雷蒙詹姆斯金融 (RJF) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the analyst conference call.

At this time all participants are on a listen only mode.

Later we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions).

Now your hosting speaker, Tom James.

Please go ahead, sir.

Thank you very much.

Welcome to the year end quarter earnings release and conference call for analysts.

I think we have a large group that have joined us this morning, indicating that we have some other than analysts that are listening in to this call.

I welcome you all, also.

As you know, we reported a down quarter compared to last year.

I guess my reaction is I was waiting for someone to ask me the question yesterday about why it was down.

I was going to reply that we didn't want to embarrass our peer group by reporting earnings that were equal to last year.

But I will have some explanation to you, the principal causes here so that you can understand the difference between this quarter and last year.

But if I might, I would chide you a little, at least the analysts present, because at the end of the second month of the quarter I thought we telegraphed pretty well that finally this market trauma that we were experiencing was beginning to impact the Private Client Group in terms of client activity in the stock market.

The institutional activity has remained at high levels, but the individual activity had slowed in spite of the additions that we continue to experience to our salesforce, which I will give you some more details on.

And I think that is understandable; if you just think about your own reaction to the market declines, the shock that has gone on here when you have a market down 32% year to date on a calendar basis.

I mean, that is a little traumatic for the average client.

And I can tell you in the number of letters, calls, etc.

that I receive directly from financial advisors and clients, you should understand that this is a time when people are really worried about their retirement, they are worried about any net worth that they've accumulated, and on some of these tremendous down days we've actually had clients that have liquidated.

Fortunately, our financial advisors here in the recent timeframe have done a good job of trying to help clients establish some discipline with respect to remembering that these times you don't want to get out at the bottom because that sort of gets you the worst of all possible results, when you miss any recoveries and you only participated in the downside.

None of us know where this market is going.

I listened to the Elliott Wave Theorist this morning on CNBC say that maybe 4500 wasn't low enough.

My response to that is I don't share that feeling, and I might give you that perspective now.

I actually think that these programs that have been announced by the government, the intervention with various individual financial institutions in my opinion has been done very well under the circumstances of battlefield conditions.

And the rapidity with which the government has acted is certainly different than any prior periods like this.

And there is a lot of liquidity in the system, and now we have commodity price erosion, just the energy price decline will add fuel to a recovery.

But we can't expect when announcements -- unfortunately in this world all of us are used to real-time news, and we tend to expect everything to happen overnight.

Well, I can tell you the money from the government's $700 billion program has not begun to wend its way through the system as yet.

And until that happens, you aren't going to see the recovery.

You may see more stability from a lessening of concern on the part of participants because emotion plays a very large part in this whole environment in which we are involved.

But I would say, while we certainly have seen some of this financial services malaise spread into other industries and impact those of us in the industry that basically kept our hands generally clean of some of the activities that have resulted in these losses, that everyone is being impacted to some degree now.

And yet I would tell you that certain parts of the economy are really relatively strong.

And what is happening now is that you have people realizing that there is this spreading through the economy, and you see companies like all of ours speaking to the analysts out there, spending time on cost control in their budgets for 2009, trying to determine what can be put off in terms of capital expenditures, etc.

And that is now occurring in other industries.

So we will see some slowdown.

But I think that the infusions of all of this money into the marketplace will actually speed the recovery abnormally contrasted to past events like this; '73, '74, 1929 through '32 when a lot of the mistakes were really made in terms of more conservative government policies following declines instead of this much positive intervention.

So we actually had a flat net revenue quarter, and I focus on net revenues just because of the gross interest impact with rates coming down during the period.

And that, I would tell you, is outstanding in light of what I just told you with respect to activity.

And if you look at commissions and fees, they were off 2% in the quarter, and that is in spite of the fact that institutional volume was up.

So you essentially see a period where the Private Client Group is beginning to be impacted, as you can see from looking at our numbers by segment.

But if you look, going back -- and the reason I included some of my remarks and my own comments to the prior quarter -- you can see a 7% decline in these securities commissions, which is pretty dramatic change quarter to quarter.

Investment banking, as you can see, suffered.

It was down 40 compared to last year.

This is a carryover to the conditions that had existed all year long as new issue business has declined.

You could see from our statistics that the absolute participations -- I think there were 17 in the quarter here and in Canada, which is actually up from last year's quarter but a lot of them were smaller participations.

Although I would say our investment banking activity because of our involvement especially in real estate, where there has been equivocation in some of the REIT balance sheets; and energy where there has been some continuing financing especially because of discoveries in the Haynesville and Bartlesville Shale, etc., which has benefited a lot of the smaller E&P companies in the United States that we serve has impacted the results positively, offsetting some of the decline.

But normally in this quarter we see a catch up as all the revenues come in.

But there isn't anything to catch up with during this period because the volume of lead managed transactions has lessened during the period, and obviously performance of the securities has not been as good in the aftermarkets, which has slowed this activity considerably.

When you go further down the line, while investment advisory fees don't show much decline, remember that a good portion of our investment advisory fees are billed in advance.

So actually you won't see the decline until the first quarter of 2009 because we will be billing on September 30th balances, which as you can see from the [friends] in assets under management is down in spite of the fact we have continued excellent relative performance statistics and net sales have generally been still positive in spite of the declines through September.

I would tell you in October with these declines you should be aware that you did frighten out a lot of investors.

And I think if you looked across the industry you would find that there were a lot of cancellations of accounts, and people just going totally to cash, which has meant that our cash deposit alternatives have swelled in the months, particularly of September and October.

So, which isn't all good either.

That sounds good, but the impact to that has been during these odd periods that actually you can have some negative interest days when your payouts on deposits are higher than you are receiving in overnight rates with the flight to quality.

So, once again, I think the conclusion that you would reach if you were watching this is that behavior hasn't really changed so much when you have massive declines in the market.

It affects all aspects of our business, albeit on a fee-based business you have more stickiness, and you have this lag in terms of fee income relative to the declines in the marketplace.

The other factor -- and by the way, just so you could quantify the PCG commission decline activity that I mentioned, I would tell you that if you measured it versus last year, would mean about $0.03.

So it is not a major impact yet.

We still have reasonably good, positive momentum internally which is offsetting some of this productivity decline of same-store FA sales that you would be or that would be occurring as we enter this period of shock.

A worse factor during the quarter really occurred in September when fixed income trading, once again, and this is the second time we've had a major shock -- we've had other periods where all the indices changed their relationships so that any hedging activity at all really becomes negative factor.

Fortunately our inventories were very small, so unlike Jefferies and others in the business piper that have reported we didn't experience as large an impact as they did, but you essentially had an $18 million trading swing, which is $0.04 a share relative to last year's quarter.

So again, this is a major impact, and the other factor that I mentioned was the fact that COLI and BOLI investments on our balance sheet declined in value, which means that you have a loss, but you don't on a tax basis nothing is deductible, so you end up with a higher tax rate during the quarter than we would have otherwise experienced.

And if you look at those tax rates at the bottom of the page there, you would see that impacts us by another $0.02, and you see you get into about a $0.10 change just from those factors.

And it really impacts everything, as I've mentioned before the Raymond James tax credit funds which typically have their biggest quarter in the fourth quarter actually were relatively uneventful.

While we were still profitable in this area, for the year, the fact is our normal year end closing activity ground to a halt.

And the reason for that, of course, is there aren't very many typical buyers for tax credits.

Fannie Mae and Freddie Mac are out of the market.

The bigger corporations in America from GE through all the major banks no longer have tax problems; so while CRA is an incentive to buy these tax credits, there really aren't the normal group of buyers that would have made up 75% or 80% of the market.

We do have some sales occurring, as I speak now.

There seems to be some settling of this business in the 7% to 7.5% after-tax internal rate of return pricing for tax credits.

But, no one knew what price to pay.

That made those that were interested in buying a nonfactor during the quarter.

And while this is a small subsidiary, it really does have its financial results concentrated in this quarter.

So I guess that the old comments about our business rising and falling with the tide of the markets still remains true.

You should have recognized that more than you did in terms of your own adjustments to financials.

I realize that the fact that we are generally invulnerable to some of the direct cost of subprime and credit derivative swaps and all of these activities, makes you think that our results might have more stability.

And they do, in fact, have more stability because if you look at the companies that have these activities you will see that they have massive write-offs still occurring while we essentially have avoided it.

Again, the bank has been a major contributor during this activity to profitability.

The comparisons on the bank segment are very positive.

I have Steve Raney with us if we have more detailed questions later on.

But I would point out to you while we have more non-accrual loans, they really still reside in the specific sector of acquisition development type activities and that are focused in five loans, three of which are still paying, although two of those are paying from interest reserves.

And as a result we put them in non-accrual status when we think there is a chance we might have a principal issue and we take losses to mark down to market actual charge-offs against those loans.

And we put them on non-accrual and the interest payments we get just go to principal reduction.

So that effectively you have the vast majority of those outstanding loans resulting from that activity whereas we have about 45 or 46 individual real estate loans that are in non-accrual status, they don't amount to much.

It's about $17 million (multiple speakers) and when we've had to foreclose on these properties, so far we've experienced an average of 15% value decline.

And as you know, some of the areas, the stronger areas have actually recovered a little bit in terms of real estate sales due to the declining prices that these things are being offered at.

So depending on the quality and location of the real estate, you really get different activity.

But when you take that number of loans and you relate it to the 6500 individual loans we have, it is really a nonfactor and what I had tried to explain to you before was that this very detailed due diligence review loan by loan that we go through on even residential loans, has really proven to be a saving grace contrasted to other lenders on the banking front.

And so the negative factors there aren't so large.

And I would also remind you that we have larger than ever spreads in the normal corporate lending part of the business.

And that is offset a lot of this; the spreads are large, and in fact, the loans that we buy today we buy at ever increasing rates.

And our bank, Jeff Julien who is also with us, our CFO and Jennifer Ackart, our controller would tell you that our bank is actually performing probably a little above budget in terms of ROE statistics, with an ROE by itself of over 15% during 2008.

So positive in spite of the fact that some of the trends, as you would expect, are finally moving slightly negatively.

And we expected this.

I have warned you of this in past periods that as we have grown these loan balances, the absolute numbers of non-accrual or delinquency loans is going to grow.

And we expect that to continue for another few quarters.

But we still don't think it is going to be any kind of a major factor.

And in fact, I would tell you that as we put more money to work here going forward we will have very good spreads on rates currently for loans that are in the market.

There is simply nobody out there yet making these loans except at very attractive margins, and that bodes well for us in the coming year in the bank.

So while you are looking at overall operations, and the bank has certainly become a larger percentage of our profits if you look at the segment results, I would tell you that things look good from that side of the business.

And I am actually positive they are going forward.

In terms of the other businesses, my outlook would be for two to three quarters you are going to have sort of lackluster results as people regain confidence in the market and we try to establish a baseline in our overall bottoming out process in the market.

This volatility actually then will slow somewhat.

But you always need to remember that when we suffer these major declines and I would add '87 to the prior periods that I mentioned, the experience has been that we lose a small percentage of investors period.

And it takes a while for those that have gone to cash or even those that are investing new dollars to begin to move them back to equities; they tend to move them to fixed income products, especially if there are some that have reasonably high yields relative to the yields available in equities.

That doesn't mean there aren't places in the market like the MLPs and REITs that don't have high returns today.

There are many conservative ones that do, indeed, have high returns.

So there are places to invest, but the individual investor is going to be reluctant to do this, and it's going to take a strong pitch on the part of the financial advisers to actually encourage them to participate in the recovery as it develops in the stock market.

We, on the other hand who might have had cash during this period as I did myself, tend to be earlier investors in these declines, which can be painful at first but in the light of day five years later looks like it can be a very positive factor.

That is the quarter.

The year, as you know, actually should give you a little better perspective on how we have performed relative to the industry.

And when you look at the results with $1.97 in earnings versus $2.11 last year, that is actually a very small shortfall, giving the scenario that I just described for the prior year in the market.

And the more traumatic period that those of us in the financial services industry have actually experienced.

You can almost go to all those lines I talked about and draw immediate parallels and indirect impacts from problems at the major institutions.

One that I mentioned in my remarks was the total lack of credit lines on an unsecured basis available to financial service companies by peer lenders.

Actually policies from some of the major banks like Wells Fargo are that they are currently not making unsecured loans to anybody in our industry.

Foreign banks are pretty much in the same school, and other banks depending on their own cash needs have been impacted in that process.

So you might conclude from looking at that that if you can operate without any of those lines you are a pretty stable organization and I would tell you that is certainly true, but the impact of this is actually trickled down again to the rest of industry where loans for new borrowers, for borrowers that have in small and medium-sized companies that have normally depended on these lines are not available for renewable.

And the lenders are over scrutinizing results expecting downturns and being very cautious.

You can see why the government is endeavoring to infuse capital to encourage them to put money to work to turn around the mentality that develops.

Now the -- and I think that is true.

Now, I think that it is important for all of us to develop a longer-term perspective and that is why it is important that you look at the yearly results.

It really isn't bad to have a 13% ROE overall in a year like the one we just experienced.

I wish I could have reported that in '75 when we came out of the downturns in the marketplace, we were indeed profitable every month after the market turned in October of '74, but the fact is the rates of return in spite of the fact we had very little equity, were still small.

And during the down period we actually experienced actual losses.

So when you see the stability afforded by the great diversification in our industry now, along with -- and I'm talking about the Private Client Group industry when I say that, because there aren't many of us left who are really sole practitioners almost of two thirds of our business coming directly and indirectly from this activity -- you need to understand that this is still a profitable business and that we can still perform reasonably well.

So when you take the longer-term view and you look at a book value of 16.18 we are now selling at less than 1.5 times book, which given the outlook that I have described to you for the coming six to nine months, if you're a short-termer isn't real exciting but in a longer-term viewpoint is very attractive.

And some of the points I would make to you are that while I see some downturn in asset management business with $33 billion down from $37 billion kind of number there, we actually have all the underlying factors still very positive to 10-year track records in our small and mid-cap areas that are four-star and five-star kinds of performance.

Now in very good recent relative performance almost across all of our fund and SMA type managers, and nobody pays any attention to that by the way, when they have absolute losses until the market turns and people get positive.

But the fact is that the performance is there, and as people begin to re-enter the market this is a very attractive alternative, and our net sales have still remained positive, highly positive outside the firm on platform sales, etc.

So I actually think the outlook for activity while next year won't be any barnburner, the underlying factors are very positive.

On the Private Client Group front the biggest factor you should pay attention to is the actual activity in our people counts, which have been outstanding, remain outstanding.

We substantially increased the number of financial advisers here in the fourth quarter, and which is an extremely positive.

And for the year comparisons have added substantially across the 5000 type accounts on our financial advisers we've had big growth in Canada.

We've had good growth in all of our broker-dealers here recently.

So the outlook is very positive going forward.

And I actually had totaled those for you; when you look at the three that we released.

We had 5045 financial advisers versus 4758 last September.

And only 4913 in the immediately prior quarter.

So you can see we have never seen the activity of financial advisors searching for a new home.

We have never seen a large number of Merrill Lynch financial advisers looking to join another firm.

And these are not small advisers.

These are a lot of financial advisers with over $0.5 billion in assets, that are looking for homes where there is stability, where things operate the way they are used to, and they have been shaken by the experience of seeing the major firms fall by the wayside during 2008.

So we actually -- I think we had 57 home office visits in just our employee base firm with similar higher activity in the month of October scheduled.

Now that kind of activity puts us strained to even talk to the people.

I know that our independent contractor operation decided to go outside the home office with a team and go to the West Coast, where we probably have less participation in terms of the broad number of financial advisers than we do here.

And they went out there for a short weekend and met with about 30 financial advisers and took the team there because we could actually reach more people by doing that than we were by having people fly in.

And when people come here the great advantage is the normal Weyerhaeuser firm sees the same support that they see at the major firms, if not more here.

And we have very competitive payout schedules with the independent contractor firms.

But more important to them, we have the capacity to provide the same kinds of service that they are used to, where they came from, with a very positive attitude from all of our service people here at the home office.

So this is a very positive kind of number.

If you go down to our proprietary activity where our two companies that we now own a good part of operate, both of them are operating well.

The companies that are available in the marketplace to buy today are available at much lower multiples of EBITDA in our venture capital subsidiary.

We are now seeing more opportunities for high-quality companies in second- and third-stage financings that are extremely attractive.

We have successfully raised a new fund for them.

We have surpassed our objective of $125 [billion] for these small and mid-cap type companies located in the southeast and southwest.

So that new business is performing well and contributed positively to our results this year.

This is exactly the kind of time when venture capital funds and buyout funds can't raise money that you should be investing in those activities, because the opportunity in this space is excellent.

I mentioned tax credit being down, but I would tell you some of the major competitors of ours have exited the business, which means that we will have a larger share of this business.

And I assure you the government is soon going to be saying, how do we stimulate low-income housing construction because the current plans are simply not generating any new activity.

So they are going to give added incentive to buyers.

They are going to provide more lending.

They are going to do something, and they are going to do it relatively soon.

So that business has a very good outlook for us.

The institutional business, when I talk about recruitment, you need to understand that I am not just talking about retail salespeople.

Our institutional sales forces have swelled as a result of the availability of Lehman, Bear Stearns, UBS.

Salespeople, as you know, UBS sort of exited the municipal marketplace.

So we also have picked up public finance producers from them and others during this period.

Just to cite one example, when Bear Stearns sold to JPM, they had an overrun -- or an overlap of depository institutional salesmen, which were principally based in Memphis.

And we recruited 25 new people to our already existing Memphis office and took over the old Bear Stearns space so that we now have 40 institutional salespeople in that market.

So that is an example.

So I meet with a lot of these high-end producers when they come here, and I've never been busier.

Chet Helck, our COO who is here, also is having these meetings with advisers from all parts of the business and these professionals.

So the outlook for our business is extremely good.

Now on the financing side, since I brought that up, you should know that we believe that we will be eligible, even though we have an S&L holding company, for the guarantees on unsecured capital.

We don't know that yet, but we've had conversations with various governmental officials about this.

And it appears that we can get that.

That is not the preferred capital I am talking about.

They actually have a program where they guarantee -- we will be eligible for that certainly if we decide to use it.

We will be, however, if we could get this eligibility for the savings and loan holding company the way we expect, we actually will be able to have government guaranteed 3.5 year financing for $250 million of unsecured, which is actually more than we had before.

Because they used 125% factor of what you had on September 30th.

So that would be beneficial for us.

And what that would enable us to do in conjunction with a new revolver financing and, perhaps, some term debt at the longer end of five to seven years, which we are currently under discussions with some insurance companies on, which is the reason why I said the preferred stock may not be as attractive, the combination of those would give us more than adequate capital to conduct any operations in addition to what we already have if we decide to take advantage of some of these opportunities to expand further either by adding additional people at a higher rate or by acquiring some of the variously available companies in our industry.

So this is one of those opportune times for companies that are stable, that do have good programs and platforms, to really take advantage of the times.

I think you see it happening at JPMorgan.

You see it happening at Wells Fargo.

I believe -- and Bank of America with Merrill's acquisition, I would tell you in spite of the fact they probably didn't need to pay that much, in the long-term view it will be a very good purchase for them.

And while we think we are going to acquire a number of their salesmen, that doesn't mean that we are going to somehow diminish the overall value of the Merrill Lynch franchise.

And the same can be said of our competitors that are left in the business.

So as usual, when you have these downturns, the opportunities really [virgin].

And a firm like ours can take advantage of a lot of that, and we already have.

And you need to understand that when you look at these margins, when we are growing our sales forces and our investment banker counts and our institutional sales counts that that impinges on our margins.

And we normally experience 1.5% to 2% margin erosion due to the growth that we normally expect.

And when we have an opportunity like this, which we believe will benefit us perhaps not immediately, but certainly in the intermediate and long terms, we actually will spend more at the same time we are cutting other costs.

So the fact is it may look like we are not controlling expenses as well as we might otherwise do, but I can assure you that all of our managers are trying to operate more efficiently.

But this is not going to be one of the areas where we are trying to be totally efficient.

While we try to control growth, we are going to take advantages of special opportunities in the market at reduced front-end money often for some of these institutional type hires with no front-up in money and limited salary guarantee levels, etc.

we are going to grow.

And we are going to add these people intelligently because the need for financing when we come out of this is going to be dramatic.

And you might say that someone of my age who has been in this business for this long might be more conservative and being very careful at this point, and I would tell you we have been very careful.

So we have the opportunity to take on a little risk here in order to grow at advancing rates during this timeframe.

And when we come out of this timeframe we are going to do extremely well.

And as I said, I think that six to nine months from now -- and none of us are seers.

None of us know for sure when that is going to occur.

But I do know that we are going to be a stronger firm, certainly relative to whatever our peers are when we come out of this period.

And I think that our shareholders will be well rewarded.

With that, since I've got all this talent here at the table with me on detail and I know you have some additional questions with respect to some of these operations, I am going to open it up for questions.

(Operator Instructions) Devin Ryan, Sandler O'Neill.

Can you remind us approximately what percentage of client assets are equity related?

And are you seeing actual outflows in client assets just given the volatile markets or -- or are the declines still primarily related to the equity market declines?

Actually I would tell you we are seeing net inflows because of the recruiting again we continue -- I just reviewed last night the number of new accounts moving into the firm versus those being delivered out.

And we maintain about a 2.25 to 2.50 to one ratio.

It is largely from the recruiting and the acquisition of accounts by existing financial advisors.

So any decline we have in what we call assets under administration is related to the market decline.

And in fact, this new inflow of money has offset a lot of the market decline, not just in managed assets, but in unmanaged assets.

So the actual breakdown -- we have been working for years on improving asset allocation throughout our sales force and you've seen some of that reflected in our client base.

And apart from those that I described that had moved out of the market from managed assets or from unmanaged fee-based programs, which is small relative to the total group, it is still larger than you would normally see.

I think during the year we still were more like 14% or 15% erosion out of managed accounts in terms of cancels, 10% to 14%, which is sort of a low average relatively speaking especially in a down market.

The opportunity here is that the base has grown, it is just that unfortunately the assets have depreciated in value.

I can't give you off the top of my head.

I don't know if anybody here knows.

There is a lot of packaged products in there that it is hard to (multiple speakers)--

Yes, see, we see just a mutual fund number.

We don't know how much of that would be in PIMCO and other fixed income alternatives, the Templeton type assets.

We believe it is heavily weighted towards equity versus fixed income alternatives and other types of asset classes.

And for our own benchmarking we tend to estimate somewhere in the two thirds to three quarter equity kind of totals for large groups of clients.

But because of the packaged products it is hard to be precise.

That's actually helpful.

And just given the more recently recruited FAs and it sounds like they are typically larger on average than maybe the existing FAs, how long does it take for them to actually become accretive to results on average?

What was that question again, the last part?

The more recently recruited FAs, how long does it take for them to become accretive?

That is a good question, and the answer varies dependent on whether you open a new office and those individual FAs go into the new office.

And what we have done recently, we've actually decreased the total package sizes, and we have moved more of the retention front-end money to a not exactly front-end money status where really in the second and third year you get additions to the base amount, which start a new period of amortization.

So that effectively you might give a broker 50% upfront and allow that broker depending on performance of his production over the next two years to move up to 80 in total production.

But you are not going to pay money based on 12 months of historical gross when we know that the future gross is probably going to be down just because of the market environment.

So we actually have made those adjustments, and anybody that is not doing that now, the answer is it is going to be at least three to five years until they make money on their deals.

I think in our case I would expect these bigger brokers who tend to maintain productivity much better than smaller brokers in these time frames that we will be accretive in the second year.

And in terms of share repurchases it seems like every time the stock has traded down to around 1.5 times book value or in that range you have been out there repurchasing shares.

So just with the stock you have been trading a little bit below that.

Just wanted to get your thoughts here on the repurchase program.

The last couple of times the stock has moved down to this level we have been in our quiet period, which we respect as a company.

So we haven't been active in those particular time frames.

Because of the current condition of the financial markets we have been extremely conservative marshaling cash.

And we don't want to be in a position if we have some special opportunity that we couldn't turn around and invest $50 million or $100 million.

So we are less apt to do purchases at this moment than we normally are, but if the stock obviously moved down considerably from this point again as it has once or twice in the immediate past three to six months, we would use some of these new lines that we are obtaining.

And as you can see from our release, we have adequate collateral lines for all of our inventories.

That is not really a problem.

The reason you need some of these lines on an operating basis are simply for delayed settlements, unusual situations in terms of cash flow in and cash flow out that require more free cash to operate.

And they are not so much -- it is not a net capital related issue.

So actually what I would tell you is as the situation begins to clarify here and some of these new lines are put in place, we would, once again, be positively predisposed to utilizing the existing purchase authority that our board has granted us to repurchase stock.

It has been our history to try to time these payments or these purchases at lower end prices, which is actually been extremely positive for us over the long run.

You are quite correct in pointing out that the current pricing timing is very good, and if we, as I said, if we see any further decline and some opportunities here we probably will take a good look at participating again.

But again, you need to understand that the prime directive today is to keep powder dry.

Okay.

I'm going to hop back in the queue.

Thanks for taking my questions.

Joel Jeffrey, KBW.

Can you guys give us an update on your clients' auction rate securities positions?

It is about -- that last study said --.

About $1.1 billion.

I think actually it is $1.1 billion in total and about $950 million in illiquid securities.

Actually some of these securities have become liquid and are trading some of the municipal ones.

We have had a few repurchases from some of the closed-end funds recently, but they are related mainly to violations of covenants with respect to coverage in things like convertible bonds.

And some of the international equity closed-end funds and things like that we have not seen a follow through by firms like Nuveen or PIMCO in terms of stepping up these merely because of the instability in the marketplace.

Actually the rates certainly would justify repurchases.

So I think what is going to happen here is either the auction rates are going to be financeable somehow through government assistance or the issuers are going to have more pressure on them.

At the same time we see if more liquidity in the market place allowing financing alternatives to proceed, so that the auction rate securities issue goes away in the next 9 to 12 months.

Are you seeing any increased pressure from clients in terms of trying to unlock that?

And how would you be dealing with that?

Well, we have always provided margin lending to our clients that want to borrow on the securities that have emergency needs.

And actually the demands for that have been very low.

We have a few arbitrations with clients that are ongoing, but that is all.

We have been very open in terms of describing the issues that are posed to us and other firms of our size who don't have access to the federal window to buy these back, plus the issue of not having any capital credit for any purchases directly into the firm.

So I think our clients are pretty aware of this.

We wouldn't have had any problem at all were it not for some of the larger firms that did have access to the window who had other violations with respect to employees getting out at the same time they were selling auction rate securities to clients.

Inside information that caused suppression of research reports; activity like that.

We don't have any instances of that.

We weren't auction market makers in any major sense of that word.

So while we did do some business in between period dates, we really didn't do much.

So we didn't have much inventory ourselves at all.

So this is a problem that I think is going to go away.

The regulators are still being unreasonable, I would tell you, in their demands in terms of having this happen because they simply don't understand how the process works, number one.

And number two, this was one of the first manifestations of this perfect storm caused by subprime and related credit issues.

And to be frank, this is absolute nonsense.

And if I had been chairman of the SEC, I would have slammed the New York attorney general for this activity, and I think it is not only been unfair, it has been unreasonable.

And you know in our case we have very clear warnings on our con firms about the inability of auctions leading to illiquidity in the marketplace.

And we do have separate categories on our client statements.

This has been nothing short to some of the members of the industries who didn't participate in some of these kinds of activities I described, short of extortion.

Now I have to tell you that some of those guys could look at the remediation of that as positive because they could buy these assets in at positive spreads and finance them at the window at 1.5% or 2%.

And some of those programs really haven't triggered yet.

They announced that they were happening in January and in April, and hopefully by then more of this will have gone away as we get this increased liquidity for borrowing in the marketplace.

And this would be a fairly safe utilization so long as you stay out of the scholarship student loan activities, which have some problems associated with them that are special.

So a wise lender actually could make some good money in this business, and I would tell you if the government doesn't do it themselves, which I would suspect would actually be beneficial to them.

Because they are trying to get credit into some of these same institutions that have announced buybacks.

What are they going to do with those?

If they could get them refinanced some way and off their balance sheets, it would actually improve the credit conditions at those institutions just the way the direct infusions of capital would.

So I would think that would be a good alternative.

Can you just give us a little more detail on the necessity of that tri-party repo agreement between RJ and Raymond James Bank and why that $300 million is necessary as opposed to the sort of $78 million that was talked about in the footnotes?

Jeff, do you want to --?

Yes, I mean, as we talked about, that was mirroring a bank exemption that was permitted to allow affiliated institutions to provide secured financing, only supported by collateral permitted under regulation W.

where that type of lending had become less available in the marketplace.

We have not even used our bank facility at all yet, not even the $78 million.

We put it in place as a contingency back stop when the darkest days of September were upon us we didn't even know if committed lenders were going to live up to their commitments at one point in time.

As it turns out, the availability of those lines has continued in pace.

We are in the process of putting other committed lines in place with other lenders such that when the $300 million ability runs out, if it does or if it is not extended at the end of January, that will be a somewhat non-event.

We don't carry large inventories, as you know, Joel.

We are carrying a $200 million to $300 million at this point in time in terms of financeable inventory.

So we don't really need $1 billion worth of secured lines, but we will -- we would like to comfortably have enough secured lines in place that when the bank line goes away it will be a non-event.

As Tom pointed out, it is (technical difficulty) secured lending is available in the marketplace under fairly conservative collateral requirements and margin requirements etc.

But it is the unsecured lending that is really totally dried up.

Great.

Just lastly, given what is going on with the declining economy and concerns about commercial real estate, is there any thought about sort of reconsidering your strategy at the bank in terms of aggressively pursuing commercial loans?

I will respond to that.

I don't like to use the word commercial loans.

I like to use real estate related lending and that would be development oriented as opposed to general mortgages and use corporate lending.

And on the corporate lending side I would tell you that so far we really haven't had any problem loans.

We have a couple that we have rated at some of the lower quality levels.

But actually the companies are performing quite well with respect to coverage in terms of EBITDA performance.

And where we think our big advantage is, is understanding the individual corporations.

And we can invest with management teams that we know, with businesses that we understand and industries that we have great internal knowledge about.

So as you know we have announced that we had intended prior to all this to convert to a bank, which would make us a bank holding company.

And we still intend to do that.

We would love to do it sooner than later in the event that some other future timeframe has problems with liquidity so that we have the availability of the Fed window ourselves directly.

And from a business strategy we had to go through this I will describe it as Mickey Mouse from my perspective, dynamic of pumping money into the bank and then investing it overnight in real estate related short-term securities, and then taking it right back out to meet a requirement which is a fully permissible activity.

In fact was supported with the regulators who didn't want us to cease becoming an S&L.

And so we really should do it anyway because our business is much more corporate related.

We understand how to buy good real estate mortgages and are still doing it, but in the interest of diversification we will always maintain participation in different forms of loans.

We will always have allocation within the corporate side of the portfolio.

But the fact is we are going to have larger amounts in corporate loans than we do in real estate related loans.

And in the commercial real estate end of the business we will continue to be extremely cautious.

And I want to remind you that the total size of that lending was less than 1% of our balance sheet.

So we will continue to exercise caution.

I have done development myself.

As a matter-of-fact, this firm at one time had a subsidiary that was in the home building and town house type building operation, and I know what the risks are in down periods.

So I don't like A&D loans.

I certainly don't like them if you are not receiving 700 basis points over.

And as you may recall, we were getting 150 over in the banking industry to do some of this financing for the bigger developers.

So we don't really have any intention of being a major player in that kind of activity any time where you are not paid to do it.

And the outlook isn't so rosy that -- and it was clear, by the way, when you see investors buying down payments, paying down payments and flipping them that there is a lot of risk in the real estate marketplace.

That is when you exit.

We had actually really pulled back from these activities two years earlier.

So we don't have nearly as much exposure as our other compatriots especially in Florida, California and Texas and Nevada.

So this is -- our bank is kind of rock solid compared to the rest of the industry.

Joel, let me give you a couple other reasons that I think the answer to your question is no, we don't plan to alter our strategy going forward.

Aside from the internal knowledge base with research and investment banking of these companies, industry historically the corporate commercial loan side has been more profitable than the residential mortgage side.

Not always true given some of the pricing anomalies in the market today, but historically that has been true.

So we certainly want to put ourselves in position to take advantage of that if that normality returns to spreads there.

Another factor is availability.

In case you haven't noticed, there are fewer mortgages being originated today than in the past, and there is also fewer corporate loans available today.

But again, if availability swings back and forth and again, we need to be in a position to go where the goods are if we are in a growth mode and have cash to put to work and that may be more on the corporate side than it is on the residential side at any point in time.

One of the most important factors to me is that the corporate loans are all floating rate as opposed to the 5/1 type ARMs that we typically buy in the residential portfolio, which is a much better match, interest rate risk wise to our bank's balance sheet where all the deposits virtually are floating rates.

Just to provide a few numbers for you, as of September 30 our corporate and real estate lending portfolio was about $4.6 billion in outstandings.

Approximately $3 billion of that were corporate loans, so about $1.6 billion in commercial real estate.

And also including in that $1.6 billion is our loans to REITs.

So and of that $1.6 billion only a little bit less than $100 million were in the residential acquisition and development and homebuilder space.

So that kind of gives you a little bit more diversification and color for the size of the portfolio as of September 30.

Great.

Thanks for taking my questions.

(Operator Instructions) At this time we have no additional questions in queue.

I want to thank you very much for spending the time with us this morning.

All of us look forward to a period when market conditions are rosier, but this is the kind of environment when I think the good management teams will prove their worth for analysts.

And we look forward to continuing to generate relatively good results as we go forward into 2009.

We look forward to talking to you in the near future, certainly at the next quarterly call.

Thank you very much for participating.

Ladies and gentlemen, that does conclude your conference.

We do thank you for joining and for using AT&T executive teleconference.

You may now disconnect.

Have a good day.