James Mark Zemlyak - Stifel Financial Corp. Ronald James Kruszewski - Stifel Financial Corp..

Steven Chubak - Nomura Instinet Devin P. Ryan - JMP Securities LLC Christian Bolu - Credit Suisse Securities (USA) LLC Conor Fitzgerald - Goldman Sachs & Co. Christopher Harris - Wells Fargo Securities.

Good afternoon. My name is Heidi, and I will be your conference operator today. At this time, I'd like to welcome everyone to the First Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

It is now my pleasure to turn the call over to Mr. James Zemlayak, CFO. You may begin your conference, sir..

Thank you, Heidi. Good afternoon. I'm Jim Zemlyak, CFO of Stifel. I would like to welcome everyone to our conference call today to discuss our first quarter 2017 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 stifel.com.

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

They may include statements regarding, amongst 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 effects of various regulatory matters, legal proceedings, management expectations, our liquidity and funding sources, counterparty credit 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 of results on the company's quarterly reports on Form 10-Q. I will now turn the call over to our Chairman and CEO, Ron Kruszewski..

Thanks, Jim. Good afternoon to everyone and thank you for taking the time to listen to our first quarter 2017 results. This afternoon, we issued a press release on our first quarter results. We also posted a slide deck on our website, and I'll be referring to slides as is our custom on this call. So with that, look, I'm pleased with our results.

Stifel generated a second consecutive quarter of record net revenue, and non-GAAP pre-tax margins came in just under 15%, which is the highest level since the fourth quarter of 2014.

Our continued growth on both the top and bottom line is a testament to Stifel's diversified business strategy as well as our efforts to improve our expense (03:22) efficiencies.

In the first quarter, our net revenue was driven by record results in our Global Wealth Management segment that was due to further increases in fee-based revenue and improved net interest income at Stifel Bank.

The growth in these recurring revenue streams over the past year-and-a-half has helped to offset the volatility in our more transaction-driven institutional businesses. In terms of expense discipline, we continue to make progress in our cost reduction initiatives as the first quarter represented the lowest non-comp ratio at the firm in 11 quarters.

Looking at our first quarter results, you can see from the table on the slide that our total net revenue was a record $676 million, as I said, driven by Global Wealth Management. Our Bank continues to be a driver of a lot of this growth as net interest margin rebounded as expected from last quarter subdued levels to 256 basis points.

And that does not include, what I think – what I know is the impact of the March rate increase. For the quarter, our GAAP EPS was $0.78, but our EPS was impacted by a couple of items. First, we had nearly $17 million in anticipated merger-related pre-tax charges related primarily to our Barclays acquisition.

We also have severance expense of approximately $5 million. Offsetting that, we had a tax benefit of nearly $17 million associated with the change in accounting rules regarding equity-based compensation.

Therefore, the tax benefit, which relates to 2016 compensation, offset merger-related and other expenses, resulting in non-GAAP EPS of $0.74, which was in line with consensus. Moving to our primary revenue lines, I'll start with brokerage revenue.

Brokerage revenues were $292 million, which was up slightly sequentially but down 8% from the year-ago quarter. I want to point out that we should exclude the brokerage revenues generated by the independent Sterne business that we sold on July 1, 2016.

Now, looking at it, Global Wealth Management brokerage revenue came in at $172 million, up sequentially due to increased productivity. Excluding the revenues from this aforementioned Sterne businesses we've sold, our Wealth Management brokerage revenue increased 9% from the prior year.

Institutional equity brokerage revenues were $54 million, which were down 14% year-over-year and 16% sequentially. Our results were impacted by the declines in industry-wide equity average daily volumes that were down 20% compared to last year and 3% sequentially.

While equity trading revenue declined more sequentially than market volume, I would point out that we had a 26% increase in sequential revenues last quarter when market volumes were only up 7%.

So, I really believe that just on averaging that went on here (06:34) between those numbers, but the institutional business is challenged by many what people believe are secular trends, and I think we're seeing that as well. Fixed income brokerage revenues were $67 million, up modestly on a sequential basis but down 20% year-over-year.

Commission and principal transactions, while they were down, we experienced a rebound in trading profits on last quarter's weakness due to the market pull-back in municipal securities.

Taxable revenues in the first quarter were negatively impacted by market conditions as industry-wide secondary volumes were dictated by the new issue calendar, which increased the concentration of secondary volumes with the underwriters.

Additionally, our rates business was negatively impacted by lower activity levels at depositories, given the market environment and our institutional tax-free flow of (07:31) revenues declined slightly as well. Investment banking revenues were $127 million as equity capital raising remained healthy but advisory in DCM slowed sequentially.

Total equity capital raising revenues totaled $49 million, up 91% year-over-year and in line with last quarter's improved result. As I noted last quarter, we certainly expected our capital raising to improve meaningly from the first quarter of last year, given last year's, frankly, the lack of activity in capital raising.

Industry-wide equity capital proceeds increased almost 100% year-over-year. Our results were driven by improved activity in financials and in health care. Fixed income capital raising had revenue of $25 million, which was down sequentially and year-over-year.

Recall that our public finance business was the primary driver of our fixed income capital markets business although the number of issues we underwrote were actually up year-over-year, the dollar value of deals declined.

If looking at it industry-wide, new issue volume was down 13% year-over-year, but Stifel remained number one in terms of the number of new issues underwritten in the country. Advisory revenues were $56 million in the quarter. The modest sequential decline was primarily the result of seasonality, but we did see a nearly 12% increase year-over-year.

Overall activity was relatively steady, and in certain sectors such as financials and technology, we are seeing some positive momentum with an uptick in stock prices. The next two slides we'll touch on the quarterly results from our two primary segments. Let's start with Global Wealth Management.

It was a strong quarter for Wealth Management as net revenue grew 9% sequentially, 17% year-over-year. The $35 million sequential increase in net revenue was frankly fairly evenly split between brokerage, asset management and net interest income. Let me give a little more color.

Asset management revenues improved as a result of higher fee-based revenues and the positive impact of the December rate hike on money market deposits and third-party bank deposits.

In terms of net interest income, it was up 14% sequentially, and net interest margin at the Bank increased 266 basis points for the quarter versus 224 basis points in the fourth quarter of 2016.

This more than offset a modest pull-back in average interest earning asset at the Bank, which I will discuss in a moment a little bit about what happened there. Advisors, we totaled 2,299 at the end of the quarter, which was up from 2,282 at the end of 2016. Client assets reached $252 billion.

Growth in fee-based assets, which are now more than $75 billion, continues to outpace total client asset growth and should provide a tailwind for fee-based revenue in the second quarter.

The year-on-year growth in revenues in the Wealth Management segment did result from increased revenues at Stifel Bank, and that did have an impact on the segment's expense and profitability ratio. The comp ratio came in at 51.6%. Our non-comp ratio came in at 16.3%, resulting in pre-tax margins of about 32%.

Again, a lot of this is the result of the growth in net interest income at Stifel Bank & Trust. On the next slide, we'll look at the results of Stifel Bank. As we stated last quarter, total asset growth slowed sequentially as we surpassed our targeted asset levels in the fourth quarter.

And as we've stated, future asset growth of the Bank would be in line with the incremental capital generated from earnings at the Bank. Total Bank assets increased roughly $440 million in the quarter and now total a little over $13 billion. Bank loans of nearly $6 billion increased 5% sequentially and 69% year-over-year.

The majority of the loan growth in the quarter was from commercial and security-based loans, while mortgages accounted for the bulk of our year-over-year growth. Looking on the investment side, investment securities of $6.6 billion increased 58% year-over-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 yield was 254 basis points and the duration was approximately two years.

The provision for loan-loss expense in the quarter was relatively flat at $6.1 million, and that was, again, due primarily to the loan growth and our allowance for loan losses. If you look at our allowance for loan losses, it increased sequentially to 87 basis points from 81 basis points.

All that said, our credit metrics remained strong as the non-performing asset ratio in the quarter was 21 basis points, flat with the previous quarter and down from last year from 28 basis points. Moving to the next slide, we'll look at our Institutional business. Institutional net revenue was $237 million, down 6% sequentially and 2% year-over-year.

On a sequential basis, revenues were down really due to a 6% decline in investment banking and a 7% decline in brokerage. Year-over-year, though, the revenues did decline but, again, it was primarily the weakness in brokerage, both equity and fixed income, that was almost offset by a 25% increase in investment banking.

Given the lower revenues, pre-tax income in this segment decreased by 16% to $40 million sequentially. In terms of specific revenue lines, I'll add just a few incremental comments, as I discussed these in earlier slides. Institutional equity underwriting revenue in our Institutional Group came in at $37 million, which was nearly double from last year.

And it was roughly in line with the growth of the overall industry-wide equity issuance. We continue to take market share and the number of managed equity deals in the first quarter (14:00). And while our pipeline remains healthy, increased market volatility could negatively impact the issuance market.

In terms of our advisory revenues, the $53 million in the first quarter was down 5% from the fourth quarter due to lower private placement fees. Given that our traditional corporate advisory fees increased sequentially and that we've generated 12% year-over-year increase in total advisory revenue, we are generally pleased with the results.

Our current pipeline remains ahead of last year's levels as the improved sentiment (14:32) around financials has been the primary driver of this pickup. That said, we would expect our full-year results to be more weighted to the second half of the year.

Institutional equity brokerage experienced a largest decline of our business line items in the quarter.

I commented on last year's call that activity in the early part of the first quarter had moderated from our strong results, primarily post-election in the fourth quarter, and this moderation continued through the end of the quarter as volatility frankly remained low.

Our quarterly institutional fixed income brokerage revenue was $67 million for the quarter, relatively consistent with last quarter, but down 20% year-over-year. As I mentioned earlier, our quarterly revenues were negatively impacted by the current market conditions.

Looking ahead, if these market conditions remain in place, we would expect our quarterly run-rate for our institutional fixed income brokerage to be similar to the revenues of the past two quarters. Moving on to the balance sheet.

As you can see on slide 10, we finished the quarter at on a consolidated basis a little over 19 – actually $19.14 billion in assets, which was essentially flat with the prior-quarter levels. The lack of sequential growth was due to some specific circumstances in the quarter.

What it really was – what happened was that, while Stifel Bank grew, the activity that we saw in the brokerage in the investment bank actually expanded our balance sheet at the end of the year, so customer receivables, a number of the things that just drive a brokerage balance sheet elevated at the end of the year and that turned around in the first quarter, so our assets were up in the Bank, down in the brokerage relatively flat, consolidated is the best way to say that.

We continue to believe that our overall asset growth will be driven by the amount of incremental capital generated at the Bank, while maintaining our targeted capital ratios of 10% leverage and 20% risk-weighted. On the Bank balance sheet, this should equate to approximately $2 billion in asset growth.

As you can see on the slide, we have a $21 billion forecast and we're showing it for 2018, while in the last call, I showed it as guidance for fourth quarter 2017.

Given the dynamics that occurred in our balance sheet in the first quarter, we felt that 2018 – and I would say the early part of 2018, was a more likely timeframe for our consolidated asset levels to reach $21 billion.

As I said before, this doesn't really impact the expected $2 billion of growth on our balance sheet, which is the driver of our net interest income growth, so this should not materially impact overall NII growth expectation.

At the end of the quarter, as expected, our capital ratios were 10.1% for Tier 1 leverage and 20.9% for Tier 1 risk based capital, very consistent with what we've told you.

Given the high ROEs that we generate, the Bank does remain an attractive way for us to deploy our excess capital, as we continue to focus on generating the best return on a risk-adjusted basis. The next slide focus on the drivers of our growth in net interest income.

Of our $19.1 billion of assets, our total interest earning assets averaged $15.2 billion during the quarter. Bank interest earning assets, which are really, again, the driver of our balance sheet growth, were down slightly on average for the quarter and this was really due to the money market reform.

And what we did in money market reform is, we swept a large number of cash balances to the Bank for the end of the year. And then, frankly, we invested a lot of that, which we swept some of those Bank balances away, because we didn't see the reinvestment or trying to do it very quickly, so we just swept them away.

Those are funding for future growth, but that increase in cash was why our net interest assets are relatively flat for the quarter. Sweeping them away, of course, did improve our net interest margin at the Bank, which improved to 266 basis points from 224 basis points in the fourth quarter of 2016.

The lower average NIM last quarter, again was the increase in these cash balances. So if you look at it all through this, led by the Bank, firm-wide NIM increased 33 basis points to 224 basis points. Net interest income, as a result, up 14% sequentially.

Looking to the second quarter of 2017, we expect that net interest income will benefit from the impact from March increase in Fed funds, which really didn't have much of an impact in the first quarter's NII, plus a full quarter's impact from the December rate increase.

Book value came in at $38.40, declined slightly as a result, in the first quarter when we issue our share grants. That's also what drove some of our – not some of – drove the tax benefit and I'll come to that in a moment. We did not repurchase any shares in the first quarter and we continue to have existing authorization of 7.4 million shares.

Let's look next at the reconciliation of our GAAP and non-GAAP revenues, it's on slide 13. Last quarter, I had said, we expected full-year non-GAAP pre-tax merger-related charges to be approximately $30 million.

In the first quarter, we incurred about $5 million in severance as well as some incremental merger-related expense tied to our City Securities acquisition. By the way, I would like to welcome, that's a deal that was integrated very seamlessly and I would like to take the opportunity to welcome our new partners, City Securities to the Firm.

But as a result of all of this, our total non-GAAP charges for the quarter came in a little under $22 million.

We estimate at this point going forward and looking forward for the remainder of the year, it would be approximately $23 million in these and as you can see, these have come down significantly, as we have integrated our deals of recent years. In terms of our non-GAAP expense results, they were better than expected.

Our comp ratio of 62.3% was at the high end of our annual range that we gave in guidance, which is now 60.5% to 62.5%. You'll recall that that's down from 62% to 64% and we're at the high range. Generally, what happens in the first quarter, so there is a impact primarily of payroll taxes that occurred in the first quarter for us.

Non-comp expenses excluding the loan loss provision which I said you should kind of look at it without loan loss provision, those tend to jump around with our growth of loans, but non-comp expenses were just under $149 million, below our guidance of $151 million to $158 million as we benefited frankly from some of our initiatives on our expense base.

Loan loss provision was $6 million, roughly in line, elevated over last year but again this is really tied to our loan growth. For the second quarter, we're maintaining our first quarter guidance for non-comp expenses excluding loan loss provision of $151 million to $158 million.

I would also note that our diluted share count came in slightly above the range we gave for our full year. The impacted diluted shares outstanding is front-loaded during the year due to the timing of the vesting of our past grants and the issuance of new grants.

We anticipate the year-end diluted share count to be approximately 81 million shares, barring any repurchase or issuance of our common stock. I also want to spend just a moment here on our lower effective tax rate for the quarter, which as you can see came in at 17% on a GAAP basis.

This lowered our provision for income taxes by nearly $17 million in the quarter and positively impacted our GAAP EPS by $0.21 (23:15), which more than offset the after-tax impact of our non-GAAP merger-related charges.

You know what? What is this really is, the accounting rules, if you vest stock higher than what you granted it at, we got more of a tax deduction, we ran that through capital, we now run that through earnings. I would note that that can both be an increase to earnings and a decrease to earnings depending on where the stock is.

To give some – I've had a few questions about this. Our average grant price this year was $35 and we vested it at $50 and that's what drove this income tax benefit.

So a little bit more on that, I do think we thought it was appropriate to just pull that out of how we look at our business and look at our business at an effective tax rate, which is approximately 38.5%. We feel that's the way you should look at it.

And I think going forward, this is going to be noise around earnings for many firms that – depending on what happens with stock prices, it's like the (24:24) old debt adjustments had occurred. And I think I'm not exactly sure how we'll handle it going forward, but I suspect we're going to be pointing it out as to its impact on net earnings.

Let me give a brief update on the DOL and interest rate sensitivity. Regarding DOL – no, look I know you're all looking for further insight into the time and implementation of the role. I really wish I knew more than I know. I don't really have much to add to the comments I've made in the past.

We certainly were happy that the administration pushed back the effective date by 60 days to June 9. Not really happy with the way the interim rule came out, which implies an implementation date could actually be on June 9 for part of the rule, which would really be the Impartial Conduct Standard.

I personally believe that that would be very disruptive to the market. We'll continue to monitor developments in Washington. We do have the new Director of DOL and I'm confident that the Department will follow the administration's directive to study and update financial impact. But if not, the rule becomes effective in June, we will be complaint.

In terms of rate sensitivity, we generated approximately $7 million in incremental pre-tax income from the December rate hike. We would expect incremental benefits from the December rate hike in the second quarter, because that we've repriced (26:04) some of the securities on our Bank balance sheet, there's a lag.

Additionally, we expect the March rate hike to have a similar impact on the second quarter as the December rate had on the first quarter of 2017. Now, one of the things that's going on is there really not any material increase in deposit yield that we or the industry pay.

I think that, although the competitive environment will continue to be the primary factor deposit yield, the way we look at it is historically the spread between the Fed fund rate and the deposit yield has been 110 basis points to 130 basis points. Today, we're at about 90 basis points.

To me, that implies that if we would look forward competitively, we'll start to see some increase in deposit yield and less of a benefit from the increase in rates, as you get into that historical range of 110 basis points to 130 basis points. But competitive markets being what they are, we'll just – we'll see how this plays out.

We're certainly not going to lead one way or another on this. We're going to watch and see what happens as we continue to do this. With GDP, there may be a stall in the expected rate increases when you saw what I actually thought was a dismal (27:32) first quarter report in GDP.

That must cause some pause on some of the thoughts as it relates to increasing short-term rates. So before I open it to questions, let me just comment on the operating environment. As I just said, I thought GDP was certainly disappointing. I said on our last call, it appears that in general, optimism and confidence is good, and it was good.

I also cautioned that a lot needed to be accomplished in Washington before the potential benefits of a more pro-growth environment could be realized. Frankly, in the first quarter, we saw some of that optimism fade and the increased uncertainty negatively impacted some of our businesses, primarily our institutional businesses.

That said, we still generated record net revenue and posted our strongest pre-tax margins since the first quarter of 2015. We also posted record client assets and fee-based assets and we think that will benefit revenue in the second quarter.

As we continue to improve our operating leverage and look for attractive risk-adjusted opportunities to expand our businesses, I believe that our company, Stifel, is well positioned for further top and bottom line growth. So with that, operator, I would be pleased to take some questions..

Certainly. Your first question comes from the line of Steven Chubak with Nomura Instinet. Steven, your line is now open..

Hey. Good afternoon, Ron..

Steven, how are you?.

Good. Thanks. So just want to kick off, I've had a couple of questions from folks that have just come in, just trying to clarify some of the guidance that you'd given around NII. So you did note that you should see a comparable benefit next quarter from the March rate hike.

And I was hoping you can give some insight into whether that's in terms of NIM expansion or NII uplift? If you can just give more specifics around how we should think about that benefit, that'd be helpful..

I think I said that the – that – you would – a couple things happened and there's a lag effect here, okay? I mean, we – you do get some immediate fee when you have a rate increase, but assets take a while to reprice, okay? You also have a lag effect on deposit.

So I think what I've said is that you'd see a similar impact in the second quarter as we saw in the first and if I would give you a number, I would say 10 basis points to 12 basis points..

Okay. Got it. And in terms of the benefit that you saw from, on some of the off balance sheet cash and the asset management fee line.

Since you had really strong growth in fee-based assets, I'm just trying to parse how much of the benefit we saw this quarter was from higher rate on cash balances or off balance sheet cash versus the benefit from stronger fee-based conversions that you guys continue to see?.

Yes, well, look, it was – part of that is – the answer is, it's about equally split, just so if you're trying to model it, if I could say, part of it, our asset fees have a full, our (31:03) deposit fee income plus our asset management fees. So about 50-50, to answer your question directly..

Perfect. And just one more from me. I was hoping you could speak to some of the secular headwinds you alluded to for the equities business.

What factors are at least most concerning to you? And any thoughts you can provide on MiFID II, which continues to garner more attention?.

Well, we were talking – I was in a meeting earlier, Steven, and the secular headwinds and the equity brokerage business I think is celebrating its 40th anniversary (31:46) May Day and it's a continual. We've always buy and that sort of bailed us out. I'm not prepared really to talk about MiFID. I understand where it is.

It's European, it impacts the global firm. A lot of questions about how it impacts 40 Act and a number of things. So I don't expect it to be a net positive, I can say that, but I don't know that I can really quantify it for you.

I do believe that the trend, which has just been continuing toward paths of investing, at some point will – that pendulum will swing back. We'll see, I've said that consistently. I think I put it in the annual report, maybe we could be the last active investor in a passive world, which would be interesting.

But I think that right now there are clearly secular headwinds to that business..

Fair enough, Ron. I appreciate the color. And thanks for taking my questions..

Yeah..

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

Devin Ryan. Thanks..

Changed your name? Did you change your name (33:05)?.

Actually, it's a nice name. So a couple of quick ones here. So I guess, first, financial advisor headcounts stepped up.

I suspect that's from City Financial, but I'm just curious, it seems like we've kind of been flat-lining a little bit in kind of maybe the core financial advisor work force, I know that's a little bit of an industry dynamic, but I'm just curious how focused you are right now on growing financial advisors in this backdrop? Is it a high priority? Or is there maybe some reason that I'm not seeing that you'd be less interested like competitive dynamics or just waiting for DOL to get resolved?.

Look, it's a combination of a lot of those things, okay. And we're always, every day, trying to bring people that believe in our business model and believe in our culture and the way we do things. Those people, we're trying to bring in every single day. There have been a number of trends. The DOL has had two impacts.

One is, it does create some questions about even, frankly, the legality of the structure of some of the recruiting deals. That's caused some pause.

But on the other hand, it's also caused, well, I would say frankly an uptick in just retirement, in people that have looked at how they've done business and can you just conform with this and so a lot of people have just said, you know, I was going to retire anyway, I just think they've accelerated it. So we're seeing a combination of that.

I would say that it's never a numbers game for us. We don't have a target to hire X number of people, we don't have a budget to say we're going to have this kind of money at recruiting. We believe that we're going to continue to recruit. I think when DOL does get results here, one way or the other, it will change the environment.

At least for us, it'll be a more conducive recruiting environment, once that uncertainty gets off the table. We don't – there's a lot of questions about that, at least to me..

Okay. That's great color. Thank you. And then GWM commissions principal transactions, obviously, a nice step-up this quarter.

I'm not sure if you look at it like this, but can you give us any sense of how much of that increase was driven by just higher billings on trailing commissions, just with the higher markets versus how much was seeming, maybe more or a better retail investor engagement, or customer engagement and then, if any was City Financial?.

Well, look, first of all, asset-based fees don't fall in those line items, okay. So asset-based fees fall in assets and servicing side (36:11), so I would say that the commission in principal transaction, which is primarily our transactional business in equities and fixed income is a result of higher engagement.

We've seen a pickup in that business in our Barclays, they've gotten more acclimated to Stifel. They certainly have improved numbers over a year ago, when they were kind of just with the firm for the first quarter. And City Securities was not a big impact on that. We just closed on that and that's in the early stages of acclimation.

So it really, probably, is a little bit of a productivity and engagement is what I would say is the reason for that..

Okay. Okay. Great. And last quick one here, just on the FICC commentary that was for fixed income brokerage.

I mean, what's the biggest driver of just the maybe more subdued activity? Is it tax uncertainty, or the yield curve? I'm just trying to think about it before thinking for what could make it change and maybe break back up to something that's a little bit more active, what might that be?.

Well, I – first of all, in our business it's a growth area for us and we're focused on increasing our debt underwriting capability, all right. And that is something that we believe we can have strong growth in and that adds benefits across that business, just as equity underwriting and businesses has benefited from (37:51) equity brokerage.

So we're in the early stages of fixed income on the taxable side and that will help.

But I would really say that I – we really were looking at a very, very strong quarter in the first quarter of last year, as I said in my remarks that in these market conditions, which is a flattening of the yield curve a little bit, the depository which is a big part of our business in the rates business is a little – it's more subdued and – in this environment.

So some color on tax policy that never – that uncertainty, that's helped (38:34) the tax-free business. So I think as we get some of these policy and tax reform, this infrastructure, is it going to be public, private, a form of that. What's it going to be? A lot of questions out there. I think we're well-positioned for that right now.

But as I said, in this current environment, I would encourage you to look at our results, which I'm very pleased with, to look at our results of the last few quarters as you try to think about where we are going forward..

Okay. All right. Terrific. Thanks, Ron..

Yeah..

Your next question comes from the line of Christian Bolu with Credit Suisse. Christian, your line is now open..

Good afternoon, Ron..

Hey, Christian..

Hey.

Apologies for the nitty question here, but following-up on Steven's earlier question, is it possible just to break out of the $163 million in asset management fees, how much of that came from kind of cash balances fees on that? And what kind of yields are you getting on that?.

I think that, probably, depending on how we can do this under (39:48) and all of that, we'll try to get these numbers out. I'm not prepared today to sit there, and I would want to think about there's average impacts on this and there are things that have happened, we did two rates increases.

So I didn't deduct your question a little bit here and that I'd like to, now that I've gotten it twice, we'll try to provide a little more color on what is flowing through that, because it is primarily our – many of the discounters, that's where they are – or people that don't have banks, the increase in rates is flowing through that line item.

For us, it's also true, but less so, as we continue to grow the Bank, because it'll sweep those deposits into the Bank. But all that said, Christian, I think that I would prefer not to just wing some numbers at you.

And I want to look at the average balance here, okay?.

(40:42)..

The average....

Yeah. (40:43) just for modeling purposes for us..

Yeah, okay..

And then just on this $7 million you mentioned that was a benefit from the December hike, I believe you said there was still some left to come in the second quarter, so how much is left from the December hike?.

So, I think it's all – I didn't give you a number. Our asset side reprices overtime, okay? It doesn't immediately reprice on the asset side. So I think I gave 10 basis points to 12 basis points. I think I would focus on that right now, as what the impact on the second quarter and then we'll get a little bit more color.

More often, I tend to be cautious about this, because the dynamics around the NII, the dynamics around the – what deposit rate path through (41:43) is. There's a number of things here, but I think I'm going to comment a little bit more clarity, as we normalize a little bit higher in rates.

I would caution all of our shareholders, I might personally believe that the equilibrium interest rate, which is where everyone is trying to get to, a lot of people think it's 3% to 4%, I personally think it's 1.5% (42:07), but I don't know how much further we have to go on this.

And I think we'll see some normalization of pass-through rates to clients and kind of (42:19) balance sheet..

Okay. Got it.

And then, maybe just on the comp ratio, given most of the growth is now coming from your higher margin Wealth Management businesses, should we expect the full year comp ratio to trend towards the lower end of that 60.5% to 62.5% guidance range?.

A lot of the growth – as I've said in the past, a lot of the growth, the higher, if you will, margin business is actually in the Bank at net interest income. To answer your question, we changed our guidance from 62% to 64% to 60.5% to 62.5%, and we're at the high end of that range right now.

So, I think it's fair to think that we might – there's more room to the downside than there is to the upside, but so much of this, Christian, is market dependent. And we want to make sure that in times like this that we retain the optionality for business improvement.

And that means that we just not (43:32) – we don't want to be cutting comp and cut our business capabilities when I believe that there's still high optionality to business improvement if we get tax reform, if we get infrastructure reform, and if we get some of these pro-growth things done in Washington, we're well positioned.

Frankly today, the promise is greater than the reality, and we want to maintain that. So, our comp ratio, I would think, could come down but I'm not going to give you guidance for that..

Okay.

But just to be clear the guidance range of 60.5% to 62.5% still stands?.

Yes, absolutely..

Okay. And then, just a longer-term one. I know we've had this one back and forth here. But ROE target, just given the integration of your major acquisitions, we've now had three rate hikes, you've grown the balance sheet. Just curious how you're thinking of where long-term ROEs ultimately shake out for Stifel..

Well, it's a great question, Christian. I think, there's two numbers. Our tangible ROE is 14%, which is very competitive. Our ROE is a little under 10%, not where I certainly would want it to be, and there are structural changes that will do that.

I will tell you this in a very broad comment, Christian, and that is that we are – as a company, we are relatively more levered to the equity markets. Okay? And the capital raising (45:16) on the institutional side, and some of our recent deals are focused on that, Thomas Weisel Partners, KBW, these were equity-based shops.

And as I look at it, the amount of capability that we have in the existing footprint to do a lot more revenue in better market condition will be a big driver to this ROE problem, which I acknowledge. So, we'll continue to focus on ROE, but we needed some – I'm hoping for some – a little bit of tailwind from economic growth..

Just maybe – just a follow-up on your point about equities.

So, as we sit here with, I guess, near record high in most indices above trend on a PE basis, I guess, what sort of equity backdrop would you want to get those equity businesses firing on all cylinders?.

I would like to see the uncertainty of potential tax reform taken off the table. I mean, meaning that what is it going to be? How are we going to do? Where are long-term rates going to settle? Are there going to be any border adjustment type things? There are a lot of questions now about pass-through rates versus personal rates.

All of these things, the uncertainty especially around tax policy in general is not conducive to robust markets. That's been my experience in the past. Equity levels, you're right, on a PE basis, but (47:05) corporate tax rates to whatever they're talking about, those PE ratios are going to look (47:10) a little different.

So that's (47:15), we're levered to the equity markets, we like our position. I believe that GDP growth is not going to average less than 1%, which is what it was in the first quarter, and we're going to try to maintain some of the optionality that we have to improving markets..

Okay. Really appreciate all the answers, Ron. Thank you..

Your next question comes from the line of Conor Fitzgerald of Goldman Sachs. Conor, your line is now open..

Good afternoon. Just want to appreciate the color on the deposit rates, but just wanted to kind of get a little more – dive a little deeper on those comments.

Where you talked about trying to be competitive on the deposit rate but not necessarily a leader, when you think about your deposit rates, who do you consider your peer group that you'll try to match?.

Well, we're going to keep – we're going to watch the full-service investment firms. Much of our client cash is very mobile. It moves in and out of securities, bonds mature and sit for a while, it's not as if we have $19 billion in cash just sitting there, or $20 billion that gets moves around.

And so, our clients aren't with us because they're looking for the highest Internet money market rate, we've never been there, but we'll look at, frankly, the Morgan Stanley's and the Raymond James' and the various firms that are similarly situated to us with clients similar to ours, and we'll be competitive..

Thank you. And then, maybe just asking on Christian's question on the comp ratio another way. I think you had almost $60 million of revenue growth year-over-year, the majority of which was net interest income, and compensation expenses were up almost $30 million year-over-year, so you had a marginal comp ratio approaching 50%.

Just wondering if that's a fair way to think about the operating leverage from the revenue growth?.

Fair question. I think that, as I've said in the past, I think there is leverage potentially in those numbers, but also in some of those numbers is us preserving optionality in our businesses..

All right. Thanks for taking the questions..

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

Thanks. Another question on the expenses. Non-comp, you guys did better than you thought this quarter. Can you talk a little bit about what drove the small surprise there? And then, related to that, you mentioned that you're making progress on some of your cost initiatives.

Wondering where you are in the evolution of your kind of expense management focus at this point?.

communication to occupancy to client engagement-type things that we're looking to make sure that our expenses are in line with our business expectation. So I think we have a focus. It's been going on for a while. And we're going to continue to focus on that.

It was – you see some of the fruits of that this quarter, but I still had our guidance at $1.51 to $1.58.

So, if we miss it on the high side, you have to remember at one point I think we had fees on the low side (51:34) but we won't – it's $1.51 to $1.58 is where we think we are, but I don't want to – we're not trying to guide that lower is what I'm trying to say..

Got you, okay. And then, I guess, the other question I had was a sort of a bigger picture question on DOL, Ron. There was a view in some circles that this rule was going to lead to some consolidation among wealth managers in order to achieve a little bit better scale.

Hoping you can give us your updated thoughts on that, whether you actually think that view is still valid? And whether you guys are sort of assessing any opportunities or if there are really any opportunities that are presenting themselves to you at this point?.

Yeah. I believe that when some of this comes out and when you actually understand, the rule is so complex that I do not – I for one am not in the camp that the potential for the rule will drive consolidation. I do believe that if the rule is implemented as written, it will become effective June 9 with the full implementation date of 01/01 of 2018.

But that rule – to comply with that rule will require some scale, and will require investment, will require incremental dollars and will frankly lead to some increased litigation expense, all of which you could argue would tend towards some consolidation. Right. I think that that's true.

I don't think that with the specter (53:27) of the rule, if delayed, if not repealed, I think we're going to have to see how that plays out before we start speculating on the consolidating impact of it..

Okay. Helpful. Thank you..

If there are no further questions at this time, I will turn the call back over to Mr. Kruszewski..

Thank you very much, everyone. Thank you. Always appreciate being able to update you. Certainly appreciate the questions. We'll try to follow up with the couple that we did not answer on this call, and I look forward to improved economic conditions and talking to you next quarter. So, thank you and good evening..

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