Stifel Financial Corp. (SF) Q4 2014 Earnings Report, Transcript and Summary

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 fourth quarter and full year 2014 financial results and today’s announcement of Sterne Agee. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. 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 a copy of today’s presentation, you may download slides from our company 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 ‘95. 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, 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 risks 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 results in the company’s quarterly reports on Form 10-Q. I will now return the call over to the Chairman and CEO of Stifel, Ron Kruszewski.

Thank you, Jim. Good afternoon everyone. Exciting time here at your company and I am 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 net revenues. Both the Global Wealth Management and Institutional Group, both of them, generated record revenues and record pre-tax 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 am 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 results, I’d like to add a little color on the operating environment during the fourth quarter. For the quarter, S&P was up 4% and the Dow was up 5%. As measured by the VIX, volatility increased 21% which helped the equity volumes which finished up 23% with an average of 7 billion shares traded per day and this corresponded also the 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. So 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 charges. 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 future. Our non-GAAP pretax margin for the quarter, well actually exceeded our target, came in at 15.5%. Turning to next slide, we thought it’d be beneficial to comment on our results versus Street expectations. We've been trying to do this. As I said, we had a great quarter to finish the year. Our investment banking revenues were strong, coming in $18 million higher than estimates. It is 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 are high or when they're low, which now they can tend to be both. Two items of note, on the other side, banking was very positive. On the negative side, principal revenues missed Street consensus by $26 million and a significant part of that miss was frankly in trading. Our trading accounts or trading losses produced a $7 million delta in the quarter. So it was $7 million versus what we would normally expect 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 they were somewhat unusual. Comp. Turning to expenses, comps 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 and a matter which I am pleased to have behind us and we also had a charitable contribution of $3 million which was more than -- which would've driven -- those two items together pretty much account for the $5 million over expectation on 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 am 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 have 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-GAAP comp and benefits was 62.3% and non-comp operating expenses 22.5%. So all in all, to have 15% margin is what our target is, it’s all that we've been doing. I am 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 loss as compared to where we normally have trading gains that 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 a 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 the city of Detroit by Miller Buckfire and that was a very positive event. Overall I want to comment and I have been especially pleased with our growth in investment banking. As a 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 seven-fold increase, and it underscores the investments that we've made to bolster this business. Asset management service fees increased 26% or 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 Ziegler 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%. So total brokerage was up 3.3% and exceeded for the first time over $1 billion. Investment banking at a record fourth quarter, as I 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 highlighted the reserve [ph] capabilities we are building at Stifel. For example, Stifel ranked number one as the most active 2014 midmarket 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, the way we measure their business. In volume for an investment bank in 2014, Miller Buckfire completed a number of notable assignments, including the city of Detroit, almost $17 billion municipal restructuring and $975 million out-of-court restructuring for iPayment. Stifel’s public finance group, including our acquired firms, led the nation in a number of negotiated issues in 2014, serving as sole or senior manager for 586 transactions with a total par value of over $11 billion. We're 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 do it, we had completed a merger with Merchant Capital which would bolster our abilities in the South-eastern section in 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; they came in at 61.5. It was the same as the year ago quarter. Transition pay, which is our investments over the past is where we pay above our model for people that we bring on board, as a percentage of net revenue, it was 4%. Core non-comp operating expenses were $132.8 million and I have already given the reasons for the increase and 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 benefits as a percentage of net revenues of 62.3% and we maintained 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 will 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 am not prepared at this point to provide a projection for non-comp operating expenses in 2015. 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. And our institutional group, record net revenues of nearly $1 billion, an increase of 16% and operating contribution [37%]. 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 our growth in asset management and 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 which is 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 the transitions 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 NIM stood at 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, non-performing loans and non-performing assets were [25] and 11 basis points respectively. Trailing 12 month charge-offs were zero and reserves now covering NPLs are at 373%, a very robust credit statistics. Securities based loans decreased 17% for the quarter and 44% for the year to almost $750 million, $733 million to be exact. We like this business, securities based loans, this asset class is highly complementary with our global wealth management business, has attractive spreads and carries a zero risk weighting in terms of the new risk rating 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 securities based lending or line 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 are generally rated credits, nearly half of which are investment grade. Loans continue to be sourced through large indication banks and on the commercial side secondary market purchase into a lesser extent through investment banking in St. Louis based credit facilities. Loan underwriting is traditional in nature with all credits individually research 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 portfolio is reviewed in the interagency Shared National Credit process. None of the bank’s credits are criticized and as comparison in the nationwide review, about 10% of credits are criticized. Again I am pointing to the asset quality. We have a diversified portfolios. Securities based loans, mortgages and C&I loans are diversified geographically and by industry, financial services of 17%, consumer and retail 16%, diversified industry is 12%, technology 8%, healthcare at 7%. So bond redemptions and runoff, when you look – turn to the loan portfolio it’s the bond redemption and run-off has funded loan growth as we held off crossing $10 billion in total consolidated assets, which would trigger DFAS requirements. Looking forward, it’s our plan to stay $10 billion through the third quarter of 2015. I believe that will be over $10 billion in the fourth quarter and we will then at that point with the infrastructure and all the things that we believe we need to do that meets all the requirements and doesn’t 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 have 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 have discussed in the past. Looking at other financial data. Stockholders’ equity stood at $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 up as a company. At the end of the year we had 2103 financial advisors. During the quarter we hired 25 advisors and for the full year we hired 122. Client assets totaled 186 – almost 187 billion, 13% increase from last year. So again all in all a very very good year. Turning to turn 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 professionals by 35%. And importantly, Sterne Agee’s fixed income platform is highly complementary to our existing products and services and together we’ll 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 our institutional business. So I also want to, I think I’d like to thank Eric Needleman, 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 tracked and led one of the most experienced and talented teams in our industry. We and he are excited by a desire to join with the 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 the US market making and head of high-yield sales, trading and research at KBC Financial Products. He also served at executive positions at Lehman Brothers and Granchester Securities which is a 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 –

Thanks, Ron. Appreciate it. Sterne Agee has 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 organization. And 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 more 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 the 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 at 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 Heinzerling in terms of co-running fixed income together and I am looking forward to the opportunity.

You know, Eric, Heinzerling, can you say Kruszewski yet? All right. You can say Kruszewski either I guess.

I can say Heinzerling but I – you know.

You can’t say Kruszewski?

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, 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. 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 is also asset sensitive, and it means 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 complementary fixed-income platforms have very little overlap. I will come back to that in a minute. Now I’ll ask Eric to comment to. There is net, net, Sterne Agee focused on larger tier 1 accounts. We generally are focused on more middle market accounts. It’s a highly complementary with Knight and 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 with, which I will discuss in a minute. Looking in the next slide, I am going to turn to Sterne Agee’s business slide. We intend and I want to look at this -- we intend to acquire and integrate five of Sterne Agee’s businesses, we will group them under what I call global wealth management four of them, which is the private client business, traditional independent of advisory trust and clearing and fixed income. And first of all, those we look at it, the private client in total, say Sterne Agee did about $500 million in revenue and what we’re looking at is the private client business, traditional 130 financial advisors, and 23 branches, highly complementary with us, $10 billion of AUM, that business is about $85 million in revenue. The independent advisor channel, about 90 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 abilities 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 scale to be profitable, and something that we look forward to growing us significantly. And Sterne Agee is a top 10 clearing firm in the US with over $27 billion in assets under custody, $5 million to $6 million in revenue but also very important net interest – that’s just fee revenue that doesn't 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 is over 200 professionals with minimal overlap and I'll come back to that on fixed income when we get into it a little bit in detail. But also today I want to talk about what the businesses that we’re looking at in terms of what I want to call strategic evaluation. Stifel, first, it’s their mortgage company, a very high quality mortgage origination company and their equity business. I’ll 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 FBC’s mortgage business to sell this business back to them. Very entrepreneurial group of people and versus where it fits with us and what their long-term objectives were. We signed an agreement today which sells the business back to them. That's all encompassed – I am 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 founded that business, FBC mortgage. So that deal is signed and will close in the near future frankly. In addition to that, Sterne Agee has both a leading institutional equity and investment banking business. I will tell you, not only do I know the people and I met the people, this is a quality people with quality individuals and they’ve built really a very nice scalable business and we 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 in the professionals and Sterne Agee’s institutional equity and investment banking business, to either operate it on a standalone independent basis. We believe there is 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 for alternatively considering all strategic alternatives. We will consider spinning it off. We will consider it merging it. We have a number of people that are interested. Bottom line is as I said, in a number of the deals that we've done, this is a quality business and that’s in the people, anyone on the Street I will say this the things that this business is going to add, because it’s now part of larger Stifel, could not be farther from certainly where my viewpoint is on this business. My viewpoint is, 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 evaluation, it’s farther along in 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. 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 the 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 what 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 in deal structure that the Stifel shareholders have adequate reserves and in fact, as you can see by our estimate in the purchase price more than adequate reserves to cover the potential liabilities and – but anything that 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 it will allow the shareholders of Sterne to elect either cash or stock or some percentage. We -- to help with -- may be of interest of having more stock, we reserved an additional 200,000 shares if there's more interest in the stock. Right now this deal is based, that we will issue 1,420,000 shares of Stifel that’s 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 is 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 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 people of Sterne Agee see that. So I'm confident about the combination of all this together that we’ll move forward together as we have on our prior deal. In terms of closing, we’d 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 Sterne's business, which is based on conservative assumptions. 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 investments or the uses of the capital consist of the purchase price of $150 million plus, as I state these others on an after-tax basis, $35 million of retention. We think that there is restructuring and one-time expenses after tax the $15 million. And we believe that there is a duplicative overhead of $32 million. And what we look at is we will -- we have income 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 – as we run some of this through non-core as you know in our case but the way we evaluate fees is our economic investments $191 million. We will fund that by using $73 million of equity, that’s at the low end of the range and retention -- is 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 $300,000 to $325 million, expected after-tax net income of between $28 million and $38 million, including full realization of the cost savings and net with the cost of financing. These expenses that I’ve said before, they on a pretax basis are $136 million or $81 million. They flow through – they will flow through our non-core portion, but as I have always said, we view that as investment, it’s just the accounting that makes us expense that. So when you cut through all of this, 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 month into, let me tell you what I think it is accretive, it’s going to be approximately 6% to 8% accretive to core EPS with full implementation of cost savings. And 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’ve 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 has been a full-service investment bank, and that’s how we look at our rankings, where we compete, where we sit. This makes us the sixth largest now with advisors and reps in terms of -- the brokers include investment bank as well. So it is a significant step forward and it's a nice addition in the Southeastern part of the United States. Stern Agee, looking next, has a great trust company and clearing business. Again on the clearing side, it’s the ninth largest in the country. They have 27 billion in assets under custody, 85 broker-dealers clear 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 complementary fixed-income business. Our combined fixed income capability simply will take this business to the new level. They will -- 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 leveraged finance capabilities. So I am really excited about it and Eric, I'll 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 as I have said this reminds me of when we did the Thomas Weisel transaction. When we looked at the overlap, there was an overlap in 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 5 years. And you know, Eric, I’ll let you – I have been talking a lot here. Just give your thoughts on how big –

No, Ron, I don’t have much to add. You hit an element on head in terms of 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 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 sales force, 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, and that was also going to be very complementary to KBW. So we were amazed at how little overlap there was in terms of accounts and in terms of direct products. And so yes, this one plus one is definitely not one; it’s heck of a lot closer to 2.

Yes, and in fact, I just get it, when we looked at it, we were amazed at the fact it’s amazing how much -- we didn’t have overlap at all. But I think the number -- I think when we looked at it, when we modeled it, and looking at not only on an account level but product by account level and sales level, we’re talking about the fact that the business is 93% complementary. And that doesn't build into what I think is going to be significant synergies and being able to go after and compete for business. So as I said there is no overlap. I think Eric made a comment to me, I thought was - I will repeat it on the call. He said, while there's no overlap in the business, there is significant overlap in culture and the way people approach the business. And again we’ve spent a lot of time and 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. And I believe 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 the entire Sterne team is excited.

Yes. Well, look, Eric, I'll let you sign off here and 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.

We’re looking forward. Thanks again, Ron.

All right. So look, some comments on our recent acquisitions. Merchant closed in December 31, 2014. This transaction adds a great public finance team in Southeast. We’ve underwritten or writing a dozen issues through Friday as the 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 underwritten. Again it speaks to their capability. 1919, we closed it in early November. The 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 31st, in the fourth quarter they contributed $10.6 million to the top line and was about $5 million in brokerage and $7 million in advisory. The integration and convergence is underway. That’s a something we have to focus on because again it's in Europe but we have a strong management team in Oriel and between Oriel and our higher-yield in KBW and the Stifel teams have come together nicely and I am excited by our prospects. As I said earlier, we reversed our NOL in Europe, because I think we’re going to make money in Europe and really reverse 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 negotiated issues, across everything I talked about. As I’ve previously mentioned, Stifel KBW, -- you can see Stifel KBW ranked number one M&A advisor in the midmarket in 2014 and 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, pretty well. So finally I will just say – I want to look at how we’re going to looking at non-core deal costs. This just rolls forward what we think is going to happen. This is the way we look at it. I won't belabor the point as to how we look at economic investment. We look through accounting and we look at cash and cash return, whether reside as goodwill 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 incur 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 couldn’t never be more excited than I am about today's announcement of Sterne Agee. I believe there are numerous, numerous merits to this deal and it’s going to be highly complementary 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 to gain market share in the verticals and products we specialize in. We have access 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 will 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 a 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 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, lot is going on, maybe there are no questions. Operator?

[Operator Instructions] Your first question comes from the line of Chris Harris with Wells Fargo.

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

Chris, I was wondering how long it would take for that question to come out. So look, I gave it to you in reverse. And 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 how what we’re going to run through duplicate type expenses that we run through non-core. And I gave you that estimate. But if you look, you will see that the way we look at it is that our economic investment will generate unlevered and levered returns that were noted on that slide and the question is when we 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. Does that make sense?

Yes, no, all right. I was just wondering kind of what Sterne Agee is making here pre-cost savings but I guess we can go through these numbers and try to bake into it.

What’s the matter? You look, I mean the question is what are we going to make when we put them on our overheads? So all of our deals are based on the fact that we have a robust platform that we add revenue producing things too. 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, the 28th 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. We do it this way.

Fair enough. Maybe you can talk a little bit about what kind of revenue synergies might be created as a result of this deal? I mean it would seem like there's some interesting ones that could to be flushed out but perhaps you can comment on that. And then maybe if you think back at all of these other transactions you’ve done, were you positively surprised on revenue synergies that were created as a result of those?

Absolutely. We do not model revenue synergies. It’s hard enough to just think about revenue period. Because we’re so – we’re in a market that is cyclical. Even though wealth management side is cyclical, but in each of our transactions we've done, we do bridge financings now on Miller Buckfire with Stifel provided synergies that we would hope, would be there, 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 with synergies that came with Knight. We 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 forth in the credit expertise and fixed income, we see significant synergy potential to drive our very large footprint in research, a very large equity footprint and frankly our fixed income business is undersized compared to the size in relevance to our firm. So I'm very excited about the potential that this brings to wealth management side, the independent channel and potentially clearing and looking at what we can do in the RIA space and that channel has not something been a lot of growth in that area that we’ve not participated in and so that is another lever in growth synergies. Look, I could go on and on and on. The answer is we haven't modeled any of them and we are hopeful we’re there. I look back to all the deals that we’ve done, I've always been surprised at how – as you increase relevance your ability to get revenue synergy increases almost exponentially.

Interesting. All right. 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 get into the terms but is it safe to assume then that, that’s all kind of baked into the terms we’re looking at here today and you guys aren’t going to get like an incremental cash payment that flow s through after the fact as a result of that business being sold?

That’s a fair assumption.

Your next question comes from the line of Devin Ryan with JMP Securities.

So just a quick follow-up here on Chris's question and clearly the returns from Sterne Agee look pretty compelling. But I am just trying to get some sense around the revenues and how stable will the bank -- some of the businesses seem more stable, maybe retail and then fixed-income can be a bit more volatile. So I am just trying to think about that band of 300 to 325, is that a pretty tried level or have revenues been bouncing around quite a bit within that view?

Look, I wouldn't say anymore than the Street level. Fixed income has been more volatile and may be a little more challenged across the Street. I think that they certainly didn’t have the challenges that you have 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 have been really pretty much – their business has been fine. That going forward, talk 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 Sterne Agee. And now combined Stifel Sterne Agee.

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

Yes, we have an independent channel but we are not – it’s not like we don't know business. As I previously stated, I think that in any businesses that we want to get into, and this is the wealth management business, it’s the same system, it’s the same system of records and controls, it’s such a different channel, I think embracing us very well for example. And for us, it provides us the ability to have scale and being able to really focus and compete in that business. So there is new player in town in that business and we look forward to investing in that business.

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

Look, I think it has gone up and we continue to recruit, that said we’ve also been a little bit busy. And so there is only 24 hours in a day. So we butt the group and then recruiting. 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 ’07, and ’08, ‘09 the second half of this year and ‘16 are going to be interesting. We tend to be prepared and be a player in those markets.

Your next question comes from the line of Chris Allen with Evercore.

I was just wondering if you could maybe talk about retention and attrition trends for FAs at Sterne Agee over the past year or two and how long the timeframe is going to be to transition those FAs on to your platform once the deal closes?

Sterne Agee has got a strong culture and they have – those 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 go out and 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 independents and their client relationships and everything that we do, so is Sterne Agee, our cultures are very similar that way. And I'm hopeful that that our new partners will – are going to join and be part of what I think as the best firm to work at on the Street for financial advisors. And I never want to predict because people make the wrong decisions but if past is prologue, people find what -- the way we approach this business to be very attractive. We have attractive retention as we build in the deal and I'm confident that we will do well. I am sure I have a number of competitors that are going to try to prove me wrong but we will see.

And any color in terms of the length – thanks for the update on the $10 billion, you expect to surpass that, any color just in terms of how much you should to potentially accelerate the loan growth right now relative to what we’ve seen in the couple of prior quarters and which channel do you see the other best opportunity for growth in the near term?

Look, I think we’ve taken the opportunity, with all the talk about the raise – rising rates, and what’s going to happen, and my own personal viewpoint that the yield could slightly curve or flatten a little bit. I think it's been an opportunity for us to focus inside in terms of our infrastructure and not simply driving growth into a market that I feel is rich on the loan side and it becomes more covenant – there has been a lot of things that have been going on that the ability to say look, we’re going to keep our powder dry and from a loan growth perspective, yet build our capability -- it seems to me, no one knows the future but feels right. If we were out there and just competing for loans, we could be growing significantly on the loan book. But I personally don't view it’s the best environment today based upon risk-adjusted returns but I think that we’re well-positioned, when we do grow and hopefully that will be into raise in spread environment that it can be even more attractive than today.

Your next question comes from the line of Hugh Miller with Macquarie Group.

So I guess in following up on the bank, a couple of questions there. You guys had mentioned that there was kind of unusual benefit in the third quarter that enhanced the NIM. I was wondering if you could just give us a little bit more of a flavour as to what that – what was driving and you also mentioned that the securities based lending penetration is extremely low at this point and what's the strategy to kind of improve that? And what’s the yield on that asset relative to the overall loan yield?

I think the yield, I will take the second question first. I think it’s relatively similar but we are very comfortable with the collateral on how we monitor. Look, we have securities based lending is marginal lending under rate yield and we’re 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 products available. But as the capabilities broaden, you generally accelerate growth. I always like to say water finds its own level and that level of water in our firm is a lot more right yield than loans 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 products. 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. Look, we bought -- your first question, we bought Acacia at a substantial discount. There's some estimates about how that substantial discount comes through vis-à-vis prepayments and a number of things that that you got to adjust. And it’s a sort of purchase accounting adjustments. The net economic 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 lump space upon what happens to prepayment speeds and all of that and that’s what happened in the third quarter.

And other housekeeping question on the asset management fees, just running up a bit higher and you 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 should we be rethinking about that as a run rate?

I am not sure I understood the question. I am not sure that’s what I said in performance fees. And 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 leveraged finance and we have some investments, they are liquid investments but with what happened in the fourth quarter, there were significant write-downs on a mark-to-market value which in many cases has recovered but that was a $7 million loss, 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.

The jump from $97 million in asset management service fees up to 106 million quarter over quarter was based on kind of market appreciation and flow in that type of –

Well, in 1919 – 1919, I think I have said is $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. But –

And then just a couple of questions with regard to the acquisition, and you guys are obviously talking about 300 to 325 revenue run rate. I assume that that's inclusive of the – at this point retaining the Sterne ECM business, that's correct, right?

No. No, look, look at the slides that I think I showed you is inclusive of, what it’s inclusive of and it does not include ECM or mortgage.

Okay. I thought the other one’s total is a lot less than that. But I will run through the figures again. And on the fixed income capital markets, obviously about $130 million business and you had mentioned that it has been a little more volatile than maybe some of the other business lines. Can you just give us a sense of maybe where that was at the peak in the past couple of years?

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

And then on the retail side business obviously someone else mentioned, a lot more on the independent financial advisor 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 – I mean there seems to be a lot of technology out there that's allowing for independent advisors to kind of break away and what -- do you see that channel as a little bit more approachable from a recruiting standpoint?

Look, I think if you look at it, as 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 look at their technology and some of these breakaway technologies you’re talking about, they own it, have 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’re excited to have them part of the team.

And my last question just with regard to the resumption of 6% to 8% accretion post the synergy realization, it looks like according to your slides that you guys are anticipating a duplicative cost running into mid-2016. So is that kind of a safe assumption to assume at that point, call it, mid-2016-nish that you guys should be able to start to achieve that type of EPS accretion?

Well, again it’s the same question, it always comes back to me. It's going -- the fact that we charge all the stock based comps upfront and the fact that we charge all of what I view as acquisition related investment through the income statement, the GAAP results will be negatively impacted by all of those charges. I look at it as that those are investors accounting, showing you what we believe our economic investment is, we're showing what we believe how that economic investment runs through the income statement, when we think it'll runoff and then ultimately what we’re talking about is a $300 million to $325 million business that generates $30 million of profit and run -- you can run accretion dilution on that. So we look at the shares we’re issuing, add it together and it’s going to come to 6% to 8% or whatever it is. So it’s fully integrated after we run off these expenses but again that's how we how we've done 22 deals.

I appreciate your time, it’s helpful on the insights. You overlook the Sidoti partnership.

Well, you know, I'm very excited about that, I did overlook that, I hope that Peter doesn’t feel neglected. There probably is 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 the 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 there 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.

Your next question comes from the line of Christian Bolu with Credit Suisse.

As you grow the independent broker dealer business, just curious I get your thoughts on possible compliance burden on increases compliance burden at a time when we’re seeing increasing scrutiny from 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 DOL and that impacts the entire industry. But I think that the wealth management and in fact, many of the wealth management, the RIAs would argue that that scrutiny is going to improve that and view that this 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 is a standard deviation apart from what we otherwise do in any of our businesses.

Trying to get a sense of how much interest sensitivity Sterne should add, so of the 200 billion in client assets how much of that is cash and how is that currently monetized today?

Look, I have to update those slides. I wasn't 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, okay, 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.

Just a couple of clean up items. In terms of deposit cost of the bank, that’s still pretty significant in the quarter, I'm just curious on what's going on there?

I think it really we have swaps -- interest-rate swaps, we have to amortize those interest rates. We try and not to take interest rate west. I don't know that if we compare to Fed funds or what -- it looks higher but it's just that we try to match fund, we do cash flow hedges and that we have to run those at 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.

And just lastly, just pro forma for the acquisition, what does the balance sheet look like?

We believe that we – it’s not two and two equals four, we haven't 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 it. There is a certain amount they 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.

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

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

We’re doing it now. I mean the point is that is in our expenses now. We don't have the Durban amendment, that is a big – yes, it’s a big item when you cross, that doesn’t really impact us. We don't have that kind of fee income as a traditional bank would have. I think it’s just that you need -- it's a line in the sand, the arbitrary as it may be that that requires that you have 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 or 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 regulatory front they look at you differently, if you're a $10 billion and a dollar than if you’re $9.9 billion.

So and based on the commentary it would suggest that the incremental – we’re not going to see an incremental bills in terms of the investment pertaining to investments in systems specifically that a lot of that’s reflected in the run rate. I just want to make sure that I am thinking about the expense trajectory appropriately?

No, a lot of that is built into our run rate. We will probably have a better or we’re pulling a lot of this, hopefully to some completion in the first half of 2015 but a lot of it is in our run rate and again the reason I said that we will probably look at – to Q4 as when we will cross 10 billion, as you may 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 will focus on our systems, we will focus on what we need to do from a regulatory front and this is a marathon, not a sprint and when we’re 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 the things we’re doing but the fact remains that we have a significant runway to build our net interest margin and our ROE by deploying access tier 1 risk-weighted capital.

And then just one final one from 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 sort of some of the pretax income guidance you’d 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 a point that certainly some of the larger players are deemphasizing?

Look, I am glad you asked that question, because if you had to told me that, it looks like a perfect time to invest, and I’d get 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. How could we be wrong, yes we can be wrong but I'd rather be wrong at what is viewed as a trough, can be wrong at what is proven to be a peak. So I believe that fixed income markets are fine, and I’d going away for sure and we will 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 -- fixed income is going to be at some point, would be a $billion business for us and we will be glad we made the investments. I never know about timing, I'm very comfortable with our entry point here.

Your next question comes from the line of Douglas Sipkin with Susquehanna.

Just wanted to focus a little bit on – I guess a little bit more on sort of the independent channel. I am just trying to see the transaction -- I mean was it driven because you guys are feeling that that’s a channel you want to embrace or was it sort of like an opportunistic time for you guys to get bigger in fixed-income and in independent I guess? So I am basically saying, has your viewpoint around the independent channel changed, has it gotten more attractive for you?

Well, look, it’s a fair question. But I think that our approach to grow via acquisition 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 mean I guess it could have been, if you look at how we evaluated at 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 would – we either wouldn’t have done the deal or we would have looked at the strategic alternatives for that business. So I think our approach sort of answers your question.

Shifting gears a little bit, that 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, I mean have you guys thought through that yet? Is that some potential revenue synergy that may manifest over time just having 35% more divisors? 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 think, again as I said I don't mean to be flipping about it. I don't relevance maps, the ability to say that you have whatever we end up here 2800 going to 3000 divisors, 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 have been in the business for long time and we will win more business that we would have on the margin then that we would have up 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.

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

I think the additional clearing is one thing but I think also this whole space in 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, and it is a money flow business, it’s a money balance business and the risk adjusted returns are high. And so you have a team, an experienced team there that knows the clearing business, we might -- I might make a suggestion as we look for new clients maybe to point toward more of 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.

Your next question comes from the line of Michael Wong with 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 you didn’t use more cash and debt instead of equity for the Sterne Agee acquisition, that potentially just increased your excess capital position?

That’s fair. Look, we can always – there’s two sides to every deal and our new partners wanted a tax-free our real reorg and a cash election merger. I think that we should do our capital planning in the market. We don't need to hoist in on our new partners just because they have new capital -- you don't get a tax fee. That is just not a good way to start a new relationships. So they had input into what they wanted and we certainly wanted to do a friendly deal. But on paper I agree with you. We could have used cash, more cash but there's tax rules.

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

Well, we’re focusing on it. I mean we’re focusing on – where we’re focusing on building out our loan capability and we’ve been funding that by just taking it out of our investment portfolio. But what I like about it is that that is not wholesale and it’s not just running a mortgage REIT or an investment REIT inside the firm, it’s real 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 is to – at a point to get to 50% retained loan to investments and we’re nearly there today. So I am pleased with that and our capabilities and we’ve done it slow but when we go to get over – to grow the bank I believe that our capabilities to do high quality underwriting is getting better everyday.

I just wondering if you went out and just bought a loan portfolio?

No. I am sorry, I’m not sure that was your question – I would have announced that, I think, to that side. But no. End of Q&A

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

Good bye. I think it was a long call. Look, I am very excited by not only – I will start with our capabilities of the farm, our record revenues and everything we’re doing, and I want to thank all of my partners at Stifel for all 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 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.