KBW, Inc. Q4 2009 Earnings Call Transcript

Feb.18.10 | About: KBW, Inc. (KBW)

KBW, Inc. (NYSE:KBW)

Q4 2009 Earnings Call Transcript

February 18, 2010 9:00 am ET

Executives

Alan Oshiki – IR

John Duffy – Chairman and CEO

Robert Giambrone – CFO

Analysts

Patrick Davitt – Bank of America/Merrill Lynch

Steve Stelmach – FBR Capital Markets

Michael Hecht – JMP Securities

Hugh Miller – Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2009 KBW Earnings Conference Call. My name is Michael and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer sessions towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Alan Oshiki, KBW Investor Relations. You may proceed, sir.

Alan Oshiki

Thank you, Michael, and good morning, everyone. This is Alan Oshiki, KBW's Investor Relations contact. And joining us on the call this morning are John Duffy, Chairman and Chief Executive Officer of KBW; and Robert Giambrone, the company's Chief Financial Officer.

Before we start, I want to briefly remind everyone that some of the statements made during this conference call constitute forward-looking statements within the meaning of the Federal Securities Laws, including such statements as those regarding expectations of future results, general financial performance, future business prospects, and strategies.

These statements are based on management's current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned not to place undue reliance on these statements.

Additional information about factors that could cause our results to differ materially from those in the forward-looking statements can be found in the company's filings with the U.S. Securities and Exchange Commission.

At this time, I would like to turn the call over to Mr. John Duffy. John?

John Duffy

Thank you, Alan. Good morning, everyone and thanks for joining the call and your interest in our story. We released our fourth quarter and full year 2009 results this morning. I'll spend a few minutes discussing the full year and the quarterly numbers and the trends, and then talk a little bit about our outlook for 2010. After that, Bob Giambrone, our Chief Financial Officer, will go into more detail on the numbers and we will both be available to answer questions when Bob does conclude this comments.

Our 2009 revenues were $387 million, up 60% from 2008's $242 million. We were generally pleased with our rebound from the previous year's dismal results despite a fairly challenging environment. Our net income of $23.6 million contrasted with the loss of $62 million in 2008.

Our fourth quarter revenues totaled $87.1 million and our earnings totaled $3.8 million. The fourth quarter's revenues were 29% below the record level of Q3, principally due to a 42% drop in investment banking revenues. While all the estimates that I've seen for total revenues and investment banking revenues were substantially higher than we achieved, I believe the shortfall is a function of a slowdown and softness in the markets rather than missed opportunities on our part.

It is obvious to us and most of the market that the U.S. banking industry continues to have very substantial capital needs to restore balance sheets and eventually, repay TARP funds. The raising of that equity maybe lumpy by quarter, but we continue to believe that our equity capital markets business will be quite busy over this year and next. At some point, we also believe the credit markets will open to more of the banking industry as balance sheets are repaired. We expect to be active in that business also.

The activity in our capital markets business will continue to offset the extremely low level of traditional M&A activity in the banking sector. We expect M&A activity to be modest at best this year as acquirers continue to focus on FDIC-assisted transactions.

One of our businesses that picked up substantially during 2009 was our loan portfolio sales group, which advised the FDIC on several assignments. Eventually, we expect more of the banking industry to dispose off troubled assets as the market and pricing for these assets improves and as the industry rebuilds its capital and reserve ratios. This opportunity plus the progress at our fixed income group demonstrated in 2009 as the credit markets improve, bodes well for us to continue to grow revenues in these businesses.

On the expense side, our cost of compensation and benefits totaled 58.4% of revenues for the year, if you exclude the $10 million of expense associated with the amortization over our IPO stock awards. Our compensation expense in 2009 included approximately $7.5 million of expense associated with severance costs earlier in the year and certain employee expenses incurred in the fourth quarter relative to our expansion in Asia.

As we strive to lower this key ratio, we expect to build out over our Asia franchise to negatively impact this ratio in 2010. However, we are confident that it will not push that ratio above 60%, which we have communicated to be the upper end of our target range.

Finally, we are hopeful that we will be able to announce shortly that we have received the necessary licenses to operate in Hong Kong. We are very excited about the opportunities that exist for our franchise in Asia.

At this point, I would like to turn it over to KBW's CFO, Bob Giambrone, who will go into our results in more detail. Bob?

Robert Giambrone

Thank you, John and good morning to everyone. As usual, I'll be discussing our operating results. Our operating results are based on our GAAP results, adjusted for one-time restricted stock awards issued in connection with the Initial Public Offering of our common stock, which was completed in November 2006.

2009 fourth quarter and full year's significant items include; for the full year 2009, we reported total revenues of $387 million and net income of $29.1 million or $0.81 per diluted share. Capital markets revenue for 2009 was a record $130 million. We were involved in 78 equity financial institutions' capital markets transactions in 2009, more than any other firm and a record for KBW. Principal transactions revenue was $63.6 million, reflecting record fixed income revenues of $47.6 million. Total expenses for 2009 were unchanged from 2008's total expenses.

For fourth quarter 2009, we are reporting total revenues of $87 million and net income of $5.3 million or $0.15 per diluted share. Fourth quarter capital markets revenue was $24.6 million, which was off the record capital markets revenue for the third quarter of $51.7 million, but still much higher than the fourth quarter of 2008's total of $16 million.

Both equity commissions and fixed income revenues were down from third quarter totals by $3 million and $7.1 million, respectively. Fourth quarter compensation and benefits expense was down from the third quarter by $22.5 million on lower revenues and a full year true-up.

Now, I'd like to go into some more detail on specific items. Investment banking revenues for the fourth quarter were $33.5 million, an increase of $6.2 million from the fourth quarter of 2008. Capital markets revenue of $24.6 million increased $8.6 million, while M&A fees decreased $2.4 million to $8.9 million in the fourth quarter 2009 compared to fourth quarter of 2008.

Investment banking revenues for 2009 were $160.4 million compared to $163.7 million for 2008, a decrease of $3.2 million. Capital markets revenue for '09 was $130.1 million compared to $87.4 million in 2008, an increase of $42.8 million or 49%. M&A and advisory revenue was $30.3 million for 2009 compared to $76.3 million for 2008, a decrease of $46 million or 60%, reflecting the absence of strategic banking industry mergers and acquisitions.

Equity commissions for fourth quarter 2009 decreased 8.3% to $33.5 million, including $10 million by European equity securities. That compared to third quarter commissions revenue of $36.6 million, which included $11.1 million by European equities. Commissions on U.S. equity securities decreased 7.8% from the third quarter due to decreased volatility and a drop-off in customer trading, following the recovery of financial issues in the first three quarters of 2009.

Equity commissions for 2009 decreased 26.3% to $142 million, which included $38.5 million for equity – for European equities compared to $192.8 million and $63.5 million, respectively for 2008. Equity commissions in 2008 reflected unprecedented trading volumes around a volatility relating to uncertainty associated with financial stocks including short-selling banks in the U.S. and in Europe. These factors contributed to record commissions revenue for 2008. In addition, foreign currency translation of European equity commissions was approximately a $7 million negative factor in translating revenues for 2009.

Principal transactions revenue of $12.2 million for the fourth quarter including fixed income revenues of $8.9 million compared to third quarter principal transactions revenue of $23.7 million, including fixed income revenue of $16.2 million. Principal transactions revenue for the full year 2009 was $63.6 million compared to a loss for 2008 of $143 million. Fixed income revenue for 2009 was $47.6 million compared to 2008 fixed income results of $8.8 million, which included unrealized losses of $14.4 million in '08.

Interest and dividends decreased 57% to $14.2 million for the full year 2009. The reduced level of revenue from interest and dividends reflect significantly lower levels of interest-bearing assets, as well as lower interest rates in 2009. Other revenue increased $4.8 million to $7.7 million for full year 2009 compared to 2008, primarily due to a $5 million increase in fees from loan portfolio sales services in 2009.

Compensation and benefits expense increased 5.6% for the fourth quarter and 5.3% for the full year 2009 compared to the fourth quarter and full year 2008. For the full year, non-compensation expenses decreased $9.8 million or 8.3%, due primarily to lower brokerage and clearance and interest expenses.

That concludes my remarks. And John, I'm going to turn it back to you for Q&A.

John Duffy

Thanks very much, Bob. Michael, if you would queue up the Q&A?

Question-and-Answer Session

Operator

(Operator Instructions). Please standby for your first question. Your first question comes from the line of Patrick Davitt of Bank of America/Merrill Lynch. You may proceed.

Patrick Davitt – Bank of America/Merrill Lynch

Good morning, guys.

John Duffy

Good morning, Patrick.

Robert Giambrone

Hey, Patrick.

Patrick Davitt – Bank of America/Merrill Lynch

Could you kind of speak to the client activity trends, both in equities and fixed income over the quarter and how those are kind of tracking through 1Q?

John Duffy

Yes, I think we saw a distinct slowdown on the equity side right around the time in the end of the third quarter and I think it accelerated or continued to get more difficult and a lower level of activity around the end of October. I think the – part of that was just the clear volume of transactions that had taken place between April and October. My sense is the buy side, which was probably severely underweighted banks and financials earlier in the year had moved the needle a lot and frankly was – we experienced just digesting.

And clearly, there is a lot of need for more capital. We are pretty much through earnings season now. I wouldn't say there are a lot of deals filed that we expect to come here in the next couple of weeks, we are working on a couple. But clearly, the pipeline is still very full. I think transactions are going to sizeable. I don't expect to see a lot of small deals. To be frank, I think it's difficult for the smaller guys to access the public markets. So I think it's going to be more people that are probably doing deals that are probably going to be the more active issuers in the public markets.

Patrick Davitt – Bank of America/Merrill Lynch

Right. And what about on the trading side?

John Duffy

In the trading side, I would say activity has picked up in the first six weeks of the year versus kind of where we were probably in the last six weeks of last year. So that's kind of some normal seasonality there. So I don't think there is anything unusual or disturbing or concerning to us six weeks into the year on the institutional sales and trading side.

Patrick Davitt – Bank of America/Merrill Lynch

Okay. And then in investment advisory, I know it's small, but you had your best quarter ever. Was there a significant performance fee in there or some change in AUM mix because of that?

Robert Giambrone

The AUM hasn't changed a whole lot unfortunately. We would love to grow that, but the manager – the – had a very nice performance this year and we don't recognize the performance fees obviously until the very end of the year. So that typically is very lumpy. So the performance of the fund was good and that's what –

Patrick Davitt – Bank of America/Merrill Lynch

Drove it? Yes, okay. And then just finally, on your quarterly and annual, you gave kind of the breakout of PT into those four buckets. I know you gave the FIC number. Do you have the other three buckets?

John Duffy

Bob, do you have that? I don't have specific, we've gotten that in the past.

Robert Giambrone

Yes. Did you say the fourth quarter, Patrick?

Patrick Davitt – Bank of America/Merrill Lynch

Yes.

Robert Giambrone

Yes. Well, as far as the rest of it, essentially the equity number is about – I mean, the rest of that line item includes all firms' investments.

Patrick Davitt – Bank of America/Merrill Lynch

Right.

Robert Giambrone

As well as any trading we do for own account, including market making. So market making for the fourth quarter '09 was a loss of $1.6 million.

Patrick Davitt – Bank of America/Merrill Lynch

Okay. And then the – then that would be the prop?

Robert Giambrone

The prop from investments, which is a whole number of things –

John Duffy

We've got some limited partnership interest and we've got some gains in that in the fourth quarter. We didn’t get the year-end valuations yet on many of those partnerships. So there maybe – most of those funds did better in '09 than in '08. So it might pick up a little bit more in the first quarter based on when we get year-end valuations.

Patrick Davitt – Bank of America/Merrill Lynch

Okay. All right. Thanks a lot.

John Duffy

Okay. Thank you, Patrick.

Operator

Your next question comes from the line of Steve Stelmach of FBR Capital Markets. You may proceed.

Steve Stelmach – FBR Capital Markets

Hi, good morning, guys.

John Duffy

Good morning.

Robert Giambrone

Good morning.

Steve Stelmach – FBR Capital Markets

Just on the backlog, putting a little bit finer point on it, can you compare the backlog today as it stands versus maybe what it was in sort of second quarter '09? Third quarter, you had obviously a very strong banking quarter. How does it compare today versus prior to the third quarter?

John Duffy

Good question. I'm getting a little feedback, sorry. I would – yes, let me hold on a second here. We are going to try to clear that up.

Steve Stelmach – FBR Capital Markets

Okay.

John Duffy

Just bear with us a second. I don't know what's causing that. Let me try again. I would say probably not quite as many issuers wind up to go to the market, because almost everybody was lined up at the middle or end of the second quarter last year because the markets have been closed for a year, but there are a lot of, I would say, sizeable transactions that we are discussing with clients that probably put a lower profitability weighting on them because it's early in discussions.

But we look at this more at how far into the capital raise for the industry, are we – and do we feel like we are maintaining our market share or gaining and I think on those two items, we feel there is still an awful lot of capital to be raised and we don't feel like we missed many of our assignments.

There have clearly been some assignments that we've worked on where we haven't been able to raise the capital for the clients, because, again, the market is focused on what I would term offensive capital, they are not looking to totally repair a balance sheet. So there are a lot of companies out there that would like to raise capital that haven't been able to and I don't know if that will change. If it did, then we would have even more transactions than you probably saw in the second and third quarter, but I don't – we are not betting on that being the case. We still got as much in the pipeline as we probably had back in the middle of last year.

Steve Stelmach – FBR Capital Markets

Okay, that's helpful. And then in terms of just total employees, do you feel you are about adequately staffed or is there room for that number to move around?

John Duffy

I think the two areas where we might – where we expect to add incrementally, we are not completely full on Hong Kong. I think we have 18 people there now and I would expect we will wind up something closer to 25 by the end of 2010. And we are on the verge of announcing a new head of investment banking for us in the REIT silo and we expect we will – we will add some people there during the course of the year, but all told, tote [ph] two groups together would be a net addition of no more than probably 15 people.

Steve Stelmach – FBR Capital Markets

Okay. And then how many employees currently?

John Duffy

I think we are at 518, Bob, at the end of the year – was at the end of January? And I think that compares with like 529 or 539 a year ago. So we are still down a little bit. We laid off 39 people at the end of March, we refilled some of those seats, but we are still down on a net basis.

Robert Giambrone

(inaudible) joined us in Asia since the end of the year. We are right back to right around 529 [ph].

John Duffy

A good point, yes. I probably wasn't looking at Asia when I was looking at those numbers. Thank you, Bob.

Steve Stelmach – FBR Capital Markets

Okay. And then just last question on Asia, actually. You guys said that you expect to be fully operational sometime in the first quarter. What does that mean in terms of staff, in terms of product offerings?

John Duffy

It's primarily research, sales and trading and equity capital markets and then the necessary support systems for those folks.

Steve Stelmach – FBR Capital Markets

Okay. And then is that all locally recruited or is there somebody from KBW actually going to head up that effort?

John Duffy

The vast majority of it is locally recruited. We are sending one person over for a while beginning March 1st.

Steve Stelmach – FBR Capital Markets

All right, John. Thanks a lot.

John Duffy

Okay.

Operator

Your next question comes from the line of Michael Hecht of JMP Securities. You may proceed.

Michael Hecht – JMP Securities

Hey guys, good morning. How are you doing?

John Duffy

Good, Michael.

Michael Hecht – JMP Securities

Maybe just to come back on some thoughts on the M&A cycle for financials and banks, specifically. I mean, it sounds like you expect kind of a slow progression in 2010 and maybe it's more of a 2011 story. But I mean, how should we think about splitting up? It seems like with large financial institutions – large banks in particular, there may be an opportunity for a lot of divestitures and maybe even scaling back and maybe that's more of a near-term opportunity versus consolidation amongst smaller firms.

John Duffy

I think that there may be an opportunity there, there may be an opportunity with some foreign institutions divesting U.S. operations. But – yes, I think until the industry feels like they have got some confidence in asset pricing, some stability in asset pricing and until we are kind of further along in working through the disposition of failed institutions, I wouldn't expect traditional M&A to pick up a whole lot. And now, it doesn't have to do a whole lot to be better than '09. We had one traditional M&A fee this year in excess of $2 million.

So – I mean, it's almost like the traditional M&A market is non-existent. So I'm pretty pleased with the revenues we generated from investment banking, considering there really is no M&A market or has – there was none in '09. So I think there was less than $2 billion of transactions announced last year versus years where we've had $60 million to $100 million. So any kind of pickup in activity would be welcome and would move the needle for us. But I think a lot of the activity in that sector is going to continue to be FDIC related and where our opportunity there is to work with the buyer and in many cases, they are going to need to do a capital raise.

Michael Hecht – JMP Securities

Got you, that's helpful. And then just on the capital raising side, I mean, are you more optimistic or do you have a – any sense to backlog U.S. versus Europe and expectations there?

John Duffy

I think the level that we saw generally in the last three quarters is going to continue. I think it's going to be just like a three-month picture, it's going to be lumpy, because the deals are sizeable. I mean, we had a couple of issues last year where we had our best or biggest capital market fees ever because people were out raising $400 million in a clip and if you are a co-lead on one of those deals, the fees are very substantial, kind of relevant to our revenue line.

Michael Hecht – JMP Securities

Right, okay. And then on the expense side, non-comp expense of $29.4 million was a bit higher than it's been all year. I mean, any one-timers in there or is that a good run rate given – or maybe even goes a little higher given the geographic build-out you guys talked about in Asia?

John Duffy

Yes, I would say the fourth quarter was higher than the previous three when you carve out clearing and some of that volume related stuff and it was solely a function of what was going on in Asia.

Michael Hecht – JMP Securities

Okay. And then on the balance sheet, can you give us a sense of where level 3 assets, I guess, kind of ended the quarter and if you were like $91 million or $92 million at the end of the quarter and how much on the corporate debt side, banking insurance, trust preferreds, what – ?

John Duffy

Yes, I – I'll let Bob dig through what he wants to say on level 3. I did do a little homework on the trust preferred. We are down to, I believe, carrying value at the end of the year of $12.3 million. So relatively insignificant and I believe the cost of that stuff was north of $40 million. We've got two or three pieces of collateral that we have marked at extremely low levels and then we probably have another $20 million of costs that we are carrying in the neighborhood of $12 million.

So depending upon when we can dispose off that stuff, we've got some, what I would say is, imputed gain that's marked $0.60 on the dollar. But we've been able to – during 2009, we were obviously able to wheel that down substantially. So we are down to, I don't want to call it the tag ends, but pretty close to it.

Michael Hecht – JMP Securities

Okay, that's fair.

John Duffy

Bob, have you got any more color on level 3?

Robert Giambrone

Yes. Total level 3, and this is still somewhat preliminary, is just a little bit over $80 million, which – at the end of '08, it was $78.5 million.

Michael Hecht – JMP Securities

Okay. And that sounds fair enough quarter-over-quarter, right?

Robert Giambrone

I think it's about the same from the third quarter, if that's what you are saying.

Michael Hecht – JMP Securities

Okay. I thought I had it at like $92 million. I have to go back and check, that's fine. And then just like total assets, where do we kind of end the year? I mean, with $450 million in equity, clearly you guys have a very strong balance sheet, low leverage. I mean, any plans to increase leverage over time and then maybe just help us think about the priorities capital management wise across dividend, buybacks, acquisitions?

John Duffy

Yes. We are – we probably feel we have more than adequate capital, we've spent a lot of time thinking about that over the last maybe three months or so as things have kind of stabilized. But I think we have come to the conclusion that we may have more than we need, top rate business despite the expansion in Asia and some of the other things we are doing.

So I think it would be fair to say that we are kind of looking at should we have a dividend policy or a dividend payment policy and also buybacks. Acquisitions – we look at a lot of stuff, we haven't bought anything really and we find lift-outs of people frankly to be cheaper and less risky than buying franchises. We continue to kind of poke around in the asset management area. So we are not ruling anything out, but we've had this currency for three years and we haven't used that in an acquisition really.

Michael Hecht – JMP Securities

Okay. And then just last one from me and thanks for taking my questions. Just can you update us on the shares eligible for sale, overhang if there is a – when the next lockup comes up?

John Duffy

Yes. I have – a little unprepared, I'll have to do this from memory. We had in our IPO shares, the – it was a four-year – that's 25% a year and – so we are three years plus into that, we would have had an anniversary back in November.

Robert Giambrone

Yes, the last vesting is 40% on the restricted stock.

John Duffy

That's right. I'm sorry. Zero, 25%, 35%, 40%. So November of 2010, 40% was the IPO award shares – IPO award shares.

Robert Giambrone

2.4 million shares, 40% of that.

John Duffy

Of the pre-IPO?

Robert Giambrone

Not of the pre-IPO. It will be about 5.5 million pre-IPO shares will come open in November and 40% of 2.4 million IPO awards.

John Duffy

Okay.

Michael Hecht – JMP Securities

Got it. And any plans to kind of manage that overhang or how do you think about that?

John Duffy

We – in November, we kind of canvassed the employee base in terms of should we do an organized sale. And frankly, the selling has been fairly light. So we will – I'm sure we will do that again towards the end of the year to see whether we need an organized distribution or do we let the employees handle it on their own. To date, we don't think there has been a big overhang on the market and I think employee ownership is still around 40% of the total shares outstanding.

Michael Hecht – JMP Securities

Okay, that's helpful. Thanks again for taking all my questions.

John Duffy

Sure. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Hugh Miller of Sidoti & Company. You may proceed.

Hugh Miller – Sidoti & Company

Hey, good morning.

John Duffy

Good morning, Hugh.

Hugh Miller – Sidoti & Company

Thanks. I just had a question about, I guess, first on the comp ratio in the fourth quarter. I guess if you x out the IPO awards, a noticeable decline from the third quarter coming in towards just the low 56%. And I realize you guys are still doing some hiring in Asia and so forth. But how should we kind of think about that level as we move forward into 2010 and obviously just – some of the operating leverage in the business?

John Duffy

Yes, I think we feel over time we can get that ratio down to 55%. I think we probably need to be in that neighborhood to get the ROE that we want. But I think as we go into either new product areas or new geographic areas, there is a period where it takes for the revenues to just kind of catch up with the expense base, including the compensation expense base.

So we think for 2010, the impact of the Hong Kong expansion will take that ratio – well, probably a couple of percentage points higher than it otherwise would have been. I think if we grow the business or the rest of our business in 2010 and in future years, we can certainly get the comp ratio down to 55% in a normal operating environment. But I think it's – we are not sure we've got a normal operating environment in 2010. And we have the overhang or the drag of the Hong Kong expansion.

So if we had to guess today, we think we would be in the – we've given guidance as 55% to 60% as kind of a normal for that number when we went public. I think we would be at the higher end or the upper half of that range this year and I think it may largely be because there will be some drag from Hong Kong.

Hugh Miller – Sidoti & Company

And do you have a sense of what the drag in the fourth quarter from the Hong Kong operations were?

John Duffy

Well, there was no revenue and it was over a $3 million of expense.

Hugh Miller – Sidoti & Company

Okay. And –

John Duffy

Which is a little bit less than 1% comp ratio.

Hugh Miller – Sidoti & Company

Okay. And I guess, as we think about the ramp-up in research coverage in Asia and kind of how that strengthens your relationships with the U.S. and European clients, the type of influence we could see in incremental revenue driven through commissions and so on?

John Duffy

Yes, I think – we thought that it was critical to be in Asia eventually, we didn’t rush there. I think the London experiment or the expansion – I wouldn't call it an experiment – the London expansion went quite well. I look back at what we've done to commissions over the last six years and despite the drop in 2009, our institutional cash equities business is growing at 18.8% a year from 2003 through 2009. I think some of that is a function of the geographic expansion, obviously in the London. And I think the expansion in Asia will help us continue to grow that line.

And also, we've obviously added coverage during that same period. In 2004, 2005, we started following mortgage REITs; in 2008, we started following property REITs. So we are covering more companies and we've got a bigger geographic footprint. So – and that growth rate in the cash equities business is counted to what's happening in most other kind of mid-size public firms that we are able to attract. So we think the formula has worked where we expect we will be able to continue to grow that business.

Hugh Miller – Sidoti & Company

Okay. And I guess last question in Asia was with regards to – I guess, thinking out in a bit longer term and with the experiences in Europe, how long do you anticipate it will take before you are able to kind of garner the reputation where you are able to kind of generate some business on the capital markets side in that type of a region?

John Duffy

Well, there is probably more activity in Asia on the capital markets side than there was in Europe when we went over to London in 2004. We don't have a very full staff there at the moment and we've got two capital markets people that are experienced and have been in that geographic area. So we think they will be productive immediately, but we are giving serious thought about kind of increase – increasing the headcount over there to capitalize on the opportunity more.

So I would expect within two years, people will know us very well over there because of the research coverage and what we are able to do on the distribution side. I think the challenge in the first 18 or 24 months is getting out and visiting those clients. We are a new name there, but the people that we have there have been working in the area for awhile. So it's not like we have inexperienced [ph] people. So we think it can happen relatively quickly.

Hugh Miller – Sidoti & Company

Okay, great color there. And I guess the last question is with regards to the M&A environment here in the U.S. with – for regional banks. Obviously, you guys have mentioned things are very, very dormant right now, especially given all the FDIC-assisted deals. But I guess, barring that type of a headwind, what do you kind of foresee has to happen in order for banks to really start to turn towards M&A activity to kind of be able to put capital to work and grow in that business and should we – I guess, thoughts as we head out a little bit further maybe into very late 2010 and into 2011 and what you expect to see happening there?

John Duffy

Yes, I think first of all, the acquirers need to be confident in their own balance sheet and capital ratios and reserve coverage. And then they need to see some price stability or certainty. And I don't think we have that in the commercial real estate sector. I think we are kind of still in the early innings of that or the discovery phase.

So when bank A is looking at bank B and bank B has got a big commercial real estate exposure, I don't think a whole lot of banks today are confident that they really know whether that target bank is adequately reserved for the potential loss exposure in the portfolio and – they can hazard a guess, but I think the risk reward for them to move now is unfavorable.

So people don't want to buy something at the absolute bottom. I mean, they would love to buy it, but the risk there is that it's not the absolute bottom, it continues to go down. And most acquirers want some certainty and see some stability in asset pricing levels before they are going to make a major commitment. Once they are getting a loss share in arrangement with the FDIC, which then mitigates that risk.

So as long as you've got a lot of pipeline coming out of the FDIC, I think the acquirers are saying, well yes, some of these other franchises are interesting, but I'm not sure the risk reward is there, certainly on a relative basis to participating in the FDIC transactions, whether there is 80% and 95% loss protection.

Hugh Miller – Sidoti & Company

Great color.

John Duffy

So it's not that people aren’t interested, it's just the alternative affords a better return relative to the risk.

Hugh Miller – Sidoti & Company

Yes, that's certainly understandable and I appreciate the insight there. Thank you very much.

John Duffy

Okay, Hugh.

Operator

There are no further questions. I would now like to turn it over to John Duffy for closing remarks.

John Duffy

Great. Thanks very much, Michael. Thanks, everyone for dialing in this morning. If you have any further questions, don't hesitate to contact Bob or myself. And we are delighted with your interest in the company and we look forward to chatting with you again in six months or on the road sooner. Thanks very much.

Operator

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

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