雷蒙詹姆斯金融 (RJF) 2007 Q1 法說會逐字稿

Welcome to the quarterly analyst call for the first quarter of fiscal 2007.

We had a good first fiscal quarter.

Our gross revenues were up 23% to $709 million.

Our net revenues which we principally focus on now were up 15% to $604 million and basically the -- as has occurred in recent quarters, the larger ramp up in gross numbers relates to higher interest rates or higher balances and its interest -- gross interest generated.

Non-interest expenses of $513 million were up 13% which obviously generates an opportunity again for positive leverage in the comparisons.

Our net interest income was up 32% from last year so it's become 56% of pre-tax income for the quarter.

Obviously, very meaningful and that's a reflection not only of increased balances and all of our interest generating source accounts but also through the rapid ramp up of Raymond James Bank which now has far more loans in place than we had at the beginning of the quarter or compared to last year.

So, you now have another major segment in terms of both revenue generation and net income.

That increase in net income to $59.4 million was -- oh, excuse me.

That -- yes.

That's right.

Excuse me.

I cited the net interest income as up 32%.

It's actually up a slightly different number from that.

So, earnings per share were $0.50 per share fully diluted up from $0.40 which is obviously an increase of 25%.

Pre-tax margin was 15.5% on net revenues versus 13.6% last year and the after-tax margin was 9.8% versus 8.6% which generated an ROE of 16% versus 14% last year and a resultant book value per share of $13.28.

Over the year's timeframe we have -- this is sort of the lowest number that we have for FA account.

Normally, on a seasonal basis because of the fact that annual renewals come up during this quarter and we typically replace lower-ending account executives as fees are charged our independent contractor branches.

There's not really much of a change at the employee-based firm.

So we actually experience during the quarter now as - not as compared to last year, a decline of 90 financial advisors.

That's contrasted to a drop last year of 85 during the same quarter.

So, roughly the same kind of an effect happening but the count is down year-over-year by about 170 financial advisors.

And this is still, I would tell you, being generated where the net additions that we have are at much higher levels but, I mean, the additions we have are at much higher levels.

But we still have not stopped the decline in financial advisors at the independent contractor even though new recruiting activity has now picked up somewhat.

So, you know, I would tell you, if we have this count again next year declining, I will be concerned because we're trying to focus on increasing the number of financial advisors in the independent contractor force.

We're experiencing good growth in the employee-based broker-dealer.

And the same might be said of their gross production in the employee-based broker dealer, Raymond James and Associates, whereas I recall quarterly commission revenues were up about 34% in the December quarter, whereas we were in single digits at RJFS, our independent contractor broker-dealer.

So there are still increases in terms of revenues even in RJFS where this decline has occurred.

The only other factor - factors that are really meaningful and I'll get into some of the segment reporting in a minute, but when you look at the overall results, I would say that as I mentioned in our press release, we had a $10 million bonus reversal in the quarter which was about $3 million more than last year's.

And obviously, we can't -- we don't have those impact us on a quarter-to-quarter basis.

So, we won't see anything meaningful for any of the other succeeding quarters of the year.

So when we look at results, I mean, I think you have to take that into consideration to get a feel for actual operating results.

Assets under control at the firm which represent our clients' assets that are held here have increased 23% over last year from $157 billion to $193 billion.

I think that's one of the better measures in terms of setting benchmarks for what improvement you're experiencing and obviously some of this relates to appreciation of assets but there's still substantial growth here in terms of additional assets, either secured by our existing financial advisor base or through the recruiting of much larger financial advisors.

Just as one measure of that, you know, in the employee-based firm we now have 58 financial advisors that are tracking at over $1 million in production which is about 6% of the field force or 5% of the field force.

So, we're substantially increasing the number of larger brokers in the employee-based firm and that firm now has an average production of about $420,000 per financial advisor at current rates.

So, there's been substantial improvement over the last several years and there's been substantial improvements at the independent contractor too.

It's just that we started from a lower average so that essentially their numbers are lower and when you do the simple calculations on the retail broker-dealers, currently you get a lower average than Raymond James and Associates average.

Some comments on some of these segments that we're operating.

The private client group continues to generate better results with respect to their profit contributions relative to the amount of revenue contributed by the private client group which now accounts for about 63% of overall revenues and is now generating 57.6% of the contribution which means that, you know, their margins have been increasing overall.

In capital markets during this period, only 14.8% of the profits were generated by capital markets and that really reflects the fact that while we had excellent investment banking revenues, capital market suffered somewhat through a reduction in ECM commissions and continued lackluster results at the fixed income segment.

The M&A activity was at extremely rates as we recorded our highest M&A fee in history during the quarter of $7.5 million.

So, the fact is that M&A carried the quarter.

This is, as I've said before, is one of our objectives, to increase M&A as a percentage of overall ECM revenues.

So, I think we're achieving some success.

Obviously, this year or this quarter probably should be looked at as somewhat of an aberration because of the size of that one fee.

Hopefully, we'll have a recurrence of large fees but you don't have records every quarter.

So, the pipeline still remains pretty good.

The underwriting results were down a little bit largely not because of the total count of deals that we co-managed but because the lead managed deals were reduced and I would say that the transactions in energy income-related transactions and real estate income transactions, either there were less deals or we had a smaller percentage of the overall underwriting fee during this particular quarter and that just happens to relate to what activity occurred during the quarter.

I don't see any trend there at all.

Merging markets made less of a contribution, but -- but - during the quarter than they had last year at this time, but they were positive as contrasted to a loss reported last quarter.

But that loss all related to some reserves that were taken due to some regulatory issues in Turkey.

So, they were unrepresentative of the vibrant activity that we were experiencing on an operating basis.

And as you can tell, at the Bank, as I mentioned, these revenues went up a lot, because of interest -- net interest activity at the Bank accounting for 7% of overall revenues during the period.

It shows this ramp up of loans and deposits at the bank as a result of the change of some of our sweep alternatives, but you also see that at the profit line where we have essentially have doubled the pre-tax profit contribution versus last year at this time and we've continued to experience ramp up.

We have another major sweep scheduled for the end of the quarter, but we're also experiencing good organic growth month to month as this particular sweep has become the default sweep for those that don't select one of our other options.

As I've explained before, our approach here has been a low-key approach of effectively offering our FAs and their clients the choice of sweep alternatives except for cases where the firm is making the decisions on - or is in control of the assets.

The next sweep that's scheduled is another one that is more controlled-type assets and Jeff Julien is with me, our CFO, who has responsibility for the Bank and Trust Company and Jeff, what kind of activity are you expecting as a result of the sweep?

The next sweep is the accounts, retirement accounts for which we are custodian and have custodial arrangements with.

We think that will -- based on current numbers, we have about $1.6 billion at the end of March from the money market fund over at the Bank.

Organic activity, by the way, has been running ahead of our projections at about $90 million per month inflow which is about three times what we were budgeting, largely because of the increase in total customer assets that Tom pointed out earlier.

It's -- it's growth plenty at the bank right now.

And we still maintain pretty good activity on the loan side although it's still pretty competitive out there for good loans and I would say that some of these spreads that are existing for some of the lower quality loans that you see in the marketplace are not adequate to compensate for the risk and, you know, we tend to high grade these loans and as a consequence, you know, we may begin to have some difficulty growing the loan portfolio quite as fast as we can grow these deposits.

And that's one of the reasons for our conservative approach to doing these segments of our depository base in phases as compared to an alternative which might just have said we're changing all of our sweeps.

So - but the intended consequence here, you're seeing a little bit of from the growth in revenues and the growth in profits, but as I've stated before, this is really -- you don't see the entire consequences in any short-term period because as you grow those loans at such a rapid rate, you're still establishing very large reserves and we were above budget for our reserve rate again for this quarter.

So -- not because we're experiencing any actual losses at the moment, but because the balances are growing this fast and until you slow down the rate of growth, you won't see the full effect on the net income line even though it's growing rapidly compared to last year currently.

So, as these additional groups become a smaller percentage of the overall deposit base of the bank, you will begin to see a ramp up in the rate of increase in earnings and that -- you know, we're looking forward to that, but we're essentially accomplishing exactly what we intended to do which was to deploy a much larger portion of our equity capital in the bank subsidiary over a relatively short period of time in terms of deploying that much capital without doing a major acquisition.

So, the -- we still expect a substantial ramp up in future quarters.

I thought one thing that I should mention on PCG that I didn't mention yet has more to do with the changing nature of commissions and fees.

You know, we have often talked about the combination of things at our firm that are recurring in nature which includes securities commissions, I mean, include advisory fees, part of the securities commission and fee category, interest income, financial service fees, and other fee-related income.

And I thought you might like to see one of the points.

If you looked at it on a gross income basis, the percentage for the first time now exceeds 50% of total revenues and really that's not as relevant as a statistic that might relate just to the private client group because a lot of these revenues and fees are not really related to commission income.

But the fact that we've gone just in the last three years from 2004 to 40% to 52% this year against growth -- gross and are now at 46% using a net revenue calculation, I think indicates the tremendous transition in terms of client behavior and method of compensation that they chose.

It also demonstrates the importance -- the growing importance in the industry of recurring revenues from 12B1s from similar fees for annuities and from net interest income, as we know, becoming more important here with rates where they are.

So, I -- I would tell you there's more stability in revenues at brokerage firms today than there has been in the past which obviously is a favorable factor.

When you look at our commissions you will see that total commissions and fees were up 9.4%, but actually retail private client group revenues were up 14.1%.

Some of our other segments were off, but the domestic was up.

The investment banking revenues overall were up 41% for the quarter.

Again, a lot of that resulting from M&A fees.

Investment advisory fees continue to be very consistent, growing at 17% with assets now up 19.5% year-over-year to $33.9 billion.

So, that's one of the most stable growing areas that we've had and we continue to be active now.

We did complete the lift-out of a team from Boston that is now making the investment decisions in our A1S at management subsidiary, a team with a very high rating for past mutual funds that they have managed.

So, their Morningstar rating has been a 4 or 5 in the small cap area.

And we continue to look at potential acquisitions there in the asset management area and I hope to be able to report some additional activity to you in future quarters.

The net trading profits were up 7% over last year but they're not really very meaningful and there hasn't been a very -- a good opportunity as rates have been pretty consistent here.

Most of our trading profits come from fixed income and in fact our equity capital markets area has probably experienced more trading losses in the last quarter than they have at any time in the recent past.

That relates mainly to facilitation of commission income.

And financial service fees overall were up 30% to $30 million in the quarter.

So, substantial gross -- growth in that category of income which includes some of the fee wrap income as well other fees we charge accounts.

So, it's becoming a more meaningful item.

So, overall, I would tell you that everything ran very well in the quarter.

If you saw my press release, you would see that I injected a little conservatism going forward, mainly related to the anticipated slow down in corporate earnings growth that I'm starting to feel in the marketplace.

I use the word "feel" because I don't think this is quite as much a science -- at least my comments aren't -- as it is my 40 year experience in dealing with economic matters.

And past portfolio manager experience tells me that we have more threes and fours in our one to four rating schedule for our stocks covered by research which leads me to believe that you're not going to see quite as aggressive growth as we've experience recently in the marketplace.

So, I tend to be a little more conservative.

On the other hand, I'm not frightened because I think that the overall economy is still reasonably strong so that you're probably equally worried about the slowdown in corporate earnings as you are about the increase in wage push inflation because there's not much unemployment.

So, it's one of these situations where you generally ought to feel pretty good even though not everything has got its needle pointed to the high end of the speedometer.

So, you know, I'm encouraged.

I don't know if this recruiting pace that we've had at the employee firm can continue to maintain growth at well about 10% additions or not, but our visits here by prospective financial advisors are still good.

They're not as good as they were last year at this time, but they're still very good.

So, you know, that's kind of one of the key growth engines that we have here and I think since we've made a change and added a top recruiter -- charged a top recruiter with running RJFS's recruiting effort, I think we're going to see some change there and more activity on the recruiting side.

We have a lot more visits on that side of the ledger than we had last year at this time.

And with that, I think it's appropriate to open up to questions.

So, I'd be glad to do that now, entertain questions.

Your first question comes from Douglas Sipkin.

Yes.

Thanks.

Good morning, guys.

Good afternoon, I should say.

Just a couple of questions.

First off, around the bank initiative and more specifically, net interest.

I think it would be helpful if you could -- and you might have said this, so forgive me.

Can you just say how -- how much is -- is available basically in the broker -- in the brokerage piece of business to be swept over into the bank ultimately over a period of time?

You know, from an economic standpoint, how should we be thinking about that?

The total taxable sweep cash balances we have at the firm are about $14 billion.

We have some tax-free funds as well.

It's not anticipated that all of that will be at the bank, but the majority of it probably will be over the next two to three to four years.

The economics of this we talked a little bit at the last conference we presented at, but again because of the loan loss reserve as we're going in the ramp up phase here becomes less and less meaningful over time.

Obviously earnings -- incremental earnings will increase over time.

We are on record as saying that we think for '07 the impact was going to be about a $0.03 to $0.04 for the year incremental impact.

For '08, our initial projections were somewhere in the $0.12 for the year.

And then it's a little fuzzier when you get out to '09 and beyond because it's unclear as to exactly which steps we'll take, how much money will move how fast, et cetera.

But obviously it would be that kind of geometric progression going forward.

And in terms --

To be frank, that movement is -- is, as I've said, is paced on our part and we're not -- we've taken sort of the reverse view of the industry.

We're not maximizing earnings by only matching bank rates depending on the tiered size of client assets.

We're using a much more money market fund competitive rate and that probably will be our long-term strategy.

I mean, we feel obligated to provide our customers with rates that are competitive as a matter of course as opposed to having it the exception that requires manual intervention.

So this is -- you know, may be an expensive view in the short run but we believe it's the right thing to do for clients and financial advisors.

So, that's the course that we have elected to take.

The other thing that Jeff didn't mention here which is what I'll call the indirect impact bank, the size now has enabled us to increase our loan limit to over $35 million per client and that -- as this ramp up continues, we will be a more effective participant with other banks with whom we joint venture including Wachovia, by the way, in these lending efforts and we may in fact be leading some loans for our client base which is not been our past history.

And as we grown beyond this level -- so there are going to be some indirect benefits, I would tell you, from this expansion and there will also be some at the retail level as we continue to offer additional products through our retail networks and we're -- we think we're going to be positioned to open up mortgage lending to our independent contractor sales force.

We can do it now we just can't pay them which tends to not make them enthusiastic supporters of the approach.

So we're soon going to be able to do that and I think that will result in increased lending at that front and the originations will be more profitable than they have been in the past.

Can you update us on your -- and forgive me, I should probably know it, but your reserving methodology on the loan originations.

I believe you guys reserve like 1% for the first year -- am I correct with that?

Correct.

It's a fairly complicated grid and there are a lot of factors involved, the nature of the project, the credit of the borrower, the terms, et cetera, et cetera.

But the total reserve based on our weighted average loan portfolio which is again pretty heavily residential loans -- probably about a 55-45 or 60-40 mix roughly today is the weighted average reserve is a 1.01.

So, that is where it comes out on a balance sheet basis.

And in terms of that stuff maturing -- you know, I think you -- you had said that you would potentially release reserves after a year or two of aging or am I wrong in that?

No.

The reserve stays in place as long as there's an outstanding balance on the loan.

Okay.

So there's --

The way I would look at it is I would look at it like a pool.

Say as the pool increases on the general balance sheet basis, you're just going to add another 1%.

What happens effectively though is it's all charged in the year of origination.

So - the quarter of origination since we're talking about quarterly results here.

Right.

Right.

Right.

I think the point he made, Doug, that wasn't maybe totally clear was that if we originate say a constant number per year, $1.02 billion or $1.05 billion, somewhere in that range, net loans per year, that becomes a less and a less -- a lower and lower percentage of the overall loan portfolio, hence the economic results even though the provision percentage stays the same as a percentage of loan.

It becomes a lower and lower income statement hit as a percentage of the net interest income.

Plus, some of the other cost factors spread themselves over a larger base too.

So, you actually get some increased margin in the non-reserve side of the equation here.

And are all these dynamics factored into some of those estimates that you guys threw out for the impact for '07 and '08?

Those are in the '07 and '08 impacts, yes.

Okay.

And then just a quick question -- I wasn't quite clear, Tom, on your comments around the compensation adjustment.

What exactly -- I mean, what exactly happened in the first quarter with that $10 million?

The dynamic of our system here is that a lot of the bonuses are based on profits and they're set up by formula and then we have an award based on a -- with a certain percentage objective and a certain percentage subjective.

And we do our best job of trying to estimate all these pools for every class of employees, but we do it conservatively during the year, I would say.

We've had them go the other way, but generally now since that happened we tend to have a conservative bias.

And this year even we were a little surprised by the size of the pre-tax profit increases and consequently we were over-reserved versus the final awards and the timing of all this is that the actual meetings and performance reviews usually occur in the month of November.

So, a month after the year end.

So - and they're awarded from the pool.

So, we're trying to refine this process to have more quarterly adjustments so that we don't have them this large in the future as a percentage of comp, but the fact is that when you have those awards below the estimates and accruals, you run the risk of reversal.

And that's what happens.

If you looks at Merrill's it happens in their third quarter.

They go through the exercise before year end and eliminate a lot of the disparity.

But this goes on at every broker-dealer.

This isn't just us that does this.

It's just, I guess, because it was quirky because it was the first quarter.

I figure all that stuff gets just washed out in the fourth quarter.

It's the timing.

It's the timing of our process.

That's one of the things we're going to try to work on to get it better refined in the fourth quarter of the year it relates to.

Okay.

So with that being said and I know you guys don't give guidance and I know there's some adjustments depending on where, you know, broker production comes from.

How should we be thinking about the compensation ratio for the remainder of the year?

I think it would trend somewhere to what it averaged last year.

Okay.

That's helpful.

And then also just a follow-up question, obviously the natural resource market in Canada has been a nice addition to the investment banking business and I'm just curious.

What are your thoughts on that market and how big of a piece is it of your banking revenues?

Or total, I should say, you know, capital market revenues?

The -- we like the natural resources, as you know.

I mean, we had a big energy practice before we bought the Canadian subsidiary.

And we think there's opportunity to expand Canada well beyond its current percentage of business activity relative to mainly the banks, obviously in Canada.

And there's more cross-border opportunity then there has been in the past.

So Canada accounted for about $5 million was the - ?

In the quarter.

For the revenues in the quarter?

$5 million and most of that shows up in corporate finance?

In the investment banking line.

The investment banking line.

Yes.

Okay.

Okay.

Terrific.

Okay.

That's helpful.

Okay.

Very good.

Thanks a lot, guys.

There are no further questions, sir.

Well, we're starting to get too thorough.

Thank you.

We hope to have another good report for you at the end of the second quarter.

Thank you very much for your confidence in the Company and we look forward to seeing you at the next conference we attend.