Stifel Financial Corp (SF) 2009 Q1 法說會逐字稿

I will be your conference operator today. At this time, I'd like to welcome everyone to the Stifel Financial first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Zemlyak, you may begin your conference.

Thank you, Kayla. Good afternoon, everyone. This is Jim Zemlyak, CFO of Stifel Financial Corp. I'd like to welcome everyone to our conference call today to discuss our first quarter 2009 results. Please note that this conference call is being recorded. If you would like to follow along with today's slide presentation you may download 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. Our first slide of today's presentation covers forward looking statements and risks in greater detail. These statements are not statements of fact or guarantees of performance. They are subjects to risks, 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 assert nonGAAP measures of financial performance and liquidity. These nonGAAP measures should only be considered together with the company's GAAP results. And finally, for a discussion of risks and uncertainties in our business, please see the business factors affecting the company on the financial services industry in the company's annual report on 10K and MD&A of results on company's quarterly report on form 10Q. With that, I would like to turn the call over to Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Thanks, Jim, good afternoon, everyone. Appreciate your time to listen to our call. First quarter was a very interesting quarter. Gratifying in a number of ways, challenging in a number of different ways, hopefully we will go over those with you today. For those of you following along on slides, I will frame my remarks in accordance with the slides of our call. First slide talks about our first quarter highlights. We recorded net revenues of $220 million which was a 4% increase over the first quarter of last year.

Our private client group segment had revenues of $111 million, which was a 4% decline from the first quarter of 2008 , equity capital markets also a decline of 4% with net revenues of $47 million, our fixed income capital markets group continued their outstanding performance and results, recording revenues of a little over $58 million, which was a 33% increase from what was actually a good quarter in first quarter of 2008. The result of all this was net income of $13.2 million or $0.44 per diluted share, which was an 8% decrease from the first quarter of 2008 on a GAAP basis, lower than that on a core basis. As I said we would quit comparing to core. It is a good quarter to quit comparing to core when it would have been down in excess of 30% some, but on a GAAP basis it is down 8%.

Our pretax margins which I will talk a little bit were 10% compared to a GAAP basis of 11% and almost 14% on a core basis for the first quarter of 2008. I do want to talk about margins. I have said in previous calls that a couple of factors were going to squeeze our margins going forward. I will explain that to you. Our annualized return on average equity was 9% compared to 14%. Financial advisors almost 1,400 at the end of the quarter. And during the quarter we did announce an agreement to acquire from UBS Financial Services up to 55 branches. We did have a press release talking that and where we are on that process and I will address that also on this call.

So what I have talked about in effect, the first quarter, PCG and equity capital markets negatively have been impacted by difficult markets, decline in asset values, just a decline in some flow business there. I think it is a well told story of the difficult markets of the first quarter of 2009. There was offset as I have said by excellent performance in fixed income capital markets and Stifel Bank, and probably the other thing is that we have been adding to our platform and capabilities primarily through the addition of people. And since 1/1/2008 some of these numbers even surprise me as I sit here, we have hired 361 FAs. We have opened 55 PCG branches. That includes a small acquisition of [Butler Wick] which would have been about 70 financial officers and I think about 17 offices, but still just without that a tremendous amount of hiring. We added 134 revenue producing investor bankers, traders in the capital markets side. Again, a tremendous opportunity for us to build the capabilities of this firm. And then importantly too we recognize that we can't get to where we are going to go unless we build our infrastructure, and we've added nearly 300 branch and home office staff some of which is in anticipation of the closing of our UBS transaction which we expect to occur in the third quarter of this year.

But you really can't add the support in the branches simultaneously. First of all, you can't do it. It doesn't make much sense. We have been adding to that. I will talk about that. If you look at the summary income statement on the next slide. Again, revenue's up 4%, an increase in compensation and benefits greater than that of 6%. First quarter is always a little bit heavy on the compensation and benefits primarily due to all the payroll taxes and the things we have in the first quarter. It is historic. You will also see an increase -- a 21% increase in OpEx. That's our investment in people and new branches. Again I will come back to that. I think probably the thing that would be noteworthy on this page besides the $0.44 earnings per share is the fact that our pretax margins for the quarter were just a shade over 10%. I would like to address that for the people on this call.

So if you look at this, I'm trying to normalize and give you a sense as to how we look at this. Now I'm not going to do this every quarter. I don't want this to become something we get used to doing. It will be interested to see how people reverse engineer this. I'm trying not to do this. I'm trying to give you snapshot as how I see the quarter and how we look at the margin compression, because it really isn't that difficult when you look at it this way. So as reported, we had about $220 million of revenue with pretax margins of 10%. Some of the big items that impact the way that we are looking at the business going forward. First of all, when we look at our established branches, this would be branches that were opened or in business prior to the beginning of 2008, so they have somewhat seasoning to them. And what you will see and what we have done as we have looked at what was the market decline in revenue, what did the market do? And as this will say is we lost about almost $16.5 million of revenue in those branches and almost $8.5 million of contribution.

It is important that we all understand the leverage in this business which is in round numbers or round cents 50% contribution margins on the incremental dollar gained and loss at the margin. And as many of the analysts have said and I agree with a softening in the private group as we saw in the first quarter resulted in a decline in revenues almost all driven by declining client assets due to the decline in the market. The other thing that we want to talk about if you go back, and when I talk about the Private Client Group, you will note that the revenues in the private client segment only declined about $4 million, even though I just said there is a $16 million decline in our revenue base on our established branches. The difference of about $12 million is revenue that we derived from our new branches that we have opened over that time and continued to add and invest in. But what happened in those branches is we lost either opportunities, some costs, ACAT fees, legal, etc., about almost $3.3 million. This is what I talked about in the past about the margin compression that would occur both in the declining market and our investment in new offices, all of which we are very excited about, but you will see that the revenue decline in private client group of about $4 million masks a $16 million decline in business with a high profit margin offset by $12 million of revenue from new branches where we actually lost money. So that will give you a sense on the private client side.

We also think that the equity capital markets business, primarily investment banking has been challenged. Again, no news here. When we look at and I think about it on a quarterly basis, primarily in the underwriting calendar, but a little bit in our advisory business, we believe there is about $10 million of revenue that has come -- that we are not really seeing that hopefully will come back when the markets improve. Again, using round numbers of about 50% profit margin on an incremental revenue, that would add $5 million. But frankly an improvement in the equity markets will probably result in the fixed income markets not being as robust. So a tightening of spreads and a number of things that will cause as the equity markets improve, I think to annalize the fixed income business is not something I would do in my mind, so in effect they net each other in my mind. We will see some improvements in equities and we will probably not see the same level in fixed income, although I hope we are, I just think it is not realistic to think that both the equity markets will improve and fixed income will decline.

The last thing on this or the last two things is i'll talk about excess liquidity in our bank. We are wash and liquidity in the bank. We have not been putting out many loans nor have we been investing. We've begun to invest our excess liquidity. I will talk about it, it is about a $2 million item both in revenues and in contribution. Finally we have added some overhead, as I have said adding the people getting ready for our continued expansion and our UBS. So net-net we look at it, and I work backwards, because 15% margins are important to me. I want you to understand how we look at it. I also want to emphasize, this is not guidance and this is not in any way trying to guide you to a number. I have said all along 15% margins and 15% -- excuse me, we have a fire here in St. Louis somewhere, 15% margins and 15% ROEs are something we focus on. I'm sure I will get a couple questions on that. That's the way we look at it.

Turning the page, pretty much the same story in that commissions down 13%, investment banking down almost 30%. Asset management fees down 18%. This is kind of in line asset management fees, market declines offset by growth, commission's the same thing, principal transactions up again. Two factors, one, the very strong performance in fixed income as I have talked about in the past, coupled with the fact that a lot of our private client investors have shifted their money flows into fixed income which for us flows into principal transactions. So the net of all that is declines in private client, declines in equity capital markets offset by fixed income in the bank, a 4% increase, but these investments did hurt our margins.

If you look at the next page, again, the principal transactions you will see the significant increase in taxable debt, almost all institutional, [MUNI] debt is both institutional and private client although the taxable debt certainly has a private client component to it also. Equities, it looks like a big percentage increase. We just did a little bit more over the counter business in equities which shows up as principal versus listed. So you will see the principal transaction line item up. Again I expect that as the agency business improve, that we will see an increase in agency business and a decline in principal business as we move forward. If you look at segments as I have said 4% same story weakness both in PCG offset by ENCM offset by fixed income, and if you look here you will see it, and I will come back to it, the private client group, $10 million of loss in contribution, and I will come back to that in a moment. That's what I was trying to explain in our compression of our margins in the quarter.

The next slide looks at why we are comfortable with our business model. We think balance is important. In the first quarter nearly -- our business was nearly down the middle, 50% private client, 50% capital markets. We think that in these volatile markets it is a mix as we have seen. A weakness in one market is offset by strength in another. So in the first quarter though you will see the decline in private contribution of private client and operating profit. And again it is something where we believe we are building a tremendous amount of leverage into our PCG operating business for when the markets return.

Looking at the private client on 10, the income statement again, the margins were lower. They declined from 22% to 14% due to the market conditions, decline of managed money again due to market and the opening and hiring -- the opening of offices and the hiring of financial advisors. So again, I explained the 4% decline in revenue being sort of $16 million market driven offset by $12 million in new branches. The decline in operating contribution, which was significant, $10 million, about $8 million of which is market driven and $2 million to $3 million of which is investment in new offices and new people. So we believe that it is something we -- that has been talked about which is the private client business. I will say that not a month does a recovery make, but April has shown some definite improvement as I guess you would expect with what has happened in the marketplace.

Equity capital markets which is the next slide, gratified by our increase in flow business, up 6% despite the fact of what we see as almost an industry wide slowdown in this business from the hedge funds to a lot of long only accounts. But what we see we are gaining market share driven primarily by our research platform. The investment banking weakness, I have talked about even though the advisory business was up, almost nothing on the capital raising side, less than $1 million in capital raising. So that is something that we look forward to improving and again you are beginning to see life in that business today, but again we are not comfortable -- comfortable is the wrong word -- we are not looking at accepting 12% margins, but nor are we going to not invest in this business. So now is the time to invest for the future rebound in this business.

Fixed income, what can I say? It has been phenomenal. We have made a lot of investments. Revenue's up 33%. Contribution up 36%. Margins at 35%. This is not at all market driven. We have added a lot of great people, sales, trading a lot of people in banking, a lot of people in finance, a lot of people in investments. This business is really hitting on almost all cylinders. It is something that while we can see it potentially spreading down with credit spreads tightening, it is a business where we feel we have gained real market share and will be a real contributor to us going forward.

The bank quarter-over-quarter or year-over-year however you want to look at it, I would say it is really a tale of a doubling of assets and a doubling of liquidity. Our assets have gone from $215 million to $530 million while loans remained relatively flat, and it is the fact that we have been aggressive as I will talk about in a minute as to limiting and monitoring our risk, but we are going to be -- it is a great time to make money in a bank with the yield curve where it is. We have not been taking advantage of that, hence when I talked about the margin improvement. I can show it here in the bank. If you put the slide up, we will talk quickly.

Our assets, I'm going to talk here quarter to quarter sequentially, so I think it's the bank has grown so much and I think we have to look at how it has grown since the end of the year. But assets have increased almost $200 million or 54%. But importantly almost all of that increase is in cash and cash equivalents. We have almost $.25 billion in very short-term investments. We have significant on balance sheet liquidity. Our retained loan portfolio has declined in this period and it is again us being cautious to this market.

Credit quality, our allowance as a percentage of loans at almost 1.5%, net charge-offs for the quarter only $270,000. If you annualize that as you see our net charges-offs of about .5% compared to our loan loss of 1.5%. It is not perfect, but we will give you a sense of how we are looking at it. Probably more indicative of our credit quality is we have less than $100,000 of loans past due 90 days. When you see our Q you'll see that other real estate owned, REO, increased $2.1 million to $4.4 million from the end of the yea, but $2.2 million of that increase represented one commercial real estate property. We sold it in April for no additional loss, it was no additional charge-off. So as of April 30th, the other real estate owned was back to $1.9 million. But I thought for people that read our Q they would want to know about that.

The shining star in the bank has been our mortgage banking operation. In the first quarter, we sold over $240 million. That compares to $330 million all of last year. Our revenues were almost $4 million in the first quarter compared to $4.4 million all of last year. We made a lot of investments in this business and it is one that we are pleased with the progress we are making. Of that, we only retained $3 million of our mortgage loan originations that we kept on the balance sheet. Again, average loan to value of 47%, a FICA of 789. The point is we are being selective. Probably most important thing in the bank is our significant excess liquidity that's almost $.25 billion on balance sheet excess liquidity.

In addition the UBS transaction will provide almost another $800 million that will be available to us.Our loan to deposit ratio is very low at 47%. But the bad news is that we didn't really take advantage of the yield curve. The good news is we intend to take advantage of that in that there is a tremendous amount of yield pick up in very safe assets. This is a good time to be a bank with where the yield curve is and we intend to take advantage of that and pick up some significant spread income in the coming quarters. If you look at our balance sheet, probably the first is our assets which at the end of last year increased about $400 million, again, that would be two primary factors in the increase in assets both very liquid. One is we swept more deposits into our bank. Therefore, you see excess liquidity.

The second is that our trading inventories which are fresh and liquid. Our trading inventories and fixed income, they are up rather significantly to handle all the flow business we have been doing. The rest you can see is all pretty much in line. If you turn to page 17 you have been hearing a lot about the stress tests. You have been hearing about what is the right level of common tangible equity to assets. People have said 4% with tier one capital of 6%, as what the stress tests have been going for. Our common tangible liquidity to assets is 24% up from 17% and our tier one capital risk based ratio is over 50%. Bottom line is we are very well capitalized, resulting in leverage ratios equity leverage of 3.2 times, and looking at our capitalization including our trust preferred under three times. So we again are very well capitalized, a lot of dry powder for what we have been doing and what we continue to do, which is to build the franchise value of this company.

Level three assets on page 18, you will see a carrying value of $37 million which was down slightly from a year ago, but it is almost all in auction rate securities. Our auction rate securities inventory today is $20 million, almost all closed-end preferred, something that we are comfortable with the credit quality. We do want to see that market get unfrozen. But again, it is not something that is going to go poof. In terms of how you normally think of level three assets, it is hard to value. These are high quality AAA rated securities. Then you will see the Stifel Bank -- the rest of the categories we have reduced level three assets in some cases rather significantly. So as a percentage of assets our level three assets have gone from 13% to 6%. If you look at other financial data, nothing really to point out here other than just our growth overall. I'm not going to really comment there. We did have stockholders equity of a little over $630 million at the end of the quarter.

To give you an update on the UBS transaction, we had a press release this morning and we announced that we originally set out to acquire 55 branches. We had a few ins and outs of that. Not to many. We filed an 8K to explain that. The net of it is we are going to acquire 55 branches, and importantly and I think frankly quite gratifying to me is that 320, give or take, of the UBS financial advisors, we offered 340 letters, which effectively committed the people to join our firm and to remain for a certain period of time. So 320 of 340 people representing nearly 90% of the people are signed up and on board. And I'm very gratified. The UBS private client platform is very sophisticated, a very robust platform. This in turn shows that our platform is something that can handle the business with these advisors and it is certainly something I'm very excited about the fact that we have had this kind of response. It is almost unheard of and I just feel very good. And even though that we are expecting to get more commitments in for these advisors. So it is just phenomenal.

These offices, I have said before, they are in 24 states, $15 billion of client assets under management, $213 million in loans, $1.8 billion in money market and FDIC deposits, generated revenue of about $120 million. So often times you are looking at these numbers and haircutting it significantly for attrition. And as I sit here today, we don't see that, we see a tremendous amount of excitement on this transaction and I think it validates the rationale that we had and UBS had in doing this transaction. I think it ended up being a win-win transaction. And again we are very pleased.

Why did we look like this? Quickly, I just wanted to tell you again, this extended our geographic presence, it strengthened our brokerage. It gets us going in the bank with our reg-u strategy. I think it's going to be accretive in the first year. The next page shows the overlap of the branches and how it overlays with ours. There will come a time where we will be in all 50 states. So we're looking forward to opening in Idaho, Nevada, Utah, New Mexico, Arkansas, West Virginia and Maine. I couldn't have said that a while ago. So that's where we don't have branches and it is something that we are looking for. My General Counsel is reminding me of Alaska. That's what General Counsel's are good for.

In terms of strengthening our brokerage position, if you look at traditional brokerage firms, not including the independent contractors and maybe not some of the bank-owned platforms, but the way we look at it, it will put us pro forma at over 1,700 financial advisors, the 7th largest in the way we look at this which is the traditional financial advisor. The metrics all again updated. What you will see is very similar metrics between our system and the UBS branches. I think it is a great fit. Again about $425,000 in revenue per advisor. Very good transaction. And again, we update -- we upped the upfront cash payment by $1.50 million to account for larger offices we got. This is all outlined in our 8K, net-net a very nice transaction for us.

Key takeaways, significant capabilities, solid financial terms, it just extends our geographic, extends our position and helps us get to where we want to be, which is again one of the premiere middle market investment banks in the country. Finally, our outlook, it is [sort of passes prologue], as the markets are improving, there is a lot of restructures, a lot of instability and a lot of moving parts within the private client segments. That provides us a lot of opportunity. We think our balance business mix as evidence by our fixed income, offsetting our equity now and private client is very significant. We think the same uncertainty in the private client platforms also impacts the capital markets platform. We have hired a lot of people. We added a convertible capability to our ECM platform, and again it is just exciting time to be growing a firm when you have the financial wherewithal that we have today.

We think the market turmoil equals opportunity, as I have said in the past, our wealth management is one of the fastest growing in the business. We are number one in research, in many ways we are the third largest provider of research, the number one provider of small cap research. Again a great platform to grow our investment bank and to continue to grow with the company. Speaking of growth, the last slide will show what we have been doing. As you can see in the first quarter of 2009, we added 94 financial officers, opened nine additional offices, 10 in capital offices, another almost 10 in fixed income. The bank is pretty well staffed at this point. We have added two, so you can see this.

Part of this is our investment not only in our platform but our investment today to be prepared for the UBS transaction, which again, 55 branches, over 300 financial advisors, over $100 million in revenue expected to close in the third quarter. That is significant. So I'm excited about it. I'm excited about what is going on. Maybe the markets will contribute. We will get off the treadmill and the stress tests and move forward to some improving markets. With that operator, I will be glad to take

Thank you. (Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Daniel Harris with Goldman Sachs.

Hey, Good afternoon, guys.

Hey. How are you?

Doing well. So I want to make sure I understand the UBS transaction. Going forward from here, we should then build in the revenue streams immediately, or are these assets going to come over over time as the accounts transfer?

Yes, we -- I'm sorry I wasn't clear on that, Daniel. We expect the transaction to close in the third quarter. And it is at that time. So if you pick the middle of the third quarter and start streaming in that time frame, that will be as close enough for horseshoes, I guess. But they don't come now. They come when we close. The good news though about the transaction is that our commitments from the financial advisors are effective today.

Okay. I've got you then.That makes sense. If I think about what you guys are paying, with the two-year guarantees to the brokers, is that generally based on a percentage of trailing 12 months? And how should I think about what the amount is, in terms of looking at your balance sheet, either cash or paying out?

Well, I think you have to look at what were the combination of what we are paying the seller, in this case, plus what we are paying to the financial advisors and they are not two years. They are longer than that, but in terms of trying to model it, as I have said in the past, you can estimate additional expense relating to that of about 12% of the revenue.

Additional expense, 12%. But in terms of the cash coming down, you have $50 million in UBS and whatever you are paying to the brokers, right?

Correct.

Okay. That's fine. Thanks a lot. I appreciate that. Just one last one here on the operating environment and the bank, I think you said that the environment is great from the interest rate environment, but that you probably haven't performed as well in terms of net new loans or taking advantage of that. What's holding you back? And if you think about your loan to -- your 47% ratio, where can that go to, and how big giving what is coming in from UBS, can we expect your loan portfolio to grow?

Well first of all, it has been something where we have been focusing on sticking to our strategy. Obviously we can grow the bank very fast if we went out on a wholesale basis, and we -- during all this turmoil and not understanding what the stress tests we're going to do, how many assets will hit the marketplace, we didn't feel like we were being paid to [manage this], to bet on asset quality, whether it is loan or investments. We have changed that viewpoint. We think there is quality out there. We can continue to -- we can start to invest on a very, very attractive risk adjusted basis. I think the difficulty today with most banks is you can get better terms investing in highly liquid, highly rated securities than you can get making a loan. It is something that's probably plaguing the industry, or certainly plaguing the borrowers that are trying to get loans.

How fast can we grow? We can probably grow as as fast as we can. We have a bunch of deposits that we haven't swept to the bank. But we are trying to be prudent about it. There is no need in tripling the size of the bank certainly not overnight. To answer your question about $200 million comes with the UBS that will go on loans, and then the other thing we were talk being in our margin expansion is we do have way too much liquidity sitting short-term, and we need to step up and invest that. Until this bank crisis has a little more clarity, short-term cash didn't feel that bad.

Okay. Thanks, guys.

Our next question comes from the line of Steve Stelmach with FBR Capital Markets.

Hi, Steve.

Hi, Ron, how are you? Ron, you spent a lot of time on the margin. How should we think about that post close of the UBS deal? Should we -- would that sort of mark the trough margin, all else equal absent of a market recovery, or should margin compression continue beyond through our third quarter numbers?

I think that first of all, a significant amount of the margin compression came from the significant reduced revenues because of market conditions, that was $8 million of it. $2 million was our investment in new branches which we expect will be profitable at some point. Those two things are hopefully self-correcting. That is a lot of compression there which is what I would call market driven and investment driven. A portion of it was our adding almost 300 support people to support this growth and some of that is for the UBS transaction. Net-net, the UBS transaction is like acquiring a firm with no overhead. We are just getting the branches. So I have always said you look at it -- we would like to think that our margins pre the transition pay can be in the low to mid 30%s, all in and the transition 12% give or take. That's how you can think about it going forward. We believe -- I believe and I'm hopeful when we get around to that point, it will improve our margins.

I guess another way to ask it the infrastructure support you are putting in place prior to the UBS transaction, should that all be completed by the third quarter or is there stuff that will bleed through beyond third quarter?

I don't know. We have added a lot now, but we are always trying to manage to the proper margin. We see tremendous opportunities, so we are adding to our capabilities. It is -- I mean, it is a fair question. I don't know if I really have the answer in terms of when it will stop. Again, most of our margin compression is market related.

And then to the extent you have received any sort of push back from the financial advisors, doesn't look like you've seen much, but to the extent that there has been any from the UBS platform, could you give us some insight there? Is there products they would rather see that you don't offer or capabilities that you don't have that UBS does?

From the 3% we haven't gotten letters from?

Exactly.

You can rest assured that that precious little to do with anything other than other issues that had really nothing to do with anything. It is such a small amount. The real story there is the 97% that signed up. That to me is just unbelievable. It is something that I'm very pleased about both the fact that we did it. The fact that UBS was so helpful in helping us get to that point and that the advisors embraced that. That's the real story here. The 3%, I don't know.

No, I agree. Even the 97%, just curious if there was any commentary with regards to differences in platform?

Commentary from financial advisors, no. Of course, there is always. They will be very pleased and be very helpful. We will come out of this a better firm. I will tell you that. There are things we need to do to improve, but we will come out a better firm because of this transaction.

Got it. And then just lastly, when you think about restraints to growth, what is it at this point for you? Is it capital, is it operational capacity, outside of market recovery, is there anything that governs your growth right now?

I think we have to keep -- obviously, there's no business can grow unabated without capital, without operational constraints. Let's talk within the realm of that. With growth and any intensive business will come the start up costs and the additional pay that you have to pay to put those people on. I struggle with the ability to explain how we are looking forward to adding these people, but the margin compression that we take in adding new people and to the extent you double and triple that, you create more of that margin type situation, but these are unprecedented times with unbelievable opportunities and we intend to take advantage of it.

Understood. Thanks very much, Ron.

(Operator Instructions) Your next question comes from the line of [Joel Jefferies] with KBW.

Hey, Ron. How are you? Just a quick follow-up question, on the accretion number you gave for UBS, is that inclusive of the sign on payments you would make to the brokers or excluding them?

I didn't give an accretion number, did I?

You said it would be accretive within the first year. Does that include the payments?

Absolutely. I wouldn't, no -- we have cash out the door and contribution. We have some shares that will be issued to the advisors. Net-net add all of it in, it is going to be accretive.

Okay. Great. And then lastly, given your very low levered balance sheet, is there any interest or thoughts of raising additional capital and would debt or equity maybe be more appealing to you?

I think we are always looking at our opportunities and looking at the future pipeline and whatever the opportunities are, so whether it is debt or equity depends on the market conditions at the time.

Alright. Great, thanks.

Your next question comes from the line of Brian Hagler with Kennedy Capital.

Hey. Good afternoon, guys. How are you? Ron, you mentioned obviously the improvement in not only the equity markets in the last month but capital markets. Can you just talk about what you are seeing in the pipelines? How much they have changed in the last month? We all know financials, a lot of offerings there, what are you seeing in other sectors sectors as well?

I don't think this is news to anyone. The business was very good in April. It felt good. Obviously the market went up seven weeks in a row. It was -- it tends to be good to the flow of business which increases asset values. The credit markets appear to be thawing. There is a tremendous amount of business that needs to be done in the capital markets. We are -- we have a robust pipeline, but I have to caution people that the markets can change quickly and things feel better today and they can turn on a dime. We are not through this yet but we definitely -- the tone and what we are seeing in the marketplace both capital raising, maybe the ability to get some M&A stuff done with financing that used to be stopped for financing, all of which feels better today. But I have got to tell you, these are volatile times with things that can change very quickly. I feel better today than I did last time I spoke to you though.

Alright. Great. And on the bank side again, you mentioned the amount of cash that you have kind of built up at the bank. It sounds like when you mentioned better yields and highly liquid, highly rated securities, are you looking at agency mortgage-backed securities, or -- I was trying to get more color on that?

We are looking at sleep at night type of securities with the yield. The yield curve is very steep here. So we are not looking at getting into subordinated tranches. There are some real yield plays out there if you wanted to play there, but you can get very high quality stuff, shorter durations, 4% to 6% type area. You've got to remember a lot of our [SO] liquidity is sitting in our bank under 1% today. It is crazy. I'm almost a little embarrassed to talk about it. There was a lot of uncertainty going into this bank and what banks were going to have to do. We weren't comfortable stepping out and investing. We feel better about it today. So that's what we are looking at, but we are not looking at going out and buying support tranches or anything like that. That is within the safety and soundness within the bank.

And just to clarify, did you say there is $200 million in loans and $800 million in cash?

Potential. $200 million in loans and deposits of $800 million that is future that we can sweep. We actually dispersed those deposits through our bank deposit program where we use other banks. We are not -- we could be in a position to sweep most of those into our bank. But that would require taking risks on the asset side that we are not comfortable with. The bank is going to grow within a prudent basis, as I've said all along. If we leave some short-term spread on the table, so be it.

Okay. Great. I appreciate your time, Ron.

Our next question is a follow-up question from the line of Daniel Harris with Goldman Sachs.

Hey, you guys. Thanks for taking the follow-up also. On the fixed income side, Ron, I think you had mentioned that obviously the last few quarters had been exceptionally good, and with the change in environment, that would turn around. You talked about a lot of this has to do with hiring of new people, a lot of revenue producers in different areas. If you were to normalize the quarter for spreads or people, either way you would like, versus the prior year, how do you think about that growth? Was it much more driven by the market, or because if you hire the people what percentage of additional revenues came from those new desks?

It is a fair question that I probably can't answer because we have hired a lot of people. So you go to our growth slide, since 2008 the last slide in the deck, we have added sales and trading professionals, we have increased it by almost 40% in the beginning balance. We have added a lot of public finance people. It is a combination of widening spreads, adding of people and disappearing market participants. There is a lot of business that -- you don't absorb [Barrett] or JPMorgan and all that business goes -- two and two doesn't equal four in those situations or whatever. It is a combination of all of the above and I can't split it out for you. I do know that we have made significant market share gains through the addition of people and capabilities and fixed income. How much of that is market driven and spread driven. I know it is some. It is not all of it, but I can't really break that out for you.

Sure, and I appreciate that. It is fair to say then, even with a more difficult fixed income trading environment, the addition of people in new areas and potentially less competition means you will not go back to where you were, just you go off a little bit of these highs.

Yes. I would be very disappointed if we went back to where we were.

Okay. And then just lastly for me, on those UBS loans, is it essentially if you had to characterize the quality if it is on an LTV or a FICO basis, and then the type of loans they are, are they similar to what you have done or they a little bit riskier, per se?

We had some regular loans, this is going to really ramp our -- these are security-based lending. Again, I hate talking about other firms, but I can tell you the risk management collateral, the whole thing we have looked at is very, very sophisticated, very solid and something we are very comfortable with. This is not high risk loans. They are very liquid and it is something that it is really what we want to do in the bank. We are not interested in wholesale increases in the bank. We want to lend to our 400,000 to 500,000 clients and this is what they have done and it is what we will do. So I'm comfortable with the loans. We have the ability to reject any loan we don't like anyway, if you read the agreement, which we don't anticipate rejecting any frankly.

Is there going to be a one-time pickup in provisioning when that happens though, or not really?

Good question. I think there has to be in the bank. I think you have to -- in a securities firm we wouldn't have to. In the bank we will have to do something for the security-based lending and that's true. That's non-cash balance sheet strength is the way I look at it. These loans are -- these loans, the collateral is quite liquid, but that's a fair question.

Thanks a lot.

(Operator Instructions) Your next question comes from the line of Devin Ryan with Sandler O'Neill.

Hi, guys. I want to follow-up on the last question, I want to make sure I understand your comments on the fixed income capital markets business and your comments not to analyze this quarter's number. Now are you starting to see the level of activity pull back today in the fixed income business, or is that your expectation as the equity markets improve and potentially liquidity comes back and [fixed] spreads tighten? Just wanted to clarify that.

Expectations without any -- fixed income business are still quite robust, but experience tells me that as the equity markets improve that that is the things that will cause, if for no other reason then the flows will change but spreads will tighten. So it is just the way it works. My expectations are that the environment for fixed income will generally not be as good as the equity markets improve.

Got it. Great. Thank you.

(Operator Instructions) There are no further questions at this time.

Fantastic. Well, to everyone on the call and the people that are on the web, I want to thank you for your time, almost an hour, so it is a little bit longer than we are used to, but a lot of great questions. I want to finish by saying that our goal of filling the void that is created by the consolidation and the disappearance of some of the market participants is something we are very excited about and something we believe will add long-term and significant value to our shareholders. We continue to look forward to report to you on a quarterly basis and look forward to a challenging but improving year. Thanks for your time and attention, and talk to you next quarter. Thank you.

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