Piper Sandler Companies (PIPR) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Piper Jaffray Companies conference call to discuss the financial results for the first quarter of 2008. During the question-and-answer session, securities industry professionals may ask questions of management. The Company has asked that I remind you 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 are identified in the Company's reports on file with the SEC, which are available on the Company's website at www.PiperJaffray.com and on the SEC website at www.SEC.gov. And now, I would like to turn the call over to Mr. Andrew Duff. Mr. Duff, you may begin your call.

Thank you and good morning. Clearly, market conditions were very difficult in the first quarter of 2008 and directly impacted our business. As a result, today, we reported a loss for the first quarter of 2008. Our reduced performance was driven by the lowest equity underwriting activity in the industry in the past five years. In addition to the lower revenues, our operating loss was driven by a $5 million net loss in High Yield and Structured Products sales and trading, and a $2.5 million severance charge related to reducing head count in certain areas. We have reduced our inventory exposure in High Yield and Structured Products. Tom will cover both of these areas in his comments.

First, let me comment on the Capital Markets environment, which was one of the weakest quarters in many years by several measures. For the first quarter, the NASDAQ index declined 14%, making it the worst performing quarter in over five years. Within the industry, only ten IPOs were completed in Q1, the lowest number since the second quarter of 2003. In addition, the number of withdrawn or postponed IPOs in the quarter significantly outnumbered pricings. One bright spot in the quarter was the VISA IPO, which was the largest in U.S. history, on which we were a co-lead manager.

The majority of my remaining comments will provide you with an update on our municipal business, which overall performed well against a backdrop of extraordinary market conditions. First, let me say we posted trading gains in our municipal business, which combined with commission revenues, more than offset the losses taken in our tender option bond program. We have taken steps to improve the quality of our tender option bond program, which has already produced positive results in Q2. I will come back to this later.

The short-term municipal market has suffered severe dislocation, which was caused by uncertainties around the credit quality of monoline bond insurers. We participate in the short-term municipal market through variable rate demand notes, auction rate municipal securities and variable rate certificates, which fund our tender option bond program.

When the dislocation began in January, we made a business decision to step in and support both our investor and issuer clients. We made a concerted effort to develop new investors as the existing investor base contracted. We managed our inventory limits in such a way that we would not subject the firm to unmanageable risk, both from a P&L and a liquidity perspective. The result was that we increased our inventory positions in certain short-term muni securities during the quarter.

To be transparent in this regard, we have included an additional schedule with our earnings release that shows balances of these securities at March 31st, 2008, as well as our balances at December 31st, 2007, and at February 15, 2008, which were both disclosed in our 2007 Form 10-K.

Let me take you through an update by category of security, starting with variable rate demand notes. The dislocation caused a significant decrease in demand for variable rate demand notes, which are insured by monolines. In an effort to facilitate liquidity, we maintained an inventory position in the security. As of March 31st, we owned $136 million of variable rate demand notes in inventory, down 27 million or 15% from the level at February 15th. To take you current as of April 14th, the balance was reduced to $92 million.

During the quarter, we worked with the underlying municipal issuers, and they, in some cases, have already restructured the debt or they have a plan in place to restructure the debt into a new, more marketable variable rate vehicle. We expect that the inventory will be reduced to more average levels by the end of June. The variable rate demand notes on our balance sheet are valued at par. Variable-rate demand notes have a commercial bank that provides a liquidity backstop, barring exceptional credit events of the bond insurer. As the owner of the security, we can put these securities back to the liquidity provider and remove them from our balance sheet.

Now, I will cover auction rate securities, which have been under particular pressure in the current environment. We act as a broker-dealer for certain auction rate municipal securities, and we saw a significant decline in investor demand for these securities in the first quarter. Since the end of 2007, we have increased our inventory position in these securities in an effort to facilitate liquidity. We have been working with the underlying municipal issuers to restructure the outstanding auction rate debt into something more market acceptable.

As of March 31st, we owned $250 million of auction rate securities, down $110 million or 31% from the level at February 15th. As of April 14th, the balance was $224 million, down an additional 18% from the quarter end and near the balance we reported at year end.

The reduction is due to successful auctions or restructuring transactions in which all existing auction rate securities were sold or redeemed at par. The restructuring plan calls for the issuers to refinance the current debt with either long-term fixed-rate financing or marketable, short-term variable rate vehicle. We currently anticipate the majority of the remaining inventory will be refinanced and moved out of our inventory by the end of June.

We took no marked-to-market adjustments in the first quarter related to this inventory. We believe our valuation methodology is sound and is appropriate, given the facts of circumstances around our municipal auction rate inventory positions.

As one of our proprietary strategy, we also sell variable rate certificates, securitized by municipal bonds through what is referred to as a tender option bond program or TOB. As of March 31st, our TOB portfolio totaled $300 million, which is a typical level for our program. Similar to the other securities I just covered, investor demand for variable rate securities also decreased, given the uncertainty of monoline insurers.

As we noted in our 10-K in Q1, we recorded a $3 million loss to dissolve two trusts with assets totaling $29 million. We took this action because the rating uncertainty of FGIC, the monoline insurer of the underlying bonds in these two trusts, and the lower credit rating of the underlying municipal issuers, limiting our ability to sell the associated variable rate certificates.

In early April, we added additional credit insurance provided by Berkshire Hathaway Assurance Corporation on several remaining trusts where there was particular uncertainty of the credit quality of the monoline insurers. The new credit enhancement has improved the marketability of the variable rate certificates.

Our TOB portfolio consists of high-quality credits having underlying ratings of 8 or better. A majority of the credits are further enhanced to a rating of AAA through the insurance providers with high credit quality. We have just seven trusts that are marketed based on an underlying AA rating. Our portfolio is sound.

Finally, we hold long-term municipal bonds in inventories to facilitate our clients' low business and for our proprietary municipal arbitrage strategy. We use different vehicles to hedge this inventory. Our hedging strategy was effective in the first quarter, and we recorded a net trading gain for our municipal trading.

The dislocation in the municipal market is unprecedented. However, we believe we took the appropriate actions for our clients and for our firm. We remain diligent as we continue to help our investors and issuer clients manage through a particularly challenging municipal market.

In closing, I stated on our fourth-quarter conference call that we had a cautious view of the first half of 2008. Our outlook has not changed. We believe the weakness in the first-quarter activity levels will carry through the second quarter. That said, we remain focused on our long-term strategy and growth objectives.

We also intend to seize opportunities presented by the market downturn, including selectively hiring talent to enhance our franchise that can place us in an even stronger competitive position when the conditions turn more favorable.

Now I would like to turn the call over to Tom for more details on our financial performance.

Thank you, Andrew. For the first quarter of 2008, we reported net revenues of $95.7 million and recorded a net loss of $3.4 million or $0.22 per share. Equity financing levels were very depressed within the industry and the lack of revenue from this business was the key contributor to our low revenue performance.

Our current equity backlog is eight transactions compared to nine transactions when we reported our year end results. We anticipate that equity financing activity will remain depressed through the second quarter.

The second-largest contributor to our reduced performance was our High Yield and Structured Products sales and trading business. The year-over-year reduction in High Yield and Structured Products revenues accounted for 31% of the year-over-year delta in total net revenues. The high yield operating environment continued to be very difficult in the first quarter. Commission revenues declined significantly year over year and quarter over quarter, and we recorded trading losses due to reduced market values. As a result, we recorded a loss in High Yield and Structured Products sales and trading of $4.6 million in the first quarter.

Market conditions did not improve during the quarter, and we do not see improvement in the high yield market in the near term. We have liquidated certain of our inventories in High Yield and Structured Products to mitigate our exposure to this business.

The other components of our business performed relatively well, given the difficult environment. Total public finance investment banking revenues rose year-over-year and quarter over quarter. Underwriting revenues declined due to fewer completed transactions, but were more than offset by higher revenues related to short-term municipal products and interest rate products associated with public finance underwritings. We expect the public finance underwriting revenues may continue to be soft in the second quarter caused by continued disruption in the municipal market.

We generated solid investment banking advisory revenues in the first quarter, consistent with last year. We have a healthy backlog of business in this area and it continues to develop. Our U.S. equity sales and trading revenue in the first quarter performed well, up 10% compared to last year. We also had a positive contribution from Hong Kong equities. These results were offset by lower performance in Europe and in convertibles trading.

Turning to expenses, we took certain actions in the first quarter which increased our operating loss, but were appropriate to manage our business. First, compensation expense included approximately $2.5 million in severance costs for reducing resources in certain areas of the firm. We routinely analyze our resources against returns and make adjustments, and given the current environment, this reduction was appropriate.

The reduction accounted for 4% of head count at year end. In the first quarter, our compensation ratio was 68.2%, up from 58.5% last year. The higher ratio was attributable to the severance charge, and to fixed compensation expenses such as equity amortization expense over a lower revenue base. We expect that we will have upward pressure on the compensation to revenue ratio during 2008 as compared to 2007.

We remain vigilant on non compensation expenses. Excluding the non compensation expenses associated with FAMCO and Piper Jaffray Asia, which we did not have last year, our non compensation expenses were 5% below the first quarter of 2007. Total non compensation expenses declined 16% compared to Q4 of 2007.

Going forward, we're balancing growing our business with exercising cost discipline in a difficult environment. We expect the quarterly non comp expense total may increase somewhat from the first-quarter level.

Our tax rate for the quarter was 22.1%. The low rate was driven by a higher proportion of tax-exempt municipal net interest income to total income.

Finally, today, we announced a new authorization to repurchase up to 100 million shares of our common stock. The principal purpose of the share repurchase program is to manage our equity capital relative to the growth of our business, and to offset the dilutive effect of employee equity-based compensation. The authorization expires on June 30, 2010.

That concludes our formal remarks. Now Andrew and I will answer your questions.

Operator, we can open the call for questions now.

(OPERATOR INSTRUCTIONS). Devin Ryan.

On the comp expense side, you just noted that there may be some upward pressure. Is a good way to think about this going forward just to back out the $2.5 million charge in this quarter, which I guess is starting around 65.5%? Or is that going to just fluctuate depending on revenues going forward?

Yes, it's really the latter part of your hypothesis there. The $2.5 million of severance costs, assuming we don't take any further action in that regard, which is not currently our plan, would not obviously be there going forward. The rest of it is going to be significantly dependent on the level of revenue.

Okay. It's helpful. The share increase from the fourth quarter to the first quarter, now is that primarily just driven by employee stock-based compensation?

Yes.

Okay. And then finally, on the tender option bond program, really appreciate all the detail. Just want to get some commentary on I guess the remaining FIGC insured program, that I believe was for par value at around $40 million, and just whether we could expect more charges going forward, just given the fact that FGIC was downgraded to junk status. How should we think about maybe that one in particular, or if just any monolines do get downgraded going forward is there a risk of more charges?

Okay, a couple thoughts for you there. First of all, that was part of what was rewrapped by Berkshire Hathaway Assurance Corporation. So what we now currently have is a portfolio. I'll just briefly take you through it again. All the underlying issuers are at least A or better. We have strong insurers bringing the bulk of it up to AAA, which is either Berkshire Hathaway, PSF, FSA, or AGO, which is Assurance Guaranty; or the securities are being marketed on their underlying AA. So we're not exposed to the weakest monoline insurers.

Okay, great. Thank you very much. Have a great day.

Steve Stelmach.

Could you touch a little bit on the loss in Goldbond in the asset management side of that business? I'm not sure I have a lot of clarity on that aspect. Sound like you had a loss there for the first quarter?

Yes, we had a small asset management business or fund there as part of what we acquired. That included an investment of firm capital within the fund. Given the downturn in the Hong Kong market, we did experience a loss on our principal investment. That is not a business that has critical mass, and we are currently liquidating our capital from that fund and exiting the business.

Okay. And then how is Goldbond going generally in terms of pipeline and outlook there?

I would say the banking side in the first quarter was ahead -- experienced a similar environment to the U.S. environment, low volume of activity.

Okay. And then just lastly, on the recent hires, and the media and telecom hires, would you characterize that as part of your ongoing strategy, or were they sort of just an opportunistic team that was available that you decided to pick up?

It's maybe perhaps best said is a combination. We're continuously looking for the opportunity to grow our franchise and expand our industry verticals. We believe an environment like this can be particularly favorable. You have some talent available that typically wouldn't be. And the terms in which you can bring them onto the platform are much more variable and make good sense to us. And that is just a really good example of expanding our technology practice to technology, media, and telecom, TMT, which is reflective of how others approach the industry and just gives us more strength and penetration into the market.

Okay. Well thank you very much.

Aaron [Kadell].

Thanks for all the detail on the different exposures. I first just was wondering if we could just walk through again, and I apologize, I know you kind of walked through this, but kind of the net effect of the different onetime charges and it seems to me there are four. There's the tender option bond, there's a trading loss, there's a severance charge, and there's Asset Management. Can you just walk through the net effect of those again? So tender option bond was $3.1 million, right?

Correct. This is all two trusts that had approximately $30 million.

And that's -- there wasn't any kind of -- that's a net, so there's no comp against that or anything?

Well, no, that's correct. There's $3.1 million of loss. We did experience an additional loss in the quarter after that disclosure of $1 million that related to bringing two trusts onto our balance sheet because the underlying monolines were of the weaker variety and the variable rate certificates were not marketable. Those are the trusts among others that we reinsured with Berkshire Hathaway, that became effective just after quarter end. And so we recorded an additional $1 million loss within the quarter related to that; that really is reversed, and a gain will be posted in the second quarter. The fact that those variable rates are now off the balance sheet again. The severance was $2.5 million.

And then the trading you said was 5, trading loss?

Well, the High Yield and Structured Products business experienced a net trading loss of $4.6 million during the quarter.

$4.6 million, net of --?

Net of commission revenue.

Okay. And then what was the loss in Asset Management?

The only loss that we showed in Asset Management was related to the Goldbond piece that was about $600,000.

$600,000. Okay. And then, what's the kind of normal tax rate? Assuming you don't have all these things going on, what would be a normal tax rate to use going forward?

Well, when we posted a tax rate, as we did in the first quarter, it really is our estimate for the year, given how we see the business playing out. That's the way we are required to set the rate, so that is our forecast for 2008 at the current time. And that is a high proportion of municipal interest income relative to total income.

So 22%?

Correct.

And then lastly, just more kind of conceptually, there's obviously these issues in the municipal market. But Andrew, maybe you could just talk about maybe kind of the opportunity as well. You talked about kind of working with the issuers on refinancings. Are they doing those refinancings through you or through others? Can you talk about presumably if liquidity ever does return to this market, kind of what opportunities might exist for the firm with the municipal business? Does it look different than it did before all this happened?

Sure. Let me make a couple comments and then please follow up if I don't cover everything you'd like me to. The vast majority, almost to one of all those restructurings are being done with us. Again, we tried to be very thoughtful about how we managed this location, and we are doing the vast majority of those refinancings with our clients, who I think are very appreciative of our efforts and our advice. I do think the municipal market is going to be choppy for a while, so you've got the traditional calendar, if you will, of a variety of types of financings, short-term and long-term. But now you've got a significant volume of restructurings.

I think the industry book on auction rate securities is something in the neighborhood of $350 billion. I don't believe all of that can be restructured. Some of it is in forms that will be much more challenging. In our particular case, it's all municipal issuers, who we are working with and are on some kind of path to restructure. So I think that will be choppy for a while as the marketplace absorbs it. But I do think sort of a more intermediate, longer-term perspective in the municipal market should function again. It's a very effective, deep marketplace with very substantial pools of capital, and it's an effective place to raise capital for issuers.

So I do think it normalizes over time, much like we talk about the downturn here. We are certainly looking and trying to recruit additional talent in this environment and grow the size of our franchise.

Okay. That's it for me for now. I'll maybe get back in the queue. Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS). Brian Hagler.

I guess you've already touched on my main question that related to the losses at Goldbond and some of the other losses you posted. But I guess, can you just maybe comment on -- you commented that you expect weakness in the equity environment through the second quarter, but what about the fixed income side? I guess you just commented on munis being choppy for a while, but I guess if you could comment on when you think the weakness there may subside.

Okay, so we did just discuss our outlook on the municipal market, which, again, frankly is going to be pretty active, but it's going to be choppy as the marketplace absorbs this additional restructuring on top of the regular calendar. We see the broader, if you will, taxable credit markets as still quite choppy. So our perspective is, and it was reflected in Tom's comments, we reduced our inventories and our exposure in that marketplace and view it as, in some regards, [non thawing], but still pretty difficult.

Okay, thanks.

Steve Scinicariello.

Just a quick question. Kind of looking through the over $6.5 million of onetime charges, just kind of due to the environment and some other things, the one area I did want to get a little more clarity on is just that $4.6 million net loss in the High Yield and Structured Product area, maybe if you could just give a little more color on what exactly kind of drove that and what were the drivers behind that? Thanks.

Within that group, we trade both corporate high yield-related credits as well as structured paper, which is largely related to our specific expertise and participation in the aircraft structured finance market. The majority of the losses related to the corporate credits, we have, as Andrew said, substantially reduced our exposure to that market. The significant majority of our revenue, or excuse me, our inventories at this point and probably in the near-term going forward, are within the aircraft structured paper business, AATCs and aircraft ABS.

We did have some more modest losses in those areas, as well, within that $4.6 million during the quarter, but that is a business that we have traded well over a seven, eight-year period, where it's been profitable for us, and we continue to remain very engaged in that marketplace and will do so going forward.

And would you say a lot of the reduction in inventory had already occurred in 1Q, or is that something that you are repositioning in this quarter and beyond?

No, that's past tense.

Okay.

Has occurred.

Okay. Got you. Thanks very much.

Lauren Smith.

I just want to circle back on the comp ratio, please. I can appreciate, given market conditions and the like, that you will have to adjust accordingly. But can we just sort of get a sense, would it be reasonable to assume when I look back historically, where the highs have been, that we wouldn't exceed sort of that 61, 62%? When I look back, I guess to '04, you had a couple quarters where it was pushing about 62%.

Lauren, it's Andrew. A couple of thoughts. If you look at our history here and our track record, we've been reasonably steadfast really at that 58, 59 for years, and believe as our business remixes over time, we actually can bring that down and intend to.

When you look at this environment, it's particularly challenging. It's really the combination of obviously the onetime charge, but that's 2.5 points, call it, gets you around 65. It's really the very low revenues over amortization is a big part of it. We have an equity program that we think is very effective and appropriate, three-year cliff vesting. Typically, our ongoing revenues sort of offset that. And in this very weak revenue environment, that amortization pushed up our overall comp ratio.

What we're trying to communicate to you is as the revenues rebound, we would anticipate bringing it back down. But it would have been really disingenuous to show it at 58.5 for the quarter. That would not have been acknowledging the real cost, which would have come out later in the year.

Sure. Has there been any change in the mix of cash and stock? And if you could just refresh for us what that mix looks like currently?

We use a grid based on your compensation level, and essentially it's an upward sloping line. So everybody has a salary and then come February, you get a bonus that is a combination of cash and equity.

The equity gets introduced if your bonus is $150,000, something like that. And it goes from approximately 8% to 35. We think that that's very competitive and looks like the industry. We tweak it a little bit annually. We actually try and do a survey every year or two with our industry competitors just to make sure it's reflective. We have not significantly changed that in the last year or two, don't intend to.

Okay. That's very helpful. And then, I guess just last question, Tom, I think you said, if I heard you right, that the head count reduction was about 4% from year-end levels, so that would imply something like about 50 people, and we've only seen about 14 or 15; so we will see more of that in 2Q. Did I get my math right?

Yes, you are correct; that's approximately the number of folks. And the data in the release just reflects the fact that they all haven't left the Company as of the March 31, but that is the right number.

Okay.

Yes, you are spot on.

And just, with respect to, I know you -- obviously, this is an annual process, you look where you can right-size, but given this head count reduction, were there any particular areas where they were concentrated? And I guess just lastly, do you think you are pretty much right-sized for the environment? Or might we see continued reductions, but maybe not an overall net reduction in headcount since you are going to use this opportunity to add in select areas?

Well, first of all, we made reductions in several areas of the firm that included High Yield and Structured Products. It included some in investment banking. It included some in U.S. equities as well as our fixed-income sales and trading area more broadly. So all -- it was fairly widespread across various areas of the firm. I think as we sit here today, we don't intend to have more rift-type activities, but that's always dependent on the market conditions.

Okay. Thanks very much.

(OPERATOR INSTRUCTIONS). David Trone.

Hi, it's David Trone, Fox-Pitt. So have you completely exited the high yield business?

No, we have not. We've reduced our inventories and our profile, but we have not exited that.

And -- but you also mentioned the head count reduction, so that was not the whole staff?

No, no. You know, a little additional background there, as Tom said, we've got a long-standing, very effective, profitable aircraft structured expertise, whether it's AATC or ABS. We have been developing for the last couple of years, what I would say is an early stage, relatively modest, narrow, intentionally high-yield effort really around two of our industry verticals, where we think we can apply proprietary knowledge and expertise, that being healthcare and consumer. And it's modest and we are going cautiously. But even all of that said, the environment in the first quarter, we experienced some losses and brought our profile down.

Okay, so the cycle notwithstanding, you think when things normalize, there is a strategic opportunity there to cross sell the high yield product?

We do, particularly in those two industry verticals, really are leading (multiple speakers).

Right, okay. So this is one of those kind of tougher questions that I know you don't have a crystal ball, but you've inferred that the environment in the core ECM business is very difficult, obviously, the five-year benchmark or comparison. How should we think about, from what you are seeing, any potential for improvement in the second half of the year in terms of can it get -- are you thinking 10% better? Back to 4Q '07 levels, is that within -- is that plausible?

Well, I would say we are anticipating, based on pent-up demand for capital among the issuer base that we count as our client set, we are anticipating better results in Q3 and Q4. That will be highly dependent on whether the market is open. Particularly IPOs tend to be a product that requires some positive and risk-taking environment that allows you to complete transactions like that. So all that being said, in terms of the staffing levels, we are maintaining the level of dialogue with the clients. What we see as demand for capital within our client base, we hope to see a significant rebound in the second half. But if we have a continuing negative overall equity environment, that will be muted.

Okay, and then with that, you mention the opportunistic hires. Would that be extensions, or upgrades, or what would the nature of that be?

It's potentially all of the above. So we talked about, we had an opportunity here and we're very pleased to be expanding in the telecom and media. Another example would be, we have added four biotech analysts to our research effort and a very senior biotech investment banker, Michael Brinkman. So that's arguably inside our core franchise, but just extending it, so it's really both. And I would say directly, we're doing an enormous amount of interviewing currently. So where that all ends up, I can't tell you, but it's a lot of very talented people looking to be on a platform that makes sense to them and their clients.

And this is presumably due to the dislocations that -- kind of it in the bolds bracket?

Yes, it's coming from multiple areas.

I guess the next -- the point I was getting at is, are these situations where you are having to pay guarantees or are the people coming onboard without them?

Without them. I'm trying to be very clear about that. In an environment like this, which we think is advantageous for hiring number one, you have significant, really talented, experienced professionals available. Number two, you are able to do this in a variable nature without guarantees.

Okay, great. Thanks very much.

Tom Conner.

Can you just tell me with the FAMCO acquisition, what were their revenues for the quarter versus last quarter?

Well, their revenues were down for the quarter. We break out Asset Management as a single line item. But overall, that business was down, impacted by the decline in asset values and attendant reduction in fees. It was small. Probably the other impact within that segment was the loss we talked about in the Hong Kong unit.

From an assets under management FAMCO perspective, down from 8.9 to 8.3 in the end of Q4 to the end of the first quarter here, that really reflects the decline in the marketplace. They actually had not modest net inflows, so it's really market driven.

Thank you. One other question on balance sheet. And that would be in the area of return on equity and goodwill. Basically, you have been -- I guess you disclosed in your press release annualized return on tangible shareholders' equity. And that has increased related to the acquisitions. I guess I have a little problem understanding; are you basically ignoring in your return on equity, the purchase price of your two acquisitions?

No, we regularly look at return on equity in terms of our, certainly, internal metrics and how we judge the performance of our business, both return on equity as well as return on tangible common equity.

We do have two sort of segments of goodwill, if you will. One, the vast majority of it is the goodwill associated with the original purchased Piper Jaffray by U.S. Bank, which was on our balance sheet and stayed with us post spin-out from the bank. So it's kind of our own goodwill, which is kind of an unusual item to be carrying, but that's $220 million of the goodwill that's on the balance sheet; there's $284 million on the balance sheet. The rest of it is goodwill that's been associated with our more recent acquisition activity. So we certainly expect and hold ourselves accountable to earning a return on that goodwill that we've purchased.

Okay, so your annualized return on shareholders' equity for the first quarter was --? I guess it's -- I'm looking at the tangible, but I don't see where you disclose the real shareholders' equity.

Yes, well, obviously, for the quarter, it was negative. We reported a loss. So --

Okay. And then I guess, the other question is, you've spent between share repurchases and acquisitions, probably about anywhere from 450 to $500 million in cash related -- that probably came from the sale of the private client business.

(multiple speakers).

Yet your share price now is significantly below your book value. Are there any -- and obviously with the return on equity over the last three years being sub-par, is there any write-down of goodwill expected in the near future?

We review that on an annual basis as the accounting principles would have us do, and we continually look at the value associated with those assets, and we're comfortable with our accounting treatment as it sits today.

Okay. Do you have, over a period of time, are you targeting an annualized return on equity? Is it 15%, 10%? What would -- what is management's goal?

Certainly, we recognize that our return on equity is subpar. It's really a combination of an underlevered balance sheet, which is something that in a more favorable market environment, we will seek to balance our capitalization between equity and long-term debt financing to give us a better overall return on equity. And so that is part of our objective. We certainly recognize we need to bring that figure up into a double digit area just for starters, and we are definitely working on that, both through improved performance of the P&L and also seeking a -- I would say a more natural capitalization for somebody in our industry, which will include some debt financing within the cap structure as well as the equity.

But over a cycle, what would you -- if you were to give yourself a pat on the back, what would your return on equity be over a cycle, let's say five years? What --?

Well, coming from where we are coming, we obviously have some work to do along both the parameters that I just outlined in terms of improving the return on equity. But again, I would say our immediate focus is to move ourselves on a predictable basis into a double-digit category, and then we'll go from there. Obviously, you see the larger firms with substantially different composition of business, etc., showing returns on equity that are well into the 20s and above. And that is not something that we're going to attain in the near term. But we are focused on making sure that we can position ourselves to create a double-digit return on equity.

Is management compensation tied to that goal at all?

Our primary metric that drives management compensation is our annual operating income, but we are working with our Board to create a component of management committee compensation that would be directly tied to return on equity.

And hopefully real equity and not just tangible equity.

That program will ultimately be determined by and set by the compensation committee of the Board.

Thank you. Thank you.

At this time, there no further questions.

Thank you all for joining us today. I reiterate we remain confident about the strength of our franchise and our market position in the industry. Thank you all for joining us this morning.

This concludes the Piper Jaffray conference call. You may now disconnect.