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Stifel Financial Corporation (NYSE:SF)

Q3 2007 Earnings Call

November 5, 2007 11:00 am ET

Executives

Jim Zemlyak - CFO

Ron Kruszewski - Chairman, CEOand President

Analysts

Brian Hagler - Kennedy Capital

Thomas Haines - Empirical Capital

Joel Jeffrey - KBW

Dan Wimsatt - AD Capital

Operator

Good morning. My name is Heatherand I will be your conference operator today. At this time, I would like towelcome everyone to the Stifel Financial Third Quarter Earnings Call. All lineshave 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 Iwould like to turn the call over to Jim Zemlyak, Chief Financial Officer. Youmay begin your conference.

Jim Zemlyak

Thank you, Heather. Good morning,everyone. This is Jim Zemlyak, CFO of Stifel Financial Corp. I would like towelcome everyone to our conference call today to discuss the third quarterresults of our 2007 fiscal year. Please note that this conference call is beingrecorded. If you would like a copy of today's presentation, you may downloadslides from www.stifel.com.

Before we begin today's call, Iwould like to remind listeners that this presentation may containforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. These statements are not statements of fact orguarantees of performance. They are subject to risks, uncertainties and otherfactors that may cause actual future results to differ materially from thosediscussed in the statements.

To supplement our financialstatements presented in accordance with GAAP, we use certain non-GAAP measuresof financial performance and liquidity. These non-GAAP measures should be onlyconsidered together with the company's GAAP results. And finally, fordiscussion of risks and uncertainties in our business, please see the businessfactors affecting the company and financial services industry in the company'sannual report on Form 10-K and MD&A of results in the company's quarterlyreports on Form 10-Q.

With that, I would like to turnthe call over to the Chairman, CEO and President of Stifel Financial, Mr. RonKruszewski.

Ron Kruszewski

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

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

Three factors impacted thequarter besides, obviously, the markets. First, there was a soft quarter forus, for investment banking. Although investment banking was up 57% from Q3 of2006, it declined 52% from Q2 2007 on a sequential basis. And I would like toremind everyone that we had a large investment banking transaction, the people'sstock conversion, which generated approximately $24 million in investmentbanking revenue in Q2 of this year.

In addition, we had some tradinglosses, while not significantly, they did somewhat impacted our margins. It wasapproximately $1.5 million in July in fixed income, not anything more for usthan just a widening of credit spreads on inventory that we held for sale, butit did impact the quarter somewhat.

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

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

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

Jim Zemlyak

Thanks, Ron. Today, we reportedunaudited quarterly net income of $8.1 million or $0.45 per diluted share, and revenueof $190.8 million or net revenue of $183 million for the quarter ended September30, '07. For the comparable quarter of '06, net income was $5.4 million or $0.39per share on net revenue of $115.2 million.

After adjusting for acquisition relatedcharges, 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 quarterof '07 compared to 2006 third quarter core earnings of $9.6 million and core earningsper share of $0.69 per diluted share.

For the nine months ended September30, '07, we post net income of $18.3 million or $1.09 per diluted share onrevenue 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 acquisitionrelated charges, principally compensation expense for accelerated deferred compfor the Ryan Beck acquisition deferred compensation plans and stock-basedawards offered to key associates of Legg Mason, Capital Markets, non-GAAP netincome and non-GAAP earnings per share, our core earnings for the nine monthsended 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 September30, '06. Again, as Ron noted, our net revenues increased 67% from Q3 '06.They've decreased 13% sequentially from Q2.

The next slide highlights oursegment comparisons of note. All three major segments achieved record revenueson a nine month basis, Private Client up 89%, ECM up 69% and Fixed IncomeCapital Markets up 14%.

Now, into the Private ClientGroup slide. Private Client Group comparisons are impacted favorably by theRyan Beck acquisition, which closed in Q1 of '07. Private Client Group netrevenue 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 andprinciple transactions, sales credits from investment banking and increasedasset management service fees.

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

Private Client Group's operatingcontribution increased to $23.4 million, 84% over the third quarter of '06, asa result of the 100% increase in net revenue, and the leverage and increasedproduction.

Our operating margins came in at28.8% for the quarter, down from 22% for the previous quarter and the previousyear, as we are completing the integration of Ryan Beck, as Ron previouslynoted.

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

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

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

Investment banking revenueincreased principally due to the financial advisory fees of $10.1 million, a12% increase over last year and equity financing revenue of 6.5%, up 30%compared to the third quarter of '06.

Non-interest expense increased37% to $39.2 million in the third quarter of '07, compared to $28.6 million inthe third quarter of '06, principally due to a 35% increase in employeecompensation and benefits to $28.2 million compared to $20.9 million in thethird quarter of '06.

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

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

On our next slide, Ron will makesome comments.

Ron Kruszewski

Yeah, I think the next slide issomewhat 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 aboutthe components of our Equity Capital Markets. First of all, something that weare pleased with is the increase in our flow business. Many people have beenreporting declines in the flow business that being simply the commissions andprinciple 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 up28% for the year and it's up 5% sequentially.

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

So, those sequential declineslook significant, but if you take out the one large transaction, I would stillsay, it was a soft quarter in investment banking. And frankly, not unexpectedconsidering what happened during the summer.

Jim, why don't you do FixedIncome, quickly?

Jim Zemlyak

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

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

For the nine months, Fixed IncomeCapital Markets, net revenues increased 14% to $41.1 million from $35.9 millionduring the same period of last year, principally due to an increase incommissions and principle transactions and investment banking revenue.Investment banking revenue increased principally due to increased underwritingactivity for the nine months.

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

Operating contributions decreased42% 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 increasednon-interest expense.

Ron Kruszewski

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

While we achieved profitabilityof $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, whatwent on, again, in the industry I thought has done a stellar job of managingrisk and managing our inventory. I will take a moment at this time to tell youthat we have really nothing on our balance sheet that provides us any concernon a mark-to-market basis. So, our Fixed Income Group did well.

If you flip to the next slidequickly, 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. Asyou 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 anice 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 isproceeding right on plan in terms of both our asset generation and ourintegration. So, the banking segment is according to Hoyle.

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

You will also note that our otherssegment, not acquisition related, for the quarter is up from $7.5 million, ifyou will to $11.2 million, and that's the result as we integrate the Ryan Beckacquisition. We do also add to our overhead staff here. All of that is ontarget although our integration is not complete.

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

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

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

And the Ryan Beck acquisition, wehad 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, ifyou flip, is our annual income statement impact is to what we project and thisreally 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 $31million of which a lot of that, almost $20 million of that was a non-cashcharge relating to the restructuring of the deferred compensation. We've talkedabout that in Q2.

But, in fiscal year 2008, we willbe left with the Legg Mason acquisition charges. And then in '09, we will notbe 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 ofequity, book value of about $27 a share. I think it's important to always lookat our equity roll forward, because if you follow our book value and ourequity, you'll note that our equity account grows much faster than our GAAPearnings.

This just tries to illustrate foryou what is happening. We have had $18 million of GAAP earnings and then youhave 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 thebeginning of the year to $406 million today.

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

I would like to do more of thattoday. 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 cansee we are averaging 665 per annum.

As you know, these trustpreferreds have really no covenants. They are due between 35 and 37, as in 2035and 2037. So, it's a good part of our capital structure, actually very cheapcapital today. We have $511 million of total capital. Our equity to assets is27%. Our capitalization, which includes the debt to asset, is 34%, and our trustpreferred to our equity, is a very reasonable 26%.

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

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

With that operator, we will take somequestions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Yourfirst 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 youcould give us a little bit of an outlook or pipeline data for your InvestmentBanking division and maybe your Fixed Income division? I know, you said it is alittle soft this quarter, but I was just wondering what the pipeline looks likegoing forward?

Ron Kruszewski

Well, traditionally the fourthquarter is the strong quarter for our Fixed Income. I believe that pipeline isstrong. Again, this year, I've already said that, we believe that they willhave a record year. And so, again, with the caveat of who knows what happens torates. But, Fixed Income pipeline is strong. And same with the investmentbanking 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, Ithink, probably, the important thing would be that we believe our bankingplatform, our banking pipeline is very good.

But, you have to look at it bysort of smoothing out Q2 where we had a very large transaction. And I wouldn'twant that to be the baseline. In fact, I remember answering this question thenby 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 ofthe stuff that you would maybe thought would close this quarter just gottenpushback 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 capitalraising activity, obviously, slowed down especially in a lot of the interestand credits type industries, financial institutions, where we're large and inthe lot of the equity REIT areas things slowed down. So, capital raising was slowand I think that the M&A environment also got delayed, because of all theconcerns over stable financing and what not.

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

Brian Hagler - Kennedy Capital

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

Ron Kruszewski

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

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 unrealizedgain or loss on that portfolio today or could we expect maybe more of that tocome or what's kind of the outlook there? It depends on obviously creditspreads, but...?

Ron Kruszewski

Right. I mean, I think, it was.First of all, we mark that to market, we mark-to-market daily. Obviously, Ithink that that was more indicative of what happened in the summer months inour daily business. But, we've generally, even after hedges, we'll have a netlong exposure to the marketplace just to support our flow business. And whilewe 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 areflection of some very disruptive market, which I do want to say. I believeour 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. Iappreciate it.

Ron Kruszewski

Sure.

Operator

Your next question comes from theline 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 ofcharges 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'reestimating for the rest of this year?

Ron Kruszewski

I thought I had that on theslide, where it was going to be $3 million for Q4 and then nothing after that. Slide14…

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 ofme, 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 aquarter that really hasn't changed since we did the deal, give or take some ofthe things that we had budget at that time to fully pull them out of theirformer 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 RyanBeck charges this quarter were about $1 million higher than you expected?

Ron Kruszewski

Yes.

Thomas Haines - Empirical Capital

Can you just give a little morecolor on that?

Ron Kruszewski

We had estimated. I mean, we wentthrough converting some 31 branches that we were doing on a rolling basis andwe had estimated the cost of dual staffs and dual operations and some of thecosts that you can't charge to the deal. And they came in higher then we'vethought. I gave you the example of just the printing cost, the printing aloneand postage to notify the clients of our charge. I don't know that I thoughtabout 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 Idid 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 confidentfor that number?

Ron Kruszewski

$3 million?

Thomas Haines - Empirical Capital

Yeah.

Ron Kruszewski

Yeah.

Thomas Haines - Empirical Capital

Okay. All right, that's all Ihave. Thanks.

Jim Zemlyak

Okay.

Operator

(Operator Instructions). Yournext 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 typicallydisclosed certain metrics in your 10-Q. But, can you give us at this time sortof 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 Quntil Friday, and I don't believe that I have that, I apologize. I just don'thave that in front of me. We normally file our press release and Q at the sametime, which is why we disclose those in our press release. So, we didn'tbecause we've released earnings. So, we can come to your conference tomorrow,frankly.

Joel Jeffrey - KBW

We anticipate that. Just oneanother question. Have you guys noticed any regional differences in activity inyour Private Client base between say the Midwest and the Mid-Atlantic Statesover the past quarter or is it generally, you are seeing a similar activityacross the board?

Ron Kruszewski

Similar activity across theboard. I will just tell you, I think the businesses are very similar. ThePrivate 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 theline 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 justlet's talk macro big picture. Obviously, there is a lot going on with yourcompetition as it relates to sub-prime at all. And I think, one of theadvantages to coming to Stifel is to not be at in those kind of environments.

So, perversely, all thedisruption in the markets right now may make it easier for new private clientguys in particularly to come over to you with a higher payout at all. Just talkabout couple of things please. The good and the bad with the currentenvironment, how that makes it more attractive to come to your firm vis-à-vis theMerrills of the world, or other people?

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

Ron Kruszewski

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

But it's not the growth businesstoday 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 realquestion is can we go from say 1,000 financial advisors over time to 3,000 andthat'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 offinancial advisors. But, on the margin it's definitely accretive to shareholdervalue.

So, then back to the environment,this environment, we've found historically that we grow faster in times ofdisruption then in times when things are great. So, it's times like this thatwe look to really begin to grow or add to our platform. That disruption cancome from either the sub-prime, if you will, that's less of a factor for usthen 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, becausethat 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 growthstory period, faster on the Private Client side, but we will also grow ourCapital Markets.

We think that the middle market, asconsolidation occurs, it orphans the middle market. There is just less firms. Andso, 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, withoutadding additional infrastructure, can you go to 1,500 guys?

Ron Kruszewski

Yeah, sure we've done that. When westarted here, we were able to grow from say 200 to 600 organically and thenwith really a flip of the switch, it wasn't that easy, we went from 600 to a 1,000in 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 additionalcost. You do need to add. And certain areas of the business are not asefficient as you like it to be.

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

Dan Wimsatt - AD Capital

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

Ron Kruszewski

Well, I have to go to, whichslide?

Dan Wimsatt - AD Capital

15. Just the charges that werelaid 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, Ibelieve 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-basedcompensation. There are some charges relating to double rent. There were somecharges in the first year on where we had to carryover compensation plans thatwere different than ours. That was in '06, but the majority of Legg Mason isnon-cash charges.

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

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

Dan Wimsatt - AD Capital

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

Ron Kruszewski

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

Dan Wimsatt - AD Capital

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

Ron Kruszewski

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

Dan Wimsatt - AD Capital

Yeah.

Ron Kruszewski

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

Dan Wimsatt - AD Capital

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

Ron Kruszewski

Well, I went through our capitalstructure, I think, we are very well capitalized. I wouldn't want to push the envelopeon any kind of transaction that would make us financially vulnerable. I alsodon'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 itdebt versus equity, accretion versus prudence and act accordingly.

We can adjust our capitalstructure 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 recklessacquirers.

Dan Wimsatt - AD Capital

Okay. Thanks Ron.

Ron Kruszewski

Yeah.

Operator

(Operator Instructions) There areno further questions at this time, sir.

Ron Kruszewski

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

Operator

This concludes today's conferencecall. You may now disconnect.

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Source: Stifel Financial Q3 2007 Earnings Call Transcript

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