Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel, Nicolaus 2012 Second Quarter Earnings Conference Call. [Operator Instructions] Mr. James Zemlyak, you may begin your conference call.

Thank you, Mike. Sorry for the delay this afternoon. I'm Jim Zemlyak, CFO of the Stifel Financial Corp. I'd like to welcome everyone to our conference call today to discuss our second quarter 2012 financial results. Please note that this conference call is being recorded. If you'd like a copy of today's presentation, you may download slides from our website at www.stifel.com. Before we begin today's call, I would like to remind the listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of '95. These statements are not statements of fact or guarantees of performance. They are subject to risks, uncertainties, and other factors that may cause actual future results to differ materially from those discussed in the statements. To supplement our financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance and liquidity. These non-GAAP measures should only be considered together with the company’s GAAP results. And finally, for a discussion of risks and uncertainties in our business, please see the business factors affecting the company and the financial services industry in the company's annual report on Form 10-K and MD&A and results in the company's quarterly reports on Form 10-Q. I will now turn the call over to the Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Thanks, Jim. Good afternoon, everyone. The operating environment in the second quarter was challenging, especially compared with the strong start to the year. The headwinds in equity and bond markets as well as macro-economic factors affected the industry, our business and client activity. In the quarter, asset management, investment banking, advisory and Stifel Bank performed well, while commission stabilized and principal transactions and equity capital-raising results were lower. Throughout the year, we have continued to grow through investments in selected professionals and certain businesses, namely our fixed income platform. We are well positioned with the scale and expertise to gain market share. While the challenging environment impacted results, we also continued to invest in growth opportunities. Before I review the financials, I'd like to discuss the market backdrop. The major indices were down in the quarter with U.S. equities giving back much of the first quarter gains as the re-emergence of European credit and debt concerns increased. The macro trends and lack of investor confidence resulted in first, lower share of volumes; next, continued equity mutual fund outflows; three, fewer new issues and lower trade volumes. Average daily share volumes on the New York and NASDAQ although flat sequentially is on pace to decline for 3 consecutive years. Over $300 billion has been withdrawn from equity funds since May of 2010. Only 33 IPOs priced in the second quarter, which was down 35% from a year ago quarter of 51, and trade volume sequentially declined 15% from the strong start to the year. All of this underscores the second quarter's difficult market environment. I will now go through our results for the second quarter. As compared with the year-ago quarter, net revenues were $374 million, which were up 4%. Net income was $26.1 million or $0.42 per diluted share, compared…

[Operator Instructions] Your first question comes from the line of Devin Ryan.

Just wanted to see if I could follow up on the comments about examining some businesses that are currently underperforming. Can you give any more detail on what businesses and kind of what you're thinking there?

Look, I'm -- I don’t want to -- suffice it to say, I don’t know -- naming or what purpose that would serve. We’ve already actually done it, okay and are continuing to do it. I think that some of the things that happened that impacted the first half results or the second quarter results, we think we've restructured to a certain extent that. But they did have an impact on our results. They're in those numbers. But I'm not -- I don't think it serves any purpose to actually provide any more detail, Devin.

Okay, that's fine. And then just you referenced this in your prepared remarks, but obviously week after week we're seeing money move out of equity mutual funds. And just want to get your perspective from the behavior that you're seeing from retail clients and maybe hearing from your advisors. I mean, it sounds like you think equity markets will see a better day. So, I guess, is it fair to say that you think that a lot of what we're seeing right now in terms of money flows is more cyclical than secular?

Well, it feels secular, actually. It’s been going on since May of 2010. I guess that the way I look at it is I think that a lot of the events, and the world events, have had a huge impact on confidence, whether it be the things I mentioned that actually impact confidence, to what you constantly read about, about the unstable situation in Europe, the fiscal cliff. All of these things result, in my view, and I don’t know how to weigh them, but equity outflows, I think we’ve only had 2, maybe 3 months where we actually had an inflow since May of 2010. You have $330 billion, I think the number is, of equity outflows. That has impacted issuance in equities, has impacted share volumes. And I don't believe that equity outflows are going to continue to 0. I think that they're going to stabilize. And I think that when you see what I feel is going to occur, I believe Europe will stabilize. I believe they will -- they’re not going to come up with one solution, but every day you see where they move toward a solution, which is going to be effectively wrapping [ph] all of that. But when that happens and when I believe that the fiscal cliff will be resolved, the election uncertainty will go away, all of these events are going to help what the market's already sensing today, which is undervalued equities. That’s why I think you're seeing a rally despite all these things. So I actually think that the markets will improve from here. Is it going to be gangbusters, robust? No, but it does not justify the disparate returns between equity returns measured by earnings to price versus the 10-year. Makes no sense to me. And I think that the environment will improve.

Got it, great. And then just lastly from me, within the results of principal transactions, equities were down 60% from last quarter. So just -- what was that mark-driven? And then also within the taxable line item, that was s down 22%. So just trying to get a sense of how much that maybe some of the softness in principal transaction was driven by a function of some mark-to-market issues, more so than slower client...

Well, 2 things: One is definitely slower volumes. We also -- we changed trading systems in January, and so a little bit of that's geography. I’ve had that comment a couple of times as it relates to the way we do things. And in many ways, Devin, I think you need to, as I said, you need to combine principal and commissions when you want to get a true picture of what's going on. But the short order is, is that equities are slower. Fixed income, certainly a little bit better, certainly, with Stone & Youngberg. But don't read too much into that.

Your next question comes from the line of Alex Blostein.

So wanted kind of go back to some of the things, Ron, you were talking about earlier, with your view on the market right now, and I guess your view on balancing building out the business in clearly a tough revenue environment. I guess from our perspective, what needs to happen and what do you guys need to see from a top line dynamic to slow down the growth of expenses to start protecting the margin a little bit?

Well, what I was trying to show was that I think that the viewpoint at the top level, the highest level that I can look at, I believe that the restructuring in the industry provides us a lot of opportunity to grow this franchise. And therefore we -- I do not believe -- and I don't come to work every day thinking that the markets are in a secular decline. I believe that the factors that have impacted investor confidence, and coupled with Europe in the -- all of these factors have weighed heavily on the ability for markets to expand. And I believe that they will generally improve from here. And therefore that gives me confidence to continue to invest in opportunities and to sacrifice some margin today for our increased profitability later. If you remember, and go back to 2009 or ‘10, when we opened from 100 offices and hired 700 people, the margins in our Private Client business declined from 25% to 16%. Yet today they're back to 26% on significantly higher profits. So the investments we're making today are to build a better, more profitable firm on a per share basis for our shareholders, and that's just the way it is. And if anyone wants to take exception with that, it would be that we are continuing to build this firm. And maybe some believes that markets are not going to return. I'm not in that camp.

Got it. And then you spoke about the fact that the leverage in the business is clearly a competitive advantage for you guys, as in from the perspective that you could add leverage while the others are shrinking. Can you be a little more specific, I guess, what business areas you're trying to grow more from a balance sheet perspective? Clearly, the bank is one of them, but is there anything else you're doing to add leverage on your balance sheet? And I guess what kind of businesses you're trying to take advantage of there?

I think there will be opportunity to increase. The broker-dealer is way underlevered at 2:1. I mean, it’s way underlevered. But we're very cautious. The funding markets are volatile. Frankly, the ability to fund pure broker-dealers with what’s happened in -- even the recent years, makes it, I think, a little bit prohibitive to be adding leverage in the broker-dealer. On the other hand, adding leverage in the bank, which is what we've been doing, our assets are over $3 billion, we're funding that with very low-cost deposits. And so you'll see the bank continue to grow. I think I said last quarter I expected it to be $3 billion. I expect it to grow from here. And that's where we're adding leverage, although we're not taking a lot of risk. For now, that's where I see the balance sheet expanding. When you compare us to peer groups, we are still underlevered, even in the bank, compared to our overall leverage ratios. So an increase of couple billion dollars, you take the net interest margin, you want to assume we don’t have to raise capital to do that. And we can increase, certainly increase, our earnings per share to get to peer levels of leverage. So that’s the way we're looking at it, but we’re not looking at starting trading operations in the broker-dealer.

Got it. That's helpful. And then just one numbers question. We’re kind of almost halfway through the third quarter now. Activity levels haven’t really picked up, even though the market's certainly better. How do you guys think about, I guess, expenses into back half of the year? Or so -- should stick to that comp rate of kind of like the 64-ish percent, I guess, into the back half? And then a on a non-comp side is the 90-ish, I guess, non-comp number from a just overall dollar perspective, is that kind of the outlook for the next few quarters as well?

Yes, I think that’s fair. I don’t know. The 64%, I think, is at the high end of the range that we'd given, okay? So I would still say that, that would be at the high end of the range. No, look, non-comp expenses are hard, because what happens, they lead the -- and any time the investment business, I what comes first, okay, it's the non-OpEx. I mean, you have to open the office. We’ve opened a number of offices. Rent starts on Day One. Revenue doesn't always come in. So the non-comp OpEx tends to be a little bit more difficult. I was commenting the other day when our non-comp OpEx a few years back was $20 million a quarter versus $90 million. So that increase has been a very good increase in that non-comp, because it’s been tied to revenue and profitability. But to answer your directly, I think the $90 million is fair. But as we make investments or acquisitions that number is going to change. I hope the number goes higher. I just want it to go lower as a percentage of revenue. Which is where need to work a little bit, because that -- I will tell you, the percentage of non-comp to revenue was not acceptable if that's what I thought it was going to be. What I'm trying to tell you in looking at these things, is we've made investments where we've got the OpEx, but the revenue has yet to come in, certainly on the run rate that we expect.

Your next question comes from the line of Joel Jeffrey.

Sticking with the expense line of questioning, can you just give us a little bit of color on the increase in other operating expenses quarter-to-quarter, what really drove that?

The line item [indiscernible]...

Yes.

It’s a combination. There was -- in looking at it, and I thought I'd have this question, we had, not real material, but it's material when you're trying to explain it this way. It was a combination of some of the investments coming in. And we had a couple of credits, not -- again, not significant at the quarter last quarter. But it does look more significant when you're trying to explain a $5 million increase. So it’s a combination of maybe last quarter would've been, if you compare them apples-to-apples, a little bit higher, and then the rest would be an increase in just our investments.

Okay. And then in terms of the investment you guys made into Knight, where -- how on the balance sheet you are holding that? Would that be in the trading securities or available-for-sale? And will that have any impact on the income statement going forward?

Well, I hope it has a positive impact on the income statement. I mean, I would think that first, I think we'll hold it in investments. It'll -- we'll probably record it as part of our Institutional Group, since I viewed it as a capital-raising banking-type transaction. And I believe that we will need to mark that to market. Okay? So today we have, subject to market conditions, but today we have 20 million shares with a cost of $1.50. The market's not $1.50.

So the unrealized gain would impact the income statement next quarter?

Last I checked, Joel.

Well, no, I mean, well, if it was an available-for-sale holding you [indiscernible]...

Well, no, you know what, Joel, that’s a fair question, although you can't hold equities in a bank, and the available-for-sale is a bank accounting. We do have different accounting between the bank and the broker-dealer. What’s held in the broker-dealer we mark to market daily. The bank can have available-for-sale and not -- and run it through what other comprehensive income or whatever it is. But that’s not the case here, I'm sorry. To answer your question directly, the mark to market will flow through the income statement.

Okay, great. And then just lastly, on the -- in the investments you’re talking about, and I appreciate some of the comments that you made about it breaking -- or potentially becoming profitable in 2012. Do you think that would be enough to offset the loss you guys sort of talk about in the first 6 months of this year, by next year?

You mean in that legacy line item?

Yes. Well, in the line item of the investments.

I'm sorry, investments. Absolutely.

Okay. So you believe those investments could -- will break -- that line would be a breakeven number in 2012 -- by the end of 2012 or into 2013?

By the end of 2013?

Yes.

On the same [indiscernible] measures, that same thing then as they do now, I would expect it to make money.

Your next question comes from the line of Hugh Miller.

Just I guess I had a question that wasn’t touched upon with regards to some of the strength you're seeing in M&A, especially given the global markets that we're seeing and the trends. Are there particular areas that you're kind of seeing the pockets of strength in to do advisory business? Or is it pretty spread across the board?

It's spread. Our M&A business obviously tends to be lumpy as most firms like ours. Even the big firms have lumpy M&A. I think what you're seeing in M&A for us is a strength in our franchise. As we build our franchise, we've added a lot of capability and a lot of capability on the advisory as well as the capital front. So I'm pleased when I see the level of M&A and the type of transactions that we’re doing. So we've done some buy-side transactions where we've competed head-to-head with some large firms that have bridge financings involved that we’ve been involved with, that have a number of debt take-outs, things that we were unable to do even 2 years ago that we’re doing today. And so that's what I like about the progress that we've made on that front. And I would say that we have a lot of market share that we can gain [ph] on the advisory side.

Okay. And if what you're commenting about, kind of focusing on the non-comp costs and kind of already doing some of that restructuring, should we expect to see some types of charges in the third quarter based on that restructuring effort? Or will that not be material?

A, don’t expect it; and B, it's not material; and C, a lot of it’s done.

Okay, okay. And a lot of questions were asked on the expense side. It seems as though a lot of it running on the non-comp, primarily in the Institutional Group. And I know you talked about some investments in that. But is there anything in particular you can just provide some color on, areas that were kind of running higher?

Well, I would -- the -- some of the things that we were looking at that we’ve already talked about resided in the Institutional Group, okay, in terms of some of the -- some of it is investment, and some of it's review of businesses. So I don’t know that I have any more color than that, other than I will go back to say that -- I want to reiterate -- I was debating to put it in for you guys, but you can go back and look at our historical PCG, because that’s where it’s most evident, is when we made those investments in PCG, what happened to our OpEx and our reported margins, how fast they -- how fast OpEx grew and how quickly our margins shrunk in that year- to 18-month period when we made all those investments. And then conversely how fast revenue grew without OpEx growing, that took our margins back to 26%. That’s the way I think about a lot of these things, and we are making investments in this market. There is a slew of opportunity for a firm positioned as we are, unlevered, to take advantage of the restructuring that’s going on, and we intend to do that. And that's what we’re doing. It's just that when you do it in a market and in a market environment in Q2, those investments stand out on margin compression. But I'm still going to do them.

Okay. And I guess speaking on the PCG side of the business, I know you guys were able to grow headcount in the quarter. We were hearing from one of your competitors about just kind of seeing a noticeable improvement, I think, during the quarter with the recruiting environment and just interest, given that some of the larger firms were seeing their advisors and the retention awards coming towards the end of that lifespan. I was just wondering if you could talk about what you're seeing. And I guess how competitive is the upfront money now relative to what you’ve seen in the past for recruiting those advisors?

Well, first of all, I think the environment is definitely improving. It’s going to improve because part of the restructuring that’s going to be going on at the very large firms is going to impact their private firms -- private wealth management segments. And so we definitely see an increase in recruiting opportunities. We also have seen that may be the apex of recruiting deals, back at the end of last year. So we see that softening. So I would echo those comments as to what we are seeing. That often gets dampened by difficult market conditions, though, because it’s hard to recruit and move people in and out of markets. So it’s a little of both but certainly on balance, recruiting, the environment is better.

Your next question comes from the line of Michael Wong.

Michael Wong from Morningstar. So I noticed that your Institutional Group commission revenue, just that specific section, was up about 20% sequentially when industry equity trading volumes were flat. And it looks like the breakout of your equity and fixed income brokerage were down. So can you just talk about how that mapped out?

Yes, Michael, as I said, there are -- we've had a little bit of geography issues when we moved systems. It all related -- we had it in the year past, where we don't principal trade, we don't take a black box market risk. But there's a technical regulation, a reg show [ph], that we had last year, that when we got it in the right geography on the balance sheet, we then changed trading systems in January of this year. We completely rolled out a new trading system. And I think some of that geography was there, and I would look at commissions and principal transactions together. Some of it is there, but overall our equity volumes were down. So if you look at, you combine equity principal and equity commissions, you're going to see that they're down.

Okay. So looking at headcount, so if I take the headcount growth year -- growth this year so far, and take out the net increase in financial advisors and the 52 people you added in fixed income personnel, it looks like headcount outside of those 2 focused area was about 6. So outside of those 2 focused areas, are you expecting headcount to go down as you restructure a little more? Are you planning to add there or add more especially to let’s say your Institutional Group in order to bring the Institutional Group operating contribution closer to your previous goal of let’s say 60-40 split between the Institutional Group and Global Wealth Management?

Well, look, we'll make investment -- I mean, you're telling me a net of 6 people absent those focus areas. Well, those focus areas are revenue-producing people. My view on it is that our current infrastructure, our current support infrastructure, is adequate to add a lot more producing people. We have a lot of leverage in the firm that we have today. So the fact -- that’s part of what I'm trying to point out, is that we've hired a lot of those net increase are all revenue-producing people. OpEx has gotten here before revenue, which always happens. And we've not hired a lot of people in support, which we don’t feel we have to. We feel that we can add revenue people, and on the margin that's -- those are good hires.

Last question from me. So looking at the transition pay, which had that 5% drag, was a disproportionate amount of that related to, I guess, the UBS financial advisors? Or was that related to just the normal hiring of financial advisors?

It’s question that probably needs to be answered a little bit deeper, but I'll try to give it quickly. I guess what I'm trying to say is transition pay in a growing firm is always going to be there. However, we have grown from -- in a few years we've grown from 500 advisors to 2,000 advisors, such to the point we have a lot of transition pay. And the normalized transition pay isn’t almost 6%. It probably -- say it’s 3% or 4%. And so that’s what I'm just trying to point out, is that we've done a lot of hiring. We did the UBS transaction. We hired 800 people in that year, and we were on a real hiring. And so when you go from 500 to 2,000, transition pay as a percentage of revenue was higher than it would be in a normal growth environment. That’s what I was trying to point out. But it doesn’t go away unless we quit hiring. And then it eventually goes away.

There are no further questions at this time. Mr. Kruszewski, I turn the call back over to you.

Well, I would like to thank everyone for their interest in our company. And I want to end again by saying that last quarter when I looked forward, I felt the Street was more optimistic than what I saw. And today I feel the pessimism is more than what I'm seeing in activity and optimism. So I'll leave you with that thought. We'll see how it all plays out. With that, talk to you next quarter. Bye.

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