Good morning. My name is Roshira, and I will be your conference operator today. At this time, I would like to welcome everyone to the quarterly analyst call. (Operator instructions) Thank you. Mr. Reilly. You may begin your conference.

Good morning everyone, and thanks for joining us. I have two pieces of good news to start our call. First is the company and our earnings are much stronger than my voice this morning, and secondly, I would say that it is rare when you have a company where you can go to the bench and get a replacement for the starter, who has more experience than the starter. So, in a sense my voice won’t hold out through this call due to laryngitis. I’m going to turn it over to Tom James, who will lead the call this morning. Tom.

Thank you Paul. I’m here with the normal cast of characters, our CFO, Jeff Julien; our bank president, Steve Raney; Jennifer Ackart, our Controller, our lawyer, who must sit in on these calls; Paul Mataki [ph]; and then Chet Helck, our COO, is here. So, hopefully we can all fill in for Paul adequately. It is a pleasure to join you again, albeit I wish Paul was in better condition, because it is kind of fun to do the good numbers, as opposed to some of the ones that are less favorable in comparison. As I recently announced on CNBC, of course, we had a record quarterly net income and net revenue number. We had 748 million basically in net revenues which was a 12% increase in the quarter. Costs were contained reasonably well with a 6% increase. Again that has bank loan in it, but those are non-interest expenses. And generally I would say cost continued to be well managed as they do mainly for corporate America, generally speaking, although we, of course, have been doing a lot of hiring. So it is not as if we don’t have more comp expenses. You can see that generates most of the increase in expenses during the quarter. And as a result, net income per common share beat your estimates of $0.43, $0.44. They were $0.55, up from $0.35, and $0.49 in the immediately prior quarter, which means we were up 57% for the quarter, and pre-tax margins were 13.8%. After-tax margins on net revenues were 9.23%. Our comp ratio stays relatively high, especially on net revenues, but you got to remember to eliminate the high payout for independent contractors, which basically translates its way into the expense reductions. And in fact that comp ratio adjusted would have been 60.6%. So…

(Operator instructions) Your first question comes from Devin Ryan with Sandler O'Neill.

Hi, good morning guys.

Good morning Dev.

Just want to drill down a bit more into the commissions and fees line, you know, obviously you guys bucked the industry trend, and then it looks like September was a record month. So, just want to dig in a little bit more, you know, FA productivity just really ramping from the new additions, which may be offset some of the slowdown, or was in your view the bigger driver than mix of the revenues, just trying to get some more…

Actually the fee basis as I said is being very positively impacted, but the regular commission levels are up too, where you wouldn’t have that kind of an increase in PCG commissions which – were the commissions fees up 12, somewhat that percent. So, what I would say is that activity is good there. The institutional equity commissions are still somewhat lackluster, but fixed income picked up from recent quarters, albeit not at the levels of last year. So, I think it is mainly productivity enhancement is sales people who moved and the sales people who are here, are now in the process of recovering in their business plans, and essentially client attitudes. While you see this continuing movement to fixed income from equities are much more positive than they were. They feel a lot better. You know essentially those that had the perseverance, the retirement funds are now back up to the numbers they had prior to the start of this chaos that existed in the financial markets and the following recession. So I expect actually that will continue. We still have not returned to the productivity levels that we had at the pre-downturn point. So there is a lot more room for growth there. I also think that the movement of people as the retention on a lot of these contracts at some of the major firms drops as it amortizes over time, will enable more people to think about moving because there is still a lot of upset from the changes in the industry. It hadn’t stopped. So, I’m sort of bullish on the individual PCG business, and I think that we will continue to successfully grow it in the UK and Canada here, as well as in the United States. So, Chet and Paul and all of our retail heads, Dick Averitt and Dennis Zank, I think are doing a good job of controlling expenses. They are working hard to make the newer offices that we have more productive and profitable, and their contributions they are more selective in what they are doing in terms of new office openings currently. So, I think they are doing the right things, and we will continue to have improvement. But if you don’t get more people back to work, and you don’t have a better tone to what is happening, I think we may not see the increases we would like.

And then Tom, you touched on this already, but with certain items within FinReg that are pretty open-ended like the SEC’s interpretation of the fiduciary duty language, just as an example. As time passes, are you guys getting any more clarity on what the regulators are thinking about some of the interpretations that seem open-ended?

Basically Chet reported to us in the last department head meeting. Some were passed, we don’t have a clue, but not very far. I mean this is very complex area. The regulators are way behind the times of what is really going on in the relationship of financial advisors to their clients. And you know, to make some kind of distinction between registered investment advisors and financial advisors in general, it is really not quite correct anymore. So we don’t really have a problem as financial planners with somebody defining higher levels of fiduciary responsibility on the part of financial advisors. We actually have very high quality training in the financial planning area, and in values and in all of the issues in addition to investment management, and investment advice for our financial advisors. So I am fairly comfortable with this. I don’t think you can kind of hold people to the old RIA language, which was designed for real money managers that were professional third-party organizations. So you got to craft something that works for someone that gives advice to individual clients, and host financial advisors to high standards, but it doesn’t prevent them from doing the kinds of business that we do today on the retail side, where we have inventory positions we sell out of. I think that is beneficial to our clients, because we divide them into smaller retail like lots. We do it for a low-cost to the investor. I actually think that having some of these rules that prevent that kind of activity are unnecessary. I think there are numerous other areas where the technicalities of the differences are going to interfere with the business. I mean, just think for a minute, what do you do for new underwritings if you are forcing somebody…

Okay. That is good. I just want to make sure it was open conversation, which it sounds like it is.

They are inviting comments and meetings.

Okay, good. And then just lastly, for Steve, and then I'll hop back in the queue, just on the bank side, with some of the credit trends improving, it looked like on the residential side especially, would it be reasonable to assume that we could assume some reserve releases in the near future, or are we just getting ahead of ourselves on that one?

I don’t know necessarily about any substantial reduction in reserves Devin. We are seeing some improvement in credit terms. We are starting to see some moderation, although problem assets are still at escalated levels. You know, this is the first reduction in the residential past-dues since the December 2007 quarter. We have also seen four consecutive quarters of declining charge-offs on our residential portfolio. But our corporate portfolio, as you know, has actually performed very well. But we are still subject to having – it is pretty lumpy. One or two loans going back could change that, but we’re starting to see some moderation and some improvement in credit trends.

Remember Devin, we’re going to have the same conservative attitude about reserve levels that we have everywhere else in the firm. And I would have argued that actually a combination of the accountants and regulatory positions et cetera actually had reserves at too a level for the banking industry, and still does for the securities industry. And it is unfortunate because it doesn’t adequately tie revenues to future potential losses. So, we are going to always err on the side of conservatism.

Okay. Thanks, guys.

Your next question comes from Hugh Miller with Sidoti.

Hi, good morning.

Good morning Hugh.

Just, I guess, wanted to touch a little bit further on the commissions. I guess you have talked a little bit about maybe an improvement in some of the production from the new advisors and client attitudes maybe adjusting a little bit. From some of the industry trends that we have kind of seen, even with the movement up in September, we still saw substantial outflows of assets coming from equity funds. I guess, I was wondering maybe could you talk a little bit about whether or not you saw some advisors maybe trying to generate business during September, ahead of the fiscal year-end, maybe to achieve production, was that at all maybe a benefit you were seeing.

September wasn’t a really great month compared to other months, other than for the fee increases if you look at the comparisons to the immediately prior quarter. What I would tell you, there is a lot more underwriting activity that does drive some increased commission generation, not only on the primary issuance, but also in the aftermarket. So that helped commission volume, both retail and institutional, but this is not – we’re not seeing some tremendous surge on the part of either the FA or the client in terms of generating more equity business. I wish I could say that that was the case, but let me tell you, investors are now – they are also very conservative. They are being careful, maybe too careful. I would tell you, as I did to one of our BIO visits, by invitation only, when we bring large clients in, and just last week, I told the individual as he was talking about, this is a 47-year-old who sold this second business, and has multimillions of dollars as a result of this. And he was trying to be 50% fixed income and 50% equity, and I pointed out the risk of fixed income in this market, and the fact that he really shouldn’t be based that way, but actually the intermediate term outlook, and the only caveat I put on this is that I am very fearful of not getting our financial house in order on the US basis. I am actually sure the States will do a better job of this. But I am very concerned that our Congress and our President are not addressing, giving the confidence to our people by showing they are stopping profligate spending. So you know that is a countersense to improving the employment and things like that, but I’m telling you right now if you don’t show the kind of effort and control here, we are looking at some big numbers out there, both on balance sheet and off balance sheet, and boy, we better show some progress. I mean, I think the US public is just fed up with politicians who are dealing with that, and we are going to see that in the voting results against both incumbent parties. So this is a strange environment we’re in, but not surprising given the first election after the new president is in place. It is just – it is really discouraging to those of us who are more fiscally conservative whatever our social views are, which generally are far more liberal than people think. The fact is that we need to deal with these issues.

Okay. I guess maybe as a quick follow-up there, I was under the assumption that a good portion of the fee-based commissions, especially within the retail channel, were generated off of the June 30 balances for the quarter, which obviously maybe were a little bit of a headwind there. Am I overlooking something? Or one would have thought that a good portion of the commission strength from the retail channel would have been driven off of increased transactional-based opportunities?

It is about a 60-20-20 for managed business. About 60% of those assets are upfront, 20% are on average over the quarter and 20%, particularly the institutional accounts, are in arrears.

Retroactive, yes. 60% would have been based off of the June 30 balances?

Correct.

Okay.

But there are also new accounts being opened throughout the quarter as people commit new dollars to the market. And those are pro rata (multiple speakers). So, we got an 8% increase in the assets under management during the quarter. I mean it isn’t really – this is not a dramatic change. It is just some increases. The billings for this quarter going forward are clearly higher. I mean they are going to be better. As I said net sales are still layered, albeit for the whole industry, I would tell you there is too much asset rotation amongst managers. And you see that in the holding time. It is ridiculous, and we’re trying to get our salesmen less sensitive to trying to outguess sectors and outguess markets or geography moves.

I would just add in September the two biggest drivers that made it an abnormally high month, and abnormal relative to the other two months in the quarter, where the level of capital markets activity that Tom mentioned, and just the general upward trend in the market, which was strong obviously in September, which caused a lot more new dollars to come in as you can see by our client assets.

Okay, great. I appreciate the color there, and maybe a question with regards to the Bank, just talking a little bit more about – with some of the change you've seen, obviously, you are seeing new originations and runoffs kind of offsetting that. Can you talk about the LTV metrics now that you are seeing on the portfolio relative to prior quarters? Is that starting to come down, given the new originations and whether or not you are being a bit more conservative on those LTVs for originations?

Yes, Hugh, just to make the distinction, a lot of our corporate loans are not tied specific to real estate. And so that LTV dynamic is a little bit different on that sector of the portfolio. I would say that over the last couple of years, actually, we've made some changes to our underwriting criteria, and our LTVs inherently have come down a little bit. There are some certain product types that we've shied away from in our residential portfolio clearly. But we have always underwritten to a very conservative standard, and even despite that, we still have loans that are over 100% loan-to-value in the residential portfolio, given the significant price depreciation throughout the country. But I would say that the loans that we have either purchased or originated in the last couple of years have been at very conservative LTVs. And those loans have performed exceedingly well. It's the legacy loans that were originated back in the '05, '06 timeframe, '07 timeframe, are the loans that have been the most challenging.

I think the LTVs are still in the same, the 60s type of range, but it's on a very depressed (inaudible) where they were being underwritten several years ago.

Okay, and you mentioned there about – Tom mentioned about his expectation that we could potentially see some lower provisioning in future periods. And that – you mentioned, obviously, that you wouldn't expect to see as much reserve releases. But obviously, one would then assume that you would anticipate that we are getting to a period where charge-offs should continue to trend lower. Or is it just that you expect that the reserve ratio may kind of moderate a bit, as you see some expansion in the portfolio, you may not need the kind of reserve at that still to change level?

Yes, Hugh, the going-on business is reserved at a lower level than what our current portfolio reserve level is. But there may be some very small release this year, if it all goes according to plan. And to the extent that we have charge-offs, our reserves – we would think our reserves and our charge-offs would approximate one another over the next few quarters, and thereby not having any release of reserves.

Okay. Thank you very much.

Once again, our going-on business, we actually would like to be able to be in a position to actually add some more to reserves through growing the loan portfolio. But it is going on at a lower rate than what our current reserve levels are. As a reminder, our average going-on reserves in the corporate portfolio is roughly in the 150 basis points to 160 basis points on our residential loans; new loans go on at a little over 80 basis points of reserves.

Okay, great. I appreciate the color there. Thank you.

Your next question comes from Daniel Harris with Goldman Sachs.

Hi, good morning guys. How are you doing?

Good Dan.

Good morning.

I wanted to come back to the question – point you were making, Tom, about the difficult recruiting environment for the advisors. As we look at the numbers you guys have, it seems like the US has really been where the problem is, and you guys had ramped there so nicely in ’08 and ’09. But as you think about the recruiting environment, what are you thinking for the next 12 months in terms of activity levels there? Or are you comfortable just sort of to grow slowly from here, although it seems like it has been more stable to slightly lower recently?

We are comfortable growing at the way we have been growing, but I can tell you we are used to higher rates of new FA acquisition. So, we have pretty big business development efforts, and so all those people would certainly like to see the numbers higher. And I think they are going to begin to edge up now. Our home office visit statistics are increasing. The fact is that the people that are interested in moving are trending to take longer to convert again, because they are being cautious and their business is better, their economics are better, and most of them have some sort of retention they didn’t have two years ago. And that really does affect the numbers, but I have always been amazed at the ability of these major firms to shoot themselves in the foot, the knee, and sometimes higher up. So they find a way to encourage their own people to leave. So I think that is going to happen again, so I’m not in as big a hurry to do anything about that, but that doesn’t mean we’re not aggressively recruiting and that all of us in senior management aren’t meeting with high producing FAs every week. I mean, we’re still talking to a lot of people. There is a lot of interest out there. It is just that people are more impacted by these times. And sometimes they will even commit for 8 months out. I mean, this is – it is a very strange kind of an environment here.

Your next question comes from Joel Jeffrey with KBW.

Good morning guys.

Hi Joel.

Can you give us a little bit more color into what was really driving the net trading profits? Was it just a better fixed income environment or was there anything else in there?

In recent times, equity capital market losses have been reduced. But by and large here this was a much better quarter for fixed income. And you know, we have pretty active small position business with outside broker dealers that generates a lot of commission income with the high levels of interest in fixed income generally speaking. So I would tell you, I anticipate that the kind of slowdown continued to slow down a little bit, but fixed income is so much stronger as a portion of the firm today than it was when the downturn started. We have far more institutional sales people. We have a lot more analytics and support for institutional sales. We have a lot more public finance people, originating activity. I actually am quite bullish about the place that fixed income now has in the overall firm position, and we still have opportunity on the international side in this area, which we haven’t developed at all. So this is, I think, a good time for them. The equity side, I find it harder and harder to find ways to justify a lot of facilitation losses, because you see less and less commissions being dedicated to research. We actually gained some market share last year, where our commissions in absolute numbers were not that good. So they ought to be 30% higher is what I would tell you and what our heads of equity capital markets and sales would tell you. So, it is a little bit of an enigma for us because when you talk about small and medium cap companies, you got to really rely on a lot of outside research. And there are a few of us and many fewer doing this with the same depth and breadth of coverage today that has existed before. So as new issue activity picks up both from the private equity side and from just small entrepreneurially oriented companies, and it spreads into technology and consumer, and some of the other areas. But I think we will see more institutional commissions.

Okay, great. And then in terms of the investment banking side of the business, can you just give us a breakdown between how much came out of M&A, how much came out of ECM and then how much came out of DCM?

I will let Jeff or Jennifer do that. M&A has been terrific for us. I mean, we sort of met our objectives of generating a higher percentage of revenues from M&A. Jeff, you got a statistic.

At least for a quarter, we are about $20 million, this past quarter. About $20 million Joel.

Okay. And then I guess just lastly, Tom, you had talked a bit about growth opportunities. Is there anything you are specifically looking at and you are going to focus more internally? Or do you think it is – there is a possibility of an acquisition maybe outside of the asset management business that you've talked about in the past?

Well, there is nothing far enough along to announce as acquisition, potential, and what we look at are mainly tuck in acquisitions now that add value. And on the asset management side, we are still looking for lifts outs and small acquisitions in several specific product areas. And I would say the same in ECM and fixed income, we would look at opportunities out there if they show up for us to consider. We have as many internal opportunities I would tell you. We don’t rely on external acquisitions to affect growth here. We expect our people to be able to grow their businesses on average above 15% rates, and more careful, we don’t like overpay.

So is there one business within Raymond James that you guys think has potential for more outsized growth than others?

I have always thought asset management was the easiest one to do. It is just hard to identify really superior sort of cast-iron track records that you can rely on, and you don’t want to buy anything that has a lot of immediate market risk attached to it. So it has been slower than I would have thought. My son works in that area, and now my son [ph], he is busy looking at all kinds of potential opportunities, but trying to screen through the whole process, and have somebody come out of the other end of the pipeline is a lot harder than it sounds like it would be.

Great. Thanks for taking my questions.

Okay Joel.

Your next question comes from Douglas Sipkin with Ticonderoga.

Good morning. Can you hear me, guys?

Yes Doug.

How are you doing, Tom? Nice to hear your voice again, we missed you for a quarter.

You do not want [ph] hearing this.

Just a couple of questions. Maybe get a little bit more specific on the commissions and fees, and obviously, I don't want to hold you guys to this, but maybe you could ballpark it for us. So you did $497 million in commissions and fees, can you give us – what percentage of that is fees versus commissions, and then what percentage of that fee number is priced on beginning assets?

You know, what you want to do I would tell you is you need to separate out the institutional commissions from the retail commissions. I think the – I don’t have the numbers right in front of me, but it seems to me it was in the 440 range in the PCG sector. And there are roughly 51% or 52% fee-based and 49% commission-based or 48%.

I don’t understand what is in recurring fees. I mean it is not just asset management accounts, they are trails, they are shares, recurring payments from bonds, they are other things that go into the recurring stream.

Net interest.

And in terms of the total revenues, it is a different line item, but in terms of total revenues, the interest went up in some of these other fees as well. So, it is driven by how much of our business is some of the packaged products that pay recurring fees as well.

Got you. Okay. So I know you gave a little bit of it, Jeff. You said about 60%, 20%, 20% – I guess is that – I man, a fair sort of way to think about it? Obviously, there is a lot of things in there.

That is for the managed, discretionarily managed $30 billion number that you see down there. And then we have another $30 billion of non-discretionary reps that are billed in advance.

Okay.

And average of those two it is about 80%, but that is a lower number.

Okay. All right, that's something to play with, I guess. Second question, I noticed the margin balances, I guess in retail, jumped a lot – well, at least the highest I've seen in a while. I'm assuming some of that happened in September. And I'm just curious, you guys seem pretty lukewarm on interest in the retail business, obviously, because of rates. But I would imagine that helps a little bit.

That helps a lot. I mean the fact is that margin spread on margin accounts is very good. And we report that number in a quarter, I think last quarter or something like that. So as the balances continue to escalate as they have both domestically and in Canada, and hopefully in the UK, we will begin to see bigger spreads in our business. I mean it has hurt our UK business, and our Canadian just as much as it has hurt our US business not to have that revenue source at levels we are used to. And you have to remember, there has been a general trend down in margins versus assets. Our firm, we used to be many years ago over $2 billion in total margins if you looked at all these pieces that we have in there now. And so it basically came down all the way to almost $1 billion, and then it has been easing its way back up. And as markets continue to improve, I expect it will get better, but it is never going to be at the same levels in terms of measurements to client assets as it was in the past. I can just tell you it takes a long time for people to want to take leverage risk when they go through a down-market, and that is quite appropriate given the average age of our client. So, we always have mixed emotions. You know, you will hear certain members of our board argue hard for more and more net interest earnings, which we love them. They are great things, but on the other hand, we are more concerned about the risk management profiles of our client base, and trying to be very careful that the wrong people don’t have merchant accounts. And you find it – actually these margin accounts are a very small percentage of our overall client base. So we haven’t been as good as we should be at selling people to use margin accounts as immediate cash needs as supposed to other forms of lending. And maybe we will get better at that. Merrill has always been the great leader in that kind of activity over the years. And given our conservative financial planning background, we really are more careful I would say than most of the firms.

Great. Drilling into some of the ratios at the Bank, total capital, 14.2%, I believe you said, maybe last year or a bunch of quarters ago, you would like to see that at maybe 13%, 13.5%. What is the plan? Are you guys just going to operate with that big cushion, or is there a plan next year to maybe give some back to the parent from the Bank or investment opportunities or any light on that?

Doug, we have more cushion than we need. That 13% to 13.5% is quite a bit of cushion in and of itself. We would like to grow in and use some of that cushion. And then also consideration has been given to sending some money back to the parent company as well during fiscal 2011.

Got you. Okay. And then just finally, nice jump in ROE, ROA, the best in a bunch of years, or quarters, whatever, what is the road map? What business is going to get you back to the mid-double digits? I mean, it seems like it is going to be Retail and Capital Markets, but maybe a little bit more from you guys how you can get back to the mid-teens, which I believe is sort of where you guys are targeting.

Well, we certainly like to have the $80 million to $120 million of additional interest profits that we are currently missing that we had before. It dramatically comes from the retail side of the business, and that would get us back to our historical contribution margins in the PCG Group. So, I think that is the biggest number. There is this general expansion of productivity, which is the next biggest number, because if we get back above our highs in the past before all this started, there is a considerable amount of growth there. And we see that we are growing assets per financial advisor, and this other stuff is trailing largely for some of the reasons we mentioned about people’s concern about having too much equity exposure, and not having the nerve to step up to the point, and add – it is hard enough trying to convince them to maintain their equity commitments. And if you remember back in ’73, ’74 crisis you really didn’t generate the kind of enthusiasm about equities until ’82, after ’82. And we had lows in the market that weren’t dissimilar in ’66 and ’82. So, this can take a long time. It doesn’t mean that you don’t have growth. It doesn’t mean you don’t have profits. If you look at our records back then they were in the 20% plus internal growth rate during that period. So, we can do that. We still have great opportunity for expansion in all of our sectors over the future here. So, I’m actually encouraged. I think the bank, one of the things you don’t talk about a lot is the interface now with our investment bank and commercial bank working together, trying to find solutions to financial needs of our clients, corporate clients. I think there is lot of progress. Steve gets a lot of credit for working well with our investment banking teams. He even has lenders now in the areas which are major sectors, practice and the segments for him. You see the same thing on the retail side where we’re trying to provide product to our financial advisors to use with our client base that make them competitive with major banks in whatever markets they are competing in. I think those things have great growth potential in the future, and so you know, as I said when I was retiring from the CEO role, the thing that excites me and I know excites Paul, is the opportunities going forward from the base we have already that we strengthened during this downturn that we have for internal growth. So I’m excited about that, and we all look forward to taking advantage of that and we just hope the wheel doesn’t come off and the US economic from a failure to deal with our intractable off-balance sheet and balance sheet issues.

Your next question comes from Steve Stelmach with FBR Capital Markets.

Hi, good morning.

Out of the queue.

I don’t know.

Steve you are on.

You are on.

Hi, just real quick, on the provision expense, Steve. I know you talked about it a little bit. But you were talking about provisions going lower – just to clarify – both on a percent of asset basis and dollar amounts, correct?

Yes, I would think, and maybe on a percentage of assets during the course of the year it would just maybe come down slightly.

Yes. Okay. And then Capital Markets' margin, pretax margin, it looks like it jumped pretty nicely quarter-over-quarter on what was the same revenue number. What was driving that? Was it just simply more lead-managed deals or was something else going on there?

Trading.

Yes.

Trading, investment banking fees and other financial service fees.

They basically replaced commission income.

Got you. Okay, and then lastly, on the – I think I remember you guys talking about increasing marketing. Is that – and then maybe not coincidentally, I saw an advertisement for you guys today in the Journal. Is that a function of you trying to offset what has been a tough recruiting environment on the FA front, or is that just purely directed at the …?

I will tell you it is the marketing cycle. we have gone through a couple of years, or three years were we haven’t really changed our team approach to advertising, and we did that because times were tough, we did that because we were watching margins during the downturn, and it was an appropriate time for us to issue new both written and TV ads. So, you will see launches of TV ads now currently. I think we had some in the baseball games this week. It has nothing to do with earnings release. To be frank, we started this independent of recruiting kinds of considerations that is more driven to our private client individuals, if you look at it. And trying to actually – to me, this is one of the most frustrating things. I know it is for Jeff too. The time to differentiate yourself from other firms, and trying to be creative to get attention, those kinds of things, there are extremely difficult to be very effective at and the measurement issue of what the impact is very hard. I can tell you what the stadium naming did, but I have a lot of trouble now trying to determine whether the new ads have more impact, less impact. It is just one of those things you keep dripping on people all the time in different ways, and we try to do that effectively, and I know Jeff has been through this a lot more than I have over the years. Jeff you might have a comment or two on this area.

What I would tell you is that our approach has been remarkably consistent. We did dial it back for cost savings the reasons in the last couple of years, held off on developing any new materials because of the cost, and therefore slowed our schedule. But you see, if you put our spend on advertising in a longer term perspective, we are remarkably consistent with a relatively low percentage of revenue, especially compared to our competitors, and you see our schedule in somewhat of a lumpy fashion. We do that for concentration. When you don’t have a budget that let you be on the six o’clock news every day, you tend to try to group them into periods when people will notice you, and then go silent for a while and then come back later. And so that is our strategy. We have been doing that for years, and has actually worked. Our measure of awareness scores have gone from the low 20s just a few years ago to about 50% within our target audience. So we have really been successful in making people aware of who we are and what we do and build some brand strength in the process.

Okay, great. Thanks very much.

Yes, Steve.

Your next question comes from Michael Lipper with Lipper Advisors.

Good morning, Tom.

Good morning Michael.

I'm delighted that you are in good health, and sorry that Paul is having some throat problems. I would like to focus a little bit on the securities loan business, the variability on the revenues. And what are the elements in the expenses for that business? Because it looks like the margins should be higher.

I will answer the first part of the question, which is the nature of the business has changed considerably. We used to do a lot of non-box lending, matching, what you call your matched book, which really doesn’t exist much in the industry any more. You know, they eliminated the finders involved in the business probably for good reasons. So we don’t do much of that. It is mainly out of the box. The box here is good because we have a lot of smaller companies that tend to be less available to borrow some of these stocks. You can still learn some margin on that. The general margin rates number two shrink kind of in relationship to absolute interest rates, so that we don’t earn the same margin in this type of period that we would earn in a higher interest rate environment. Third, you have a high fixed component. You haven’t fired a lot of people, when in fact your net interest-earnings have declined during this period, so your margins have shrunk. It is not really a whole lot different other than that. And you have more support cost for outsourced information systems and IT support for that business now. So, what I would tell you is we need to have that business internally anyway for supporting clients, and short positions and things of that nature. But it will never be as impactful a business as it was when we had a big matched book. So it will get better again. Those margins will increase as interest rates go up, but I don’t view this as a major segment that deserves a lot of attention. I think we have good people, but the business has changed. Jeff you want to elaborate on any of that?

Not really. I mean it is just the low revenue and the results really are a function of rates. I mean, we just can’t earn as much on the cash that we generate from lending out securities. Also I would guess the only other comment I would make is we don’t believe we are guilty of any of the things in the recent New York Times article about the business with respect to clients sharing of gains and losses. So I don’t think we don’t run our business that way. We don’t have a lot of big fiduciary type clients either that we’re not letting the box out for some major trust companies or anything else. It is just our own client base.

Thank you.

You have a follow up question from Hugh Miller with Sidoti.

Hi, just one quick follow-up question, maybe for Chet. Was wondering maybe, just given kind of the barest sentiment industry wide for equity flows, just your sense as to maybe are you seeing maybe a less risk-averse sentiment from some of your clients that are working with a financial advisor, as opposed to maybe the person who is doing it themselves and still kind of pulling money out of equities, and putting it into fixed income? Is there anything that you are seeing there or would that probably not be the case?

Well, I think most good financial advisors are taking a very prudent balanced approach with putting more emphasis on our asset allocation than maybe even they traditionally did. So that would tend to try to steer more clients, as Tom mentioned, towards the equities at this juncture. That said – it is part of our throat – we are continuing to be concerned about the flows into fixed income and the risk in the fixed income markets at these low interest rates that clients are exposed to. And that is happening with individual bonds, it is happening in managed accounts, and it is happening in mutual funds where the flows are just proportionately going into the fixed income types of products. I guess the good news is that most of that is going into very duration kinds of portfolios, which signal the fact that clients are seeing it as a positioning tank where they can wait until they are comfortable putting more and more of it into equity markets, which is very bullish for all of us. So, it is something you have to manage carefully with clients so that they are not overexposed to long durations when rates start to rise. And we talk about that lot with our financial advisors, and they spend a lot of time with their clients. So I think clients who are taking advice from financial advisors are actually in better shape than the self-directed people by and large based on the statistics, but that doesn’t mean we don’t have the same issues to be worried about.

Yes, in the fixed-income area, I would say that if you look in our compliance or standards meetings, we spend a lot of time now talking about issues of disclosure, issues of maintenance, of positions. Think for a moment about the potential risk of municipal failures in the United States like Harrisburg, where in California, some places in Florida, various locations all over the US, where we are trying to go to clients to get them to change positions. I still remember when we had this exercise 12 or so years ago with GM and Chrysler and some of the automotive companies, and we went and recommended to clients that they get out of these securities, the debt securities. And we couldn’t move the client. I mean it is hard to get clients to want to move out of investing in their local municipalities, or moving away from a security that has provided good steady source of yield over a long period of time when in fact, internal condition of that particular body has declined considerably. So, we’re doing everything we can in our fixed-income department, in our compliance departments, in our sales and marketing departments to try to sensitize both our FAs and clients to these issues. So we are writing a lot of articles on this subject matter. I think this is a major problem going forward here, and we need to protect our clients. That is the most important thing we do.

Okay. I appreciate the color there. And the last question I have is with regards to a follow-up on the increase in margin balances outstanding, I think in prior conversations, we've talked about how the majority of those are more loan types of borrowings, as opposed to actually investing in securities and so forth. Is that still the case, and if so, what is kind of causing people now to want to borrow more?

Those that were doing it especially after those that took a risk near the bottom of the market, and profited a lot, who are more investment leverage oriented, are continuing to do that, probably dragging in a few other people. I would still say the vast majority of our margin accounts are really intelligence sources of borrowing at lower rates for other purposes. But who knows, I mean this is an imperfect science. You have to look at a balance sheet, and you don’t take a look at activity. So, I wish I had a better answer to that than I do, but I just know how conservative our reps are in this area, and when you get margin accounts that are 0.5% of assets, I mean, you are talking about a very small amount of leverage in your overall portfolio construction.

Okay, thank you.

You do have a follow up question from Joel Jeffrey with KBW.

One quick question, actually for Steve. Of that $380 million of loans you guys purchased on the commercial side, are those any different from what you were buying in the past? Are you getting similar discounts? Are they the same quality? I guess any color you could add would be great.

They are very similar. They were 100% C&I, commercial and industrial. Well I say that there were some REIT loans in there too. But they are of the same quality. There was a very, very small amount of that that was secondary market. Almost all of that was originated business, where we’re joining on with – had inception with the other banks in the syndicate.

Versus prior year Joel. I would say that they are comparable quality and higher spreads with many more covenants.

Great. Thanks for taking my question.

That means they are good loans.

And there are no further questions at this time.

This is Paul Reilly again. I really enjoyed speaking with you this morning. I will trade my voice for these results any quarter. Thank you for joining us, and we will talk to you again soon.