Stifel Financial Corp (SF) 2016 Q4 法說會逐字稿

Good morning. My name is Scott and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter earnings call for 2016. After the speaker's remarks there will be a question and answer session.

(Operator Instructions)

Thank you. James Zemlyak, Chief Financial Officer, you may begin your conference.

Thank you and good morning. 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 2016 financial results. Please note that 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, we 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 they may include our beliefs regarding the effect of various regulatory matters, legal proceedings, management expectations, our liquidity and funding sources, counterparty credit risk or other similar matters. As such, they are subject to risks, uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP, we may use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the Company's GAAP results. To the extent we discuss non-GAAP measures, the reconciliation to GAAP is available on our website at www.stifel.com.

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

Thanks, Jim. Good morning to everyone and thank you for taking the time to listen to our fourth quarter and full-year 2016 results. This morning we issued a press release with our fourth-quarter and full-year results and posted a slide deck on our website.

With that, let me start with my opening comments. I'm very happy to announce we posted our 21st consecutive year of record net revenues despite what was a challenging operating environment for the vast majority of the year. The business we've built over the past 20 years continues to benefit from the diversity of our revenue streams and is well positioned as the post election market optimism continues.

Our results underscore this diversity as investments we made in 2015 helped drive substantial growth in net interest income, asset management service fees, fixed income brokerage and trading and advisory revenue. These more than offset weaker institutional commissions and underwriting revenue.

The improved market environment is a solid backdrop for continued organic revenue growth in 2017 and we will continue to look to deploy our excess capital in ways that generate the best return. However, as we continue to grow our top line, we will put increased emphasis on improving operating leverage through expense efficiency. In 2016 we illustrated our commitment to meeting our expense expectations as our comp and non-comp expenses consistently fell within our guidance. We have instituted a firm-wide cost reduction initiative that I expect will continue to generate positive results that will ultimately result in improved operating margins.

Lastly, I'd note that the vast majority of our non-GAAP deal related charges are behind us and we have consistently stated that over the past year we expect the difference between GAAP and non-GAAP results in 2017 will be materially less than what we reported in 2016.

In terms of our full-year results, as stated, GAAP net revenue was a record $2.6 billion and GAAP EPS available to common shareholders of $1. In 2016 we not only generated record firm-wide net revenue but we also recorded record net revenue in both Global Wealth Management and our institutional segment. Additionally, our Global Wealth Management segment recorded a record pretax operating income.

Other corporate highlights include a nearly $6 billion increase in our balance sheet, the issuance of $150 million of non-cumulative perpetual preferred stock, the issuance of $200 million of senior notes to refinance $150 million of existing senior notes, the acquisition of City Securities, the successful integration of ISM and Eaton partners. And finally, we purchased 3.4 million shares at an average price of $33.22.

Looking at our fourth quarter results, as you can see from the table on the next slide, GAAP net revenue was $661 million while GAAP EPS available to common was $0.31. Our fourth quarter GAAP results were impacted by a few items. First, we had $14 million in anticipated merger charges primarily related to our Barclay's acquisition.

Our income tax provision, as previously disclosed, was negatively impacted by $8.9 million due to the non-deductibility of the settlement with the SEC. And lastly, we increased our legal reserve by $20 million in the quarter. Excluding these items, our adjusted non-GAAP EPS was $0.68. Lastly, we surpassed our target of $18 billion in assets on our balance sheet reaching $19.1 billion at the end of the year.

Moving on to our primary revenue lines, I will start with brokerage revenue. Brokerage revenues were $290 million which was roughly similar to the sequential and year ago quarter. Excluding the brokerage revenues generated by the Sterne business that was sold on July 1, 2016, brokerage revenue increased 4% year over year.

Global Wealth Management brokered revenues were $160 million, which was down sequentially. But again excluding the aforementioned revenues from the Sterne business, the global wealth brokerage revenues for the fourth quarter of 2016 increased 6% compared to the fourth quarter of 2015. Institutional brokerage revenues were up both sequentially and year to date with increases in equity brokerage offset by declines in fixed income.

Institutional equity brokerage revenues were $64 million, up 17% year-over-year and 25% sequentially. We're happy with these results as industrywide daily volumes were up only 7% sequentially and flat year over year. Our equities business was where we experienced the most significant impact to institutional brokerage revenue. Clearly the market buy-ins and activity levels post-election drove these results.

Fixed income brokerage revenues were $66 million, declining both sequentially from 2015 fourth quarter. The revenue declines were the result of higher trading losses relating to our taxable muni inventories following the November election as our inventories were negatively impacted primarily due to higher rates, the expectation of higher rates in the future and possible changes regarding tax policies. In addition to the trading losses, a modest sequential decline in trades average daily volumes for investment grade securities also impacted our revenue.

Investment banking revenues were $135 million as a strong pickup in equitable capital raising was offset by lower advisory revenue on a sequential basis. Total equity capital raising revenue totaled $48 million, up nearly 20% year-over-year and nearly 50% sequentially. Much of the pickup in this segment occurred after the November election and was driven by increased activity in the financials vertical, which is conducted via our KBW subsidiary.

The strength and KBW franchise was illustrated during the quarter as the firm was book runner on 7 of 18 publicly announced bank offers from November 8 to the end of the quarter. No other firm was book runner on more than 3 bank offerings during this time period.

Fixed income capital raising had revenue of $30 million, up double digits sequentially. Our results were driven by our public finance business that ranked number one in the country in the number of negotiated and K-12 transactions and was the leading underwriter of development and housing finance.

The recent closing of City Securities acquisition strengthens this platform. The future outlook for public finance looks positive given the new administration's infrastructure plan, despite potential headwinds from changes in tax policy and higher rates.

Advisory revenue was $56 million in the quarter and the volatility of this revenue stream is illustrated by the 72% year over year increase in advisory revenue, contrasted by the 35% sequential decline. We had an outsized fee on a single transaction in the prior quarter that accounted for much of the decline. Additionally, some transactions that may have closed in 2016 were delayed following the election due to the prospect for tax policy changes in 2017.

The next few slides will touch on the quarterly results from our two primary segments as well as the growth we experienced year on year. So starting with Global Wealth Management, fourth quarter revenue growth was driven primarily by the growth in our bank assets. This more than offset weaker brokerage revenues during the quarter.

As I've already commented on the decline in the private client brokerage revenue, I will move on to the segment net interest and expense ratio. Net interest income continued to drive the segment's revenue growth, increasing 23% sequentially and 87% year over year as average earning assets of the bank rose approximately $3.4 billion sequentially.

Total advisors were 2,282 at the end of the quarter, essentially flat with prior quarter levels. The net increase in advisors was relatively modest as new hires were offset by retirements.

Total client assets reached nearly $237 billion. Growth in fee-based assets, which reached $70 billion, continued to outpace total client asset growth. The higher revenue in the quarter as a result of our bank growth had a positive impact on our comp ratio in this segment, which declined to 52.9% in the quarter.

Non-comp ratio was 17%, up 10 basis sequentially, and most of that non-comp was due to growth in our bank. The decline in the comp ratio resulted in an improved pretax margin of 30% for the segment. For the full-year, total net revenue increased 14% to $1.56 billion which was a record.

Growth was driven by the nearly $5.6 billion increase in the bank balance sheet, an increase in fee-based assets, as well as the additions of Barclays and Sterne Agee. In addition, pretax income increased 28% to a record $430 million.

On the next slide we look at the results of Stifel Bank and Trust which is part of our global wealth management segment. Stifel Bank results continue to benefit from growth in assets as we reached and surpassed our targeted asset level during the quarter. Total bank assets reached $13 billion, up nearly 80% from the end of 2015.

Bank loans, which totaled $6 billion, increased 13% sequentially and 78% since the end of 2015. The bank was able to grow both consumer and commercial loan portfolios during the fourth quarter and our year-over-year growth was primarily seen within our mortgage loan portfolio.

Investment securities of $6 billion increased nearly 80% since the end of last year. The investment portfolio's growth in the quarter was consistent with our long term strategy of emphasizing high credit quality, short duration issues that provide attractive risk adjusted returns. As such, the portfolio's average yields is 248 basis points and the duration was 2.16 years.

The provision for loan loss expense in the quarter increased to $6 million, up from $3.6 million in the prior quarter due to loan growth. The increase in the provision impacted our consolidated non-comp operating expenses which resulted in those coming in at the high-end of our range for consolidated non-comp OpEx.

Overall, our credit metrics remain strong as the nonperforming asset ratio in the quarter was 21 basis points, down sequentially from 25 basis points in the third quarter of 2016. We've had some questions about the net interest margin in the bank which I will address in a moment.

Moving on to the next slide. Quarterly institutional net revenue was $253 million, down 2%, but total net revenue for the full-year increased 4% to a record $1 billion. Growth was driven by the addition of Sterne Agee fixed income as well as a more than 33% increase in advisory revenue, which was helped by our acquisition of Eaton Partners. Additionally, pretax income increased by 16% to $164 million as our comp ratio and non-comp ratio declined by 110 basis points and 60 basis points respectively.

I've already talked about these revenue line items earlier, but I will touch on a few incremental points. Equity underwriting revenue in this segment was $40 million, nearly double sequentially as overall industrywide activity in the quarter was the strongest of any quarter in 2016. We expect a favorable market backdrop for equity issuers in 2017 in many sectors, but for us financials, healthcare and technology are notable.

While still early in the year, Stifel has been active so far and our pipeline remains strong. However, I would caution that it's very early in the year and really none of the new administration's proposed policies, which is driving market optimism, has yet to be implemented. To the extent these policies are delayed or appear unlikely to be implemented, the issuance markets could be negatively impacted versus current expectations.

Despite a sequential quarterly decline in advisory revenue, we are pleased with the full-year of advisory where revenues of $257 million were up 33% from 2015. Our current pipeline heading into 2017 looks strong, particularly within our financial vertical. We believe higher stock valuations will drive increased M&A activity.

In terms of the outlook for the first quarter, which is typically slower due to seasonality, we expect that some of the transactions that have been delayed could partially offset some of the sequential slowdown typical in the first quarter of most of our years.

Institutional equities brokerage revenues surged in the quarter due to the post-election rally. While we remain optimistic that an improved economic environment will positively impact activity levels in 2017, I would note that so far in the first quarter overall trading activity has moderated from fourth quarter levels.

Our quarterly institutional fixed income revenue of $66 million was down 8% sequentially and 11% compared to the fourth quarter of 2015, which was a very strong quarter. As I've already noted, the primary driver of the declines were due to losses on our inventory due to an increase in rate and policy changes which impacted our holdings of municipal securities.

Moving on to our balance sheet, we have recently surpassed the target level of $18 billion of assets this quarter, and the growth in our net interest income has reflected this accelerated growth. As you can see on slide 10, we finished the quarter at $19.1 billion in assets, above the initial target of $18 billion we have discussed since late 2015.

Overall, we have doubled our total assets since the third quarter of 2015 from $9.8 billion while maintaining targeted leverage and risk weighted capital ratio.

As we have said in the past, our asset growth will not continue at its recent pace. Going forward we believe that we can continued to grow the balance sheet at a rate that is in line with the amount of incremental capital generated at the bank while maintaining our consolidated target capital ratio of 10% leverage and 20% risk weighted. This should roughly equate to incremental asset growth of approximately $2 billion.

At the end of the year our capital ratios were 10.2% for tier 1 leverage and 20.3% for tier 1 risk based capital, which was consistent with our asset growth. Said another way, looking forward with our capital ratios near our target, our balance sheet growth will be driven by retained earnings, and as we've always said, we will continue to deploy our excess capital on our risk-adjusted basis.

On the next slide, we illustrate not only the progress we've made in growing our balance sheet, but the impact that it has had on net interest income and net interest margin. Of our $19.1 billion in assets, our total interest earning assets averaged $15.6 billion during the quarter. Interest earning assets are up more than 111% from the end of 2015.

As I mentioned a moment ago, some of the commentary we've heard this morning has focused on the compression of our net interest margin from the third quarter. Net interest margin at the bank declined to 225 basis points from 240 basis points in the prior quarter. Let me address that.

This decline was the result of increased levels of cash on our balance sheet at the beginning of the quarter due to money market reform that caused us to sweep more cash to Stifel Bank. As we deployed the cash in the higher interest earning assets during the quarter, the bank NIM increased and reached 252 basis points in December. We believe that this is more representative of our net interest margin prospectively.

Despite the decline in net interest margin for the quarter, the firm-wide net interest margin increased 10 basis points to 191 basis points. This was primarily due to lower interest expense as we retired our baby bonds in July -- actually refinanced them in July with lower cost debt.

As a result of the increase in our balance sheet and improvement in firm-wide net interest margin, net interest income increased 65% year over year. Looking to the first quarter of 2017, we expect that net interest income will benefit from the rebound in net interest margin in December, further increases in interest earning assets and a full quarters impact of the December increase in the Fed funds rate.

We did not repurchase any shares in the fourth quarter and we continue to have our existing authorization of 7.4 million shares.

Next we move on to the reconciliation of our GAAP non-GAAP results. On slide 13 we review these expenses and the impact. In the fourth quarter GAAP results were impacted by the following: As I said, anticipated merger-related charges of approximately $14.2 million, litigation-related expenses of approximately $20 million associated with previously disclosed legal matters, and the previously disclosed settlement with the SEC which impacted the Company's provision for income taxes by approximately $8.9 million due to the non-deductibility of the settlement. Taken together, these items reduced net income available to common shareholders by $29.6 million or $0.37 per common diluted share.

I would also highlight that our acquisition charge and litigation reserves are expected to decline in 2017. To summarize, total non-GAAP pretax charges in the quarter were just under $35 million, down from $47 million in the prior quarter.

Now looking ahead to 2017, we estimate that non-GAAP merger-related charges will decline materially to approximately $30 million. We estimate that by 2018, barring further acquisitions, that non-GAAP related charges will be eliminated.

Also, I want to give a little more detail on our legal expenses and reserves. We incorporate ongoing legal costs in our non-comp guidance and in the fourth quarter we had elevated levels of litigation due to our settlement with the SEC. This is one of three legal matters that we have disclosed in our Qs and 10-Ks over the past three years. Each of those cases -- each of the three cases relate to issues that occurred prior to 2009. In the fourth quarter we increased our legal reserves by $20 million for the remaining legal items highlighted in our recent public filings.

Given the reserve increase, I'm sure you're all looking for additional details on our remaining legal matters, but as a corporate policy we do not comment on ongoing litigation so I really don't have any more to say, but I will certainly update you when we can.

Now let me give a brief update on the DOL and interest rate sensitivity. Regarding the Department of Labor, we are closely watching developments in Washington DC and believe the rule will be delayed but so that it can be reviewed by the new administration.

If the rule is not delayed, while disruptive, we have plans to meet its requirements. But again, I believe the rule will be delayed. Should the rule go back out for comments, which I anticipate, we're interested in advancing a best interest standard that informs client selection of service levels and levels of care. We believe that an approach of this sort embraces full transparency and will preserve investor choice, primarily relating to the 1940 act and the 1934 act.

In terms of rate sensitivity, we updated our guidance last quarter and stated that the next 100 basis point increase would result in $70 million to $80 million of incremental pretax income annually. This projection, as I've always said, was based on a parallel shift in the yield curve, a 40/60 split of benefits of clients and a relatively similar impact for each 25 days of point increase over 100 basis point move.

Given the timing of the Fed announcement, we did not generate material benefits from the December rate increase, so we would expect to generate the vast majority of the benefits from December's rate hike in the first quarter. Additionally, as some of our peers have highlighted in their earnings announcement, we have yet to see an increase in the competitive environment for yield on client deposits.

As such, we would expect to retain the vast majority upside from the recent Fed hike which should equate to an incremental $5 million of pretax income versus our prior estimate for the quarter. However, if market for deposit yields increases, we would see benefits more in line with our original guidance.

Looking forward to 2017, the operating environment appears to be far more optimistic than we've seen in recent years. The November elections have increased investor hopes that businesses will see lower taxes, fewer regulations and increased economic growth, which at least the market hopes, will translate into stronger top and bottom line results and ultimately provide the foundation for strong market performance.

We have already seen the impact of these expectations on the price of our own stock as shares of Stifel have increased about 30% since November 8. Although we would expect to benefit meaningfully from this type of market environment, and importantly a reduction in corporate tax rates, there is a lot that needs to be done in Washington to get us there. That said, we feel good about where we are and our ability to grow our top line.

While we will continue to look at acquisition opportunities, we believe that our current business is now of the scale that our continued focus on cost control and operating efficiency should result in incremental bottom line growth in 2017.

While we don't give revenue guidance, I did want to touch on a couple of items as we start the new year. In terms of our balance sheet growth, as I said earlier, we'd expect assets to grow by roughly $2 billion in 2017 as the bank generates capital.

In terms of investment banking, we had a strong advisory year in 2016 that was partially offset by weaker issuance markets. Our pipelines remain strong, but we are currently optimistic that if the current market conditions remain in place, that are equity underwriting business would be the biggest beneficiary, particularly in light of how weak the first half of 2016 had proved to be.

In terms of expenses, we continue to believe that there are increased efficiencies within our business that we can capitalize on. In terms of our comp ratio guidance, we would expect that in 2017 the range will be within 60.5% to 62.5%. This is down from last year's guidance of 62% to 64% as we've experienced strong growth in revenue from net interest income and fee-based businesses that carry lower comp ratios. But we also look to improve efficiencies within our businesses.

For non- comp expenses, we will continue to give quarterly guidance as we continue the cost reduction initiative that we have embarked on; however, we will now exclude the impact of loan loss provisions as this is more reflective of the growth in loans and unpredictable -- in terms of how the bank grows. So for the first quarter of 2017, we would expect non-comp expenses to be in the $151 million to $158 million range, excluding loan loss provisions that occur when we have loan growth in the bank.

Lastly, I want to briefly comment on our diluted share count. In the quarter we came in above Street expectations, primarily due to the increase in shares that were tied to the non-cash stock comp charge for Barclays that we took in the third quarter, and the impact of the increase in our share price.

To help you with your modeling, the fully diluted share count at the end of 2016 was just under 80 million, and going forward we would expect our fully diluted share count at the end of 2017 to be around 80.5 million, barring any share repurchases or issuances.

As I open it up for questions, let me say we feel good about the progress we've made in 2016 given the potential for more business from the environment. In 2017 I believe our Company is well-positioned for further top and bottom line growth.

With that, operator, can we open it for questions?

(Operator Instructions)

Your first question comes from the line of Steven Chubak with Nomura Internet. Your line is open.

Hi, good morning.

Good morning, Steven.

Ron, just wanted to kick off with a question on the NIM. You did guide to the December Bank NIM of 250 bps. I was hoping you can update us on where your current reinvestment yields sit today, and based on the forward curve and Bank growth targets that you outlined, maybe what's a reasonable expectation for where the Bank NIM could actually shake out for the full year?

That's a hard question, Steve, and I'm just going to go with what I said, which was, at the end of the year our NIM was, for the net interest assets, was 252 basis points. And that is more indicative of what our balance sheet looks like going forward. It can go up as rates go up, but there's a lot of assumptions and yield curve and reinvestment; we have short-duration assets that roll very fast.

To give you a projection on NIM is really a prediction in interest rates and the level of the yield curve, which I'm not going to do simply because I do not know. Taking a snapshot of our balance sheet at the end of the year, it is 252 basis points. And assuming a parallel shift in rates going forward, that should improve from there, but a lot can go on with the shape of the yield curve as we have to reinvest. As I said, our average duration is 2.16 years in our investment portfolio, so I want to be cautious about trying to predict the shape of the yield curve.

Fair enough. Ron, switching over to the expense side, certainly the guidance for the upcoming quarter is pretty encouraging, and we have certainly seen progress on the non-comps. As we see a better revenue growth environment, I'm just wondering whether we should be focusing more on the ratio declining or should we actually expect to see dollar expense reduction in non-comps even if it's a better operating environment and there is some revenue growth?

You know, look, it's math. So, as revenue increases, all things being equal, the ratio is going to decline in what is really more of a fixed cost base of non-comp.

I want to caution you on our guidance; I want to make sure that what I said in our range excludes loan loss provisions in the Bank, all right? Because it's hard to predict how many loans -- as you know, when you put a loan in the books you have to book today the loan loss reserves at the time you put the loan out, which impacts that provision as you are growing the Bank's loan portfolio.

So, I am optimistic about what we have been doing and our ability to achieve operating leverage, but I do want to note so it's not misunderstood that the range we gave excludes the loan loss provisions, which I think was $3 million in the third quarter of 2016. It was $6 million last quarter. But that all said, I think that you will see, given the optimism that the market has and what we think can happen at the top line, I think you will see more operating efficiencies, all else being equal.

And one last one from me, Ron, just regarding your remarks on the capital markets backdrop, it sounds like you actually struck a more constructive tone, on the M&A business specifically, at least relative to the remarks you made in early December, which may be focused more on sources of uncertainty versus positive equity valuations. I just want to get a sense as to what informs that change in view, and specifically, is your expectation that you should see revenue growth on the M&A side of the Business as well?

Look, the only thing I'm trying to show is that the optimism in the market can drive M&A activity. There is a lot of things that are going into this; tax policy changes and higher valuations and just the whole prospect that's driving sentiment today can drive M&A.

As I said in my remarks, I want our Business in M&A, that for the full year was very positive, a record I think, $257 million of M&A revenues, but we were down sequentially in the quarter. And so M&A tends to be lumpy, and you need to look at it a little more smoothing, if you will.

As I look forward, I think that 2017 in the first quarter for us usually for a firm where we are in the marketplace is usually a weaker quarter, but we did see some transactions delayed, and we think that could offset otherwise weakness. Net-net, Steve, I think M&A across the board in this environment has the prospects of improving.

All right. Thanks for taking my questions, Ron.

Yes.

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

Good morning, Ron. How are you?

Good.

One on the Bank here: So, I appreciate the updated expectation for the end of 2017 Bank growth. As we just think about the capacity beyond that, and how much funding is available, can you help us think about that? I know there's a lot of moving parts, but maybe how much capacity you do have to grow the Bank beyond that $21 billion?

Well, we have capacity; we have not swept all of our deposits, and so I would still say it's several billion dollars of capacity. But what I am trying to say is, as we said last year, it wasn't deposits that would constrain our growth, and I would say that right now is true also.

What will change in our growth assumptions going forward are our capital ratios. We started with 30% tier 1 risk, and we said we would get to 20%, which we have. And going forward, as we maintain our target of 10% and 20%, we believe that will fund growth with retained earnings, so that will do that.

If you look in our statistical information, you will see that we have client money market insured deposits of about a little over $19 billion. And we have swept approximately -- I think the Bank today has probably $12 billion in the Bank, round numbers. There is capacity to do that, but those deposits grow as we grow our Franchise.

But the Bank now is going to be more constrained by consolidated capital ratios, which right now we are at our target. And we're going to now be looking at retained earnings, improved NIM as we move from investment securities into loan products, and then just general more favorable interest rate environment that comes from rising rates, period, for a financial firm like ours which is asset sensitive. I would say, again, our constraint is more capital than deposits.

Got it. Great color. In wealth management, can you talk a little bit about what you're seeing with retail engagement maybe post-election? Any things you can point to that maybe give you more optimism there?

And then also just looking at financial advisor headcount, what are you guys doing to grow that organically? Obviously you've had some deals, but there hasn't been big organic growth, and so just trying to think about what is going to boost that growth rate going forward?

Well, I think client engagement has been an interesting question that a lot of people try to address. And I think with all of the rules and all of the changes, client engagement is more driven just by, frankly, overall levels of asset values than it is on transactions, what it used to be.

Client engagement was always -- are your clients trading and are they doing more transactional business? And certainly client engagement is more reflective of asset levels. But I would say that with this optimism you can see rotation into equities, which are, by market definition, higher asset management type revenue streams from equities than you have for fixed income.

What was the second part of your question? I forgot.

Just on financial advisor headcount growth, and what you guys are doing internally to try to boost growth?

Yes. I think our focus like we are in the Company, at this point we have achieved a lot of scale. There's a lot of things going on, on the recruiting front, that I'm optimistic about.

Their numbers -- a lot of commentary, a lot of things about some of the, what I would say elevated recruitment costs of the last few years may be coming, hopefully, into what we would consider more reasonable numbers, which is where we are. And so, net-net, if that happens, we are more competitive by what we do because we have not been at certainly the big firm levels of recruitment packages, if you will.

With respect to advisors, we are focusing on productivity, and we are focusing on the models and the work that we have done for the Department of Labor's rule, which as I said I think is going to be delayed, but I do think it really has focused us on models and how we are positioning our advisor business. So we have been focusing on productivity, and so you've seen muted increases in our advisor count. But I would say, like the Firm, we have scale and we want to start turning scale into margins going forward, especially in this market environment where we are hoping what we've built is positioned for the [current] environment.

Got it. Okay, great. Last quick one here -- appreciate the guidance on the comp ratio. How should we think about the comp ratio on the incremental net interest income growth? Obviously assuming that's coming on at high incremental margins, just want to think about the two pieces.

I'll just point to our guidance. I think we obviously want to be -- while I'm optimistic, I want to be somewhat cautious that, as I said, many have slipped from cup to lip on expectations in the market. But we gave new guidance, and I would say that you can pick between those numbers.

Okay, great. Thanks, Ron.

Your next question comes from the line of Conor Fitzgerald with Goldman Sachs. Your line is open.

Hi, Conor.

Good morning. Just following up on that question, for the compensation ratio it seems like you are implying you could see 30 to 280 basis points of operating leverage. Maybe leaving aside the provision for a minute, how should we think about operating leverage for non-comp expenses in 2017?

Conor, I'm trying my best to provide guidance. The margins, if I'm saying, acting out as I said, loan loss provisions, which are booked at the time you are growing your loan portfolio, we gave a range for the first quarter. We have been updating that range on a quarterly basis.

And so the leverage, in many ways, if you take the comp ratio and you take the range of operating expenses, the leverage is based on the assumption for net revenue. And I have said the market is certainly more optimistic, and the environment is more looking forward optimistic than we've seen in a few years. But we don't give revenue guidance, and so that is sort of your job. I mean, because we can't give revenue guidance, and if you take the revenue guidance times the comp guidance minus non-comp OpEx, you'll get to the number.

Okay, thanks. And on the deposit beta, or you're sharing assumptions that clients clarify, your previous guidance have been 60% of the benefit went to clients?

Yes.

Okay. And given that $5 million uplift you talked about because of lower client sharing seems a little bit conservative. Is there any reason why the uplift from no passthrough to clients wouldn't be higher than $5 million quarterly?

I'd want to see how that plays out, Conor. I think there is a delay in that right now, people being the market, is trying to find where that level of cost deposits falls. It feels to me like the economy is still awash in liquidity and, therefore, the competitive environment hasn't kicked in, but my belief is at some point it will.

I would rather be more cautious about that. I would actually think that if that becomes more competitive, that's indicative of a better market that's moving forward. On one hand it might be negative if that becomes more competitive, but on the other hand, if it does, I think market activity is really picking up.

So I am going to be muted and not try to overstate the benefits of that in the short run. The benefits meaning that we have not seen the market yet increase for the cost of deposits.

That's helpful. And then just two clarifying ones, if I could. Was there a difference in your December NIM, the 252 basis points, before and after the Fed rate hike, or does that 252 capture the full benefit of the December hike?

And average earning assets, I think you said they averaged $15.6 billion for the quarter. Can you give us where that exited the year?

I don't know, but as I said, I think that the net interest-bearing assets was pretty consistent because, like I said, we swept it into the Bank and it was in cash. So the impact is not really going to be -- it is somewhat in net interest being outstanding for the year. The real impact is going from the 252, and that 252, the rate increase happened too late in the year to impact what that is. So I would say that most of what you will see is the increase in the NIM, and then the NIM increasing by the impact of the Fed rate in the first quarter, but average earning assets are probably pretty consistent at where they were for the quarter.

Thanks for taking my questions.

Sure.

(Operator Instructions)

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

Hi, thanks for taking my questions.

Sure, Hugh.

So a follow-up on the competitive recruiting environment you mentioned for advisors: It seemed like one of the potential reasons for a more moderate level of recruiting incentives was some of the efforts from the DOL regarding the use of back-end targets to protect the Firm from paying up more for those back-end weighted incentives.

If we get into an environment where the DOL is maybe taking more of a business-friendly view and you do see a softening of some of those proposed regulations, how do you think about the risk of seeing increased competition if it's a better environment for brokers and people who are willing to pay up more for those brokers because the production could be higher? How do you think about that?

That's a good question. Did you say a Department of Labor that is more business friendly?

(Laughter) that's a possibility, right?

Okay, you said it. I, first of all, think, as I said a long time, I don't believe that the Department of Labor, as much as I respect that agency of the government, really should be in the investment markets, and that's the purview, in my opinion, of the FCC. And as such, I believe that the new administration probably shares that view. That's my speculation, because I don't know.

And I think that the Department of Labor's rule is going to be delayed for comment, that's certainly my belief. And then hopefully that purview of the market gets back to the FCC, which is where I believe it belongs.

To the recruiting question, certainly the proposed rule, every advisor has retirement accounts, and trying to structure recruiting around those DOL proposed regulations was a Rubik's cube if nothing else, and I would say muted the recruiting just as people are trying to understand it. My sense is that many firms have taken the opportunity with all of this, the large firms, to become more rational in what I see as recruiting packages. So take a snapshot in time, it appears more rational, but I've been in this business for a long time and it doesn't take long for that rationality to turn back into irrationality in numbers.

It's hard to predict, okay? I think, net-net, I believe that with what I -- my sense is that the overall recruiting costs are coming down, led by the largest firms, and I think that benefits us competitively.

That's very helpful and that's certainly appreciated. And I definitely appreciate the color you gave in terms of thinking about balance sheet growth at the Bank. You alluded to the potential for considering changes in the interest earning asset mix, and maybe seeing a shift from securities to loans. Do you anticipate that is going to be a meaningfully greater focus in 2017 at Stifel Bank?

What I would say is that I believe that as we look at it, our ability to grow our loan portfolio, which, as long as we do it on risk-adjusted returns, the loan portfolio's NIM, net interest margin, is higher than our investment securities portfolio because we have a very conservative short duration investment portfolio. If I say that our growth is going to be $2 billion, I would say that, while it be at $2 billion, the mix of loans to investments will skew towards loans because that's where we have a lot of demand and we are going to look at deploying reinvestment because if you have a two-year duration on your investment securities, that's providing a lot of cash as that investment portfolio matures for reinvestment. We think that is going to provide funds to fund our loan growth. So, while we are about 50/50 today, I would see that ratio going more toward loans, all else being equal, on a risk-adjusted basis.

Got it. And one more for me: We've seen some others that have given a little bit of guidance in terms of thinking about the tax implications from some of the changes in accounting for stock-based comp. Is there any insight you could provide to us, how we should be thinking about that impact potentially on the first quarter of 2017? Do you anticipate seeing a lower-than-normal tax rate for early next year, or early this year?

I think you are talking about the fact that you try or you are supposed to now -- the increase in your stock price or decrease relative to the grant date should be run through your income tax provision versus additional paid in capital. Is that what you are talking about?

Yes.

I think that where our stock price is today, the price is higher than our average grants. But most of what would've happened for us, the 2016 grants were vested for book purposes at the end of the year. So that went to additional paid in capital versus our tax rate.

I will say that I think that rule is going to be a little bit like the change in debt valuations. A lot of people are going to be just going by that because they are forcing that APIC of taxes, and it's going to become very confusing, and you will see it, you are going to see a lot of people trying to talk like it's going through APIC because it's not reflective of your tax rate going forward. It's not reflective of any future economic value. It's a one-time change to your balance sheet that you are running through earnings.

So I believe that, all things being equal, today at our stock price, any vesting of our stock price would reduce our income tax provision on our books, but economically it is nothing. That rule kind of bothers me because you are going to have to explain it away.

Got it. I appreciate the insight. Thank you very much for taking my question.

Sure.

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

Thanks. Good morning, Ron.

Hi, Chris.

Another follow-up on your cost reduction initiative: I know we've been trying to talk about some numbers here, but I was just wondering if you could share with us qualitatively what some of the things you guys are doing internally as you focus on expenses?

I think it's really across the board, and I would just go to my high-level comment that our focus is always cost. I don't want to suggest that we are not -- that we don't look at costs. We do.

And I think historically we've maintained -- ex all these acquisitions we've done, we've maintained margins even despite the difficult market conditions. We have accepted margin compression to keep in place what we've built during down markets.

But what we are focused on now is making sure [only] just normal -- how many [Coke] machines are there and how many paperclips are there floating around. But what we're focused on is making sure that our various acquisitions are all -- that we're harmonizing all the costs of these various deals.

It's hard to quantify for you, but it's not only real estate, it's purchasing power, it's policies on using your purchasing power in T&E, it's looking at all of the things that we've done because we've gone from a firm that had but eight years of the beginning financial crisis, $700 million in revenues to $2.5 billion of revenues, and we are just a different firm. We see the ability to harmonize a lot of the things we put together on the cost base, and that's what we are doing. We will just do it as we talk about our -- as our non-comp OpEx guidance going forward.

My message is that where we were, we will always look at good deals and we will always look at them, but right now our emphasis is on taking advantage of the market conditions, and improving and consolidating what we have done. We think we have scale here; that's first, and acquisitions will always be there, but our focus will be first on getting what we've built to generate the earnings which I think it can.

Now I say that, and we will announce an acquisition tomorrow, but -- we won't, but just saying that we still want to do good deals if they come up. There is a lot of optimism right now in the marketplace also, which causes the valuations to be what I would say is higher than what our historical appetite is for valuation, so it's a good time to focus on consolidating what we built.

That's helpful. Thank you.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you very much. We are pleased that you joined us on our call. We look forward to some interesting times and optimistic times in the future, and look forward to reporting to you on our first-quarter results after they occur. Have a good day and thank you.

This concludes today's conference call; you may now disconnect.