Stifel Financial Corp.

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 with net income of $3.4 million or $0.05 per diluted share. Of course, last year’s quarter included a nearly $28 million after-tax charge or $0.45 per diluted share related to previously disclosed litigation-related charges and merger-related expenses.

Pre-tax margin for the quarter was 12%. I will discuss the impact of our growth strategy on our pre-tax margins in a moment.

Our results were lower than Street expectations by 10% mainly due to higher non-comp expenses and the significant investments in our growth, which again I will discuss. Net revenues were essentially in-line, off 1%, while total non-interest expense was 7% higher.

I'm going to skip over our 6-month results, which basically tell the same story, which was an increase in revenue with higher expenses.

The next slide compares our sources of revenues. Commission revenues decreased 8% to $127.4 million in the second quarter from $138 million last year.

Principal transaction revenues increased 15% to nearly $92 million from $80 million in the year-ago quarter. Investment banking revenues were up 5% to $67.4 million.

The year-over-year increase was the result of an increase in advisory fees and fixed income capital-raising activities, primarily attributable to our Stone & Youngberg acquisition. Sequentially, the difficult market for capital raising, particularly in the last part of the second quarter, resulted in a 26% sequential decline.

This decline in capital raising was almost entirely offset by increase in advisory revenues.

Looking at our brokerage revenues. Commissions and principal transactions combined were flat compared with last year and decreased 9% sequentially.

Year-over-year taxable debt increased 11%, and muni debt increased 26.5% while equity declined 5%. As I said, the increases in taxables and muni are attributable to increased fixed income trading volumes, again, as compared to last year, tighter credit spreads and our acquisition of Stone & Youngberg in October 2011.

The next slide reviews our non-interest expenses. Compensation and benefits as a percentage of net revenues was 63.9% compared to 64.1% in the year-ago quarter and 63.6% in the first quarter of 2012.

Our comp ratio came in, in our targeted range of 62% to 64%.

Transition pay as a percentage of net revenues was 5% in the second quarter of 2012. Again, this is a significant line item that I expect to decrease as a percentage of revenues as it reflects the significant amount of primarily financial advisors that we've hired in the last 3 years.

As you know, our financial advisors in the 5 years has gone from about 500 to nearly 2,000, and that's driving a very high transition pay line item in our financial statements.

Non-comp operating expenses were $91 million in the second quarter or 24.4% of net revenues. The increase in sequential and year-over-year non-comp OpEx is mainly in communications and quote [ph], data processing, occupancy and client conferences, and it's also attributable to investments in growth that I will detail -- I will review in detail in a moment.

The 6-month non-interest expenses are consistent with my previous comments. And I'll skip over this next slide.

I'll now turn to a segment comparison. Overall results for the quarter in both Global Wealth Management and the Institutional Group reflect difficult market conditions but are an improvement year-over-year.

The diversity and integration of our business model offset the challenging periods. Revenues in both Global Wealth and Institutional group were up as compared to last year, 6.4% and nearly 2%, respectively, but PCG was down 11% and our Institutional Group was down 26% sequentially.

Global Wealth operating contribution increased 10.7%, which helped offset the challenges faced by our Institutional Group, but had operating contribution which was down 20%.

Turning to the Global Wealth results. Again, I am pleased with the results in this segment as we have operating contributions of 26%.

Net revenues for the quarter were $240 million which increased 6.4% over last year. Asset management service fees increased due to an increase in total client assets.

That was really a result of both market performance and inflows.

Net interest revenues increased as a result of the growth of Stifel Bank, and our investment banking line item and private client were higher. Fee-based accounts increased 9% to nearly $20 billion, a little over $20 billion sequentially.

That was driven by higher asset levels and a 4% increase in new accounts.

Turning to the next slide on Stifel Bank. Asset quality remains high.

Our assets now exceed $3 billion -- actually $3.1 billion as of June 30, 2012, up nearly 70% from a year ago. Our investment securities totaled $1.8 billion, which is up 57%.

Our loan portfolio today is over $800 million and our deposits of $2.8 billion, mostly which are sourced from the brokerage, increased nearly 70%, which is in line with the increase in our assets. In short, we continue to prudently grow the bank's assets on a risk-adjusted basis.

The next slide looks at our Institutional Group. Year-over-year comparisons show that net revenues increased 2% to $135 million.

Stone & Youngberg contributed nicely to our fixed income brokerage and investment banking results. Pre-tax operating income of $17.5 million represents, though, a 20% decrease, and it also declined 26% sequentially.

Margins simply came under pressure due to slower activity and an increase in operating expenses.

Turning to the next slide. I'll just walk you through our Institutional Group revenues.

Our institutional brokerage revenues were $74.9 million, which was up 2.4% compared with the second quarter of ’11. Our equity institutional brokerage revenues were $38.5 million, which was a 7.7% decrease compared to last year, just reflecting again lower overall average daily volumes.

Offsetting this decline, fixed income institutional brokerage revenues were $36.5 million, which was a 16% increase from last year. Although both of our flow businesses show the weakness in the second quarter, they showed sequential declines.

Investment banking revenues increased slightly to $58.8 million. Advisory fee revenues were a solid $26.6 million, which was up 7.2%.

And capital raising revenues were $32.2 million, which was a 3% decrease. Basically our fixed income origination offset declines in our equity origination on the capital-raising front.

In terms of our investment banking activity. Our Equity Capital Markets Group results again reflect the environment.

While we started off the quarter strong, it was really a continuation, I think as I said last year -- last quarter, I saw what I thought would be some weakness, which unfortunately came true. U.S.

IPO activity slowed dramatically in the second half of May and the first 3 weeks of June with no IPOs pricing until June 26. And that was the result primarily, or almost exclusively, of the Facebook IPO.

Volatility increased and investors remained cautious after that. Despite the slowdown in the second half, we still priced 12 IPOs in the quarter, book running 5, which was over 40%, which is our strategic initiative to do more book run deals, both IPOs and secondaries.

While the overall fee pool in the U.S. listed equities was down 29% in the first half of ‘12 versus last year, our market share is up.

We continue to, as I said, make inroads in our effort to book run more business and grow the franchise.

With the start of the new quarter I will say investors’ appetite for both yield and growth equities has improved. The capital markets business is bumpy, but we expect public issuers to pick up activity with continued market stability.

Our pipeline is building, but again, the execution is dependent on the markets cooperating.

Looking at M&A. Global M&A environment is slowing in ‘12 with annualized volumes down 16%.

We remained very active in the second quarter. We had 13 announced or closed M&A deals, including 7 buy-side and 6 sell-side assignments.

In addition, we've announced or closed another 7 M&A deals in July and the first week of August for a total of 36 year-to-date.

The next slide looks at our capital structure as of June. As of June 2012, our total assets were $6.1 billion and total capitalization was $1.6 billion.

Book value per share was $25.63. Tier 1 capital to risk-weighted assets was 26%.

Our debt-to-equity is 18.8%, and our leverage ratio of total assets divided by total capitalization was 3.8x while our equity capitalization, just looking at equity, was 4.5x. And we just simply continue to maintain a relatively unlevered balance sheet.

Looking at other financial data. As of June of 2012, the leverage ratio at the parent broker-dealer was 2.2%, which underscores our conservative nature toward funding in the broker-dealer, while at the bank it was 13.2%, which we believe is reasonable to fund the future growth of the bank.

From a year-ago quarter we added a net 70 financial advisors. Recruiting remains active.

We’ve had some great new hires, and we'll continue to seek opportunities to recruit top seasoned advisors. Full-time associates has -- actually opposite to what’s been going on in the industry, which has seen substantial decreases in headcount, our headcount has increased 5% from last year.

Total client assets are -- total client assets, which includes deposits, are nearly $138 billion. So a nice increase compared to June of last year.

Slide 19 looks at our Level 3 assets. As in the past, the majority of our Level 3 assets are auction rate securities with a carrying value of $175 million.

But of that, nearly $84 million are ARS held at Stifel Bank as part of that investment portfolio. So it’s not -- it's things that we have bought versus what -- bought for investment versus what we’ve repurchased from customers as pursuant to our settlement as it related to the ARS matter.

Other investments of about $32 million, as been consistent, is private investments held by our TWPG subsidiary.

Before I open the call for Q&A, I want to share my view of the markets and our company strategy. Numerous recent events simply have eroded investor confidence.

The flash crash of 2010, the Facebook IPO, Peregrin,e, MF Global, Libor manipulation, even last week's trading disruption at Knight, simply have undermined investor confidence. But what I really see is a tug-of-war between what should be simply modest growth expectations and the fear of deflation, those are the one -- one side being looking for slight growth and the other side being a worry of deflation, results in a wide risk premium.

The risk premium, the way I'd define it, if you look at yesterday’s close, the 2012 earnings yield on the S&P 500 is 7.4%, while the 10-year was around 1.6%. So that simply doesn’t make much sense to me, as you look at it.

It's either deflation is going to really hurt earnings and bring the earnings yield down substantially by having the S&P fall, or the bond yields are very low. When you think of the 10-year at 1.6% yet the 10-year inflation rate being 2.2% annual, that doesn’t make much sense.

I believe that, and I think this goes to our strategy, I believe that Europe will stabilize further, the fiscal cliff and tax issues will be resolved, and deflationary concerns will ease, all of which will generally improve investor confidence. This will narrow the risk premium that I spoke about earlier in favor of equities, in my opinion.

Our company with that outlook is positioned well in a rebounding or normalized equity market. Therefore, we continue to invest as we have done over the past 7 years.

We are building a firm to take advantage of the restructuring of the financial services industry.

Looking at our strategy as it relates to that market outlook, our strategy is straightforward. It’s to take advantage of opportunities.

We believe the events over the past years -- few years provide us tremendous opportunity to build our capabilities while gaining market share. Simply the structural changes required by Dodd-Frank and Basel III will require that the large global firms both shrink and restructure their businesses in order to be capital compliant while also achieving acceptable return on invested capital.

The new regulatory framework generally does not burden Stifel, and our unlevered balance sheet provides us ample dry powder to take advantage of opportunities.

We have built this business over the past several years by prudently evaluating opportunities and executing on those that provide acceptable risk-adjusted return on investment, always measured on a long-term basis. We plan to continue this simple yet proven effective plan for us.

We are well-positioned to gain market share.

However, the execution of our ongoing strategy has impacted our margins. Year-to-date we've hired 103 financial advisors.

We have opened 12 private client offices, and since last year, June of last year, we've opened 25 offices. We've lost money in making these investments.

They've impacted our margins, but we expect these offices to turn profitable.

We’ve also made significant investments in fixed income sales, trading and research, an area we’ve hired 52 professionals so far this year. We’ve also selectively hired senior investment banking professionals and research analysts in areas where we believe their expertise are going to have a meaningful impact on our franchise.

Additionally, we’re also evaluating some underperforming businesses.

So next I will actually illustrate the impact of our investments the way I look at it. This slide shows what I will call our legacy or core businesses separated from the revenues generated and expenses paid for investments in new businesses and new hires.

In the 6 months ended June 30 of ‘12 our core business increased 7% -- the revenues increased [ph] 7% with a compensation ratio of 62.7% and importantly pre-tax margins of 15.4%.

The revenues generated by our new investments were approximately $14 million, while total expenses were $28 million, impacting earnings per share by $0.13, dropped our margins nearly 200 basis points. We expect that these businesses, these investments, will generate profits and will get to our normalized return margins, which are 15%, and we expect them to increase revenue especially on the private client side.

Also as I mentioned, we’re reviewing certain businesses that are underperforming. Bottom line, we are growing in this market.

One last topic I would like to address before Q&A is our investment in Knight Capital. We invested $30 million that converts into 20 million common shares of Knight at $1.50.

Until we convert we will receive a 2% dividend. I've been asked a lot of questions as to why we did this.

From my perspective it was a financial investment that was both attractive, but importantly, we participated in an industry solution for Knight, who is a major market liquidity provider. We do not have a board seat.

I've been asked that question.

In conclusion, I am confident in the second half of 2012. Some of our new businesses will start to generate increased revenues and profits.

On last quarter’s call I was cautious given future expectation. Today, however, I believe expectations have come in line with the current environment.

I expect the environment to actually improve, and therefore I am optimistic as I sit here today.

Stifel continues to grow through hiring, opening offices and expanding capabilities. We are evaluating underperforming business and know we have work to do on our non-cash expenses, but overall I am pleased with the performance of our core business and believe we are well-positioned to gain market share.

I will now open the call for questions.

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.

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.

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.

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.

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.

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.