Penson Worldwide Q1 2009 Earnings Call Transcript

Apr.28.09 | About: Penson Worldwide, (PNSN)

Penson Worldwide, Inc. (OTC:PNSN) Q1 2009 Earnings Call April 28, 2009 10:00 AM ET

Executives

Phil Pendergraft - Chief Executive Officer and Co-Founder

Kevin W. McAleer - Chief Financial Officer

Analysts

Patrick O'Shaughnessy - Raymond James & Associates, Inc.

Michael Vinciquerra - BMO Capital Markets

David Scharf - JMP Securities

Ken Worthington - JP Morgan

Rich Repetto - Sandler O'Neill

Mark Lane - William Blair & Company, L.L.C

Operator

Good morning and welcome to the Penson Worldwide Conference Call. Before we begin, I would like to read some Safe Harbor statements.

Please note that this presentation contains some forward-looking statements about management's goals, plans and expectations which are subject to various risks and uncertainties outlined in the Risk Factors section of Penson Securities and Exchange Commission filings. Actual results could differ materially from those currently anticipated and we disclaim any obligations to update information disclosed in this call as a result of developments which occur afterwards.

At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. (Operator Instructions).

I would now like to turn the floor over to Mr. Philip Pendergraft, Chief Executive Officer. Mr. Pendergraft, you may begin.

Phil Pendergraft

Thank you and good morning and thank you for joining us today. I'm here with Kevin McAleer, our Chief Financial Officer. I will discuss what's happening with our businesses and our plans for the year and then take your questions.

Overall, the quarter came in as we'd previously announced. We are on $0.07 a share in the 6 to $0.09 a share range which we indicated earlier this month. The quarter also was indicated included $0.04 a share in one-time severance cost from staff reductions and from non-recurring costs related to outside consultants. Revenues were 66.8 million.

More importantly, we gained the momentum as the quarter progressed and that has continued in the April. The trends look very good for the second quarter and for achieving our financial goals for the year. One of the most important developments in the first quarter was our success in moving almost $900 million in customer segregated assets into to FDIC insured bank accounts with a group of high quality banks.

This provided us with an average balance of more than 500 million of these assets in bank accounts for the quarter. Contributing to a 17 basis point increase in spread on customer interest earning assets to a 202 basis points versus 85 in the fourth quarter. And actually, our spread was a 113 basis points in March.

It's important to note that this took place at a time when the average effective federal funds rate dropped 81 basis points quarter-over-quarter.

As of today, I'm pleased to report that we've already reached our mid-year goal of moving a total of 1 billion in the insured bank accounts.

At this point we believe, we could move substantially all of our 2 billion in segregated assets at our U.S. securities broker-dealer into these accounts by the end of the year.

Another meaningful achievement during the quarter was the increase in average interest earning customer balances, which rose 4% on a sequential basis. Most of this increase was in our segregated funds total.

Our in-house stock lending book began to pick up, while margin loans remained leveled. Growth is coming principally from three areas: Existing in customers beginning to reengage in the market; existing correspondents continuing to expand our customer base bringing in new assets; and new correspondents adding in their customer's assets.

As a result, net interest revenue from customer balances increased 12% on a sequential quarter basis and total net interest revenue increased 8%.

We had projected our net interest revenue would be at its low in the fourth quarter and it was. As we look at the current trend, we now believe that the decline in customer balances associated with the market fall-off in the fourth q is over.

We expect to resume balanced growth on a quarter-over-quarter basis. We also believe that the spread will continue to widen as we deploy more segregated assets in the higher yielding investments and as we begin to see a recovery in margin lending balances.

Now we've also seen a strong recovery in our stock lending business, both in-house and through conduits.

During the first quarter, conduit net interest revenue declined just 343,000, versus the $1.4 million drop we experienced between the third and fourth quarters. That's when the new short sale regulations took effect and the market declined, precipitating major short cover.

Over the course of the first quarter, conduit balances and spreads grew as the value of short inventory also grew. In fact, conduit spread hit an all time high in March. For the quarter, the spread is up more than 1.5 times from the third quarter. But these trends continuing, we would expect to see strong conduit revenues in the second quarter reflecting both increased spreads and better balances.

As for non-interest revenues, March was one of the top two months in the company's history. And that strong trend has continued into the second quarter. As we've said in our news release last night, it truly was a tale of two markets. In January and the first half of February, trading volumes were weak across the board, particularly in futures.

Volumes rebounded strongly in the second half of the quarter with particular strength in options. We cleared a high of 25 million option contracts in the U.S. in March alone, which for us was a record 8% market share, up from 5% in the fourth quarter. And so far in April, we've cleared over 28 million contracts in the U.S.

Looking at our operating companies, we saw the strongest performance in the quarter in our U.S. and Canadian securities clearing businesses. In the U.S., our execution services business has continued to grow with our trade aggregation product turning in a record quarter.

In Canada, our fixed income business had a record quarter, exceeding 2 million in revenues for the first time.

Both the U.S. and Canadian businesses were very strong in March and that trend has continued in to April. Where business was a little weaker; was in the UK and at Penson GHCO. Our UK business is continuing to struggle from profitability perspective. But the prospects for new business continue to look good.

Of note, we've recently joined the NASDAQ, OMX, Euro, MTF and will be expanding our execution services and offering sponsored access in both the UK and Europe.

With Penson GHCO, while we continue to add new clients, we are coping with lower futures volumes industry-wide and lower affected interest rates. GHCO segregated funds have continued to grow, but this quarter, that's not been enough to offset the impact of lower volumes and rates.

Nexa were down a little quarter-over-quarter continues to grow from a recurring revenue perspective. That's side of the business is driven by transaction volume and Nexa's transactions were up 7% on a sequential quarter basis.

Where we are being challenged is in the non-recurring revenue side, which is primarily made up of third-party development board. Not surprisingly, many of our larger customers have frozen their development budgets or delayed projects due to the current economic environment. We anticipate that this revenue segment will continue to be slow for the rest of the year.

Now on a sequential quarter basis, total correspondents were down by 2 to 300. Over the past few months, we've been carefully reviewing our correspondents. Raising fees were appropriate and attempting to lower any inappropriate risk profiles. This activity plus normal attrition has resulted in the termination of 19 relationships during the first quarter.

We added 17 new relationships during the quarter giving us a total of 300. And we will continue to review our client mix in order to ensure that we are being properly compensated for the type and risk of business that will process.

Not reflected in above numbers is a pipeline of 24 new correspondents that are expected to begin contributing to revenue in the second and third quarters of 2009.

Now, here's Kevin to discuss operating cost.

Kevin W. McAleer

Thanks, Phil. We believe that we're going to see as we go through the second quarter, this growing operating margin driven not only by the operating scale of the business, but by reduced costs, based on the staff reductions and certain other targeted cuts that we have made and will enhance the efficiency. The reduction in force we undertook in the first quarter should enable us to keep compensation expense inline with 2008 level.

As we look into the second quarter, based on the activity in March and what we have seen so far in the second quarter, we anticipate non-interest revenue will approach record levels for the quarter. We expect interest revenues to grow because of the growth of balances and the growth of spreads. We expect a strong quarter on a conduit side driven by the increased spreads and higher balances, and as we see extended operating margins because of better cost structure. Also taxes are likely to continue to be a little higher as a result of higher percentage of our pre-tax income is coming from domestic U.S. sources.

As we indicated previously, we have received commitments from our bank group for a new $70 million revolving credit facility that we expect to sign this week. This agreement has an accordion feature that permits us to expand the facility up to 100 million with the existing banks or additional banks that are acceptable to the group.

This documentation has been collateralized as we speak. Now back to Phil.

Phil Pendergraft

Thanks, Kevin. Now our plans for new products, services and markets are off to a good start. On March 31, we announced that we were launching a domestic clearing business in Australia. We're excited about this opportunity. This market reminds us a lot of the Canadian market. And in fact, Canada is the 12th largest securities market in the world, while Australia is next at 13.

We've already received four Letters of Intent from potential correspondents and assuming we'll receive all requisite regulatory approvals, we expect to launch this business in the third quarter. And we don't believe Australia will be material this year from a revenue income or expense level, but we do expect the business will begin to contribute to the bottom-line in 2010.

We've launched our retail FX product for use of our correspondents and the clients. We have our first data customer working on this product. We've seen some good initial interest, and are hopeful that the product will contribute to revenues in the second half of the year.

Also, we continue to move forward with regulatory filings and technology development related to Dublin, our Dark Pool alternative trading system or ATS. It is designed to cross our internal order flow in a completely non-conflicted environment to the benefit of our customers and their in -- of our correspondents and their in-customer. We expect to be able to launch this at the end of the second quarter or early in the third quarter.

As we come to the end of our prepared remarks, I'd like to summarize our perspective on the rest of the year. As you know, we believe that revenues will grow between 3 and 5% and our pre-tax income will be flat with last year's pro forma's income of approximately 45 million.

The key factors in achieving these numbers are as follows. Strong interest, strong non-interest revenue driven by growth from existing correspondents and from the continued addition of new correspondents. Improving interest income driven by a widening spread and increased interest earning balances. As we continue to deploy segregated assets more effectively and as we see an improvement in our overall balance mix.

By improving margins driven by strong cost controls, as we hold compensation expenses flat with 2008 and benefit from targeted improvements in other expense areas.

Now in order to get our revenue targets, we need to average about 80 million in total revenue per quarter for the rest of the year. Based upon our actual performance in March and our expected results of April, we don't need much growth from current levels the rest of the year in order to achieve these targets

Overall, we are very close to where we expected to be at this point in the year. And remain confident about the balance of the year. That ends my -- our formal, our prepared remarks. We appreciate your support, confidence and interest in the company.

And with that, we'll be pleased to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Patrick O'Shaughnessy.

Patrick O'Shaughnessy - Raymond James & Associates, Inc.

Hey, good morning, guys.

Phil Pendergraft

Patrick, good morning, sir.

Kevin McAleer

Good morning, Patrick.

Patrick O'Shaughnessy - Raymond James & Associates, Inc.

First question I had was around your pipeline of new correspondents, it's has been relatively leveled a last few quarters. I was kind of curious is this kind of level that we can expect it to be on or do you anticipate a ramp-up in that pipeline as to your marketing efforts kind of gear a little bit more throughout 2009?

Kevin McAleer

Patrick, I think somewhere in this range is probably pretty realistic for the rest of the year. We added 17 new correspondents in the first quarter. And so we are continuing to see good additions to the correspondent base. I think that will keep the pipeline from ballooning. I think we're going to be in this 25 to 35 range, I would expect.

Patrick O'Shaughnessy - Raymond James & Associates, Inc.

Okay. Fair enough. And then kind of on a similar point, your number of accounts that you've severed your relationships with this past quarter was a little bit higher than the past two. Are you pretty much through the end of your process of examining the risk or your correspondents and becoming comfortable with where they stand and kind of who you want to continue your relationships with in the long run?

Phil Pendergraft

Patrick, we are not complete with that review. And so it would not surprise me if we had a higher than normal attrition rate in the -- or high than normal termination rate in the second quarter as well.

Patrick O'Shaughnessy - Raymond James & Associates, Inc.

Okay. And then just one real quick modeling question. As far as your consulting fees, is that something that we should expect to continue for the duration of '09 or was this 750,000 charge that you took in the first quarter kind of going to be the end of it?

Phil Pendergraft

We might have a small piece in April, but we are essentially done.

Patrick O'Shaughnessy - Raymond James & Associates, Inc.

Very good. I will jump back in the queue. Thanks guys.

Phil Pendergraft

Thank you.

Kevin McAleer

Thank you.

Operator

Your next question comes from the line of Mike Vinciquerra with BMO Capital Markets. Please proceed.

Michael Vinciquerra - BMO Capital Markets

Good morning, gentlemen.

Kevin McAleer

Hi, good morning.

Phil Pendergraft

Good morning.

Michael Vinciquerra - BMO Capital Markets

Just want to follow-up. Thanks for the additional color, both Phil and Kevin on the outlook. I was just curious when I look at the numbers, given you had 45 million in pre-tax and then applying kind of more on recent tax rate, you need to do earnings of -- that would imply earnings per share in the 30 to $0.35 range per quarter for the rest of the year, is that -- am I looking at that properly and is that a realistic expectation for investors?

Kevin McAleer

So, Mike this is not a business that is typically consistent flat quarter-to-quarter.

Michael Vinciquerra - BMO Capital Markets

Right.

Kevin McAleer

So I certainly wouldn't predict that we're going to do 30 or $0.35 every quarter for the rest of the year. On the other hand, I do think that, I think the second quarter will be sharply better than the second quarter. And I would expect growth -- I would expect to grow each quarter the rest of the year.

Michael Vinciquerra - BMO Capital Markets

Okay. So basically when we look at March and April, those have been stronger across the board, if I guess just the online brokerage space, I guess I, recall which is a good chunk of your customers, at least. So you, you feel it's realistic to assume may be activity levels to come down little bit from April, but as you add additional correspondents and your correspondents add customers, that will actually level out, you could actually see commissions being at or above the current level?

Phil Pendergraft

Yeah. I think that's exactly the way we look at it. We're not, we realize that March and April from an industry perspective were good months and they certainly have been very good for us. We would expect, I mean what we certainly would be pleased to see activity levels at this rate for the rest of the year. We don't really expect that, but we do expect that we will be somewhere close to these levels because any declines in the market will be offset by additional business coming in. Does that make sense?

Michael Vinciquerra - BMO Capital Markets

Yeah it does, it does. Thank you. Okay. And just two other things, is it possible Kevin to breakdown, your net interest margin improved a little bit better than you'd actually hoped in the period. I'm guessing that it was related to the stock borrow activity, can you breakdown the improvement between the movement to the bank accounts as far as you improvement in them versus the additional stock borrow which gave you a little bit of boost as well? I guess it was up 17 basis points.

Kevin McAleer

We've really never broken down the elements and components, Mike.

Michael Vinciquerra - BMO Capital Markets

Okay, is it safe to say that you're only looking for 10 basis points from a $1 billion moving and clearly haven't even gotten a full quarter effect of that and you were up 17, so is it just that the bank accounts are producing better yields for you or is it those are where they were supposed to be and you got the bonuses of the stronger stock borrow?

Phil Pendergraft

Yeah, we expected the average for the quarter, 500 million which we did on that, on our target and we did see a little bit better improvement in our ability to negotiate with the banks than they originally thought. So 500 million was our target, we achieved that on an average. Not a 1 billion.

Michael Vinciquerra - BMO Capital Markets

Got it. Okay, very good, thank you guys.

Phil Pendergraft

Thank you.

Operator

Your next question comes in the line of David Scharf with JMP Securities. Please proceed.

David Scharf - JMP Securities

Thank you, good morning.

Phil Pendergraft

Good morning.

David Scharf - JMP Securities

Just a couple of hits. Little color on what looks like some pruning of some correspondent relationships, the 19 in the quarter and the Q2 outlook which sounds like it may be more of the same. In aggregate, is it fair to characterize these as sort of breakeven clients?

Phil Pendergraft

Yeah. I think it's very fair to say that the customers we're pruning are not meaningful, in terms of revenue or contribution to our earnings. What we are candidly, after our experience with Evergreen last fall, we have taken a really hard look at our customer base and in certain circumstances, we determine that the risk profile of clients are not -- it doesn't fit with the compensation or the income associated with that client. And so we've made some difficult decisions that I think in the long run will be the best for the business.

David Scharf - JMP Securities

Good and I believe you said in your remarks relating to that process of reviewing all of your relationships, that in some cases you were actually reviewing price increases. Is there any pricing leverage we're seeing, even if it's just a modest amount?

Phil Pendergraft

The places where we are increasing pricing is around activities that we consider to be where we're think we're being under-compensated associated with the risk of the activity. And so, in some cases, we certainly are pushing through increased pricing.

Now I don't think that increased pricing is going to be material, but it does sort of fit with the concept that there has to be associated reward for every risk that you take and if we're not properly balancing those, then someone's got to change, wither we've got to reduce the risk or we have to get properly compensated for it.

David Scharf - JMP Securities

Good, good. Moving on to the net interest margin. Now, did I here you say for the month of March, the spread was a 113 basis points?

Phil Pendergraft

Yes, that's correct.

David Scharf - JMP Securities

Okay. So, that's a realistic, sort of jumping off point, you would say for modeling the balance of the year assuming we stated a just 1 billion of those assets having them move to matured accounts?

Phil Pendergraft

Yeah, I think that's a pretty good place to jump off for at least the second quarter. Obviously, the overall spread will vary based upon asset mix as we go. And I think that mix is likely to improve in the second half of the year, as we hopefully see, begin to see some improvement in margin balances. But feel pretty confident about it. It's been a good jumping off point for the second quarter.

David Scharf - JMP Securities

Okay. Just a couple of more quick ones. First, I believe last quarter, you commented that the Lightspeed was now your largest customer. Do you have the information of when the contract with them expires?

Phil Pendergraft

I think Lightspeed's contract has two more years, maybe. I actually don't know. I don't want to guess. I'd certainly be happy to get that for you offline.

David Scharf - JMP Securities

Okay. Perfect.

Phil Pendergraft

But I think, I'm not sure that they occupy that spot for the first quarter.

David Scharf - JMP Securities

Well, okay.

Phil Pendergraft

But they're still one of the top three or four correspondences in our deck.

David Scharf - JMP Securities

Are you comfortable mentioning who made up in the top customer in Q1?

Phil Pendergraft

I didn't think of when we gained that position.

David Scharf - JMP Securities

Got you. Okay and then a last question, more broadly. We've seen some, how some recent regulatory changes impacted some of your profit metrics, particularly on the conduit side with the cost of borrow effectively going up and it seems like that's probably more of a structural change now?

Is there any other regulatory issue out there, either roomer or chatter coming out of Washington that we should pay attention to that might impact your business in similar fashions or the coast kind of clear right now?

Unidentified Company Speaker

Well, there certainly is a lot of talk about new short sale regulations. The SEC has a couple of things pending, related to potential of the increase uptick real. But, as well as some kind of circuit breakers. We don't currently think that those will be meaningful from a financial perspective. But obviously, it's difficult to know for sure until you actually see the intended and unintended consequences of those kind of things.

David Scharf - JMP Securities

Sure. Okay. Thanks a lot. I'll get back in queue.

Phil Pendergraft

Yes, sir.

Operator

Your next question comes from the line of Ken Worthington with JP Morgan. Please proceed.

Ken Worthington - JP Morgan

Hi, good morning.

Kevin McAleer

Ken, good morning.

Ken Worthington - JP Morgan

So I apologize if you mentioned this. But if the average balances of the segregated funds that you moved to the banks goes from a 1 billion to 2 billion, is it fair to say you get an extra 10 to 15 basis points of spread on that?

Kevin McAleer

Ken, I think that may be just a little bit high, because what we are finding that, it is harder to let's see, how do I say this. As we continue to expand the pool of assets that we're moving, the average rate we're receiving is falling because the -- we're -- at first, we have to cherry pick our rates, let's put it that way. And now as we continue to move more and more money, we're accepting lower rates because rates are moderating. That makes sense?

Ken Worthington - JP Morgan

Yeah. And what is -- can you give us a little more of a description on are you putting all these segregated funds in one bank, in a small group of banks. I think you mentioned in your release that they are FDIC insured, does that mean you have like an individual bank account for each customer deposit, because I think FDIC insurance, once you get to a very large deposits, I thought it was only for zero interest, zero interest accounts. So, how does the FDIC insurance work for you?

Kevin McAleer

Sure, so when you --

Ken Worthington - JP Morgan

And then lastly, what kind of rates are you getting? Are you getting obviously higher than demand deposit rates? Are you getting some sort of CD rates on your funds?

Kevin McAleer

So, the answer with the last question is it it's a range, in some cases we're receiving CD like rates. We are -- we have really not done much in the way of CDs, because we don't want to term up any of our deposits. But, we have meaningfully improved our yield overhead funds.

On the insurance question, we are fiduciary. And so as long as we have the, as long as we're maintaining the proper records of the underlying beneficial owner, we're able to achieve flow through insurance. And so we're not opening a 100,000, $250,000 accounts. I think we're dealing with at last count probably 20 banks, where we have sizable deposits that have been where we do the sub-accounting for the flow through insurance.

Ken Worthington - JP Morgan

Okay. And then -- that's it from me. Thank you very much.

Phil Pendergraft

Thank you, sir.

Operator

Your next question comes from a line of Rich Repetto with Sandler O'Neill. Please proceed.

Rich Repetto - Sandler O'Neill

Good morning, Phil; good morning Kevin.

Phil Pendergraft

Rich, good to talk to you sir.

Kevin McAleer

Good morning, Rich.

Rich Repetto - Sandler O'Neill

This was sort of asked a little bit prior, both in regard to retail activity, but when you categorize the quarter as being the tail of two quarters, I guess the question is you had a down market in January and February, very close to 10%, around 10%. And then March and April are both up 8 to 9% in each month. So I guess the question is going forward, you guys -- who knows whether we have another more extreme months, but are we factoring sort of a flat type, can you still get to these guidance when we're in with a lot less movement, say in the overall market, because we had extremely down, some could say extremely up, so far.

Kevin McAleer

Sure, Rich. We actually, let's see how you say this. If we continue to see same level of activity from our existing correspondents, as we've seen in March and April, we would easily make the numbers that we have, make our targets for the year.

We actually don't think that's going to happen. We think that those activity levels are going to decline somewhat. But we also expect to continue to grow our correspondent base and continue to grow the base of the business to make up for some of what we think will likely be a little bit of the retrenchment from our existing business. But, we also think we're going to benefit. So that's on the non-interest side. We sort of -- think, we're going to -- we expect to see a little bit of a pull back.

But we expect it to add, continue to add in additional business.

On the non-interest side, now chuck that (ph), on the interest side, I think we're going to see a growing interest income on a quarter-over-quarter basis, because we believe that balances have begun to grow again. We saw growth this quarter. We think we're going to see at in the second quarter and we're going to see a wider spread. And so two things we think will drive a stronger interest income regardless of market activity.

So you put those three factors together and we feel pretty good about hitting those goals for this year.

Rich Repetto - Sandler O'Neill

Okay. Maybe another question and ask you in a reverse way. What could toward throw off? What could -- what the plan here, that's the question. What in the market conditions would you need to not make the numbers?

Phil Pendergraft

Well, so if went back to January's activity levels, we would have a hard time hitting those numbers. Although, even if we had January's activities levels on non-interest income, interest income is going to be meaningfully higher in the going forward quarters for the reasons I've already stated. And we continue to grow our customer base. So I think it would be, even if on a per customer basis we went back to January's levels, we'd be in a better place because we've got a broader deck.

And I guess the other point would be that we do have our foreign exchange product launching and Dublin launching in the second half of the year. And both of those are new revenue sources that we think will help us get to our targets.

So, I guess, I sort of rambled in answering your question. Fundamentally, there are clearly sets of market, sets of market conditions where we'd have a hard time hitting these numbers. Specifically, if we go back to where we were in the first half of in -- if we go back to where we were in January, we will struggle with that. Although, I would -- even if that happened in May, we'd do better, simply because we have a broader base of customers and because of the improvement we've made in the interest income side, we'd be in better place than we were in January.

So we're continuing to build the base. And best case, we have a great year in the market and we've grown the customer base and we'll make those numbers easily. Worse case, we go back to January and we're going to need to continue to grow our customer base aggressively to make them.

I think, the most likely cases is somewhere in the middle there. And so we're pretty comfortable with those targets.

Rich Repetto - Sandler O'Neill

And then, going to two last quick questions. Is just to be direct, what's the incremental rate that you do get on these -- when you transfer the FDIC to the deposits? That's one, and the other any update on thinkorswim, as they get acquired by AMERITRADE. I know you can maintain, I think for the -- recent next year, I think all the businesses, but I am just try to clarify that.

Kevin McAleer

Okay, so we think we're getting, incrementally we're getting at least 50 basis points on, when we move funds out of our Fed funds investments into the bank deposits.

The and that's what we've gotten. Now, as we look at going forward, we may not get that much, because rates are moderating and because we're, I mean we have sort of chosen the high yielding options where we're comfortable with the credit and now we're sort of expanding into little bit lower yielding options, still better than Fed funds. So you -- so that was one part of your question.

I'd think this is the second part. We've been told that the existing thinkorswim business will be here through the end of our contract in 2010 and we're working with the TD AMERITRADE folks and the thinkorswim folks to -- on additional product that we hope to launch with them and this year that I think actually could be a meaningful revenue contributor as we look into 2010.

Rich Repetto - Sandler O'Neill

Okay. Okay, thanks guys. Thanks for the report Phil.

Operator

Your next question comes in the line of Catherine McKay (ph) with William Blair. Please proceed.

Mark Lane - William Blair & Company, L.L.C

Hi it's Mark Lane from William Blair.

Kevin McAleer

Good morning.

Phil Pendergraft

Good morning.

Mark Lane - William Blair & Company, L.L.C

Hey, just a few follow-ups. So on the client reduction efforts and the risk management efforts, does that include the futures business and of those, of those 19 terminated accounts, how many are within the GHCO?

Phil Pendergraft

GHCO we were down 8 for the quarter.

Mark Lane - William Blair & Company, L.L.C

Okay.

Phil Pendergraft

And so certainly, we're looking at risk profiles of our clients across our customer base, including all geographies and asset classes.

Mark Lane - William Blair & Company, L.L.C

Okay. And then regarding new business conditions and the competitive environment, can you give a little bit more insight on what's happened so far this year versus last year and do you still believe that you're in a favorable competitive position or that that might even get better as we go through the year?

Phil Pendergraft

Mark, it's been good four months. And I would certainly, I'd be happy for it to get better, but I'll be very satisfied, if we just kept the current environment for rest of the year. There is -- we are seeing a number of very significant opportunities and just generally speaking, we're in as many as conservations as we've ever been in.

It's just, there is I think because of what happened in the last half of last year, there was -- people were really, potential correspondents were really focused on other things. And so there is going to be some pinup demand that really over the last three or four months has resulted in a -- our sales guys are extraordinarily busy.

Mark Lane - William Blair & Company, L.L.C

Is it dialogue or is there actually real change being made?

Phil Pendergraft

Obviously, we don't get everything, not every conversation turns into real change to real change. But, we're continuing to keep the pipeline full. And I think that the level of conversations we're having make me comfortable that we'll keep it in this level or higher as we look at the rest of the year.

Mark Lane - William Blair & Company, L.L.C

Okay. And just one follow-up on net interest margin. So if I take an incremental 50 basis point of off a $500 million average balance for the first quarter, so is it fair to say that the yield enhancement for the first quarter, if you wouldn't have moved into the FDIC insured deposits was roughly about 10 basis point benefit the first quarter, is that right (ph)?

Phil Pendergraft

Mark, I don't have that number at my finger tips. Let me see if I come up with it.

Mark Lane - William Blair & Company, L.L.C

Okay.

Phil Pendergraft

And I would give it you before we finish now or later.

Mark Lane - William Blair & Company, L.L.C

Okay. Thank you.

Operator

Your next question comes from the line of David Scharf with JMP Securities. Please proceed.

David Scharf - JMP Securities

Hi, just had a follow-up on the expense side. First, as far as compensations being held flat with 2008 level, that's a figure that includes the charges in Q1?

Phil Pendergraft

Yes, it does.

David Scharf - JMP Securities

Okay. And as we think about GHCO and the outlook for futures volumes this year, obviously we're still close to a zero rate policy, so it's unlikely we see a lot of pick up in interest rate related products. Are there any further opportunities to cut back and rationalize cost at GHCO, is that sort of built into the forecast?

Kevin McAleer

Actually, GHCO is extraordinarily busy from a client acquisition perspective. We're not seeing, certainly we're not seeing the kind of volumes that we saw last year. But they are been very successful at growing their base of business.

And so I would say that we certainly don't expect to be -- that's one of the companies where we probably won't see cost reductions. But we may the actual personnel growth this year at GHCO, just because the level of activity there.

David Scharf - JMP Securities

Okay. That's helpful.

Phil Pendergraft

Yes sir.

Operator

Your next question comes from the line of Michael Vinciquerra, BMO Capital Markets. Please proceed.

Michael Vinciquerra - BMO Capital Markets

Just two other things, Nexa itself, you mentioned the development revenues likely to be down for the rest of the year. Is it typical that your ongoing or your recurring revenue at Nexa is higher margin than in development revenue? Is that fair way a look at it?

Kevin McAleer

It's higher incremental margin.

Michael Vinciquerra - BMO Capital Markets

I see. So as the accounts grow using Nexa, your margins grow along with it?

Kevin McAleer

That's correct. It's essentially a high fixed infrastructure business. And the more with a lot of capacity and so the more volume we drive through it, the better the margins.

Michael Vinciquerra - BMO Capital Markets

Is your typical margin on a development revenue relatively low, as compared to your transaction business?

Kevin McAleer

Yes.

Michael Vinciquerra - BMO Capital Markets

Okay. And then secondly, you mentioned Dublin is going to go live here in next couple of quarters. Should we compare that to something like a millennium where Nifex essentially has a lot of volume coming through it? It's just -- I'm just trying to match up. I mean are you going to have resonant liquidity providers within the system so that your client flow has something to match up against as it passes out to the market price?

Phil Pendergraft

Yes.

Michael Vinciquerra - BMO Capital Markets

So a similar business model for that is what we expect?

Phil Pendergraft

I think so.

Michael Vinciquerra - BMO Capital Markets

Okay. That's it for me. Thank you.

Phil Pendergraft

Okay. You're welcome. Answer for Dave's question, I think 10 basis points is a good estimate.

Operator

And I will turn call over back to Mr. Phil Pendergraft for closing remarks.

Phil Pendergraft

Again, we appreciate your interest in Penson and your participation in the call this morning. Just a couple of notes. As we look forward on our calendar, May 18th we'll be at the JMP Investor Conference in the San Francisco. May 21st is our annual meeting in Dallas. June 4th and 5th we'll be at the Sandler O'Neil Conference in New York City.

And we look forward to chatting with you again when we report second quarter results in July. On behalf of the Penson team around the world, we'd like to wish you all a very good day. We appreciate your interest in our company.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!