Piper Sandler Companies (PIPR) 2005 Q1 法說會逐字稿

Welcome to the Piper Jaffray conference call to review first quarter 2005 financial results. My name is Marcia, and I will be your facilitator today. (OPERATOR INSTRUCTIONS). The Company has asked that I remind you that statements on this call that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements that involve inherent risk and uncertainty.

Factors that could cause actual results to differ materially from those anticipated are identified in the Company's reports on file with the SEC, which are available on the Company's web site at www.piperjaffray.com, and on the SEC's web site at www.sec.gov.

And now, I would now like to turn the call over to Mr. Andrew Duff. Mr. Duff, you may begin your call.

Good morning, and thank you for joining us this morning. Let me start by saying that we are very disappointed in our first quarter results. Our performance fell well below expectations, ours and I'm sure our shareholders.

We will cover three topics on today's call. First, I will provide context for the results. Second, Sandy will review the detailed financial results for the quarter. Third, I will discuss the strategic course we are pursuing to address our performance.

First, some context for the quarter's results. Overall, within Capital Markets, our institutional sales and trading businesses are challenged. However, our investment banking businesses performed well against the market, albeit with less underwriting activity. We believe Private Client Services is showing measured progress in executing the primary advisory strategy.

Let me comment on Capital Markets, starting with institutional sales and trading, which was largely the cause of the shortfall in the first quarter compared to the first quarter of 2004. Like many middle market firms, our institutional sales and trading revenues is derived largely from providing clients a traditional set of products like cash equities and corporate bonds. This traditional platform has always been highly susceptible to the market cycle, and it is now also being impacted by structural market changes.

Compared to one year ago, rising interest rates reduced the volume of certain fixed income products, particularly agent fees, which reduced revenue. We believe we also are experiencing the effects of industry changes taking hold in both the fixed income and equity institutional sales and trading businesses. These changes include, increased price transparency in the corporate bond market and a growth of electronic trading. The effect of these changes has been to create competitive downward pressure on trading margin in the case of bonds, and net commissions in the case of equities.

Let me be more specific. In an effort to increase competitive pricing in the corporate bond market, the NASD began phasing in electronic trade reporting and compliance engine, or TRACE, over the last 2.5 years. TRACE provides public trade data on U.S. corporate bond trades on an almost real-time basis.

The recent phase was implemented in February of 2005, and expanded trade reporting to the remainder of corporate bonds for an approximately an additional 12,000 issues, and reduced the reporting time for most bond trades from 45 minutes to 30. The high-yield bonds in which we have a proprietary research, and which represent a large portion of our overall corporate bond sales and trading, were included in this phase. From the end of the fourth quarter of 2004 to the end of the first quarter of 2005, we have experienced a decline in the trading margins of these high-yield bonds of approximately 30%.

In the cash equities business, excluding activity from our electronic trading business, our commissionable trade volume increased 10% in the first quarter of 2005 compared to the first quarter of 2004. However, the net commission per share declined 27%, resulting in a year-over-year decline in revenue. Just since the fourth quarter we experienced a decline in net commission per share of 20%.

We did not anticipate the magnitude of the effect of the recent phase of TRACE on corporate bond trading margin. Likewise, the continued downward pressure on net commissions in the cash equity business in the first quarter was greater than we anticipated. However, the general transition to electronic trading drove our acquisition of Vie Securities last year.

These structural changes are ultimately good for investors, as transaction costs are driven lower. However, the changes highlight the fact that the traditional model for sales and trading is under pressure as the institutional investors' demand reduce transaction costs. We are reviewing our business thoroughly in this new environments, and we will reallocate resources as it is appropriate. I will say more about that later.

Now, I will comment on the Investment Banking businesses, Public Finance, Equity Underwriting, and M&A. These businesses generally performed well against the market, and we maintained or improved our competitive position.

Public Finance performance in our stronghold of the upper Midwest was on par with the industry, which was down 14% year-over-year based on the number of issues. The number of issues we completed in the upper Midwest also was down 14% year-over-year. We maintained our leading rank in this market in terms of the number of completed transactions. We were less active on a national basis.

Year-over-year on a national basis the number of issues declined 3%, and the number of our issues declined 16.

For equity offerings we ranked 13th nationally, based on the number of completed transactions. This position was consistent with our rank for the full year of 2004, and up from 15th in the first quarter of 2004. Compared to one year ago the number of equity offerings that Piper Jaffray completed dropped 30%, while the overall market dropped 36. As a result, we improved our market share based on economic fees.

In addition, we improved the number of our lead manager mandates. We completed 19 transactions in the quarter, of which we lead managed nine deals, or almost half. During the same quarter last year we completed 27 transactions, and lead managed 6 deals, or 22% of the total.

M&A revenues were stronger relative to the first and fourth quarters last year, due to a higher aggregate enterprise value of completed transactions. Compared to one year ago the aggregate value of transactions that Piper Jaffray completed increased 65%, while the overall market increased 44%.

Our equity backlog stands at eight transactions. We are lead manager on 3 of them. The backlog is similar to what it was at the time of our fourth-quarter conference call at the end of January. Our M&A pipeline looks reasonably strong and has built slightly going into the second quarter.

Let me turn to Private Client Services. We continue to advance our primary advisory strategy, and several metrics are indicating measured progress. We are working to improve our existing financial advisers' productivity, which is largely driven by FAs advancing an advisory approach to their business. Despite lower total revenues for the quarter, net revenue per financial adviser and assets under management per financial adviser are in line with the full year of 2004.

In addition, assets and fee-based accounts continue to grow, and currently stand at approximately 16% of clients' assets, up from 13% approximately one year ago. We need to transition FAs more quickly from a largely transactional model. We are providing tools and resources to financial advisers to enable them to transform their business to a comprehensive advisory approach. The total number of financial advisers at the end of the quarter was 866, up from 860 at the end of 2004, and was the third consecutive quarterly increase. Lower attrition and additional hiring of developed financial advisers drove the increase.

In 2004, we added 80 professionals for a developing financial advisory program. We have a similarly aggressive plan for 2005. Recruiting of experienced financial advisers was very modest in 2004, as we came out of the spinoff with essentially no pipeline. Recruiting activity is picking up, however, and we are on track with our 2005 plan.

We believe we have the right strategy in Private Client Services, and a very competitive platform of products and services for our clients. We estimate that returning this business to competitive performance will take three to five years. We are one year into executing that strategy, and we are on track with our plan.

In summary, the Institutional Sales and Trading businesses are facing fundamental challenges. Our Investment Banking franchises performed well against the market. Private Client Services is making measured progress.

With that backdrop, Sandy is going to cover the detailed financial results of the first quarter. Sandy?

First, I will review the consolidated results for the quarter, and then I will provide details on the segment results.

For the first quarter of 2005, Piper Jaffray reported net revenues of 179.1 million, down 14.5% from the first quarter of 2004, and down 8% from the fourth quarter of 2004. Net income was 7.3 million, or $0.38 per diluted share. Net income was down 47% compared to the first quarter of 2004, and down 38% versus the fourth quarter of 2004. And earnings per share were down by similar percentages.

Lower principal transaction revenue and Investment Banking revenue were the main contributors to the reduced revenue and bottom-line results in the first quarter versus the comparable year ago period and the preceding quarter.

For the first quarter, non-interest expenses were 167.6 million, down 10.5% from the first quarter of 2004. Compensation expense was 109.4 million, down 15.7% from the prior year period, due to lower variable compensation, consistent with the decline in net revenue and profitability.

Non-compensation expenses were up 1.2% compared to the same period last year, due to two factors. First, higher outside services costs resulting from the outsourcing of certain technology operations; and second, the amortization expense of intangible assets that began to be recorded in late 2004 in conjunction with the acquisition of our new algorithmic and program trading business, or APT.

Compared to the fourth quarter of 2004, compensation expense declined 6.3%, and non-compensation expense declined 2.3%. All non-compensation expense categories declined, except for floor brokerage and clearance costs, which rose due to the increased activity from the APT business. We expect this line item to continue to increase as this business ramps up.

Although we continue to look for ways to improve the efficiency of our business, such as outsourcing noncore operations, topline growth will be the key driver to leverage the non-compensation base.

The pretax operating margin for the quarter was 6.4%, down from the margin of 10.6% in the first quarter last year, and down from 9.3% in the fourth quarter of 2004. The decline in pretax margin was due to the sharp falloff in revenue and the relatively fixed nature of non-compensation expenses.

The tax rate for the quarter was 36.1%, slightly below the full year rate in 2004 of 36.8%. The lower rates were driven by two factors. First, a higher proportion of tax-exempt municipal interest income to total income; and secondly, the tax effect of contributing appreciated securities to the Piper Jaffray Foundation.

Finally, during the quarter we repurchased 325,000 shares of our outstanding common stock at an average price of $40.09. The remaining authorization under the share repurchase program is for repurchase of up to 975,000 shares for a maximum aggregate purchase price of $52 million.

Now, I will turn to our segment results. Before reviewing the details, I would like to note that we have reclassified certain expenses between segments, and therefore restated our segment results beginning in the first quarter. This reclassification followed the conclusion in early 2005 of a lengthy study of costs included in Corporate Support and Other to determine how those costs related to and were driven by business activities conducted in Capital Markets and Private Client Services. As a result of this study, certain expenses, as such as human resources, finance, and other corporate administration have been reclassified between segments. Corporate Support and Other now consists solely of the results of our Private Equity business, our long-term financing costs, and our public company costs.

Internally, we are now managing and allocating resources to our business segments based upon on these reclassified results. We have restated segment income for each of the four quarters of 2004 and the full year of 2003. A supplemental schedule showing the restatement figures is included at the end of the earnings release for the first quarter. The restatement did not affect the first aggregate financial results for these periods.

Now, I will cover the Capital Markets results. Capital Markets recorded 91.9 million in net revenue for the quarter, down 20.1 million, or 17.9%, from the prior year. Segment pretax operating income for the quarter was 11.5 million, down 39% compared to the first quarter of 2004. Lower institutional sales and trading revenue largely led to the decline, due to the factors that Andrew cited earlier.

Total Investment Banking revenue was 48.5 million, down 6.2 million or 11.4%, compared to the first quarter of 2004. Fixed income underwriting revenue was lower compared to the first quarter of 2004 due to lower taxable underwriting and completing fewer public financed transactions.

Equity Underwriting declined 6.6 million, or 24.4%, compared to a strong first quarter in the prior year. Partially offsetting the decline in underwriting revenue were stronger mergers and acquisitions revenue due to a greater enterprise value of completed transactions.

Segment operating expense for the quarter was 80.4 million, a decrease of 12.7 million, or 13.7%, from the same period a year ago. The decline in expense was primarily due to lower variable compensation expense, due to lower net revenue and profitability. Lower compensation was partially offset by increased costs associated with ramping up the APT business.

For the quarter, segment pretax operating margin was 12.5%, down from 16.9% in the first quarter of last year, and 15.4% for the fourth quarter of 2004. The decline compared to both periods was largely due to lower revenues, as just described, and increased costs associated with the APT business.

Let me move to the Private Client Services segment. Private Client Services recorded net revenues of 89.2 million for the quarter, down 7.2 million, or 7.5%, compared to a strong first quarter of 2004. Segment pretax operating income was 4.8 million, down 31.5% from the first quarter of 2004.

Compared to the first quarter of 2004, the revenues decline was driven by two factors, less trading by private clients, and approximately 5% fewer seasoned financial advisers year-over-year. In the first half of 2004 we experienced some anticipated attrition related to our new financial adviser compensation plan. These declines were offset in part by a 16.5% increase in managed account fees, driven by existing clients moving into fee-based accounts and new clients opening fee-based accounts.

Segment operating expense was 84.4 million for the quarter, a decline of 5 million, or 5.6%, from the first quarter of last year. The decline was primarily attributable to lower variable compensation expense. Segment pretax operating margin was 5.4%, down from 7.3% last year and 6.4% in the fourth quarter of 2004. The decline in both periods was mainly due to lower net revenue and a relatively fixed nature of non-compensation expense.

Finally, a few comments on Corporate Support and Other. Corporate Support and Other pretax operating loss was 3.7 million for the first quarter, an increase of 1 million over the first quarter of 2004, due to lower gains on private equity investments and a higher interest rate on our outstanding subordinated debt.

Now, I will turn the call back to Andrew for some final remarks.

Let me address our challenges and plans to improve performance. In a competitive industry with large-scale players, we have to select niches where we can be experts, differentiate ourselves with our clients, achieve appropriate profitability and sustained competitive growth. By carving out niches, we believe we can create competitive advantages that will sustain us through market cycles and better enable us to weather structural market changes. We will build on our areas of strength, and we will seek out new areas of opportunity.

First, we continue to review our Institutional Sales and Trading business thoroughly in the context of the environment I outlined earlier. In regard to electronic trading, we added new capabilities to respond to client demand. In November of 2004 we added an Algorithmic and Program Trading capability for equity securities. We are encouraged by the early client response to the product. During the quarter, we added 22 new clients.

At the end of the first quarter, we also joined TradeWeb, and now have an electronic trading capability for our fixed income corporate bond business.

Quality sales, trading and research is a critical part of our underwriting value proposition. And we will continue to provide a high level of support for our underwriting business. However, we will reallocate resources to areas of greater opportunity, which include providing a more comprehensive set of services to our clients who most highly value them.

Second, we are evaluating a range of alternatives to leverage our strong, differentiated Investment Banking franchises. For example, we have developed strong relationships with our middle market Investment Banking clients. We currently focus largely on providing either M&A expertise or raising capital for these clients. We are evaluating providing additional capabilities to this client base, such as credit products.

As another example, we have a very established public finance underwriting franchise. A couple of years ago, we began to offer interest rate derivatives to our public entity issuers, and this product now accounts for over 10% of total public finance revenues. We are evaluating additional product and geographic expansion to leverage this solid platform. We intend to carefully evaluate these alternatives, as well as others.

As we look at adding new capabilities, we may build them internally, acquire them, or partner with other firms to provide them. We clearly understand where our challenges lie. We are working through these strategic decisions with appropriate urgency, but in a thoughtful, disciplined manner.

I will end my comments with a brief outlook for the rest of the year. We anticipate that systemic changes in the sales and trading businesses will continue to keep pressure on revenues over the near term. If the markets are constructive, we expect our Investment Banking franchises to record competitive performance, and Private Client Services to continue to make measured progress.

Markets have been more challenging recently, so we are more cautious.

That concludes our formal remarks. Now, if you would, operator, let's please open it up for questions.

(OPERATOR INSTRUCTIONS) Todd Halky, with Ballyogny (ph).

A question on the equities side of the business from an illustrative perspective. A 20% sequential decline in the average commission rate per share is pretty dramatic. And it is something I don't think we have seen anywhere else in that short of period of time.

So I just kind of wanted to see -- is there something -- is that a mix, also, with regards to the electronic execution of new shares traded? And kind of what is the mix between electronic versus the traditional segment?

And then, if you think that that trend is going to continue, and you said that you think those changes will continue to pressure revenues over the near term, what are you going to do on the cost side to re-establish margins in that? I don't think you would be comfortable with continuing to operate the business in the margins that you put up this quarter. So if you could just kind of highlight that?

Let me make a couple of comments, and then Andrew can follow up. Just to be clear, the figures we were reporting did not include the results of the algorithmic trading. It was primarily the high touch business that we were quoting. And we have been in recent quarters trading more with our tier one clients. And we are actually using our capital a little bit more to drive business there. So we did have quite an increase in the volume, quarter-over-quarter and year-over-year.

And then let me turn it over to Andrew to make some comments about overall trends in the institutional business.

A couple of additional comments, Todd -- actually, I do believe that if you look at closely at some of the other reporting firms, you do see this trend elsewhere. The magnitude is different depending on the platform and how diversified your products are.

As you suggested, and I did previously in my comments, the magnitude of that decline will be addressed at our firm. Historically, the margins in these businesses -- the trading, the net commissions, have trended down but in more of a stair step fashion where you could have a drop, and did it will re-plateau. And we have continually adjusted our resources appropriately.

Okay, so when you say you are committing more capital also did you guys have your trading losses dramatically higher than they have been in the past? I mean, this is -- on a sequential basis, it is somewhat of a startling number.

Yes, that did contribute to decline in net commissions per share. We are quoting growth less trading losses -- is the net that we are quoting.

Okay, so is there any -- I hate to hammer on this point, but it is kind of important. You are seeing that your trading losses are increasing. Do you believe that that is imperative to grow volume -- to increase the amount of capital that you are putting on the desk? Or is the any chance that you might start pulling back the amount of capital that you are throwing on the desk? And just get back to more of a traditional research-driven platform?

I think we are expecting to continue to see the net -- again, that is what we are focused on, because in the end that is all that is really is important. We are focused on the net. And I think that there is downward pressure. We are expecting to continue to see that going forward, downward pressure on the net.

Okay, so then just the other thing would just be on the cost side. I mean, what can you do to kind of alleviate some of the pressure on the cost side? And then I am done. Thank you.

We actually have a process where we continually are looking at costs for all of our businesses. And last year we did make some adjustments in sales and trading as we saw some of the fixed income markets start to pull back. And that is an ongoing process for us. So we would continue to look at our research as allocated to both the sales and trading business and all of our businesses, frankly.

Doug Sipkin, Wachovia.

A couple of quick questions. One, in reference to TRACE, I saw you guys cite it in your press release as an item impacting fixed income trading. I am just wondering what happened in this quarter versus prior quarters? Because TRACE has been out there for quite some time, that it did have an impact this quarter, whereas it didn't have as much of a recognizable impact in the prior quarter? That is just the first question.

Very specifically, as you commented, TRACE has been implemented in phases. There was an important phase from our Company's platform in February of this year, meaning in this quarter, where they expand it into a broader set of securities, which then encompassed some of our research-driven, high yield trading activity that had not been previously included.

I see. So it did seem to be a bigger impact on the high yield side, I guess, post February?

Yes. And again, that was February of this year for this quarter.

Sure. Next question -- in terms of modeling, we actually modeled a very similar amount of M&A completed deals, but we did have much higher revenues. Is there anything to read into that? Is there some evident pricing pressure in the M&A business that maybe we are not seeing that is starting to hit the surface now? Because based on activity levels, it looked like you are sort of right in line, but the M&A fee capture was much lower.

Actually, we are not experiencing fee pressure in the M&A business.

So then just from a trend standpoint, it looked like it was down considerably as a percentage of the deal values. At any rate, okay, if you are not, you are not.

And then can you speak to the headcount change quarter versus quarter? Because, as I say, you did actually add on the FA side. Where were the losses total firmwide headcount?

Both the year-over-year and the quarter-over- quarter change in headcount were primarily related to some technology areas that we have outsourced, as well as some reduction in our sales and trading personnel. So it is really those two -- mostly those two factors.

Specifically, the sales and trading is down 8% year-over-year.

Sales and trading headcount?

Yes. The point we are making is we continue to evaluate that, and we will actively continue to do that.

Jim Adell (ph), Millennium Partners.

This is obviously a very disappointing quarter to anyone like me that owns the stock. So my first question to you is what is management during with respective to their share ownership? As I read your proxy, you guys selectively -- management, executive officers, and directors own 200,000 shares. Given your market cap, and your place in the securities industry, that seems like a laughably small number.

You have to, Tim, go back to the beginning here. As employees -- just give you a little background, and then speak to the current and prospective. The equity ownership that we have built up in U.S. Bancorp, it was our intention to have transferred that into Piper Jaffray. And actually we labored at that at great length. And ultimately were forbidden to make the exchange for a host of reasons by the SEC.

So as of January of 2004 there was zero employee ownership, and currently it is approaching 10%. It is a very substantial amount and mix of the senior management team's compensation. It is a variety of percentages on up to mine, which my compensation now comes 50/50 in the form of firm equity. Several of us have been in the market buying shares as well at different times.

Okay. Let me go back to a couple of the questions that were trying to focus more on cost and cost savings. You guys have at this point given these "structural changes" in revenue pressures in the institutional sales and trading businesses. Do you have specific plans to cut expenses to increase your margin in those businesses?

That is actually -- it is an ongoing process for us for all of our businesses. So, yes, we do that on a daily basis, we look at cost. And I will point to in particular, improvements we have made on the private client side of the business. If you look at that from '03 to '04, we were able to improve margins by about 500 basis points. And that was primarily a cost exercise. We continue to review all of our businesses, both Private Client Services as well as the Capital Markets on an ongoing basis looking for efficiencies on the cost side.

What are the -- have you guys publicized margin goals by business? Obviously, a lot of it is due to volatility in revenues and the business cycle. But do you have sort of pretax margin ranges for your businesses?

What we have stated publicly in the past is that we want to be a top performer among our public company peer group. Clearly, we are not there yet. The group we include in the comparison is Jeffreys, Raymond James, and A.G. Edwards.

Charlie Ackermann (ph) with Sagamore Capital (ph). Mr. Ackermann, your line is open.

Sorry about that, I am here. A lot of my questions were answered, but I just wanted to ask on the expenses. And to the extent you have had an ongoing program, and you make changes on the margin here and there, but do you think this will be some more wholesale, quicker changes in this coming quarter?

We are going to continue that process, but what we are also trying to communicate is this was not wholly anticipated in the steep decline in the quarter. And we will continue to evaluate it, and we are.

And then last, I saw you bought back some shares. Will you guys be buying shares as soon as you can, or are you going to wait to see where the business settles out?

No, let me -- that is a good question. We actually had our Board approve a share repurchase program in January. We began the program in February. And we are actually operating under what is called a 10b5-1 plan, which means that the program -- you set certain parameters or formulas and then the program just operates automatically throughout the course of the year. So we are not making specific actions to go in and out of the market at specific times; rather, we are operating under the Safe Harbor type plan, a 10b5-1 plan. So that will continue throughout the course of the year based on the formulas that we have previously set.

Lauren Smith, KBW.

Circling back to the fixed income institutional sales segment, or the revenue. Can you try and frame out for us -- I mean, you clearly identify high yield as being a specific area where you had a meaningful revenue shortfall. Could you try and frame out for us when we look at 16.3 million of fixed income institutional sales, how much of that might be from high yield?

That would be a very good portion of it, Lauren; in fact, the majority of it.

Of the 16.3 million?

Yes.

It includes all of our products, munis, agencies, mortgages and corporate. But the decline -- I think focusing on the decline, Lauren, both if you look at year-over-year to begin with, the decline really came from two factors. One was our agency business was actually down fairly substantially, and we believe that is market cycle related, related to the interest rates and what is happening with new mortgage issuances and such.

The other portion of the year-over-year decline was due to, we think, the impact of TRACE on our corporate bond business. Then, if you look at the sequential quarter change that is primarily due to TRACE. We had a particularly strong quarter in fourth quarter of corporate bonds in our high yield products where we have researched. So that was a very strong quarter, just on the surface. And then on top of that, you layer the change due to TRACE, and that explains most of the drop-off between fourth quarter and first quarter.

Okay, so we can -- I guess, two things. So one we can attribute, I think if I am hearing you correctly, the sequential drop of 8.3 million of fixed income institutional sales is all for the most part largely high yield.

That is correct.

Okay, so that's one. And then looking at the run rate, let's say the 16.3 million, could you give us a feel for what is from high yield, and say, versus other?

Well, we think the trends are -- we don't see any run-up in the trends, basically. So we think we are going to continue to see some of the same pressures, both market cycle and structural. And so we don't see a large change in the run rate for fixed -- for institutional sales going forward.

Okay. And then you talked to one of your three or four strategic focal points as reviewing institutional sales business. And if I heard you correctly, year-on-year you are already down about 8% headcount or thereabouts?

That's correct, Lauren.

So going forward, should we be thinking about not only trimming people, but are there areas or products that you would also consider exiting?

When we speak to, Lauren, reallocating resources that is a broader view, both from the personnel-related costs around that, as well as a review of each of the key products and the resources allocated to them.

So when we think about -- you talk about evaluating adding additional areas in say Investment Banking or in public finance area, it really is taking from Peter to pay Paul? Or do we need to be thinking about -- are you guys thinking about what you can or cannot afford to commit in terms of capital investment? Does that make sense?

Yes, capital investment meaning in people, or --?

Well, I mean, you are telling us that you want to continue to try and differentiate yourself from an investment bank, evaluated adding different areas, i.e., credit products or public finance. Perhaps there will be additional product and geographical expansion. You know that costs money. So are we talking about taking from other areas and reallocating, or is this also going to potentially require additional investment?

Lauren, thank you. I think that is at least -- let me answer it, and I think I understand it more clearly now. It is both. We believe that we do need to reallocate some resources against some current clients where those margins are under substantial pressure that we talked about. The ability to add new product strategically might exceed those reallocations, and we would be prepared to do that, if it is the right product and the right opportunity.

Yes, I think a good -- great example would be our investment in Vie last fall. As far as we know, we are the only middle market firm that has this kind of capability. It was a unique opportunity, and we went ahead and made the investment.

Okay. And then my other question would be looking at the consolidated P&L. I mean certainly interest expense is a big number for you guys because of the debt you have outstanding. Is there anything you can do, or what are you thinking about in terms of your financing?

Yes, let me just start -- when we look at interest on a net basis -- and that is probably what you are looking at as well -- it was up -- or excuse me, the net interest was down quarter-over-quarter and year-over-year. And it really was twofold, increased costs in our subordinated debt as interest rates rose, and secondly we earned a little bit less carry on our inventory. And that was a combination of just reducing fixed income inventories, net inventories carried, as well as the flattening of the yield curve. That took a little bit out of the carry. Those are the two factors.

As regards to financing, the subordinated debt that was provided by U.S. Bancorp is actually fairly attractive long-term financing. If you remember, that is a five-year note. And from a regulatory standpoint, it is viewed like it is equity. It is viewed as regulatory capital. So we find that to be a very favorable financing structure. And so we don't really have any intention at this point of refinancing that debt at this point.

Peter Seuss (ph) with Canova Capital (ph).

From what I understand, there are a significant number of options that have been given to employees at a strike price that is around $10 higher from whatever the stock is currently trading. Are you concerned that there is going to be any loss -- that there is going to be any attrition because of that due loss of compensation, or do you have any plans to restructure those option contracts?

Peter, let me start with your latter question. We have no contention of restructuring them. Our employee equity compensation, the vast majority of it comes in restricted stock, not in options. There is a very modest option component.

Matthew Fischer, IRG.

Most of my questions have been answered. I just wanted to clarify one thing. You mentioned that the same trends and pressure on the fixed income trading -- so is that to say that the $16 million run rate in the fixed income institutional sales -- is that a run rate, or are we to see additional declines due to this pressure? Is it going to be 33% in the following quarter as well?

Our view is the cyclical trend and these systemic trends, we do not see a turn in them in the near term that directly. They continue.

Okay. So the 16.3 would not be a good run rate. We are looking for further decline?

It is the combination of cyclical and systemic. And I cannot point to a factor that shows a change in direction currently in either one of them.

Jim Adell, Millennium Partners.

Two things. One, on that sub-debt that you referred to earlier, did you say that interest expense was actually up on that in the quarter?

Yes. It is a variable-rate note. And so as interest rates have risen, the interest expense has increased.

It is LIBOR-based.

Okay, LIBOR plus.

Exactly.

Right.

And then when you look at your balance sheet and see a high level of intangibles relative to -- again, the difference between tangible book and stated book -- do you test those intangibles quarterly, or on an annual basis, at least, to determine whether or not they are money-good, if you will?

Yes. We do. The goodwill that is on our balance sheet is primarily as a result of the original acquisition of Piper Jaffray by U.S. Bancorp. And we do perform the annual impairment test. We typically do that in the fall time frame at least annually. So at this point we are not moving from that type of a time frame. There really doesn't -- any reason -- or wanted to move from that.

Right. And then back to your goals of wanting to be a top performer among your regional smaller broker-dealers comp set. You guys put up, if you annualize this quarter, roughly 7% return on tangible equity, which is far below those peers that you mentioned earlier. Are we at the trough in the cycle right now, or does it just not get any better?

Those goals are unchanged. And if you look back at 2004 we made some progress against our peers that the current environment, the combination of the cyclical and the systemic particularly in our institutional trading business, which as part of our business is relatively unique verses that peer set, has us under substantial pressure. And near-term performance on that 7%, there is nothing in those trends that changes that immediately. I would point to our discussion about ongoing evaluation of the cost structure, and we are hard at work on that.

All right. So is there are reasonable -- is there a target you have for ROTE, or no? Return on intangible.

The target is really to be a top performer amongst that group.

Correct, but no quantitative --?

No stated percentage.

No absolute level, relative to the peer group.

And then back to the buyback, you have, I think you said 975,000 shares roughly of authorization left.

That is correct.

With the drop in the stock price is it expected to be done much sooner? And if so, do you plan on reauthorizing, or can you reauthorize and new buyback before the end of 2005?

The program -- the share repurchase program is being operated under a 10b5-1 plan, which basically sets up a formula and just repurchases throughout the course of the year based on a set formula. So, no, we are not planning on changing the funding of the buyback. And we also are not planning on going to our Board for additional authorization for repurchase.

Todd Halky, with Ballyogny.

I am just following up to Jim's buyback question. And the way I understand the way that those plans work is there are different triggers at different price points. So if a company is buying 50,000 shares a day -- I would like to split that out there -- like 10 and the stock goes down to 9. Then there are triggered changes, and it can go to 75,000 a day.

Is your plan structured in that fashion, that at least with a $7 or 20% reduction in stock price today, that level -- maybe your plan stays in place throughout the year, but the level is sped up over the near term?

No, we don't have that kind of feature in our plan. It is just a fairly simplistic formula, no more than a certain percentage of shares on a daily basis -- traded on a daily basis.

Matthew Fischer, IRG.

Just another quick question. Do you have an internal or an unpublished goal for ROTE? Or how do you kind of manage your businesses and deploy capital at that moving target?

Yes, as we stated, our goal is to be a top performer in the public company peer group. So internally, is nothing more than the same as we have stated externally. And we do look at each of our businesses' returns and allocate resources accordingly to what we think the opportunity is in each of those businesses.

And with a changing environment and through a cyclical business, how do you -- without any kind of stated -- without a set goal, how do you measure your competitors, and how do you sort of I guess keep up, or -- when you are just looking at the peer average rather than kind of an internal benchmark?

We do use an internal model that RAROC, risked-adjusted return on capital, and do have an established internal hurdle rate that we use that we don't publicize. But we do have hurdle rate. I think that gets to your issue about a moving average.

(OPERATOR INSTRUCTIONS) Tisha Jackson, Credit Suisse Asset.

After listening to the whole call, the frustration with shareholders is probably the fact that it is very difficult to come up with a path as to how you are going to get from under performing to even a mediocre performance. If you can give us any sort of guidance as to how you are going to get from A to B, it would be much easier to both be able to look forward and kind of evaluate how management is doing on a go-forward basis. But it also would give people the sense that there is a plan to improve. Just saying that there is an internal hurdle rate, and that the business is cyclical, and not looking better makes it sound like basically we should annualize this quarter, and things are not going to get better. Is there anything more you can give us?

Yes, let me try and respond. And please follow up if this is not getting to the heart of your question. We continue to believe that both of our business segments have significant opportunity. But let me comment on what has changed and what has not changed in our view.

Starting with Private Client Services, the demographic trends in the markets that we are in do remain favorable. And we believe we have established a very competitive platform to serve our clients. We are on track for a three to five year turnaround, which is modestly impacted this quarter by softer equity markets. Progress is driven by a migration to an advisory model, and a recruiting pipeline that is now beginning to build. I think we have often pointed to the fact that far from ideal, but we spun out of our previous ownership with zero pipeline, which is a position that you would never want to be in a Private Client Services business. But we were in it for some obvious reasons. And they are now able, having established that platform, to recruit both developing advisers and seasoned advisers.

From a Capital Markets perspective, our key investment banking franchises are solid, and provide us a position to grow by adding additional products and services and achieving primary advisory strategy to those clients. Having said that, neither of those previous comments is new. What is new is the accelerated trading margin decline, and it has created a headwind for us. These cyclical trends, coupled with structural changes, are outpacing our ability to appropriately expand clients to our client niches and to continue to differentiate.

But we are hard at work at that, and recognize that our performance clearly lags our peers. The progress that we made last year has been erased in the first quarter.

Okay, and if I can just do a quick follow-up. Can you give us -- where are the trainees -- the financial adviser trainees kind of in the disclosure of employees? Are they counted in the employee count, or are they counted in the financial adviser count?

Yes, they are included in both. They are both in the employee count and the financial adviser count.

Okay. So if you added 80 last year, does not that mean you have necessarily lost some of the experienced financial advisers net?

Yes, particularly in the first half of last year, because we made a comp plan change.

Right -- no, I remember that.

Yes. So the attrition has slowed demonstrably in the second half of 2004. So that was mostly in the first half, which is part of what you're seeing -- the decline year-over-year in Private Client Services revenue is because of that.

Okay. And then finally, I guess you have opened up -- or named new leaders in Minneapolis, San Francisco, Kansas City, and Denver. Can you give us an update on how -- the progress that is being made in those businesses?

Those are all in the Private Client Services. That is a blend of some internal candidates who took on additional responsibilities, and some came from outside of our firm, but were very seasoned in the industry, such as San Francisco Mark Zielinski, who has had experience in Private Client Services at other firms for over 20 years, and now heads up our San Francisco/Bay Area.

It is a combination of both, which we feel like is the right mix. We do believe in promoting our internal personnel and offering that opportunity mixed in with some others that had experienced at other firms that we can leverage and/or relationships at other firms that provide us opportunities.

Well, and has there been any traction in those markets? Or is that kind of something that we should see over the next 12 months, 18 months, 24 months?

We are beginning to see traction in the pipeline. We now need to realize it, and look forward to updating you on that in the coming quarters.

Again, I would give us the backdrop that I think is a realistic view and why we stated what sure may appear like a long turnaround -- three to five years. We are now one year into it, call it two to four -- is the condition of the firm. We were not able to recruit to the firm until we achieved our spinout and successfully established what would be the platform.

It is our view that good, strong candidates used a very deliberate, thoughtful process and evaluate a firm's platform. And we couldn't offer that clearly until the second half of last year when we established it. And that typically is it a six to nine month process, which we would encourage. It is thorough, it is thoughtful. Their reasons for selecting a firm are very much driven on the products, services, I believe the culture, and the direction of the firm.

Okay, and kind of based on your plans, at what point do we as investors start seeing this hit the bottom line, or hit the assets under management levels, or --? So it is gaining traction, but when we will we be able to see it?

There is clearly a lag there on developing financial advisers, DFAs, as we refer to them -- we view their are full growth, their full productivity, if you would, when we re-categorize them from developing is 5 years. And that is a relatively modest incline over time. And that is the decision we are making. And we think the benefit of taking that longer view and that longer build out is that twofold -- one, we have trained them into the advisory process that we believe in, and secondly, ingrained in our culture. And the retention of them tends to be in our experience much, much longer.

From a recruiting perspective, as we have suggested, our pipeline is relatively new. We continue to make progress with it. And I believe we can show you that in the coming quarters in our headcount. That can be -- a more rapid. Those assets and revenues and a transition -- our experience is whatever the trailing 12 months were, that somewhere between 70 and 80% of that transition and is reflected in the first year with us.

There are no further questions at this time. Mr. Duff, are there any closing remarks?

No. Thank you all very much for the attendance and the questions. Thank you.

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