Ladies and gentlemen, thank you for standing by, and welcome to the Raymond James Financial Analysts Conference Call. At this time, all lines are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. I would now like to turn the conference over to our host, Mr. Tom James. Please go ahead, sir.

Thank you very much. Good morning everyone. It's a pleasure as usual to talk to you a little bit about the quarterly results this quarter and third quarter. Of course our comparisons are good relative to the rest of the Street. I wouldn't say that, if we were eliminating the conditions of the market that they would be satisfactory to us. But I'll have more to say about that later as I try to kind of look at some sort of a normalization hypothetic to get some sort of feel of how management would judge we are doing, which I think publicly has some more value than just looking at stale numbers. As we of course reported, our net revenues did achieve a new record at $742 million for the quarter, we actually had a slight decline in gross revenues. If you look at securities commissions, the major number, you see a 5% increase over last year's comparable quarter. I would tell you that, almost were more than all of that essentially or all of that is derived from increase in mainly fixed income institutional commissions. But both institutional categories were up over last year's comparisons. Two factors, on the equity side, we continue to have very good activity and are being rewarded for our research. On the fixed income side, we've seen more activity, hedge funds, other large buyers that are looking for good opportunities in the marketplace. And as I reported to you before, we have a major effort underway to distinguish securitized tools from each other so that we can give good recommendations to clients about how to upgrade their portfolios or they are looking at the bottom fish to be able to acquire once and have more opportunity for price appreciation. And that's going on very…

[Operator Instructions]. Our first question comes from the line of Lee Matheson with K.J. Harrison & Partners. Please go ahead.

Hi, good morning guys.

Good morning, Lee.

Just a couple of quick things. In terms of... on the private client group and the addition of these advisors, can you give me some sort of update in terms of where the upfront payments are trending either what you guys paid for to bring these guys over or what the general industry is looking like and ended that up in the last 36 months?

No, I'd say, actually maybe up slightly... it would be up on an average at our firm only because we are recruiting people with higher average gross production. So if you're looking in the teams with multibillion-dollar production, we would be somewhat over 100%, it might be 110%, it might be 120%, average is still somewhere between 60% and 100% upfront. We prefer to use some good portion of that in stock. The industry is still higher, the firms that have net outflows are somewhat frantic in an effort to maintain positive count. And so you see them making large offers which is... the people that take those offers under the circumstances are going to pay for it, because some of these reputations have been besmirched at these firms and it isn't going to be easy. We are benefiting from the fact that we stayed out of the fray here. So... but all firms again I'm going to add a degree, it seems as if all firms think everybody else is higher than they are. So, I would prefer to say that what we can do and we certainly can recruit with our current levels. We have productivity growth still going on at both firms in spite of all these factors that I've mentioned. That's why I say, I think we're a little bit vulnerable, but that also augurs well for rate of return on investment because the key here is to make sure that you are making wise investments and not buying production on its way down as opposed to production on its way up. So...

Absolutely, from a balance sheet aspect, what... I mean, I don't know if you guys are really... but can you give us an idea what non-bank cash level was at the quarter-end?

I will defer to Jeff and Jennifer on that. Jeff says [inaudible] as he is pulling out another book of financial data that he thinks it was around 200 million and with... what kind of borrowing... 400 million.

But a lot of that is in sub where we wouldn't really call it readily investable or available for dividend of the parent.

Right.

In terms of true parent-free cash, as Tom mentioned earlier, we've, without reducing the capitalization levels of some of our subs, we substantially deployed our free cash at this point in time.

I am sorry, can you just reiterate the share buyback program, what the activity was under that ?

It was next to nominal this quarter, no open market purchase to speak of at all.

I see. Okay.

Remember, our discipline is somewhat different than other people, we don't do it on a consistent basis.

Right.

We buy it when we think the multiple of book and earnings are low and very attractive over a longer term viewpoint, and that's why I say we had a real opportunity, we could have bought a lot more back which if we had had more free cash and hadn't been successfully deploying it in our proprietary capital activities and in the bank, the main part in the bank, of course, we would have bought more stock.

Fair enough. And then just one last one on... just in terms of, you guys are scouting maybe for acquisitions looking at some of the publicly traded and mid-market investment banks, they are all trading substantially over tangible book value, I mean, is there an opportunity for you guys to go in and beef up in areas that you find attractive in geographies you feel attractive in that space? And also on the asset management division, bolting some things on to heritage or doing lift-outs there, can you just comment on those?

Yes. On the part of the broker-dealers, yes, I'm well aware of the comment you just made about some of the smaller investment banks out there that are... have reasonably good franchises, unfortunately you can't just bolt them on, you've got some overlap. So, when you do your analysis, you have to decide what earnings power are you really adding when you do this. You also need to be prepared to sustain some current losses during a period of inactivity. So, heretofore, that's about as far as I can go, when we got into these analysis, we've had a little difficulty with our own staff being real comfortable with wanting to go through the process of making these evaluations of current and external staff, and instead of adding one plus one, adding up with one-and-a-half instead of two. It's... they don't really like the process, but it's certainly a possibility given the current market and it's not something that we are not looking at. I mean, we are evaluating potential opportunities in that space, but we haven't done any more than that currently. We have talked to some of the smaller boutiques that really do have the attributes of bolt-ons that should have lower price expectations. But to-date, haven't shown to you know except those kinds of prices, but look if this goes on a little longer in the capital markets, I would suspect we can do that. In the meantime though probably it's at least equally as opportunistic for us to take some of these individuals that are either still with places they are nervous about or who have been cut back as a result of some of these sort of gross across-the-board cuts, that have gone on especially with some of the younger associates that have a tremendous potential. On the Asset Management side, we continue to be very active in looking at companies. We recently participated in a process and came in second. So the... in very close bid form on prices we are...

In the retail mutual funds space? Sorry, in the retail mutual funds space?

No, it was in the portfolio management individual accounts space.

Okay, yes.

But we're looking in all spaces, so what I would tell you is that I really do anticipate that we will see some opportunities. Again we needed to bolster the balance sheet to take advantage of this, also before I would have felt comfortable right now certainly writing a check for more than $100 billion for something. Smaller acquisitions are different or stock acquisitions or larger deals are different. I would... I [inaudible] there may be some other larger institutional owners that may still be considering perhaps withdrawing from various spaces that might be of interest to us.

Okay, excellent. Okay, well, thanks guys.

There is opportunity and we are spending time looking at things.

Great, thanks Tom.

Thanks Lee.

And next we have a question from the line of Doug Sipkin with Wachovia. Please go ahead

Yes, hi, good morning everyone. Just a bunch of questions.

How are you doing, Doug?

I'm doing all right. Wachovia's stock was up 28% yesterday. So the first good day in a long time. Hope it lasts.

[inaudible] little point was that?

All right, hey, come on, don't rain on my parade. A couple of quick questions. On the retail business looking at on the segment basis retail revenues, and you might have explained this and I apologize if I missed it. The 20 some odd million drop in retail revenues, I mean, can you talk a little bit more about what drove that? I mean, I know retail is softer but maybe the dynamic of the spreads compressing?

Yes, part of it is the interest that I mentioned. We moved some assets out of broker-dealer into the bank, about $550 million. In addition, the spread compression from about 60 basis points to 40 basis points during the quarter. Are you talking to gross? Yes, if you're looking at gross, you need to understand that just the rate differential will drive you down.

Can you talk a little bit about that dynamic and what would be a better environment for sort of the spreads and retail?

Well, that factor, just the net interest spreads. Yes, Jeff I'll just defer it to you.

What would be a better environment, I think that the answer to that is going to be when rates start rising a little there seems to be... this happened before back in '01 to '03 time frame when rates got back down into drill bit sizes. We saw some compression on spreads because just the absolute of the percentage differential in rates, there's some psychology to the differential. I mean 50 basis points doesn't sound like that big a difference when you're talking about the difference between 6.5 and 7. But when you're talking about the difference between 1.5 and 1, it's a huge percentage difference. So, with rates at this lower level, we're going to... we see some compression in spread. We see it in the stock loan business as well, it's not just in the customer cash versus overnight investment side.

I was just under the impression that you guys are going to see a little bit of a bounce back this quarter because of the fact that the Fed cut so much...

And we did, that is one to the degree we thought it would be. And even as we sit here today, the spread that we... the most common spread we look at in the broker-dealer is between a customer cash deposit and the overnight rate we're able to invest that at, which has historically been about a 65 basis point spread, today it's sitting at about 40.

So, I guess in an environment of rising interest rates, that dynamic would benefit you?

That's correct.

Okay.

Shorter and longer term.

Yes, second point, I mean the non-comp moved up quite a bit this quarter. Tom had mentioned quite a bit of expense related to retail brokerage, hiring new offices, etcetera. Any color around... I mean obviously I know some of this is tied to revenues, but would you characterize $137 million as sort of a little bit of an outlier or more sort of new realistic type of rate given the revenue base, well talking non-comp?

Non-comp, not interest. I would say that there is nothing... that's large, abnormal. Yes, the options which would... maybe taking them up...

No, there wasn't anything particularly large...

I think that's probably where we are. The... again as I said, if you're running at an inflation rate of 4% to 6% depending on aberrational kinds of things that go on quarter-to-quarter, you ought to get more growth in commissions and fees in these levels to have any margin expansion. That's been typical of our model when we're in... I always say that it's costing at least 200 basis points at the current rate of growth that we have, and maybe more. So, you need to understand that we are making that investment in the future, and so I suspect that the operating costs are going to be about where you see them. But I'm excited about the additions. You need to understand that this recruiting activity, when I say that it's good, it's not just good, it's about as many office visits as we can basically handle and we are talking to a lot of people... a lot of people in the pipeline, and I think this is going to continue, but it does bring with it incremental expense.

Okay.

Back to first question, let's put some numbers to it on the decline in Private Client Group gross revenues. From this year's quarter to last year's was $37 million of that decline of the $27 million decline was related to the gross interest rates.

Okay.

Net interest was relatively flat year-to-year in the segment, but the gross interest because of the rate declines were a big part of that.

Sure, well, that's helpful. Can you talk just a little bit more on the bank and let me speak to [inaudible], looking at the sort of net interest margins for the quarter, pretty consistent to even some of the larger banks, 3.09% on earning assets. I mean, can that go higher or is that a function of just the paper you guys are putting on at the better prices, I mean, where do you see that going if it can continue to move up?

Doug, good morning, it's Steve. How are you doing?

Pretty good, how are you, Steve?

That was the function of a couple of things, if you remember, at the very beginning of March, so you didn't see the full impact of this last quarter. In the March quarter-end, we'd changed the pricing methodology that we're using in the bank on the Raymond James Bank deposit program. If you remember, we had determined that the benchmark, one of the main benchmarks that we're using contained a lot of money market funds that had riskier assets in them. And we didn't feel like that was appropriate given the profile of the bank and the FDIC insurance. So, we made that change at the very beginning of March. So you have the full impact of that pricing differential in this quarter, the June quarter-end. And then also couple that with, as you know, the assets that we have been adding, we've been able to put on new assets at better spreads. I would say that, I don't think that that level is sustainable, I would say that, that's probably 20 to 30 basis points higher than what I would say is more long-term sustainable, although we are obviously going to ride this as long as we can.

Okay.

There are two other... I would say that there are two other things that happened during the quarter that make it non-sustainable. One is, I think we had a very artificially high LIBOR relative to our cost of funding, and I mean firstly all of our commercial portfolios keep off of LIBOR and that differential between that and Fed funds rates accrue to us, a very big gap relative to historic norms. And secondly, the Fed continued to cut rates during the quarter. As you know, we have about $2.2 billion of residential loans that are in that five year fixed rate period before they put the floating rate and our cost of funding those dropped as the Fed contained the lower rates. We won't see that anymore, we don't think we'll see continued lowering going forward. So those are two other factors that I think Steve and I and the bank folks kind of think that a sustainable rate is somewhere closer to 2.5 to 2.75 based on what we've got in place today.

Okay. Could you just chime in on the credit quality obviously I don't think it's a surprise non-accruals jumped a good amount, but I don't know if that relates to some of the developmental stuff or that's just general normal seasoning and any expectations for where that sort of non-accrual and non-performing percentage can go to over a time period?

Sure. Doug, that... as you know when you are starting from the real low base that can be very lumpy and affected by a handful of names. We did add some corporate loans to the non-accruals that were some larger loans that we had had in non-accrual before that were almost exclusively the residential loans. So that... and almost all of that the increase was related to residential acquisition and development homed over type loans, also the charge-offs in the quarter related to the same credits. So, in addition to some residential loans, about $3.5 million of the $5 million that we had in charge-offs was related to our corporate portfolio with about $1.5 million in charge-offs on our residential portfolio. All the... and that and the non-accruals are related to one another. In terms of looking out, I would anticipate some additional loans going into non-accrual status, we have an increase in our watch loans and increase in categories of credit size loans that are not in non-accrual status now, but I would... we would expect some increase in that, just given continued softness, particularly in this residential acquisition and development space, which we've quantified for you. We have a total outstanding of $110 million in that industry segment. That number has come down by about a third over the last 12 months or so. We're not adding anything more in that space, but we are very fortunate we have a very small percentage of the bank's balance sheet devoted to that industry segment.

Okay. And then just finally, question around just the balance sheet. If I understood the comments around excess cap, I mean, let's just say hypothetically and let's hope this doesn't happen, mortgage gets crushed again, stock was back to $21, $22, you guys not have the same amount of capital to buy back like you did in the first quarter?

Yes, that's correct.

I mean...

When we complete the... we have about the same amount and we're not devoid of credit and cash. I mean we have about $100 million, but it's drawn on our credit lines. But... so that we could actually use for that today, but Tom was as I'm sure about to say, once we put in place the term debt here in the next, hopefully 30 to 45 days, that will be... we will have taken what I call a belt-and-suspenders approach, we're going to have excess cash on the balance sheet, as well as credit lines just backing that up, and then we would be in a position. Today, we could still buy $60 or $80 or $100 million stock if that opportunity arose, but then we would be very stretched.

I got you. And again, I guess that's just a function of growing the bank and the buyback in the first quarter.

Yes, the bank... those are the two big factors, yes.

Okay. Great, thanks.

[Operator Instructions]. And we have a question from the line of William Tanona with Goldman Sachs. Please go ahead.

Hi, good morning everyone.

Hi, Bill, good morning.

Just to kind of follow-up and focus on the bank again, obviously that's the hot button for you guys over the last couple of quarters. As you look at the charge-offs, I mean obviously increased charge-offs are going to be a cost of doing business for the bank. But just trying to get an understanding in terms of, of those charge-offs or of the charge-offs that we saw this quarter, when would those loans actually put on?

Once again, about $1.5 million of them were residential loans, Bill. We're going to see kind of that as a normal flow, I would think. Those particular loans, I actually don't have the origination dates on those particular loans, that one is roughly seven loans that made up that $1.5 million. The other three loans that in our corporate portfolio that comprise the remaining $3.5 million were all originated in the '05 time frame and one loan was in early '06.

Okay. So that's helpful, pretty seasoned in terms of that the portfolio not some of the newer stuff that you guys have been adding. I guess in following up on Doug's question in terms of the non-performing loans, I mean, where ultimately, as you guys are continuing to build this out as the bank continues to mature. What do you think is the right level in terms of non-performing loans given your mix of business?

Yes, that's a hard number, Bill to anticipate on, we're obviously looking at past due pipeline information on our residential portfolio. Although we... the 90 day plus loans in the residential portfolio have increased, if you look through the pipeline at even loans that are less than 30 days, that number has actually gotten lower in the last quarter. In that industry segment, we do continue to see some softening in this particular, this residential acquisition and development portfolio, really almost with that exception that entire portfolio is at least on our watch list and it's... I would say it's a little bit up in the air in terms of what's ultimately going to happen to all of those names, I would anticipate some of those names deteriorating further and some of those names even winding up in our non-accrual status, all of those loans have some level of collateral support, but as you can tell that happened with these charge-offs this last quarter, what we're going through the evaluation of our collateral position, when a loan is going 90 days past due or the borrowers having problems, we have seen material deterioration in the collateral values, and then we're getting new appraisals and discounting that further. So, using that map I would anticipate some additional charge-offs and larger non-accruals particularly in that one industry segment.

Okay, that's helpful. And then I guess on the reserves, I know you're obviously restricted in terms of the reserve built that you can ultimately do. But where do you ultimately think you're going to feel comfortable in terms of reserves to the kind of loans. If I look at your reserve and kind of compare it to a lot of the other banks, you guys seem to be at the lower end of that range, just wondering whether or not you anticipate kind of building that reserve up as this portfolio continues to grow?

One thing that's, sometimes hard to compare institutions in terms of the asset mix. We don't have any consumer loans, no credit cards, no auto loans, and typically have higher reserves associated with them. Our residential loans had a certain reserve going in that tends to be a more homogeneous product offering and asset, our corporate loans based on the risk profile of each individual loan when we book it, it varies it could swing by almost a 100 basis points based on the risk profile of that transaction. We actually feel like we've been pretty conservative in the way we reserved against these certain assets, and we've also been very proactive in downgrading loans, early on in the process and when we're downgrading loans, we are actually taking additional reserves against that particular asset through that process. So, we... we have seen an increase in reserves over the last five quarters, that's really been a reflection of the credit, some of the credit deterioration really changed the methodology, we haven't really seen the evidence of a need to change the methodology and feel comfortable that we got really the reserves adequately covered and pretty conservative that now a little over $85 million in total reserves.

Yes, just adding color to that. Most of the questions from our auditor are still dealing with the fact that our reserves are too high. So, our outside auditors should be chastened in their approach to what reserves are necessary in the banking industry, at the moment still are not convinced that we're not over reserves. So, you... we'll find out, but Steve pointed out to you and I hope you got a feel of essentially the residential loans are nominal, way below industry averages in terms of... and we do have a lot of history with a lot of those loans over a period of time. The A&D loans, [inaudible] to mark them down the instant that there is any question about any problems dealing with them and we do anticipate that a couple other of those loans will have some sort of loss exposure. But again they do have good assets, I mean it isn't like they don't have good assets. So, it's not like we're going to have any fire sales in those areas. So, I'm... I feel more than confident without any problems in the corporate sector that we have far more reserves than we need. If we have some problems in the corporate sector, I still think our methodology is appropriate based on experience in industry factors even in recessionary times. So, I'm pretty confident that we're well reserved, we don't need to have any massive changes in our write-off strategy.

Bill, one other thing that happened this last quarter, we had our regulatory exam that was effective as of March 31st using those balances. And they went through a rigorous process, as you can imagine on credit quality, actually we're dealing 50 plus loans, including all of our watch and worse [ph] loans, and also really went through a validation on our loan loss reserve methodology, and really kind of confirmed that we were using... they validated that our approach was accurate and somewhat conservative.

Okay, well that's hopeful color. And I guess just finally on the bank obviously saw a pretty big jump in consumer loans this quarter, looks like it increased about $77 million. Just if you could provide some color as to was that one transaction or what was driving that big jump in the consumer corporate portfolio?

That was related to a couple of corporate loan transactions. One was a soft drink company and the other is a [inaudible] company that provides services to theme parks and sports facilities and catering business. So once again, I know those two businesses don't necessarily seem that related to one another, but we are putting it in the consumer products category in our industry concentration disclosures.

Okay. Thank you.

Sure.

And speakers please go ahead with any closing remarks, no one else in queue at this time.

I want to thank all of you for spending so long with us this morning. I look forward to seeing you again next quarter and let's hope this market continues to have more favorable conditions. Thank you very much.

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