Stifel Financial Corp (SF) 2008 Q4 法說會逐字稿

Good morning. My name is [Sharnay] and I'll be your conference operator today. At this time, I would like to welcome everyone to the Stifel Financial fourth quarter and annual earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Jim Zemlyak, Chief Financial Officer.

Thank you, operator. Good morning, everyone. This is Jim Zemlyak, CFO of Stifel Financial Corp.

I would like to welcome everyone to our conference call today to discuss our fourth quarter and 2008 fiscal year results. Please note that this conference call is being recorded. If you would like to follow along with today's slides or if you have phoned in you may download the slides from www.Stifel.com.

Before we begin today's call, I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of fact or guarantees of performance. They are subject to risks and uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statements. To supplement our financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance and liquidity.

These non-GAAP measures should only be considered together with the Company's GAAP results. And finally for a discussions of risks and uncertainties in our business,s please see the business factors affecting the Company in the financial services industry in the Company's annual report on Form 10-K and MD&A of results in the Company's quarterly reports on Form 10-Q. With that, I will turn the call over to the Chairman, CEO and President of Stifel Financial, Mr. Ron Kruszewski.

Thanks, Jim. Welcome, everyone. As we do on all of our calls, we follow along with slides and hopefully everyone on the call has those. I thought the way to start would be to restate the quote I put in our earnings release, which was simply put, 2008 was uniquely challenging for the financial service industry.

Our company has been fortunate to have side stepped many of the issues which plagued a number of our brethren. While we are mindful of this environment, we consider this a time of unparalleled opportunity for our company. Going forward, we will continue on the long-term building of shareholder value, primarily through the addition of talented and entrepreneurial people. I would like to take the time to congratulate and thank our hardworking associates for record results in the most difficult of environments in 2008, and also thank our clients for their continued confidence in Stifel Financial.

Turning to the fourth quarter highlights, we recorded record net revenues of $228 million, 8% higher than the comparable quarter in 2007. It was a balanced business model which drove those record revenues frankly, a balance in net fixed income offset declines in equity and private client, which is historically what happens when the economy is performing like it does. Those revenues drove a record core net income of $21.7 million, $0.72 per diluted share so it was up 6%. It was not a record core net income. We have some increase in shares due to our offering in September. It was a second best quarter on a core EPS basis.

Our pre-tax margins were 16%, equal with last year. And on a GAAP basis, net income was $17.8 million, $0.59 diluted share. Book value increased to $22.75 which was up 24%. And at the end of the year, we closed on the acquisition of Butler Wick, which added 18 private client branch offices and 75 financial advisers. For the quarter, our analyzed return on equity was about 15%.

Year to date, I'm pleased to announce record net revenues of almost $868 million, up 14% over 2007. This marks the 13th consecutive record of net revenues. And it was driven by -- again, record revenues from fixed income capital markets, private client group and Stifel Bank. Core net income for the year of $73.1 million, $2.60 a diluted share so it was 9% up in net income. EPS was flat at $2.60 year-over-year. For the year despite the environment, we still were able to maintain pre-tax margins of 14%, and return on equity of 15%. On a GAAP basis $57 million, $2.04 a diluted share, up significantly. And as I said book value of $22.75.

If we turn the page and look at the summary income statement, I think what this will show is year-over-year, pretty consistent rations. Comp to revenue of 64%. OpEx slightly higher due to our -- both due to some writedowns, but also the opening of a number of private client group offices. We have taken some margin impression.

Looking at a source of revenues for the quarter, not unsurprisingly commissions were down 8%. Principle transactions -- this is all compared to the previous year's quarter. Principle transactions again driven primarily by our fixed income capital markets almost doubled. Investment banking, no surprise again down 50%. The combination of all that drove operating revenues up 8% and net revenues up 8%.

On the annual basis, really, I think all the numbers are up, except for investment banking. I really think we need to focus a little bit on the sequential aspects of the quarter and what is going on. But again, we are pleased to have recorded our 13th straight record year of revenue.

We have talked about principle transactions. The next slide shows that and again, you will see that the significant increase in principal transactions is due to fixed income. It's actually across-the-board. But the primarily increase is in taxable debt, which again, is -- flows through primarily our fixed income capital markets group. And certainly on the private client side, more of an emphasis on taxable debt and muni debt, but not equities which again should not be a surprise to anyone.

I think we should look at some unusual items in the fourth quarter, just to give a sense of what happened. Last year, which was a record year for us, to put things in context -- a record quarter for us, we had $0.76 per diluted share. But included in that number was $0.07, relating to a gain that we had on a [trust extinguishment] we did in the fourth quarter of last year. Just is to try to have an apples to apples comparison, we look at it as $0.59 if you exclude that gain. What happened this quarter was we start with $0.72 for core diluted EPS.

And then four items I'll talk about quickly. First of all, $0.11 relating to our previously announced extinguishment of our trust preferred outstanding. That was $0.11 a share. I'll come back to it.

But what we have done is we announced yesterday a partial redemption of an auction rate securities. While we have for the done that as of yet, we have accounted for the potential evaluation adjustment that we may need to take -- a liquidity adjustment, if you will. We are purchasing these securities at par. We think they are worth par.

But on a liquidity basis, we are going to create a evaluation allowance as many firms have done. That took away $0.06 a share. We also had some investments in our bank portfolio that we believed, given the environment, I think everyone understands the fourth quarter was a disaster as it relates to some of the investment -- evaluation of investments in a mark to market basis.

And while we think that these securities will perform well, we felt that we needed to look at the market value of these securities, net-net about $0.04 a share to adjust those down -- unrealized but $0.04 a share. Then we have been talking for awhile about the establishment of a charitable foundation. We also need to be good corporate citizens and we have not had a foundation so we are going to establish a foundation and that was $0.02 a share. Net-net, those all offset a penny, but we look at it $0.73 cents to $0.69, depending on how you -- the shareholders won't look at it, but that's how I look at it.

The next page, I will talk a little bit about our auction rate securities redemption notice. I will just again say what I said in the press or in our press release as it relates to this issue. And that Stifel is announcing a partial repurchase of auction rate securities in order to assist our clients. Neither Stifel nor its clients had access to the information available to major market participants, regarding the impending collapse of the auction rate securities market.

Had the major market participants disclosed to the entire marketplace, the material facts known by them or allegedly known by them, the simple fact is that Stifel would not have sold auction rate securities to clients. While several larger firms have announced more complete repurchase plans, we believe that this lack of knowledge is the critical difference that serves both as the foundation of our position and the one that is the basis of our partial redemption plan. When you look at it -- what we wanted to do to assist our clients we -- first of all define the population as both clients that bought auction rate securities from Stifel and continue to hold them on our books. That is effectively 1153 clients, [that own] $183 million.

I think it's important to note that that $183 million through the ongoing redemptions that have been announced by the issuers, that's almost declined by 50%. This market is becoming more liquid, but certain issuers have not done any redepositions yet. We just felt that we had to step up to some of our clients, especially clients that had smaller balances and small accounts and provide some liquidity. This will give you a sense of our thought process and what this slide really shows is that of the 1153 clients, 445 of them have a $25,000 lot.

These things trade in $25,000 increments. This plan will completely redeem 445 clients. For those clients that have two units or $50,000, those get -- 201 of our clients will get a 50% redemption. 210 will have a 33% redemption. And then the larger accounts will have 10% basically of a redemption.

It's a difficult situation. It's been difficult. We just felt it was time to do this. Since I'm speaking to the shareholder, I believe on this call, we also have a fiduciary duty to our shareholders. We needed to balance the interest of our shareholders with the interest of our clients on this matter.

I do not believe that we -- that the facts, as we understand them, would warrant the shareholders taking a significant hit and leveraging the balance sheet based upon our review of the situation. We think this is a -- something that balances the interest of our clients and our shareholders. And it also does provide significant liquidity to small accounts. That is what we did. I'm sure I'll get a question.

I'll look going forward, the next page, simply the environment -- the unstable conditions -- really in the private client market presents tremendous opportunity. Same story as last time, the uncertainty surrounding the largest domestic and European private clients -- impacts thousands of US-based financial advisers and that turmoil spells opportunity for us. As we look forward, we think our balanced business mix will facilitate our growth. Last year, 54% of our revenues were generated by private clients, 45% by capital markets. We think that balance is important to all of us as shareholders.

We also see the same turmoil creating a talent pool of people in capital markets and is again, something I have never seen before. The number of people that can add to our intellectual capital is unbelievable. And we are well capitalized to fund this expansion. We did that successful follow-on offering in 3Q of this year. And simply while eligible, we did not participate in the TARP program. It's more of a philosophical point that I -- certainly I and the Board have felt that we did not need government assistance, and therefore did not take it.

If you turn the next slide, this will show that turmoil equals opportunity. We have one of the fastest private wealth management businesses. As you see, our growth in net revenues financial advisers and private client branches have been strong. You couple that with our research effort, which is particularly gratifying to me that our research department, as you saw, was picked by StarMine as number one in stock picking and number one in earnings accuracy.

The intellectual capital on the research side was recognized last year. This has helped us tremendously in our efforts to recruit or attract talented people to join our team. If you look at our overall coverage of research you can see that we now have -- it is hard if me to say this, the fifth largest research department in the US, at least the way we counted on domestic stocks and we are the largest provider of small cap coverage today in the country. We think that that research base is the foundation that's going to fuel our growth going forward across all of our businesses.

When you look at growth, again that past is prologue. It is the way we look at it. The private client group, we added 269 financial advisors, 52 offices. That does include the Butler Wick acquisition, as I previously talked about -- closed on the last day of the year. We have added 63 people in equity capital markets. We have added 50 plus in fixed income -- a big, big investment in public finance. And we have added to the bank, as we positioned the bank, to be able to provide banking products. This growth has -- is, again, where we are focusing on adding to our collective value as shareholders.

If you look at the segments, I'll talk in general. But for the quarter, the weakness in private client and equity capital markets, which is no surprise to anyone, was more than offset by strength in fixed income. That's gratifying. I'll talk a little bit about that going forward. That's true, both on the revenue side and on the contribution side, the way we look at it.

If you have flipped the chart just to look at our mix of revenue, you will see that private client group is 54% of our revenue and 52% of our contribution. Capital markets 45% of revenue and 48% of operating profits -- a balance, I like that balance. We would think that it would stay. The mixes may change a little bit, but it is a balanced business model. I also think that the bank which is just a sliver here -- the bank will continue to become a bigger contributor to our profitability as soon as bank isn't any longer a four-letter word. It is tough to have a bank in this environment, but we believe that the bank will be prudently managed -- will be a significant contributor to our profits going forward.

If you look at -- let's just talk quickly about the private client group. You'll see commissions for the quarter down 9%. Investment banking down 61%. In fact all revenue items are down and then offset by an increase in other noninterest expenses of 15%. In short order, it is a -- the market is difficult.

You have declining asset values, declining fees, yet we are all opening offices left and right. I was saying to my partners, it's lions and tigers and bears, oh my. What are we doing? Because we are continuing to invest, but we think we are laying or planting the seeds of future shareholder value. It's just that simple.

We are going to take margin compression. I don't know what the short-term views or actually I don't have a short-term view other than I think it's going to be weak in private client. But my long-term view is that this is adding significant shareholder value to all of us. If you put up to equity capital markets, as it has been all year, it's a tale of two cities. Especially gratified by the increase in our flow business, as reflected in commission and principal transactions for the quarter of 26% in a difficult quarter of 33% for the year. Just -- I think that something that underscores our investment in research. And our sales and trading teams have done a phenomenal job on the flow business.

That's offset by investment banking. No one -- I don't think there is a firm on the street that has had any success on the investment banking, simply because there is really no pipeline. It is very difficult to close M&A in this debt market. I don't really know how investment banking can get much worse from a relative standpoint in the market, or for us financially.

It's been very difficult. But again we are going to continue to add in that area because we do think, in time, this will change. You will see comp and benefits coming down; it helped the profitability a little bit. We true up our accruals a little bit and there was a slight benefit to that to the equity capital markets and in fixed income capital markets also.

Fixed income, again the flow business if you turn the page, the flow business was phenomenal, up for the quarter, up 150%, almost 200% for the year. Tremendous operating leverage. Very pleased with our year-to-date margins in the mid-30s. Our fixed income capital markets team deserves a standing ovation for their efforts and what they did for the year. Again it's quite appreciated.

I must say that as I look forward, I'm concerned about some of the recent developments in fixed income -- the cram down legislation that's being proposed. There is all these unintended consequences. We see what's being proposed as the way they would allocate losses through these structures. It is really-- as I understand it, would be pro rata versus actually hitting first losses piece. The net-net of all that is it creates uncertainty. And then some of the very seasoned things that we trade, people are now having difficulty projecting losses. This cram down legislation, while it has an intended effect of helping markets, we see it actually seizing up the markets a little bit because of the uncertainty that it creates. That's something that concerns me going forward.

Stifel Bank and Trust finally, you will see that we last money in the quarter. And that relates -- and the other revenue line item to a writedown of some of the bank investments. We wrote down -- I think it was about $2.4 million in the bank, relating to some investments. We felt in the environment we should do -- it is unrealized and I can talk about that in a moment when I talk about level 3 assets.

But I think a way to look at the bank quickly is the loan portfolio -- the way we're changing the loan portfolio. Loans are up $71 million which is an increase in -- loans of about $21 million. An increase in one to four family mortgages, primarily in many cases to Stifel clients, up $38 million. We have increased [HELX] -- the HELX -- the weighted average loan to value -- combined loan to value 70%. We have average FICO of 756.

We are giving HELX to our best customers. That is offset by a $15 million decrease in commercial real estate in construction and development. As this bank goes forward, you will see us doing more. The bank will lend to our clients. That is what it's there for.

On the asset quality side, for the year we had about $1.1 million in charge offices. Our loss as a percentage of retained loans was 64 basis points. We have an allowance for loan losses on the retained loans of almost 1.25%. And our nonperformers are 30 basis points. Asset quality as of today is very good. I'm always concerned about what -- the recession and what it can do. But I feel very good about the bank in terms of asset quality.

We also have a very -- we built a very solid mortgage banking operation. We sold over $330 million in mortgages to the market in 2008. Revenues were over $4 million from that operation. We had a very, very good December. And frankly, January -- might have been a record in January as the refinancings were unbelievable. The bank is well positioned to continue its growth.

Last couple of slides -- talk about -- the last time I'll be doing this after three years, is a reconciliation of GAAP to core. I think I have talked about this enough, so I'm going to go over it really quick. But as always, we project that on a quarterly basis that our net impact is about -- gross pre-tax of about $6.2 million. After tax, it is somewhere in the 14% range. That's been the case. If you look at what is my slide 21, you will see that our projection came right on at $0.56. But for 2009, we'll no longer have the GAAP to core in that all of the stock based comp we did to fund recent acquisitions has now been reamortized through the income statement.

Looking at the balance sheet, assets $1.5 billion. I'll come back to that in a moment. Very well capitalized -- $600 million of equity. $84 million in trusts with $681 million. Leverage ratio of about 2. Book value grew very nicely.

Page 23 just talks about our cap structure. Again, a very, very attractive tranch of trust preferred, $82 million at LIBOR plus basically 180. You'll see, we are very well capitalized to take advantage of this.

Level 3 assets is slide 24. I just wand to show this and give a little bit more detail -- a little bit more visibility to people -- to you our shareholders. Today in Level 3 assets, we have $18.5 million today of auction rate securities. That's what's in our firm inventory accounts, as you can see. We are carrying those at about 91% of par.

In the bank, we have $10.4 million of Level 3 assets. That's down from an amortized cost of $14 million. What the difference is -- it's $3.7 million between our costs and what we carry those at. $2.4 million of that went through earnings and $1.3 million is in other comprehensive income. We think the bank portfolio is fairly valued.

And then you'll see a few trading securities. Primarily some our aircraft group carries securities that are classified as Level 3. We'll tell you the majority of these have already been traded out and not at a loss. You'll see effectively $38.2 million of Level 3 assets -- about 6%. But of that, almost more than half of that -- or almost half is auction rate securities. They are all AAA. These are the closed and preferreds for the most part.

Rolling it forward, if we complete our redemption plan, we could be adding $40 million to this level in auction rate securities. You could see our Level 3 assets approaching $70 million to $80 million which again, significantly more than half would be auction rate securities. By the way, we have financing in place and we are not concerned about that aspect of our repurchase plan.

Finally, other financial data, we'll just show our assets. Year-over-year, relatively flat. The brokerage assets are down a little bit. The bank assets are up. Equity's up significantly. You'll see the growth in financial advisors, employees and locations; all just driving our growth.

Pretty good year. Great year relative. 2009 is -- cautious would be an overstatement of my view of what 2009 could be. But we are so well-positioned to deliver results to you, our shareholders that I frankly, have never been more optimistic as to our long-term potential than I am today. With that, operator, I'll take some questions.

(Operator Instructions). First question comes from the line of Guy [Mathowski] with Bank of America, Merrill Lynch.

Hello, Guy.

Hi, Ron. How are you? Question for you first of all on what are you seeing in the first six weeks or so of the year, in terms of changes in private client behavior to give us a sense for how activity is starting off the year?

It's -- I'll tell you as I see -- with the volatility in the market and it was as we all know -- I think the activity -- I have not seen a real change in activity. But the activity is around a base of assets that is significantly lower. When I look at it -- it's not like the clients are saying, mail me the cash on my count and putting it away. I think clients are still in the market.

We are seeing -- I would say relatively normal activity. But asset values are down on probably -- we have a lot of fixed income, but you know assets are down 20%. That flows through revenue. That is offset though, Guy, by our increases in new hires. Unfortunately those new hires margins aren't the same so that's how I got to my lions and tigers, and bears, oh my comment.

Just to follow-up on that -- you did talk about this a little bit. But maybe you could give us a little bit more color on how you are seeing the recruiting environment in what clearly is an unprecedented or close to unprecedented level of upheaval in the industry broadly and certainly affecting retail. What are you hearing from people? How can you take the best advantage of it? And how do you trade it off against the fact that we might be looking at a weaker revenue environment overall?

First of all as I said, I think the environment has never been better for a firm position as Stifel is. We are well capitalized. We don't have the distractions that a number of these firms have. We have the capital available and we believe access to capital to prudently grow.

The answer simply is that we can't keep up with the opportunities, Guy. It's that simple. And I don't know how to say, we have to be prudent and selective in what we are doing just so that we can maximize our investments. It's a very, very active market, if you will, with all the upheaval.

As I look forward, it's difficult to add people, in the viewpoint of a short-term market decline in revenues, but you have to do it. Because if you are going to build value for us long-term, we have to look beyond the abyss and look forward to when markets will recover. And the firms that add -- the people that we are adding are going to significantly add to our value. Now if the market never comes back, probably made a few mistakes here.

But I don't believe that for a second. I do believe though -- and we are being cautious, I do believe that this will go on longer than people think. Long answer to a very pointed question. But I'll summarize it by saying, we are going to continue to add people because we believe, when we looked back in future periods, that this will be the investments that create a lot of value.

Is there a sweet spot for you in the fact that a lot of the larger firms haven't maybe in some cases tended as much to the care and feeding of what they view as some of the small producers -- the $0.5 million type guys?

They have certainly created a sweet spot. I don't know -- I think it's been created. As I have said, we are -- our cost structure -- our ability to make acceptable cash on cash returns will -- goes down below $300,000. That doesn't mean that we don't love the guys doing millions. But we also believe that financial advisors that frankly are being -- I like your care and feeding analogy -- probably not being done, we welcome them here. A lot of phone calls.

And then just a completely different question, a balance sheet question, really. You pointed to the deleveraging that's happened. And in the quarter, some of that was probably just because of the buyback of the trust. But at the same time, you are looking at taking some of these ARSs, as you said, on the balance sheet. Is that going to basically reverse the deleveraging we have seen over the past couple quarters?

By definition, yes, although these ARSs are high quality. To the extent we are going to put $40 million on our balance sheet, it is not significant to a $1.5 billion balance sheet. Again we have to balance our shareholders and our clients on that equation. But I'm not really sure it moves the needle, in terms of our overall leverage and what we are doing, Guy.

Okay. Fair enough. Thanks very much for answering the questions. Appreciate it.

Thanks, Guy.

Your next question comes from the line of Ariel Woodman with Woodman Capital Management.

You have been adding a large number of reps and I was wondering if you could help us in terms of the likely developing patterns for compensation and benefit expenses. In some of your divisions, those expenses went down. Others went up. Assuming that the markets continue the support pattern for the foreseeable future, could you help us with the interplay of revenues and compensation and benefit expenses by division?

The this round numbers, depending on -- it's more in the OpEx is a little bit more of the problem on the private client. I'll speak to the private client. The private client business -- the additions of new financial advisors costs money. And then you have to expense that over time.

That can add up to 15 basis points, if you will, 15% on that incremental revenue over and above normal. How that impacts the overall comp ratio is obviously a weighted average and something I haven't really thought about. The simple answer I think to your question is that across all divisions, when you add people in difficult markets, you are going to drive your comp ratios higher and you are going to drive your margins lower.

The question is when that market turns, do you have the capability to take that same leverage on the upside. That's what we are betting on. I really can't give you any numbers to model it, because it does go to how other people are rolling off from previous years and how you are adding people. But in general, I have said that we will have margin compression as we add people in tough markets.

Thank you.

Your next question comes from the line of Joel Jeffrey with KBW.

Good morning. How are you? Just a quick question on the release you guys had last night. Could you give us more detail on what the exactly the assignment of clients actual legal claims means?

It means the assignment of actual client legal client. Joel, our belief is that we -- that if you believe what you read -- and maybe one of the big arguments between the downstream firms and the bigger firms is who had -- who knew what, when? We simply believe that this was not -- the financial advisors did not have knowledge and did not knowingly sell a product that was going to freeze in the marketplace. But we do think there was a period of time where people did have that knowledge.

Certainly if you believe what you have -- if you have read in complaints filed by some of the states -- I don't want to name names here, you can quickly get to that conclusion. To the extent that we are going to provide liquidity to our clients, on the amount of ARS that we buy from them, we want an assignment of those claims that may exist. It doesn't mean we're going to assert any and we're not going to do it.

But we need to protect all of our shareholders, too, on this investment or this liquidity we are providing. If we think our clients have some recourse upstream, if you will, we want that recourse to travel with the paper that we are buying back. Make sense?

Yes. In terms of the $0.06 charge you took this quarter related to the IRS, if the IRS stay at current levels you wouldn't anticipate another unrealized loss in the first quarter?

Correct. We simply -- it was an interesting discussion as we went through the whole process. At the end of the day, once we agreed to do it, we felt that we had to take a liquidity -- basically a liquidity charge for our commitment to do this. While it is not on our balance sheet yet, we have effectively taken what we think will be the earnings impact in Q4 for what's going to happen sometimes between Q1 and Q2.

Will you be carrying these securities in a trading portfolio or in a available for sale portfolio?

It will be in the broker deal. We don't have available for sale in the broker dealer. That's trading.

Okay. I apologize if I missed this earlier. Could I just give us more detail on the decline in the asset level in the last two quarters?

We had a lot of -- you are talking about the broker dealer?

Yes. It looks likes it's down about $500 million.

It was off about $500 million, right, between June and September. What happened is we had a lot of activity at the end of Q3, which was a lot of a lot of just slow business. We had sales and inventories and the difference between trade date and settlement date et cetera, et cetera. It was all flow based. I think I said in Q3, our assets went up to $1.9 billion. I think two days later, they were back to $1.5 billion. That was a snapshot in time, relating primarily to slow activity.

Okay. Great. Can you just give us any sense for the impact on the expense side that the Butler Wick acquisition's going to have in 2009?

I think Butler Wick's going to be accretive. And on the expense side, we certainly have some retention expense and we haven't talked much about that. But we even think net of retention, Butler Wick's accretive.

We think that that's a great franchise. Great people. Couldn't be more pleased with how that's gone so far. That's a real, solid name in their part of the country. We see that as a great merger with us and so I view it as net-net accretive.

And then just lastly, do you have a tangible book value number for the quarter?

If you bear with me -- I'll tell you what, I'll take the next question. Is that your last question, Joel?

That's it.

I'll get it and I'll say it so we can move on here, okay?

Great. Thanks so much.

Next question comes from the line of David Trone with Fox-Pitt.

Good morning. How are you doing? I had a quick question for you. You alluded to the future FA growth, the current capital and access to capital. You did the raise in September. I'm wondering under the first scenario, current capital, how many more brokers, roughly, do you think you could bring on?

We have -- let me answer it this way. I don't know that I want to give you a number that way. I would have to work -- there is a lot of moving parts in answering that question, David. Because it depends whether we are sitting them in existing seats or opening offices, level of production, a whole bunch of things.

I will say -- I see that you picked up on that comment about access to capital. I think what we are -- what we feel is we have -- we are very well capitalized to fund our ongoing organic growth for the foreseeable future. I don't see any need to do anything as it relates to just our ongoing recruiting. I actually think our capital probably, at least today --and plus retained earnings, we keep hopefully making money.

Yes.

That pool of capital, probably, well positions us for adding organically, as we have in the past. As I look forward, though, I see a lot of opportunity as -- through dislocations to potentially -- to other things we've done in the past, aka whether it be a Rhinebeck or Butler Wick. That may require capital.

We feel that if that's the case, we are well positioned because we actually believe we have access to capital. I believe that we can do that. I was more talking about our positioning. To answer your question, we are very well capitalized to continue our growth going forward. But we also think we are -- if a big opportunity came along, we think we are well positioned to also take advantage of that.

Okay. It is unlikely you would raise to fund organic growth? You are going to do that with ongoing earnings?

We did a raise. That one was --

Right. But the big ramp up is over and now you are -- it will be a little bit slower pace of growth over the next several quarters?

I wouldn't say that.

Versus the second half of '08?

We are actively growing the Firm and we are well capitalized, David. I don't want to be evasive. I don't really they how to answer that question.

Okay.

But I can say, we are actively growing. The market is well conducive and we are well capitalized.

Then how do you tie in the lure of buying back more trust preferreds at what continue to be pretty big discounts in the market?

Well first of all, the two trusts in the trust preferred are buried in securitization so I don't know that that's even possible. We were able to buy trust preferred where they never got secured types, so they sat in warehouses. I'm not sure with that last -- I think the two $35 million pieces that are on the caption, those are buried in securitizations. But I don't see those coming out unless those securitizations collapse in some manner. Then the last piece -- the last one, I'm not actually sure where that is.

Okay.

It would be the only piece -- the allure of doing that -- we effectively swapped $12.5 million trust preferred at $0.50 on the dollar per stock at two times book. I might do that again.

Okay. Okay great. Thanks a lot, Ron.

Tangible book value $17.23, Joel.

Your next question comes from the line of Michael [Eisenberg with Questen Shell].

Good morning, gentlemen.

Good morning.

Congratulations on a really solid quarter. I justify have a couple of questions or a question on the fixed income division. And more specifically, just looking at the quarter-over-quarter reference generation and earnings generation from that division, if you could just, to the extent you can, provide some details as to what drove that quarter-over-quarter growth? And if you think it's sustainable going forward? That type of growth.

I don't think -- I would not take that growth line and project that forward. I don't think that would be realistic. That said, we -- this is a business we can grow.

What happened was that we have added a lot of people. The combination of the unfortunate circumstances surrounding Bear and Lehman creates a lot of flow business that ended up in firms like ours. I think a lot of firms like us are not only experiencing the additional people, but the business that used to go elsewhere that's coming our way, combined with credit spreads, combined with a distraction of other firms is a perfect storm for fixed income. While I believe that our fixed income business is very strong and very well positioned, I would be hard pressed to continue that trajectory of growth.

And would you say if I can just follow-up that if you had to break that to the extent you can again, where that growth came from. Was it predominantly from the principal side, the principle investing side? Was it from the slow business, the pick up in agency transactions on the fixed income side?

I have always asked this question and people -- our agency transactions flow through our principal line item. That is how we do it. We trade through inventories that turn very fast and are very liquid, but it drives principal transactions. We are not a proprietary prop trading house.

Virtually all of those revenues are driven through flow business. And if you want to say agency, okay. We just don't book them as agency trades. We book them as principal trades. But they are buying and selling and servicing clients on the flow side. It is not embedded in our results as some black box prop trading book that's generating a lot of profits.

Okay. Thank you very much.

You are welcome.

Next question comes from the line of Michael Wong with Morningstar.

Hi. Good morning. I was wondering, did you have any unusual expenses and other operating expenses this quarter because of the big jump from 3Q?

I think that a fair amount of that is the -- is our increases in opening offices. As I have said, we're continuing build in a market where revenues have been declining, certainly on a same store sale basis. The quick, fast answer to that is the -- is that -- it's our building with some declining revenue. That's going to drive OpEx ratios higher. We had some unusual legal expenses also in the quarter. I'm not sure how much that drove of that.

But I would say the primary driver is opening a bunch of offices that certainly aren't profitable. Unfortunately, you don't drive revenue, but rent and quote expense hits day one. That's what I have been talking about for awhile and I see that continuing. I am going -- we are going to continue to sacrifice margins for what I believe is going to be future growth.

Okay. That $20 million or so run rate, it's better probably than the $15 million or so in the prior quarters of this year?

I don't give projections, but somewhere in between it would be. I'm just trying to give you some sense, okay? I think there were some one timers in there, too. It's fair enough.

Okay. And just a question. Do you have any level assets under management by a financial advisor at which you think you would be getting a good return on the capital use to support that advisor?

I'm not sure I understand your question. The private wealth management business is a stable, high return -- high ROE business. You don't have to deploy a lot of capital to that.

You have to look at it as CapEx when you are adding people. And as you add offices, we view that as CapEx and we measure our cash on cash returns after tax on CapEx. I don't know if that answered your question. In the end, it is revenue driven, not necessarily assets driven, although they are highly correlated.

If you were to be recruiting financial advisors from other firms that had -- that bring with them relatively lower levels of assets with them -- if there is like a certain breakeven point with assets that they have to bring with them to make a decent return on your investment with that financial advisor to recruit them over.

The answer to that is of course. Yes. Revenues follow assets. You know assets. Round numbers -- if someone's doing $300,000 in production, they'll probably have $40 million in assets to give you some sense of that. We certainly look at assets as a basis to drive revenue.

Okay.

I'm not going to give you my breakeven per FA if that's what you are driving for.

Okay. Last question. For the large gain in the -- instead of actual growth but the fixed income capital markets commissions and principal for this quarter, is that seasonally high? It is like 30 to 40 of the private quarters a little more normal?

Fixed income had a great quarter. As I have said, we have seen tremendous building in that business. The market had been very conducive. As I said in my earlier remarks, some of the changes and some of the uncertainty, whether it be stimulus what that means for inflation or legislative cram down, it can have some unintended consequences in that market that has me somewhat concerned about the trajectory of growth in that market. But we'll see. It changes almost every day.

Okay. Thank you for answering my questions.

(Operator Instructions). Next question comes from the line of Steve [Selmich] with FBR Capital Markets.

Hey, Steve.

Hay, Ron, how are you? Just more on FAs real quickly, It sounds as if there is -- competition is heating up pretty aggressively even along the larger guys. Can you give us an idea of the retention efforts on your part to maintain the current FAs that you have, as well as recruit others? Is there retention efforts going on on your part?

You retain FAs by allowing them to be entrepreneurial and create an environment that lets them do what they think is in the best interest of their clients and providing them the arrows they need in their quiver to service their clients. And then from a management perspective, try your darndest to keep your name out of the press and the bad things, and protect your reputation and run a good shop. If you do all those things, retention generally is pretty high and there's not uncertainty. Our FAs are significant shareholders in the Firm. That is also highly retentive.

We own somewhere in the mid-40s on a fully diluted basis with the Firm's -- our FAs are significant shareholders. They have not only helped drive the growth, and that is not only just financial advisors, that is equity capital markets, banking, fixed income. They also share in the rewards of that growth through share ownership.

All of that is -- has led to what I think is very high retentive rates across the Firm. Are we doing anything above that? No. We are all partners and view ourselves that way.

I was just wondering whether -- the transition is filtering down toward the mid cap players -- ?

Their issues are different. Those issues they are facing are different and frankly, is creating the environment that is conducive to our growth.

Okay. That's fair. And then just real quick follow-up. Lastly, you mentioned the disruption at Bear and Lehman creating some flow business. Is that a transitory benefit? Once those existing platforms get more established at their new owners, does that benefit tend to subside a little bit? Or do you think it is pretty sticky for you guys?

I feel it's pretty sticky so time will tell. But I'm not sure that when -- I am pretty confident in my 25 years that institutional business -- two and two never equals four and that leakage goes elsewhere. That is just my belief. If you do a good job for your clients, it tends to be pretty sticky.

Okay. Great. Thanks for the color and congratulations on a good quarter.

Thank you.

There are no further questions at this time.

Okay. I will conclude by again, congratulating the partners in the Firm. We are cautious about 2009. But we will continue to invest and hopefully continue to create shareholder value for all of you that were on the call. I appreciate all the questions and look forward to talking to you in Q1, 2009. Thank you.

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