Stifel Financial Corp. (SF) Q4 2016 Earnings Report, Transcript and Summary

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. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Jim 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 would like a copy of today’s presentation, you may download slides from our website at www.stifel.com. Before we begin today’s call, we’d 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, our 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 risk and uncertainties in our business, please see the business factors affecting the Company and the financial services industry in the Company’s Annual Report on Form 10-K and MD&A results in the Company’s quarterly reports on Form 10-Q. I will now turn the call over to the Chairman and CEO of Stifel, Ron Kruszewski.

Thanks Jim, and 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. So with that, let me start with my opening comment. 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 if the post-election market optimism continues. Our results underscore this diversity as the investments we made in 2015 helped drive substantial growth in net interest income, asset management and 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 look to deploy our excess capital in ways that generate the best returns. However, as we continue to grow our top line, we will put increased emphasis on improving operating leverage through expense efficiencies. 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 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 was a $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 record pre-tax operating income. Our corporate highlights include a nearly $6 billion increase in our balance sheet, issuance of $150 million of Non-Cumulative Perpetual Preferred Stock, the issuance of $200 million of Senior Notes to refinance the $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 with 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 like, 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 Barclays acquisition. Our income tax provision as previously disclosed was negatively impacted by $8.9 million due to the non-deductible 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’ll 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 brokerage revenues were $160.5 million, which was down sequentially. Looking, 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 are happy with these results as industry-wide daily volumes were up only 7% sequentially in flat year-over-year. Our equity business was where we experienced the most significant impact to Institutional brokerage revenue. Clearly the market volumes 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 and muni inventories following the November election, as our inventories were negatively impacted primarily due to higher rates, the expectation of higher rate in the future, and possible changes regarding tax policy. In addition to the trading losses a modest sequential decline in traits average daily volume for investment grade security also impacted our revenues. Investment banking revenues were $135 million as of strong pickup in equity 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. Most of the pick up in that 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 of the KBW franchise was illustrated during the quarter as the firm was bookrunner on 7 of 18 publicly announced bank operated from November 8 to the end of the quarter. No other firm was bookrunner on more than three 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 in K12 transactions, and was the leading underwriter of development and housing finance. The recent closing of City Securities acquisition strengthened 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 technology 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 asset. This more than offset weaker brokerage revenues during the quarter. As I’ve already commented on the decline in the private client broker revenue, I will move on to the segments net interest and expense ratios. Net interest income continue to drive the segments revenue growth increasing 23% sequentially and 87% year-over-year, as the average earning assets of the bank grows 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 at fee-based asset 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 was – the non-comp was due to growth in our bank. The decline in the comp ratio resulted in improved pre-tax 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 nearly $5.6 billion increase in the bank balance sheet and an increase in fee-based assets as well as the additions of Barclays and Sterne Agee. And additionally pre-tax income increased 28% to a record $430 million. On the next slide we look at the result 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 target asset level during the quarter. Total bank assets reached $13 billion up nearly 80% from the end of 2015. Bank loans increased – bank loans which totaled $6 billion increased 13% sequentially and 78% since the end of 2015. The bank was able to growth 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 was $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 empathizing high credit quality, short duration issues that provide attractive risk adjusted return. As such, the portfolio of average yield was 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 the coming end at the high end of our range for consolidated non-com OpEx. Overall, our credit metrics remain strong as the non-performing 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 more than 33% increase in advisory revenue, which was helped by our acquisition of Eaton Partners. Additionally, pre-tax income increased by 16% to $164 million as our comp ratio and non-comp declined by a 110 basis points and 50 basis points respectively. I’ve already talked about these revenue line items earlier, but I’ll touch on a few incremental points. Equity underwriting revenue in this segment was $40 million, nearly doubled sequentially as overall industry-wide activity in the quarter was the strongest of any quarter in 2016. We expect a favorable market backdrop or equity issue in 2017 in many sectors, but for us financial, 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 is very early in the year and really none of the new administrations 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 the advisory revenue, we are pleased with the full year of advisory, were revenues up $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 equity 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 was $66 million was down 8% sequentially and 11% compared to the fourth quarter of 2015 which was a very strong quarter I would know. As I already noted, the primary driver 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 reached and 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 asset 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 ratios. As we have said in the past, our asset growth will not continue at its recent pace. Going forward we believe that we can continue 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 ratios of 10% leverage and 20% risk-weighed. This should roughly acquit 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 targets, 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 a risk adjusted returns. On the next slide we illustrate not only the progress we’ve made in growing our balance sheet, but the impact that it had, a 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 earnings 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 of 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 perspective – prospective all the way. 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 expenses, we retired our baby bonds in July, actually refinanced on the July with lower cost debt. As a result of the increase in our balance sheet improvement in firm-wide net interest margin, net interest income increased 65% year-over-year. Looking at 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 asset and a full quarter 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’ll move on to the reconciliation of our GAAP and non-GAAP results. On Slide 13 we review these expensive 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-detectability 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, litigation reserves are expected to decline in 2017. To summarize, total non-GAAP pre-tax 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 charge will decline materially to approximately $30 million. We estimate that by 2018 buying further acquisitions the non-GAAP related charges will be eliminated. Also, I want to give a little more detail on our legal expenses and reserves. We incorporate on going legal costs, on going legal cost in our non-comp guidance then in the fourth quarter we had elevated levels of litigation due to our settlement with the SEC. This was one of three legal matters that we have disclosed in Qs and 10-Ks over the past two years. Each of those three cases related 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 in our remaining legal matters, but as the corporate policy we don’t 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, D.C. and believe the rule would be delayed so that it could 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 are interested in advancing our best interest standard that informs client selection of service levels and levels of care. We believe that an approach of this or embraces full transparency and will preserve investor choice primarily relating to the 40 Act and the 34 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 of incremental pre-tax income annually. This projection as I always said was based on a parallel shift in the yield curve of 40% to 60% benefits for clients and a relatively similar impact for each 25 basis point increase over a 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 announcements, 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 of sight from the recent fed hike which should equate to an incremental $5 million of pre-tax income versus our prior estimate for the quarter. However, if market for deposit yields increases, we would see benefits more in line with our regional guidance. Looking forward to 2017, the operating environment appears to be far more optimistic than we’ve seen in recent years. The November election had increased investor hopes that businesses will see lower taxes, pure 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’ve 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’s 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’ll continue to look at acquisition opportunity we believe that our current business is now off 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 do want to touch on a couple of items that will start the New Year. In terms of our balance sheet growth, as I said earlier, would expect assets to grow by roughly $2 billion in 2017 as the bank generates capital. In terms of investment banking, we have a strong advisor year in 2016 that was partially offset by weaker issuance markets. Our pipeline remains strong, but we are currently optimistic that of the current market conditions remain in play that our equity underwriting business would be the biggest beneficiary, particularly in light of how weak the first half of 2016 proved to be. In terms of expense, we continue to believe that there is increase in efficiencies within our business that we can capitalize back. In terms of our comp ratio guidance we did expect that 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 initiatives that we’ve embarked on. However, we will now exclude the impact of loan loss provisions and this is more reflective of the growth in loans in unpredictable terms of how that 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 our model – your modeling, the fully diluted share count at the end of 2016 was just under $80 million and going forward we expect our fully diluted share count at the end of 2017 to be around $80.5 million borrowing any share repurchases or issuances. So, as I open it up for questions let me say we feel good about the progress we made in 2016 given the potential from more business friendly environment. In 2017 I believe our company is well positioned for further top and bottom line growth. So with that, operator, can we open up for questions?

[Operator Instructions] Your first question comes from the line of Steven Chubak with Nomura Instinet. Your line is open.

Hi, good morning.

Good morning, Steven.

So, Ron, just wanted to kick off with a question on the NIM. You did guide to the December bank, NIM was 250 bps. I was hoping you can update us on where your current reinvest yields are today. And just based on the forward curve and bank growth targets you outlined, maybe what’s a reasonable expectation for where the bank NIM could actually shake out for the full year.

Well, that’s a hard question, Steve. I mean, 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’s more indicative of what our balance sheet looks like going forward. It can go up as rates go up but that – there’s a lot of assumptions and yield curve, and reinvestment we have short duration assets that roll very fast. So to give you a projection on NIM is really a prediction in interest rates and the level of yield curve, which I’m not going to do simply because I don’t know. But taking a snapshot of our balance sheet at the end of the year its 252 basis points and assuming a parallel shift in rates going forward that shouldn’t prove 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. And, Ron maybe just switching over to the expense side, certainly the guidance for the upcoming quarter is pretty encouraging and we have certainly seeing 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.

Well, look its math right so as revenue increases all things being equal to ratio it’s going to decline and what is really fixed more of a fixed cost base of non-comp. I want to caution you on our guide, I want to make sure that what I said in our range excludes loan loss provision in the bank, all right because its hard to predict how many loans as know when you put a loan in the books you have to book today, the loan loss reserve at the time you put the loan out, which impacts that provision as you’re growing the bank’s loan portfolio. So I am optimistic about what we’ve been doing in our ability to achieve operating leverage. But, I do want to know it’s not misunderstood that the range we gave excludes the loan loss provision as 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 it happen in top line I think you’ll see more operating efficiencies all is being equal.

Got it. And just one last one from me Ron just regarding your remarks on the capital markets back drop its sounds like you actually struck a more constructive tone on the M&A business specifically at least relative to the remarks that you have made in early December, which maybe focused more on sources of uncertainty first is positive equity valuations. 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 in the M&A side of business as well.

Look, I think what the only thing I’m trying to show is that the optimism in the market can [Audio Dip] M&A activity. There’s a lot of things that are going into this tax policy changes and just 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 record I think $257 million of M&A revenues. But we were down sequentially in the quarter. And so M&A turns 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 the first quarter for us usually for firm where – where we on the market place is usually a weaker quarter. But we did see some transactions delayed and we think that that could offset otherwise weakness. Net Steve I think M&A across the board in this environment will – it 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, Devin.

Thanks. Good morning, Ron. How are you?

Good.

Good. One on the bank here. So I appreciate the updated expectation for the end of 2017 bank growth. As we just think about kind of the capacity beyond that and really just how much funding is available? Can you help us think about that? I know there’s a lot of moving parts but just maybe how much capacity you do have to grow the bank beyond that $22 billion excuse me $21 billion.

Well, we have capacity, we have not swapped all of our deposits. And so I don’t – I would still say its several billion dollars of capacity. But what I do – what I am trying to say that we said last year, it wasn’t deposits that would constrain our growth. And I would say that that right now is true also. What will change in our growth assumptions going forward our capital ratios. And so we started with 30% Tier 1 risk and we’ve said, we 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 I’ll do that – if you look in our statistical information you’ll see that we have client money market insured deposits of about over a little over $19 billion. And we’ve swapped approximately – I think the bank today has probably $12 billion in the bank, round numbers. So there is capacity to do that but that – those deposits grow as we grow our franchise. But the bank now is going to be more constrained by consolidated capital ratios, which we’re right now, we’re 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 confident. So I would say again our constraint is more capital than deposit.

Got it. Great color. Just in wealth management, can you just talk a little bit about what you’re seeing with retail engagement maybe co-selection any things you can point to that maybe give you more optimism there. And then also just looking at financial advisor headcount, what do you guys doing to grow that organically, obviously you had some deals but it hasn’t been big organic growth. 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 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. The client engagement was always – 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 in the equities, which are just by – at least by market definition higher asset management type revenue streams from equity than you have for fixed income. So, what was the second part of your question? I forgot.

Just on financial advisor headcount growth and what you guys are doing internally trying to boost growth.

Yes. I think that our focus like we are in the company at this point we’ve achieved a lot of scale. There’s a lot of things going on the recruiting front that I’m optimistic about. There are number – a lot of commentary, a lot of things about some of the – what I would say elevated recruitment costs over the last few years maybe coming into hopefully, coming into what we would consider more reasonable numbers, which is where we are. And so if that happens we are more competitive by what we do because we’ve not been at certainly the big firm levels of recruitment packages if you will. With respect to advisors, we’re focusing on productivity and we’re focusing on the models and the work that we’ve done for the Department of Labor’s rule which I think is – what I said, I think its going to be delayed. But I do think it really has focused us on models and how we’re positioning our advisor business. And so we’ve been focusing as we on productivity and 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 we’re 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 what to kind of think about the two pieces?

Yes. I’ll just point to our guidance. Okay, I mean I think that we obviously want to be – well I’m optimistic I want to be somewhat cautious that as I’ve said many are slip 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.

Hey, good morning. Maybe just following up on that question on the – for the compensation ratio it’s seems like you’re 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?

Well look, Conor, I’m trying my best to provide guidance I mean the margins if I’m saying acting out as I’ve 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’ve been updating that range on a quarterly basis. And so the leverage in many ways – if you take the comp ratio and you take that range of operating expenses the leverage is based on the assumption for net revenue. And I’ve said that the market is certainly more optimistic in environment is more looking forward optimistic than we’ve seen in a few years. But I don’t – we don’t give revenue guidance. And so that’s sort of your job. We can’t give revenue guidance. And if you take the revenue guidance times that comp guidance minus non-comp OpEx, you’ll get to the number.

Okay, thanks. And then on the positive data – your sharing assumption with the clients to clarify your previous guidance had been 60% of the benefit went to clients.

Yes.

Okay. And then given that if the $5 million uplift you talked about because of lower client sharing seems a little bit conservative, is there any reason why the uplift from kind of no path to clients wouldn’t be higher than $5 million quarterly?

I want to see how that plays out, Conor. I think there’s a delay in that right now as people are trying to – people being the market is just trying to find were that level of cost deposits fall. That feels to me like the economy still a wash in liquidity and therefore the competitive environment haven’t kicked in. But my belief is that some point it will. So we’re – I’d rather be more cautious about that. I would actually think that it actually becomes more competitive that’s indicative of a better market that’s moving forward. And so that on one hand it might be negative that becomes more competitive. But on the other hand if it does I think market activity is really picking up. So I’m going to be muted and not try to overstate the benefits of that in the short run. The benefits meaning that we haven’t seen the market yet increase for the cost of deposits.

That’s helpful. And then just two clarify once if I could. Was there a difference in your December NIM the 252 basis points before and after the Fed rate hike? Or is that 252 kind of capture the full benefit of the December hike and average earning assets I think you said they have a averaged $15.6 million for the quarter. Can you give us where that exited the year?

Yes. I don’t know but as I said I don’t have – I think that the net interest bearing assets was pretty consistent because like I said, we swapped into the bank and it wasn’t cash. So the impact isn’t really going to be if somewhat in net interest being outstanding for the year. The real impact is going from 225 or what is to the 252. And that 252 really – the rate increased happened too late in the year to impact what that is. So I would say that most of what you’ll 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 taking my questions.

Hi, Hugh.

So just a follow-up on kind of the competitive recruiting environment that you had mentioned for advisors, it seem like one of the potential reasons for a more moderate level of recruiting incentives with some of the efforts from the DOL regarding the use of backend targets to protect the firm from paying up more for those backend weighted incentives. If we get into an environment where the DOL is maybe taking more of a business friendly view, when you do see a softening with some of those proposed regulations. How do you think about the risk of just seeing increased competition if it’s a better environment for brokers and people are willing to pay up more for those brokers because the production could be higher? And how do you think about that?

Yes. It’s a good question. Did you say Department of Labor that’s more business friendly?

Yes, that’s a possibility, right.

Okay, you said it. Look I first of all think as I said a long time I don’t believe that the Department of Labor is much as I respect that agency of the government really should be in the markets where the investment market. And that’s the preview in my opinion of the SEC. 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 as I said is going to be delayed for comment that certainly my belief. And then hopefully that preview the market gets back to the SEC which is where I believe it belongs. Now to the recruiting question certainly, the proposed rule every advisor has retirement accounts and trying to structure recruiting around those deal well proposed regulations was a Rubik’s Cube but nothing else. And I would say muted – the recruiting just as people are trying to understand that. 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. So it’s hard to predict. Okay, I think net – I believe that with what I – my sense is that the overall recruiting cost are coming down, led by the largest firms and I think that benefits us compatibility.

That’s very helpful. And that’s I certainly appreciate it. And you – 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 maybe seeing a shift from securities to loans. Do you anticipate that that’s going to be a meaningfully greater focus in 2017 at Stifel bank?

Well, 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 for loan portfolios NIM net interest margin is higher than our investment securities portfolio because we have a very conservative short duration investment portfolio. So as if I’d say that our growth is going to be $2 billion. I would say that well it would be at $2 billion, the mix of loans to investments will skew towards loans. Because that’s where we have – we have a lot of demand and we’re going to look at deploying reinvestment because – we have a two year duration on your investment securities that’s providing a lot of cash as that investment portfolio matures for reinvestment and we think that that’s going to provide funds to fund our loan growth. So while we’re about 50/50 today I would see that ratio going more toward loans all else being equal on a risk adjusted basis.

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

Well, I think you’re talking about the fact that you try, your spoke 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 that what you’re talking about?

Yes, yes.

Yes, I think that with – where our stock price is today our average, the price is higher than our average grants. But most of – what would have happen for us, we – the 2016 grants were expense for or not expense, were invested 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. You know a lot of people are going to be just go and buy that, because they’re forcing that Apex of taxes and it’s going to become very confusing and you’ll see it – you’re going to see a lot of people trying to talk like it’s going through Apex because it’s going to – it does not reflective of your tax rate going forward. It’s not reflective of any future economic value it’s just – it’s a one-time change to your balance sheet that you’re running through earnings. So I believe that all things being equal today at our stock price any best thing of our stock price would reduce our income tax provision on our books. But economically it’s nothing. I mean – that’s what I – that rule kind of bothers me because it’s going to – you’re going to have to explain it in a way.

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

Sure.

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

Thanks. Good morning, Ron.

Hey, 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. I would just go to my high level comment that our focus is always cost. I don’t want to suggest that we’re not – that we don’t look at cost, we do and I think historically we maintained, exile these acquisitions we’ve done, we’ve maintained margins even despite the difficult market conditions. We’ve accepted margin compression to keep in place what we built during down market. . : My message is that we will always look at good deals and we will always look at them. But, and right now our emphasis is on taking advantaging of the market conditions and improving and consolidating what we’ve done, we think we have scale here that’s first and acquisitions are – will always be there. But what would our focus will be first on getting what we’ve built to be – to generate the earnings which I think it can. And I’ll say that we will announce an acquisition tomorrow, we won’t but just saying that, anyhow. We still want to do good deals if that 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 apatites for valuation. So it’s a good time to focus on consolidating what we built.

Gotcha, that’s helpful. Thank you.

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

Well, 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.