Good morning. My name is Lakesha and I will be your conference operator today. At this time, I would like to welcome everyone to the Quarterly Analyst Conference Call. [Operator Instructions] Mr. Paul Reilly, CEO, you may begin your call.

Thank you, Lakesha, and we're calling here from St. Petersburg. I hope today is reflective of the earnings. We are bright, sunny and 74, as I'm sure most of you are sitting in right now. I have in the room with me Jeff Julien, who will be presenting our CFO; Jennifer Ackert; Steve Raney; and Paul Matecki, and we'll get to your questions. I'm going to start with kind of a brief overview and go through the segments on an overview basis and then turn it over to Jeff who will go into some of the more detailed numbers. Then we'll open it up for questions. I think the overall message is this is a strong quarter even after maybe some one-time adjustments. We had record net revenue and a record net income even without the historic non-bank earnings that our industry has enjoyed. And I think if you really look at it, there's really two factors that are driving that. First is the firm is well-positioned and even in the downturn, we continue to recruit and grow and add to our team. And the second factor is we've had a positive market and because of that growth in positioning, we are able to really take advantage of the market and drive these results. In all the business units really participated, and I'd like to cover kind of the highlights of those, the business units, and then turn it to Jeff. First on our Private Client Group, we had record Assets under Administration of $262 billion. This is a result of both market improvement and the historic recruiting we've done to continue to bring more financial advisors into the firm. Productivity, the average productivity of advisors depending on the channel is up 3% to 4% just versus the preceding quarter,…

Thanks, Paul. I guess the over-arching comment which is most appropriate for this quarter is that with some equity market wind at our back, some of the operating leverage that we've been telling people for years exists within our segments, particularly in this case, PCG and Asset Management actually did come home to roost. I'm going to focus on some of the -- a couple of statistics that aren't readily apparent from all the information that we sent out in the press release or are not disclosed there but kind of a precursor to some of the things that would be in the Q when it gets filed. One is the comp ratio, which there has been a lot a focus on. It actually did come down in the quarter. We had some that's not unusual, I think, when we have record net revenues, but it did drop below 68%. But it’s still hovering in the high 60s, 67.8% this quarter versus 68.4% last quarter. I think as we pointed out last time, I don't expect to see any major movements in there as long as our business mix stays similar. Until we get some help from interest earnings at which time -- which doesn't have a lot of variable comp associated with it, at that time I would think our comp ratio would drift down a couple of hundred basis points possibly from here. Another factor is recurring revenues. Last year, last fiscal year by comparison, our total recurring revenues were 54% of total revenues. And for this quarter, not much different, 53%. So we're in a lot of transaction-related things that was still a lot of recurring revenues driving the revenue stream, a lot of fee-based type accounts, et cetera. Paul touched on the asset management performance fees.…

Thanks, Jeff. Quickly on kind of just the outlook and of course, when you look at the outlook, the biggest question is the economy. Certainly, it has a major factor on our business. Our view is that we are on a slow but choppy growth, and we'll see small corrections that we believe as the economy will continue to slowly grow and recover. So the upside is going to be determined partly by how the economy grows and the reflection into the capital markets. And certainly, we always have to look at our correction or downside. We continue to manage costs. We went -- '09 wasn't that far away, that remember the big corrections can happen. And even though we came to that with an 8% return on equity, it wasn't a time we enjoyed. But if you look at the businesses, really all of the indicators are positive. Given a slowly improving market, I think the $0.65, given Jeff said $0.05 or $0.06 of unusual items is high, but we still see a lot of positive momentum kind of off a lower base. In PCG, our assets will continue to grow at the market, and I think as clients move into equities again, that trend continues, should have a positive effect on our business, that we're still very focused on recruiting. But we're not going to overpay for financial advisors, and we can't do in markets where people aren't be very aggressive and markets where we believe people are maybe overpaying a little more cautious, and we're willing to go through the cycle. Having said that, we're very focused on kind of recruiting, but the big driver will be the shift to equities and really driving our business. In the bank side, the loan backlog looks strong. The big…

We'd like to say we have a couple of more on one-time items in our pocket for the coming quarters. But we really don't know if we got any more...

But they haven't. So with that, let us go ahead and open it up to questions.

[Operator Instructions] Your first question is from the line of Devin Ryan, Sandler O’Neill.

Just trying to reconcile the strengths in the commission and fee line. It looks like December, if you just look at December on the month alone, was a record quarter and just given that a lot of the fees are billed upfront and that industry trading activity levels seem to fall off a bit in the month. I'm just trying to figure out what happened in December and why it was such a strong month.

Versus the preceding quarter, there was a $16 million increase in institutional commissions, largely driven by the number of syndicate participations and equity underwriting activity, and they also come out of our analysts' best picks for the UIT that we come out with every year, that drove $5 million in commissions. So we had just an exceptional quarter institutionally, and the balance of that increase was in Private Client Group and that's just the strength of a rising market. You know we had a jump start when the fee billings on October 1 were about 5% or 6%, 3% or 4%, 5% or 6% higher, whatever they were, from the July 1 billings, and we have that same dynamic incidentally, going forward, where we have about 10% higher market billings January 1 than we had on October 1. And it's again, as Paul mentioned it's clients shifting back to equities where we're seeing some of that. They're, obviously, nowhere near the levels that they were three years ago in terms of household ownership of equities. But that drives a lot of business and the funds where we get bigger trails and some of the managed accounts, et cetera. So I think it's the manifestation of some of the unused capacity that we had within PCG as the markets recovered.

Devin, I think that people kind of focus, by the compare of commission lines, a lot of the institutional business. In the overdue that business is tough and it's still challenging, but a lot of this is driven by PCG, the movement to equities and certainly underwriting and syndicate some stuff [indiscernible].

But there was nothing unusual in the quarter. I'm proud to say beyond our Analysts' Best Picks, which is probably a $5 million type item.

So that is a December -- that's when you get paid for that in December? Or I'm just trying to understand December and I understand that, obviously, with the beginning of period asset levels up that, that would help each month in the quarter but just...

That's in December of every year we do it. That's in December, their Best Picks for the coming year.

And then just also, I guess the SEC is going to deliver a report to Congress tomorrow on their results and recommendations just related to the study, I think, that's going to outline the extent that broker-dealers going to be held to fiduciary standards. Just wanted to get any early insights you guys might be expecting or if you just have any expectations in general or on the suggested changes related to what might happen. So...

I think, Devin, it's still pretty well an unknown. There's been kind of a moving market, moving controversy between registered investment advisors and our industry and what defines what. We don't see any dramatic change for the business, but I think the ultimate deliverable and even in some of these other findings that are out, there's not an answer to a lot of them. I mean, it gets down to what regulator but then what rules are going to come down from whatever regulator body gets some of the pieces, and our take is on all this legislation shouldn't dramatically change our business or positioning but it's going to increase costs, compliance costs. And I think that's going to be the net, net result, and whether that protects investors long term or not, we’ll leave that to others. So we don't see a dramatic impact on our business. We've been involved with it. We'll see what really comes out when it all settles out, not just when the positions rolled out but the rules and what does that mean and we just think that net-net, is compliance costs will go up.

And then just lastly on the non-comp expenses, outside of the bank loan loss provisions, they increased 6% and in my take, it just looks like higher business activity levels, higher revenues probably drove that. But is there anything seasonal in there or anything else we should be looking at?

I don't think so.

No. Looking down the -- it can't be a big dollar number. There's nothing unusual in our numbers there.

Your next question is from the line of Hugh Miller with Sidoti.

Just a follow-up on the question with regards to how strong the December commissions were in the month. Would you say that there was year-end tax loss planning and maybe some harvesting there of tax losses that were kind of maybe driving up December commissions relative to November in the prior few months? Or is it really just kind of -- some of the things you mentioned with regards to the Best Picks and just the shift in interest in equities and retail investors?

I don't think we see a big seasonality in terms of the year-end tax transaction-related movement. But I think it was again, and this was somewhat the explanation in September as well, we had just a busy underwriting calendar in the month.

We've looked through it, Hugh, I mean, and we didn't see any unusual items outside of the ones we've mentioned. So again, I think the underwriting calendar does impact it. We had a very strong month, and I think the big movement for us is always the PCG group and the movement to equities does push it there. But we can't point at anything that looks really unusual.

And you guys, I think, you've mentioned in the presentation that you were seeing broker production levels, if I had this right up, somewhere around 3% to 4% on a sequential basis. I guess is that right? And then the other just being -- where would you say that they are relative to historical norms for production?

They're getting closer, they're not there yet. But I think we have a number of factors -- in our recruiting over the last few years, we've recruited much higher producing financial advisors, that's historic. So I think as you look at productivity on this account is relatively flat, but if you look at the average financial advisors, the production level is higher historically, and we're getting closer to that historic level. But we still have some room.

And I think just to give you some definition, I think in RJA the employees' side, I think we peaked, if I remember right, at about 515,000 average gross. We're currently up back at 490,000. So as Paul said, we're getting close. And we've got probably on average people with a higher trailing 12 than we had back when we set the previous record. So there's still some room to run. But it's getting back toward records for us.

One question with regards to -- obviously, you made some commentary on the pickup in competition on the recruiting side, that you're not going to go out there and kind of pay up for advisors above and beyond what you're comfortable with. But I guess given the potential for competition to remain somewhat high, how confident are you with the company's ability in fiscal '11 and beyond to kind of grow advisor head count?

Well, I think that our goal is to grow advisor head count. I think we can and probably will for the year. But I mean, our view and we reiterate it all the time, is we target 15% growth from the PCG segment and sometimes in '09, we'd say it's a factor of three items: recruiting a 5%; productivity a 5%; market of 5%; and '09 we got no market. There's no productivity, it was recruiting. And this year, we're getting a lot of help from the market and productivity, and recruiting is down but we're not going to do uneconomic deals to make the numbers look better short term. And we've ridden through the cycle, it's been historic Raymond James. And I have no intention at all of changing that. So if people want to buy an uneconomic, what we do is on uneconomic deals, we're not going to participate and we'll wait until, as the market always does, they get economic again. Having said that, our inquiries, if you look at January, are way up, now that's very early in a recruiting cycle inquiries versus closing. But we think we're doing the right thing, and we'll continue to recruit and try to grow the head count, I think we can, but I just don't know how much.

And the last question I have, just with regards to the bank, you guys are, obviously, mentioning that you're kind of seeing a pickup in interest in loan originations at the bank and obviously, the headwind is the runoff and the portfolio, but can you just talk about -- if are there certain loan types that you're seeing more of an interest at the bank at this point?

Hugh, it's Steve Raney. We highlighted that we had a pretty significant increase in C&I, which has been our focus, our commercial and industrial loans versus commercial real estate in the quarter. We actually grew that segment of our business almost $200 million in outstandings during the quarter. And in the C&I bucket, it's been rather broad across a wide cross section of industries. So no one or two industry is really driving that. It's been very broad. Although it does align itself well with our business units inside investment banking, energy, health care. We've done some business with the REITs as well, as well as some of the other industry groups we're focused on, telecommunications and in some of the consumer areas as well. The Residential business has been very challenging. Paul mentioned that we had the largest quarter in the bank's history in terms of loan closings on the origination side. We are actively trying to grow our own originations in our mortgage banking area. We've not been able -- we have grown or actually purchased some pools, but it's been relatively small. We've been very disciplined with our approach to that business. We're not willing to buy pools of loans without strong buyback language. So I think that over the time, you're going to see a higher percentage of the bank's balance sheet in C&I commercial loans versus commercial real estate and residential real estate.

Next question is from the line of Joel Jeffrey with KBW.

In terms of the growth in other revenues, can you tell us sort of what was driving that? The growth in other revenues quarter-on-quarter?

There's a kind of an anomaly thing with, when we have OTTI costs at the bank, they're a contra revenue item. They were a lot lower this quarter. So that, obviously, makes the other revenue number higher. The other thing is we continue to convert more and more mutual fund families to the omnibus arrangement that we've got, and we get paid much more per account than we do in the previous networking-type arrangement. So that will continue to grow as we continue to convert more funds. I can't tell you what percentage we are as a way through, and all the fund families aren't big enough to convert. But that'll continue to -- that's a recurring type item that will be there going forward. I think that was what $3.5 million number going forward, number like that.

So is this sort of low 30s number a decent way to think about the other line going forward?

Let's see. Probably. It looks like it at this point. I mean, I'm looking down and figure there's nothing particularly unusual. There's nothing in the Proprietary Capital write-ups and write-downs going there, that's a little lumpy. But it wasn't a big deal this quarter, but it can be so on a run rate I would say...

Probably right.

Probably 30-ish is probably reasonable.

And then in terms of the investment banking, can you just give us a revenue breakdown between M&A and what you did in the underwriting side?

Domestically, it was about $17 million of each for this quarter. And within Canada, it was about $16 million, but I don't have the breakdown between the two. So I think it's more and more weighted to underwriting, so probably something like 60-40 underwriting and M&A.

And then just lastly, can you give us a sense for how much of the increase in AUM came from inflows versus market appreciation?

There was about $1.9 billion of net inflows.

And is that sort of similar to what we saw last quarter?

Probably a little stronger than the preceding quarter. We had a lot more market help this quarter. Of course, we had a lot in September month, market appreciation was $4 billion number. So it was a big help. I don't remember what last quarter's inflows were. I don't have that in front of me.

Your next question is from the line of Daniel Harris with Goldman Sachs.

I was wondering if I could come back to one of the questions that was posed earlier. I think maybe about the trajectory of the quarter on the commission line. It looked like that the December month, not the quarter, was really, really strong. And I guess my question is was that really driven by a lot of activity in the muni market? I know that it was very volatile, and it seems like some of the volumes that we could track were very high, and I was just wondering if you could put some color around that.

We get a lot of mutual fund trails at the end of the quarter. And then you got underwriting activity and Best Picks, so there is some lumpiness at the end of the quarter, so I don't know...

A lot of the trail funds we try to accrue on unpaid but we're estimating, as we don't really know what they're going to end up being. When we get quarterly payments of trueing them up. That's happened the last two quarters. So that added about, I'm guessing about, $3 million above and beyond what our accrual rate was in the December month. We had a strong underwriting month as I'd mentioned before in terms of number of transactions. Not all leads that we have to be leading, just so that we participate in as well, so that drives a lot of volume both institutionally and Private Client Group and then the Best Picks UIT that we do in December for the coming year was about $5 million commission number as well. So those three things all happened in December.

Tell me about something you guys announced really late in the year, the Howe Barnes deal. What was it about that transaction? As far as I can remember one of the first you guys have done in a while that really attracted you guys to it. How did that actually come about? And should we expect that you guys should be looking to do smaller things in the securities side outside of this? I know that you've thinking about the asset management side more in the recent past.

Yes, I think as we look at growth given our size that, again, we're great believers in organic growth so we'll continue to recruit one by one because as you do that, you're pretty comfortable that people are joining you for the right reasons and there's a good cultural fit. But having said that, I think we're getting much more proactive and talking about really our corporate development function what we look for, what I call niche acquisitions. So Howe Barnes acquisition, again, added to our financial institution space, a place that we thought that we had a decent practice but certainly weren't at the levels of some of our other practices in terms of the size and scope. So it added great capability. We really liked Dan and Bill, actually introduced to us through the Private Client Group through talking to some of their advisors, and we met. And it was just a great fit. It fits our business, again, our fixed income folks were great supporters of the transaction because of synergy, and we'll continue to look for, hopefully, more systematically niche acquisitions, which I would put The Lane Berry acquisition, which really helped us in our M&A practice. Howe Barnes which we think will give us more critical mass in our financial institutions group with great people and look at other areas in all of our businesses that we can do that. Again, we're not a big believer in big acquisitions because of both the cost, the cultural implications, the integration but acquisitions, niche acquisitions we would hope to do more of if we can find them, if the culture fits and if the price is reasonable and if we can get those criteria and they fit the strategy that we will, hopefully, we'll do more of.

Your next question is from the line of Michael Lipper [ph] with Lipper Advisors.

I'm a little curious thinking long term. Assuming for the moment that you don't do any foreign acquisitions, at what point will your international activities be a meaningful contribution to your earnings? I'm thinking out like five years. Would they be 10%, 20% some normalized period out there?

Yes, I think if you look at institutional sales, they're already at $30 million gross. I mean, they're already a factor in our business. But we will continue to look at growing our business in Europe, organically and in South America. But having said that, I think that if you look at the real number drivers, international become more important and we're very committed to it. But we have plenty of opportunities in North America and the U.S. and Canada, and those numbers I think will continue to be the predominant growth numbers even as we invest more in Europe and South America.

But let's assume for the moment you're not considering Canada international because we clearly have a big commitment there. I would say that Europe is already a material factor in our Institutional business. We have several independent contractors, sales offices over there and some trading and research operations. What you see in our segment presentation as Emerging Markets is a small number and if that's what you're referring to we go a lot a little more gingerly into the Emerging Markets space than we do in the developed markets, and if the opportunities don't present themselves, that may never become a meaningful part of our business.

Would it be useful at some point to, at least in your commentary, aggregate your international activities and for the moment include Canada, include your institutional sales overseas as well as the office space activities?

I think it's in the 10-K if you go...

By country.

By country, but is that by where the client is or where the office is?

That's by where we're located, where our sales person is located or our producer is located.

Your next question is from the line of Steve Stelmach, FBR Capital Markets.

My question is on the rate sensitivity to just -- you sort of mentioned the $80 million to $100 million of your pretax leverage at the higher rates. It's been out there for, I guess, for a few quarters you mentioned it, yet margin balances are up, call it, 12% year-over-year. Are you seeing any sort of incremental benefit from those higher margin balances yet? Or is the level of absolute rates just not really moving a needle yet on the broker side of it?

Yes, to the extent that margin debit has increased just as bank loans would increase, then we'll see some increased interest earnings from that. But when I talk about the $80 million to $100 million, I'm really talking about the spread on cash, client cash balances that we just are turning around and then deploying in overnight investment-type activities or in our own bank, et cetera. That dynamic hasn't changed. We haven't really seen cash balances change much, if anything, they've increased a little bit. So we haven't seen a big massive deployment back into the market of cash balances. That $80 million to $100 million, the reason I give a range, is because it's depending on how much is in cash at any point in time. But to the extent that loan balances either at the bank or the brokerage firm increase, that will definitely benefit interest earnings even without any change in rates.

You are seeing the benefit of that, those loan balances or the margin balances increasing to some degree?

Yes, rounded to a $1 million this quarter to the Private Client Group.

And then on the bank, is it fair to say it's still fee liability-sensitive business?

Steve, we would characterize it -- we're really more asset-sensitive in terms of -- and that business mix has not changed at all. I mean, we are funding the portfolio predominantly with floating rate deposits. We do have almost all the corporate loans or floating rate. The residential loans are almost exclusively 5, 1 adjustable rate loans that have typically a three to three and a half year average life. So we do have some interest rate risk, but it's relatively low and manageable. We've done some hedging in the past, and we monitor that very closely on a monthly basis on a formal, very formal approach to the interest rate risk management. So...

People need to remember the flexibility we have in the bank on the funding side. We can adjust deposits almost overnight, and so most institutions have to worry about that where we have the luxury of being able to sweep deposits into the bank or sweep them into other banks through our bank sweep program.

I see interest hovering around this $80 million to $85 million range for a while until either balances take a huge jump in terms of loan balances or until interest rates start moving, and then we'll see a dramatic and get back over the, well over the $100 million a quarter where we had seen it before.

And that's even with your 340 basis points of NIM guidance?

Yes.

Your last question is from the line of Douglas Sipkin with Ticonderoga.

I just wanted to come back to the provision expense, maybe Steve could chime in just a little bit. Obviously, a bigger drop off than I expected, and could you maybe and I apologize if you have given it, I jumped on late, can you give us how we got there from where we were running at? I mean, I know I saw MBAs decline, but you guys are starting to -- the loan balances did grow a little bit, so I'm just trying to get the sense of how do we get this decline this quarter and what sort of the outlook is right now.

Sure. I'm trying to reconcile that back for you. We've had a low number of downgrades relative to upgrades. We did resolve some of our largest problem loans. So actually our largest, nonperforming loan was resolved in the quarter. We had another problem loan that was fully paid in the quarter that freed up reserves, if you look at that on an isolated basis. So in effect, our charge-offs and our additions to reserves offset each other approximately. So it was really a reflection of improving credit trends kind of across the board, and then our residential portfolio has really stabilized in the last couple of quarters. We haven't seen dramatic improvement. The improvements have been nominally better the last couple of quarters. So all of those factors led to the lowest provision expense in a couple of years.

And then maybe a question for Paul. It seems like you'd have to be blind not to see you guys are doing better in investment banking. How much of that is hires? How much of that is maybe you guys are finding better leverage points with the commercial bank and the investment bank? How much is the environment.

I guess it's a little bit of everything. We've continued to hire. The Lane Berry acquisition and M&A is starting to really come into fruition. That always takes time when you do an acquisition both between the market and the integration of very good people. I think we're getting payoffs. We continue to hire bankers. The market has been pretty strong in sectors where we're strong in, both the REITs, downstream, energy, business, health care have continued to produce very, very well, and also as a recovery and the capital markets open up more to the middle market companies, it's also going to benefit us or position us. It's kind of hard for us to compete on Fortune 100 business. And as you know, as the markets continues to open up and allow more companies in, then we become a stronger and stronger player in terms of being able to be the lead book runner on deals. So it's a factor of all of them and again, I think the outlook looks good but given the markets stay open and they continue to trend it open, it should be a good outlook.

ROE just below 14%. I know you guys raised the dividend last quarter. You did an acquisition. It does sort of feel like you guys are starting to use that excess a little bit more. Should we continue to think probably bolt-on acquisitions? I know 5x historically haven't that big of a focus unless stock really got a lot lower, maybe just update us on that.

Yes, as you know, we've had a pretty consistent dividend payout policy except for the board. If earnings go up, my guess will probably be dividend within the range, that's up to the board, and we're not big on stock buybacks unless we feel like there's no use for money, and we would like to systematically do deals like Howe Barnes and Lane Berry, if we could systematically find them. So the big caveat is we would like to do more, we’re going to put processes in place, hopefully do more. But we're very, very disciplined in terms of -- as Steven said, we're not going to do it just before some growth number, and we're very focused on that return on equity. So I think with any help with interest rates, they would be in their historic earnings this quarter return on equity of 15% outside of that. We're going to stick to the fundamentals. So hopefully we could do more deals like Howe Barnes, but I can't say we have a ton in the pipeline. We happened to look at a lot last year and found one that we closed on, and we'll continue to more systematically look. And if we find them, we'll close on them and hopefully invest some of the cash as we build it.

It also seems like non-comp expense can seem to be pretty well under control. I mean, just generally with the revenue levels, you probably expect to see a little bit more. I mean, are you guys doing some stuff internally to get more efficient or track stuff a little bit better to maybe kind of save a buck here, save a buck there, where it adds up to a little bit on the non-comp side?

That we do everyday.

I would say, Doug, that we are very sensitized to it after what we've gone through over the last couple of years. We don't have a lot of fat in this organization, and we never really have. So I think that what we're seeing here is a reluctance to build expenses, to meet those revenue levels and we're making sure expenditures are really very, very necessary before we undertake them.

If you look at the expense levels, we have bolstered IT spending a little bit, it's very focused on where we spend money in things that are critical, and we try to keep very tight on the operations side. Yet if you look at advisors satisfaction and stuff, I mean, I think people rate us just kind about unusually high in service. So we tried to manage cost but in the downturn, we didn't cut the back, really the support areas in order to keep our service level high. So we tend to be more even, but even in that markets tend to be watch our cost, too, because we know markets come down. So I think, again, as Jeff said, you'll see the comp ratios without interest increases in the same maybe hopefully down a little with volume but as the businesses grow that are less comp sensitive or earnings grow like in net interest earnings that will bring the comp ratio down to put it more historic levels.

As well as all the other expense ratios. There's not a lot of expenses with improved interest expense. So we have very little control over that.

There are no further questions.

Great. Well we appreciate you joining the call, and we'll get back to work. Have a good day.

This concludes today's conference call. You may now disconnect.