雷蒙詹姆斯金融 (RJF) 2012 Q2 法說會逐字稿

This is Paul Reilly and Raymond James.

I am going to turn it over to Paul Matecki to read our FD disclosure.

Paul?

Thanks, Paul.

To the extent that Raymond James makes forward-looking statements regarding management expectations, strategic objectives, business prospects, anticipated expense savings, financial results, anticipated results of litigation or regulatory proceedings, and other similar matters a variety of factors, many of which are beyond Raymond James control, could cause actual results and experiences to differ materially from the expectation and objectives expressed in these statements.

These factors are described in Raymond James 2011 annual report on Form 10-K which is available at RaymondJames.com or SEC.gov.

In addition to those factors in connection with the Morgan Keegan transaction, the following factors, among others, could possibly cause actual results to differ materially from forward-looking or historical performance.

These include difficulty integrating Raymond James and Morgan Keegan's businesses or realizing the projected benefits of the transaction, inability to sustain revenue and earnings growth, changes in capital markets, and diversion of management time on the transaction-related issues.

Thank you, Paul, and what a rousing way to start a conference call with a good FD disclosure.

We are going to go through I guess step-by-step in the conference call to make sure we understand the pieces.

Talk a little bit about the quarter and kind of the non-GAAP adjustments and how I think the basic operating business is doing and go through the segments.

Jeff will then go through a little more detail on some of the other things.

Then we will get into the Morgan Keegan combination, which I know a number of you have questions about.

First, I really believe we had a strong quarter in an improving environment.

Our net revenues up 11% at $871-plus-million and our non-GAAP pretax earnings up 22%.

Now, we are doing that off a weaker December-ending quarter.

If you go again to a year ago, we are comparing -- we are up only 3% or 2% on the net revenues, but a very, very strong quarter, if we can remember the markets a year ago, that we are comparing to.

But certainly a very, very solid trend really driven by rising asset values of strong equity market.

Our assets under administration were up 8% and hit a record of $292 billion.

This is, again, without any Morgan Keegan numbers.

We closed after the quarter ended and our assets under management up 11% at $39 billion.

On the basis of that, as you know, we build a lot of assets in advance.

We have started with tailwinds in that quarter.

Again, with the S&P up 12% this quarter should portend well to a strong start to our next quarter.

Starting with the Private Client Group, the second quarter was really driven by those asset values.

Again, with the tailwinds in our billing we had record productivity per adviser at $361 million at RJFS, $540 --

Thousand.

Thousand; I am sorry.

I wish it was millions.

$361,000 at RJFS and $546,000 at Raymond James Associates, our employee division.

We also had a net increase of 42 advisers as recruiting continues to ramp up.

One of the slight concerns when we announced the Morgan Keegan acquisition we felt that recruiting was picking up.

The impact, we were worried about an impact.

There has been no negative impact and I think, as we talked to recruits, a positive impact that we are growing the business.

And the backlog of home office visits continues to improve.

So, as we go into a third quarter with an S&P up again and more advisers, we should be off to a good start.

The revenue growth there was offset by comp expense.

Some of that was additional personnel, but a big chunk of that is what I would call seasonal, if you can use that word.

The first quarter our raises hit; starting in January our FICA payments and taxes start over, so we over always have a first-quarter impact on comp.

The other areas we talked about before is we have been ramping up our technology expenditures.

We have got some very exciting technology rolling out, including the new Advisors Desktop starting in May.

It's a strategic investment we have made across the firm and that did have some impact on the numbers for the quarter.

In the Capital Markets area, ECM had a big recovery really since, again, against a very weak December quarter.

If we can remember what happened at the end of last year, the markets, starting at September, really shut down.

The underwriting part of our business in IPO was slow in January and February, as it was in the quarter, but really picked up in March and has continued up stronger in April.

Who knows what happens day to day in that business?

But if you look to the -- commissions were up, underwriting revenues were up versus last quarter, but M&A activity was down slightly.

So, again, improving significantly from a very weak market the quarter before, but certainly not at the levels that we were a year ago were we had strong Equity Capital Markets.

Moving to Fixed Income.

Fixed Income has been kind of a steady producer for us.

With the announcement of Morgan Keegan I think people had some concerns, but again we are showing a strengthening, slight strengthening through the quarter for Fixed Income on trading profits and commissions.

So business is performing very, very well.

Asset management, again, is kind of our steady Eddie business.

Assets were up, both from market appreciation, as we have talked about earlier, and continued net inflows.

So off the back of a 4% increase in the revenues side we had a 5% increase in profits.

Again, the markets coming in should portend well for a good start this quarter.

The Bank had outstanding performance for the quarter; record earnings.

Basically two factors here.

We have continued to grow loans.

As you remember, $400 million of that was the Allied Irish Bank loan portfolio that we did finally close on.

That drove significant loan growth as well as other loan growth, as you can see, through this year.

We have had good loan growth and improving credit.

If you look at the loan loss provision there, almost all of it was attributed to the Allied Irish Bank acquisition.

So we have had strong credit metrics and improvements and payoff of loans that have continued to, I think, show improving credit performance at the bank.

What I am really proud at; I think we had solid operating performance, but this was all accomplished while we were working on the Morgan Keegan integration.

So people were doing their day job and the other job.

When we get into the acquisition expenses you are going to see that those costs are really only adjusted for direct costs of that acquisition and acquisition planning.

And it doesn't include the massive amounts of people time and other efforts that are focused to integrate Morgan Keegan, which I will get to that one in a minute.

But that has gone extremely well.

We got a lot of work to do; can't declare victory yet, as I have said in the release, but we are very pleased with where we are to date.

Moving on to the -- projecting into the third quarter, based on the S&P up and improved ECM environment, net recruiting and a strong loan book at the bank and good credit, I think, portends positively to third quarter.

We also have to add the small factor of Morgan Keegan combination as we report next quarter.

So with that I will turn it over to Jeff Julien to give you a little more color.

Jeff?

Thanks, Paul.

I just wanted to reiterate that we had a whole host of records this quarter.

I think that is important to note going into the second half of the year.

We had both record gross and net revenues, record Private Client Group revenues, record Private Client Group average productivity, record assets under administration, record assets under management, record bank pretax earnings for the quarter.

Although this one is a little bit out there, if you use the non-GAAP section of our release, that is actually a record pretax income number for a quarter for us.

Non-GAAP record pretax income.

There you go.

Paul said if we picked the right expenses to exclude we can get a lot of records every quarter.

A couple of other comments I will make to augment Paul's description of what happened in the segments.

We had a nice jump in book value; I am sure you noticed.

It's amazing what can happen when you do an offering at 1.5 times book value during the quarter, so that was somewhat as expected.

Tangible book value did not see quite the same increase.

Our shareholders' equity now exceeds $3 billion.

It's nice not to have to explain the tax rate for the quarter.

I am mentioning it, but just to say that I don't have to say anything about it.

It was about 38.25% for this quarter and 38.75% for the year-to-date, which is about where it should be.

We got some benefit from the appreciation in COLI, but as I pointed out in prior periods, it's offset by some of the nondeductible meals and entertainment and other things that hit our books.

These rates are about where it should be in a normalized environment on the year-to-date basis.

We talk about the $19.6 million of hard acquisition expenses in the non-GAAP measure.

That is the line item that you see in the P&L.

To that, when we did our non-GAAP presentation we also included about $1.7 million of interest expense, which is in interest expense, not in that $19.6 million, which related to the debt offerings that we did ahead of time prior to the actual acquisition.

We also factored in about 3% dilution from the share offering that we did in mid-February in anticipation of the acquisition.

Those things all added together came up with that $0.12 impact related to the Morgan Keegan acquisition.

The ROE for the quarter, as reported, was 9.62%.

Again on a non-GAAP basis, so that would be about 12.2%.

And on a year-to-date basis it was 9.83% reported, again on non-GAAP.

Excluding those costs, what we will call core operating earnings, was about 11.25% for the year-to-date.

I think the surprises for the quarter relative to what was projected, and I have read some of your comments this morning, the bank loan-loss provision I think was a surprise.

The Allied Irish portfolio shrunk from the time we initially started talking to them to the time we consummated the transaction.

So our provision for that originally started somewhere around $7 million, ended up only being about $5 million.

But the rest of the entire bank's portfolio on a net basis was really -- yielded no provision expense for the quarter.

We had some net growth, which there was some provision expense for, but we also have a lot of credit improvements, payoffs, pay downs, things like that that had the opposite effect.

So it was basically a net neutral other than the Allied Irish acquisition, which I think was a surprise, maybe even a little bit to us, that it was at that level for the quarter.

Obviously the net interest margin at the Bank held up a little better than at least I expected earlier in the quarter, thus net interest earnings a little better.

Again, we had some of these payoffs, pay downs which yielded fees, but we also have -- adding the Allied Irish in at a fairly high average coupon certainly helps the net interest margin as well.

So that will maybe be a little higher going forward than it has been in the past.

Another surprise, I think you all pointed to other revenues.

Well, if you look at it on a segment basis that is really in the Proprietary Capital segment.

We had a fairly significant write-ups and distributions received from some of the private equity funds in this quarter.

That is a lumpy number; very, very hard for us to predict.

As you all point out, usually it's a June quarter event as we get the audit statements for all the smaller ones that we are invested in.

But there were these larger ones, some of which we even consolidate, that we mark on a quarterly basis and that is what happened this quarter.

Not much of that; as you can see in the segment, results fell to the bottom line.

We do consolidate one fund in particular that we have about a 14% net interest in, so a lot of that comes out through minority interest, but it did impact the revenue line.

I would also want to make a comment on the number of lead managed deals.

If you have been tracking that from our monthly operating statistics to now, it looks like we had one deal in the March month.

Well that obviously wasn't through; I think you know how active it was.

We made the decision at the end of the quarter here to exclude from that total the RJF offerings, which we were a joint bookrunner on all three of them -- two debt, one equity -- but we didn't think it appropriate to include those.

We also made the decision to exclude some of these at-the-market deals, these continuous offerings.

There were about five of those during the quarter.

So March was much more active than it appears.

It was the monthly operating statistics that included those things I mentioned that we have now excluded at the final count here for the quarter.

I will make a couple comments on the year-to-date segment information on the press release.

As you can see, again we are comparing against a very good six months a year ago.

Then looking forward last year you know we ended up with a record year last year.

Well, the June quarter last year had a $45 million pretax charge for ARS in it for starters, but then we also had a very difficult capital markets environment in the fourth quarter last year.

So the first half of last year was much better than the second half.

We have just about equaled that first half of this year.

We are about dead on in terms of total revenues.

We are a little bit behind.

Even excluding the acquisition-related expenses, we are a little bit behind in total pretax income but, again -- so if you look at it on a big picture basis, we are just a little bit behind where we were on an earnings basis this time last year.

We had all these negative impacts in the second half of last year, so that should give us some optimism looking into the second half of this year.

In terms of the earnings, you can see, for the six months, Private Client Group is about 6% behind where they were a year ago.

Paul mentioned some of the factors.

In our methodology most of operations and IT, those parts that aren't allocated to other segments, end up in the Private Client Group segment.

And IT expenditures and people have been a large factor in Private Client Group, not surpassing the prior year yet.

Capital Markets we talked about last year's first six months was the strongest period we had had in some time, so that is going to be a tough comparison.

It really is all Equity Capital Markets just shortfall versus the prior year Fixed Income slightly ahead of where they were on a year-to-date basis last year.

Asset management stuff, as you would expect, modestly -- we expect again some sequential improvement as you heard where the asset levels or you see where the asset levels started the third quarter.

Then the bank is eclipsing all records here, both from an earnings and a credit perspective.

So we go into the second half I think with some optimism.

The last thing I will mention this in the other segment you can see there is all of the acquisition-related expenses.

Even though they have been incurred by all the segments, we are putting them all in the Other segment for convenience.

That entire $20 million is down there in the Other segment.

The other thing impacting that, of course, is the additional corporate interest from our April offering a year ago, as well as the $1.7 million that I mentioned from the offerings we did in anticipation of the acquisition.

So a lot of facts and figures, but at the end of the day I think a good quarter.

I know that we need to talk a little bit more about what to expect from acquisition-related expenses going forward, so for that I will turn it back over to Paul.

Thank you.

I think, you know, if you look at the operating statistics I am kind of proud of the organization as they have taken on their day job of running their business and their other day job of planning on the integration.

Now well into the integration; it's great to have solid operating results going in.

I think we certainly have started the quarter with tailwinds.

But, hey, it has been an interesting market the last few years so we are not putting anything in the bank.

Now Jeff read a lot of records off to start with and I am sure we will have records next quarter just because of the combination.

The important thing is going to be how we do on the bottom line in our earnings per share, which, as we said, we didn't expect this transaction to be immediately creative but believe strategically it will be accretive and very, very strong.

I do want to note as I get into the MK acquisition, net-net we are at ahead on retention and we are doing better on our budget of costs slightly.

Ahead meaning we spent a little less than we have planned.

The retention, in terms of percentage of people we have retained, we have had less overlap than we thought in some of the businesses, so we have severed a little less, although it's a big number.

You have to remember, too, that our MK acquisition and numbers were based on market conditions in December.

We used the December trailing 12.

So part of the purchase price adjustment you saw was strong performance of Morgan Keegan.

We haven't audited them; we can't give you those numbers but -- in the first quarter so a lot of the trends that impacted us are impacting them.

It's a little bit of a different business but we have got some room because of that, if we can keep the people, which is the focus, because of the improved conditions in the quarter for them also.

We are ahead of retention, as we said, are those we made offers to in PCG on retention.

We have had 98% of them still here at the quarter and so we have done better in the retention side than we assumed.

But we know we will lose a few more advisers.

We don't want to; it's just so far to date it has been a smattering one or two here, no particular direction.

And just a handful of regrettable losses, but in this market we have always had some given the checks that are put out.

But we are ahead of our retention estimates to date.

Our job over the next year is to make sure that we make people feel at home, so we have done very, very well there.

Fixed Income.

Similarly, we had less overlap, so although severance numbers as we talk about as we look forward are significant across the organization there was less in Fixed Income.

Our revenue per producer has been growing there also, so we are hopeful but we expect more fallout.

As you merge accounts and move accounts around you do lose some sales and trading folks, but again so far to date we are ahead of our own budgets and estimates, but we don't think that is done yet.

We will watch closely over the next couple of quarters.

Our retention expenses that we spend are below our estimates, mainly on the Capital Markets side of the business.

We have spent less in RSUs totally than we originally projected in estimates.

We are about -- slightly below but about on our projections for the PCG group so we feel good about those too.

But this is all early.

We know the combinations here.

We have fixed income trading off one group of inventories, we have Equity Capital Markets basically all consolidated into the RJA business, and the PCG we are operating dual systems but utilizing marketing, branding, and a lot of other things.

Trying to use all of our resources -- marketing research and everything we can help during this transition period before we make a systems changeover.

So far, so good, but a lot of work ahead of us.

So we are optimistic, but, no, we have a lot of things to do.

With that Jeff, I don't know if you want to make any more particular comments.

It's hard for us to really accurately predict where we are going to be on these future acquisition-related costs.

We had originally projected, I think, $70 million for the fiscal year.

The interest will stop now, so it's going to be just these remaining severance-related costs and other integration costs that come up for the rest of the year.

We don't have a great handle on that because it's going to be a continuing, evolving number.

But I guess if we had to give you a projection for the rest of the fiscal year, it would probably be in the $40 million range plus the $20 million we have already spent gives us $60 million, which will probably come in a little under the $70 million we originally projected.

But that is one of these things kind of swallowed up in Paul's forward-looking comments earlier -- Paul Matecki, our council.

There is a good chunk that we have incurred that will occur in this quarter, especially severance.

But as we told you we have been very deliberate in terms of the integration, going step-by-step and keeping support levels up.

But so far, so good.

The market continues to be reasonably solid.

I think the basic business is in good shape and we are focusing on working hard on the retentions.

No red flags yet on the integration, just a lot of work ahead of us.

With that I am going to go ahead and open it up for questions.

I am sure you have a number of them today.

So, Jennifer, why don't you go ahead and ask for questions?

(Operator Instructions) Joel Jeffrey.

Good morning, guys.

Just a question on Morgan Keegan, in terms of their fee-based assets and the additions that you will get from that deal, can you give us what the level was at the end of the quarter?

Then do they typically sort of price off quarter-end levels as well?

We are thinking how to answer that one.

We are going through the process actually now of, again, not having -- we are just finishing kind of the opening audit and balance sheet, so that is why there is a little bit of hesitancy on the numbers.

They have more of a stock brokerage business than and asset management (inaudible) [that is] fee based.

We just don't want to give you a number that is not totally accurate yet; that is the only hesitation.

We know they have got $70 billion in retail assets that will be coming over that will be on our books.

They won't be coming over until next year some time.

But of that we think the numbers, just in terms of [ramp] fee, and we should have a better handle on that, I guess, than we do.

It's something around $8 billion is the number we have been told, but I got to make sure they pick up outside discretionary as well as our equivalent nondiscretionary to make sure we get the total correct.

Not near the percentage we have got where we have got a third of our client assets in [ramp] fee type arrangements over $90 billion, including discretionary and nondiscretionary.

Their number is between 10% and 15%.

And do those typically price off quarter-on levels?

I believe they are quarterly in advance like it is sort of the industry norm.

Okay.

Then in terms of the Capital Markets revenues, can you just give us a break down in terms of on the institutional side what the Equity Commission line was versus the Fixed Income institutional line?

Have it here.

For the quarter you are talking about?

Yes.

What were you asking, an absolute number?

Yes, just the level of revenues generated by institutional Fixed Income business versus the institutional Equities business.

They are about equal at about $36 million each for the quarter.

Okay, great.

Then I guess just lastly, in terms of -- it sounds like you guys had some solid growth at the Bank outside the Allied Irish deal.

How should we think about loan growth going forward and sort of what you are focusing on there?

Joel, it's Steve.

Good morning.

Good morning.

I would anticipate growth going forward kind of in the 6% to 7% on an annual basis for the next couple of years.

I would think that this quarter growth would be maybe $150 million to $200 million in the loan portfolio.

The one item that will be a little unique is -- and we don't anticipate it closing this quarter.

We anticipate it being in the September quarter.

But we are working on a plan to purchase the securities-based loans from Regions Bank that were referred by Morgan Keegan Financial Advisors; that is about $200 million.

So absent that I think that kind of a good forecast for you to use would be loan growth in the 6% to 7% per year for the next couple of years.

So that would be inclusive of the growth you already experienced this year?

Well, really, no.

I would say going forward -- I would say, obviously, the Canadian portfolio that was acquired this quarter.

Then we had a very robust quarter in the December quarter that was really higher than that forecast I am giving you going forward.

I think you are going to see some more tempered growth going forward, kind of in the 6% to 7% range.

And just in terms of the types of loans, are they this similar sort of -- the commercial type loans?

Yes, we are trying to grow our residential portfolio as well, which typically has lower reserves on it compared to the corporate portfolio.

But I would say that the asset mix, going forward it will be roughly equal to what the current mix is.

It may be slightly more heavily skewed toward corporate, which would have more reserves associated with it.

Great.

Thanks for taking my questions.

Joel?

Yes?

Before you go, let me correct what we said.

I gave you the domestic numbers only.

When we add Canada and some of the international operations total equity institutional commissions are about $56 million.

Fixed Income is $36 million.

Terrific, thanks.

Chris Harris.

Thanks.

Good morning, guys.

So really record quarter in Private Client; you guys talked about that.

Great metrics, great production we are seeing there in that business.

Really wondering how we can reconcile that strong performance relative to I guess some of the other indicators we are seeing that suggests volumes really haven't picked up.

Referencing kind of trading volumes, trading activity, exchange volumes, margin borrowing looks like it's coming down, retail fund flows are really not all the robust either, so just wondering if you guys could kind of help us think about that, how your advisors and clients continue to stay active relative to what we are seeing in the market.

Yes, we have got a strong fee-based billing business, so when the markets go up it really drives our commissions more than anything.

More than the trading volume.

So we have continued to push our advisors for years to be in the fee-based business, to be on the side of clients.

So in down markets we get down drafts and up markets we get up drafts, and that is right driving the business and driving the numbers in PCG, as well as our increasing productivity, which is market and asset gathering driven, and net recruiting.

So --

If you look at the commission line in Private Client Group, commission and fee line, more than 60% of it is fee-based recurring revenues.

Fee-based meaning that includes [credit]; it means things that are time based as opposed to transaction based.

That sort of differentiates us, I think, from some of the other Private Client Group comparables.

Okay, got it.

Then on the NIM, nice increase in the quarter.

You mentioned -- I am just wondering how much of that is related to the Allied transaction?

In other words, if you backed out that deal what would NIM have been in the quarter?

Yes, Chris, we had one month's impact of the Canadian loans, but there were some extraordinary paydowns in that portfolio, even in the one month that we had it which had an impact.

That portfolio has NIM in the 8% range going forward, so that is going to have more impact this quarter because we are going to have the full impact for the entire quarter.

I don't know -- I don't have the number off the top of my head what the NIM would have been absent Canada.

Every quarter we have fee recognition on pay downs and pay offs of loans that can be rather lumpy and can skew the NIM number.

I do think that going forward kind of a 3.50% to 3.60% is kind of a good number to use.

Which is higher than we have guided in the past because both we had excess cash balances in the past and then we also didn't have this other portfolio.

On the pay downs, what is the average yield on those loans versus the new loans that you are originating today?

It has really been, when Jeff mentioned that in his comments, those pay downs that impacted provision were loans where we had higher reserves on them.

So the NIM on those loans compared to what we are doing on a go-forward basis are approximately equal to one another.

So no impact to NIM.

But it does have an impact or it has impacted us positively over the last few quarters in terms of problem loans, loans that we have higher reserves on, paying down -- getting good resolution on them, either paying down restructuring, paying off entirely.

Okay.

Then last question for me real quick on the Morgan Keegan transaction.

You had mentioned that you had a little less overlap than you have thought in Capital Markets and so maybe fewer headcount reduction there.

What do you guys, assuming for how the environment is going to progress over the next year or so as you think about making your employment decisions or your headcount decisions in Capital Markets?

First, let me talk about the overlap.

We had significant overlap in the Equity Capital Markets business.

We knew that going in.

I think our coverage overlap was 86% or something, so we knew we had overlap coming in.

But essentially we ended up with more people than we thought just the professionals.

We kept all the good people we could in there.

In Fixed Income we were actually surprised.

Again, still a good number of severed folks but less overlap.

What we want to do is we think that will, through natural attrition, fall a little bit, but we are trying to keep people in higher service levels.

Assuming that the market -- our strategy over time has been to try to keep people in down markets.

We don't race out and pay a lot to try to hire people in up markets.

So our focus is kind of -- to the extent we can is carrying down -- as markets are slower and they pick up, we get the benefit of it.

It has been a strategy that has paid off well for over 20 years here being public and I don't see any difference in our strategy right now.

Thanks for taking my questions.

Devin Ryan.

Good morning, guys.

You guys have a nice quarter for FA hiring, so with the Morgan Keegan integration under way just want to get a sense of whether you guys have backed off of your hiring efforts outside of the deal or whether you can do both simultaneously.

Absolutely not.

I think in the ECM and Fixed Income business we are not being as aggressive.

We are hiring folks as we -- we are still slotting people in.

Because of the size of those businesses and our position we are looking at spot hiring in those areas, but in the Private Client Group we are hiring full speed.

We find good people willing to come in.

Again, we are not leaders in transition assistance in the industry by a long shot, but we are continuing hiring.

In fact, hiring pace has picked up, as you can see in the quarter.

Our home office visits have picked up.

We were concerned that the acquisition may slow that down, but I actually think it has helped that people see that we are investing in the business.

We think we have a different model of being FA-centric with our Advisors Choice platform.

We don't want to slow down on hiring.

In fact, even Morgan Keegan is starting to hire again for the first time in a long time for them now that it has been resolved.

So we will go with the market and continue to hire anytime we can good people.

We haven't slowed that down at all in the Private Client Group.

Got it.

Does it does it feel like the competitive environment maybe has changed a bit?

Because I just know that a year ago things were incredibly competitive and there was big upfront packages and so that put a little bit of a damper on the ability to hire.

So has that dynamic changed at all more recently?

The dynamic and that there is still big packages out there, the dynamic we have seen are people that have gone through mergers with packages that are wearing down of just -- it's not the right environment for them.

And that is not a slam on the other firms, but there is a big difference between the way we operate and some of the larger firms operate in terms of process, financial advisor kind of freedom, the way we serve versus others.

I think that what has happened are people who have served time at some of those firms want to go back to an environment they were used to before some of the consolidation began.

So that has been the main source of recruiting.

Great.

Then in regards to the Morgan Keegan integration.

Appreciate all the update that you gave.

It sounds like both revenues and expenses are trending ahead of original expectations, but just want to dig in specifically on the expenses.

Is there any change to your thoughts on the ultimate size of the cost saves, once they are fully phased in?

I think we take the same approach as, first -- after 20 days we are not declaring any victory, so we have an early trend.

As we have told you, when we did the acquisition we tried to budget conservatively and do better.

So I am hoping that we do get some cost savings or grow into capacity as we hire.

That has been our strategy, that hasn't changed.

So I think that there could be further cost savings in terms of percentage of revenue if the market grows or more cost reduction.

If we are in a flat market we will size to fit, but our goal right now is to keep all good people.

We did a little revenue growth; it's hard to find good people.

Our model has been keep service levels high and, hopefully, we grow into the headcount that we have on both sides.

It's going one to be hard to really know what the savings are from right-sizing the support until we actually go through the integration of the Private Client Group next year.

There is a lot of support related to that operation.

It's just a little hard to tell right now how it's going to look on a combined basis versus how we are handling it today.

But our goal is to keep -- they have got some very, very good people and we want to make sure they have a home to the extent that works out on both sides.

Okay.

Just lastly for me, a question for Steve on the Bank.

Is it reasonable to expect there could be some more reserve releases going forward?

And on the Allied Irish acquisition, I believe you mentioned a NIM of 8%.

Are you going to be hedging that portfolio from here?

Is that a good number to think about going forward?

Devin, we already have that hedged.

That is a different line item so the expense associated with the hedging or the impact of the hedging won't be reflected in the NIM, but it will be reflected in other expense items.

So need to factor in the approximately around an 8% net interest margin in that portfolio.

In terms of reserve releases, our bias is not to do that.

It's obviously built loan by loan.

We have had a lot of success over the last 18 months or so in terms of problem asset resolution and reducing our criticized loans.

We remind you the last couple of years when we have gotten the Shared National Credit exam we have had -- last year was a relatively small impact.

It was a couple of million dollars.

It was in the June quarter last year.

The prior few years it had been in the September quarter.

We are actually trying to grow the loans which should have provision expense and actually increasing our allowance through that process.

But we were pleasantly surprised with the credit impact of this last quarter or the credit improvement and the impact to our allowance through upgrades and pay downs.

Devin, I want to be clear.

We didn't make any general reserve releases.

I mean, we had releases because loans paid off or I paid down that and higher reserves to them.

It netted out.

So this isn't a reserve release (multiple speakers) loan-by-loan result.

But if you are asking will we have additional pay downs and things, I am sure we will.

But we also, like Steve said, hope to have net growth which would replace it.

Okay, great.

Actually just one last one on the expenses.

The communications and information processing picked up and I know that you do have some seasonal items there.

Should we expect that to come down to more normal levels or levels that it has been in previous quarters, or are we at a higher run rate because of some more permanent expense increases?

I think that there are some increased mailings, etc., in this quarter that might have taken it higher.

Yes, I think that just because of the time it occurred with statements and stuff there is increasing --

1099s.

And 1099 -- there is increased mailings.

Technology is increasing as the spend, but there is obviously from the mailings at time of quarter this is where we do get a big jump up in hits.

So it's a little bit of both.

It's not all there, but it is -- we are continuing to increase our spend in technology.

We have talked about that for the last several calls I think, Devin.

I think that technology has kind of reached a little bit of a new plateau here for the foreseeable future as we have a number of big initiatives underway, some of which Paul has mentioned already.

So I can't back out the mailing expense increase for you right now, but that is a number we could look at.

We don't think it's going to come down dramatically from these levels for a while.

Okay.

Appreciate all the color.

Thanks.

Douglas Sipkin.

Good morning, guys.

Just a couple of questions.

One, and I am pretty sure you guys are going to refrain from giving more color, but I just sort of to a look at Morgan Keegan revenues for March.

I guess it was in the Region's release.

Maybe now that we have -- that was sort of the last quarter before the close.

How does that compare to what you guys were thinking?

I know you guys are modeling a pretty decent size drop off in the run rate.

I guess I remember it being sort of in that low $800 million range.

Does that March quarter shed any light and make you feel better or make you feel worse?

Just curious for your thoughts.

From what we have seen, they had a good quarter so they had a very solid quarter, which makes us -- we would rather -- outside of paying for the net income, we actually like the fact that their business had a positive momentum also.

So to opine exactly what the resulting revenue before the retention all settles out is kind of harder to say, but certainly they were doing better, as I opened up, than they were in December when we projected.

We try to be conservative on retention and conservative on the revenues.

To the extent that the run rate is higher and our retention is higher we should do better, but we will let you know this quarter.

So they do have positive momentum coming in.

Then with the asset management business, continues to do very well.

Strategically any update on what you guys are thinking about that business?

I know this strength historically has been small and mid-cap, and I know you guys want more international and more large cap.

Any color on efforts there?

Our efforts continue as we have been very clear.

We have been looking systematically at acquisitions and hired firms to help us lift-outs and niche acquisitions.

Focused on the large cap and international spaces and are talking to folks, but nothing announced.

But we will, in our normal Raymond James way, be very methodical and if we find the right fit we will close on it.

Great.

Then just last question.

Just curious, with your increased size now at FA headcount, have you already started to see maybe a little bit more negotiating power with some product providers or is it too early in the days for that?

Or just not big enough of an increase in the FA count that that is going to change things that much when you negotiate with firms?

Obviously, we think it will.

We treat our -- we have partners in this business so we have a dialogue and we have got great relationships with them.

Certainly it hasn't gone unnoticed that our salesforce has increased.

We also do some things that we think will put a lift to Morgan Keegan in terms of things we do with some of our partners in the business.

So we will see some, we are sure; how much and how significant we don't know yet.

But it will be a positive.

I don't think it will be a needle mover on its own.

There are a lot of little pieces that we do think that will contribute to this being a good combination.

Great.

Thanks for taking my questions.

Hugh Miller.

I just had, I guess, a question for Steve at the Bank.

I appreciate the updated guidance on the expected NIM going forward, and I realize that the pay downs from some of the potential problem loans has a benefit there.

But I was wondering in general for some of the pay downs for loans that aren't substandard or nonperforming are you guys benefiting at the margin from any prepayment penalties that may have been embedded in these loans?

What occurs is fees that we earn at closing actually get amortized over the life of the loan.

If it was a five-year loan and the loan pays off, restructures, pays down other than what the scheduled repayment terms where, we take those seasoned income.

Now the portfolio is of the size now where every quarter we have got fees that we don't expect -- they are payoffs and pay downs that are not part of the scheduled payment structure.

So we are recognizing fees every quarter.

It can be a little lumpy.

This last quarter it was a positive impact for the Canadian portfolio, even for that one month.

The prior, the legacy domestic portfolio was about equal to, maybe even slightly lower than the December quarter in terms of paydowns.

Our NIM gets impacted by that fee recognition, but each quarter we are going to have some of that.

We could run into a quarter where the NIM gets negatively impacted because we don't have any extraordinary -- a reduced level of extraordinary paydowns or payoffs.

I don't believe there are prepayment penalties in any (multiple speakers).

No, none of the corporate loans have any prepayment penalties.

It's just fee recognition.

(multiple speakers) The acceleration of unamortized fees.

Exactly, and that is just what I was trying to assess was that potential for pressure from there if for some reason you don't start to see the continuation of those paydowns.

Then within the loan portfolio growth that you were guiding to, kind of exclusive of some of these opportunities to purchase loans, 6% to 7%, I realize that the entrance into Canada is expected to be a conservative growth going forward.

But how do think about the target between domestic and Canadian growth in that 6% to 7% forecast?

Obviously because it seems like the margin benefits for the Canadian exposure would be substantially more positive.

Yes, the new business in Canada will have net interest margins and the credit profile is very similar to the US business, so I wouldn't anticipate heavier weighting towards Canada.

I would anticipate it being -- right now there is about -- we have about $500 million in outstandings to Canadian-based companies.

I would anticipate that percentage growing equal to the domestic business.

Okay, that is good and stay there.

I apologize, because I hopped on the call late, but I think you were starting or you talked a little bit about the reduction in March average daily commissions versus February.

I was wondering if you could just quickly mention again what was it that caused that to pull back more than what may have been expected.

I don't -- I think you misheard that part.

Commission revenues were up I mean sequentially in all of our businesses really.

I don't know about the month of March.

No, I was talking about the month of March on an average daily basis was kind of down from the run rate in February.

And I was wondering whether or not there was color or if it was from an institutional side of the business or any reclassification or something like that?

Hold on one second.

The last question I had was just with regards to -- obviously you have talked about retention kind of running in above your expectations from the Morgan Keegan deal, but I was wondering if you guys have given any updated insight into your expectations for the total percentage of the advisors that you anticipate will probably stick with the Company.

I think we told people that we kind of have this 90% kind of retention rate.

From the original numbers we said 10% that we would lose in redundancies and 10% in loss just being able to hold them.

I would just say the redundancies have been less than we have thought and the fallout has been less to date.

So obviously retaining the revenue is the number one goal and that is why we have gone very deliberate on expenses to keep service levels high, and that hasn't changed.

So we are ahead of where we thought we would be, but we have been joined as a family now for 20 some days so we are not going to declare victory on the trend.

So we have -- we are sticking by the estimates.

We thought they were conservative when we made them, but time will tell.

The other upside is their business is up, so that is obviously helping to -- we acquired a business that had much better momentum than when we negotiated the purchase.

Just looking and I see that total commissions were down slightly in March versus February.

I think that there were a couple of more days in March relative to February as well.

On a per day basis it's even -- I don't have an explanation for -- there wasn't anything unusual that comes to mind other than we participate heavily in our own offerings.

I think it has to do with the number of days, because the assets, the fee-based assets aren't impacted by days of transaction they are just a monthly number.

That is a good point.

That is true.

Causing the math to change a little on you.

There is nothing that happened in March.

I mean I think March and going into April has been an uptrend, not a downtrend.

Okay.

Thank you very much.

At this time there are no further questions.

Great.

I think that, again, a very solid quarter which we are -- I am proud of our folks that worked very hard to keep the business going and to welcome the Morgan Keegan people.

The fit from a cultural standpoint is as good as we thought it was.

You have glitches and you have people changing jobs, which has been a challenge, and will continue to be a challenge as people settle in, but it has gone much better than we thought to date.

It's good to have an economic environment that gives us some tailwinds moving into the quarter and we will continue to slug it out here.

So appreciate your time on the call.

Jeff, did you have (inaudible)?

We look forward to seeing most of you at our analyst day next week, our annual analyst day.

And if some of you can't get there, we still have some slots open so please attend.

Great.

Well, thank you all very much.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

You may now disconnect your lines.