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Stifel Financial Corp. (NYSE:SF)

Q4 2013 Earnings Conference Call

February 24, 2014 5:00 pm ET

Executives

Ronald J. Kruszewski - Chairman, President and Chief Executive Officer

James M. Zemlyak - Senior Vice President and Chief Financial Officer

Analysts

Hugh Miller - Sidoti & Co.

Devin Ryan - JMP Securities

Michael Wong - Morningstar

Patrick O'Shaughnessy - Raymond James

Operator

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings Call 2013. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

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

James M. Zemlyak

Thank you, Mike. Good afternoon, everyone. This is Jim Zemlyak, CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss our fourth quarter and full year 2013 results. Please note that this conference call is being recorded. If you’d like to follow on with today’s slide 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. Slide 1 of today's presentation covers this in greater detail. Forward-looking statements are not statements of facts 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 MD&A section of the Company’s annual report on Form 10-K.

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

Ronald J. Kruszewski

Thank you, Jim. I'd like to start off today's call with my overall comments, which are that, we are very pleased to post our 18th consecutive year of record net revenues at Stifel. These results speaks to the dedication of our over 5,800 professionals as well as to our balanced business model. Non-GAAP net income from continuing operations for the year improved over the prior year as a result of both better market conditions and the benefits of our recent acquisitions. Looking forward, we will continue to take advantage of opportunities in the marketplace that add to shareholder value.

Now turning towards looking at the market overview, client activity in the last quarter of the year was [excellent] (ph). Both equity and corporate bond average daily volume was up 4% sequentially. U.S. equity capital markets finished the year strong, up in terms of both number of transactions, they were up 14% in dollar volume which was up 55%. This is reflected in our strong investment banking results for the quarter. New bond activity was up 8% sequentially, although debt capital market activity declined. Domestic equity flows in mutual funds were positive for all four quarters of 2013.

Now, our current outlook of the market could be summed up with a word which I believe is going to be 'choppy'. The year ended, 2013 ended with great optimism reflected in the strong market rally and the hand-off to 2014 was expected to be strong. However, the hand-off at this point appears to be at best a limp handshake. Many of the economic indicators, housing, manufacturing, retail sales are coming in weak and below expectation. Common explanation is weather and an increase in inventories in the second half of 2013, although while certainly an impact in my belief is that the general economic conditions are not as strong as anticipated at the end of 2013.

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

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

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

We successfully completed the merger and integration with KBW and I believe instead of playing defense in an integration year, which in many respects was what 2013 was, we look forward to playing offense in 2014 and believe we'll continue to gain market share. We acquired and integrated the fixed income business of Knight Capital in July of 2013 which added to our already impressive fixed income capabilities. Our Institutional Group achieved record flow levels and record investment banking revenues. We continued to gain market share in the year and completed a number of unique and high-profile financings for our clients.

We completed the acquisition of Acacia Federal Savings Bank in the fourth quarter. Stifel Bank assets reached $5.1 billion while our risk profile at the Bank remains conservative. We welcomed Ziegler Lotsoff Capital Management to the firm’s asset management efforts. We added 138 new financial advisors to our Private Client Group. We opened 11 new offices in 2013. And finally, our stock performed very well ending the year at $47.92, was up 50% from the start of 2013. In the last 15 years, our stock is up over 1300%.

The next slide looks at our stock performance overall. Our stock is the top performer over the past year, six years and 13 years. However I do want to comment on our five-year performance which is what many people will use where Stifel's stock has apparently lagged, certainly as the numbers would be. So while our growth since 12/31 has lagged many of our peers in the S&P 500, if you go back one year, which is what this chart attempts to do, if you go back one year to 12/31/07, you'll note that our Company performance is almost double from our closest peer and is over four times the performance of the S&P 500 index. And this is really due to the fact that in 2008, during that year, our Company stock was up 30% while nearly every financial service's stock was down in 2008. So it's always interesting to play with numbers. I think the strong performance of our Company in 2008, i.e. we were up almost 31%, creates a tough base here for comparison when you look at five-year numbers.

Now turning to our financial results for the quarter, record net revenues for the quarter was $563 million, which was a 37% increase over the prior year. EPS from continuing operations totaled $0.69 per diluted share and after discontinued operations was $0.64 per diluted share. As you know, because of our numerous acquisitions and our discontinued operations in Canada, we do talk about earnings on a non-GAAP basis where we exclude merger-related expenses and discontinued ops. And on this basis, our diluted EPS was $0.79. This compares to net income of $40 million or $0.74 per diluted share last year. Our non-GAAP pre-tax margin for the quarter was 16%.

So I'd also like to point out a few items in our core numbers for the quarter. So in the $0.79 for the quarter, first we booked about $7 million gain on Acacia, second we had about $10 million in unusual non-comp operating expenses which accounts for the difference above our stated quarterly goal of $115 million to $120 million, and finally our tax rate was positively impacted by Acacia by about 5 points. So if you net the gain on Acacia with our non-comp OpEx and normalize the tax rate for the quarter to about 38.5%, I would note that that impacted about $0.03 a share.

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

Looking at the financial results for the year, we posted record net revenues of nearly $2 billion, which is up 24% year-over-year. Our non-GAAP net income from continuing operations was $185 million or $2.51 per diluted share. That compares to net income from continuing operations of $145 million or $2.31 per diluted share. Our non-GAAP pre-tax margin was 14.9% which was on target with our goal of 15%. Comp and benefits came in at 62.5% of net revenue. But I will note then, I feel like I'm saying this every quarter, our non-comp OpEx of 22.6% of revenue I believe was a challenge. We continue to make progress and we continue to grow the Company. Last year we did five deals and we continue to work on that number because I believe there's room for improvement in our non-comp OpEx. Our loss from discontinued operations net of tax was $11 million compared to $6.7 million during 2012.

So looking at sources of revenues for the quarter, our commission revenues increased 16%. The increase was due to higher OTC and mutual fund transactions. Principal transaction revenue was up 22% to $119 million. That's due to an increase in equity and fixed income, Institutional brokerage revenues as a result of higher trading volume and the contributions of both KBW and Knight Capital fixed income. Investment banking revenues increased 118% to $159 million and that is up from the prior year quarter of $73 million. The year-over-year increase was a result of the 54% increase in capital raising and a 229% increase in advisory revenues over the prior year. Our investment banking revenues were positively impacted by the strong year-end activity as well as our acquisitions of KBW and Miller Buckfire. I'll go into more detail on investment banking in just a minute.

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

Looking at brokerage revenues, as I've stated in the past, we review the impact of commissions and principal transactions on a combined basis, we call that brokerage revenues. Brokerage revenues for the quarter were up 19% from the prior year quarter and up 1% from the third quarter of 2013. For the quarter, Private Client Group was up 9.1%. Our equity brokerage revenues institutionally increased 56% year-over-year while fixed income institutionally increased 17%. Both equity and fixed income trading was solid in both segments other than the loss that we took in fixed income in the second quarter of 2013.

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

Transition pay which is significant, although as a percent of net revenues is declining, it was 4% compared to 5% a year ago. Core non-comp operating expenses were $127 million as I said, about $10 million above the middle of our range of $115 million to $120 million, and that compared with 22.6% in the fourth quarter of last year and 24% in the third quarter of 2013. As I look forward, I do – non-comp operating expense, it is a range I give, I expect it on a quarterly basis to be in the range of $118 million to $120 million on a quarterly basis.

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

The next slide shows the results of our reporting segments. For the fourth quarter, Global Wealth Management posted record net revenues of $293 million, up 15% from the prior year and 7% sequentially. Our Institutional Group posted record net revenues of $266 million for the quarter. It was up 66% year-over-year and 30% from the third quarter of 2013. The revenue mix in the firm, we do like our balanced revenue mix with 52% from Global Wealth Management, 48% from the Institutional Group. For the year, that mix was 56% to Global Wealth Management and the balance from our Institutional Group. Our Global Wealth Management's operating contribution increased 15% to $79 million, was up 10% from the third quarter of 2013. Our Institutional Group's operating contribution was up 124% from the prior year to $49 million, up 39% sequentially.

Looking at Global Wealth Management, it continues to perform with margins of 27% for the fourth quarter and 26.8% for the full year. Commission revenues increased 12%. Our asset management and service fees were up 21%. As I said, it was a result of an increase of assets under management, both the market performance and net inflows of client assets. Our fee-based assets increased 24% from the prior year to $26.2 billion.

Net interest revenues increased 47% from the prior year. This was a result of increased net interest revenues as we continue at execute our strategy of prudently growing the interest earning assets of Stifel Bank. Comp and benefits in Global Wealth Management increased to $168 million, which is again due strictly to our growth. More importantly, looking at it as a percentage of net revenues, it was 57.4% for the quarter compared to 57.7% in the prior year.

Turning to next slide on Stifel Bank, as I mentioned in our last call, the strategy within the Bank is to remain consistent, and that's to monetize deposits from our broker-dealer clients and to provide complementary services to the clients of both the Private Client and our Institutional Group. Stifel Bank is an extension of and complementary to our businesses.

For the quarter at the Bank, the noteworthy items are; nonperforming assets improved to 3 basis points, that's down from 32 basis points at the end of the third quarter; total assets are slightly over $5 billion at the end of the year. I do want to provide some additional comments on the acquisition of Acacia which was completed in October. That transaction added assets of $534 million prior to any purchase accounting marks. $150 million of that was in cash, $377 million was in loans, but we sold pretty quickly $75 million of CRE commercial real estate loans that didn't meet with our strategy and we recorded purchase accounting marks of $44 million. So net loans added was about $258 million.

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

The next slide looks at our Institutional Group results for the quarter. Our Institutional segment had record net revenues of $267 million for the quarter. The increase was mainly due to higher Institutional equity flow business, higher equity capital raising and advisory M&A, primarily investment banking revenues. This quarter was positively impacted by our recent mergers with KBW, Miller Buckfire and the Knight Capital fixed income business.

Comp and benefits expense certainly increased as revenue increased, but if you look at as a percent of net revenues, it was 62% for the quarter compared to 65.4% in the prior year quarter. Non-comp operating expenses also increased significantly with revenues. There's been a lot of activity going on for mergers here. But you will see that our margins, our pre-tax contributions for the quarter improved to 18.2%, and while it's still below our goal of the mid to low 20s, it's up from 13.5% at the last quarter ending 12/31/12 and up from 17% in the third quarter of 2013.

If you look at Institutional Group revenues for the quarter, again we had a great quarter which reflects the investments we have made in the past. Our equity business continued to show significant year-over-year growth. To illustrate, equity brokerage is up 56% year-over-year, equity capital raising up 175%, advisory fees up 230%. Fixed income, our Institutional fixed income flow business remained positively impacted by our acquisition of Knight, offset by weaker public finance revenues, which is consistent with the industry. I want to comment that we're very pleased with our investment banking quarter, but as you all know or should know, investment banking results are cyclical and lumpy. That would caution against annualizing our fourth quarter results.

The next slide illustrates the progress we made in building our investment banking capabilities. In order to look forward, I think we should look backwards to review our historical results. With the mid-year acquisition of Thomas Weisel Partners in 2010, our total investment banking revenues in that year increased to $218 million from $125 million. Since then we have added professionals from Stone & Youngberg, Miller Buckfire and KBW and as a result have grown investment banking revenues to $450 million in 2013. And while results can be choppy, I believe we can continue to build our investment banking revenues from here.

The next slide reviews our capital structure with review as conservatively levered. Total capitalization was 2.4 – almost $2.5 billion, the debt-to-equity was 12.5%, our Tier 1 leverage ratio came at 15.5%, and our common on this, our Tier 1 risk-based capital ratio was 26.8% which is higher than many of our peers and presents an opportunity to conservatively grow EPS in the future. And to give you an idea of the potential earnings impact of this, and I'll use the Bank as an example to make this, if we took our Tier 1 risk-based capital ratio from 26.8% today to say 18% which is where many of our peers are and if we do that by growing assets in the Bank using the Bank's current asset-backed, we could nearly double the assets of the Bank which would provide approximately 20% EPS accretion without raising any capital. And that is the runway that we have and the ability to grow our Bank or frankly leverage our balance sheet from a very conservative nearly 27% Tier 1 risk-based capital ratio.

Turning to other financial data, as of December 31, our stockholders' equity was $2.1 billion, book value per share of $32.38. Leverage ratio which we look at simply as assets into equity of 3.6x, at the broker-dealer it's 1.9x, very conservative, Stifel Bank it's 15x. As I said, we look at when we add the leverage, we add it within the Bank utilizing core deposits. We continue to recruit established financial advisors. We recently brought on an eastern region director which we think will be impactful. In 2013, as a firm, we added over 500 net new associates. Our total client assets reached nearly $166 billion, up 20% from last year and up 7.6% from the prior quarter.

I'll give you an update on our recently announced acquisition of De La Rosa which is an investment bank in California. They are a highly regarded bond underwriter in California with a 25 year operating history. The deal was announced January 30 of this year. It is expected to close during this first quarter toward the end of this quarter. We plan to integrate this within our Company. As a result, Stifel will become, on a pro forma basis, the number one underwriter in California negotiated in terms of both par value and number of issues. We'd become number one in California in K-12, lease revenue bonds, tax increment, economic development, and water and sewer, and substantially all the senior leadership has executed, what is our norm, of continuation agreements with Stifel. I am very excited, I know my business partners are excited to welcome our new associates and build on our commitment we made to California with the merger of Stone & Youngberg in 2011.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Hugh Miller with Sidoti & Co. Your line is open.

Hugh Miller - Sidoti & Co.

So I guess wanted to start off a little bit on the investment banking side of the business and obviously you guys commented about not annualizing this number on a go forward basis, but I realize that advisory revenue can sometimes benefit from a year-end push but do you feel as though any of the business kind of possibly that pulled forward and closed during the quarter, this is demand expected was going to close in 1Q, or how should we be thinking about that?

Ronald J. Kruszewski

As I said, look, I think that the fourth quarter historically for us being a year-end and for whatever reasons, some years are tax motivated, other reasons are just people trying to get things done within a calendar year. The fourth quarter is historically a quarter where business is strongest, and my comment there is that, I don't think that if you take $160 million annualized, [$700 million or $750 million] (ph), that's a lot, and it was a great quarter. Here I'm just trying to show that we consistently build this segment and I believe that we can build it from here, but investment banking is historically more cyclical and can be lumpy. I'm not sure if that answered your question, it was a strong quarter but reflects in many ways the investments we've made in the past, primarily KBW and Miller Buckfire, along with some strong additions we've made on the historical Stifel platform.

Hugh Miller - Sidoti & Co.

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

Ronald J. Kruszewski

Look, I think a lot of what I see, and I only see what you see in many of these firms, but when the markets are up as much as they are and you have activity and the process, et cetera, et cetera, it's not surprising for me to see the DARTs, the daily trades as the discounters go up. I think that's more reflective of maybe the day-traders in many ways. I mean I think engagement has never – has always been strong here, it's been more fixed income than equity, and we're seeing more equity engagement but I wouldn't say that we're seeing the increase here in terms of equity engagement that maybe is indicative of what you're seeing in some of the discount brokers DARTs, but I'm also not surprised by that.

Hugh Miller - Sidoti & Co.

Okay, I appreciate the insight there. And as we turn to kind of the advisor recruiting, we've been hearing a little bit about some of your peers that are starting to get excited a bit more about the environment, it's been a little bit more challenging than it was during the credit crisis, but that [aggregate condition] (ph) of seeing retention awards does create some opportunity. I was wondering if you can talk about what you're seeing with advisor recruiting interest and also on the potential for Wealth Management M&A for your firm on that basis as well?

Ronald J. Kruszewski

Well, first question – you asked two questions there – on the first, our recruiting is based upon our financial models which are not always in line with the competitive environment of recruiting. If we don't see an increase to shareholder value through recruiting, we won't adjust our deals accordingly, and that's really been the case for the past actually several years now, as I think that there's been stabilization efforts of the largest firms defined by keeping headcount constant, defined by recruiting as many people as you're losing, which there's been a lot of shuffling going on between major firms and big deals, but we don't play there.

Has that gotten better? I think it has but I would say marginally. I don't feel that there is – you're going to see a return to the recruiting that we saw in 2009 and 2010, both because of environment is a lot more stable for one, and for us we're still not going to play in a dilutive recruiting environment, dilutive to earnings. So that's my overall view. I forgot, what was your second question?

Hugh Miller - Sidoti & Co.

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

Ronald J. Kruszewski

Look, M&A for us is very opportunistic and when I look back at our M&A in Global Wealth Management, the reasons that they all occurred are as numerous as the deals themselves. So I generally would say that in strong equity markets, M&A is not as prevalent as it is in weaker markets, and we just flipped through a market that was up 30% and it leaves its teachings all in here. So I would not say that this market is conducive to M&A which is generally – will be mostly driven because of one factor, it will be weak markets and people having fear, which we don't have today. So, not something that I'm going to say is a robust Global Wealth Management M&A market, not at the prices that we would want to pay.

Hugh Miller - Sidoti & Co.

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

Ronald J. Kruszewski

Look, a lot of the Institutional flow business for the most part is in the high – the liquid names and the flow, that's the way the business has evolved, primarily because spreads in the ticks have narrowed to sub-penny. What has then happened is, in my opinion, has been almost a destruction of the ecosystem for small-cap companies, in that it is very difficult to support both through research and through trading companies that have small-market cap. So to answer your question, I am encouraged by the fact that we have policy-makers that recognize that to encourage capital formation and to encourage an environment that allows small-cap companies to grow through the capital markets and not just sell, that there is some minimum spread that can be almost an opt-in system.

So what does it mean to the flow business? I don't think it means much. What does it mean to the potential for capital raising or capital formation? I think a lot. If you couple this with some of the other things that you're seeing, like the confidential process that you can file IPOs, has helped. And so that depends on appear to be swinging towards recreating of an ecosystem which can allow companies with post-IPO market caps of $200 million to $250 million to get the market support required so that they can be relevant, and in the end that will be positive for a firm like ours that has a lot more influence, a lot more focus in that market. We talk about wanting to be, and in many ways are, the top investment banker to that segment and so the supporting of that ecosystem is important to us and I'm encouraged by it.

Hugh Miller - Sidoti & Co.

Okay, appreciate your thoughts. Thank you.

Operator

Your next question is from Devin Ryan with JMP Securities. Your line is open.

Devin Ryan - JMP Securities

I just have a question on excess capital or capital return, I mean obviously it still seems like there's lot of attractive areas to put capital back into the business and the Bank is an example of it, you guys have talked about. Just trying to think about are there other areas that you can actually return capital or there are just so many attractive areas to put capital back into the business that that's more compelling use right now?

Ronald J. Kruszewski

I mean as I understand your question, in its simplest answer, we can deploy excess leverage by adding assets to the balance sheet, i.e. deal with the numerator of the equation, and/or look at the denominator which is equity, and as an example buy back stock or look at ways to reduce the denominator, which is the equity base. And my view on it has been, certainly if you look at it very simplistically, leveraging the balance sheet is much more accretive to shareholders than say buying back stock in terms of what we can do to get book dilution and you have a number of things. So we are looking at leveraging our balance sheet to what we believe are significant growth opportunities.

I think that's been our past and as I look forward, I think it's our future, not to say there's no more growth opportunities. So since the beginning of the financial crisis, we have tripled revenues. You can look at all of our numbers, I won't bore you with them, but that was opportunities that we see to deploy capital versus return it and I would say that my mindset today is to deploy capital with the appropriate return hurdles. We're not looking to dilute shareholder value, we're looking to accrete shareholder value, and we see opportunities to deploy capital in our businesses versus dealing with the denominator.

Devin Ryan - JMP Securities

Got it. I appreciate the update, I just wanted to get the current thoughts there. And then just with respect to the fixed income business, walk again maybe your view of how the Knight Group has been performing relative to expectations when you made the acquisition, if there's additional upside in that Group relative to kind of the run rate?

Ronald J. Kruszewski

Yes, I mean I think I have said that I thought my expectations – I'll correct this if I'm wrong because I don't have it in front of me, but I think I said $70 million to $100 million in revenue and I would say that it's within that range. As any business, you've got to get traction and get going. That business is not unlike any deal we've done and that capability leads to other opportunities to leverage revenues. So I'm pleased with where that's gone and it has opened other doors and we're evaluating other opportunities as a result of that. I would say that it is performing well within our initial expectations. But frankly for the six months, I would tell you it probably exceeded my expectations as to what – it always takes time to start a business up or transfer a business to a new platform. And so I'm pleased with our results thus far.

Devin Ryan - JMP Securities

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

Ronald J. Kruszewski

I think, again, we talk about – I think you have to look at the fact that we have done a very good job of integrating businesses, and if you look historically, after we get through our merger related expenses, our margins have remained consistent at about 15%. I see though the ability to even have more leverage to an overall cost basis and while we continue to make progress on that front, we also continue to grow. And so while I can point to numerous cost reductions in numerous places where we have consolidated rent and saved millions here or a couple of million there, we also did KBW, Knight, Acacia, and Ziegler, those all deals we did last year, those all in and of themselves increased the expense rate and the inefficiency in the short run.

So look, at the end of the day, 22.5% in my way of thinking about the business, all else being equal, we can produce and we'll continue to leverage, but I want to compliment our team at also doing all of these and maintaining 15% margin. So do I see opportunity? Yes. I'm often frustrated that I see all these cost saving initiatives come through yet that ratio stays stubbornly in the 22%, mid-22% range and I've looked at it a number of times and I have decided that our acquisition appetite has something to do with that.

Devin Ryan - JMP Securities

Got it, appreciate the color and congrats again on the nice quarter.

Operator

Your next question is from Michael Wong with Morningstar. Your line is open.

Michael Wong - Morningstar

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

Ronald J. Kruszewski

All of the above. Look, I mean I think what we've said is that we always look – and I don't mean we have a flip band per hedge, I mean I don't really know because Acacia was an opportunity we took advantage of. I will say that our approach at loan growth has been what I would characterize more as natural to our clients versus wholesale. So I don't want to say we're going to get to 50% loans to investments by doing shared national credit and selling our investment portfolio. That we could do but that is not then our strategy today. What we do want to do is increase our loans almost organically and naturally, and as I see it, the Bank has gotten a sufficient scale where we are focusing on increasing our net interest margin and also increasing the loan book relative to the investment book. How it gets there is through our Global Management business, through our Institutional business and potentially through acquisitions, if they still arise.

Michael Wong - Morningstar

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

Ronald J. Kruszewski

I think most of the substitutions occurs to the extent that it has. I would like to think that that growth of certainly security-based product lending is incremental, and I certainly look at it combined, Reg T and Reg U in my mind, the location might be separate but it's part of the loan book, we manage it that way. But I think I would just be repeating my answer to your previous question if I went much further on that.

Michael Wong - Morningstar

Okay, thanks.

Operator

The next question is from Patrick O'Shaughnessy with Raymond James. Your line is open.

Patrick O'Shaughnessy - Raymond James

Just my question is, with the Global Wealth Management segment at this point, you are growing your advisor base kind of 1% to 2% a year for past couple of years and it sounds like you don't really think that's going to dramatically accelerate from here. So kind of putting the Bank growth aside, what is your framework for your growth model for the Global Wealth Management segment at this point?

Ronald J. Kruszewski

Despite all of that, Patrick, we've probably been at the top of the recruiting list of anyone in terms of number of net advisors. I think that – I'm not saying that we are accepting 1%, 2% or 3% net growth, many people have net declines, I'm not accepting that, I'm saying that we are going to recruit on an economic model that makes sense. If I was going to say I want to grow our advisor base by 15% and took our deal up significantly, we would far exceed that in our ability to recruit. We recruit at a significant discount, which has been the case for the last few years. So I believe that pendulum has a way of swinging both ways and we've been in business for long time and I'd rather keep our powder dry. There will come a time, either through a potential acquisition or by a change in the environment or a change in the competitive landscape of recruiting, that we will be able to go back to 10%, 15% growth, but we're not going to have that as a target and sacrifice that at the altar of financial returns.

Patrick O'Shaughnessy - Raymond James

That's helpful. And then kind of building off a point that you mentioned, a lot of your or most of your recent acquisitions have been in the Institutional space, what sort of opportunity is out there for acquisitions in the Global Wealth Management space at this point?

Ronald J. Kruszewski

I think again, you look at what really has happened in the last few years, if you had a significant increase in the equity valuation from the crisis flow, and we all know the numbers and the equity valuations, multiple expansions, last year they were up 30%, and so the overall environment in the Global Wealth Management business with that kind of business has been – it's been a very strong market to be talking about whether or not that's conducive to Global Wealth acquisitions or what have you.

On the other hand, in that same environment, you've had the Institutional volumes, Institutional equity volume grow from $10 billion a day to $5 billion a day and fixed income go from the securitization money machine to – that business model got broke. And so what happened was that all of our opportunities that we saw that we could add shareholder value have been on the Institutional space. It's not that I suddenly have become myopic in the Institutional space, it's because that's where we saw value opportunities, and I think frankly the last quarter is proving that up, that we've made the right deals at the right time.

And so in the past the opportunities have been to do mergers with the Stone & Youngbergs and the KBWs and the Thomas Weisel Partners and the Miller Buckfires, all of which are exceeding where they would have been before we did the deal with them and we've not seen the same opportunity in Global Wealth Management. If we do, we'll execute.

Patrick O'Shaughnessy - Raymond James

Got you, that's helpful. On KBW, now that you have a few quarters under your belt with that being integrated, how is it going, I think in particular on your Institutional equities business, trying to make sure that you're still getting I guess two separate checks from your clients, the KBW check, the Stifel check, what sort of pushback are you getting from them, and I guess just in general, how is that kind of a separate carve out of the KBW folks, how is that going?

Ronald J. Kruszewski

I couldn't be more pleased. I mean our volumes in almost any way that you measure it, our market share is up, and the answer is that while the Street in general, both the buy and the sell side, maybe questioned our strategy, what came out of it was an underscoring of the fact that if you provide service in a sector to a marketplace, you will get paid. The KBW brand and where they trade and where they research is so strong in financial services that the fact that we left it alone and didn't talk about all the things that we were about talking about, is not a testament necessarily to the fact that there's two different brands, the testament is that they provide value in the financial services sector that no one else really does and we kept that value in terms of sales trading and research and the market did what they should've done which was reward us for doing that.

I think the integration has gone exceedingly well, both from a people and a market acceptance. If I have any disappointment, it's the fact that in any year of integration you play defense instead of offense and we played a lot of defense last year and I'm looking forward to some nice market share gain in that space and I couldn't be more pleased with the integration of the KBW brand under the Stifel umbrella both, you name it, from investment banking, equity flow business, research, our trading volumes, I could bore you with statistics but they are all up.

Patrick O'Shaughnessy - Raymond James

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

Ronald J. Kruszewski

Yes, look, I often say 39% and I always say 39%, it always comes in at 38.5%, and so if I go talk to my tax guys, they pick 39% and I always say, whatever. So, in that range, 38.5%, 39%, you can pick a number. I thought 38.5% was appropriate certainly for this quarter. Going forward, there's a lot of things. We've been more impacted by our international operations in our tax rates, and then as we've made investments, both the discontinuing of Canada plus the investments we've made in Europe, I think will make the 38.5% more achievable, but it's like interest rates, I don't like predicting tax rates.

Patrick O'Shaughnessy - Raymond James

Alright, understood. Thank you.

Operator

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

Ronald J. Kruszewski

My closing remarks is that I would like to congratulate my partners at Stifel on a great year. We've been busy building this Company from $100 million of revenue back in the late 90s to $2 billion today, and I believe that as the shareholders of this organization, we continue to look forward to opportunities and continue to provide above-market shareholder returns. I look forward to reporting first quarter 2014 results and thank you for your interest in our Company. With that, we will say, goodbye.

Operator

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

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