雷蒙詹姆斯金融 (RJF) 2010 Q2 法說會逐字稿

Good morning.

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

All lines have been placed on mute to prevent any background noise.

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

(Operator Instructions).

Thank you.

Mr.

Tom James, you may begin your conference.

Welcome, analysts.

It's a pleasure to be talking with you this morning.

By the way, generally speaking, this is my last leadership as CEO on this conference call, so if you hear me on this sometime in the future, it's because Paul Reilly, our about-to-be fully employed as CEO, will be leading these calls and if he is doing something else, I might sometime do something, but he will be the face of Raymond James.

So he's here with us this morning, along with Jeff Julien and Jennifer Ackart, who are leading the financial disclosure.

Of course, Chet Helck is here with us, as well as our Bank President, Steve Raney, in the event you have very specific questions dealing with the Bank.

Corporate Counsel is always here to make sure that we stay on the straight and narrow in terms of public disclosure.

You know, what a difference a year makes, I guess, is where I would start.

Unfortunately, the human mind works in strange ways.

We tend to want to forget negative experiences quickly, so when times get better, we are kind of back to business as usual; we don't spend as much time thinking about the lessons that we learned.

It's especially poignant to look at the comparisons year-to-year, only because the times were so bad.

I think I said bleakest moments of the decline in the financial markets in last year's March quarter, so none of us should be surprised by dramatic increases in profitability and revenue lift.

What was most surprising to us, I would tell you, was that, in 2008, that our numbers were almost as good as 2007.

And then in 2009, we did indeed get impacted by what I call the fallout of what happened in the financial markets more than real weaknesses in our own internal operations.

So all of us had that happen.

Certainly, our clients were injured by the down market, although those that have stayed the course, as you can tell by our client assets, accounts now, $242 billion, much higher than they were at the beginning of the market decline -- have largely recovered.

But I would tell you, they still have some room, in some cases, for those that were either concentrated in equities or who tended to shift some of their assets out of equities into fixed income securities.

Somewhere near the bottom or on the way up, before we've topped out, I think all of us would admit that both the rapidity of this market rise and the level of the increases over these last 12 months is kind of amazing without any kind of real corrections in the path.

That's the caveat I guess I express when I talk to our clients and financial advisors, as I did this last week in Indianapolis where we have a complex of five offices and a lot of financial advisors that are relatively -- that have been accumulated over the last ten years, basically, from start up on our part in Indianapolis.

So, the fact is that I just want to make sure that everybody understands that -- here -- that the lessons that you should learn from a downturn.

So I spend a lot of time trying to get that message across to all of our people here in the home office and in our branches so that, in their own planning efforts for their clients or for their departments, that they consider what happens in very negative environments and are prepared to sustain operations in the eventuality that we have to go through something like this again.

So, I guess I wanted to mention that just because of the comparison that we see now.

Actually, I guess we call this an uneventful quarter in a normally upward market environment.

We are still in the recovery phase, economically speaking, as a country, and it's stronger than a lot of the pundits had forecast any time over the last year.

The American resilience here in the economy is always incredible when you get upturns.

Obviously, as we begin to reemploy the unemployed in the United States and across the world, this improvement, in pure numbers, will only be more dramatic.

With the S&P increases that you all and economists are expecting for the March quarter and going forward into the June quarter and forward there from indicate that the economic recovery is still in its incipiency and is very strong now.

So I suspect that, while there may be some gyrations and corrections in the stock market moves, which will impact our results, that the general trend is still going to be positive simply because, if you're talking about 35% or 40% increases in S&P 500 earnings quarter to quarter here for a while as we often have in a turnaround out of a recession that has been deep, we will see real good fundamental support for increased stock prices.

Unless these rates start going up at the same time, as opposed to lagging, you won't have sort of the dampener that maybe would be more healthy in terms of stock market activity, may not be in terms of economic activity.

But the fact is we've got to start raising these interest rates.

As I pointed out to our clients in Indianapolis, clients with cash balances are still subsidizing the financial services industry with very low rates, which in fact generates economic activity throughout the whole system.

At some point here, we've got to give fair returns to those that are investing their cash for retirement and our people are probably suffering as a result of this.

So while I would say the government and regulators are probably happy that they've shifted a lot of cash assets out of our money market funds and other alternative cash investments to bank deposits, so they've been very effective doing that with our help in the investment industry, as we've used more bank depository methodologies than in the past.

We, for example, as you know, have gone through this shift of promontory to improve the quality of the insurance available to cover client assets and improve returns for them at the same time.

So, the -- and it helped us slightly in terms of interest rates.

While I'm on that, I might just mention that that's still the major element for the retail-oriented stockbrokerage industry in terms of lost revenues.

If you look at net interest in the broker-dealer segments of these companies, we are missing a very large contributor to pretax profits, whether it's $80 million a year or $100 million a year or $120 million.

I mean, it really depends on some complex of factors, but it's certainly a lot of pretax dollars that you won't find in any of these comparisons yet, but they're latent revenue generators for the industry.

Now, as I did in my report, what I'd really like to do, rather than focus on these annual comparisons which you all are now familiar with from our release, is to actually focus you on what happened in the quarter-to-quarter comparisons where, as you can see, we had a 7% increase in net revenues, which is actually a large increase on a quarter-to-quarter succession.

Some people have commented that they were a little disappointed with the securities commissions and fees.

I will remind everybody that the asset fee increases lag in our system because we bill forward for the quarter based on the year-end assets, so we don't have that.

The impact of increasing equity capital markets activity is still really relatively new, and you will see more retail participation as well as institutional revenue line from the new issue activity.

The secondary issues that made up the majority of the offerings in which we participated over the last six or nine months were largely smaller participation as Co-Manager than you would expect.

As a matter of fact, I refer to them around here as syndicate allocations.

Just so you understand, while that terminology is no longer relevant because they really aren't syndicates.

You tend to have groups of firms that are all managing underwriters as the offers, and you have more concentration.

The fact is the allocation to the junior co-managers are still in normally the 3% to 6% type of the economics, whereas when you have IPO activity, we are liable to have not only a much higher percentage of lead-managed offerings or co-lead offerings, but we will have higher percentages with even smaller groups of underwriters in those transactions, which will generate more retail and institutional commission activity, both in the immediate primary offering but also in the follow-on trading activity that goes on after offering.

So when you are trying to analyze what's going on in retail components of the industry, you need to think through some of that dynamic.

Obviously, the investment banking activity on the sequential and even comparisons to any of those quarters going back from there was up dramatically this quarter.

Both underwriting activity and M&A activity were up considerably during the period, and the pipeline is still very active, so those revenues are good.

So when you look at these, the general numbers -- and I'll get to the segments in more detail in just a second -- I think those numbers are good.

Because of the control of costs which are still being held down essentially and as you often see coming out of a recession, you see it nationally in all industry, even though we've done a lot of hiring -- I want to point that out very clearly, not just in FAs but in institutional salespeople, traders, public finance, investment bankers.

We've done a lot of hiring.

IT -- the fact is we still have very favorable leverage on an operating basis.

So going from $43 million after taxes, which was bolstered by the reversal of bonus pools in the first quarter, to the $55.6 million this quarter is actually a pretty dramatic increase, I would tell you.

I foresee not necessarily that level of increase but given what's happening in the economic scenario that I described, that we will continue to have ramp up in these numbers.

I will point out that, last quarter, we had that charge in the quarter that depressed earnings, so when I look at these comparisons, I think of this as more like $0.38 or $0.39 compared to the $0.45 in the quarter, but that's still a good successive rate of increase.

I wouldn't diminish the importance of the trend because I think that's the most important lesson that the numbers are generating.

All of those platform comments that I've made in prior quarters really are indicative of the fact that we have a lot more earnings capacity today than we have in the past and we are seeing a pretty rapid ramp in productivity in the salesforce.

I think, in RJA, the number I saw -- that's our employee-based broker-dealer -- I saw a number like 441,000 for the quarter as average productivity.

So you see increases occurring at that level, and it's happening now in the independent contractor in a very [para pursue] kind of fashion even though their recoveries for some reason started out a little bit slower.

Then when you look at -- there's not much to say about the six-month comparisons except, again, the increases are pretty dramatic.

I guess, from our standpoint, the nicest thing about it -- and you need to think about this -- is that free cash flow rates increase dramatically.

When you combine that with the fixed income offering we did, we are in real good shape in terms of working capital and being able to fund new business activities and indeed to do things that will increase the activity levels at our existing major segments.

With that, I will turn directly to the segments because I think that's where the lessons are more easily discussed.

The Private Client Group sector, as I mentioned before, is -- while we only had a 3% increase in commissions in that period, I actually think the more recent part of the quarter run rate is increasing.

I think that's going to be good as all of those new additions to our sales force begin to operate more like their historical gross commission levels.

You perhaps have seen some of the comments in the industry on -- about what happened to brokers during this moving period.

You know, the first, in the year of a move, produce at about 70% of their historic rates in the first year and usually come near or slightly exceed historical levels in the second year.

Certainly, by the third year, they are back on their normal growth tracks or dependent on whatever the general market is doing.

What happened in this case is we often saw brokers down 50% the first year after a move.

I think 55% or 60% might have been a reasonably good performance.

So when you see that impact of that wearing off and the productivity increasing again, you will see the ramp up in numbers.

So that's very favorable.

I made some general comments already about capital markets.

You know, in the press release, I remarked, as I anticipated, we would see a decline in fixed income revenues and profits related to the activity levels of institutions getting out all of a lot of these mortgage-backed securities, often at very low prices, and that we played a part along with many members of our group.

It wasn't just a big Company activity whereby we used our analytical capability to recommend the interested buyers at the lower ranges of the security prices, that they buy these as the large banks were unloading them and insurance companies and other holders, both nationally and internationally.

So, the opportunity here was to do very large transactions with larger than normal spreads, reflecting the uncertainty that existed with respect to pricing.

That situation has changed.

While there is still some of the process of unloading going on, the banks are getting stronger now, they are wiser about selling things at prices that might involve losses that aren't appropriate, and they pretty much solved their capital problems, as we all know, by the repayment of TARP and by the rapid return to public equity markets to strengthen their balance sheets.

If anybody had told me that TARP would have -- in the large banks would have already been repaid and some of the auto companies would even be repaying some of TARP already, I would have been in disbelief a year ago, I can tell you for sure.

So again, that signifies the recovery that I mentioned, how fast we are coming out of this and how proud we should be in spite of perhaps the fact that maybe regulators and government poured fire on the -- kerosene on the fire rather than water.

At the beginning, they rapidly acted to get this system back in order and pump money into the system to restore the integrity of our financial system for which I give them many kudos.

Again, looking at that, that rather small increase quarter-to-quarter in capital markets and look at the more dramatic level of profit increase, it shows you we were sort of on the cusp, certainly in capital markets, of a point where revenue levels barely covered costs and when you increase revenues incrementally, you get a dramatic surge in the profit margins.

So I think that's reflective in spite of the, again, slower levels of fixed income commission revenues and trading profits that I think are here now.

They are still very good, don't get me wrong, but they are not anything like they were in the period I described.

Again, looking at the pipeline of activity, just to give you data, I mean usually we have capital markets meetings three or four days a week now.

Some of the meetings have multiple deals that are considered and so -- and I think this is pretty much industrywide.

I don't mean to say that we've gotten tremendous advantage of the competition.

But the small and mid-cap offerings, many of which emanate from private equity firms where we have increased our exposure and relationship base, are beginning to heat up.

If that happens or continues to happen, I expect better results in capital markets.

If of course we have a correction, that will interrupt it.

I don't need to tell you this is pretty market-dependent kind of a reading.

Asset management -- as you know, the discussion I made about the amount of assets and what has happened to assets directly impacts managed assets.

In fact, we are benefiting even at a greater rate than we were before by outperformance by our money managers as well as large net sales in asset management area, whether they are managed or unmanaged -- unmanaged being Wrap fees that we offer where the financial advisor actually manages the disposition of the assets.

Those run rates month-to-month are at record levels, as you might anticipate, given that market environment that I just described and the fact we've added those brokers in the past.

So asset management -- again, they had dropped down to the point where revenues were only slightly above expenses, and they reduced expenses in response.

Now that revenues are ramping up fairly rapidly, I expect a restoration in our run rates of profit margins back into the high 20s% and 30% type rates, which are kind of our historical averages.

Pretty hard to complain about those kinds of results.

Then, of course, I talked mainly about our four major segments so you understand that the ones that are listed here -- Emerging Markets, Stock Loan, Proprietary Capital and Other -- from my standpoint are all other because they don't amount to much.

So, the remaining piece of this puzzle is RJ Bank, which obviously is a major part of our business.

It has been a rocky road in banking generally.

I would say, while we stayed largely above the fray, we still suffered from the radioactive fallout associated with the downturn and problems of real estate.

But as I've told you before, we basically, with the exception of REIT loans, state as a -- on a percentage basis far below the percentage allocations to commercial real estate, even since we are an S&L and even to residential lending.

And because of our underwriting, we manage to always stay beneath the kind of experience that occurred in other parts of the country, in other institutions, in terms of delinquencies, charge-offs, and all of those other factors.

That's beginning to reflect itself in pre-tax profitability, as you see in our numbers here where we had the reversal.

Obviously, the March quarter last year was a terrible quarter for commercial real estate.

The expectations for commercial real estate got substantially worse.

Reserves were taken in that quarter across the industry as people realized that this disease was spreading out of subprime residential into the more economically directly impacted segments of real estate, and we were considering that to be a bigger problem.

We suffered from that because we did have some exposure but nothing like anybody else in the industry.

I actually had a conversation with Jamie Dimon last week, and Jamie was remarking that, while clearly, from the normal bank standpoint where they still have a lot of exposure to commercial real estate, that commercial loans were still a much smaller percentage, even at $2.5 trillion or some number like that, than the residential side.

Besides that, this rapid increase that we are having in improvement in the economy will mitigate the fallout in the commercial sector.

Those banks that are a little more patient in dealing with these problems, as they have been, I think are going to be rewarded.

We've seen that in things like general growth properties and other situations that you could point to where some values are starting to return, even though I would tell you some of the losses in banks have not yet been taken.

From our standpoint, we would say we are well reserved here in light of what's going on in the marketplace.

Essentially, what you've seen is the percentage of reserves are up slightly because of declines in the denominator mainly.

Even though we added to some of these problem loan charge-off kinds of categories, if you look overall in the portfolio, you see more improvements in category descriptions than those dropping down, and hence those assets numbers are already in decline.

Spreads were up slightly in the quarter but they are probably a little overstated, we would say, from the fees that came in as a lot of these institutions have paid down their loans, which, as I've reported to you over the last several quarters, was way above where we thought they would be as these firms have generated positive cash flow, been more conservative in employing that capital, and have returned to the capital markets to raise money.

That's certainly been true in the REIT and energy fields in the main.

But you're seeing it across industry now.

So we have a very large pipeline in terms of new loans going forward.

We should be able to deal with these things.

We do think that spreads will stay in the 3 to 3.25 range longer-term.

So we think the returns are still going to be very good in banking, going forward, albeit, as I always give this caveat, one individual loan can always affect a quarterly result in a bank our size, so you have to not pay a lot of attention to a one-time event.

But I think the general trend now is very positive at the bank also in that we will begin to see the kinds of rates of return on equities that we had anticipated when we went into the banking industry.

So, Steve, don't feel any pressure!

But the fact is you have it.

So, we actually, if you look at this, I think if you had an eight-cylinder car now, we are operating at about 6.5, and -- but the trend is improving.

We are getting more of these cylinders leveled out, and we will continue to see successive improvements here.

Recruiting, as I pointed out to you, has slowed down, which almost was a welcome respite, but I would tell you the activity for home office visits and interest in the independent contractor, while our recruiters are having to work for the first time in years, is actually picking up again.

But I don't -- I expect normal times kind of is what I would say.

The major firms have stabilized, the people that elected to stay are less likely to leave, those kinds of things.

But I still think the attractions generally support the movement to firms like ours that are focused on the Private Client group and are very sensitive to the needs of financial advisers are very positive, and we will continue to be a net beneficiary of movement.

I would also tell you, at the same time, that it's appropriate for us, as we've had this shrinkage in firms and more retention packages, that we ramp up our training activities again, which principally impacts Raymond James and Associates, but we also invite people who wish to attend at their expense from Raymond James Financial Services to attend these training meetings.

I think we need to invest more time and effort in those things because the field forces have shrunk.

We have an aging population in the financial advisory marketplace.

You've probably read of that.

So, we have more retirements than we typically have had.

Maybe a lot of them came in with me.

So the fact is that it is incumbent on us to regenerate youth additions.

I say "us" as an industry.

There are a lot of firms that don't take this seriously and then there are a lot of firms that do, like Edward Jones and Merrill, but we obviously believe you need to have a balanced approach to adding financial advisors.

The only thing I would add to all of that is that the Canadian operations, the UK operations that we have in retail are prospering.

They also have added a lot of financial advisors in total.

We will see the productivity increases there.

I would tell you we are becoming a better-known name in both those markets, which will -- that brand recognition will impact our effectiveness and our profitability there.

So the long investment we've made in those markets, with good management teams in place in both firms, will [rebound] to our benefit.

When you look at some of emerging market activities, they are going to pick up too, albeit they will continue to have the kind of volatility that gets a little frightening.

We've added to our analytical staffs in Brazil.

We are trying to do a global product with Latin American exposure in it, in addition to the European effort we have underway.

Needless to say, in North America, we have great research.

But it's expensive in these large, emerging markets, to add talented people.

There is a shortage, and everyone has rushed into the emerging markets, so there is a dearth of well-known, competent researchers, institutional salesman, etc., that we are suffering from.

So, the way we approach this and our strategy will be impacted by that going forward.

But generally speaking, what we see here in the US is happening in the world.

I expect to see more cross-border activity in capital markets.

One of the companies that went through capital markets this week was an Argentine company, so this is -- we have more participations in Brazil now.

So generally speaking, as you can tell from my comments, I am bullish on the outlook.

I think Paul has some good times to navigate here going forward.

I think they are going to be exciting for firms like ours, still both because of the general economic condition and because of our relative positioning versus the larger firms.

So I will leave you with those comments and solicit your questions.

(Operator Instructions).

Devin Ryan.

Good morning.

Tom, you gave some color here in your opening remarks, but I just want to dig in a bit more on the state of the retail investor and I guess the potential impact in revenues.

Obviously, asset levels are increasing, so the fee-based revenues are also on the rise.

But just I want to get some flavor on the willingness to transact or even move new assets over and how that's trending.

You know, it's surprising that as many of them have returned to the market.

I actually think that our financial advisors did a good job of having our clients stay the course on their asset-allocation models.

The only deviation from that I would make is those that were totally committed to equities now have realized the wisdom, especially those that are retired, of having some of their money in fixed income.

So as you see in these national statistics on mutual fund sales, we are actually seeing a continuation of flows and net flows into fixed income.

However, I think that is lessening now and that we will begin to see more money flow into equities going forward.

I actually think what's happened over the last two years in shift of those asset allocation models is positive.

We've made a major effort at this firm to focus our clients on investment policy statements and asset allocation models so that they think of this as a real balancing and diversification routine, and that we have methods of being able to focus our FAs and clients on these relative allocations of assets.

So, I actually think it's fairly positive.

There's a lot of demand for the new issues out there.

Salesmen are once again complaining that they aren't getting enough from the syndicate calendar, so I actually think that the attitude is improving.

As you know, most of clients for firms like ours are either retired or nearing retirement or in very productive high-earning levels.

Those people are still in equity markets, even though they were quite frightened over that two-year period.

There are a few exceptions.

We actually had a worse problem in '73/'74, when we saw -- we lost a generation of investors.

I don't think that's happened this time, in spite of the fact it was a very similar kind of a market environment.

I give credit and kudos to our financial advisors in the industry and certainly at our firm where we have this financial planning bend for having that occur.

So, as I said, I think we are going to see this productivity line begin to increase.

We've had a pretty good run in small and mid cap stocks already.

We haven't seen the new flows of money in those areas, as you would think.

I think actually that, looking forward over the next 12 months, large caps are going to be more rewarded.

I still think the US is very attractive, relative to all markets, over the next 12 months.

So, I think there's a lot of opportunity to sell our story, both here and abroad, because our institutional operations in Europe benefit when people think that the dollar is relatively strong and/or the economy in the US is outstripping the results in their own local markets.

So I think that's also a bullish indicator because they make up about a quarter of our institutional equity sales.

Our capabilities in terms of researching the European securities is also rising, which means we've added to the productive capacity of our institutional sales force in Europe and in the US, as a matter of fact, for selling European ideas.

So I think, both on a retail and an institutional level, that we should be fairly bullish about the outlook for the individual investor.

I would not be negative about this.

I also would tell you they are very attuned to fee-based pricing now.

They actually feel better when they have a decline, when they see their FAs are rewarded at a lower level during that period.

Contrary to some of the negative articles that have appeared in the industry rags again dealing with fee-based being high, I can tell you fees have come down a lot over the years.

They actually -- they haven't come down as fast as volume of dollars have increased but, boy, they are very reasonable now for investors -- well-spent money.

The wealthier people are very happy to pay the fees for the support they get from firms like ours that do both investment management and financial planning for their client.

So, boy, I -- there are really no holes in the Private Client Group story, I would tell you.

If anything, we are better off than we ever have been.

Great, and thanks for all that color.

Just one quick one for Steve -- can you just talk a little bit about the competitive environment for adding loans and what type of loan growth might be reasonable to expect in the coming quarters?

Yes, sure, Devin.

Things have certainly turned dramatically in the last, even the last couple of quarters.

Activity levels and the deal flow has actually picked up dramatically.

I would say our pipeline is bigger than it has been at least in 18 months or so, so -- which is encouraging.

But at the same time, it has been very competitive.

There's a lot of non-banks that have come back into the market.

Even this past quarter, we've committed on some deals and the allocations that we wound up receiving were, in some cases, less than 50% of what we committed to in the original transaction.

So right now, we are anticipating at least flat if not some positive growth in the June quarter, just because we've ramped things up and activity levels are good.

The M&A markets have -- and the lending markets have rebounded quite a bit.

And so there's just a larger number of transactions in the marketplace that we are seeing right now.

That's helpful.

I will leave it there and hop back into the queue.

Steve Stelmach.

Good morning.

Just real quick, Steve, on the bank, just to follow-up that last question, can you talk a little bit about the reserving methodology there?

I understand the balance sheet shrinking and the allowance for loans as a percentage is up, but charge-offs exceeded provisions again this quarter.

How can we get comfort on that provision trend?

Is it simply just lower asset balances or are you seeing something on the credit side that gives you some comfort?

Yes, there's been quite a marked improvement in the last couple of quarters in terms of credit quality, and some of the things that have driven the provision expense down here the last couple of quarters have been a combination of things.

We have been proactive in selling some problem loans incidentally at prices that are better than what we had them marked at --

Which is part of the charge-offs.

-- which is part of the charge-off, and also freeing up of some of the reserves.

We've also had some upgrades.

We've also had some paydowns of some problem loans that freed up reserves.

So -- and at that same time, we've made mention in the announcement in the press release yesterday that we actually increased our reserves on problem commercial real estate loans that contributed a little over $10 million of the overall provision expense for the quarter.

So we are still continuing to be very cautious on commercial real estate and thought that it was prudent and appropriate to add reserves for our criticized and problem commercial real estate.

So, all of those factors drove provision once again, as you mentioned, for a couple of quarters in a row to being slightly below what charge-offs were.

Just as a general rule here, while one portfolio grows, we will again have the sort of general reserve additions that go on here.

As Steve always reminds me, you know, there's going to be a quarter in the not-too-distant future when we really don't have net additions.

That's going to impact margins considerably in the bank when that happens.

I will remind everybody we went the first 12 years of the Bank with only $300,000 in actual losses, so the -- I think our underwriting results will begin to show improvement as conditions improve.

Now, if we begin to move the needle on employment, you'll begin to see general statistics impact defaults and delinquencies in the residential market.

So I think the Bank's outlook is just as good as a securities firm outlook.

Great, that's good color.

Just one last question on the Bank -- the REO, can you give a little bit of color on that bump in the quarter?

You know, as we have guided the prior quarter, there are things that are currently in the nonperforming loan category that are working their way through the foreclosure process, so we had an increase in OREO through taking nonperforming loans into OREO and through the foreclosure process.

We would anticipate that continuing to happen.

We would think that there are a couple of loans that are currently nonperforming that we anticipate being fully foreclosed and owned by the banks this quarter, so we would anticipate another increase.

It won't change nonperforming assets, but it's just moving through that process.

So it may be something in the neighborhood of $15 million to $20 million this quarter anticipated going -- still subject to the court process and the foreclosure process, but we would anticipate having maybe another $15 million increase this quarter coming out of nonperforming loans and into OREO.

But that increase has already been reflected through the income statement, correct?

Yes.

Once it goes into OREO, it's at fair value.

We take write-downs periodically in OREO on the income statement, but it is already reflected.

Yes, understood.

Then just the last question, Tom, you gave some great color on the transition, the guys who transitioned over the past year.

You said they are about 50% other productivity.

What's the entire sales force, in your estimation, in terms of where they are in terms of productivity versus potential?

I know you gave the analogy of an eight-cylinder car operating on 6.5.

Does that apply to the financial advisory network, or is that sort of business-wide for (multiple speakers)?

I think that the experienced long-term brokers that were here typically were down somewhere between 20% and 40%, and so the average was probably 25% to 30%, and I think they are improving.

As a matter of fact, I came up the elevator with a manager that's here for one of our meetings today, and he informed me that, last month, they had their best month in history in his branch.

I think we are seeing that happen throughout the system, so that's why I am fairly bullish on what could happen.

As I said, that's all subject to these erratic market moves that can occur that haven't occurred for a while now, but I think the trend is very positive.

So, it's a more general comment than just for new experienced move people here that we have recruited.

It's pretty much true for the whole sales force.

Great.

Thanks and good luck on dial-back role.

Thank you, sir.

Hugh Miller.

Good morning.

I had a question about the potential estimated benefit at some point in the future from the money market waivers.

I know you guys have commented on the past.

Do you have a sense of what that could potentially add?

I'm going to let Jeff Julien respond to that question.

We had been experiencing expense or fee waivers in the neighborhood of $2 million to $3 million a quarter.

We have made the decision to outsource our money market funds; it's been announced.

So that dynamic will no longer be there.

Most of the money at this point in time has already moved into the Bank Waterfall program that Tom mentioned earlier anyway, so the money market balances are a small percentage of what they used to be at their peak anyway.

Okay, okay.

Any color that you could give us maybe on the composition of the Investment Banking line item?

Also, we obviously had a pretty big dramatic increase in the other line item.

I was wondering if you could just maybe provide a little color on the composition for those two.

Other?

Again, we have this wonderful consolidation of entity issues that exist just under our new accounting principles where we manage a merchant banking fund.

Really the only remaining asset of any consequence is a firm called Albion, which is better known in the marketplace as Greer, which is the largest anti-allergenic company.

In the quarter, there was a $12 million write-up in the value of that asset, when in fact we own 22% of that either by direct investment in the fund or through our GP interest.

So the impact, after bonus affecting and all of that stuff, was actually netted out to come to $1.8 million.

So while the other line is inflated, the real dollar effect is not really a meaningful number in terms of net.

We always have this problem with anything we are a general partner of that meets some of these tests for roll-up consideration, and then we have to go back and subtract out minority interest.

The way we report that, you have gross-up on the balance sheet, which is just insane because they are not our assets.

Why are they on the balance sheet?

You should have notes that explain these things, and when transactions occur as they did in Enron, between those entities and the Company, they should be completely disclosed and the earnings impact disclosed, but the rest of this is absolute nonsense.

It is obfuscating, not helpful to analysts to understand what's really going on at the Company.

(multiple speakers) also -- yes, about investment banking generally.

I sort of responded that M&A and underwriting activity fees are very good.

There are about even in our income levels in Equity Capital Markets now, so that was a long-term goal, to increase M&A.

The addition of Lane Berry in Boston was another move in that area because their specialty is M&A.

The people at Lane Berry have basically been absorbed into our SBU units and added some expertise in the business services area, but I would tell you that you couldn't have a better group of guys added in and the chemistry is very good, so we're going to continue to see more M&A and more reorg work.

We have become more active in reorg type activity as we are often not conflicted out because of other associations with companies that are going through difficult times.

There are always some of those and certainly, in bad times, there are more of them.

So we have good income from those areas, so basically it's coming from everywhere right now.

I think that --

Including tax credit.

Yes, including cash credit funds, the very small -- one of the others is what I would say even though it's lumped in the capital markets investment banking sector what was a complete absence of activity going on in tax credits since banks and the GSEs were the big buyers.

Those guys disappeared as buyers, so they obviously didn't have any earnings to shelter.

CRA became secondary to the regulator.

CRA is back on the radar again, so some of the banks are buying these.

A lot of firms have gone out of the business or reduced their activities in these areas.

We are about as active as we've ever been in that area, but you know, even at its height, this was a business that made us $10 million or $12 million.

This is not a real major business, but it's going to be a bigger business this year probably than it's ever been.

So, that is affecting the line items.

Again, Canada's equity capital market activities are improving, too.

So I basically, as I said, I think everything is pretty rosy there and it's pretty well-balanced.

It's meeting our objectives on everything, but we really need to get a little better control of compensation expense, which I think we can do in this area.

It -- while you are expected to be a higher percentage in downturns, it went up to too high a percentage.

So this is often a business that returns in the 20% margin areas, and that's the kind of objective that I think we need to have on average, not at just the high end of the business.

Okay, thank you for the color there.

Then I guess a question for Steve at the Bank.

Could you just talk a little bit about the reduction in criticized loans that you are seeing in the internal ratings upgrade?

Is there a theme you are seeing either by product type or maybe sub-sector of the economy that there's certain areas kind of peaking up here?

Anything particular you are seeing from a trend standpoint?

It's been rather broad.

I would say that the one area that we haven't seen dramatic improvement in yet is kind of in the broader commercial real estate sector, but the -- our commercial and industrial portfolio, the corporate loans, it has been really broad across almost all of the sectors.

So most of it has been strengthening balance sheets.

They've raised capital, reducing leverage, improved operating results, including even some topline growth, so very favorable.

Then some of the things we've done on our end is actually selling some of our criticized loans.

Okay, that's perfect there.

Then the last question, just with regards to -- and I think you guys kind of alluded to it in your commentary, that we have seen a little bit of a trend down in average commissions per trading day for the last, what, two months, just maybe 3% or 4% on a sequential basis.

But I'm correct in assuming that's strength in the retail segment being more than offset by maybe a moderation on the fixed income side?

Well, we had the moderation on the fixed income side; we also, until this quarter, had lower equity institutional commissions that were impacting the general commission and fee lines.

So both of those -- I mean, as you point out, fixed income continues to moderate somewhat, although it seems to be trying to base out at the levels we are in now.

You have to remember what we have in fixed income now that we didn't have before -- and many of our competitors don't have -- is this very financial institutions activity based in Memphis that we picked up from mainly from Bear Stearns acquisition by JPM.

We've picked up most of the office in Memphis of Bear Stearns and added it to our office.

I would say that business is still operating at 50% to 60% of a general market level.

As the institutional balance sheets improve in the smaller community banks and medium-sized banks, that activity is actually going to increase, offsetting some of the bigger fee type things that I was mentioning earlier.

So, I actually think we have a much stronger franchise today than we did before.

The other thing we have in there is whole-loan trading, and whole-loan trading will continue' it's a relatively new activity for us.

That will continue to grow.

We continue to build out our tools to analyze both whole loans and the kinds of products we sell to financial institutions in IT.

That will make us directly competitive with people like First Tennessee and Morgan Keegan that have done well historically year after year, not just in the recent downturn.

So the -- I am sort of -- as I said, I think we are seeing out some bottoming type levels of revenues there, and I hope that they will continue to make good, profitable results going forward.

Thank you very much.

Christopher Nolan.

Good morning.

Looking at the client assets under management, excluding money markets, it seems to me that you saw a large inflow of fund assets in March.

Is that a fair assumption?

Every month of the quarter, we saw pretty good inflows of assets.

Then of course the market values have been the major difference to the appreciation.

What did you say, Jennifer?

The inflows and the market appreciation were approximately half and half of the increase.

Okay, great, thank you.

Then for Steve, on RJ Bank, back to the provisions not quite covering the charge-offs, but I see that you're continuing to build equity capital at the Bank level.

Should we -- is this a trend that we are going to be more likely to see going forward in terms of dialing back on the reserve additions by building up the equity capital base there?

No, we really have, we think, more than enough capital we would like to grow and thereby reducing capital on a percent on a ratio basis.

Or over the longer-term, the plan is for us to actually generate more earnings and begin to dividend back and repatriate back to the parent company.

But the plan is right now for us to actually grow into that capital level.

We still have the capacity for more growth.

We have more deposits that we can shift to the Bank, so the plan, as we announced it, was to try to maintain this sort of capital ratio of our total capital to total capital committed to the Bank and to only grow through retained earnings growth.

Of course, we have been somewhat thwarted by the fact that we have had this repatriation of loans out there.

But as he said, the pipeline, they've worked hard to restore the pipeline.

I actually think we are going to be able to add loans going forward.

Our total capital is 13.5%.

We would love it to be 12.5%.

Great.

Any update on the Charter conversion?

Yes, it's not going anywhere!

The regulators, as you can tell, are apt not to want to do anything that might be considered inappropriate.

They have had their focus totally on working out problems at existing banks, and we don't see much activity in trying to get this conversion completed.

I think, on the other hand, as we mentioned before, we've also watched the auction rate securities process here.

As we've reported to you, Nuveen has picked up its rate of repayment of auction-rate securities.

This month, we are below, we will be below $700 million of outstanding auction-rate securities.

At the rate that they have been going -- and I have no idea whether they will maintain this rate or -- although they've indicated an interest now that they have two methods of repatriating these preferreds -- that this is going to be -- I think this month they were scheduled to I think refund $80 million or $100 million to our clients.

If they could do anything like that for succeeding months, it would substantially -- since they still make up the vast majority of our auction-rate securities outstanding, it would alleviate that problem and the regulators might tend to move with more alacrity.

They've also got us doing the thing they're doing with everybody these days on risk management evaluation schemes.

We have been -- going to submit an overall program to them for our risk management activities here at the Firm in general for fed consideration.

So those are things that they can delay with that hopefully will get us through this process.

I actually think they were overly concerned.

They sort of applied the general principles rather than specific principles because obviously our results have been far better than normal banks.

So hopefully, we will get this done sometime in the foreseeable future.

I had hoped it would be done for Paul by now, but (laughter) they haven't been complying with our long-term objectives.

Understood.

Thank you very much for the color.

Douglas Sipkin.

Yes, thank you.

First of all, Tom, I just wanted to wish you the best of luck in your reduced role.

I know I've been listening to you on this call for many years, so I just wanted to give you a congrats sort of.

And then just sort of moving to some of the questions -- a lot have been answered I guess.

Well, I appreciate that, Doug.

I think it's, as I said, I think this is fun.

This transition has gone about as well as you could manage a transition.

As I continue to tell everybody, my own employees and other associates included, the fact is the quality of our whole team is very good and I have good confidence that Paul and his team -- and I expect it to act more collegially actually than it has been exact acting.

In the early years, I was described as a benevolent despot, and the -- and sometimes probably benevolent wasn't even earned.

So I think this has gone fine.

I appreciate that.

I think you'll be interested to get a slightly different slant probably in perception of what we are doing, although I can tell you, in terms of values, understanding of our culture, all those things, Paul is a team leader.

The rest of our team is right there to continue to follow.

So I have the utmost confidence that it's going to work out well.

As I point out to everybody, the hardest management job here is going to be my self-management to keep me from saying anything so that -- you know, I'm not even going to go to these management meetings for two months just to make the point that Paul is the chief honcho and line reporting senior manager.

If I can do this, this may be one of the best things I've ever done, so I am looking forward to the process, and playing more tennis, by the way.

Terrific.

Just a couple of quick questions for Steve -- I know there's been a lot of talk on the commercial side.

How about the resi side?

The delinquencies still look like they are moving up.

I know it's not as big a piece of the loan book, but any sort of color there, when that is sort of going to peak out?

Yes, you know, it will continue -- it continued at a slower pace, and we are hopeful that we are starting to see maybe that subside and turn around but, to this point, it was a small increase.

It was -- there were approximately 20 more delinquent loans out of the roughly 5100 loans that we have total, so it's a relatively small number.

But I've said it for a couple of quarters, that we are anticipating maybe late summer time this thing actually peaking out so --

Certainly by calendar year and it should be done.

Doug, as you know, there have been a few other institutions that have actually reported some decreases in their portfolios, so more broadly, there seems to be a little bit more optimism regarding residential.

I would also say that things continue to be relatively tight on that.

As you know, we have a history of purchasing pools of mortgage loans that were originated by other institutions.

That -- things tend to be a little bit tight there, not as many sellers, particularly the way we want to buy them.

We've only purchased loans with very strong buyback and rapid warrant language, and we are not willing to really compromise on that.

So our own originated volume has been very, very high quality, so we are actually doing some things to actually try to generate some more, some more of our own originated business.

So we are taking some actions in that regard.

Okay.

Then I'm just surprised by the big jump in NIM.

I sort of thought we were in a place where that NIM was sort of going to flatline, you know, jumping pretty substantially.

Can you sort of -- and I know you restated some stuff, but still about a 50 basis-point increase.

You know, the last two quarters were negatively impacted by the excess cash that drove the margin down, so the 50 basis point increase, on a relative basis, part of that was comparing it to the prior quarters was that, but also impacting the last couple of quarters.

When we get these paydowns and we have unamortized fees, we are taking those fees into income.

I would say the last couple of quarters, we've taken an inordinate amount of fees into income through these paydowns.

So, I would think that something in the 3.25 to 3.30 range is really more reasonable on a run rate basis if you take out the noise, if you will, of the paydowns occurring more rapidly.

We would think that some of those -- we think the paydowns are going to slow down to a certain extent.

Steve, I was more generous and gave you a 3 to 3.25 kind of average to benchmark against.

Yes, well, you know, trying to give him the real number!

(laughter)

Yes.

Then just finally, backing in -- and I apologize if you've given some color around the compensation ratio.

I just sort of thought, with the strong investment banking numbers, that maybe would've come down some more.

Is that just because we are earlier into the year, or is it offset by the hiring and amortizing trails and stuff like that?

No (multiple speakers) I think the comp ratio comes a lot out of retail increase in commissions shift against institutional because you have very low payouts on institutional.

It was down a little from last quarter.

It was down a little.

(inaudible) (technical difficulty) fractionally.

Yes.

Okay.

Great.

Thanks, that's helpful.

Remember, that comp ratio, when your independent contractors start ramping up in their revenues, you know, we've got a very high payout to them and a corresponding percentage decline in the direct expense levels that they have to cover out of their payouts.

So, you have to remember that when you contrast our firm to other distribution firms, because their payouts always look lower but we've got an 8% advantage on direct costs or some kind of a number like that.

So it's actually -- we do a lot better than it looks like we are doing.

Joel Jeffrey.

Most of my questions have been asked and answered.

Just Tom, you gave some great color on sort of retail investors' thought process going on right now.

Could you just give us a little insight into what you're hearing about what their major concerns are about the equities markets right now?

Are they concerned that they have already missed the big run-up or are they concerned about the levels that the markets have run up to?

Well, the number one factor that happened is clearly that they are worried that they were as exposed as they were to the downturn, and that's what has caused the shift to fixed income.

They don't want to have a repeat, especially those that were already retired.

So now that their assets have increased again -- and you're seeing this right now is what I would tell you.

Now that they've increased again, some of them are taking the opportunity to take some money off the table now as opposed to taking it off at the bottom, thank G-d.

I mean, we haven't had a lot of clients who exited at the bottom, but if they missed that increase, they missed a great chance to recover their purchasing power going forward.

So I -- in addition to that, you do have some residuum of concern about the markets with the run-up we have had, which causes them to be more selective.

That's what we are preaching, is to be very careful to try to buy more securities that have good dividend payout ratios, etc., which gives them some downside protection but also increases their income and to stay relatively short on the fixed-income side in high quality so that, as rates begin to inflate and we see some longer-term increases, that they can convert more permanently to longer durations.

That's kind of the message we are preaching out there, and the client force is very receptive.

I know that because I spoke to 350 of them earlier this week, as I mentioned.

They all indicated that kind of a response.

By the way, before I forget it, I just want to add that we are having our analysts and institutional investor days here starting May 4 for dinner and then in the day on May 5.

I know many of you have responded.

If you haven't, please feel free to add yourself to the group and called Jeff or Jennifer and let us know that you would like to come.

We always enjoy those interchanges, as opposed to this being more one-way kind of communication, so we are looking forward to seeing you all in person.

Then just in terms of the fixed income business on the institutional side, it looks like some of the bigger firms are looking to get back a little more heavily involved in this business.

Are you guys seeing any sort of pressure on your own staff?

Are there (technical difficulty) inquiries into (multiple speakers) --?

Oh, there is a good question!

The answer to that is, as is normal in Wall Street where you see them six months ago cutting people and closing down operations, they have done a 180 and a number of them are back in there with both feet paying too high prices, too large guarantees, too much front money, to move people.

Where people were knocking our doors down from those institutions before, we are now seeing pressure from our existing people because of offers from outside firms.

This is a normal cycle, I would tell you.

I hope these people have a little better short-term memory than that.

They ought to remember the kind of risks that they face if they go to an organization like this.

Unfortunately, the guys that were there, that were here or in firms like ours, are probably more susceptible than they should be because they don't recognize that they subject themselves to that kind of volatile management behavior, which is simply inappropriate on both ends, I would tell you.

The stay-the-course view in this area is much better.

We are still adding net, but I can tell you that there is pricing pressure, comp pressure, in those areas.

It's astounding to me that it could be happening this fast.

Great.

Then just lastly, Steve, can you give us a sense for where the trends in 30 to 90-day delinquencies are going?

Well, it's kind of across-the-board, Joel.

I would say that the slight increase was kind of across the spectrum of past-dues.

So, I'd love to say that the 30 to 90s have come down, but it's about the same as it was last quarter.

Okay, terrific.

Thanks.

There are no further questions at this time.

I want to thank all of you.

We look forward to seeing those of you that are coming to the meeting, and thanks so much.

I hope that Paul will have as good an environment to report on next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.