Stifel Financial Corp (SF) 2011 Q2 法說會逐字稿

Good afternoon. My name is Amanda and I will be your conditions operator. At this time I would like to welcome everyone to the second quarter earnings of 2011 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Jim Zemlyak, you may now begin.

Thank you, Amanda. Good afternoon everyone. This is Jim Zemlyak, CFO of Stifel Financial Corp. We would like to welcome everyone to our conference call today to discuss second quarter results. Please note that this conference call is being recorded. If you would like a copy of today's presentation you may download slides from our website at www.stifel.com.

Before we begin today's call, we would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995. 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 services industry in the Company's Annual Report on Form 10-K and MD&A of the results on the Company's quarterly reports on Form 10-Q.

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

Thank you, Jim. Good afternoon to everyone. As is our custom we will be going through slides, so as Jim said, hopefully you have either got them off of our website at Stifel.com. or have downloaded them, so I am on page three, the Chairman's comments. Our second quarter results improved over the year ago period on a core basis, but were impacted by a challenging market environment dominated by macro economic factors, and significant non-core expenses, primarily related to legal reserves in connection with previously disclosed matters.

Despite these factors our investment banking group generated their second best quarter in terms of revenue which was offset by pressure in our brokerage and private clients businesses, due to lack of investor conviction coupled with generally lower industry-wide volumes. We continue to position the firm for long term growth and our recent announcement of the pending acquisition of Stone & Youngberg delivers on this strategy, by adding public finance expertise and coverage in new markets. We are excited about combining our highly complimentary businesses and delivering enhanced services to both our Institutional and Wealth Management clients.

Turning, we will start today with a little bit of a market update, as this slide shows year-to-date after the carnage of today the NASDAQ is down 11%, the S&P is down 11, and the Dow about 7%. So it has been to say the least, it really hasn't been choppy. It is been for the last week and a half pretty much straight down, and is a very uncertain I would say market environment. If you look at interest rates we ended today with the 10-year at 2.34%, so the environment at today's, I thought today's activity was interesting, and that the Treasuries were out I guess you would expect that, but it seems to me that a lot of investors are discounting the possibility of a recession. In fact, today's action alone probably raises the risk of a recession. Plus I think just a lack of conviction about where the growth is going to come from globally. So it is a difficult environment.

If you look at our financial results, looking at the three months ended June 30th of 2011, we had net revenues of $359 million, which was a 9% increase over the second quarter of 2010, but declined 2% on a sequential basis. Our Global Wealth Management segment posted net revenues of almost $226 million, up 13% but again, a 5% decline as compared to the first quarter of 2011. Our Institutional group posted net revenues of $133 million, 7% over 2010, and 5% increase on a sequential basis from the first quarter of 2011. Excluding non-core charges our nonGAAP net income was $31.3 million, $0.50 per diluted share, compared to non-GAAP net income of $24 million, or $0.46 per diluted share in 2010. And nonGAAP net income of $33 million, or $0.52 per diluted share for the first quarter of 2011. Our pre-tax margins on a nonGAAP basis was 14% compared to 13% in 2010, and 15% in the first quarter.

I would like to spend a few minutes explaining the most significant impact of our second quarter results, which relates to additional litigation related expenses in connection with Stifel's role as placement agents in certain investments and collateralized debt obligations 5 southeastern Wisconsin school districts. I can tell you in all honesty that is this a very difficult situation. I fully believe that in our role as placement agents we acted appropriately. We disclosed all aspects of the investments to the school districts, and obtained written acknowledgements of these disclosures. We do believe that there were issues related to the product itself that ultimately related in the losses that were incurred. We intend to defend the claims of the school districts while addressing our issues with the manufacturer of the product in our cross claim proceedings.

I point you to our cross claim against the manufacturer of the CDOs for additional background, from and accounting perspective to be prudent, we took a set charge in the second quarter, even though there is no final resolution at this time. The charges we took are the result of really two items. First we purchased at a substantial discount approximately $162 million face value notes from Depfa Bank, and we put a provision for estimated costs with the ongoing civil and related regulatory investigation. The purchase price of the notes is confidential, but we feel that it was an appropriate thing to do all things considered with what that exposure represented to us to buy those. And that's wrapped up in the charge that we took at this time.

Turning to core net revenues, if you look at on a quarterly basis commission revenues increased 34%, this is compared to the second quarter of 2010. Commission revenues were up 34%. That is a result of increased client assets and higher productivity. Our asset management services fees were up 29%. This is a result primarily in asset center management market performance, at least as of the end of June, and our merger with TWPG. Investment banking revenues were up 56% primarily due to an increase in equity capital raising activity. The increase on revenue growth was offset by a decline in Fixed Income institutional brokerage revenues,which was negatively impacted by the challenging market conditions that were present in the second quarter of 2011.

Our core revenues on a sequential basis decreased 2%. This decrease is primarily attributable to commission revenues which decreased 11% across, it is a combination of all of our segments, and simply a result of lower trading volumes. Principal revenue transactions decreased 14% as a result of decline again at Fixed Income asset management and service fees decreased 1%, and investment banking revenues on the bright side were up 56%. That is all compared to the first quarter.

Looking at net income by quarter, a net income of $31.3 million is up 30% from 2010. It is really attributable to increased revenues as our margins remained fairly consistent. In the fourth quarter of 2010 we definitely benefited from favorable market conditions in our merger with TWPG, and the first half result of 2011 while short of our fourth quarter record results, I believe are solid given the market headwinds.

Looking at margins our second quarter pre-tax margin of 14% is just below our stated goal of 15%. Again, pressure on margin was primarily attributable to lower revenues, and the pressure on compensation which results from that. EPS on a core basis declined $0.02 sequentially, while it was up 8% over the year-ago period. So again, from my perspective an acceptable quarter considering the market.

I thought I would take on opportunity on slide 13 to comment and give some color as it relates to our core results versus the mean estimates on the street, to allow just some idea of what we see going on, and if you look at this on again, I am on slide I believe it is 13, our commissions, and I am going to look at commissions and principal transactions sort of combined, but I will comment that there are still some misclassifications, at least as the Street sees it, between our principal transactions and commissions, because I have commented that we did a geography adjustment as it related to Reg Show, but that said, and I will speak about it in a moment, our principal transactions for the second quarter of 2011 were negatively impacted by difficult trading markets. Our net trading gains are within our principal transactions, and those on a sequential and year-over-year basis were substantially below those comparative purposes.

If you look at investment banking, it is again, it was as I said I didn't look at $90-some million in the fourth quarter as correct, I didn't look at $40 million give-or-take in the first quarter as correct. This quarter is a good quarter, but significantly above the $50 million that the Street was looking for. I would like to think that given normal market conditions in this range is what we could look at for investment banking. The only other thing that is going on is net interest is going up a little bit faster. That is the growth in our bank. So if you look at non-comp operating expenses, we came in a little bit below but that looks correct, and diluted shares are spot on. So just to give some sense of where we are.

Generally what I would say our results are short of what people thought, and I think it is across the industry because volumes are markedly slower than what we have seen in the past. Book value per share, we ended the quarter at $24.50 per share in book value. If you look at six months, we had record net revenues for the six months of $726 million, up 13%. Our Global Wealth Management had record six month net revenues of $464 million, up 16%. Our Institutional group that very well may be a record of almost $260 million, I am actually not sure which is up 9%, that is the six month period. So we ended up on a nonGAAP basis of $1.02, and GAAP net income after taking the legal charge I talked about of $0.55.

Turning to sources of revenues as I have said commission revenues up, all of these numbers compared to last quarter are really up, except for the geography change and principal transactions. So I won't go through each of these. I think it is more telling to look at the sequential declines and commissions and principal transactions as it relates to the first quarter, and to point out that starting in June the markets began to feel like they did last summer. Lack of conviction and then a ton of uncertainty starting with between the European debt crisis into the debt ceiling and then most recently as the downgrade, if anything all of those things, what they do is add to uncertainty, and really I think in a cyclical turn away from risk based assets.

If you look at what I would consider brokerage revenues, I just wanted to give this for the people, because principal transactions again have been mischaracterized. I look at it in combination with commissions, and you will see if you combine them 2011 versus 2010 we are down 3.8%, and versus the sequential down about 12%. Again, not to beat a dead horse, but lower volumes and significantly lower net trading in the firm. Investment banking revenues a bright spot for sure as certainly compared, but I think that our integration has gone well. We are winning mandates. We have completed deals that actually I was very encouraged by the start of the third quarter, but as you can see it is not capital raising and advisory up on a combined basis were up about 55%, both prior year and sequentially, up 40% year-over-year. So this was positive.

If you look at core comp and benefits as a percentage of revenues, ticked up slightly to 63.5%. That is a result of just softer revenues, a higher component of our compensation is fixed, but within an acceptable range. Included in that is transition pay, which is our amortization of our up front notes. That was about 5% in the second quarter of 2011, compared to 6.2% the prior year, and about 5% in the first quarter.

Non-comp operating expenses is somewhat for these quarters leveled off at $82 million as I have said, we were looking at in total at about $330 million. I don't know that we changed that as we look forward, so I think you can expect an increase in non-comp, but just within that range it really hasn't changed. Segments we realized revenue growth in both our operating segments as compared to the second quarter of 2010. I think that probably more telling is our Global Wealth Management segment contributed 72% to our margins, while our IG was contributing 28%. Typically we would expect our segments to be more equal, maybe more of a 60/40 basis, but also in terms of profitability, but given the environment and really the lack of Institutional flow, our contributions from Global Wealth Management outweigh those from our Institutional group, but we believe our balanced business model facilitates growth during volatile markets, and I think that is evident in this quarter's financial results.

I am pleased with our contributions on the next slide from our Global Wealth Management segment for the quarter. Our segment generated pre-tax operating income of $55 million, up from $40 million in 2010, and down from $61 million in the first quarter. The increase in net revenues over 2010 is due to higher commission revenues due to increased client assets and higher productivity. Also our growth in asset management service fees as a result of our assets under management being higher, and positive gains in market performance and contributions as a result of our merger with TWPG, and an increase in equity underwriting sales credits which was reflective in this group of the activity, the capital raise that went on in equity capital markets. So all-in-all a good quarter for our Global Wealth Management.

Stifel Bank and Trust had net revenues of $12.1 million, up 36% compared to 2010, and up 36% compared to 2011. As I have said in the past, we intend to prudently increase leverage in the firm, we will increase that leverage by increasing the assets again on a prudent risk-adjusted basis, but we will do that primarily within the bank, and you are beginning to see some of what we believe will be increased contributions from the bank going forward. If you look at the asset quality, we continue to maintain solid ratios, non-performing loans as a percent of gross loans was 0.13%, and non-performing assets total assets of 0.1%. In the last 12 months, we have had net recoveries of $200,000. So I am very pleased with the asset quality, the bank's footings now stand at $1.8 billion, which is up 30%. Our strategy at the bank remains to increase the credit risk profile with a corresponding increase in net interest margin, but all on a prudent risk-adjusted basis.

Turning to our Institutional group, the Institutional group generated pre-tax operating income of $22 million. That compares to $31 million last year, and $21 million in the first quarter. Our revenues were $133 million which is up from $125 million in 2010, and up from $127 million sequentially. The growth in revenue over 2010 was driven by investment banking revenues which was primarily related to improved equity capital market activity, and contributions as the result of our merger. This increase was offset by a decline in Fixed Income and equity institutional brokerage revenues as I have already talked about. So the Institutional group again is showing more of the cyclical impacts of what is going on in the marketplace.

If you look at the Institutional group revenues, you will see our brokerage revenues were down 17% compared with the second quarter of 2010, and 19%, and this is where you are seeing these market-driven declines in our flow business. Our Institutional equity brokerage revenues were $42 million, which was 6% below 2010, and 20% below the first quarter of 2011. Our Fixed Income flow business if you will decreased 29% from 2010 and 18% for the first quarter in 2011. If you look at those two line items, that is where you will see really the shortfall in revenues, which again, is driven by the market. Those declines of flow business were offset by investment banking revenues which increased 62% and 65% over 2010 and sequentially respectively.

The equity capital raising revenues for the quarter were $28 million, up 35% and 22%. Fixed Income capital raising which is primarily our public finance business was up 17% compared to 2010, and 70% from basically nothing that happened in the first quarter. Equities advisory fee revenues about $23 million, up significantly from 2010 and 2011.

Turning to financial condition, we again if you look at our capital structure, we remained to have a strong balance sheet, $4.5 billion of total assets, $1.4 billion of total capitalization resulting in book value per share of $24.50. We will continue to manage our business utilizing a low leverage model, and adding leverage when market conditions permit. Our level 3 assets basically as compared to the end of the year, they consistent primarily of auction rate securities including our level 3 are about $45 million of ARS that we hold at Stifel Bank in our portfolio. Those are there for investment purposes. The increase in ARS at Stifel Bank have been offset. We are having a fair amount of issue of issuer redemptions at par, so this thing seems to be clearing itself up.

Other financial data. The financial advisor growth remains relative muted due to a very competitive environment. We choose not to be aggressive in this environment. However, we will continue to seek opportunities to recruit and frankly retain our advisors. Total clients assets have increased 26% to $116 billion.

Turning to the Stone & Youngberg acquisition, we are going to acquire 100% of the membership interest of Stone & Youngberg. The rationale is simple. We have opened 27 or 28 offices in California. It has been a significant growth for us. We have a significant public finance operation primarily in the Midwest, Colorado, Michigan, Missouri, Stone & Youngberg had a very impressive and longstanding history in their markets, primarily California and Arizona. This helps us build a national public finance practice without overlap, establishes muni research, which they have and we need. It will increase and help build our California presence in that muni finance access is an important component to building a private clients business.

I am pleased that Ken Williams, as the CEO of Stone & Youngberg, will run our muni finance business for the combined group. The financial assumptions that we have used, would be annual revenues if you look at what they have done in the past, between $75 million and $100 million, we are targeting 20% to 25% pre-tax operating margins, expense savings through rent clearing and other compensation. Consideration we do not disclose consideration, but we have a combination of up front cash, stock and retention payments at closing, which effectively I think what is important here, is I think we will issue about 300,000 shares of stock. So not a lot in stock. Mostly in cash.

This transaction is structured to have a fixed payment for three years and an earn out over five years. That is to encourage retention and team work. We think it is a win/win deal done in the typical manner that Stifel does acquisitions and mergers, and I believe this deal will be accretive and will significantly improve our capabilities. It is targeted to close October 1st, 2011. Obviously, it is subject to customary approvals. Page 33 just shows what I was talking about. We will have 16 public finance locations,frankly, no overlap. We will end up with 95 bankers and analysts. This acquisition broadens our exposures in markets we simply did not conduct business in, primarily California and Arizona, as represented on this map.

If you look at our negotiated rankings we will end up on a national basis the tenth largest, importantly K through 12 number three, we are on a combined basis in 2010, we would have been number two in K through 12. So again, a transaction that I am very excited about. If I could get excited about this market it would be better.

With that, operator, I will take questions.

(Operator Instructions). Our first question comes from Daniel Harris from Goldman Sachs. Your line is open.

Hi. Good afternoon, guys. How are you?

Good.

Well, I am glad to hear you are good. It has been a tough day, I am sure. I would love to actually on that topic get your view of how investors have been reacting over the last few weeks, certainly today or Friday, or it is too soon, but are you seeing a lot less activity than you normally would at this time of year there, obviously it is seasonally slow as well? But just more broadly, what are you seeing in your Private Wealth business?

Well, the Private Wealth business has slowed somewhat, but not nearly what has occurred on the Institutional side of the business. Although the Vick is improving, it has been difficult, but it has improved the flow business over the last few days, but I don't really see. What concerns me, not concerns me. but what I notice and not notice I am sure that it is across the industry, is how much of our clients assets, they are willing to let sit earning virtually nothing.

And that is the number that, oh people say there is no such thing as a liquidity trap, but when I see investors sitting on for us relatively high relative cash assets that will not engage in the market, that is where my concern comes from. Where you would rather earn nothing than invest, absent you can make an argument that today presented a buying opportunity, but I see a lot more caution than I see risk taking. So fear is still trumping greed at this point.

Okay. Staying in the GWM business, you guys have been having a pretty consistent increase in the assets and fee-based account line. So two things. One, I would love to get what the number is in the assets of fee-based accounts, but it also look like where you put up on the slide, Consensus looked like we missed you guys on the asset management service fee line, that the yield you guys were earning on those assets went down. Is there anything, is that just more assets in low yield instruments, or how should we think about that going forward?

I think part of it was we had, and it is not significant but it might look funny. We had in our asset management is some of our private equity investments that we got on TWPG, and we have had a few nice marks in the fourth quarter and the first quarter. Enough that you might notice if you are looking at a is a pure percentage AUM type play, but our assets under management in terms of classical fee-based business is growing. I think it is reflective of somewhat of a change in some of our recruiting, and some of the larger, certainly our UBS acquisition had a positive impact on that, but there is not anything other than, and that I think we booked, I think I said in the first quarter $3 million or something, that flowed through that line item.

Okay. Okay. That is helpful. And then just lastly maybe more akin to my first question, on the broader municipal market obviously a lot of turmoil going on with the US ratings here. How do you think the muni market plays out over the next three to six months in terms of ability to issue and investor demand for that paper?

Well, the munis have been one of the better performing asset classes, and despite the sky is falling predictions of many people, and so we see a demand for that paper, but I believe the overriding question in many degrees will be the impact on the risk free benchmark. What really happens and what happens to muni rates relative to Treasuries once this settles out. Net/net I believe the second half of the year even with the start we have, will be better for the municipals than the first half of the year. There are still things that need to be done. There is a lot of projects up. The interest rate environment is very positive, and after-tax yields on munis are very attractive compared to what you can get in Treasuries. So I am cautiously optimistic for that business.

Okay. Ron. Thanks a lot.

Yes.

Our next question comes from the line of Joel Jeffrey from KBW. Your line is open.

Hey Ron. How are you?

Good. Got a little bit of a cold.

Okay. Believe it or not, it is 110 degrees, and I have a cold. Just going back to your Institutional equities business. Sort of last quarter we saw sequential growth that was about 13% I think that was far superior to what a lot your peers were generating, this quarter it looks like the 20% decline was a little worse than what your peers were doing. Just wondering if there is anything specific to your business that might make it a little bit more volatile, or how we should think about it doing forward?

I don't think so. I mean I think that I have been tracking that a little bit, I think that we have gained enough market share that, well you have seen us gain that, but when you had the cut back it probably, where we rank with accounts probably, we caught more. We caught more of the upside, we caught a little bit more of the downside. I am pleased with the relative stability as I have seen it up through July. So I am not sure there is anything marked there. I don't see us losing market share. I hear you, but I think if you look at a lot of the larger firms, and we are the number, we are one or two in terms of research, and we are certainly a top ten account in many firms. We just took less of the volume.

Okay. And then on the investment banking side, just thinking about that going forward, sort of how sustainable are these levels again going forward? They seem to be a little bit better than what most were looking for, and specifically on the M&A side?

It is so cyclical. I mean I have said that given normal capital raising and normal markets, I would expect these to end up, I would like to think that they are higher, and that was reflective of kind of what could happen in the fourth quarter, and given tepid markets the first quarter is not out of the question. So I have banded it for you,$40 million to $90 million. This was somewhat in the middle, and I thought it was a good quarter considering the market conditions.

Okay. And then just lastly for me, and you mentioned a couple times that the comp is a little bit more fixed. I mean is the 228 number you did this quarter something we should about as maybe a floor, or is there still some variability on the downside there?

228, you lost me.

Well, just thinking about you had mentioned comments that compensation was becoming a little bit more fixed, and it looks like the comp number has been relatively--?

No, not fixed, I think I was saying that I have targeted, I think we were saying that we would be 62.5 to 63 for the year, and when you look at lower revenues, that was based for us on a higher revenue assumption, which we don't show with you, but it was. With revenues more muted, the 63 to 63.5 is probably more what we are looking at, and it is merely a function of a component of our comp is fixed, and so just as revenues, the fixed portion goes from 11% to 12% of the number, because revenues are down that is what I meant when I was saying about the fixed component, but historically we will have lower comp to revenue ratios in the second half, and while I wouldn't expect it to be as dramatic as it has been in the past as a difficult year, I still think that you will see improvements in that ratio in the second half of the year.

Great. Thanks for taking my questions.

Yes. Operator.

And our next question is from Patrick Davitt from Bank of America. Your line is now open.

Hi, guys. How you doing?

Good.

Can you give us I guess some color on separating I guess how much may be new advisor or new office ramp up have kind of helped offset the weak environment and retail client activity?

Well, I don't know that I can give you specific numbers. I can tell you that the offices that we have opened in 2008, 2009, and 2010, when we really put a push I think we opened some 70 offers and hired a lot of advisors, that you are seeing that improvement just in the absolute numbers. Look at what is happening in Global Wealth Management, despite the difficult markets our contributions are up significant, and that is a lot of those new offices coming online.

The UBS acquisition is performing much higher than what our expectations, what we projected at the time. That is a very nice transaction for us. And we have seen increased productivity. I mean I think the Global Wealth Management business, up until what really felt like a slowdown that started in June was going very nicely, and I am very pleased with those results.

Great. I think you noted that you don't really like to be too aggressive in hiring in this kind of environment. Do you feel like there is a sense that a lot of people want to make a move given the uncertainty of some of your larger competitors, or does this kind of environment cause people to be more likely to stay put?

The latter.

Okay. Okay. Even if you wanted to it would probably be more difficult?

Well, it is more difficult to do it on a manner that is going to result in returns that are going to drive our value, and we are going to stay disciplined on that. So again, one of the nice things was that Stone & Youngberg had a nice component of Private Client, 20, a nice little pickup there with a few offices in California. That is going to help that whole deal helped us recruiting on the West Coast, just because of our ability and our commitment to that marketplace, but on the market, the recruiting environment has become certainly and continues to be slow.

Okay. And those FAs at [Stone] & Youngberg, would you say their production is in the same range that your Stifel guys run at?

Actually a little bit higher.

A little bit higher?

Yes. They are more focused and it is a more focused group with--, yes. It is a nice addition.

Great. Great. And then finally I think you noted that the prices being down at 34 to 40. Can what change given the sell-offs for the Youngberg?

I guess only if I am nice but--

Yes.

No. We have it--

It is locked in?

It is locked. Absent anything that might be viewed as material. It is really not that material to, if you understand when I said there was 300,000 shares, it is just not that material.

Alright. Thanks a lot.

Yes.

And our next question is going to come from the line of Hugh Miller. Your line is open.

Hi. Good afternoon.

Hi Hugh.

I had a question on the comp ratio within the Global Wealth Management business, it looked like it was down just a little under 100 basis points from the first quarter, despite maybe a 5% reduction in net revenue. Was wondering if there was anything kind of unusual there, or is that just kind of a greater exposure to business and growth at the commercial bank kind of bringing that ratio down?

That is the right answer. I mean our comp ratio as you would expect, but as we add leverage and increase our net spread business in the bank, that will drive the comp ratio lower.

Okay. And obviously you have talked about for a couple of quarters now your willingness to increase leverage at the bank, and willingness to kind of move maybe a little bit down the spectrum here. Can you just I guess talk about you have started to move on that plan. Why is it that your comfort level is there now to go out there and do that with where we are right now in the cycle relative to a year ago?

Well, I mean we had seen, we had gone through a significant credit cycle. My comments were in the first quarter, and we were comfortable with the types of credits that we were seeing in taking other than GSC rated type debt, I am going to defer here for a moment and that is why we don't jump in with both feet in anything we do. I want it see how all of this shakes out in this environment, but we believe and continue to believe that the spreads, and some of the commercial type credits we see on a risk-adjusted basis are better than what we were doing on more of an investment agency type basis, and we will continue to prudently do that, but we are not just jumping into the wholesale marked and dropping a few billion on the table.

Okay. And can you just I guess talk about maybe since the end of the quarter, is there anything you are seeing in change for demand for originations, and people's I guess willingness to go out there and borrow money given concern about slower growth going forward?

Well, I don't think it has really changed. I mean I think one of the issues that we face as a country and for policy makers is that as I said as I started this call, we are awash in liquidity, banks that we normally sweep some of our excess deposits don't want it, Bank of New York is charging you to keep money there. We want to make loans. The problem is not that there is not sufficient liquidity to make loans. The problem is there is really no demand, relative. And I think that is the quandary that faces our economy and the resolution of that quandary will have more impact on our results going forward than anything I am talking about. If we can get this economy and demand in investment going, we are well positioned to take advantage of that. As I sit here after today, I wonder if we really, if anyone in policymaking decisions really had their hand on the tiller, but we will see.

And I guess with your appetite to go out there and sign of grow the business when there are opportunities like this in the marketplace, is there anything that you are seeing from an M&A standpoint that looks exciting as additional kind of tuck-in acquisitions there, other things you are looking at or are you just kind of focusing on integrating the recent ones, and just running the core business?

I think with the help that we are getting from Stone & Youngberg and they were a very well managed firm, that I believe that integration will go very easily, and it is not really going to consume too much bandwidth. The Weisel deal as I said before is integrated, and people are working well so we are positioned to take advantage of opportunities as we always have been, and we will continue to do and look at things. Generally these kind of markets present opportunities, and I believe we are positioned in all respects to evaluate and take advantage of them if they present themselves.

Okay. And I guess in the follow up on the TWG comment there, you had mentioned in the past about some of the costs kind of slipping out further, and I believe that this was the last quarter you were expecting to recognize some of those integration costs. I was just wondering if that will be the case, and if they kind of came in line with your expectations prior to this point?

Yes, actually they came in lower than we originally projected a year ago on a pre-tax basis, I think $2 million or $3 million lower doing that off the top of my head, but I know that they were lower not materially so we are done. We will have, with the accounting rules today you almost can't even get through a deal with Stone & Youngberg without running what effectively is part of the purchase price through the income statement. So we will have a little bit of noise in the fourth quarter. We will close that deal October 1st, but there are things that you just are required to expense, and I will give more color on that in the fourth quarter. In fact, I will tell you what it is going to be, it is not material, but that will be a fourth quarter event.

Okay. And the last question was just a follow-up on, I am not sure if you guys had imagined about the value of fee-based accounts as of 2Q I think it was about 16.7 as of 1Q, but I just wanted to get a sense on that if you had that number handy?

I think it is about the same. A little bit higher but not significantly. I will try to get the number on the next question if I can.

Great. Thank you very much.

Okay.

And our final question is going to come from the line of Devin Ryan from Sandler O'Neill. Your line is open.

I am just looking for some silver linings of this tough market. I know you just touched on I couple, but you guys have obviously been beneficiaries of prior market downturns, and if I am just looking here at this volatility is going to be with us for some time, would you expect that some of your larger peers could pull back the risk tolerance on the trading front, and would that be good for you, or just any other long-term positives that could come out of a prolonged kind of volatile market?

Well, I think two things. I think that we remain well positioned even though we can't repeal the cyclical nature of our business for ourselves. We are well positioned, and I feel very good about it, primarily because we have been very disciplined on our cost structure and on our leverage. So when I look forward, when I see markets like this in declining volumes coupled with regulatory reform, Basel 3 and Sifi surcharges, what I see is significant restructuring of business models that are going to provide real opportunity for us. We are not going to be a Sifi, and we are not trying to shrink to achieve acceptable returns.

We have been doing a lot of thought and a lot of analysis around businesses that could be frankly 20% ROE businesses for us, that are going to get shunned by the larger firms because of a combination of a need to retrench plus capital. And so the silver lining in this is that if you are a firm that really is well positioned from a capital and people and market perspective, this turmoil is going to provide opportunities as it did in 2001, and in 2008, and I think it has the potential to do it today. So we grow and we make some of our best decisions in markets like this. I can't predict that, but this is when opportunities present themselves, and I am answering my phone.

Great. Thanks for that color. And then just lastly apologize if I missed this, but what were the fee waivers in the quarter?

Huge, I mean I don't think it has really changed. It gets hard to measure because now you got to start wondering, what is a normalized environment. I think what I said in the past, which is still true approximately $50 million, but I am wondering, when we go from fee waivers to just, if we will ever forget what debt funds at 1.5 looks like. I mean it is hard to envision an environment where we are going to see an increase in that rate. So it remains a hidden potential pickup in margin for us and all firms, but I am not predicting it.

I hear you. Well, thank you very much.

Yes. Are there any more questions, operator? Hello.

I apologize about that, we do have one more question in queue, and it is going to come from Patrick Davitt, Bank of America. Your line is open.

I have a quick follow-up. How concentrated of an issue do you think the situation with Wisconsin is? Have you looked back I guess at all of the securities that you distributed, and found other issues or concerned about other things that may come out, or do you feel like this is probably it?

That is a great question, Patrick. I can tell you that we did not manufacture, or sell or were really at all in the CDO game. This is an isolated incident, one that is very difficult, but I can tell you there is not like where this situation repeats itself anywhere else. This is ring-fenced. Our difficulty is on a myriad of events that are coming together, but I think it is important to note that, we did not put this thing together, we did not book significant profits on the origination of this, and this is an isolated albeit, a difficult situation for us.

Great. Thank you.

And then let me just give one other, just a follow-up so that we are, our assets and fee-based accounts we ended the quarter at $18.3 billion, which is up $1.6 billion or about 10%, for whoever asked that question.

I am hopeful that when we reconvene in November I feel first of all, in all of our businesses I am optimistic about our relative position, I am optimistic about opportunities that I am seeing. I am less optimistic about the general worldwide market conditions, but that can turn on a dime. I am just not sure what the catalyst for that will be. I am hopeful that when we reconvene in November, we will have navigated this current malaise in the marketplace, and we will be looking at a stronger second half.

But with that, I wish everyone a good day. Thank you for your interest, and we will talk to you next quarter. Thank you.

And this concludes today's conference call. You may now disconnect.