雷蒙詹姆斯金融 (RJF) 2010 Q3 法說會逐字稿

Good morning.

My name is Marsha, and I will be your conference operator today.

At this time, I would like to welcome everyone to the quarterly analyst call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you.

Mr.

Reilly, you may begin your conference.

Well, thank you, and good morning.

Pleased to be here to present our third-quarter 2010 results, which compare favorably to last year and the third quarter and the sequential quarter.

You're hearing a different voice than you have.

You know, Tom has been for 40 years presenting to -- our lead spokesman presenting to our investors.

So although you have a new voice, if you're looking for a lot of change, you're going to be a little disappointed.

Raymond James will still continue its conservative management, its long-term orientation, and the candor that you are used to on these calls.

The transition, I think, has gone exceedingly well.

We've been able to reduce Tom's working load from 80 hours to 70 hours a week, as he continues to be extremely evolved and help us all continue the direction for Raymond James.

Our call is going to take a little different format today.

We're going to give it a try and see how it works.

I'm going to give you kind of a general overview, and then do an overview by segment.

And Jeff Julien our CFO will then join in and talk about that segment; then we'll move on to the next segment.

We're going to see how that works.

I also have a lot of support in the room here.

I have Chet Helck, our COO and head of our PCG segment.

Tom and Jeff, as I've indicated.

Paul Matecki, our Chief General Counsel; Steve Raney, head of our Bank; and Jennifer Ackart.

So we should be able to answer anything you have.

From an overview standpoint, I know a lot of people have been looking and talking about financial reform, and the impact it's going to have on our industry, but particularly our business.

I think the way Raymond James has conducted its business over these 40 years, puts us in great shape, and to have little impact I think from the regulations.

We're not a proprietary trading shop.

We're an agency, and we should not have much impact from the language in that bill.

We really don't write a lot of derivatives.

We do some interest-rate swaps for people in the bank, but are very limited.

Proprietary Capital or fund activities are maybe some impact, but it's not material, really, to our overall business.

The Company continues to be well-capitalized, the bank hitting over 13% in our broker dealer subs, multiples that are regulatory capital.

And under fiduciary standard, this Company was founded on client first.

And so we believe we act, and always thought we acted, in that capacity.

Now, the caveat is that most of the bill, as you know, is subject to regulators writing the interpretations or the studies, which haven't been done, and the devils will be in the details.

But we are certainly well positioned, and I think we'll be able to just generally operate our business the way we have and continue our long-term performance.

For the quarter, net income was $60.7 million or $0.48 per diluted share, up 42% from last year's third quarter, albeit last year was a pretty turbulent market, but 9% under the immediate preceding quarter.

And last quarter was really a tale of two halves.

The first half of the quarter, we had pretty strong markets and benefited both in PCG from a rising market and a strong capital market.

And then in the second half in May, you can remember as the European credit crisis kind of hit, the markets went down and capital markets got much tougher.

The real story of the quarter is really driven by the recruiting success in the past of 2008 and 2009 as PCG really drove a lot of increases in those results.

So let me start and segue into our first segment, which is the Private Client Group.

Private Client Group was about 64% of our revenues or approximately 45% of our pretax income for the quarter.

So obviously, our results were heavily impacted by what individual investors were doing.

33% of the increase over last year and 4% over the previous quarter, driven by commission volumes and revenues reacted generally the same way.

Those numbers were driven by our success in recruiting and a good market environment in the first half.

Recruiting has slowed this year.

Last year was kind of a record recruiting year, given the problems in the marketplaces and the disruption.

And we are recruiting at a slower rate, but last year, we were about a -- probably peak maximum recruiting, and maybe as much as we could possibly have handled.

The quarter also showed increased margin balances, modest improvement to spreads, and we had some enhanced fee income from our bank suite program that we implemented in September of 2009.

On the expense side, expenses stayed well-controlled, if you look at expenses without -- or interest expense and compensation expense for the quarter.

With that, I'll turn it over to Jeff to talk about some more detail on the Private Client Group segment.

Yes, referring to the segment data included in the press release, compared to last year's June, you can see the significant increase over 30% in Private Client Group revenues, largely driven by commission and fees.

That comparison shouldn't be too surprising as the June quarter was just the very beginning of the recovery from the low point in March of last year.

And so all the fee-based accounts were built off of the virtually the low point in the market cycle.

So, it was predominantly driven by commissions and fees, but an additional factor is that toward the end of last fiscal year, we launched the promontory program, and that's contributing about $9 million a quarter now to recapturing part of the lost interest spread that we've endured, as they took rates down to near zero.

And on a 31% increase in revenues, you would certainly expect some significant operating leverage.

And obviously we saw that on the bottom line as pretax profits in that segment were up 144% over the prior year.

The FA count was actually up 13% versus last year, and client assets were up 18% year over year.

So all those factors versus a year ago look very, very positive.

Versus the immediately preceding quarter, revenues were up just 3%, and that's actually on 13 fewer FAs at the end of the period at least.

So, that actually is indicative of slightly higher average production.

And, there was a nice pickup in profits on that modest increase in revenues as there were some expense controls that certainly function properly as some of the expense categories in this segment declined.

So that resulted in a better margin.

Client assets did decline during the quarter, as you might expect with the market activity, down 4.5%, which is something we will talk about a little later on in terms of what that might mean for next quarter.

Okay, the next segment we'll talk about is Capital Markets.

For the segment, for the quarter on quarter, we had an increase of both revenues, but a decrease in pretax income.

If you really look at the equity side, the investment banking activity, we had pretty strong M&A activity, down a little bit on the quarter but up over the year.

And, certainly, the volume of the deals in the first half of the quarter were very, very strong.

But, again, we had a tale of two quarters.

But it was driven mainly by larger investment banking kind of deals during the quarter.

On the Fixed Income side, again, the second half of the quarter was impacted by the flight to quality and the credit issues in Europe negatively impacting trading profits, which were down significantly for the quarter and the year and versus last year, so we kind of had an offset there between the two.

Jeff, do you want to go into a little more detail?

Sure.

Versus last year, the Capital Markets segment showed about an 11% pickup.

It's been a little bit of a shift.

Last year, if you'll recall, Fixed Income was pretty much carrying the ball in the segment until this quarter.

Then, Equity Capital Markets started a nice rebound.

But, versus last year, the increase in revenues is really driven by increased investment banking, net of the decline in trading profits, as we talked about.

That -- in the trading profit line item, we got victimized a little bit again by the flight to quality, sort of what happened in September of 2008, but to a much lesser degree; where, and I think you've seen this in a lot of our peers that have already come out with results, but virtually any Fixed Income instrument you held other than treasuries are the best agencies, went down in value as spreads widened and treasuries went up in value.

And we have a -- we periodically or most of the time have some short treasury position to hedge some of our Fixed Income inventories.

So when you lose both on the long and short side, it's hard to make a lot of trading profits, so we were impacted by that.

The profitability in that segment was impacted by the fact that you lost the higher-margin trading profits and you had a little more investment banking revenues, which has a little bit higher incentive comp and other expenses related to those revenues.

And versus last quarter, things were relatively flat.

There's been a little shift between Equity Capital Markets and Fixed Income.

As I said, Equity Capital Markets is doing better to sort of compensate for the trading profit decline in this particular quarter.

But a lot of the profitability has to do with how large a participation we have in deals, whether they are lead managed, et cetera.

And so you can see that profitability was actually down slightly from the preceding quarter, but relatively flat.

Okay, our Asset Management business, investment advisory fees, are up 38% over last year, really driven by a number of factors; first, the inflow of client assets from our recruiting and our growth in our Private Client Group.

Obviously, the market with increased asset values.

Revenues remained flat with really prior quarter.

But the mid-period decline in asset values will likely have a negative impact on this segment next quarter, as most of the asset fees are billed at the beginning of the quarter.

We've also streamlined our external mutual fund business this quarter by outsourcing our Eagle money market funds.

This will reduce costs, but probably won't have a big impact on next quarter as we get through that transition.

Jeff?

Versus the year ago, assets under management are up about 22%.

We're talking about discretionary assets under management as portrayed in the press release.

This improvement obviously tied to market activity and that led to the higher revenues in the asset management segment, as well as you can see the operating leverage present again in significant increase of 80% in profitability versus last year.

Versus the last quarter, I think what you are seeing is kind of the continual modest improvement as the -- I guess Paul mentioned -- a lot of these assets are billed on April 1.

The market on April 1 was higher than January 1, so that led to some of the sequential improvement.

I'll just talk real briefly about next quarter while we're on this just because it's in front of us at the moment.

Assets under management were down 6%; discretionary assets under management were down 6% quarter over quarter, which intuitively, would make you think that asset management fees would be down about that.

Our asset management fees, rough numbers, are 60/20/20, in terms of beginning of quarter, average for the quarter, end of quarter billings.

So some of that may depend on where assets -- will depend on where assets trend for the rest of the quarter.

In addition to the assets that we talk about in the press release, there's another block of assets -- it's about $32 billion -- that are wrapped-fee assets that are billed in advance; are all Private Client Group accounts.

And most of the revenues flow to the Private Client Group segment.

The vast majority flow to the Private Client Group segment.

That's -- so, if you look at assets billed at the beginning of the quarter, it's really about $60 billion, of which about $48 billion or 80% are billed in advance.

But those, that other pot of assets, that $32 billion, was roughly flat, down maybe less than 1% quarter over quarter, as we continue to bring in new net assets to the programs.

So our overall billings won't be down the 6% that you see here, but maybe about half of that.

That's as a look forward.

But again, most of the nondiscretionary flow to the Private Client Group, not to the Asset Management segment.

And Raymond James Bank, the competition and the challenge, I think, is we continue to try to grow the loan balance sheet as there's a lot of competition for higher-quality loans.

Tom reported a number of quarters ago that we were looking to grow our loan balances, but it would take a number of quarters before we could do that.

I guess the good news is, certainly last month, we had a net increase in the loan balance, and so we're hoping now that not only can we keep loan balances flat, but we'll continue to grow them in the future.

Commercial loans were up.

We've grown loan balances last month maybe [$2 billion].

We've had the lowest loan loss provision expense in two years, due both to improved conditions in the credit markets and fewer new loans.

Now, as we always caution you, that could change quarter by quarter due to the lumpiness of some of the loans, but again, we see a positive trend in the bank.

Jeff?

Steve?

Go ahead.

Thanks, Paul, and good morning, everybody.

We have pretax earnings at $29 million for the quarter.

And that was just slightly less than the immediate prior quarter.

Net interest income was down about $5 million, due to lower average loan balances.

And as we had talked about last quarter, we had unusually high level of loan fees and discount income in the prior March quarter that resulted from a large amount of refinancings and pay-downs that we had in that prior quarter.

As Paul mentioned, our provision expense was at a two-year low at $17 million, and charge-offs were at $18 million, at its lowest level since December of 2008.

That being said, problem loans and credit charges remain at elevated levels compared to normalized periods.

We are still anticipating that given the very challenging economic environment, that that will continue for some time.

Although we are pleased with the trends in the portfolio.

Loans were down, actually, quarter over quarter by 1%.

But as Paul mentioned, we've actually grown the loan portfolio the last two months.

In particular, we're starting to get some traction with our large corporate clients, and several growth initiatives are underway to bolster our growth plan.

We actually added net 15 new corporate borrowing relationships in the June quarter.

Net interest spreads were strong and stable when you take out the effects of the unamortized fees that we recognized in the prior quarter.

They should stay in that range for the next couple of quarters.

The coverage of Allowance for loan losses to nonperforming loans remains very high at nearly 100% compared to 64% for all financial institutions based on the FDIC data.

Nonperforming loans increased in the quarter by $12.5 million to $154 million, and that was driven primarily by two Commercial Real Estate loans going on non-accrual during the quarter.

Our other real estate owned, our OREO properties, actually came down slightly in the June quarter.

Commercial Real Estate remains under pressure, and we have not seen stabilization in values yet.

The REITs that comprised about a little over a third of our portfolio remain in very good shape.

They've continued to raise equity and de-lever.

And they are positioned for good opportunities in the future.

Over the last year, we've actually reduced our commercial real estate loan outstandings by $300 million, and it now stands at about $1 billion.

So it's become a smaller part of the bank's balance sheet.

And in particular, as we've talked about before, the loans that have been under the most pressure, the construction and development loans, have been reduced to $60 million as of June 30.

Our residential past dues continued to increase and now stand at 4.6%.

That percentage is impacted by continued runoff in the residential portfolio.

The number of residential loans that are now past due increased by only six loans compared to 19 loans in the March quarter.

So although it's increased, it's been doing so at a reducing rate.

Home prices are still under significant pressure, and that supply/demand dynamic is still out of balance.

And while we would have thought we would have seen a peak in residential past dues by now, we still may be two or three quarters away from that peaking out.

I know everybody's aware that many of our corporate borrowers -- meet the definition of a Shared National Credit.

And that once again, is a reminder is loans that are over $20 million that have over three financial institutions involved in it.

We actually will be receiving the formal Shared National Credit exam report in this quarter, the September quarter.

But we've already been having a lot of discussions with the agent banks as we've been going through our review process to determine the appropriate risk ratings.

And I would say we probably have actually got the ratings on maybe 50% of our borrowers already.

We're also in the middle of completing our own third-party loan review process, and about 65% of our loan portfolio will be reviewed as part of that third-party review process.

Once again, our goal is to minimize the discrepancies between where we have a loan rated and where the regulators have it rated.

We are planning for, and have seen indications, that the regulators are taking a pretty harsh look at these credits, but once again, we are planning for that and feel like we are aligning ourselves well in that process.

Paul, I know you mentioned earlier about our capital ratios; that continues to grow.

Total risk-based is now 13.8%, and our Tier 1 capital is 11.6%.

And on the regulatory front, that became law yesterday, the OTS and the OCC will be merged together.

The thrift charter will survive, but we will become regulated by the OCC at the bank level.

And the federal reserve will be the regulator at the holding company level.

We are continuing to work on our plans to convert from our thrift charter to a national bank and actually think that the merger of the agencies will expedite that plan over the next few months.

That's all I've got.

Let me make a couple comments about net interest, which is largely driven by the bank.

It was down slightly quarter to quarter and down about $15 million from a year ago as we have intentionally shrunk the Bank's loan portfolio.

As I mentioned, we've replaced some of that lost spread through the promontory program, about $9 million of that $15 million that we've lost.

We don't expect that -- well, one of two things has to happen for us to resume growth in net interest income.

Obviously, we can increase balances, which we're going to try to do at the bank, and we have done over the past year in margin balances at the broker-dealer, which are up 17% year over year.

But the other thing that would facilitate and benefit us is actually having the interest-rate increases by the Fed.

We've talked at some conferences about these numbers and believe that we would see a significant positive impact from the first 100 basis point rise in rates.

But unfortunately the timing of that seems to be getting farther away, not closer.

Secondly, on ROEs, we did hit 11.1% for the quarter versus 8.8% last year, which brings us to right at 10% year to date versus 7.7% versus last year to date, which is still significantly below our target of 15%, which we still believe is achievable once we get through this stress test that we're all living.

Well, in summary, I just think the Company is in solid shape.

It's well positioned.

We continue to recruit our PCG segment and capital markets, both in investment banking, mergers and acquisitions, and our public finance segment -- continue to add people.

In Asset Management, we're looking to -- the opportunities to expand our investment platforms and in the bank continues to meet its goal of increasing the loan balances, but, it's a tough market.

The near-term market is uncertain; we know that.

We believe that we're in a gradual recovery and that it's going to be choppy.

So, we continue to manage by watching our costs and investing in the future with people and technology.

So, with that, I will go ahead and open it up to question and answers.

(Operator Instructions).

Devin Ryan, Sandler O'Neill.

Paul, you talked about recruiting slowing a bit, but your voluntary attrition rates have historically been very low.

So I'm just curious what did drive that small decline in that phase from last quarter?

And then want to know if it still seems likely that you're going to have net additions in that phase through the remainder of the year?

Well, the voluntary attrition rate -- the attrition -- the voluntary attrition rate hasn't really changed.

The regretted transition remains very, very low.

And we do have people through retirement, death, other things, losing people, as well as management of the financial advisor force.

So with recruiting down, we are down slightly, but it's really a rounding error for the quarter.

Chet, I don't know if you want to add any other color to the PCG --?

Well, the color I would add is that while conditions are certainly improving in the marketplace, this has been a very tough period of time to be in our business.

And at Raymond James, a large portion of our business is done by independent contractors, where they bear the brunt of the fixed overhead at the branch.

And there are always people operating at a level where any decline in revenue is greatly impactful.

So at the lower end of our producing group, there's a great deal of pressure.

And I would tell you we have had impact from that as people just aren't able to continue operations.

So we see some headcount reduction that may be over our normal levels -- it's not the highly productive people -- but on the margins.

And so I think that's another factor in addition to what you mentioned.

And Devin, our productivity continues to increase.

It's not up to past high levels, so we still have room for improvement, but obviously, the market has an impact on that.

So overall we feel pretty good about where we are headed.

Got it; no, that's helpful.

And then just I guess along the same lines, just want to see if we can get the latest update on the pulse of the retail investor in these volatile times.

Well, I guess the pulse is, the investors, like everybody else, they're just uncertain.

People have been -- a flight to quality to CDs, to treasuries, to fixed income investments, has stayed about the same.

People went a little bit more into equities and came a little bit more out if you look at our percentages.

But I think it's been pretty steady, the tail over the last year.

And I think people are being cautious.

They're in the market and a lot of cash in the sidelines still.

Okay, great.

And then, Steve, can you give us any more detail on the two Commercial Real Estate loans that moved to nonaccrual during the period?

And even though it was a solid credit quarter, I was just a little bit surprised to see the under provision.

So any details on how you guys think about that would be appreciated.

Well, I was highlighting those two in particular.

We had a lot of movement, a lot of reductions, actually, out of nonaccrual as well.

But on a net basis, the increase was driven by those two properties.

One of them is a retail project, and one of them is one of the development loans that I mentioned that we've now reduced in a great way.

The balance now stands at $60 million in our total land and development portfolio.

So, as I've mentioned, Devin, there's a lot of pressure on these project-financed real estate transactions.

And we continue to monitor them very closely, and also feel like we've got -- and taking very aggressive action in terms of our provisions; doing quarterly updates, valuations of the underlying collateral very frequently; and trying to be very proactive with how we are managing the risk of that portfolio.

And in terms of how you think about the provision?

You're talking about the allowance compared to --?

Exactly.

The allowance compared to the nonperformers?

Right, exactly, yes.

Yes, it stands at -- and I know it came down slightly, but it still is almost at 100%.

As a reminder, the loans that we have in our nonperforming category, we would have already taken charge-downs, write-downs, of those loans to levels that we believe to be less than the actual current appraised value and current market value of the properties, both as it relates to our residential loans and our commercial loans.

So the fact that we've got reserves at close to 100% of our nonperforming when we know we've got collateral that supports the balance that we've written a loan down to, we feel like this is -- we're doing it in a very conservative fashion.

Okay, got you.

And then just lastly, one administrative thing and I will hop off.

So on the expense side, you guys did a good job in the quarter, but other expenses seem maybe just a bit high; so I was just wondering if there's anything in there of note in the other expenses.

Let's look here, Devin.

We're not (multiple speakers).

(inaudible) for the quarter; fairly unusual.

(inaudible).

I can circle up on it.

Maybe it was just a little bit higher than I was looking for.

That's right.

I'm showing $29 million versus the last five quarters -- $29 million, $36 million, $28 million, $31 million.

We didn't -- (inaudible) anything we flagged to look at particularly.

Okay.

I'll circle up on it.

Thanks.

Daniel Harris, Goldman Sachs.

You talked a little bit about the flight to safety and the client accounts.

If that persists over the next 12 months, how should we expect that's going to impact commissions or client activity if people are focusing more on CDs and bonds versus equities and mutual funds?

Well, you know, it obviously depends on how actively in the market.

If you looked at commission activity overall, April was a good month.

May and June were weak, but July appears to be more towards the April side.

So, it's going to depend on activity in the market.

The percentage move out that I looked at yesterday didn't show a big move, maybe out of equities, a slight move out of equities, so it's all going to depend on what investors do.

A good portion of our assets are fee-based, so we're going to have a mix in the market.

It's hard to tell what's going to happen in the quarter unless you tell me what the market is going to do.

Yes; no, I guess my question was, if things continue to persist that the direction you had talked about with the flight to safety, what changes on the way we should be thinking about whether the revenue capture per account or activity rate per account that drives some of the revenue numbers and commission?

We think it's a nominal change.

We think we're in -- again, people are pretty liquid right now.

Sure.

No, that makes sense.

And following up on a question of Devin's, so in the FA space, is there any differentiation in the way you are seeing recruits coming in, whether it's the fixed contractors less so than the employees?

And how should we think about that going forward?

I would tell you that the trend has somewhat tilted back towards the independent contractor in the last 12 months.

After having been through a cycle where the employee model clearly out-attracted the other models in the prior 18 months or so.

So we see the trend rotating somewhat, given activities going on at other firms and general market conditions, which all gives us comfort knowing that our strategy of having multiple channels is really good for the firm and good for the FAs because where one seems to go through a soft cycle, the other one gains momentum.

So just to summarize, right now, the independent contractor model, while still well below last year's level, has a bit more momentum than the employee model.

And that's true not only in the US, but probably in Canada as well, and in the UK.

So these -- whatever these levers are that drive these cycles, seem to be underpinning all the markets.

Okay, Chet; thanks.

And can you remind me, do you guys have a target that you think about for percent adds or headcount adds in your Advisory business?

Well, we do; and we think about it on a lot of different levels with different business units.

But we do that more by dollars than we do by people.

So we look for 10% kind of numbers on a net basis over a cycle.

Any quarter, it's hard because the market conditions change.

So we've, again, we're opportunistic where we can be.

And when the market gets crazy, we're not in the business of buying people.

So it's -- we kind of look at a long-term average thing.

Okay.

And, that's 10% net new or is that 10% gross new?

I would tell you, that's 10% net, but it's over a cycle.

So I wouldn't tell you that we expect to do that this year.

Okay.

And, that's also conditioned by what's going on.

But what I'm trying to show you is that we don't think about it in terms of saying we're going to go out and hire X number of new people this year whatever the cost may be, which is the way a lot of firms seem to run their business.

Sure.

We look at a balanced growth rate, trying to maintain a good growth rate, balancing the net addition of financial advisors with our also focus on increasing productivity of existing financial advisors.

And we're looking for 15% to 20% kind of range depending on market conditions for both those put together and keep it balanced over time.

I know that's a lot to throw at you at one time, but that's the way we think about it.

No, that's helpful.

And then maybe just lastly, Jeff, the compensation and benefits line as a percentage of net revenues -- ticked up closer to 69% this quarter.

Obviously, it's always going to be volatile quarter to quarter, but how do you guys think about that on a full-year basis, especially given your mix with so many advisers getting the fixed payouts on a percentage basis?

I think, with the mix of businesses we've gotten, the revenue mix we've got, the high 60s is right.

The main factor that is going to drive that down aside from more revenues coming from contractors or investment banking or high compensation areas, but the main factor that's going to drive that back toward the mid-60s is when net interest picks up.

And when we had a higher contribution from net interest earnings, then we saw that comp ratio driven back down toward the mid 60s.

So I think that's the factor that drives us within this range between 65% and 70%.

Okay.

Thank you.

Hugh Miller, Sidoti & Company.

Hi; I appreciate you taking my questions.

I had one with regards to -- obviously you talked a little bit about FinReg and the fiduciary standard and so forth, and obviously, you put client interest first.

But I was just wondering, do you have a sense as to, within your advisors, what percent are either registered investment advisors or certified financial planners and maybe kind of held more strictly to that fiduciary standard?

Yes, I can tell you that the vast majority of our registered representatives are also registered investment advisor agents, either under one of our RIAs or in the case of independent contractors, in their own registered investment advisories.

And that's because of the large portion of fee-based business that we do, which requires one to be an RIA in order to do fee-based business.

So, the bottom line is, most of our people are already operating in dual mode as both RIAs and registered representatives.

Okay.

And maybe shifting towards the Capital Markets segment, obviously saw a little bit of a contraction here from the March quarter.

But can you talk a little bit about the discussions you are having with companies, and given the challenging market conditions that persist, whether or not the backlog still looks pretty strong here?

And just whether or not the conversations with those companies has kind of changed -- if they are throwing in the towel per se with their thoughts on any of the raising capital going public, M&A?

I think every -- people that want to raise money still want to raise money, so the question is the market.

Our backlog actually looks pretty good, and if we can get any kind of pickup in the market, I think there's a -- you know, we could have a decent quarter even maybe against an industry trend.

But, the backlog looks good.

The question is, will the markets cooperate?

And I think people are still wanting to go out and recapitalize balance sheets or -- for those that are going public and IPOs, there's still a -- we could have a good quarter.

It depends on the market.

Yes.

And then on the M&A side of things, a similar types of situation?

I would say the similar things.

They're certainly -- it's keeping the pipeline open.

There's a lot of middle-market firms waiting for pricing.

The bigger deals do get financed.

The smaller deals -- we almost have to create the market.

So, it was down slightly from the quarter, but I was just talking to some of our M&A guys yesterday, and they're optimistic.

A lot of things going on, but I would put it in the same category.

Okay.

And with regards to, with the implied average daily commissions in June relative to May, came down just a touch more than what I was anticipating.

Can you talk about whether or not that was kind of fueled more by some sluggishness on the retail side of things or more on the institutional side?

Chet.

Certainly the retail side was cautious, and we saw people continuing to respond to events like the flash crash and other things that undermined their confidence in markets and asked a lot of questions rather than making decisions.

I'll let Paul comment on the institutional side, but I think retail certainly was a part of that.

Yes, Fixed Income was hit hard for the quarter, as I think it was everywhere.

So as spreads widened, it just slowed down.

So I don't know if there's any one factor or another, but the second half of the quarter was a tough quarter.

Yes; and Equity Capital Markets actually did pretty well considering they didn't have the same degree of new issue activity in the second half of the quarter.

Yes.

I mean I certainly am hearing the same thing on the Fixed Income side.

But was just wondering whether or not maybe with some of the active hiring or rehiring per se from the larger banks, whether or not you are seeing maybe a little bit of give-back on some market share, just given how aggressive they've been recruiting and trying to get back in and generate those Fixed Income trading?

No, I would say -- I would say, I think we've built up our Fixed Income business where it will outperform what it has done traditionally.

And certainly, I mean as a base business; certainly last year was not a good benchmark.

I wish it was for that one business.

And Equity Capital Markets being good, which tend not to happen at the same time.

But I think we've continued to -- we're continuing to build out that business; in fact, continuing to hire in a lot of the areas.

So, I don't think we're giving up a lot of market share.

I think it's just a tough quarter.

Right, okay.

Certainly appreciate the color there.

And then the last question I had was for Steve with regards to the Bank.

I guess, you said in the past that you guys have been somewhat cautious with regards to lending to the CRE markets, and we have kind of seen a little bit of firming in prices on CRE properties in April and May.

Obviously, still, delinquencies are a little bit of a challenge there.

But I was wondering, with the thought of growing the Bank a little bit more, is that an area that you are considering now on lending to with the high-quality borrowers there?

Or is that an area where you are still pretty cautious here and unlikely to grow in?

We've continued to support our REIT clients, and actually have a few new ones this year.

With the exception of one real estate project that had an investment-grade tenant that was taking the whole building, we have not done any project-financed real estate transactions this fiscal year.

But the REITs in particular, we -- given our institutional knowledge and long relationships with many of these management teams, we think that's good business and they're poised for success going forward.

But, there aren't that many new developments -- new real estate -- project-financed real estate transactions that we would really be inclined to proceed with at this point.

And, Hugh, we're just not a great believer in individual project financing (multiple speakers).

It's just too volatile.

We're activating and trying to increase our residential mortgage origination capability.

We like the REIT space for good companies because you get both the asset backing and the operating company ability to raise capital, and they tend to be less levered.

So, those spaces, we continue to look at, but the individual property segment, we've just never been enamored with.

And our corporate -- the pipeline of the new corporate transactions has been growing.

So we're starting to, as I've mentioned, see some traction in that space.

And the covenants included in today's loans are a lot different than they were three and four years ago.

Lopsided.

Certainly a good point.

Maybe just one quick follow-up.

You had mentioned in the past, too, when you saw a relationship that you wanted to lend to, that you weren't getting filled on as much of it through the Shared National Credit program as you would have liked.

Any difference in trend there?

Are you kind of getting filled on a greater percentage of the stuff that you are bidding into?

Yes, I think there's still -- for good credits, there's more demand than there is supply, so there's still some pressure there.

We've become an important component.

And many -- I would say also, I know we've shared this before, a much larger percentage of our transactions are with clients of investment banking and/or research, so in many cases, the client themselves are helping us with the allocations.

But to your point, I actually just got an e-mail on a transaction we're working on right now that it looks like it's going to be 2 times oversubscribed.

So, there's still certain transactions that are going to be -- there are a lot of -- there seems to be a lot of the institutional nonbanks, hedge funds and institutional fixed income funds that are back and active in this space and competing with us.

Great.

Thank you so much for answering the questions.

Christopher Nolan, Maxim Group.

A quick question for Steve.

Steve, it seems like corporate loans was the driver in terms of maintaining overall loan balances relatively steady.

Most banks actually -- they're seeing C&I balances flat, slightly down.

Is there a reason why the corporate loan balances have increased so much?

Yes, on a comparative basis, Chris, many of the other institutions that are doing typically small businesses and smaller companies, I would say that we're seeing a lot of activity kind of on the larger end.

Typical -- our typical borrowers typically are EBITDA north of $50 million or $100 million, so the larger companies, there seems to be a lot more activity.

They're able to access the loan markets easier perhaps than some of the smaller borrowers.

So, kind of the higher end of the corporate loan market, we're starting to see a lot of activity.

I'm optimistic that that's actually going to eventually flow down and help the broader economy where smaller companies are able to access financing as well.

So, I think that's what we're seeing in terms of the marketplace that we play in predominately.

Great.

And just a follow-up, in terms of the capital ratios, they're looking pretty robust at this point.

Should we anticipate the beginning of dividends from the bank up the holding company in the near term?

Yes, I mean we would actually like to grow the Bank and use some of that, but the reality is, we're continuing to generate earnings.

And we are giving serious consideration to dividending back to the parent.

Great.

And then a quick follow-up for Jeff.

Jeff, you have comments on the assets under management.

You indicated that the management fees are based on 60% on the beginning of the quarter, 20% for the average for the quarter, then 20% for something else, which I missed.

The end of the quarter, some of the institutional accounts are billed at the end of the quarter.

End of quarter balance, which is worked -- which is basically the same point as the next quarter, the beginning of quarter, so.

Great.

That accounted for the stronger -- partially accounted for the stronger PCG results despite the declining equity markets?

Because they were at the beginning of the quarter, yes.

Great.

Thank you for the clarification.

Steve Stelmach, FBR Capital Markets.

Good morning.

Jeff, I think you mentioned some benefit on the expense saves within PCG this quarter.

And, from the investor day, I thought it was mentioned a few different times that given the market conditions in '08 and '09, you thought that sort of the heavy lifting in the expense saves was finished and there wasn't much left to do there.

What accounted for this quarter?

I'll give you two examples.

One is, with less recruiting activity, you have a lot less cost of bringing people in and et cetera -- account transfer fees, some of the types of costs associated with recruiting because recruiting is way down.

And another one is, there is seasonal fluctuation in some of our mailings.

For example, we have to send out all the year end 1099s, et cetera, in the March quarter.

So, quarter versus the preceding quarter, there's an example of two expense accounts that were down.

It's items like that.

It's not a land sea shift or any philosophy or anything we're cutting back on that we previously had not.

Steve, just a bit more is we're managing costs and we're cautious about it and we're not doing any big production programs.

Okay.

And that makes sense.

And just, then turning to the Bank real quick, Steve, on the provision one more time, how will you reconcile what sounded like pretty cautious outlook on the Shared National Credit review with the provision this quarter?

It would seem that you would want to stay relatively robust in the allowance ahead of that Shared National review, no?

Well -- and I've mentioned that we've got a rather significant number of the Shared National Credit exam -- once again, it's preliminary until we get the final report.

But they usually don't change.

The vast, vast majority of them were already matched up with the results from that exam.

So, therefore, there's no impact of any great change or downgrade in the loan.

So, I know we talked about how we billed this loan by loan, and we are reviewing the rating of every single loan in the portfolio, every single quarter.

So that's our --

We've checked maybe half our credits with the agent bank (multiple speakers)

Yes.

Yes.

There's probably half (multiple speakers)

Rating is.

And we're pretty far down that process, but you can still get a surprise.

Absolutely.

I remind you last year, you know, we tend to -- we believe we mark them conservatively.

Last year, I think the results showed that versus the other banks.

But when the final results come in, there can always be a surprise.

Yes.

The September quarter last year, net net, was about a $15 million impact to our provision expense.

$15 million of the $40 million in the September quarter last year was -- I would attribute it to that.

And we knew that that was an extraordinarily tough environment credit-wise last year.

And it can only be negative to us because we only adjust the ones that are graded more harshly.

We typically don't upgrade the ones that we have graded less harshly.

But it's just a matter of magnitude.

Really, I don't expect at this point, based on what we've heard and how consistent the ratings have been with where we already had them, I don't really expect it to be material.

Yes.

When we have it rated more harshly then we leave it like that.

So --.

Okay.

And then, also, can you give us a feel for how you reserve based on the stage of delinquency?

It sounds like you've had somewhat of an uptick in early-stage delinquencies on the CRE side, and correct me if I'm wrong.

But, do you take the reserve within that 30- to 90-day bucket, or do you sort of wait till -- I know you said those were nonaccrual, but --

The commercial loans, both Commercial Real Estate and our corporate loans -- we're reserving way ahead of any past due issue.

As a matter of fact, there's very little, if any -- there's very little if any issue with loans being past due.

Even -- we're typically putting loans even on non-accrual before they're even past-due.

Now that's not the case with our residential portfolio.

We actually are adding reserves once they get 60 days.

And once a loan goes 90 days past due, we're putting it on nonperforming status.

So, it's directly tied to the payment status on our residential portfolio, but the commercial loans and our commercial real estate loans, it's not really payment-related.

Okay, so --

Our reserve starts the day we put the loan on the books.

Actually put reserves on.

And then we have analysts looking at financial results every quarter.

And these loans that they are -- in a tough operating environment, they're going down the stair step of our categories way before they stop performing.

Got it.

So you don't necessarily need to see a missed payment before you put of the reserve?

Oh, no, no.

As a matter of fact, that really never happens.

It's (multiple speakers)

Right, (multiple speakers) event of any sort.

We're building reserves well in advance of any payment issues on the commercial portfolio.

Got it.

And I would say to all these questions on the loan reserve are great questions from you guys, but I hope over the last year, you've seen that we did a lot better than the industry at staying on top of these issues, so.

Joel Jeffrey, KBW.

Steve, I think you had said you added about 15 net new corporate relationships this quarter.

I was just wondering, in terms of growing the loan portfolio, are there any new strategies you guys are thinking about implementing to enhance growth?

Good question, Joel.

We have targeted certain subsectors, if you will.

We would like to grow certain sectors in the healthcare portfolio.

We've -- as you know, we've got a rather significant healthcare investment banking practice with some clients that we have not currently done lending business with.

There are also, in the consumer products space, in the consumer products space, we're actively going after names that have performed well historically.

So there's certain subsectors that we are more inclined to do business with; and we already talked about the fact that we are really not looking to do a lot of project-financed real estate loans.

I would also mention that we have got some activities underway right now where we are looking to comanage deals with relationships that we have more of an institutional relationship with.

And so, you're going to see us kind of moving up the food chain so to speak.

We've been kind of a retail investor, if you will, in these large corporate loan syndications.

And we're looking to kind of move up to the comanager role that improves our economics, and it will also improve our allocations over time.

There's some staffing that we're looking to take on to drive that business, but that -- look for more information on that over the next few quarters.

Okay, great.

And then, Jeff, on the promontory program, I think you said it was about $9 million of income this quarter on that?

$9.5 million, exactly, but yes.

$9.5 million.

Is that a number that's going to say relatively stagnant or do you expect to be able to grow that line?

That's balance dependent, obviously.

I don't expect a -- I expect -- if rates stay where they are, I don't expect much change in our spreads, so it's just a matter of whether balances stay where they are.

As Paul mentioned, we have a lot of clients with a lot of cash right now, so there's pretty big balances in that program.

If those funds go into the market and/or we grow our Bank, where more of those funds need to be allocated to RJBank to fund loan growth, the outside promontory balances may go down.

If rates go up, that would probably expand that spread like it would expand some of the other spreads.

So, it's going to be both balance and rate driven like the other categories.

But I don't anticipate it going very much from where it is without one of those two factors happening.

Okay, great.

And then just lastly, I think in the past you guys have said you looked at asset managers as a potential acquisition.

Is that something that still might be on your radar screen?

We're still looking, and we would like to expand the investment platform, especially into Fixed Income international or large-cap spaces.

But, we're looking.

If we find the right fit, we will add them; and yes, we're still interested in the area.

Great.

Thanks for taking my questions.

Douglas Sipkin, Ticonderoga.

Good morning.

Two questions.

First, sort of big picture retail brokerage business, the SEC has six months to potentially come up with fiduciary standards for brokers.

And then yesterday, the SEC came out with new fee guidelines for asset managers and price competition for retail brokers around 12b-1 fees.

How are you guys thinking about that?

Does that have a big impact on your business?

Does that have a big impact on some of your competitors versus you've given sort of your fee-based model?

Just curious for thoughts.

Go ahead, Chet.

I don't think it has a big impact, but go ahead.

We think that, in principle anyway, we operate pretty much in line with what the regulators would like everybody to do.

So we don't see this as a game changer for us.

I think if we were primarily in the manufacturing, distribution business, for certain products anyway, we would be thinking hard about how we were going to reinvent ourselves, but that's not going on here.

The fee, the 12b-1 fee is a very closely watched issue, as you might imagine, among financial advisors.

But the drafts I see of what the proposals are would not materially change anything.

Again, I will remind you that a high portion of our business is already fee-based, where the client is paying a percentage of assets for ongoing advisory services, and 12b-1 fees are a tax efficient way for the client to pay those fees.

And if that tax efficiency is somehow limited over time, which is what they are proposing, I would expect that you would see some of that business shift more into a straight advisory fee.

I thought it was also interesting that they included in the proposal the ability for the broker-dealer to determine ongoing pricing on fund shares not in an advisory account, which is something we've always said should be the case because funds should determine how much they need to operate and we should be able to price the services we provide.

So we think this is all right down the middle of the road for our way of doing business.

Okay, that's helpful.

Thank you.

And then, Steve, I apologize for I'm probably beating a dead horse a little bit, but, I'm just trying to explore the provision a little bit more.

Your loan balances have been coming down, but this quarter, there was an increase sort of in the corporate loan book in aggregate.

And I know you guys typically reserve maybe 1.5% -- and I don't want to put words in your mouth -- 1.5%, 1.75% on the onset.

And you did have two new NPAs on the commercial side, not commercial real estate just corporate loans in general.

So I'm just wondering, is there something that you are seeing in the credit outlook getting much better?

I was just surprised that the number was that, considering sort of those two factors.

Those two loans that went into nonperforming were already heavily reserved in prior periods.

They were already criticized loans that we had set aside significant reserves.

So just by virtue of them going into nonaccrual really doesn't necessarily impact the provision expense and the reserves we have set up for them.

$17 million is still a big number and our charge-offs are still escalated.

So, in some cases, when we're actually taking a loan to non-accrual, we're actually charging part of the loan off and taking that that we have already set aside as reserves, we're charging that off and taking it out of reserves, but in some cases adding additional reserves based on the new value of the underlying collateral.

So, that, in and of itself doesn't necessarily trigger additional reserves because we would have already recognized that as a problem loan in prior periods.

Right.

But to your point, Doug, there were a couple of loans during the quarter that we couldn't justify carrying them at the criticized level we had anymore that didn't get upgraded.

I got You.

So there was a bit of give and take.

And then just in terms of -- but in terms of just the actual -- while the aggregate loans didn't -- they went down, the corporate loans went up; and I know that typically gets reserved at the onset tougher than residential, correct?

That's correct.

That's correct.

And so --

(multiple speakers) graded a loan at inception, but typically it would be in the 150 to 175 basis point range on day one.

Okay.

All right, no, that's helpful.

I mean I guess it sounds like it's just going back and forth on stuff.

And --

And we also had an opportunity this past quarter to dispose of a loan or two at par.

(multiple speakers) had in the criticized status.

Yes, we sold a couple of loans that we had marked or had reserved at levels that were greater than what we actually sold the loan at.

So that, in and of itself, would by itself would just free some reserves up.

Those were not big pieces.

Okay, that's very helpful.

And then I apologize.

I jumped on late.

If you did give this already, the NIM, any outlook around the NIM?

I know some of the bigger banks have talked about tighter NIMs because of lack of loan growth, I think.

I mean I'm just curious for your outlook for NIM.

Well, loan balances this quarter, I anticipate point-to-point will be flat to maybe slightly up, but on average, our balances will be down during this period.

The actual net interest spread itself should remain relatively stable over the next couple of quarters, Doug.

So I would anticipate net interest income just being down because average balances will probably be down slightly.

Okay, perfect.

Yes, I think, Doug, and your first question, I think general is we see a generally improving credit environment, but there's still some stuff left over.

So as we grow the book, we are cautiously optimistic, but we are conservative in the nature, so we're going to keep a look at it.

Got you.

Okay, so it still sounds like in terms of the credit outlook, it's pretty consistent with what it's been over the last couple of months.

It's a slow improvement.

The last I guess month or two hasn't had that big of an impact on your guy's outlook with sort of maybe a downdraft in the economy?

No, I think that I continue to be a little bit surprised that the residential market is just under a lot of pressure.

And we would have thought that we would have seen maybe some more improvement, but we're still seeing price declines in a lot of markets in terms of values of residential properties in particular.

Okay.

And then, again, I apologize because it may have been asked, but a lot of your bigger competitors are talking about the flash crash and how negative it has been for retail psyche, yet you guys posted pretty good results.

Is it a different world at the smaller or midsize firms?

Or, what are you guys seeing?

Was there a real change in sentiment post that in May?

We tell people, look, that they should manage their portfolios long term.

And you get noise in a day, sure, it can shake people, but you got to shake off this short-term noise and look at your long-term investment portfolio.

So sure, there's withdrawals or there are things that happen in a couple days, but overall the investors I think are hanging in there.

They are still cautious in their mix, but we don't see a huge change there right now.

Doug in addition to the long-term conservative planning-oriented approach that we espouse here, I think you are seeing the effect of our recruiting continue to offset some of the softness that obviously we still feel some of.

So it's a combination of factors, but you can't really appreciate how much of a game changer the last two years have been in terms of adding market share here.

We still have a lot of future benefit to realize from that.

Okay.

Thanks a lot, guys.

I appreciate it.

(Operator Instructions).

Well with that, I think we got through the list.

I appreciate everybody's time.

I do want to close with one thing.

We have Tom in the room, and we've been through a pretty strange market, both regulatory, market-wise, you probably thought you have seen it all, but this year, you probably think you haven't.

I don't know if you have any comments you want to add on kind of outlook in the market or --?

The only thing I would highlight is what Jeff and Chet were saying there at the end, is that most of these regulatory changes are really non-impactful for us on a financial basis.

But they are impactful in the sense that those 2200 pages plus all the regs to come are -- largely didn't address the two major problems specifically, although the regs will -- leverage and capital ratios, which are the two major causes of problems; and a lack of disciplined regulation on the part of the regulators.

And the lack of disciplined management on the part of the industry.

What I would tell you is that nothing was done to really increase the budgets of the regulators that need to address these.

Consumer protection agency will add duplicative costs to oversight, so there are going to be some additional frictional costs for the industry.

In the main, any incremental costs will probably get directed at big banks where there's still a lot of ire.

But the fact is, we've already experienced costs from increase -- FDIC costs from -- and we're going to see more.

So, those costs go directly to the broker dealer, and then are passed on to consumers.

So, while all these guys are up waving their arms about what great accomplishments they had with this bill, I can tell you I think they did a lousy job.

They didn't deal with those major issues that I just mentioned, nor the second level one, which is they didn't create a mechanism on an ongoing basis that would allow dynamic response to changing products, changing industry conditions and afford our industry to plan for the future in a way that would deter some of these kinds of problems that we experienced in this down market.

And for that, I give these guys an F.

For the first part, I would probably give them a C-.

So, I actually am disappointed, but I don't think it impacts us very much except for some of these frictional costs that will be there.

We, in the industry, will continue to work with the regulators.

We are continuing to do it to try to make sure that the regulations -- as Chet mentioned, they are reasonable on fiduciary standards.

If we can keep the regulation to reasonable levels, I think we're going to be in good shape.

So, it's a mixed bag, but I don't really think we've seen a downturn in the last two quarters, by the way.

I still think we're in the slow growth.

And, we're going to be okay.

And you're going to see continued growth on average, albeit with all this volatility, not necessarily quarter to quarter.

And, I think the new team is -- the new CEO is doing an excellent job and our team and he are working very closely together.

So as far as I'm concerned, the outlook is excellent.

Great.

Thank you, Tom.

Thank you, all.

This concludes today's conference call.

You may now disconnect.