雷蒙詹姆斯金融 (RJF) 2013 Q1 法說會逐字稿

Good morning.

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

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

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

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

(Operator Instructions)

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 and 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 expectations and objectives expressed in these statements.

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

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

This call could integrate Raymond James and Morgan Keegan's businesses or realizing the projected benefits of the transaction, the inability to sustain revenue and earnings growth, changes in the Capital Markets and the diversion of management time on integration related issues.

To the extent Raymond James discusses non-GAAP results as reconciliation to GAAP is available on RaymondJames.com and the earnings release issued yesterday.

Thank you.

I would now like to turn the call over to your speaker for this morning, Mr. Paul Reilly, Chief Executive Officer of Raymond James.

Please go ahead, sir.

Thank you, Felicia, and good morning.

As I looked at kind of some the price targets this morning we are reticent to ever give guidance but we are making a prediction and our prediction is 70 plus, and that's not the stock price but that is the temperature here in St.

Petersburg today for those of you in New York.

So if anybody wants a challenging career and great temperature, we are here in St.

Petersburg, give us a call.

I'd like to start the release and kind of taking a high-level view and I think our first big accomplishment is 100 consecutive quarters of profitability which is a big milestone.

I think it's really a testament to the management philosophy that Bob and Tom James have built here.

It has been since black Monday that we've -- that quarter where we had a loss, and that loss was due that we kept the trading desk open that day and recorded over an $800,000 loss some 25 years ago.

I think that is the story of Raymond James continues to be a strong long-term ROE with a buffer to the downside because of our management philosophy which should translate into value to our shareholders and associates.

This quarter I believe was a good solid quarter given the marketplace.

We recorded record net revenue of $1.1 billion, up 4% from last quarter and 42% from last year.

We also turned in a record net income of $85.9 million, up 3% over last quarter, and 28% over last year.

GAAP EPS was $0.61 up 2% from $0.60 last quarter and 15% from last year and our non-GAAP, excluding the integration costs, of $0.69 flat with last quarter and up 30% from last year.

And I go through those highlights for one thing, that our story has been very consistent since pre-acquisition.

We're going to focus on revenue growth and retention during the Morgan Keegan combination and I think we are accomplishing that.

Our retention levels stay high, we can see it in our revenue numbers and I think in the faces of our financial advisors as we go through this integration.

But that is also consistent with elevated compensation expenses and often technology expenses through the integration.

We do not see those expenses diminishing over the next couple quarters as we go through this integration.

And I will give a little bit more color as I talk about that through some of the business segments.

Our assets continue to grow although the S&P was down 1%, our assets under administration were up 8.6% for the quarter and 33% over last year.

Of the $3.7 billion increase in our assets under administration, $3.1 billion was from our ClariVest acquisition.

A little bit of that is accounting.

We acquired a 45% interest in ClariVest, and because of the control features in that, it is a consolidation.

The full $3.1 billion is in our $3.7 billion number.

Assets under administration grew to a record $392 billion, up less than 1% this year but up 45% over last year.

As we get into the business units, the Private Client Group turned in good revenue growth at 3%, sequentially up 35% over last year.

Pretax income over 5%.

The top line story is retention remains high in the Morgan Keegan advisors.

Over 95% of the Morgan Keegan production offered retention is still with us so we have good retention and again very happy with the advisors staying.

If you look through the attrition and the decrease in financials advisors, the majority of it was caused by lower-end producing Morgan Keegan advisors.

In fact, many of them were under $100,000 of production.

We had three in that group that we considered regretted losses.

They were in production of a $400,000 plus.

One was by death, unfortunate.

Which we usually retain the books and two did go to competitors.

But almost all of the other attrition was really by the lower-end producers.

The recruiting pipeline remains very robust and the December quarter is typically a slower quarter for bringing people over.

People don't like to change through the year-end, both because of holidays because retention agreements, year-end payouts, but the pipeline is very good in recruiting and continues to stay strong.

Our productivity per financial advisor is set as high as Raymond James & Associates, our employee side, and Raymond James Financial, our independent advisors, and the Morgan Keegan advisor productivity is about 15% lower than our RJA advisor.

We will be converting the Morgan Keegan advisors over to our platform starting mid-February, our technology platform, and that gap between the Morgan Keegan advisors and Raymond James advisors we feel we can make up over time.

It will not be an instant.

It will be a process over a year or two where we think our systems and products and services will help bring them up to the Raymond James & Associates productivity levels.

I said a conversion of our systems will begin in mid-February where we will bring all of our advisors over.

The expenses will remain elevated through second quarter and most of third quarter.

We are committed to getting the efficiencies out but I think we are really looking at that until the fourth quarter event after, not just the conversion into our technology systems, but also to make sure there is a smooth operating transformation of the advisors onto our platforms.

Our technology expense has remained elevated for two reasons.

One, high conversion expenses which were anticipated but also we've continued to upgrade our systems really to very almost rave reviews of our advisors of our new technology and also validated by our recruits who see our technology and are very surprised that the platform we are offering to our advisors and we continue -- we are committed to continue to upgrade our financial advisor facing and client facing systems.

Capital Markets turned in a good growth quarter.

And it really is the tale of really kind of two businesses as we said last quarter but flipped.

We had a record quarter.

In our Equity Capital Markets division really [up] just to give you magnitude, almost 30% sequentially, driven by a record M&A volume.

Now the M&A volume probably was somewhat accelerated by year-end deals.

I don't think were generated because of year-end, but accelerated by year-end under the you know uncertainty in tax law.

So being a lumpy business you get some acceleration.

Our pipeline is good but we certainly had an acceleration into December.

In fact our M&A volume was almost 60% of our total M&A volume last year.

So very strong quarter.

We also had strong underwriting, just to give you an example, in one week in December we had priced 11 offerings and we were left lead on five of them.

It was a very robust quarter in December almost and as we closed out the year very strong.

Conversely on the Fixed Income business, which was down 15% sequentially, both commissions were lighter but trading profits were off and it's mainly due to sudden rate movements in December which caused us lowering our trading profits because of our muni book, both by offerings we were in and our inventory at that time.

The business is in good shape.

We expect Fixed Income to return to a more kind of it's traditional operating levels.

We'd love the Capital Markets business to continue as it was last quarter but there was a very strong last quarter, and we expect that likely to be softer than it was last quarter.

Asset Management revenue up 7%, pretax up 18%, 16% over last year.

Again, good, solid, steady results in Asset Management as we have had for a number of years.

And again, assets grown totally in that segment by the ClariVest acquisition.

Not sure what to say about the Bank.

Just another very strong quarter, highlighted by an increase of 5.9% and [net] loans $468 million, and I'm sure you'll want some color and stead both on our originations and some of the buying in the secondary market.

You saw a lower provision because credit quality improves as loans pay off that have reserves, you release those reserves.

And so the net number is lower than you've seen but it's a combination of just strengthening credit quality and those loans that reserve when they pay off you have to release the reserves.

So the Bank has continued to perform well and we are happy with its positioning in its credit quality.

The integration will continue through the third quarter where we think we can get it behind us, essentially a little bit more in a year, which I think is a great testament to the management here.

We are committed to the cost efficiencies that we have given you before.

We're about halfway with halfway to go and we think most of those will attack later in the fiscal year but we are committed to reaching those numbers once we have an integration and very comfortable that we have a stable operating platform after combining the whole Morgan Keegan franchise into our system.

The integration has gone so well that we made a commitment to Morgan Keegan that we would keep some dual branding and businesses for two years.

They have asked us to drop the Morgan Keegan name in February after the integration and to operate under Raymond James, and I think it is at their request which I think tells you the cultural integration and the satisfaction of the advisors and I applaud both sides for really reaching out and working together.

As you look at the results, even Capital Markets, a lot of those M&A deals were generated by what we formally called Morgan Keegan bankers who are on our system, as in early on when fixed income combined it a lot of the even though they were -- there were public finance group was a much stronger group.

A lot of the big deals were generated by former Raymond James bankers.

So we've gotten good integration on both sides.

Good teamwork.

Happy with the integration so far and we should complete it over the next couple of quarters.

So with that, I will turn it over to Jeff for a little more color.

Okay.

A few comments to add to what Paul said.

First, I would like to make sure everybody is aware that we did beef up the press release this time.

We've added some additional balance sheet data, including tangible book value per share.

We've added ROE for each period both GAAP and non-GAAP and we've added a breakdown of commission and fee revenues and similarly a breakdown of investment banking revenues.

This particular time we put in a trailing five quarters so those of you who model our earnings can update your models accordingly going forward, we'll probably put in the comparative periods similar to the way we present the P&L in the quarterly press release.

For a second, let me talk about the comp ratio which we analyze as a percentage of net revenues.

It was 68.73 this quarter versus almost 70 last quarter, so we actually had a 123 basis point improvement.

I would say that was a couple of factors.

A small piece of it was result of some of the right-sizing we did towards the end of last fiscal year.

It is now starting to manifest itself.

But also there was a surge in revenues as we've talked about particularly in Equity Capital Markets, although that certainly has a variable comp associated with it, as well as a modest amount of bonus reversals which we have every year in that first quarter.

Nothing like Goldman Sachs.

And so net we improved 122 basis points.

We think there will be more to come post conversion as long as revenues hold up at these levels.

This is the area that the cost efficiencies will primarily be recognized in so we are hopeful that trends lower as we go through the fiscal year.

I am very disappointed to tell you that I don't have anything to talk about with respect to the tax rate.

It was somewhat normal at 38.3%.

You get that that's sort of what happens in a flat market when your COLI values don't bounce around much.

Similarly recurring revenues, we talk about that every time we present at conferences, et cetera.

It's been holding pretty steady here at about 55% of revenues, up for us.

One thing that we tried to estimate this time, we typically start out in the past, start out our MB&A saying that our results are very highly directly correlated to the direction of the domestic equities market, so we decided to put that to the test a little bit and just see how much of our revenues really are equity market sensitive.

We know it is a lot lower than it used to be as the bank has grown and Fixed Income certainly is much more significant operation that it was.

So when we do the math, we actually think that probably a little less than half of our revenues currently are equity market sensitive and another factor is asset management -- assets under management have gravitated more towards fixed income and our retail clients have gravitated more towards fixed income as an asset allocation, so with all those factors at play we are not as sensitive to the US equity markets as we have been in the past.

So just as a quick recap skimming around the segments, in the PCG world, our FA count was down 41 for the quarter, however average gross and average assets per FA hit record levels.

Client assets, as Paul reported, hit a record level about $370 billion of the $392 billion is Private Client Group related.

However, the segment margin for PCG is still at 7.4% and again this is an area that we should see some the cost efficiencies toward the end of the year.

Remember we consolidate into that segment our IT and ops area which predominantly serve the Private Client Group and that's where we expect some of the efficiencies to be realized later in the year.

In Capital Markets, obviously we had the record Investment Banking quarter that Paul mentioned.

We're hopeful that at [least] activity continues at the brisk level even if it does not match this quarter and we would expect Fixed Income to somewhat return to the normal profitability levels, particularly in the trading profit line going forward.

Asset Management, we hope there is continued steady growth.

We did add capacity both with a small mid-cap team as well as ClariVest.

Assets Under Management, I think Paul reported up 1.4% organically this quarter and $3.1 billion added from ClariVest that we also anticipate that once the conversion is completed and some of these asset management products now are available to the Morgan Keegan sales force that there may be a little more of a surge into professionally managed product from that sales force.

The Bank, we kind of anticipate steady results going forward, maybe even a little higher on the revenue side.

We are going to start seeing some impact from the loan growth that we've had here in the last two quarters, as Paul reported metrics continue to improve and so far our interest spread has held in there.

It's still at around 3.5%.

I think we guided between 3.4% and 3.5% for the year.

And then the one thing that has swung our results a little bit each quarter here lately has been proprietary capital and that also impacts as it was correctly pointed out in at least one report this morning, impacts the noncontrolling interest to some extent.

Just about every quarter, we've got about $5 million to $6 million of what I will call operating losses from consolidated tax credit fund partnerships consolidated due to the ownership structure, the fact that we have a guarantee in place, so that is a consistent add-back in noncontrolling interest.

And that's what you saw in the September quarter and the December quarter a year ago because there were very few other significant factors.

The one that swung it around lately has been the consolidation of our merchant banking fund, Raymond James Capital, which has one investment left in it that has some significant valuation swings, lately all positive, and it happened again this quarter, actually it's a dividend distribution from that entity.

That factors into other revenues on that line item and the portion that we do not own becomes a net deduct from income in noncontrolling interest, which is what happened this quarter.

That is going to bounce around.

We can analyze that at any level of detail that anyone wants to.

But net-net to RJ is, as reported, at a record level.

Okay.

We would like Felicia to turn it over for questions.

(Operator Instructions)

Joel Jeffrey, KBW.

Good morning, guys.

If you could just give us a little bit more color on sort of your expectations for pretax margins in the Private Client business going forward.

I know you've done about 7.4% this quarter, and it looks like sort of the period right before the deal was done is a little bit above 9%.

Is that the kind of level we should think about once the integration is done?

Or given what you said about getting increased productivity out of the Morgan Keegan guys once they're on the platform, should we expect kind of a higher number going forward?

I think, Joel, you're going to see a drag; the Morgan Keegan margins were slightly lower.

If you really look at effective payout, it's going to take time to get them up.

Our payouts, we went to a kind of a new grid we announced, which was really neutral, so we're not going to really get any pick up there.

So, we expect them to improve, but I think [back] to 9% would be very difficult short term.

We also have the other impact was the amortization of the retention bonuses for Morgan Keegan, which impact that line.

It's a lot of money being run through on the amortization of retention impacts that ratio also.

Thinking about the loan-loss provisions, again, clearly came in a bit below what we were looking for.

When we think about it going forward, are you guys targeting a specific, say, like allowance to loan ratio percentage?

Or is this really going to kind of vary based on how many loans are paying off and the release of reserves that you have?

Hey, Joel, it's Steve Raney.

Good morning.

It's really loan specific.

There's not really a target, per se.

Each loan is rated -- each one of our corporate loans is rated individually.

We've been pretty aggressive at taking actions against loans that early on we perceive to be potentially problematic.

Even this quarter we sold a couple of loans, a couple of positions at close to par when we had rather significant reserves.

Much more so than what we were able to sell the loan at.

We are trying to be as proactive on that as possible, and as we are booking loans, as we've shared with you, in general we are adding about 150 to 160 basis points of the new loans on the corporate side.

It's a lower amount on the residential and our securities based loans are lower than that even.

So, it's really constructed at the loan level.

And there's not really a set target, per se.

We are comfortable with where we stand in terms of our total allowance to non-accrual loans, nonperforming loans, relative to our peer group and other institutions that we look at.

The noise you are going to get every quarter is -- our reserving is pretty consistent for grades, but as loans pay off that are reserved, we have to release them, and it's just going to make it move around in quarters.

We actually added $0.5 million to our allowance, but on a percentage basis, it did come down 9 basis points in terms of allowance to total loans.

I guess if we had to have a target for the allowance to loans it would be having no classified loans of any kind, and having 150 basis points of commercial and whatever we have on resi now.

Joel, that's my boss, I have a pretty high bar to meet now.

(laughter)

Sorry for setting you up that way.

And then just lastly, in looking at December commission and fee revenue, it looks like it came in a bit above our expectations.

I'm just wondering if you could comment on if these kinds of trends continued into January?

December was a little on the institutional side because of the syndicate.

They were slightly elevated because a lot of syndicate business.

And January, I don't think has been a bad month so far either, but I think we got a little elevation from the Equity Capital Markets business, but you're down the fixed income business, that I think will have picked back up.

I don't see anything.

I can't -- I haven't looked close enough at the January numbers to tell you whether --

We actually had slightly higher fee billings than we did October 1 for the quarterly stuff despite the down 1% S&P 500 market in the December quarter.

Which will give us a little bit of a tailwind going into January also.

Great.

Thanks for taking my questions.

Alex Blostein, Goldman Sachs.

Good morning, everybody.

A couple questions on expenses.

Maybe as you guys kind of look through this year, I guess the first question is -- what do you guys see sort of the normalize comp rate settling in?

Still right now kind of like in the high-60%s, is mid-60%s still I guess the number we should be thinking about for comp?

You can see it coming down, but I don't know if it's mid-60%s.

If you mean 65%, if that's mid, that's no.

We can get improvements, but there's only so much you're going to get out of operational and overhead synergies.

If you get improvements, it's going to have to be in payouts, and you're not going to see reduction in the Private Client Group of really of payouts overall.

We are looking at a number of things, including our client net pay pricing we're studying right now.

We're doing other things that could impact margins.

We've said we were looking at the Equity Capital Markets.

We are operating heavy there, and there will be some, but with the independent contractor division being two-thirds of the PCG, you're not going to get it down that low.

Got you.

That's helpful.

And then, I guess on the non-comp side, it seems like especially in technology, so there's two things going on, right?

On the one hand, you're still converting the platforms, but also it sounds like you guys were doing a few upgrades that feels like might be also temporary in nature, at least for now.

Is there a way to quantify that, and how much of a non-comp relief you guys would get once everything sort of settles down?

Yes, I think that there's two pieces.

One, we have elevated technology for improvements and -- but there is certainly elevated technology costs for integration.

And honestly, we are pretty conservative in what we call acquisition related, and I think until it all settles out, you can't really get a good number.

We've given you a $60 million to $80 million target.

We think we've gotten 50% of it.

We think there is another 50%.

A lot of that is in ops and tech, and we're just going to have to wait until we settle through.

Our technology spend is up.

It's not sustainable at the level we have out, but -- because of the integration expenses -- but it is up from prior and will continue to be as we look to actually strategically position our technology as a leader, which I think we are getting good results so far.

Got it.

Very helpful.

Steve, had a quick question for you on the Bank.

So, long growth obviously very good.

Can you give us a sense of where the organic loan growth is coming in from, and at the same time, revenue's down a little bit sequentially.

I'm assuming that is because net interest margin has come down, and I just want to clarify if you guys think that this is probably the run rate [name] we should think about, or there's more kind of incremental compression to go.

In other words, if we continue to see decent balance sheet growth, should the revenue growth be kind of going in line with that?

Yes, Alex, related to the loan growth, it was across all of our loan classifications, but the bulk of it was in our corporate area.

The December quarter we enjoyed some pretty robust opportunities in the marketplace, both in the primary market and also we added to some positions in the secondary market.

I would say that we are seeing those opportunities have kind of waned a little bit this quarter.

We have seen continued pressure on margins and also structure.

So, I would not anticipate our loan growth to meet that close to -- actually it was over 5% for the quarter.

I would not anticipate that for the next few quarters, although we are growing at a slower rate, I would anticipate, over the next couple of quarters.

Related to our revenue number, there was a couple of things that impacted our net revenues.

We have a bank on life insurance policy that is about a $65 million investment that had about an $800,000 sling, a negative sling between the December quarter and the September quarter.

And also, while the vast majority of our Canadian loans are in our Canadian enterprise that are hedged against the Canadian currency, we do have some legacy Canadian-denominated loans in the bank itself that are unhedged, and that had about a $2.5 million impact negatively between the December and the September quarters.

Those two things in combination with the slightly lower net interest margin contributed to the reduction in our net revenues for the December quarter.

In terms of our NIM going forward, I know Jeff alluded to this, we are seeing some pressure.

I would anticipate, although if you really hung in there this last quarter, it only came down 3 basis points.

I think over the next few quarters, you're going to see some slight reduction, maybe over the next 12 months, a reduction by as much as 10 basis points or so on a run rate basis.

Got you.

Great.

Thanks very much, guys.

Devin Ryan, Sandler O'Neill.

Good morning, guys.

How are you?

Just want to follow-up on the strength of PCG results, and I guess specifically in December.

Was that driven by year-end client repositioning, just given looming tax hikes, or was there something else driving that?

I know that sometimes you have some one-time, maybe boost related to selling and a product related to analyst top picks.

Trying to get a sense of what really kind of boosted that improved momentum there in December.

And then, that's kind of part one of the question.

And then secondly, with equity mutual funds seeing some inflows the past couple weeks here, are you seeing similar positioning within your client base and any signs of changes in engagement levels?

Yes, two things.

Certainly, December had tax harvesting and positionings --.

Tax loss and tax gain selling.

We had certainly the syndicate business was a good month.

So, you had positive spins in December that certainly boosts the business.

Having said that, January appears to be a good month, too.

Certainly you have factors like that, that impacted, and so, yes, we had some boosts from those factors.

I think the business is still very solid, and continues to grow very well.

You know, we will see.

Your second question, I'm sorry?

Essentially just -- we've had some positive flow trends, and I know it's only been a couple of weeks, but just wanted to see if you're maybe seeing some early signs of improvement in retail investor engagement now.

Clearly things were, in the year end, I would say were -- investors were less engaged.

I want to see if there's been any shift in engagement levels.

We see, I think, our investor sentiment survey is up.

We have not seen a massive move to equities.

I know a lot of the funds are showing big inflows.

I think we've been more -- with our investors, we try to keep them engaged.

Maybe they've been a little more engaged in other places.

Haven't seen a big movement yet, but having said that, the commission levels in January have been pretty good so far.

I'm a little bit behind in terms of probably up to today.

I can't say we have seen a huge flood into equity since the beginning of the year.

Okay.

Got you.

And then, just following up on expenses, when you say that you are halfway there on expenses, does that mean that essentially 50% of that $60 million to $80 million targeted cost save run rate from Morgan Keegan has already been reflected in the results that we've seen?

I just want to kind of clarify what that comment means.

Yes.

I think that's where we are.

I know that CEOs as a breed aren't patient, and I have an expression -- patience is a waste of time.

And so, we look at the expenses and want to get at them.

I think our strategy from the very beginning was focused on retention and to let operating expenses run at a level to support the integration.

So, we're committed to get them out.

We can't zero on them yet because frankly we're focused on flipping a switch in mid-February and getting the integration done and making sure that goes as smoothly as possible.

All of our testing shows it's going very well.

But it won't go perfect.

It never does.

But we anticipate it will go well.

Like any new systems, we have almost 500 advisors on a totally new system on a day; we are going to have operational support just because they are not used to the system.

It doesn't matter where they came from.

With their own people, we would have that.

So, we're going to be running elevated for a while, and we think there are savings there.

I know you guys want a harder quantification.

We think we've gotten 50%, and we'll get 50% more.

But to pinpoint it, we can't yet, but we're very focused on it.

And after the integration, as we get through this second quarter, I think in the third quarter we will be doing a lot of work to position ourselves to do that.

The majority debt of what we've realized has been in the Capital Markets area where we have combined the departments, and we've, as an example, in Equity Capital Markets hopefully you're retaining most of the revenue-producing individuals, at the same time you're eliminating duplicate research analysts and financial analysts and et cetera.

Some of the support-level people.

So, both in ECM and fixed income, that's where most of the duplicative costs have come out.

The ones that are left are primarily going to be in PCG support, and ops and IT.

Okay.

Great.

Just within investment banking, your underwriting revenues, clearly an improvement from last quarter, but let me just get your perspective on -- not an exact number, but just kind of what the upside is to that business.

I feel like there's improvement there, but you are probably still hitting well below your potential, and then clearly we don't have a functioning IPO market at this time.

I want to just get some perspective on kind of where we are relative to what you think is maybe a more normal level for you guys.

That's kind of the crystal ball question.

So, we're either overstaffed or the markets aren't performing enough.

One or the other.

So, to measure potential is very, very hard; certainly in a robust market, we have a lot of upside.

The question is -- do we really think the markets are going to turn that quickly?

I think we've seen some improvement.

Our view is that December was an extremely unusually good quarter, almost, and that business will be better.

We predicted business would be better than last year in our budgeting process.

Having said that, I think we've got some cost capacity issues and we are going to have an improving market.

So, hopefully over the year we will get pick-ups in both.

You tell me how good the market is, I can tell you how well we will do.

We certainly have, I think, upside if we get a functioning Equity Capital Markets business.

I don't see any vast improvements short term.

Okay.

And then just lastly, within the investment advisory fees, was there a meaningful performance fee within that?

I know that this is a quarter where you can record performance fees, or a higher number of performance fees.

I just want to get a sense of that boosted results there a little bit and how much?

Nothing unusual.

There was a small one last year.

Okay.

Great.

Thank you.

I guess that's good news and bad news, right?

(laughter)

Chris Harris, Wells Fargo.

Good morning, guys.

Just a quick follow-up on the synergies here from Morgan Keegan.

Not to beat a dead horse here, but it sounds like we're pushing it out, or it's going to start to be realized here in the fourth quarter.

How should we think about the pace of those synergy realizations once we get there?

Is it going to be something that we might see a lot of them accrue fairly quickly, so, like, in the fourth quarter I think then Q1 of the next year?

Or is it something that's going to take a gradual process to actually fully realize what we have remaining, so it's more of a next fiscal year type event where we see the bulk of those kind of kick in?

I think there's two pieces.

One is, in our view, we have not pushed it out, so we've been on a schedule.

I think people have always thought that we were being very conservative, and people said -- well, they are going to do it quicker.

We've been pretty consistent that through this integration process we were going to run elevated.

I think people thought there would be more fallout.

Maybe we even thought more people would leave on their own.

They stayed the course, and so our view still is that through certainly the second quarter and into the third quarter, we will be running on those levels.

And then we will get at them third quarter and fourth quarter.

My guess is we will get a lot out by the fourth quarter.

It may not be fully reflected until the first quarter of next year -- the normal run rate.

Maybe in the fourth quarter it will be some of it reflected.

Somewhere in there, but our commitment is to get the synergies out this fiscal year.

I just can't tell you which quarter they are going to hit.

Those are the efficiencies.

What I call the synergies, you get over time.

And I do believe either getting the Morgan Keegan advisors and the PCG side more productive, synergies and kind of cross-selling the business.

The good news is I think we've gotten a lot of people in the other businesses a little more focused on the marketplace.

One of the risks in any combination is you get a little internally focused, and hopefully we'll get a lot more of that when we get through the systems conversion and the last adjustment and the op and tech part of the business.

But I think that will focus into next year.

Net-net, I think it is still a great combination.

It gives us great market position, great platform, and it's just going to take us this year to get it done.

Okay.

Great, that's helpful.

A few questions then on Capital Markets.

You know, we've talked about M&A being very strong this quarter.

A lot of folks are kind of predicting that this year will be very strong for M&A.

Curious to get your thoughts as to how the margin in that business is affected by revenue mix.

So, in other words, if we get a very strong environment for M&A this year, and maybe commissions are not as robust.

Is that mix better for you guys from a margin perspective than maybe having the year shape out the other way, where you get a stronger commission revenue, and less on the M&A and underwriting?

There are two answers.

First, I hope they're right, and this is a record M&A year.

Part of this business, too, especially when you are a research-based firm is you have a big fixed cost called research.

You are paying that whether it's over-the-desk commissions, whether it's underwritings, or it's M&A.

If you looked at M&A as a pure business because it's less research oriented or the payouts may be a little more advantageous, it's a more profitable business, but if revenue goes down in one area and goes up in the other, you still have your fixed costs to cover.

If you say a switching of the business from revenue I don't think helps us a lot.

A pick up in M&A would be very, very helpful to us.

The commission payouts for salespeople are lower than M&A payouts for bankers.

But we don't expect the over-the-desk trend of decreasing, although it was up this quarter over last year, we don't think that declining trend [over as] commissions has been one for a while now, for years.

We don't see it booming back up.

But if that boomed up, our payouts are lower in that area than it is in other areas.

It depends on the mix.

Okay.

And then on staffing and Capital Markets.

I think in the -- on the last call, you guys were mentioning you were in the kind of exploratory phase of taking a look at your headcount there, and I think it was during a fairly weak period in the markets.

Now that things look to be picking up or they improved this last quarter, are you guys putting those plans on hold or is that something that you're still kind of monitoring at this point?

We're looking, I would say we believe there is some structural changes in that business if you look what's happening to over-the-desk commissions, how people are paying you for research, that we do have to make changes whether they are in number of people or in payouts, so we are still looking.

Certainly, we were so busy in December, we did not do anything but execute.

That's a better answer.

There are still some structural cost side that we have to achieve; even if markets continue to be good, we've got to make some changes.

We are still working on that.

Okay.

Very helpful.

Thanks, guys.

Hugh Miller, Sidoti.

Good morning.

Had a question in the line of the recruiting environment, you guys have talked about how you feel as though the opportunities are robust.

I realize December quarter is always a challenge to really bring on advisors.

I just wanted to get a sense of kind of what is driving that strength, because from what I am hearing, with brokers, production that's been improving overall for the industry, most firms' satisfaction levels amongst those brokers is improved and is fairly high at most firms.

You know, I've always found that that kind of makes it more of a challenge to get people to make a move.

What is it that you guys are seeing that get you confident about the recruiting environment?

I know that you can gauge by home office visits, but what are you seeing now that really gets the advisor to make a move?

Hugh, there was just a study done, I forget who it was by, of financial advisor satisfaction, and us and Edward Jones really ranked high.

And if you look relatively, one of the wire houses had pretty good scores.

The other two, I believe the study said 20% or plus of their FAs -- I forget the numbers -- didn't expect to be there within two years.

I would not call that high satisfaction.

A lot of that was driven by pre-merger, and I can tell you by the visits here that the biggest question most people have -- is it worth getting rid of all this front money and being in a place that I like to work, versus being trapped at a place I'm at for money.

I mean, so I would not call satisfaction at number of the big firms high.

In fact, the survey shows just the opposite.

So, we continue to get to strong pipelines from especially two of the firms and brokers that are very unhappy in the environment they are in.

[Took checks] don't like the environment and are looking to make the change.

So, now people take their time, they don't always come when they look, but there are a backlog of home office visits, and the high traffic volume indicates very positive momentum for us.

Okay, yes.

I'm actually looking at that survey right here in my hand.

I think it was one firm in particular that had sub-50% satisfaction, where all the other ones were 70% or above.

Basically it's a handful, or the firm or two that does not have that satisfaction that you guys are seeing those opportunities from?

Yes, I think that if you, again, look and say how many plan to be there in two years, I think there are two firms I think we are getting strong pipeline from, particularly.

But we are getting -- and honestly, I think a few other things have happened for us is that the Morgan Keegan acquisition I feared might scare people off -- it's increased interest.

We've rolled out some new things on our independent platforms, and models and pricing, which has got a lot of interest, and our technology news is really getting out now.

We've mobilized a lot of our apps.

We have advisor technology, our advisor platform and our client platform are both getting very strong reviews, and I think people will get surprised when they see us.

Part of our issue is to get advisors to see what is really here.

I don't think a lot of them even know what is available, and we get them in the door, which is the test.

They are very, very positively surprised, and honestly there's only a handful of firms left that have what I call that regional, original broker dealer culture for the financial advisors.

I'm not saying it's good or bad, it's just different.

We offer a different environment.

A lot of people grew up in the environment we offer, and when they come and see they can get paid reasonably well, competitively, they can get leading technology and they can get the culture, we get a lot of interest.

Usually we find if we get them in the door, we get pretty good success rate.

We just got to keep getting them in the door.

And you guys have commented on the new product-neutral compensation plan.

It was supposed to be effective later this year.

I was just wondering if you really expected that to have a substantial influence on product mix and the comp ratio?

That, in and of itself, the comp ratio and the retail segment, or is it just kind of very modest?

We modeled this to be neutral.

And part of it was to get Morgan Keegan integration.

They were on a different grid than we were.

And though the view was to make it simple, very transparent, and I think we will look to see over time if it causes a movement in product.

We can always change pricing or change the grid if there is an adverse effect.

We are very clear to our advisors, two things that most people announce in December there's a new grid on January.

We announced in January that the grid was effective October 1. So, we give a lot of notice.

We don't want to surprise advisors.

We're very open about changes.

We change it very seldomly, but we tell advisors that, for it to be fair, it has to be fair to clients first.

It has to be good for them and for our shareholders, and we're very open in the communication.

But we modeled it to be neutral.

Okay.

Great.

And last question I had was -- within the Capital Market segment, you talked about some of those opportunities, but I was wondering if you could focus in a little bit with the addition of the Howe Barnes franchise and looking at the financial segment within Capital Markets.

And your expectations there and how discussions are going with clients and companies you work with, and the prospects for seeing an improvement in that space in the coming year.

First, we've had great retention, we've got good leadership during that Howe Barnes acquisition.

Very happy with the positioning of the clients and the space.

Where we are not happy is the market stinks -- bank acquisitions have not been robust.

Recapitalization at prices last year I think surprised everybody that the market just went silent.

So, it's picked up some.

We believe there will be consolidation will pick up, so we like the people, we like the positioning.

But if you looked at that isolated financially since the acquisition, it wasn't the best of timing just from a pure financial standpoint, but we got very good bankers, very good people.

And when that market picks up, we think we will realize that investment

Sure, sure.

But are you getting any sense that you feel now you are going to potentially get that change in dynamics in the coming year or so, or is it just a wait and see --?

Again, I think you're starting to see some movement, but whether to say it is robust or not, I can't tell you.

It's going to come.

I don't know when.

Okay.

Appreciate the insight.

Thank you very much.

Douglas Sipkin, Susquehanna.

Good morning.

A question for Steve, and then a retail question.

With respect to the Bank, obviously I know the Firm's philosophy is not to release reserves, but is it possible you would find yourself in a position where the loan growth does slow down, and it sounds like that is at least going to happen in the near term, but the credit quality continues to improve.

I mean, how do you avoid a situation where you may have to release reserves?

Is that a possibility over the next couple of quarters if credit quality continues to improve?

Good morning, Doug.

Yes, that's absolutely a possibility.

We could have a situation where you have no loan growth at all.

We do have and we disclose what our criticized asset levels are that have higher reserves obviously than our past rated loans.

You could have continued improvement in credit that would cause us to release reserves, and you could have a situation where, for whatever reason, in that quarter your charge-offs also exceeded your -- your charge-offs exceeded your provisioning.

That could happen.

I think that the key thing to remember is the reserves are loan specific.

You can say it's bad news when you get a criticized loan to pay off, but it's good news too, but the problem is you have to release that reserve and there's no choice.

So, we do not do general reserve releases when loans payoff.

You have to relieve that specific reserve.

Yes.

Okay.

Because effectively it looks like that took place this quarter, right, because you did have pretty nice loan growth, and as you indicated, it was more on the C&I side, so that has a higher upfront provision.

So, if that didn't happen, obviously it did, but if it didn't happen you probably would of had a negative number, no?

That is correct.

That's right.

I would say probably just if you isolated just the loan growth itself, our provision expense was probably $2.5 million or virtually all of -- a big chunk of what our actual provisioning was related to loan growth.

Behind that there was a lot of noise upgrades, downgrades, sales of criticized loans and the like.

Well, we had $2.5 million in all categories of just loan growth.

It was not just corporate.

I agree with that.

Okay.

That's helpful.

And then the second question as it relates to the private client.

Obviously, you guys have been tremendously successful early adopters of managed products, fee-based models.

As you bring on the Morgan Keegan advisors to one platform, I'm just trying to get a sense, whole company, how much more room is there obviously at the broker advisor's discretion to move to a greater population of your retail franchise to those managed account fee-based models versus the historic traditional commission-based model?

They are, if you look at their productivity, it's about 15%, 14% lower than our employee productivity, and a lot of that is a percentage of fee-based models, and we think over time they will move there.

Now, we don't tell advisors they have to use our product or they have to use our platform.

We go through both education, which they are already attending, on the products and on the management of portfolios.

And over time, we think that -- my guess is they will move up there because they will see it's good for them and it's good for their clients.

So, we believe we will get the room on those advisors, that they will catch up.

But that's not overnight.

That's over a year or two, we think they will get there.

Just to follow-up on that, have you guys ever done internal studies to sort of show how much more profitable over a cycle, over some measurement period, that type of account is for Raymond James versus the traditional?

Actually, in some cases, it's less profitable.

If you get somebody that is new issue oriented or pretty heavy trading volume, that's probably the most profitable, especially when you add margin to the overall complexion of the analysis.

The philosophy behind fee-based for us early on has been to put the advisor in the same basis with the client -- that their comp and their success went up and down with the client.

So, it wasn't really driven by profits, over a short term or over a cycle it's really much more with philosophy in putting the client first.

Having said that, steady market is a steady income for the advisor, but as Tom pointed out, that if someone is -- you have clients that like to trade a lot and you have a lot of activity, they can generate a lot of commission revenue.

We wanted to avoid that kind of mindset, too, where people were focused on trading versus advising.

A lot of that drive in the early adoption was a philosophical adoption.

Got you.

So, it's really --

Assets that you can actually handle, and you can find a lot of our financial advisors with $0.25 billion of assets now with a small team of support, and that's happened because of the asset management services platform that we have.

And you are quite correct in pointing out that over time, because of the support we give people, not in pushing individual investments, but in teaching them how to use professional management as a levering capability to build their annuity business, you will see over an extended period of time that they will adopt it just because it is easier for them and better for the client, as Paul said.

Okay, great.

And just one final, I know you guys have provided a lot of detail on interest-rate sensitivity.

I am assuming no change in sort of the pro forma impact, obviously rates would have to go up for that to happen.

But you guys still comfortable with sort of the interest rate guidance that you provided in the past in a rising rate scenario?

It hasn't changed much in the last quarter.

That's correct.

We are just waiting for them to go up.

As soon as the government gets to the interest rate management business, we think we will see some benefit.

Okay.

Great.

Thanks for taking the questions.

(Operator Instructions)

Bill Katz, Citi.

Good morning.

This is actually Neil filling in for Bill.

My first question is -- you earlier mentioned record productivity for the advisors.

Is there a particular metric you focus on here?

Trailing-12 production -- what they're producing over the last 12 months.

You'll find if you try to compare that across, everybody calculates it just a little bit differently.

They include or exclude trainees or people that have only been with them a short time, et cetera, et cetera.

We don't count people until they have been with us a year, so we can hire some significant producers and they won't factor into that number for a year.

But that just shows the manifestation of the people that we have hired in the past.

We measure it consistently, and it is a record, and it's continued to go up, so I think it is a reflection of more productivity per advisor.

Got it.

Thank you.

My final question -- can you provide any color on the Other revenue line?

It saw a nice sequential pickup this quarter.

Thanks.

Again, it had to do with that proprietary capital where we consolidate.

That's also why you saw a net deduct from earnings related to non-controlling interests.

It had to do with the consolidation of our merchant banking fund, which had a significant valuation adjustment in the quarter, the majority of which does not belong to us, which is why came it came out through non-controlling interests.

So, it's the net that impacts it.

Thank you.

There are no further audio questions at this time.

Great.

Well, we appreciate everyone joining the call.

Again, we are still committed to the integration.

I know people are really trying to focus on the synergies to get the numbers are.

We're focused on the conversion, retaining advisors; and the synergies, the cost efficiencies will come, but again, I would tell you that they will be late in the year, is probably our target unless we have a perfect conversion, but I haven't seen one of those yet.

We feel like it will go very, very well.

So, thank you for your time, and we will talk to you next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.