Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Raymond James Financial Inc. (NYSE:RJF)

Analyst Conference Call

January 24, 2008, 04:15 PM ET

Executives

Thomas A. James - Chairman and CEO

Jeffrey P. Julien - Sr. VP of Finance, CFO

Analysts

Operator

Welcome to the analyst conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Tom James, please go ahead sir.

Thomas A. James - Chairman and Chief Executive Officer

Thank you. Welcome everyone to the quarterly analyst conference call. Glad to have you aboard. Apparently you have a lot of questions, there are lot of you assembled and as a matter of fact I have some questions. So I'm glad to have you join us today. Let me just begin by making the comment that contrary to the way the stock acted today, we didn't take any big write-off or any losses on our balance sheet, none of them are contained in the operating statement. The results from my perspective during the December quarter were actually pretty good but the only segment as I reported in my notes was impacted to any great degree was investment banking although there are some other areas to which I have referred.

Back at the end of November as you recall we released monthly statistics and one of the reasons for that is to give analysts some opportunity to make course corrections based on what trends are in the industry and what was reported then if you recall was that we were doing pretty well on the private client group front with commissions up year-to-year but we reported at that time that volatile markets had reduced investment banking business and negatively affected trading results. And of course when you look at December, December is a month that doesn't have normally large amounts of revenues associated with investment banking transaction. And at the same time we reported that falling interest rates were affecting spreads on our interest earnings. So the reason I'm referring back to this is to let you know that we were trying to make sure that we telegraphed the conditions that we were facing in the marketplace.

We also mentioned that the loan portfolio was continuing to grow as we took advantage of very favorable discounts available in the loan secondary market, generally purchasing loans for the bank that either were of a real estate pool variety or of corporate loans where we either had existing loans or knew the industry or the particular companies very well. And with the drive for liquidity at a lot of the major banks they have made a lot of loans of all types available in the secondary market. I don't know if you have been tracking any of this or not but these loans are available often at 5% to 8% discounts and I'm talking about quality loans now not ones that have any problems associated with them, certainly not ones that have any subprime content.

So essentially those things as you now as we've reported before when we grow the loans we also add to potential loan loss reserves and that did occur during this quarter not quite to the degree it did in the preceding quarter, because while we added about $1 billion to the loan portfolio, a good bit of that was real estate pool high quality purchases that for balance sake and recall that we're an S&L really and it's important for us to have real estate loans where we bought those loans with good returns, much better than we had been able to get for the prior year but they also carry lower loan loss reserve type. Reserve percentage is often 10% of the... yes these are residential loans as opposed to corporate or commercial real estate loans which bear much higher reserve rates.

So I would have said if we were looking at... I hesitate to use the word normal, expected is probably the word I should use levels of activity, we would have expected that we would have had about $4 million less in reserve creation during the quarter than we did and we had substantial creation during the quarter. So when you look at our model you should be aware that the bank, the net interest earnings we had great growth in balances and that sort of obscured the fact that as these rates have dropped, there have been tremendous compression in margins.

So it looks like net interest earnings are up and they are up because the bank of course is the major contributor to that but when you look at the traditional lines at the broker/dealer the spreads have narrowed considerably which impacts all the areas from which interest is generated not the least of which is the private client group. So that when you look at private client group contributions as we will later in the conversation, you will in fact see that the private client group didn't increase its earnings at the rate you might have expected given the revenue increases and this is one of the two major factors that contribute to that and I'll discuss the other one when we get a little further along.

So essentially when you look at these numbers you see we had a good 18% increase in commission volume, again driven more by the employee state brokerage firm and by the independent contractor firm but both experienced growth both on a productivity basis and recruiting continues to be good. So new account arrivals were good. The investment banking numbers that we experienced were of 43% but you need to know that as we reported last year and this quarter we had the largest single M&A fee that we had ever received in that quarter, $7.5 million plus we had… while we had roughly the same number of transactions in issuance, those transactions were [inaudible] advantaged and so the big fee business didn't occur in the quarter as the number of transactions that we were working on were basically put in remission awaiting a better market condition.

So we do have and I always comment on pipeline, we do have activity that is awaiting better market conditions both lead and participating deal but the fact is when conditions are like they were certainly in the last ten days, you don't see any offerings because a lot of other things are attracted, number one but number two, the market is just not very tuned to receiving these kinds of offerings in the marketplace when conditions are like that and the issuers don't want to sell a big discount. Consequently, both demand and supply are impacted until you get some more equilibrium in the marketplace.

Investment advisory piece were up 13%. They continued to be essentially good as new net sales occurred and we actually didn't experience a lot of market erosion in those positions. Interest income grew dramatically on a gross basis largely because of the bank again. As I mentioned, we've had record levels of new cash flows into our cash depository including our Heritage Cash Trust, our CIF program and in bank deposits. And most of the new deposits coming from new clients are in fact electing the bank depository. So our good recruiting results are impacting the accumulation of more and more deposits into the bank. And while I'm sure there may be some evidence here of some shift by clients into more cash that hasn't been the most significant factor that has been affecting this as you can tell from the commission and fee activity levels. We are clearly not seeing some big erosion on that front either.

The financial service fees were up 10% over last year, which is a good result. They were down a little bit from the immediately preceding quarter I think let me see... no they were also up, no they were down. They were down about $0.5 million so it was a minor change. And then other debt was up and what I would tell you about that and this always you know is a catchall. The fact is that the individual factors that affect this are many or can be many, they are not necessarily recurring so when you look at this what we tried to do was to divide the change in terms of what you would call normal growth activity and what was more unusual entries and I always call these recurring, non-recurring entries because every single quarter we have some number of entries that wasn't there the prior quarter or weren't really affected in normal course of business which can go either way. And in this case, half of the growth occurred from just general business growth in the segments that affect that revenue line and the other half results from these isolated individual sources.

So when you are trying to assess this and looking at trend lines, this is not a good line to try to look at trend lines and it's very difficult. So, you can see we increased gross revenue 17% and we increased net revenues 14%, which actually was a good result. I would have anticipated if somebody had told me that we were going to continue to have the same degree of volatility along with not only the subprime activities but some growing concern about inflation, some growing concern about collateral debt problems like credit cards loans, other consumer loans, home equity, etcetera and even if no one ventured into thinking maybe that the lower quality corporate loans might experience some problems.

I would tell you that this was… you would have thought that investors would have reduced activity and that really… if I were an analyst sitting there and looking at that environment, that would have been my conclusion. So I was actually favorably surprised by this, it shows the strength of quality of brokers that we have been adding and the fact that in the employee base we continue to make material quarter-to-quarter increases in average productivity. So actually that side of the businesses has done better than I would have expected. And when you look at commissions on an institutional basis, the debt business has been dramatically up during that December quarter and I think that's really continued into this quarter. So, that reflects the levels of activity that are occurring by institutions but we have of course have been affected by the lower amount of originations in the institutional front so that offset some of the gains.

So, when you look at the increased rate of expenses of course, the biggest portion of that comes from commission increases, but we still have some areas that are up year-over-year albeit not much quarter-to-quarter. Actually they weren't I would say out of control or anything of that nature. So, when you look at net income and see net income down 5%, I am not really surprised as I said you could explain it all by the investment banking differential, which really is not much different than Jeffries experienced during the period, not true of Piper another benchmark firm we use but Piper had a terrible quarter last year in this quarter so that you don't get the same comparability that we had since we were comparing against one of our best quarters and certainly for the first quarter, it was one of the best quarters that we have ever had. So, and not to say we didn't have M&A activity, it was just smaller activity during the quarter and none of these big fees.

When you look at that on an earnings basis that meant that earnings were off 6% on a per share basis from $0.50 to $0.47. Certainly, we would have expected that if the market had maintained the same kind of conditions it had in the prior quarter that we would have done better than that but given the circumstances I actually thought that, that would be a reasonably good result. One of the problems I would say was the analyst estimates on quarterly basis is they don't seem to show much sensitivity with sequential growth and when we look at this, certainly things like bank earnings, recurring fees and investment advisory area, other forms of the fee portion of the fee commission line. When you look at those factors they really do ramp up overtime, the other transaction based compensation tender be more variable related to what the market conditions are. So but I still would have probably in a model had a quarter-to-quarter ramp up in terms of these results.

So assuming what's a worst quarter environment, I wouldn't say it's a surprise that we would be down somewhat on an operating basis from last year and I want to remind you again that last year not only did we have very good investment banking revenues but we did have this net interest compression, which affected the retail numbers by roughly $3 million in a decline in their line plus there was also and you never know this you do always accruals for your pay outs and this period last year we had about $4.5 million of reversal into income and this year we had virtually none in the PCG line. So the combination of those two factors explains the lack of growth in profitability given the commission increases in PCG. Other than that I would tell you that PCG since we are successful on recruiting continues to be affected by the cost of recruiting which include things like reimbursing clients for ACAT fees and things like that are record levels often we have to pay something to the firm from which they departed and then of course you have the growing pool of amortizing front money that has to be amortized over some reasonable period of time related to the length of the contract with the broker.

So you really have a situation where if you wish to which I am not recommending I didn't point this out much before but if you wish you would've seen the potential growth in the base earnings power that could have occurred had all these factors that not been in place that caused some deterioration in the earnings level that you might say that actually the growth more corresponded to the overall growth in the business during the period. So don't think that was a particularly unfavorable result to report to you.

When you go to our segment reporting, which I think is another useful thing to take a look at, you can see some of these impacts occur in a way that probably explain some of these numbers that I was talking about. If you look at the earnings line differential in capital markets, you see roughly a $10.4 million differential. Again I told you the private client group was roughly was up some, but it was basically flat for the two reasons I mentioned. Asset management's growth was 17% in profits, RJ Bank was up a 129% in spite of the fact that some of the compression factors that I have just described to you and some idiosyncratic ones that relate to the way we price our deposit program against an external benchmark led actually to lower earnings than should have occurred during the quarter. So those major profit lines generally were fine in good shapes and understandable differences.

On the emerging markets front on the profit comparisons, we've continued to have these problems in Turkey with some of these clients that they been leveled against us and I have told you in prior calls that we've actually reserved earnings here in the network... basically to the whole network of the company. So that should we have to leave the country, which is, I would say is probable at this point where I said it was possible last quarter, because we got some more unfavorable results from court reviews of our PLs.

Stock loan did well. Proprietary capital doesn't really show much of a profit effect but we reported that we have now purchased our second platform company, [inaudible] which is a supplier of kinds of things that Police departments and Government agencies, Security agencies would buy ranging from fingerprint powders to bullet-proof vests to mobile troop carriers with all those wonderful screens inside that we think is a firm that we had a good opportunity to grow, both internally and externally.

And the company that I've told you about before, then Event Photography Group has made a couple of additional tuck-in acquisitions, continues to perform above budgeted results doing quite well. So we're going to see some more favorable results from that activity. And the other thing I would say is some of this interest loss that we have in certain areas relates to the fact that we've deployed capital both in the banks. So, we've essentially shifted capital out of the broker dealer or out of other areas that RJF into the bank and also into these proprietary capital purchases that distorts any kind of line analysis you're trying to do on the growth in those departments to some degree. So that you can't really have perfection in terms of tracing these results quarter-to-quarter but the upshot is that we have effectively utilized the capital that we had underemployed in this bank growth and in proprietary capital both here and Ballast Point Investments.

So I'm ... I actually think I've lived up to my commitments to the Board, which will substantially increase the earnings power potential of the overall corporation. I would say the other favorable thing I should mention that I didn't mention in the capital market segment is the levels of business activity with all this upset in fixed income has increased and actually the fixed income factor for the first time showed a operating profit as part of the capital market's results. So, really the decline is all related and more than all related to ECM during the period and I would describe that more as anomalous compared to the past results. But I would also say that if this market continues in its current vein of high volatility, increasing risk of recession, corporate earnings disappointments begin to occur, that comparisons will be difficult going forward in the year.

So, I feel kind of at the mercy of the external market like our competitors are, but I would also kind of ask whether if you have really taken a look at the underlying business engines that some of these other broker-dealers that have retail business and have investment banking businesses and try to segment out some of these other major impacts that have occurred to them as a result of their involvement in fixed income subprime and things of that nature, because I think you will find that the same kind of trends that I have just described have impacted their earnings often in cases that exceed what's occurred in our business model where we have built up ever increasing stream of recurring earnings. Jeffrey, I believe Jeff Julien our CFO [inaudible] that statistic has reached what for the prior quarter -- recurring revenues 63% for the December quarter.

So, we have succeeded in that business plan going forward but I don't need to tell you, stock markets goes down, assets under management go down, investment banking activities go down, eventually commissions recede, net interest earnings may go up because we've got more money in cash items so long as we get some kind of stability in terms of rates. And when you read the comments of market commentators who agree to 75 basis point decline with an immediate cry for more, which by the way I personally view as at least they are responsible. The fact is if that happens, we continue to have these margins compressed for a few more weeks. So, 75 basis points moves have a lot more compression associated with them than 25 basis point moves and I don't know if any of you have ever tried to do those analysis by looking at what happens but what happens to you is you actually are paying higher rates on the money you have deployed and you are earning in the overnight investments. And as far as if you have invested longer you’re also are declined, because your overall spread is impacted. So, this is not a fun time in terms of this cash management type statistic for those of us that have reaped great rewards for some period of time and in growth for which perhaps we've taken credit for market condition instead of life management skill but the fact is that's the case.

I would say generally that Canada is doing well, our securities operations in the UK continue to make progress towards becoming profitable entity there. We tend to now some times get to breakeven contribution level and we continue to add to the sales force there. The operations, elsewhere on a foreign basis other than Turkey are doing reasonably well but again if the emerging markets get slammed like they have in January you can expect that that will have some impact on the level of investment activity in those countries too.

And of course while our client assets or our client accounts have continued to grow and our ACAT in, far exceed ACAT out the dollar volume of those client assets are while they are up a lot over last year they are actually somewhat down from say in October reading when we were near a monthly peak, as a result of the market in the succeeding month. So generally though, all of the activity levels that I've just described remain generally favorable ex the market condition. So I am basically saying one about the health of our business, I certainly don't think we released anything that would justify to 10% decline in the stock price today, but I am biased and owner operators are never objective, when they look at their own stocks but that notwithstanding, I would say when I look at the market for some of our other companies who have recovered, which have recovered somewhat form their lows I am not sure that the operating factors are being properly factored into their stock performance either, if in fact our stock price reflects that our outlook is somewhat down from what it might have been, a quarter ago because clearly it is.

And I would say that for the whole industry that there is now a higher risk that the economy continues to slow perhaps becomes a recession by the traditional definition, but many cases not an exciting place to be operating and talking about growing corporate earnings and things of that nature because that will put a stop to corporate earnings growth and we are certainly not getting that in the financial sector. So this is a, probably it’s appropriate that for the moment, there is some adjustments in prices, but I would say that many of these companies were worthy of being acquired having stock purchase because their franchises are worth so much and indeed this two-shell path. And if you look at even if this were a bear market that we're in we’d look to have resolution of that over the next six to nine months and we would be back in pretty good market times.

And I think that's the perspective that you don't get watching CNBC every morning when everyone is trying to explain or magnify the impact of some particular individual financial statistics. I actually feel that six months from now, we'll probably see the other side of the subprime problem. We may be experiencing a little higher actual loss rates at the banks from things like the credit cards and other consumer loans.

And I think if this negative information keeps covering the financial press, the fact is the investor will take a respite from the high levels of participation that they have been involved in the recent past. And that's a little unhealthy, these things long-term create opportunities, certainly they have created opportunities for us on the loan front as they will lower... they lower, we bid on packages of these securities in our fixed income department, we buy companies at lower multiples of cash flow. There are all kinds of things we may be able to make acquisitions we couldn't have made otherwise that are beneficial to those that are fast on their fleet like our bigger brother and firms like us.

So I certainly have not discouraged by having a down quarter albeit it's a lot more fun to talk about new record at these meetings. And with that, I think I will open it up for questions.

Question and Answer

Operator

[Operator Instructions] Your first question comes from the line of [inaudible]. Please go ahead.

Unidentified Analyst

Hi, when you are going through your income before provision for income taxes, I missed the part, could you address the other line when you went from $2 million to $2.5 million loss?

Thomas A. James - Chairman and Chief Executive Officer

The segment line you’re... addressed that saying that basically the revenue items generally there that [inaudible] income is interest on our capital and what we've done over the past year deployed a lot of that capital into the bank into some of the private equity activity, so effectively three has been a shift of the earnings there, you could say the earnings that are on the capital shifted from there up to bank line to some extent as we deploy the excess capital.

Unidentified Analyst

Thanks.

Thomas A. James - Chairman and Chief Executive Officer

Right.

Operator

And our next question comes from the line of William Sinona [ph]. Please go ahead.

Unidentified Analyst

Hi James.

Thomas A. James - Chairman and Chief Executive Officer

Hello, good afternoon.

Unidentified Analyst

Can you hear me?

Thomas A. James - Chairman and Chief Executive Officer

Yes, you scared me up.

Unidentified Analyst

[inaudible] the mute button.

Thomas A. James - Chairman and Chief Executive Officer

Yes, that button is important.

Unidentified Analyst

So, I heard you a little bit in terms of the explanation as to the pre-tax earnings in the private client group, but I can't… I want confess, I am not a 100% clear exactly why it is that we haven't necessarily grown the pre-tax earnings, because if I look a year ago you guys… today you are generating about $70 million more in revenues in that segment than you were a year ago and it seems pretty consistent. But every single quarter it's been stuck in that kind of $55 million pre-tax earnings range. And so, just trying to get a better sense as to why that hasn't moved up.

Thomas A. James - Chairman and Chief Executive Officer

Two levels of response to that. One versus last year's quarter, that related to the fact that we actually had $3 million of lower net interest earnings because the spread on margin lending and overnight cash balances were down this quarter versus last year due to the fact we are in the declining interest rate environment. And number two, roughly $4, $4.5 million of bonus accruals in that area were reversed into earnings last year and we are not, that we didn't have any reversals like that in this quarter. So that would have raised roughly $7.5 million, the pre-tax this quarter versus last quarter.

The B part of this answer is a little more complicated and has to do with your longer-term trend analysis and that relates to the economic accounting for recruiting aggressively. As you recruit new people, you build a pool of amortizable cost, the front money that's paid for those individuals and the pool essentially started building for us about three years ago when we really ramped up employee at a recruiting rate. And so, we're still in the period now there’s a lot of these deals are amortizable over six or seven years, some of them even go to 10 years in our own dynamic, and from a managerial standpoint I'd like to look at those as being amortized over seven years, I think max because I think it's crazy to kid people about, you don’t have any present value considerations in that, and there are chances people leave late in the period, those kinds of things.

But what happens is as that pool grows, I mean if we looked at that pool a year ago in this quarter it was probably 4.5% and this year it's probably 5.5% of growth because we've recruited those people. Second on that and similarly related cost you are paying for these ACAT fees for clients, you are opening new branches, you are hiring new assistance. The rest that come normally in their first year don't produce at the same level they did in their prior year because they are spending a lot of time going through the transitional things with their clients and not having time to prospect this much. The bigger brokers tend to have less of that because they typically have more fee-based revenue streams but still there is some degradation on a temporary basis in terms of that revenue line.

We also pay fees to sometime to outside recruiters, we don't do that very often, but you have some of that and you pay fees to broker dealers from whom you recruit people when they sue you for either waiting or violation of contract and we have fairly standard industry percentages that you are not in the protocol but when you are in a protocol there is more and more evidence that those that have signed are still trying to get some recumbent and will say that there was a violation of the protocol itself. So that's why more than you wanted to know about that process but as you can see during the base time when you recruit people you have a lot of costs associated whether it is flow through, some of it flow through the income statement on a current basis and the amortization of the front money also reduces the current rise that you might think would happen from the higher levels of commission.

And this is a industry wide factor, there wouldn't be any specific to our own recruiting efforts other than we paid lower front money than most of the major firms pay in terms of trying to analyze what's going on in this factor. Now I will tell you though, we have been a very successful recruiter, so the volume that we are recruiting is a lot higher, which necessarily means that you are adding to that pool at a more rapid rate than the other firms that are lot successful in recruiting front.

Unidentified Analyst

That's helpful. Just two quick add-ons to that in terms of, is it straight line in terms of how you amortize those?

Thomas A. James - Chairman and Chief Executive Officer

Yes, it is and it shouldn't be, but it is.

Unidentified Analyst

Okay. And then the other part is obviously the fed lowering rates, you are pretty aggressively this week. Can you kind of help us quantify what the impact for every 25 basis points than fed easing might be to you guys in terms of revenues over the bottom line?

Thomas A. James - Chairman and Chief Executive Officer

Well, they're temporarily; you see they're transitional that these rates are floating and you have some differentials. If you look at it in a mutual fund for example you got your investments put in 30 to 60-day paper, and so you are paying out at a higher rate than the current overnight rate. For example, I think today we would have a cost of money in paying out to our clients who may be 385… the bank is 385, it's 345 at Heritage and 361 and 345 we can earn overnight. So, we lose 16 basis points on the money in Heritage type pay out schedule. So in our CIP balances we did in Heritage, but I was using the rates to show you because we price off that, we are experiencing a lot where we had excellent profit when interest rates were going up. So…

Unidentified Analyst

Sure. But that's not going to be more than as you said 30 to 60 days, correct?

Thomas A. James - Chairman and Chief Executive Officer

Yes. It's mainly 30 day period but when does it stop, I mean if in fact we…

Unidentified Analyst

According to the market it's not going to be next week.

Thomas A. James - Chairman and Chief Executive Officer

Well, I don't know, but if they take it down 50 basis points next week or 80 basis points next month, the fact is this we will suffer from these differences during that period. So I think most of that will be out of way by the end of the first quarter of the calendar year, our second quarter but 25 basis points is almost negligible in terms of the impact but when you start looking at 50 and 75, I mean you're talking about major differences that occur and they do affect these profits to the firms. And as I said, this is happening all over the industry. It happens more to us, because as you should know our payout rates are not tiered like they are at the majors so that our cost of money is at the higher level. It's more sensitive to this.

Our commitment is essentially to try to secure a competitive rate for our clients, given the safety of the investment they have. And I say that because our Cash Trust, for example, wasn't using SIV back commercial paper or anything like that, so we didn't experience any of those losses. But you do pay for it in terms of the yield, because you are buying the high-quality yields and a real yield differential now exists in the money market investment arena.

Unidentified Analyst

Okay. That's extraordinarily helpful. Just one last question. A lot of the questions that I get and I know I'm sure you guys get a lot of too is that the bank and given everything that's going on out there, whether it's in the mortgage world even in the consumer land, concerns continue to mount as you guys build out to your banking franchise. Just could you help us understand a little better in terms of what type of loans you are putting into those… into the bank? How you feel about the credit quality that you have added since you've started to really grow that. And if you could give us any additional color around the actual… the loans that are in there in terms of what might be residential, what might be traditional, what might option-adjusted ARMs and give some type qualification as to what exactly is going into the bank?

Thomas A. James - Chairman and Chief Executive Officer

Yes, I think Jeff Julien, our CFO, is responsible for the bank. I can answer that, but I just have him answer that question. So I'll refer to my first CFO here to respond to that question, because I think if you know us at all you know that we are conservative people. And so the only thing I would tell you is when we got in this business, we developed a series of rules that essentially said we're in businesses that have very limited down sides maybe to a fault. And what I mean by that is we probably could enhanced our yields taking intelligent that more than we did, but we have been very careful in the selection of these things. And now I'll let Jeff explain to you what we have done that may be would give you comfort. This is not a question that is new to us. We've got a lot of new directors at the company now and we are going through this education with them too, because they are used to normal bank operation and we really don't like a normal bank. We are wholesale bank but we use much more concerted investment philosophies. Go ahead, Jeff.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

Now, we've got about $7 billion at the bank now total puttings, of that about $5.7 billion is currently invested in loans and breakdown of that currently is, $3.4 billion in commercial/corporate loans and $2.3 billion in residential mortgage loans. Our rate of addition is roughly in that proportion. We have been adding roughly, two-thirds of the loan production has been corporate commercial versus residential. In the corporate commercial space, we typically have been in a BB, BB+ type world in terms of corporate credits. We've had an opportunity to move upscale little bit as credit spreads have widened and still meet our return hurdles, but generally our portfolio averages around that on the credit scale. We have clearly concentrated in areas in which we have expertise, healthcare, energy, consumer products, real estate, which are very strong investment banking and research capabilities of the brokerage firm, we have leveraged those and concentrated in those areas for our lending and used those research analysts as an additional input source.

We have had virtually very, very limited credit problems to speak of, we have had charge-offs, I think we reported last time we had charge-offs for last year of over $1.1 million and we actually had $0.5 million charge-off this past quarter; charge-offs if we were to, we’d have no further exposure. We sold a loan piece that we had at a discount to end our exposure to that. So that's how we realized that charge-off. Our past news, our non-accruals etcetera are just insignificant type numbers in terms of absolute numbers or percentages or anything, any other way to look at it. So, we have experienced no credit erosion to date other than those handful of charge-offs, almost all of which were in the real estate homebuilder type sector that really held the brunt of the real estate decline.

So, we are… I would say we are extremely comfortable with our level of reserves, and the credit quality of the portfolio, the monitoring processes we have in place etcetera. On the corporate commercial side, the residential side, we are… I would just tell you we are extremely choosy about what we buy. We are shown very large packages which we typically whittle down to very manageable size packages that have extremely high credit quality, high FICO scores, low LTVs, good state diversification, owner-occupied; all these screens that we put them through. And just like on the commercial side, we have very, very small past news as a percentage of the portfolio or versus industry averages or any way you want to look at it.

I mean out of our nearly $6 billion loan portfolio, we have all of $4 million on non-accrual status today just to give you some indication of how small credit problems have really been. So the game plan is not to do much different than we've been doing. We are going to continue to take advantage of the current market conditions as long as this window stays open and we have sufficient liquidity to do so, we are still seeing very attractive returns on very high quality merchandise today. So, despite the fact that it has a negative immediate impact through increasing the allowance as we book these loans, you're starting to see already what it does to the interest earnings power for the bank and consequently for the firm as a whole.

Unidentified Analyst

Great, and I guess just two additional follow-ons, on the commercial side what's the largest asset class if you will or sector that you are concentrated in? And then I would also ask same thing in terms of where are the two or three biggest carriers of the country in the residential side that you concentrated in?

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

Biggest single industry, remember there are millions sub-sectors to every industry but broad industry is healthcare on the commercial side. The two states that we have the biggest concentration of residential mortgages are Florida and California.

Unidentified Analyst

Okay. Thank you.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

And just to give you an idea… healthcare is all of 6% of total assets and so it's not a huge concentration there and our residential portfolio, California is about 18% and Florida is about 11%. And then it drops off pretty precipitously from there.

Unidentified Analyst

Okay.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

And that's one thing we are scrubbing current pool for is to try to avoid some of additional loans in those states, so we get broader diversification. But that's sort of aligns up with where mortgages in this country are originated period. And that's followed by New York and New Jersey in single digits.

Unidentified Analyst

Okay. Helpful, thank you.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

Sure.

Operator

Your next question comes from the line of Erin Skidell [ph]. Please go ahead.

Unidentified Analyst

Hi guys, can you hear me, okay?

Thomas A. James - Chairman and Chief Executive Officer

Sure.

Unidentified Analyst

Can you give me what the provision was for the quarter, provision for the credit losses?

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

That's $12 million.

Unidentified Analyst

$12 million. And then…

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

Versus $19 million in the prior quarter and $4.8 million a year ago.

Unidentified Analyst

Okay. And then can you tell me again what the balance of the residential mortgage loans in Florida and California are?

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

As a percentage, I can do the math. California is about $400 million and Florida is about $250 million.

Unidentified Analyst

Okay.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

Out of a $2.3 billion residential portfolio.

Unidentified Analyst

And can you give any kind of broad guidelines, nothing specific, but what's the typical kind of LTVs are or just kind of specifics of the types of the loans you underwrite, and then what percentage are purchase versus originated within the branch network?

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

Very predominantly purchased and we originate somewhere around $100 million a year and if their fixed-rate we sell them. So we only keep the ARMs and we originate and that's less than half of the $ 100 million. So its virtually all purchased loan pools.

Unidentified Analyst

Okay.

Thomas A. James - Chairman and Chief Executive Officer

But we individually underwrite those pools, he didn't quite say that, but he said that we were screening for them and we individually look at the loans, the FICO score by individual loan, by the LTV, by individual loan, all those things.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

I think the weighted average LTV of our portfolio is 67%, but I don't have that right in front of me on the residential side.

Unidentified Analyst

That's fine. Thanks very much.

Operator

Your next question comes from line of Doug Sinkin [ph]. Please go ahead.

Unidentified Analyst

Thanks and good afternoon. Just a couple of follow-ups. First off, if you could just provide the actual loan amount you guys booked this quarter, I think you probably said it already, so I apologize.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

Just under $1 billion and it was roughly 70/30 corporate to residential.

Unidentified Analyst

So you actually did originate almost as much as much as last quarter?

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

It was about a billion in the quarter and 2 billion last quarter so it's close.

Unidentified Analyst

Okay. Just a question obviously the stock took a bit of pounding today, I know you guys would prefer to allocate capital to the bank and organic growth opportunities, but I do remember you guys saying that if the stock pulled in closer to 1.5, 1.6 times you do consider buyback, I know you don't have any formal mandates but is that something that would be interesting if the stock continues to stay here. I believe it's like 1.6 , 1.7 times book value right now?

Thomas A. James - Chairman and Chief Executive Officer

You appropriately stated our existing policy.

Unidentified Analyst

Okay. So I mean it's reasonable to assume the stock order to stay down here, that's something you might think about whereas in the past you probably wouldn't?

Thomas A. James - Chairman and Chief Executive Officer

You appropriately…

Unidentified Analyst

Okay. Fair enough. Question answered. And then just in observation I guess because I think it was touched on earlier, I mean obviously there is banks amongst the investment community around the bank you guys are clearly doing a very good job with it, but there is angst and I guess when you announced earnings and it's in earnings myth and the reality is it is not really a big deal considering the capital markets environment, but when investors have a whole day to sort of speculate about what it could be sometimes you get situation like this and I know you guys are targeting long-term shareholders and people buy Raymond James for a long-term but just the reality of the situation is a full-day without sort of a fall sometimes you can have investors just run amok and that’s at least from an observation might have been what happened today, so…

Thomas A. James - Chairman and Chief Executive Officer

Would you expect, would you recommend that we had something more akin to a full quarterly financial release that comes out in conjunction with the earnings release? You know I noticed that some of the bigger companies actually do that. We certainly can do that, I already written the quarterly report which we could have added them.

Unidentified Analyst

No. I'm just sort of thinking hey you guys released results that didn't match up with some of the analyst estimates and there are legitimate reasons for that as we have seen on this conference call, but it probably would jive better, you guys releasing results and then sort of hearing what the differences between our model is rather than having to go through a whole day with the stock especially with the hedge funds and the volatility that's all. And again it is just a suggestion, it is just my observation because I know the stock was incredibly volatile last time, you guys put out the release, it was a monthly release regarding the higher provisions because the loans you originated, there was massive confusions there and I just know that there is a higher volatility in the market all those being equal, but I guess, it seems like your stock has gotten increasingly volatile around these earnings release. So again, it’s just a suggestion, but obviously I think I personally think there is value in the stock at 1.6 times book value, so I'm sort of on your side.

Thomas A. James - Chairman and Chief Executive Officer

I appreciate the confidence and I also appreciate the recommendation and will see what we can do to better deal with that…

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

Part of the problem with that is trying to ascertain exactly when the release is going to hit, I mean we have Dow Jones or Reuters are backed with a bunch of new stories sometimes they don't… they have it for 15 or 30 minutes before it actually hits.

Unidentified Analyst

I see.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

So maybe we could plan a call but we might be, I'm going to call before the actual results…

Unidentified Analyst

Right. Fair enough.

Thomas A. James - Chairman and Chief Executive Officer

We did one after the close, you really could have the call but you are not going to have a lot of people on the call.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

You wouldn’t have a time to analyze to get your questions together either which was part of the reason we tried to give you that.

Unidentified Analyst

Well, I could do it pretty fast. And just finally last question. Tom, you mentioned that teams like Stepros [ph] on the capital market side instead of late November/December, I mean, how did you categorize your investment banking pipeline, market conditions considered of course obviously right now are challenging but in the event that things were to stabilize and you guys were pretty confident that, that business has some dry powder in it?

Thomas A. James - Chairman and Chief Executive Officer

Well, yes, there is no question there is dry powder in it. I'd tell you the activity level on the pipeline is down but there are deals in the pipeline that are material. In addition the kind of deals we've been working on lately are more in the energy fields probably the largest percentage and in health care. So they are the kind of deal that really can get sold so long as you just don't have a free falling say for stock market. So I actually think we are pretty well situated but it's the market conditions that I have just described and I don't posses to know what's going to happen. I have been surprised by the resilience of the market in all of 2007. So, but if in fact we have a situation here where you do begin to worry more about corporate earnings maintenance and things like that in the industry that will affect us directly and things will slowdown.

However we still have that great revenue stream protection on the downside. I remember the days when we first went public when if we'd had a period like this we would have a difficult time making any money. And I find it very hard in the absence of some kind of scenario with an individual event that I can't even like to, but maybe [inaudible] shows up here, I don't know.

Unidentified Analyst

Hopefully not.

Thomas A. James - Chairman and Chief Executive Officer

Yes, hopefully not. We think we get caught before 7 billion too.

Unidentified Analyst

Yes.

Thomas A. James - Chairman and Chief Executive Officer

But in the absence of that kind of an event, I mean, the downside here is much more limited than it is in lot of these other firms and I think actually that's a valuable attribute that we posses that lot of people don't. And so really it's just a question of what you think that's market... what is going to happen to this market? Obviously, if we look at a year from now, it's in the same place, I don't think we will do bad way.

Unidentified Analyst

Two follow ups and thanks for your patience. One, the comp rate it was a little bit higher than I imagined that is just because of a mixed shift less capital market revenue and more retail revenue and then as a higher payout?

Thomas A. James - Chairman and Chief Executive Officer

You're on the money.

Unidentified Analyst

Okay. And then...

Thomas A. James - Chairman and Chief Executive Officer

And the bonus reversals.

Unidentified Analyst

And then also you mentioned the amortizing of some of the front money for the brokers I guess all of being equal right seven years previous to today those advantages would start to roll off this year and so I am trying to gauge what is the weighted-average life?

Thomas A. James - Chairman and Chief Executive Officer

It's probably between six and seven years. And we have a built-in retention system here where we actually create more retention with our brokers when their base contracts run off, it’s at a lower rate but it’s served as a substantial return to departure, we don't have a lot of big brokers that leave the firm.

Unidentified Analyst

So I guess from a standpoint of having that amortization run-off it's something that's probably not going to be likely any time soon. The pace of that amortization running through P&L?

Thomas A. James - Chairman and Chief Executive Officer

We keep recruiting at the level we are recruiting. If in fact we had a down market for a year, I would tell you… your recruiting will slowdown before brokers don't want to go through, explaining to clients anything but why they… but why they should stick with them in the down market. So you actually have slowdowns during that period on the recruiting front. We haven't witnessed any yet, but it will happen I can assure you should this market continue on a downward direction.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

And while this market isn't conducive to it, part of your economics come from the brokers increasing their own gross during that contract period.

Unidentified Analyst

Okay, great. Well, thanks for taking my questions.

Thomas A. James - Chairman and Chief Executive Officer

Good question.

Operator

We have one final question and that question will come from the line of Lauren Smith. Please go ahead.

Unidentified Analyst

Hi. Hi, guys, how are you, I'm Jennifer.

Thomas A. James - Chairman and Chief Executive Officer

I thought you died.

Unidentified Analyst

No. God forbid. No, I am here. I know, we've covered a lot of information and I appreciate all the details it's very helpful, but I guess first and foremost, I just want to say, I absolutely admired Doug’s commentary about the conference call timing. I know we've talked about in the past and even worst case, we are all used to getting up early have it early next morning would just be my two sense for what that is worth. And I guess really just the follow-up question, I would have is gain on the buyback, because given the stock over reaction of the course of the day to your earnings release, could you just refresh our memory of what you have left remaining on your buyback.

Thomas A. James - Chairman and Chief Executive Officer

We can refresh it.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

So, a little over they did in a dollar amount, we authorized 75 million at the discussion with management, we've haven't reviewed enough and it's still over 70 million, I think.

Unidentified Analyst

Okay.

Jeffrey P. Julien - Senior Vice President of Finance, Chief Financial Officer

And again, it’s…

Thomas A. James - Chairman and Chief Executive Officer

We have our Board meeting in February.

Unidentified Analyst

Okay. Great. Now, I appreciate that. And thanks very much, and hope all is going well.

Thomas A. James - Chairman and Chief Executive Officer

Thank you very much Lauren.

Operator

There are no further questions at this time.

Thomas A. James - Chairman and Chief Executive Officer

Good. Let me thank all of you for the active participation. I hope the questions were good. I appreciate all of you getting on the line. We will take seriously the recommendations that have been made by analyst who participated in the comments. I think that some of those recommendations were good. We don't mind starting early in the morning either after our release. We didn't do, yes, we can do an 8:30 kind of a deal or an eight 'o clock deal, that's not a problem. So, we appreciate that recommendation and we'd like to avoid any misconceptions that develop anyway. That's not why we do these calls and why we…we try to explain a lot of this in the press releases and in prior months. So, thanks a lot. We appreciate it, and we'll talk to you next quarter.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for using the AT&T Executive Teleconference Service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Raymond James Financial, Inc. F1Q08 (Qtr. End 12/31/07) Earnings Call Transcript
This Transcript
All Transcripts