Stifel Financial Corp (SF) 2009 Q4 法說會逐字稿

Good afternoon. My name is Kelly and I will be your conference operator today. At this time I would like to welcome everyone to the Stifel Financial fourth-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). I will now turn the call over to Mr. Jim Zemlyak, Chief Financial Officer. Please go ahead, sir.

Thank you, Kelly. Good afternoon, everyone. This is Jim Zemlyak, CFO, Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss our fourth quarter and full year results for 2009. Please note this conference call is being recorded.

If you would like to follow along with today's slide presentation, you may download the slides from www.Stiefel.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 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 statements.

To supplement our financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the Company's GAAP results.

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

Thank you, Jim. Good afternoon, everyone. I will start with my quote as is my tradition in the press release and that is in a year of change for our firm and the entire financial services industry, our associates delivered significantly improved financial performance which is evidenced by our achievement of our 14th consecutive year of record net revenues and exceeding $1 billion in net revenues for the first time in our history.

This was accomplished while also making substantial progress in the implementation of new platforms and capabilities that will direct our business in the years ahead. While economic conditions remain fragile and unpredictable, we are confident the steps we've taken this year and in past years will ensure that we remain well positioned to serve our clients, seize new opportunities in the marketplace and continue to grow our market share in the years ahead.

Fourth-quarter highlights, record net revenue for the quarter of $319 million which was 38% increase from the fourth quarter of 2008. Our global wealth management segment posted record net revenues of $185 million, a 64% increase from the fourth quarter and that size of this business is a $740 million business today I was talking to you all about this last time. Our capital market segment posted record quarterly net revenues of $133 million, 18% increase over the fourth quarter of 2008, over $500 million business in our capital markets.

We posted record net income of $25 million or $0.71 per diluted share, a 54% increase over the prior quarter. Pre-tax margins 13% versus 12%, annualized return on average equity was 12% versus 11%. Both of those metrics are not where I would like them to be, but they are in line when you ex out our investments in new businesses and transition expense, which I have said in the past. So all and all, those are good numbers but on an absolute basis is not what we look for.

As I've said, I through market cycles believe 15% pre-tax margins, 15% return on equity is achievable. We also in the quarter successfully completed the acquisition of 56 branches from UBS Financial Services and as a result today, we stand at 1885 financial advisors in global wealth management in 272 offices in 42 states.

Year to date, again pleased to report for the first time in history we exceeded $1 billion in revenues. Revenues came in a record for the 14th consecutive year of $1.1 billion, 25% increase from the prior year period.

Global wealth management, record annual revenues of $591 million for the year, a 26% increase from the prior year. Capital markets record net revenues of $494 million which was 27% increase. Record net income of $76 million or $2.35 a diluted share, 37% increase.

And for the year, pre-tax margins were 11% which was comparable to the prior year and annualized return on average equity was 11%. I'll repeat my comments about my view of those two metrics.

And during the year which is one of the reasons our margins are compressed is that we added 99 private client group offices and 645 financial advisors. Included in that number is 73 offices and 388 financial advisors from UBS and Butler Wick transactions which has been our ongoing strategy of expansion for the last decade.

If you turn the page, we will talk a little bit about our growth from 2004 and this year and simply phenomenal growth; revenues almost 3.5 times increase, equity capital over five times increase, market cap from $200 million to almost $1.8 billion at the end of the year. We have added an increase of 220% in associates in five years.

But even I think more indicative of our growth and taking advantage of the turmoil is that we added 1455 people in the last year alone and then you'll see the same growth metrics both in five-year and in the last year across the board. So just tremendous, tremendous growth I think again underscores and validates our strategy of expansion.

Page six, it is the end of the year so we do a report on our share performance. This is the chart that will appear in the proxy. And as you can see over the five-year period, our Company, your Company, you're shareholders, has grown at 33.5% compound annual growth rate. That compares to the S&P 500 of essentially flat and the AMEX Security Dealers Broker/Dealer Index which declined at a 5.5% annual compound growth rate over the same five-year period.

So impressive growth over the five years certainly on a relative basis. The next page just to finish the story, I think equally impressive and speaks to our unlevered business advice model is that since the beginning of the credit crunch which was 1-1 of '08 through the end of last year, stock was up 69%; 31% in 2008 and 29% last year.

Again, I think this business model works. Not only do we gain market share in the marketplace, but we have been delivering good returns if not better than good returns for our shareholders. Page eight, quick look at the numbers across the board. I've already talked about the increase in revenues.

Non-interest expenses are also up significantly, led by compensation as you would expect. But also non-comp operating expenses growing a little bit faster in the quarter and certainly for the year than I would like. I think one of the expenses left to their own devices trend upward, they don't trend downward and I think we're going to have to do a little bit of work of getting our arms around non-comp operating expenses which we will be able to do.

We have been focusing a lot on growth and maybe not as much on that as we should. But again, I see opportunity there. Again, net income of nearly $25 million with diluted EPS for the quarter of $0.71.

Source of revenues, as we've said and if you look at this principal transactions, certainly continuing to grow 36% but not at the level it has in the past. It reflects a slowdown in fixed income.

I've been predicting this slowdown for two years and it's the first quarter where it actually happened. And I'll talk more about that but you will see the principal transaction, the commissions, all of these numbers are going to show strong growth just because of the growth in our number of our associates in our businesses.

But investment banking, a very good quarter in investment banking; $50 million in revenue, a year ago $15 million, so up 220%. Overall our strategy of building out our investment bank and people that we brought on board has helped make this business look a lot better. As you can see for the year, $125 million in investment banking. We believe we can looking forward -- I am optimistic about that business and what we are continuing to do.

Asset management service fees, I'll point to the year which will -- is one of the headwinds we're facing as a company that despite all the growth, our asset management service fees declined 6%. And the real reason for that is something that people need to focus on and that's waiver of asset management fees.

And you will see it elsewhere but in the quarter, I believe our waiver was nearly $11 million and if rates stay this low, it could exceed -- that's an annualized rate of $40 million but it could exceed or be nearly $50 million. Both good and bad news in that we had the kind of quarter we had despite that waiver of fees.

But it is something that I've not seen a lot of people talk about but is something that we need to be cognizant of. Again if you look at principal transactions on slide 10, really the only thing to really talk about is the slowdown really in primarily taxable debt to the quarter. So won't spend much time on that.

Page 11 looks at non-interest expenses, starting with comp and benefits. For the year, comp and benefits as a percentage ratio was 60.6%. This is excluding transition pay versus 60.1 last year.

I want to point out and we're going to talk about the level of transition pay. This is as we define it, is pay related to our expansion efforts, amortization of all hiring incentives whether it be stock or notes that we provide in the private client group. It's a non-cash charge.

But it is -- we do part with stock and cash at the get-go. But it can -- talk that this does run off. So you're talking about almost $1.00 per share, in excess of $1.00 per share in transition expenses that if we quit growing will go away. I don't intend to quit growing, but it is something that when I talk to investors I want to point out that they understand the accounting for how we do this.

Rest of the OpEx if you look at the increases, in some cases consistent with our growth and in some cases higher than I would like them to be. Key items with negative impact to our margins, I'm on 12, are net revenues of $319 million for the quarter.

On the non-interest expense side, as I spoke, $15 million of transitional compensation which is 4.8% on a margin basis; transitional operating expenses of nearly 1%; and acquisition related costs, about nearly $0.5%. For the year, you are talking -- that $56 million I've already talked about, the transitional operating expenses which was duplicate of rent costs relating to UBS of $11 million. It was 1% in margins and then additional acquisition related costs.

This does not include the cost that we incurred and the losses on nearly 60 de novo branch startups to be redundant that we have that we have done. Those costs and expenses are really outside of this analysis. And in addition, the asset management fee waivers, $10.5 million for the quarter, $23 million for the year and could be significant going into 2010 although it was significant for the quarter too and you still see our results.

Segment global record record record across the board in both revenue and profitability and our segments that were -- that we not only are looking back and looking at the quarter, but looking forward, we continue to see opportunities to grow these businesses. On a percentage of revenue and contribution, the global wealth management, it was in the fourth quarter, and I think it's a little bit more how it might look going forward, at about 55% of revenue and contribution.

That's what I see going forward for the year primarily. Because of the strong fixed income, capital markets at a bigger piece of our operating profitability the way we measure it and about 50-50 in revenue split. But as I look forward, I see it being more in the 55, even maybe a little bit higher than 50s, wealth management versus capital markets.

The income statement for global wealth management, again we look at comp and benefits and transition pay; for the year, about 1% additional margin and transition pay. $40 million we've brought to that income statement.

Margins are depressed to 17% on a yearly basis, although they improved in the quarter. That improvements for the quarter is really some of our branches beginning to not only not lose us money, but beginning to start to make us money.

So for the year, the margins 17%; for the quarter, 18%. These are margins we expect to be in the 20s but not when you are opening 60 new branches.

If you look at the Stifel Bank and Trust, a very good quarter; a gain on the -- we disposed of a branch and there's some resulting gain in that, not overly significant but a good quarter for the bank. We have swept now about $1 billion to the bank and are earning good spread income on this.

The asset quality side for Stifel Bank and Trust, the balance sheet, just to show what's been going on here; 242% increase to $1.142 billion. Still a lot of liquidity, we have cash and cash equivalents of over $100 million.

Our investment portfolio increased over $0.5 billion. Primarily agency MBS is where we did it. We swapped out the interest rate. So we feel very good with the interest rate spread that we have locked in, minimizing interest rate risk and of course it's agency MBS, so still think the government is a good credit. So we feel good about that.

The retained loan portfolio increased primarily due to stock-based loans that came over with the UBS acquisition. Those are security-based loans which is a good chunk of that increase. Deposits are significantly up as we continue to fund our growth by sweeping deposits to the bank.

In the mortgage banking side, tremendous year. Loans sold were almost $900 million, up from $333 million in 2008. Gross mortgage revenues of over $13 million versus $4 million. The retained mortgage loans were up $32 million with a weighted average, give you a sense of our credit quality here, the weighted average cost to value of 49% and weighted average FICO of the customers of 767. So this is what we are looking at that we will portfolio.

And then finally on the credit quality side, I do feel good that even in this environment, our nonperforming loans on a $1 billion bank are $1.4 million. Our losses for the whole year were $1.4 million and yet despite that we still have an allowance of loan loss of 1%. So all in all, the bank is high high quality; very liquid, low-risk asset at this point.

On the capital markets side, record quarterly revenues, record annual revenues, contributions for the quarter of 28%, over 26% for the year. Very good performance in the capital markets business. In the quarter, a slowdown in fixed income, yet we still are doing well in gaining market share.

If you look at the next page, you'll see what happened in that sales and trading for the quarter versus the prior year quarter, about 11% both in equity and fixed income declined 12 for equity and 11 for fixed income. And in the year, equities down 4% and fixed income was up significantly.

But I suspect on the Street that that increase, rate of increase is slowing; in fact, beginning to reverse; offset by a significant quarter in the capital markets for investment banking, both in terms of advisory fees and capital raising. So very good quarter and frankly a pretty good year for capital raising, although we had a pretty pretty good year in the second half of the year.

On the balance sheet side, there you will see some growth. Again it is going to be attributable to the growth in the bank. We've traditionally run Stifel Financial at a three to one leverage ratio but we're going to run the bank at least 10 to 1 which is how we -- what you have to do in a bank.

So you're going to begin to see our leverage ratio go up. You'll begin to see your balance sheet footings go up. But we remain very well capitalized with total capital of nearly $1 billion.

Our book value grew from the year both as a result of earnings, accretive equity offerings to book value and stock-based compensation caused book value per share to go from $22.68 to $28.86 per share. Our capital structure, again very well capitalized.

As you see, $873 million of equity. $82 million of trust preferreds, so $950 million supporting footings of $3.2 billion and ratios all at the top of what I believe the industry or our peer group.

Level three assets, auction rate securities, still we completed in the quarter, we settled our regulatory issues regarding -- with the states regarding auction rate securities. We have agreed to buy them back over the next -- now through the end of 2011 and primarily back end weighted on our repurchases.

So today we own $56 million -- at the end of the year, $56 million in auction rate securities. Our other level three assets excluding ARS are $9.3 million. So really insignificant, so investments in partnerships, a few securities. But a percentage of equity of level three assets which you can argue are less liquid excluding ARS which are still AAA being redeemed at par, we're looking at 1.1%.

Other financial data, we've talked about our footings. Equity book value ended the year with 885 financial advisors, nearly 4500 full-time associates and nearly 300 offices, $91.3 billion of client assets.

Outlook remains the same as it has in the past. I view as I said a number of times that we view past as prologue. While we have no specific plans, our plans every year are to be in a position to take advantage of opportunities as they present themselves. And with the investments that we have made in infrastructure, people, the capabilities that we have proved on when we brought over our UBS friends today make us as well positioned in my 12 years here at Stifel as we have ever been to continue to take advantage of opportunities as they present themselves. So great quarter, great year. We'll go off to 2010, take some questions.

(Operator Instructions) [Patrick Devitt], Bank of America.

Can you separate contribution from the UBS advisors and then kind of speak to what kind of trends you're seeing in client activity?

I would say that if you go back to our previous clients, they'll say that the UBS is in accordance with what we said when we disclosed it. I think at round numbers, we talked about productionable revenue of 85 to $90 million.

I think -- I could tell you that it's performed (multiple speakers) expectation. We don't always attribute back the interest on loans and deposits and the money flows so that that starts to get a little mixed up.

But UBS has been -- great people, I'll tell you that, and great cultural fit. And frankly they have ramped up or have gotten going pretty good. As it relates to overall client activity, asset values are up. That helps, all asset fee-based businesses. This market is choppy at best as evidenced by today and yesterday and whatever and that always has tugs and pulls, frankly not only just on the private client side, but on all flow businesses.

Okay. And then on the institutional side, can you -- there's been a lot of talk about how the fourth quarter was unusual. There was unusual seasonal weakness this year as clients kind of shut down a little bit earlier than they usually do. Could you speak to the patterns that you saw in client activity and maybe how that's changed so far in Q1 and to what extent you saw any spread tightening in the fixed income trading business?

The numbers speak for themselves, Patrick. I think the flow of business quarter over quarter and even sequentially down in the fourth quarter, I think the Street talked a lot about it and people knew that for whatever reasons, I have heard 100 reasons to why the business slowed down.

Part of the reason was we didn't have the run-up in the market as strong as we did up until November. But regardless, the business slowed. It was pretty robust before that.

Fixed income, we've been talking about it for a while that the wind -- I have said we have been sailing downwind for a while for a lot of reasons and I think we are tacking into the wind now and not only us, but the entire industry. That's true in for the fourth quarter and I think it's going to be true for all of 2010.

Then on the hiring front in that business in particular, we saw some slowing as I guess we got [a bonus period]. Is your sense that there will be kind of another wave of guys for you to pick up as we get postponed, given the continued uncertainty of the larger firms?

I would say on balance that the competitive environment has gotten tougher and that's good. I think the industry is getting healthy from whatever near death experience we had as an industry and an economy. I think it's good but from our perspective, certainly the -- it's tougher to attract and hire people but we are always up for a good (inaudible)

Hugh Miller, Sidoti & Co.

I guess I had a quick follow-up question with regards to the recruiting environment there. Can you just give us a sense of the capacity utilization at the office level and the room? Obviously as you ramp that up, you're going to see some of that leverage in the business. But just giving us I guess a sense of the open space still in the offices on average there.

We have a significant amount of capacity, not only in our infrastructure, not only in -- I always used to take -- in my on mental thought process, I always wanted to be in the position to do a UBS or even something bigger than that. I always said to be able to add 1000 financial advisors and not feel that we can't do that if another situation came along. And I feel that we put in the infrastructure and the capability to do that, both across platforms in this firm, we've added a lot of people.

But on top of that, we have a lot of empty desks in our existing 280 whatever odd offices. The exact percentages -- I'll give you a range. It's 25 to 35%. I don't know the exact number but there's a lot of capacity unutilization if you will that we intend to take care of that. That is high profit and it's a good use of time to fill empty seats.

Yes. And then just I guess a quick follow-on with the recruiting environment here. One of your peers had kind of commented that Q4 tends to not be seasonally strong environment to try and attract advisors. But since the beginning of the year, they were noticing a pickup in home office visits and just kind of interest levels and so on. I guess any insight you can give us to kind of what you are seeing on that so far this year, has their kind of been a little more interest?

I don't know, I can take more interest. We have had a lot of interest. Certainly the fourth quarter always -- I mean it's holidays. People don't do anything. Fourth quarter is seasonally slow and I will assure you it will be seasonally slow in 2010 and forward in every fourth quarter.

I think it's compared to the fourth quarter, sure things have picked up. That's a given. I would say though that the general environment year over year is -- it's not as active as it was, nor do I think it's going to be for a while, be as active as it was this time last year. There's a lot of turmoil. So things are settling down.

We still will grow at our fair pace but it's certainly not the number of visits (inaudible) across the industry are not where they were a year ago. They are up from the fourth quarter but that's not saying much.

Yes, and with regards to the equity capital markets business, certainly seems as though you are pretty optimistic about the opportunities there. Do you anticipate that it's just going to be an improvement industry-wide or can you talk about the opportunities you guys see in order to gain more market share as well, especially given some of the opportunistic hiring that you have done and the success you have had so far?

I don't know that things have really changed for us. I feel that we could always -- in the equity capital markets, we have always had a robust sales and trading flow business. We have had a good M&A business and slightly less than hitting our weight on the origination side over time.

We think that we are going to definitely pick up on origination. It's been a focus of ours and new people that we have brought on. And you have seen some of those results being to come through. So I think that we can gain market share in line with our relative size.

It's the first objective and then after that, I also think that we can continue to do well in that business. Of course, the economic environment in the calendar is important to everyone in this business. If there's no deals being done, doesn't matter what your market share is. But I am confident that we can continue to gain market share as we have in the past.

And the last question I have is with regard to the commercial bank. Just given I guess the improvement we are seeing right now, risk premiums, with so many people dealing with ailing asset quality and pulling back in the reins here, is there any consideration at this point with you guys just stepping out a little bit away on the risk spectrum and trying to add a little bit of risk there or is that not even a consideration at this point?

Well -- look, it's a good time to get to be in the banking business. I think it is opportunistic. We are awash in liquidity. We don't have any problems.

We have a platform and capability to get involved. We are not going to grow the bank on a wholesale basis. But I see great opportunity to step out, as you say, on the risk -- I hate to say it that way because I think you can do some very good quality loans and improve nicely your interest rate margin and not really take that much more risk.

So I would almost say it in reverse. I think that the risk -- the marginal risk that we take on to do some of the business you're talking about is more than made up in the additional fee and interest rate spread you can get. So I think it's a good time to be in the position our bank is right now and so you will see us opportunistically diversifying our -- what we have done on the asset side. But we're not going to do it on a wholesale basis.

Certainly. Thanks a lot. I appreciate the color there.

Steve Stelmach, FBR.

Congrats on a good year. I want to focus a little bit on the expense side.

It was a good quarter too.

And a good quarter, yes. On the expense side, the comp ratio, you gave some good color there. What's the expectation as we enter 2010? Is there an opportunity for the (inaudible) to come down a little bit or do you expect a sort of baseline around the 66% ratio?

Well I think -- again I think the number that I'm trying to get you to focus on is the comp ratio and understand that our transition related expenses are the amortization of our acquisition costs. I mean it's -- our strategy always has been that we would rather hire person by person and amortize that through the income statement and get a tax deduction than to go out and put goodwill on the books by doing an acquisition.

So look at the base number pre-transition and you'll see that number's been pretty stable at about 60%. Some improvement, sure. A lot? Maybe 1%, the $10 million that we could if all businesses run. We subsidized some businesses as all investment banks did this year in my opinion because some businesses just didn't have enough revenue to support and you have to protect your franchise and you've been hearing that across the street.

But I think our comp ratio where it is today is going forward kind of where we are maybe, maybe we can drive it a little bit lower. Then the real question is the amount of transition expenses we're going to have. And that is a lot of the hiring we been doing.

That number does -- it doesn't always go away if we keep hiring, but if -- as I told our board, if I'm expensing $60 million and I continue to grow, within three or four years or whatever that number is when that rolls off and if I'm still growing, I'm still expensing $60 million; my pretax income went up by $60 million because I got rid of this tranche, if you will.

I tried to have that conversation so that people understand our strategy as it relates to growth. My answer is 60% transition expenses will tend to go higher as we continue to expand. It's like a pig through a python.

We've hired so many people and we've done so many acquisitions. [Fully] almost probably 1400 of our financial advisors are on transition type arrangements because of our growth. So that's about the only color I can put on it for you.

And then just on other operating expenses, that was up decently in the fourth quarter. It seems to be up generally in the fourth quarter seasonally. But after the UBS acquisition, what's that number look like? Is that a fourth-quarter run rate into 2010 or does that come down a little bit starting the first quarter?

Well as I said, operating expenses are hard to -- they tend to get institutionalized in many ways. As I said in my previous remarks, we intend to focus on our operating expenses. I think we focus on growth and I think some expenses have crept into here, unneeded items, [quote machines, too many quote machines]. There's a lot of areas that we feel that we can be more efficient and better at. Our OpEx ratio right now is higher than I would like and I will just leave it at that.

Okay and then just last question. You mentioned (inaudible) transaction and you focused on fixed income but equities is actually pretty good in the quarter. Can you give us a little color on that? Is that a matter of just more resources, more capital at that business or was there some opportunities sort of unique to the quarter?

On which -- on equity investment banking?

Investment -- principal transactions, I'm sorry.

Well, I think on principal transactions, I think it was a little bit -- actually I'm not sure. That would be a mix of whether or not we would do more over-the-counter business than principal business and it's not reflective of proprietary trading but it is a mix of our flow business and actually I don't know the answer, nor would I think it would be significant.

Brian Keeley, KBW.

On the strength in the asset management line item in the quarter, was any of that tied to more fee-based accounts coming over from the UBS transaction?

Certainly (multiple speakers) but that's why you will see generally an increase for the quarter but I pointed out the decrease for the year.

So in the commission line item, did that negatively impact any of that in the quarter?

On a relative basis, it almost has to by math, right?

Then sticking on the asset management side, you referenced the fee waivers that we should focus on. So the way to think about that when we do get a rate increase that you guys -- all of that will flow to the bottom line or or is there margin that you earn on that because some will flow to comp?

A significant portion of that flows to the bottom line, let's put it that way. This is unique -- I don't think that this is a situation unique to our Company or -- this is a situation unique to the industry. When I read industry reports and read about Schwab talking about the significance and some of those firms, I make the comment, well why hasn't anyone asked us about it because it's the same issue? So I'm just pointing it out.

And then the last question for me. Investment banking seemed like a pretty strong quarter. Was that unique to one transaction maybe on the equity side where you guys had a [book runner roll] or not really?

Sure it was. We were the sole lead manager on a $600 million conversion secondary offering and it was something we talked about and that was a nice transaction. So that did help.

On the other hand, we also -- our number and our percentage of lead and co-lead deals have gone up significantly as has our forward calendar for this business. So we've made nice progress. Certainly the one transaction helped.

But it -- we also see a good calendar going forward. And I'm frankly pleased with our progress on that front in terms of not only are we winning business, but we're pitching a lot more business and that's good.

Daniel Harris, Goldman Sachs.

As you think about the opportunity that you have at the bank and if you put that in the context of the growth within your financial advisors, how do you and do you think at all about cross-selling of loan products into those guys and if you did, how should we try and think about that opportunity as it could shake out over the next few years?

Well the answer is of course we think about all those things. I don't know that we are as -- that we're as -- I always believed that water finds its own level. So I have not really ever been a big believer in cross-selling of products aggressively so to speak.

However, there is a tremendous amount of -- just the amount of mortgage business that we do. I think we're up to 50% from nothing. I think 50% of our mortgage origination that we sold came from our private client group and I think that goes higher as the number goes higher.

But really to answer your question, I think that where -- the previous question asked about growing the bank and stepping out on the risk profile, I think that there's a lot of opportunity in the private client group to go and increase the footings of the bank with high-quality assets that are tied not on a wholesale basis, but to our private client business.

And hence an increase in the footings of the bank, but also an increase in the net interest margin of the bank and just overall that is cross-selling in that we're not only doing transactions on the broker-dealer side with our clients, but we're also banking them. So it's a whole consolidation of industry where the banks bought the brokerage firms, we just did it in reverse.

So as you think about that opportunity, is there any reason why you would retain more loans going forward than you have in the past or is the strategy still to try and sell off most of those into the market?

Well I think that we will retain every loan that meets our credit criteria and spread criteria and interest rate management criteria and -- I'm not trying to dodge your question because it's a fluid question. However, I can say that the trend of retained loans in the bank from our natural client base will increase from what it's been in the past. Again, we are in the early stages of building the bank.

Right, no; totally agree. So switching gears here a little bit to the recruiting environment on the FA side, so barring any sort of M&A transaction and of course you guys have done quite a few of those over the last few years; how do you think about given the breadth of your franchise now that we should think about your organic growth rate going forward versus what it was? It seems like you've got a lot more offices in more states than you ever used to. Does that tick up what we should expect on an organic growth rate out of you guys?

I think we have done this -- if you look, we do this in sort of fits and starts a little bit and I never answer your questions. I get this question every single time and I never answer it well. Si I'm sure I won't answer well now because there is no constant growth rate you can put to it.

I can't say we're going to grow so much a month and then if we don't hire this many people -- I just -- we never run the business that way. It's sort of we want to hire all the best people we can. I will say that our general viewpoint since we completed the UBS integration is to focus inward a little bit, in that we feel -- and I think that that pointed out some things to us that we can do better and we've been focusing on enhancing our platform and our infrastructure so that we can go against -- I would say that we have taken, as I said at the last call, we have taken the foot off of that recruiting if you will, the pedal a little bit. We've been focusing on our platform.

We want to have a platform to support 4,000 to 6,000 advisors and not -- we don't need to get there tomorrow. We just need to get there and do it in an efficient manner and in a manner that frankly people believe that they can service their clients' needs. So that's a long-winded answer. I don't know what the growth rate is going to be. But, I do know that over the years, we've grown faster than anyone.

That's fair. It's hard to peg down a nominal number. So just lastly on a complete numbers question. I know you said that you're not totally comfortable with where the non-comp stands today but was there anything in the fourth quarter that should change in the first and second quarter of next year or should the fourth-quarter run rate be a good starting point as we look forward into 2010?

I think that's a fair -- I think it's a fair run rate going forward and it's going to be hard to understand when we add new offices, will the absolute number go up. It's my belief that if everything stayed exactly the same, that the absolute OpEx would go down because I think it's too high in some areas. I already know where they are. But for you, for modeling purposes, that is a good -- I think it's a good base that will increase because we're going to grow from here.

So I think I'm answering your question. I think there is -- maybe the pace of growth of OpEx won't be the same as it's been as we grow revenues. Maybe that's the way to look at it.

Yes, no; that's very fair. Thanks, Ron; great quarter.

Steve Stelmach, FBR.

Just a follow-up on some of those banks question. Right now I'm assuming there's about $120 million of capital at the bank and please correct me if I'm wrong there. But the question is how do we think about incremental capital going forward as you allocate throughout the franchise? Does the bank receive a disproportionate amount of capital going forward or is it pretty much the same proportions as we see today?

The allocation of capital is an art when you're overcapitalized which we are today. The bank I believe is more like $100 million of capital. I don't (inaudible) scrambling to look. But just call it in round numbers, it's about a $100 million bank.

On a $1.1 billion asset base. So if the bank grows to $2 billion, I'm guessing capital is going to be around $200 million. So it's about -- as I said, it's about a 10 to 1 ratio. It's not completely like that; tier one capital, well capitalized, all the rules that go into that.

But as a rule of thumb, I think that's fair, that we want the bank to be well capitalized. There's no reason it can't and should not be well capitalized and we think even at well capitalized, we can get returns that meet our internal objectives and help drive the shareholder returns that we want.

But so -- as the bank doubles, I would -- I think the bank's properly capitalized today; maybe put it that way. So we will allocate capital to the bank as it grows. The question is if we can do that without -- we don't need to go anywhere to do that. We've got the capital to allocate to the bank.

Okay and then just one sort of 10,000 foot question, or just want to get your thoughts. You have a few very large competitors who would like to trumpet scale and what scale means in this business. Can you just give us your thoughts on that, how that translates into your business as sort of a mid-market competitor and then how you compete against the larger guys when they're talking about scale and profit margin and such.

Well that depends on the business, right? And so generally in the private client business, it's interesting when you get away from the black bank platforms, because I don't really understand the accounting when I read their financial statements. But generally the larger scale model aren't driving significantly higher profit margins.

And so I've always been of a belief that at a certain point, there's diseconomies of scale in this business. We're not there but I think you do have diseconomies of scale. It's a relationship business and it's not something you're going to economize too much.

For some reason, no one has been able to -- competitors that are three times my size aren't driving much better profit margins. So I'm not -- people say what they want to say to recruit but in the numbers if you look at the numbers, I don't think it's there.

On the capital market side, I think scale in many ways equates to your ability to use your balance sheet and that is something where certainly we are not in a position nor are we sure that that is a good economic return at this point. But there is so much business to do in the proverbial middle and so much business and so much market share to be gained across all of our businesses with what's happened in financial services. I think there's plenty for everyone to do. So we are who we are. We're not Goldman but we're not some little firm either and we -- there's plenty to do in our market segment.

Daniel Harris, Goldman Sachs.

Daniel, I said I wasn't Goldman.

I know, I know. I had to come back on just for that. Just a real quick question on the asset management and service fees in the private client group. They were up pretty substantially in the quarter. Is there anything in there that we should be aware of or did the fee rate on those assets somehow change after the UBS deal?

I would say that the UBS advisors in general came in with a higher proportion of fee-based assets than what our otherwise average would've been. So the private client business will manifest itself to the financial statements; and commissions, principle transactions and asset management and service fees to the extent that you have fee-based business.

And so you are -- what you saw there was an increase relating to our friends at UBS plus the fact that asset values for that quarter are based upon -- we bill in advance and then we amortize over the quarter. Certainly the asset values at September 30 with UBS and with the increase in the market on the rest of Stifel, that was probably more significant than the UBS was just the increase in the asset base, was a bigger reason for the fourth quarter. That was then muted or offset by the waiver of fees.

I'm not sure if Jim is there, if you actually have any of those numbers. I know they usually come out in the Q, what the assets and the fee-based accounts were and how many accounts there actually were.

It will be in the K.

Okay, thought I would ask. Thanks, guys.

Yes, I just don't think we have it at our fingertips. Maybe we will start adding that to the press release if that would be helpful.

Hugh Miller, Sidoti & Co.

Just had a housekeeping question with regards to the other non-interest expense in the fourth quarter kind of up noticeably to roughly $29 million. Can you just give us any sense as to if there's anything kind of unusual in the uptick on that relative to roughly $20 million in the third quarter?

That's right (inaudible) we -- would that have been in non-interest?

Yes.

We did for the quarter -- well one of the things -- we increased some of our reserves in the quarter, I can tell you that. That would have been -- that's not something that I would anticipate going forward as we evaluated where we were on the balance sheet.

I would say we had a disproportionate increase in our reserves. And that would be a fair amount of that increase. We also took -- I'm not sure where it falls through -- we also took an OTTI charge in the quarter for an investment security. But I'm not sure that that's a non-operating expense but I will disclose on the call that it was about $2.5 million of a charge that we took on a held to maturity security that we did. So those two items now that you pointed out I guess, [that will suppress] the quarter if you will.

Okay, I guess just one last question with regards to that sole lead managing secondary underwriting that you guys were able to do during the quarter. Just a rough sense of the type of fee you were able to generate for that type of transaction?

I don't know that we have really disclosed that but I can tell you -- I can just say that the gross revenues were in the approximately 15, $16 million range. So nice (inaudible) do [$50 million] in the quarter investment banking. It was a nice transaction.

I would like to do 10 of those a year or one a quarter. Shoot, I don't mean to be -- but it was a nice transaction and it was a business that we brought over a lot of the synergies. It was one of the carryover businesses from Ryan Beck merger. It was a nice transaction and I'd like to do some more.

At this time, there's no further questions.

Well, that was a robust call with a lot of questions. We would like to thank everyone. Thank you for your support as shareholders and your interest in our stock, 2009 and 2008. This period has been a very good period for our Company.

We look forward to your continued support and hopeful investment in our Company going into 2010. And I look forward to reporting to all of you our quarterly results for the first quarter of 2010. We are celebrating our 120th year as a company and we hope it to be a good year. Thank you very much.

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