to our top-line activity during the quarter, which I said was impacted by a challenging market backdrop. Total brokerage revenues increased 8.5% to $295 million and increased 2% sequentially. I will give additional detail on the next slide.

Investment banking revenues were down compared to last year and sequentially. I would note that the typically strong year-end quarter, which is usually, in our case, we have historically had strong fourth quarters in banking, did not materialize this year and was impacted by heightened volatility and market uncertainty around commodity prices, and really global growth, in general. Asset management service fees were $129 million, the increase was mainly due to growth in AUM, 1919 Investment Counsel and Sterne Agee.

Now turning the slide, Brokerage & Investment Banking Revenues, for the quarter, we had record global brokerage revenues, which were up 4% year over year. Institutional fixed income in the quarter increased 66% year over year, reflecting the benefits associated with the Sterne Agee merger, principally in the taxable institutional business. In addition, we are encouraged by the synergies being recognized between the Sterne Agee's depository sales capability and combined with KBW's depository investment banking franchise. We have seen a significant increase in this channel.

Equity brokerage declined 18.6% year over year, again reflecting the environment. Investment banking revenues were $103 million, down 40% year over year, principally driven by weaker advisory fees on a comparable basis.

At this time, I would really like to recognize our public finance group, which posted record revenues for the year. This is a business that we have invested in, we have nurtured and we have grown both organically and through acquisitions over the last decade. These investments in our growth is highlighted by the fact that we led the nation in 2015 in the number of negotiated issues, serving as solar senior manager for 811 transactions with a par value of more than $16.7 billion.

And we led all firms in the number of issues in the national K12 financing category. A really great year by our public finance groups, representing a lot of growth and a lot of partnering. A great culture there, and I want to congratulate those guys for a great year (inaudible).

Equity capital raising decreased 15%, generally I believe in line with the overall marker for the quarter. It was $40 million in the quarter, increased from the third quarter, which was truly a challenge, at least in that area. The overall equity market remained volatile in the fourth quarter, creating a challenging environment for issuers, particularly IPO, which has been a significant contributor to our equity business.

The number of priced US IPOs in the fourth quarter of 2015 decreased to 32 from 68 during the same time period. It's really down 53%. For the full year 2015, the overall US IPO market was down in terms of both number of transactions, which were down 41%, and dollars raised, down 65%. Certainly a difficult year in the IPO market and not starting off particularly strong this year.

Quarterly advisory revenues decreased 68% year over year to $33 million. I smile as I look back on advisory fees of almost $200 million for 2015, and think that I'm saying that, that might be slightly disappointing. That again goes to the growth that we have made in this Company to have advisory fees of $200 million yet feel slightly disappointed. Our fourth-quarter results are lower, again, because both periods had unusually high number of large transaction deals.

Looking forward, our equity pipeline, the levels remain solid. We continue to be active in obtaining mandates for both new and existing clients. Our activity will always be dictated by market conditions. And they will vary from sector to sector. As I've said, new issue businesses at historically low leverage rate and Stifel. However, we have built a significant equity origination and distribution platform. Between 2012 and 2015, our equity capital market-to-market share, as defined by fees, our fee share, increased 3%.

Looking at it another way, it actually may have been higher. I should look at that number. Looking at it another way, for book run equity transactions under $1 [billion], our ranking went from 11th to 7th. What I am saying is we have certainly been gaining market share in that segment. Reflecting that progress, we are pleased to once again be named Middle-Market Equity House of the Year by IFR magazine.

The next slide reviews our non-GAAP non-interest expenses for the quarter and full year. Non-GAAP comp and benefits, as I said, elevated in the quarter at 64.8%, compared to 61.5% in the year-ago quarter, so again, a big delta right there in our results. As I said, this [exscreech] is the result in investing in our professionals, but also in a depressed revenue environment.

Non-GAAP OpEx was $148 million, 25.4% of net revenues. Same reasons again, our investments and declined revenues drives that 25% higher. For the full year, our comp ratio, again, was in line at 63%, our non-comp elevated 24%.

Looking at GWM on the next slide, this segment, I am pleased to say that we have record revenues in pre-tax operating income for 2015. We welcomed our partners at Barclays in December and look forward to their contributions in 2016. Our revenues for the year increased 12%. I would like to note that the addition of Barclays has had a noticeable impact on recruiting, especially amongst advisors from the larger firms.

For this segment, comp and benefits were 56.7%, non-comp came in at 15.6%, which resulted in pre-tax margins of 28%. All in all, a good year for our wealth management segment. As it relates to industry-wide issues, specifically DOL, MSRB and money market reform, we are, of course, as everyone is, is waiting on final role, if and when enacted, but I want to say we are well-positioned to deal with these industry-wide changes when and if they occur.

As I look forward in this business, it is important to note that the investments we've made in Barclays in getting ready and converting over the Barclays advisors is aiding not only attracting new advisors, but will benefit our entire wealth management business.

Next slide looks at our Institutional Group results. For the quarter, our institutional revenues decreased 11%, but were up 6% sequentially. Comp and benefits came in at 58.1%, non-comp at 25.3%, resulting in a pre-tax margin of 16.6%. Again, our non-comp ratio, which appears high at 25.3%, reflects the investments we've made in this segment, but also the weaker-than-anticipated revenues for the quarter.

The next slide looks at our other segment. As I've said on numerous calls, we have made significant investments in our infrastructure and control environment, particularly in enterprise risk management, internal audit and information technologies. The impact of these investments are really shown in this segment. Comp and benefits in our other segment increased 52% year over year. Non-comp operating expenses increased 10%. All in all, our other segment, which is really the overhead aspect of the firm, increased 26%, or $41 million.

Significant areas that I would point out on an annual basis, that I pointed out in the past, the increase in cost for compliance internal audit and ERM, in addition to what we have invested in operations and technology. The control environment of $16 million in annual expense over 2014. IT was a little over $6 million, and almost $9 million in investing in our operations. All of this was done, as I've said in the past, to both improve, and it has improved the firm, but also to position the firm to cross the $10 billion asset level.

The next slide looks at our asset growth. We resumed asset growth in the fourth quarter, as we've stated all along that we would. We crossed over the $10 billion threshold and increased consolidated assets by 43%. We ended with $13.3 billion. By resuming the asset to growth, we continue to build scale, which will help absorb these infrastructure costs, which I said we front-end loaded. We built those to grow the balance sheet.

Asset growth in the fourth quarter was driven both by organic growth and by our Barclays transaction. The Barclays transaction contributed $1.2 billion of bank assets and $900 million of margin loan. Organic growth, which accounted for $1.5 billion, was primarily consisted of the bank's bond and loan portfolios. And I would note that most of the balance sheet growth occurred during December, and therefore our net interest income does not reflect a full run rate of $13.3 billion.

In the past quarters, we have illustrated how Stifel can achieve more optimal leverage by growing the balance sheet. Inherent in our projections has been a consistent asset mix and risk-weighted asset density. We have grown our balance sheet with a conservative mix of bonds and loans, as reflected in our overall lower net interest margin.

As our investment portfolio and the majority of security-based loans and mortgage loans carry a lower relative risk-weighting charge, our overall risk-weighting density is conservative relative to other banks. If we were to increase our overall risk profile, you would see more of a conversion between our risk-based capital level and our leverage capital ratio. As we've said in the past, we will continue to evaluate our overall profile and risk-adjusted assets based upon the market.

Said another way, during the last year, we have been cautious about the credit markets. We have been cautious about making significant loans in credit, and it frankly has coincided with our desire not to go over $10 billion, so I think that those two things were nicely correlated. But as we look forward, we do see opportunities as credit's price has widened significantly, and we'll continue to evaluate the growth and our risk weighting appropriately based on risk-adjusted return.

In this slide, we also illustrate the impact of growing total assets to $18 billion by using today's capital levels and risk-weighted assets. You can see that this would result in a 19.5% tier 1 risk-based capital ratio and a 9.6% tier 1 leverage capital ratio.

Again, this is simply a function of the amount of risks we are willing to put on our balance sheet really as it relates to highly liquid securities versus C&I loans. The one drive tier 1 risk weighting faster than tier 1 leverage and vice versa. Based on today's market, we believe we can prudently grow the overall balance sheet to more than $15 billion by this summer.

If I look at Stifel Bank, and again, Stifel Bank is part of our $13.3 billion of consolidated assets. The total assets of the bank increased $2.7 billion to $7.3 billion, up 58% sequentially. Investments increased $1.8 billion. The $1.8 billion growth in the bond portfolio nearly doubled in size, with purchases centered in high investment-grade CLOs, investment-grade corporates, and fixed and floating rate agency MBS. Loans increased $743 million in the fourth quarter. It is up $1.2 billion year over year.

Commercial loans increased 16%. They stand at $1.4 billion. Security-based loan portfolio increased 40% in the quarter as a bay and 89% year over year. It's up $1.4 billion, it includes $375 million of regular loans that we got from Barclays. The bank balance sheet remains about 50/50 split between investment and loans. Investments carried an average risk weighting of 29%, while the loan portfolio carried an average risk weight of 50%.

Asset quality is strong, NPLs and NPAs were 2 and 1 basis points. That's 2 and 1 basis point respectively. Past due loans and the percentage of total loans at the end of the year was 1 basis point. Our commercial loans are predominantly shared national credits, which we independently underwrite, and the entire portfolio is performing, including our modest credit exposure to the energy sector.

Net interest margin is stable at 2.5%, again, lower than you might see in other banks, but again, reflects our low risk profile and low credit relative to our overall asset. The bank and the entire Company continues to be positively exposed to a rising interest rate, given the generally short vectored duration of our bonds and loans. Given the timing of the interest rate hike in the late fourth quarter, the benefit rate hike will be realized in Q1 of 2016, and to a greater extent, in Q2 of 2016, as the bank's floating-rate asset have an effective duration of only three months.

The next slide looks at our capital structure. Total assets, again $13.3 billion, our tier 1 risk-based capital ratio was 26.3%. Our tier 1 leverage ratio was 16.6%.

Looking at the next slide, given the recent market pullback in our stock, we have been actively repurchasing shares. Prior to September 30, we repurchased 1.2 million shares at an average price of $42.40. Since October 1, we've repurchased another 3.3 million shares at an average price of $39.99, so we have repurchased 4.48 million shares.

Our Board recently approved an additional increase of 5 million shares under our buyback program, bringing the total authorization to 9.1 million shares. We expect to continue to take advantage of share repurchase opportunities based on current market pricing.

I would now like to give you an update on our acquisition philosophy. I field a lot of questions about how we do deals, so I want to share this with you. And I've shared a portion of this with you previously, but I would like to expand upon how we think about deals for you, our shareholders and investors. And I just want to start at the top and get a broad explanation of how we look at things, and frankly, how we accomplished them.

For shareholders, first of all, we always expect revenue and EPS growth and accretion in a reasonable time frame. I'm a shareholder. I want accretion, as does everyone. With respect to financial metrics, this is where I want to spend some time about what we do. This is how we structure deals and how non-core income expenses come into play with respect to deals that Stifel does.

And what I want to explain quickly is why we do this and why we have a difference between what we call core and non-core results, and it is entirely related to the acquisitions that we do. The first thing we do is ascertain our view of enterprise value of any organization. Second, and importantly, we determine our view of the split of value between shareholders and the employees.

Importantly, our view is that the employees who remain in our productive active and merger need an appropriate amount of deal consideration regardless of their legal ownership. I will show you more about that in a moment, but this is what often leads to our non-core charge for equity-based compensation. It is simply an allocation between shareholders, legal shareholders, and our view of how equity considerations should be split.

Once we determine that, we of course, have to capitalize the purchase price to shareholders, the amount of any purchase price in excess of assets acquired, accountants like to call this goodwill. We typically try to do asset-based deals to make goodwill tax deductible, although we're not always able to do that. A lot of our deals are that way. We then expense as compensation, through non-core, the amount of enterprise value that we pay to employees.

Again it is usually stock-based grants to employees. We always try to structure our transactions to take advantage or accelerate tax benefits. Simply stated, this often means taking charges to our income statement versus pushing these expenses into goodwill. If you push them into goodwill, you either eliminate tax deductions or often take a tax deduction over 15 years.

We believe that the right way to structure deals is to maximize cash flow, and we will often not be looking to maximize goodwill. In many cases, by not maximizing goodwill, we increase the amount of non-core charges that we run through our income statement. Further, we evaluate our total investment as including the duplicate operating expenses through non-core expenses.

Said another way, we look at what we're going to pay the shareholders, what we're going to allocate to the employees, regardless of their legal ownership, and finally, we look at what the duplicate expenses are that we're going to have to pay. These are cash expenses. But we evaluate that as total consideration for the deal regardless of geography as to where it sits in either goodwill or run through the income statement.

We then, after all of that is done, we will then consider the amount of retention required after we determine all the splits above. So that's how we look at deals. I will come to it on the Barclays deal in a moment. But it's important to understand that when I get questions about non-core charges, non-GAAP, and the difference between GAAP and non-GAAP, it is simply our structuring deals to the best economic outcome for our shareholders. That is what we do.

Our associates, in terms of doing deals, we want to add capabilities, new geographies, new talents to this firm. Clients, we of course want to be more relevant with expanded product offerings. And our new partners, we want them to have authority coupled with the stability of Stifel's size and scale. This is a proven model. It has proven to work for us over the last 15 years, and it's a model that we are going to continue to take advantage of.

With all that said, let's take a look at Barclays. What'd we do with Barclays? Once again, and noteworthy to this transaction, the issue of how we allocated enterprise value between the seller and the Barclays people who joined Stifel is important. What we would allocate to the seller generally is goodwill, and what we allocate to the employees joining Stifel is a charge that we have to run as stock-based comp. You will see more of this in a moment.

We view, in Barclays, a total investment of $147 million investment. And of that $147 million investment -- that's our view of the value of the enterprise. Of that $147 million, we are looking at approximately $115 million as what we're going to charge through for stock-based and other comp expenses as an allocation to the purchase price and some non-duplicate expenses, or expenses that we view as duplicate, with results in about $115 million charge to earnings.

Again, I view it as purchase price. We maximize taxes and reallocate out equity appropriately. I want to note that the amount of the charge regarding stock-based compensation, this $115 million I'm talking about, could fluctuate because certain aspects of the award, including the service requirement, are still being determined. For purposes of this illustration, we used yesterday's stock price.

But I do want to know that we are still determining some of the service requirements of those awards. So therefore, based on this, as I've said, our investment is $115 million that we allocated to the new people and other charges and $32 million is goodwill. This results in $100 million after-tax investment that's net present valuing our tax benefits over the years that we get them. I want to note that we also issued new Stifel broker notes to the employees. Those notes run through our core results.

We do not consider those non-core charges. We will run those through core results. What we run through non-core is the way we structure transactions. We acquired, as I said, $1.2 billion of bank assets. The equity required to support this business is really $190 million. When you look at that, it's minimum tier 1 leverage of 7.5% plus goodwill.

In terms of financial projections, I will say that based on when we first started looking at this, the financial projections are depressed primarily because the equity markets are depressed, syndicate especially, as I've already said, [west] syndicate. So at this point, we see total revenues of $160 million to $190 million, pre-tax margins of 20% to 25%, again inclusive of the amortization of retention notes, our non-GAAP charges that we will take. This is what we're going to take and we will tell you more, is well, we have spent $13 million in Q4, and then the remainder in 2016 and 2017.

As I've said, the composition of final amounts are still being determined, but that is how we do it. Our return analysis is a return on investment of, it depends on ranges and various things, 19% to 29% return on equity, 10% to 15%, which in this environment, is good. It obviously would be higher if we get some investment banking business back.

The next slide looks at our Sterne Agee acquisition. Our expenses related to Sterne are going to come in about $5 million under our prior estimate, and about, it will be about $6 million over. And I want to just go back to this slide here was what we originally presented to shareholders as it related to the Sterne deal. And it again, it points out what happens between GAAP and non-GAAP. We view the economic investment of Sterne as being $191 million. This was back on February 23, 2015, when we presented this.

And it simply showed that we believed that we would have pre-tax duplicate operating charges and various all the things I've talked about of $116.5 million, and we show the quarters that we believed, back in February of 2015, that they would fall at. And as you can see, it was $116 million, and again, you go back to that slide, and what has changed here is, as I've said, two things changed.

One, we had to expense an employ note to our income statement. It had no impact on purchase price, it just was something, again, we had to expense. And we reduced the amount that we ultimately paid to shareholders. That's how the agreement was read, but we had to run that through the income statement.

But net net, you can see that, as I have said, what's really going on is that while we're on target, we're delayed. We are delayed in our integration because of our Barclays deal. And I talked about that, but I believe that we're on track, as it relates to the original projections that we gave our shareholders, on the Sterne deal.

So if you go to non-GAAP integration costs in total, within the detail provided, I just want to point out that our ongoing deals today are Barclays Wealth Management, Sterne Agee, as I said, I believe the cumulative charges are in the right here. Knight fixed income. We did Knight fixed income as a deal where we gave all the consideration, basically, to the employees. As I remember, that was a distress sale. That is what we've said back then. Those charges, which are primarily what we gave the employees, was a three-year deal that ends on 6/30/2016.

Eaton Partners has a one-time charge, again an allocation of ownership through stock-based paths, it's approximately $10 million that will occur in the first quarter, and then intangible amortization, which we do show in our non-core item. The completed deals that have no future ongoing costs are Oriel, 1919, Acacia, De La Rosa, KBW, Miller Buckfire, Ziegler and Merchant Capital.

So I think that, that explains and hopefully gives an idea of this. Again, I've received a lot of questions, and I believe that what we do maximizes the economic investment. As I know, it puts the consideration in the right hands. It helps us retain people and helps us drive our business.

In conclusion, the fourth quarter was a challenging quarter for the industry. We were not exempt. That said, we had record revenues in 2015. We are investing in building a firm for future growth that best services the needs of our clients. The execution of our acquisitions are on track. Our deliberate strategy of conservatively increasing bank leverage is underway.

We have work to do on our expense base, but it is also a function of revenues in integrating businesses which do take time. I am positive on Stifel's position in the marketplace and our future growth prospects, and I will now open the call for questions. Thank you, Operator.

(Operator Instructions)

Your first question comes from the line of Dan Paris from Goldman Sachs. Your line is open.

Hello, Ron, good afternoon. This year was obviously characterized by investing in the business on the back of two deals and ultimately being able to support a lot bigger balance sheet so I just want to get a sense of where you are in terms of this investing. Is the non-comp base in 4Q that we saw a good run rate and maybe just kind of adjusting for only two weeks of Barclays in the run rate, but just trying to get a sense of where we are in the cycle.

Well look, Dan, first of all, we made significant investments in our infrastructure. And as I have said, I believe two things. One, we had a lot of non-comp expenses in consultants. This concept on the regulatory front was expensive. I don't think it's any secret that these tax requirements are very expensive. We took them very seriously, because frankly, to not comply would eviscerate our entire strategy of how we grow.

So we made a significant effort to comply. That resulted in a lot of non-comp OpEx, like consultants and getting everything in order. Those expenses, I believe go away. We do have the Barclays now that we have to roll in. If we're always growing, it's hard to always try to say this is the number.

But I believe that the infrastructure of people are overhead of a percentage of net revenues is probably at levels that I haven't seen since 2004. The answer is that the overhead structure that we've built supports a much larger firm and a bigger balance sheet. So it's almost like, build it and they will come. We've spent the expenses and you will see the balance sheet growth and hopefully if the markets rebound, I like our position in the marketplace.

If we think about some of those puts and takes of stuff like stress testing costs going away, but some of the Barclays stuff coming in the run rate, is this a good jumping off point for non-comp?

Well look, I guess that I want to and maybe I'll put out with a run rate. I'm not prepared to give an estimate of non-comp expenses as I sit here right today. I'm just not going to answer that question, although, I do want to get that so that you could model and so I really can't answer that.

Remember, Barclays in terms of the fourth quarter, was only here for three quarters of a month. And so, I think the Barclays transaction would intelligently think contribution margins are. But look, I will take it as a note to try to provide a little more guidance on non-comp OpEx before the next call. Fair enough?

Fair enough. Maybe last one and along the same lines. Obviously, we don't know what the final DOL rule is going to look like, but as part of the investments spend that you've done this year, does some of that contemplate changes to the way you're going to need to run the business post-DOL or are we waiting and there's risk we would see another round of expense build up?

We're not waiting. We're not waiting, but I think frankly, I have been watching and the products that I see that are similar to what we're thinking about; it's more some of the issues, Dan, that are going to surround, in many ways, the best interest exemption. And I testify that I felt it was unworkable. They've said there were changes. I don't really want to anticipate that, because there are some products that will make sense on the advisory front.

I think that what everyone is waiting for is to determine whether or not you can actually have an infrastructure spend, or frankly, whether you can even operate in an environment that the best interest exemption might have existed under the prior role. So frankly, we've thought about it. We've looked at it.

We've considered a number of things. We have decisions trees as to what we think is economically feasible versus not economically feasible. But frankly, I want to get the final rule because I have been told that a lot of the things that I personally testified about were not going to be issues because the best interest exemption in many, many ways is not workable. If you can't do that, then it is going to mean a lot towards investors and how you approach self-directed brokerage IRAs in general. That's my belief. But it is hard to speculate on something I haven't seen yet.

Understood. All right. Thanks for taking my questions.

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

Thanks. Hello, Ron.

Hello, Chris.

You highlighted the challenging macro in Q4 and we know Q1 is not off to a great start for really anybody. Wanting to get your thoughts, then, if revenues kind of stay here, how aggressive do you guys want to be on the cost side of the business? I know there's puts and takes. You've invested so much and you don't want to lose talent and there's risk to under-investing. And then if there is some leverage on the cost side, maybe what costs might you want to focus on?

Well, I think the first thing that I want maybe you all to do, is to recognize within a range of, however you want to do it -- I do it. Chris, I'm going to try to answer your question. But recognize again that a lot of our infrastructure spend and our capital base supports the much larger balance sheet. And we have limited the growth in our balance sheet. And so I have always said that we are being compared based upon an unlevered balance sheet. And I run these numbers levered.

I knew that we had the opportunity to do it. We went from $9 billion to $13 billion in one quarter. I've stated we'd be at $15 billion. So to answer your question, the first thing we do is look at where are we on a levered basis and then where are we compared to various peers and what they're doing and how do we feel about this. And I don't feel that we really have necessarily an expense problem.

Now it's this is the new normal, and there are no other IPOs or sue and you annualize all that, well of course we're going to have to look at businesses, simply because I think the opportunity for people to be paid isn't going to be there. It's not just my decision. We're going to -- we believe, I personally believe that the market is way over sold, especially in financials.

I believe that there is a lot of macro events that at least can get us back on the right track. I am not going to, I don't want to say panic, but I'm not going to sit here and do that. I'm not at that point yet, especially when I see our basic results getting fully levered. And so that's how I look at it.

Got it. Okay. Understood. That is it relates to growing the balance sheet from here. I think you'd reference maybe $15 billion by the summer. How should we be thinking about the composition of that growth whether it is in loans or securities?

I think in the past you'd kind of talked about a 50/50 mix as being optimal. Is that reasonable, given where we are? I know you'd mentioned it depends on where spreads are and your appetite for risk and so one. So any guidance you could provide there would be great.

You just answered your own question, Chris. You want to come over here and tell me what to do based upon, I mean I'm all ears. I think that we consistently, as I have said, looking backwards, we have felt that the investments that we have made in the investment portfolio and security-based loans and some of the investments that we have made have provided very attractive risk-adjusted returns and ROEs that are accretive.

And because we're always allocating capital to whatever we do, we take proper interest rate hedges and so everything we do is with a mind toward risk adjusted returns and doing things appropriately. As I sit here today, I don't know really how -- I know we have a lot of opportunities. I believe that we have shied away from the credit market in terms of loans.

I believe that we are seeing credit spreads and terms and covenants and things like that that are making that more attractive on a relative basis. But the only way I can answer it is the way I always answer it, is that I believe as long as we can deploy capital at an acceptable ROE, whether that be in bonds or loans, then adjust it for risk; that is what we will do. The risk adjusted density, I can't answer, but not because I don't want to, because I just don't know.

Okay.

You kind of know it when you see it.

All right. Thank you.

Your next question comes from the line of from Hugh Miller, Macquarie. Your line is open.

Thanks for taking my questions. First question, you kind of made a comment in the prepared remarks about the Barclays transaction that has been a positive in your ability to attract some of the other advisors from larger peers. Can you give is some more color on what you are seeing there?

I'm not sure if you're able to quantify that in terms of how many reps you have been able to see since then come on board. What are you seeing there and what is your expectation on your ability to see growth in the financial advisor headcount?

The amount of interest that we have received from what I would characterize it as many of these high net worth teams from many large firms has exponentially grown. It is a direct result of the perception that what our platform is and our ability to service clients, which I always felt was reality, but the perception that we could retain and hire the Barclays people has helped. So we have seen a lot of capabilities.

I was thinking some, I want to make this comment a little bit and it goes to a lot of what's going on in the marketplace on those big deals. I get a lot of people who say, oh there were, when we got around to it, there were 150 advisors at Barclays and 50 of them left or 60 of them left and what happened? And I always say it in reverse, I say: you know, from my perspective, they didn't even know who Stifel was. I had a shot at about 10 of them and recruited 100 of them. And I think that that's kind of what's happening now.

When I first walked in there, I always remembered, as I'm sure some of them are listening on this call and smiling. They looked at me and said, see you. And then we were able to recruit them. And because of that and the investments that they brought us and some of the capabilities that they brought us in terms of how they view the marketplace, there are many platforms that we've built into our technology -- and simply word-of-mouth. We have a number of people say, well wait a minute. If you can do that, then I need to talk to you.

Those phone calls are up, forget the percentage. Because when you go from a low number to a percentage, it's huge. And we are seeing it. If we have any concern today, you are dealing with market multiples. You are dealing with production that may be elevated and deals and so it is always hard in down markets.

But I will tell you, that our place in the marketplace, as a relates to options for people looking for a home, was significantly enhanced by both the Barclays transaction in perception and in capabilities on what we added. So look, we are seeing a lot. These are interesting teams to recruit. Maybe I will end with that.

Sure. And just a quick follow-up on that is that you kind of started to allude to it, about the challenges of market multiples in production. When the rubber meets the road, obviously, people may be more interested in sitting down with the firm. But are you seeing opportunities that make sense for you to move forward when you think about the retention awards from an organic standpoint?

Are you talking about new recruits?

Yes. Just as you're bringing on some of these people that are now interested that may be higher producers and you consider where the market is at in terms of upfront recruiting awards. Are you still seeing opportunities to be able to move forward?

Maybe I'll characterize it this way. We get a lot of interest. We have not changed our pencil and our back of the envelope, the way we do things. We are going to be a lot more successful, but as I have said, the street deals that pay some of the multiples that you read about, my pencil breaks when I start writing those down. It just does not work.

And so what we are seeing is -- we certainly have raised our level because we're talking to a lot of different people. But we're nowhere, we're really nowhere near what's [SAR], so still some of the shareholder destroying type stuff that goes on, I do not understand it and we're not going to do that. So to the extent that -- I just believe the people who are looking for a place where they want to work, we are here and we are getting the right people. So we are not the highest [deal] on the street, never have and not going to be.

All right. That's certainly helpful. And just had a couple of questions just getting back to the bank. As we take a look, you had mentioned kind of the differences in risk weightings between securities and loans. When we take a look at the loan yields versus the securities portfolio, a couple of things there. First, the securities portfolio has seemed to have gone up considerably quarter over quarter.

Is that just a function of the duration being extended there and where you're seeing opportunities to invest? And how do we think about the gross yields on securities-based loans versus C&I loans and call it that 3% loan yield that you're seeing right now on the loan portfolio? How should we be thinking about that given the increase in credit spreads and as we think about 2016?

If you work at a bank, you'd find some of these things interesting. I think our loan duration is down. I think we've seen real opportunity in the loan portfolio. That's why we've added to the loan portfolio. We look at everything based upon allocated capital, so if you have zero risk weighting, that doesn't mean you need zero capital. You need 7%, 7.5%, 8%. I'm just picking the number. You need tier 1 capital because you need capital and so you have to allocate that.

If you have a C&I loan, you have to look at the fact that you need risk-based, it's risk-based capital of 100%. How do those returns work? How does that risk work? All versus capital and risk. And so what I have seen, we have always felt security-based loans relative to the floating-rate nature of their duration, the fact that we understand the collateral and the capital allocated, is a great asset class. The yields are not as high necessarily on an absolute basis of say a C&I loan, but on a risk-adjusted basis, we like that asset class.

As I've said, we are beginning to see risk-adjusted spread and covenants. You've got to remember, you can't just lose sight of the fact of terms. But we're beginning to see things that can make that asset class, what I would generally define as C&I, as maybe being attractive. Again, what I would say to you and what I want to say to the shareholders, is if we were simply looking to drive pretax earnings, we would just level the balance sheet tomorrow.

There is net interest spread in almost anything, but we do not look at it that way. We leverage the balance sheet risk-adjusted and allocated capital to every position we put out. That's how we look at it. Sometimes we are transfer pricing to do certain things, but at the end of the day, that is what we do. And I would say the environment in the last quarter was very attractive to adding to our investment portfolio risk-adjusted.

Okay, thank you. And then last from me, if conditions are unchanged, given kind of what you're seeing right now for covenant spreads, returns in the bank, how much of the growth that you mentioned, the bogey of $15 billion by mid-2016, is it the function of kind of pent-up demand given that you were trading sideways for some time? As we think about the back half of 2016 and beyond, if conditions are unchanged, would we anticipated that growth rate or pace would continue or is that unlikely to happen?

Again, we're going to grow the bank prudently. We had a lot of pent-up demand and the Barclays transaction, which took us from $9 billion to $13 billion. In any credit and interest rate cycle, fast growth is almost not a good risk adjusted return because you're making a bet in that cycle, whether it be interest rate deal curves, steepness or credit spreads. So we want to grow the bank prudently.

What I would say to you, as I think I've said a lot of times, the relative size to our bank, relative to our wealth management business and relative to our institutional business and relative to our immunity finance business and relative to everything we do, we have plenty of opportunities to grow the bank. Our need -- and we have a lot of deposit funding. Our need is to continue to be disciplined in the bank's growth and hopefully, knock on wood, you look at our bank performance and our NPLs and non-performing assets and the credit statistics, up to this point, I think we've done what we've said.

Thank you very much.

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

Hi, good evening.

Hi, Steven.

Hi, Ron. One of the things I wanted to get a better handle on is where your capital management priorities lie at the moment. It sounds as though, based on the commentary in your prepared remarks, that you're really leaving the door open to, I suppose, the three levers that most of us are thinking about, which is growing the bank, accelerating the share repurchase activity, and considering some more deals. I just want to get a sense as to given what's happened to your share price and the challenging environment, where your priorities lie today.

Obviously, coming from my perspective, I don't know what I can ever say about this, but I certainly have proven by the number of shares we bought back at levels higher than where we are today, I think that that is an attractive use of capital. We do capital projections and capital planning and we look at share repurchases. We look at capital deployment. We are probably, in terms of deployment, I would say we are a little more cautious than normal.

Normally your best opportunities for deals come in environments like this. You tend to overpay in good environments and you tend to do good deals in bad environments, but that said, there is a lot of angst on the streets, I would say. We're maybe a little more cautious on that front. We're going to drive our returns, our return on equity, our margins, our pretax margins, and our EPS all our levers that drive shareholder value and we are going to do all of them, as the individual largest shareholder in this place would do himself, and that's me.

So I'm going to do it and do it appropriately. So all of those levers are available. None of them are excluded and, really, I don't know that any one of them is necessarily favored, although I would admit our stock price in this slump at levels that seems, I will leave it there, seem sun burnt.

All right. Maybe just to follow-up in a couple of the expense questions from earlier. I recognize that you're probably going to give us more detail on the non-personnel side in future calls. But I just wanted to get a sense as to how much of the elevated expense tied to the regulatory investments that you have made and whether it's defast and the like, how much of that has been front loaded and should decline over time and how much of that's going to be reflected in the run rate going forward?

I think as I said, Steven, I said I think that the personnel and the capabilities is front loaded. I think I've already said that, as we look at our overhead as a percentage of net revenues, we measure it, not only as a segment, but by area and so we have a historical perspective. And in general, our overhead structure relative to the revenue of the firm is elevated, but that is what we set out to do.

As I've said, we spent an additional $15 million in IA and compliance and all our risk systems and in technology and I have given all those numbers. A lot of those expenses are front loaded. We did have a lot of one-time, what I would call non-comp OpEx, consulting and all of that that does go away. That was to help us get to where we wanted to be.

But I believe that a lot of expenses that we put in place was done, as I've said to all of the shareholders, with the express intent of being able to prudently, from a regulatory and risk management and just overall evaluation perspective, prudently grow this Company beyond -- personally $10 billion is a line in the sand, but certainly much larger than that. We have put in a lot of infrastructure and now we need to build the firm into that to a certain extent. I do not see additional personnel hires needed, certainly, at this level of revenue at all. And again, that just goes to how we look at the business.

Got it. And just one more for me. Recognizing that the investment banking backdrop currently is certainly challenging, the one area where some of your advisory peers have highlighted increased activities on the restructuring side and just given the fact that you have Miller Buckfire under your umbrella, just wanted to get a sense as to whether you anticipated their growing contribution from that particular business.

Well, of course I do.

Maybe you could quantify it for us.

We have that and of course I do. It's always ironic to talk about how good it is for a company to need to restructure but in that business, that's true, and so we don't have Miller Buckfire for the logo. I mean we do, I guess, but we want to participate in the restructuring space. We've done some very noteworthy transactions, as I've said. And I can't disclose what we might be working on, but as you know, we got [deals] award for being the advisor to the city of Detroit.

This comes to mind for me as what was a very significant, not only noteworthy in the marketplace on the largest, but also indicative of our intellectual capital that resides within Miller Buckfire. Of course, I would like to participate in that increase. I always just feel a little uncomfortable pitching that business.

I understand. Ron, it might be helpful if you could at least quantify what that business had contributed during the last crisis, or at least going through the last cycle, just to give us a range as to what peak revenues are? And maybe what the trough levels are, which is likely over the last couple of years, given the low levels of default.

We merged with them at a trough level. Right? And their peak level, which was I guess, 9, 10, 11 -- I do not think is relevant. But might be, but I don't -- I guess that I hear you in terms of that, but when we merged with them, we were at a trough and where and I think there's more opportunity today. I can ask Victor to give historical run, but I think most of the restructuring firms would show revenues back in peak levels that even they don't think they're going to get to today.

At least I hope they don't get to in 9 and 10. So obviously, I don't disclose restructuring advisory revenues. I guess I will consider whether we should do that. We do not disclose revenues by the product type either. At this point, I really can't answer your question.

I appreciate the effort and thanks for taking my questions.

You got it.

There are no further questions at this time. Mr. Ron Kruszewski, I turn the call back over to you.

Kruszewski. It's all right. No one can pronounce it. So to our shareholders, I believe that these are interesting times, certainly interesting times for me. I will leave you like I always do, the reality sometimes of what's going on versus the market's perception are completely different. This is one of those times. See you.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.