雷蒙詹姆斯金融 (RJF) 2003 Q2 法說會逐字稿

Good afternoon, my name is Beth and I'll be your conference facilitator today, I would like to welcome everyone to the Raymond James 1st quarter conference call. All lines have been placed on mute to prevent background noise. After the speakers remarks, there will be a question and answer period. If you would like to ask a question during this time, press the star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Mr. James, you may begin the conference.

Good afternoon, this is Tom James, Chief Executive Officer of Raymond James Financial and I'm joined by Jeff Julien, our CFO, and we welcome you to our March quarterly conference call.

Let me first run through some of the basic numbers and then I will refer to the attachment that we presented this time with respect to business lines and after we go over some of the information, that attaches thereto, we'll then open it up for questions, so, I'm sure you'll have some new ones, given the new details that we're providing you.

The three months ending March was not a particularly good quarter in the sense that revenues were down 8% from last year's comparable quarter, with essentially the same time period covered. I will point out, however, that there was a 2% increase in revenues from December quarter and the total revenues were 350 million. Essentially, the change is not all due to gross interest differential as it has been in recent periods, only 7.5 million is attributable to that source. Actually, commissions were a larger contributing factor, as they dropped 8% to 247 million for the period. In addition, there was slightly less investment banking revenue than normal, or than last year, because the new issue market was basically morbid. We had four managed or co-managed offerings during nine during the same period last year.

The investment advisory fee revenues were somewhat less than they were last year, down 9%, resulting from the fact that average assets that were built upon during the period were slightly less, about a billion-and-a-half dollars in total in the mutual funds, and our private managed accounts down from last year, which results in less investment advisory fees. The net trading profits were up for the quarter, financial service fees were up somewhat, and other was roughly flat, year to year.

On the expense side, total expenses were down 7% during the period and compensation commissions and benefits were down 3%. Essentially, if you look underneath that a little bit to understand what the relationship is to the commission decline, you would see that part of the reason that decline is not as large as the decline in commission -- or the decline in payouts is not as large as the decline in gross commissions is that our administrative costs were flat for the period, which reflects a fairly large decline in employees in our headquarters and back office operations, probably 200 people, which is roughly 4%, but that sort of offsets our pay excalation during the year.

So, while we've exercised control in terms of people and continued not to totally refill attrition, we have not been able to cut the overall cost at the same rate that revenues have declined during the period. And, again, that's somewhat different than past periods because we have the commission decline contributing a large amount to the reduction in revenues. So, it is not as good an expense number as it may first appear in looking at the total cost you would like to have it down more than this because we have exercised good control during the period.

But I would point out to you that we do run the risk, if we accelerate the -- the rate of personnel reductions at the headquarters office of not providing adequate service because while commissions declined during the period, we once again experienced a increase in the number of financial advisors, you know, when you look at these comparisons. And consequently, we're actually servicing more people. Their productivity has declined. As the period of this market malaise as extended. People become less active and, I don't know whether you would call them in shock or just waiting for better times ahead.

And if one is to draw upon the experience of past similar periods like the '70s, you, in effect, really do lessen the trading volume during periods like this. And consequently, the -- the retail area of the business is impacted probably from a profitability standpoint more than the other segments of the business, with the exception of underwriting business. So that's sort of the picture of revenue and expenses. I would say that in most of the areas, we had pretty good control on expense versus comparable periods last year. And, as a result, profits were down from the 18.8 reported last year to 15.2. Which is $0.31 a share versus $0.38.

And we did repurchase during the period a million 440,000 shares of our stock at a average price slightly less than $25 a share so that we have a -- a lower average amount of shares outstanding, albeit not as large as that amount, because the timing of the repurchases and also because stock is actually purchased under our stock repurchase plans and stock option plans. But we did have an opportunity during this period to repurchase stock at priceless than one-and-a-half times book which, as I've told you before, is pretty much our initiation point for becoming active in looking for blocks of stock.

Again, the second part of the policy is that we do not attempt to influence prices of the stock, if the direction is down. We stand in and buy blocks but we're not trying to do anything that would influence the stock to move higher. During these repurchase periods. So prior that stand point, we were quite happy to be able to repurchase some stock. But, you know, there was not enough net there if you look at the reported number of common shares outstanding to impact the share numbers to any great degree during the period.

Now, interestingly, one of the -- and I think this will point out some more of the underlying events that are reoccurring when we discuss segments, this is a new presentation that we're currently utilizing; consequently, I -- I certainly cannot claim that it is perfect, if any numbers are ever perfect. But the fact is that I think it is instructive in terms of taking a look at what is happening in our businesses.

If you look at the retail segment, you can see the impact of what I mentioned with respect to lower revenues from last year, this period, all -- although they were up somewhat from the December period. And you have to remember that 20 million also includes 5 million of gross interest income in it that are related to retail oriented activities. So the real commission decline is not the whole amount of the revenue decline in the retail segment. When you go to the bottom line, and you look at the bottom line, you may say, "gee whiz", the comparison looks pretty good given that result.

In fact, the contribution of the segment is, on a pretax basis, is higher than it was last year at this time. And substantially higher than it was in December of 2002. And that is a function of legal costs, net legal additions this quarter were at a lower level than they were last time, probably accounts for a good bit of that. We had good expense control at the retail level in the branches, in terms of support personnel for our employee base model.

We have attempted at all levels of retail to exercise very close control over expenses, as, you know, given the revenue lines, they are out of our normal guideline levels, and it certainly costs more in percentage terms to run branches today than it did three years ago. So this is a major effort on our ongoing effort on our part to continue to control expenses in this area. I'm not as -- you know, I'm not overly bullish that this segment is going to get a lot more profitable at any time in the near future, given the fact that people are going to have a memory about this experience, as they did in the 1970s.

Although I would point out to you all that when we emerged from the -- in the fall of '75 from that particular time period, results changed markedly at our firm as productivity began to increase. And then by the time you got to the late 1970s, even though those were not great times, retail was performing far more acceptably. So as you look at other firms that have retail results, I think that you will see that this extended period is impacting their results markedly. And I -- you know, I point you to AG Edwards and some other firms like that that have substantial retail and you can look at the retail segments and Merrill Lynch and places like that to get this overall view of what is going on.

And the only other part that I would point out to you is that the recruiting continues to be successful, even though accounts are down in the employee broker dealer partially because we are reclassifying what we call our AFAs, glorified junior partners or assistants, people that you would not classify as full-time producer quality. But do work on team bases with their senior represents. The -- the account is down for that reason. It is also down because we continue to experience a pretty high rate of failure amongst those in our training programs over the last three years. We continue to -- to hire.

As a matter of fact, we -- we had 18 in our class that was introduced to our department heads yesterday, or Monday. And consequently, you know, we're going to continue to have a little higher failure rate as those that are concerned with expense control try to prune the list sooner in order not to -- in order not to carry people that they think are not going to be successful, going forward.

On the other hand though, recruiting activities picked up, partially as a function of prudential's merger into Wachovia, general need, I would say, as a practical matter for some of these brokers for front money due to their own lower productions over periods of time. And, surprisingly, as I've reported to you before on the independent contractor front, activity is -- remains pretty good on independent contractor recruiting. And, again, here the entrepreneurial urge you would normally expect to be mitigated by the increased risk associated with going out in a environment where business is not easy.

So this is actually very encouraging to us. And I would say that that puts us in the position where we do have a lot of leverage in the retail system, should this condition in the marketplace change any time in the near future. I -- I -- as I said, I expect it to come back somewhat slower. It is clearly trying to make some sort of a bottom in here. But I would still probably realize the market be -- given the uncertainty of world events, as well as those here in the United States, and corporate earnings, that, you know, we probably could have a 25% chance that you would go to new lows. Albeit, I think, we probably have seen the lows. And we're trying, in a volatile fashion, to establish a bottom.

On the capital markets front, I would say that fixed income continues to operate well. During these periods, it is not quite as good as it was last year this quarter for us. Although some of my peer group members, I know, have reported that their trading operations are even somewhat better. In any case, they look very good relatively speaking and we are adding personnel in some of these areas that have been successful for us, more fixed income taxable salesmen, and some municipal salesmen, as well as traders that support them. More people in -- in risk management control and things of that nature.

To make sure that any of our product extensions do not involve any unnecessary risk. So the institutional sales in equity are somewhat less vibrant currently, but they're still good. They are just not -- they were up last year over the prior year by a pretty good amount. And we're experiencing declines in Europe, and -- and small declines domestically. As you might guess, with a weak dollar, the Europeans are less inclined to buy US securities, and their own securities if anything are cheaper than ours, so if I were a asset manager there I would probably not make my traditional allocations to the U.S. market either, especially given some of these uncertainties that I mentioned on a worldwide basis.

While the war is going well, no one quite knows what the aftermath will cost the United States in terms of real out-of-pocket dollars and problems with our own economy going forward. So the -- if you look at the profit line on that particular effort, you can see that it is -- it has declined by 5.6 million from last year. And, as I said, part of -- a little bit of that is fixed income. The majority of is just this lack of activity in the new issue market, albeit merger and acquisition business is still reasonably good. And I do not see any reason why that will change. If anything, it may get better. Along with the strategic consulting on bankruptcies and reorganizations.

On the asset management front, we reported revenues that were down 9%, as I said, on the line basis. Not much different from the immediately preceding quarter. And on the profit line, we're down roughly 10%. That's really due just to the shortfall in revenues during the period. We've continued to manage costs very well there. And we have -- we still are experienced good net sales.

Unfortunately, the market depreciation is offset some of that growth. Albeit the -- the totals that the -- at the end of March, which were in the 16.4 billion range were -- were up, you know, 5% from the immediately preceding quarter so that, you know, we continue to show improvement. And we continue particularly to raise new money in the institutional front for eagle managers during this period.

So, the outlook for the business there is -- is still good. It is just a question of having a engine that is capable of handling far more money than we're currently handling. And, you know, we need a little better market to support the effort. We have split out as a segment the bank. The bank is not really a large operation at Raymond James. However, its profits are growing. They're growing, not because we're growing footings.

We're actually not attempting to grow footings at any kind of a dramatic rate currently. We are restructuring the asset side of the balance sheet by replacing mortgage-backed securities with whole loans. Of all types. Normal residential mortgages, commercial mortgages, and corporate loans. And -- and I -- I would say good progress is being made on that front as we speak. But you do not see it as much in the bottom line, when you look at that bottom line as probably is due. And the reason is that we have a very rigorous reserve policy. And as we grow those categories of assets, we in fact are, you know, roughly adding 1% bad debt reserves which essentially means that during this period we probably added 7 or 800,000 dollars to bad debts on the reserve front.

We would like to think, given our conservative underwriting that that will be more than enough. But who knows? So that part of the business I would say is going along fairly well. We're actually making more progress on this front than we have in recent years. And I'm encouraged, if it were not for considerable rates of refinancing, we'd be finished with this. And we could be back to growing the bottom -- the -- the balance sheet footings. By encouraging our clients to by CDs or make more deposits in bank interest-baring deposits. So the -- the outlook there is still reasonably good and I expect a continuation of profit increases, just not major when it is -- not major when you compare it to asset management. Or other capital markets.

The other area is a catchall obviously by definition. As you can see, revenues were down considerably. And we experienced a loss during the period. And that's really a reversal of our foreign joint ventures, which had been contributing profits heretofore. But that good profitability has mainly been interrupted by just general market mal lays every place. I expect that things will get better, especially in the emerging market areas, as the situation in the Middle East clarifies, and is resolved here. And that will, you know, make people a little more comfortable with some of these kinds of investments going forward. And so I expect, actually, to see this return to a profit line going forward. I do not expect it to be a -- a loss, as it was this quarter. That's pretty much the financial numbers discussion.

We are continuing at a pace with the tower four construction where we now have glassed in the vast majority of the whole new building addition. Which is a good thing, since summers bring more rains in Florida. So this is on target for a January 2004 delivery. And as far as I know, costs are reasonably on schedule with respect to that. We have continued to generate good performance in our asset management, money management disciplines. That's why the money continues to come in, net. We continue to have four-star type mutual funds or better. So the results are -- are good there.

We have focused, as you might guess, a lot of management time, as everyone in the industry is, on issues of control and legal action, as I've said before.

The nature of bad markets is they expose problems, you do not see that, because rising tides, when the market is going up, manage to cover up any kind of behavioral activities that might result in losses to broker/dealers and I might say, you know, some of these losses, as I've said before, do not relate whatever to activity; they result much more from losses that cause empathy for the arbitration panels, and juries that hear these cases. And often we elect to settle for more than perhaps we should settle for just because the cost of litigation these days is mammoth. I mean, this environment we're -- in which we're living, you know, I would tell you one of the biggest problems that American industry has is tort reform, whether it is tobacco companies, asbestos companies, financial services companies, doctors, the fact is that there's a awful lot of time being spent on things that are not necessarily better for clients as a whole. So this is a concern for the whole industry, not just the concern of those here at Raymond James.

We obviously have supported the President's tax proposals, here, we think the economy does need somewhat of a shot in the arm. While the elimination of double taxation on dividends is not, perhaps, the most immediate hit to take, it probably has the most long-term effect of any of the actions, because it actually improves the way the free enterprise system works. So, if you could afford to adopt this whole program, you know, I would think it would be in the best interests of the country to do so. Unfortunately, this, like most issues on Capitol Hill, have evolved to party-based politics and aren't really based on, necessarily, the best interests of the public and consequently, you know, we have a biparty alignment by and large on these issues. It is going to be extremely difficult to pass the entirety of the bill. So, somewhere between that 350 billion and the 726 billion that had been recommended by the Senate, I guess, we will have some sort of a compromise come out of Congress and the Senate here going forward and that will be good for our business.

So, I once again apologize for the fact that the focus of my comments has to be on negative results. We do not like it any better than our shareholders do, the attitudes of our sales force are surprisingly good. I just returned from another national conference in Dallas, where we had our independent contractor group principally from the West assembled. The attitudes of those people were -- were pretty good, given the fact that these people are obviously having to cope with difficult conditions in the marketplace to not only retain their income levels, but to keep assuaging clients during these periods of poor results for clients who have been frustrated and disappointed with the results of their investments. With that, I will open this up to questions and Jeff and I are here to try to answer any more detailed questions you might have.

At this time I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question is from Chris Allen.

Hey, guys, how are you doing?

Hi, Chris.

Just a question in terms of the retail segment. Client trade volumes declined sequentially, margin balances were down sequentially. It just seems -- but retail revenues were up on a retail basis, I'm wondering if it was due to seasonal factors, or did you guys raise pricing on commission or retail trades? If you could give me some color on that, that would be great.

The, as I said, the gross interest revenues declined. But if you look March to March, you know, that whole retail segment had a decline in revenues.

Um-hum.

And part of it was commission. We have not raised commission rates, as a matter of fact, we're looking at that currently, as we do on a regular basis.

Okay.

Anyway, and we're looking at some of the other fee alternatives, as you know, some firms have introduced account fees and things of that nature that we have not introduced to date. We're taking a look at whether we want to follow some of those leaders, or not, in terms of pricing.

Um-hum.

The other thing that's happened here is net interest earnings which, you know, do contribute to the results in the retail segment.

Yeah.

They're actually up a little bit lately, mainly because the trend of interest rates has yielded a more favorable spread than we had at some of the earlier comparable periods. And even though rates are lower on free credit balances that we have at the firm, the -- in our overnight investments, for our own account, or the 15C3 accounts, the spread on the margin accounts is better, than the spread on the 15C3 investments is better.

So those -- that is somewhat offset and legal here is a big -- a big differential quarter to quarter, because you just do not know, you know, what cases are going to get settled for less than you expected, what new cases are going to enter onto the log, et cetera.

Um-hum.

And so there's a pretty large variance quarter to quarter. To be frank, under the existing rule set by which we set reserves, we cannot do it in a way that makes any more sensible logic that would -- that would yield a more logical result. So, you know, it is not my favorite way of doing it, but that happens to be the business.

Yeah. No, I understand that for the bottom line. I'm just looking top line, retail revenues from four -- the -- the December quarter and to this quarter end.

Yeah, so you're looking at the 230 to 234?

Exact limit I know net interest income, that is going to.

Yeah. And I will -- I will remind you that March quarters are usually a little more view vibrant than the December quarters usually because the holiday season has a effect on the market place.

Okay.

I would have actually expected us to be up more and I think probably the TV time index watching the war.

Sure.

Rather than the market is also impacting commission behavior. That may sound strange, but I really believe that.

Thanks a lot.

Thank you.

Your next question comes from Justin Hughes.

Good morning. First of all, thank you for the additional disclosure this quarter, that helps us analyze the trends a lot.

Second of all, I wanted to ask up about your comp ratio, it went to 73.3% of revenue this quarter, the highest at least in recent history. Can you explain this, you know, why that was so much higher, is it a question of mix and where should we expect to see that going for the rest of the year?

A it is probably your volume variance factor, where commissions have declined. The -- B, I would tell you is, you know, independent contractor revenues do not make up a very large percentage in the payouts that are high.

So, but the commissions were actually up quarter to quarter. so that is why I thought that the comp ratio would go down a little bit.

Well, no. But if -- commissions were up -- yeah. The -- my point is if you change your mix of business between your employees and your contractors.

Okay. So it was -- it was a question of mix of business between employees and contractors.

You get a -- you know, you get a -- it is just different places that the expenses enter the line items. I mean, if you get a -- when it comes from a independent contractor, it may be 77 or 78% payout, whereas by the time you add in some of the indirect compensation payouts, you may be at 54, 55% and the employee-based model. So, if you get a mixed change it is a pretty material factor.

Okay. And do you think that trend will continue? I mean is your independent.

Remember that admin was flat, so if you're looking at the total expense, you know, the compensation, commissions and benefits line.

Um-hum.

You know, that -- the fact that administration costs were flat quarter to quarter when revenues dropped the 8%, you know, it is -- it is offsetting part of the decline in commission payout.

At which line? You're saying admin, you mean the combination of communications, occupancy?

No, no, no, I mean the payment to the home office employees.

It is a component of compensation expense.

Oh, okay. So we just cannot see that number.

Yeah, right.

Okay. Are you seeing better growth from the independent advisor channel, and so should we expect to see that comp ratio continue to maintain here or go up a little bit?

Yes. If you look over time, if you drew a trend line, would you see that the balance between our employee counts and -- and independent contractor counts have changed the percentage mix considerably to the benefit of the independent contractor group. And, you know, you should not be as concerned by that. Because what happened, what -- what happens there is that the differences is essentially comprehended in the other categories in the employee base model. So that your communication costs will be higher, your occupancy will be higher for the employees, whereas, out of the 78% the independent contractors' paying for those expenses at the local level.

Um-hum, okay. The next question was on your -- on the capital markets group, if I look year-over-year, the revenue was only down, you know, $3 million, and yet the pretax was, you know, cut in half. You know, down six to 7 million. Is there anything non-recurring in the number, were there any gains in the prior year number?

Nothing really non-recurring, except that deals obviously are non-recurring. They are almost discreet in the way that they occur. But we had a -- we had a trading decline of about $3 million in terms of -- Um-hum. -- so that really goes almost direct to the bottom line. You are still paying the traders anyway.

Yeah.

So, you know, that is $3 million of the profit differential.

So really any change in the revenue here, whether it be up or down, is probably going to go to the bottom line.

Not the institutional sales commissions, which were off about a million-and-a-half in the quarter. They go down net of the commission payouts, but, you know, you're not talking a lot there. You're talking about between the -- the institutional salesmen and the sales traders, the traders, you are probably talking only about 25 or 30% comp costs.

Okay. Thank you.

Your next question comes from Lauren Smith.

Hi, Jeff. How are you?

Good, thanks.

You -- first, to mirror someone else's comments about the disclosure. It is so comprehensive now that I almost didn't have anything to ask you.

That's the goal.

But I do have a couple of questions.

Actually, I want to compliment those of you who do ask the questions, because we're -- you know, we're really working not just here in our quarterly conference call or are on our quarterly releases but in the quarterly reports and annual reports to provide more useful information, not just for our clients, our shareholders, but for analysts so that they can do a better job of analyzing what is already a very difficult business in the first place.

Sure. A couple of -- a couple of questions. Just a follow upon the comp question. Was there any -- did you have a increase in total head count at all? Because I know, you know, you still selectively are hiring in certain areas of your business. Would that have had any impact on the overall comp ratio?

There are selected areas that are still growing.

You are talking about the employee count now, because I've told you about...

The total head count, not focus on the IC, the independent contractors and all of that.

If you look at fixed income, we probably are adding some employees. Our text credit housing business, growing by leaps and bounds, albeit a very small part of our business, is -- you know, adding people net. Whereas our operation departments are dropping people by and large and, you know, that -- that is just part of what goes on. I mean, it is -- it is -- as I said, we continue to drop this employee count. If you look at the trend, it continues to decline.

The grand total employee count was down quarter to quarter, slightly.

Well, where does it stand, roughly?

Total head count? Let me look down here, by the way. And -- the end of March was 5,360.

5,360. Okay. So, I mean, you are, saying, you know, selectively hiring in areas like fixed income and so -- which, I mean, it is fair to say that maybe they're either higher producing employees, and therefore maybe a little more expensive and you are dropping out, say, maybe on the operational side which may, you know, be lower cost employees, so could any of that dynamic be --

Oh, yeah, there is absolutely some substitution. The employees we are hiring in the two areas I mentioned are higher paid people than the operation people that were -- we're reducing. And at the same time, you know, we do have about a 4% increase in costs of the same employee year to year.

Right.

So you, you know, when you factor those two things in, you -- you -- you know, that -- it is -- as I said, it is very hard to reduce this consistent with the decline in revenues.

Yeah. Sure, absolutely. Looking at investment banking, I mean the public offering -- the public offering arena obviously is pretty transparent and pretty weak. But my guess is MNAs side is strong. And would you say -- is there a -- any disproportionate strength out of Canada, or, you know, here in the U.S.?

We had disproportionate weakness out of Canada last quarter. You know, one of the reasons for the differences in -- in comparable quarters to last quarter, or a year ago quarter is the loss in -- the loss in Canada was much larger than it was both from the retail side and from the equity capital market side. Equity capital markets has always offset retail there. As you know, we're in a rebuilding effort there, and we're adding people.

And, by the way, you know, we're growing our independent contractor account in Canada you know, we've got 15 people in that activity now. And, you know, I'm -- I'm encouraged that, you know, we're going to continue to make progress. We also introduced a new IT system up there. It is much more broker friendly, and has a lot more content. Consequently, you know, I think it will be more attractive system than even some of the major banks have in terms of attracting FAs to our model.

Um-hum. And then could you update us, if there is any update, because I know it is still sort of more in the -- you know, the infant stage, but your JV in the UK with Killet and Company.

We continue to add some people. The production from the -- production levels are much lower -- are much lower than the historical rates than these people have had, just like here in the states, maybe worse. And, you know, we're trying to -- to -- we're not making our budgets revenue numbers, but we are making progress on the head count and, you know, I think this is a pretty long-term project.

Our President and Chief Operating Officer, Chet Helck will do personal visits over there to see how he assesses the marketplace, to give us more input from his standpoint. So, you know, we're continuing to look at that. I still have reasonably high hopes. It is just not going to be a overnight success.

Sure. Jumping around a looking at, you know, now that you've broken it up, by segment for us, you know, pretax, and, you know, clearly some of these JVs that you have are -- are a drag on, you know, drag on pretax. I mean, have you ever considered just sort of dismantling or exiting some of those?

Yeah. I mean, we've -- on numerous occasions we've considered doing that. That is an easier said than done in some cases. And -- and the fact is that, if you took for example our Turkish joint venture, which, you know, often does very well, it is not going to do well in the middle of a war with Iraq.

Yes.

So, you know, some of this I would tell you is -- it is not exactly noise, because there's more noise from these kinds of joint ventures than there is from an office in Tampa. But the fact is that I do not-I do not expect to see those kind of losses on a -- on a regular basis. You might have some periods where they're negative, but they're not substantial and that would be okay. If we had periods like this for a extended period of time, you can be sure we would close those operations down.

Sure and then just focusing for a second on -- on the banks, what are the -- forgive my ignorance, but I really do not know. You know, what are your deposit levels? Like, just put it in context for me. You know, how -- how big the bank is. Like, say, in terms of deposits, and, you know, what sort of loan original nation volume.

Total assets are around 900 million.

Okay.

We have about two-thirds of the balance sheet in deployed in loans currently. We'd like to get that number to 75 to 80%, or maybe even higher, to maximize the earnings potential. You know, banks have a -- have a pretty healthy capital requirement. So these are not a decent spread on those assets to earn us a reasonable return on the equity deployed there. Most of our deposits are all floating rate.

We have some CDs but the vast majority are floating rate, which make it is a little more challenging on the asset side to stay in a relatively matched -- we are -- we are very adverse to taking any interest rate or credit risk to speak of.

Right.

On that and so if -- if we have -- if we have, from time to time, purchased packages of fixed rate loans, but we have traditionally swapped them to better matched deposit side.

Okay.

So it is about 900 million and, as Tom said, it has not really grown a lot in the last 12 months. He's been spending a lot more time repositioning the balance sheet.

Right. Okay.

We have about 65 million dollars in capital deployed there, which by the way.

Yeah, and the rationale is that we do not want to deploy any more capital unless we're going to have rates of return in the mid-teens. And so we are waiting to make sure that we have the -- the vehicle in place to match the better managed banks in the business, so that we can continue to grow it with a profitable use of capital.

Right. Just two more questions, I promise. Any update relative to the -- I guess you disclosed in the Q, relative to the mortgage lending program, premiere 72, those run by two of your financial advisors?

The -- we're -- we're still in the process of discovery. We've just begun to look at some of the documents that -- or boxes -- there were boxes and boxes and boxes of documents there sequestered by the bankruptcy trustee. We're -- we're pulling all of that stuff out now and are counsel is still in the evolutionary stage.

I mean, we really do not know much more to talk about the case more than we have. You know, we're not happy about it. It was a external activity that these people were involved in that -- that we knew about as a generic thing. But that's all.

Okay. Okay, and then just lastly, because I know you guys have investments in -- what is it, two leverage leases for airlines?

That's correct.

Have you had, you know, given, you know, the -- the woes experienced by the industry, and -- you know, others who, you know, mainly Morgan Stanley, but, you know, I guess it is very different when you, you know, own 176 planes, but, I mean, have you had any, you know, additional, I don't know, costs or have you had any, like, write downs of any sorts, you know, given the decline of -- in air travel, and -- and market value of planes?

We have taken no write downs when we've looked these initially, we took a very conservative residual value, much more conservative than the industry used so that somewhat mitigated our profits from it to date along the way. We check fairly regularly with the industry. Back when we did these deals, and this is -- I guess we'd rather be lucky than smart.

Right.

That, you know, we ended up with maybe the two best of the big six at that time airlines. And we probably would have done the same deal with any of the six.

It is, what, Delta and Continental?

Yeah.

We ended up with Delta and Continental. We have checked pretty regularly. We also happened to end up, this was not by luck, end up with the particular aircraft model that's sort of deemed to be the work horse of the industry, and would be one of the last that they would take out of service, we're told.

So, we have checked regularly and have not seen the need to take any write down. There are a whole series of events that could occur that might -- you know, whether it is renegotiating the lease, whether it is someone else taking out -- a whole lot of in-between steps before you would have a total -- a total loss on it, obviously.

Right.

We've also checked with some appraisers on whether residual value estimates have changed, to see if they've actually gotten lower than our assumption, they have not. So, as of this date, we have not taken any impairment, and they are -- they continue to be booked as though the leases are going to perform for the balance of the 20 and 17 years respectively that the leases were -- the initial lease terms were --

Okay. Thanks very much for a lot of good information.

Thank you, Lauren.

Once again, if you would like to ask a question, press star, then the number one on your telephone keypad. There are no further questions at this time.

Well, thank you for joining us this quarter. I should play the tape again to say that I hope our discussion next quarter is more pleasant than this quarter with some up comparisons, but who knows? Thanks so much, and any comments you have with respect to additional disclosure, Jeff would be glad to hear about. Thank you very much.

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