Stifel Financial Corp (SF) 2009 Q2 法說會逐字稿

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Financial Corp. second-quarter 2009 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). Thank you.

I would now like to turn the call over to Jim Zemlyak, CFO of Stifel.

Thank you, operator. Good afternoon, everyone. This is Jim Zemlyak, CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss our second-quarter of 2009 results. Please note that this conference call is being recorded.

If you'd like to follow along with today's slide presentation, you may download the slides from www.Stifel.com. You can also get our earnings release from www.Stifel.com.

Before we begin today's call, I'd like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private securities litigation Reform Act of 1995. Slide 1 of today's presentation covers forward-looking statements, risks in greater detail. These statements are not statements of fact or guarantees of performance. They are subject to risks, uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statement.

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.

Finally, for a discussion of risks and uncertainties in our business, please see the business factors affecting the Company and the financial services industry in the Company's annual report on Form 10-K and MD&A results in the Company's quarterly reports on Form 10-Q.

With that, I would like to turn the call over to the Chairman, CEO and President of Stifel Financial Corp., Ron Kruszewski.

Thanks, Jim. First of all, I would like to just apologize. There was a delay in getting our earnings release for some reason. Really I don't know why, but regardless there was a delay.

Let's talk about the second quarter right now. We recorded record net revenues of $261.5 million, which was a 25% increase from the second quarter of 2008. The record -- record revenues in the Private Client group, record revenues in capital markets, net income of $15.8 million or $0.51 per diluted share, which was 28% increase from the second quarter of '08. Our pretax margins were 10%, unchanged from the comparable quarter last year. Our annualized return on average equity was 10% compared to 11% from the second quarter of 2008. The number of financial advisors increased to 1562 from 1178 in the second quarter.

On a year-to-date basis, record net revenues of $481 million, up 15% year-over-year; record Private Client revenues, up 3%; record capital markets revenues of $230 million for the six months, 31% up over the comparable six months.

Net income was $29 million or $0.94 a diluted share, a 9% increase. Again, the margins were 10% compared to 11% for the year. As we said also, in the year, as a highlight, we've announced the acquisition of 56 branches from the UBS Wealth Management in the Americas branch network. That conversion is scheduled to start this week and will continue through the end of this quarter and into the early first part of the fourth quarter. So that is an overview.

I thought that what we should talk about first of all is the overall growth of the Company, because I think the underlying story that we want to talk about today is the same one that we've had in that, while many in financial services are retrenching, many are talking about hiring freezes or rightsizing business models to the business environment, we continue to grow and to add to our people and our capabilities. So we have a slide out there, again for those of you that can get our website and follow along or download the slide, at www.Stifel.com.

But talking about growth which will lead into some of the things that are going on with our margin compression, I thought it would be instructive to go back to the end of 2004, so 4.5 years ago. What has happened to the Firm over that four-plus years? As you'll see, our net revenues have gone from $247 million to $963 million annualized, and that's before approximately $100 million that will be added via the UBS branch acquisition. So revenue is up almost 300%.

Our equity capital back in the end of 2004 was $131 million; it is over $700 million today. Our share price was approximately $14. At the end of the quarter, it was $48, so up significantly; our market cap from $207 million in 2004 to almost $1.5 billion. Probably just to underscore the amount of growth is the total associates that have gone from 1384 at the end of 2004 to 3800-plus as of 6-30. This is where you'll see our working to build our infrastructure to take -- to be able to support all of the people we are hiring. We have added 641 people to date in the six months; and that's 291 new financial advisors, including the opening of 20 new offices, 11 sales and trading professionals; 6 in fixed income; 7 and investment banking; 8 in public finance. The banks added 11 people, and across our infrastructure, we've added 86 people. We had 195 people in what would be accounting, human resources, compliance, IT. Today, we have 489 people. So it's all to show the amount of growth, because we are truly taking advantage of the dislocation in the market and continuing to build out our franchise.

So that growth -- I will talk about it, but that growth and the building of the infrastructure has depressed our margins, even though we are growing revenues nicely. Our infrastructure is in advance of some of the revenue, primarily again the UBS branch network that we've added the overhead structure today, but we have not yet obviously added the revenue.

The next slide will give you a sense of some of the things that have happened in the quarter on the expense side, and this ACAT, which is the automated customer account transfer system. The fee reimbursement and what we've been doing -- and this just to give a sense of the growth and what's going on at our company. For the first six months of 2009, we have transferred in over 55,000 accounts and have reimbursed the Street members -- we don't make our clients transferring in pay the termination fees; we pay them. So you will see that we paid $5 million -- 55,000 accounts, over $8 billion of customer assets have come into the Firm in the first six months.

I find it striking because, when I joined the Firm in 1997, I think we had 87,000 accounts, and we've added 55,000 in the first six months. Again, this is before the 140,000-plus accounts we are going to add from the UBS transaction. But it's cost us $5 million. If you really look in Q2, almost 40,000 accounts where we expensed almost $3.7 million and compared to last year over the same timeframe, we had transferred in 12,000 accounts and only had reimbursed $1 million -- so a five-fold increase year-over-year. This just underscores the amount of growth that assets -- that where we stand today in our ability to grow this franchise I think is best illustrated by the amount of customer assets and the amount of customers which really are following their financial advisors who are joining us. So we have been extremely busy, but this kind of growth does come with expenses.

Looking at the income statement, net revenues, as I said, up 25% quarter-over-quarter, up 15% year-over-year. But on the other hand, non-comp operating expenses are up 35%, so that's not a trend that we -- for those of you know the Firm, that's not a trend that we look -- we do not look to grow operating expenses faster than revenue, but in this case, we are building the infrastructure and we've invested heavily so that we can have a smooth transition. That results in the margins, so when you have net income on a comparative basis, regardless net income is up 28% year-over-year. The primary reason for that is that, while we've increased expenses, we're also not charging the acquisition-related, primarily stock-based compensation relating to the Legg Mason Capital Markets transaction. So that's an overview of the income statement.

If you look at the next slide where we look at normalized pro forma, again I just want to give a sense as to what has happened to our margins and how we look at it. As reported for the six months, $481 million of revenue, generating pretax of $48 million or a 10% margin.

Then when you look on a broad-brush basis as to what's happened here, this is similar to what I did last quarter. Our established business in the private client business, had it been on the same basis as last year, established business would be up $22 million on a same-store basis. That decline, if you will, comes from the fact that we have reduced asset management fees on managed accounts, lower activity in general, plus waiving of certain management fees on our money market accounts, so it has significant dollars. But on that $22 million, we've lost on the margin almost $10 million of contribution.

You couple with that the fact that we have added new branches which, while it has added almost $30 million of revenue, those new branches have cost us, for the six months, over $6 million in pretax profits.

So if we just said "Okay, we never opened these branches" you would deduct $29 million from revenue, you would add $6 million back to your pretax. I'm not saying that we would do that; we are very pleased with these branches. We see them as big contributors to our profitability going forward, but in the short run, they certainly have been users of earnings.

The bank excess liquidity, we started investing our excess liquidity in a very really short-duration, high-quality portfolio that we still have yield pickup of in excess of $3 million by continuing to do that. We are awash in liquidity in the bank, but if you look at that, you would add that back.

On the Firm overhead, we had, in addition to some other -- some of the ACAT reimbursement is in the new branch business, but some of it is relating to existing branches. That, coupled with the salaries we've added, coupled with [CPTIC] and FDIC special assessments, approximately $1.8 million that are one-time things for the six months, that will give you a sense. If you add all that back, you will see that that's how we look at what has happened to our margins.

If you turn -- if we move onto the next slide, we will just quickly look at the sources of revenues. You will see you, for the quarter, commissions, the agency commissioned business down slightly, 3% for the quarter. It has been improving. Our private client business has shown very nice trends starting in June, continuing into July, some nice pick-up. As you would expect, the market has been, as we all know, pretty robust, principal transactions up 85% for the quarter, investment banking up 18% also down 6% for the year. Asset Management service fees down 18% for reasons I've already discussed -- decreased assets, waiver of fees. So net-net, you will see that our -- net of all that, our revenues are still up 24% here for the quarter and -- total revenue, I'm sorry. Net revenues are up 25% for the quarter and 15% for the year, a lot of revenue that we've been adding to the Firm.

Turn to the next slide, I always get a question on this -- principal transactions, again just to show what's going on. The long and the short of this is I've been talking about the fact that fixed income was going to slow down. I will say that and now I've been saying it for a year, so I will continue to say it -- that I don't think fixed income continues at this pace, although I do believe equity picks up to offset some of that. But you'll see the taxable debt on principal transactions up 129%, the muni up 50%, so mostly what's going on is this is our flow business running through fixed income.

If you look at noninterest expenses, I want to take a moment here. This is on Slide 10 on the presentation. But what we show and what I want to talk about is what's going on in compensation and benefits, the single-largest item. For the quarter, our comp ratio came in at a little over 67% and a little over -- both for the quarter and year-to-date.

But what I want to point out is the hiring incentives. We have added a lot of people, and you don't do that without incurring hiring incentives in the form of forgivable notes for financial advisors and stock units or restricted stock, if you will. These are things that we amortize over time, but I think it is noteworthy to understand that, for the quarter, a little over $13 million -- and for the six months, $25 million of hiring incentives, both a little over 5% of net revenues is being spent on the investments that we've made in people. These are effectively, as they go forward, they are non-cash charges because it's either the amortization of stock-based compensation, or the amortization of notes that we've already put out there that we view as acquisition-related expenses. So in many ways, we've almost acquired another couple of small firms, but instead of putting goodwill on our balance sheet, we amortize the cost of compensation expense, get a tax deduction -- the best cash-on-cash result, but not the best accounting result.

So on an annualized basis, this year, we will run through almost $50 million of hiring incentive. And you want to think about it a different way because of the magnitude, that would be $30 million simply after tax about $1 a share in hiring incentives. But it does -- we are -- we said that we were going to take advantage of the opportunity to build this Firm and we're doing it, but it does not come without a cost to short-term margins.

Turning to segments, we -- again, records. We, as was announced, we hired Victor Nesi, who formerly was a Director of Banking for the Americas of Merrill Lynch, a great new partner -- appointed Victor to the Board today. In conjunction with his association with the Firm, we made Victor and Tom Mulroy, who was formerly the Head of Equity Sales and (inaudible) sales and trading as co-directors of capital markets. So, we've changed our segment reporting to combine capital markets, and although I will talk about the flows in a moment, going forward, our segments will be private client or wealth management, capital markets, and a bank.

So based on that, with that segue, our private client, as I said, record revenue up 8% quarter-to-quarter, now up for the year up 2%. That trend, by the way, is, as I've said, is good. The last couple of months have shown some real upticks in what's going on in private client.

Capital markets, led by our fixed income group, is phenomenal, up 51% for the quarter, up 31% year-over-year. The Bank, while still small, is growing. I think those are also record net revenues for the Bank, so all of our segments had record revenue.

On the operating contribution side, as I've already said, the Private Client, even though revenues are up 8%, the contribution private client is down 31%, again same discussion -- a reduction in same-store sale revenue, plus the investment in new branches results in that compressed operating contribution from Private Client. Of course, capital markets as a contribution has more than doubled for the quarter, up 56% for the year, and the Bank has had phenomenal results also.

If you look at our percentage of revenue, we feel we are very well-positioned because we are a diversified business model between private wealth management and capital markets -- as you can see for the quarter, about a 50-50 split between capital markets and private client business. The contribution for reasons I've already talked about is 60% capital markets and 40% private client, but we feel that we are well balanced as a Firm. Private client will probably get back to 55% or a little bit higher pro forma for UBS, but again we feel that we are very well-positioned to continue to grow.

Looking at the Private Client group on Page 13, I've already I think beat this to death and I won't spend much more time, other than to say that the goal now is to start to reap some of the benefits of the investments that we have made on the Private Client side.

If you look at capital markets, where capital markets revenue is up 51% quarter-over-quarter, 31%. I like, obviously with -- when you have for the quarter revenues up 51% but contribution up 100%, that's the leverage inherent in our business -- actually across all segments, not just capital markets. But it's been a very strong quarter for capital markets, strong for fixed income, strong for flow of business, still relatively weak on investment banking but an acceptable quarter.

If you look at the next slide, we look at our flow business or look at the revenues, and equity capital markets sales and trading up 6% for the quarter, fixed income sales and trading up 100% -- really the story of what's been going on, not just at Stifel but across the street.

Two years ago [the spread] Fed funds to the 10-year treasury was a negative 25 basis points. It was flat; the yield curve was flat in 2007. Today, you're talking about 3.5, 3.6; I'm not sure where the 10-year closed today, but a steep yield curve. That, plus wide spreads, have really helped our fixed income business.

On the Investment Banking side, Investment Banking quarter-over-quarter up 50%, year-over-year up 9%. The revenues -- this is within Capital Markets, $21 million, equally split between advisory and capital raising.

While you have seen strong results on that, I don't think that we've participated in as much in the origination efforts in the second quarter. Although we've had some nice transactions, we have not participated fully, I believe, to what we can do considering our other platform.

If you look at the Bank, I would just point out that the total net revenue is up 28%, almost a 300% increase for the quarter, and income before income taxes, or a contribution, driven by very strong mortgage origination and sale activity. Asset quality remains strong.

If you look at the next slide, we can talk about what's happened. First of all, on the balance sheet, our investment portfolio grew $74 million from 3-31-09 to $133 million, but since the quarter end, we've added an additional $85 million. The portfolio stands at out $219 million today. That redeploying of capital has represented a 300 basis point increase in our yield, and that goes to some of what we're going to see here.

What I'm also pleased is that we've been doing a lot of agency MBS, so a lot of credit is not something we're doing. We are doing agency MBS, high-quality investments and beginning to swap out our funding risk, although the duration on this portfolio is very short.

On the loan side, really we've had just really pretty much a net decrease in loans. We've had trouble seeing the relative value versus the investment portfolio in the loan book. It's just been difficult, so we've been -- loans have been decreasing.

Mortgage banking -- $521 million in mortgage loans sold in the first six months. That compares to $330 million all of last year. That has been a business where we've been gaining market share.

On the credit quality, still very strong -- allow once as a percentage of gross loans is 1.66%. That's up 19 basis points from last quarter. The trailing 12-month losses as a percentage of our average loans was only 0.39%, so when you look at our allowance to our losses, you'll see that our asset quality and our reserving I think are very strong.

As I said last quarter, other real estate owned decreased $2.5 million. We did foreclose on a property at the end of last quarter and immediately flipped it out, really didn't incur a loss. So you had an increase in owned real estate at last quarter, and that decrease came through this quarter.

If you look at the Other segment, you'll see this is where, despite our increase, we've got a lot of investment. What I'm trying to show here is that, when you look at the Other segment in total, it looks like it only increased for the quarter to $28 million in expenses versus $25 million last year. But what we really need to talk about is last year included for the quarter $6.5 million of acquisition-related expenses. So sort of apples-to-apples, our costs in the other overhead infrastructure segment, if you will, is up 48%. It's $28 million versus $18 million, a reason for our margin compression, but again, our investment in our infrastructure.

Looking at the balance sheet, which is the next slide, the balance sheet is up to $2.2 billion. Most of that is quarter-end stuff that has to do with flow business. We get a lot of activity and you will see an increase when you get the Q; you'll see an increase in broker-dealer sales and things that cleanup, but a lot of balance sheet-type stuff.

Probably the only thing that was of any increase we did, our securities owned was up in the $450 million range, again facilitating our fixed income flow business. That inventory turns fast, but our assets of $2.3 billion, total capitalization $785 million, over $700 million of equity, $83 million of trust preferred, puts our leverage ratio at under 3.

Our book value grew nicely as a result of doing an accretive offering. We did an aftermarket offering that was accretive to book value, plus the way we amortize stock-based comp. So, book value since the beginning of the year has gone from $22.75 to $24.86, and that -- the $0.94 of it is earnings, but the rest is at the market offering plus stock-based compensation.

So the next slide just shows the capital structure a little bit more graphically. Needless to say, I feel that we are very well capitalized to continue our growth in the market.

The next slide looks at level III assets. Level III assets at the beginning of the year were $38 million. They are $70 million today. You'll see that the increase is entirely auction-rate securities. We completed the first phase of our voluntary buyback, buying approximately $40 million of auction-rate securities at the end of June. So that took auction-rate securities up to $57 million on our balance sheet, up from $18 million and all other level III assets declined.

So the fact again is that I'm comfortable these are mostly the closed-end auction-rate preferreds, something that we think is generally getting redeemed. We've seen a lot of redemptions and we are confident that, when it gets around to completing our repurchase program, many of the issues are already going to be redeemed. But that is level III assets.

Other financial data, again, just to look at the increase in Bank assets and Stifel Nicolaus assets explains a little bit of the increase in assets. Shareholder equity already explained, financial advisors in total at 1562, so we are going to be over I think 1900 with the addition of UBS. We have 3800 full-time associates and 239 locations managed, so almost $65 billion of client assets.

So, how do we see things? Our outlook has not changed. In fact, this is the same slide as last quarter. We believe that the unstable conditions in the private client market presents opportunity. As you can see, we are taking advantage of this by hiring very good people that are going to add to our capabilities.

The balanced business mix that we have as a capital markets and a private wealth management firm positions us very well to fill the void that has been created by what's happened to the large firms. What's true in private client is also true in capital markets, the amount of talent that we are seeing.

All in all, a very acceptable quarter -- I of course always get nervous when we are the firm that is adding, hiring 600 people in the midst of layoffs and what else is going on in the industry. That said, I again feel very good about the way we are positioned for future growth and future profitability.

With that, operator, I will take any questions.

(Operator Instructions). Daniel with Goldman Sachs.

I just wanted to go back to your slide about the non-comp operating expenses, and clearly growing quickly as you talked about given the investment. But how do you think about that trending over the next -- throughout 2010 might be the best time frame -- in terms of are you spending a lot now and that should normalize next year, or do you anticipate, given the dislocation in the market, that we should expect to see some pretty significant non-comp growth again next year?

Are you talking about non-comp or comp expenses?

Non-comp.

No, on a non-comp side, I believe that we are, in addition to hiring or associating with what was the number? -- 230 people that we've hired in the Private Client group, right -- 291 people. When we did the Ryan Beck acquisition, we added 330 people. We've just added 291, sort of one by one, I mean a lot of work and a lot of recruiting going on. On top of that, we are adding 330 UBS people who I am excited to have, but I'll tell you we've added an infrastructure.

So I think that we are of course going to grow expenses, but I've not layered in -- once we layer in the revenue from UBS, those nonoperating expenses as a percentage of revenue are going to look much more reasonable. So we've added a lot of the infrastructure already for the revenue that's coming in, plus the people we've hired.

My biggest worry is that we take advantage of this market dislocation, hire a bunch of people, but the infrastructure can't handle it. So we've been adding the infrastructure. So I don't think you're going to see -- certainly going forward, you're not going to see nonoperating expenses outstripping our growth in revenue. I think it will get to a more normalized rate.

Okay, and thus that actually leads me to my second question. So if you will -- I don't want to say "scaleback" but if the pace of non-comp slows to some extent but you are starting to layer in revenues, we reached a 10% pretax margins this quarter. I guess the anticipation or the question really is, how do you think about that going forward across the overall businesses where you've added people in Capital Markets, the Bank and PCG for 2010? Or even the next few quarters? It seems like the trajectory should be higher from here, barring some sort of major equity markets change.

Well, again, we don't provide guidance, but that said, the mere fact of adding the revenue from the UBS onto the infrastructure we've already built is going to increase margins. Again, we start with our first wave of conversions this weekend. So, we've added the expense but we haven't added (inaudible) to that. So that revenue is going to come on at relatively high, certainly higher than 10%, incremental margins on that revenue that comes in. That should be accretive to our margin.

Couple that with -- because of that, our pace of hiring other people is slowing. We have a lot of significant ACAT reimbursement, those are big numbers, plus [SFTC] and FDIC. There's a lot of one-time things that you have to come out.

To answer your question though, we've invested in the infrastructure. We think we are positioned for a lot more growth without adding a lot of costs. As the revenue comes on, it should be accretive to margins.

No, that's perfect. Thanks a lot, Ron. Then just lastly from me, the second quarter obviously was a pretty good environment for fixed income trading with credit spreads narrowing and a ton of new issuance in the market I guess despite the fact that you guys didn't participate as much. But how much of your second-quarter results from the Capital Markets side or Fixed Income were driven by spread-tightening and positive impacts on your inventory, versus client facilitation?

You know, I would say that the second quarter on -- the second quarter was incrementally a little bit better than the first quarter, but not -- we are not a prop trading shop. Obviously, it is a favorable environment. But if you look at it sequentially quarter-over-quarter, it was better in the second quarter but not as if it was double the first quarter in terms of what happened. But we turn our inventories pretty fast. But it has been favorable.

I will continue to say what I've always said in that I believe that the increase in the profitability of fixed income has to slow. I just sound like a broken record. I hope it doesn't, but I think it does. But I wouldn't -- there is no huge, one-time items in the second quarter as compared to the first quarter, but the environment certainly is favorable.

Steve with FBR Capital Markets.

You know, Ron, just going back to your comment, you mentioned $50 million of sort of annual hiring incentives that you've incurred, and that's about $1 I share. How should we think about that if the pace of hiring slows down? Does that $1 come all back to you, or is there some residual impact because you have the higher dilution regarding the restricted stock units? How should I think about that sort of $1 of maybe embedded earnings?

Well, I mean it's a great theoretical debate. The way I look at it is, first of all, I don't see the $50 million going away anytime soon. I don't see it growing as fast because I just don't see it us keeping up this pace of growth. I just again, it's been phenomenal but we need to digest a little bit of what we've been doing.

But the point I'm trying to make is that the way we have been hiring people is that, unlike buying a firm and just putting it in goodwill, we hire people and run the goodwill through our income statement. So frankly, another way to look at it is that if we were going to -- if we wrote off all of these incentives that sit on our balance sheet in terms of forgivable notes, I could tell you approximately our book value would decline by probably a little under $3, but our earnings would go up by $1. These are all sort of these non-cash charges where effectively we are acquiring businesses but running it through the income statement. I like doing it that way because the cash-on-cash returns are higher, because you are getting tax-deductibility because you are doing it through compensation. But I just think you need to -- I just want to point it out because a lot of the firms I'm competing with talk about IPO awards, and you should ignore IPO awards. I'm not sure whether I agree with that or not.

But I do think it's important to note that a lot of these charges are going to the fact that we've increased our Private Client group from 400 people to 2000 people, so that's all. I just think it's something worth noting because it's getting -- it's a big number; it's one of those numbers that frankly we feel good about because we've added a lot of good people. But I wouldn't say that it's going to go away.

Okay, that's helpful. Then just turning to the Bank briefly, retained loans were down a little, 1% or so, and you gave some color around that. But is it just the economics of selling loans right now that is more favorable than holding them on balance sheet? I sort of got the impression last quarter that you were going to be a little bit more aggressive in using that excess liquidity at the Bank.

Well, we have, but we've gotten a little bit more aggressive in, frankly, investing in very highly rated securities and agency MBS with the yields and where the curve is is probably, on a risk adjusted basis, it's hard to justify a C&I loan when you can get these kind of spreads with credits at least, agency credit. What we've done is we were trying to make loans but frankly the payoff of our existing loan portfolio is happening faster than us originating new loans.

As it relates to what's going on, on the mortgage side, most of -- because of what's happened on Fannie and Freddie and the government helping with sort of setting rates, if you will, on that product, that's fixed-rate product that we don't want, all right? So we are originating it and selling it. So we've deployed almost $200 million to date of excess liquidity, $157 million at the end of the quarter, but we are doing that primarily in the investment portfolio.

Got you. The vast majority of that mortgage is agency conforming mortgage?

Yes.

I will add -- and I know you're getting off -- I will say that we have started looking and starting to retain some of our 3-1 product because that's something that we view attractive today. At certain FICOs and certain loads of values, we think we could portfolio some of that in the bank. And we're looking at that, too.

But the Bank still is awash in liquidity. At the end of the quarter, we still have over $150 million sitting in very short term. We need to put that to work; we are just trying to do it in a balanced manner.

Then we're just going to get our arms around that and along will come the UBS transaction and we will be awash in more liquidity. These are good problems; we are just trying to keep the credit quality high.

Next question, operator?

Joel with KBW.

A quick question on the equity offering you guys participated in this quarter. I mean it looks like you did a much higher number than you had in the first quarter, but the sort of revenue flow through wasn't quite there. Is that something we can see as a trend going forward, or is there something you guys can do to sort of up your percentage of each deal?

Well, we made -- we are focused on that; we've made some strategic additions to people. I believe that the trend line for our equity origination revenues, both as a percentage of the deals that we are in, plus a percentage of the deals that underwrite that we are in on, both of which are and really have only one way to go, and that's up.

So we think that our research, our sales and trading and our expertise in banking, if you look at it, Joel -- and I've talked about this in the past -- our equity origination and debt on the taxable side -- origination, percentage of revenues compared to the size firm we are, we under-hit our weight in that area, and I expect that to improve.

Okay. I know you guys have said or you just said that you are looking to possibly slow down the hiring on the FA front, just given the pace that you had. But we've heard from some other firms out there that the environment for hiring is getting more difficult out there. Are you guys seeing that as well?

No. I mean, I think the environment has been difficult because we are hiring people coming through what's been very difficult markets. I think that is difficult in and of itself. But frankly, our -- I don't know that I would characterize it as difficult.

When I say we're going to slow down between now and October 1, we are going to add another 330 financial advisors. We will have acquired a firm that is larger than what we were four years ago in the next three months, plus what we've just done! So we have been adding people at quite a pace. I think we are slowing down because we have to do the UBS conversion correctly, which we will do, but we're going to focus on that now for the next few months. You're not going to see us in the next six months add 291 financial advisors, one by one. Were going to add 330 in four conversions.

Okay. The UBS deal, have the -- you guys have not yet paid the upfront payment to those brokers yet, have you?

No. They are anxiously awaiting it, though.

And then just lastly, if we're looking at potentially a sort of slower growth scenario for the Company in the future, has there been any discussion of potentially offering a dividend?

Well I don't -- let's not miss -- don't mis-characterize what I'm saying in terms of -- I mean, slower -- we have grown significantly over the past years, and we will continue to do that. Just, the pace of the last six months has been extraordinary. You haven't even seen it yet. A lot of what we've added has not hit the revenue stream, all right? You've not seen it. I'm just saying that when I -- I don't want anyone saying that we are going to add 600 financial advisors a year organically. That's not going to be the case. But our historical growth rate -- we are still growing. I still believe we will grow faster than the industry. I believe we will continue to gain market share. But the last six months and particularly the second quarter was extraordinarily a very busy time for us, and I just don't want people annualizing those numbers.

Patrick with Banc of America-Merrill Lynch.

In fixed income and fixed income trading in particular, could you give us an idea of how much of that year-over-year improvement is from your build-out versus just the competitive environment allowing for wider bid/ask spreads and more market share gains? Have you all tried to do that?

No. (multiple speakers) no because we've added a lot of people; we've added a lot of capability; we've added a convert desk; we've added significantly to corporate desk. We've added capabilities and an aircraft-leasing group. All of this is all organic, but all of this also adds to the ability for existing professionals to offer more product.

I just -- I know, without question, that the environment is helpful. I also know that we've added a lot of capabilities, so if we went back to an environment similar to 2007, I believe we would do significant more revenue than we did then. Frankly, I've can't -- I've tried to think about it. It's like chasing your tail; it's not worth the time.

Yes, okay. I have had similar answers from others, so -- (laughter).

In Private Client -- this is kind of a broader question -- I know historically we've kind of seen, when you see the amount of wealth destroyed that we saw at the end of '08 and into 2009, that the traditional private client will tend to be in a kind of shellshocked period. Are you seeing a similar trend, or do you think that there is more willingness to get back into the market quicker because of the kind of fee-shaped rally we are seeing this year?

Well, I mean, yes, I think you answered your question. I have been surprised over the last, say, nine months, since September of last year, generally surprised at the relative resiliency of the Private Client business.

Now, the fact of the matter is, when assets are down 30%, revenue on those assets is going down but the number of people which used to see -- and I've said this in the past -- closing their accounts, saying "send me my money, I am closing the account" -- that we are not seeing.

Now, we see a lot of cash on the sidelines, a lot of clients starting to get back into the market. So relative to, say, what happened in, say, '87, maybe in '90 where we really had people exit the market, I think that this decline was so broad-based across many things that investors didn't want to miss the rebound. So they've done pretty good. I certainly would say the business has been slower, but not what you would expect considering the kind of market route we had.

Yes, yes, obviously. And then just real quick, I know that you all have filled out a lot of the capital markets holes that you had, fixed income and equities and investment banking. Where do you see kind of as some areas of weakness there that would like to continue to build out in? Like, you brought in a converts team. What's something like that that you still think you could build out in?

Well, again, we are not specifically set out to do anything. We react to people that approach us but that said, we need -- we are going to invest in equity origination, and we're going to invest in more investment banking, the fixed income side. I think high yield is a place that we can invest in. I don't think we're going to -- certainly not going to get into currency trading, but there are some additional opportunities for people who might be looking for a great platform. There are areas that we can add, and we are looking at that and in constant discussions with people.

We've added a lot of people in public finance origination. I could see us adding in tax exempt sales and trading is another area. So we have an idea, but we don't set out to look. We set out to answer the phone.

Hugh with Sidoti.

Most of my questions were asked and answered. I just wanted to follow up a little bit more on the recruiting environment and the competitive landscape there. I was wondering, this quarter relative to the past few, are you seeing any difference in the competitiveness of some of your peers with the upfront payouts that they are offering, trying to kind of be as aggressive in their recruiting? Kind of who are you who are you most seeing yourself coming up against? And I guess I will start with that.

Frankly, we've not -- if anything, we've ratcheted back our hiring incentives. In fact not if anything -- we have, as have many of the other people in the industry.

Frankly, I don't really know who we are running up against because we are not spending a lot of time. If you want to join the Firm, great, and if you don't, well, okay; we've got a lot of other people. So, I think the general trend has been from the large universal models, back to the regional. That's a trend that's been going on for obvious reasons. I am sure that a lot of people are seeing that. But I don't know that we are really running into any anyone in particular.

So in thinking historically through other recessionary periods and so on and the movement of FAs, and it seems to be that, right now, there is, as you're saying, a big demand for people to kind of move shop to somewhere else that they can -- that they feel more comfortable at -- obviously nobody has a crystal ball but what is your best guess as to how long this continues to play out where there are so many FAs looking for a new home? At what point do you think we probably got to an environment where there will still be opportunities but not nearly as great as there are right now?

Well, I don't know. I think what you're seeing, first of all, first of all, there's been a lot of dislocation, but there's a lot of great firms out there and the firms will rebuild and they will -- they are great places and there's been a lot of turmoil. But that will end, and when it ends, I think you'll see a decline in the amount of people looking to move. I think it's just natural. I fully expect the other firms that have gone through a lot of difficulties to right their ship, if you will. So, I don't think that the pace will necessarily -- it's not going to get quicker, I don't believe.

But that said, when you're trying -- I don't want to name names, but when you start combining very large firms and a lot of offices and consolidating offices, and have a lot of consolidation, that will tend to disenfranchise a lot of people. I see it being better than, say, 2006-2007. I see it being better than that from a recruiting, frankly for the next several years, but maybe not just as much as it has been in the last six months.

Okay, great color there. And I guess just one last follow-up question on that -- are you concerned at all about, as we maybe head into next year with the large-cap peers that you do compete against, some of them may be increasing their recruitment efforts more aggressively to try and recapture some of the FAs that may have moved away, and doing so through significant upfront money and so on? Any thoughts there from -- that it may weigh on the comp that you guys pay out or so on?

Well, you know, I think, on a relative basis, the spread between what you can get to go to some large of the large-cap as you put competitors and us has always been very large. That trait is always there for someone that wants to do it, but you have to couple that with reduced payouts that the people take.

So we always tell people, if you want a mortgage -- so it's really taking out a second mortgage on your business is all you're doing -- because you pay it back in lower payouts over future years. So all I'm trying to say is that we -- I don't think that much about that. I think our competitors are very good; they're very strong, good competitors. We will just stick with our business model, and it served us in the past and it will serve us in the future.

(Operator Instructions). There are no further questions.

Fantastic. Well, I would like to thank everyone for your time and your questions. We, as a firm, I will say that, again, as I've said for the last few years, we are well-positioned to continue our growth. You've seen it and I'm very excited about our future prospects while being equally cautious about some of the things that come along the way.

So with that, everyone, thank you very much and we will talk to you next quarter.

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