雷蒙詹姆斯金融 (RJF) 2003 Q4 法說會逐字稿

Good afternoon, my name is Mandy and I will be your conference facilitator today.

At this time I'd like to welcome you to the Raymond James Financial quarterly 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 simply press star 1 on your touch-tone phone key pad.

If you would like to withdraw your question, press the pound key.

Thank you, Mr. James, you may begin your conference.

Thank you and welcome, all of you participants.

This is Tom James, CEO.

I'm here with Jeff Julien, CFO and Jennifer Ackart, our Controller and I even have our Risk Management Head, Barry Augenbraun, here at the table.

Let me begin by briefly reviewing some numbers and then making some comments with respect to those numbers.

Net revenues for the quarter, as you recall, we have shifted now to the more traditional methodology for the brokerage industry.

For us, we're about $402.8 million, which is 9% over last year and 6.6% over the prior quarter.

And when you go beneath the total, as you see, the commissions were up 9% from last year's comparable period.

They were about flat with the prior quarter, but that reflects a decline in institutional commissions and an increase in retail.

Investment banking revenues were up 45% for the quarter and were 179% over last quarter's period.

Investment advisory fees were up 3.5% over last year's comparable quarter and 10.6% from the immediately proceeding quarter.

Trading revenues were down 70% from last year's comparable quarter and 65% from the last quarter.

And just as an editorial comment, most of that results from the fixed incomes losses in mortgage securities trading during that period.

If you recall, we had a particularly volatile environment that resulted in some trading losses over a very few number of days in the trading period.

And then financial service fee income was up 19% over last year and 3% from the prior quarter and then our large contribution to earnings in the net interest column were down 12% from last year's comparable quarter and 5% from the immediately proceeding quarter.

Expenses were up 5.5% from last year, so, needless to say there was positive operating leverage as revenues were up more than expenses and they were up 3.1% from the immediately-proceeding quarter.

And as a result of that, net income increased 51% over last year's comparable quarter and 41% from the immediately-proceeding quarter, yielding earnings per share of 67 cents, diluted up from 44 cents last year, which had an 8% after-tax margin on revenues this year versus 5.7% last year and an ROE of 14.6% up from 10.5%.

And that obviously was a dramatic increase and I think reflects, when you look at the quarterly results, the operating leverage that's present on any incremental revenue dollars given the expense levels that we now have.

And I think reflects some of the comments I've made in earlier conversations relating to the fact that we've continued to grow the engine while we really haven't shown that as productivity has declined and the retail sector primarily during the downturn in the market over the last three years.

And this is the first time we've really seen retail confidence increase at a level that would increase their activity levels.

The institutional levels I would come at really reflect the fact that in the fixed income sector you've seen somewhat of a decline in activity.

And in the equity capital markets side, I think the volume of transactions has actually increased, but the commission rates over last year have probably declined a penny or two on the average transaction volume throughput.

So, there's been some compression in margins in the commission gross side, but there's also been continuing pressure from over-the-counter trading losses in that sector as well as continued, relatively, high research expenses.

I don't mean they're higher than they were last year, but relative to the revenue dollars.

So, there continues to be compression in the equity capital markets side of the business.

However, the increased volume in transactions has made up for that and increased investment banking revenues during the period, also generated higher profitability in that sector, generally speaking.

When you look at the annual numbers, you will see that as a result of a rapid finish, we were able to slightly surpass last year's net revenues.

We achieved revenues of 1,452,000,000 and there you can see commissions flat, investment bankings down 2%.

Investment advisory fees down 4%.

Trading profits down 9%.

Financial service fees up 15%.

Other revenues up 26% and net interest earnings down 1%.

And basically we had reasonably good expense control flat with the preceding year, with net income therefore, up 9% for the year.

After-tax margin on revenues of 5.8%, up from 5.2% and an ROE slightly below 10% in both years, yielding $1.76 versus $1.60.

Tax rate impacted that as the average tax rate for the year was 37.5% down from 40% and I might say we had an unusually high tax rate due to a confluence of factors last year in the fourth quarter.

So, that effectively the quarterly tax rate was a lower rate, more consistent with the annual rate this year than it was last year which, you know, had an impact of a couple of million dollars, or a million and a half dollars on last year's tax rate if you had applied the same tax rate or net earnings, if you had applied the same tax rates to last year's net income pretax that we applied to this year's.

So, that is a factor in the dramatic increase in profitability.

Some of the other factors that we normally review when we look at, or when we comment during these meetings, I think are appropriate, as remarked on equity capital markets, that fourth quarter last year we had a birth of activity, essentially we did 27 lead and co-managed deals this quarter versus 6 public offering transactions last year in the comparable period.

We had a slight increase from our investment advisory activities, really reflects billings on the balances that existed at the end of June, when obviously they were lower than they were at the end of September.

So, you didn't see as much increase as you would otherwise seen on the investment advisory line, but that does auger well for the succeeding quarters as these balances have continued to increase.

We had, as I will say in a moment, about the current values.

When you go our segment analysis, and I guess we're just doing that for the year, the 66% of the revenues were ascribed to our private client group, which is a slight increase from last year, again, representing this mainly a shift between fixed or between capital markets and private client commissions.

Capital markets were again about 22% of revenues, not much difference from last year.

Asset management revenues were down 4.69%.

If you think about that, we only had one quarter where you had any equity appreciation and the assets under management, which are now $18.8 billion, up 6% for the quarter and 23% for the year.

So, you know, we have a much larger base to bill on, as I said, in this coming quarter.

The Raymond James Bank accounted for $28.7 million, or almost 2% of revenues.

Again, very little change.

Rates came down during the period but net revenues were up.

And then our other revenue segment, in these classifications, was off 41% during the period, reflecting lower stock loan, interest revenues, lower international joint venture revenues and the Toronto stock exchange sales, seat sales that we had in prior periods.

And when you look at the more important factor on this division for the year, you see the private client group with $73.4 million in profits, about 53%.

Not a whole lot different, again, from the 55% prior year capital markets, again, flat down 1% as we ran quickly to that finish line, which represented 27% of profits for the annual period versus 29% in the prior year and then asset management, 13.5% of profits down from 15.4 in the prior year.

The bank, at picking up some of that slack with $10.2 million in pretax contribution, which is 7.4%, and other representing a loss somewhat smaller than the loss in the prior period.

So, we only had about 1% of overall losses in this period from that particular figure.

So, we did manage to catch the year, as I think I remarked in last year's quarterly report, that if we did well in the fourth quarter that we had a chance of reaching the numbers.

When you look at FA count, FA count is up 1% for the year and flat with the immediately proceeding quarter.

That does not reflect any change in our current recruiting on the new additions side.

It's more a reflection of the fact that, as I said, I think last quarter we had begun to prune the numbers in our independent contractor subsidiary for the first time, really tempting to recognize that there is some fixed costs associated with both maintaining offices and individual financial advisors.

And we have this quality effort now, only a portion of which is directed at actual productivity.

So that what we are doing is we're going back and talking to offices that don't meet current minimums, which have been raised, and suggesting that they might like to seek other affiliations.

And also encouraging notes that have successful offices to review their own internal personnel and reduce the counts of financial advisors, wherein they have lower productivity rates.

And I think that is being reflected in some of these numbers because as you can see, the traditional numbers that we would normally have growth in the independent contractor network, we really have not done that during this period as we've pruned the numbers.

But I can tell you that there's been substantial improvement, that the net recruiting, absolute numbers based on historical gross commissions, still outstrip any of the attrition or terminations that we've been going through, they've been a factor of more of 2 to 1.

So, I'm very encouraged about the period going forward.

And I might say, while I'm remarking on this, that this effort, as I mentioned, relates to a quality concern, not just with production, that our new management team across our retail, now called our Private Client Group, activities is really focused on cooperative effort across firms, which I think you're going to see reflected in some changes in our advertising approaches.

It's certainly much more cooperation across the firm in trying to seek a multi-distribution channel approach by all of our personnel.

So that if somebody applied for an independent contractor position that belonged to one of our employee-based activities, we would, you know, actually solicit their employment there and turn that over to the appropriate recruiter.

And I think this increased cooperation is certainly improved the attitudes across the Private Client Group and I think we'll bear fruit in terms of overall recruiting results.

So, I'm very encouraged, as a side, by the renewed and reinvigorated enthusiasm that's being demonstrated by this new management team.

I might also say you see a reflection in the quality of people that are being recruited in the employee-based broker dealer, Raymond James and Associates, and we've made our first recruit into our intermediate approach, where we are recruiting people with some of the characteristics of the independent system, into our employees-based broker dealer.

So, I can't say whether that's going to be a success or not a success.

I do see some success in terms of our independent contractor recruiting in both Canada and the U.K., where we've been adding a large number relative to the existing number of financial advisors.

Just to show you how nascent they are, in talking to our head of our U.K. operation on Monday, we only have 2,000 client accounts in that subsidiary but we've already designated 2200 more accounts that need to be transferred between now and the end of December.

So, we are making good progress there on the recruiting front and, you know, that's beginning to show up in commission dollars.

And we can see now some improvement in terms of results that we're achieving in the U.K. and Canada overall, while it still had a loss during the fourth quarter on the retail side, is made of profit in the fourth quarter.

So, we're seeing improvement there, actually the international underdeveloped country operation was sort of a non-event during the quarter, but we've seen a renewed activity level, especially in our Turkish subsidiary during the latter part of the fourth quarter, as their market has improved considerably.

And our South American and Latin American operations continue to be positive revenue and profitability generators.

So, but as I said, they're not major impacts currently.

So, it's just that the trend is right.

And I really expect to see more positive results in the developed countries, where, while admittedly, they're new concepts in both markets, our approach to recruiting, it's being met with more and more success.

And what we learned in the early years of independent contractor recruiting and in our RJFS predecessors is that the financial advisors themselves become the best recruiters in the marketplace and their positive attitudes in the organization radiate out to prospects and actually they generate a lot of the prospects themselves.

So, I think that we're going to see a recruiting rate that continues on a percentage basis to be reasonably high.

So, I'm encouraged in that respect.

Our employee counts were down about 111 people for the quarter.

Again, that reflects continued abstinence on the part of our departments and their building expenses here at the home office.

If we, indeed, continue to see the kind of increasing enthusiasm, although not reflected in the market today, in retail, in next quarter and the succeeding quarters, I think you're going to see a reversal of that, but it's going to be lagged.

So, we're going to continue to have very good operating leverage during this period.

We will see, you know, some increased expense associated with our new building coming into service in the second quarter of fiscal 2004 as it's scheduled for delivery in January.

That, obviously, brings some more expense, even though we have leases that are terminating.

The new space has a vacancy factor in it that's material that will impact us somewhat.

Other than that, I don't really see any major impacts that would reverse expense control factors.

I think we're in reasonably good shape and still have the ability in areas like equity capital markets and asset management, to add considerably larger activity levels without having to add personnel.

It's more in the service areas of financial advisors and clients where you tend to start experiencing problems when the volume of transaction increases.

I might also comment that we have continued to add additional assets in the fee-based alternatives during the quarter and in the latter parts of the quarter that rate was accelerating, also.

So, all of those trends that have been in place with us for years are continuing.

I think that pretty well covers my prepared remarks.

Any one of us would be glad tot answer any questions you might have with respect to additional personnel or issues in the industry.

At this time, I'd like to remind everyone, in order to ask a question, please press star 1 on your telephone keypad.

Your first question comes from Lauren Smith.

Hi, Jeff, hi, Tom.

Hi, Lauren.

How are you doing?

Could you provide us with more clarity on the investment banking line?

Clearly just, I mean I can't speak for everybody else, but it just blew away whatever I was modeling and, you know, I think we can get access to a lot of public data.

So, you know, just looking at the 27 deals you did, 18 in the prior quarter, yet it was such a marked difference in the absolute number.

Can you provide us with, maybe, more clarity there?

Well, the transaction, you know, it's always difficult, you know, to pin down, largely because if you have a higher percentage of lead bandage deals or if the transactions are much larger, we generate a lot more revenues in those areas.

We didn't have very many translations last year in the quarter and I did comment in the last quarterly call that the pipeline activity was pretty vibrant.

As a matter of fact, there have been periods here where we've had more than one deal per day to consider it a capital markets committee meeting.

Uh-huh.

And that activity has continued and that, if you think about the logic of that, when you look at the increases in small stock prices off the lows in October of 2002 until now, a year later, you see dramatic increases in the prices.

I think some statistic I saw said over 200% for stocks under $5, you know, very high double-digit numbers for stocks under $15 and above $5 over 50%, above $15.

At those kinds of numbers, make issuers look at the possibility of re-equifying their balance sheets in the prospect of rising rates.

And we've necessarily seen a lot of that.

And the second factor I would mention is the offerings in the income oriented securities, wether they're REITs now selling to premium at NAV or they're other fixed income-type insurances, closed in trust, et cetera.

While we tend to show participation in high yield type merchandise that has leverage associated with it, we're seeing a lot of offerings to that type, now, there.

There still are more offerings than we've traditionally seen in the sector even of an online variety and we continue to be active in that area.

In addition, we had substantially more M&A activity in the fourth quarter than we did in the third quarter, you know, three and a half times, you know, three and a half times the activity level.

So, it's often hard, when you have good periods in the fourth quarter, we always have this clamoring to get in before the bell rings with revenues.

And since the market also supported that kind of activity this time, I just think you saw a more traditional quarter than you did last year.

And, you know, but I wouldn't suggest by that comment that I expect there to be any less activity in this quarter as long as the market conditions maintain the current kinds of activity or the current kind of trends that we've seen in the preceding quarter.

So, we really are geared up to maintain levels of activity in excess of this.

And, you know, I would hope that if, in fact, the economy continues to improve, as it has improved, even if we have a market correction, that would give back part of these gains that I just reported on the lower price sectors and certainly in the technology areas, that our particular numbers, which are more focused in energy real estate, consumer, financial services.

Those kinds of activities will continue to generate high levels of activity.

So, you know, I'm fairly bullish, but at the same time I tell you that, I would say if rates gone edge up on the fixed income side, this would, you know, be offset, at least to some degree, by declining activity in the fixed income sector.

So, I still think that the immediate outlook, depending on the market, if it stays like it is, is somewhat better than it was last year at this time.

So, if I'm hearing you correctly, you have given the tone of the markets right now, perhaps given what you see in terms of your own backlog, that, you know, a $30 millionish range, in other words, this quarter wasn't that much of an anomaly, all else being equal, that the conditions hold in.

You got it.

That's a good summary.

Okay.

Another question but shifting to expenses.

Could you talk to the revenue ratio?

It came down, you know, well below your trend level.

Is that really a function of just a really banner quarter in terms of revenues?

Or has there been some mix shift or change in how you're approaching compensation?

Yeah, well, it's just more people gone out of the system.

Okay.

You know, part of that is a rollover from preceding quarter in addition to the 111 that left this time.

So, we have had some good luck with that.

As you can see, we had one of these negative trend numbers with respect to commission payouts.

And that results to a shift from institutional business to more independent contractor retail business.

It's almost, totally, accounted for by that.

The registered reps have not increased their individual productivity to a level where they would move to a higher bracket payout or still benefitting from low bracket payouts.

It's a one-year, trailing 12-month system that we have for bracket movement, which is meant to dampen the moves either way.

So, you know, those things are still generally favorable to us.

I would tell you, that's why I say that there really is a tremendous amount of operating leverage and on the retail side, and I don't just mean to focus on us when I say this, if you look at any of the big retail firms, from Merrill through Edward Jones to the smaller retail firm, you will see, I think, you know, really good operating leverage and more commission flow.

This kind of increase, this 9% number, that's really not consistent with coming out a downturn in our industry.

And the only reason I'm less enthusiastic and counsel somewhat more caution is the level of the stock prices, where we would normally have them at a lower level.

And if they were at a lower level, I'd tell you that I really expect in 2004 that, you know, commission rates, given an improving market environment, doesn't have to be dramatic improvement, in our industry, based on historic calculations, would go up 20 to 25%, not 9 or 10%.

Uh-huh.

So, you know, that really does generate 50% plus increases in pretax profitability.

So, you know, you have to understand this leverage and that's why I always caution analysts when they talk about this.

It's so sensitive to the retail psychology in the marketplace if you're a retail-based firm, that it's very hard to try to extend it or extrapolate recent trends.

And so you look too negative when you have a period like this and you look too positive when you continue to ride out of a good market or a good retail environment.

So, you know, my hats off to you for trying to prognosticate these things!

I hesitate to try to do it because I know how many factors are really external to our control.

We can control the expense levels, we can control recruiting, we can't control this productivity level that's based more on this attitude and psychology in the marketplace.

Okay.

Thanks very much.

Very helpful.

Your next question comes from Douglas Sipkin.

Yeah, hi, good afternoon.

Good afternoon.

How are you?

Yeah, just wanted to beat, again, I know Lauren spent time talking about it, but the investment banking number, I mean, I'm just looking at sort of the trends in, you know, dating back to, I guess, you know, let's just call it the bubble time, like 2000, you know, what not.

And your banking revenues are significantly higher than that.

So, I'm wondering, I mean is it, you know, obviously the retail market has gotten better and the close then fund business has gotten a lot better.

But have you guys been gaining noticeable market share, you know, when I look through some of the public data, you know , I was never able to spit out any sort of number reasonably even close to 34 .

And I know you mentioned, Tom that this type of number could be more sustainable given this type of environment.

But is there some other business lines that are hitting your P&L that never were before?

Other businesses that didn't exist back then that you guys are making progress in?

Just more additional color, if there is some, it would be helpful.

Yeah, actually our highs were in '98.

And if you recall, the constituency of our investment banking effort was almost tolly non-technology.

Uh-huh.

And the only technology we had was the technology just happened to fall in sectors that we covered, which, you know, and there were some, certainly you had technology in health care and you had technology in telecommunications.

But other than that, we really didn't have a concerted effort in technology.

I would tell you what we've done in the last two years is actually add that area in the downturn.

There were people available to hire that we thought were of sufficient quality to fit in with this sort of niche approach that we have in our strategic business units.

We expanded our research coverage and we added bankers in the area.

And we've actually opened an office in Silicon Valley.

So, we have some technology participation now in the numbers.

The consistent presence in, for example, the southwest, has, you know, expanded our exposure in technology.

We also have built up a substantial financial services practice and added more analysts in the banking sectors so that both with midwest and Florida-type coverage, now we'd have a more national practice on the banking side in financial services.

M&A activity we really created a specialty during this period so that we'd have a lot more support in M&A than we've had in the past where we did it back in the late '90s, more in the SBUs themselves.

We also included in these numbers the RJ tax credit business and the venture capital businesses that we have, which aren't very large numbers, but you get a big revenue component and profit flow from tax credits in the fourth quarter of the year.

That's the way they close their business, typically, in the last six months of a year or so.

You see a big fourth quarter, and remember, you know, we're, you know, the sixth or seventh largest originator of tax credit for institutional purchase.

It's not a major thing contrasted to the rest of investment banking, but it is growing and we did conclude a $56 million venture capital fund during the year so that the revenues now have begun to, you know, show into our quarterly numbers.

There's not a big number, but, you know, there wasn't any number, while there was the expense prior there to.

So, there are some things going on that are somewhat different.

Now, I will also tell you that from my perspective as a senior manager overseeing investment banking, that I'm discouraged and disappointed by the revenues per banker.

I think there's considerable, latent potential.

I mean we have a lot of senior people that have been around for a long time with us where we really haven't had much turnover.

They've had a chance to build the relationships and, you know, we're looking at a revenue number per investment banker in the annual low 800,000 level.

When I was an investment banker in the late '70s, I did over a million for all of our producers at that time.

So, I would tell you, you know, if I had a stretch goal for those guys, I'd tell them that their number ought to be 2 million and certainly ought to be over a million.

They don't budget anything like that for me, which will be a subject of conversation in our budget review meeting, but that's the kind of number I think that's attainable with the staff we have.

We have good quality staff.

They have very good backgrounds, a lot of them have experience here for a long period, or here in the big firms prior thereto.

And, you know, our juniors have matured into senior capability.

I really think that we have a lot more capability.

I just don't know what the environment's going to look like.

So, I do think that the levels are at least sustainable if, in fact, we have the right kind of market environment.

All right, fair enough.

And then just my next question, I guess, is related to, you know, obviously not as big a piece of the revenue stream, but you had a noticeable decline on the trading line.

Now, is it as simple for me to assume that if we continue to get, well, it's stopped a little bit, but if interest rates continue to trend in the correction, you know, they look like they might be heading, you know, with the reversal of the last 20 years and such, is that trading line more impacted by, I guess the fixed income stuff?

Or more impacted by, you know, OTC?

It's far more impacted by fixed income.

Over-the-counter trading, on a gross trading profit line in the equity side, normally loses money for us.

It might make some money in a very vibrant marketplace.

Fixed income tends to be a profitable trading activity, both institutional or dealer to dealer and retail.

The event in the quarter was more of an aberration, though....

Uh-huh.

because the movement was so dramatic and the hedges didn't work.

We stayed pretty fully hedged, so, you know, I don't think you're going to see a period where profits reversed the losses.

I do think that the level of profits will decline.

And certainly my department projects that, because they are forecasting an increase in rates.

And that's why I made the comment earlier about profitability declining somewhat, but as I point out to them, they have substantially built the platform here during this favorable marketplace we've had in the last three years for fixed income.

And I think that means, and I mean this in both a people sense and in a technology sense, so, in a trading sense so that I believe they're going to be generating better profits than they had in other increasing interest rate periods, but certainly the profits will be less than they have been in the house in the last two years.

Okay.

Thanks a lot.

All right.

At this time, there are no further questions.

You have a follow-up question from Lauren Smith.

Hi.

Is there anything out of the ordinary in the other income line that seemed to be materially higher than in the prior quarter?

By definition everything in that line is a little unusual.

The networking fees at our firm have increased.

This quarter you get sponsor fee income for conventions and things that , where they're paying expenses, so, it's higher than preceding quarter.

The networking fee is the only secular one that I would say is up.

We don't charge or haven't been charging as much as the industry charges for the networking services.

I would say we leave money on the table in that regard.

As you know, the industry's now under some pressure to try to get those numbers down from their side.

So, I can't forecast to you what's going to happen.

I don't think the numbers going to come down.

I actually think our expenses that are hidden in our operating costs are actually more than the networking fees, it's not like it's some big profit item.

Right.

So, it's more of a cost recovery item...

Lauren, for the quarter, I don't think there was anything that you would say is unusual or non-recurring, it's just the timing of some of the sponsor fee issues, which are now recorded in gross basis.

For the year, the only significant non-recurring item was the sale of the Toronto stock exchange seats or shares, actually, and our Canadian subsidiary, which was a $5 million gain in that item.

Wasn't in this quarter --

In the first quarter of the fiscal year.

Yeah.

And then just to sort of go back to what Doug was trying to get at, you know, if we kind of just aggregate, you know, and I know maybe isolated or by themselves they may not be meaningful, but the RJ tax credit business, some of the fees trickling in on the venture capital.

If you had to just sort of wrap that up, you know, some of the things are just sort of starting to be part of the P&L.

I mean would you say it's $5 million?

Or 2?

Or 7?

I mean, is there any type of way to put your arms around that for us?

Oh, boy.

I mean looking at the tax credit business, I mean the tax credit business can generate 10 to $15 million in revenues a year.

The two venture capital funds, one merchant bank and one venture capital fund that we have, will generate 3 or $4 million in revenues.

They're basically covering expenses or most of the expenses without any of the shares of profits.

When you get the burst of shares of profits, that will augment the net bottom line.

The one thing I didn't mention that I should mention with respect to equity capital markets and the capital markets sector analysis is that as I sort of glossed over it in talking about Canada, say taking was profitable and retail was a loser, but, you know, they had more revenues that quarter than they've had in preceding quarters.

So, that's provided some of the upsurge and as long as these conditions to exist here, they will continue to exist there.

So, there's just a lot of leverage in the numbers, Lauren and I wish I knew that the market was going to be supportive.

You know, I never make a habit of projecting anything because I really don't think I can.

It's not because, you know, I don't understand the dynamic, I understand the dynamic very well.

I just think the variables really are beyond our control.

And so trying to pin this down, and I understand your efforts to do this, as I said earlier, I empathize with the job of an an analyst in our industry, trying to fathom what the revenues are going to be looking like and understand that these point estimates are very difficult to deal with.

They really are difficult to deal with.

And at the beginning of a quarter without anything else known other than what I have in place, I probably, if I were analyzing my own numbers, would have a substantial difference between the high point and the low point of expectations.

It's just very hard.

And then just lastly, if you have any margin balance numbers, I'm just curious what the trends are there?

We're seeing it varies from firm to firm, but we're seeing notable pick up on that front.

Are you seeing similar?

No, we had about a 45 or 50% decline in margin balances from the absolute high and they're basically hanging in there.

You know, they might be up a percent or two, but we do not see any trends.

And one of the things you have to remember is that we haven't discussed on this call, is this ongoing legal cost and legal fees, settlements, judgments, et cetera, that we continue to experience in the industry.

I just saw in the Securities Week, the comment that Merrill was offering $100 an hour for part-time league help to handle arbitrations.

There's a lot of this going on, there's a lag with respect to these costs and, you know, they will begin to slow down if the market stays in a favorable position, but we're going to see these costs last for another year or two, even if the markets have seen the bottoms and we're in an uptrend.

So, that's a real factor and, you know, don't let me underestimate this to you because this is a number in the, you know, 20 to $40 million range of annual expense, deviating from norms, that we're seeing in our firm.

So, there's another factor in the overall leverage when you're in a more favorable environment.

But what started me on this is we have been pounding our staff in the home office, our financial advisors in the field, about all of the issues that lead to risk in terms of their strategies with clients.

And one of those areas was a combination of investing in what's hot lately, let's call it a trend investing, momentum investing that was so popular during the late '90s, combined with margin.

Uh-huh.

And, you know, investors can try to blame it all on financial advisors after the fact, but the fact is they were willing participants in this kind of activity.

And I've basically, have told our financial advisors, don't get caught up in this, just tell the clients that it's not wise to do this and to be very cautious in how they use margins.

So, the way we advise our clients to use margin is to use it for other low cost borrowing sources because if they're going to go borrow something in a bank for a car or for a home improvement, usually the best source of capital is margin borrowing and the lowest cost borrowing, especially when they expect to have short-term repayment of those loans.

So, we're not encouraging this and I realize that's difficult because when you look at your numbers, the profitability is extremely high on margin balances and there's nothing I'd like better than to take our balances, which are somewhat beneath $1 billion, back to the $2 billion range, but I'm only in favor of doing that if it's done on a very conservative basis because I don't want our clients to lose money in the event of another market decline.

All right.

Okay.

Thanks.

You're welcome.

At this time, there are no further questions.

Well, thanks so much for joining us, as I said last quarter, I hope we, I said last quarter I hope we have better things report in the succeeding quarter.

We did.

I hope we can do at least as well in the current quarter as we did this last quarter.

Thanks so much for participating and Jeff and Jennifer and I are always available if you have any further questions during the quarter.

Thank you.

Thank you for participating in today's conference call.

You may now disconnect.