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Stifel Financial Corp. (NYSE:SF)

Q4 2012 Results Earnings Call

February 25, 2013 5:00 PM ET

Executives

Ron Kruszewski - Chairman, President and CEO

Jim Zemlyak - Chief Financial Officer

Analysts

Devin Ryan - Sandler O'Neill

Hugh Miller - Sidoti

Chris Harris - Wells Fargo Securities

David Trone - JMP Securities

Operator

Good afternoon. My name is Candice, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year 2012 Earnings Conference Call. 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. Mr. Jim Zemlyak, CFO of Stifel. You may begin your conference.

Jim Zemlyak

Thank you, Candice, and good afternoon. I’m Jim Zemlyak, CFO of Stifel. I’d like to welcome everyone to our conference call today to discuss our fourth quarter and full year 2012 financial results.

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 website at www.stifel.com.

Before we begin today’s call, I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are not statements of fact or guarantees of performance. They are subject to risks, uncertainties, and other factors that may cause actual future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the company’s GAAP results.

And finally, for a discussion of 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 From 10-Q.

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

Ron Kruszewski

Thank you, Jim. Welcome everyone and good afternoon. 2012 both the fourth quarter and year were good year. 2012 represented Stifel's 17th consecutive year of record net revenue. This was a significant accomplishment particularly given past market cycles. We remain focused on our goal delivering superior client service which has benefited all of our constituencies, clients, shareholders and our associates alike.

Our fourth quarter results finished the year with record revenues, both segments, our Global Wealth Management, our Institutional Group reflected strong underlying performance even in light of the political and economic uncertainty which was present during the fourth quarter. We continue to selectively add talent to the professionals to expand our product offering and gain market share.

At the end of the last year, we finished our acquisition so to speak of Miller Buckfire which is a preeminent franchise in restructuring advisory, and most recently closed our merger with KBW, the leading financial services investment bank. As we've done in the past, we’ll continue to position Stifel to take advantage of opportunity.

Turning to our financial results for the quarter, we posted record quarterly revenues of $426 million, which was up 17% from a year ago. Net income was $40 million or $0.63 per diluted share, which compares with net income of $27 million, or $0.43 per diluted share last year.

Results for the quarter included gains on our investment in Knight Capital of -- a little over $13 million. This gain was offset by normal compensation accruals on that gain and merger-related and other unusual expenses approximately $4 million.

Those expenses consisted of about $2 million in merger-related expenses for KBW and Miller Buckfire, $1.5 million provision for loan loss in our Bank, not quite sure I would call that unusual, we had a lot of new loan activity and you have to book for loan losses upfront when you book loans at our Bank, but that was a $1.5 million of front loading net expense so to speak, and we had $0.5 million in advertising expenses related to our new advertising campaign which I’ll discuss later.

If you take everything together, the net after tax impact of these items was a gain of $0.02 per diluted share for the quarter. Pre-tax margins were 15%, which compares with 15% in the year ago quarter.

Also we had a benefit in the quarter of an effective tax rate of 35% which was primarily due to certain tax benefits as a result of the Miller Buckfire acquisition and those tax benefits were offset by an increase in the valuation allowance for our deferred tax assets, but net net our tax rate was lower than it has been in previous quarters.

Looking at the year, as I previously said, we posted our record revenues for our 17th consecutive years. Revenues totaled $1.6 billion, which was up 14% compared to 2011, net income of nearly $139 million, or $2.20 per diluted share, compared with net income of $84 million, or $1.33 a share in 2011.

The results for 2012, as I previously stated, included our gain on investment in Knight of $39 million pre-tax, which was $0.14 per diluted share after tax. The results for 2011 also included previously disclosed litigation and merger-related expenses of $0.47 per diluted share. Our margins for the year in 2012 were 14% compared to 10% in 2011.

If you look at our discussion of our legacy business, 2012 was a year of investment and growth at Stifel. As I mentioned on previous calls, we are always making investments in our business. During 2012 we hired 152 financial advisors, opened a number of new offices and we’re active in our fixed income division where we added 77 fixed income sales and trading professionals.

For the year our core businesses which excluded these investments generated diluted EPS of $2.38 with compensation ratio of $62.6 and pre-tax margin of 15.6%.

If you look at our investments, we generate revenues in these investments approximately $46 million, while total expense were $64 million. This impacted our earnings per share by 18% reduced our margins by 160 basis points.

EPS was more significant, however, in the first half of the year than in the second half $0.13 versus $0.05. And as our investments mature we expect them to contribute nicely to our growth as they have in the past. We remain committed to our strategy of investing in down cycles and we continue to position the company to take advantage of opportunities.

The next slide reviews -- reviews our source of revenues, commission revenues increased 8.5% to $134 million. The increase was due to higher mutual fund commissions and listed and OTC transactions. For the full year, commissions were down due to lower trading volumes.

Principal transaction revenues increased 4% for the quarter to $98 million, from $94 million in the year ago fourth quarter and it was due to strong fixed income trading volumes and tightening credit spreads, for the full year these same trends continued with revenues increasing 19%.

Investment banking revenues increased 35% from the prior year quarter to $76 million. The year-over-year increase was a result of an increase in both equity and fixed income capital raising revenues offset by a slight decline in advisory revenues. For the full year revenues increased, investment banking revenues increased 44% on increases in both capital markets and advisory.

Asset management revenues increased 23% to $69 million from $56 million. The increase was due to both an increase in the value of assets and fee-based accounts and an increase in fee-based accounts. For the full year revenues increased 13%.

Looking at the next slide, we compared our brokerage revenues year over, I’m sorry, year-over-year and quarter-over-quarter. Commissions and principal transactions combine increased 7% were flat sequentially, quarter-over-quarter taxable debt increased 5.6% and muni debt decreased 18%, while equities increase 46%.

The increases in taxable was due to increase in government -- in our government business and an equity to an increase in corporate equity trading, both of these were offset by decrease in our muni area because we took some losses in December, due primarily to the malaise that occurred in the market due to year end tax discussions regarding marginal tax rates and muni debt, it really cause some disruption in the market in December and we incurred some losses.

On a full year basis, taxable muni are attributable to strong fixed income trading volumes, tighter credit spreads and unless I forget, our acquisition of Stone & Youngberg in October 2011, which I will say, looking back not a year was a very successful transaction, met all of our projections and goals, and the integration was a smooth as anyone that we have done.

The next slides reviews our non-interest expenses, compensation and benefits as a percentage of net revenues was 62.8% in the fourth quarter, compared to 64.1% a year ago. For the full year our comp ratio was 63.5% which was within our targeted range of 62% to 64%.

Transition pay as a percentage of net revenues, it’s been pretty consistent about 5% and non-comp operating expenses were $94.6 million or 22.6% of net revenues. And I’ll come back when I and look a little bit at our non-comp operating expenses, as I’ve said, about $4 million of that was what I would consider if not unusual the non-recurring.

Full year non-interest expenses were consistent with my previous comments. I’m skip over the slide and look to non-interest expenses. On segment basis, revenues in both Global Wealth Management our Institutional Group for the quarter were strong and for the year both recorded record net revenues, quarter-over-quarter Global Wealth revenues were up 14% while Institutional revenues increased 23% and for the year, our Global Wealth increased 10%, our Institutional increased 22%.

Looking at overall as firm split we had about 62% of our revenues from Global Wealth and 38% from the Institutional group. Our Global Wealth had an excellent year with operating contributions up 14% to $268 million, while Institutional Groups operating contribution totaled $96 million, which was up significantly from 2011, up 52%, although I will note that we recorded the nice gain in our Institutional Group.

Looking at Global Wealth results, the next slide, this segment continues to perform very well with margins of 27% in the fourth quarter. Net revenues for the quarter of $255 million were up 14%, asset management, service fees increased due an increase in client assets through market performance and nice inflows.

Net interest revenues increased as a result of the growth in net earnings asset of Stifel Bank and sales credits in this -- for investment banking were higher due to improved activity in our capital markets. Fee-based assets were up 6% to $20.8 billion driven primarily by market appreciation.

Looking at Stifel Bank, net revenues for the quarter were a little over $22 million up 16% and for the year they were $80 million up 38%. Importantly, asset quality remains high less than $200,000 in trailing 12 month charge-offs of 6 basis points of non-performing assets.

Our assets of $3.7 billion as of the year end, is up 61% and we continue to have significant on balance sheet liquidity in our Bank. Our investment portfolio was $2.3 billion up 66%. The portfolio assure with an average life of just around two years.

Our loan portfolio totals now over $1 billion and we had deposits that we swapped $3.3, it’s up 62%, but our access to total cash balance is probably in access of $10 billion to $11 billion, as always the Bank will continue to prudently grow assets on a risk adjusted basis.

Next slide, looks at our Institutional Group results, revenue for the quarter up 23%, $165 million driven by across-the-board increases and other revenues, as I’ve said, we recorded our gains in Knight of $13 million. If you look at our pre-tax operating income for the quarter that was $21.5 million, up 100% from fourth quarter of 2011 and our margins were 13%, compared to 8% a year ago.

If you look at our Institutional Group revenues on the next slide, you’ll see our institutional brokerage revenues were $84 million up 5%. Institutional equity brokerage revenues were $42 million up 3% and fixed income brokerage revenues were also $42 million, which were up 7%.

Investment banking revenues up 25% to $65 million. Capital raising -- within investment banking we have capital raising revenues of $38 million, up 64%. We had both strong results in our equity and especially strong results in our fixed income capital raising revenues. Environment for IPOs had slowed however and were delayed due to year end issue while secondary calendar was very active and investors continued to search for yield.

For the full year, the number of equity transactions increased and we improved our percentage of book managed deals which you know from prior calls it’s been a focus of our percentage of book managed deals increase to 31% versus 27% in 2011.

And while the current new issue market isn’t as robust as this time last year, we are in a good position to capture our share. Our equity backlog is up from year end and it’s also important to note, that the job accessibility in some case is limited given confidential filings, so you don’t really see our backlog I’m trying to say.

Advisory fee revenues for the quarter were almost $27 million but were slightly down from the fourth quarter of last year. For the full year advisory revenues were up an impressive 28% in the market where M&A volumes were down in excess of 25%.

And if you look at 2012 rankings, if you combine Stifel and KBW pro forma in middle market M&A volume you would approximately $250 million and announced I would call middle market M&A we would rank number one in terms of number of deals done and number three in terms of dollar volume. This is one of many compelling reasons for our merger. The backlog from legacy Stifel is solid and so far this year we’ve closed eight deals.

The next slide looks on our capital structure. As of the end of the year, total assets were $7 billion of our capitalization. Debt and equity was $2 billion, book value per share of $27.24. We issued $150 million of senior notes in December resulting in an increase of our debt-to-equity ratio to 31%.

And in total in 2012, we issued $325 million in senior notes pursuing our strategy of increasing our leverage from a very conservative three times lever to something higher than that. We’re not going to be 30 to 1. But I have noted that I felt that our leverage can be more. Our leverage ratio at the end of the year stood at 3.6%.

Looking at other financial data as we’ve stated in the past, we looked to manage the leverage in our broker-dealer. It was two times and our leverage in the bank was about 13.5 times. We believe those are reasonable ratios of leverage to fund our future growth.

Recruiting is active so far in 2013. We’ve hired approximately 30 financial advisors. Our full-time associates were up 5%. This is organic growth and hiring from a Miller Buckfire. And our total client assets under administration up 13% to $138 billion at the end of the year.

Next slide looks at our Level 3 assets. As in past calls, our Level 3 assets, the majority of our option rate securities was a carrying value of $169 million at year-end. Other investments consists primarily of $30 million in private equity fund.

Turning to the KBW merger, I would say that integration with KBW is going very well. We closed a week ago on February 15 of this year. Tom Michaud and Michael Zimmerman joined Stifel’s Board of Directors. Key employees as you know, 95 of them signed letters. They remain with the firm.

Starting next quarter, we’ll report core versus non-core earnings as we want to show and will layout as we have in prior mergers, how our cost saves will be rolled in and how we’ll look at expenses that will lay all of that out on the next call. I’d also like to address some of the concerns that I've been hearing.

One is I have been reading reports about overlapping research coverage. I've heard valuable personnel changes and some comments with respect to branding. I’ll start with branding. We’re going to as I’ve said KBW is the premiere financial services firm and brand in the industry. We -- our strategy is to is to become the category -- dominant , category player of financial services through KBW, which is the Stifel company and we’re going to continue on that and that does not change.

And with respect to our integration, our goal is to put the best team on the field in financial services. And as a result and then effectively, Stifel contributing its research and banking to the KBW brand in financial services. And in some cases, we have Stifel analysts that are now under the KBW brand. But there has been some confusion, not really understand why is that confusing on the Street. But I will tell you that from my perspective things are going very well.

KBW had a -- look in the next slide, had a strong fourth quarter. Revenues in the fourth quarter for KBW were $71 million and $246 million for the full year in what I believe was a trough year in financial services. If you look at KBW pro forma for the full year, our revenues would be $1.9 billion. And we still have work to do but we believe and I continue to believe, this would be a powerful combination that will add the shareholder value.

Looking at branding over the course of last year, we took a close look at our multiple brands which were Stifel Nicolaus, Stifel Nicolaus Weisel, Stifel financial et cetera. And we’ve decided to promote a single unified identity under Stifel are our brand such as KBW. We will still have other brands, Stifel Bank and Trust but they will be also labeled as a Stifel company.

So you’ll see us in branding, going to just Stifel to represent our various companies that we do -- that we do business under. And with this role, we've upgraded, improved Stifel.com. If we go to our new website, you'll see a new improved www.stifel.com. We’ve introduced a research app for the iPad. And we have commercial bearing on CNBC and Bloomberg which started today. All of the goal of getting a Stifel brand known in communities and within the constituency with which we tried to do business.

So I thank you for your interest in Stifel. We’re excited about our market position and the opportunities they had. My view as it’s the market I usually comment or I have in the past if I feel that the market at least is valuing. Financial stocks are ahead of itself considering what I think as a fundamentals. I do not feel that way today.

I feel that the markets -- there is a lot of comment about what happened today and maybe what was going on with Feds, you pointed last week. Look the markets been almost straight up. I think it needs a reason go back but the fundamental aspects of the market, I believe are sound and provide a foundation for us to begin to reap some of the investments that we've made in previous years.

So I look forward to updating you on our progress which will include KBW next quarter. And I’ll be glad, now, operator to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Devin Ryan with Sandler O'Neill. Your line is now open.

Devin Ryan - Sandler O'Neill

Good afternoon. So we're obviously starting to see some inflows into equity funds. So I just love to get your sense of whether you’re seeing that translate to any change in investor engagement or investor behavior like money flowing into equity products within wealth management?

Ron Kruszewski

Yeah, Devin, I think that we’ve definitely seen a rotation of where money is flowing to equity and equity-linked products versus fixed income. At some point, they had to change. Otherwise there will be no more money in the equity markets. But there is no question that will change.

It will be interesting to see how the markets react to this kind of a sell-up and what kind of a pull back we could get here. It seems that the pattern over the last three years is a very good start to the year. Some thing happens in Europe and you’re kind of going into a malaise.

I don’t think that that’s going to happen this year; I think the news out of Italy whilst surprising I do not think reverses the trend of overall improvement in the Euro zone. But certainly, when you got by the fiscal cliff, the markets became a sort of risk on trade. I think people forgot there is still risk in the markets. And we saw a little bit of that today.

Devin Ryan - Sandler O'Neill

Okay. And then just the loan growth in the bank. Could you just talk a little bit about that outsize growth and what drove that? Was it only a one particular category and just -- is this level sustainable. Just want some color just given that it was such a large jump quarter to quarter?

Ron Kruszewski

We’ve seen opportunities on a risk adjusted basis. I’ve been optimistic about our ability to put on quality assets in the bank. We’ve added capabilities and you’re beginning to see. Again we’re building infrastructure to do this. So I felt that we had some opportunities. We funded some opportunities that’s why we see those loan loss provisions.

But I have said and we’ll continue to say that the bank will continue to be a contributor to our profit. We’re going to continue to see the bank grow albeit on a relatively conservative basis.

As I’ve said, Devin, many time, could grow the bank over night, a wholesale, a lot of what we put on, what I considered natural flow product from our leveraging our relationships into the bank.

Devin Ryan - Sandler O'Neill

Okay. Got it -- I mean, so just from a category perspective, are we talking about commercial loans. I’m assuming given that provision?

Ron Kruszewski

Yeah. There was a slide -- there was exactly. I mean, it was commercial and SBA loans. But it was definitely a higher preponderance of our increase. We certainly put on more loans that we had and previous in those loans are C&I and primarily a greater proportion of C&I loans.

Devin Ryan - Sandler O'Neill

Okay. Great. And then just lastly, in terms of the $4 million, call it, unusual expense. Some of the deal-related expenses are not going to recur going forward or maybe not normal. But this advertising expense, this is an example of that, something that is now going to be running through just as you’re doing this branding initiative?

Ron Kruszewski

Well, I think first of all, we went -- that was for the cost that related to actually going to shoot some commercials and getting advertising agencies in the talent et cetera. But I think you’ll see some increase. Obviously, we are running ads now and I think it was the shooting of, the commercials where we felt were probably more of one time. But we’re going to be increasing our budget for advertising, for branding. There is no question, some thing we need to do.

Devin Ryan - Sandler O'Neill

Got it. Okay. Thanks, Ron.

Ron Kruszewski

Yeah.

Operator

And your next question comes from Hugh Miller with Sidoti. Your line is now open.

Hugh Miller - Sidoti

Hi. Good afternoon.

Ron Kruszewski

Hey Hugh.

Hugh Miller - Sidoti

Hi. I guess, one question on the recruiting environment. I believe, did you mention that so far this quarter, you guys have hired 30 advisors?

Ron Kruszewski

Yeah. Hired or signed up. I’m not exactly sure where they are in process of getting here. But yeah, I did say that.

Hugh Miller - Sidoti

Okay. And can you just talk about that environment. I realized that the fourth quarter tends to be kind of slow for bringing people over and then people will look to make a move in the first quarter. But are you noticing any difference in trend and the willingness for people to kind of make a move and seeing opportunities from particular brokers or anything like that?

Ron Kruszewski

I think the environment in the fourth quarter is always a slower quarter in terms of recruiting. I don’t know that the environment today is anymore robust, if you will, than we’ve seen for the last six months or so. I think what you’ve seen, what you’re seeing us do is we’re going to be a little more aggressive. We’ve been somewhat less aggressive and if you saw the advertising today that we’re doing is both with an eye toward branding but it’s also directly targeting recruiting. I don’t know if you saw those Hugh.

Hugh Miller - Sidoti

I did. I did.

Ron Kruszewski

Okay. Well, those are targeting our recruiting efforts.

Hugh Miller - Sidoti

Okay. One housekeeping question just in regards to the tax rate in the quarter. Just coming in a bit below expectations and much if there was anything, in particular, that was influencing it during the quarter or sometimes at year-end true up. Color on that will be certainly helpful?

Ron Kruszewski

Look, as I said, it was a combination of two things that offset each other. I didn’t give the components. But in one case, we had some tax benefits related to one of our acquisitions, which was offset but not completely offset by an increase in valuation allowance for some deferred items and some of our foreign companies. Since net-net, we had a slight benefit to earnings through our tax rate.

Hugh Miller - Sidoti

Got you. Okay. And then looking at follow-up on the growth at Stifel Bank, you gave us some good color there on the loan portfolio. And obviously, we saw an increase in the securities portfolio as well. Just I realize you guys have a tremendous amount of liquidity you can tap into. But can you just talk to us a bit about the strategic rationale for kind of growing the securities portfolio at this point and how we should be thinking about that going forward?

Ron Kruszewski

Well, the rationale is that if we can on a reasonable risk basis achieve, we look at each investment to achieve an ROE threshold against the capital. We have to put into hold those investments. But the short story is that even with interest rates as low as they are where the yield curve is, we can add to the investment portfolio, add an acceptable ROE hurdle.

And keep credit risk and interest rate risk minimal. We do cash flow hedges and as you can see from our net interest margin, we are not exactly reaching for credit yield. So the answer is that this environment has been conducive to allowing us to add to that portfolio. We just simply don’t want to grow very fast in any cycle whether it’d be an interest rate cycle or credit cycle.

So our growth has been balanced. I think the takeaway should be is that given our capital structure and so long as we can continue to add quality assets, which I believe we can there remains a fair amount of growth within our bank to absorb our overcapitalization that exists and you just look at our balance sheet. So, net-net, there is increased earnings potential. And I think acceptable risk levels that will emanate out of the bank.

Hugh Miller - Sidoti

Okay. Okay. And last question I had was just with regards to the comp ratio and the institutional group. And I realized that you had some unusual items that kind of flowed in this particular quarter with payouts on CKG investment and other things like that. It just kind of crapped up a bit more than what we were expecting. And I was wondering, are you seeing anything with regards to the recruiting environment that is kind of causing you guys to pay up a little bit more on the comp ratio as well or any color there’s certainly helpful?

Ron Kruszewski

I think -- I think you said it right, the first way, and that is that, we believe that we are investing and we’re building the capabilities of this firm to gain market share, in the market that otherwise could be flat if not even declining a little bit. What we see is a lot of restructuring in the largest firm as they rebuild their business models to achieve their own return on equity hurdle.

Letting a lot of people go which I believe are very good people that we can add to those investments though do depress margin as you get -- as you make investments in either individual people or business verticals. So I -- what I here you on the comp ratio increasing. We’re cognizant of that. We are continuing to invest in this business because we believe that we’re going to be well positioned for improving fundamentals in the institutional business.

Hugh Miller - Sidoti

Great. Thank you very much.

Operator

And your next question comes from Chris Harris with Wells Fargo Securities. Your line is now open.

Chris Harris - Wells Fargo Securities

Thank you. First question from me is just on the margin. I want to follow up on that last point. So Ron I know we got a lot of moving variable as we think about 2013. You certainly got the KBW integration going on. We’ve got the new branding initiative that you alluded to. How should we think -- be thinking about margin as we looking in ’13. I know there is some things that will affect obviously revenue being a big component but where do you see the upside in the margin as you look at your business plan over the next four quarters?

Ron Kruszewski

So look I think the margin, as margin improvement comes from as our investment for we’ve been losing money begin to pay out as I’ve shown in our legacy slide. Our margins will improve because we won’t -- we won’t lose $15 million to $20 million on $40 million of revenue that that turns around. And you’ll get some margin improvement there.

We’ve shown how that -- that I think 160 basis points. But we’ve also -- it’s a lot of the investment will begin to bear fruit. And that’s lot of it but all that said our stated goal is through market cycles, to have pretax margin of about 15% and that we would be above that. And I would consider okay markets in 2012.

So as I look forward, if you we’re going to say that our margins should be in the low 60s, in the low 20s -- low 60s and comp of low 20s in OpEx and in the mid teens for margins, I would not give it yet.

Chris Harris - Wells Fargo Securities

Okay. Great. Then with respect to KBW, I know, you guys just close the deal. All of the , expense synergies at this point been kind of fully realized? Or how should we be thinking about that? And then do you have some sense as to what the actual dollar amount of the synergies will be as we kind of build out our model for ‘13 here?

Ron Kruszewski

Well, look, we approach the dividend. First of all I would -- we would be a hurricane effort to realize the cost savings. We’ve closed the deal a week ago effectively. So and it’s lot of the cost saves take time, which Chris is why we will layout the next quarter as it relate to our OpEx the duplicative expenses. We set those aside. I always viewed as purchase price.

And we all will say what we think are going to be for the next -- for the reminder of this year because we actually -- you can’t the accountants don't let you charge them off all at once and you can’t cancel contracts immediately. So there is a transition period of duplicative expenses that always occur and we’ve done this a number times and we’ll do it again as we show what those are.

What -- I think what we’ve said was somewhere in the high 50s to low 60s depending on what your revenue estimate is there are variable expenses that you add to our base, last year we had $360 million of OpEx, ex-KBW and we’re going to add the OpEx, which I've said was anywhere from $55 million to $65 million depending on your revenue estimates for KBW.

And so, that’s where, I would look at it, it would be, what we going to show in core expenses and we will identify the duplicative expenses that make that not achievable on day one.

Chris Harris - Wells Fargo Securities

Okay. That makes sense. When do you expect to have kind of all those synergies worked out through the systems, you won't be kind of double counting, I mean is it the year or for?

Ron Kruszewski

Normally they become -- they become insignificant within the year. If you asked me today, I would say, that the longest we’ve ever reported non-core which is -- which again as I identified list of contracts, duplicative space, all the things that we are getting rid of, we put those in a segment and then show the burned-out of those if you will. But that will started in Q1 and wouldn’t go fast at the end of this year no later than Q1 of ’14, would be the latest, that we’ve ever done that. I will lay that out in a lot of detail on the next call.

Chris Harris - Wells Fargo Securities

Okay. Last question for me and I let some other guys get in here, question on the fixed income division. I know you guys have added a lot to the headcount here, I think you mentioned, Ron, 77 new employees over the last year, stop me, if I'm misquoting you. And then obviously you have some M&A? How are you feeling about the current size of your fixed income division, do you still think there is opportunity to incrementally add here and where exactly do you think there might be more opportunities?

Ron Kruszewski

I think the fixed income market is huge, highly fragmented and been under tremendous disarray, and we believe that the fixed income market, we can make more investments. There is a lot of market share for us to gain without burdening the balance sheet overly. And so we have seen a lot of opportunity within fixed income have invested, but if you are saying to I think we’re at the, toward the end of what we see is the opportunity curve or framework, I would say absolutely not.

Chris Harris - Wells Fargo Securities

Okay. Great. Thank you very much.

Operator

And your next question comes from David Trone of JMP Securities. Your line is now open.

David Trone - JMP Securities

Hi, Ron. Good evening.

Ron Kruszewski

Hi, David.

David Trone - JMP Securities

I had a quick question for here, I was actually pleasantly surprised of the KBW number that you put in there on slide 22, we really looking for about 58 and 70 is pretty nice number?

Ron Kruszewski

Yeah.

David Trone - JMP Securities

Are you able to give any kind of color is that really banking strength or what?

Ron Kruszewski

Yeah. Well, look, I think I didn’t really get into that, I just, but, I would as you would expect the flow business with the uncertainty and year end issues, the flow business would have been not as price didn’t get to your numbers, I don’t what you are numbers are and they had strong banking revenues relative to each other, okay, over prior quarters.

Some of the good quarter demonstrated the strength of their franchise. Had they not had the disruption of our merger, I think it would’ve been a bit better, okay. In terms of the factors I talked about.

So I’m pleased with that and believe that there is that that space can generate a lot of revenue and believe that when we get this integration better done, you're going to see good things out of our institutional group and especially our equity business, and especially our FIG business. We’ll see. The $71 million I was pleased with, when I saw it too.

David Trone - JMP Securities

Yeah. Great. Okay. Thank you very much, Ron.

Ron Kruszewski

Yeah.

Operator

And we have no further question at this time. I’ll turn the call back to Mr. Kruszewski for closing remarks.

Ron Kruszewski

Well, as always, I always appreciate everyone’s interest in Stifel. I remain optimistic as to our opportunities, our ability to gain market share, our ability to increase earnings and increase our earnings per share and book value. I think things feel pretty good. We have a lot of work to do on some of our integration, which we’ll report next quarter and I look forward to a great 2013, and I thank you for your support and we’ll talk next quarter. Thank you very much.

Operator

And this concludes today’s conference call. You may now disconnect.

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