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Good morning. My name is Jessie and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2017 Earnings 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. [Operator Instructions] Thank you. Mr. Jim Zemlyak, you may begin your conference.
Thank you, Jessie. Good morning. I am Jim Zemlyak, CFO of Stifel. I would like to welcome everyone to our conference call to discuss our fourth quarter and full year 2017 financial results.
Before we discuss our results, I would like to remind everyone that today’s call may include forward-looking statements. These statements represent the firm’s belief regarding future events that by their nature are uncertain and outside of the firm’s control. The firm’s actual results and financial condition may differ possibly materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firms’ future results, please see the description of risk factors in our current Annual Report on Form 10-K for the year ended December 2016. I would direct you to read the forward-looking disclaimers in our quarterly earnings release, particularly as it relates to our ability to successively integrate acquired companies or the branch offices and financial advisors, changes in the interest rate environment, changes in legislation and regulation. You should also read the information on the calculation of non-GAAP financial measures that is posted on the Investor Relations portion of our website at stifel.com. This audiocast is copyrighted material of Stifel Financial Corp. and may not be duplicated, reproduced or rebroadcast without our consent.
Our Chairman and Chief Executive Officer, Ron Kruszewski, will now review the firm’s results for the year. Ron?
Thanks, Jim and good morning to everyone and thank you for taking the time to listen to our fourth quarter and full year 2017 results. Earlier this morning, we issued a press release with our quarterly and annual results and we posted a slide deck which we will refer to in this call on our website.
I am particularly pleased with our results as the market and general economic conditions in 2017 provided a strong tailwind to a number of businesses and illustrated the strength of the diversified business model that we have created over the past decade through opportunistic acquisitions and hiring as well as a focus on cost discipline. We generated a number of records for the full year, allow me to state a few. Our 22nd consecutive year of record revenues was revenue in excess of $2.9 billion, up 14% over the prior year. Annual and quarterly records for revenue and profits in both operating segments, record investment banking and over $21 billion in total assets.
In terms of the fourth quarter, it was a messy quarter across the industry as financial services firms took significant charges for deferred tax asset revaluation, foreign earnings repatriation as well as deferred compensation acceleration ahead of the tax law changes which weighed on the GAAP results with many firms. We were no different as we incurred $125 million in charges in the quarter. However, when you cut through these one-time issues what is clear is the earnings power we have created at Stifel in a decent operating environment. We generated over $800 million in revenue in the quarter with record results in nearly all of our businesses, except institutional trading, which continues to face industry-wide headwinds.
As a result of our higher revenue and cost control of our comp and non-comp ratios declined to 60% and 19.9% respectively, which drove our pre-tax margins to just over 20%. Our effective tax rate for the quarter was 23.9% and is just below our targeted range for 2018, thus our quarterly EPS of $1.47 with return on common equity and return on common tangible equity of 18% and 30% respectively. While our results will vary from quarter-to-quarter based on market conditions, we believe that the fourth quarter performance is representative of our top and bottom line capabilities as we go forward into 2018 with a lower tax rate, a more business friendly regulatory environment and improved global economic growth. As such I am pleased to announce that we are raising our quarterly dividend by 20% from $0.10 per quarter to $0.12 per quarter.
Before diving into our results, I would like to review the impact of U.S. Tax Reform and the future implications. On the next slide, I summarized what we did to optimize tax reform and the related impacts on our reported results for the fourth quarter of 2017. So turning to the slide impact of tax reform, we do a walk across from our GAAP to our non-GAAP results that we had a number of non-recurring items in the quarter, which were mainly tied to changes in the tax code. Without doing anything, we estimated that tax reform along would have resulted in approximately $75 million after-tax charge with no cash savings. So what did we do, we took various steps to optimize our tax situation. The simple analysis of tax reform of an acceleration of expense into the fourth quarter of 2017 would result in cash savings due to a tax reduction of 35% versus 21% for years after 2017.
As we previously disclosed, the change in the corporate tax rate and the steps we took to optimize our tax benefits, negatively impacted our GAAP fourth quarter results. We incurred a charge of $125 million with $101 million directly related to tax reform, $10 million related to the settlement of our last major disclosed litigation matter and $14 million of acquisition related charges. The impact on our non-GAAP and GAAP EPS was illustrated on this slide. We reported a GAAP loss of $0.06 per share. This included $0.01 for the anti-dilutive shares because of the impact of a net loss, $0.72 for the acceleration of compensation, $0.52 for the re-measurement of our deferred tax asset, $0.12 for the settlement of our last disclosed litigation matter and $0.16 for acquisition related charges. Therefore in terms of our operating results, we view our non-GAAP EPS of $1.47 for the fourth quarter of 2017. The non-GAAP effective tax rate for the quarter was 23.6% of this was positively impacted by a tax benefit relating to stock based compensation. I would note that while the tax rate benefited the fourth quarter, this rate approximates what our future tax rates will be going forward.
Finally, we estimate that the various steps we took in the fourth quarter of 2017 generated cash savings in excess of $70 million. The future benefit of tax reform is significant for Stifel in both direct and indirect way. First, we estimate a reduction in our all and effective tax rate to between 25% and 27%, the result of a 14 point reduction in the corporate rate, offset by the loss of some deduction, primarily executive compensation and the deductibility of FDIC insurance expense. In addition, while indirect we see the potential for increased business and investing activity as the U.S. economy adjust to the new tax law. While we believe that the new tax law will result in economic growth and investment, we also believe there will be an increase in financing volumes, robust merger activity, as well as the shift towards more active equity management. The greatest impact of increased activity should be in the Institutional segment of our business, primarily investment banking, which happens to be where we have made significant investments over the past several years.
Our fourth quarter results speak to this potential. Going forward, we estimate that the incremental net income from the lower tax rate will add between 250 basis points and 300 basis points to our return on common equity. Included in our fourth quarter non-GAAP EPS was approximately $0.32 of tax benefit as the result of an accounting change on share based compensation. By including in our fourth quarter results, our non-GAAP effective rate was 23.9% which is just below our guidance for our 2018 effective tax rate. Consequently, we believe that using this tax rate for our non-GAAP results is more indicative of the earnings power of our business going forward and we had excluded it as we did in the first quarter when our effective tax rate was 38%. Bottom line, with $800 million in revenue and the benefits of tax reform, it is clear that the earnings power of the franchise we build has improved significantly.
The next slide illustrates both our GAAP and non-GAAP results for 2017 and the fourth quarter. Annual revenues totaled $2.9 billion, up 14% as I noted represented our 22nd consecutive year of record net revenue. Furthermore, we reported annual non-GAAP net income of $324 million, pre-tax margins of 17% and record EPS of $3.99 in 2017. Both our operating segments contributed to the strength of our annual results as each posted record revenue and pre-tax income. The primary drivers were the strength of our investment banking franchise, the growth in our bank balance sheet which drove net interest income and the increase in our fee-based revenues. The growth in these businesses coupled with our focus on expense management resulted in bottom line – improved bottom line results and increased capital generation. This not only enables us to continue to grow our balance sheet, but also to implement a quarterly dividend midway through the year.
In terms of our quarterly results, we have surpassed $800 million in quarterly net revenue for the first time after surpassing $700 million for the first time in the second quarter of this year as fourth quarter revenue increased 22% from the same period a year ago. Again, after adjusting for roughly $125 million of non-recurring charges primarily related to changes in the tax code, we generated non-GAAP pre-tax margins of 20.1%, net income of $121 million and EPS of $1.47 as both global wealth management and the institutional business generated record results. The stability provided by our asset management net interest income revenue accounted for approximately 37% of our total net revenue in the quarter and the full year. The strength of our results in the quarter resulted in a return on common equity of nearly 18% and return on tangible common equity of approximately 30%.
With that, let me go through in more detail on our business lines and segment results. Moving to the next slide, we take a closer look at our brokerage and asset management revenue. While our results in 2017 were strong, it hasn’t been about headwinds with low volatility and low volumes, institutional trading at Stifel and industry-wide has been faced with a challenging operating environment. And brokerage revenue despite the challenging environment was encouraging that both institutional equity and fixed income trading saw a pickup in activity from the third quarter of this year.
Global wealth management brokerage revenues increased both sequentially and from the fourth quarter of 2015 as we generated higher revenue in insurance, corporate debt and OTC products. For the full year, brokerage revenue and wealth management declined slightly. However, this was more the result of the ongoing shift to fee-based accounts and a decline in private client activity. As such, it’s appropriate to look at brokerage revenue, combined with asset management revenue in order to gauge the activity in our retail business.
Looking at the combined revenue for these line items, we generated approximately $350 million in the quarter, up 13% and $1.4 billion for the year, up 9%. The growth in the combined revenues in 2017 illustrates the increased contribution from fee-based accounts. Asset management revenue increased 25% from the fourth quarter of ‘16 and 20% in the full year as a result of strong growth in our client fee-based assets and to a lesser extent from the increase in fed fund rates that benefits our client cash deposits, which are held at third-party bank.
In institutional equity trading, we did see a 10% sequential improvement quarterly revenue versus the same quarter a year ago revenue was down 22% as the market activity spiked in the fourth quarter of 2016 following the election. However, the trend for this business industry-wide is challenging as it continues to be negatively impacted by the historic lows in volatility, depressed volumes and a trend toward passive investing. Therefore, despite our sequential improvement, annual institutional equity trading revenue declined 14%. The environment for institutional fixed income trading is similar to that of equity as the industry continues to face the headwinds that include low interest rates, a flattening yield curve and low volatility.
Our fourth quarter results totaled $53 million and they were up 15% sequentially, but declined 19% in the fourth quarter of ‘16. For the full year, revenues of $215 million were down 29%. Given that our business mix is more focused on rates and credits which I would note were each down approximately 29% for the full year, we are hoping that increases in the longer end of the yield curve continuing and will translate into improved trading activity. However at this timing, it’s too early to see any noticeable changes in activity levels from 2017.
Moving to the next slide, we take a closer look at investment banking revenue. We generated record investment banking revenue of $727 million for the year, as well as another record quarter of $233 million. As compared to the prior year quarter, investment banking in the fourth quarter increased 73% and surpassed our previous record set in the second quarter of this year by approximately 25%. Additionally, we achieved these record revenue levels without the benefit of any outside fee which illustrates the breadth of our franchise. We posted record advisory fees of $123 million in the quarter and more than doubled last year’s fourth quarter results. We again had another strong quarter in our FIG vertical. In fact KBW’s annual advisory fees were up 120% from the prior year and surpassed the prior record for annual advisory revenue by more than 60%.
While technology and healthcare continue to be strong verticals for us, I am also pleased that the triumph [ph] we are getting in diversified services, industrials and energy as well as the contributions made from the Eaton fund placement franchise as these are growth areas that we have focused on recently. For the full year, we generated a record $361 million in advisory revenue, up 41% from the prior year as we continue to see the benefits of our investments into this business and an improved operating environment. To put the scope of our advisory revenue into perspective, our fees in 2017 are comparable to the advisory revenue of some of the publicly traded M&A firms. Our capital raising revenue of $110 million this quarter increased 37% from the prior year quarter. Annually, we generated $366 million in underwriting, up 43%. The increase was driven by strong results in both our equity and debt underwriting businesses.
Looking at our equity underwriting revenue, increased more than 57% from the fourth quarter of 2016 as the new issue market remained strong. Our sequential revenues improved 34% as activity in FIG healthcare and technology increased from the prior quarter. For the full year, we have generated $183 million in equity underwriting revenue, up 77%, driven by strong growth in healthcare and FIG. Looking at our debt underwriting business, we generated a 55% sequential increase as a result of strong public finance activity. For the year fixed income underwriting totaled $143 million, up 29%. We have made a number of investments into our public finance business over the past few years and we are seeing the benefits of increased capacity in fourth quarter issuance, industry-wide was at record levels due impart to concerns regarding changes in the tax codes.
The next slide focus was on our growth in net interest income which increased nearly 81% from the fourth quarter of 2016 as we continue to grow our bank balance sheet and improve our net interest margin. For 2017, we target total asset growth of $2 billion and surpass that growth by $200 million reaching consolidated assets of $21.4 billion. We grew our bank average interest earning assets by nearly $700 million sequentially, which increased our firm wide average interest earning assets by 5% to approximately $17.5 billion. Along with the continued increase in our interest earning assets, our net interest margin continue to improve as a result of increases in the fed funds rate as well as the improvements in the yields on our loan portfolio. As you can see from the table on the right of the slide, the increase in the yields at both our loan book and securities portfolio was similar over the past year as both have benefited from the increase in short-term rates, while the vast majority of our interest earning assets are tied to the short end of the yield curve and improvement in the long end of the curve would benefit yields in our mortgage portfolio.
On the liability side, the average yield on deposits declined by 2 basis points sequentially, primarily as a result of the mix of deposits. You can also see the impact that the increase in short-term rates is having on the liability side as the average yields on our liabilities increased 16 basis points from the fourth quarter of last year. Last quarter, we commented that the bank and firm wide net interest margin was expected to be flat to up 5 basis points in the fourth quarter. In fact we came in at the high end of our guidance as bank NIM was up 5 basis points and firm wide net interest margin increased 4 basis points. The growth in NIM was due to improvements in mortgage and security based yields as well as additional interest accretion in our securities portfolio.
In terms of our expectation for bank and consolidated net interest margin in the first quarter of 2018 we are facing some modest headwinds that include 2 less days compared to the fourth quarter as well as a full quarter’s impact on the recent rate increase on deposits. While the full benefit of this rate increased on our assets won’t be recent to the second quarter and beyond. As such, we expect bank and consolidated net interest margins to be flat to even down 5 basis points in the first quarter of 2018. However, while we won’t give specific guidance further out in the year, we do expect our net interest margins for the full year of 2018 to improve from year end 2017 levels. Given the higher returns on capital we generated at our bank, we continue to – we expect to continue to deploy capital and grow our bank balance sheet in 2018. Our anticipated asset growth, coupled with an expanding net interest margin, should result in continued growth of our net interest income in 2018.
In the next few slides, I will touch on the quarterly results from our two primary segments. So starting with global wealth management, net revenue was up 5% in the prior quarter’s record results and increased 16% from the 2016 comparable quarter. For the full year, global wealth management revenue increased 17% to over $1.8 billion as a result of very strong growth of the bank and our asset management revenues. However, I would remind everyone that in our 2016 revenues, we had 6 months from the Sterne, Agee independent contractor business that we have sold. Excluding those revenues from 2016, our wealth management revenue would have been up 20%. The drivers of the full year growth were the same for the fourth quarter as record asset management service fees as well as record net interest income drove a 5% sequential increase in global wealth net revenue.
Brokerage revenue also improved in the quarter for the first time in two quarters as a result of higher insurance corporate debt and stock trading. However, full year brokerage declined 1% primarily the result of a migration to fee-based accounts, which I referenced earlier. Additionally, if you exclude the revenue from the Sterne business, we saw brokerage revenue would have been up approximately 6%. As a result of this shift to fee-based accounts, we continue to see strong growth in fee based assets, which was the primary driver to our asset management line. We ended the year with record fee-based assets of $88 billion, up 6% sequentially. And this compares to record total assets that were up 3% sequentially to $273 billion. As a reminder, our fee-based accounts are priced off trailing quarter end asset levels. So, the 6% increase in fee-based assets should give us a solid starting point for asset management revenues in the first quarter of 2018.
Net interest income grew 9% sequentially as net interest margin and average interest earning assets of the bank increased from third quarter levels. For the full year, net income was up 61% as we continue to put our excess capital work by growing our bank balance sheet. Given the low efficiency ratio at our bank, the growth in revenues was a positive driver of bottom line growth. Our comp ratio in the fourth quarter of 48.9% was down 400 basis points in the fourth quarter – from the fourth quarter and more than 500 basis points for the full year.
Like our full year 2016 revenue, our comp expense in 2016 also included 6 months of the Sterne business. Excluding those costs, we have decreased the 2016 comp ratio modestly. Overall, the decline in our 2017 comp ratio together with lower non-comp ratio resulted in nearly 600 basis point improvement in our pre-tax margins to 35.8% in the quarter and nearly 700 basis point improvement for the full year to 34.4%.
On the next slide, we take a closer look at Stifel Bank & Trust. Total bank assets increased to approximately $15 billion as average interest earning assets increased $700 million sequentially to $14.6 billion. Bank loans increased 2% sequentially. The growth was driven by commercial and mortgage lending that more than offset a modest decline in security-based loans. Despite a sequential decline in security-based loans, demand for these loans remained strong. Investment securities increased 3% sequentially as increases in CLOs and corporate offset modest declines in other investment securities. We continue to focus on high credit quality short duration assets that provide attractive risk adjusted returns. The increase in CLOs and corporate led to a book yield and duration of 289 basis points and 1.6 years respectfully at year end. The provision for loan loss expense in the quarter declined to approximately $5.4 million sequentially due to slower commercial loan growth in the quarter. Our allowance for loan loss as a percentage of loans increased sequentially to 96 basis points.
Overall, our credit metrics remained solid as the non-performing asset ratio was 18 basis points, which was up 3 basis points sequentially due to an increase in non-performing assets. I would note that despite the sequential increase, our non-performing asset ratio was down slightly from the fourth quarter of 2016 as we continue to focus on credit quality. Following the most recent increase in Fed Funds, we raised the yields on our deposit by an average of 10 basis points, which equates to a 40% deposit beta that was similar to the deposit beta of the prior Fed increase. Future deposit betas will be determined by competitive forces in the market, but we believe that our current deposit pricing is in line with the broker dealer insured bank sweep programs of our competitors.
Moving to the next slide, institutional business generated quarterly revenue of $332 million, up 31% from the same period a year ago and full year revenue of $1.1 billion, up 10%. This growth was achieved despite what can generously be described as a challenging trading environment. Our strategy to opportunistically add capacity and maintain staffing levels during weaker market conditions benefited us in 2017 as the investment banking environment improved meaningfully. As we have stated earlier when discussing tax reform, we believe that we are well-positioned for the improving environment and we will continue to look for growth opportunities while managing the business to the best risk-adjusted returns.
Our equities business continues to benefit from strong investment banking results and particularly strong advisory revenue. Our advisory business remains healthy going into 2018, but I would remind everyone that the fourth quarter is typically our seasonally strongest quarter and that our business is generally back half weighted. Given the strength of our fourth quarter results, I would expect a seasonal pullback in the first quarter. For equity underwriting, I’d say that our outlook is similar to our advisory business as our pipelines remain healthy and the environment for capital raising remains strong as economic growth is improving and equity market levels are at all-time highs. That said, the new issue market is episodic and seasonality can impact results, particular in the first half of the year. However, we are seeing solid activity levels in our largest vertical that again include FIG healthcare and technology. And given the diversity of our platform, we believe that we are well-positioned for pickup in activities in verticals such as energy.
Our fixed income business rebounded in the quarter following a seasonally slow third quarter as public finance revenue surged and trading improved, but does remain depressed versus the prior year levels. Debt capital raising improved significantly both sequentially and from the same period a year ago due to increased public finance activity as issuers did pull forward a number of offerings due to concerns about changes in the tax laws. For the year, our public finance group generated record revenues as Stifel ranked number one nationally in a number of senior managed negotiated new issues and our market share increased to 11.9% versus 10.5% in 2016. Given the pull forward of activity in the fourth quarter, the reduction of corporate taxes and the elimination of advanced refunding, we anticipate 2018 fixed income underwriting revenue to be lower than 2017 particularly in the first half of the year. However, improvements in the economy and/or the introduction of an infrastructure bill would be positive factors for this business.
As has been the story for all of 2017, our institutional trading revenues for both equities and fixed income were and we believe will continue to be driven by market conditions. The low volatility and low volume environment continues to weigh on trading activity. With the recent improvement in longer term rates, we have seen some improvement in fixed income activity, but it is too early to know if it’s sustainable and we would expect our first quarter 2018 results to be similar to the fourth quarter. For equity trading, industry volumes are up sequentially and versus the first quarter of 2017. However, the industry is still trying to digest the impacts of MiFID II on the business and it is too early to know what the impact will eventually be. While we feel we are well positioned to deal with the impact of MiFID, I would reiterate my prior statements that importing a European regulation to the U.S. markets is simply not a good idea.
In terms of expenses, the strength of our revenue growth help push our comp expense down sequentially to 59.7% and 59.9% for the full year. Our non-comp ratio benefited from our increased scale reaching 18.2% in the fourth quarter of ‘17 and 20.5% for the full year of ‘17 which was a decline of 330 basis points. Our record net revenue and lower expense ratios resulted in institutional operating margins of nearly 22.1% in the quarter, up 260 basis points sequentially and nearly 20% for the full year.
Moving on to our balance sheet, before I get into the specifics of our asset growth, let me comment on our capital ratios. We target Tier 1 leverage weighted capital ratios of 10% and 20% respectively. At the end of 2017, our capital ratios were 9.5% for Tier 1 leverage and 19% for Tier 1 risk-based capital. The declines in our leverage and risk-based ratios were the result of the charge that we took in advance of the tax law changes. However, with the improved economic conditions and the decline in our tax rate, we will build capital quickly. Please note we will deploy our excess capital to maximize risk-adjusted returns by growing our bank balance sheet, paying dividends, repurchasing stock and making acquisition, all with an eye towards maintaining our 10% and 20% capital ratios.
We finished the quarter at $21.4 billion in assets on our consolidated balance sheet, up roughly $900 million from the prior quarter levels of more than $2.2 billion from the end of 2016. The sequential increase in period end assets on a consolidated balance sheet was due to a more than $400 million increase in our bank balance sheet as well as growth in cash receivables and trading securities. For the full year, the growth was essentially driven by more than $2.1 billion of asset growth of the bank that included approximately $1.4 billion of loan growth and $1.3 billion of growth in the securities portfolio partially offset by more than $400 million decline in cash. We have targeted as I have said $2 billion in asset growth as our results were generally in line with the expectations. As we look out to 2018, we expect to continue to fund our bank growth with capital generated at the bank. However, we not only have a larger balance sheet and higher NIM than we did last year. We have additional excess capital available from our lower corporate tax rate. Consequently, we would expect asset growth to be between $2 billion and $2.5 billion in 2018.
Now, I would again reiterate that our growth on a quarterly basis will not be linear and we will always look to invest with the best risk adjusted return. Book value of $38.26 declined by $2.41 in the quarter. This was the result of a previously disclosed charge we took in the quarter as well as a $2.5 million increase in the basic share count that resulted from the acceleration and issuance of deferred shares. We did not repurchase any shares during the quarter and we currently have just over 7 million shares remaining in our existing authorization. In August, we announced a regular quarterly dividend with the goal of growing the dividend annually based on continued growth in our bottom line. As a result of the expected benefit of the lower corporate tax rate and strength of our results, as I have already noted, we are increasing our quarterly dividend by 20% to $0.12 per quarter.
Next, we move on to the reconciliation of our GAAP and non-GAAP results. On Slide 16, we review our expenses for the quarter and the impact in our non-GAAP adjustment. As I have commented a number of times in the presentation, the fourth quarter was impacted by number of after-tax charges we took primarily related to changes in the tax code, which totaled $101 million. Additionally, we incurred approximately $14 million in merger-related charges, primarily related to acquisition-related compensation included Barclays and severance.
Lastly, we settled our final disclosed litigation matter during the quarter and incurred nearly $10 million in litigation-related charges. Despite the increased charges in the fourth quarter, we have achieved our goal of managing down non-GAAP expenses during the past 2 years to be more in line with GAAP results. With our large legacy non-GAAP charges titled litigation and mergers behind us, we believe that non-GAAP charges going forward will be relatively minimal.
In terms of our non-GAAP expense results, they were better than consensus expectation. Our comp ratio of 60% continued to decline and was below the consensus estimate as we continue to generate revenue growth in our advisory business in our bank. For the full year our comp ratio was 61.2%, which was in the lower half of our full year guidance of 60.5% to 62.5%. As we discussed earlier this month, we expect our 2018 comp ratio to be in the range of 59% to 61%. The decline in our annual guidance was primarily the result of the revenue trends in our business as well as a modest benefit we received in the acceleration of some deferred comp costs. That being said, I would expect the first quarter to be in the higher end of the range due to the typical seasonal item.
Operating expenses excluding the loan loss provision were a little more than $154 million, which was near than midpoint of our guidance of $151 million to $158 million. The sequential increase was due primarily to seasonality. For the full year, our non-comp ratio declined 240 basis points to 21.7% as operating expenses excluding the loan loss provisions were up just $2 million from the prior year. For the first quarter of 2018, we are increasing our quarterly operating expense guidance to $154 million to $161 million excluding the provision for loan losses. The increase is due to a few factors including a change in the accounting related to revenue recognition for certain investment banking expenses that had previously been categorized as contra revenue items as well as some increased technology spending. Overall, we will continue to focus on expense discipline. We will continue to update our guidance for this line item quarterly. Lastly in terms of share count, fully diluted share count came in above our forecast, increased – had increased by nearly 1.4 million shares during the quarter as a higher average share price increased the dilutive impact of unvested grants. Barring any share repurchases or material fluctuations in our share price we would expect our fully diluted share count to be approximately 82.9 million shares by the end of the first quarter of 2018.
Next I want to illustrate the growth we have achieved over the last decade. Last quarter, I used the similar slide to illustrate on our ability to execute on our goal since our last substantial acquisition. The improvement in our operating metrics over the past 2 years has been a result of executing on a longer term strategy of opportunistic acquisitions, solid organic growth, cost discipline and focus on shareholder value. Given the number of acquisitions we have done since I have been CEO and a general bias in the market towards short-term results, I think the progress we have made is sometimes overlooked by investors. So on this slide we went back and compared the business today to where we were 10 years ago and the numbers on this slide illustrates the magnitude of growth we have experienced. Let me illustrate, our 2017 net revenue is up nearly 4x what it was in 2007, global wealth management revenue has increased nearly $1.4 billion and nearly $1 billion excluding the bank growth. Institutional revenues are up more than $800 million, in fact investment banking revenue which came in at $727 million in 2017 approximates total firm revenue in 2007 as advisor revenue has increased 5x and capital raising rate revenue is up nearly 4x.
The mix of revenue between institutional wealth management has stayed relatively similar with 60% wealth management, 40% institutional. However, the percentage of revenue contribution within each segment has shifted meaningfully and underscores the shift away from brokerage revenue in our business. In wealth management, asset management net interest income account for 61% of revenue versus 26% in 2007, while brokerage revenues declined to 36% from 65%. In the institutional group investment banking now accounts for 62% of revenue versus 42% in 2007 while brokerage declined to 37% from 58% in 2007. The growth in revenue has been achieved while improving our operating leverage as we brought our comp ratio down 350 basis points and improve our pretax margins to more than 17%. This has resulted in a nearly 400% improvement in our net income to common shareholders. We have increased the size of our balance sheet by nearly $20 billion during this timeframe, while keeping our total leverage ratio at just under 8x. We have added more productive advisors to our platform as 132% increase in the number of advisors corresponds to 360% increase in client assets to $273 billion. Lastly, the growth in our business has been rewarded and our stock prices, our shares are up more than 180% and our market cap increased approximately 450% to $4.5 billion.
As I said last quarter, while I am pleased with these results and the hard work that my colleagues have put into achieve them, we are by no means finished. Stifel is in a much stronger position as a company than we were just a few years ago. And while we have focused more recently in maximizing the efficiencies in our existing business, we continue to see opportunities for growth within the construct of managing our capital with a focus on the best risk adjusted return. We will continue to look for additional capability from services that make us more relevant to our client. Given our performance over the past few years, the improvements in global economic outlook and a tailwind from lower corporate tax rate, I am optimistic about the outlook for our business in 2018.
Before I open the call for questions, I want to take this time to welcome the team we acquired from Ziegler Wealth Management. We expect this deal to close by the end of the first quarter which will add approximately 5 billion in client assets and more than 50 financial advisors to our platform.
And with that operator, I will now take questions.
[Operator Instructions] Your first question comes from the line of Chris Harris from Wells Fargo. Please go ahead.
Thanks. Hey, Ron.
Hi, Chris.
You mentioned some of the benefits of tax reform and I am wondering does that reform change your risk appetite at all with respect to the bank or your thought process about M&A?
Just in relative terms I mean it’s not going to certainly the change in the tax rate is not going to increase our risk appetite. I don’t know how those would be – would be relevant. In terms of M&A, we – all things been relative, it’s relative valuation. So many, many sellers also recognized tax reform and increased their expectation. So, I think most of those factors are just get immediately built into the market.
Okay. I had a question, a bigger picture type question for wealth management, private client business and the industry is going through lot of change, just wondering if you could kind of elaborate what Stifel’s value proposition is in private client and more specifically, what do advisors really like about Stifel’s platform versus perhaps some of your peers?
Well, first of all, I believe the value proposition is that – is that advised matters, that technology – as technology gets deployed and allows clients to better understand and organize there well, which is what we are seeing with many of the fintechs. What comes out of that is more questions, more need for advices, clients understand and then begin to ask what am I supposed to do with the state planning, asset allocation and a number of things that maybe in the path you never saw. So I believe the advent of technology enhances the advised model at Stifel and then elsewhere. And as it relates to Stifel, we have always had an entrepreneurial advisor first culture that respects the relationship between the advisor and their client. And that has served us well above in terms of retention and recruiting. And I also believe serves our clients well and that there the best service is delivered in a consultative manner between an advisor and their clients. So I think we are well positioned and I am optimistic about the advice business. And I also believe that with the advent of tax reform and a number of things that are going to occur that active management is going to begin to swing in terms of asset gathering over passive. And so the combination of all those things paints a good picture for the wealth management business at Stifel, I am really well positioned to compete.
Okay. Thank you.
The next question comes from the line of Steven Chubak from Nomura Instinet. Please go ahead.
Hi, good morning, Ron.
Good morning, Steve.
So wanted to start off on a question on the expense side, you highlighted the 59% to 61% comp guidance, I am just wondering what revenue environment is contemplated as part of that guidance maybe how much flex you have to manage that in the event of a revenue slowdown. And just as one follow-up, just on the non-comp side, it looks like your guidance range for 1Q if I were to annualize that essentially implies sort of flattish non-comps for the full year. And I am wondering if you could speak to what sort of non-comp inflation should we maybe be contemplating for this year relative to 2017?
Well, let me take your last question first. I am not sure I follow your math. I think I will stick with what our guidance was going forward. We will update it every quarter. We upped our guidance a little bit for the first quarter. Again, that the big fluctuations in that are litigation and loan loss provisions that we don’t put in that. I would note that our most significant litigation items at this point are behind us. Loan loss provision is obviously tied to loan origination. But I mean I think the guidance is what it is, Steve and I think it’s up not flat, I think it’s up a little bit, but maybe we can take that offline. With respect to the comp ratio, look 59% to 61% is a broad range, when you think about $3 billion in revenue. And so I think that within that range, if revenues would come in lower, we would be at the higher end of that range and if revenues continue to build in an improved economic environment, I think we would tend to the lower end of that range. That’s why we give a range, but we will manage within that range as we have in the past. We have taken our comp ratio over 10 years from 64 plus to now 59% to 61%.
Got it. Thanks for that, Ron. And it was immediately us annualizing the midpoint of 632, but happy to talk to Joel and Jim offline on that.
Fair enough.
On the capital side, you spoke of plans to just build capital towards that 10% leverage target or essentially replenish that shortfall all while achieving bank growth of 2% to 2.5% and even alluded to steady dividend increases. You already addressed the question on M&A, I am just wondering given where your stock is trading today whether you have any appetite actually reinitiate or increase share repurchase just given the discount where you are trading relative to the market?
Historically we are opportunistic on that and we look to me buying the stock and doing a dividend and doing an acquisition and increasing in the balance sheet are all relative decisions that we make based on market conditions. All of those levers are available to us and we are not committing to anyone other than the fact that we did raise our dividend 20%. But look we will, if you look we buyback stock. We bought back a lot of stock at an average of about $40 and we will continue to be opportunistic with an eye toward maintaining 10% and 20% leverage and risk-based as we return capital or invest capital under what we think is the best way to increase shareholder value. There is no way I can predict forward, which of those levers will provide the best value for our shareholders.
Fair enough. And one final one for me just at Stifel Bank we did see nice growth in the quarter. I was hoping you could update us on how much off balance sheet cash you still have available to sweep into the bank and what reinvestment yields are you currently earning on that cash today?
Well, I mean, as the interest rates have come up, the fees we get from our third-party bank have also increased. I am not sure that I have that number at my fingertips. In terms of additional cash balances, approximately I think it’s in the press release, but it’s approximately $4 billionish today that fluctuates too as we grow the business. So, looking forward to next year, certainly we have the funding.
Got it. That’s it from me. Thanks for taking my questions.
Your next question comes from the line of Conor Fitzgerald from Goldman Sachs. Please go ahead.
Good morning. Just wanted to ask on how the dialogue you are having with clients on the investment banking side of your business has changed post the passage of tax reform. Could you give a sense there is more confidence in people deals or the body language has changed from some of your counterparts?
You mean clients that we are talking to?
Yes, clients exactly.
Yes, for sure. I mean, for sure, the tax reform is like taking the U.S. economy and tossing in the air and adapted filters back down in accordance with where the tax reform points you. And so just that general description of money and motion is very positive for financial intermediaries both bank and investment banks and that’s what we are seeing. Some companies have too much debt, they can’t deduct all the debt, but you have to raise equity. Maybe what I am seeing more than anything in terms of confidence in discussions is a willingness and a thought process to make investment in the U.S. with now corporate tax rates that are competitive for instance with England both at 20% or 21%. That’s where I see. And I see as investment occurs in the U.S. that increases the potential for the GDP more investment. It’s just a circular thing that’s going to do it does occur. And so we see a lot of discussions surrounding financing investment, restructuring balance sheets and making investments also raise the competitive bar. A number of companies are looking at this and thinking they have to make investments to remain competitive. So, I am optimistic that the economic growth that will occur simply by making the U.S. tax code more competitive in the world is going to be I believe even greater than what I am reading many economists are talking about in the improvement in GDP I actually think it will be greater than that.
That’s helpful color. Thanks. And then just circling back to the non-comp guidance, it hasn’t always been the case, but usually seasonally 1Q is the lowest from a non-comp perspective or among the lowest quarters, is there seasonality in your non-comp expense base we should be thinking about?
I think I do believe it goes some of the non-comp follow-up revenue obviously and so it’s closely T&E and what happens as you wind up years. I mean, our fourth quarter is always seasonally high as the first quarter tends to be seasonally lowest. If I actually knew the exact reason that would be a lot smarter than I am, I don’t know other than pull forward of expenses into the fourth quarter as people have finalized their years and that tends to pull away from the first quarter, but in the scheme of it, all the numbers we are talking about that’s pretty minimal.
Alright, that’s helpful. And then just had a couple of cleanups, does your tax rate guidance incorporate any benefit of share vesting?
No, in terms of what you took it will be paid in capital, it does not.
Okay, that’s helpful. And then sorry just few more tie-up ones, I know you mentioned it was modest, but could you quantify how much of the pull forward for the comp expense into this quarter was? And then on top of that, how helpful is the accounting change you are seeing were contra revenues in the investment banking business are flowing into revenue and non-comp expenses now, how much of a downward pressure is that putting in your comp ratio as well?
Well, first of all, I don’t really – within our comp ratio, it is minimal and it’s within the 59% to 61%. So, it’s not – we will pay over $1.8 billion in comp and it’s not material to that number as it relates to what we did in non-comp. I am not really sure we are still looking at the accounting impact of the comp for revenue, some of that hopefully can be down the way we do our contracts. I find it little disconcerting that the account and things that we have a legal bill and a big underwriting that’s our run-rate non-comp OpEx, but we are looking at that. So, I can’t quantify that for you today, but when we come out with our first quarter, we will tell you what we thought that was to give you some run-rate basis and then the amount of that as it relates to volume, it will sort of be like loan loss provisions that those expenses will go up as we do business. It’s kind of a gross up of revenue versus expenses. I do want to comment a little bit on the share-based thing since you brought it up. And it is important and I have looked at it with some of the people sad in terms of our earnings, our adjusted earnings and whether or not the tax benefit that we achieved this year in share-based comp this quarter, whether that’s core or non-core. And the only thing I want to say is that our tax rate for the quarter approximates what’s going to be going forward and that’s why all things been equal if we had the same benefit our tax rate would be in the team not 25%. So going forward without any benefit of stock-based comp, our tax rate is in that 25% to 27% range and that’s meaningful. And I just don’t want that to be lost on the earnings power, because Stifel is one of the highest incremental taxpayers in the business and so we have a real benefit with tax reform here.
That’s helpful and understood. And I am sorry, I just didn’t want to put words in your mouth, but it sounds like the accounting change was not a major part of your thinking when you lowered your compensation ratio range?
It’s nothing to do with it.
Great. Thank you.
Minimal to do with it, okay, but nothing is always a strong word.
[Operator Instructions] Your next question comes from the line of Devin Ryan from JMP Securities. Please go ahead.
Hey, thanks. Good morning, Ron. How are you?
Good morning, Devin.
Maybe a follow-up here just on some of your commentary on wealth management recruiting. And you are trying to get a sense of whether maybe there is a specific opportunity right now to go after some of the larger firms that are still in the broker protocol and then just trying to think how this may play out and if you think that others might leave, how do you see that kind of impacting recruiting over time and then maybe your appetite for M&A to maybe expand the footprint that way? Just trying to think about how broker protocol might be impacting?
Well, we have always – we have always favored doing strategic acquisitions over recruiting has always been our favorite way of growing for a variety of reasons, not including just that the pure retentive aspects of acquisition. So, we will do this. As it relates to the recruiting environment, we obviously talked about and significantly slowed down our recruiting in anticipation of the DOL. We have revamped that backup I think that our recruiting pipeline is healthy. As it relates to broker protocol, I think that’s one of the big questions out there. I personally dismayed that the large firms have pulled out of protocol. It is strategic I understand what they are doing. But I think the industry is going to react, because we can’t get in a situation or limiting client choice if you give an advisor, you should be able to know where your advisor went. And while I think that there is going to be maybe a little bit of increased litigation over recruiting, I think in the end, the industry is going to deal with this. We are not going to tell clients that they don’t have a choice where they want to do business. That’s certainly my belief. So net net net, I think that protocol is a negative, where good markets tend to be negative to recruiting too. I will just tell you people are very busy in good markets and that tends to be a dampening effect on recruiting why leave when things are really good or even put that in the mix of your client discussions. But as I look forward, we are going to – wealth management is core to our business and we are going to invest and continue to invest as we have for the last 20 years that hasn’t changed.
Got it. Okay, that’s great color. Maybe just to follow-up on one point, I think you mentioned the DOL and there is obviously report to the SEC moving forward on its own, fiduciary standard, we have seen that the SEC’s approach to fiduciary standard from much more of a business friendly perspective than the DOL. And so I am just interested in whether you have any perspective or expectation around whether that itself could change behavior whether it’s around recruiting or the relationship between advisors and clients or maybe even own expenses?
Well, certainly on expenses, the fully implemented DOL rule through the BICE and all the recordkeeping was a tremendous amount of expense and would be if we – the industry had to comply with. That I – that would have been – that would have changed our viewpoint on forward OpEx guidance that we had to be rolling some of those record-keeping it was really a lot. I think that I think I wouldn’t call it as much business friendly approach that the SEC is taking as that I would, it’s preserving client choice. I think that – I think the SEC recognizes that pay as you go versus straight fee benefit clients in certain fixed situations and you shouldn’t favor one business model over another. Look at the fact that one of things people won’t talk about in the tax laws is frankly the non-deductibility of fees for certain clients and that certainly should factor into any what’s in the best interest of client’s viewpoint as to what’s going on. So I think net-net what comes out of the whole DOL discussion will be a better standard which preserves client’s choice and that actually takes away some of the confusion about advisors and full-service investment banks like ours and so I am optimistic where we are today versus say 1.5 year ago where I wasn’t sure where this thing was going to end up.
Yes, got it, okay. I appreciate that color. And then maybe switching gears just in the public finance business, clearly we saw the industry volumes in the fourth quarter, so kind of huge numbers and so makes sense there was kind of that pull forward ahead of tax reform and the uncertainty, early days in 2018 I am just curious to get some perspective around to how pronounced do you think that pull forward was or whether this is going to take a couple of quarters to get back to something more normal or just what your expectation is for that business just given how strong it was and some of the kind of the unusual circumstances that may be helped a bit in the fourth quarter?
Yes. Look, I think first of all, our public finance business historically is back half way, it always has been and just goes to one of our biggest practices is K-12 school districts and they just get their path to resolutions in January for deals that then occur in the second half. The first quarter is always typically slower over time. And I think that that’s the case with us and we did have some pull forward. But look that reflects the state of the union to that. I fully expect the next big initiative is going to be an infrastructure bill and an infrastructure bill that’s going to be relatively large. Congress can get it back together and get that passed, that’s going to be very positive for our public finance business.
Great, okay. Maybe just last one here, the interest margin commentary, obviously a lot of moving parts and I understand the comment on the near-term, but longer term I know the expectations you have interest rates and you also have you probably still some remixing, can you just remind us on where you think we are in kind of the bank, we are mixing more towards loans, now that loans are close to half of the overall balance sheet, how much more would you be comfortable going assuming there are opportunities to grow with a good risk adjusted return there?
Well, we will favor loans at the appropriate risk-adjusted spreads. Those spreads are going to be wider NIM by definition is just it’s just less a credit assumption. But we have said and I will continue to say that an improved economic environment so long as the market is providing adequate returns to the lenders which is us in this particular case, we will all will look at remixing loans to a greater share of our assets than 50-50 today. And we believe if we do our job that itself will improve our NIM.
Alright, understood. Thanks Ron and congrats on the nice end of the year.
Thank you.
There are no further questions at this time. I will turn the call back over to the presenters.
Well, I would – it was a great year in 2017. I would just reiterate that as we have said we have built the firm to be more relevant and to be a firm that can take advantage of improving economic conditions, couple that with global growth what I think will be pendulum swim back more towards active at least stopping that pendulum to passive in an overall economic environment, I am optimistic about where we are positioned as a firm and look forward to a good year in 2018 and talking to all of you after the first quarter of 2018. Thank you for your time and have a great day.
This concludes today’s conference call. You may now disconnect.