Stifel Financial Corp (SF) 2009 Q3 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's prepared remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would like to now turn the conference over to our host. Mr. Jim Zemlyak, CFO. Sir, you may proceed with your conference.

Thank you, Ashley. Good afternoon, everyone. This is Jim Zemlyak, I'm the CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss our third 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. Slide number one of today's presentation covers forward-looking statement 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 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 financial measures of performance and liquidity. These non-GAAP 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 and the financial services industry in the company's annual report on Form 10-K and MDNA pfresults on the company's quarterly reports on Form 10-Q. With that, I would like to turn the call over to Chairman, CEO and President of Stifel Financial, Ron Kruszewski .

Jim, thank you very much. As is our custom, we do this conference call in conjunction with slides. You can get the slides at www.stifel.com. Download them or follow along. So let me start. I'm on the second page of Chairman's comments. Let me just start with my quote, which again, I do, which is we are pleased with our quarterly results.

Our company is on pace for the fourteenth consecutive year of record net revenue and despite significant investment in our platform and capabilities, is also on track to post record net income for the year. Our quarterly results were positively impacted by an $0.11 tax benefit -- earnings per share tax benefit, which was offset by approximately -- I'm sorry. It's $0.10 actually, earnings per share tax benefit, which is offset by approximately $0.07 in earnings per share transitional expenses, which included $1.9 million in duplicate rent in New York and $2.5 million related to our UBS transaction.

During the quarter, we raised approximately $92 million in equity capital to support our plans to become a premier middle market investment bank and brokerage firm. Turning the slide to the third quarter highlights, we posted record net revenue across the firm and across all segments. Record net revenues were $290 million, 32% increase from the third quarter of 2008. Our global wealth management, I'll talk about that.

We've combined Stifel Bank and the private client group in a new segment that we're calling global wealth management. That segment posted record net revenues of $157 million, which was up 34%. Our capital market segment, record net revenues of $130 million, which was 28% increase over the third quarter of 2008. We also posted record net income of $22 million, $22.1 million, which was $0.67 per diluted share. Pre-tax margins for the third quarter, which I'll talk a little bit more about, were 11%, up from 10%. Our third quarter annualized return on equity was approximately 12% compared to 10% for the previous quarter.

Finally, the number of financial advisors increased 1,823 at the end of the quarter from 1,228 a year ago. On a year-to-date basis, really the same story. Record net revenues of $771 million, 21% year-over-year increase. Global wealth management, $407 million of revenue record, a 14% increase. Capital markets record, net revenues of $361 million, a 30% increase year-over-year.

For the year, net income, a record $51.1 million or $1.62 a share, 30% up. Pre-tax margins for the nine months were 10%, unchanged from the prior-year period, and we did successfully complete during the quarter and actually in the first week of October the acquisition of 56 branches from UBS Financial Services. As a result, fully integrated with the last wave. We now have a network of 1,900 financial advisors in 273 offices in 41 states across the business.

Turning the page, we can look at our summary income statement, which again shows all of the numbers across the board, and the increases. I would say that the story is very -- I'm very pleased with our revenue growth, compensation of benefits. It's really consistent, although our transition pay is up as a percentage of revenues. Again, you would expect that considering how many people we have hired. Operating expenses, higher than I would like as a personal of revenues. And again, that's why our margins are down, but we have invested in our infrastructure. So that just summarizes it.

The significant quarterly items on page six, I'll spend a moment on and that is, first of all, the UBS conversion costs. The printing, they used to put some of this stuff in the deal. And now with the FASB, you have to expense this stuff. But the cost, a little over $2.5 million, which is around $0.04 a share. We consolidated all of our offices in New York. We now are on 237 Park in New York. We consolidated four other locations there, but we had duplicate rent, again, from when you take possession versus went you actually move in. Net/net, that was about $2 million dollars. Those two items cost us $0.07. We view them as one-time items in the quarter. But offsetting that was a tax credit relating to a Maryland tax credit that we did when we did the LeMason merger back a few years ago. That tax credit added $0.10, so net/net, I would say that the items added up to a positive $0.03 to the quarter of our 67.

Our margins are something -- turning the slide -- it's something we want to talk about. Our reported margins for the quarter are 10.6%. Those are -- it's -- I understand the investments that we're making in our infrastructure, but I want to talk to you about what they are and how we're looking at it.

First of all, we have 59 de novo branches that we've opened, a significant in these branches. I'll talk more later about it. But we've got about, for the quarter, $16 million in revenue and we lost $2.2 million. So I just wanted to adjust that back, add back the conversion costs I talked about, and we have been transferring in accounts left an right.

The excess overlapped here of (inaudible) cash and the excess of transitional pay coupled with the rent will explain most of the difference between my target -- I like to think 15% margins and where we ended, which was around 11%. But those are items that, they come with growth. I don't want to say that we're not going to have continuing growth expenses. But these are items that are related to the significant growth that we've had. If you look at our source of revenues in the next slide, I think it's the same thing. I won't spend a lot of time. Principal transactions up 81% driven by our fixed income business. Commission is flat. Investment banking, we had nice traction in investment banking, up nearly 40% over the prior-year quarter at $35 million. I'll speak a little bit about that.

On the negative side, asset management and service fees are down 16%, a combination for the quarter of lower asset base, which really almost self-corrected since July 1. We bill in advance and that is already a positive. Be we also, because of the -- where the fed funds rate is, we're waiving fees on the asset management side of the business because of where the fed funds are. So that is -- so that's negatively impacting our margins and our profitability, reflected through the 16% decline in asset management and service fees, and that's despite a significant increase in assets under management and financial advisors. There's a fair amount of fee waiving going on. So that's the source of revenues. As you can see, net revenues up 32% quarter-over-quarter. Looking at principal transactions, same thing. Taxable debt up quarter-over-quarter and year-over-year, 94% and 81%, respectively. Again, reflecting fixed income, and the rest is the same as the last quarter. Again, we're not a prop-trading shop. The principal transactions is how we execute fixed income and to a certain extent, our over the counter equities business.

If you look at non-interest expenses, typical to look at unless you look at them on a margin basis. We do show compensation and benefits for the quarter, 66.7% versus 68.6% last year. But you have to look at the components of that. The most important on a comparative basis is comp and benefits, what I would call, without enhanced pay and without acquisition related, was 61.6 versus if 61.2 a year ago, and for the year, 61.7 versus 62. So pretty consistent, right in line with our business model. You will see that that transition pay and acquisition related comp is what causes the major variances in our comp expenses. The rest of the expenses, occupancy, communication, commissions, other operating expenses, significant increases, but in line, generally other than the duplicate rent and (inaudible) and things I've talked about, in line with our growth. So, it's kind of hard to look at those on an absolute dollar basis when you consider how much we have grown.

Looking at segments, global wealth management, records, 34%, capital markets record up 28%, contribution a rebound in the contribution for global wealth management, capital markets, again had a great quarter. More driven this time by investment banking, equity investment banking than fixed income. At least the increase is driven by that.

If you look at our segment comparison on the next slide, I just, again, will show the balance, 2009, 47% of our business was capital markets. The balance is global wealth management, and it's a nice balance of the business, and the capital markets it's equally -- it's nicely balanced between fixed income and equity. If you look at global wealth management, I'm on page 13 of the slides. You will see the increase in global wealth management. The point I want to make here is that we did for the quarter $157 million in revenue.

A question you might ask is how did UBS transact and impact that? I answer it by saying that in the quarter, we expect, first of all, that the revenue is approximately $25 million to $27 million for UBS as to what we would expect on a quarterly basis. And the way we staggered the transition, our revenue this quarter was about $4 million. So not -- my point is that we had a great quarter in global wealth management, but we had -- we have not had -- we barely had a less than a quarter of the impact that we expect to see from UBS in the third quarter. The last conversion occurred in the first week of October, so we should get substantially a full run rate in the fourth quarter of '09.

On the Stifel Bank and Trust, again, we are putting this -- we're consolidating this with private -- with our former private client group. The primary reason is that these are very intertwined businesses. We lend to the same clients, we, sweep deposits from the private client group. We're moving loans from the brokerage firm to the bank. Our overall strategy is to bank our traditional clients, if you will and therefore, you're going to see that.

Now that said, we will still talk about asset quality, we'll talk about all of the asset quality questions on the bank. We don't intend to not talk about that, but we're not going to try to explain the variances in contributions between the bank and private client group when that would require a lot of explanation of transfer pricing. So we just don't intend to do that.

If you go to slide 15, you will look at what's going on on the bank. Assets have increased to $966 million. The short story of that is that we've swept a lot more deposits, both from the UBS transaction into the bank, and we primarily bought agency MBS. That's been an attractive trade considering the yield curve. We also swapped out interest rate risk. We have floating rate deposits, some of the agency MBS is fixed rate. We've swapped that out, and we've locked in those. I feel very good about what we've done there. It's very conducive to that utilization of those deposits, is to put it in agency MBS on a swap basis.

So very seasoned, relatively short duration. So as you can see, the portfolio has a weighted average life of less than three years. We also had our retained loan portfolio increase 85%. A lot of that was the Reg U loans from the UBS transaction, which accounted for $141 million of the increase. So that's really in effect margin loans. But under the bank regulations that's Reg U loans. And then after the final wave which occurred in October, that Reg U loan portfolio will be approximately $225 million. Despite all of our -- what we've been doing to invest this money, both in Reg U loans and in agency and investments, we still have, on balance sheet liquidity as of the end of the quarter of over $250 million, actually $271 million. So that is still something we're working on, and we're not earning much money on that excess liquidity. In the bank, our mortgage banking operation has also benefited as many in the street have, by the, in many ways, the subsidy of housing with FHA and all that's going on.

We sold $665 million in loans in the first nine months, and that was up from $330 million in all of 2008. So we've also, in certain cases, have retain certain of the mortgage loan originations when we think it meets our criteria for interest rate and credit analysis. The weighted average -- that loan to value is 47% and the weighted average FICO is 765. We're very comfortable with our retained mortgage loans. Credit quality, non-performing loans and $1 billion bank are $1.9 million, so we don't really is any issues with non-performing loans. Excluding acquired loans, the allowance as a percentage of gross loans was 1.25% allowance. So all in all, the bank is in good shape.

Turning to capital markets, you will see that this business for the quarter, kind of right in line with our model of 59.5% comp to benefits ratio, about 15% in Opex, 26% margins. A nicely operating business for the quarter and improved margins over 9/30 of '08. Flipping the page, we can talk on page 17 about what's happened. While I don't show it here, the -- while equity capital markets flow business is down. Sequentially, it's up.

We had a great quarter in 9/30/08. In fact, it was a record quarter for a lot of reasons. But our fixed income business for the quarter sequentially was down. That is the first time in a long time it has been down. It was down slightly for the quarter. But as I've been saying, I think that while we had a great quarter in fixed income, I think that this was -- we've seen maybe a leveling off of fixed income. Certainly, the slope of growth and fixed income was not going to continue. That said, we still did nearly $60 million in business. It's a great business, but it's not going to have the that trajectory of growth. Certainly I don't see that continuing. We're going to continue to grow the business, it's a great business, but it's been driving a lot of the earnings on the street.

Investment banking, a great quarter within the segment. Investment banking up 41%, driven really by capital raising. I'm encouraged by that. I believe in the quarter we have five lead transactions, up from zero. We've made some strategic decisions and some strategic investments in that area, and we're beginning to see that pay off. So I am encouraged about that.

The other segment really will show significant increase in our cost, as you can see. The contribution or loss in this case, this $30 million up from about $20 million. So a $10 million variance. It's really our investment in our infrastructure in many ways. So I will leave it at that, but I do want our investors to understand that we're not trying to just layer on revenues without building the infrastructures to support it. The reason for that is we don't intend to stop here in terms of our growth. We intend to continue to keep growing.

Turning to the balance sheet, assets are almost $2.9 billion. The majority of the increase from the assets are attributable to the bank where we've -- as I've said, the bank now has $1 billion in assets. So we've swept more deposits plus a little bit in our inventories to facilitate our flow business. But the majority of the increase in the bank -- I'm sorry -- of our assets relates to our bank. The leverage ratio a little over three times. Book value stands at $27.63.

Next shows our capital structure. Net/net, we're very well capitalized for the amount of business we're doing and we have a lot of capital support our future growth plans. Level three assets on page 21. $73 million of level three assets.The increase almost all is auction rate securities. As we've announced, we have a voluntary plan to repurchase auction rate securities over the next few years from our clients. Nearly 96%, 97% of our client have accepted this plan. We did the first wave where we purchased about $40 million in Q -- in this quarter, in Q3, the beginning of Q3. So therefore you will see the increase in auction rate securities. There's more detail about how we are looking at that in our Q, so I would point you to our Q which by the way, was just filed. So again, nothing on a level three assets.

Other financial data, this shows basically what I was saying about the increase in our assets, primarily relating to the bank, client assets. We ended at $83 million. I will tell you today that fully in for UBS now, we have about 90 billion of client assets today. For our outlook, and I want to tell you just one other thing as to how we're looking at branches. Stifel outlook, we continue to see the unfavorable conditions presenting a lot of opportunity. We think our balanced business mix facilitates our growth. We think there's a lot of -- the turmoil in capital markets has given a pool of very qualified candidates to join our firm and a lot of clients. And finally, the company begin to see payoffs from our investment in de novo branches.

The next slide just shows our growth since 2004. I just want to reiterate that we've added a lot of people, gone from 600 to almost 1,900 financial advisors, 86 offices to 256, a tremendous amount of growth. As I have been pointing out, on page 25, a significant expense in ACAT investment -- ACAT reimbursements. Through three quarters, we have transferred in over 82,000 new accounts. That compares to 29,000 in 2008. So this underscores our growth.

And finally, and this is a new analysis, but I'll then take questions, on page 26, we look at de novo branches. These were branches that were not acquisitions. These are just branches that we've opened in 2008 and 2009. And the long and the short of this is, as you can see for the quarter, we had about $17 million of revenue, and we lost about $1.7 million for the quarter. That's an improvement, because year-to-date we have had about $36 million in revenue and we lost $7.6 million in those branches.

But today, with the people that we believe we have at these branches, if you look at who we've hired, when they're fully up and running based on their trailing 12 revenue, we think that the branches have the potential revenue to do $110 million, and we have transition pay that you will see that we estimate to be about $14.3 million. But net/net, we believe that these branches, as they get going, we turn, call it $1.7 million in the quarter on an annual basis to a $12 million profit in those branches, and that's after transition pay. So this is where we believe that we can begin to see some of the payoffs on our investment. So with that, it was a great quarter; and, of course, the markets have been conducive to that, but I remain optimistic about what we're doing. With that, operator, I'll take some questions.

(Operator Instructions) We will pause for a moment to compile our Q&A roster. Your first question is from the line of Hugh Miller of Sidoti.

Hi, good afternoon. I was wondering if you could comment a little bit about the dynamic of the PCG business during the quarter. Our checks are indicating that advisor production was kind of stepping up and strong in September and that some of that momentum carried over into October. I was wondering if you could comment about what you guys were experiencing.

Yes, I would think that I would second that. It's a combination of primarily some optimism by a market that's been a pretty strong market from the lows of the spring, and that also drives asset values. So a lot of the fee based business, a lot of the absolute asset values are up. Confidence, at least in the market, is up. So it's a decent environment for the private client.

Okay. Just as a follow-up to that, I haven't gotten a chance to take a look, but on the client margin balances there, I noticed some peers that were seeing an increase for their the first time from the second levels into the third quarter and maybe a change in investor sentiment toward greater risk taking. Can you comment on what you're seeing there in your platform?

We haven't -- I guess I wouldn't second that one. We haven't seen as much of that, although our absolute loans are up, and we will continue to see an increase in loans. But I wouldn't say that we're seeing those -- we're seeing Reg U loans for other purposes. We're seeing loans for homes and lines of credit. But traditional margin loans, I would say that we're not seeing that.

Okay, okay. And I guess in just looking at the PCG branches that you guys have organically grown, the de novo branches there, can you just talk about where you guys are right now from a capacity utilization standpoint and the thoughts on how long that might take to get to a full capacity there?

I don't have those. I know that we -- when we opened branches, we end up with some empty seats, and I actually -- maybe I can talk, I don't want to obviously speculate. But we're not -- our full run rate that I talked on the last flight, is not full capacity --

Okay.

-- at all. But it's not full capacity in those de novo branches. That said, we've lost a fair amount of money in those de novo branches, and it is going to be nice to start making some money.

Okay, great color there. And with regards to the investment banking business, you talked about it on the equity capital markets, can you just comment about -- obviously, it seems like both M&A advisory and the capital raising saw some strength, but I guess what sectors you were seeing that strength coming in and any other commentary on what you were seeing during the quarter in the pipeline, how it looks going forward?

It's -- we saw, we have done some consumer transactions. We had done (inaudible). It's been a strong market for everyone, and so I think our traditional sectors have done well. I'm more pleased, frankly, with the fact that we had five lead transactions on the quarter. I tell you that's where we're focusing. We have the capability and the ability to lead transactions. We haven't been doing it, and that's good.

Just my last question, and I'll step back in the queue. With regards to the strategy with the waiving of the fees on the asset management side. Can you comment a little bit more -- obviously, you mentioned it has to do with the fed funds rate, but when that should probably stop and, I guess, the thought on the rationale for waiving the fees.

Well, first of all, it's true across all asset management platforms. It's true for every firm on the street and other firms are talking about it. When you're talking about fixed income instruments and short-term rates , effective fed funds of less than 25, you're obviously waiving fees, and the -- when it will -- when you won't have to waive those fees will be when the fed funds start ratcheting back up. So it's one of those things where the, in one case, the yield curve helped our fixed income business, but it hurts on the fee waiver side, and when we start ratcheting rates back up, it will reverse itself. When that happens, I don't predict interest rates. That one I won't

Okay. Thank you very much.

All right. Sure.

Your next question is from the line of Steve Stelmach with FBR Capital Markets.

Hey, Steve.

Hey, Ron. How are you?

Good.

Congrats on a good quarter.

Thanks.

On the UBS transaction, you mentioned that only about $4 million of about a $25 million run rate hit in the third quarter.

Right.

That's about 16% of revenue. What personal of fixed costs do you think hit in the third quarter?

Well, as I said, as I said, we put a lot of the overhead costs already in. We've been doing that throughout the year. So I've been talking about that. So what we're really layering on to our system is these branches. All right? So there's a contribution margin within a branch, and we've added a lot of the human resources and compliance and the overhead in anticipation of that. So I expect that as -- that that revenue ramp is accretive, if I can answer it that way.

Okay. So it fair to say that the majority of expenses are reflected in the third quarter, maybe not all, but a majority?

Well, first of all, the biggest expense is financial advisor compensation.

Right.

And that's directly attributable to the revenue. But a lot of the infrastructure expense is in place. Now, that's not the fixed expense, that's the branch. But you just don't add 500 people and 350 financial advisors and all that we did without adding to the home office infrastructure, and all that's in place.

Got you.

Okay?

Yes. Let me ask one more question and perhaps jump back in queue. On the principal transaction side in fixed income, you had mentioned, I think, probably going on close to two years now. It's been a great market, an you don't expect it to continue. Yet it still keeps going higher, that revenue number.

What I really said was don't annualize the numbers. I just didn't tell you which way not to annualize it.

How should we think about that in terms of -- clearly, you're a bigger desk today than you were a year and a half ago, two years ago. How should we think about it between market conditions and just your expansion? Is it a majority your expansion or majority benefit because of market conditions?

Well, it's a great question, Steve. I'm not sure that I can answer that question completely. I do know that a significant amount of the increase is increased capabilities. We've added trading capabilities, we've added product capabilities. We've added a lot of salespeople. We have a convertible desk that we didn't use to have. We have an aircraft group that we didn't have. We had a lot of business.

I can tell you that it's not -- I'd probably fall over if we went back to 2006 levels. I don't think that's possible. But how much of it is the market, spreads and all of that? I really don't know. I believe that we have a much more robust fixed income department than we had in the past. I'm not sure anyone on the street really can answer that question. At least intellectually honest about it. So I can't answer. I do know that we have -- we've added significantly to fixed income.

Got it. Okay, I'll hop back into queue. Thanks.

Your next question is from the line of David Trone with Fox-Pitt Kelton.

Hey, David.

Hi, Ron. How are you doing ?

Good. David?

Ron, can you hear me?

I can now. You broke up.

Oh, okay. You mentioned -- you probably mentioned this and I missed it. But on a line item basis, you had the other revenue of about of $6.6 million, and it was about 2.7 last time. What exactly is in there?

What? Let's see. In sources of revenue? That is -- some of that is -- and that's a good question, David. Some of that will be our deferred comp hedge is a lot of that, and it offsets in comp, and I really don't like the way we have to do that. I think we should be netting it. But a lot of that swing is -- it looks bigger in this line item than it does in comp, but a lot of companies have a deferred comp that we're ahead, but we're not allowed to offset the increases and decreases in the investment side with the comp expense. So that's a fair amount of that. I would say it's not a lot of impact on the bottom line.

Okay. Great, great. And then a more conceptual question. Your latest raise, I know you don't keep an inventory of the exact dollars, but if you had to conceptualize, how much of that do you think you've been able to deploy thus far?

Very little. Of the latest raise?

Yes.

No. As we've said, as we went back, we raised $108 million between Butler Wick, UBS, de novo, growth, up until our last raise. We raised -- we deployed $172 million, after-tax shields, net presently value, about $110 million. We raised about $110 million. The last equity rate was a little over $90 million net, and that's sitting waiting to be utilized.

Okay. And then how would you prioritize your wish himself on deployment of that?

Highly accretive deals.

So more deals than -- more -- let's say whole firm acquisitions versus branches versus individuals.

David I think you're -- I think that your point might be well taken. We want to be in a position to take advantage of opportunities. We see a lot of opportunities. But just because we've raised the money doesn't mean we're going to buy the first thing that comes along. It has got to be an opportunity for us. So we felt that in this environment, it was prudent to take capital, because we are going to see an ability to deploy the capital, but we're not going to do it just because we have to do it. We think that we're well capitalized, extremely well capitalized. We are in a perfect position to continue to grow this firm, and our growth plans are to become one of the premier middle-market investment banks and brokerage firms. So net/net, we have not identified anything, we have a lot of things that we're thinking about. And it's good to have the capital. It makes us very flexible to do what we've done in the past.

Okay. Great. Nice quarter. Thanks.

Thanks, David.

Your next question is from the line of Daniel Harris from Goldman Sachs.

Daniel! How are you?

How are you doing, guys?

Good.

Can you talk a little bit about the assets that you bought in from UBS and what the composition of those were with regards maybe to fee based versus commission versus transactional?

David, kind of interesting. It's really about the same as what we did -- with we had before. I always hear all this about fee based. Frankly, it doesn't matter, Daniel. I've said to you in our meetings that I don't view one revenue source more profitable than -- or actually more stable than the other. But frankly the UBS transaction, business mix, fixed income fee, equity, the whole thing very similar to our core business. So it fit right in, and I can't say it was. I was surprised. I thought it might actually be more fee based just because of what I always hear, but it wasn't. It's great business, though. Don't get me wrong.

So you guys don't have a strategy or a target for where you would like to ship those assets to fee based, as long as they're just at your firm.

That's exactly right.

Okay. So shifting gears a little bit to the capital market side. Big numbers in growth, and just wanted to get your latest views. I know it's the fourth quarter, there probably isn't a lot of transition happening at this point but as you look at 2010, do you anticipate trying to grow headcount there again, above sort of the trend, or do you think that that number will come down to a five to ten person headcount increase?

I get this question about nine different ways, always, and which is how much are we going to grow, and my answer is always the same. We will ask people when we think it's opportunistic and where we can add value and we can compete. And I don't know if that will be organic or what it will come from. We hired a high-yield team justice recently. We're going to do it opportunistically. We're not going to set out to hire a lot of people. I think that leads to bad business decisions. So frankly, I can't answer your question. I do know though that the overall environment, even though the people talking about the competition heating up and this, and I see a lot of that, but we see a market that's conducive for growth. I'll answer it that way, but I can't give you any numbers.

I think that's fine qualitatively. And then just wanted to put some more color on this. So your commissions were up 2% year-over-year, and your principal transactions were up 80%. That is just a function of the fixed income growing and the equities business not necessarily growing nearly as quickly. I know you guys have always talked about not necessarily engaging in any proprietary business, so I just want to make sure that I'm reading that right, that it's just client flow through fixed income.

You're reading it exactly right. The fixed income was up significantly year-over-year, equity was flat to down. That would -- if you would have told me that, I would say principal transactions are up and commissions are flat. That's just how our business works.

And I don't know if you or Jim have put any numbers around sensitivity to say a 50-point basis move or anything like that in terms of credit spreads widening out. If that were to happen throughout the course of the quarter, would that be giving your business not that impactful, or neutral or very impactful?

Well, I think to the extent that credit spread is widening the bid offer spreads widening impacts the fixed income flow business, that can be impactful. I think we're seeing it go the other way now, which I think is going to cause the fixed income business to not be as robust. But those kinds of things are not going to impact our balance sheet. As I said earlier, if we get an increase and when we get an increase in the short-term rates, whatever impact that might have elsewhere will have a positive impact on our fee waivers.

Okay. Thanks, guys.

Yes.

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

Hey, guys. How are you?

Hey, Joel.

Just quickly, you typically over the past couple of years had a lower comp ratio in the fourth quarter. I'm just wondering if that's something we could expect to continue or with the UBS deal, if you were expecting something a little higher?

I think it's -- I mean, historically -- and I think it's true across the street, Joel. I think that we need to accrue, and we do our best estimate of what comp accruals are, but when we true them up to actual, if anything, we're conservative in the way we accrue. I want to be careful the way I say that, because we do our level best to estimate compensation expense. But I prefer to historically make sure that we're not sort in compensation at the end of the year. So historically, we've done that. I get concerned when I start hearing about it getting institutionalized into our numbers, but I think you've made a fair statement. Now -- but UBS. You -- actually, that's a private client business. That really won't impact what's happened in the past if that answers your question.

Okay. Terrific. And then lastly, I mean, in terms -- over the past year or so, we've certainly seen productivity at that broker level come down a bit. I'm just wondering, in terms of your business, do you think it's more of a sort of market-driven event, or is it really the impact of the growth and the sort of ramp-up of costs tied to the brokers and lack of the revenue there?

Are you talking about productivity on the revenue side per broker, or are you talking about profitability?

Productivity on the broker side.

Well, no. Listen, you don't have a market that's down 50% or 40% subdued competence, asset values that got clobbered like they did. Every single financial services firm that's in the wealth management fund, whether it be a mutual fund, a hedge fund or a brokerage firm has reduced productivity per person by definition. And just like in the quarter, you're going to see increased productivity over the second quarter, simply because asset values have come up. At the end of the day, one of the biggest predictors of overall revenues is asset, whether it be fee based or transaction based or whether you're a mutual fund. So I think that what happens is exactly what you expect to happen. I actually believe our hiring -- I'll answer it a different way. On a qualitative basis, I think our expected, everything being equal, our net productivity per advisor is going up, because we're hiring some productive people. But that's all relative to the market. Does that make any sense to you, Joel?

Yes. I've got it.

All right.

All right. Thanks so much, Ron.

Yes.

Your next question is from the line of [Patrick David] with Bank of America.

Hey, guys.

Hey, Patrick.

How is it going?

Good.

In regards to the bank, can you speak to your comfort of maybe rolling more of the excess liquidity into a retained loan -- into the retained loan book, given how small it is? I would imagine there would be a pretty significant market share opportunity for someone in your position.

I think there is, and we're definitely doing that, and we're looking at it, and we're being -- we could do it faster maybe than we have been. We see a real opportunity there. There is going to come a time when it's going to be good to make loans again. I think the government would like to see that be sooner rather than later. We're biding our time, and we're being prudent about how we deploy the liquidity. We see it today, Patrick. I see it today, right now. We're just am -- we're just not really a jump in with both feet type thing, especially as it relates to a bank. So I mean, heck the bank is $1 billion dollars now, so -- but your point being that is that on the investment side or is it on the retained loan side, we're seeing opportunities on the retained loan side, absolutely.

And I would imagine that you have a natural lending base with your private clients, right? Can't you feel more comfortable with their credit quality given you have a relationship with them historically?

Yes. I will tell you, we were talking, and I'll just give you a number. But I can do it on this call in general. Where at one point, our origination mortgages sold was not originated at all when we first bought the bank, and today over half of is going higher of our originated loans, are coming from our natural client base. And you're now seeing us start to retain some of those loans, because we're very comfortable with what we pick for retained loans. Not that we're -- Actually, we're comfortable with everything we underwrite. I don't want to make it sound like we're not, but we're going to do that. The problem is a lot of people still want 30-year fixed rate. I don't really care what the credit quality is, I'm not too interested in portfolioing those kind of loans. But we're getting a lot of 3-1 and 5-1 ARMs and even some 15 year stuff where we think that it matches our interest rate and our GAAP analysis, and we're portfolioing those. And the environment is much better.

Okay. That makes sense. And then on the investment banking side, I'm just curious if there is any particular asset classes or areas where you still feel fairly undersized that you would be looking to take in a lot more people. Either -- That's that you're undersized in or even businesses that you're not even in yet that you would prioritize.

Again, it's going to be a qualitative versus a quantitative analysis, and I think that we have a real opportunity when you look at our private client business, our research, which is, I think, the second largest now and the quality of our research and you look at our sales and trading, our ability to add quality personnel on the investment banking side is tremendous. That just -- it's not a quantitative game. It's a qualitative game.

Okay. Thanks a lot.

Yes.

Your next question is a follow-up question from the line of Steve Stelmach with FBR Capital Markets.

Hi, yes. Just real quick. On the MBS you added to the bank .

Yes.

How should we think about that in a rising rate environment? Is that held for maturity? Is that available for sale? Is that subject to marks if we see rates go higher?

Well, it's available for sale. Okay?

Okay.

And it's -- we've -- what you would see, it's not perfect, obviously. We've hedged the interest rate side. If rates -- without getting too much into it, if rates rise you'd see some extension risk on what we think the average life is, but we don't think we've -- nothing really dramatic. In fact, some of an extension would be something we'd welcome the way we're looking at maintaining that portfolio. But it is available to sale, to answer that question.

Got it. Okay, thank you very much.

And at this time, there are no further questions in queue.

Well, first of all, we always thank everyone for your attention. We've had a good quarter, we've looking forward -- we had our board meeting in New York today, and it's something else we're looking at in terms of our growth, but it's been a good quarter. We're looking forward to a future good quarters, an we thank all of you for your support. See you next quarter. Good-bye.

And this does conclude today's conference call. You may now all disconnect at this time.