Stifel Financial Q3 2007 Earnings Call Transcript

Stifel Financial Corporation (SF)

Q3 2007 Earnings Call

November 5, 2007 11:00 am ET

Executives

Jim Zemlyak - CFO

Ron Kruszewski - Chairman, CEO and President

Analysts

Brian Hagler - Kennedy Capital

Thomas Haines - Empirical Capital

Joel Jeffrey - KBW

Dan Wimsatt - AD Capital

Presentation

Operator

Good morning. My name is Heather and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Financial Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you and at this time I would like to turn the call over to Jim Zemlyak, Chief Financial Officer. You may begin your conference.

Jim Zemlyak

Thank you, Heather. 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 the third quarter results of our 2007 fiscal year. Please note that this conference call is being recorded. If you would like a copy of today's presentation, you may download slides from 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 be only considered together with the company's GAAP results. And finally, for discussion of risks and uncertainties in our business, please see the business factors affecting the company and financial services industry in the company's annual report on Form 10-K and MD&A of results in the company's quarterly reports on Form 10-Q.

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

Ron Kruszewski

Thank you, Jim. Good morning to everyone. First of all, for those of you as is our custom, we have slides that accompany this presentation that you can either see on the Thomson Network or you can download from our website at www.stifel.com. With that, I would like to talk about our highlights for the quarter.

As we all know, it was a turbulent quarter, with that said Stifel Financial's annualized return on equity was approximately 14% with pretax margins of approximately 13%, 12.7% to be exact. I will comment a little bit on those later. But, all in all, all things considered, a very good quarter.

Three factors impacted the quarter besides, obviously, the markets. First, there was a soft quarter for us, for investment banking. Although investment banking was up 57% from Q3 of 2006, it declined 52% from Q2 2007 on a sequential basis. And I would like to remind everyone that we had a large investment banking transaction, the people's stock conversion, which generated approximately $24 million in investment banking revenue in Q2 of this year.

In addition, we had some trading losses, while not significantly, they did somewhat impacted our margins. It was approximately $1.5 million in July in fixed income, not anything more for us than just a widening of credit spreads on inventory that we held for sale, but it did impact the quarter somewhat.

And then finally, increased operating expenses relating to our continuing integration of Ryan Beck, while that integration is going very well. In fact, during the quarter, we completed the last of the brand conversions. We have done that in five ways. And all of the Ryan Beck branches are on Stifel's operating systems today and that have gone quite well.

As I have said back when we did the deal, the full integration process of Ryan Beck could well take a year and that is true. So, that our margins are impacted by increased operating expenses as we work through the integration of Ryan Beck.

With that Jim, why don't you just go through the numbers quickly? We'll move on to page 3 of our presentation.

Jim Zemlyak

Thanks, Ron. Today, we reported unaudited quarterly net income of $8.1 million or $0.45 per diluted share, and revenue of $190.8 million or net revenue of $183 million for the quarter ended September 30, '07. For the comparable quarter of '06, net income was $5.4 million or $0.39 per share on net revenue of $115.2 million.

After adjusting for acquisition related charges, principally stock-based awards offered to key associates of Legg Mason, Capital Markets division, non-GAAP net income and non-GAAP earnings per share, our core earnings were $14.3 million and $0.80 per share for the third quarter of '07 compared to 2006 third quarter core earnings of $9.6 million and core earnings per share of $0.69 per diluted share.

For the nine months ended September 30, '07, we post net income of $18.3 million or $1.09 per diluted share on revenue of $574 million compared with $8.2 million or $0.59 per diluted share on $336.2 million for the same period a year earlier.

After adjusting for acquisition related charges, principally compensation expense for accelerated deferred comp for the Ryan Beck acquisition deferred compensation plans and stock-based awards offered to key associates of Legg Mason, Capital Markets, non-GAAP net income and non-GAAP earnings per share, our core earnings for the nine months ended September 30th were $46.3 million or $2.75 respectively, compared to $27.7 million or $1.99 per diluted share for the nine months ended September 30, '06. Again, as Ron noted, our net revenues increased 67% from Q3 '06. They've decreased 13% sequentially from Q2.

The next slide highlights our segment comparisons of note. All three major segments achieved record revenues on a nine month basis, Private Client up 89%, ECM up 69% and Fixed Income Capital Markets up 14%.

Now, into the Private Client Group slide. Private Client Group comparisons are impacted favorably by the Ryan Beck acquisition, which closed in Q1 of '07. Private Client Group net revenue for the third quarter of '07 was $112.6 million, an increase of 100% from the third quarter of '06, principally due to increased commission and principle transactions, sales credits from investment banking and increased asset management service fees.

Sales credits from investment banking increased due to increased underwriting activity, principally corporate finance. Asset management and service fees increased, as there was a 32% increase in the number of managed accounts and 41% increase in assets under management in those accounts.

Private Client Group's operating contribution increased to $23.4 million, 84% over the third quarter of '06, as a result of the 100% increase in net revenue, and the leverage and increased production.

Our operating margins came in at 28.8% for the quarter, down from 22% for the previous quarter and the previous year, as we are completing the integration of Ryan Beck, as Ron previously noted.

Private Client net revenue for the first nine months of '07 was $316.5 million, an increase of 89% for the first nine months of '06, principally due to increased commissions and principal transactions, sales credits from investment banking and increased asset management service fees.

Sales credits from investment banking increased due to increased underwriting activity, principally corporate finance. The Private Client and operating contribution increased to $67.9 million or 84% over the comparable '06 period, as a result of the 89% increase in net revenue, and leverage and increased production.

The next slide, we will go over to the Equity Capital Markets division, which recorded net revenue of $47.7 million in the third quarter of '07, an increase of 30% from the same quarter last year, principally due to increased commissions and principle transactions and increased investment banking revenue.

Investment banking revenue increased principally due to the financial advisory fees of $10.1 million, a 12% increase over last year and equity financing revenue of 6.5%, up 30% compared to the third quarter of '06.

Non-interest expense increased 37% to $39.2 million in the third quarter of '07, compared to $28.6 million in the third quarter of '06, principally due to a 35% increase in employee compensation and benefits to $28.2 million compared to $20.9 million in the third quarter of '06.

The increase in employee comp and benefits is primarily due to increase in variable comp associated with increased revenue. As a percentage of net revenue, employee comp and benefits was 59.2% and 57% for the third quarter of '07 and '06, respectively. Increase in all non-comp expense categories can be attributed to the increase in revenue.

ECM operating contribution increased 5% to $8.5 million in the third quarter of '07, compared to $8.1 million in the prior year period as a result of 30% increase in net revenue and the leverage in the increased production.

On our next slide, Ron will make some comments.

Ron Kruszewski

Yeah, I think the next slide is somewhat instructive of what happened in Equity Capital Markets. First of all, I will point out that the margins declined in the quarter to approximately 18%, down from 22% a year ago.

The next slide, we can talk about the components of our Equity Capital Markets. First of all, something that we are pleased with is the increase in our flow business. Many people have been reporting declines in the flow business that being simply the commissions and principle transactions that we do on a day-to-day basis. And as you can see, our flow business increased 41% over the comparable quarter a year ago. It's up 28% for the year and it's up 5% sequentially.

So, that certainly was a positive impact in the quarter. But, on the banking side, our investment banking capital raising was up 24%, advisory fees up 12%. So, that investment banking quarter-over-quarter was up significantly. But, as we have said in previous calls, we have been ramping that business up nicely. Certainly, the capital raising slow down in the summer. And that's further exacerbated, if you will, by the large transaction we did in Q2.

So, those sequential declines look significant, but if you take out the one large transaction, I would still say, it was a soft quarter in investment banking. And frankly, not unexpected considering what happened during the summer.

Jim, why don't you do Fixed Income, quickly?

Jim Zemlyak

Fixed Income Capital Markets net revenue for the third quarter increased 15% to $16 million from $13.8 million during the same time period last year, principally due to increase in investment banking revenues. Investment banking revenue increased 57% due to increased advisory fees.

Non-interest expense increased $3.1 million or 29% to $13.8 million, primarily due to a 27% increase in employee comps and benefit, which increased, as a result of increased transition pay for institutional fixed income salesmen, and increased occupancy and equipment due to office expansion. As a result of increased, non-interest expenses, Fixed Income Capital Markets, operating contribution decreased $1 million from the previous year.

For the nine months, Fixed Income Capital Markets, net revenues increased 14% to $41.1 million from $35.9 million during the same period of last year, principally due to an increase in commissions and principle transactions and investment banking revenue. Investment banking revenue increased principally due to increased underwriting activity for the nine months.

Non-interest expense increased $7.6 million or 25% to $37.7 million, primarily due to 27% increased employee comps benefits, which increased as a result of increased transition pay for institutional fixed income salesmen, increased occupancy and equipment rental due to office expansion.

Operating contributions decreased 42% to $3.4 million from $5.9 million in the first nine months of '06, principally as a result of inventory losses that Ron discussed, and increased non-interest expense.

Ron Kruszewski

And for the nine months and those interest loss, those inventory loss is primarily occurred in Q2 other than the little bit that we took in July. The good news in Fixed Income Capital Markets is that we basically broke even, a slight loss in Q2, because of those losses.

While we achieved profitability of $2.1 million, the margins are still relatively weak, if you will, at 13%. But, our Fixed Income Capital Markets Group all things considered, especially, what went on, again, in the industry I thought has done a stellar job of managing risk and managing our inventory. I will take a moment at this time to tell you that we have really nothing on our balance sheet that provides us any concern on a mark-to-market basis. So, our Fixed Income Group did well.

If you flip to the next slide quickly, our flow business up 39% sequentially, 4% from the previous quarter. Investment banking, which is primarily our tax exempt [munny] finance business. I am pleased to report, I believe, we will have another record year in 2007. As you can see the investment banking line item is up 67% sequentially and 57% over the prior year quarter and over 60% year-to-date. So, they're having a nice year in our public finance.

Our next segment is just banking. Maybe I'll take a few questions of the banking segment. All in all the bank is proceeding right on plan in terms of both our asset generation and our integration. So, the banking segment is according to Hoyle.

With respect to our other segments, we spend this time quickly just to talk about our acquisition related other expenses. It's been the story, the same story for now a year and half, as it relates to acquisition related compensation or stock-based compensation primarily. Further we had some Ryan Beck acquisition related charges. So, as you all know, we have been growing very fast and with that come some, what we term, acquisition related expenses.

You will also note that our others segment, not acquisition related, for the quarter is up from $7.5 million, if you will to $11.2 million, and that's the result as we integrate the Ryan Beck acquisition. We do also add to our overhead staff here. All of that is on target although our integration is not complete.

The comparison in the others segment is more, it's almost has doubled year-over-year and that's primarily because last year we included our New York Stock Exchange gain in our other segment. So, that's why you will see that variance.

Quickly, if we reconcile GAAP our core earnings, you will see on slide 13 that for the quarter we had net loss and acquisition of $6.2 million or $0.35 a share, $27.9 million or a $1.66 a share for the nine months.

Slide 14 will just show our projections and what we have done on that. As you can see for Q3, there were two things that happened here. We had a few additional acquisition related expenses, primarily our move in Baltimore that was budgeted to occur earlier in the year, actually fell into Q3. You will see that variance. That's been planned, as we have moved our headquarters, as we had to get out of the former Legg Mason headquarters and moving in to our new building in Baltimore. So, that caused that variance to be about 400 grand from our projection.

And the Ryan Beck acquisition, we had estimated cost of $2 million for the quarter. Actually it was $3.2 million. We simply just missed the cost of converting all those accounts. Postage alone ran $750,000 to notify new clients and so that just came in a little bit higher.

I think the important thing is, if you flip, is our annual income statement impact is to what we project and this really hasn't changed. Legg Mason acquisition charges for '07 and '08 remain at $25 million a year, zero for '09. The Ryan Beck acquisition charges of $31 million of which a lot of that, almost $20 million of that was a non-cash charge relating to the restructuring of the deferred compensation. We've talked about that in Q2.

But, in fiscal year 2008, we will be left with the Legg Mason acquisition charges. And then in '09, we will not be reporting any more on a core, non-core basis, we will be right back to GAAP.

If you look at the next slide, our balance sheet, we have $1.5 billion in assets, supported by $400 million of equity, book value of about $27 a share. I think it's important to always look at our equity roll forward, because if you follow our book value and our equity, you'll note that our equity account grows much faster than our GAAP earnings.

This just tries to illustrate for you what is happening. We have had $18 million of GAAP earnings and then you have stock-based compensation, the Ryan Beck units that I spoke to earlier, plus the acquisition of Ryan Beck, causes equity to change $220 million at the beginning of the year to $406 million today.

Slide 18, looks at our capital structure. Again, I think today with everything that's going on, strong balance sheets are important. We think we have a strong balance sheet. We have assets of $1.5 billion, stockholders' equity of $406 million. Supplementing our stockholders' equity is $105 million of trust preferred, which as you can see here we have three, they range in from LIBOR plus 170 to LIBOR plus 185.

I would like to do more of that today. Unfortunately, I don't think that's possible. We further swap that out, fixed 638 to 679, until we do a swap on interest rate from 10 to 12. You can see we are averaging 665 per annum.

As you know, these trust preferreds have really no covenants. They are due between 35 and 37, as in 2035 and 2037. So, it's a good part of our capital structure, actually very cheap capital today. We have $511 million of total capital. Our equity to assets is 27%. Our capitalization, which includes the debt to asset, is 34%, and our trust preferred to our equity, is a very reasonable 26%.

With that the last slide just shows other financial data in terms of how we have been growing. We had slowdown, at least for quarter, in our growth to financial advisors. We have been focused on the integration of Ryan Beck. So, you can see our advisors go from 938 to 956. Although that's picked up pretty much a pace in September and in today as we have gotten the Ryan Beck acquisition behind us.

We have managed over $61 billion for our clients today. All in all, all things considered a very good quarter. Albeit lower than what we would have expected when we spoke in June. But, a lot of things have changed in the last three to four months.

With that operator, we will take some questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Hagler with Kennedy Capital.

Brian Hagler - Kennedy Capital

Hey, good morning guys.

Ron Kruszewski

Hello, Brian.

Brian Hagler - Kennedy Capital

I was just wondering, if you could give us a little bit of an outlook or pipeline data for your Investment Banking division and maybe your Fixed Income division? I know, you said it is a little soft this quarter, but I was just wondering what the pipeline looks like going forward?

Ron Kruszewski

Well, traditionally the fourth quarter is the strong quarter for our Fixed Income. I believe that pipeline is strong. Again, this year, I've already said that, we believe that they will have a record year. And so, again, with the caveat of who knows what happens to rates. But, Fixed Income pipeline is strong. And same with the investment banking pipeline is as robust as ever.

In the regional firm environment, when things close in a quarterly basis that can cause bumps in the road. But, I think, probably, the important thing would be that we believe our banking platform, our banking pipeline is very good.

But, you have to look at it by sort of smoothing out Q2 where we had a very large transaction. And I wouldn't want that to be the baseline. In fact, I remember answering this question then by saying, you don't grow from that base. All that said, it was a soft quarter, but our pipeline is strong.

Brian Hagler - Kennedy Capital

Okay. So, it looks like some of the stuff that you would maybe thought would close this quarter just gotten pushback a little bit?

Ron Kruszewski

Well, I think, yeah. It was a combination. Plus if you look at lot of the firms that have been reporting, the capital raising activity, obviously, slowed down especially in a lot of the interest and credits type industries, financial institutions, where we're large and in the lot of the equity REIT areas things slowed down. So, capital raising was slow and I think that the M&A environment also got delayed, because of all the concerns over stable financing and what not.

So, I don't want to apologize for a slow quarter, it sounds like and it was a slow quarter, but that's how it goes in our business. Looking forward, I don't think it's a trend or anything negative. Although, we are all wondering about how the economy is going to shakeout through all of this.

Brian Hagler - Kennedy Capital

Right. So, it sounds like you are seeing maybe a little evidence of the capital raising picking up even though we are still in a somewhat tough environment?

Ron Kruszewski

Well, we do. I mean, again, I think, this is a good quarter. The fourth quarter is usually stronger. But, if I look forward into '08, I would think that the capital market activity industry wide is, I would expect, not would be as robust as it has been in year's past.

Brian Hagler - Kennedy Capital

Okay. And then one last question, the $1.5 million of trading losses in July. I guess, do you have an unrealized gain or loss on that portfolio today or could we expect maybe more of that to come or what's kind of the outlook there? It depends on obviously credit spreads, but...?

Ron Kruszewski

Right. I mean, I think, it was. First of all, we mark that to market, we mark-to-market daily. Obviously, I think that that was more indicative of what happened in the summer months in our daily business. But, we've generally, even after hedges, we'll have a net long exposure to the marketplace just to support our flow business. And while we hedge sometimes hedges are not as effective as you would like theme to be. And that's what happened.

But, I would consider that more a reflection of some very disruptive market, which I do want to say. I believe our risk and the way we manage risk, our team came through that very, very well. All things considered.

Brian Hagler - Kennedy Capital

Right. All right, thanks guys. I appreciate it.

Ron Kruszewski

Sure.

Operator

Your next question comes from the line of [Thomas Haines with Empirical Capital].

Thomas Haines - Empirical Capital

Hi. Yes, just needed to go back, I missed a number. I think you said that you so far had about $31 million of charges related to Ryan Beck, $20 million non-cash. Is that's year-to-date?

Ron Kruszewski

Yes.

Thomas Haines - Empirical Capital

And then how much you're estimating for the rest of this year?

Ron Kruszewski

I thought I had that on the slide, where it was going to be $3 million for Q4 and then nothing after that. Slide 14…

Thomas Haines - Empirical Capital

Okay.

Ron Kruszewski

And then nothing in '08.

Thomas Haines - Empirical Capital

And then the Legg Mason charges, are those on the slides also?

Ron Kruszewski

Yes

Thomas Haines - Empirical Capital

And so I don't have it front of me, but what are the estimated charges for '08. I mean for '08 for Legg Mason?

Ron Kruszewski

Yeah, $25 million.

Thomas Haines - Empirical Capital

$25 million.

Ron Kruszewski

Yeah, that $6.250 million a quarter that really hasn't changed since we did the deal, give or take some of the things that we had budget at that time to fully pull them out of their former firm. But, that's on slide. I thinks its 14 and 15 of our presentation.

Thomas Haines - Empirical Capital

Okay. And you said that the Ryan Beck charges this quarter were about $1 million higher than you expected?

Ron Kruszewski

Yes.

Thomas Haines - Empirical Capital

Can you just give a little more color on that?

Ron Kruszewski

We had estimated. I mean, we went through converting some 31 branches that we were doing on a rolling basis and we had estimated the cost of dual staffs and dual operations and some of the costs that you can't charge to the deal. And they came in higher then we've thought. I gave you the example of just the printing cost, the printing alone and postage to notify the clients of our charge. I don't know that I thought about it was $750,000.

So, things like that. We estimated $2 million, they came in at $3 million. It wasn't that of a bad estimate, but I did want to point it out, we did project last quarter, we thought it would be $2 million.

Thomas Haines - Empirical Capital

But then for Q4 you are pretty confident for that number?

Ron Kruszewski

$3 million?

Thomas Haines - Empirical Capital

Yeah.

Ron Kruszewski

Yeah.

Thomas Haines - Empirical Capital

Okay. All right, that's all I have. Thanks.

Jim Zemlyak

Okay.

Operator

(Operator Instructions). Your next question comes from the line of [Joel Jeffrey] with KBW.

Joel Jeffrey - KBW

Hi, guys.

Ron Kruszewski

Hi, Joel.

Joel Jeffrey - KBW

I know you guys typically disclosed certain metrics in your 10-Q. But, can you give us at this time sort of the number of managed accounts and assets under management. And particularly, number of independent contractors that you guys have?

Ron Kruszewski

Let me see. We won't file our Q until Friday, and I don't believe that I have that, I apologize. I just don't have that in front of me. We normally file our press release and Q at the same time, which is why we disclose those in our press release. So, we didn't because we've released earnings. So, we can come to your conference tomorrow, frankly.

Joel Jeffrey - KBW

We anticipate that. Just one another question. Have you guys noticed any regional differences in activity in your Private Client base between say the Midwest and the Mid-Atlantic States over the past quarter or is it generally, you are seeing a similar activity across the board?

Ron Kruszewski

Similar activity across the board. I will just tell you, I think the businesses are very similar. The Private Client businesses, as I think, are almost homogeneous across most firms, frankly. So, we don't see any regional differences.

Joel Jeffrey - KBW

Okay, great. Thanks very much.

Ron Kruszewski

Yeah.

Operator

Your next question comes from the line of [Dan Wimsatt with AD Capital].

Dan Wimsatt - AD Capital

Good morning.

Ron Kruszewski

Good morning.

Dan Wimsatt - AD Capital

Could you spend a second and just let's talk macro big picture. Obviously, there is a lot going on with your competition as it relates to sub-prime at all. And I think, one of the advantages to coming to Stifel is to not be at in those kind of environments.

So, perversely, all the disruption in the markets right now may make it easier for new private client guys in particularly to come over to you with a higher payout at all. Just talk about couple of things please. The good and the bad with the current environment, how that makes it more attractive to come to your firm vis-à-vis the Merrills of the world, or other people?

And then maybe talk about, now you've got a lot of the acquisitions behind you and the footprint in place, how many bodies could you add given your current infrastructure. Let's say you can began to leverage this infrastructure you've got put together. Or is it a thought more, all right, we are going to get this assimilated now, and go to our next large acquisition down the line? That's one question please, and I have one more follow-up.

Ron Kruszewski

Well, I think that's on a macro basis. It's almost why I don't like quarterly earnings calls. You have to measure quarterly, but on a macro basis I think you've got your finger right on what I focus on and I'll separate it to answer your question between the Private Client Group and the Capital Markets business. I'll say that Capital Markets business is a growth business and it's a business that we can continue to do well. And as we build on our investment banking platform, we have tremendous research. And we think that we can do this.

But it's not the growth business today that I think the Private Client has been. Nor it has been in the past, absent acquisition. It can grow very nicely, don't get me wrong. But, the real question is can we go from say 1,000 financial advisors over time to 3,000 and that's our plan and that's our goal and it's been stated that we can do that. We've, of course, have to grow infrastructure as we grow that number of financial advisors. But, on the margin it's definitely accretive to shareholder value.

So, then back to the environment, this environment, we've found historically that we grow faster in times of disruption then in times when things are great. So, it's times like this that we look to really begin to grow or add to our platform. That disruption can come from either the sub-prime, if you will, that's less of a factor for us then just the consolidation that's going on.

So, as I always say, consolidation in and of itself is one of our largest drivers of growth, because that disruption is what makes the Stifel model the most attractive. So, net, net, I think you are right. We can and will continue to grow. And we were a growth story period, faster on the Private Client side, but we will also grow our Capital Markets.

We think that the middle market, as consolidation occurs, it orphans the middle market. There is just less firms. And so, we are very optimistic over the long-term of our growth prospects, short-term cyclical business.

Dan Wimsatt - AD Capital

How much of the little 2, 3, 5, 10 person teams given your infrastructure how could you just infill, without adding additional infrastructure, can you go to 1,500 guys?

Ron Kruszewski

Yeah, sure we've done that. When we started here, we were able to grow from say 200 to 600 organically and then with really a flip of the switch, it wasn't that easy, we went from 600 to a 1,000 in the last six months. You don't do that without infrastructure capability. But, I don't want to mislead anyone on, that's not just without additional cost. You do need to add. And certain areas of the business are not as efficient as you like it to be.

So, you need to add people to open new accounts and there are certain administrative functions, human resources or you just need to add, as you add body count. But, the platform in and now itself today there is really, I don't want to say no limit, but I would like to be challenged as to how many three to five member teams we could take. We've not run into that problem yet.

Dan Wimsatt - AD Capital

And Ron, I know you talked about this, I apologize. Just a quick summary of the $123 million charges that's you talk about on slide 15. How much total that is cash and non-cash, just a quick breakdown for those numbers in terms of where the major charges are coming?

Ron Kruszewski

Well, I have to go to, which slide?

Dan Wimsatt - AD Capital

15. Just the charges that were laid out for Legg and Ryan, just looking at '06,'07, '08.

Ron Kruszewski

Right, the Legg Mason charges, and in this we are going to have to very approximate okay. But, I would say, I believe of the $91 million about $88 millionish, and I could give this to you. I don't want to put in numbers. The majority of that is stock-based compensation. There are some charges relating to double rent. There were some charges in the first year on where we had to carryover compensation plans that were different than ours. That was in '06, but the majority of Legg Mason is non-cash charges.

Of the Ryan Beck, I would say two-thirds of it is non-cash and or maybe a little bit more and the reminder are charges relating to the integration, the additional charges for having two operation centers, as we had to integrate that.

The Legg Mason is primarily stock-based comp. The portion of the cash charges on Ryan Beck relate to the merger related costs to put the organizations together. And I would say that probably in a $31 million to two-third of it is cash related.

Dan Wimsatt - AD Capital

So, just looking at the bodies that you've added in the productivity side of this, if you were to do another large acquisition, can we assume this kind of numbers going forward in terms of per headcount addition? Here I am saying if you had another big…?

Ron Kruszewski

I know, what you're saying. I don't know that I'm prepared to say. I think each deal is unique. The costs per person to bring on Legg Mason was much lower then the Ryan Beck, and it did depends on factors such as who does their clearing, how is that going to work? There are just a lot of things that can happen in a Private Client business. I think each deal has to stand on its own. So, I don't know that I can answer that question for you.

Dan Wimsatt - AD Capital

Ron, last question. BankAtlantic, the position in your stock that they own, obviously, there are parent company given the Florida home building exposure. Do you have first right of refusal if they have to sell all or part of that piece? Is there any constraints if they have in terms of checking in with you or you have any right if they have a foresell and would have to sell that given what's going on in the rest of their portfolio?

Ron Kruszewski

Well, first of all, Alan Levan has been a very good shareholder. We communicate. So, we've been talking. And he is someone who talks to us so. I can't speak for Alan nor would I speak for him. I can only tell you that, his shares free up a third, third, third. And so he is free at some point to do a third of his shares so called 600,000 shares approximately or maybe 700,000 would be free to trade. Well, I think we all recognize that if he would want to do a trade like that, he needs to work with us.

Dan Wimsatt - AD Capital

Yeah.

Ron Kruszewski

And so, we have been communicating and he has been a very good shareholder and understands the importance of working with us to the extent that he would choose to, and I won't comment on that, it's his, he would choose to dispose off any of the stock. I don't think he intends to have this kind of a position and a broker dealer long-term?

Dan Wimsatt - AD Capital

Last question just in terms of balance sheet, optimal capital structure for future acquisition, what kind of firepower in terms of again acquisitions do you have?

Ron Kruszewski

Well, I went through our capital structure, I think, we are very well capitalized. I wouldn't want to push the envelope on any kind of transaction that would make us financially vulnerable. I also don't want to do dilutive transactions. We have a publicly traded currency, which we've used in the past. So, I look at the costs of capital, balance it debt versus equity, accretion versus prudence and act accordingly.

We can adjust our capital structure by stock repurchases if we so choose. And so, the answer is, I think, we've firepower to do what we want to do. But, we've never been reckless acquirers.

Dan Wimsatt - AD Capital

Okay. Thanks Ron.

Ron Kruszewski

Yeah.

Operator

(Operator Instructions) There are no further questions at this time, sir.

Ron Kruszewski

Very good. Thank you everyone for your time and we will convene again in February of '08. Thank you.

Operator

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

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