Jul 22, 2010
Paul Reilly
Good morning. Pleased to be here to present our third quarter 2010 results, which compared favorably to last year and third quarter and the sequential quarter.
You are hearing a different voice than you have. You know Tom has been for four years presenting to our lead spokesman, presenting to our investors.
So, although you have a new voice, you are not going to, if you are looking for a lot of change, you are going to be a little disappointed. Raymond James will still continue its conservative management as long-term orientation in the cantor which are used to on these calls.
The transition I think has gone exceedingly well. We have been able to reduce Tom’s working load from 80 hours to 70 hours as he continues to be extremely involved and help us all continue the direction for Raymond James.
Our call is going to take a little different format today. We are going to give it a try and see how it works.
I am 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, and then we will move on to the next segment. We are going to see how that works.
We 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 have indicated, Paul Matecki, our Chief General Counsel; Steven Raney, Head of our Bank; and Jennifer Ackert. 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 that’s going to have in 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 have little impact, I think from the regulation.
We are not a proprietary trading shop, we are an agency and we should not have much impact from a language in that bill. We really don’t write a lot of derivatives, we do some interest rates, swaps for people in the bank at a very limited proprietary tap or fund activities, there may be some impact but it’s not material really to our overall business.
Company continues to be well capitalized, the banks hitting over 13% in our broker dealer subs, notables at a regulatory capital. And under fiduciary standards, this company was founded on clients 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 regulated writing, the interpretations or the studies which haven’t been done and the doubles will be in the detail.
But we are certainly well positioned and I think we will be able to just generally operate our business the way 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 proceeding quarter, and last quarter was really a tale of do have.
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, 2008 and 2009 as PCG really owe a lot of increases from those results. So, let me start and say into our first segment which is the Private Client Group.
Private Client Group is 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 volume, and revenues reacted generally the same way. Those numbers were driven by our success in recruiting in 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, you know, probably peaked maximum recruiting and maybe as much as we could possibly have handled.
The quarter also showed increased margin balances, modest improvement for spreads, and we have 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 our interest expense and compensation expense for the quarter.
With that, I will turn it over to Jeff to talk about some more detail on the Private Client Group segment.
Jeff Julien
And 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 buildoff of 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, recapturing part of the lost interest spreads that we have 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 in the bottom line.
Pretax profits in that segment were up 144% over the prior year. The FA count was actually up 13 versus last year and fine assets were up 18% year-over-year.
So, all those factors versus a year ago looked 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 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 functioned properly of some of the expense categories in this segment declined that resulted in a better margin. Client assets, it 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.
Paul Reilly
Okay. The next segment we will talk about is capital markets.
For the segment for the quarter-on-quarter, we had an increase in 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 over top over the year, and certainly the volume of the deals in the first half of the quarter were very, very strong.
Again, we had a tail 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 life of quality credit issues in Europe, negatively impacting trading profits, which were down significantly for the quarter ending year and versus last year.
So, it kind of had an offset there between the two. Jeff, you want to go into a little more detail?
Jeff Julien
Sure. Versus last year, the capital markets segment showed 11% pickup.
It’s been a little bit of a shift. Last year, if you recall, fixed income was pretty much carrying the ball in the segment until this quarter, and equity capital markets has 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 it. We got in the trading profit line item, we got victimized a little bit again by the flight of quality sort of what happened in September of ’08, but to a much lesser degree, where and I think you have 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 head 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.
Profitability in that segment was impacted by the fact that you lost a higher margin trading profits and you had a little more investment banking revenues, which has little bit higher incentive comp and other expenses related to those revenues. And versus last quarter, things were relatively flat.
There has been a little shift between equity capital markets and fixed income. 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, etcetera, and you can see that profitability was actually down slightly from the preceding quarter, but relatively flat.
Paul Reilly
Our asset management of this business, investment advisory fees were up 38% over last year, really driven by a number of factors, we see inflow of client assets from our recruiting and our growth in our private client group, obviously the market with increased asset value. Revenues remained flat with prior quarter, but the mid period decline in asset values will likely have a negative impact on this segment next quarter, mostly asset fees are built at the beginning of the quarter.
We have also streamlined our external mutual fund business this quarter by outsourcing our legal money markets on, this will reduce costs but probably won’t have a big impact on next quarter as we get through that transition. Jeff?
Jeff Julien
Versus the year ago, assets under management are up about 22%, we are talking about discretionary assets under management as portrayed in the press release. This improvement obviously tied to the 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 a continual modest improvement as Paul mentioned, a lot of these assets are billed on April 1st. The market on April 1st was higher than January 1st that led to some of the sequential improvement.
I will just talk real briefly about next quarter while we are on the, 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 is another block of assets, 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, a vast majority flow to the Private Client Group segment. I mean, if you look at assets bill 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 other part of assets, that $32 billion was roughly flat or 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 in the 6% that you see here, but maybe about half of that as we look forward. But again, most of the non-discretionary flow to the Private Client Group, not to the asset management segment.
Paul Reilly
In Raymond Bank, the competition and the challenge I think we continue to try to grow the loan balance sheet as there is a lot of competition for high 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.
Because the good news is certainly last month, we have had net increase in loan balance and so, we are hoping now that not only can we keep the loan balance flat, but we will continue to grow them in the future. Commercial loans were up, we have grown in loan balances last month maybe two, and we have had the lowest loan loss provision expense in two years due both in improved conditions in the credit markets and fewer new loans.
Now, as we always caution you that the change of quarter-by-quarter is due to the lumpiness of some of the loans, but again, we see a positive trend in the bank. Jeff?
Jeff Julien
Thanks Paul and good morning everybody. We had 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 have 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 refinancing and paydowns that we had in that prior quarter. As Paul mentioned, our provision expense was at a two-year low at $17 million, in charge-offs we had $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 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 have actually grown the loan portfolio the last two months. In particular, we are 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 non-performing loans remained very high at nearly 100% compared to 64% for all our financial institutions based on the FDIC data.
Non-performing loans increased in the quarter by $12.5 million to $154 million and that was driven primarily by two commercial real estate loans doing on non-accrual during the quarter. Our other real estate owned, OREO properties actually came down slightly in the June quarter.
Commercial real estate remains under pressure and that 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 that continue to raise equity and delever and they are positioned for good opportunities in the future.
Over the last year, we have actually reduced our commercial real estate loan outstandings by $300 million and it now stands at about $1 billion. That’s become a smaller part of the bank’s balance sheet.
And in particular, as we 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 30th. Our residential past dues continue to increase and now stand at 4.6%.
That percentage is impacted by continued run-off 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 at a balance.
And while we would have thought, we would have seen a peak in residential past dues by now, we still maybe two or three quarters away from that peaking out. I know everybody is aware that many of our corporate borrowers meet the definition of a shared national credit, and that once again as a remainder as 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 have already been having a lot of discussions with the agent banks as we have 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 are 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 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 within that process.
Paul, I know you mentioned earlier about our capital ratio, that continues to grow. Total risk base is now 13.8%, and our Tier 1 capital is 11.6%.
On the regulatory front, it 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.
Paul Reilly
Let me make a couple of 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 intentionally shrunk the bank’s loan portfolio.
As I mentioned, we have replaced some of that loss spread through the promontory program, $9 million of that $15 million that we have lost. We don’t expect that – one of two things has to happen for us to resume growth in net interest income, obviously we can increase balance, which we are going to try to do at the bank, and we have done over the past year and margin balance at the broker dealer, which were 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 have talked in some conferences about these numbers and believe we would see a significant positive impact from the first 100 basis points rise in rates, but unfortunately that 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 to this stress test that we are living.
Jeff Julien
In summary, I just think you know the company is in solid case, and so well positioned. We continue to recruit in our PCG segment and capital markets, both in investment banking, mergers and acquisitions, and in our public finance segment, continue to add people.
In asset management, we are looking to opportunities to extend our investment platforms and 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 are in a gradual recovery, and 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 questions and answers.
Operator
(Operator instructions) Your first question comes from the line of Devin Ryan with Sandler O'Neill
Devin Ryan
Good morning guys.
Paul Reilly
Good morning.
Devin Ryan
Paul, you talked about recruiting slowing a bit. Your voluntary attrition rates have historically been very less, I am just curious what’s the drive that small decline in FAs from last quarter and then where now it still seems likely that you are going to have net additions in that base through the remainder of the year.
Paul Reilly
The voluntary attrition rate has been really changed. I mean, regretted transitions remains very, very low, and we do have people to retire, other things losing people as well as management of other financial advisory report.
So, with the recruiting down, we are down slightly, but it’s really around for the quarter. Chet, I don’t know if you want to add any other color to this?
Chet Helck
The color I would add is that while conditions are certainly improving in the marketplace, it’s 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 is 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, not the highly productive people, but on the margins. So, I think that’s another factor in addition to what you mentioned.
Paul Reilly
And Devin, our productivity continues to increase, it’s not up to past high level. 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.
Devin Ryan
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?
Paul Reilly
Well, I guess the bulk of the investors like everybody else, we are just uncertain, and people have been for flight to quality, the CDs, the treasuries, the fixed income investment 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 detail over the last year, and I think people are just being cautious, they are in the market and lot of cash in the sidelines.
Devin Ryan
Okay. Great.
And then, Steve, can you give us any more detail on the two commercial real estate loans and moving non-accrual during the period. I know even though the solid credit quarter, I was just a little bit surprised to see it on the provision.
So, any details on how you guys think about, that would be appreciated.
Steven Raney
Well, I was highlighting those two in particular. We had a lot of movement, lot of reductions actually out of non-accruals 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 have now reduced in a great way, the balance now stands at $60 million in our total land and development portfolio. So, as I had mentioned, Devin, there is lot of pressure on these projects finance real estate transactions, and we continue to monitor them very closely and also feel like we have got, and taking very aggressive actions in terms of our provisions, doing quarterly updates, valuations of the underlying collateral, very frequently in trying to be very proactive with how we are managing the risk of that portfolio.
Devin Ryan
And in terms of how you think about the provision.
Steven Raney
You are talking about the allowance compared to –?
Devin Ryan
Exactly.
Steven Raney
The allowance compared to the non-performers?
Devin Ryan
Right. Exactly, yes.
Steven Raney
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 non-performing 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 have got reserves at close to 100% of our non-performing when we know we have got collaterals that supports the balance that we have written a loan down to, we feel like this is we are doing it in a very conservative fashion.
Devin Ryan
Okay. Got you.
And then last one, administrative thing, and I will hop off. On the expense side, you guys did a good job in the quarter, but other expense, maybe just a bit high, so I just wonder if there is anything in there of note in the other expenses?
I can circle up on it. Maybe it was a little bit higher than I was looking for.
Paul Reilly
It’s right. I am showing $29 million versus the last five quarters, $29 million, $36 million, $28 million, $31 million.
That’s all of anything we plan to look at particularly.
Devin Ryan
Okay. I will also call up on it.
Thanks.
Paul Reilly
Okay.
Operator
Your next question comes from the line of Daniel Harris with Goldman Sachs.
Daniel Harris
Hi, good morning guys, how are you?
Paul Reilly
Hi Daniel.
Daniel Harris
You talked a little bit about the flight to safety in the client accounts. If that persists over the next 12 months, how should we expect that’s going to impact commissions for a client activity if people are focusing more on CDs and bonds versus equities and mutual funds?
Paul Reilly
It obviously depends on how actively in the market. If you look at commission activity overall, April is a good month, May and June are 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 out of equities, with slight move out of equities. So, it’s all going to depend on what investors do.
Good portion of our assets are fee-based. So, we are 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.
Daniel Harris
Yes. No, I guess my question was if things continue to persist at the direction you are talking about with the flight safety, what changes on the way we should be thinking about was the revenue capture per account or activity rate per account that drives some of the revenue numbers and commission?
Paul Reilly
Yes, we think it’s a nominal change. And we think we are in – again, people are pretty liquid right now.
Daniel Harris
Sure. Following up on question with Devin, 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, how should we think about that going forward?
Chet Helck
I would tell you that somewhat tilted back towards the independent contractor in the last 12 months. After having been through a cycle where the employee model clearly attracted the other models in the prior 18 months or so.
So, we see the trend rotating somewhat given activities going on in 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 the 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, whatever these levers are that drive these cycles, seem to be underpinning all the market.
Daniel Harris
Okay, Chet, thanks. Can you remind me, do you guys have a target that you think about for percent adds or headcount adds in your advisory business?
Chet Helck
We do. We think about it on a lot of different levels with different business units.
So, we do that more by dollars than we do by people. So, we look for 10% kind of numbers on net basis over a cycle.
Paul Reilly
Hi Daniel, any quarter a year, it’s hard, because the market conditions change, but we again are opportunistic where we can be, and when the market gets crazy, we are not in the business for buying people. So, we kind of look at a long-term average there.
Daniel Harris
Okay, and that’s 10% net new or is that 10% gross new?
Chet Helck
I would tell you that’s 10% net, but it’s over cycle. So, I wouldn’t tell you that we expect to do that this year.
And that’s also condition by what’s going on, but what I am trying to tell you is that we don’t think about it in terms saying we are going to go out and hire ex number of new people this year whatever the cost may be, which is the way a lot of firms seem to run their business. We – 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 advisories, And we are looking for 15% to 20% kind of range among market conditions for both those put together and keep it balanced overtime.
I know that’s a lot to throw at you one time, but that’s the way we think about it.
Daniel Harris
No, that’s helpful. And then maybe just lastly, Jeff, the compensation and benefit fund as a percentage of net revenues takes that closer to 69% this quarter, obviously it’s always going to be quarter-to-quarter, but how do you guys think about down in the full-year basis especially giving your mix with so many advisors getting the fixed payouts on a percentage basis.
Jeff Julien
I think with the mix of businesses we have got, and the revenue mix we have got, it’s high 60s is right. The main factor that is going to drive that down aside from more revenues coming from contractors or investment banking are high compensation areas, but the main factor that’s going to drive that back towards the mid-60s is when that interest picks up and when we had a higher contribution from net interest earnings then we saw that comp ratio driven back down towards the mid-60s.
So, I think that’s the fact that drives us within this range between 65% and 70%.
Daniel Harris
Okay. Thank you.
Operator
Your next question comes from the line of Hugh Miller with Sidoti & Company.
Hugh Miller
Hi, I appreciate you taking my questions. I had one with regard to, obviously you talked a little bit about FIN Reg and the fiduciary standard and so forth and obviously your per 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?
Chet Helck
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.
Hugh Miller
Okay. And maybe shifting towards the capital market segment, obviously a little bit of a contraction here from the March quarter, but can you talk a little bit about 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 kind of changed, they are kind of throwing in the caliber [ph] say with their thoughts on raising capital going public?
Paul Reilly
People want to raise money still chase the money for the questions to the market. Our backlog actually looks pretty good.
If we can get any kind of pickup in the market, I think 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 the balance sheet that are going public and IPOs.
There is still, we could have a good quarter, it depends on the market.
Hugh Miller
And then on the M&A side of things, similar types of situation?
Paul Reilly
I would say similar things. We certainly, it’s keeping the pipeline open, lot of middle market firms waiting for pricing the bigger deal to get financed with smaller deals, we almost have to create the markets.
So, it was down slightly from the quarter, I was just talking to some of our M&A guys yesterday and they are optimistic, a lot of things going on. I put it in the same category.
Hugh Miller
And with regards to the implied average daily commissions in June relative to May, it 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 Helck
Certainly, the retail side was cautious and we saw people continuing to respond to events like the Flash Crash and other things that undermine their confidence and markets and ask a lot of questions rather than make a decision. I will let Paul comment on the institutional side, but I think retail certainly was a part of that.
Paul Reilly
Fixed income was a bit hard for the quarter as I think it was everywhere. So, spreads widened, it just slowed down.
So, I don’t know if there is any one factor or another, but the second half of the quarter was a tough quarter.
Jeff Julien
Yes, and the equity capital markets actually did pretty well, because certainly they didn’t have same degree of issue in the second half of the quarter.
Hugh Miller
Yes, I mean, I certainly am hearing the same thing on the fixed income side, but we are just wondering whether or not you may be with some of the active hiring or re-hiring per se from the larger banks, whether or not you are seeing maybe a little bit of kickback on some market share just given how aggressive they have been recruiting and trying to get back in and generate those fixed income trading.
Jeff Julien
No, I would say, I think we have built up our fixed income business where outperform has done traditionally and certainly I mean, it’s a base business, certainly last year was not a good benchmark, I mean, 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 are continuing to build out as business in fact continuing to hire in a lot of the areas. So, I don’t think we are giving up lot of market share, I think it’s just the tough quarter.
Hugh Miller
All right, okay. Appreciate it.
And then the last question I had was for Steve with regard to the bank. I guess you said in the past that you guys have been somewhat cautious with regard 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 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 the high quality borrowers or is that an area where you are still pretty cautious and unlikely to growing?
Steven Raney
We continue 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 we are taking the whole building, we have not done any project finance real estate transactions this fiscal year, but the REITs in particular, given our institutional knowledge and long relationships with many of these management teams, we think that’s good business and they are poised for success going forward, but there are that many new real estate project finance real estate transactions that we would really be inclined to proceed with it at this point.
Paul Reilly
And Hugh, we are just not a great believer in an individual project financing segments. It’s too volatile.
We are activating and trying to increase our residential mortgage origination capability. We like the REIT space for good companies, because you get both of the assets backing and the operating company’s ability to raise capital and they tend to be less levered.
So, those basis, we continue to look at, but the individual property segment, we just never have been enamored with.
Steven Raney
And our corporate, the pipeline and the new corporate transactions has been growing. So, we are starting to as I had mentioned see some traction in that space.
Paul Reilly
And the covenants included in today’s loans are lot of different than they were three and four years ago.
Hugh Miller
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?
Steven Raney
Yes, I think there is still, there is for good credits, there is more demand than there is supply. So, there is still some pressure.
We have become an important component, but in many, I would also I know we have shared this before of much larger percentage of our transactions are with clients of investment banking into our research. So, in many cases, the client themselves are helping us with the allocations, but to your point, I actually just cut an email on a transaction we are working on right now that it looks like it’s going to be two times oversubscribed.
So, there is still certain transactions that are going to be, there seems to be a lot of the institutional non-banks, hedge funds and institutional fixed income funds that are back and active in this space and competing with us.
Hugh Miller
Great. Thank you so much for answering the questions.
Operator
Your next question comes from the line of Christopher Nolan with Maxim Group.
Christopher Nolan
Good morning guys.
Steven Raney
Hi Chris.
Christopher Nolan
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 are seeing C&I balances flat, slightly down. Is there a reason why the corporate loan balances have increased so much?
Steven Raney
Yes, on a competitive basis, Chris, many of the institutions that are doing typically small businesses in smaller companies, I would say that we are seeing a lot of activity kind of on the larger end that are 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 are 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 are starting to see a lot of activity.
I am optimistic that, that is actually going to eventually slow down and help broader economy where smaller companies are able to access financing as well. So, I think that’s what we are seeing in terms of the marketplace that we play in predominantly.
Christopher Nolan
Great. And just a follow-up, in terms of the capital ratios, they are looking pretty robust at this point.
Should we anticipate the beginning of dividends from the bank up to the holding company in the near term?
Steven Raney
Yes, I mean, we would actually like to grow the bank and use some of that, but the reality is we are continuing to generate earnings and we are given serious consideration to dividending back to the parent.
Christopher Nolan
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 a 20% for something else, which I missed.
Jeff Julien
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, beginning of quarter.
Christopher Nolan
Great. That accounted for the stronger – partially accounted for the stronger PCG results despite the declining equity markets?
Jeff Julien
Because they were at the beginning of the quarter, yes.
Christopher Nolan
Great. Thanks for the clarification.
Jeff Julien
All right.
Operator
Your next question comes from the line of Steve Stelmach with FBR Capital Markets.
Steve Stelmach
Hi, good morning.
Jeff Julien
Hi, Steve.
Steve Stelmach
Jeff, I think you had 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?
Jeff Julien
I will give you two examples. One is with less recruiting activity, you have a lot less costs of brining people in and etcetera, count transfer fees, some of the types of costs associated with recruiting, because recruiting is way down and another one is there is a seasonal fluctuation in some of our mailings.
For example, we have sent out all at year-end 1099 [ph] etcetera in the March quarter. So, quarter versus the preceding quarter, there is 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 are cutting back on that we previously had not.
Paul Reilly
We are managing costs and we are cautious about it and we are not doing any big reduction programs.
Steve Stelmach
Yes, and that makes sense. And just then turning to the Bank real quick, Steve, on the provision one more time, how 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?
Steven Raney
I have mentioned that we have 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 is no impact of any grade change or downgraded in the loan.
So, I know we have talked about how we build this loan by loan and we are reviewing the rating of every single loan in the portfolio every single quarter. So, that’s our –
Jeff Julien
We have checked maybe half of our credits, the agents banks.
Steven Raney
Yes, we probably have.
Jeff Julien
Preliminary rating is. We are pretty far down that process, but you can still get a surprise.
Steven Raney
Absolutely.
Paul Reilly
Last year, 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, it can always be a surprise.
Steven Raney
The September quarter last year net-net was about $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 extraordinarily tough environment credit-wise last year.
Paul Reilly
And it can only be negative to us, because we only adjust the ones that are graded more harsh.
Steven Raney
That’s right.
Paul Reilly
We typically don’t upgrade the ones that we upgrade less harshly. So, it’s just a matter of magnitude.
We don’t really – I don’t expect at this point based on what we have heard and how consistent the ratings have been with where we already had, and I don’t really expect it to be material.
Steven Raney
When we have it rated more harshly, then we leave it like that.
Steve Stelmach
Okay. And then, also, can you give us a feel for how you reserve based on the stage of delinquency?
It sounds like you have had somewhat of an uptick in early-stage delinquencies on the CRE side, and correct me if I am 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 non-accrual, but –?
Steven Raney
The commercial, I mean, the commercial loans, both commercial real estate and our corporate loans, I mean we are reserving way ahead of any past due issue. As a matter of fact, there is very little if any, there is very little if any issue with loans being past due.
We are typically putting loans even on non-accrual before they are even past due. Now, that’s not the case with our residential portfolio.
We actually are adding reserves once it gets 60 days, and once the loan goes 90 days past due, we are putting it in on non-performing status. So, it’s directly tied to the payment status on our residential portfolio, but the commercial loans and commercial real estate loans, it’s not really payment related.
Steve Stelmach
Okay.
Jeff Julien
Our reserves starts the day we put them on the books.
Steven Raney
Yes, we actually put reserves on.
Jeff Julien
And analysts looking at financial results every quarter and these loans that their tough operating environments are going down the stair step of our categories way before they stop performing.
Steve Stelmach
Got it. So you don't necessarily need to see a missed payment before you put up the reserve?
Steven Raney
No, as a matter of fact, that really never happens.
Steve Stelmach
Right. Not triggering event of any sort.
Steven Raney
We are building reserves well in advance of any payment issues on the commercial portfolio.
Paul Reilly
And I would say all of these questions on a loan reserve are great questions from you guys, but I hope over the last year, you have seen that we have done a lot better than the industry at being on top of these issues.
Operator
Your next question comes from the line of Joel Jeffrey with KBW.
Joel Jeffrey
Good morning guys.
Paul Reilly
Hi Joel.
Joel Jeffrey
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?
Steven Raney
Good question Joel. We have targeted sub sectors if you will, we would like to grow certain sectors in the healthcare portfolio.
As you know, we have 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 are actively going after names that have performed well historically.
So, there are certain subsectors that we are more inclined to do business with that we already talked about, the fact that we are really not looking to do a lot of project finance real estate loans. I would also mention that we have got some activities underway right now where we are looking to co-manage deals with relationships that we have more of an institutional relationship with, and so, you are going to see us, you are kind of moving up the food chain so to speak.
We have been kind of a retail investor if you will in these large corporate loan syndications and we are looking to kind of move up to the co-manager role that improves our economics and it will also improve our allocations overtime. There is some staffing that we are looking to take on to drive that business, but that – look for more information on that over the next few quarters.
Joel Jeffrey
Okay. Great.
And then, Jeff, on the promontory program, I think you said it was about $9 million of income this quarter on that?
Jeff Julien
$9.5 million exactly, yes.
Joel Jeffrey
$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?
Jeff Julien
That’s balance dependent obviously. I don’t expect – if rates stay where they are, I don’t expect much change in our spreads.
It’s just a matter of whether balances stay where they are. I mean, as Paul mentioned, we have a lot of clients with a lot of cash right now.
So, there is pretty big balances in that program. Those funds go into the market and/or we grow our bank where more of those funds need to be allocated to RJ Bank 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 suppose to be both balanced 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.
Joel Jeffrey
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?
Paul Reilly
We are still looking and we would like to expand the investment especially into fixed income international large cap spaces, but we are looking. If we find the right fit, we will add them, and yes, we are still interested in the area.
Joel Jeffrey
Great. Thanks for taking my questions.
Operator
Your next question comes from the line of Douglas Sipkin with Ticonderoga.
Douglas Sipkin
Yes, good morning. Can you guys hear me?
Paul Reilly
Yes, sure, Doug.
Douglas Sipkin
Hi, how you guys doing? 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 have given sort of your fee-based model, just curious for thoughts?
Paul Reilly
I don’t think it has a big impact, but go ahead.
Chet Helck
Doug, we think that in principle anyway, we operate pretty much in line with what 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 12b-1 fees is a very closely watched issue, as you might imagine among financial advisors, but the rest I see of what proposals are would not materially change anything.
Again, I will remind you that a high portion of our business is already fee-based. 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 overtime, 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 camp, which is something we have always should be the case, because funds should determine how much they need to operate and we should be able to price services we provide. So, we think this is all right down in the middle of the road for our way of doing business.
Douglas Sipkin
Okay. That's helpful.
Thank you. And then, Steve, I apologize for I am probably beating a dead horse a little bit, but I am 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 am just wondering, I mean, 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.
Steven Raney
Doug, those two loans that went into non-performing 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 non-accrual 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 are actually taking a loan to non-accrual, we are actually charging part of the loan off and taking that we have already set aside as reserves, we are charging that off and taking it out of reserves, and 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.
Jeff Julien
To your point, there were a couple of loans during the quarter that we couldn’t just justify carrying them at the criticized level we had, more than we had upgraded.
Douglas Sipkin
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?
Steven Raney
That’s correct.
Douglas Sipkin
And so –
Steven Raney
Greater the loan at inception, but typically it would be in the 150 to 175 basis points range on day one.
Douglas Sipkin
Okay. All right, no, that's helpful.
I mean I guess it sounds like it's just going back and forth on stuff, and so –
Jeff Julien
And we also had an opportunity this past quarter to dispose off a loan or two at par, had a criticized status.
Steven Raney
We sold a couple of loans that we had marked or had reserved at levels that were greater than what we actually saw the loan at. So, that in and of itself would by itself would just free some reserves up.
Jeff Julien
Those were not big pieces.
Douglas Sipkin
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 am just curious for your outlook for NIM.
Steven Raney
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.
Douglas Sipkin
Okay. Perfect.
Paul Reilly
Yes, I think talking to your question, I think general, as we see it generally improving credit environment but there is still some stuff leftover. So, as we grow the book, we are cautiously optimistic but we are conservative in the nature, so we are going to keep a look at it.
Douglas Sipkin
Got you. Okay.
So, I mean 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?
Steven Raney
I think that it continues 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 are still seeing price declines in lot of markets, in terms of values of residential properties in particular.
Douglas Sipkin
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 mid-sized firms, or, what are you guys seeing? Was there a real change in sentiment post that in May?
Steven Raney
We tell people that they should manage their portfolios long term and you get noise in a day, you 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 investors I think are hanging in there, and they are still cautious in their mix, but we don’t see a huge change thereof.
Paul Reilly
In addition to the long-term conservative planning-oriented approach that we espouse here, I think that you are seeing the effect of our recruiting continue to offset some of the softness. Obviously we still feel somehow.
So, the 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.
Douglas Sipkin
Okay. Thanks a lot guys.
I appreciate it.
Operator
(Operator instructions)
Paul Reilly
With that, I think we got to the list, I appreciate everybody’s team. I do want to close with one thing.
We have Tom in the room and we have been through a pretty strange market, both regulatory and market-wise. You probably thought you have seen it all, but you sure you probably think you haven’t.
I don’t know if you have any comments you want to add on kind of outlook and the market.
Tom James
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 2,200 pages plus all the Regs to come are largely didn’t address the two major problems specifically although the Regs will leverage in capital ratios, which are the two major causes of problems and 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, 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 is still a lot of hire, but the fact is we have already experienced cost from increased FDIC costs, and we are 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 have 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 minus.
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 are going to be in good shape.
So, it’s a mixed bag, but I don’t really think we have seen a downturn in the last two quarters, by the way, I still think we are in a slow growth, and we are going to be okay, and you are going to see continued growth on average albeit with all this volatility, not necessarily quarter-to-quarter. And I think that the new team, the new CEO is doing an excellent job in our team and he worked very closely together.
So, as far as I am concerned, the outlook is excellent.
Paul Reilly
Thank you Tom, thank you all.
Operator
This concludes today’s conference call. You may now disconnect.