Piper Sandler Companies (PIPR) 2005 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Piper Jaffray Company conference call to discuss the financial results for the fourth quarter of 2005. During the question and answer session, management has asked that the media and individual shareholders remain in a listen-only mode.

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 risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated or 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 web site at www.SEC.gov.

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

Good morning and thank you for joining us this morning. I'm going to start with some comments on the quarter as well as the year, and then I will turn it over to Sandy to provide financial details.

First, a broad perspective on the quarter. We are pleased to deliver strong back-to-back quarterly financial results. Capital markets performance was a key contributor here particularly, M&A and advisory services. Additionally, we realized some revenue from our new initiatives, both the London expansion as well as structured products. And while PCS -- private client services -- revenues were flat, we had some improvement in our profitability.

Let me turn to capital markets. Starting with advisory services, as I mentioned, very strong back-to-back quarters and record revenues for the year. This quarter had strong revenue despite half the number of completed deals compared to the third quarter. Recognize that this is a lumpy business, high quarters and low quarters, but our underlying franchise is strong.

We are pleased with the full year performance, increased our market share and overall ranking from 20th to 15th in the industry. Our M&A pipeline is quite a bit lower, but solid at this point. Equity underwriting contributed a decent quarter, lower than last year due to lower convertible revenue. Revenues were down 14% year-over-year on 30% fewer transactions. We realized higher average revenues per transaction than previous year, mainly driven by a higher portion of book-run deals. Underwriting backlog looked solid and continued to strengthen during the quarter. It currently stands at 17, which includes eight led-managed assignments, as well as five book-run. For the full year, we increased our market share by 5% to 1.34%, increased book-run transactions by 70% to 19 from 11 in 2004.

Turning to public finance, generated solid quarterly revenues. Compared to last year, the number of public finance issues for the quarter was flat versus down 5% for the industry. We also participated in transactions with more favorable economics. Again for the full year, public finance contributed solid revenue performance.

Finally, institutional sales and trading. Revenues in this area were down 3% compared to the third quarter. Equity sales and trading revenues were off, driven by lower customer flow. Fixed-income sales and trading improved from the quarter, driven mainly by stronger municipal trading. For the full year, sales and trading revenues were down 6%, primarily fixed income due to the trends in transparency and interest rates that we have spoken to throughout the year.

Now turning to private client services, revenues were down slightly compared to last year and last quarter. The main driver was fewer number of FAs compared to both periods, primarily from lower producers, offset in part by an increase in revenues from fee-based accounts. We increased the pretax margins 7% for the quarter due largely to decreased litigation expense and our continued commitment to focusing all of our resources to best advance the primary advisory strategy. For the full year, pretax margin was 5.3% compared to 7.5 last year, reflective of lower revenues and higher litigation related expenses. Our productivity was constant and our assets under management per adviser were up from 60 million to 62 per adviser. Fee-based revenues were up 16% year-over-year and now account for 21% of total net revenues.

In summary, some overall comments on the year. We rebounded from a difficulty first-half and took actions to position the business for improved performance. Our second quarter restructuring charge has positioned us to realize 10 million in savings on an annualized basis. We also made a number of investments in the business, specifically repositioned fixed income resources into public finance and high-yield and structured products now (indiscernible) corporate and institutional services, closer to our issuing clients. We expanded our health care platform in the United Kingdom, opened a Boston sales and trading office and made further investments to advance the transition to private client services to an adviser model with enhanced trading and additions our wealth advisory services team. This is the group that partners with our financial advisers to provide expertise, like estate and wealth transfer planning.

Let me end with my view of 2006. Continued work ahead of us to achieve consistent performance. 2006 will reflect this additional work in continued investments. Private client services continues to transition to an advisory model, recognize those in transition takes somewhere between 18 and 24 months resulting in limited revenue and profitability growth in 2006. We are adjusting our investments by slowing our developing financial advisor hiring and increasing the production benchmarks; in essence, moderating the very significant investment we have made by hiring over 200 developing advisers in the past three years.

We are also going to increase the recruiting of seasoned financial advisers while still relatively modest. Our focus remains squarely on increasing the productivity of our existing financial advisers.

The full transition is going to require the longer end of the three to five-year timeframe we have articulated since then. The market environment looks reasonably constructed for capital markets. Our goal is to grow our underwriting market share. We expect modest revenue benefit from our new efforts that were undertaken in the third and fourth quarters as they ramp up in 2006, the London expansion as well as structured products.

Now let me turn it over to Sandy for a review of the financial details.

Thanks, Andrew. First I will review the consolidated results for the fourth quarter and full year and then I will provide some details on the second.

For the fourth quarter of 2005, Piper Jaffray generated revenues of 207 million, up 6.4% from the year-ago period and essentially flat compared to the preceding quarter. We recorded net income of 16.4 million, or $0.87 per diluted share, up from net income of 11.8 million, or $0.61 per diluted share for the same period last year. For the full year, net revenues were 775.1 million, down 2.8% compared to 2004 and higher investment banking revenues, particularly advisory services, offset softness in our transactional business. Net income was 40.1 million, or $2.10 per diluted share, compared to 50.3 million, or $2.60 per diluted share, in 2004.

For the quarter, compensation expense was 122.7 million, up 5% compared to the prior year due to increased variable compensation, driven by higher net revenues and profitability. The compensation ratio for the fourth quarter was 59.3%, down from 60% last year and down from 61.7% in the third quarter of 2005.

Noncompensation expenses for the quarter were 59.3 million, essentially unchanged compared to the year-ago period and up 3.8% compared to the third quarter of 2005 mainly due to additional deal-related expenses, legal fees and costs associated with new initiatives.

For the quarter, pretax operating margin was 12.1%, the highest level achieved since becoming a public company, up from 9.3% from the year-ago period and up from 11% for the third quarter of 2005. For the full year of 2005, compensation expense was 471.7 million, down 16.7 million or 3.4% compared to last year due to lower net revenues and profitability and the savings from the restructuring actions taken earlier in the year. For the year, noncompensation expenses were 242.3 million, up 12.8 million, or 5.6%, primarily resulting from the $8.6 million restructuring charge recorded in the second quarter and higher litigation-related expense. For the full year, pretax operating margin was 7.9%, a decline from 10% last year due primarily to lower revenues.

Now I will cover our segment results, beginning with capital markets. For the fourth quarter of 2005, capital markets generated 122.3 million in net revenues, up $18 million, or 17.2% from the prior year. Segment pretax operating income for the quarter was 23.6 million, up 46.3% compared to last year and up 4.1% compared to the third quarter of 2005. For the quarter, investment banking revenues were 73.4 million, an increase of 20.5 million, or 38.8% compared to last year, driven by a robust advisory services activity and stronger fixed income underwriting.

Within institutional sales and trading, net revenues were 48.6 million, down 4.5% from the year-ago period, reflecting the negative impact on corporate bond spreads of TRACE, which stand for trade reporting and compliance engine, and lower customer volumes resulting from increased interest rates and a flattened yield curve. Partly offsetting these declines was increased revenues from algorithmic and program trading.

Segment operating expenses for the quarter were $98.7 million, an increase of $10.5 million, or 11.9% from the same period a year ago, primarily due to higher variable compensation expenses from increased net revenues and profitability. For the quarter, segment pretax operating margin was very strong at 19.3%, up from 15.4% achieved in the same quarter last year and 18.3% in the previous quarter. The improvement compared to last year stemmed from higher revenues and the benefit of the restructuring actions taken earlier in the year.

For 2005, capital markets recorded net revenue of 435.8 million, a 1% increase compared to the prior year. Robust advisory services revenues and stronger fixed income underwriting revenues were offset by lower institutional fixed income sales and trading and equity underwriting. Segment operating expenses for the year were 365.2 million, essentially flat compared to 2004. Segment pretax operating income of 70.6 million was up 3.7% compared to the prior year and segment pretax operating margin of 16.2% was up from 15.8% last year.

Now I will turn to private client services. For the fourth quarter of 2005, private client services recorded net revenues of 86.4 million, down 2.8% compared to the fourth quarter of 2004, resulting from fewer financial advisers, offset in part by an increase in revenues from fee-based accounts. Segment pretax operating income was 6.1 million, up 5.8% from the fourth quarter of 2004 and up 14.1% compared to the third quarter of 2005. The increase in profitability compared to prior years was largely due to disciplined cost control and lower litigation-related expenses.

Segment pretax operating margin for the quarter was 7%, up from the 6.4% margin in the fourth quarter of 2004 and up from 6.1% in the third quarter of 2005. For the full year of 2005, segment net revenues were 347 million, down 3.5% compared to the prior-year period. Segment pretax operating income was 18.3 million, down 8.7 million, or 32.2% compared to 2004, largely reflecting the decrease in net revenues and higher litigation-related expenses. Segment pretax operating margin was 5.3% for the year compared to 7.5% for 2004.

Finally, corporate support and other pretax operating loss was $3.6 million for the fourth quarter of 2005, an increase of 1.2 million compared to the fourth quarter of 2004. For the full year, pretax operating loss was $15 million, compared to a loss of 10.7 million last year. The increase in pretax operating loss for both periods was due primarily to increasing interest rates on our subordinated debt and lower gain of private equity investment.

That concludes our formal comments, and now Andrew and I would be happy to take any questions that you may have.

(Operator Instructions). Jonathan Casteleyn, Wachovia Securities.

Good morning. Congratulations on a nice back half of the year.

Thanks, Jonathan.

Can you quickly go over the degree of magnitude in the M&A backlog? I you don't give a whole lot of color there, but you said down but solid. Any other adjective you can use there to give us a little bit of guidance? Because it is, as we all know, a very important part of the business?

I would reiterate that, Jonathan, and just maybe look at it on a more annual basis, and we're on a typical run rate from that perspective.

So you wouldn't expect an immediate drop-off from the two-quarter production you've seen in Q3 and Q4?

It's lumpy, Jonathan, and if you look at it from an annualized basis and maybe think of it in a more annual basis, I'd reiterate that. It is down from the backlog that we went into, the third and fourth quarter was.

Understood. Is there any sort of change in the [PCG] strategy? I've never really heard you say to hire more experienced advisers is a core or an initiative within PCG. Has that changed as you look at this business?

No, and let me reiterate a couple of things. We've been weighted towards hiring and developing financial advisers and I'm making a reference to our intention at this point to harvest that to some degree. We have hired over 200 advisers, developing advisers, Jonathan, in the last three years. That is a substantial investment and our intention is to mature that and move them up in their productivity. We have had relatively modest hires in the industry. Our goal last year was 20, which we achieved, and our intention is to raise that to approximately double it this year, but that is relatively modest versus others. And our philosophy on that is, there are some very good fits with our platform, open architectural, culture, menu pricing strategy. But in many of the markets, the transcomp is intensely competitive and ultimately noneconomic. So we don't intend to be overly aggressive there. And we're very pleased with who we have recruited under this strategy in the last two years.

And then as you look out into '06, you talked about, you've managed our expectations pretty well here. If I look at this segment, you had negative sequential growth in topline, but increased profitability. How are you going to start to grow that topline, notwithstanding new hires, new experience hires, if they are 40 in headcount, which does not seem too substantial or consequential?

In a word, productivity is the primary advisory strategy we are taking our advisers through. And I made some references to this on the last quarterly call. But we are tracking closely in essentially two categories -- those that have already achieved that status, and those that are transitioning. In every single metric they, are improving their business, whether it's number of products per household, average size, relationship per household, assets under management and productivity. Every one of those benchmarks are directionally outperforming those that have it (MULTIPLE SPEAKERS) productivity.

Perfect. On the fixed income sales side, your revenue levels are up 29% since Q1, which is in essence a TRACE issue. I'm just wondering -- how much of that is a recovery in that principal TRACE business, versus new products, structured products, interest rate products, what have you?

In the first fourth quarter, we had very strong muni trading, and that really contributed to the uptick from Q3 to Q4. We're still seeing those downward pressures on corporate bond spreads. We have not seen another step downward, but --.

So the sequential and increase was due mainly to the municipals from Q3 to Q4?

Right.

Can you give us any sort of sense as to the percentage of principal on the top corporate bucket that is attributable to APT? Can you give us any sense of growth there?

No, we're not going to specifically talk about percentage of the business from that, but we did see some good benefit during 2005 of the APT business and we're expecting that to continue. We do think it's a very strategic investment for us as the business continues to change and there's some [secular] trends in the business regarding the need for efficient trading. And so we think it's a key investment for us.

I just reinforced Sandy comments. It's really twofold, Jonathan. It is important to have the product capability for our clients, and additionally, it's clearly enabling us to be increasingly efficient on our own trading.

Understood. Thank you very much.

[Kyle McLean], KBW.

Just to start off, you gave a little bit of color on the year-on-year change in the comp ratio. Can you do the same for quarter-on-quarter?

Could you speak up a little bit? We're lost you there.

Sure, I'm sorry about that. You gave some color on the year-on-year comp ratio change. Could you give the same color on the quarter-to-quarter?

Sure. In the fourth quarter of the year, we typically have our lowest compensation ratio of the year, and that's due to the fact that you are maxing out on a lot of the employee benefits, such as 401(k) match and [FICA] expenses and things like that. But typically, we have that as our lowest compensation ratio of the year. That said, we also, between third and fourth quarter, we made some investments, some personnel investments in the third quarter and some new initiatives in capital markets. And I believe Andrew referred to those on the call here. And, obviously, we weren't receiving any revenues from those investments in Q3 when we made them. But in the fourth quarter, we did start to see some revenue benefits, so that has more normalized our compensation ratio from Q3 to Q4.

Okay, that is good. So would you expect Q4's level to be a run rate going forward, or --?

You know, I think it's more instructive to look at the full year rate because you will have some changes from quarter to quarter based on mix changes in the business. Plus, generally, we have our -- the general trend is that the comp ratio is a little bit higher in that early part of the year as you're restarting your benefit plans, your FICA and your 401(k) matches, and that tends to drift downward during the course of the year.

Thank you. Was there anything similarly any seasonal factors or anything to contribute to the lower tax rate this quarter?

Again, I would look at the full-year rate. We did have a lowering of our tax rate in 2005 over 2004, and that is because we have a growth in our municipal business. We have a higher proportion of our total income from municipal interest, which is tax advantaged. So I would expect that tax rate to continue into the future, but there might be some slight changes based on the mix of business in the municipal area.

In the text and in your comments, you talked about doing a lower number of deals both -- I guess in M&A, you talked about it in the tax, and I think you talked about it in your prepared comments in equities. But you talk about receiving higher fees on that lower number of deals. Is there anything -- is that a trend that's going forward, or was that just a matter of timing? Is there anything that we can see in there?

That is a bit of a trend, and particularly in the underwriting activity. We continue to advanced the number of [led-managed] and book-run, and that has been a strategic objective and we have good traction on it. And in and our current backlog going into '06 reflects that as well, a high degree of book-run and led-managed proportionally. So that's a trend.

Also, I guess it was this time last year, and I think I had asked about this earlier in the year with respect to buyback. You guys announced a buyback with your fourth quarter earnings last year, and we sort of expected something this year. Do you have any comments in regards to the buyback and share count in general?

Sure. You can expect we will be in the market during 2006 with a share repurchase plan. It's our general goal to be able to offset the dilution we get from our stock-based compensation plan. So you can expect us to be in the market. And share repurchase plans require Board approval, so we would actually issue a specific information or release about when we have an approved plan.

Okay, that's fine. And I guess back to M&A. You guys had previously broken out the enterprise values of the number of deals, but I don't think you did this time. Could you give us any, just so we could try and size the deals that were done, compared to historical quarters?

For the quarter just ended, the M&A transaction value was 2.9 billion.

I should be able to go back and find the other one.

Were you asking for previous quarters as well?

I think you guys had given it in the prior and year-ago quarter, so I can just go back and look for that and (MULTIPLE SPEAKERS) circle up.

Full-year was 8.1 billion versus last year's 6.8 billion, and then the quarter third quarter was 4.2 billion and the same quarter last year, 1.3 billion.

Okay, great, thank you very much.

Douglas Pratt, Mesa Capital Management.

Thanks very much, good quarter there. To follow-up on a couple of earlier questions (MULTIPLE SPEAKERS)

Could you speak up a little bit?

Following up on a couple of the earlier questions and (indiscernible) the last question, when you talk about the M&A being somewhat flat to slightly down in the first quarter, is that relative to the fourth quarter or prior year first-quarter?

I was referring to the preceding two quarters -- Q3 and Q4.

(indiscernible)?

The high water mark of Q3 and Q4. The pipeline is down from that.

And getting back to the cost issue, you've done just a tremendous job at restraining cost over the last, it looks like four or five quarters. How much more can you do on that? And although, as you notice, you have a record (indiscernible) the tax margin here since you've been a public company, it's still below what you see in a lot of the other public companies. I mean that's not talking to the Goldman Sachs or (indiscernible) kind of business, but say for example an A.G. Edwards, which is more along I think 13, 14% level. What kind of expectation should we have for an improvement in profitability, and how much of that [will come] do you think versus revenue growth versus continued cost reduction?

Let me make a couple of comments, and then I will let Andrew add his. Number one, if you look at the noncompensation expenses for 2005, I think backing out the restructuring charge, which obviously was a onetime charge, we were up a little bit less than 2% on our noncompensation expenses. And it is our goal to continue to be extremely vigilant on expenses and manage those down. We're continuing to look for efficiencies. So you can expect going forward that we're going to be watching those, growth in those areas very tightly. And I think that is just as much of the profitability equation as it is driving revenue. So it is really managing both sides of the equation.

I guess I would just reiterate that, and I would start with your headline, which is -- well, we're pleased with this performance, it is not consistently competitive yet. Your point is well-made and we are fully cognizant of that. We're making investments in revenue growth, a couple of initiatives on the capital markets. We referred to the London expansion, the structure products, high-yield and Structured Product Group and our very substantial investment in our private client services to get to an adviser model, and all of our metrics indicated that that's working.

I also indicated that we're going to moderate the investment in developing advisers and try and deter that a bit. The headline on all of that, as Sandy suggested, is we're going to continue to be very, very diligent on expenses as we build out the revenues so that we get to a more consistent competitive performance. And we're not there yet.

I guess as Paul said, if I look at in the last few quarters, you've really ratcheted down. And if I look at noncomp expenses, actually I (indiscernible) able to take up (indiscernible) take some more advertising and promotional expense out. It seems like that kind of hit a level that is difficult to go below. I think it's around $60 million now and I think it was a similar level -- actually it was a little lower than that in the prior, in the September quarter. It sounds like you're saying that you're going to contain -- continue to contain expenses, but that we should be expecting some more revenue upside to really drive earnings. Is that a fair characterization?

Clearly at this juncture, there is a lot of leverage in our performance. I mean, increased revenues would have a fairly immediate impact on the margin. Having said that, we are going to be diligent -- I'm going to come back to it, to the cost. We were very successful in our restructuring in the second quarter and we're going to continue to manage it and take every opportunity to reallocate resources to ramp growth.

Okay and then final question. I don't know if I missed it (indiscernible) there was some news out a couple of weeks ago regarding municipal bonds, that some of the regulators (indiscernible) the regulators were concerned that some (indiscernible) had been not only advisers to the municipalities, but they were essentially recommending themselves as the underwriter I believe for (indiscernible). And I know that Southwest Securities (indiscernible) was mentioned. Is that something that has impacted your business at all either positive or negative, or are have you been contacted by any of the regulators on this, or this an opportunity (inaudible)?

That has not impacted our business. There is a discussion that you're referring to in the industry about the relationship of those two roles adviser and underwriter. We do participate in both roles with our clients, but not both. If we have been an adviser when it comes time for an underwriting, the client needs to make the decision which role they'd like us to continue. That is the issue being reviewed throughout the industry.

Is there any timeframe or event or comment being floated by the regulators [aiming to] keeping an eye on it?

We have no particular knowledge.

Finally on the investment banking, you said down or flat to down from the benchmark third and fourth quarters. Should we assume that it's still ahead of the first -- or equal to or ahead of the first or second quarter level, which I think was around 55 (inaudible)?

Let me separate two things. First of all, the M&A more specifically described as advisory. I'm indicating that it is down from the record third and fourth quarter and suggesting you look at a normalized run rate for the previous year. And from an underwriting perspective, we have a very strong backlog and it had continued to grow throughout the quarter. We're up to 17 on file currently.

What's the rough breakdown then in investment banking (inaudible)?

I'm sorry, I did not hear that question.

What's a rough breakdown? I'm just looking at the overall investment banking revenue number. So if those two pieces (indiscernible).

Actually, we have a schedule attached to the earnings release.

I will take a look at that then. Thank you very much.

(indiscernible).

Hey, guys congratulations. A couple of very quick questions because I'm new to this story. I think you had mentioned the restructuring surge in Q2 had resulted in 10 million annualized cost saves. One, is that a pretax number? And secondly, how much of that has actually been realized so far this year?

Yes, it is a pretax number and we announced the restructuring in the second quarter. We have about half a year, maybe a little bit more worth of benefit in 2005.

It's actually right on track for its annual run rate.

And secondly, could you just (indiscernible) history. You've had two quarters here of kind of (indiscernible) plus on the topline. Can you just speak briefly on the sustainability of that type of revenue run rate going forward?

What we're trying to indicate here is that we're going to watch the expenses very carefully and allocate our resources towards the growth opportunities that we have and recognize that it's lumpy. Our private client services is in a major reorientation to the primary advisory strategy, and that is going to take us several years to accomplish from this point completely.

Number two, our capital markets are still delivering relatively -- let's call it lumpy --- performance based on the underwriting activity and the M&A being two big drivers. What you saw at the first part of last year, which perhaps as you suggested, you're newer to the story, was the convergence of everything working against us. We had the last stage of TRACE brought in, so we had a very precipitous decline in the spreads in our cash trading and the fixing income, coupled with a relatively very modest M&A realization for the quarter versus our typical. And thirdly, modest underwriting activity. So those are the issues we try and highlight on a quarterly basis to give you some perspective prospectively.

And would you say, just out of curiosity, would you kind of characterize it to sustain that $200 million plus, because I understand there is some lumpiness you're highlighting. If the capital market and the overall macro environments stay kind of the way it is now, I'm just curious with the impact of the lumpiness in the product client business, would that be enough to sustain the 200 million, or would you actually need to see strength in the product client?

We don't give specific guidance, but I would come back and reiterate that the capital markets environment is a driver of our performance and currently as we sit here today, it looks pretty constructive.

Thanks so much guys. Good job.

Kyle McLean, KBW.

Hi, guys. I just wanted to confirm one thing. You said 17 deals in the pipeline, and that was all equity?

I was referring to the equity pipeline.

And eight of them were (indiscernible)?

Correct.

Okay, thank you.

Lauren Smith, KBW.

Hi, good morning. Kyle and I are dialing them from different locations this morning, so sorry for that. First, really congrats on really a good back half. It was really, seen quite a lot of improvement. This is really more of a big picture question, theoretical question. Looking at your private client business and the turnaround, which will no doubt take time and referencing, which I agree with you, sort of that three to five-year timeframe and probably the longer end of that. But typically with competitive environment and private client better and intensifying, is there really that much synergy between capital markets business? Could there be more value of private and client as part of another organization and use that capital and effort in putting it forward in your capital markets business where you really seem to be having -- have momentum there and various and really (technical difficulty)

You cut out, Lauren.

Did you hear any of my question?

Yes. Let me try and answer it, we just lost you at the tail end.

The tail end part was, couldn't you use the capital and management's efforts and time and really focus on the capital markets business where you seem to have far more momentum in various aspects of your capital markets.

The private client services business has a lot of very attractive characteristics. The macro demographics, the intergenerational transfer, frankly the investment dollar, what's going to the product, what is going to the advisor, increasing continuously to the adviser. Our efforts are on achieving that kind of opportunity consistently for our firm. And as you suggest, Lauren, it's right there in the primary advisory strategy. And on every single metric, we're succeeding. It's just the timeframe for each adviser to make the transition, which roughly each one is perhaps different, 18 to 24 months, and we're well into it. Ultimately, there's very attractive characteristics to the business.

I'm just trying to, four or five years is a long wait ways away and there is certainly high demand for financial advisers. And could there just be an opportunity where you could really just focus on the capital markets business where clearly higher margins and you guys seem to be gaining some notable traction there?

We think the business has attractive characteristics, we think we have the right strategy. We're constantly evaluating our progress and allocating resources to drive it.

Okay, thanks much.

Jonathan Casteleyn, Wachovia Securities.

Two quick follow-ups and more longer-term in view. I'm just trying to understand, what do you think when you think of the percentage of the business from capital markets to private client in the longer-term? Where is that going to shake out? What's the right number there, as far as the business being driven from capital markets versus private markets?

It can move quarter-to-quarter, but if you look at it over time, Jonathan, it has been roughly consistent at 45, 55. At times when the capital markets environment is strong and currently it's feeling pretty constructive, that maybe expands and ultimately you get to 60/40. But it has been really relatively constant over extended periods of time.

Basically what I'm saying is you're seeing great results in capital markets. Obviously, the private client group is a fledgling. I'm just wondering, will that mix change two to three years from now? How do you envision that shaking out?

If the capital markets environment remains constructive, it probably continues, that that's growing more quickly at our company, so that would expand.

On the M&A business, we saw a 28% increase, you told us to look at this business annually. Is this 28% increase, is that an increase in resources within Piper that you've put towards that business, or is it more industry trends? How can you characterize that for us?

It's really both. We've continued to invest in that business and build out the franchise. But the M&A environment across the industry is very strong currently. And we're participating in that.

So your M&A banker headcount has increased over the course of the year?

Modestly, not significant, nor any major acquisition.

Okay. And then as far as specialty fields, are there specific sectors or silos that you feel you have a better competitive advantage in than others or?

If you just look at the lead tables in our four verticals, our position in three of the four is really very strong, it has been consistently. Consumer, technology and health care, we tend to be the number one, two, three underwriter based on number of transactions, not necessarily notional value. Our Financial Institutions group has lagged quite a different competitive landscape there with many more niche players. It's also a very big market, as you know. We are continuing to invest in that and believe that our position needs to be improved significantly. And we plan to do additional hiring in that area specifically.

Okay, thank you very much.

There are no further questions at this time.

Okay. Well then thank you all for joining us. Just a couple of final comments.

The structural changes in the market continue to impact our business. Know that we view them and carefully and we will take appropriate actions to advance our business and are very confident that we're well positioned to take advantages of these changes over time and get to more consistent performance. Thank you for joining us.

Thank you for participating in today's conference call. You may now all disconnect.