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Stifel Financial Corp. (NYSE:SF)

Q4 2008 Earnings Call Transcript

February 12, 2009 11:00 am ET

Executives

Jim Zemlyak – SVP, Treasurer, and CFO

Ron Kruszewski – Chairman, President, and CEO

Analysts

Guy Mozaki [ph] – Bank of America

Darren Woodman – Woodman Capital Management

Joel Jeffrey – KBW

David Trone – Fox-Pitt

Michael Isenberg [ph]

Michael Wong – Morningstar

Dave [ph] – FBR Capital Markets

Operator

Good morning. My name is Ardae and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Financial fourth quarter and annual earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions).

I would now like to turn the call over to James Zemlyak, Chief Financial Officer

Jim Zemlyak

Thank you, operator. Good morning, everyone. This is Jim Zemlyak, CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss our fourth quarter and 2008 fiscal results. Please note that this conference call is being recorded. If you’d like to follow on with today’s slides and you may download the slides or view it on www.stifel.com.

Before we begin today's call, I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 in the Company's quarterly reports on Form 10-Q.

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

Ron Kruszewski

Thanks Jim. Welcome everyone. As we do on all of our calls, we follow along with slides. So, I will be addressing slides and hopefully everyone in the call has those. I thought the way to start would be to restate the code I put in our earnings release which was simply put 2008 was uniquely challenging for the financial services industry.

Our Company has been fortunate – many of the issues which plagued a number of our brother in. While we are mindful of this environment, we consider this a time of unparalleled opportunity for our Company.

Going forward, we will continue on the long-term building of shareholder value primarily to the addition of talented and entrepreneurial people. And I would like to take the time to congratulate and thank our hard working associates for record results in the most difficult of environments in 2008, and also thank our clients for their continued confidence in Stifel Financial.

So, turning to the fourth quarter highlights, we recorded net revenues of $228 million, 8% higher than the comparable quarter in 2007. It was a balanced business model which drove those record revenues, frankly balanced Fixed Income offset declines in equity and Private Client which is historically what happens when the economy is performing like it does. Those revenues drove a record core net income of $21.7 million, $0.72 per diluted shares. So, it was up 6%. It was not a record core net income. We had some share of – increase in shares due to our offering in September.

It was a second best quarter on a core EPS basis. Our pre-tax margins were 16%, equal with last year. On a GAAP basis, net income was $17.8 million, $0.59 diluted share. Book value increased to $22.75, which was up 24%. And at the end of the year on the acquisition of Butler Wick which added 18 Private Client branch offices and 75 financial advisors.

For the quarter, our annualized return on equity was about 15%. Year to date, pleased to announce record net revenues of almost $868 million, up 14% over 2007. This marks the thirteenth consecutive record net revenues and it was driven again record revenues from Fixed Income capital markets, Private Client Group and Stifel Bank.

Core net income for the year of $73.1 million, $2.60 a diluted share. So, it was 9% up in net income. EPS was flat at $2.60 year over year. For the year, despite the environment, we still were able to maintain pre-tax margins of 14% and return on equity of 15%.

On a GAAP basis $57 million, $2.04 a diluted share, up significantly, and as I said book value of $22.75. If we turn the page and just look at the summary income statement, I think what this will show is year over year pretty consistent ratios, comp to revenues 64%. OpEx slightly higher due to our both – due to some write-down’s but also the opening of a number of Private Client Group offices. So, we’ve taken some margin compression.

Looking at the source of revenues. For the quarter, I’m – not unsurprisingly commissions were down 8%, principle transactions. This is all compared to the previous year’s quarter. Principle transaction again driven primarily by our Fixed Income capital markets, almost doubled. Investment banking, no surprise again down 50%. So, the combination of all that drove operating revenues up 8% and net revenues up 8%.

On the annual basis, really – I think all the numbers are up except for investment banking. I really think we need to focus a little bit on the sequential aspects of the quarter and what’s going on. But again, we pleased to have recorded our thirteenth straight record year of revenue.

We’ve talked about principle transactions, the next slide shows that. And again, you will see that there’s a significant increase in principle transactions is due to Fixed Income. It’s actually across the board. But the primary increase is in taxable debt, which again flows through a primarily our Fixed Income Capital Market group. And certainly on the Private Client side more of an emphasis on taxable debt and moony [ph] debt.

Then in equities, but again should not be a surprise to anyone. I think we should look at some unusual items in the fourth quarter. Just to give a sense of what happened. Last year, which was a record year for us, to put things in context, a record quarter for us. We had $0.76 per diluted share, but included in that number was $0.07 related to a gain that we had on a trope [ph] extinguishment that we did in the fourth quarter of last year.

So, just try to have an apples to apples comparison, we look at it as $0.69, if you include that gain. What happened this quarter was we started with $0.72 for core diluted EPS and then four items I’ll talk about quickly. First of all $0.11 relating to our previously announced extinguishment of some of our trope preferred outstanding. So, that was $0.11 a share. I’ll come back to it. But what we’ve done is we announced yesterday a partial redemption of auction rate securities.

While we have not done that as of yet, we have accounted it for the potential valuation adjustment that we may need to take a liquidity adjustment, if you will. And we are purchasing these securities at par. I think they are worth par. But on a liquidity basis, we are going to create a valuation allowance as many firms have done. That took away $0.06 a share.

We also had some investments in our banking portfolio that we believed given the environment I think everyone understands the fourth quarter was a disaster as it relates to some of the investment – evaluation of the investments in a mark-to-market basis. And while we think that – while we think these securities will perform well, we felt that we needed to look at the market value of these securities net net about $0.04 a share to adjust those down unrealized but $0.04 a share.

And we have been talking for a while about the establishment of a charitable foundation. We also need to be good corporate citizens and we’ve not had a foundation. So, we are going to establish a foundation and that was $0.02 a share. So, net net, those are all offset a $0.001, but we look at it $0.73 to $0.69 depending on how you the shareholders’ want to look at it, but that’s how I look at it.

The next page, I will talk a little bit about our auction rate securities redemption notice. And will just again say what I said in the press or in the press release as it relates to this issue and that Stifel is announcing a partial repurchase of auction rate securities in order to assist our clients.

Stifel North clients had access to the information available to major market participants regarding the impeding collapse of the auction rate securities market. And the major market participants disclosed to the entire marketplace the material facts known by them or at least allegedly known by them. The simple fact is that Stifel would not have sold auction rate securities to clients. And so while several firms, larger firms have announced complete repurchase plans, we believe that this lack of knowledge is the critical difference that serves both as the foundation for a position and the one that is the basis of our partial redemptions plan.

So, when you look at it, we thought we wanted to do to our sister client. We – first of all to find the population as those clients that bought auction rate securities from Stifel and continue to hold on our books. That is affectively 1153 clients in home, $183 million. I think it’s important to note that $183 million through the ongoing redemptions that have been announced by the issuers has almost declined 50%.

So, this market is becoming more liquid. But certain issues have not done any redemptions yet. We just felt that we now – we had to step up to some of our clients, especially clients that had smaller balances and smaller accounts and provide some liquidity. So, this will give you a sense of our thought process and what this slide really shows is that of the 1153 clients, 445 of them have $25,000 lot. These things trade in $25,000 increments.

So, this plan will completely redeem 445 clients. For those clients that have 2 units or $50,000, they will get – 201 of our clients will get 50% redemption. 210 will have 33% redemption. And then the larger accounts will have 10% basically of redemption.

It’s a difficult situation. It’s been difficult. We just felt it was time to do this. Since I’m speaking to the shareholders’ I believe on this call, we also have a fiduciary duty to shareholders’ and we needed to balance the interest of our shareholders’ with the interest of our clients in this matter.

I do not believe that the fact as we understand them with warrant of the shareholders’ taking a significant hit and leverage the balance sheet based upon our review of the situation. So, we think this is a balance of the interest of our clients and our shareholders’ and it also does provide significant liquidity to small accounts. That’s what we did. Sure, I’ll get a question.

Outlook, going forward the next page. Simply, the environment, the unstable conditions really in the Private Client market presents tremendous opportunity, same story as last time. The uncertainties surrounding the largest domestic and European Private Client platforms and packs thousands of US based financial advisors and that turmoil spells opportunity for us.

As we look forward, we think our balanced business mix will facilitate our growth. Last year 54% of our revenues were generated by private client, 45% by capital markets. We think that balance is important to all of us as shareholders’.

We also see the same turmoil creating a talent pool of people in capital markets and is again something I have never seen before. Then the number of people that can add to our intellectual capital is unbelievable. And we were well capitalized to fund this expansion. We did that successful follow on offering in 3Q of this year, and simply well eligible we did not participate in the TARP program. It’s more of a philosophical point that I – certainly I and the Board have felt that we did not need government assistance and therefore did not take it

If you take to the next slide, this will show the turmoil equals opportunity. We are one of the fastest private wealth management businesses as you see our growth and net revenues, financial advisors and private client branches had been strong. You couple that with our research effort which is particularly gratifying to me that our research department, if you saw was picked by StarMine as number one in stock picking and number one in earnings accuracy.

So, the intellectual capital in the research side was recognized last year. This has helped tremendously in our efforts to recruit or talented people to join our team. And if you look at our overall coverage of research you can see that we now have, proud for me to say this is the fifth largest research department in the US, at least where we count it, on domestic stocks and we are the largest provider of small cap coverage today in the country.

So, we think that research base is the foundation that’s going to fuel our growth going forward across all of our businesses. When you look at growth, again I think that passes prolog is the way we look at it. The Private Client Group we added 269 financial advisors, 52 offices that does include the Butler Wick acquisition as I previously talked about close on the last day of the year.

We’ve added 63 people in equity capital markets. We’ve added 50 plus Fixed Income, a big, big investment hub of finance. And we have added to the bank as we positioned the bank to be able to provide the banking products. So, this growth has – is again where we are focusing on adding to our collective value as shareholders’.

If you look at the segments, I’ll talk in general. But for the quarter, the weakness in Private Client and equity capital markets which is no surprise to anyone was more than offset by strength in Fixed Income. So, that’s gratifying. I’ll talk a little bit about that going forward. That’s trueable on the revenue side and on the contributions side the way we look at it.

If you flip the chart just to look at our mix of revenues, you will see that Private Client Group is 54% of our revenues and 52% of our contribution, Capital Market 45% of revenue and 48% of operating profits. The balance – I like that balance we would think that it would stay, the mixes may change a little bit, but it is a balanced business model.

I also think that the bank, which is just a slibber here, the bank will continue to become a bigger contributor to our profitability as soon as bank isn’t any longer four letter word. It’s tough to have a bank in this environment. But we believe that the bank will be prudently managed, will be a significant contributor to our profits going forward.

If you look at – let’s just talk quickly about the Private Client Group, you’ll see commissions for the quarter down 4%, investment banking down 61%. In fact, all revenue items are down and then offset by an increase in other non-interest expenses of 15%. And it short order, it’s a – the market is difficult, you have a declining asset value, declining fees, yet we are opening offices a left and right. I was saying to my partners it’s lions and tigers and bears, oh! My it’s – what are we doing? Because we are continuing to invest, but we think we are laying or planting the seeds of shareholder value. It’s that simple.

But we are going to take margins compression. I don’t know what the short term of use of our – actually we don’t have a short term view, other than I think it’s going to be weak. And Private Client, in my long term view is this is adding significant shareholder value to all of us.

If you flip to equity capital markets, as it has been all year to tale of two cities, especially gratified by the increase in our flow business that reflected in commission and principle transactions in the quarter up 26% in a difficult quarter, up 33% for the year just a – I think some thing that underscores our investment in research and our sales and trading teams have done a phenomenal job.

On the flow business, that’s offset by investment banking. No one – I don’t think there is any other firm in the Street that has had any success in investment banking simply because there’s really no pipeline. It’s very difficult to close M&A in this dead market. So, I don’t really know how investment banking can get much worse from a relative standpoint in the market or for us financially.

It’s been difficult. But again we are going to continue to add in that area because we do think in time this will change, you will see comp and benefits coming down. It will help the profitability a little bit. We true up our accruals a little bit and there was a slight benefit to that, to the equity capital markets and in Fixed Income capital markets also.

Fixed Income, again the flow business. If you turn the page, the flow business was phenomenal for the quarter, up 150%, almost 200% for the year, tremendous operating leverage. Very pleased with our year to date margin were in the mid-30s. Our Fixed Income capital market team deserves a standing ovation for their efforts and what they did for the year, and again it’s quite appreciated.

I must say that as I look forward I’m concerned about some of the recent developments in Fixed Income, the crammed down legislation is being proposed. These always have intended consequences, but we see what’s being proposed as the way they would allocate losses to these structures. It’s really as I understand it would be prorate versus actually hitting first loss. The net net of all that as it creates uncertainty and that some the season things that we trade, now people are having difficulty projecting loss.

So, this crammed down legislation, while it has an intended effect of helping markets we see it actually ceasing up the markets a little bit because of the uncertainty it creates. And that’s something that concerns me going forward.

Stifel Bank and Trust, finally you will see that we lost money in the quarter and that relates in the other revenue line item to a write down of some of the bank investments we wrote down. I think it was about $2.4 million in the bank relating to some investment, but we just felt that in the environment, we should do that it’s unrealized. I can talk about it in a moment, I’ll talk about level three assets.

But the bank, I think the way I look at the bank quickly is the loan portfolio, the way we are changing the loan portfolio, the loans are up $71 million, which is an increase in regu loans of about $21 million. An increase in one-to four-family mortgages primarily in may cases the Stifel clients up $38 million. We’ve increased HELOC. The weighted average loan to value combined loan to value 70%. We have average cycles of 756. We are giving HELOCs to our best customers. And that’s offset by $15 million decrease in commercial real estate, construction and development.

So, as the bank goes forward, you will see us doing bank more. The bank will lend to our clients, that’s what it is there for.

On the asset quality side, for the year we made about $1.1 million in charge-offs. A loss as a percentage of retained loan was 64 basis points. We have an allowance for loan losses on the retained loans of almost 1.25%, and our non-performers are 30 basis points.

Asset quality as of today is very good. I’m always concerned about what the recession and what it can do. But I feel very good about the bank in terms of asset quality. We also have a very – we built a very solid mortgage banking operation. We sold over $330 million in mortgage to the market in 2008.

Revenues were over $4 million from that operation. And we had a very, very good December and frankly January, might have been a record in January as the refinancings were unbelievable. So, the bank is well positioned to continue its growth.

Let’s couplified talked about – the last time I’ll be doing this GAAP to core. I think I have talked about this last time and go over it really quick. But as always we project that on a quarterly basis that our net impact is about gross pre-tax of about $6.2 million. After tax, it’s somewhere in the $0.14 range. That’ been the case.

If you look at in my slide 21, you will see that our projection came right on at the $0.56, but for 2009, we’ll no longer have the GAAP to core. In that all of the stock based comp that we did to fund recent acquisitions has now been amortized through the income statement.

Looking at the balance sheet, assets – I’ll come back to that in a moment. What happened there, very well capitalized $600 million of equity, $84 million in Trust with $681 million leverage ratio of about 2, book average grew very nicely.

Page 23 talks about our cap structure. Again a very, very attractive tranche of trust preferred, $82 million that’s LIBOR plus basically 180. So, you will see, we are very well capitalized to take advantage of this.

Level 3 assets is slide 24. I just wanted to show this and give a little bit more detail and a little bit more visibility to people to our shareholders’. Today in level 3 assets, we have 18.5 million of auction rate securities, that’s put’s in our firm inventory accounts as you can see. We are carrying those at about 91% at par.

In the bank, we have $10.4 million of level 3 assets. That’s down from an amortized cost of $14 million. But the difference is $3.7 million between our cost and what we carry it those at. $2.4 million of that went through earning and $1.3 million in other comprehensive income. We thin the bank portfolio is fairly valued.

And then you see a few trading securities, are primarily some of our aircraft group carries securities that are classified as level three, and looks the majority of these have already been traded out and avoided a loss. So, you will effectively $38.2 million of level three assets, about 6% put of that the – almost half of that or almost half is auction rate securities. They are all triple A, piece of the closed in preferreds for the most part. Going forward, if we complete our redemption plan, we could be adding $40 million to this level in auction rate securities. You could see level 3 assets approaching $70 million to $80 million, which again significantly more than half of the auction rate securities.

By the way, we have financing in place and we are not concerned that aspect of our repurchase plan.

Finally, other financial data. It will just show our assets, the year over year relatively flat – the brokerage assets are down a little bit, the bank assets are up, equity is up significantly. And you will see the growth in fiancé advisor, employees and locations all just driving our growth.

So, pretty good year, great year relative. 2009 is cautious would be an overstatement in my view of what 2009 could be. But we are so well positioned to deliver results to our shareholders’ that I frankly never been more optimistic as to our long term potential than I am today.

With that operator, I’ll take some questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Guy Mozaki [ph] with Bank of America, Maryland.

Ron Kruszewski

Hello, Guy.

Guy Mozaki – Bank of America

Hi, Ron. How are you? Question for you, first of all what are you seeing in the first six weeks or so of the year in terms of changes in Private Client behavior to give us a sense for how activity is starting off the year?

Ron Kruszewski

I’ll tell you. As I see with par facility in the market and as we all know, I think the activity – I’ve not seen a real change in activity. But the activity is around a base of assets that’s significantly low. So, when I look at it, it’s not like the clients are saying, mail me the cash in my account and putting it away. I think clients are still in the market, we are seeing – I would say relatively normal activity. But asset values are down, probably down 40. We have a lot of Fixed Income, assets are down 20%, but that flows through revenues. That’s offset by our increases in new hires. Unfortunately those new hires margins aren’t the same. So, that’s how I got to my lions, tigers and bears in my comment.

Guy Mozaki – Bank of America

And just a follow up on that. You did talk about this a little bit, but may be you could give us a little bit more color on how you are seeing the recruiting environment in what clearly are unprecedented or close to unprecedented level of upheaval in the industry broadly and certainly affecting retail. What are you hearing from people? How can you take best advantage of it and how do you trade it off against the fact that we might be looking at a weaker revenue environmental role?

Ron Kruszewski

First of all, I said the environment has never been better for a firm position as Stifel is. We are well capitalized. We don’t have the distractions that a number of these have. We have the capital available, and we believe access to capital to prudently grow. The answer simply is that we can’t keep up the opportunities Guy, it’s that simple. And I don’t – how to say, we have to be prudent and selective in what we are doing, just we can maximize our investments. It’s a very, very active market environment if you will with all the upheaval. As I look forward, the – it’s difficult to add people in the view point of a short-term market decline in revenues, but you have to do it. Because if you going to build value for us long term, we have to look beyond the abyss and look forward to when markets will recover. And the firms that add – people that we are adding are going to significantly add to our value. Now if the market never comes back, if I made a few mistakes here. But I don’t believe here for a second. I do believe though, and we are been cautious. I do believe that this will go on longer than people think. So, long answer to a very pointed question, but I’ll summarize it by saying we are going to continue to add people because we believe when we look back in future periods this will be the investments that create a lot of value.

Guy Mozaki – Bank of America

Is there a sweet spot for you in the fact that a lot of the larger firms haven’t may be in some cases tended as much to the care and feeding of what they view as some of the smaller producers, the $0.5 million type guys?

Ron Kruszewski

They certainly created a sweet spot. I mean, I don’t know if it’s – I think it’s – I mean as I have said it, we – our cost structure, our ability to make acceptable cash on cash returns will – goes down below $300, 000 per FA and that doesn’t mean we don’t love the guys doing millions but we also believe that financial advisors that frankly are being like care and feeding analogy, probably not being done, we welcome them here. And a lot of phone calls.

Guy Mozaki – Bank of America

And then a completely different question, the balance sheet question really you pointed to the deleveraging that happened. In the quarter, some of that was probably was just because of the buy back of the TARP. But at the same time, you are looking at taking some of the ARSs, you said on the balance sheet, is that going to be basically reverse the deleveraging we’ve seen over the last couple of quarters?

Ron Kruszewski

By definition, yes. We – these ARSs are they are high quality, but to the extent we are going to put $40 million on our balance sheet. It’s not significant to $1.5 billion balance sheet. Again we have to balance our shareholders’ and clients on that equation. But I’m not really sure it moves the needle in terms of our overall leverage and what we are doing.

Guy Mozaki – Bank of America

Okay. Fair enough. Thanks very much for answering the questions, appreciate it.

Ron Kruszewski

Thanks Guy.

Operator

Your next question comes from the line of Darren Woodman [ph] with Woodman Capital Management

Darren Woodman – Woodman Capital Management

You have been adding a large number of reps and I was wondering if you could help us in terms of likely developing patterns for compensation, benefit expenses. In some of your divisions, those expenses went down, others went up. Assuming that the markets continue this pattern for the foreseeable future; could you help us with the interplay of revenues and compensation and benefit expenses by division?

Ron Kruszewski

I mean, it’s all be round numbers depending on – it is more on the OpEx, it’s a little bit more of the problem on the Private Clients, I’ll speak to the Private Client. The Private Client business, the additions of new financial advisors cost money and then you have to expense over time. That can add up to 15 basis points if you will, 15% on that incremental revenue over and above normal. How that impacts the overall comp ratio is obviously weighted average and I haven’t really thought about. The simple answer I think to your question is that across all division, when you add people in difficult markets, you are going to drive your comp ratios higher and you are going to drive your margins lower. The question is when that market turns, you have the capability to take that same leverage on the up side. That’s what we are betting on. I really can’t give you any numbers to model it because it does go to both how other rolling off from previous years and how you are adding people. But in general I have said that we will have margin compression as we add people in tough markets.

Darren Woodman – Woodman Capital Management

Thank you.

Operator

Your next question comes from the line of Joel Jeffrey with KBW

Ron Kruszewski

Hi, Joel.

Joel Jeffrey – KBW

Good morning. How are you?

Ron Kruszewski

Good.

Joel Jeffrey – KBW

Just a quick question on the release you had last night. Give us a little more detail exactly the assignment of client actionable legal claims means?

Ron Kruszewski

It means the assignment of actionable legal claim. I mean, Joe, our belief is that – if you believe what you read and may be one of the big arguments between the downstream firms and the bigger firms is who had – who knew what went. And we simply believe that this was not the financial advisors did not have knowledge and did not knowingly sell a product that was going to freeze in the marketplace. But do we think there was a period of time where people did have that knowledge. Certainly if you believe what you – if you’ve read in complaints filed by some of the state that I don’t want to name, you can quickly get to that conclusion. So, to the extent that we are going to provide liquidity to our clients and the amount of ARS that we buy from them, we want an assignment of those claims that may exist. It doesn’t mean we are going to assert any and we are not going to do it. But we need to protect all of our share holders’ too in this investment for the liquidity we are providing. So, if we think our clients have recourse upstream if you will, we want that recourse to travel with the paper that we are buying back. Does it make sense?

Joel Jeffrey – KBW

Yes. And then in terms of the $0.06 charge you took this quarter related to the ARS, if the ARS stayed at current levels, you would anticipate another annualized loss in the first quarter?

Ron Kruszewski

Correct. I mean we simply – it was an interesting discussion as we went through the whole process. But at the end of the day, once we agree to do it, but we felt that we had to take a liquidity, basically a liquidity charge for our commitment due with us. So, while it’s not in our balance sheet yet, we’ve effectively taken what we think the earnings impact in Q4 for what’s going to happen some time in Q1 and Q2.

Joel Jeffrey – KBW

So, would you be carrying these securities in a trading portfolio or in an available for sale portfolio?

Ron Kruszewski

It will be in the broker deal because we don’t have available for sale in the broker deal. So, I guess that’s trading.

Joel Jeffrey – KBW

Okay. And I apologize if I missed this earlier. But can you give us a little more detail on the asset level between the last two quarters?

Ron Kruszewski

We had a lot of – you talking about the broker dealer?

Joel Jeffrey – KBW

Yes, it’s looks like it’s down about 500.

Ron Kruszewski

Yes, it was down about 500, right between June and September. And so what happened was, we had a lot of activity at the end of Q3 which was a lot of flow business. We had failed in inventories and the difference between trade etcetera, etcetera, etcetera was all flow based. I think I said in Q3 that our assets went up to $1.9 billion. I think two days later, we were back to $1.5 billion. That was a snapshot in time relating primarily to the flow activity.

Joel Jeffrey – KBW

Okay. Great. And then can you just give us any sense for the impact on the expense side that the Butler Wick acquisition is going to have in 2009?

Ron Kruszewski

I think the Butler Wick is going to be accretive. And on the expense side, we certainly have some retention expense and we haven’t talked much about that. But even think that net of retention, in other words accretive. We think that that’s a great franchise, great people, couldn’t be more pleased with how that’s gone so far. That’s a real solid name in that part of the country and we see that as a great merger with us. So, I view it as net net accretive.

Joel Jeffrey – KBW

Great. And then just lastly Ron, do you have tangible book value number for the quarter?

Ron Kruszewski

I’ll take the next caller’s question. Do you have a question, Joel?

Joel Jeffrey – KBW

That’s it.

Ron Kruszewski

I’ll get it now. I’ll say it, so we can move on from here. Okay.

Joel Jeffrey – KBW

Great. Thanks so much.

Operator

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

Ron Kruszewski

Hi, David.

David Trone – Fox-Pitt

Hi, Ron. How are you doing? I had a quick question for you. You alluded the future FA growth, the current capital and access to capital. And you did the raise in September. I’m wondering under the first scenario current capital, how many more brokers roughly do you think you could bring on?

Ron Kruszewski

We have – let me answer this, but I don’t want to give you a number that way. There’s a lot of moving parts in that, answering that question, David. Because it depends whether we are sitting on existing seats or opening offices, level of production a whole bunch of things. I will say, I see that you picked up on comment about access to capital. I think what we feel, is we have – we are very well capitalized to fund our ongoing organic growth for the foreseeable future. So, don’t see any need to do anything as it relates to just on ongoing recruiting. I actually think our capital probably it leads today and plus retains earnings. We hope we are making money. That pool of capital probably well positions us for adding organically as we have in the past. As they look forward though, I see a lot of opportunity through dislocations to potentially other things that we have done in the past AKA, whether it be a (inaudible) or Butler Wick, that may require capital. And we feel that if that’s the case, we are well positioned because we actually believe we have access to capital. I believe that we can do that. So, I would more talking about our positioning. To answer your question, we are very well capitalized to continue our probe going forward. But we also think we are – if a big opportunity came along, we are well positioned to take advantage of that.

David Trone – Fox-Pitt

Okay. It’s unlikely you would race to fund organic growth? You are going to do that with ongoing earnings?

Ron Kruszewski

(inaudible)

David Trone – Fox-Pitt

Right. But so the kind of the big ramp up is over and now you are – it will be a little bit slower pace of growth over the next several quarters versus the second half of ’08?

Ron Kruszewski

We are actively growing the firm and we are well capitalized, David. I don’t want to be vague. I don’t really have an answer to that question. But I can say we are actively growing. The market is very conducive and we are well capitalized.

David Trone – Fox-Pitt

Okay. And then how do you tie in the lure of buying back more trust preferred? Would it continue to be pretty big discounts I guess in the market?

Ron Kruszewski

Yes. First of all, the two tranches of trust preferred are buried in securitization. So, I don’t know that’s even possible. We were able to buy trust preferred where they never got secured type. So, they sat at warehouses. So, actually I’m sure whether it would last. I think the $235 million pieces that are on the captive, those are buried in securitizations, but I don’t see those coming out unless those securitizations collapse in some manner. And then the last piece of the last one, I’m not actually sure what that is.

David Trone – Fox-Pitt

Okay.

Ron Kruszewski

The lure of doing that I – we effectively swapped – we swapped $12.5 million of trust preferred and $0.50 for stock, two times book. I might do that again.

David Trone – Fox-Pitt

Okay. Great. Thanks a lot, Ron.

Ron Kruszewski

Tangible book value $17.23, Joel.

Operator

Your next question comes from the line of Michael Isenberg with (inaudible).

Michael Isenberg

Good morning, gentlemen.

Ron Kruszewski

Good morning.

Michael Isenberg

Congratulations on a really solid quarter. I have a couple of questions, or question on the Fixed Income division, and more specifically looking at the quarter-over-quarter revenue generation and earnings generation from that division, if you could just think you can write some detail as to what drove that quarter-over-quarter growth? And if you think it’s sustainable going forward that type of growth?

Ron Kruszewski

I don’t think I would not take that growth lying and project that forward. I don’t think that would be realistic. That said, we – this is a business we can grow. And what happened was that we have added a lot of people. The combination of the unfortunate surrounding Bear and Lehman creates a lot of flow business that ended in firms like ours. So, I think a lot of firms like us are experiencing not only the addition of people but the business that used to go to them are coming our way, combined with credit spreads, combined with a sort of distraction of other firms – a perfect storm for Fixed Income . And while I believe our Fixed Income business is very strong and very well positioned, I would be hard pressed to continue that trajectory of growth.

Michael Isenberg

And would you say, taking this follow up, that if you had to break down to the extent you can again wherever the growth came from, was it phenomenally from the principle side, the principle investing side or was it from the – as you said from the flow business the pick up in agency transactions on the –?

Ron Kruszewski

Again I’ve always asked this question, people – are agency transactions flow through our principle line items. Al right, it is how we trade through inventories that turn very fast and are very liquid, but it drives principle transactions. We are not a proprietary trading house. Most of – virtually all of those revenues are driven through flow business. And if you want to say agency, okay. We just don’t book them as agency trades. We book them as principle trades. But they are buying and selling and servicing clients on the flow side. So, but it’s not embedded in our results as some black box profit, trading book that’s generating a lot of profit.

Michael Isenberg

Okay. Thank you very much.

Ron Kruszewski

You are welcome.

Operator

Your next question comes from the line of Michael Wong with Morningstar.

Michael Wong – Morningstar

Hi, good morning.

Ron Kruszewski

Good morning, Michael.

Michael Wong – Morningstar

I was just wondering do you have any unusual expenses and other operating expenses this quarter because of the big jump from 3Q?

Ron Kruszewski

I think that a fair amount of that is the – is our increases in opening offices and as I have said, we are continuing to build in a market where revenues have been declining, certainly on a same store basis. So, the quick cap answer to that is the – it’s our building with some decline in revenue and that’s going to drive OpEx ratios higher. We had some unusual legal expenses also in the quarter. I’m not sure how much that drove off that. But I would say the primary driver is opening a bunch of offices that certainly are profitable. Unfortunately, you don’t drive revenue but rent and code expenses since day one. Anyhow that’s what I had been talking about for a while, and I see that continuing. We are going to sacrifice margins for what I believe is going to be future growth.

Michael Wong – Morningstar

Okay. So, that $20 million or so run rate, it’s better than the

$15 million or so in the prior quarters this year?

Ron Kruszewski

I don’t give projections, but the – somewhere in between it would be – I’m just trying to give you some sense, okay. I think there were some one-timers in there too, but is fair enough.

Michael Wong – Morningstar

Okay. And just a question, do you have any sort of level of assets under management, as a financial advisor which you think you would be getting a good return on the capital you used as advisor [ph]?

Ron Kruszewski

Let’s try and understand your question. The financial – the private wealth management business is a stable, high return, high ROE business. It is you don’t have to deploy a lot of capital. To that you have to look at it as CapEx. When you are adding people and as you add offices, we view that as CapEx, and then we measure our sort of cash on cash return after tax and CapEx. I don’t if that answers your question. In the end, it’s revenue driven not necessarily assets driven, although they are highly correlated.

Michael Wong – Morningstar

Okay. Yes, I was just wondering if you were to be recruiting financial advisors from other firms that had – that being with them a relatively lower levels of assets with them if there is like breakeven point with the assets that they have to bring with them to make a decent return on your investment in that financial advisor if you recruit them over?

Ron Kruszewski

The answer to that is of course, yes revenues follow out such assets. I mean it’s round numbers. If someone’s doing $300,000 in production, if I have $40 million in assets, it gives you some sense of that, but we certainly look at assets as a basis to drive revenue.

Michael Wong – Morningstar

Okay.

Ron Kruszewski

I guess I’m not going to give you my breakeven for FA, if that’s what you are driving for.

Michael Wong – Morningstar

Okay. Last question. For the large gain in – instead of actual growth, that’s just the Fixed Income capital market commissions and principle this quarter? Is that seasonally high, it’s like 30 to 40, or the private quarter is a little more normal?

Ron Kruszewski

Fixed Income had a great quarter. We’ve seen, as I’ve said, we’ve seen tremendous building in that business. The market had been very conducive as I said in my early remarks. Some of the changes and some of the uncertainty, whether it be stimulus and what that means for inflation or legislative cram down has the consequences in that market has me somewhat concerned about the trajectory of growth in that market. But we’ll see it changes almost every day.

Michael Wong – Morningstar

Okay. Thank you for answering my questions.

Operator

(Operator instructions) Your next question comes from the line of Dave [ph] with FBR Capital Markets

Ron Kruszewski

Hi, Dave

Dave – FBR Capital Markets

Hi, Ron. How are you? Just quickly it sounds as if there is competitions leading up pretty aggressively even along the larger guys. Can you just give us an idea on the retention efforts on their part to sort of maintain – the current – they can have as well as recruit others? Is there a retention effort going on your part?

Ron Kruszewski

I mean you retain FAs by allowing them to be entrepreneurial and creating an environment that let’s them do what they think is in the best interest of their clients and providing them the arrow they need in their quiver if you will to service their clients. And from the management perspective try your – to keep your name out of the press and bad things and protect your reputation and run a good job. If you do all those things, retention generally is pretty high, and there is not uncertainty. So, our FAs are significant shareholders’ in the firm, that’s also highly retainable, we own somewhere in the mid 40s on a fully diluted basis of the firm. Our FAs are significant shareholders, and they have not only helped drive the growth and that’s how I advise [ph] that equity capital market, banking, Fixed Income, they also share in the rewards of that growth through share ownership. All of that has led to what I think is very high return of rates across the firm. We are doing anything above that, no? We are all partners and view ourself that way.

Dave – FBR Capital Markets

And that’s helpful. I was wondering whether the transitions having the large guys that’s really filtering down towards the mid cap players but –?

Ron Kruszewski

Other issues are different. And in those issues that their pacing are different and frankly it’s creating the environment that is conducive to our growth.

Dave – FBR Capital Markets

Okay. That’s fair. And just follow up lastly, you mentioned Bear and Lehman creating some flow business, is that what trended the benefit once those existing platforms get more established with their new owners. Does that benefit do you think kind of subside a little bit or do you think it’s pretty sticky for you guys?

Ron Kruszewski

I feel it’s pretty sticky. So, time will tell. But I’m not sure that when – I’m pretty confident in my 25 years at institutional business two and two never equals four. And that leakage could go elsewhere.

Dave – FBR Capital Markets

Yes.

Ron Kruszewski

And that’s just my belief. And so when you do a good job your clients tend to be pretty sticky.

Dave – FBR Capital Markets

Okay. Thanks for your color and congrats on a good quarter.

Ron Kruszewski

Thank you.

Operator

There are no further questions at this time.

Ron Kruszewski

Okay. I will conclude by again congratulating the partners in the firm. We are cautious about 2009, but we will continue to invest and hopefully continue to create shareholder value for all you that are right on call, and I appreciate all the questions and look forward to talking to you Q1 2009. Thank you.

Operator

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

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Source: Stifel Financial Corp. Q4 2008 Earnings Call Transcript
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