James Mark Zemlyak - Co-President and Chief Financial Officer Ronald J. Kruszewski - Chairman, President & Chief Executive Officer.

Chris M. Harris - Wells Fargo Securities LLC Sharon H. Leung - Nomura Securities International, Inc. Devin P. Ryan - JMP Securities LLC Daniel Paris - Goldman Sachs & Co..

Good evening. My name is Blair and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. Thank you.

Jim Zemlyak, CFO, you may begin your call..

Thank you, operator. Good afternoon. This is Jim Zemlyak, CFO of Stifel. I would like to welcome everyone to our conference call today to discuss our first quarter 2016 financial results. Please note this conference call is recorded. If you'd like a copy of today's presentation, you may download the slides from our website at www.stifel.com.

Before we begin today's call, I would like to remind the listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of fact or guarantees of performance.

They may include statements regarding, among other things, our ability to successfully integrate acquired companies or branch offices and financial advisors; general economic, political, regulatory and market conditions; the investment banking and brokerage industries; our objectives and results; and also may include our belief regarding the effects of various regulatory matters, legal proceedings, management expectations, our liquidity and funding sources, counterparty risks or other similar matters.

As such, they are subject to 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 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 in the company's Quarterly Reports on Form 10-Q.

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

Thank you, Jim, and good afternoon, everyone, and thank you for taking the time to listen to our first quarter 2016 results. After the market closed we released our first quarter results and posted a slide deck on our website.

First, I will run through our financial results for the quarter as well as the progress we've made on growing our balance sheet. I will then touch on some of the key industry drivers impacting Stifel such as the DOL fiduciary rule and interest rate sensitivity, before opening up the call to questions.

So with that, let's start with my opening comments and some of the highlights for the quarter. The diversity of Stifel's business model that has evolved through both organic growth and acquisition was highlighted in the quarter as the firm generated record quarterly revenue and sequential improvement in EPS.

The growth in our private client business, Stifel Bank & Trust, our institutional fixed income business more than offset the negative impact that increased market volatility had on the equity capital markets business, specifically investment banking, during the first quarter.

In terms of the results from the first quarter, we are pleased that despite what was a volatile and challenging quarter for the markets, we generated record quarterly revenue of $620 million, which was up 7% sequentially and up 11% year-over-year.

Much of the growth was driven by the record Global Wealth Management segment that generated revenue of $380 million, which was up 9% sequentially and 15% as compared to the first quarter of last year.

This segment was the focus of the majority of our growth initiatives in 2015 and we are beginning to see the revenue benefits from the acquisitions of Barclays's Wealth Management and Sterne Agee as well as growth in our balance sheet.

To that point, revenue at Stifel Bank & Trust was up 34% sequentially and 49% year-over-year due to both higher short-term rates and balance sheet growth. Overall, assets of the holding company level increased to $14.2 billion and are up 54% from the same period a year ago.

The diversity of our institutional business model helped to keep the decline in that segment's revenue to just 2% sequentially and we were up 1% from the prior year. I'd like to highlight that our acquisition of Sterne Agee's fixed income business was a meaningful contributor to our 38% growth in institutional fixed income revenue – excuse me.

So overall, revenues are up 11%, but pre-tax margins declined from 14.3% to 11.4% resulting in the decline in EPS on a core basis by 12% to $0.57 per diluted share. The quarter was impacted by headwinds that included a higher comp ratio, increased legal expenses, higher loan loss provision and a mark-to-market loss on a private equity investment.

We also took advantage of the decline in equity markets. During the quarter, we repurchased 2.7 million shares of our stock at an average price of $33.85. On January 4, we completed the acquisition of Eaton Partners, a global fund placement advisory firm, and recently we added two new directors to our board, Kathleen Brown and Maura Markus.

I'm very pleased to welcome such qualified directors to Stifel's board. I'd also like to take the opportunity to thank Alton Irby and Charlie Dill for their services. Kathleen and Maura will be replacing them. Alton and Charlie both retired from the board pursuant to the company's retirement policy.

Lastly, the Department of Labor released its final rule on the fiduciary standard for retirement accounts in early April. While it takes time to fully digest and understand the specifics of this new regulation, we believe that Stifel is well-positioned to handle any of the implications of the new rule and I will give more thoughts later on the call.

So let me go through our revenue and segment results. The primary drivers of the increase both quarterly and annually were brokerage revenue, asset management, and net interest income. These line items in both Global Wealth Management and Institutional segments benefited from our recent acquisition as well as our increased balance sheet.

Brokerage revenue was driven by stronger private client commission levels as well as increased institutional fixed income flow business. This offset declines in investment banking.

Turning to the next slide, (7:38) benefited from the recent acquisitions of Barclays's Wealth Management and Sterne Agee as well as the growth in our balance sheet, generating net revenue of $380 million, which was up 9% sequentially and 15% year-over-year.

These growth initiatives resulted in solid quarterly revenue growth for brokerage, asset management and net interest income. Each of these line items benefited from the inclusion of Barclays for the full quarter.

However, given the weakness in ECM activity during the quarter, we believe that the quarterly contribution from Barclays was muted versus our expectations. Balance sheet growth and higher interest rates accounted for another $14 million increase in net revenue year-over-year.

Total client assets reached $232 billion, down 1% sequentially but up 23% year-over-year. Of this $232 billion, $41.3 billion are in fee-based accounts, which is essentially flat from year-end, up slightly. Despite stronger revenues, Global Wealth pre-tax operating margin was down due to higher comp and non-comp ratios.

I'd also note that margins were impacted in part by a $2.5 million write-down in an investment in our asset management business as well as the investments we've made to support our growth initiatives. On the next slide, we look at the result of Stifel Bank & Trust, which benefited from growth in assets and higher interest rates.

Total bank assets were just under $8 billion, which was up 12% sequentially and 55% from last year. Bank loans of $3.7 billion increased 4% quarter-over-quarter and 44% year-over-year, primarily due to growth in residential mortgage loans. Investment securities of $4.2 billion increased 58% year-over-year.

I'd highlight that we've been able to grow this portfolio with reasonable yields of more than 2% with the duration of approximately two years and we've maintained solid credit quality in our investment portfolio. The net interest margin of the bank declined 2 basis points sequentially to 248 basis points and was flat year-over-year.

I want to give a bit more color here as our NIM declined quarter-over-quarter despite a rise in short-term rate. The bank is positively exposed to higher short-term rates as we experience increases in the yield of certain of our loan portfolios. However, our bond portfolio yield is essentially flat.

This is due to the fact that about $1.5 billion of assets are tied to 90-day LIBOR, so the full benefit of the rate increase will hit the income statement in the second quarter of 2016. Additionally, we added approximately $2.2 billion of security-based loans and high quality bonds that had yields in the low 2% range.

Loan loss reserves increased $4.4 million sequentially and $2.5 million year-over-year.

$1.8 million of this increase was tied to organic loan growth, $1 million was the result of a repurchase of a commercial real estate loan that came from our prior sale of Acacia loans, we were required to repurchase one loan, and the remaining $1.5 million was the result of modest credit deterioration in the C&I portfolio as the result of the recent SNC exam.

Despite the increase in the provision expense as credit, the bank remains strong with the NPAs as a percentage of total assets at 0.28%. Moving to the next slide, our Institutional Group generated $241 million of net revenue which was up 1% year-over-year despite a decline in investment banking revenue from $125 million to $101 million.

Specifically, investment banking was down due to lower equity underwriting revenue that was off 58% from the prior year's quarter. Advisory revenue of $47 million rebounded 54% from a generally weak fourth quarter. This was due to increased deal closings and the benefit of a nice fee from our role in advising Microsemi.

That said, the declines in the higher margin investment banking business and lower gains on investments resulted in elevated comp and non-comp ratios that drove the decline in pre-tax margins. On the next slide, we look more closely at some of the components of institutional revenues for the quarter.

As you all know, the first quarter was extremely volatile. The S&P 500 declined nearly 11% in the first six weeks of the quarter before rebounding from March 12 to the end of the quarter. The average VIX during the quarter increased 21%.

The benefit of these market swings and increased volatility was higher trading volumes in bulk equities and fixed income. Equity average daily volume increased 21% over the fourth quarter while corporate bond volumes increased 34% sequentially.

As we said in the past, our institutional business is more focused on flow and trading volume than some of our Bulge Bracket competitors, so we are less impacted on valuation changes or mark-to-market.

In addition to the increased market volumes, we've benefited from investments we've made in our institutional business, particularly in institutional fixed income sales and trading. In the first quarter, fixed income represented 58% of our institutional brokerage revenue compared to 50% in the first quarter of 2015.

Quarterly fixed income brokerage revenue of $84 million was driven by improved corporate debt revenue. That was up 35% sequentially and 76%. This was mostly our credit business that, again, we built nicely. And again, many of it is attributable to the addition of Sterne Agee.

While not as impressive as the growth in our fixed income business, we are very pleased with the performance of our institutional equity business, which increased 14% sequentially. Despite the strength of our institutional brokerage business, the financing market continued to be extremely challenging.

On one hand, we continue to see very solid results in our public finance business as Stifel ranked number one nationally in the number of issues underwritten in the first quarter and number six in terms of total volume underwritten. However, the weakness in equities more than offset the continued strength in our muni finance business.

To give you some color on the environment in equity capital markets in the first quarter, there were only eight IPOs in the quarter compared to 34 in the prior year. And for us, two of our largest sectors are financial and technology, media and telecom.

The total fee pool for financials was down 95%, a decline from $203 million in the first quarter of 2015 to $9 million this quarter. And in TMT, or technology and media, the fee pool was down nearly 90% from $227 million to $24 million in the first quarter of 2016. Consequently, our equity underwriting revenue declined 58% year-over-year.

While new public filings remain low, our private company pipeline continued to build with quality companies looking for market windows to finance and we continue to be very active with our public company discussion. In terms of advisory revenue, as I noted earlier, revenues increased 54%, impacted by a nice single M&A transaction.

However, the M&A markets remain challenging with significant volatility but our pipeline is consistent with year-end levels. We've seen some potential transactions that have been delayed or abandoned because of difficult markets but we have new mandates that are less sensitive to the current environment. Next, we'll move on to our expenses.

On slide 10, we walk through both compensation and non-comp expenses as well as the reconciliation of our non-GAAP results to our GAAP results. Compensation expense of $395 million was up 5% sequentially and 12% year-over-year.

The quarterly increase was a result of a full quarter of Barclays and the Eaton Partners, as well as seasonally higher costs tied to payroll taxes as well as other seasonal factors. The comp ratio came in at 63.6%, which is at the higher end of our targeted range of 62% to 64%.

As we continue to grow the balance sheet, we would expect to see the comp ratio decline and these revenues carry higher margins but we continue – I will say we are comfortable with our prior guidance of 62% to 64%.

Non-comp OpEx came in at $155 million, which was up 5% quarter-over-quarter and 19% year-over-year but consistent with consensus expectations. Much of the increase was tied to our recent growth initiatives. I also want to point out a couple of issues that have contributed to the growth rate over the past year that fall into other operating expenses.

The first is a $2.5 million increase in loan loss provision, which I previously discussed. While we did see a tick up in impaired loans, the bank's overall credit metrics remain strong. Our loan portfolio is approximately $3.5 billion with $23 million of impaired loans, of which $2 million are past due.

Consequently, both of – we had two loans that were effectively classified as impaired at quarter-end. The second issue was a nearly $4 million increase in legal expense tied to a few specific cases. While potential legal costs are unpredictable, we do not expect this expense line to continue at elevated levels in the future.

In terms of our outlook for the second quarter 2016, we think that a range of $153 million to $158 million in non-comp OpEx is appropriate as our growth rates in expenses should slow considerably following the integration of recent acquisitions.

In terms of the reconciliation to our GAAP results, the vast majority of the adjustments that we make are in the expense outline are primarily the results of acquisitions. The total expense adjustments in the quarter were $26.6 million with $16.4 million related to comp and $10.1 million tied to non-comp.

Again, these are all related historically to acquisitions. Slide 11 provides further details on our non-GAAP charges. Our long-term approach to acquisitions is the structured transactions in order to maximize both associate retention and tax efficiency.

We view the costs of duplicate expenses which are not considered ongoing as merger related costs and include them in that core. As discussed on last quarter's call, the total dollar amount of stock comp expense for Barclays was a bit of a moving target due to some of the accounting requirements related to the stock brands.

Those have since been finalized and that chart will now hit in the second quarter of 2016. After recording the charge for this stock-based comp, you will see that the charge for the notes that we assumed in the transaction from Barclays will run through 2017. At that point, we'll have no further non-GAAP charges associated with Barclays.

For the other remaining transactions, the non-GAAP charges will run through the third quarter of 2016. On the next slide we quickly review the balance sheet and our re-purchase activity. Total assets continued to increase during the quarter reaching $14.2 billion as we continue to use our excess capital to conservatively leverage the balance sheet.

Interest earning assets averaged $9.7 billion during the quarter, up more than 50% from the first quarter of 2015. This is almost entirely due to growth at the Stifel Bank. Firm-wide, net interest margin was 200 basis point, was impacted by both higher short-term rates as well as growth in the balance sheet.

As I stated earlier, we expect further benefits from the fed funds initial rate increase to be felt in the second quarter of 2016 as the number of our loans in our loan portfolio re-priced based on 90-day LIBOR. In terms of our capital ratios, they continue to decline as we conservatively deploy our excess capital through asset growth.

Given the market sell-off and the decline in our share price in the quarter, we have $91 million to repurchase 2.7 million shares of stock, which lowered our average fully diluted share count by more than 2.5 million shares. I would note that we have an additional 8.2 million shares remaining on our authorization.

On the next slide, I want to give you an update on our interest rate sensitivity. Recall that in the third quarter of 2015 we stated that 100 basis point increase in fed funds would result in an annual pre-tax income benefit based on our assumptions of approximately $66 million.

Following the said 25 basis point rate hike in December, we realized roughly $3.7 million of incremental pre-tax income from our asset management and service fee line items as a result of increased yields in our insured deposit program and money market fees.

While the bank NIM was down 2%, the incremental benefit from higher rates in the quarter total approximately $4.5 million pre-tax. Given a limited competitive pressure on customer yield, we were able to keep the vast majority of this first 25 basis point rate hike.

Consequently, we believe we captured a larger percentage of the total rate sensitivity in this first 25 basis point increase than we will in future rate increases. However, I want to reiterate that we expect to experience the full benefit of the December rate hike in the second quarter of 2016.

In the last few slides before we take Q&A, I wanted to touch on a few of what I think are important topics to Stifel in the near term. The first, as you can see from the slide, is our continued focus on utilizing our excess capital to increase the leverage on our balance sheet.

By now you're all pretty familiar with this slide as we've used the bar chart in our last few earnings calls, but I think it is important to see the progress we've made, not just in growth but in how we've managed to increase the size of our balance sheet without taking on significantly higher risk.

This is illustrated by our risk-weighting assets density ratio, which increased to just 50.8% despite nearly $1 billion of incremental balance sheet growth. Now, the downside to the conservative growth path we are following is that our net interest margin is lower than firms with riskier balance sheet.

As you can see by the slight decline quarter-over-quarter in our bank's NIM to 248 basis points, we continue to invest in lower risk securities and loans but the growth in interest earning assets more than offset the pressure on NIM as net interest income increased by approximately $12 million during the quarter.

We continue to expect that the balance sheet will reach $15 billion to $16 billion, say, $15.5 billion by midyear and we'll continue to see incremental benefits to our pre-tax income. We also believe we can grow our balance sheet to $18 billion within our capital targets.

Turning to the next slide, this illustrates the point I made earlier regarding the convergence of our core and GAAP EPS as our current deal-related expenses run off.

As you can see in the charts on the left side of the slide, there has been an increase in the differential between our GAAP EPS and what we view as core EPS or to put it another way, our EPS ex-deal-related charges.

GAAP EPS was particularly impacted in 2015 as we not only had legacy deal costs but we also had two large acquisitions, specifically Sterne Agee and Barclays. This resulted in a $1.24 per share differential between core and GAAP EPS.

What we want to illustrate on this slide is that, barring further acquisitions, we expect these GAAP charges to substantially wind down beginning in the second half of 2016.

So as you look at the impact of these deal-related charges compared to the current consensus, and I want to note that I'm using consensus to make this point, our GAAP EPS would effectively double in 2017.

Now, this is not to say we won't do another deal if the economics are compelling, but it felt it was the (25:18) if it's the best use of shareholder capital. But we are highly focused on integrating our current acquisitions, and we expect to see accretion generate and specifically see our GAAP EPS increase.

In terms of the DOL, as I said on the last earnings call, I would try to give you a few more details on our thoughts. (25:42) most firms that are potentially impacted by the new regulations. We are not in the position to give specifics on the likely impact to our business given the complexity of the new rule.

We've a team of associates as well as many, many attorneys going through the document, but it will likely take more time before a true understanding of the ramification will be known to the industry in general and to Stifel. Now that said, I do want everyone to understand why we believe that we are overall in a good position to handle the new rule.

In terms of revenue impact, as I said earlier, it's too early to know how the final rule will impact given our business mix, we believe we are well positioned. To give you some numbers, we have approximately $35 billion in brokerage IRAs in terms of assets under management, and this is out of roughly $200 billion in PCG.

Of that $35 billion, 23% is tied to accounts with only brokerage IRAs and no other account relationship with Stifel. The average commission rate on these assets is roughly half of what our advisory rates are.

Additionally, brokerage-only IRA totaled 78,000 accounts of which 59% have 50,000 or less in assets under management and really only generate about $5 million in revenue.

Given the more extensive client relationship with the remaining 77% of our retirement accounts, we believe we are in good position of finding beneficial solution, including potentially migrating these accounts to advisory accounts.

From an expense standpoint, we think that given the increased compliance and legal requirements that expenses are likely to go up modestly, but we do not believe that the cost will be overly punitive at this point though we will reserve final judgment until we get further along implementing the new regulations.

So given the footprint of our private client business, we feel we're well-positioned to manage the change in how our IRA accounts are managed despite the lack of clarity that exists now and even today with these new regulations.

So with that, let me just conclude my prepared remarks by saying that no one here understands the frustrations with the performance of our stock more than I do as we deal with the current challenging market conditions.

However, given the business we've built and the benefits we are beginning to realize from recent growth initiatives, I believe our stock is undervalued.

As you saw in our recent proxy statement, I and my partners took substantially all of our compensation stock which should give you all a pretty good indication about our feelings about the valuation of Stifel. Overall, for the quarter, we're pleased with our results despite the difficult market conditions.

We believe that the benefits of the diversified business model we've built were evident in the first quarter as our bank and fixed income businesses more than offset the weaknesses in our equity investment banking business.

In light of the continued challenges that the current market environment presents, we will continue to look to be more efficient and deploy our excess capital in areas that we believe represent the best returns. As always, I appreciate you taking the time to listen to our call and your interest in Stifel.

And with that, operator, please open the line for questions..

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

Thanks. Hey, Ron..

Hey, Chris..

So we know it was obviously a difficult quarter for capital markets and specifically ECM.

Wonder if you could talk a little bit about not quantitatively necessarily but just qualitatively what things have been like in April and so far in May? Have things gotten a little bit better than they were in March? Or is it still kind of flattish to where we were in that particular month?.

There have been – in March and in the latter half of March, you did see some improvement. I would just say that I feel that sort of the malaise that surrounds the equity capital raising is still evident.

It's kind of hard to envision 90% declines in the fee pool continuing throughout the year but I wouldn't say there's been a marked improvement certainly in April. And it's sort of a quandary in my mind between the overall view of the economy and what's going on in capital markets generally.

So it feels – it not only feels, it is slow and as I look at the pipeline, I believe that it will get better, but it's not a marked improvement in April..

Got you. Okay. And the other question I wanted to ask was in private client, I heard you say that that Barclays maybe came in a little bit less than what you guys were anticipating. I didn't quite catch the reason for that so maybe if you can expand on that.

And then I noticed there you lost a few advisors in the quarter, so maybe you can give us a little bit of color on what happened there..

Well, first of all, I'll take your second question first. We always – if you look historically, we generally have a decline in the first quarter. It relates to the way that we set our expectations for the year in that people that believe and/or retire.

So it's always a marked time, at least in our business, that people will finish a year and then will retire in the first quarter. But we also – that's where we set our performance expectations for the prior year are played out always in the first quarter.

And so that what you're seeing in this quarter, if you go back and look, you'll see the same general picture in prior years.

With respect to Barclays, the Barclays business is both a very nice, high net worth advisory business but it's also a transactional business and specifically in syndicate as it relates – as this is really the old Lehman (32:35) private client group. And so the decline that we saw in equity capital markets also impacted their trailing 12 revenue.

They would do a fair amount in syndicate and not only didn't – no one do any business in syndicate, they didn't – they obviously didn't do what they had done in prior years. That's what I meant by that..

Okay. Make sense. Thank you..

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

Hi. Good evening. This is actually Sharon Leung filling in for Steven. Just had a quick one on the fed loan office's survey. The most recent one suggested that the banks are tightening underwriting standards on C&I loans.

And I guess, how should we think about that in the context of where we should expect the pace of loan growth and your appetite for C&I loans?.

I would like to think that we've always had some pretty tight underwriting standards in our C&I portfolio and so as it relates to us, I wouldn't say that there was a marked change in the way we underwrite loans and I think we've been very selective in even loans that we participate in. So I don't really see that impact.

Did you have a second part of that question? I'm sorry..

No. Just in terms of like what we should expect for your appetite for C&I loan growth moving forward..

Well, I believe that our opportunity in C&I loans are still extensive. We've said that we believe we had a lot of growth potential, as you can see, since the third quarter of last year we've grown our consolidated assets from a little under $10 billion to $14 billion and we continue to see that growth.

But as always, we're going to be selective in what we always believe are risk-adjusted returns. So I would say that I know what you're talking about. I think that we've always been selective, especially as it relates to credit. I believe you'll – we've said that we'll get to $15.5 billion by mid-summer.

I still stand by that and we believe we could grow our balance sheet to $18 billion in our current capital target. So not much is changing for us as it relates to your specific question about underwriting standards..

Okay. Got it. And then one more just regarding the DOL.

Under the final rule, we were just wondering whether, because the conversion of brokerage to advisory falls under the BIC, whether that limits at all your ability to convert legacy brokerage relationships to advisory?.

I think that – look, that's a very detailed question. I think it's open. I think I believe that the limitation of going from brokerage to advisory is in 2017. That's not been clarified, but the rule doesn't take effect to 2017.

Certainly, you can – all you will be able to in the future convert brokerage accounts to advisory, but that will be done under the BIC. Today, I believe you can go from brokerage advisory, and I'm sure it occurred today, it happens every day. IRA brokerage accounts are converting to advisory accounts not subject to the BIC.

The rule does not take effect until April 2017..

Okay. Understood. Thanks for taking my questions..

Sure..

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

Hey, good afternoon, Ron. Maybe one starting here on coming back to capital management, $92 million in buyback's obviously a big number.

Moving forward, if there aren't acquisitions that you see that are attractive, assuming that you do hit your bank targets, can you help us think about the capacity for further buybacks? And I'm assuming the $92 million a lot higher than normal.

And then with shares at current levels, is it reasonable to think that buybacks are kind of the logical outlet there? Or is there any reason why you would actually build excess capital for opportunities that maybe we're just not thinking about?.

Well, I think that first of all, capital management is always – we always view it as return on invested capital whether that return is by sharing – by returning capital versus – via share repurchases or leveraging our balance sheet. So we're always looking at the numbers and again how we can do that.

The way I'd answer your question is, if you look at what we've presented, we get from $14 billion to $18 billion gets us to our capital levels. And at that point, we'll look at increased earnings that add how and how we either leverage our earnings or buy back our stock.

So in the past, we've bought $92 million and more than that since the third quarter. We'll always be opportunistic as to when we buy back our stock, and we'll weigh those returns versus the returns that the market may provide.

So in general, when our stock was – got as low as it did we were very aggressive in buying back stock, but I'd also like to increase our bank's balance sheet to – because we put a lot of infrastructure in place to support a balance sheet of $18 billion. And so we'd like to do that.

We believe that that's the highest and highest returns to shareholders, but we've shown that we'll buy back our stock too. That's a double-edged answer to your question, but we will always look at the numbers and do what we think is in the best interest of earnings and diluted earnings in our shareholder value..

Got it. Okay. That's helpful. Maybe bigger picture on DOL. I know we don't want to get too specific here, but we're starting to see some of the product manufacturers change share classes already. Commission structures are evolving.

Yeah, I know everyone's still trying to digest but are there any changes bigger pictures that you're already observing in the business maybe ahead of implementation just as we've had the proposed rule out there? And with that said, are you expecting any change in the industry around maybe with the manufacturers or are you anticipating making any – that that could change maybe the broader mix moving forward?.

First of all, I think the industry will evolve and I think that you're going to see manufacturers of product evolve as well, meaning that there will be more products that are available for advisory relationships because that's certainly – make no mistake about it.

The DOL rule certainly in my opinion is not – discourages, let me put it that way, discourages brokerage relationships. And so many firms are going to move to an advisory or flat fee arrangement that's outside of brokerage.

And the manufacturers obviously see that as well and will be creating product that is appropriate for fee-based accounts versus brokerage accounts. So you'll see share classes without 12b-1s. You may very well see annuities that are structured in a way that they can have a fee versus the upfront charges on annuities.

So I think you're going to see an evolution of this business.

If I would look past all of that, I think the real challenge for the industry is trying to understand that brokerage IRAs that are under a fiduciary standard very similar to ERISA (41:46) standards needs to sit right next to taxable relationships that are not – that have a different standard.

And the evolution of how those come together, which obviously the FCC has some input on, is something that is an unanswered question at this point, and one that I think has a lot of implications for not only our industry but just capital formation in this country.

So those are some of the unanswered questions but as it relates to products, the industry will adapt and will adapt quickly to providing advice primarily more fee-based than brokerage-based..

That's really helpful. Thanks, Ron. And then just last one on credit in the quarter, obviously, a little bit of an uptick.

I appreciate the color on those loans, but I was a little bit surprised by the provisioning that the uptick in non-accruals was more than I would have thought, given – or excuse me, the provision was lower than I would have thought given the uptick in non-accruals.

So just curious if that was because of the collateral position or if there's anything else you can share....

Well, look, I – first of all, it was not an uptick in non-accruals. It was an uptick in impaired, okay? And our uptick in impaired are all current, but there's been a pretty rigorous review in loans in the SNC process. And so what you saw was an increase in our impaired loans.

But as I said, I believe our non-accruals, was it $2 million? Yeah, or I'm sorry, past due. The non-accruals were – let me come back to you with that number.

Is that all right?.

Yeah. Of course. No, that's fine. I appreciate the color. Thank you..

Okay..

The next question comes from the line of Daniel Paris from Goldman Sachs. Your line is open..

Hey, Ron..

Hey, Daniel..

You've given us some helpful color on kind of sizing the balance sheet growth opportunity, and I know you've also spoken in the past about this kind of 80 basis points to 100 basis points ROA on that marginal growth.

Wondering if you can just help us think through what is factored into that in terms of interest rates and charge-off levels? I'm just trying to get a sense if there's upside potential there if rates rise quicker than expected or if credit stays lower for longer..

I mean, I think that – I mean, I don't think – I mean, what we were – we were trying to be illustrative, Daniel. I mean, our ROA is higher than 1% in the bank, in fact, significantly higher.

I think that what we were trying to show was just using 1%, which in and of itself is conservative relative to our current mix, how we fund, what our efficiency ratio is.

So if you want to think about – if you want to think about the way we've looked at that, you can think about the 1% incremental ROA versus our historical ROA, and upside to that on a normal basis.

The downside to that scenario would be quick (45:20), which where we tried to not be that aggressive as evidenced not only in our current situation with non-accruals and past due loans, but just in our NIM. Our net interest margin is very conservative.

So I would like to think there's upside in those projections, but what we did was just use illustrative 1% on the growth..

Understood. That's helpful. Thanks. And maybe just switching gears real quick. I was glad to see the pre-tax margin ticked up linked quarter.

I know this is a challenging revenue environment and there seems like there's a couple one-off items that you spoke about as well, but you're still running well below the 15% pre-tax margin that you've spoken about over time.

So what does it take to bridge that gap? Are there other things that you can do on the non-comp side if the revenue environment doesn't accelerate from here?.

Well, a couple things. Let me reiterate what I said, or at least tell you what I said again. I think that last year, our margins were 14.3% and this year they were 11.4%.

And the thing that drives that differential is what I pointed out, all right? First of all, even though we have record revenues I would tell you that the revenue environment in many of our businesses was challenging especially on the equity side of our business and so that was one of the reasons that our comp ratio went up 110 basis points.

So there's 110 basis points in margin compression versus last year just on the comp ratio. The other ones that impacted that margin, as I said, was increased legal expenses, which we don't expect to stay at these levels. The higher loan loss provision, which was unique to the SNC review, I would like to think that doesn't continue at this level.

We had a mark-to-market loss in a private equity investment. So taken all together, that accounts for almost 95% of the differential between, what is it, 14.3% and 11.4%. 14.3% pre-tax margins and 11.4%. And while I don't – I'm not going to say that these are non-recurring, I will say those were elevated levels of expense.

I would like to believe I'm comfortable with our comp ratio. As our business has improved on the institutional side, primarily equity, I believe that will improve. I believe as we grow our balance sheet, that'll drive our comp ratio lower.

And I think that these loan loss provision and legal and the markdown of our investment are all maybe – well, they certainly explain, in my eyes, the difference between, say, 14% and 11.5%..

Got it. Thanks a lot, Ron. Appreciate it..

Yep..

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

Well, I would again like to thank everyone for their interest in our company. I will say that I believe that we've built a great firm with a great business model and a diversified business model. We are weighted more so than maybe some other firms to the equity markets and the difficulty in the equity markets in the first quarter were very difficult.

But I believe that we have a lot of upside as those markets improve, which I believe they will. So we'll continue on our path of growing prudently, optimizing our expense base and growing the value of this company. And I look forward to reporting back to all of you in the second quarter results next quarter. So thank you very much and good afternoon..

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