Stifel Financial (SF) Ronald J. Kruszewski on Q4 2015 Results - Earnings Call Transcript

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Stifel Financial Corp. (NYSE:SF)

Q4 2015 Earnings Call

February 23, 2016 5:00 pm ET

Executives

James Mark Zemlyak - Co-President and Chief Financial Officer

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

Analysts

Daniel Paris - Goldman Sachs & Co.

Christopher M. Harris - Wells Fargo Securities LLC

Hugh M. Miller - Macquarie Capital (NYSE:USA), Inc.

Steven J. Chubak - Nomura Securities International, Inc.

Operator

Good afternoon. My name is Christine and I'll be your conference operator today. At this time, I would like to welcome everyone to the Stifel Fourth Quarter and Full Year 2015 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session.

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

James Mark Zemlyak - Co-President and Chief Financial Officer

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

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

As such, they are subject to risk, 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, a reconciliation to GAAP is available on our website at stifel.com.

And, finally, for a discussion of risks and uncertainties in our business, please see the business factors affecting the company and the financial services industry in the company's Annual Report on Form 10-K and MD&A of results in the company's Quarterly Reports on Form 10-Q.

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

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

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

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

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

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

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

However, our mission has not changed. We continue to take advantage of opportunities and invest for future growth. Our deliberate strategy of conservatively increasing bank and balance sheet leverage is underway. And our execution of acquisitions and their integration is on track. We are a growth company and we'll continue to build into the premier investment banking and wealth management firm.

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

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

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

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

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

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

Now turning to slide the brokerage and investment banking revenues, for the quarter, we had record global brokerage revenues which were up 4% year-over-year. Institutional fixed income in the quarter increased 66% year-over-year, reflecting the benefits associated with the Sterne Agee merger principally in the taxable institutional business.

In addition, we are encouraged by the synergies being recognized between the Sterne Agee's depository sales capabilities and combined with KBW's Depository Investment Banking franchise. We've seen a significant increase in this channel. Equity brokerage declined 18.6% year-over-year, again, reflecting the environment. Investment banking revenues were $103 million, down 40% year-over-year, principally driven by weaker advisory fees on a comparable basis.

At this time, I would really like to recognize our Public Finance group, which posted record revenues for the year. This is a business that we've invested in, we've nurtured and we've grown both organically and through acquisitions over the last decade. These investments in our growth is highlighted by the fact that we led the nation in 2015 in the number of negotiated issues, serving as sole or senior manager for 811 transactions with a par value of more than $16.7 billion. And we led all firms in the number of issues in the national K-12 financing category, a really great year by our Public Finance group, representing a lot of growth and a lot of partnering, great folks in there. And I want to congratulate those guys for a great year – and ladies.

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

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

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

Looking forward, our equity pipeline remains – the levels remain solid. We continue to be active in obtaining mandates for both new and existing clients. Our activity will always be dictated by market conditions. And they will vary from sector-to-sector. And, as I said, new issue business is at historically low levels – rates (11:52) and Stifel. However, we've built a significant equity origination and distribution platform. Between 2012 and 2015, our equity capital markets' market share as defined by fees or fee share increased 3%.

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

The next slide reviews our non-GAAP non-interest expenses for the quarter and full year. Non-GAAP comp and benefits, as I said, elevated in the quarter at 64.8% compared 61 5% in the year ago quarter. So, again, a big delta right there in our results. As I said, this increase is a result of investing in our professional but also in a depressed revenue environment. Non-GAAP OpEx was $148 million, 25.4% of net revenues. Same reasons again. Our investments and declined revenues drive the 25% higher. For the full year our comp ratio again was in line at 63%, our non-comp elevated to 24%.

Looking at GWM on the next slide, this segment I'm pleased to say that we have record revenues and pre-tax operating income for 2015. We welcomed our partners at Barclays in December and look forward to their contributions in 2016. Our revenues for the year increased 12%. I would like to note that the addition of Barclays has had a noticeable impact on recruiting, especially amongst advisors from the larger firm. For this segment, comp and benefits was 56.7%, non-comp came in at 15.6% which resulted in pre-tax margins of 28%. All-in-all, a good year for our wealth management segment.

As it relates to industry-wide issues, specifically DOL, MSRB and money market reform, we are, of course, as everyone is waiting on final rules if and when enacted. But I want to say we're well-positioned to deal with these industry-wide changes when and if they occur. As I look forward in this business, it is important to note that the investments we've made in Barclays in getting ready and converting over the Barclays advisors is aiding not only attracting new advisors but will benefit our entire wealth management business.

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

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

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

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

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

In the past quarters, we've illustrated how Stifel can achieve more optimal leverage by growing the balance sheet. Inherent in our projections has been a consistent asset mix and risk-weighted asset density. We've grown our balance sheet with a conservative mix of bonds and loans as reflected in our overall lower net interest margin. As our investment portfolio and the majority of security-based loans and mortgage loans carry a lower relative risk-weighting charge, our overall risk-weighting density is conservative relative to other banks.

If we were to increase our overall risk profile, you would see more of a convergence between our risk-based capital level and our leverage capital ratio. As we've said in the past, we will continue to evaluate our overall profile and risk-adjusted assets based upon the market. Said another way, during the last year, we have been cautious about the credit markets.

We have been cautious about making significant loans in credit. And, frankly, it's coincided with our desire not to go over $10 billion. So I think that those two things were nicely correlated. But, as we look forward, we do see opportunities if credit spreads widen significantly. And we'll continue to evaluate the growth in our risk-weighting appropriately based on risk-adjusted returns.

In this slide, we also see (19:26) the impact of growing total assets to $18 billion by using today's capital levels and a risk-weighted asset. You can see that this would result in a 19.5% Tier 1 risk-based capital ratio and a 9.6% Tier 1 leverage capital ratio. Again, this is simply a function of the amount of risks we're willing to put on our balance sheet really as it relates to highly liquid securities versus C&I loans. The one drives Tier 1 risk-weighting faster than Tier 1 leverage and vice-versa. Based on today's market, we believe we can prudently grow the overall balance sheet to more than $15 billion by this summer.

If I look at Stifel Bank – and, again, Stifel Bank is part of our $13.3 billion of consolidated assets – the total assets in the Bank increased $2.7 billion to $7.3 billion, up 58% sequentially. Investments increased $1.8 billion. The $1.8 billion growth in the bond portfolio nearly doubled in size. The purchases centered in high investment grade CLOs, investment grade corporates, and fixed and floating rate agency MBS.

Loans increased $743 million in the fourth quarter. It's up $1.2 billion year-over-year. Commercial loans increased 16%. It stand at $1.4 billion. Security based loan portfolio increased 40% in the quarter at the Bank and 89% year-over-year. It's up $1.4 billion, includes $375 million of Reg U loans that we got from Barclays. The Bank balance sheet remains about 50%/50% split between investment and loans.

Investments carry an average risk weighting of 29%, while the loan portfolio carries an average risk weight of 50%. Asset quality is strong. NPLs and NPAs were 2 basis points and 1 basis point. That's 2 basis points and 1 basis point, respectively. Past due loans and the percent of total loans at the end of the year was 1 basis point. Our commercial loans are predominantly shared national credits, which we independently underwrite. And the entire portfolio is performing, including our modest credit exposure to the energy sectors.

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

The next slide looks at our capital structure. Total assets, again, $13.3 billion. Our Tier 1 risk-based capital ratio was 26.3%. Our Tier 1 leverage ratio was 16.6%. Looking at the next slide, given the recent market pullback in our stock, we've been actively repurchasing shares. Prior to September 30, we repurchased 1.2 million shares at an average price of $42.40.

Since October 1, we've repurchased another 3.3 million shares at an average price of $39.99. So we've repurchased 4.48 million shares. Our board recently approved an additional increase of 5 million shares under our buyback program, bringing the total authorization to 9.1 million shares. We expect to continue to take advantage of share repurchase opportunities based on current market prices.

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

Okay. For shareholders, first of all, we always expect revenue and EPS growth and accretion in a reasonable timeframe. I'm a shareholder. I want accretion as does everyone. With respect to financial metrics, this is where I want to spend some time about what we do. This is how we structure deals and how non-core income expenses come into play with respect to deals that Stifel has done. And what I want to explain quickly is why we do this and why we have a difference between what we call core and non-core results. And it's entirely related to the acquisitions that we do.

The first thing we do is ascertain our view of enterprise value of any organization. Second and importantly, we determine our view of a split of that between shareholders and the employees. Importantly, our view is that the employees who remain and are productive after the merger need an appropriate amount of deal consideration regardless of their legal ownership. I will show you more about that in a moment but this is what often leads to our non-core charge for equity-based compensation. It is simply an allocation between legal shareholders and our view of how equity consideration should be split.

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

We always try to structure our transactions to take advantage or accelerate tax benefits. Simply stated, this often means taking charges to our income statement versus pushing these expenses into goodwill. If you push them into goodwill, you either eliminate tax deductions or often take a tax deduction over 15 years. We believe that the right way to structure deals is to maximize cash flow and we will often not be looking to maximize goodwill. Many cases, by not maximizing goodwill we increase the amount of non-core charges that we run through our income statement.

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

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

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

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

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

I want to note that the amount of the charge regarding stock-based compensation, this $115 million I'm talking about, could fluctuate because certain aspects of the award, including the service requirement, are still being determined. For purposes of this illustration, we use yesterday's stock price. I do want to know that we're still determining some of the service requirements of those awards.

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

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

In terms of financial projections, I will say that based on when we first started looking at this, the financial projections are depressed, primarily because the equity markets are depressed. Syndicate especially as I've already said. What syndicate? So at this point we see total revenues of $160 million to $190 million, pre-tax margins of 20% to 25% again inclusive of the amortization of retention note.

Our non-GAAP charges that we will take. These are fixed. This is what we're going to take and we'll tell you more is, well, we've spent $13 million in Q4 and then the remainder in 2016 and 2017. As I said, the composition of final amount are still being determined but that's how we do it. Our return analysis is a return on investment of 9% – depends on ranges and various claims 19% to 29%, return on equity 10% to 15% which in this environment is good. It obviously would be higher if we get some investment banking business back.

The next slide looks at our Sterne Agee acquisition. Our expenses related to Sterne came in – are going to come in about $5 million under our prior estimate and about – will be about $6 million over. And I want to just go back. This slide here was what we originally presented to shareholders as it related to the Sterne deal and that, again, it points out what happens between GAAP and non-GAAP.

We view the economic investment of Sterne as being $191 million. This was back on 2/23/2015, which we presented this. And it simply shows that we believe that we would have pre-tax duplicate operating charges in various – all the things I've talked about of $116.5 million. And we show the quarter that we believe back in February of 2015 that they were fallen. And as you can see, it was $116 million. And, again, if you go back to that slide and what's changed here is, as I've said, two things changed.

One, we had to expense an employee note to our income statement. It had no impact on purchase price. It just was something, again, we had to expense. And we reduced the amount that we ultimately pay to shareholders. That's how the agreement – we had to run that through the income statement. But net- net, you can see that, as I have said, what's really going on is while we're on target, we're delayed. We're delayed in our integration because of our Barclays deal. And I talked about that. But I believe that we're on track as it relates to the original projections that we gave our shareholders on the Sterne deal.

So if you go to non-GAAP integration costs in total, within the details provided, I just want to point out that our ongoing deals, today our Barclays Wealth Management, Sterne Agee, as I said I believe the cumulative charges are on the right there. Nice fixed income. We did nice fixed income as a deal where we gave all the consideration basically to the employees.

If you remember, that was a distress sale. That is what we said back then. Those charges, which are primarily – would be what we gave the employees was a three-year deal. That ends on 6/30/2016. Eaton Partners is a one-time charge, again an allocation of ownership through stock-based comp, approximately $10 million that will occur in the first quarter and then intangible amortization, which we do show in our non-core items.

The completed deals that have no future ongoing costs are Oriel, 1919, Acacia, De La Rosa, KBW, Miller Buckfire, Ziegler and Merchant Capital. So I think that that explains and hopefully gives an idea of it. Again, I've received a lot of questions and I believe that what we do maximizes the economic investment. And, as I know, it puts the consideration in the right hands. It helps us retain people and helps us drive our business.

In conclusion, the fourth quarter was a challenging quarter for the industry. We were not exempt. That said, we had record revenues in 2015. We are investing and building a firm for future growth at best services and needs of our clients. The execution of our acquisitions are on track. Our deliberate strategy of conservatively increasing bank leverage is underway. We have work to do on our expense base, but it is also a function of revenues and integrating businesses, which do take time. I am positive on Stifel's position in the marketplace and our future growth prospects.

And I will now open the call for questions. Thank you, operator.

Question-and-Answer Session

Operator

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

Daniel Paris - Goldman Sachs & Co.

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

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

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

Those expenses I believe go away. We do have the Barclays now that we have to roll in. We're already growing. It's hard to always try to say this is the number. But I believe that the infrastructure of people, our overhead as a percentage of net revenues, is probably at levels that I haven't seen since 2004. And the answer is that the overhead structure that we've built support a much larger firm and a bigger balance sheet. So it's almost like build it and they will come. We've spent the expenses and you'll see the balance sheet growth. And, hopefully, if the markets rebound, I like our position in the marketplace.

Daniel Paris - Goldman Sachs & Co.

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

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

Well, look, I guess that I want to and maybe I'll put out with a run rate. I'm not prepared to give an estimate of non-comp expenses as I sit here right today. So I'm not going to answer that question although I do want to get that so that you could model. And so I really can't answer that. Remember Barclays, in terms of the fourth quarter, was only here for three quarters of a month. And so, I think, there is – the Barclays' transaction we told you we think contribution margins are. But, look I'll take it as a note to try to provide a little more guidance on non-comp OpEx before the next call. Fair enough?

Daniel Paris - Goldman Sachs & Co.

Fair enough. And then maybe just last one along the same lines. Obviously, we don't know what the final DOL rule is going to look like. But as part of the investment spend that you've done this year, has some of that contemplate changes to the way you're going to need to run the business post-DOL? Or are we waiting and there's a risk that we'd see another round of expense build on that?

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

Look, we're not waiting. We're not waiting. But I think, frankly, I've been watching and the products that I see that are similar to what we're thinking about. It's more some of the issues, Dan, that are going to surround in many ways the best interest exemption. And I testify that I felt it was unworkable. They said there were changes. I don't really want to anticipate that because there are some products that will make sense on the advisory front. I think that what everyone is waiting for is to determine whether or not you can actually have an infrastructure spend or frankly whether you can even operate in an environment that the best interest exemption might have suggested under the prior rule.

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

Daniel Paris - Goldman Sachs & Co.

Understood. All right. Thanks for taking my questions.

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

Yeah.

Operator

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

Christopher M. Harris - Wells Fargo Securities LLC

Thanks. Hey, Ron.

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

Hey, Chris.

Christopher M. Harris - Wells Fargo Securities LLC

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

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

Well, I think, the first thing that I want maybe you all to do is to recognize within a range of however you want to do it, I do it, okay. So I'm going to try to answer your question. But recognize again that a lot of our infrastructure spend and our capital base support a much larger balance sheet. Okay. And we have limited the growth in our balance sheet. And so, I've always said that we're being compared based upon an unlevered balance sheet. And I run these numbers levered. And I know that we had the opportunity to do it. We went from $9 billion to $13 billion in one quarter. I stated we'd be at $15 billion.

So to answer your question, the first thing we do is look at where are we on a levered basis. And then where are we compared to various peers and what they're doing and how do we feel about this. And I don't feel that we really have necessarily an expense problem. Now if this is the new normal and there are no IPOs or two (44:03) and you annualize all that, well, of course, we're going to have to look at businesses simply because I think the opportunity for people to be paid isn't going to be there. And it's not just my decision.

So we're going to, we believe, I personally believe, that the market is way oversold, especially in financials. I believe that there's a lot of macro benefit at least can get us back on the right track. I'm not going to – certainly not going to, I don't want to say panic, but I'm not going to sit here and do that. I'm not at that point yet, especially when I see our basic results getting fully levered. And so that's how I look at it.

Christopher M. Harris - Wells Fargo Securities LLC

Got it. Okay. Understood. And then as it relates to growing the balance sheet from here, I think, you'd referenced maybe $15 billion by this summer. How should we be thinking about the composition of that growth, whether it's in loans or securities? I think in the past, you'd kind of talked about a 50%/50% mix as being optimal. Is that reasonable given where we are? I know you'd mentioned it depends on where spreads are and your appetite for risk and so on. So, any guidance you could provide there would be great.

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

You just answered your own question, Chris. I mean you want to come over here and tell me what to do based upon – I mean I'm all ears, okay. I mean I think that we consistently, as I've said, looking backwards, we have felt that the investments that we've made in the investment portfolio, in security-based loans and some of the investments that we have made have provided very attractive risk-adjusted return and ROEs that are accretive. I mean because we're always allocating capital to whatever we do. We take proper interest rate hedges. And so everything we do is with a mind toward risk-adjusted returns and doing things appropriately.

As I sit here today, I don't know really how – I know we have a lot of opportunities. I believe that we've shied away from the credit market in terms of loans. I believe that we're seeing credit spreads and terms and covenants and things like that that are making that more attractive on a relative basis. But the only way I can answer it is the way I always answer it, is that I believe as long as we can deploy capital at an acceptable ROE, whether that be in bonds or loans, then adjust it for risk. That's what we'll do. The risk-adjusted density, I can't answer. Not because I don't want to, because I just don't know.

Christopher M. Harris - Wells Fargo Securities LLC

Okay.

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

Kind of know it when you see it.

Christopher M. Harris - Wells Fargo Securities LLC

All right. Thank you.

Operator

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

Hugh M. Miller - Macquarie Capital (USA), Inc.

Hi. Thanks, Ron, for taking my questions.

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

Sure.

Hugh M. Miller - Macquarie Capital (USA), Inc.

Sure. First question, you kind of made a comment in the prepared remarks about kind of the Barclays transaction that has been, I guess, a positive in your ability to attract some of the other advisors from larger peers. Can you give us some more color on what you're seeing there? I'm not sure if you were able to quantify that in terms of how many reps you've been able to kind of see since then come onboard. What are you seeing there? And what's your expectation on your ability to kind of see growth in the financial advisor head count?

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

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

I was thinking of something. I want to make this comment a little bit and it goes to a lot of what's going on in the market with those type of deals. But I get a lot of people who say oh, you know, there were – when we got around to it, there were 150 advisors at Barclays and 50 of them left or 60 of them left and what happened? And I always say it in reverse. From my perspective, seeing how they didn't even know who Stifel was, I got a shot at about 10 of them, and recruited 100 of them, okay. And I think that that's kind of what's happening now. All right.

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

Those phone calls are up – forget the percentage. Because when you go from a low number to a percentage it's huge. And we are seeing it. If we have any concern toady it's you're dealing with market multiples. You're dealing with production that may be elevated and deals. It's always hard in down markets. But I will tell you that our place in the marketplace as it relates to options for people looking for a home was significantly enhanced by both the Barclays transaction in perception and in capabilities on what we added. So look, we're seeing a lot. These are interesting teams to recruit all. Maybe I'll end with that.

Hugh M. Miller - Macquarie Capital (USA), Inc.

Sure. And I guess just a quick follow-up on that is that you kind of started to allude to it about the challenging market multiples and production (50:32). And I guess when the rubber meets the road obviously people may be more interested in sitting down with the firm. But are you seeing opportunities that make sense for you to move forward when you think about kind of the retention awards from an organic standpoint?

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

Are you talking about new recruits?

Hugh M. Miller - Macquarie Capital (USA), Inc.

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

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

I think maybe I'll characterize it this way, okay. We get a lot of interest. We haven't changed our pencil and our back of the envelope the way we do things. Okay. We're going to be a lot more successful. But, as I have said, the Street deals that pay some of the multiples that you read about, my pencil breaks when I start writing those down. It doesn't work. And so what we're seeing is we certainly have raised our level because we're talking to a lot of different people but we're really nowhere near what are still some of the shareholder destroying type stuff that goes on. I don't understand it and we're not going to do that. So to the extent that I just believe that people who are looking for a place where they want to be and want to work, we're here. And those – we're getting the right people. So we're not the high deal on the Street, never have and not going to be.

Hugh M. Miller - Macquarie Capital (USA), Inc.

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

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

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

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

If you have a C&I loan, you have to look at the fact that you need risk-based – it's a risk-based capital of 100%, how do those returns work, how does that risk work, all versus capital and risk. And so what I've seen, we've always felt security-based loans relative to the floating rate nature, their duration, the fact that we understand the collateral and the capital allocated is a great asset class. The yields are not as high necessarily on an absolute basis of, say, a C&I loan. But on a risk-adjusted basis, we like that asset class. As I said, we're beginning to see risk-adjusted spreads and covenants. Remember, you can't just lose sight of a fact of terms. But we're beginning to see things that can make that asset class, what I would generally define, as C&I as maybe being attractive.

Again, what I would say to you and what I want to say to shareholders is if we were simply looking to drive pre-tax earnings, we would just lever the balance sheet tomorrow. There's net interest spread in almost anything, but we don't look at it that way. We leverage the balance sheet risk-adjusted and allocated capital to every position we put out there. That's how we look at it. Sometimes we're transfer pricing to do certain things. But at the end of the day, that's what we do. And I would say the environment in the last quarter was very attractive to adding to our investment portfolio risk-adjusted.

Hugh M. Miller - Macquarie Capital (USA), Inc.

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

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

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

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

Hugh M. Miller - Macquarie Capital (USA), Inc.

Okay. Thank you very much.

Operator

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

Steven J. Chubak - Nomura Securities International, Inc.

Hi. Good evening.

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

Hey, Steven.

Steven J. Chubak - Nomura Securities International, Inc.

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

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

I mean, obviously – I mean, from my perspective, well, we can never say about this. But I certainly has proven by the number of shares we bought back at levels higher than where we are today, I think, that that is an attractive use of capital. We do capital projections and capital planning. And we look at share repurchases. We look at capital deployment. We are probably – in terms of deployment, I would say, we're a little more cautious than normal. Normally, your best opportunities for deals come in environments like this. So you tend to overpay in good environments and you tend to do good deals in bad environments.

But that said, there's a lot of banks on the Street. So I would say we're maybe a little more cautious on that front. But, look, we're going to drive our returns, our return on equity, our margins, our pre-tax margin and our EPS, all our levers that drive shareholder value. And we're going to do all of them as the individual largest shareholder in this place would do himself, that's me. So I'm going to it and do it appropriately. So, all of those levers are available. None of them are excluded. And, really, I don't know that any one of them is necessarily favored, although I would admit, our stock price is at levels that seem – I'll leave it there – seem something.

Steven J. Chubak - Nomura Securities International, Inc.

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

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

Well, look, I mean I think, as I've said – Steven, I said I think that the personnel and the capabilities is front-loaded. I think I've already said that as we look at our overhead as a percentage of net revenues, we measure it not only as a segment but by area. And so we have a historical perspective. And, in general, our overhead structure relative to the revenue of the firm is elevated. But that's what we set out to do. So, as I've said, we spent an additional $16 million in IAA compliance and all our risk systems and technology and I've given all those numbers. So a lot of those expenses are front-loaded.

We did have a lot of one-time what I would call non-comp OpEx, consulting and all of that, that does go away. That was to help us get to where we wanted to be. But I believe that a lot of the expenses that we put in place was done, as I said to all the shareholders, with the express intent of being able to prudently from a regulatory and risk management and just overall evaluation perspective prudently grow this company beyond – firstly, $10 billion is a line in the sand, but certainly much larger than that. So we've put in a lot of infrastructure. And now we need to build the firm into that to a certain extent. I don't see additional personnel hires needed, certainly, at this level of revenue at all. And, again, that just goes to how we look at the business.

Steven J. Chubak - Nomura Securities International, Inc.

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

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

Well, of course, I do. I mean it's -

Steven J. Chubak - Nomura Securities International, Inc.

Maybe you can quantify it for us.

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

We have that. Of course, I do. It's always ironic to talk about how good it is for companies to need to restructure. But in that business, it's true. And so I mean that – we don't have Miller Buckfire to the logo. I mean we do, I guess. But we want to participate in restructuring space. We've done some very noteworthy transactions, as I said. And I can't disclose what we might be working on. But, as you know, we've got deals award for being the advisor to the city of Detroit. This comes to mind for me as well as a very significant, not only noteworthy of the marketplace, the largest, but also indicative of our intellectual capital that resides within Miller Buckfire. So, of course, I would like to participate in an inquiry. I always feel a little uncomfortable picking that business.

Steven J. Chubak - Nomura Securities International, Inc.

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

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

Well, look, we merged with them at trough levels, right, and their peak level which was, I guess, 2009, 2010, 2011, I don't think is relevant but it might be but I don't – I guess that I hear you in terms of that. When we merged with them we were at a trough. And I think there's more opportunity today. I can ask Victor to give a historical run. But I think most of the restructuring firm show our revenues back in peak levels that even they don't think they're going to get to today. At least I hope they don't get to in 2009 and 2010. So I don't know – obviously I don't disclose restructuring advisory revenues. I guess I'll consider whether we should do that. We don't disclose revenues by product type either. So, at this point, I really can't answer your question.

Steven J. Chubak - Nomura Securities International, Inc.

Well, I appreciate the effort and thanks for taking my questions.

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

You got it.

Operator

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

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

Kruszewski.

Operator

Thank you.

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

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

Operator

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

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