雷蒙詹姆斯金融 (RJF) 2011 Q1 法說會逐字稿

Good morning.

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

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

(Operator Instructions).

Thank you.

Mr.

Paul Reilly, CEO, you may begin your call.

Thank you.

We are calling here from St.

Petersburg.

I hope today is reflective of the earnings.

We are bright, sunny and 74 as I'm sure most of you are sitting in right now.

I have in the room with me Jeff Julien who will be presenting, our CFO; Jennifer Ackart, Steve Raney and Paul Matecki, and we will get to your questions.

I'm going to start with kind of a brief overview and go through the segments on an overview basis and then turn it over to Jeff who will go into some more of the detailed numbers, and then we will open it up for questions.

I think the overall message is this is a strong quarter, even after maybe some one-time adjustments.

We had record net revenue and a record net income even without the historic non-bank earnings that our industry has enjoyed.

I think if you really look at it, there's really two factors that are driving that.

First is the firm is well positioned, and even in the downturn, we continue to recruit and grow and add to our team.

And the second factor is we have had a positive market, and because of that growth and positioning, we were able to really take advantage of the market and drive these results.

All the business units really participated, and I would like to cover the highlights of those business units and then turn it to Jeff.

First, in our Private Client Group, we had record assets under administration of $262 billion.

This is a result of both market improvement and the historic recruiting we have done to continue to bring more financial advisors into the firm.

Productivity, the average productivity advisors depending on the channel was up 3% to 4% just versus the preceding quarter.

And with good cost control, our margins expanded where we are double-digit in both of those segments.

So on a 5% revenue increase, we had a pretax contribution increase of 18%.

Our advisor count was slightly down, essentially flat.

The backlog of recruiting inquiries are going back up again.

As you I'm sure saw, that Registered Rep rated us as number one in advisor satisfaction, which, again, is I think getting much more inquiries into the firm and people looking to move calling Raymond James.

The next section I would like to touch is capital markets.

A little bit of good news in here and some, I guess, noise flowing through the segment.

Revenue was up 12%, but you saw a decrease in the contribution.

Deal volume was very good.

Now some of the deal volumes we always have a hard time trying to give you apples to apples as indicators.

You could see that we showed the US going from 12 lead-managed to 5.

One of the issues of that is just size, is even though we made the elite-managed deal, what is our participation?

So it may reflect direction, but you can't really use it as a multiple.

Canada also had a very, very strong quarter, you know, with 14 versus 6.

And the M&A activity, not just the underwriting, but the M&A activity continues to be very, very strong.

That's on the positive side.

On the negative side, we had a decrease in trading profits really as a result of fixed income with some municipal inventory that kind of went the wrong way in November and December brought our trading profits down for the quarter, but that pretty much seem to have corrected in January.

We also had some comp accrual reversals.

Overall for the firm, they were not out of line, but the Equity Capital Markets had actually went the other way.

And we also had a product, which we call Best Picks, which is sold heavily in Europe where the commissions are higher, so that drove expensive with our independent contractors.

That drove the expense line a little up.

So the first quarter has some numbers I think flowing through that make the quarter a little more difficult to read for capital markets.

Of course, we also announced the Howe Barnes acquisition, which we think is a great fit for our firm.

There is about 120 associates.

This acquisition really fit Raymond James very well.

First, with Dan and Bill and the team, it is a great cultural fit with our Financial Institutions Equity Capital Markets practice.

We think it will help us to continue to penetrate our Financial Institution business and be synergistic to our existing business.

Patrick DeLacey, our co- -- who heads our Financial Institution practice there is going to co-head it with Dan and was a big advocate of the acquisition.

We office near each other in Chicago.

I would say on both sides people are excited about the addition to the team.

But there is also a lot of synergies with our Fixed Income Group that we have been growing our Financial Institution Fixed Income practice headquartered in Memphis.

We have added a number of sales and trading people, both in the Fixed Income side, and the synergies between the Equity Capital Markets and Fixed Income should be very, very strong.

We also have about 20 financial advisors that are part of the definitive merger agreement that we hope will be joining us, so there is a good addition to that group.

And also, as one of our fastest growing recruiting segments, as I said, our Financial Institutions division in PCG, which we think will help us in that area, too.

So we think it's a great cultural fit and a good kind of niche acquisition like the Lane Berry that we looked for here at Raymond James.

Asset Management had record AUM, excluding money market funds at $33.4 billion, and again, assets were driven by the market, but strong net inflows, especially on the institutional side, produced great results.

That business has very strong leverage.

So, on a 14% increase in revenue, we had a 35% increase in the contribution side.

We do have a little bit of one-time $3.2 million in performance fees that Jeff may address in the quarter, but we had $3.6 million last year at the same time in the quarter.

So fees may be a little high for the quarter on a normal run-rate, but not unusual as compared to a year ago.

Probably, again, a lot of focus on the bank, which is the next segment I will talk about.

16% increase in revenue, driving a 70% increase in the contribution here, and it is a tale of really a lot of stories.

Our loan production was strong.

In fact, it was our best presidential mortgage month in production.

We had good commercial production.

It is still a very, very strong competitive market for the good credit.

So, as the backlog looks strong, we do compete for loans.

And even those spreads may be tightening a little bit on new loans, they are replacing loans with lower spreads that are running off.

And the story here for the bank is really the runoff, is people paying down loans, and that rate is still staying high.

And when that comes down, we hope with these production levels to be adding to our loan balances in the bank.

The other big story here obviously is continued credit quality improvement.

I think you are seeing it in the industry, but, as we reflect back at Raymond James, we have had well-managed credit vis-a-vis our industry, and you are seeing those adjustments really flow through in this quarter.

So with that, that is kind of the highlights of our four major segments, and I'm going to turn it over to Jeff.

And then at the end, I will come back and talk about what I think the outlook looks like.

Jeff?

Thanks, Paul.

I guess the overarching comment, which is most appropriate for this quarter is that with some equity market wind at our back, some of the operating leverage that we have been telling people for years exists within our segments, particularly in this case PCG and asset management, actually did come home to roost.

I'm going to focus on some of the -- a couple of statistics that are not readily apparent from all the information that we sent out in the press release are not disclosed there, but kind of a precursor to some of the things that would be in the queue when it gets file.

One is the comp ratio, which there has been a lot of focus on.

It actually did come down in the quarter.

We had some -- that is not unusual I think when we have record net revenues, but it did drop below 68%.

But it is still hovering in the high 60s, 67.8% this quarter versus 68.4% last quarter.

I think, as we pointed out last time, I don't expect to see any major movement in there as long as our business mix stays similar until we get some help from interest earnings, at which time -- which does not have a lot of variable comp associated with it.

At that time I would think our comp ratio would drift down a couple of hundred basis points possibly from here.

Another factor is recurring revenues.

Last year, last fiscal year, by comparison, our total recurring revenues were 54% of total revenues, and for this quarter, not much different from 53%.

So we are in a lot of transaction-related things that was still a lot of recurring revenues driving the revenue stream, a lot of fee-based type accounts, etc.

Paul touched on the Asset Management performance fees.

I think that is an important factor to note.

Always to the extent -- it is indicative, first of all, that our performance has held up very well in asset management.

But it does have a tendency to distort the December quarter slightly relative to the asset levels.

Within the commission and fees line of $534 million for the quarter, of that $104 million was Institutional and $430 million was Private Client Group.

But equally important, again, to me is within the Private Client Group, 57% of their $430 million was recurring, which included basically fee-based accounts and trails on funds and annuities.

So, again, indicative of the strong equity market we have seen.

I do want to touch on net interest income for a moment.

It was $88 million for the quarter, up from $78 million the preceding quarter.

We had been running along in the $75 million to $80 million per quarter range for some time now.

As pointed out in the footnotes to the bank information, there was a correction of an interest accrual at the bank, which effectively added $6.4 million to net interest income this particular quarter.

So exclusive of that, net interest income was about $81.5 million, which is indicative of two things.

One that the bank is maintaining a high spread and actually slightly growing loans again.

Second, so the bank had about $3 million of improved interest earnings this quarter from last quarter, and the balance was in PCG.

As you get an upward moving equity market, we start to generally see a slight uptick in margin debits, and we have seen that versus a year ago.

The bank error that we talked about, the interest accrual catchup, if you will, on the residential side added about 9 basis points to the interest spread for the quarter.

But that spread stays quite strong, even with that taken out.

We had been guiding people toward 325 to 330 range for spread.

It looks now like it is given where the market is, and the loans we have been adding, it is probably going to be more like 340ish going forward here for guidance.

Expanding a little bit on the bank, the biggest surprise, if you want to call it that, or the difference between actual and analyst projections, I think were as a loan loss provision, which came in a little over $11 million for the quarter.

This is the lowest since March 2008.

So it has been a while since we have seen that.

It's nice to see the improving credit environment.

There were some loan upgrades and things that factored into that.

But, by and large, our rate of additional problem loans surfacing has gone down dramatically.

So our total criticized loans are down 37% year over year.

Nonperforming assets were down $25 million during the quarter.

All of the credit metrics are looking better and better as we get quarter after quarter without any more hiccups in the economy here.

The only other thing I will talk about right here at the bank are the capital ratios.

We did pay a $75 million dividend in November from the bank to the holding company.

We went and got regulatory approval to do that.

Even after that, though, the bank's risk-based capital ratio at the end of December was 13.2%.

To the extent that the bank keeps generating earnings at these levels without a lot of net loan growth to need that capital, they may become for a period of time a regular dividender back to the parent company.

The only other thing I will say is kind of nonrecurring, it is nonrecurring for the rest of the year at least, but it recurs every December quarter is that we end up reversing some of the over accrued bonus pools that we have around the firm.

This year that number amounted to about $7.7 million.

That served to help the comp ratio, of course.

That is similar to the amount that it was in the prior year, but obviously that is a factor that will not be there every quarter.

So those trying to look at a run-rate, which I know is something that people focus on, certainly the adjustments at the bank and the bonus reversal between those two things, it is $0.05 or $0.06 of nonrecurring type items in this particular quarter, but still would have been even without those things a record quarter for us.

And where the rubber meets the road in terms of our own analysis of our results is the return on equity.

For this quarter it was 13.9%, which is pretty impressive without the help of the traditional interest spreads, which, as we have talked about before, could mean between $80 million and $100 million pretax to us when rates start heading up by 100 basis points or more.

And that 13.9% is contrasted to 12.2% last quarter and only 8.3% a year ago.

So we are I think pretty pleased with the magnitude of that number.

We would surely love to be back in our 15% plus target range, but had been somewhat resigned to the fact that that wasn't going to happen until we had the traditional interest spreads.

But we certainly made good progress toward that goal this quarter.

Thanks, Jeff.

And quickly on kind of just a little outlook and of course when you look at the outlook, the biggest question is the economy.

Certainly that is a major factor on our business.

Our view is that we are in a slow but choppy growth, and we will see small corrections.

But we believe the economy will continue to slowly grow and recover.

So the upside is going to be determined partly by how the economy grows and the reflection into the capital markets, and certainly we always have to look at a correction or downside.

We continue to manage costs.

2009 was not that far away that we remember the big correction can happen.

And even though we came to that with an 8% return on equity, it was not a time we enjoyed.

But, you know, if you look at the businesses, really most all of the indicators are positive.

Given a slowly improving market, I think the $0.65 given Jeff said $0.05 or $0.06 of unusual items is high, but we still see a lot of positive momentum kind of off the lower base.

In PCG our assets will continue to grow with the market, and I think as clients move into equities, again, if that trend continues should have a positive effect on our business that we are still very focused on recruiting, but we are not going to overpay for financial advisors, and we intend to in markets where people are not be very aggressive and markets where we believe people may be overpaying a little more cautious, and we are willing to go through the cycle.

Having said that, we are very focused on recruiting, but the big driver will be the shift to equities and really driving our business.

On the bank side, the loan backlog looks strong.

The big question is runoff.

We will continue, I think, to push loan production within our credit limits.

We are very, very focused on credit quality and high quality credits.

There is a lot of competition for them, and the question is, as we continue to book those loans, how much will runoff?

The credit quality is clearly improving, and I think the provision is approve because the loan quality is approved, and I don't know what we will move that except as we start adding more loans.

And once again, though, anything can happen to an individual credit given our size that can affect the provision.

In the capital markets, ECM has a solid backlog both in underwriting and in M&A.

Canada has been surprisingly strong and looks continually a good backlog.

We are continuing to recruit to build our ECM business and believe it has a solid outlook.

In our fixed income, we had some bumps in the quarter with trading profits, but they look like they are rebounding more to traditional levels.

But, as you know, in that market, any blip can happen.

That is one that is hard to predict, but we think it is well managed and well positioned.

Asset Management, they are leveraged with controlled costs very well and, as long as we continue on inflows and market improvements, should continue to be positive in our outlook.

So if the market improves, we feel very good about our positioning in earnings.

We don't take it for granted.

We still have to continue to recruit and build this business, which we think we are well positioned to do.

We have a strong team, and given a reasonable economy, we have a good look on the outlook, again, if you take out the one-time items from a little lower level.

And we would like to say we have a couple more on one-time items in our pocket for the coming quarters, but we really don't know if (multiple speakers)

(multiple speakers) -- but they happen.

So with that, let us go ahead and open it up to questions.

(Operator Instructions).

Devin Ryan, Sandler O'Neill.

Just trying to reconcile the strength in the commissioning in fee line.

It looks like December, if you just look at December on the month alone, was a record quarter.

And just given that a lot of the fees are built upfront and that industry trading activity levels seem to fall off a bit in the month, I'm trying to figure out what happened in December and why it was such a strong month?

Well, versus the preceding quarter, there was a $16 million increase in institutional commissions, largely driven by the number of syndicate participations and equity underwriting activity.

And they also come out in our analysts' Best Picks UIT that we come out with every year that drove $5 million in commissions.

So we had just an exceptional quarter institutionally, and the balance of that increase was in Private Client Group, and that's just the strength of a rising market.

You know, we had a jumpstart when the fee billings on October 1 were about 3%, 4%, 5% or 6% higher whatever they were from the July 1 billings.

And we have that same dynamic incidentally going forward where we have about 10% higher market billings January 1 than we had October 1.

And then again, as Paul mentioned, it is clients shifting back to equities where we are seeing some of that.

They are obviously nowhere near the levels that they were three years ago in terms of household ownership of equities, but that drives a lot of business into funds where we get bigger trails in some of the managed accounts, etc.

So I think it is the manifestation of some of the unused capacity that we had within PCG as the market recovered.

I think that people kind of focus to compare commission lines a lot of the institutional business.

The over the desk business is tough, and it is still challenging.

But a lot of this is driven by PCG, the movement to equities, and certainly underwriting to syndicates (inaudible).

There is nothing unusual in the quarter -- I probably would say beyond our analysts' Best Picks, which is probably a $5 million type item.

And that is a December -- that's where you got paid for that in December?

Or, I guess, I'm just trying to understand December.

I understand that obviously with the beginning of period asset levels up, that that would help each month in the quarter, but --?

That is in December of every year we do it.

That is in December; it is our Best Picks for the coming year.

Okay.

I will follow-up with you guys after on that one.

And then just also, I guess, the SEC is going to deliver a report to Congress tomorrow on the results and recommendations just related to the study.

I think this is going to outline the extent that broker-dealer is going to be held to a fiduciary standard.

I just wanted to get any early insight you guys might be expecting or if you just have any expectations in general or on the suggested changes related to what might happen.

I think it is still pretty well and unknown.

There has been kind of a moving market, moving controversy between registered investment advisors and our industry and what defines what.

And so we don't see any dramatic change for the business.

But I think the ultimate deliverable, and even in some of these other findings that are out, there is not an answer to a lot of them.

I mean a lot of it gets down to what regulator, but then what rules are going to be -- what rules are going to come down from whatever regulator body gets some of the pieces.

Our take is on all this legislation should not dramatically change our business or positioning, but it is going to increase costs, compliance costs.

And I think that's going to be the net-net result.

And whether that protects investors long term or not, we will leave that to others.

So we don't see a dramatic impact on our business.

We have been involved with it, and we will see what really comes out when it all settles out.

Not just when the position is rolled out, but the rules and what does that mean, and we just think the net-net is compliance costs will go up.

Okay.

Great.

And then just lastly, on the non-comp expenses, outside of the bank loan loss provisions, they increased 6% and might take is it just looks like higher business activity levels, higher revenues probably drove that.

But is there anything seasonal in there or anything else I should be looking at?

I don't think so.

Jeff?

No, I'm looking down the line items.

I mean it can't be a big dollar number.

There is nothing unusual in those numbers.

Hugh Miller, Sidoti.

Just maybe a follow-up on the question with regard to how strong the December commissions were in the month.

Would you say that there was year-end tax loss planning and maybe some harvesting there of tax losses that were kind of maybe driving up December commissions relative to November in the prior few months, or is it really just kind of a -- some of the things you mentioned with regards to the Best Picks and just a shift in interest and equities from retail investors?

I don't think we see a big seasonality in terms of the year-end tax transaction-related movements.

But I think it was, again, and this was somewhat the explanation in September as well, we had just a busy underwriting calendar in the month.

We have looked through it, and I mean we did not see any unusual items outside of the ones we have mentioned.

So, again, I think the underwriting business calendar does impact it, and we had a very strong month.

I think the big movement for us is always the PCG group, and the movement to equities does push it there.

But we can point to anything that looks really unusual.

Okay.

And, you guys, I think had mentioned in the presentation that you were seeing broker production levels -- if I had this right -- up somewhere around 3% to 4% on a sequential basis.

I guess is that right?

And then the other just being where would you say they are relative to historical norms for broker production?

We are getting closer.

They are not there yet.

But I think we have a number of factors that we in our recruiting over the last few years we recruited much higher producing financial advisors than historic.

So I think, as you look at productivity, the count is relatively flat.

But if you look at the average financial advisor, the production level is higher historically, and we are getting closer to that historic level, but we still have some room.

I think just to give you some definition, I think in RJA, the employee side, I think we peaked, if I remember right, at about 515,000 average gross.

We are currently up -- back at 490,000.

So, as Paul said, we are getting close, and we have got probably on average people with a higher trailing 12 than we had back when we set the previous record.

So there is still some room to run, but it is getting back toward records for us.

That is great color.

Very helpful.

One question with regards to -- obviously you made some commentary on the pickup in competition on the recruiting side, that you're not going to go out there and pay up for advisors above and beyond what you are comfortable with.

But I guess given the potential for competition to remain somewhat high, how confident are you with the Company's ability in fiscal 2011 and beyond to kind of grow advisor headcount?

Well, I think our goal is to grow advisor headcount, and I think we can and probably will for the year.

But our view, and we reiterate all the time, as we target 15% growth from the PCG segment and sometimes in 2009, we say it is a factor of three items -- recruiting a 5% production, productivity of 5% and market of 5%.

In 2009 we got no market and no productivity that was recruiting, and this year we are getting a lot of help from the market and productivity, and recruiting is down.

But we're not going to do un-economic deals to make the numbers look better short-term.

We have ridden through the cycle.

It has been historic Raymond James, and I have no intention at all of changing that.

So if people want to buy what we view as un-economic deals, we are not going to participate, and we will wait until as the market always does, they get economic again.

Having said that, our inquiries, if you look at January, are way up.

Now that is very early in a recruiting cycle, inquiries versus visits versus closing.

But we think we are doing the right thing, and we will continue to recruit and try to grow the headcount and think we can, but I just don't know how much.

And the last question I had just with regards to the bank, you guys are obviously mentioning that you are kind of seeing a pickup in interest in loan originations at the bank, and obviously the headwind is the runoff in the portfolio.

But can you just talk about are there certain loan types that you are seeing more of an interest at the bank at this point?

We highlighted that we had a pretty significant increase in C&I, which has been our focus, our commercial and industrial loans versus commercial real estate in the quarter.

We actually grew that segment of our business almost $200 million in outstandings during the quarter.

And in the C&I bucket, it has been rather broad across a wide cross-section of industries, so no one or two industries really driving that.

It has been very broad, although it does align itself well with our business units inside investment banking -- energy, healthcare; we have done some business with the REITs as well -- as well as some of the other industry groups we are focused on -- telecommunications and some of the consumer area as well.

The residential business has been very challenging.

Paul mentioned that we had the largest quarter in the bank's history in terms of loan closings on the origination side.

We are actively trying to grow our own originations in our mortgage banking area.

We have been -- we have not been able to -- we have grown or actually purchased some pools, but it has been relatively small.

We have been very disciplined with our approach to that business.

We are not willing to buy pools of loans without strong buyback language.

So I think that over the time you are going to see a higher percentage of the bank's balance sheet in C&I commercial loans versus commercial real estate and residential real estate.

Okay.

Great color there.

Very helpful.

Thank you.

Joel Jeffrey, KBW.

In terms of the growth in other revenues, can you tell us what was driving that?

Say it again.

The growth in other revenues quarter on quarter?

I will just take a second to look here.

The famous other.

We had -- there is kind of an anomalous thing with when we have OTTI costs at the bank, they are a contra revenue item.

But then they were a lot lower this quarter, so that obviously makes the other revenue number higher.

And the other thing is we continue to convert more and more mutual fund families to the Omnibus arrangement that we have got, and we get paid much more per account than we do in the previous networking type arrangement.

So that will continue to grow as we continue to convert more funds.

I cannot tell you what percentage we are the way through, and all of the fund families are not big enough to convert.

But that will continue to -- that is a recurring type item that will be there going forward.

I think that was what, $3.5 million in the quarter, some number like that.

So is the sort of low 30s number a decent way to think about the other line going forward?

Let's see.

Probably.

It looks like it at this point.

I mean I'm looking down to see there is nothing particularly unusual.

The other thing that bounces -- there is nothing in there.

Proprietary capital write-ups and write-downs going there.

That is a little lumpy.

But it was not a big deal this quarter, but it can be.

So on a run-rate, I would say -- (multiple speakers)

Probably right.

Probably 30-ish is probably reasonable.

Okay.

Great.

And then in terms of the investment banking, can you just give us a revenue breakdown between M&A and what you did on the underwriting side?

We don't have that breakdown for Canada, do we?

Domestically it was about $17 million of each for this quarter.

And within Canada, it was about $16 million, but I don't have the breakdown between the two.

I think there is (multiple speakers) more weighted underwriting, so probably something like 60/40 underwriting to M&A.

Alright.

Great.

And then just lastly, can you give us a sense for how much of the increase in AUM came from inflows versus market appreciation?

There was about $1.9 billion of net inflows.

Is that similar to what we saw last quarter?

Probably a little stronger than the preceding quarter.

We have a lot more market help this quarter.

Of course, we had a lot in September month.

Market appreciation was a $4 billion number, so it was a big help.

I don't remember what last quarter's inflows were.

I don't have that in front of me.

Daniel Harris, Goldman Sachs.

I was wondering if I could come back to one of the questions that was posed earlier.

I think maybe about the trajectory of the quarter on the commission line, it looked like that the December month, not the quarter, was really, really strong.

And I guess my question is, was that really driven by a lot of activity in the muni market?

I know that it was very volatile, and it seemed like some of the volumes that we could track were very high, and I was just wondering if you could put some color around that?

We get a lot of mutual fund trails at the end of the quarter.

So and then you got underwriting activity and Best Picks.

So there is some lumpiness at the end of the quarter.

(multiple speakers)

A lot of the trail funds, we try to accrue them honestly, but we are estimating because we really don't know what they are going to end up being.

So when we get quarterly payments from those, we are truing them up.

That has happened the last two quarters.

So that added about I am guessing about $3 million above and beyond what our accrual rate was in the December month.

We had a strong underwriting month as I mentioned before in terms of number of transactions.

Not all leads that we have to be lead in just that participate in as well that drives a lot of volume both institutionally and Private Client Group, and then Best Picks UMT that we do in December for the coming year was about a $5 million commission number as well.

Okay.

So those three things all happened in December.

Okay.

That is helpful.

I guess we will keep that in mind for next year.

Coming back to something you guys announced really late in the year, the Howe Barnes deal, what was it about that transaction?

As far as I can remember, one of the first you guys have done in a while that really attracted you guys do it?

How did that actually come about, and should we expect that you guys to be looking to do smaller things on the security side outside of this?

I know that you have been thinking about the Asset Management side more in the recent past.

I think as we look at growth given our size that, again, we are great believers in organic growth, so we will continue to recruit one by one because, as you do that, you are pretty comfortable that people are joining you for the right reasons, and there is a good cultural fit.

But having said that, I think we are getting much more proactive in talking about really a corporate development function where we look for what I call niche acquisitions.

And the Howe Barnes acquisition, again, added to our Financial Institution space, a place that we thought we had a decent practice but certainly were not at the levels of some of our other practices in terms of size and scope.

So it added great capability.

We really like Dan and Bill, actually introduced to us through the Private Client Group who were talking to some of their advisors, and we met, and it was just a great fit.

It fits our business.

Again, our fixed income folks are great supporters of the transaction because of synergy.

And we will continue to look for hopefully more systematically niche acquisitions, which I would put the Lane Berry acquisition, which really helped us out in our M&A practice; Howe Barnes, which we think will give us some more critical mass in our Financial Institutions group of great people; and look at other areas in all of our businesses that we can do that.

Again, we are not a big believer in big acquisitions because of both the costs, the cultural implications, the integration, but acquisitions, niche acquisitions, we would hope to do more of, if we can find them, if the culture fits and if the price is reasonable.

If we can hit those criteria and they fit the strategy, hopefully we will do more of them.

Michael Lipper, Lipper Advisory.

I'm a little curious thinking long-term.

Assuming for the moment that you don't do any foreign acquisitions, at what point will your international activities be a meaningful contribution to your earnings?

I'm thinking out like five years.

Would they be 10%, 20% in some normalized period out there?

I think if you look at institutional sales, they are already at $30 million gross.

I mean they are already a factor in our business.

But we will continue to look at growing our business in Europe organically and in South America.

But having said that, I think that if you look at the real number drivers, international becomes more important, and we are very committed to it.

But we have plenty of opportunity in North America, the US and Canada, and those numbers I think will continue to be the predominant growth numbers, even as we invest more in Europe and South America.

But let's assume for the moment you are not considering Canada international because we clearly have a big commitment there.

I would say that Europe is already a material factor in our institutional business.

We have several independents contractor sales offices over there and some trading and research operations.

What you see in our segment presentation as emerging markets is a small number, and if that is what you are referring to, we go a little more gingerly into the emerging markets space than we do into the developed markets.

And that -- if the opportunities don't present themselves, that may never become a meaningful part of our business.

Would it be useful at some point at least in your commentary to aggregate your international activities and for the moment include Canada, include your institutional sales overseas, as well as the office space activities?

I think it is in the 10-K if you go (multiple speakers)

(multiple speakers) by country.

But is that -- by country, but is that where the client is or where the office is?

That is why where we are located, where our sales person is located, our producer is located.

Steve Stelmach, FBR Capital Markets.

My question is on the rate sensitivity, Jeff.

You sort of mentioned the $80 million to $100 million pretax leverage that is a higher rate, and it has been out there for a few quarters.

You have mentioned it, yet margin balances are up, call it, 12% year over year.

Are you seeing any sort of incremental benefit from those higher-margin balances yet, or is the level of absolute rates just not really moving the needle yet on the broker side of the business?

Yes, to the extent that margin debits increase just as bank loans would increase, then we will see some increased interest earnings from that.

But when I talk about the $80 million to $100 million, I'm really talking about the spread on cash -- client cash balances that we just are turning around and then deploying in overnight investment-type activities or in our own bank, etc.

That dynamic has not changed.

We have not really seen cash balances change much.

If anything, they have increased a little bit.

So we have not seen a big massive deployment back into the market of cash balances.

That $80 million to $100 million -- the reason I gave a range -- is because it is dependent on how much is in cash at any point in time.

To the extent that loan balances, either at the bank or the brokerage firm increase, that will definitely benefit interests earnings even without any change in rates.

Okay.

You are seeing some benefit of that -- of those loan balance or those margin balances increasing to some degree?

Yes.

That was about rounded to $1 million this quarter to the Private Client Group.

Okay.

And then on the bank, is it fair to say that is still a pretty liability-sensitive business?

Steve, we would characterize it really more asset sensitive in terms of in that that business mix has not changed at all.

We are funding the portfolio predominantly with floating-rate deposits.

We do have almost all the corporate loans are floating-rate.

The residential loans are almost exclusively 5/1 adjustable rate loans that have typically a three to three to a half year average life.

So we do have some interest rate risk, but it is relatively low and manageable.

We have done some hedging in the past, and we monitor that very closely on a monthly basis in a very formal approach to the interest rate risk management.

We have also you know -- people need to remember the flexibility we have in the bank on the funding side.

We can adjust the positives almost overnight.

And so most institutions have to worry about that.

We have the luxury of being able to sweep deposits into the bank or sweep them into other banks through our bank sweep program.

Okay.

Great.

I don't -- I see interest hovering around this $80 million to $85 million range for a while until either balances take a huge jump in terms of loan balances or until interest rates start moving, and then we will see a dramatic -- and get back well over the $100 million a quarter where we had peaked before.

Okay.

And that is even with your 340 basis points of NIM guidance?

Yes.

Douglas Sipkin, Ticonderoga Securities.

I just wanted to come back to the provision expense.

Maybe Steve could chime in just a little bit.

Obviously a bigger drop-off than I expected.

Can you maybe -- and I apologize if you have given it, I jumped on late.

Can you give us how we got there from where we were running at?

I mean I know I saw MBAs declined, but you guys are starting to -- the loan balances did grow a little bit.

So I'm just trying to get the sense of, how do we get this decline this quarter and what sort of the outlook is right now?

Sure.

Doug, trying to reconcile that back for you, we had a low number of downgrades relative to upgrades.

We did resolve some of our largest problem loans.

Actually our largest nonperforming loan was resolved in the quarter.

We had another problem loan that was fully paid in the quarter that freed up reserves if you look at that on an isolated basis.

So, in effect, our charge-offs and our additions to reserves offset each other approximately.

So it was really a reflection of improving credit trends kind of across-the-board, and then our residential portfolio has really stabilized the last couple of quarters.

We have not seen dramatic improvement.

The improvements have been nominally better the last couple of quarters.

So all of those factors led to the lowest provision expense in a couple of years.

Okay.

That is helpful.

And then maybe a question for Paul.

It seems like you would have to be blind not to see you guys are doing better in investment banking.

How much of that is hires?

How much of that is maybe you guys are finding better leverage points with the commercial bank and the investment bank?

How much is the environment?

You know, I guess it is a little bit of everything.

We have continued to hire.

The Lane Berry acquisition M&A is really starting to come into fruition.

That always takes time when you do an acquisition both between the market and the integration with some very good people.

I think we are getting payoffs.

We continue to hire bankers.

The market has been pretty strong in sectors where we are strong in both the REITs, downstream energy business, healthcare have continued to produce very, very well.

And also, as a recovery and the capital markets open up more to the middle market companies, it is also going to benefit us in the position.

It is kind of hard for us to compete on Fortune 100 business.

As the market continues to open up and allow more companies in, we become a stronger and stronger player in terms of being able to be the lead book runner on deals.

So it is a factor of all of them.

And again, I think the outlook looks good, but given the markets stay open and they continue the trend and open, it should be a good outlook.

And then maybe just one last one, ROE just below 14%.

I know you guys raised the dividend last quarter.

You did an acquisition.

It does sort of feel like you guys are starting to use that excess a little bit more.

Should we continue to think probably bolt-on acquisitions?

I know buybacks historically have not been that big of a focus unless the stock really got a lot lower.

Maybe just update us on that?

Yes, if you know, we have got a pretty consistent dividend payout policy.

That is up to the board.

If earnings go up, my guess is we will raise dividends within the range, but that is up to the board.

And we are not big on big stock buybacks unless we feel like there is no use for money.

We would like to systematically do deals like Howe Barnes and Lane Berry if we could systematically find them.

So the big caveat is we are just -- we would like to do more.

We are going to put processes in place to hopefully do more.

But we are very, very disciplined in terms of if it does not fit, we are not going to do it just to force some growth number in.

We are very focused on that return on equity.

So I think with any help with interest rates, we would be at our historical earnings this quarter, return on equity.

But 15% outside of that, we are going to stick to the fundamentals.

So hopefully we can do more deals like Howe Barnes, but I cannot say we have a ton in the pipeline.

We happened to look at a lot last year and found one that we closed on, and we will continue to more systematically look, and if we find them, we will close on them and hopefully invest some of the cash as we build it.

Okay.

And then maybe one last one.

I apologize.

It also seems like non-comp expenses seem to be pretty well under control.

I mean just generally with the revenue levels, you would probably expect to see a little bit more.

I mean are you guys doing some stuff internally to get more efficient or track stuff a little bit better to maybe save a buck here or save a buck there where it adds up to a little bit on the non-comp side?

That we do every day.

I would say that we are very sensitized to it after what we have gone through over the last couple of years.

We don't have a lot of fat in this organization.

We never really have.

So I think that what we are seeing here is a reluctance to build expenses to meet those revenue levels, and we are making sure expenditures are really very, very necessary before we undertake them.

I would say if you look at the expense levels, we have bolstered IT spending a little bit.

Very focused on where we spend money in things that are critical, and we try to keep very tight on the operations side.

Yet if you look at advisor satisfaction and stuff, I mean I think people rate us as kind of unusually high in service.

So we try to manage costs.

But even in the downturn, we did not cut really the support areas in order to keep our service level high.

So we tend to be more even, but even in up markets, tend to watch our costs, too, because we know markets come down.

So I think, again, as Jeff said, you will see the comp ratios without interest increases in the same, maybe hopefully down a little with volume, but as the businesses grow that are less comp sensitive or earnings grow like in net interest earnings, that that will bring the comp ratio down to more historic levels.

As well as all the other expense ratios as there is not a lot of expenses associated with improved interest spreads.

So we have very little control over that.

There are no further questions.

Great.

Well, we appreciate you joining the call, and we will get back to work.

Have a good day.

This concludes today's conference call.

You may now disconnect.