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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the quarterly analyst conference call.
At this time, all participants are in a listen-only mode.
Later we will conduct a question-and-answer session and instructions will be given at that time.
(Operator Instructions).
I would now like to turn the conference over to Mr.
Tom James.
Please go ahead.
Tom James - Chairman and CEO
Good morning, everyone.
I welcome you all to the second-quarter analyst conference call.
We have with us Chet Helck, our COO; Jeff Julien, our CFO; Jennifer Ackart, our Controller; Steve Raney, the President of Raymond James Bank.
And, of course, Corporate Counsel is sitting in on the meeting to ensure that we all comply with appropriate disclosure regulations.
Pleasure to join you this morning, although it's not been a very pleasant or it wasn't a very pleasant quarter in the March quarter given the environment that existed.
We have, as you are well aware, continued to give input with respect to changes on a monthly basis on some of the key indicators, which obviously led everyone to understand that when you look at the securities side of the business, that we were suffering from a direct impact of declining values in our client accounts, which, versus the prior quarter, were down substantially.
Obviously the parallel decline in assets under management that we were handling and just the malaise of the continuing onslaught of negative information causing clients to be less active; such that for the first time, I would tell you on the securities front, we were actually seeing some despondency on the part of financial advisors whose income were being affected; but more importantly, were being affected by the impact on client accounts, which, needless to say, increases the importance of communication and conversation with clients.
But pain and suffering tends to occur.
As you are also aware, we have a lot of our income based on fees, so those factors impacted us.
I will get into more detail with each segment.
But just for a summary review, although all of you clearly have read the release since I saw your comments already this morning, we, obviously, suffered a fairly large decrease in net revenues, 15% decline.
And when you include the fact of gross interest, you are going to net interest, the decrease was even larger at the gross revenue line.
Net income was down 90%.
As we indicated in the press release where we focused a lot on the bank, it largely stems from a change in bank earnings quarter to quarter, that, obviously, were very large.
So we will get more into that later.
So, the quarter obviously was down a large percentage from the preceding quarter and for the six months, which we all seem to ignore when we get focused on quarterly reports, was off 41% to $0.57 from $0.97 or 42% at the net income level where we fell from $116 million to $67 million.
So, essentially, a continued deterioration in the overall securities environment, as I've discussed.
But that was even paralleled in larger fashion by the continuing decline in the real estate markets, where commercial real estate, office buildings, malls, even multi-unit apartment buildings, other large income-generating real estate suffered a massive decline in cash flows, valuation resulting from increased cap rates, etc.
That impacted a lot of lines at the bank levels, as you can see in the write-offs from the larger banks, which we are a microcosm.
As you know, we, as an S&L, have had to have some degree of concentration in real estate, even though we have mitigated that, as we have explained to you before, by some fairly liberal accounting practices on the part of the OTS, which has allowed us to count as real estate commercial lines things that you and I might call corporate loans, which leads us to kind of focus on the $1.3 billion.
Whereas a lot of people, especially bloggers writing and hedge funds that are short, etc., to focus on the much larger balance, which they think reflects not large enough losses sustained to date.
Well those are really corporate loans that have a small portion of real estate as collateral, so they get counted as real estate loans for reasons that elude me.
So let us just, for a minute, make some general observations, then, on the financials.
Obviously, the securities commissions and fees were off substantially in the quarter, 23%.
Investment banking was down, but the investment banking number actually was flat pretty much in the US.
This results from declines in Canada by and large so that you have -- and also what we include in investment banking revenues, the RJ tax credit, which, as you might imagine, tax credit revenues have dropped because there aren't very many banks who have been the principal buyers along with Fannie Mae and Freddie Mac because there are no profits to offset with tax credits, and there are obviously more needs for maintaining high levels of liquidity as opposed to investing in things that really are totally illiquid.
Which has led to some very interesting dynamics, just as an aside, in that business because the rates of return now have reached levels that I think make this product attractive to other corporate buyers and, perhaps, even to individual buyers as you can get double-digit internal rates of return on a very safe product, resulting from tax credits.
And, as you know, individuals are almost so sensitized to taxes that they would sooner have tax credits than equivalent returns from other kinds of investments.
So it's, I think, an opportunity that's where looking at and we see some new buyers entering the market, along with the reentry of those profitable institutions that are seeking CRA or other corporate buyers that now are attractive because of those increased returns.
But during this particular quarter, we had a substantial decline in those revenues, which affects that investment banking line.
Needless to say, the investment advisory fees are about directly impacted by the decline in assets under management.
While those are stabilized this quarter, a lot of our bills are forward bills.
So in other words, you bill for the coming quarter based on asset value at the end of the quarter.
Last time, we did have a substantial decline from September to December, so the prior quarterly revenues are down a lot, and we expect that we will be in a little better shape than our revised forecasts had indicated.
Interest rates year-to-year continue to come down, as I mentioned earlier.
Net trading profits, a big positive.
Those profits are principally in -- or almost totally in fixed income, more than totally.
But accommodation losses in the institutional side have been managed very well at less than normal percentage levels.
So when you look at the overall revenues, while they are down considerably, the impact here of some of these activities is actually positive.
When you go down the expense side, you obviously see the variable reduction in compensation commissions in the overall line.
You see good control and communications, occupancy, currents and floor brokerage, business development.
And so generally we have had a pretty good decrease in expenses.
And what you have to take out of here in addition to the comp costs to look at sort of your fixed cost control, or your discretionary cost control, is the loan loss provision, which relates to the bank, which was up 575%, so it affects the overall expenses.
But if you pull those out, you've got nominal rates of increase in the overall expenses there.
So not a problem on that line.
As you might expect, all of our departments are focused on expense control, albeit, I would tell you that our direction, unlike the normal reaction you often see in New York, is to try to get rid of underperformers and perhaps not fulfill attrition, but really to try to maintain a stable workforce during these periods.
And that kind of policy is underscored by the -- the need for that policy is underscored by the vast additions that we have made to our sales force year-to-year, which requires a higher level of service, because you have more bodies.
But more importantly, we require a higher level of service because in these kind of times, people are more sensitive either to the clients or the FAs to service deficiencies.
And it is extremely important that you have problem resolution on a very timely basis.
So we would tend, unless we know we have a more permanent decline in revenues, which we don't believe that we are experiencing, if we're looking at something we think will be over in less than a year, we will do these things to tighten up.
And we're pretty lean anyway, but the fact is, we don't dictate 10% reductions in workforce.
That makes absolutely no sense to me, those kinds of policies.
You have to look at, number one, how do you replace them when business comes back and the cost of that versus the savings on the way out.
And you also have to be aware that you can't find these talented people in St.
Petersburg, Florida, when you need them.
So from our standpoint, we tend to be more disciplined in terms of how we go about this process.
And in the past, even in '73, '74 and '87 and '89 and the 2000 through 2002 periods, I would say that we are net beneficiaries of that policy when you look at it in the longer term.
So, that's kind of the quick run through.
I think it's timing differences, and I would ask Jennifer on tax rates since we obviously had a higher tax rate than normal.
Is that the --?
Jennifer Ackart - Controller and CAO
The tax rate is impacted by permanent items such as COLI expense and options.
And they just have a greater impact in a quarter with a lower earnings.
Tom James - Chairman and CEO
Yes, and we have experienced that last quarter too.
So we would like to not have that impact us because that would indicate that normal profitability has been reestablished, and we don't have these kinds of adjustments.
Let me, for a minute, try to get beneath the surface.
I'm going to start with the Private Client Group part of the operation.
We clearly had this substantial decrease in commissions and fees.
It was 27.5% in the Private Client Group.
Again, that reflects lower asset values, but it also reflects the reticence of investors to transact as much business or make any financial decisions in consistent down periods.
I think we have done a good job in terms of trying to be proactive in generating ideas for our sales force based on the opportunities of the time, which are legion in this kind of scenario.
And a lot of money will be made.
As a matter of fact, here in the month of March, a lot of money was made in rallies just in some securities groups.
But we think there are some even better intermediate-term opportunities that are also considerable opportunities kin some of the fixed income sectors and some of the other depressed priced securities, where we are making efforts to raise additional funds.
We have our research teams in all of our areas, not just individual securities, coordinating to generate a constant flow of good ideas with some new products that we have designed.
A lot of fixed income information coming out, closed-end information -- closed-end fund information coming out, etc.
So, on the general front, I would tell you that's going well, in spite of the fact we are seeing this decline.
And the best evidence is, contrary to the current politicians' focus, we believe that the kind of meetings that you have in -- I'm not talking about chairman's counsel trips and things like that, I'm talking about these annual development conferences, where you bring in a lot of sponsors and meet with all your people and bring your home office people together with your sales forces.
We are continuing to have those, though, at much reduced cost levels for the purpose of maintaining mainly attitude, but also providing a specialty education on the additional products and focus of how to conduct reviews during periods like this; even how to prop up spouses and significant others during down periods like this.
So this is a massive psychological job in addition to a substantive job in terms of generating ideas in the downturn.
And it gets really into the nitty-gritty.
And I would tell you the feedback from those meetings has been very positive.
And the information exchange even from peer group members, who describe their processes in dealing with this, it's kind of where we take our leaders and have them actually be teachers.
In the environment, it's been very positive.
So I actually think you get far more value than the cost, even if people complain about these, since we are not the beneficiary of government money.
We don't have to stand up to all of this.
But I would tell you just as an observation, the complaints about Northern Trust meetings and the tournament that they have run for years -- trust companies are highly dependent on serving the really high-end client.
They have to differentiate themselves from peer group members in doing this.
They have to appear in terms of brand and -- to the specific sub segment of the universe, small as it may be, to be able to track that money.
I actually think Northern Trust should have stuck to their guns in terms of really fighting the kinds of comments that were made.
And some of the meetings that have been actually canceled by industry participants probably were net costs of the firm, not just in these terms that I've described, but also in real dollars, where you have very large down payments and costs of canceling meetings.
And then you usually have a less obtrusive kind of an event someplace.
But the total cost of the two usually exceeds what would have happened had you gone back and negotiated with the event providers, the vendors, as we have done ahead of time.
So cost control -- and by the way, in the case of most of us in the securities business, sponsors pay for these costs anyway in large measure.
So, it's not as if you are even changing your out-of-pocket dollars.
But you should be aware (technical difficulty) you are that some of the populace press is totally out of line, in my view.
Unfortunately there are not enough of us that say that publicly.
I would say on the retail side and, indeed, on the investment banking side, Canada has been more impacted by this decline than has Raymond James proper here in the US market.
And the reason for that is not just the downturn in prices, but also the downturn in natural resource prices.
And when you overlay the two, it is extremely difficult to generate the kind of enthusiasm and activities.
Although I can assure you we are trying to assist our new leadership in Canada in accomplishing this.
And I think they are working hard to reverse the trends there.
And just as an aside, you know a lot of these energy prices are down so far, especially in the gas sector, that when you take a little longer-term view, like two or three years, the intermediate-term outlook there is very good.
So I actually am hopeful, and we have been very successful recruiting there too.
And what I should tell you there is on the recruiting year to year, net -- and obviously you prune out low-end producers during periods like this or they prune themselves out -- we added 112 net brokers at RJA year over year.
We have added brokers at RJFS.
As a matter of fact, the recent recruiting results have been extremely good.
I announced a couple quarters ago that the inflection point had been reached in terms of stopping our pruning efforts and adding a lot of net advisers.
And then, in Raymond James Ltd, we have added considerably to our sales force principally in our independent contractor operations there.
But we are now a material factor relative to any firms that aren't bank owned in Canada.
And I foresee good opportunity from that.
So that we had about a 7.5% increase in sales force year to year net.
So we have good numbers there.
And what I can tell you from this end is we can't process any more applicants for positions with us than we are currently seeing.
I've told you before that there are only a few of us that are really mainly above the fray in terms of a major damage to brand to retirement funds to other -- to the stock of the Company, which also impacts retirement funds.
So that you really have sort of abused current sales forces at those firms unintentionally, and as a result, they tend to want to go somewhere else.
And that's understandable in the time frame.
The front money consideration, the other emoluments that have grown to unheard-of proportions have now been reduced to more logical levels.
And I think it's extremely -- I mean much larger than all these numbers, much lower than all these numbers that get reported, dealing with 150% to 200% plus front-end deals.
We never did anything like that.
But the fact is we are substantially below 100% in our average costs for these recruiting efforts.
And, of course, those are based on historical production, which has dropped considerably too, even for producers that are way above average.
So this is actually a good time to recruit, albeit you want to be reasonable in terms of your capital committed to the area, which we do.
We budget all of these expenditures.
But to just give you some insight in RJA, in the first six months of this year, we spent our entire budget at a lower cost than we had estimated.
So we had to allocate some additional funds for recruiting in the second half at much lower rates.
So while we are slowing that down, you will see some pretty dramatic increases here over the year so far and over the rest of the year in terms of increased occupancy at the branch levels.
So because we've really curtailed branch openings.
If you have limited amounts of capital you want to commit to this in some logical format, it is clearly best spent in existing space.
So we recently had our regional roundtable group meeting, and this is a discussion that all of us agreed on in terms of our own approaches as CEOs to the business.
So very positive results.
I have also reported, just as an aside, that we have been very successful in recruiting, especially in fixed income on the institutional front.
So we have grown those sales forces year over year also.
So that's important, I think for you to note that this effort isn't just going on in retail.
Now, when you have that kind of revenue decline, however, and you have the, what I call an amortizing cost base expanded from prior front-money expenditures, and you put that kind of a decline on the revenue dollars, you substantially drop your contribution to profits from that area.
And as you can see in our private client group, a description of pretax income included with the press release, you see an almost 80% decline in pretax income.
That's not cash flow now.
That's because that money was invested heretofore in that front money.
So, but I would tell you that you have substantially decreased that, and we have always invested probably affecting margins by maybe 20% of total margin by investing in the frictional cost of growth.
So we will continue to do that and I expect we will do fine.
When you look at the Capital Markets numbers in that segment reporting, you see that it's pretty flat on the revenue side.
Again, there are declines in the ECM area, although the ECM area at RJA was relatively flat with the comparable period last year.
So it's really been in Canada, and some of these other things that we include in this area.
Asset Management, well, other comments on Capital Markets first.
We obviously had pretty good underwriting activity with 10 underwritings domestically.
We only had one in Canada, reflecting my earlier comments.
We also had increased restructuring revenues as we have grown that part of our business.
Needless to say, we look for opportunity wherever it exists.
There's probably more of that today than has ever existed.
And some of the underwriting opportunities are what you would call financial restructuring by increasing equity components in things like REITs and other corporations that can do some things with small stock offerings.
You actually see a pretty good level of business currently directed at this effort, where you will see some of these REITs sell off some of their assets with large debt proportionality and raise a little equity capital, and as a result, substantially increase their equity to debt ratios, so that not only do they meet covenants even if things get much worse, but they really stabilize cash in terms of their operations.
And so I suspect you will see more of that going forward.
I think you will see some of this in the energy sector.
And you may even see some of this in the traditional corporate sector, so I actually am hopeful, as long as we don't have these massive drops back down to 660 on the averages, that would be in the S&P, that would affect us dramatically.
So we see pretty good activity there.
On the Asset Management side, assets have dropped.
Again, this almost flows -- there's some variable components in the way we pay people in this area, but the fact is that the high margins that exist with the assets at levels that did exist are very much impacted when you drop your assets under management as much as have dropped overall in our firm.
So this is large changes, so there's been some substantial cost cutting in those areas to assure profitability even at today's market levels.
So there's been positive change on that front that will preserve profitability, but the profits will be much less than we have been experiencing.
So -- but again, still important that you have sort of the same mission going throughout the organization.
And the performance of our asset managers is still very good relative to their benchmarks.
Nobody cares when you are talking about outperforming big downs by 300 basis points.
So we may get some institutional money, but retail sales fall considerably.
And the other thing that happens, and it's benefited us to some extent, is people actually switch a lot of their assets to more fixed income.
Well we do have excellent fixed income management results, so we have had big net growth in our fixed income assets under management, and we have even had some wins outside of the firm on this front, which has never been a hallmark of our overall Asset Management operations at Eagle.
So I am actually bullish on that front.
The bank, which garners most of the focus over the last year, where we had a massive ramp-up in earnings, actually experienced a loss this quarter.
And the unfortunate thing about this is if we look back a couple of years ago, while we would debate with our accountants about levels of reserves, their arguments were always your reserves are too high, you need to cut them back.
And our arguments were always you reserve for difficult environments that happen about once every 12 or 15 years in the banking industry, like clockwork.
And you actually can do studies to check all this out.
So virtually we had no bad debt losses for our first 12 years.
And we still have very low levels of losses in residential real estate.
So that's not really a major problem with us, but we have substantially increased the reserves for that area.
I think we are 83 basis points or some number like that now.
Yes.
Steve is re-confirming numbers in that range.
So what we have been ramping up are the commercial real estate, which we started probably a year and a half ago when we had the first signs of a few more A&D type loans, and there were only a few that we reserve for in spite of the fact we started out with loan to value ratios in the 50%, 60% range, you still experienced some losses.
And what's happened now, of course, is other real estate loans, whether they are REIT-related like the one we were a participant in that caused us a $28 million write-off during the quarter, you simply don't know when those occur.
So we were actually surprised at the end of the quarter by that write-off.
We had already had reserves for it -- for some of it, but not a very large amount of it because we didn't anticipate the level of loss percentage that existed, which we think is extraordinarily high.
But we would also recognize these are extraordinary times.
So the ones that become troubled can have extraordinary losses attached to them.
And, so we have been increasing reserves in this sector for other individual loans that we can hopefully deduce might have a problem.
But again, using historical reference points is imperfect.
We look at them; we know the numbers.
We tend to try to analyze all of these loans, and I think we have done a good job in terms of trying to be in front of the losses.
That's why you see our ratio not a whole lot different than the non-performing or I call them reserves.
I'm always told they're allowances and provisions.
But the fact is, we have increased those reserves to a level that offsets roughly 100% of those non-performing loans.
And I would tell you that I would have guessed that we would have had a write-off slightly higher than last quarter's for this purpose had we not had this one large situation.
But in looking at the portfolio, I expect as I have said for the last couple of years, that when you run into bad times, you then experience some actual losses.
So we expect those numbers to continue.
I don't know when exactly.
I don't know for how long.
I have a feeling that our levels, which are around 240 in this segment of the portfolio, 2.4% are competitive to the much larger peer group in terms of their scope and size.
And we are adding, and had planned to add, at above historical rates to those reserves, and we expect we will continue to do that as I mentioned.
But I would say that when we have done all this stress testing internally, that we are fairly comfortable looking forward that these reserves, as I've said before, are not only at a pretty good level, but that when you look at operating earnings in terms of sustaining any additions and all those things, we are as confident as you can be in times like this, which is not very confident because are we going to fall off the cliff or are we reaching an inflection point by year end?
I honestly don't know.
I tend to think it's closer to the latter than the former.
So we are reserved for -- conservatively, I think, for that kind of environment.
And we will, as new problems arise, we will continue to take reserves.
I think we increased reserves more than some of you thought we would over the whole year in this quarter.
So my instructions are at these meetings, tell me what your best judgment is right now for what we've got and where we know the problems are and take the reserves now.
This isn't any -- there is no earnings management going on here.
We are trying to stay in front of it, as I mentioned.
So these -- I think we are in good shape.
With that, I would tell you that I think you need to take the longer view.
That's the point that I left here.
These spreads, I don't expect to decline back to more normal levels anytime in the near future because the government has every reason to try to generate large operating earnings for the bank structure because that's one of the best ways to improve confidence and to really sustain any losses that have not as yet occurred.
So that's why you've seen some positive results at places like Bank of America and Citigroup -- Citicorp -- that really are not probably in line with recent results prior thereto.
But you also see these warnings, as Ken Lewis issued, of Bank of America about, look, we expect to see some more loans get in trouble going forward because when, I think our best estimate was that some of these commercial type properties probably dropped in value around 25% during the first quarter.
You can't have many quarters like that.
But the fact is you still are in substantial downward revisions and if you are trying to prepare yourself for problems related to that, it's a very difficult job.
Prophecy has never been one of my best strengths, and so we tend to be conservative.
And that's what we're trying to do.
I know a lot of people have always said well you haven't taken very many write-offs, therefore, you're going to have more.
I would tell you we haven't taken very many write-offs, therefore, relative to everybody else.
We're going to continue to have lower write-offs than they do.
And I still think that's true, but it's not as much fun as it was when we didn't have these for 12 years.
Steve, I don't know what you would like to add specifically in terms of -- if you might just add before we open it up for questions.
Steve Raney - President, and CEO of Raymond James Bank
Sure.
Just continued focus on the commercial real estate sector, as you mentioned, specifically those areas that are tied to consumer spending -- retail, gaming, hospitality, those subsectors in particular are areas of focus and our credit team is watching that very closely.
I also wanted to highlight, I know that, and Tom alluded to this earlier, that our commercial real estate as reported in our regulatory reports and also some of our public filings, our Q and our K, is really not reflective of how I think you, the investors and the analysts that follow us, along with our management team, would view the real estate exposure.
Once again, we have $1.4 billion of commercial real estate exposure compared to about number $3.5 billion of what we would -- what would be called commercial and industrial or corporate loans.
So it is a smaller percentage of our balance sheet is actually tied to commercial real estate than what is reported in our regulatory report.
So that being said, that continues to be our primary focus at this point.
Tom James - Chairman and CEO
But you generally have pretty good diversification of assets in your loans, right, Steve?
It's --
Steve Raney - President, and CEO of Raymond James Bank
Yes, I mean (multiple speakers)
Tom James - Chairman and CEO
(multiple speakers) watch that over the years.
Steve Raney - President, and CEO of Raymond James Bank
Absolutely.
We've got limits, corporate limits on various sectors within not only the commercial real estate space, but also our corporate portfolio by industry sector, we have a limit of 5% of total assets.
But nothing exceeds 3.9% right now which, the highest is consumer products and services.
So we are highly diverse across various property types and geographies.
So --.
Tom James - Chairman and CEO
With that, Jeff, anything you would like to add or can I open this up for questions?
Jeff Julien - SVP of Finance and CFO
I guess the only comment I would make is on net interest earnings, and we talked about gross interest.
And net interest earnings was actually up 33% quarter versus the prior-year quarter as a result of some of the increased loan portfolio manifesting itself in some operating earnings at the bank.
It was down about $10 million from the prior quarter, and that's somewhat reflective of the statements that we made last time saying that we do not expect that very high interest rate at the bank to be sustainable for an extended period of time.
And it drifted down 23 basis points this particular quarter.
And I think we kind of expect it to, I would say to drift lower, not to see a sharp spike down, but to drift a little bit lower as some of these LIBOR loans reset and some of the mortgage pools that we are replacing over time are lower mortgage rates than we have seen historically, etc.
So I think you are going to see that continue to drift downward just a little bit over the next couple quarters, but again, not fall back sharply.
Tom James - Chairman and CEO
Yes, and I would add on that front, we have a little bit of contrarian thing going on here because net interest earnings in the securities side of the business are virtually insignificant currently when they historically have been large percentages of pretax profits.
So that as rates rise, when we come out of this, while bank earnings may drop, the insurance, the securities part of the business in net interest will rise.
So when you look at the general results, you have to recognize it's comprehending both on the net interest front.
So we have actually absorbed a large decline in net interest earnings at the securities firm over the last couple years.
Let me open it up for questions.
Operator
(Operator Instructions).
Joel Jeffrey, KBW.
Joel Jeffrey - Analyst
Just in terms of the bank, can you give us the quarter-end tangible equity levels of the bank?
Steve Raney - President, and CEO of Raymond James Bank
Sure.
Joel, the -- let me give you all three of our ratios.
Total capital to risk weighted assets was 10.3%.
Tier 1 capital to risk weighted assets is 9%.
And Tier 1 to adjusted assets is 7.7%.
Joel Jeffrey - Analyst
Okay, great.
Steve Raney - President, and CEO of Raymond James Bank
We had disclosed also yesterday, Joel, that tangible common equity to risk weighted assets is 7.91%.
Joel Jeffrey - Analyst
Right.
Okay, and then, in terms of the AFS portfolio and the -- I guess the revaluation of some of the securities due to the accounting change, can you tell me where those are currently marked and what kind of impact that actually had on equity?
Tom James - Chairman and CEO
Well actually we -- let me give a shot at that before Steve does.
Because we had thought, based on the early discussions on how this was going to play out, that it would make a material difference because when we run our own stress tests on these securities, we still think that that portfolio -- the reserves against -- or the market value adjustments on those securities are much greater maybe by a factor of 2 or more than we really expect to experience.
But the actual change here as a result of the conservative approach being recommended by our accounting firm, really doesn't make a lot of difference to us.
It is that the change in the asset or the revaluation, was it $18 million?
$18 million only, and it's -- we are still largely close to where we get market values from IDC.
And we haven't moved very far to any of these quantitative cap rate kinds of calculations, which was the whole thesis for the revaluation of these assets.
I think that there may be some push-back from the industry, but it seems to be very small now, which probably reflects that you are not going to see much activity in terms of interest on the part of any of the banks in terms of selling off assets.
And they certainly don't want to over-value anything.
So they are not pushing against their auditors as hard as I thought they would be.
But we are going to have to wait to see how this plays out over a little more time.
To us, this is a little bit of accounting mumbo-jumbo.
So I -- I think that we are still undervaluing those portfolios, but we certainly don't want to have anything on our -- to me, it's kind of like a reserve in net worth.
So Jeff, you were going to say something?
Jeff Julien - SVP of Finance and CFO
I was just going to -- we didn't really wholeheartedly adopt 157 before.
I would say we used it as an additional indicator as to which of the external prices, whether it's pricing service or a dealer quote, which one made more sense.
The only securities that we actually marked to a model were some of the subordinated pieces that had really no other market value provided out there.
That's where the valuation came from.
But the vast majority, I would say, we did not mark to our discounted cash flow model.
There's not really very clear guidance on what discount rates to use and stuff like that.
So I think that our -- the feedback that we're getting is that most financial institutions are tiptoeing into this rather than making some kind of massive revaluation adjustment when it would be at risk to reevaluate it back partially the other way as more clear guidance comes out and you have to use more onerous discounts.
So I would say we are just tiptoeing in as well signed everybody else and I echo Tom's comments.
Saying, based on all the stress testing we've done at these securities and if they don't break their coverage etc., that we think there's still some substantial undervaluation present in that at this point in time but not based on these third-party quotes being provided in the marketplace today.
Joel Jeffrey - Analyst
So the sort of bounce-back in the value of the AFS portfolio was really driven by more unrealized gains in a better market environment?
Steve Raney - President, and CEO of Raymond James Bank
Joel, just to clarify a couple things.
We did have -- there were two securities that we declared other than temporarily impaired -- $6.2 million pretax earnings impact in the quarter.
But in the negative mark, as of 12/31, was $174 million.
Now it's going to be in the $155 million range.
And there were -- if you are talking about what was the (multiple speakers) -- the balance increase, we actually purchased some agency, Ginny Mae securities during the quarter.
Zero risk weighted asset agency paper.
So if you are looking at the difference in the available for sale market value, the larger increase was really attributable to some purchase of some new Ginny securities.
Jeff Julien - SVP of Finance and CFO
None of the private-label stuff.
Steve Raney - President, and CEO of Raymond James Bank
Yes.
Joel Jeffrey - Analyst
Okay, great.
And then just lastly, was there any capital downstream from the parent company or broker to the bank this quarter?
Steve Raney - President, and CEO of Raymond James Bank
Yes, $10 million.
Joel Jeffrey - Analyst
All right, great.
Thanks so much.
Operator
Daniel Harris, Goldman Sachs.
(technical difficulty)
Daniel Harris - Analyst
I was hoping you could just walk us through a little bit how you think about the re-underwriting standards that you guys have in place with regards to investing in the Shared National Credits.
And, to some extent, what your forward view is or what you can see coming down the pikes in terms of delinquencies or non-performing assets, given that you are not actually underwriting those loans to the actual end-user?
Tom James - Chairman and CEO
Well, Dan, we really do re-underwrite the entire loan.
We have a credit team that does our own -- obviously we get information from the lead bank.
But we do our and interviews and discussions with the management teams of the borrowers.
We use a lot of resources with inside of the firm if there's existing relationships, which many of them have an existing relationship with the firm.
About one third of our corporate portfolio has a relationship with research or investment banking folks.
We go through a full-blown due diligence process.
And I would argue that our underwriting standards are equal to if not superior to others that are participating in these types of loans.
I would also mention, you know, Shared National Credits is a very broad universe of loans.
We're in a very small portion of the total shared national credit population.
We get statistical information only on an annual basis, and this is dated information that's probably a little over six months old.
But last year, Shared National Credits, 13% of total Shared National Credits were criticized.
Ours were 4% as of that date.
We will be getting the results of the Shared National Credit exam in the August, September timeframe.
But we would anticipate the loans that we are participating in would continue to fare better from a credit worthiness standpoint than the total Shared National Credit population.
So we continue to feel very good about the way we are going about selecting the clients that we want to do business with.
Tom James - Chairman and CEO
Yes, you know, that one-third statistic you use, Steve, is true for people we actually have relationships with.
But it's probably more than double that of the companies that we specifically know about and follow because we sort of narrow our focus on any of these loans to areas where we have substantial experience, so the segments in which we operate.
So our knowledge level in the firm, generally speaking, is high.
The second part of your question, though, is extremely difficult, which is what I reflected in the general comments.
I mean we just don't have a clue how many of the individual loans.
We expect some more problems in the real estate-related sectors on -- but I can't tell you which loans.
I mean we picked out 10 or 15.
I don't know how many you have now that we have some degree of reserves against already in the major loans.
And we are -- we try to look at them in subsectors for reserves and constantly review the individual Company financials.
So Steve, I don't know what you would say to elaborate on that.
But we don't have a crystal ball on this.
I wish we did.
Steve Raney - President, and CEO of Raymond James Bank
Yes, we have reserves against all of our loans, but the ones, Tom, that you're -- you're thinking of the ones that are in our watch or worse category that we are watching very, very closely on a monthly basis and have been taking substantial additional reserves, as indicated in this last quarter, so.
Tom James - Chairman and CEO
Even in advance of.
Steve Raney - President, and CEO of Raymond James Bank
In advance of, yes.
Just to provide a little bit more color on our non-performing loans, $143 million total; 43 of the $143 million are residential loans.
And then out of the balance of the $100 million of the corporate and commercial real estate, 40 million of the $100 million are actually continuing to paying as agreed, in compliance with their loan agreement.
But we've got them in non-accrual status, non-performing status, because we are concerned about their long-term prospects to be able to meet their obligations.
So we feel like it's prudent to take the payments -- all the principal at this point that we are receiving.
Daniel Harris - Analyst
Okay, that's helpful.
And then, so two thoughts on that.
First of all, do you guys, after the initial underwriting standards, have exposure to the actual borrowers, or is that through the manager of the loan?
And then, second of all, how should we think about -- I know that you are saying that your loans are criticized about a third as much as I think 13% for the total to 4% what you are seeing.
But how do we think about that charge-off rate versus sort of what the government is going to say with regards to commercial and credit when it releases its stress test results sometime in the next few weeks?
Steve Raney - President, and CEO of Raymond James Bank
Well we do -- all of our exposure will be directly to the borrower.
We don't have any exposure to the agent or lead bank.
That's -- when we are extending credit in these participation, we have the exposure to the borrower, and not the lead bank.
In terms of the stress test, I'm not sure I -- in terms of charge-off rates -- and we are going through and have been working extensively on our own stress test and coming up with a variety of different assumptions that we are putting it against our portfolio.
Tom, I know, as you alluded to in the earnings announcement, that we -- the earnings that are going to be generated over the intermediate term in the bank, we still feel confident are going to keep the bank in a well-capitalized status despite the fact that we know that we are going to continue to have charge-offs and problems and additional reserves that we're going to need to take against these loans that we have concern over.
Daniel Harris - Analyst
Okay, and then just lastly from me, a couple of the --
Tom James - Chairman and CEO
We didn't need to add the $10 million.
Steve Raney - President, and CEO of Raymond James Bank
Yes, we would have stayed well-capitalized without the $10 million that -- the question that Joel asked about the additional capital that came to the bank.
Daniel Harris - Analyst
Okay.
Tom James - Chairman and CEO
I think, Steve, if I understood his question, he was saying do we talk to some of those individual clients who are borrowing from us?
And obviously, given the earlier comments, we talk all the time with borrowers that we already know.
There are some that we did the reviews on, but we don't know as well.
And I would classify the one that we took the loss on as one of those, which is increasing our focus on the list that we don't have as much knowledge on to start with.
Daniel Harris - Analyst
That's helpful also.
And then on residential originations, some of your peers have noted that we are at record levels and refi's are enormous and even primary mortgages because of the foreclosures that are -- foreclosure sales.
What are you guys seeing in terms of the residential backlog?
And then I know you've talked about sort of slowing down the pace of loan origination, but how do you think about that in the current environment?
Steve Raney - President, and CEO of Raymond James Bank
And you saw that our loans were in effect flat quarter over quarter and I would anticipate that being the case at least over the next few quarters.
If you -- Dan, you may remember that our actual originated residential business is a relatively small (technical difficulty) part of the bank's operation.
That being said, that business is very robust right now.
Our own originated residential portfolio has performed exceedingly well, better than any other asset class really that the bank has.
Once again, these are loans that we are extending only to clients of Raymond James.
But that business is very robust, given the current rate environment, and we are continuing to be very active in that space.
What we have not done -- been as aggressive on here recently is actually buying pools of mortgage loans originated by (technical difficulty) institutions.
So I think that that will continue to be the mandate at least over the next few quarters.
Daniel Harris - Analyst
Thank you.
Steve Raney - President, and CEO of Raymond James Bank
Sure.
Operator
Devin Ryan, Sandler O'Neill.
Devin Ryan - Analyst
You guys spoke about the residential portfolio some here, and it sounded reasonably comfortable with what you are seeing, at least that was the way I read it.
But the loans 30 days past due had a pretty good jump in the quarter, so would you expect that the level of deterioration that we saw this past quarter would continue to rise going forward, particularly as unemployment rises or how should we think about that portfolio?
Steve Raney - President, and CEO of Raymond James Bank
Yes, and I know, Devin, that increase from 130 basis points over 30 days to 221 was a significant jump quarter over quarter.
And, Tom alluded to it earlier.
We have 84 basis points of reserves against our residential portfolio.
That was -- we almost doubled the level of reserves this quarter.
That was part of the $75 million in provision expense in light of the increase in past dues that we are seeing.
It's really hard to predict what we think the past due trends are going to be and the loss rates, so.
Tom James - Chairman and CEO
The loss rates are up, so we had to adjust for both.
Steve Raney - President, and CEO of Raymond James Bank
I would tell you the way that we are doing our probability of defaults and loss, given defaults in that portfolio, I think are very conservative and we've got adequate reserves based on our current past-due statistics, despite the fact that our past dues increased dramatically.
In reviewing a lot of data from a variety of different financial institutions, our mortgage portfolio continues to perform exceedingly well.
There's a lot of transparency regarding past-due information at these other institutions and their mortgage portfolio.
And literally we cannot find another institution that is reported of any significance or size that has past-due statistics as favorable as ours.
Jeff Julien - SVP of Finance and CFO
That being said, that's a big increase quarter over quarter.
Tom James - Chairman and CEO
But remember the rationale there.
If you remember where our principal purchases were from, we bought a lot of outside whole-loan packages, which, again, we pruned considerably as I mentioned before.
But we bought them from other financial institutions like our own, Morgan Stanley, Merrill Lynch, so they had similar profiles.
The borrowers had similar profiles to us.
And where they didn't, we pruned them.
So we weren't just willy-nilly buying all kinds of pools that prima facie had higher returns.
We were actually taking ourselves through a higher quality screening process.
Steve Raney - President, and CEO of Raymond James Bank
Yes, Tom, we re-underwrite every loan as if it's new.
So even though we are buying it from somebody else.
So --.
Devin Ryan - Analyst
Okay, no, thanks for the color.
And then just in the corporate loan portfolio, what percentage is to REITs?
Steve Raney - President, and CEO of Raymond James Bank
Out of the $1.4 billion, Devin, about $700 million of the $1.4 billion is to REITs.
And that's in, as you can imagine, every property type, virtually, apartments, office, hotels, every property type -- retail.
Tom James - Chairman and CEO
But again, they're the ones that you would find higher ratings from our analysts on than the general group.
Devin Ryan - Analyst
Okay.
And just a general question here.
How do you guys balance the task of preserving capital in this environment with obviously the opportunity to hire and build your business?
Tom James - Chairman and CEO
Yes, you are asking the $64 question.
I would tell you look, I'm an old guy so I've been through 40 years of this stuff and I rode through '73, '74.
And in periods like this, if you were looking at signage in front of you, the one that said preserve capital, maintain viability and survive, is about 40 times brighter than the one beside it that says take advantage of opportunities.
That being said, I would tell you that we still are generating enough cash flow that we can invest further in adding financial advisors, which has been our prime addition.
But we are also adding people in Equity Capital Markets; we're adding people in fixed income.
So we are taking this opportunity.
Public finance is an area where we've added a lot of people.
We're taking this opportunity to invest some money.
And by the way, the cost, as I said, with retail financial advisors is down.
It's even down further in some of these other spaces.
We are upgrading analysts.
We're doing all the kinds of things that we would normally do in -- as if we weren't impacted.
Although I would tell you that if we tried to just meet supply here on the financial advisor front, we might be able to hire 250 more financial advisors just in Raymond James Associates in the second half of this year.
Well we're not going to do that because physically we couldn't begin to process all that.
And we have very good activity in our independent contractor firm, which has a much lower levels of transition investment.
So the combination of those factors means that we are committing less.
We are watching closely, and budgeting the capital expenses, but we are getting a lot more for the dollars spent, and we are still maintaining some growth.
So that's the sort of the picture.
And I don't know how much faster we would go if we were unfettered.
It's certainly not more than 50% more, I don't think.
We wouldn't go double just because we couldn't process them and all.
We have already recruited this year 100% of what we recruited last year.
And last year was a great year.
Last year was the best year we've ever had.
So you know, how fast can you ramp up?
It creates all kinds of strains on the organization.
We've got a big transition team that does all of this work.
And we don't have that much stress in some of these other areas, nor do we have the need to add as many individuals.
So we are more unfettered in the area of, if we see really good investment banker team picking up the really good investment banker team or fixed income sales group or whatever.
So we are continuing to maintain those conversations.
Devin Ryan - Analyst
Okay, thanks.
I'm going to hop back in the queue.
Operator
Steve Stelmach, FBR Capital Markets.
Steve Stelmach - Analyst
I just want to circle back on an answer you gave with regards to the Shared National Credits.
You mentioned nice and wide 13% are criticized.
You are somewhere around the 4% number?
Steve Raney - President, and CEO of Raymond James Bank
And that was from last year's data, Steve.
That, once again, is dated.
August or September of last year, so.
Steve Stelmach - Analyst
Agreed, yes.
I guess the question is, how much is that 4% based on your credit selection versus the fact that your assets have grown and it's going to take a while for credit experience to catch up?
Credit tends to lag asset growth, right?
I guess I'm trying to get a feel for --
Tom James - Chairman and CEO
I would normally agree with that if we weren't in the heavy stress test environment today that we are in.
I mean, admittedly, you can have -- over time, you can develop more problems in a corporation because you are further away from the environment that was analyzed.
But, the fact is, we're staying at the upper end of the quality of companies in each segment.
And again, we are restricting ourselves to the segments about which we have knowledge and we see a lot of opportunity.
So when you do that, you are just by your asset allocation decision, making I think a real differential in terms of the problems you are going to experience.
And the main reason we are experiencing the level of problems even that we have is the fact that we had to have some real estate focus based on the fact that we were an S&L.
So we did have a higher percentage of real estate that, given a free hand in terms of this asset allocation, we might have even had more corporate loans than we had relative to the real estate.
But again, we think we understand real estate, so we -- including those of us that aren't necessarily (technical difficulty) analysts, we have development experience at the firm.
We have syndicated billions of dollars worth of real estate.
So we have a lot of knowledge here on that front.
Steve Stelmach - Analyst
Okay.
And so I guess the argument is you are not going to regress to the median of that 13%, but somewhere between 4% and 13% is probably reasonable?
Steve Raney - President, and CEO of Raymond James Bank
I mean that 13% will be substantially higher when we get the results in August or September and our 4% will be higher -- it already is.
We already know, you know, our criticized loans have increased.
Jeff Julien - SVP of Finance and CFO
(Inaudible question - microphone inaccessible).
Steve Raney - President, and CEO of Raymond James Bank
Yes, the ratio.
We will be less than the -- substantially less than the net average, so.
Steve Stelmach - Analyst
Okay.
And then just lastly, you mentioned the stress test.
Can you just give us some parameters of what you guys had in the back of your mind in terms of stress test?
I know it's probably more art than science, but expectations for unemployment, GDP?
What the environment is, what's your definition of stressed?
Jeff Julien - SVP of Finance and CFO
We kind of think we are in a stress test.
Steve Stelmach - Analyst
I think we all agree on that.
Steve Raney - President, and CEO of Raymond James Bank
Steve, we actually are still finalizing some work and plan on sharing in greater detail at the end of next week with the analysts the results of that test, including what our stress test assumptions are for probability of default by asset class, residential loans, corporate loans, commercial real estate loans and the severities associated with those.
I think that's probably even more relevant than what the underlying GDP and unemployment numbers are.
It's really almost loan by loan, so.
Steve Stelmach - Analyst
Okay, got it.
I appreciate that.
And I will see you guys next week.
Operator
Jim Margard, Rainier.
Jim Margard - Analyst
Hi, thanks.
Could you tell us a little bit more, give us a little bit more detail about how many loans do you have in the bank portfolio that are over, let's say $20 million in discrete loans, either Shared National Credits or other?
And how many over $15 million?
Steve Raney - President, and CEO of Raymond James Bank
I don't have that broken down that way.
But just kind of a general comment.
Out of the 257 corporate borrowers that comprise that portfolio, and that includes our commercial real estate borrowers as well, I would say 50% to 60% of them are over $20 million in total exposure.
Not all of that is outstandings.
We've got revolving lines of credit that aren't fully funded.
But in terms of our exposure levels, I would say 50% are north of $20 million.
Jim Margard - Analyst
And are those made up of multiple loans, or are those to one single borrower?
Steve Raney - President, and CEO of Raymond James Bank
Well, it may be multiple loans to the same borrower.
But I'm giving it to you on kind of a borrower by borrower basis.
Jim Margard - Analyst
Okay, thank you.
Operator
Douglas Sipkin, Pali.
Douglas Sipkin - Analyst
I just wanted to follow up on a couple of things.
I guess to the first point about the commercial real estate, just help us understand how in the 10-Q or the SEC filing, it's listed close to $4 billion, but obviously you guys are indicating that it's just $1.4 billion.
So can you reconcile the difference between those two numbers?
Steve Raney - President, and CEO of Raymond James Bank
Sure.
Hi, Doug.
Good morning.
Yes, the thrift regulators allow us to call loans commercial real estate loans if we have some real estate in our pool of collateral along with other assets that we may be securing ourselves with.
So there are a lot of companies that may have a corporate headquarters or some buildings that are part of their operation.
But you and I would look at that -- and we're calling that a commercial real estate loan in our regulatory reporting and in our public filings.
But the reality is that's really a loan that's not really tied to the commercial real estate.
It's really tied to the situation of the underlying borrower.
So, you know.
Douglas Sipkin - Analyst
So I should really be thinking about the $1.4 billion.
I guess that's a better number?
Steve Raney - President, and CEO of Raymond James Bank
That's correct.
That's where you really -- the repayment source of the loan and the use of the proceeds of the loan was really for that -- for the building and the underlying repayment sources from rental income from that property.
Douglas Sipkin - Analyst
Okay, okay.
So then my next question would be, I know you guys actually provided both the breakdown, where you did provide the commercial real estate balance and you also provided the allowance in the filing.
Can you give us an idea of what the allowance is on that $1.4 billion, the coverage?
Steve Raney - President, and CEO of Raymond James Bank
Doug, I do not have it broken out that way.
It's going to be, and as we cited earlier, 2.41% of the total of those two, the commercial real estate and the corporate loans, is -- that total -- 2.41% of that is the loan loss reserve.
I would say that a higher percentage of that against our real estate, just knowing we've got more of our criticized loans, and we typically take higher reserves against our real estate exposures anyway.
I don't have that number off the top of my head, though.
Douglas Sipkin - Analyst
So that 2.4% is coverage on, what?
I'm a little confused.
Steve Raney - President, and CEO of Raymond James Bank
If you added the $1.4 billion and the $3.5 billion together.
Douglas Sipkin - Analyst
And $3.5 billion is just corporate?
Steve Raney - President, and CEO of Raymond James Bank
Yes, that's correct.
Douglas Sipkin - Analyst
Okay.
So your coverage on basically commercial is 2.4%?
Steve Raney - President, and CEO of Raymond James Bank
Yes.
And it's 84 basis points on the residential portfolio.
Douglas Sipkin - Analyst
I got you.
Okay.
Okay, that's helpful.
And then maybe just a broader question, and I know you guys have given us an indication that you feel comfortable.
And obviously the market is very volatile.
But just as recently as last month, you guys had indicated that you felt very comfortable with the credit quality.
Again, it does look like March was an inflection point, but what's going to give us comfort that something like that can't happen again?
Tom James - Chairman and CEO
Look, the one loan occurring in the last month, so it's really caused the size of this to be much larger than we expected.
And the -- and it probably had an impact on us in terms of also reassessing other similar loans.
So consequently, it's still -- we are small enough when you have 250 loans outstanding, that a couple of loans in a quarter can have a major impact.
And that is why we say we try to identify them very early and set up reserves if we think there are any problems with any of the loans.
And -- but I've got no clue.
We may have none this quarter.
We may have two more.
I don't know.
Even though we provided for a number of additional ones than we have already experienced.
So generally speaking, these things take a while to occur.
You don't go out and make a settlement with somebody on a loan.
I'm not sure looking at the overall settlement on the loan that we did have, whether it was good, bad, or indifferent.
I'm just -- and we spent a lot of time looking at it.
The -- but normally you would have expected that whole process on that one loan to take maybe nine months or a year and a half to take.
So and a normal bank in that situation I think would be reserving more if it became clear over the period that the amount of potential lost to that particular loan was rising.
Our attitude is a little bit more front-end loaded than that.
We tend to look at it and say now, where would you really feel comfortable knowing everything you know about what's happening in the space, what's happening to this individual company, what's happening to this individual project, and so what would you reserve for it?
As opposed to saying okay, this is a level 15 and you need to take 10% against it.
So, and I know that's -- it's hard to quantify what I just said, but it is an approach that we take in looking at this.
Because what you find in these real stress tests that we are undergoing, is that specific loans cause the major problem in all the historical norms for different conditions of ratings don't really apply very well, and you need to take some larger provisions against loans that you know are at risk.
Douglas Sipkin - Analyst
Okay.
Question for Steve.
Obviously it's early in the quarter, so things can change.
$25 million provision to $75 million provision, can you give us sort of a rough range?
I know it's predicated on what you guys see the credit quality looking like.
How should we be thinking about that expense for the next couple of quarters?
Steve Raney - President, and CEO of Raymond James Bank
That's a really tough question that we don't have a lot of clarity on that on a look-forward basis.
It's just that is the biggest challenge right now, but.
Tom James - Chairman and CEO
We wish we knew the answer to that question.
Douglas Sipkin - Analyst
I guess what you're saying is then there's potential that could be in that range for the next couple of quarters?
Tom James - Chairman and CEO
I'm sorry -- no, yes, Doug.
From the earlier comments that we look at over the next 12 months and look at operating earnings rates and what loss experiences are, that conclusion is a realistic conclusion based on our already-given sort of best guess.
And the shorter period you take the more risk there is that you are wrong.
And if we are in a period right now as it appeared in the first quarter, where you are having a major revision of valuation in this commercial real estate sector, you could have it bunch in the next quarter.
I just don't know.
So our best guess is over a little longer term, we feel pretty comfortable.
But in these very short periods, and we obviously know another month now, but we don't know what's going to happen in the next two months.
Douglas Sipkin - Analyst
In terms of -- back to Steve, I know on that $1.4 billion, I guess you probably are not going to have the level of non-performers on that, are you?
Steve Raney - President, and CEO of Raymond James Bank
Well, out of -- there's $100 million of total non-performers in our corporate portfolio.
And I think maybe 100% of them are in the commercial real estate space.
I'm trying to think -- there's nine borrowers in that $100 million.
And I believe all of them are in the commercial real estate space.
I don't believe we have one -- we may have one company, one of the nine -- yes, one of the nine is in our corporate portfolio versus commercial real estate.
Douglas Sipkin - Analyst
Okay, that's helpful.
Switching gears, any update on auction rate securities?
Have you guys been able to work down the balances on your own?
Is there a plan and progress in place to deal with this situation, or it's just going to roll off over time?
Tom James - Chairman and CEO
We had some pretty significant roll off, as you may be aware of, as a result of buybacks by about three of the closed-end issuers of preferreds, which have reduced balances.
We have a plan, which is being initiated by Nuveen, for all of its holders, to try to serially go through each of their trusts and refinance the auction rate securities.
And as you are probably aware, I mean it's probably $530 million now of our say $830 million or $850 million that are currently outstanding after the last buybacks this month.
I've just had a whole series of them in my -- in client accounts I know about.
Douglas Sipkin - Analyst
So, I'm sorry, $850 million is outstanding, but $500 million of that $850 million, you feel like there is real good potential for it can get refinanced out?
Steve Raney - President, and CEO of Raymond James Bank
Yes, over the next nine months, I would say there's -- we will find out and we will have a better answer to that at the end of this quarter when we see how the initial transactions are received.
Douglas Sipkin - Analyst
Okay, that's helpful.
And then any update -- and I've talked a little bit about this with you guys, but any update on the TARP application and whether or not you guys are even going to proceed with that now?
I think you had said you were looking for $200 million, $300 million of the preferred?
Tom James - Chairman and CEO
My personal view, currently, is that we probably aren't going to get -- we wouldn't accept TARP funds, but we are still in process, and so say we are not making a decision by policy until we get -- we see the acceptance and look at the offer and see where we are at that moment in time.
Remember, we are also proceeding in our conversion to a bank holding company, which would open up the door for an application for a temporary loan guarantee program.
So I guess I would tell you all things being equal, if we had everything at the table in front of us, we wouldn't take TARP funds and we would take those.
We may not take TARP funds at all given the current liquidity of the firm.
So -- but we just don't know and I don't see any reason to commit.
Douglas Sipkin - Analyst
Okay, great.
Fair enough.
Thank you for taking my questions.
Tom James - Chairman and CEO
Yes.
Operator
Thank you.
There are no further questions in queue at this time, gentlemen.
Tom James - Chairman and CEO
Thank you very much for joining us this quarter.
Hopefully we will be reporting numbers more akin to those we have reported in the past next quarter.
Thank you very much.
Operator
Thank you.
Ladies and gentlemen, that does conclude your conference for today.
Thank you for your participation and for using AT&T Executive Teleconference.
You may now disconnect.