雷蒙詹姆斯金融 (RJF) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

My name is Alexandria, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Raymond James quarterly analyst conference call.

Conducting today's call will be Mr.

Tom James, Chairman and CEO.

All lines have been placed on mute to preventing background noise.

After the speakers' remarks, there will be a question-and-answer period.

(Operator Instructions).

Thank you.

Mr.

James, you may begin your conference.

Thank you, Alexandria.

Welcome everyone to our third-quarter analyst conference call.

I'm joined this morning by our COO, Chet Helck; our CFO, Jeff Julien; the bank president, Steve Raney; and our controller and chief numbers person, Jennifer Ackert; as well as our attorney, Paul Matecki, who is here to make sure that if I get off the reservation, we update our public disclosures.

As we reported yesterday afternoon late, we had what I would describe as a reasonable quarter given the condition of the market in the June quarter.

As we all are well aware, the market conditions were much better than they were in the March quarter.

And as I sort of reflected with Larry Kudlow yesterday, part of that is all market-driven.

It's not actually as good as you might hope given that kind of a circumstance in the marketplace, because you didn't get a lot of revenue enhancement as a result of the market improvement.

As some of you pointed out in your writeups, the bad debt provisions or the loan loss expense provisions were back to a more-normal rate from the aberrational rate that we had in the prior quarter that related to one specifically extremely large write-down, which we think may not have even been justified in the way the deal was structured, but happens on occasion.

I will say more about that when I get to the bank discussion.

So what you really had there was you had a decline in net revenues of size.

And you had from last year clearly a substantial decline of 16% and 6% from -- increase from the preceding quarter.

I might have surmised, given the data that we had that you might have gotten revenues up in double-digits as a result of the improvement in the market, especially given the number of underwritings that we have participated in which, unfortunately, didn't generate a lot of revenues.

Cost controls were good.

The securities commissions and fees -- they were up 10% from the immediate preceding quarter, but down 16% from last year's comparable period, which, as I cited in our public press release, was the best quarter that we've ever had in both revenues and net income.

So tough comparison.

Investment Banking, as I said, was down 43% from last year, but up only 14% from the immediately preceding quarter.

Investment advisory fees where there has been a substantial decrease in revenues -- and, I might also add, a decrease in expenses as a result of cost control measures in the department.

That all reflects assets under management, principally valued at the end of the March quarter as we bill forward for retail accounts and for some institutional accounts, but most of them are billed in arrears.

So the increase in the market value will be reflected in fee increases received by both the money management operation and by the financial advisors for this quarter.

And those assets were up about 19% for billing purposes during the quarter.

Interest earnings remain depressed at the broker-dealer as a result of the continued low rates that the government is maintaining as I have described, to supplement bank earnings.

Net trading profits continued to be robust, all essentially being generated by fixed income as a result of increased volume of transactions and sort of a general salubrious environment for the bond markets as spreads tightened a little bit.

And financial service fees have roughly remained constant during the period.

The other revenues were up.

Jennifer, any specific comment you would like to make to describe that increase?

The largest increase in other revenue is related to a write-off within our [merchant] banking portfolio, Proprietary Capital.

So Proprietary Capital transaction differentials in valuations.

But one item to note is there's a large portion of that that's eliminated in minority interest.

Yes.

No, it's one of these consolidated transactions and we actually only owned 22% of a USD12 million increase, and so you get a big number in the increase that is consolidated and then eliminated below the line.

This is an unfortunate fallout from the Enron situation, where some of these consolidations for statement purposes are obfuscating rather than helpful for interpreting data.

So as I said, expenses were pretty well contained.

Tax rates remain high because of COLI nondeductible at the issues that affected income.

So rather than run in the 38% or 39% range, they were over 40% again, and that's more a function of what's actually happening in those valuations of securities, etc.

So as I said, the earnings were good, but not outstanding.

When you look at the segments, we are up across the board in pretax income for all of our segments from the immediately preceding quarter -- and again, we are down across the board for the comparison to last year's comparable quarter.

In the Private Client Group, which remains weak -- and I think I would point out, one of the reasons the June quarter last year was very good is that there tends to be a lag in terms of what the reaction in Private Client Group activity is to the market.

And as you have what I describe as Chinese water torture in declining markets, clients become less and less active, more concerned generally about the market.

And at the other end, their concern tends to not be affected by a short-term rally for fear that it might be a bear market trap or something of that nature.

It takes them a while to get more positive.

So we actually had a 48% drop from the prior year, even though it was a 57% increase, it was still a relatively small number given my description that our business is 60 to 65% Private Client Group.

So when you see Private Client Group really recover, you would see a much more dramatic shift in terms of that profit contribution -- just as an analytical fact that probably applies generally and not just to our firm, for your consideration.

Capital Markets -- as I mentioned, Investment Banking numbers showed relatively weak here because we didn't generate as much revenue from this increased transaction activity.

We participated in most of the refinancings, some of the energy refinancings, but the lead transactions weren't significant enough to make a major increase, even from the immediately preceding quarter.

And M&A activity was relatively light, as you know.

And we announced we had acquired Lane Berry.

They actually had a couple of transactions in the quarter of a small nature that impacted those numbers also.

But essentially, it's Fixed Income still driving all of Capital Markets.

I don't know how much longer this lasts.

In the last couple of weeks, activity has slowed a little bit.

Still above budget rates for the year, but the -- I would expect that some of these spreads are going to decline as well as have some activity decline, although part of that will be offset in our case via the Memphis office that we opened and built this financial services -- financial institution practice, which obviously is constrained by the condition of the banks.

And as the banks improve their financial condition, I would expect that that will also increase, perhaps offsetting some of the other activities.

Emerging Markets -- let me just go through the securities first and then I will come to the bank.

Emerging Markets continued to experience a loss, albeit generated principally by some lower assets in our French asset management sub which are improving now and by the relative lackluster performance of the Argentine economy and stock market.

We are also investing in the Brazilian marketplace.

We've added to our analyst team there.

We have participated in one major offering as an international comanager.

And we have a second one approved.

So we're already having impact in the Brazilian market, which, of course, is far larger and more active than the Argentine marketplace, hence our efforts to sort of Latin Americanize what had heretofore been principally an Argentine operation in Latin America.

So we actually hope to see some improvement, certainly in 2010 from that marketplace.

I don't expect much change currently as we built our reputation as a Latin American research source and not just as an Argentine research source.

So the activities -- Proprietary Capital didn't have any impact in the quarter.

So essentially, those are the securities activities at the bank level.

The first thing you should keep in mind -- I tried to focus on in the public press release is that the bank loans shrunk during the quarter, partially as a result of the REIT paydowns.

$100 million, $200 million came from normal corporate loan paydowns that weren't renewed.

It's not that there isn't any renewal activity or new loan activities.

And the $175 million is just normal paydown of our residential portfolio.

So that $475 million decline is pretty well balanced across our portfolio.

That also results, by the way, in a reversal of some of the provisions for the size of the bank portfolio, because some of those loan loss provisions are set by mathematical formula based on total loans outstanding as opposed to any specific loan problems that might exist.

The amount of loan loss reserves over $29 million that we reported in the public press release actually increased the percentage of reserves outstanding because we did some things like change classifications of unsecured loans to increase unsecured loan loss normal reserves, etc., and continued to build reserves as a methodology as opposed to just having passthrough of actual loan loss experience.

So we pretty well [run] through what you can due to the commercial real estate portfolio.

Any exposure in that portfolio other than in some continuing decline in value in the residential market would have to come from substantial weakening in the corporate sector.

We don't really believe given our portfolio that this should be viewed as an abnormally low reserve.

But as I kind of warned in the comments, these write-downs are volatile in nature because one or two large loans can result in a pretty large provision if it catches you by surprise.

We try not to get caught by surprise, and establish reserves on an individual loan basis as soon as they are indicated.

But it is possible that that can happen, as it did not in this quarter, but in the immediately preceding quarter.

So I actually think that this is a reasonable loan loss provision.

You can talk to Steve about that later.

The strategy here is we're kind of letting some of this loan paydown run off for the moment until we reach our targeted 12% plus or minus 0.5% kind of goal objective for capital at the bank.

And if you read our capital statistics, you will see that they are reasonably high compared to the competition.

This happens to be not a regulatory dictated number to us much as it is our own number.

We continue to proceed in hopes of completing our conversion to a bank holding company.

And we have a team of coming in here -- in August, is it?

(multiple speakers) Yes, in August from the Fed to do what I would have thought they would have done in January when they kind of did a more perfunctory kind of investigation and came in with one analyst who spent some time here.

And now they've got, I don't know, 15 coming.

So they are doing thorough reviews.

We've already been subjected to OTS and the OCC reviews.

So the OTS only because -- since we don't know what the timing of this is, we have to be prepared to remain a -- regulated by the OTS at fiscal year end in September in the event that the conversion is not completed.

We are trying to prepare for both, but this has been surprisingly long, given the amount of time that we have as an estimate by the regulators when we started all of this.

So there aren't any specific problems here at the bank that should cause any difficulty at all.

So maybe once this investigation is finished, this will actually be expedited, and OCC will feel comfortable with their fellow regulatory due diligence performed by the OTS.

But as you can tell from some of the internal bickering between the FDIC and the other regulators, they are not always on the same page precisely on what the strategies are with respect to these issues.

So we will then, by the way, when we reach this objective, begin to grow the bank.

You will recall that we shut off new deposits to the bank some time ago.

We will effectively -- and I say "effectively" only because we don't really have to do this the same way we've done it in the past -- will open up deposits and increase deposits as we're going to be in one of these waterfall sweeps where some of the deposits that we don't have -- used in our bank will go to other banks, which will give more FDIC insurance availability to our clients for their cash accounts.

And I think we will still be able to learn at least the kinds of returns we have in bank interest rates even before rates tend to go up again.

So -- which, by the way, even before Bernanke's recent comments, I didn't really expect it was going to happen until perhaps a year from now, simply because they want to add more income to the US bank balance sheet, if you will, through providing higher net interest to absorb losses over this period as the individual loan losses at those banks that were described, I thought, well in the Wells Fargo release as exemplars of what's really going on in the marketplace.

And as you know, our statistics are still far better than the major banks.

So I, for one, am satisfied that the game plan is on track here at the bank.

And as we have reported to you, if you accumulate all of those kinds of projections over the next two years, we expect based on reasonable sensitivity testing that operating earnings over the next couple of years will more than cover any losses.

We actually expect far better results than that because we think we stress them at levels that we shouldn't have to undergo.

It's my own personal belief which may or may not be right -- although I'm basically positive about a general trend up, I think it's going to be very slow.

And I don't see any immediate return to ebullient markets, although they tend to surprise people when you go through periods like this.

So we're sort of prepared for anything either way in terms of our own thought process.

And the reason why I hesitate and have always hesitated -- it's not just generated by these times -- to ever make comments in terms of what earnings might or might not be in the future since they are determined principally by factors outside of the firm's control.

I would also say on the Asset Management side that our performance of our managers has been consistently higher than benchmarks.

And we are -- we had one of our best quarters in history in terms of attracting assets last quarter.

And we are anticipating a lot more institutional activity, especially in our Eagle Boston sub, which is a small, small-mid manager that has capacity.

We have an excellent track record.

And even our laggard core activities and cap -- [cap app] mutual funds are substantially above benchmarks -- and you know, numbers like top 3% of performance, 10% over benchmarks year-to-date, things like that.

So I actually -- as long as the market doesn't hurt us, from here forward, think that the Asset Management sub margins will begin to rise.

Essentially a lot of this income falls to the bottom line.

High percentage falls to the bottom line because we're sort of on the cusp of all expenses covered making money.

But getting back to our 30% normal margins requires more assets under management.

So I'm thoroughly bullish about the outlook in that business.

But again, it's totally dependent on the market.

The assets under administration have made a good recovery for two reasons.

One, of course, the market rally that we have experienced this quarter we're reporting on, and so far this quarter, based on corporate earnings.

But we have also added dramatically to our salesforce.

I reported a 150 net addition to our salesforce during the last quarter.

That's kind of consistent with year-to-date rate.

So we have continued to add high-quality, large producers.

And we're adding them about equally to the independent contractor and the employee-based firms.

And our other subs, RJIS in the UK and RJ Ltd.

in Canada, have also added our salesforce here, and we continue to recruit in those marketplaces.

We have reduced front-end payments so far without much reduction in activity, thanks to the chaos at some of the other broker-dealers from which we have benefited, that the -- it's sort of across the board, what I would tell you is the activity.

So the retail firms, whether it's Stifel, Edward Jones, ourselves, other firms, tend to be doing a very good job of building out their platforms during this down period, which should augur very well for improved results when these conditions ameliorate.

And I think that's going to happen, if it hasn't happened already.

And it's just a question of time.

This is kind of like a patient going through convalescence.

Some of it is just time.

And we do need some more time to go by.

However, I think the outlook is good.

As I said, we've grown our equity capital markets staff.

Pretty much, I think we are well poised to take advantage of any of these improvements that are going to come here in the future.

I do have Paul Reilly onboard.

He doesn't happen to be in here this morning.

But Paul is sort of shadowing me in all our meetings.

He's been here since May.

He's working on a financial structure.

As you know, we have -- as a project, as you know, we have filed a shelf registration.

And when and if conditions enable us, we will probably add long-term capital of some sort, albeit an unsecured line that we have now available to us that hasn't been tapped at all.

And cash positions are running in good shape.

There continue to be a number of opportunities in the marketplace that are worthy of consideration that, given our conservative nature, we have avoided thus far.

And obviously we still are hopeful that this ARS situation improves dramatically in the not-too-distant future, given the fact that we have two filings, two registration statements from Nuveen to use this new method of using shorter-term notes to refinance their outstanding ARSs, which make up about 70% of our outstanding balances of $800 million.

So we would substantially lower the outstanding balances.

And I think probably more heat would be applied to the other sponsors who haven't taken action.

And hopefully some of these municipalities will be in a position where they can refinance some of theirs too.

We continue to be subject to review, although no action has been taken by both the state of Florida and the SEC.

Again, I will point out that we had more disclosure than other firms did on this front, and we do not think that general templates should apply to us, albeit the regulators don't necessarily agree with us.

So I can't tell you what the final outcome of that will be.

There's also been a lot of press, which I hope you are abreast of, with respect to leveraged ETFs, which would be the only other negative on the horizon of major import, where we were one of the earliest firms to restrict their use when we saw the volume of those securities transactions go up, and our compliance department sort of led the charge on the finding that the correlations weren't there for the performance versus the -- sort of the advertised benefit of using some of these leveraged ETFs, which has now received press, but originally, they were very attractive as hedging devices.

And as a matter of fact, a lot of clients would and do elect to use some of them, even though we specifically advised them not to do it.

They have to do sign offs to continue doing any of this here, because we don't think that they are nearly as effective as the one on ones have been.

So they were never designed for long-term investment purposes.

So they really don't perform like people expect them to perform.

And actually, if you want to really lay blame on this one, I'd blame it on the regulators and the New York Stock Exchange and other sponsors of these securities who did not foresee that this correlation might be bad based upon whatever historical testing they did, and certainly didn't step into the marketplace to take action on it an appropriately timed basis.

So this is -- unfortunately, given regulators' history what they have attempted to do often is blame this on other people and try to hold them responsible for this activity.

Our balances are off by more than 75% since we found this problem in the marketplace.

And we have continued to monitor and reduce exposure in our clients' portfolios of these -- albeit sometimes not without arguments with the clients about it.

So if you haven't plugged that one into your concerns for the industry, you should.

I don't know what the relevant performance of other firms is in this area.

Other than that, I would tell you that things are very positive and we are moving forward and I would like to open this for questions.

Alexandria, are you there?

(Operator Instructions).

Devin Ryan, Sandler O'Neill.

Question for Steve.

With the agent banks finishing the SNC review, can you give us any color on kind of what you are hearing about particular credits and just how you felt you were marked in light of that and just any of the color that you have received so far?

Sure, Devin.

Good morning.

We have not gotten the results of the shared national credit exam.

We would expect that in late August, early September.

But we are in conversations with the agent banks on these credits and we attempt on every single loan where they may have already had the results of the report on the examination on that particular credit so that we try to match up our risk ratings and reserves accordingly.

In some cases, those reviews have been completed.

And in some cases, they haven't.

In some cases, actually, the agent won't share that information with us.

So obviously what we are trying to do is make sure we don't wind up this quarter with any surprises.

We have been very diligent about downgrading loans in a very timely fashion.

I would also mention that our third-party loan review company will be reviewing -- has already reviewed about 40% of the dollars of our corporate portfolio.

And they're going to be here in August to review about another 30%.

So this fiscal year, our third-party loan review company would have reviewed about 70% of the dollars of our portfolio.

But your point about the shared national credit exam is a very relevant.

We're trying to make sure we don't wind up with any surprises this quarter in terms of the examiners differing with our risk ratings.

But again, Steve, you would point out based on the 40% you've been through and what you've looked at that we are in good shape.

And our percentages continue to be much lower than the national averages.

Devin, just one more thing.

As you can imagine, every loan that we would have on our watch or worst list has already been reviewed by the third-party loan review company.

Okay.

That's helpful.

And then just in terms of the decline in loan balances -- sorry if I missed this -- but was that primarily treated to REITs paying down credit lines, with them raising equity in the quarter?

Or were there (multiple speakers)?

There was $100 million of that, $200 million in other corporate ones, and $175 million in residential.

Okay, great.

And then just finally, looking at the investment advisory, it looks like revenues declined about 29% from last quarter while AUM increased.

Just want to get some color of what's going on here.

Was it a mix issue, or just --?

some color there would be helpful.

Again, the way we bill on these is we bill forward for all of the retail accounts.

So the revenues that we received this quarter were based on March valuations.

The revenues we receive next quarter will be based on June valuations.

So fees are expected to be up 19% over last quarter.

So actually, there's been a substantial improvement there.

We were actually modeling low -- further declines in market value for this June quarter and for the September quarter.

We are no longer obviously doing that.

And we -- the goal of the head of asset management has always been not to experience a loss in any quarter.

So he manages in accordance with that as sort of a downside stop limit.

And he has done a good job, I would tell you, in terms of reducing expenses.

So we should have pretty good leverage on the upside.

But that's the reason for the decline.

The decline is based on those March lows, so --

There's a compounding factor too, there, Devin, in the current quarter -- is that the money market fees -- given (multiple speakers) the dynamics of the money market funds, those fees are substantially being waved at this point in time.

Yes.

So essentially, the money market impact here is disappeared on the income side.

As you should be aware, I've described this as sort of an actual plan on the regulators' part to move money out of money market funds into the banking system.

And a lot of that has happened.

It hadn't happened here.

We've just waived the fees and maintained balances at a pretty consistent level.

When we open up this waterfall [sweep] alternative, I would expect more money to move out of the money markets substantially, and probably our SIP balances will be maintained at a competitive rate.

So I don't expect as much or any movement from those balances out of where they currently exist.

But that's what I meant about the securities firm really suffering from the absence of a lot of interest earnings that they had benefited from in the past.

They do earn a good spread still on margin loans, but on deposits that are invested overnight, you probably have margins down from 60 basis points plus 20, beyond any of your excess capital.

That's happening.

The stock loan activity is considerably off, given the market.

And those spreads are narrower than they have been, unless you happen to have a good book in your customer holdings of securities that are hard to borrow.

As you can tell in our earnings there, they've retained profitability, but the level of profits are down considerably.

So the interest factor in the brokerage industry, which was supplying, depending on the firm, somewhere between 30% and 55% or 60% of overall pretax profits has virtually disappeared, other than the margin portion.

And margin balances have declined, reflecting concern with clients.

When you look at our $195 billion in assets, we are over -- we are slightly over $1 billion in margin loans.

So it's a very low relationship to total assets.

We always like to think that we are around 1, and we are considerably below 1.

And appropriately so, if you are worried about managing your risk in your securities portfolio, if you think there is downside risk, you pay off margin accounts.

And I think that's nationwide.

I don't think that we're the only firm that has experienced this kind of shrinkage.

But when you are looking at trying to figure out what are the leveraged effects that you get when markets improve or return to, quote, normal, end quote, whatever the hell that is, the fact is, these net interest earnings are one of the ballooning factors that will really enhance retail firm activity and profits.

Thanks for taking my questions.

Douglas Sipkin, Pali Futures.

Just had, I guess, two subsets of questions.

First, I guess for Steve on the bank stuff and then moving over to the retail broker and the capital markets stuff, as it relates to the bank stuff, you guys have any idea of how much paydowns you may be expecting going forward?

I know some of that can be dependent upon the equity markets being strong, but any sense of if we can continue to see some of this trend that we saw this quarter with the big decline in loans?

Yes, I would think, Doug, that the residential portfolio would remain relatively constant in terms of the level of paydowns.

The activities around the REITs in particular has slowed a little bit, but we have actually already experienced some additional paydowns on some corporates.

We've actually had a couple of project finance real estate loans that we were the construction lender on that have actually paid out as a result of the takeout stepping to the table per the original agreement.

So to the extent that the capital markets remain open for some of these industries, what we did see in the last quarter, most notably some of our gaming credits and also some of our energy credits took advantage of capital raises and paydowns.

So to the extent that the markets remain open, we would anticipate paydowns maybe not as high as last quarter, but still substantial.

Got you.

Would you be able to give me the updated loan balance right now?

Or do we have to wait for the monthly release?

No, we're not going to get into daily releases of loan balances.

Got you.

Okay, fair enough.

I notice that you guys sold a nonaccrual loan, and that played a role in some of the charge-offs.

Is that something you are going to be looking to do on some of these nonperforming credits?

Is that an indication that there's some more liquidity in the markets right now?

That was somewhat of a unique situation of a rather large credit, a multibillion-dollar loan, where there was kind of a more active market.

We elected to go ahead and sell our position in its entirety at a discount.

That loan, by the way, was reserved at 31% as of March 31.

So we had already taken a pretty substantial amount in terms of our provisioning against that.

We actually plan to reserve more than what the total loss was.

So in our own mind, it was a good sales price.

Good.

Okay.

And then, just thinking about the provision in general, how much flexibility do you guys have with your auditors?

The reason I mention that, obviously, investors want to see that reserve build go higher and higher and higher.

But on the same end, you guys can only provision as much as your auditors would let you.

Given the improvement in the capital markets, are you guys fighting with them right now to maybe be provisioning a little bit more?

I was a little surprised; I thought the provision number would be higher.

Obviously, you did get a big loan paydown, so that helped some of it.

Yes.

Doug, there's really not any arguments regarding our ability to increase reserves.

We are doing this loan by loan and provisioning it that way.

We did, as Tom mentioned, we did change some methodology in the prior quarter to actually bolster our reserves.

That contributed about $4.5 million to actually increasing our loan loss reserves just as a result of that methodology change.

So there's really not any pushback from the auditor at this point.

Their attitude has changed, given the scenario in the financial markets over the last year.

They don't tend to be as resistant as they would have been heretofore.

They wouldn't have allowed us to do what we are doing now.

Your question is well conceived.

But, as I said, we're actually not experiencing anything that would -- that's why I say, they would have pushed back -- that would have justified some of the levels that we are establishing.

Got you.

But in terms of maybe you guys even wanting to go above and beyond, you feel like I guess right now you are doing that and they're sort of letting you.

Is that how --

That's how I would describe it.

Yes.

Okay.

And then just finally, on the bank, and this may not be a bank question, you mentioned the shelf.

Wasn't real clear what the goals of a potential long-term capital raise would be.

Would it be to bolster capital and reserves, essentially?

Or would it be maybe do something strategically?

Because I got the sense maybe you were thinking about doing something in your comments.

I would say there's no current plan to do anything strategically.

It's just there are a lot of opportunities out there.

This is just a reflection of our conservative bent, where we would like to have a surfeit of free cash for whatever purpose.

Let's just suppose that we had an attractive acquisition that we might even estimate that we were buying at one or two times cash flow three years out.

We would like to make that acquisition within a reasonable level, but we certainly would not deplete the kind of capital balance we have now that we view as a conservative buffer for normal operations, but we wouldn't deplete it to do that.

So we probably would tell you, if we had our choice, we would like a couple hundred million more around.

We would not choose to dilute our stock at these prices to do that, unless there were no alternative and we needed it more than we needed it now.

So you can be pretty sure that unless the stock increases in value a lot, which I don't have any reason to anticipate until the markets improve, that we would not choose that option.

So we looked more at longer-term fixed income as the best alternative for that.

Okay.

Just a couple more questions, then, on the retail and capital markets side.

So, just so I understand, the bulk of the asset management revenues and fee-based revenues in the retail business are all priced on beginning AUM or beginning assets, so to speak?

Yes.

That's correct.

So I guess of -- can you give us an idea of how fee-based assets -- or maybe you can just give us, I guess, I know it's sort of specific, but in your $406 million commissions and fees, can you give us the number, what was retail fee-based revenues in that $406 million?

I don't have that in front of me.

Jennifer, do you know the answer to that question?

We'll try to dig that up.

Go into your next question, Doug.

Yes, okay.

Or maybe just the fee-based assets.

I know you guys have provided that at analyst days in the past.

Oh, yes, we do provide that.

That's actually in the book.

That's in --

Is that in your -- I don't think you give it in your releases, though.

Maybe it's --

It's in our monthly releases.

The fee-based client assets?

Are you looking for client assets?

Yes, fee-based retail brokerage client assets.

We have total client assets and we have assets under management, but fee-based I don't have a separate number for.

Almost all of the assets under management are fee-based these days on the retail side.

Oh, no, those are, but we have both managed and unmanaged.

Right.

Well, you know, and I can go back to the investor they.

I think you guys do provide some color with it there, and I can make some assumptions.

Okay.

That's very helpful.

So I guess what you are saying, then, is the fee-based revenues in retail and asset management will be --

The number I gave you, the sort of 19% increase in fees would include that.

So --

No, I understand, yes.

What I'm trying to gather is what were those revenues this quarter so we can sort of get an idea of what they would be next quarter.

About a third of the securities commissions and fees is wrapped fee-based.

Got you.

That's perfect.

Thank you very much.

Not all of it is discretionary asset-managed accounts, but various wrapped-fee programs.

Asset-based fees.

Okay.

And then, I remember you guys mentioning that you were slowing down the hiring, and I could be wrong.

And then it looks like you --

What we did was we cut our front-money offers in both firms so that the transition assistance that we give in the independent contractor side was much lower anyway.

But on the front money for employees, we also have cut back substantially.

And as I said, it hasn't slowed down our -- well, our home office visits, I often -- I think we've done 360 of them so far this year for just the employee-based firm.

And the activity, as I said, is about the same in both in terms of net adds.

So it's still robust.

We couldn't increase it even if we wanted to because of the difficulty of trying to do all the transition work that we are doing now, given our own penchants for keeping costs pretty much under control.

So it's unlikely that you would see us ramp the 250 financial advisors [a quarter], for example.

No, well, that's -- the reason why I ask is because it's a big ramp this quarter, and is it because this was a great time with the Morgan Stanley and Citigroup deal and Merrill Lynch-Bank of America?

Or is it you guys saying, hey, we're feeling a little bit better; let's go out and do more now.

Which one was it?

No, it's the former.

It's the conditions in the marketplace, probably as chaotic as they've been in any time I can remember, especially amongst those kinds of brokers that you would consider long-termers that have decided to leave with 20-year histories and things like that, those kinds of financial advisors.

Part of it is a momentum thing; once you hire some groups of these large teams, they tend to influence others that they know at the firm.

And other people move as a result.

Now, I would tell you, as you know, from the Morgan Stanley-Citi deal, those that stick around and get their -- the top producers, now, that stick around and get their 60% or 70% retention deals in January, are going to be less likely to move after January for some period of time.

So I actually think that, at least in the case of those firms, that activity will slow down.

Of course, that's the intent of the deal.

However, up until then, I really don't see it slowing down.

The pipeline remains pretty active, and there are plenty of other firms that people are concerned -- UBS.

Some of the independent contractor firms, the individuals are going through changes that they don't like, and there are opportunities for them to leave.

So we expect that we will continue to be beneficiaries of this trend, which have enabled us to run at three-to-one accounts in verses accounts out kinds of calculations here at the firm for some time.

Great.

And then one last final question.

Thank you for taking all of them.

Way off on the investment banking, looking at the number of deals you guys had done this quarter, it looks like it's almost impossible to have a number this low.

Is there anything going on with fee pressure, or are basically the big underwriting banks coming in and lowering fees and you've got to fall in line with that?

It just seems like, with the strength and number of deals -- and I know the values are lower -- it just seems like such a low number.

No fee pressure in the marketplace to speak of.

The issue is one where we will get invited in with a 5% share in an underwriting as opposed to ones where we are doing 40% and are the lead underwriter.

A lot of them are overnight deals.

And in the overnight deals, you typically don't charge as much, either.

And you do take some market risk in some of those transactions.

So, in theory, you would -- your net fees might be lower, but they are not down from what they were.

There are just more of those than there used to be.

And, in fact, a lot -- the pricing benefit has largely been for the client purposes where you will see those deals priced 10%, 12% beneath closes overnight, just to ensure that you have a successful offering in what might be described as a weak market for new money.

Got you.

So I don't -- I was surprised by this also.

So you understand your own analysis of this are questions that we asked around here ourselves and have spent some time looking at.

But I suspect that when more normal activity returns here, we will be back with the same kind of revenue sources as before.

I'm not really negative on this front at all.

I think this is a great opportunity for us.

Great.

Thank you for taking all my questions.

Doug, just by way of clarification, about 40% of that securities, commissions and fees line are asset-based fees.

But bear in mind that the institutional commissions are also in that same line item on the P&L.

So if you look at Private Client Group proper, it's a little over half coming from asset-based sources at this point.

Right, okay.

So about 40% of that $406 million is some sort of fee-based wrap type of pricing?

Right.

Yes.

Great.

Thank you.

Steve Stelmach, FBR.

Just circling back on the bank, you guys are obviously trying to take the tail risk off the bank as much as you can regarding to capital.

You put $35 million down at the beginning of this quarter.

You are bringing asset levels down.

You're not that far away from your target capital ratio of 12%.

What gets you there?

Is it just paydowns from here on out, or do you think capital

No, earnings -- we think a combination of retained earnings and -- we don't think we will need to add any more capital to get to this point in the relatively short term.

Steve, we think we will get the 12% by the December quarter.

Got you.

Okay.

And I guess my next question was sort of timing on that.

And then just out of curiosity, it doesn't sound like it was a capital issue, but I think you've mentioned in the past about $100 million of available capital elsewhere in the business.

Is that still a good number?

More.

More?

Okay.

And a line now.

Yes, we have a $100 million line in addition.

So from those numbers that you recall, and actually, we've been running pretty good cash balances, so we're in good shape.

Yes, okay.

And then just lastly, circling back on costs, maybe I'm reading too much into it, but it sounds like you are a little bit more focused on costs this quarter.

Is that because you don't have to pay the upfront fees?

Or are you guys being a little bit more cautious on the cost side?

Or am I, again, just reading a little bit too much into that?

Yes, recruiting costs are not the costs that -- most of those are amortized over the note lives.

So the real recruiting front-end costs are more related to ACATS these, other costs of just supporting the effort or opening new branches and those kinds of things.

We have substantially restricted new branches.

So that will affect current operating costs.

We really want to fill vacant seats.

If you are operating with a scarce resource in terms of budgeting capital to be used for front money, you want to spend it in the most effective fashion, which means fill up vacant capacity.

And we are making good ground up on that front.

You don't worry about that at the independent contractor level, but you do worry about that for employees.

And we just have put a clamp down on all expenses here at the home office and in the branches to try to protect margins in the face of declining revenues in those areas.

And this is what's happening all over American industry, I would tell you, and the reason why profits are up in the face of relatively flat revenues.

There's only so much of that you can do.

We're not going to be able to squeeze more margin out.

We need more revenues going forward.

We should have more revenues, given the net additions to people that we have anyway.

So what I would tell you is that if we just maintain the market environment we have today -- and I've got no reason to believe that that's any more likely than having another retrenchment in the market after the recent run-ups.

But I do feel that the overall [pump] for going forward, say, for the next six months is a lot more positive than it was six months ago.

So whether the market in the short run is up or down, I think the general trend is beginning to feel like it's an upward trend.

And so I am positive about the outlook, but I don't see a lot more squeeze on the cost side.

Got it.

That's helpful.

And then I'm sorry, just one last follow-up on the bank.

What's your hope?

Is bank holding company status sort of a 2090 event, at least you're hopeful for, or is it more of a 2010 (multiple speakers)?

I wish I knew.

I would like to tell you that it's going to be done in September, because this is the culmination of the process.

But I've been fooled so much by the process, certainly not within our control to determine this.

And I don't know what the objectives of the regulators are.

I know there weren't many people in the pipeline, and it seems like what they did was just stop.

And so, in light of all this uncertainty and in obvious sympathy for the problems that they have to face throughout their existing memberships, I would tell you that they have had their hands full.

And we probably don't deserve or merit much attention in times like this, and "we" in the sense of anybody like us.

And obviously, as you know from some of the regulatory treatment on financing and things like that, firms of our size aren't exactly on their radar screen anyway.

So this isn't about fairness.

This was, preserve the financial system.

And I give, as I have consistently, relatively high ratings to the Fed and the Treasury and what they have done.

These 2020 hindsight complaints on individual moves are probably not deserved, given the exigencies that existed at the time.

And I actually think the TARP program involved with the stock investments will turn out to be successful.

It is not a bailout.

It will be a profit for the government.

So I'm not going to lament the fact that I happen to be too small to be on the radar less than -- you know, I guess Ford could complain that they've been disadvantaged as an automotive company.

They haven't got the same cheap financing, the same care and concern, because they were able to stay in there and maintain themselves.

I don't want to see them penalized for that.

I don't think that would be fair.

But the fact is that's the way the system works when you have problems like this.

We have to grin and bear it.

And I know how hard all these regulators work, although I certainly would agree that Paulson's treatment of Lewis or others' treatment of Lewis probably wasn't correct.

People shouldn't have been ordered to take TARP money to make it look good, like a beneficial program, mainly because it didn't work.

If it had worked and everybody had said TARP is great; it's not bailout; it's a wonderful program and we all should support it, as they wished when they had those 12 firms take money right off the bat, it would have been good.

But the fact is, it didn't work anyway, and it's unfortunate that they did it.

So -- but, look, you just can't second-guess those things.

I understand what happened, and I still respect those people, even though I would describe that as a mistake.

Got it.

Thanks.

Joel Jeffrey, KBW.

I know you guys have talked a lot about the added capacity that you've got in the private client business.

And I guess timing does become the big issue.

Is there an economic indicator or a point in time or anything that would give you an indication as to when you believe you are actually going to start to really realize the upside to these numbers?

When is the market going to have a firmer tone and be consistent again?

I would tell you, I suspect that's going to happen sometime in 2010.

If it happens sooner, more power to it.

As I said, if I were a timer, I wouldn't need to talk to you on the telephone.

My ability to see in that crystal ball is as cloudy as ever.

I just know it's going to happen.

And I know when we look back on it, it will seem like a short period of time.

But when we look forward at it, given what we've been through, when you are still resting from having bailed for the last -- keep the ship afloat for the last six months, you don't tend to start talking about trying to enter the next 12-meter race.

I just think we need to be a little patient and expect this to happen.

I think that I'd describe this as kind of a taste of -- this last quarter is a taste of what really could happen if things really started to run, that this was -- I just gave you an indication with a slight ramp-up in revenues when, in fact, we have grown our productive capacity 10% in terms of people power over the last year.

At the same time, the assets that were generating revenues and the revenues' productivity of the existing salesforce is down 25 or 30.

So it doesn't take a genius to figure out when you come out of this, and everybody is convinced you are out of it, if it all happened at once, you ought to be -- your revenues ought to go up 40%.

But I don't think it will happen that way.

I think it's going to be a slower ramp.

So I wish I could help you with that one, but your guess is at least as good as mine on this one.

Okay.

And then just looking at the bank, how much of your commercial and CRE portfolio is scheduled to mature in the next six months?

A small amount in terms of actual maturity dates, Joel.

I would say in the next six months, maybe 10% or 15%.

And most of these loans, particularly the corporate ones, a year to 18 months prior to the maturity date, the borrower is working on a renewal or they don't want to get up to the maturity date to work on that.

So we're doing that all the time.

Yes.

That's an ongoing --

And a lot of those lenders, that's fine.

We don't have a problem with that.

We're not trying to run it down that fast.

That's not the game plan.

We weren't -- we actually think that the retained earnings will be good.

By the way, we didn't mention, that public securities portfolio increased in value $27 million during the quarter.

And I would tell you, to me, that's remarkably low.

That still leaves $120 million when our stress tests indicate, apart from the write-offs we've already taken, we don't see much loss out there at all, or money good.

So I suspect that that doesn't make much difference in total capital calculations, but it does make a difference in the holding company's book value calculations.

Okay.

And then I know you guys put some more capital down into the bank as well.

Just out of curiosity, what was the real driver behind that?

If it's -- would it be better served to be capital that was more accessible at the broker level or something like that?

Or was it just done to give investors a sign of confidence?

The regulators have generally indicated throughout the industry a preference for their, while they call you well capitalized at 10, I would say in their minds they have moved it up to 11 and may move it up higher.

So this is as much -- pay attention to what the trends appear to be, but I would tell you our own evaluation.

The reason we did the deep dive where we did our own sensitivity testing here, and stress testing, was based on trying to determine what we thought the capital level ought to be to protect yourself, even in the 1% downturn case, to be more than adequately capitalized.

And our answer to that was 12%.

So we have already established, when we began this program, I actually told our MBAs who worked on that, that I would be more comfortable with 12%.

And that wasn't based on any massive mathematical model that I had put together.

It was more just a feel for what adequate capital appeared to be based on the performance of what had happened out there in the marketplace.

And, if anything, I was more comfortable after they finished their stress testing, not less comfortable.

It didn't cause me to raise the number, but it didn't even reaffirm the number, necessarily.

It was too -- maybe it's too aggressively high, but that's what I'm comfortable with.

So for the moment, we're going to do that, a long way from where Jeff would have told you when he worked on all these things in terms of designing models for bank performance.

In today's spread environment, you can earn more than adequate returns with these kinds of levels, so why would you take more leverage risk anyway?

And I would tell you, if people don't respect the risk associated with leverage now, they never will.

And we would like to leave institutional knowledge since I'm sort of near the end of my career in this business, so that the younger guys like Steve and Jeff and Chet and Paul and all these guys we've got in the firm can continue passing on these experiences without reexperiencing them.

So we will set some goals like that.

And by the way, I challenged Steve to say, okay, Steve.

You've been through this already.

If you look at your lines of business, we had a very conservative model going into this business.

What would you make more conservative now?

So I'm expecting him to come back to me and say, Tom, these are lines of business that only by exception we should ever participate in.

And we ought to do some other things to generate profits.

There are plenty of opportunities here where we can use our skill sets.

And I continue to say, and don't seem to get the traction with all the analysts and other commentators, certainly not the short hedge funds, that our using our expertise in our SBUs for our corporate lending, while it's nice to say you've got SNC loans and they are all the same, they aren't, because we have our own subclass of requirements for what we lend to, who we lend to, how we lend.

And we use all those resources in addition to the highly competent lending staff we have, that is conservatively biased to begin with, to make sure that we are not stepping off the gangplank of trying to generate higher returns.

And I would tell you that expertise, which would have concluded -- the use of this kind of expertise would have told somebody that Lehman Brothers had -- with an A rating had a lot more risk than Raymond James with a BBB rating that was, I think, granted grudgingly by those that do these credit analyses, only because we didn't have the critical mass, partially because we choose not to leverage the way some of these institutions do.

And I have maintained consistently that that leverage, which has been the academic argument, that you needed the leverage to make the returns these firms have -- nonsense.

I'm going to tell you right now, Goldman, Morgan Stanley, the other major firms in this industry are going to earn high ROEs coming out of this so long as they don't try to become traditional banks.

If they maintain their business the way they have done it, using the kinds of skill sets that we possess here, only in much larger scope, in their cases, they will continue to earn above-average rates of return without the leverage lumps.

So, mark my words.

We will see coming out of here -- you've begun to see here with Goldman's recent earnings, but I would tell you, once all this bad stuff is cleared out of the balance sheets -- and they are much further along doing that in the investment banks than they are in the commercial banks -- you are going to see high rates of return there again, and people are going to make a lot of money.

So it's just unfortunate that we didn't bang the table hard enough at some of these lows to get more people in these stocks, because they are going to regret the fact.

And to a lesser extent, I will say the same things about Bank of America, et al., because when you do those 2012-type projections, a la my old research guide, [Dick Bobet], you would, I think, feel comfortable that you are going to earn above-average returns in some of those larger banks that are included in our 19 protected status, much less some of the others that have run their businesses well during this period.

So that's kind of where I am on the financial services sector.

And I don't give a damn if it takes three months, six months, 12 months or 18 months for the markets to come back, because I know all our shareholders are going to be well rewarded.

I just think we're going to have nice incrementally better earnings over this timeframe.

It isn't going to be this 40% ramp in year one with normal growth rates after that.

That's -- so that's my outlook.

Okay.

And then just lastly, in the CRE portfolio, are retail and hospitality still the two largest components of that?

Yes.

That's correct.

Although not large, but they are the largest.

Out of the $1.3 billion, retail is the biggest at $250 million.

Okay, so that's down --

I think we have demonstrated with the people that we do investment banking for and work with that they have added equity capital even at rates that you might have thought they wouldn't have.

I would rather not have, but they were worried enough about the outlook in the commercial real estate areas to add capital.

So I actually think I feel much better now than I did.

Some of the ones I was worried about actually raised money.

So this is good.

And if we are really bottoming out in the economy, these guys are going to come back much like the financial services stocks.

Okay.

So then, just looking at your last numbers, I guess retail had been $320 million, so that's down about $70 million quarter on quarter?

That's correct.

And is hospitality down about the same amount?

It may be $275 million or so, Joel, something like that.

Okay, great.

Thanks so much.

Hugh Miller, Sidoti.

Thank you for taking my questions.

Most of them were asked and answered, so I guess I'll just be quick here.

Obviously, I think you guys were a little bit more proactive in the quarter with the hiring of financial advisors than I would have expected.

I was wondering if you could talk a little about maybe what you saw with this particular group or with the environment that caused you to be so proactive?

Actually, I would tell you that a lot of that is pipeline, that it does take time to recruit these people.

A lot of them were already committed in prior quarters for this quarter addition.

But it isn't substantially above the rate that we've been experiencing in terms of people.

The effectiveness of the independent contractor recruiting effort is now just reaching full capacity.

As we reported to you about, I don't know, a little over a year ago, we had essentially -- a couple years ago, maybe -- we had essentially begun rebuilding the recruiting staff at RJFS, and we had moved one of our lead guys out of RJA over there to run that recruiting.

And he had hired a new team and replaced some of them, kind of built the team into what I now consider to be a first-class recruiting group.

And they have become much more effective.

Surprisingly, I would tell you, even to me, the reluctance that one might expect from employee large producers to move to independent contractor status seems to actually have gone down, not up.

In other words, the forces driving them out of their current locations have led them to question whether they ought to be employees or whether they ought to build their own business or whether they ought to join an employee-based firm like ours, which has a much longer demonstrated commitment principally to the private client group, that we have hired far more people than one might have guessed.

But as I described last night in talking to around 200 of our reps, the fact is that we have benefited from acts of others rather than just our own management skills in terms of building up our recruiting teams or in better marketing our firm.

And I don't want to understate the importance of this momentum issue, which again, when you make inroads into a firm -- for example, in Merrill, just to get away from Citi and Morgan Stanley for a minute -- when you have begun recruiting from Merrill successfully, when Merrill really didn't lose people, and it really took this catalyst of failing and a reputation of the firm besmirching and all those things happening, the momentum in the firm for considering that option increases when people find out that the predecessor departers are doing well in their new positions.

And those guys actually radiate to their prior associates.

And as a consequence, you pick up momentum with those firms.

And that has happened almost without exception in all the major firms.

And we are not taking the vast majority of their total departures.

We were looking -- Chet and I were looking at some statistics yesterday on departures at Wachovia over the last year and a half.

We are a minor factor overall.

This is an industry situation generated by the failure of a number of very large firms.

And if you had confidence in your leadership telling you that you were the long-term survivor and you were the best managed and the best firm, and you hadn't even bothered to look anywhere because you weren't inclined to leave, and you get forced to leave because you go through a situation like this, all of a sudden the reluctance level throughout the whole organization changes.

And that, I would say, is the most major factor, along with this building of our own recruiting team, because we've done this while probably reducing front money offers four times over the last nine months.

And as I say, I expect it to slow down.

It always amazes me how long this kind of environment exists.

But it seems like every time you turn around, there's another problem generated somewhere else, from which we benefit, even though we had nothing to did with it.

So we are going to run out of those because we are pretty well making it through.

And unless they manage to find a way to take it through the system again, I don't know how this can continue much longer.

But I do suspect that we will continue to recruit this quarter.

This is not going to be different than -- substantially different than last quarter's results.

Okay.

And just as a quick follow-up to that, are you noticing that there are certain firms that you are being more successful from a recruiting standpoint in gaining inroads and hiring advisors from?

Pretty much those major firms that I mentioned.

We're obviously not picking off any one of them.

It's whoever wants to come see us, we will talk to.

Okay.

And just a quick question on the bank there.

Looking -- I was wondering if you may be able to give us a little bit of color or comments on the composition of the charge-offs in the quarter.

Obviously, a chunk of that was from the loan sale, but aside from that, any color that you could provide on what types of loans, how many loans and so on had comprised the charge-offs?

Sure, Hugh.

Out of the $34 million, a little over a third of that was related to that one sale.

About $6.9 million of the $34 million was residential loan charge-offs.

And there were also three charge-offs related to residential A&D loans.

You know that's been the most problematic part of our portfolio.

That balance has been reduced now to about $55 million of total residential A&D loans.

And the balance was a charge-off to a building supply company that was about $6 million, so totaling $34 million.

Okay.

And I know that obviously it was a more moderate increase in the nonperforming assets during the quarter, but any sense of the marginal increase there and where that was coming from?

Yes.

All of the increase in nonperforming was in the residential and one commercial development loan, along with $15 million of residential mortgage loans that went into nonperforming status during the quarter.

All right.

Thank you very much.

Which is, by the way, still a very small percentage of the overall residential portfolio.

So as I said, the problems have generally been focused in this commercial real estate sector.

You need to realize that those things have been marked either off or substantially decreased.

So when they tell you $55 million, it's not $55 million of still assets valued at 100%.

Quite the contrary.

So we don't expect a tremendous addition to any of this.

And if it were, it wouldn't even be very large numbers.

To elaborate on that, out of the $150 million of nonperforming loans, $60 million is residential loans.

$90 million is in our commercial real estate space.

But the $90 million has already had $56 million of charge-offs against it, so it significantly reduced our book balance in that category.

Okay, great.

Thank you very much.

(Operator Instructions).

I would like to, in the absence of another request, I want to thank you for taking so long to participate with us this morning.

Hopefully, we have helped you understand these quarterly results and what's happening here at the firm and our outlooks.

I look forward -- I wish I knew what I would be reporting to you next quarter.

But I look forward to meeting together with you next quarter to once again hopefully report good results.

Thank you so much for participating.

Ladies and gentlemen, thank you for your participation in today's Raymond James analyst conference call.

This concludes today's call.

You may now disconnect.