Stifel Financial Corp (SF) 2010 Q2 法說會逐字稿

Good morning. My name is Angie and I will be your conference operator today. At this time I would like to welcome everyone to the Stifel Financial second quarter financial results conference call. I'd like to turn the call over to Mr. Jim Zemlyak, CFO. Please go ahead, sir.

Thank you, Angie. Good morning, everyone, this is Jim Zemlyak. I am CFO of Stifel Financial Corp. I'd like to welcome everyone to our conference call today to discuss our second quarter 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 our website at www.Stifel.com.

Before we begin today's call, we'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 number one of today's presentation covers this in greater detail. Forward-looking statements are not statements of fact or guarantees of performance. They're subject to risks, uncertainties and other factors that may cause actual future results to differ materially from those discussed in the statements. Supplemental financial statements presented In accordance with GAAP will be 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 on risks and uncertainties in our business please see the business factors affecting the company in the financial services industry in the company's annual report on Form 10-K and MD&A of results in the company's quarterly reports on Form 10-Q. With that, I'd like to turn the call over to the Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Thanks, Jim - Co-chairman, okay? Good morning, everyone. Thank you for joining us. We had a I think a very solid quarter, a lot to talk today. Going to go through a lot of numbers. I would want to talk about not only our quarterly results but the status of our merger with Thomas Weisel Partners and I will also comment a little bit on financial regulatory reform and the major parts that we're looking at.

First of all, as I always do, I start with my comments. In short, it was a very good quarter. We had record quarterly revenue. Record six-month revenue and net income. Our merger with Thomas Weisel Partners closed July 1. We're confident that the synergies that we will attain primarily on the business side, which I talked a lot about, will help us in our goal to build a premier middle-market investment bank. Our capital raising and strategic advisory pipeline is promising. Although as many firms know, we recognize we need a functional market environment to realize its full revenue potential. And we're going to also continue and we have continued building out our global wealth management business. Those are the opportunities. My partners on the phone with me, I'd like him to talk and make a comment just a little bit about the integration from my perspective has gone fantastic. Tom, your perspective?

Ron, it just couldn't have gone better. You know, the investment bankers are working with having joint pitches and winning business on the institutional side. The knitting of sales, trading and research has also gone extremely well. The client feedback, whether it's corporate or VC and private equity as well as the institutional has been terrific. I am not just committed, but really excited. Working very, very hard, and I'll be available for Q&A at the end of this and I'll just turn this back to you, Ron.

Thanks, Tom, thanks a lot. So let's go through the financial highlights. For the three months ended June 30, we had record net revenues, as I said, $328 million. That is 25% increase over the second quarter, sequentially up 5%. Our Global Wealth Management business revenues up $200 million, up 47% over the second quarter. Relatively flat from Q1 as you know the second quarter was difficult market environment, so we're pleased that it was relatively unchanged. As I've said before, this is about an $800 million business as evidenced by the $200 million in the quarter.

Our institutional group, $125 million, so sort of a run rate of a $500 million business which we've talked about. Their revenues were relatively consistent with the prior-year quarter, and up 10% from the first quarter. So, again, very good performance considering the market environment. Our net income on a GAAP basis was $0.60 per diluted share which was up 33% over the second quarter although down 11%.

Of course, we had some merger-related charges, and what those really were is that a lot of the merger-related charges we'll discuss will come in the third quarter. But we did with new accounting pronouncements we had expensed some of the deal-related expenses, legal, investment banking, and we also had to the extent that we had a reduction of force plan, we had to record that in the quarter that we announced it. So some of those charges, approximately $5 million, were recorded in the second quarter. If you exclude those charges which I think is appropriate on an operating basis, our non-GAAP net income would be $24 million or $0.69 per diluted share.

So, again, very good quarter. For the six months, record net revenues of $640 million, up 33%. Our Global Wealth Management business record revenues of almost $400 million, up 59%. I'll talk more about that in a bit. Our institutional group was up 3% over 2009, $238 million and, again, the same thing. If you look at GAAP, even with the charges, we had record GAAP net income of $45 million or $1.28 a diluted share, which was up nearly 80%, and non-GAAP net income of $48 million. Again, that excludes those merger-related charges or $1.37 per share. Margins on a non-GAAP basis were 13%, still below our target, but again considering the market environment and the fee waivers that we have going on and our growth expenses, very acceptable, all things considered.

One of the things we talked about, just look at growth, if you look at the next slide, just a tremendous amount of growth in our firm. Our Global Wealth Management is up 24%. This is all compared to a year ago, June 30. We've increased the head count 24%, and the institutional group, 45% increase. This includes pro forma for what we'll add or what we did add on July 1. So you'll see as we said today, we have 270-odd professionals, investment banking, equity sales and trading, up significantly. Research, our research staff totals nearly 230 people, up 45%. Increase is also in fixed income sales and trading net-net a big increase in our institutional group. And of course we do need the support to support all of this. So all in all, in just the last 12 months, we have increased the head count by nearly 1,000 people, and which is up, you know, over 25%. So a lot of growth in the firm, and a lot of jobs that have been added at Stifel.

If you look at the overall results, this just explains the acquisition-related, I'll get into more detail, but you'll see the way we've laid this out. It is to show the GAAP numbers and the non-GAAP numbers. Probably one of the things I want to talk about is our non-comp operating expenses. There's a few things that will go on there, some of which I already mentioned, but I'll come to that in a moment. But this reconciles the $0.60, the $0.69 and then the various numbers. If you look at the six-month, you'll see the same thing, $1.28 to $1.37. Again, I will just focus on the six-month on a non-GAAP basis, meaning taking out the acquisition-related charges, our OpPex is 21.8%. So that is, you know , as I've said, should be, we look more at 20. So you can just look at that as something we continue to focus on, although there is some geography items in that.

Primarily, I'll discuss it now and we'll get to it, there's about $2 million of expense at the bank that is re-classed from interest expense, relating to our accounting for our interest rate swaps. So somewhat technical but it is a geography issue in OpPex and does impact our OpPex, our net interest margin. So all in all, the numbers are acceptable.

If you look at the next, our source of revenues, I'll first of all comment, and I'll give a little more detail on our principal transactions, which were relatively flat with a year ago, and up 10% and probably going to surprise some people on the call because embedded in principal transaction, as I've been saying for a number of quarters, it would eventually happen as a decrease in our fixed income business which is offset by an increase in our equity business, and we'll talk about that in a moment here. Asset management service fees is simply our growth in our Global Wealth Management business including an increase on the relative number of fee-based accounts, offset by what is becoming significant fee waivers in our cash products. Those fee waivers today, are in excess of $50 million on a pretax basis. So that's something that also impacts our margins and obviously our profitability.

On the investment banking side, I'm pleased with these results. We've commented on past calls, our objective to increase our investment banking revenue and as you can see here, investment banking up 67% quarter-over-quarter and for the six months is up significantly, I'm looking at the numbers here, up 87%. So significant increase in our investment banking. Net revenues, again, all things considered, 25% increase for the quarter, 32% for the six months. Just significant growth.

If you look at principal transactions on the next page, you will see that our taxable debt, principal transactions declined from $85 million to approximately $60 million. Everyone should remember, and I've always talked about that 2009 was a sort of a perfect storm for fixed income, a phenomenal year, all things considered. But not a year that we expected to repeat. I benchmarked this back to 2008, to measure our growth and we're up over 2008. It would be almost impossible for us or any firm, really, to match the market environment in 2009. But that's offset by an increase, frankly, in our municipal business. We've made significant investments in our public finance capabilities, and you're seeing an increase there. Frankly, our equities business, which was what we would expect, would increase.

One of the things that we'll look at and we'll start to commenting a little bit more is our value at risk. Our value at risk, if you look at the quarter, increased to $4.6 million up from about $1 million and that is really due to two factors. One, as many firms, though is increased volatility. There is no question of volatility increase. Second of all, based on discussions with some of our regulators, we changed our method in calculating bar. Technically we went from what was a one day 95% confidence to a 10-day 99% confidence method. Net-net that increases the bar.

But regardless, what we carry significant inventories, primarily fixed income equities, our inventories facilitate our customer flows. We remain an agency-focussed firm. We do not prop-trade our inventories and our bar is to facilitate our client flow business. I think that's very important, and something that frankly I think that the street is going to come back more to, as evidenced by the fact you have a spin off your proprietary debt.

Anyway, moving on, looking at non-interest expenses on page 11, you will see and I think I've commented that comp and benefits excluding transitional pay, about 60%, down a little bit, actually down and transitional pay is up. So they don't exactly offset our overall comp and benefits for the quarter, 66.1%, down from 67%. And it's, again, you don't grow, as we have, adding 1,000 people and all the productive people and all the transition without having this expense, but it's still something we're able to achieve record profitability while we carry this expense. Which by the way, at some point goes away, at least that tranche of it goes away.

On the other operating expense line, as I've said, the things that are in there that are a little unusual, the approximately little under $2 million relating to our swap, although the way we account for our swap out of interest expense into other operating expense, and then again approximately $2 million in deal-related expenses. We had a legal settlement going back to a case that on the margin was about $1 million dollars. So net-net, you know, you can look at about $5 million dollars in OpPex, that would explain that, I don't want to say it is non-recurring, I would say it is unusual. Certainly the bank re-classes geography as you look at it quarter-over-quarter.

Segments, Global Wealth Management, again, big increases. Sometimes I think that we're slowing down and then I look at these numbers and see 50% increases year-over-year, and it reminds me that we have been growing significantly. Our institutional group relatively flat on a quarter-over-quarter, but up on a six-month basis.

Flipping to Global Wealth Management, I'm on slide 13, what I would point out here is, again, our transition pay at 7.6%, up from 7%, so it's driving a slightly higher comp to revenue. But you'll see that our operating expenses as a percentage of revenue declined from 21.5% to 18%, which results in higher margins in this business, from 17% up to 20%.

In short, this reflects our investment in UBS branches and an improvement profitability which we expected in our new branches. We opened a lot of new branches. I've talked in past calls about the amount of investment in terms of losses that we've incurred in establishing new branches. Those branches, while not at full profitability, are improving their profitability, and that of course improves our margins. If you add the way I look at this business, if you add our margins plus our transitional pay you'll get to about 27.5% margin. Our objective in the 30% margin range, about 30%, that will be achieved by both a re-establishment of our fee waivers, and the continued improvement and profitability of all of these new branches that we've opened over the last really three years. So a very good quarter in Global Wealth Management.

Looking at the bank, you will see that the profitability of the bank is quite healthy. The non-comp operating expenses, again, the re-class there, and you'll see $3.6 million up from about $1.8 million, again, most of that increase, not all of it, relates to that swap interest, which is the third time I've mentioned that. So you'll see that also impacts the six-month results.

If you look at the bank on page 15, let us just talk about what is happening here. This has impact, and I'll come back to it, but you'll see that our growth leverage has increased. And the growth leverage has increased primarily because of our investments in the bank. But it is low-risk asset growth. So assets in the bank today are approximately $1.4 billion, up from, say, little over $500 million, $530 million. So we have an $850 million increase in our bank's assets. I tried to show a little bit about where that increase has come from, and it's primarily in our agency investments, so we have bought agency, US Government, assume no credit risk, and on that and we've swapped out the interest rate risk. So a very, very low-risk strategy that's actually returning appropriate return on equity. We measure that with that increase so we've increased our agency investments from to nearly nothing, so to speak a year ago, to nearly $600 million.

And then the other increase comes in our consumer, primarily our Reg-U loans, highly liquid collateral, primarily this got jump-started with our UBS acquisition of business that we really like. You'll see an increase from $30 million to $235 million in our Reg-U loans and modest increases offset by a decrease in our commercial lending portfolio, from $73 million to $50 million. But I will tell you that when I look at the bank, even though it is a low risk, I believe looking forward, that the commercial portfolio will increase. We see a very opportune time to be looking at the commercial side of the business, both on risk adjusted returns--any way you want to look at it. So you'll actually see it won't be crazy, but you're going to see that line item increasing in the future, not declining, as it has, as we have really not been that involved in the commercial side of the business. We don't think the market was paying for the risk. Today we think it does and you'll look at us.

Our strategy in the bank, simply maintain solid asset quality. I'm not sure there can be a bank that I know of that can have $1.4 billion in assets and have non-performing loans to growth loans of 0.24%, non-performing assets of 0.16% and we've lost $1.1 million in trailing 12 losses. So again a very, very highly liquid high credit quality, low risk in the bank.

Turning to the institutional group, getting these numbers, we closed our merger on July 1. These numbers are Stifel alone. Simply a great performance in choppy markets. The ratios are all within our range with again markets that I don't believe were conducive, certainly the street has reported choppy results, but we're nearly 25% margins, the comp ratios and OpPex, all there. Just the business has been flat, again, reflecting market conditions. So you'll see relatively flat revenue, everything looking pretty consistent. Of course, we like growth and so this business, while doing very well, all things considered, is relatively flat in terms of growth.

If you look at the revenue, two things, both of which I'm extremely pleased with. One is our equity flow business, up 15% for the quarter, 10%. We simply think we're gaining market share in that business. We're going to increase that market share gains with our addition of the Thomas Weisel today, fully integrated. We're one of the either the first or second provider of US domestic equity research in the country and we think that we have, and we do, add alpha to our clients. And that is reflected in our flow business, and so we're pleased with that.

And fixed income, while showing a significant decline, as I've already said, tremendous performance in fixed income considering the market. And compared to 2008, something we're very pleased with, so our fixed income business just had a fantastic quarter. When you look at it, not looking at necessarily the blip in 2009. Investment banking I've already commented on. Capital raising of $25 million advisory fees, so the overall, the business looks very good.

Turning to financial condition. Statements, you can just look at our assets, $3.4 billion. Equity, total capitalization of over $1 billion now. Pre the merge I'll talk about that. Leverage ratio, relatively consistent although our equity leverage ratio is a little bit higher and I'll talk about that. Again, that's all in the bank. Book value ended at $30.02.

If you look at our leverage ration on the next slide on page 20 you will see that on the equity capitalization, it's not on here but it went from 3.25% to 3.6%, still very low considering we're a financial institution. And if you turn the page, globally we can talk a little bit about level three assets. Again, the option rate securities we had did a tranche of our repurchase from our clients, so that's basically I think it is a two-year plan now, offset by some redemption which have slowed. I'm not pleased with that, with what's going on in the option rate, although we think it will pick back up. Some litigation going on there with the closed-end funds, but that's a portion of our option rate securities.

And then the trading securities, I would just tell you that relates to our aircraft lease business, when we buy securities to facilitate flows in that business, they're almost always classified as level three. Half that position is sold, or was sold after the quarter. So, again, really no change in level three assets. If you look at just the overall other financial data, you will just see that two comments, one, the increase in assets, is almost entirely in the bank for one. And, second, our total client assets from the first quarter from $95 billion, actually at one point was over $100 billion, but now at the end of the quarter was $92 billion, and what that simply is it's increased assets. We have positive asset flows but obviously market declines in the quarter, which impacted that number.

Let's turn to the TWP merger. First of all, as Tom said, the integration from my perspective has been fantastic, our institutional business is substantially integrated on Stifel's platform. We are working on the Global Wealth Management transition, but its a complex business with all the fixed connections and all the things that need to get on. That got done. The merger -- we announced the merger effectively the end of April, beginning of May, and we closed on July 1. I'll take a moment to thank all the people that two public companies that can announce a merger and then closed it within two months, plus the integration, plus all of the logistics, a lot of people did a fantastic job and I want to thank them on this call.

In the end, I will discuss the shares and the book value because it is somewhat complex so I want to give everyone a sense of where we stand on shares and book value. If you look at the deal consideration, if you look at just shares, we issued gross shares of about 4.4 million shares, so if you value it at the time of the merger, it's $192 million dollars. That represents 1.08 times book of about $178 million. That $178 million, at Weisel is an add-back of the referred tax asset but net-net it's 108 of book and if you look at the restricted stock units, which while vested, do have a retentive affect as they only vest on retirement. So even if you add all of this in we're 1.5 times book, if you price it with all of the restricted stock units. So all in all we think an attractive transaction from that basis.

Let's look a little bit of what we look like combined. First of all, turn to page 25, you show the six months, to give a sense of where we are. The objective of these next few slides to give you a sense of what the revenue might look like. As you know, I don't give forecasts, I'm not going to start now. This is pure math. It's just adding things across. But I want to give certainly the analyst community an opportunity to understand in how to remodel the firm from their perspective. If you look at the six months you'll see Stifel's revenue of about $640 million. The Weisel did about $90 million. Significant drop-off in business in June, as you would expect, once the merger was announced and business was started, especially the flow business started really just for whatever reason, drying up, is what I would call it. But still if you add these numbers across, you could get a sense of what we would look like on a combined basis on the revenue side.

I want to take this opportunity to maybe explain at best, in many ways the Weisel platform as an investment bank and primarily in an equity investment bank. So I wanted to discuss the -- give you an update on our investment banking activity for the first half of the year compared with our outlook, since we combined with Thomas Weisel. The obvious caveat to this is that the future realization of our pipeline is dependent on market conditions and it is hard to predict with any certainty. Additionally, I only plan to give you pipeline data this one time, so don't expect me to update it regularly going forward. I'm not big on forward revenue projections but I think it is constructive to do it here.

So in the first six months of 2010, Stifel completed 50 equity transactions, eight of which were IPOs and we book managed 22% of all equity transactions. Currently we have 96 transactions, almost double the amount completed in the first half, that are filed, mandated or completed. 50% of these transactions, 50% I think this is impressive, are book managed transactions and 11 have been completed quarter to date. Of the 96 we have completed seven IPOs thus far in the third quarter, and we have 42 IPOs that are filed or mandated, and of those 31% of those are book managed. This is what we set out to do two years ago to improve this and I think these numbers will show this.

If you look at completed IPOs year-to-date on a combined basis, Stifel and Thomas Weisel priced 21 transactions, which ranks us tied for sixth place with only one other middle-market focus firm having completed more. So in terms of IPOs, we are a market leader. This gives a sense of the pipeline in the business, the M&A pipeline is also promising. So we see a real opportunity. And as far as I'm concerned we're just getting started. So I agree with Tom. I have been on some of the pitches, and in some ways recognize our own firm with capabilities we have, and if we get that out there, we're going to win more and more business. So that will give you a sense of what I think about on the combined revenue.

If you look at fixed operating expenses, we have been talking about cost saves. I don't want to talk about cost saves. I think it gets confusing. I thought the way to do this best is to take Stifel's annualized OpPex, fixed op, not completely fixed OpPex from Stifel because we have some variable execution primarily. But what I want to layer on top of that is our estimate of what the fixed costs that we will bring onto our platform relating to the Thomas Weisel.

So instead of talking about cost saves, let us just model it or look at it as to what costs we think we're going to add when we get our integration complete. In short it's about $47 million. We've shown you the categories of where it is. So on a run rate basis we think that our fixed OpPex is about $325-odd million dollars in OpPex. So this just gives a sense of where we would be. If you flip the page, this is at least how I look at it and how I looked at the transaction from the very beginning, and that would be sort of a break even sensitivity model. Again, this is not a forecast. This is simply to do math to give a sense of how we're looking at the business and how we looked at it.

So I look at two things here, first of all, it is break-even. What do a need to do to cover the $47 million in fixed costs that we think are coming on this platform? In addition to the $47 million of fixed costs we have about $5 million is that we've added in fixed compensation. And, frankly, that's really not fair to the deal because a fair amount of the fixed compensation filled positions at Stifel we're otherwise looking to fill, so we had a lot of openings in our IT department, for example, which we were able to fill by bringing over the Thomas Weisel IT people. But put that aside for a moment, we have $5 million of fixed compensation. So if you look at variable comp, which is sales, trading and banking and all of that variable comp, we look on a 50% comp to revenue model, we need about $110 million to cover $5 million of fixed comp, and $47 million of fixed operating. We add what we think what we think the variable cost associated with that revenue, primarily the execution costs, which are really not that much, because a lot of the revenue assumptions would be banking. But regardless, $110 million breaks even, of this model, and if you recall, I think in 2009, in a very difficult year, the Weisel group did $200 million of revenue.

If you look at what I look at as break-even EPS, taking the consensus forecast, which is not my forecast, but it is all of the analysts' forecast of $2.86 a share, we would need about $147 million doing the same math to earn $2.86 on the incremental shares that we issued in this deal. So that's just a way to look at it and in terms of this again, not a forecast. When I said that I believe this deal is accretive to book and accretive to earnings, these are the numbers I'm looking at and this is what I believe. And I do believe that this deal will be accretive to earnings and I already know it's accretive to book, which I'll show you in a moment. So that gives us a sense of break even looking at this.

Turning to go our merger-related costs, as you know, you don't do these mergers without incurring sometimes some significant costs to right-size the model. Of course, we always look at this in terms of overall purchase price, but some of it runs through the income statement. And so let's just look at it quickly. For the quarter ended June 30, $5 million of operating expenses, $3 million after-tax, $0.09.

For the quarter ending September 30, our estimate is, first of all, a big number, and I'll get back to it in a moment. I've talked about this before. It is a non-cash item, which is the modification of Stifel's unit plan to be consistent with Weisel's unit plan, which really allows the plan to have retirement eligibility. That requires an expensing of this. I will come back to it. It is all non-cash. It is really a flip into the equity section, and we'll talk about both the increase, what it does to shares and book value. But that'll be a big number for the quarter.

The other thing in comp and benefits, and I'm not quite certain yet is a little bit of accounting as to how we deal with the Weisel reduction of force. I'll just leave that out there as a caveat. But leave that aside, we estimate right now that for the quarter we'll have $177 million which is the unit amortization plus some other comp. And then you'll see occupancy and equipment, et cetera that will happen in third quarter, then the fourth quarter, and then we're substantially done. There's some trails as it relates to contracts that need to run off and some various costs. Actually I put year ended December 31, 2011. I really think all of these expenses are done by Q1 of 2011. Certainly I don't want to talk about them after that. This gives a sense of what's going to be running through our acquisition-related.

If you flip to page 29, you can look at unit modification charge, and what we're looking at here. So on August 3, our board approved a modification of our plan to align it with the requirements for vesting of TWPG's deferred comp plan. It really makes it retirement eligible. This action accelerates a non-compensation expense associated with all outstanding deferred compensation awards, it results in after-tax charge of $105 million. So what that will do is it's all non-cash. If you look first of all on the right side, shareholders' equity, what we do is when we expense the units, you debit expense for $166 million and you credit equity for $166 million. That's why it is non-cash. And then we have to run the after-tax earnings charge through equity so we have this $105 million charge that is going to run through equity. So it all goes through equity. The net effect is a $62 million increase to equity. And then we'll talk about the shares.

On a pro forma basis we start with pro forma combined of about $1.135 billion and end up with $1.2 billion. On the income statement side, after we take this charge, we will not have these future, what would otherwise be an expensing of these awards, it amounts to $0.21 to $0.22 a quarter and about $0.74 in 2011 and then you see the rest of the numbers here. All non-cash. Some people say it is optical, but what I think it does is it shows the cash earnings power of this franchise. While it is a large charge, it does allow us to again show what we have been earning. We've had such significant growth that these units are reflective of our growth, that the alignment will, I think, show the proper number of shares, the full overhang of shares that comes into equity, and will show the cash operating earnings of this business. So that gives a sense of the unit modification charge.

So on page 30 we put together the schedule I think is an accountant's dream, if anyone understands it. It'll be good. I understand it. What I thought we would do was just roll forward June 30, 2010, show what happens with Thomas Weisel, look at pro forma combined, then we do the unit modification. So where are we here and on a book value and share basis? So if you look at June 30, 2010, you start with $928 million of equity, you'll see that our shares outstanding were about $30.9 million. We had units and other equivalence of $8.2 million, diluted shares were about $35 million, resulted in book value of $30 a share. I'll come back to the book value per share and share equivalence, because I think that's important to discuss.

If you look at what happens with the Weisel merger, the merger consideration is $274 million. But, as I said, we wanted to introduce a cash component to this merger, so we have repurchased two million shares. We spent approximately $90 million. I look at that as part of the merger transaction, so that effectively, we are issuing, as we sit here today we issued 2,446,000 shares for Weisel plus the units. When you combine all of this together, you will see that our pro forma combined equity is $1.135 billion and our total shares including what we did again with the Weisel transaction, our total shares and equivalence are some 43 million shares.

And so then we do the unit modification which adds $62 million to equity, we're about a $1.2 billion, so if you look at a book value basis, GAAP simply takes equity divided by shares outstanding, doesn't necessarily look at equivalence. Our book value would go from $30 to almost $36. I don't really look at it that way. I think if we're going to talk about this going forward, I think that we should look at our equity divided by our shares plus vested units. That's the appropriate way to look at this. But on that basis, we go from $29.36 a share to $31.16 a share. So it's accretive on that basis.

And what this does, it cleans up all the shares. We estimate now the fully diluted shares to be about 39.5 million, 40 million rounded, as fully diluted shares, and this will give a sense of $1.2 billion of equity in those shares. I hope that helps a lot of people. I've had a lot of questions. On the goodwill front, if you look at the quarter, we have $160 million. We have not completed the goodwill calculations but it will be a little over $100 million, again give or take, so I'll give you a sense of how much goodwill we'll have on our books.

Finally regulatory reform, first of all we'd like to continue adding jobs. My first comment about regulatory reform is that it puts a chill on that. We're certainly uncertain about all of the things that are going on. My commentary about this is when you regulate financial services, energy and healthcare, throw in cap and trade as part of energy, with the uncertainty in the economy, you wonder why we have an uncertain economic, when people want to know what the uncertainty does, when you change, or when you reregulate an industry, I certainly can speak firsthand as to the uncertainty. And our uncertainty is going to come from these various items, all of which I believe will be worked out.

First is fiduciary duty and lot of analysts have commented a lot but people have commented that fiduciary duty somehow adversely or more so impacts Stifel. That's not the case. We have all of the same programs on fee-based business. I think there's going to be a new fiduciary standard, anyway, one that is going to be a disclosure-based regime. We will see, but fiduciary standard is a big uncertainty. I certainly believe that our business is the fulcrum between people who have money to invest in companies that need to be invested in and you can't be a fiduciary to either side of that transaction. I do think the regulators understand that. I think fiduciary standard will in the end result in a marketplace that will increase investor trust and confidence, and I think in the end will be good for our business. But we have to get it right.

The SEC authority to restrict mandatory predispute arbitration, a lot of people are very concerned about this. I share the concerns, only as it relates to the fact that I think our arbitration system has proven to be an efficient way to resolve disputes. And so the negative would be if you lose that you're going to increase your costs. While, on the other hand, the other side of this, I think where people need to be careful from an investor protection, is that there's many, especially with fiduciary standard on all the disclosures, there's many arbitrations that may not see the light of day in court, a lot of arbitrations will look at things without taking into consideration many things that may not get by a motion to dismiss. So there is two sides to this. I think that, again, we'll get this right.

I think the objective is to have an industry where disputes can be resolved in an efficient manner, especially for customers. The consumer financial protection agency is a huge bureaucracy, and one that I'm uncertain of. I don't think it has a big impact, first of all, it's severely cut back for any financial holding company with under $10 billion of assets. So we certainly are that today. But it's a huge bureaucracy, and when I read that whoever is in charge of this agency, what they may or may not be able to do, we could be creating a very powerful person within the Federal bureaucracy and that creates uncertainty.

We will have some new fees although on balance, they're probably positive to us. While we'll have higher deposit insurance costs they are going to be reflected on total assets, not deposits. That is going to level the playing field in that we're not a highly leveraged bank and we don't leverage our insured deposits with uninsured financing. So in effect, I think net-net, while it increases costs on the industry, for us on balance, I hate to say its a positive, but certainly it is on a level playing field. We'll do okay. Of course, the specific fees have already been increased and I don't see that going away. And finally the BOCA rule, which as you've been hearing on the street, the spinoff of proprietary trading desk and hedge funds, we don't believe we have a big impact. The BOCA rule is to limit proprietary risk taking, and we are a client agency-facing business, so we don't see a lot of it act on the BOCA rule. The caveat being it's not written yet. So that's part of the uncertainty. So with that, Operator, I realize this was a long call. I apologize, there's a lot going on here. We wanted to give you a complete and thorough update. I hope we did that and with that, we'll

(Operator Instructions) We'll pause a moment to compile the Q&A roster. First question comes from the line of Joel Jeffrey with KBW.

Hi, Joel.

How are you?

Good.

Can you give us some color on your Muni results in the principal transaction line? Looks like head count number was down but the actual revenue number was up pretty substantially quarter-on-quarter.

Well, we hired a lot of people, and then we had a little bit resizing of the business. What it really was, Joel, and you'll see it if you look at the rankings in the Muni ranking tables, you're going to see some significant increases as to what we're doing in the Muni business. Our Muni business has found a new level and you'll see that -- you should look at it. I don't know if I can comment anymore than that other than maybe next call I'll show what we've done in terms of volumes and negotiated and competitive transactions what we're doing. But we made some significant investments. I haven't talked much about it. I probably should. Three years ago we didn't do a Muni bond in Michigan, and today we're number one in K12 in Michigan. We've got significant business in Ohio, Texas, Colorado, Missouri. So that's a nice business for us and it is reflected in the numbers.

Okay. Great. And then in terms of the RSU modification, the board approved this on August 3. Is there any delayed impact in the third quarter by the fact there might be a month of amortization charges for the RSUs on that?

It depends on how you want to look at it. We effectively did it as of July 1. It is all going to go through that charge. I don't know that I'm going to come up and say 22 days was in the charge and it was the charge. We're going to throw it all in to that one lump number. So regardless of runs through the income statement, how you look at it is up to you. But that's the number that we will report. Does that make sense to you?

Yes. And then some of the commissions in the per FA and in the private client business looked like it held up pretty well. Can you tell us what you're seeing from the retail investor these days? It looks like from a lot of the guys they have really pulled back substantially.

Well, I think it has. There's a number of factors that make this a relatively difficult market environment. We have significant growth. So I feel the same thing. I just think you have to factor our growth, minus a difficult market environment, and so you're looking at a per FA basis, and the overall slowdown really occurred in June. It continues in the summer. So I don't want to sit there and say everything is great. The retail, the private client investor, still has aftershocks from that flash crash, plus you can't -- really for the month of June couldn't turn on CNBC and not be depressed with Euro and all of that. So it has been a difficult environment. The good news from my perspective is we have continued to do build right through that because we believe that when the market turns, and I believe it will, we're well positioned to gain market share. Our relative performance, looks pretty good. I'm not sure I understood all of the numbers that I saw on the street.

Great. And then just lastly, can you give us a sense for how much client cash is still sitting at the broker that could be swept into the bank?

Yes. Approximately, these are round numbers, okay? But I think we've swept about $1.3 billion to the bank. Maybe a little bit more. And we probably in total in all of our cash products, had $9 billion to $10 billion. So, $8 billion? A lot. Don't expect that any time soon.

Thanks for taking my questions.

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

Hi, Devin.

Good morning. First of all, thanks a lot for the additional details on the Thomas Weisel merger, definitely helpful. It would also be helpful if you could give us a better sense of -- on the expense side how we should think about the expense savings progressing and the time frame on when you would get to that full savings run rate?

Well the way we're trying to do it, Devin, is to show you the way is to put the charges that would otherwise be -- that we think are expense savings, they'll either be things like severance or termination of contracts or savings that we expect to get, that take a little bit of time. We're trying to show that in the merger-related charges. So if you go back to that slide where I show what's going to occur in Q3 and Q4 and then thereafter, and I think I said thereafter would be done in Q1, you will see the charges. And then what we expect is that on the OpEx side, not including just execution, that we estimate it is about $47 million in fixed OpEx . So if you want to look at it, you can think of the fixed OpEx being $47 million, that we have achieved on day one and to the extent we haven't achieved it, we're showing you what's going through merger charges in Q3, Q4, and Q1. That is the way to look

That is helpful. Secondly on the revenue front, it seems like banking, at least to me, is a little bit more straightforward. But on the brokerage side, I want to get update on how conversations with clients have been going given some of the overlap on the sales side and just how you're feeling about the ability to sustain a large portion of TWP's former brokerage revenues?

That is one of the transitional issues that go on. You have votes, you have window votes occur, when does all of that occur. I don't believe that today, in fact I know -- certainly I hope to know that we're not at full run rate brokerage revenue, as to what we would like to achieve. We're looking at it more from the perspective of our analysts, our companies under coverage, and where we think we should be relative to everyone else on the street. As we look at it that way, we think there is room to improve, but it also takes time. We cover nearly 1100 companies today, and getting that content to our buy-side clients and making sure we're being paid for, is a transitional time frame. Where are we on it? I'm pleased with where we are, but I know that we can improve on that. Part of it is just making sure people understand to vote for now Stifel, not Stifel and Weisel and for us to get out and get the business that we deserve. So I think you're going to see continued improvement. On that revenue side, I think it's going to take into 2011 to get that up to full realization.

Got it. Just lastly for me, on the asset management and service fees, they increased 14% from last quarter, despite the few percent decline in client assets. I just want to get a sense, is there a lag on the billings there so essentially we're going to see maybe some of that second quarter market decline show up in revenues this quarter and beyond, just want to get a sense of how that increased dramatically despite the market drop and a few percent decline in client assets?

Unfortunately, you got it right. We bill in arrears for a lot of the that. Wait a minute. Which way is that? We bill in advance, and then we record it. So not in arrears. So our second quarter reflected asset values as of March 31. Our third quarter will reflect asset values as of June 30. So that we have been through these fluctuations before. We also had some substantial increases in flows in that business, but, yes, you got it right.

Okay. Got it. So the market decline will be this quarter and hopefully the rebound you'll see next quarter. So okay, thank you.

Next question comes from the line of Patrick Davitt with Bank of America.

Patrick Davitt.

Patrick Davitt. Hi, Patrick.

Good morning. In the vein of Devin's question about the expenses, I'm curious from your perspective do you think that $47 million is in line with the expense saves you announced at the time or is it more or is it less at the time of the announcement?

More. Yes , there's other things, it just got difficult, Patrick, to start talking about what -- were we talking about, their OpEx for 2009 was about $122 million, and Tom went out and said it might be $105 million, and then I started and $47 million would relate to $105 million. This is just OpEx , it doesn't include comp. So the way you can look at the numbers, if you look at say the $47 million plus $5 million and call it $55 million. $55 million gone goes, whatever number you were comparing that to, have at it. But I got to tell you, I got more questions on that, trying to figure out what number to subtract from, that I finally just said, forget it why don't we just talk about what we're adding. And that is way to look at this. Thats why that break-even analysis is a good way to look at it. You plug in whatever revenue you want, and we're trying to give you the variable comp that goes with whatever revenue assumption you want to choose

Okay. You managed to add more than 40 FAs despite what is widely considered to be a pretty tough recruiting environment. You talk about how you're competing without playing the up front money game in what you're seeing in terms of recruiting. Largely the perception is that it is gotten much harder.

We added 43, that is like a walk in the park for us. That's sounds slow. So it is tough. I think in the end, we are going to -- we do play the up-front game, by the way. We just don't play it to the extent that some firms play it. Some of the larger firms. But we do. But, of course, we're not going to adjust with the market, when it gets crazy, we're not adjusting up, so we're going to lose market share relatively speaking. But, I think we're well positioned for our business model and what financial advisors are looking for, and especially as the larger firms restructure and do all the things they do. There is room for all of us but there is certainly room for a larger Stifel on the Global Wealth Management side. I'm not really going to comment. I feel like it is slow right now in recruiting. I did see the 43 adds and I thought that was pretty good.

Yes. Finally in the vein of derivatives reform, do you feel like you have an opportunity as the more liquid derivatives move to exchanges in central clearing to maybe move into some of those asset classes you haven't historically been in because of the capital charges and balance sheet concentration that is required by them?

It can't hurt, right?

Right.

And so I don't know, but I do know that as you get standardized, with standardized exchanges, with some transparency, if they really go that way, then certainly it is going to help us from serving our clients where before it has been a very opaque, more at least allegedly customized product, of which we didn't play in at all because we weren't using the balance sheet? No net-net, I don't think it can be a negative, for sure. Certainly going to help transparency. And from our business model, if anything, it's a positive. It could be a large positive. Depends on how that actually shakes out.

Right. Okay. Thanks a lot.

Yes, thanks, Patrick.

Your next question comes from the line of Hugh Miller with Sidoti.

Good morning.

Hi, Hugh.

Just one question I had was with regards again we saw a very strong rise in fee-based assets during the quarter, even despite the contraction late in the quarter from the market. I was wondering if a lot of that was fuelled by the recruiting success over the past couple of quarters, leading to new accounts, or are you starting to see maybe a shift in broker preference, maybe towards fee based accounts from transactional in the wake of financial reform?

Well, two things. One, certainly the adding to the force and the accounts coming over, there is always a lag between our recruiting and when the accounts get over and the paperwork. It is a mind-bend in getting all of that stuff done. So that is certainly part of it. The other part, I wouldn't say it's financial advisor preference, it's client preference, because we don't preference anything. We don't sit there and say fee-based is better. I certainly do not believe, and you'll hear me comment on this when we get into the comment period, that a commission-based model is any more in the client's interest than a fee-based model. So they seem very similar in many ways. But with that said, certainly the UBS folks that came over had a higher relative business mix toward fee business than what we had seen, and so that impacts the numbers. It's all revenue to me. Right?

Certainly. Would you say at this point we really are relative to when they came on that the majority of the account transfers now are at the firm? Obviously, there's always going to be some straggling accounts and so forth but a good portion offer what is expected to come over has done at this point?

No. I don't know, last time I looked and I'll caveat that I haven't looked in a while, but we were transferring eight to nine accounts in for every account that left. It is ongoing we're gaining market share. A lot of that is our recruiting. But those numbers while slow, are not abated and so we continue to grow. And that's why I think we're well positioned. But there's always a lag.

We have to remember that in some timeframe in the year, last year, we hired some 700 people. That was a lot. And getting all of that business done and getting the paper and all of the accounts took a while and you're just starting see some of that. That is why our margins are improving in our private client business. We've made significant investments and we think they -- I think they will pay off more than they are here today. I know that from what we have in place. I know the people. I know the culture, what I don't know is the market environment. You fill in that piece and I'll give you a forecast.

Okay. Certainly great color there. And then we're looking at the capital raised in the underwriting business here during the quarter, I was wondering if we can get a sense, obviously you break out the overall segments for institutional, fixed income and equity, but within that line item, just a flavor for whether or not you're seeing opportunities on the fixed income side for underwriting demand there or was it primarily fueled via the equity side?

I think what we've now said that the utmost of our underwriting on the fixed income side has been in the Muni bond area. But we have seen and we have completed some taxable transactions, we're looking at high-yield. You're going to see us start to talk about our ability to increase our fixed income origination business. I used to talk about the equity being somewhat undersized for our capabilities, our traditional taxable fixed income origination is going on to be improved. I know Victor is focused on that, and then Billy [Heyden] and all of our guys over there know that we can do more, then you're going to see it. Right now it is a rounding error. We don't intend it to be a rounding error to be in the future.

I appreciate the color there.

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

Hi, Ron.

Hi, Steve.

One quick clarifying question first on the reconciling page -- or slide 25 of the presentation and 44 of your 10-Q. You give pro forma six months for the Tom Weisel deal. You show a net loss in there. That's on the Q. That's simply because of the RSUs, is that the correct assumption?

Well, there's a couple of things. First of all, this can take a whole other time to explain all of those numbers. But in effect the Weisel, that's for six months, and that time frame had modified their RSU plan which was a significant, significant charge for them. Non-cash. And then various other things that went through their income statement.

I think the way you need to look at that, is to look at the fact of what was their equity at the time of close, which is about $176 million. And look at where we are on cost saves. I think looking backwards is very confusing. There are a lot of charges and one-time things, and they had a riff, and there are merger charges, all of which I didn't break out because they didn't hit our income statement. But I certainly haven't reconciled those two schedules.

But suffice to it say more accounting noise than anything fundamental, right?

For us the fundamentals going forward is what I told you on the equity page. If you look at what we're trying to show you in OpEx , our merger-related charges, and our fully baked equity and shares, that's the basis of us going forward. You look at what we're going to do and then our once we modify our units and put that all on basis, look what that does to our cash earnings. They are going to come through as GAAP earnings. I think you have to look at -- I tried to give you starting on page 25 the framework of how I'm looking at it, and then you've got to do your work. But that's how I look

That's very helpful. Thanks for the clarification.

Sure.

On the bank side you talked about growing the commercial portfolio. Is that more your desire or do you actually see the environment as pretty conducive to that? Because you do hear a lot of banks out saying they're struggling to find good loans. You don't think you have that problem?

Well, again, a matter of scale at this point. So when you're talking about a $50 million commercial loan portfolio, and we find $10 million of good loans at a 20% increase. So there are good loans out there. Maybe not with a $2 trillion balance sheet, but with our balance sheet and our relative size of our bank and our liquidity and our ability to be selective, plus the fact that we're not out there driving valuation by driving the bank, we think there is some real opportunities out there, but they're on the margin and then we're going to grow a very -- we believe will be a very profitable risk-adjusted commercial loan portfolio.

The fact of the matter is, is that that market is improving. I would say it's a good time to be a bank. The bank's problem is not necessarily making loans, it is getting people to borrow. And it's a demand problem. But for our size of the bank, there is enough demand for us to nicely grow the bank.

Yes. Okay. And then lastly on the auction rate securities, you gave a bit of an update there. Can you give us latest thoughts on the redemption issue -- sounds like things were tailed off for a while and began to pick back up?

Well, it's a [plane of spar], jumping in and trying to talk about whether or not the preferred should be redeemed, what does it mean for common? My sense of it is -- just my sense is that the boards are doing the right thing. These auction rates, especially in these closed-end funds, have penalty rates that can turn these funds upside-down, I think a lot of these boards are prudent in getting them refinanced in a low interest rate environment. Of course in the short run that can look like it's dilutive. I think these boards are looking at it -- but when you get litigation, you've got to slow things down so it's unfortunate. I think it will get resolved. I think you have seen some announcements that have come out and said, okay, we're ignoring this. But it certainly put a -- it certainly slowed down the pace of redemptions which I think is unfortunate for customers and firms alike.

Got it. No, that's helpful, thank you, Ron.

Hi, thank you. Tom? Closing comments?

Well, we appreciate everybody's interest and look forward to the dialog going forward.

Well, good. I think that, again, I am very, very encouraged with where we sit today. I look forward to welcome to all of our new partners from Thomas Weisel. Of course, I welcome Tom as my partner, and all of the people here, and look forward to continuing to build this firm as we've said into the premier middle-market investment bank in the country, and we think we're on our way to do that. And, to our shareholders, thank you for your continued support, and we will talk to you again in the future. Operator, there being no further questions, we will call this to a close, and I apologize for the length of the call. Thank you.