Raymond James Financial, Inc. F2Q08 (Qtr. End 03/31/08) Earnings Call Transcript

Apr.23.08 | About: Raymond James (RJF)

Raymond James Financial Inc. (NYSE:RJF)

Q2 FY08 Earnings Call

April 23, 2008, 8:15 AM ET

Executives

Thomas A. James - Chairman and CEO

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

Analysts

Lee Matheson - KJ Harrison & Partners

Joel Jeffrey - KBW

Doug Sipkin - Wachovia

Operator

Ladies and gentlemen, thank you for standing by, and welcome to quarterly analyst conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions]

And I would now like to turn the conference over to our host, Chairman and CEO, Mr. Tom James. Please go ahead.

Thomas A. James - Chairman and Chief Executive Officer

Thanks very much. Welcome all of you to the quarterly conference call for the second quarter of our fiscal year. As I introduced some of the comments in our press release that I would say that we were please with the report but only in light of the conditions in which the financial service industry finds itself now, which all of you know, as well as know has impacted particularly that investment banking activity industry-wide. It's obviously impacted investment advisory fees as assets under management have declined due to market actions not necessarily net with respect to net sales but the fact is generally speaking in this quarter assets did decline.

As I've reported there have been some compression and net interest spreads at the broker/dealer in particular that relates specifically to what we pay out in our credit interest program but also in our bank deposit program where we match Heritage rates. When rates are rapidly moving down as a result of fed action, you essentially -- if you are matching the Heritage rates or looking at 45-day type average timeframe, so that they don't moved down as quickly as what you have to in the overnight investment account for 15 CIP balances or for other overnight balances that the firm has that are on invested.

So you do have that compression. And by the way, it's just a preclude or a future question, in the last two quarters, that has amounted to somewhere between $5 million and $7 million a quarter in what our estimates of compression are. Actually rates begin moving up as inflation concern amounts, you will see the reversed factor, not only go back to equilibrium but that actually they had some benefit from the move as rates increase.

And of course, trading, which we've talked about and you did notice we suffered in this period in terms of net trading profits. Most of those bad results actually happened in January and February. March, there were some recoveries in the fixed income market. It's been a very difficult when often hedges go in the same direction as underlying securities. But as you probably are aware, our inventories at low levels because of this -- and just generally, because we don't tend to be very proprietary trading oriented, we're much more support the commission side of the business.

And as you looked at that, the thing that I would remind everybody is that retail commission -- I mean, gross commissions were up about 15% commissions and fees. But a lot of that growth actually occurred in the institutional side. We're still up in retail as we have consistently been here before.

Probably surprisingly, it has been surprising to me, I can tell you for sure, because normally in this kind of market outset [ph] with all the negative publicity in the newpapers, you anticipate that retail investor sits on their hands and avoids major changes in this kind of a period. Whereas some of institutions, quite the contrary, trying to upgrade their mortgage-backed securities investments by some of the pools that are very attractive, rate themselves of others, and one of the things that I think we've distinguished ourselves on during the last 18 months is developing the capacity to actually analyze full underlying instruments. And when you can do that, you really do bring a value-added content to the discussion for clients.

So, basically, the run rate of those commissions has been anywhere from 2.5 to 3 times, last years run rate and commissions and fixed income and up 30 -- you will say 30% on the institutional equity side. So, that's offset some of the other revenue lines like investment banking, that is down and the trading results. So, that's why the numbers in the segments might look a little better than you might have suspected for the quarter.

I was actually impressed that the overall gross revenues would be up 9% with lower interest rates and the mix -- and then, of course, net interest, I mean, net revenues actually grew faster because of the decline in interest rates on the gross level changing, which is not normal given the rate growth of the bank during this period. So, when you look at that, you had that 9% and 11% increase, which amounted to because of the negative factors I suggested during those earlier comments, a flat earnings result for last year and up from last quarter immediately preceding quarter. So, that we reported the $0.50 a share in earnings.

I think this is probably the first manifestation of what we basically have been saying about avoiding sub-prime, because clearly you don't have any massive write-downs. There are declines as I pointed out in my comments in the value of these securities. As you might guess, we've done a thorough scrubbing in the bank of all the securities positions that are held there and essentially in the publicly traded securities. You essentially have had a market, where prime quality mortgage-backed securities have dropped about 10% from the end of the December quarter, maybe slight less than that, but a lot and anything of lower quality during at least the first half period here is, they've gone to subterranean levels sometimes not appropriately, but most of the time they certainly where they have been affected lot more than the higher quality securities.

And while we have couple of securities that you might not qualify is the normal securities in our portfolio and that's in 30% range. We do have this research that can evaluate these kinds of securities and the scrubbing process of looking at the public ones, while the increase from $7 million of market discounts from costs at the end of December went up to $62 million in this period.

The quality of the securities hasn't declined at all there, all paying fine, and we don't see any problems there. And we don't even see anything that would recall the impairment at this point in those few lower quality securities. Now needless to say, if you were looking at the banks in general, you would conclude that, if you had declines in the public securities portfolio that you could do some sort of parallel analysis in the individual whole loans.

And I would tell you it's a general rule that's correct and that's why there was a concern currently in the marketplace that while banks have marked out all the public securities and impaired securities down, they haven't marked down some of these securities that aren't yet impaired as that's a nature of bank accounting. It tends to spread out the losses on these whole loans over a longer period of time. So, there are still more losses to be taken in those bank securities.

And clearly, if you marked our portfolio to market, you would have a similar kind of effect. But I would tell you that the actual quality is very high and I would suggest to you that that ought to give you a comfort that the earnings growth that you see in bank segment is not a harbinger things that are going to change in the future on the downside rather that we actually expect those… growth in those numbers as I will discuss here in a minute with segment reporting. Then I am going to just take you briefly through all the segments and then come back.

But first, just to round out the quarter, of course that adds up to the earned net income for the half of $116 million, down from a $119 million, so a 3% decline year-to-year. If conditions in the marketplace improve, and I am not forecasting that, I can't call short-term markets. We should be able to match last year's results or improving upon them as some of these negative factors that I mentioned began to dissipate in the marketplace.

So the outlook is actually pretty good as I have said in my remarks, some of these financial results are going to continue to trickle in negatively, especially in the bank sector. But eventually, here you will see us climbing out of this as the bulk of the bad news is behind us and really it is more dependent now on just how resilient the general economy is in the marketplace and there are plenty of places that are evidencing strength as you see in some of your own earnings reports that are coming out outside of the financial sector.

So I would tell I don't think this is going to be a deep recession, if indeed, it is a recession, really doesn't matter whether the general economy is in recession as far as I am concerned. We have been in a recession in the financial service industry certainly. Some people might say the depression at least, those are with job [ph]. So, this is, there have been lot of changing scenarios going on here.

When we look at the segments, the Private Client Group had a 5% increase in revenues which is pretty good, given the circumstances. We continue to strongly recruit and this is the third consecutive quarter of up financial advisors in the United States. We are also beginning to have a little better recruiting results abroad in Canada and the UK. So, I actually think not only are we getting very high quality brokers, but we are continuing to sort of upgrade productivity.

So, that if you look at the productivity figures, our commission results compare favorably in spite of this downturn in condition and profits were roughly flat. And I would say here the only reason that they are not up relates more to the cost of new FA recruits, as you continue to fill up this pipeline of large recruiting that we've been doing through now for three or four years, as you know, and the financial side, you amortize these costs over, usually the length of time of the agreements and well I would argue albeit shorter period, we have trouble winning that argument with the accountants.

I think they are… actually they are not making the right decisions about, because you have some failure, you have the time value of money, you got a lot of considerations that I would argue after cause or write-off scheduled is somewhat different than what actually occurs in the market place. But those numbers are very good, there is nothing particularly of surprise in those numbers. The capital market side, we still have very low equity capital markets investment banking activity in both new issuance and investment banking, somewhat better perhaps than the last quarter.

Canada is better than in the US, as natural resources are clearly leading the market place here, but we are seeing evidence of some more activity and when you think about our mix of sectors that we follow. It's clear that things that are income generative like energy, MLPs and REITs are doing some financing currently which is actually in our power zone. So, I think that we are going to see a little increase. And then as the market tenure improves, we will see more issuance in the other sector.

So, I think we are kind of near the bottom on this side of the business. And as I said on fixed income, while trading has been unusual, the commission rates are terrific. In addition to that, we are very successfully recruiting institutional fixed income sales people as a result of things like Bear Stearns upsets some of the banks that have large fixed income capital markets efforts. There are some real opportunities in the market place. So, I actually expect, we may be in for two or three years of improved results and the fixed income areas going forward and a stronger platform for a longer term in that.

On the asset management front while revenues were up 2%, remember a lot of our billings are done on a pro forma basis for the quarter, and as a result we didn't see all the decline in the market values in the March quarter being realized on the revenue line. But still there was enough, given the prior quarter and there is also some product mix in here in terms of the assets we manage. So that the net profits were actually offs slightly here.

There is nothing particularly remarkable in those numbers except that it's aberrant, because normally this business is pretty steady performer on the upside as we have positive net sales, and we also benefit from average increases in market value. So I suspect these numbers are going to start looking better going forward.

I know the bank results, clearly when you look at that revenue line and despite a lower interest rate etcetera; that just reflects the asset growth. Jeff, how much asset growth have we had in the last 12 months?

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

22% [ph] in the last quarter.

Thomas A. James - Chairman and Chief Executive Officer

22% in the last quarter, but will we double that. No, in the total asset in the bank, year-to-year it's a pretty large number. So you see that net interest earnings is mainly volume related two factors. Needless to say you have got more assets that you are earning revenues on.

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

(inaudible) March I guess.

Thomas A. James - Chairman and Chief Executive Officer

Yeah and the what?

Unidentified Company Representative

5.1 to 8.3.

Thomas A. James - Chairman and Chief Executive Officer

5.1 to 8.3, so you are looking at 60% increase. It's a very large increase, and where you see even more growth than that is because at that point last year we weren't as fully invested as we are now. So you've actually -- because we've good loan activity. And the other factor that might not be immediately apparent to you is that we have been buying very attractive loans. And so even additional pieces of existing loans at discounts to the prices we originally paid even though they are seasoned, they are more seasoned than perhaps higher quality than they were when we originally participated.

The sales by the large banks of assets, good assets to generate capital and to shrink the balance sheet has been dramatic, and firms like Citi have sold tremendous amounts of good assets to big discounts, and we've had the opportunity to take advantage of that and grow the bank. And of course as you grow you are also spreading your fixed cost base over a much larger asset base, and that means that you are going to have higher profits also. This will actually, I would tell you, I don't think we are finished with the margin improvement and we are still growing. I mean we've good organic growth and deposits.

We moved during the quarter one other small sleek group of accounts, but we have not at all kept pace with the rate that we could have moved other sweeps into the bank because we want to have a controlled group approach to the bank's growth, above [ph] the maintaining extremely high quality. And the only reason we grew at the pace we did over the last year was the quality of loans that were available in the marketplace.

So, the organic growth, however, has continued to be good. Again, that ought to be fairly clear, as people move out of investments, they tend to have a higher cash balances. They're looking for places to invest. And my comment is that while we're in these holding bonds, they are somewhat sensitive to rates.

So, while many of our competitors have all these tiered rates on their bank deposits, we actually pay higher rates. We pay market rates for everything but they're very smallest accounts. With small, I mean really small, $5,000 type of account. So, the fact that I think this is even an opportunity for us to advertise in the future to attract more of these cash funds. So it could generate more growth in the bank but to define their growth -- that is good as we would like it to be at the moment anyway. So, we're not forcing that point at all.

And as I try to deal with again after the problems that rose from our release, not this quarter but the prior quarter. While we've had big additions to reserves, in the $12 million range for this quarter, like it was last quarter which shows another expense. The fact is that the actual charge-offs that we have, have been continued to small, and when I say small, you know, in the range of 0.22% -- 0.2 basis points kind of numbers. They have been a low and I have remarked in the past that we expect them to be higher. That's why we have higher reserves.

But I do want to point out that our reserve formulas for type of loans relate a lot to industry norms as well as our own norms. Because this is very hard to separate these things out and tell really what the loan losses might be. But because of the quality concerns in our individual underwriting methodology, we're actually buying these packages from people. But looking at every single loan in most cases and certainly in all the corporate loans, where we focus on industries that we understand and companies that we already know.

I do suspect that we will have better than average bank experience, although, over the long run, we're not as good as we think. That wouldn't be the first time I have been surprised by our performance in some area or another. But I can tell you in this area, we have an excellent lending crew. We use all of our produced research here. We use all of our context and knowledge to be able to evaluate these things. I actually think we're in good shape.

So the fact that we have a lot of loans as some hedged funds would have had you believe, does not necessarily lead one to the conclusion that there are large losses to take. As a matter of fact I would tell you quite the reverse. I don't understand, why peoples have reach some of these conclusions. So the bank is doing fine.

Emerging market comparisons were down largely because of Turkey and also because some of this marketplace has actually slipped into these markets. And so activity levels were down. And as you know, the volatility in emerging markets is higher than it is in the developed market. So I don't expect it to come back really quickly. But on the other hand, I don't suspect it makes a whole lot of difference given the size of the operation there.

Proprietary Capital, we now have bought two companies in Raymond James Capital. They are both doing well. We've installed new CFOs and CEO in one case. We will install a CEO in the second company also. And I think they had a lot of opportunities. But, again, this is a small activity on our part where we budget spending $50 million a year in this kind of activity in investments of equity.

This is not going to be a monster business of ours, but it is going to be a great adjunct to the investment banking activity that we have, as is our Ballast Point Venture capital operation, where we're nearing the end of for our second fund. It's going very well there. We have excellent results in venture capital side to date. So I think that that's going well and then of course we make some small investments in outside venture capital plans where we have new business effort underway from our investor banking side, that's been successful. So, I think that's going to continue to generate good results for us.

When I pause and look back at this, I've been somewhat frustrated as you can tell from some of my remarks. By how much fallout outside of sub-prime has occurred in the financial services industry as a result of whole series of factors, not the least of which is poor management holds at the larger financial servicing institutions.

But also in writing services and regulatory oversight where clearly leaders that either the treasury or asset [ph] could easily have made some negative remarks about the growth of sub-prime and said, we don't expect to see you originate more than 5% or 10% a year portfolios sub-prime and you would have seen a dramatic change in behavior way back in 2005-2006. It did not happen and it needs to happen. I happen to favor most of the provisions or provisions like the provisions that have been issued by our treasury secretary.

We really do need to centralize our overall financial stability and soundness regulation in the United States. Obviously with an election going on, you're not going to see these things moved on quickly, but if you just make again some logical projections about Democratic Congress' activities when you have these kinds of problems, and in fact all legislator response to issues is try to find solutions which has its own set of problems attended there to.

We will probably see at least a major change where central regulator has that responsibility. So I think that it's important that you are ready for that and I am going to make a couple other comments about it in the context of what I thought, I'd wrap up my comments which, I don't do this as a matter of normal course. But for a long time we haven't really talked about what I call the investment case at Raymond James. And I sit here and I look at the shorts in our stock and I'd say, what are these people doing? We have never had this kind of short position.

I realize that we are one of the few plays in the investment industry that you actually can short enough of to make a difference, so that you can become a part of the package in shorts. And I don't have anything against shorts, by the way I am not one of the CEOs who think that you have committed some sort of heresy [ph] if you go short, a stock where, if you have a negative opinion on a company, that's fine with me, that's your job, that's what you are paid to do and I recognize that happens. But I do want to make sure that everyone understands what is really going on here. And when you look at these results I'd tell you all relates back to our overall business strategy.

And if you think about the issues that I'd discuss generally and talking to shareholders, we've got a very diversified business base. We are Private Client Group oriented, which is good. Distribution tends to not have the volatility in it at a lot of other parts of our business. But that means that you can have situations where fixed income offsets results in equity capital markets, or retail does well when equity capital markets doesn't do well. And that asset management continues to grow a pace with your ability as a distributor in your outside sales.

The second part of the model is since, at least I and many of senior management at this firm still remember down markets in the early 1970s and '87 and '89 and 2000 through 2002, all of these periods. We've always had a very conservative business model here where risk management is key and I cheer the compliance and standard's committee that meets once a months and looks at every problem in the firm and in the market generally and tries to devise strategies to avoid systemic problems arising or continuing and we've always had a very conservative balance sheet in terms of our approach to the business. Only to be subject to some of the same comments from lenders about well we are not going to lend the financial service companies in this market, unfortunately we like to borrow much money.

But the fact is that it is inappropriate, I mean people are not making the distinction among firms in our industries that are risk oriented. I don't have to tell you who those are, but you can look at 30 and 35 times leverage ratios. And when you look at ours even our 10 times -- 9 or 10 times ratios way overstated just because we've got the deposits in the firm with offset by 15C [ph] free deposits and most -- the rest of it's in the bank. So the base business is really not leveraged. And I would say to a fault actually, I mean, if anything we have been so conservative in these things, we haven't quite maximized ROE.

So a limited leverage, the agency nature of most of our business, and the fact that we just don't reach for the extra basis points and we don't recommend our clients they do that either. So, people forget about what you always assume, and when you have markets like this, you get reminded that it's extremely important that this is a fundamental tenant in your overall business strategy. And the third of course is the multiple distribution platforms.

Chet Helck has been sort of the spokesman for us in terms of all of the models we offer to recruit financial advisories and other distributors to our platform. We got the employee base activities, the independent contractor base activities, the bank financial advisor activities and advisory activity, and we have active correspondent activities going on currently recruiting business into our firm. And that affords the perspective financial advisor the flexibility not only to choose the distribution channel that here she wishes currently but to have the opportunity to move amongst those alternatives long term.

And you see this in the strong recruiting and retention that we have. Of course that is augmented by the fact that we have stayed independent and largely problem-free relative to our competition. So when you look out there and you talk about big acquisitions or brokers that have worked forever for Citigroup or for some UBS or some other large firm is now owned by a bank and they see problems with the bank and there is bad publicity, causes upset and you have movement. So I would tell you that that's a tremendous opportunity for us.

Fourth thing I would say is that small and mid-cap markets as a result of all this consolidation, all of the capital markets activities are kind of created a void here in these smaller corporate and smaller municipal markets. Big firms have difficulty making money in a lot of these activities. Just as an example, it may not come immediately to your mind, municipal finance, public finance. The fact is the current problems that exist, the new liquidity in the market are reminding people maybe they shouldn't use swaps in their financings and that means you will be going back to basics. And I can assure you without swap profits, you are not going to see major firms out in the hinder lands [ph].

So things are going well for our type of business model. There are a few really independent securities firms left in the market place. So there aren't many places to go. The ones that are around are good ones. So it's not that we don't have some competition, we do. But I would tell you we are going to attract a lot of people from the major firms. The sixth thing I would say is that we still can grow at 15% to 20% per year without substantial leverage. I mean everybody arguing that you have to have 35 times leverage to generate this kind of revenue and profits that have occurred at the major investment banks, is just not true. We can continue to earn 15% to 20% ROEs going forward on a average. Sure we're affected by market, but this is a good model to have. It's a sound model, the conservative management it's easier to sleep at night than a lot of these other model. And believe me the financial advisors in the marketplace appreciate some of this now.

They may not have appreciated it before; they may have taken for granted that everything was good, because numbers were generally up almost 20 years in the marketplace. But the fact is, that's not the way our business works. It is subject to both cyclical activity and to great dramatic events. So, you want to avoid dramatic events, and that's a big part of our strategy. And the final thing, I would say is at least our stock, and I don't normally say that, just say you understand.

Our stock is an expense. I mean it's inexpensive enough that it triggered on our own stock purchase mechanisms. It has initiated a lot of purchase activity among our associate employee base, and when I meet with my own associates, when the market… our stock is near high. You will always hear me tell people; look, don't bet a lot on the company and in market when things are overpriced. I mean, you have to pay attention to where the market is when you buy stocks.

Quite the contrary, today, I recommend that you can purchase our stock. And just give you the example of that, we have our CEO group of what we use to affectionately call the regional firm group, which today is more vestiges of firms that used to be a free standing regional firms. But we still meet the share a lot of ideas. We're very helpful to each other in the industry as trade group should be.

But one of the things we do for firm as we have an investment competition where the CEO is put up their favorite stocks. And this year for the first time, because I thought this was a first time opportunity, I recommend our own stock. And just so you understand, I use to write all the research around here in the early parts of the firm. I was the first portfolio manager in our investment advisory business. I have some experience with stocks and last year I won the CEO contest for the best performing security with good at energy stock.

So, I can tell you that -- when I say this I really believe it. It's not that I can't be wrong. And I can't be wrong, because none of us know the outside market activity. But when I sit here and I see rating agencies give higher quality ratings to large investment banks were 35 times leverage versus a firm like us, I wonder what they eat in the morning that's got all that peyote in it. You know, to me it's absolutely unbelievable. So we got some problems to deal with on an industry-basis. But the firm is doing quite well. We're glad to answer any questions you have. And I appreciate your attendance.

I do want to remark one other thing. I also described our Auction Rate Securities issue, where we essentially have -- did you get a final numbers right now. We are $1.9 billion in auction rate securities outstanding, about $800 million of which are mainly annuity -- perpetual preferred annuity-based auction rates. The $800 million are annuity-based and those are beginning to be refinanced out.

They almost all have premium rates, but those with very high premium rates make up a minority of that. Although, the rate differentials are probably large enough to encourage refinancing on the vast majority of all those and those things are beginning to happen. And the rest are taxable closed in fund perpetual preferred. And those are beginning to be taken out as we speak here. And over the next six months I expect to see a lot of this gone.

We have provided financing for these securities as they have number of funds in the financial services industry. We're not loaming 90% or 100%. We're loaming 50% on those securities. The vast majority of our clients who own these have plenty of other assets. They're only a part of their cash holdings. I mean, it's still very small related to all of our cash deposits. Just so you understand our kind firms [ph] always included a risk statement that auction rates and securities were subject to auction risk and that they might fail.

And then, you would have a liquidity problem. As of practical matters there aren't many collateral problems in any of these securities. They are well secured and it's really just the fact that the structure had a fundamental flaw, at least a perpetual preferred do. You need to have a term period in those securities. So, number of us in the industry are working to solve this at both the traded group level and at individual firm levels with the product sponsors to quote encourage and quote their rapid action in dealing with these issues.

So I suspect that this is going to get better. I mentioned the margin, actually the amount of margin that we have issued on the securities is relatively small. It even attacks time when you would expect the maximum demand for liquidity. So I think they are generally owned by people who can afford to own them, not in all cases.

We have been included in the Class Action Suit with 19 firms. But I think when you get into the distinguishing features like our kind firm and the fact that they are carried in a separate category on our client statement that you would see substantial difference in how we deal with these issues contrasted to outside firms. And the loans that are being made or being made through the bank, not through the broker's firm, although there has been some loosening of the rules with respect to loans at the broker-dealers. Some of the terms that are set up are very limiting and it's almost hard to interpret how some of them interact. So, we have avoided that to-date. And we obviously don't want a lot of liquid securities in the broker-dealer anyway. But the fact is, we are not going to have a lot of them in the bank either.

We haven't had much demand as yet for that, but this is a problem for the industry. It's a shame this happened. Again, this is one of those what can go wrong analysis, that all of us didn't pay enough attention to. Even though we paid enough in our Compliances Standards Meeting at the time we originated them to make sure we had special warnings with respect to their purchase, unfortunately not all of our financial advisors maybe as circumspect as we are in terms of these general warnings. So, it is not that there may not be some liability, but I really think these things are generally money good and we are going to work our way through these as an industry.

So, I do want to preempt your comments there too, because I think we are doing all the right stuff. I don't think that maybe the analysts and the journalists have fully understood some of the issues presented with me here on how you deal with them and the differences amongst all of the securities, although the level of knowledge seems to be increasing in some of the newspapers as I can tell but quality of writing has improved with respect to the facts.

So with that, I would like to open it up for questions.

Question And Answer

Operator

Thank you. (Operator Instructions). And one moment for the first question. And we have a question from Lee Matheson with KJ Harrison & Partners. Please go ahead.

Lee Matheson - KJ Harrison & Partners

Thanks. Hi, guys. So, a couple of quick questions on the… first of all on the write-down you took on the available for sale securities. It looks like it was about 10% of the gross amount you're carrying at the bank. Of the amount of available for sale, how much of that was agency versus non-agency paper?

Thomas A. James - Chairman and Chief Executive Officer

I'll let Jeff respond to the question on those securities. The write-down there is really a mark-to-market. It goes direct to the equity side. It's not an earnings write-down. And as we've said, we don't see even any material risk at all in terms of actual loss in those securities.

Lee Matheson - KJ Harrison & Partners

Sure. I mean, were these particularly long dated or what, I mean, to make a big move?

Thomas A. James - Chairman and Chief Executive Officer

I think your average life.

Lee Matheson - KJ Harrison & Partners

So, that three year?

Thomas A. James - Chairman and Chief Executive Officer

Two.

Lee Matheson - KJ Harrison & Partners

Two year, okay.

Thomas A. James - Chairman and Chief Executive Officer

Yes.

Lee Matheson - KJ Harrison & Partners

It's routine, okay. And I think agency, I think last call reported I think $300 million with agency so.

Thomas A. James - Chairman and Chief Executive Officer

That sounds right, yeah.

Lee Matheson - KJ Harrison & Partners

Okay. So presumably the non-agency sale substantially more than the 10%?

Thomas A. James - Chairman and Chief Executive Officer

Yes.

Lee Matheson - KJ Harrison & Partners

Okay. And I mean was there any particular exposure?

Thomas A. James - Chairman and Chief Executive Officer

I think we were about 8.5% or 9% total write-down however, so that's correct.

Lee Matheson - KJ Harrison & Partners

Okay. And there was no particular exposure to a non-agency issuer that we should know about?

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

I mean obviously there, as Tom mentioned there is a small fraction that are not AAA, not that ratings have the same credibility.

Lee Matheson - KJ Harrison & Partners

Right.

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

That that has suffered a greater percentage write-down. But again we look through our security by security basis, they still seem to have adequate credit protection, a very high quality borrowers, very…

Lee Matheson - KJ Harrison & Partners

Okay.

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

Delinquency rates, etcetera. And then the only that the pricing can be justified the market right now is that the people expect things to get a whole heck of a lot worse even from where they are today.

Lee Matheson - KJ Harrison & Partners

Okay. And then just a second question which is, just looking at the residential mortgage loan booked at the bank, you guys say you are not reaching for that extra basis. So I was wondering what the yield pick up is on these sort of deferred amortization residential mortgages versus just going with the traditional immediate amortization, obviously there's got to be someone tend to free to do that and if you could walk us through the thinking there?

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

(inaudible) for the interest only is that's predominately the product that's being sold in the marketplace right now. I mean the only experience about 6% amortization in the first five years of 30-year amortization schedule anyway. So, it's not that we are either saying dramatically lower payments by going interest only and nor that we are picking up these. We are not doing it because of the income play; we do it because of the availability of product in the market. We again with all of the screens and scrubs we do on the residential mortgage tools, we have equally good credit profile there as we do on commercial side in terms of superior statics to the industry averages.

Lee Matheson - KJ Harrison & Partners

I mean how. When you guys look at it you see, it is obviously not confirming that. I mean what, I mean are you comfortable with the $650 million of available for sale MBS as sort of a liquidity pool because obviously…

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

That plus $1.3 billion an overnight reverse repose, that are awaiting to be deployed in the loans as well.

Lee Matheson - KJ Harrison & Partners

Yeah, okay. Okay.

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

That are in the bank's books also. I mean the answer is yes, that's why they are unavailable for sale, so it's holding location that… but eventually we need the liquidity for any of, for any reason whether it's because loan demand has picked up or whether it's because of deposit withdrawals. We also have substantial line of credit at the bank [ph] secured by our loan portfolio that we drop on if it were an opportunity, at an opportune time to liquidate securities such as it is today.

Lee Matheson - KJ Harrison & Partners

Sure, sure.

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

We have ample sources of liquidity at the bank, that's not a concern for us.

Lee Matheson - KJ Harrison & Partners

Okay, great. And then just on the deposit gathering side of the bank; I mean is there any concentration risk within that, is there any one office, are there officers or advisors or anything like that that represents inordinate [ph] amount of the $7 billion in deposit.

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

Now it is a broader cross section of our client base, certain types of account such as custodial accounts etcetera are exclusively using the bank. It's more of a product by account type than it is by any kind of office. I mean this is…while it's not technically viewed totally as a core deposit; this is a substantial portion of our cash at the firm at about $18 billion in client cash balances at our firm with now about $7.5 million at the bank. And we have the ability as Tom mentioned to do other types of sweet moves if we, in such time as we are ready for it at the bank to increase the deposits there.

So we kind of consider these core deposits, I have been here closing in on 25 years this summer. Every year I have been here, I think client cash balances have increased. So we have never actually had a down year in cash balances, we do not view these as hot money or any kind of risk for other bank or anything like that.

Lee Matheson - KJ Harrison & Partners

Okay great. Thanks a lot guys, great quarter.

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

Yeah.

Operator

(Operator Instructions). And we have one from the line of [Joel Jeffrey] with KBW. Please go ahead.

Joel Jeffrey - KBW

Good Morning.

Thomas A. James - Chairman and Chief Executive Officer

Good Morning Joel.

Joel Jeffrey - KBW

Can you just talk a little bit about the compensation in expense and how that could be impacted by that $6 million you had referenced in the release?

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

What was the impacted by that? I mean the fact is that accounting rules require our mark-to-market treatment on equity compensation instruments issued to any contractors, and we have a not a significant but a significant enough reward mechanism for independent contractor or financial advisors of the past year, where they have received options and we also use some options in to our restricted shares for independent contractors and as one of the anomalies of our stock price dropping, we actually, when mark-to-market those options and restricted shares became more significantly less. So it actually reduced compensation and expense by about $6 million in the quarter.

Thomas A. James - Chairman and Chief Executive Officer

It's actually 180 from our normal experience, quarter-to-quarter the stock had normally gone up, so we actually in past quarters have consumed a large amount of increased compensation during these periods, whereas if we were using a qualified type mechanism which you can't use with an depending contractors. But if you did you would have put your self in a position where you took a write down on the value of the optionality at the time of issuance.

And I would tell you that there is no fundamental difference between how we use with identifying contractors and how we use them with employees, and that actually treatment are to be the same. And this is one of these rules that drive the stock companies from giving stock compensation to contractors of a nature that provide some vendors service to the company, when they didn't have cash and so they paid with stock.

And actually, I don't think it was ever intended to work the way its working here. So, I actually believe that a change the policy. The policy is wrong, but for the moment this is just the way it works. As well as the stock price goes up, we have increased compensation expense, and if we have a one period where you get some of that back they way we did last quarter, you can get it back.

In the nature of our reporting, we make attempts to try to get you back to understanding operating result line and try to make sure that these anomalies that occur, they are not really anomalies, but these things don't happen quarter-by-quarter that we make you aware of them, so you can factor them in the earnings estimates etcetera.

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

We are sensitive to the fluctuations caused by this. However, we are taking step to substantially to limit the amount of equity incentives used for contractors going forward. We are finding other instruments and some other ways to compensate them, so we minimize this fluctuation going forward.

Joel Jeffrey - KBW

So had that $6 million been included? Would have there been any kind of offset from an increase in share count?

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

No. It would be related really to where the stock price is...

Joel Jeffrey - KBW

Yeah. And just a word there, it would mean the stock price were higher?

Thomas A. James - Chairman and Chief Executive Officer

If you just think through what's happening, essentially if the stock doubles over the period of holding readably and it were a five-year option, you would the amortizing the increases as you went through the five-year period as incremental compensation expense. Whereas if you had a qualified plan, you would have taken the auction value into consideration or you wouldn't have any...

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

Yes. And when it relate to any revenue production or anything else that was strictly related to stock prices.

Joel Jeffrey - KBW

Okay. And then, can you give us a breakdown of the investment banking revenue, M&A versus underwriting?

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

Yeah. I can. For the quarter?

Joel Jeffrey - KBW

Yes, please.

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

For the quarter, domestic M&A was about $7.8 million. Underwriting fees, domestically again were about $3.8 million. And Canada in total was about $7.3 million. I don't have a breakdown between M&A and underwriting. I think it's substantially underwriting fees. So, roughly 10 underwriting and 8 M&A, something like that.

And then, we had to look though, one that kind of surprised me at least had to do with our tax credit on real estate syndication of tax credit housing properties, which had about $6 million revenue within the quarter which is up. That's a little bit lumpy depending on when they close bonds and some seasonality to it as well as the state of some of their normal buyers which have been Fannie Mae and Freddie Mac or some of the big banks, big insurance companies, et cetera.

Thomas A. James - Chairman and Chief Executive Officer

But this is slowing down. They don't have any earnings to show over. So that's why the surprise. But the fact is that, we had carry over from prior periods effectively as the funds are employed in new properties where you have commitments that haven't yet been executed. And that's what happened in the first half.

But we expect a slowdown in the second half. That market is basically more open [ph] for the moment while people were trying to figure out what rate of tax credit return is going to be required in this market and where are the new buyers are going to be, all our insurance companies, et cetera, to utilize the credits. So we actually, from our budgeting standpoint, budgeted very low actual revenues for the entire year. And the first half is not reflective with that, but this is not a major line item in our overall firm either.

Joel Jeffrey - KBW

Okay. Great. And then, just lastly, can you just tell us what the total buybacks for the quarter were and if there is anything remaining on the authorization?

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

We repurchased about 2.8 million shares for $60 million, which in equity nicely indicated our earnings for that quarter.

Thomas A. James - Chairman and Chief Executive Officer

It means balance sheet, net addition to that. We gave our entire equity…

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

We exhausted our authorization that had been outstanding for several years. It started back I think six, seven years ago, they authorized $75 million. Even in the 2000 to 2002 dip in market and our stock only dipped for about a week there in that timeframe. So we are not able even, we did not choose to use the authorization even then.

But when it gone down to these prices we got a lot more aggressive, we exhausted that authorization had a special board meeting, which you see in the press release about which basically reinstated a new $75 million authorization, which we've not really made any dent at all in the end.

Thomas A. James - Chairman and Chief Executive Officer

We're on our -- the timing…

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

Black out periods,

Thomas A. James - Chairman and Chief Executive Officer

Black out periods, even for our own purchases. I am not sure we have to, we do, do that. So, that's the part of the reason.

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

Our average price was around $22.5 for those shares we repurchased.

Joel Jeffrey - KBW

Great. Thanks so much.

Thomas A. James - Chairman and Chief Executive Officer

Okay, Joel.

Operator

And next we have a question from Doug Sipkin - Wachovia Please go ahead.

Doug Sipkin - Wachovia

Yes. Thanks. Good morning. Just a couple of questions here. First of, you had mentioned I think, Tom, you had given the number on net the interest adverse impact from the fed cuts, $5 to $7 million a quarter, does that fall straight to bottom-line pre-tax or is there some cost associated with that?

Thomas A. James - Chairman and Chief Executive Officer

No. That's a increased expense during the last two quarters.

Doug Sipkin - Wachovia

Increased expense, okay.

Thomas A. James - Chairman and Chief Executive Officer

If you think about it, it results in understated…

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

It would often…

Thomas A. James - Chairman and Chief Executive Officer

…from the normal rate.

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

….fall to the pre-tax line.

Thomas A. James - Chairman and Chief Executive Officer

Yes.

Doug Sipkin - Wachovia

I am sorry. I didn't get that.

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

It was all substantially the pre-tax.

Thomas A. James - Chairman and Chief Executive Officer

Yes. No. It's not. They aren't. New expenses would have been…

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

Yeah. There might be general bonus accruals…

Doug Sipkin - Wachovia

Right

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

…and like that related to it, but substantially it falls to the pre-tax line.

Doug Sipkin - Wachovia

Perfect. That's very helpful. Secondly, and I think someone might have asked this already, maybe I missed it. But the yield in the bank, whether beyond the margin or on the spread, has gone up quite dramatically and I am just trying to figure out what is that attributable to. Is it just the higher rates that you put on, the lower prices that you are able to get in the last couple of quarters or some other dynamic there?

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

That's part of it. There are really two at play I guess, actually three, one go on the wrong way. But we added a net $1 billion in loans in the December quarter. So obviously, we were getting the interest earnings impact from those and about 70% of those were in the commercial world so at much better spreads than we had been seeing historically. So, that plus the additional, we added about $0.5 billion in this March quarter. We had some earnings from those as well. Again, the prices yields continue to be very favorable relative to where we have been historically. So, you definitely had the manifestation of interest earnings from all the loans at it.

The second thing is, as the Fed continue to cut rates, as you know we have a $2.3 billion portfolio residential mortgages on the bank's books, substantially all 51 ARMs and even though they have a very shorter average life, they are in the fixed rate period of that 5, 51 [ph] and as mortgage rates have not been dramatically affected, there hasn't been a flurry of re-finances or re-payments and as our cost of financing those has dropped. So, we've had a windfall, if you will on the spread relative to financing the 51 ARM portfolio. Having said that we are very sensitive to the fact that this works the other way, if and when rates… if when I should say rates hit bottom and turnaround and go the other way. And we are actively evaluating hedge mechanism etcetera to partially mitigate that effect when interest rates turnaround. But for now, it's been a big windfall for us.

Doug Sipkin - Wachovia

Okay. Then just a couple of more. Can you give us sort of an outlook or how we should be thinking about loan growth going forward and obviously the provision expense catch there [ph] and maybe giving the sense that you guys are thinking that's going to start to slow a little big given the rapid growth and also lot of the sweeps that have already taken place. Any color on how we should may be thinking, but I know provision was $19 million, $12 million and then almost $13 million, and obviously I know you guys are going to be opportunistic. But can you put any boundaries around how we should be thinking about provision expense at least as it relates to new loans going forward?

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

Some of that's depended on what the market place is. I mean assuming that attractive loans continue to be available in the marketplace, we are probably going to try to manage going forward to maybe a 25 to 30% type growth in the bank in total assets which would imply if we keep the same ratios maybe just slightly more than that in term of loan growth percentage. So, you might see $2 billion type increase in net loans.

So $0.5 billion a quarter something on that nature is kind of where we are targeting for the next 12 months. But again it's subject to lot of banks. If the lot of opportunities present themselves, we may try to take advantage. If the market really tightens, we might go even slower than that. We have some control over the sweep steps. We don't have a lot of control over the organic growth, which is coming in from new FA recruiting and to our people sitting out from the market for a period of time etcetera. And that has really been fueling our growth more than these sweep steps. So we kind of see the bank growing at $2 billion to $2.5 type billion in the next 12 months and we will probably put 80% of that to working loans.

Doug Sipkin - Wachovia

Okay. In terms of the, I think Tom had mentioned this, the deferred competition expense that you recognize as you run through, I guess deferrals on the FA side. I mean given that you guys have done a lot of recruiting, I mean can we be thinking about that maybe slowing down at some point in the future, or is it something that is going to just kind of give the same impact on the earnings numbers pretty much consistently going forward, because I am just thinking maybe because there is a lot of hiring done, maybe you have higher deferrals right now than you normally would otherwise?

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

I would make the reverse argument actually that we are still filling up the pipeline in terms of the amortization because if you have now let's say an average of seven years of contracts outstanding on FA's that as you amortize the front money over the seven-year period that means it takes seven years to fill up to the pool at the higher rates of FA acquisition that we've had for the last three and half or four years. So, we got a few more years to go. The offsetting factors are that we have continued to have after the first year downturn in production and transfer which averages probably 15% or 20%. We have continued productivity growth in the newly acquired FAs that were brought into our net period, and they offset the rate of acquisition.

The only thing that would achieve the result that you are talking about is: Number one, of course if we keep going at the same absolute rate, I find it hard to go much faster. It will slow down relevant to the base of total production. And if the, if it becomes more difficult to recruit as indeed it ought to in the marketplace because of retention programs, you may see less movement in the future, at least that's what the impact of compensation plans would indicate. It would mean that there would be less activity out there at some place.

But right now, I see the reverse. I actually see more activity, as brokers are moving away from problems and other situations. But I suspect with fewer firms recruiting and with all these retention agreements some where out there, after things settled down in the marketplace, there will be less movement and then you will indeed see the slow. So it's a little complicated. The overall impact of this, since there are so many outsiding factors in it. But you could see a basis point or two of increase max over the next three years, and it may be mitigated by some of these other circumstances that I mentioned.

So it isn't going to be a major deal, because it's smaller as a percentage of total commission generation as we increase the sales force, but I don't see it going away here in the near term.

Doug Sipkin - Wachovia

Good. And just finally, you had mentioned that I guess the underwriting/banking environment was starting to show a little bit of signs. Can you characterize that by months in the sense that, just for my rough glance it looks like April, you guys have done a couple of things, might have another one in the piper for this week. Would you characterize April as being better than March or you just don't think about it that way?

Thomas A. James - Chairman and Chief Executive Officer

Yeah, it's not significant enough to comment month-to-month you know erratic number one, but number two what you are seeing is some more lead managed activity on our part in these areas that we call our sweet spots. So I expect to see some slow ramp here, but if we don't get a better market for new issues, it's not going to immediately go away. I suspect more that you're going have the slow increase here in terms of activity levels and it's still not going to be a great year. I can't comment on what next year is going be like, until we figure out what this general economy really does. But I see some improvement, but I don't see it being in the housing [ph] days of the recent past.

Doug Sipkin - Wachovia

Okay.

Thomas A. James - Chairman and Chief Executive Officer

The M&A activity I do expect will increase a little bit soon as the financing liquidity strikes itself out.

Doug Sipkin - Wachovia

Great, thanks a lot.

Operator

And at this time there are no further questions in queue. Please continue.

Thomas A. James - Chairman and Chief Executive Officer

Well, I want to thank all of you again for attending. Sorry, we took so long this morning. I hope you had a good day. We'll see you next quarter. Thank you.

Operator

Thank you. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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