雷蒙詹姆斯金融 (RJF) 2010 Q1 法說會逐字稿

Good morning.

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

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

(Operator Instructions).

Thank you.

Mr.

James, you may begin.

Thank you.

Welcome, everyone.

Angel, I appreciate your introduction.

We think it is quite appropriate that we would have help from above for our industry after what we have been through for the last two years.

The quarter -- just making some introductory comments if I might to think about as themes here and I think that is important -- that I think what I would say is that we expected slow improvement in the economy generally as a backdrop for whatever our performance would be.

We probably did not expect quite as rapid an increase in stock market values as we have experienced, which has led many commentators to suggest that certainly the risk of corrections or consolidations in the marketplace is present.

I think I agree with that, but I do think that the general economy is like Byron Wien sort of estimated might surprise some people in 2010 in terms of improvement.

The consumer will take a little longer, which means that generally speaking, employment, while it might start down here in the second half, is going to be slow to recover.

I think small business and even big business has a show me attitude about what is going on in terms of where they ought to make capital expenditures and whether they ought to add to their employment basis or not.

So it is not going to be one of these really exciting V-based recoveries, but on the other hand, the trend will be generally up.

So I think that our numbers kind of reflect that, and our businesses is reflecting that, about which I will comment when we get into it.

So I guess theme one I would make to you is, because of the market improvement, client assets are dramatically from a combination of all that good early recruiting we did and pure market appreciation.

We are at record levels of client assets in house here.

We call it assets under administration.

I think that is a very favorable trend for future results.

You are beginning to see client activity slowly begin to increase, reflecting all those general comments about the economy.

But it is slower than you would have anticipated by the degree of recovery in the market.

So that surprises some people.

Fortunately we have a pretty large fee-based revenue content.

So you can sort of expect that quarter to quarter comparisons here should be good.

Certainly we know that assets under management here whether it is wrapped fee or whether it is pure Asset Management, those balances, as you can see, in our monthly reports have continued to trend upwards, which means that revenues in this particular quarter because of our billing forward policy should be continuing to increase.

So sequential improvement is what I would see in the PCG-related activities going forward here, which obviously impacts the Asset Management numbers.

The Capital Markets kinds of activities that you are seeing in the marketplace, while the transaction volume is high, the percentage participations on all these overnight deals that are occurring tend to be smaller unless you happen to be the lead manager.

And unfortunately IPO, pure IPO activity, is not up enough to influence our lead managed statistics very much.

So everybody look at these kinds of numbers, and we were discussing yesterday here amongst ourselves what indicators could we give you on a monthly basis that might be more useful than just transaction numbers.

And it is not easy to address this issue.

So most of that activity level both here and in Canada can come from smaller participations in underwritings.

So don't be surprised.

Now, as the market improves, if it does indeed, you will see increased activity in lead managed transactions as private equity firms begin to try to get more liquidity into their successful investment holdings and just generally people are more inclined to sell public stock because price levels have increased there.

Not a higher mathematics type observation.

So while it is nice to report an up quarter over last year, I think you guys quite properly those of you that have already commented on our release are also noting the sequential activity that is going on there.

And the only comment I would make in that area that is probably useful for you to think about is actually on those comp expenses, remember if bank contributions are not particularly large and Equity Capital Markets are not particularly large, comp ratios go up because it is coming from our PCG segment principally, and we have already reduced expenses of the Asset Management side of the ledger.

So you're seeing seeing great operating leverage in their profit numbers as their assets go up.

But they have actually been able to manage improvement even against periods of similar asset bases in prior years.

So that is kind of my general comment.

I would tell you that we -- I'm pleased that the results are reflecting the general trends that we have estimated heretofore about what might happen.

That is as much luck as forecasting skill when you start dealing with calling market prices and levels.

In even directions you obviously are subject to a high degree of error.

On the other hand, it is I think positive to reflect on what is going on here because you see some good base trends.

I did not really mention some of those bank trends, but I will when we get there, and then Steve Raney, our President who is with us of the bank, I'm sure will be called upon to elaborate on these results.

So let me begin by just saying that it has been very difficult to increase net revenues at a meaningful level.

That is similar to the rest of industry, by the way, in the US economy.

It has been a little more intractable than I might have expected, but you have to dissect the income statement again to come back and say, where do you see the vibrancy, where do you see the returns?

And the private client commissions and fees I would focus on because they were up 15.5%.

That is a pretty dramatic kind of growth in these comparisons, and they were up over last year.

On the total commissions and fees, you do not see the kind of total growth at these levels.

It is a little bit lower, but still up sequentially 7% and up 12% year-to-year.

And the reason for that is basically that institutional commissions they are down slightly in fixed income, still above the kinds of levels that one might anticipate because we benefited from some of the uncertainty and illiquidity in the markets in prior periods that is getting better now, which is good for the markets but not necessarily good for spreads or good for pure volume of transactions.

On the equity side, the equity institutional business is still lackluster, even in our European operations because of the weakness of the dollar amongst other things.

But you know.

as people begin to think that the dollar is going to strengthen.

I think you will see some favorable numbers there.

Generally speaking, with the exception of these comp lines, non-interest expenses have been in good shape.

So we are benefiting from that.

I do want to keep pressure on management to watch this because unless we start seeing a dramatic recoveries in some of these intractably slow recovery revenue lines you don't want to ramp up too much.

So generally speaking net income before all of these adjustments that the accountants are slapping on us now for un-vested share results, the $49 million was actually very good contrasted to the $61 million from last year and up from $43 million in the immediately preceding quarter.

So it was a 14% type increase there, which lead us to that $0.39 diluted earnings versus $0.50 versus $0.35 from the sequential prior quarter.

So what I would say there, of course, just as a generalization is it is the bank, it is the bank, it is the bank; the profits -- you sort of had a confluence of all of the stars in the universe in the first quarter last year, when we had pretty good loss experience.

We had already slowed down the growth of loans and assets at the bank.

And generally speaking I would not say there is a lot that has happened to spreads, but these factors at the bank led to a record quarter last quarter and one that turned out to be well above average.

Because, as you know, in the March quarter, the commercial real estate market started to get a lot worse and began to see some of that reflected in loan loss provisions and not just by us in a much greater degree at the larger banks.

But when you look at the bank, just for a minute since I brought it up, you see that sequential improvement as some of these loss provisions have benefited from offsetting credits.

As the ratings of some of our loans have improved during the quarter and the actual additions of new loss loans has declined, I would like to think that this represents the longer-term trend, which I believe.

But unfortunately still, as we have cited in past periods, it is hard to forecast what happens quarter to quarter with loans.

So it is hard for us to forecast it will be a -- look like a nice inclining line of profitability quarter to quarter resulting from a lower loan loss provision.

So I'm sure you will have more questions on that front.

As you know, the bank also shrunk just generally speaking in the quarter, and it is way down from last year.

Part of that was by design at the beginning, and now I would tell you it is like turning around an aircraft carrier.

It is not the easiest thing to do.

You give instructions or you turn the wheel, but you don't notice very much of a change for a pretty good period of time.

We are working hard to add because that capital base, that total capital ratio, is above 13%, which is higher than our target ratio.

So we are actually trying to grow loans intelligently.

And you're seeing kind of a market that you probably may not even discern or be aware of where loans, good loans, are sort of hard to come by.

There is effort on the new originations to actually be in for a lot more than the total loans, so your requests are actually being reduced.

You have your normal renewals which are going on, and you have a continued pretty rapid rate of pay back either from re-equification of the balance sheet through earnings or public offerings of existing public companies.

Or the -- it is not really from a reluctance I would say on these numbers because we are not reluctant.

We are trying to make more loans.

And we continue to ramp up the effort that we are doing here while maintaining high credit quality standards.

And you are going to see that throughout the industry.

The industry is going to be extremely careful.

But you also see increased bids for loans for whole loans in the secondary markets reflecting this demand, which means that a lot of them will not meet our qualifications for purchase.

So it does not make it as easy as you might guess to turn around this aircraft carrier, and you should be aware of that.

But Steve certainly is making a major effort with his team to get that accomplished.

I cited some of these comments on the individual segments of the business for you so that you would understand this interplay where you have PCG and the Asset Management Group improving results at the same time -- at least the year-to-year comparisons at the bank were down for the reasons I just mentioned -- and Equity Capital Markets is still a drag on Capital Markets in general.

And, as I said, Fixed Income Commission business was down somewhat in the quarter.

So you don't see the Capital Markets ramp that we are really expecting yet, and I think we are going to see it because we have certainly seen the activity levels in the Capital Markets committee.

But, as I said, we need more of this IPO activity, which is sort of a later stage phenomenon that goes on in the marketplace, so it is not coming back as fast.

And the M&A activity is -- again, this is one of those discrete kinds of things that happens quarter to quarter and makes it very difficult to try to look at trends on that front.

And the other thing I would say about Equity Capital Markets -- so those of you that look at the quarter to quarter comparisons in Capital Markets sequentially -- is that the traditionally the fourth quarter of the year -- that was the September quarter -- is replete with activity as a result of everyone rushing to get in all their fee income making sure everything is booked in real-time, etc., which does not necessarily happen in the normal quarterly activity.

So we almost always have some burst of investment banking revenues in September quarter.

So that is part of the reason for those results.

The only other comment I would make on Capital Markets is we have made a pretty good investment in personnel.

So the expense levels there are higher than they were a year ago.

You typically do not have a lot of underwritings in December quarters.

You shut down at least for the last three weeks of December.

So you just don't see the returns on the increased investment yet.

But I think you are going to see that going forward, and in some degree that is true in the public finance market where we have added bankers and where we saw certainly an improvement last year in terms of the activity in this area, and I suspect we are going to continue to see improved results as we continue to add people in that particular area.

We have had some questions even internally here about net interest.

So what I'm going to do is ask Jeff Julien, our CFO, ably supported here by Jennifer Ackart, our Controller, to respond on net interest.

Jeff, if you would give some input with all these new bonds we have outstanding, and it changes on the money market front what is really going on here.

On its face -- I'm looking at net interest sequentially from last quarter -- on its face net interest was down $7 million.

When we tear into that just a little bit, Tom mentioned the interests on our note issuance last quarter.

That added interest expense of about $7 million this quarter and about $3 million in the previous quarter.

So if I add that back to get what we will call interest earnings from operations to take that financing activity away, just to look at the ongoing run rate of operating earnings with respect to interest, then you get $86 million in the previous quarter and $83 million in the current quarter, still a loss or a decline of $3 million, which again doesn't really comport with all the sequential improvement comments we have been making.

But if you will remember, last quarter we talked about the inception of this multibank suite program in the month of September which we completed sometime mid-quarter in the December quarter.

That added about $7 million in the December quarter of fee income, which is in financial service fees as a line item, not in interest earnings.

Now that recoups some of the spread that has been lost by the interest rate dynamics.

And, as Tom mentioned last time, the magnitude of this -- of our earnings from that is going to be roughly an offset to our bond interest costs.

But when I add that $7 million into this quarter just ended, we actually get $90 million versus about $87 million.

There is a little bit of this in the previous quarter.

So we actually did the way we would analyze this have a sequential improvement from those interest earnings and related activities from September to December of about -- not a huge jump -- but of about $3 million, and we would like to think that as balances grow that will continue.

Jeff, do you see any change in spreads or in terms of client deposits in all of our areas?

What is going on here?

With the improved markets, you might think you would have some runoff cash.

We have had -- it has actually run about flat to slightly down.

We have had some net investment, but we also have increased client assets coming on into the firm.

Another dynamic is we were earning virtually nothing on the billions that we had in our proprietary money market funds.

As of today, about two-thirds of the taxable funds or about $3 billion has moved into the bank suite program.

It still leaves $1.5 billion in the taxable fund and about a similar amount in the tax-free fund.

We will be undertaking steps to convert those to private label shares of someone else's fund to recoup again part of the lost earnings from that activity as well.

So that will additionally help going forward.

Most of the decline in net interest income, as you can imagine, is bank-related, I mean from last year.

Interest earnings are down $36 million.

$28 million of it was because the bank's earnings, and Steve can comment on spreads there.

They are down a year ago.

When we had the record bank quarter, we also had a very strange LIBOR rate.

Remember LIBOR spiked over 4%, and we benefited somewhat from that.

So we had an unrealistically and unsustainably high spread for that quarter, as well as very high balances.

So we had the best of all worlds.

But spreads are hanging in there pretty well at the bank, although our balances are way down.

And now the challenge to support that is to grow the loan balances to get -- recapture some of the spreads.

Let me come back -- we expect rates at some point during this year to begin escalating, which will actually have a favorable impact over time for us as it increases.

Because, as you know, even in the Private Client Group business, where we have a lot of these client assets, we have benefited at the bank by the low rates, but the Private Client Group essentially has not earned much as Jeff pointed out in the general investment of some of these assets, and that will get better as rates increase.

And you will see perhaps not a restoration of the total amount of interest net of earnings in any time in the near future that we've enjoyed in past periods, but you will see a pretty dramatic increase which will help private client margins.

And, as you know, during the quarter the private client margin actually increased dramatically sequentially from the prior quarter, which is what we expected to have happen and we expect it to happen more.

And the reason I say that is that essentially the productivity for a financial advisor is still about 16%, 17% beneath where it was a year earlier.

And the only reason for that is that the individual investor is not back at full force, and the impact of these increased assets has not totally restored the income levels.

But it is about -- it is getting there now.

So you are going to see built-in an increase in Private Client Group margins unless or until you have a correction in stock market values.

So the outlook there is good.

The other factor that affects Private Client Group, which has been the tremendous recruiting in prior periods, actually you saw a slight decrease in total financial advisors at the firm over the last quarter.

As you know, there are normal factors as I'm reminded by our guys -- death, retirement that can join with trimming the salesforce at year-end for re-registration.

This is calendar year-end.

So essentially we had a number of our smaller offices closed in December, and it actually spills over to a smaller degree in January so that we had a decline.

And the rate of new additions is always somewhat less in the holiday season.

But there is no question that the rate of movement within the industry has slowed, mainly because the market is good, and brokers spend less time thinking about this when they are making more money and have more things to do.

So we are seeing what we call home office visits where financial advisors who come down here and visit us are increasing again.

So I suspect we are going to see more increase in the lost numbers because of the comments I made about cutting off at the bottom each year.

It means that our additions are probably at much higher average productivity than the departures.

So I actually suspect that we will be back on positive footing here for the rest of the year, adding advisors, and that is true in Canada, it is true in the United Kingdom.

This is kind of a universal comment on what happens with financial advisor accounts.

But I think we are just not going to be as an industry as active in moving people around during this year as we were last year.

We sort of forecast that, which leads me to conclude that we need to have more trainees back in the system, which would require some ramp-up on our current activity levels.

But I think it is really an obligation to the system, an obligation to the firm, and we have very good record with the ones who survive, which unfortunately is a smaller percentage than one would like to believe it should be.

So we have improvement to make there.

As you can see, the book value of the Company has increased.

I think we had some improvement in our public securities in the bank.

We had the earnings after dividend additions, and you had option exercises that have contributed to that increase in the quarter so that we are at $17.58 on a book value per share calculation.

The margin balances have increased.

I mean pretty much by all measures we are obviously up in financial advisor count a lot over last year.

The health is good at the firm, and the outlook for firms like ours that are more agency-oriented and deal with private clients is actually quite favorable going forward.

So I think the major part of our business, 60%, 65% of it is in good health.

The Asset Management part is directly related to those numbers.

We are also seeing great net inflows from institutional accounts and from outside broker dealers in total.

So that we are seeing net growth in a reduced amount of cancellations as the market has been better.

So I'm looking forward to a restoration of that business, which is a higher-margin business here in the succeeding quarters.

As I have already said on the Capital Markets front, I expect somewhat lower levels of commission activity in fixed income.

I expect equity commissions to begin to increase here unless we have a major correction in the market, and I do expect investment banking activity to increase more dramatically unless that market has a shock.

And hopefully I know the trend in the bank will be to increase profitability as we begin to grow assets again and more importantly see more traditional levels of loan loss provisions quarter to quarter going forward.

So the outlook is good.

I do want to add something that is nonspecific just because my irritation level has reached a point where I have to sort of take the steam kettle top off.

We are, as you know, we are involved in some financial re-regulation that is taking a distant second consideration to health-care legislation.

But the rhetoric is just beyond comprehension.

And I really believe that you all have some opportunity -- and I mean the analyst community -- to add some kind of realism to this process.

Because this blame mongering that is going on in Congress and by the administration I find extremely irritating, and that does not mean that I don't believe that a lot of the management teams in larger financial institutions and even in some of the smaller banks have earned the ire of the American public, particularly their shareholders, because they have experienced big losses for lack of risk management control and just for not being tight enough in terms of the way they manage these companies.

I don't believe, however, that was generated by a concern for current levels of bonuses the way the government seems to portray this, and it is sort of an outrage to me that they do that.

Because the vast majority of financial service companies, while they have been injured by the fallout from everything that has occurred in the marketplace during the last year and a half or two years, has made it through here without TARP funds, without direct government assistance.

And often I might say with a government whose sort of ignores their plight and makes no effort to distinguish among the firms that really have kept on operating and doing what they are supposed to be doing with their stocks falling apart in the marketplace because they are put in the same category as those that have not done well.

So, as one of those firms, I would just like to comment that if you think we got through this without being injured it is not true.

Our shareholders experienced a large decline at the bottom at least in terms of our share price.

It is still below highs.

So they have been injured by this process.

The TARP recipients, while they certainly in the large institutions may deserve some of the comments on the management, they paid back the money with interest and with option profits.

And for the President to comment that the banks need to bear the responsibility for the major problems in the economy and I mean solely amongst the large 50, of which we are not one, that is an outrage actually I would tell you.

Because the administration, the Fed by both its fiscal and monetary policy, by its general comments on the economy and not reining in real estate when we add a clear bubble, not recognizing the risk of increased subprime activity and taking action through the bank and S&L regulators by making them tougher on that category of loan; the regulators themselves who simply did not tighten down the ship with all this going on around them; the monoline insurance companies that thought they could be just as good at ensuring mortgage pools as they were with municipal bonds you know bear responsibility; the rating agencies who they seem only to be able to look at the rearview mirror and that's sometimes without the benefit of a clean rear window pane is I think all of these groups, including the Administration and Treasury activities before the problems developed, and I have made clear before that I believe that the Fed and Treasury earned kudos for their recovery from the problem, but we did not need to have the problem develop at this level.

And if we had just used existing regulatory power, some foresight, some more sensitivity to changing numbers, we would not have experienced anything this bad during this period.

And for that you ought to start out with some moderation in what kind of activities are taken on the regulatory front.

But I want to point out since I have been involved with the financial services roundtable, financial re-regulatory activity since prior to all of the problems developing, when we warned everybody without anybody listening that Fannie Mae and Freddie Mac were train wrecks ready to happen with very limited equity capital when their stock prices were high and they could have easily raised more equity capital, but for some unintelligible reason their own management kept lobbying for maintaining high degrees of leverage and made no effort to protect itself from the increasing probability that the firms might be destroyed in some sort of a real estate reevaluation when they could have fixed that easily, and the government could have prodded them to do it as they should have, instead of agreeing the whole time.

I get really sick of some of our politicians playing holier than thou positions when, in fact, they were very active participants in insuring that none of that happened.

And then blaming the banks for what happened that has occurred over decades in the auto industry; the terrible management of risk at AIG, which I would argue with the benefit of retrospect that we should not have saved even though we would have had a domino effect and I understand why Treasury and the Fed were worried about it; those losses and some of the guarantees that were made, I will tell you all these transactions that occurred were done with the benefit of contracts.

There was no comment about having additional cost that sets retroactively based on participation.

I find that unAmerican.

I don't -- I think that this whole behavior is very unfortunate because we should not be focused on blame.

We should all be about restoring the jobs in this country.

We should all be about fixing the system rules where they need to be fixed.

They are all pointing out that we are fighting Consumer Protection Agency because we are trying to hurt consumers.

That is the biggest bunch of nonsense I have ever heard.

The fact is we have been arguing for four years that we ought to have an oversight agency that looks at systemic risk, that looks at risk of entire holding companies as opposed to individual elements of the holding companies, and we asked Treasury and we asked the Fed and we sent these reports to Congress and all the regulators to take action in this area.

Whether it is the Fed that does this or whether it is some new body really not as important as that we actually have this global oversight activity going on here more aggressively than we have had in the past, coordinating all the efforts, looking at the financial risk holistically going forward, we ask for that.

So it was not just for the Fed and Fannie Mae.

We asked for national charters for the large companies in these activities so that regulation would not be done by state regulators who don't even understand what derivative risk is, how swaps work, etc.

It is inexcusable that this day and age we don't have a national regulatory system.

We don't have a national charter for insurance companies.

We do have some bank regulations, but you could make it clearer for large holding companies that you had this form of regulations and certainly that applies to the brokerage industry as well.

We had areas that were unregulated.

We commented on those, whether it is mortgage brokers or other areas of the business could easily be added to existing regulators.

There should be consolidations, not additions to regulators.

The SEC, the CFTC should be merged.

The OTS and the OCC should be merged.

It does not take a genius -- I did not need to be a business school graduate or experience either '73, '74 or the recent market declines we had to make these evaluations.

We have all known this for some time, and yet we cannot get the politicians to cooperate to invoke the right kind of regulation here to fix these problems.

I mean afterall since 1934, 1933 and 1940 we have had major changes in the products we sell and the way we conduct business.

And much as I liked Glass-Steagall and supported it during its existence, I would tell you you should not go back on Glass-Steagall.

You don't need to limit the size of bank growth.

You need to limit leverage.

You need to have a real regulatory oversight.

You need to have adequate resources given to those regulators.

The SEC did not even have new product oversight until last quarter.

That is unbelievable.

So we had registrations of leveraged ETFs coming out and listed on major exchanges, the New York Stock Exchange, without someone understanding whether these leveraged ETFs worked as advertised or not.

Just -- it is unforgivable is what I would tell you.

We have seen the regulators go after those of us that sold the ARS securities when, in fact, I would tell you based on past experience, based on ratings, based on everything we knew without the impact of the perfect storm that we all have recently hopefully survived in total, that you would have never had them go bad, just the way you would not have had the commercial markets or commercial paper markets fail, or the securitized mortgage-backed market fail or generally have a collapse of global securities markets.

And what are the regulators doing?

Spending their time going back and blaming everybody when they did not even take the time to develop appropriate disclosure for secondary trading rules.

Now I mean I find this obnoxious, and it is very unfortunate that everyone does not take their share of the blame, and we are not looking for a scapegoat to blame all this on.

We need to get refocused going forward here.

I think, if we do that, we can become very globally competitive again instead of losing market share.

But that is going to take this senior agency that I mentioned or some other vehicle for the industry and regulators to cooperate to develop competitive, global up-to-date technologically capable systems to beat our global competitors.

Because if you think that developed Europe and especially Asia are going to stand by as they accumulate all of these positive cash flows in Asia and not try to grab bigger parts of the financial markets, you are sorely misled.

So excuse me for ranting on this subject, but somebody has to because no one seems to be doing this, and I think it is our responsibility as participants in the industry to do that.

With those comments, I will open this up for questions.

(Operator Instructions).

Daniel Harris.

You mentioned earlier in the call the decision at some point to start growing the loans at the bank.

I was wondering as you think about that where you see the most opportunities.

Is it in residential, or is it in the commercial and CRE space where you see that you might grow loans going forward?

If you see over the last three quarters, this recent quarter our loan portfolio was down about $140 million following two quarters where we were down roughly $500 million.

So the activity levels in terms of us growing the portfolio that effort really started in earnest at the end of the September quarter.

As you know, it takes a little while to kind of build that momentum up.

We did 18 transactions in our corporate portfolio that represented about $200 million of new funded loans.

The residential business has been a little bit more challenging where we moved from an environment where there were a lot more sellers than there were buyers.

That dynamic has changed, and we are actively looking for some new channels for some new residential loans.

We have actually got a couple of things that are closing this quarter.

But we're also not going to sacrifice credit quality for just putting on new loans for the sake of doing that.

The corporate market, the primary market right now is still very light.

But we are very active with all potential participants that we have been doing business with.

And once again, we have really started turning that aircraft carrier around, as Tom alluded to.

We would think that we would be roughly flat to try to be up slightly this quarter.

I would tell you that the activities in the Capital Markets we were notified this week of a couple of payoffs and pay downs we are getting as a result of high yield borrowers accessing the high yield market.

So once again, we are not going to sacrifice quality just for the sake of putting loans on.

But we do think that we will be able to eventually grow the loan portfolio over the next few quarters.

Great.

That is interesting color.

As you think about --

You know, before you go off that subject, there is one other item you need to consider here, and that we still have this application in to convert to a commercial bank from an SNL, which the government has chosen to move very slowly with and has concerns about ARS activity and things like that.

But no problems with respect to the quality of bank activities or the financial stability of the holding company and results or anything like that.

There is no real incentive for a regulator to approve anything that has any risk associated with it of making a mistake in an environment like the one we have been through.

So I even empathize with them a little bit, even though it is frustrating from our standpoint.

Because it caused us to again go through this gross-up activity at the end of September that we described to you.

So part of the problem is, if we are going to have to continue to comply with OTS regulation.

I mean it is important that we do add more residential mortgage loans here, and so that will affect our judgment, too.

It is not just where are things available that meet our quality and return standards Because we are going to be guided by what goes on there.

And I wish I could be more definitive, but this is a little bit outside of our control.

So I don't know what is going to happen there.

Thanks, Tom.

Just staying within the bank but moving over to the securities portfolio, do you guys look out to March or April if the government pares back its involvement in the mortgage market potentially?

I mean how do you think about your securities portfolios?

I think most of it is agency MBS.

Does that change your view in terms of maturity or the type of security that you are borrowing or how you are thinking about the mix of securities and loans?

We really have not been buying any securities.

There have been a couple of Ginnie Mae and agency bonds that we have bought over the last 12 months.

But in the December quarter, we did not buy any new securities at all.

The private-label portion of our securities portfolio continues to get paydowns on a monthly basis.

And, as Tom mentioned, we have had some improvement in that negative mark-to-market improved by about $20 million in the December quarter.

In terms of the impact of the GSEs pulling back their purchases in support of the mortgage market, I don't think that's going to have a lot of impact on our existing portfolio.

And right now we are really more interested in deploying our liquidity into loans.

So I'm not sure exactly how that is going to play out for us on securities.

Yes, we will keep an eye on it.

And then just lastly, Tom, as you look forward here to the spring with potential transition, how are you thinking about any changes going forward for the firm, or do you think it is just still the same business strategy that we have had for the last few years?

You know, I have got Paul Reilly in here also who is my -- who will be replacing me as CEO on May 1 and increasingly is involved in all the activities here on a management level.

And all I can say from my standpoint is that the transition thus far is going extremely well in terms of his rapid learning curve in terms of all of our business activities, in terms of his continuing to manifest an understanding for, as well as an endorsement of the general values and policies we have here at the business.

It is interesting that for the first time since we stopped worrying about survival you are seeing demands for the use of our existing capital again, and we are having to go through some of these decisions about, do we invest more money in Latin America, do we -- how aggressive are we on the recruiting front?

And we are going to deal with all these things at our long range planning meeting in February of our Board of Directors, which is always fun because we definitely get a divergence of opinion represented at these meetings.

We actually have an operating committee meeting later today.

So these kinds of discussions are ongoing.

I would tell you that just from my standpoint I don't see a lot of changes, but things will be done differently.

That is sort of what happens when you change CEOs.

But I think the basic precepts are going to continue to be followed, that we certainly share amongst all of our senior management team a view that there is tremendous opportunity in our business, not only to restore rates of return on equity that we have enjoyed in the past and get back some of the operating margins we had, but actually to capture share in almost every single one of these businesses.

I know Steve certainly shares the fact that we would like to return to a little more normal banking environment where people spend a lot more time worried about adding the new loans than they are about protecting the value in existing ones.

So we have a lot of that, but Paul is here, so I will ask Paul to comment if he has anything to add.

Just let me briefly say that, first, I am here because I believe in the strategy and direction and really the values of the firm.

As I tell people internally, the biggest difference on May 1 it will be the day after April 30.

So this is not about drastic changes.

It is maybe about tweaks or looking at different things a little bit differently.

But we share the same values, direction.

Tom and I almost instantly agree on 90% of issues automatically, then we debate 10%, and he has certainly got a lot of experience, and I will continue to lean on that, too, as we continue past May 1.

Great.

Thanks, guys, and good luck in the new role, Paul.

Devin Ryan.

Tom, I believe you said that productivity per financial advisor is down 16% to 17%.

Can you quantify or qualify how much of that is related to the new hires that have not ramped up yet?

Essentially what I'm trying to get a sense of is, if there is a large amount of revenues from more recent hires that just is not reflected yet in results (multiple speakers) and will be in coming quarters.

Right.

But, as you compare year-to-year, the only comment I would make to you is that we had a lot of new hires in prior periods, too.

So what I would tell you, the quality of the hires we are making has not declined.

So we are still adding above average producers in general at the firm with the exception perhaps of the FID division where we have these brokers in banks that tend to have -- well, they range all over in production -- but I would say on average you have a little lower production in some of those additions.

I don't think that is really the major factor.

Certainly we had some built-in ramp from hires over the last year that still will be ongoing this year.

But I really think we have -- this is just a major deficit in terms of recovering the levels that existed on prior assets.

And since the asset levels have recovered to a large degree, I actually think that we have a great opportunity to see that difference recovered here within the next 12 months, and that is a substantial increase in commission activity by itself without some increment from new hires or them reestablishing prior productivity levels.

Chet Helck is here, too, and he is still running all of our retail operations.

So, Chet, you are probably the best one to comment on this.

Well, I agree.

The latent productivity is more impacted by continued fear in the marketplace on the part of retail investors.

People are starting to get their legs under them again and some confidence, but there is still a great deal of apprehension about a second leg down or some double dip or some other impact that would put them through another decline in asset values.

And there is fear out there, and consequently there are large cash reserves building, and there are people waiting to see what is going to happen.

And the commission part of our business has not recovered anywhere nearly as robustly as the fee part of their business has.

So we have that to look forward to.

So I think with the increased productivity potential of the people we have recruited, which is much higher than our averages were before, there is a great deal of leverage built into our system.

Yes, and I would tell you we are still seeing some move of assets to fixed income in spite of the fact that you would have thought that this market performance would have got a lot of our people back into equities.

I would say that a number of our elderly clients -- and I can relate to them because I'm one of them now -- the fact is that they are looking at those assets and they are saying, gee whiz, I don't know if I want to go through the probability that one of these could happen again during my lifetime now that I'm 65.

And consequently I'm going to move more assets to fixed income because I really was under diversified by demand actually.

I would tell you the clients defined that because of prior performance.

And now a 10-year period of no real increase in equity values, you have got to sit back and say to yourself -- I would say, by the way, being a (inaudible) that means the next 10 years are going to be good.

It is time to buy.

That is right.

But they would conclude that I may only live five more years.

And even if I lived 10 years, I don't want to go through another one of these gyrations.

So I sort of empathize with that point of view.

But I know what has happened historically, and that is that people will continue to invest in equities.

I will remind everybody that we forget too soon, but when you looked back last March, there was not a real market for a lot of equities.

I always describe the behavior of what the stocks were doing as the freefall -- a safe and freefall falling off the top of a building.

I mean there was no way to interrupt it.

There was no logic to it other than physical laws.

No one should have pushed it off the roof of the building.

But the fact is, when you see that, that is what causes people uncertainty.

Because they realized it was not rational what happened, and they don't want to be subject to that.

Great.

Thanks for all that color.

And then just lastly, you commented that the bank appears to be on the road to higher profits.

Maybe there is some lumpiness in the provisions going forward.

But can we at least extrapolate from your comment that it is your expectation that provisions going forward on average should be lower than what we saw this quarter, essentially assuming no big surprises in volatility or above normal loan growth in any one quarter?

Steve, do you dare respond to that?

Just a couple of additional points on that.

Our residential loans we did have an increase in past dues, but it was relatively nominal in the aggregate.

About $1 million in terms of loan balances being higher in terms of our past dues.

The percentage looks a little bit higher in terms of past dues to total loans as a result of loan balance declines.

But just so you know that the less than 90 day past dues in the residential portfolio actually are down quarter-over-quarter.

So these loans we would like to think are kind of working its way through the pipe.

But we continue to be very cautious in the residential portfolio in terms of another leg down or a double dip in housing.

On the corporate side of our portfolio, we saw pretty marked improvement across the board, but we still remain extremely cautious on commercial real estate.

Out of all of the new deals that we did in the quarter, out of the 18, I think two were real estate related.

So the predominantly corporate or commercial and industrial focused at this point.

So all that being said, we know that over the last four or five quarters we have been very, very aggressive in terms of how we are reserving and charging loans off.

As Tom mentioned, we would like to think that we are starting to head into more of a normalized environment.

But we're also not here to predict what the next few quarters is going to look like.

Because, as you know, our portfolio and loan loss reserves and charge-offs can be lumpy just given the large nature of some of our credit exposures, particularly in our corporate portfolio.

A great example of circumlocution.

I'm really proud of you, Steve.

I learned from the best, yes.

Christopher Nolan.

This is actually for Steve.

Steve, the decline in nonperforming assets from the prior quarter, was that mostly seen in the commercial real estate portfolio or the corporate or what?

Yes, we actually had an increase in residential nonperformers that were a little over $10 million.

So the corporate and commercial real estate portfolio in terms of the nonperformers actually were down quite a bit.

We were down roughly -- the total reduction was a little over $20 million in nonperforming productions.

It was pretty broad.

We had some paydowns and one of our commercial real estate loans actually paid off entirely that was nonperforming.

We had some upgrades of some loans.

One corporate loan that was nonperforming has been put back on accrual status, and we have had a couple of upgrades in the commercial real estate portfolio that were upgraded as well.

We did have some charge-offs that lowered the balance of nonperforming loans.

So all of those things factored together have resulted in the net reduction in nonperformers.

Greg, as a follow-up -- (multiple speakers)

(multiple speakers) in the commercial real estate space, though.

As a follow-up, did the regulatory changes in terms of the recognition of nonperformers where if a loan is performing but the underlying collaterals were worth less than the loan -- (multiple speakers) has that change affected the NPA growth from one quarter to the next?

That had no impact on our results.

Great.

And also an unrelated question, just generally out there perhaps Tom would like to answer this.

Positive or negative, do you see any sort of impact on this proposed Obama tax on financial institutions?

I'm saying benefit from the standpoint of you could see some talent coming over from the larger banks to Raymond James.

Just I know you commented at length on it, and I am completely sympathetic with it.

I'm just trying to get a more distilled --

Yeah, I really don't think that it is large enough to impact that very much.

It is more the comp issues and the disaffection that has grown amongst employees, not just financial advisors, with the large institutions that did not perform.

Not so much because they were large, but because the performance was subpar during this period and certainly did not conform to their prior opinions that they were situated on rocks of stability where, in fact, they might have been on rocks of stability, but the sea water was rising.

So I think there is some of that still going on, that they are not really convinced that the commitment in some of these institutions is at the level that it ought to be.

That some of the institutions have totally lost credibility.

I will not specifically mention them, but if you look at where you have the biggest outflows of financial advisors, you might get a feel for that.

Because it is also true in the investment banking and public finance professionals at those firms, they have got similar levels of discontent arising from the performance.

It is just that now that things have stabilized and it looks like the vast majority of firms have gotten rid of TARP are in this special class of those that would be competitors to us.

There is just not going to be as much movement, but there will continue to be net loss from those firms during this coming year.

It is not to say there will not be, there will be.

And they are going to start worrying next about margins in their different business units when they get past the survival mentality, also.

So you may see continued activity in terms of exiting certain businesses or you may see a board of directors in some foreign country sitting down and saying, you know, we really don't want to be in that business.

We don't understand that business very well.

We have not had good managers in the businesses.

We want out, and we would certainly benefit from some of that if that happens.

Great.

Thank you.

Good quarter.

Steve Stelmach.

Tom, could you just circle back on your thoughts on financial regulatory reform?

It was not real clear where you stood on the issue.

Actually I appreciate the candor, and I actually hope -- (multiple speakers)

I am for financial reform, by the way.

I really am.

I mean that is the point I was making.

I appreciate the one-liner.

We need more of those now.

Actually just two quick questions, and the first one is for Steve.

On the bank margin, the bank's capital levels are higher clearly than last year.

All else they would tend to have a higher or buy from higher margin.

At this point what do we need to see to get that margin to at least stabilize?

Is it just the short-term rates, or are we looking for something else?

Steve, just making sure we are on the same page in terms of our reported results here.

It was footnoted, but it may have got lost there.

Our net interest spreads over the last couple of quarters have actually been very stable when you take out the effect of the excess cash balances that were in the bank, that have started in the September quarter and then continued on in the December quarter.

We have that excess cash now outside of Raymond James Bank and in the other banks that are in the multibank suite program.

So when you take all that out, our net interest spreads were roughly 3.37% last quarter, and that was 1 basis point higher than the prior quarter.

What we are seeing right now is our going on the incremental business that we're doing in the corporate portfolio is actually accretive to margins.

But, as Tom mentioned, we are seeing more demand than there is supply.

We have seen where we were for many quarters where there were very high LIBOR floors with much higher spreads.

We are seeing that start to come in just slightly, and we are seeing more buyers and, therefore, our allocations in the primary deals be cut back.

But still that being said, the incremental business that we are doing is actually a net positive to spreads in the corporate portfolio.

On the residential side, it has been somewhat stable but may be slightly down in terms of loans that are coming up for reset.

They are coming off of their initial five-year fixed-rate period, and then they are resetting -- the reset rate is slightly lower than what it was before.

So the net debt of that is we think our margins are going to be somewhat stable.

In the bank we would be negatively impacted by rising short-term rates, but I think that would be offset at the rest of the firm.

It is not a big impact, though, because most of our assets are floating rate, and we would benefit from -- in the corporate portfolio, it really would not be an impact.

It would impact our residential portfolio from rising rates.

But I would conclude that absent all the problems in the economy, the fact is that what we are doing -- and you look at it on an individual loan basis, all the way through just generally what is going on in loan classes, etc.

-- the rates of return on equity currently are not where they ought to be given anything like these spreads.

And so, as you see some normalization occur, if that is a correct outlook, you are going to see higher rates of return on equity, and Steve certainly likes double digits.

He is not real fired up about -- (multiple speakers)

Our 8% ROE.

So there is a lot of latent potential on that front, as well as from ramping up lending balances.

Okay.

That is helpful.

And then, Tom just real quick, on this incremental capital allocation, the bank obviously began higher capital than it was last year.

It seems like you are pretty close to where you want to be in terms of capital.

Incremental capital, where do you think it goes in the business?

Is it the retail side, institutional, back to the bank?

Well, I did not mention our proprietary activities.

We expect to be making some transactions on the proprietary front.

They have some demand for capital.

So we continue to look at outside private equity investments as part of our overall rate of return kind of investing, but also assisting in the investment banking activities we can do.

So there is some demand from that sector of the business, and I would tell you we are seeing pretty good transactions.

Potential transactions.

So I think there is going to be good opportunity there for us.

But, as a practical matter, as you know, we limit our capital allocations to those kinds of assets, unlike some of our higher learning institutions did prior to this market decline and illiquidity that they are now bemoaning.

So I think we're going to continue to have some demand there and on that front where we will put some money.

I think we're going to have enough capital generated from retained earnings and from existing sources.

That $300 million addition was actually a good idea.

It was not just totally for buffer funds in the event of continuing difficult times.

So I think we have enough capital actually to allocate things like additional foreign offices if we decide to do that or to make a smaller firm acquisition.

There are certainly bank lines out there that we are not even bothering currently to utilize that we could utilize our new ones we could establish for specific purposes in the event we want to do something.

We have been told that by some of our banks.

So I don't really see a shortage of capital.

It is just we are going to be tough.

If you look, for example, at emerging markets at these levels, you have got to be a little concerned that if there is a decline anywhere as China recently indicated, there is reason for concern in some of those markets that have run up a lot.

So we have to be very careful in terms of how we deploy capital even where we think we see great opportunity.

We are not going to be just rushing off a cliff to do these things.

So we are looking at a lot of things again, though, and it will be subject, as I said, of the long-range planning meeting.

I think a lot of the recovery in, for example, the PCG business really does not require capital commitment of anything like what we have been making the last couple of years.

So I think we are going to be fine.

Hugh Miller.

I had one or two for Steve.

First off, can you talk about the cost implications at the bank from the expected rise in OREO properties you guys alluded to in the press release?

Yes, Hugh.

It is still a relatively small and manageable number of properties that are currently in nonperforming that are going to be working their way into foreclosure and OREO.

It is a manageable number.

I don't have a figure for you.

It should not be a huge impact to our overall earnings, and we are -- we had budgeted and are planning for an increase in OREO expense.

Both in the actual ongoing management of those property and also as we have seen in the past, we have taken some charges -- we did not have any write-down of OREO in the December quarter, but we have had a write-down of OREO properties in prior periods.

So we are factoring that in to our operation.

Okay.

And I know that there were some questions asked before about provisioning levels on a go forward basis and so on.

I was wondering if you could just talk a little bit about, barring any type of double dip in the economy and with where we are -- I know you are still cautious on the CRE cycle as we move forward -- but how comfortable you are with the notion that September's NPA levels could represent a peak as we look back a year from now?

Absent having a lumpy -- we could have a couple of loans go on non-accrual that could be a big number and you have another spike.

So obviously we don't feel like we have -- we don't have anything like that that has been identified or it would have already been put on non-accrual.

But so it is -- we are still at risk to having something like that fall out of bad, so to speak, and have to be put on nonperforming.

It still could impact the numbers.

As I mentioned, we did have $10 million increase in non-performance in our residential portfolio.

So I think there is still some risk that we could have an increase.

So it's hard for me to handicap what that is going to look like going forward.

Obviously we would like to think we have seen the peak in the September quarter, but that may not be the case.

Okay.

I certainly appreciate the insight there.

And then I guess a question with regards to the Equity Capital Markets business.

Obviously you guys have been doing some opportunistic hiring.

It seems as though you are positive on the outlook with regards to increased activity as we head further into 2010.

Can you just talk about following the hiring that you have done how you guys feel about the opportunity to not only benefit from an increase in activity but also just may be gaining some market share as we move forward?

You know, on the Equity Capital Markets front, I mean clearly there are not as many players in the small and mid cap space.

And, as activity picks up, generally the big firms will be less apt to participate in some of these smaller transactions that they have been involved in lately and then they sort of go away after the deal.

I mean it is sort of incredible.

I mean, you know, what happens in these timeframes.

I think if you look at our SBU groups with our largest businesses being energy, real estate, financial services, we have a pretty good healthcare practice.

These are going to be vibrant areas for additional finance going forward, and we are trying to expand our consumer presence in some of the other activities, which we think are roughly -- are mainly moribund currently that will pick up.

So I actually think we have a good chance to increase the space in our market share if the market is as attractive as it is now and you see the private equity firms where we have a massive effort in terms of calling on that marketplace, etc.

for IPOs.

And just generally saying we are seeing people -- I had somebody in my office this week who made an appointment to come in to ask me how the Equity Markets were working and what his timeframe ought to be and where his hurdle rates of activity need to be for him to do a public offering.

And that just demonstrates to me anecdotally that we are beginning to come out of this very quiet period.

And while it is still a little fragile just because it is hard to tell whether you are going to have a correction here or not, I actually think we're going to see a pretty good ramp-up in business for all of these firms in this business, and we are in a particularly good place.

When you look at our retail distribution, which is more important than a lot of firms advertise in terms of who you want to have own your stock in an initial offering or who will own your stock because of the interest and type of security, and the European institutional sales and US institutional sales and global research that we are building, we are seeing underwriting assignments in Brazil, in Argentina.

I just think that we are in a good place.

Canada is going to pick up on the investment banking front, too.

So I think the business has changed a little bit currently.

And so with those big firms going down and doing these transactions and including five or six co-managers and maybe having two senior lead managers or so, that makes for very small percentage allocations in the co-manager levels.

That is hurting us more.

That change has hurt us more than about anything I would tell you in terms of -- it's not because people still don't respect our research and are not giving us business.

Quite the contrary.

I expect our institutional conference in March will be sort of record levels of interest and participation.

So I think there is a lot of opportunity, but we need -- we are at that kind of position where you are in between making it to another plateau in terms of levels of investment banking activity.

And we earn that on our research base, but we have not yet earned that in terms of direct competition for lead underwriting assignments.

And that is what is going to be the differentiating factor going forward, and we have got to do better.

We will do better.

Joel Jeffrey.

In terms of the fewer opportunities you are seeing on the commercial loan purchases, is that really being driven by larger banks generating fewer loans at this point in time, or is it just more competition for these loans?

I would say more of the former than the latter, but it is -- there are more -- once again, we've had our allocations cut down on several deals that we have done in the last few months quite substantially in terms of us committing 25 and getting 12.

But the deal flow is slower right now kind of in our sweet spot in terms of credit quality.

Once again, we are hoping that the overall economic environment and capital markets will continue to fuel M&A activity and, therefore, deal flow for us.

But there are opportunities in the secondary market.

We have added to certain positions and taken on a couple of new things in the secondary market.

But, as Tom alluded to earlier, prices have moved up substantially, kind of across the broad senior loan market probably 30 points in the last 12 months.

Well, and the arising like a phoenix is the high yield bond market with public securities, and the fact is, as you might expect, a number of borrowers are concerned about having too much commitment to bank loans that have shorter terms when they can go out further with less terms and conditions and the good ones qualify to do that.

The fact is on some of these -- these companies are quality credit B, BB type credit quality type companies, but often because of size and not because of quality of the Company.

They are looking at this and saying, well, maybe it is worthwhile to pay the premium to get the term commitment and have more flexibility with respect to using banks in future financings.

Yes, rates have not been terribly -- (multiple speakers).

Some of the deals LIBOR floors of 100 basis points, plus 400, you are looking at a floating rate of 5% or something like that.

Some of the -- (multiple speakers)

Yes, but if you can go out even like we did and do an 8 or an 8.50, that is not much freedom to pay for or premium to pay for that much more freedom.

So I think that is part of the cause.

And I also really believe, and you need to keep this in mind, that the companies that really batten down the hatches and cut costs and got rid of employees -- I mean you know, they have improved their balance sheets, and they can pay back bank lines even if they intend to go back into the bank markets when things pick up.

So we have some of that happening right now, too, and you add that to the natural disinclination of any financial institution to make a loan that has any risk associated with it, real risk of nonpayment, you're not going to get a lot of it.

And I would not blame it all on banks not making loans.

I mean they are not making loans because demand is declining, too.

And, as we see business pick up, that will reverse.

I expect that to happen, but it is not going to be an overnight process.

I would also add that I think we have talked about this before -- about a third of our corporate borrowers have an institutional relationship with the firm either Research and/or Equity Capital Markets.

In the December quarter, about 75% of the deals we did were actually with firm clients.

You will probably see that percentage of overall -- the percentage of our borrowers that have another relationship with a firm increase over time.

We think that is obviously a good client selection tool.

We will not be exclusively doing that, but it will be a larger percentage of our new business will be other relationships with the firm.

Well, in fairness, that also reflects the fact that issuers are more sensitive to trying to make relationships with people who have equity offering capability, but also conjoin that with lending capability and looking to maintain a group of relationships that are all similarly capable so that they don't have to maintain 10 relationships and that they are more sure that those financial providers stay on top of the stocks, right research and are just as sensitive to making sure that the overall capital balances are right at the firm as the issuer is.

So I think that is going on all over the world, and it certainly has not slowed down as a result of what we have just been through.

And as a follow-up to that, I mean given what you said about the relationship aspect of this -- and I realized this would be a complete sea change in the strategy -- but would you ever consider building out an origination capability to take care of this?

Yes.

No, we have talked about that on numerous occasions.

That is mainly a consequence of what size we are in and what new products or processes we are adding at the bank.

But that is in the foreseeable future I would tell you, that we would do some of that for our client base.

I mean it is almost competitively necessary that we begin to consider doing that.

And then just lastly, I mean when you guys talked about the impact of higher interest rates on the private client business and the increase in net interest income, how should we think about that falling to the bottom line?

Would the comp ratio in private client go down, or is this all factored into the advisor's comp rate?

I don't think the comp ratio would change too much.

The advisor's share modestly and some of the advisors and some of the products share in some of the interest spreads, but that is not going to impact the comp rate ratio too much.

We are trying to get our hands around the better sensitivity analysis on interest rates, but the positive impact on the Private Client Group would be more than the negative impact on the bank of a modest rise in interest rates.

So we are -- we think that the first couple of raises would be a net positive to the overall firm.

Although again we have positive on one hand and a negative in another segment, so it would not be dramatic as it would have in the past before we had the bank.

Yes, I actually think that where you are going to see the comp ratio go down a little bit is mainly in the G&A section of PCG as the productivity levels are restored and, indeed, increase above prior levels.

And that will lower some of the overall costs.

But it is not going to be a tremendously large factor from either source I would tell you.

There are no further questions at this time.

We would like to thank all of you for participating.

We look forward again to continuing seeing manifestations of this overall longer-term trend that we are forecasting will occur here, and thanks so much.

And if you agree with some of the comments I have made, don't be afraid to get on the bully pulpit.

Thank you very much.

This does conclude the conference.

You may all disconnect.