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.

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…

22% [ph] in the last quarter.

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.

(inaudible) March I guess.

Yeah and the what?

5.1 to 8.3.

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…

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.

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?

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.

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

I think your average life.

So, that three year?

Two.

Two year, okay.

Yes.

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

That sounds right, yeah.

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

Yes.

Okay. And I mean was there any particular exposure?

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

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

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

Right.

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…

Okay.

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.

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?

(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.

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…

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

Yeah, okay. Okay.

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.

Sure, sure.

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

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.

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.

Okay great. Thanks a lot guys, great quarter.

Yeah.

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

Good Morning.

Good Morning Joel.

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?

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.

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.

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.

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

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

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

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...

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

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

Yeah. I can. For the quarter?

Yes, please.

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.

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.

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?

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

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

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.

We're on our -- the timing…

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.

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

Great. Thanks so much.

Okay, Joel.

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

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?

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

Increased expense, okay.

If you think about it, it results in understated…

It would often…

…from the normal rate.

….fall to the pre-tax line.

Yes.

I am sorry. I didn't get that.

It was all substantially the pre-tax.

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

Yeah. There might be general bonus accruals…

Right

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

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?

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.

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?

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.

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?

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.

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?

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.

Okay.

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

Great, thanks a lot.

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

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.

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.