Stifel Financial Corp (SF) 2012 Q2 法說會逐字稿

Good afternoon. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Stifel Nicolaus 2012 second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

Mr. James Zemlyak, you may begin your call.

Thank you, Mike. Sorry for the delay this afternoon. I'm Jim Zemlyak, CFO of Stifel Financial Corp. I would like to welcome everyone to discuss our second-quarter 2012 financial 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 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 results and the Company's quarterly reports on Form 10-Q. I'll now turn the call over to the Chairman, CEO, and President of Stifel Financial, Ron Kruszewski.

Thanks Jim. Good afternoon, everyone. The operating environment in the second quarter was challenging, especially compared with the strong start to the year. The headwinds in equity and bond markets, as well as macro-economic factors affected the industry, our business, and client activity. In the quarter, asset management, investment banking, advisory, and Stifel Bank performed well, while commission stabilized and principal transactions in equity capital raising results were lower. Throughout the year we have continued to grow through investments and selective professionals of certain businesses, namely our fixed-income platform.

We are well positioned with the skill and expertise to gain market share. While the challenging environment impacted results, we also continue to invest in growth opportunities. Before I review the financials, I would like to discuss the market back drop. The major industries were down in the quarter, with US equities giving back much of the first-quarter gains as the re-emergence of European credit and debt concerns increased. The macro trends and lack of investor confidence resulted in first, lower share volumes; next, continued equity mutual fund outflows; three, fewer new issues and lower trade volumes. Average daily share volumes on the New York and NASDAQ although flat sequentially, is on pace to the client for three consecutive years.

Over $300 billion has been withdrawn from equity funds since May of 2010. Only 33 IPOs priced in the second quarter, which is down 35% from a year-ago quarter, of 51%. And trade volume sequentially declined 15% from the strong start to the year. All of this underscores the second quarter's difficult market environment.

I will now go through our results for the second quarter. As compared with the year-ago quarter, net revenues were $374 million, which were up 4%. Net income was $26.1 million or $0.42 per diluted share, compared with net income of $3.4 million or $0.05 per diluted share. Of course, last year's quarter included a nearly $28 million after-tax charge of $0.45 per diluted share related to previously disclosed litigation-related charges and merger-related expenses. Pretax margin for the quarter was 12%. I'll discuss the impact of our growth strategy on our pretax margins in a moment.

Our results were lower than expectations by 10% mainly due to higher noncomp expenses and the significant investments in our growth, which again I will discuss. Net revenues were essentially in line, off 1% while total non-interest expense were 7% higher. I'm going to skip over our six-month results which basically tell the same story, which was an increase in revenue with higher expenses.

The next slide compares our sources of revenues. Commission revenues decreased 8% to $127.4 million in the second quarter, from $138 million last year. Principal transaction revenues increased 15% to nearly $92 million, from $80 million in the year-ago quarter. Investment banking revenues were up 5% to $67.4 million. The year-over-year increase was a result of an increase in advisory fees and fixed-income capital raising activities, primarily attributable to our Stone and Youngberg acquisition. Sequentially, the difficult market for capital raising particularly in the last part of the second quarter, resulted in a 26% sequential decline. This decline in capital raising was almost entirely offset by increases in advisory revenues.

Looking at our brokerage revenues, commissions and principal transactions combined were flat compared with last year and decreased 9% sequentially. Year-over-year taxable debt increased 11% and muni debt increased 26.5%, while equity declined 5%. As I said, the increases in taxable and muni are attributable to increased fixed-income trading volumes again as compared to last year, tighter credit spreads and our acquisition of Stone and Youngberg in October 2011.

The next slide reviews our non-interest expenses. Compensation of benefits as a percentage of net revenues was 63.9%, compared to 64.1% in the year-ago quarter, and 63.6% in the first quarter of 2012. Our comp ratio came in our targeted range of 62% to 64%. Transition pay as a percentage of net revenues was 5% in the second quarter of 2012. Again this is a significant line item that I expect to decrease as a percentage of revenues as it reflects the significant amount of primarily financial advisors that we've hired in the last three years. As you know, our financial advisors in the last five years has gone from about 500 to nearly 2,000, and that is driving a very high transition pay line item on our financial statements.

Noncomp operating expenses were $91 million in the second quarter, or 24.4% of net revenues. The increase in sequential and year-over-year noncomp OpEx is mainly in communications that quote data processing, occupancy and client conferences, and it's also attributable to investments and growth and I'll review in detail in a moment. The six months non-interest expense are consistent with my previous comments. I'll skip over this next slide.

I'll now turn to segment comparison. Overall results for the quarter in both Global Wealth Management and the Institutional Group reflect difficult market conditions, but are an improvement year-over-year. The diversity and integration of our business model offsets challenging periods. Revenues in both Global Wealth and Institutional Group were up compared to last year, 6.4% and nearly 2% respectively. But PCG was down 11% and our Institutional Group was down 26% sequentially. Global Wealth operating contribution increased 10.7%, which helped offset the challenges faced by our Institutional Group, but adds operating contribution, which was down 20%.

Turning to the Global Wealth results, again I am pleased with the results in this segment as we have operating contributions of 26%, net revenues for the quarter were $240 million, which increased 6.4% over last year. Asset management service fees increased due to an increase in total client assets. That was really a result of both market performance and inflows. Net interest revenues increased as a result of the growth of Stifel Bank, and our investment banking line item and private client were higher. Fee based accounts increased 9% to nearly $20 billion, a little over $20 billion sequentially, that was driven by higher asset levels and a 4% increase in new accounts.

Turning to the next item, Stifel Bank, asset quality is high. Our assets now exceed $3.1 billion as of June 30, 2012, up nearly 70% from a year ago. Our investment securities total $1.8 billion, which is up 57%. Our loan portfolio today is over $800 million and our deposits of $2.8 billion, which are mostly sourced from the brokerage, increased nearly 70%, which is in line with the increase in our assets. In short we continue to prudently grow the bank's assets on a risk-adjusted basis.

The next slide looks at our Institutional Group, year-over-year comparisons show that net revenues increased 2% to $135 million. Stone and Youngberg contributed nicely to our fixed-income brokerage and investment banking results. Pretax operating income of $17.5 million represents a 20% decrease and it also declined 26% sequentially. Margins simply came under pressure due to slower activity and an increase in operating expenses.

Turning to the next slide, I'll just walk you through our Institutional Group revenues. Our institutional brokerage revenues were $74.9 million, which was up 2.4% compared with the second quarter of '11. Our equity institutional brokerage revenues were $38.5 million, which was a 7.7% decrease compared to last year, just reflecting again lower overall average daily volumes. Offsetting this decline, fixed-income institutional brokerage revenues were $36.5 million, which was a 16% increase from last year. Although both of our flow businesses show the weaknesses in the second quarter, they showed sequential declines.

Investment banking revenues increased slightly to $58.8 million, advisory fee revenues were a solid $26.6 million, which was up 7.2%. And capital raising revenues were $32.2 million, which was a 3% decrease. Basically our fixed-income origination offset declines in our equity origination on the capital raising front. In terms of our investment banking activity, our equity capital markets results again reflect the environment. When we started off the quarter strong, it was really a continuation, I think as I said last year -- last quarter, I saw what I thought would be some weaknesses, which unfortunately came true.

UFI, IPO activity slowed dramatically in the second half of May and the first three weeks of June with no IPOs pricing until June 26, and that was the result primarily almost exclusively to the Facebook IPO. Volatility increased and investors remained cautious after that. Despite the slow down in the second half we still priced 12 IPOs in the quarter, book running 5, which was over 40%, which is our strategic initiative to do book run deals, both IPOs and secondaries. While the overall fee pool in the US listed equity was down 29% in the first half of '12 versus last year, our market share is up. We continue to, as I said, make end roads in our effort to book run more business and grow the franchise.

With the start of the new quarter, I will say investors' appetite for both yield and growth equity has improved. The capital markets business is lumpy but we expect public issuers to pick up activity with continued market stability. Our pipeline is building, but again the execution is dependent on the markets cooperating.

Looking at M&A, global M&A environment is slowing in '12 with annualized volumes down 16%. We remain very active in the second quarter, we have 13 announced or closed M&A deals, including 7 by inside, and 6 outside assignments. In addition, we've announced or closed another 7 M&A deals in July, and the first week of August for a total of 36 year to date.

Next slide looks at our capital structure as of June 2012, our total assets were $6.1 billion and total capitalization was $1.6 billion, book value per share was $25.63. Tier one capital risk weighted assets is 26%. Our debt to equity is 18.8%, and our leverage ratio of total assets divided by total capitalization was 3.8 times, while our equity capitalization -- just looking at equity was 4.5 times. And we just simply continue to maintain a relatively unlevered balance sheet.

Looking at other financial data. As of June of 2012, the leverage ratio at the parent broker-dealer was 2.2%, which underscores our conservative nature towards funding in a broker-dealer, while at the bank it was 13.2% which we believe is reasonable to fund the future growth of the bank. From a year-ago quarter we added a net 70 financial advisors, recruiting remains active, we have had some great new hires and we'll continue to seek opportunities to recruit top-seasoned advisors. Full-time associates has actually opposite to what has been going on in the industry which is seeing substantial decrease of headcount. Our head current has increased 5% from last year. Total client assets are approximately -- total client assets, which include deposits, are nearly $138 billion. So a nice increase compared to June of last year.

Slide 19 looks at our level 3 assets, as in the past a majority of our level 3 assets are option rates securities with a carrying value of $175 million, but of that nearly $84 million are ARS held at Stifel Bank as part of that investment portfolio. It is things that we have bought versus -- bought for investment versus what we repurchased from customers as pursuant to our settlement as it related to the ARS matter. Other investments of about $32 million as has been consistent is private investments held by our TWPG subsidiaries.

Before I open the call for Q&A I want to share my view of the markets and our Company strategy. Numerous recent events simply have eroded investor confidence. The flash crash of 2010, the Facebook IPO, Peregrine, MF Global, LIBOR manipulation. Even last week's trading disruption at Knight simply have undermined investor confidence. But what I really see is a tug of war between what should be simply modest growth expectations and the fear of deflation. Those are the one side being looking for slight growth and the other side being a worry of deflation, results in a wide-risk premium. The risk premium the way I define it, if you look at yesterday's close, the 2012 earnings yield on the S&P 500 is 7.4%, while the 10 year was around 1.6%, so that simply doesn't make much sense to me as you look at it. It is either deflation is going to hurt earnings and bring the earnings yield down substantially by having the S&P fall, or the bond yields are very low.

When you think of the 10 year at 1.6%, you have the 10 year inflation rate being 2.2% annual, that doesn't make much sense. I believe that, and I think this goes to our strategy, I believe that Europe will stabilize further, the fiscal cliff and tax issues will be resolved, and deflationary concerns will ease, all of which will generally improve investor confidence. This will narrow the risk premium that I spoke about earlier in favor of equities in my opinion.

Our Company, with that outlook, is positioned well in a rebounding or normalized equity market, therefore we continue to invest as we've done over the past seven years. We are building a firm to take advantage of the restructuring of the financial services industry. Looking at our strategy, as it relates to that market outlook, our strategy is straightforward, it's to take advantage of opportunities. We believe the events over the past year -- few years provide us tremendous opportunity to build our capabilities while gaining market share. Simply the structural changes required by Dodd Frank and Basel III will require the large global firms to both shrink and restructure their businesses in order to be capital compliant while also achieving acceptable return on investment capital. The new regulatory framework generally does not burden Stifel, and our unlevered balance sheet provides us ample dry powder to take advantage of opportunities.

We have built this business over the past several years by prudently evaluating opportunities and executing on those that provide acceptable risk adjusted return on investment always measured on a long-term basis. We plan to continue the simple yet proven effective plan for us. We are well positioned to gain market share.

However, the execution of ongoing strategy has impacted our margins. Year-to-date we have hired 103 financial advisors. We have opened 12 private client offices, and since June of last year we have opened 25 offices. We've lost money on making these investments, they have impacted our margins but we expect these offices to turn profitable. We have also made significant investments in fixed income sales, trading and research, an area we've hired 52 professionals so far this year. We've also selectively hired senior investment banking professionals and research analysts in areas where we believe their expertise are going to have a meaningful impact on our franchise. Additionally we are also evaluating some underperforming businesses.

Next I will illustrate the impact of our investments the way I look at it. This slide shows what I will call our legacy or core businesses separated from the revenue generating expenses paid for investments and new businesses and new hires. In the six months ended June 30 of '12, our core business increased 7%. The revenues increased 7%, with a compensation ratio of 62.7%, and importantly, pretax margins of 15.4%.

The revenues generated by our new investments were approximately $14 million, while total expenses were $28 million, impacting earnings per share by $0.13, dropped our margins nearly 200 basis points. We expect that these businesses, these investments, will generate profits and we'll get to our normalized return margins, which are 15%. And we expect them to increase revenue, especially on the private-client side. Also as I mentioned we are reviewing certain businesses that are underperforming. Bottom line is, we are growing in this market.

One last topic I'd like to address before Q&A is our investment in Knight Capital, we invested $30 million that converts into 20 million common shares of Knight at $1.50. Until we convert, we will receive a 2% dividend. I've been asked a lot of questions as to why we did this. From my perspective it was a financial investment that was both attractive, but importantly we participated in an industry solution for Knight who is a major market liquidity provider. We do not have a Board senior been asked that question.

In conclusion I'm confident in the second half of 2012. Some of our new businesses will start to generate increased revenues and profits. On last quarter's call I was cautious given future expectation, today however, I believe expectations have come in line with the current environment. I expect the environment to actually improve, and therefore I am optimistic as I sit here today. Stifel continues to grow through hiring, opening offices, and expanding capabilities. We are evaluating underperforming business and know we have work to do in our noncomp expenses, but overall I am pleased with the performance of our core business and believe we are well positioned to gain market share. I will now open the call for questions.

(Operator Instructions)

Devin Ryan.

I want to see if I can follow-up on the comments about examining some businesses that are currently underperforming. Can you give me any more detail on what businesses and what you are thinking there?

Yes, look, I don't want to -- lets suffice to say I don't know naming or what purpose that would serve. We've already actually done it, okay. And are continuing to do it. I think that some of the things that happened that impacted the first half results of the second quarter results, we think we've restructured to a certain extent that, but they did have an impact on our results. They are in those numbers. But I'm not -- I don't think it serves any purpose to actually provide any more detail, Devin.

Okay. That's fine. And then just you referenced this in your prepared remarks, but obviously week after week we are seeing money move out of equity mutual funds, and just want to get your perspective from the behavior that you are seeing from retail clients and maybe hearing from your advisors. It sounds like you think equity markets will see a better day, so I guess is it fair to say that you think that a lot of what we are seeing now in terms of money flows is more cyclical than secular?

Well it feels secular, actually, it has been going on since May of 2010. I guess that the way I look at it is I think a lot of the events and world events have had a huge impact on confidence, whether it be the things I mentioned that actually impact confidence, to what you constantly read about -- the unstable situation in Europe, the fiscal cliff. All of these things result, in my view, and I don't know how to weigh them, but equity outflows, I think we've only had two maybe three months where we actually had an inflow since May of 2010. We have $330 billion, I think the number is of equity outflows, that has impacted issuance in equities, it has impacted share volumes, and I do not believe that equity outflows will continue to zero. I think that they are going to stabilize and I think that when you see what I feel is going to occur, I believe Europe will stabilize.

I believe they will -- they are not going to come up with one solution, but every day you see where they move toward a solution, which is going to be effectively wrapping up all of the debts. And when that happens, and I believe the fiscal cliff will be resolved, the election uncertainty will go away. All of the events will help what the market is already sensing today, which is undervalued equity, that's why I think you are seeing a rally despite all of these things.

So I actually think that the markets will improve from here. Is it going to be gang busters robust? No. But it does not justify the disparate returns between equity returns measured by earnings to price versus the 10-year, makes no sense to me, and I think that the environment will improve.

Got it, great. And lastly for me. Within the results of principal transactions, equities were down 60% from last quarter. Was that market driven? And then also within the taxable line item, that was also down 22%. I'm just trying to get a sense of how much maybe the softness in principal transaction was driven by a function of some mark-to-market issues more so than slower client.

Two things. One it is definitely slower volumes. We also -- we changed trading systems in January. And a little bit of that is geography. I've had that comment two times as it relates to the way we do things. And in many ways, Devin, I think you need, as I said, you need to combine principal and commissions when you want to get a true picture of what is going on. But the short order is that equities are slower, fixed income certainly a little bit better, certainly with Stone and Youngberg, but do not read too much into that.

Got it. Thanks.

Alex [Woestein].

So wanted to go back to some of the things, Ron, you were talking about earlier with your view on the market right now, and I guess your view on balancing, building out the business, and in clearly a tough revenue environment. I guess from our perspective, what needs to happen and what do you guys need to see from a top line dynamic to slow down the growth of expenses to start protecting the margin a little bit?

What I was trying to show was that I think that the view point at the top level, the highest level that I can look at, I believe that the restructuring in the industry provides us a lot of opportunity to grow this franchise. And therefore, I do not believe, and I do not come to work every day thinking that the markets are in a secular decline. I believe that the factors that have impacted investor confidence and coupled with Europe, all of these factors have weighed heavily on the ability for markets to expand and I believe that they will generally improve from here.

And therefore, that gives me confidence to continue to invest in opportunities and to sacrifice some margin today for increased profitability later. If you remember, and going back to 2009 or '10, when we opened some 100 offices and hired 700 people, the margins in our private client business declined from 25% to 16%, yet today they are back to 26% on significantly higher profits. So the investments we are making today are to build a better, more profitable firm on a per-share basis for our shareholders. And that is just the way it is.

And if anyone wants to take exception with that, it would be that we are continuing to build this firm and maybe someone believes that markets are not going to return. I'm not in that camp.

Got it. And then you spoke about the fact that the leverage in the business is clearly a competitive advantage for you guys as in from the perspective you could add leverage while the others are shrinking. Can you be a little more specific what business areas you are trying to grow more from a balance sheet perspective? Clearly the bank is one of them, but is there anything else you are doing to add leverage on your balance sheet? And I guess what kind of businesses you are trying to take advantage of there?

I think there will be opportunities to increase, the broker-dealer is way underlevered at 2 to 1, it's way underlevered. But we are very cautious. The funding markets are volatile. Frankly, the ability to fund pure broker-dealers with what has happened in recent -- even the recent years makes it, I think, a little bit prohibitive to be adding leverage in the broker-dealer.

On the other hand, adding leverage in the bank, which is what we've been doing, our assets are over $3 billion, we are funding that with very low-cost deposits. And so you'll see the bank continue to grow. I think I said last quarter, I expected it to be $3 billion, I expect it to grow from here, and that is where we are adding leverage, although we are not taking a lot of risk.

For now, that is where I see the balance sheet expanding. When you compare us to peer groups, we are still underlevered, even in the bank, compared to our overall leverage ratios. So an increase of $2 billion, you take the net interest margin and you want to assume -- we don't have to raise capital to do that, and we can increase -- certainly increase our earnings per share to get to peer levels of leverage. So that is the way we are looking at it. But we are not looking at starting prop trading operations in the broker-dealer.

Got it. And that's helpful. And one numbers question. We're kind of almost halfway through the third quarter now, activity levels haven't really picked up even though the markets feel certainly better, how do you guys think about expenses in the back half of the year, and should we stick to the comp rate of 64%-ish on the back half? And then on the noncomp side is the 90%-ish noncomp number from just an overall dollar perspective, is that the outlook for the next few quarters as well?

I think that is fair. I don't know that 64% -- I think that's at the high end of the range that we've given, okay. So I would still say that that would be at the high end of the range. Noncomp expenses are hard because what happens, they lead -- any time you invest in a business, I know what comes first. Okay, it is the non-OpEx. You have to open the office.

We've opened a number of offices, rent starts on day one and revenue doesn't always come in. So the noncomp OpEx tends to be a little bit more difficult. I was commenting the other day when our noncomp OpEx -- a few years back, was $20 million a quarter versus $90 million, so that increase has been a very good increase in that noncomp because it's been tied to revenue and profitability.

But to answer your question directly, I think the 90% is fair. But as we make investments or acquisitions, that number's going to change. I hope that number goes higher. I just want it to go lower as a percentage of revenue.

Got it. Thank you very much.

Which is where we need to work a little bit. Because I will tell you the percentage of noncomp to revenue was not acceptable, if that's what I thought it was going to be. What I'm trying to tell you and looking at these things is we've made investments where we've got the OpEx, but the revenue has yet to come in. Certainly on the run rate that we expect.

Joel Jeffrey.

Sticking with the expense line of questioning, can you just give us a little bit of color on the increase in other operating expenses quarter to quarter and what really drove that?

The line item?

Yes.

I think it is a combination. Looking at it -- I thought I would have this question, we had -- not real material but material when you are trying to explain it this way. It was a combination of some of the investments coming in, and we had -- we had two credits, again not significant to the quarter last quarter, but it does look more significant when you are trying to explain a $5 million increase.

So it is a combination of maybe last quarter would have been -- if you compare them apples to apples, a little bit higher and then the rest would be an increase in just our investments.

Okay. And then in terms of the investment you guys made into Knight, how on the balance sheet are you holding that? Will that be in the trading securities or available for sale? And will that have any impact on the income statement going forward?

Well I hope it has a positive impact on the income statement. I would think that first, I think we'll hold an investment, it will -- we'll probably record it as part of our Institutional Group since I viewed it as a capital raising, banking-type transaction. And I believe that we will need to mark that to market. So today we have -- subject to market conditions, but today we have 20 million shares with a cost of $1.50. The market is not $1.50.

So the unrealized gain would not impact the income statement next quarter?

Last I checked, Joel.

Well if it wasn't available for sale.

You know what though, that's a fair question. Although, you can't hold equities in a bank and they are available for sale as a bank -- as a bank accounting. We do have different accounting between the bank and the broker-dealer. What is held in the broker-dealer we mark-to-market daily.

The bank can have available for sale and not -- and run it through what other comprehensive income or whatever it is. But that's not the case here. I'm sorry to answer your question directly, the mark-to-market will flow-through the income statement.

Okay, great. And lastly on the investments you are talking about, and I appreciate the comments you made about it breaking -- or potentially becoming profitable in 2012, do you think that would be enough to offset the lumps you guys are talking about in the first six months of this year, by next year?

You mean in that legacy line item?

Well in the line item of the investments.

I'm sorry, investments. Absolutely.

So you believe those investments will break -- that line would be a break-even number in 2012, or by the end of 2012, or into 2013.

By the end of 2013, on the same store -- if I measured the same thing then as I do now, I would expect it to make money.

Okay. Great. Thanks for taking my questions.

Hugh Miller.

I guess I had a question that wasn't touched upon with regards to the some of the strength you are seeing in M&A, especially given that the global market that we are seeing in the trends. Are there particular areas that you are seeing, that pockets of strength in to do advisory business, or is it pretty spread across the board?

It's spread -- our M&A business obviously tends to be lumpy as most firms like ours, even the big firms have lumpy M&A. I think what you are seeing in M&A for us, is the strength in our franchise as we build our franchise. We've added a lot of capability, and a lot of capability on the advisory as well as the capital front. So I'm pleased when I see the level of M&A and the type of transactions that we're doing.

So we've done some by-side transactions where we've competed head to head with some large firms that have bridge financings involved that we have been involved with that have a number of debt take-outs, things that we were unable to do even two years ago that we're doing today. And so that's what I like about the progress that we've made on that front. And I would say that we have a lot of market share that we can gain on the advisory side.

Okay. And if what you are commenting about focusing on the noncomp costs and already doing some of that restructuring, should we expect to see some types of charges in the third quarter based on that restructuring effort or will that not be material?

I don't A, expect it, and B, it is not material. And C, a lot of it is done.

Okay. And a lot of questions were asked on the expense side, it seems as though a lot of it running on the noncomp primarily in the Institutional Group. I know you talked about some of the investments in that, but is there anything in particular you can provide some color on areas that were kind of running higher?

Well I would -- some of the things that we were looking at that we've all ready talked about resided in the Institutional Group. In terms of some of it is investment, and some of it is review of businesses. So I don't know that I have any more color than that. Other than we'll go back to say that -- I want to reiterate, I was debating to put it in for you guys, but you can go back and look at our historical PCG because that is where it is most evident is when we made those investments in PCG.

What happened to our OpEx and our reported margins, how fast OpEx grew and how quickly our margins shrunk in that year to 18-month period when we made all of those investments. And then conversely how fast revenue grew without OpEx growing, that took our margins back to 26%. That is the way I think about a lot of these things and we are making investments in this market.

There is a slew of opportunity for a firm positioned as we are, unlevered, to take advantage of the restructuring that is going on. And we intend to do that. And that's what we are doing. It's just that when you do it in a market environment in Q2, those investments stand out on margin compression. But I'm still going to do them.

Okay. And speaking on the PCG side of the business, I know you guys were able to grow headcount in the quarter, we were hearing from one of your competitors about just seeing a noticeable improvement, I think during the quarter with the recruiting environment and just interest given that some of the larger firms are seeing their advisors and their retention awards coming towards the end of that life span. I was just wondering if you could talk about what you are seeing and how competitive is the upfront money now relative to what you've seen in the past for recruiting those advisors?

First of all, I think the environment is definitely improving. It is going to improve because part of the restructuring that's going to be going on at the very large firms is going to impact their private firms, private wealth management segments. And so we definitely see an increase in recruiting opportunities.

We also have seen that maybe the apex of recruiting deals back at the end of last year, so we see that softening. So I would echo those comments as to what we are seeing. That all can get dampened by difficult market conditions though because it is hard to recruit and move people in and out of markets. So it is a little of both. But certainly on balance recruiting, the environment is better.

Okay. Thank you.

Michael Wong.

Michael Wong from Morning Star. So I noticed that your Institutional Group commission revenue, just that specific section was up about 20% sequentially when industry equity trading volumes were flat. And it looks like the break out of your equity and fixed-income brokerage were down, so can you just talk about how that mapped out?

Yes, Michael, as I said, there are -- we've had a little bit of geography issues when we moved systems. It all related, we had it in the year past where we do not principal trade, we do not take a black box market risk, but there is a technical regulation on [breckshow] that we had last year that when we got it in the right geography on the balance sheet, we then changed trading systems in January of this year, and completely rolled out a new trading system. And I think some of the geography was there. And I would look at commissions and principal transactions together. Some of it is there. But overall, our equity volumes were down.

Okay.

So if you look at -- you combine equity principal and equity commissions, you're going to see that they are down.

Okay, so looking at headcount, so if I take the headcount growth this year so far, and take out the net increase in financial advisors and the 52 people you added in fixed-income personnel, it looks like headcount outside of those two focused areas was about 6. So outside of those two focused areas, are you expecting headcounts to go down as you structure a little more? Or are you planning to add there or add more, especially to let's say your Institutional Group in order to bring the Institutional Group operating contribution closer to your previous goal of let's say 60/40 split between the Institutional Group and Global Wealth Management.

Well you're telling me a net of six people absent those focus. Those focus areas are revenue-producing people. My view on it is that our current infrastructure, our current support infrastructure is adequate to add a lot more producing people. We have a lot of leverage in the firm that we have today.

That is part of what I'm trying to point out, is that we've hired a lot of those net increase, they are all revenue-producing people. OpEx has gotten here before revenue, which always happens. And we've not hired a lot of people in support, which we do not feel we have to. We feel that we can add revenue people and on the margin, that is -- those are good hires.

Okay. Last question from me. So looking at the transition pay, which has that 5% drag, what disproportionate amount of that related to I guess the UBS advisors, or was that related to just the normal hiring of financial advisors?

It is a question that probably needs to be answered a little bit deeper, but I'll try to give it quickly. I guess what I'm trying to say is transition pay in a growing firm is always going to be there. However, we have grown from in a few years, we've grown from 500 advisors to 2,000 advisors, such to the point where we have a lot of transition pay. And the normalized transition pay is not almost 6%. It's probably, say it is 3% or 4%. And so that is what I'm just trying to point out. We've done a lot of hiring, we did the UBS transaction, we hired 800 people in that year, and we were on a real hiring.

So when you go from 500 to 2,000, transition pay as a percentage of revenue is higher than it would be in a normal growth environment. That is what I was trying to point out. But it doesn't go away, unless we quit hiring. And then it eventually goes away.

Okay. Thanks for taking my questions.

There are no further questions at this time. Mr. Kruszewski, I turn the call back over to you.

I would like to thank everyone for their interest in our Company and I want to end again by saying that last quarter when I looked forward, I felt the street was more optimistic from what I saw. And today I feel the pessimism is more than what I'm seeing in activity and optimism. So I'll leave you with that thought. We'll see how it all plays out. With that, talk to you next quarter. Bye.

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