Welcome everyone to our third quarter analyst conference call. I’m joined this morning by our COO, Chet Helck; our CFO, Jeff Julien; the Bank President, Steve Raney; and our Controller and Chief Numbers Person, Jennifer Ackert; as well as our Attorney, Paul Matecki, who is here to make sure that if I get off the reservation, we’ll you update our public disclosures. As we reported yesterday afternoon late, we had what I would describe as a reasonable quarter given the condition of the market in the June quarter. As we all are well aware, the market conditions were much better than they were in the March quarter. As I sort of reflected with Larry Kudlow yesterday, part of that is all market driven it’s not actually as good as you might hope given that kind of a circumstance in the marketplace, because you didn’t get a lot of revenue enhancement as a result of the market improvement. As some of you pointed out in your write-ups, the bad debt provisions or the loan loss expense provisions were back to a more-normal rate from aberrational rate that we had in the prior quarter that related to one specifically extremely large write-down, which we think may not have even been justified in the way the deal was structured, but happens on occasion. I will say more about that when I get to the bank discussion. It so what you really had there was you had a decline in net revenues of size and you had from last year clearly a substantial decline of 16% and 6% increase from the preceding quarter. I might have summarized, given the data that we had that you might have gotten revenues up in double-digits as a result of the improvement in the market, especially given the…

The largest increase in other revenue is related to a write-off within our merchant banking portfolio, Proprietary Capital.

So Proprietary Capital, transaction differentials in valuations.

One item to note is there’s a large portion of that, that’s eliminated in minority interest.

Yes. Now, it’s one of these consolidated transactions and we actually only owned 22% of a $12 million increase, and so you get a big number in the increase that is consolidated and then eliminated below the line. This is an unfortunate fallout from the Enron situation, where some of these consolidations for statement purposes are obfuscating rather than helpful for interpreting data. So as I said, expenses were pretty well contained. Tax rates remain high because of COLI non-deductibility issues that affected it income. So rather than run in the 38% or 39% range, they were over 40% again, and that’s more a function of what’s actually happening in those valuations of securities, etc. So as I said, the earnings were good, but not outstanding. When you look at the segments, we are up across the board in pre-tax income for all of our segments from the immediately preceding quarter and again, we’re down across the board for the comparison to last year’s comparable quarter. In the Private Client Group, which remains weak, and I think I’d point out one of the reasons. The June quarter of last year was very good, it tends to be a lag in terms of what the reaction in Private Client Group activity is to the market. As you have, what I describe as Chinese water torture in declining markets, clients become less and less active, more concerned generally about the market. At the other end, their concern tends to not be affected by a short term rally for fear that it might be a bear market trap or something of that nature takes them a while to get more positive. So we actually had a 48% drop from the prior year, even though it was a 57% increase. It was still a…

Your first question comes from Devin Ryan - Sandler O’Neill.

Question for Steve. With the agent banks finishing the SNC review, can you give us any color on kind of what you’re hearing about particular credits and just how you felt you were marked in light of that and just any of the color, that you’ve received so far?

We have not gotten the results of the Shared National Credit exam. We would expect that in late August, early September. We are in conversations with the agent banks on these credits and we attempt on every single loan, where they may have already had the results of the report on the examination on that particular credit, so that we try to match up our risk ratings and reserves accordingly. In some cases, those reviews have been completed and in some cases, they haven’t. In some cases, actually, the agent won’t share that information with us. So obviously, what we’re trying to do is make sure we don’t wind up this quarter with any surprises. We have been very diligent about downgrading loans in a very timely fashion. I would also mention that our third party loan review company has already reviewed about 40% of the dollars of our corporate portfolio. They’re going to be here in August, to review about another 30%. So this fiscal year, our third party loan review company would have reviewed about 70% of the dollars of our portfolio, but you point about the Shared National Credit exam is a very relevant. We’re trying to make sure we don’t wind up with any surprises this quarter in terms of the examiners differing with our risk ratings.

Again, Steve you would point out based on the 40%, you’ve been through and what you’ve looked at that we’re in good shape. Our percentages continue to be much lower than the national averages.

Devin, just one more thing; as you can imagine, every loan that we would have on our watch on worst list has already been reviewed by the third party loan review company.

Then just in terms of the decline in loan balances, if I missed this. Was that primarily treated to REITs paying down credit lines with them raising equity in the quarter? Or were there [Multiple Speakers]?

There was $100 million of that, $200 million in other corporate loans, and $175 million in residential.

Then just finally, looking at the investment advisory, it looks like revenues declined about 29% from last quarter, while AUM increased. Just want to get some color of what’s going on here. Was it a mix issue or just some color there? It would be helpful.

Again, the way we bill on these is, we bill forward for all of the retail accounts, so the revenues that we received this quarter were based on March valuations. The revenues we’ve receive next quarter will be based on June valuations. So fees are expected to be up 19% over last quarter. So actually, there’s been a substantial improvement there. We were actually modeling low, further declines in market value for this June quarter and for the September quarter. We’re no longer obviously doing that and the goal of the head of asset management has always been not to experience a loss in any quarter. So he manages in accordance with that as sort of a downside stop limit, and he has done a good job, I would tell you, in terms of reducing expenses. So we should have pretty good leverage on the upside, but that’s the reason for the decline. The decline is based on those March lows, so…

There’s a compounding factor too, there, Devin, in the current quarter is that the money market fees given the dynamics of the money market funds, those fees are substantially being waved at this point in time.

Yes. So essentially, the money market impact here is disappeared on the income side. As you should be aware, I’ve described this as sort of an actual plan on the regulators part to move money out of money market funds into the banking system. A lot of that has happened. It hadn’t happened here. We’ve just waived the fees and maintained balances at a pretty consistent level. When we open up this waterfall sweep alternative, I would expect more money to move out of the money markets substantially and probably, our SIP balances will be maintained at a competitive rate. So I don’t expect as much or any movement from those balances out of where they currently exist, but that’s what I meant about the securities firm really suffering from the absence of a lot of interest earnings that they had benefit it from in the past, they do earn a good spreads to margin loans. On deposits that are invested overnight, you probably have, margins down from 60 basis points plus 20, beyond any of your excess capital. That's happening that the Stock Loan activity is considerably off given the market and those spreads are narrower than they have been, unless you happen to have a good book in your customer holdings of securities that are hard to borrow. As you can tell in our earnings there, they've retained profitability, but the level of profits are down considerably, so the interest factor in the brokerage industry, which was supplying, depending on the firm, somewhere between 30% and 55% or 60% of overall pretax profits has virtually disappeared, other than the margin portion and margin balances have declined, reflecting concern with clients. I mean, when you look at our $195 billion in assets, we’re slightly over $1 billion in margin loans. So it’s a very low relationship to total assets. We always like to think that we’re around one and we are considerably below 1 and appropriately so, if you are worried about managing your risk in your securities portfolio, if you think there is downside risk, you pay off margin accounts. I think that’s nationwide. I don’t think that we’re the only firm that has experienced this kind of shrinkage, but when you are looking at trying to figure out what are the leveraged effects that you get when markets improve or return to, quote, normal, end quote, whatever the hell that is, the fact is, these net interest earnings are one of the ballooning factors that will really enhance retail firm activity and profits.

Your next question comes from Douglas Sipkin - Pali Futures.

Just had, I guess, two subsets of questions. First, I guess for Steve on the bank stuff and then moving over to the retail broker and the capital markets stuff, as it relates to the bank stuff, you guys have any idea of how much paydowns you maybe expecting going forward? I know some of that can be dependent upon the equity markets being strong, but any sense of if we can continue to see some of this trend that we saw this quarter with the big decline in loans?

Yes, I would think, Doug, that the residential portfolio would remain relatively constant in terms of the level of paydowns. The activities around the REITs in particular has slowed a little bit, but we have actually already experienced some additional paydowns on some corporates. We’ve actually had a couple of project finance real estate loans that we were the construction lender on that have actually paid out as a result of the takeout stepping to the table per the original agreement. So, to the extent that the capital markets remain open for some of these industries. What we did see in the last quarter, most notably some of our gaming credits and also some of our energy credits took advantage of capital raises and paydowns. So, to the extent that the markets remain open, we would anticipate paydowns maybe not as high as last quarter, but still substantial.

Would you be able to give me the updated loan balance right now? Or do we have to wait for the monthly release?

No, we’re not going to get into daily releases of loan balances.

I notice that you guys sold a non-accrual loan, and that played a role in some of the charge-offs. Is that something you are going to be looking to do on some of these non-performing credits is that an indication that there’s some more liquidity in the markets right now?

That was somewhat of a unique situation of a rather large credit, a multibillion-dollar loan, where there was kind of a more active market. We elected to go ahead and sell our position in its entirety at a discount. That loan, by the way, was reserved at 31% as of March 31. So, we had already taken a pretty substantial amount in terms of our provisioning against that.

We actually plan to reserve more than what the total loss was, so in our own mind, it was a good sales price.

Then, just thinking about the provision in general, how much flexibility, do you guys have with your auditors. The reason I mention that, obviously, investors want to see that reserve build go higher and higher and higher, but on the same end, you guys can only provision as much as your auditors would let you. Given the improvement in the capital markets, are you guys fighting with them right now to maybe be provisioning a little bit more? I was a little surprised; I thought the provision number would be higher. Obviously, you did get a big loan paydown, so that helped some of it.

There’s really not any arguments’ regarding our ability to increase reserves. We are doing this loan-by-loan and provisioning it that way. We did, as Tom mentioned, we did change some methodology in the prior quarter to actually bolster our reserves. That contributed about $4.5 million to actually increasing our loan loss reserves just by a result of that methodology change. So, there’s really not any pushback from the auditor at this point.

Their attitude has changed, given the scenario in the financial markets over the last year. They don’t tend to be as resistant as they would have been heretofore. They wouldn’t allowed us to do what we are doing now, your question is well conceived, but, as I said, we’re actually not experiencing anything that’s why I say, they would have pushed back that would have justified some of the levels that we are establishing.

In terms of maybe you guys even wanting to go above and beyond, you feel like I guess right now you are doing that and they’re sort of letting you.

How I would describe it.

Then just finally, on the bank, and this may not be a bank question, you mentioned the shelf wasn’t real clear what the goals of a potential long term capital raise, would it be to bolster capital and reserves, essentially or would it be maybe do something strategically? Because I got the sense maybe you were thinking about doing something in your comments.

I would say there’s no current plan to do anything strategically. It’s just there are a lot of opportunities out there. This is just a reflection of our conservative bent, where we would like to have a surfeit of free cash for whatever purpose. Let’s just suppose that we had an attractive acquisition that we might even estimate that we were buying at one or two time’s cash flow three years out. We would like to make that acquisition within a reasonable level, but we certainly would not deplete the kind of capital balance we have now that we view as a conservative buffer for normal operations, but we wouldn’t deplete it to do that. So, we probably would tell you, if we had our choice, we would like a couple hundred million more around. We would not choose to dilute our stock at these prices to do that, unless there were no alternative and we needed it more than we needed it now. So, you can be pretty sure that unless the stock increases in value a lot, which I don’t have any reason to anticipate until the markets improve, that we would not choose that option. So we looked more at longer term fixed income as the best alternative for that.

Just a couple more questions, on the retail and capital markets side. So, just so I understand, the bulk of the asset management revenues and fee-based revenues in the retail business are all priced on beginning AUM or beginning assets, so to speak?

Yes.

So, can you give us an idea of how fee-based assets, or maybe you can just give us, I guess, I know it’s sort of specific, but in your $406 million commissions and fees, can you give us the number, what was retail fee-based revenues in that $406 million?

I don’t have that in front of me. Jennifer, do you know the answer to that question? We’ll try to dig that up. Go into your next question, Doug.

Yes, okay or maybe just the fee-based assets. I know you guys have provided that at analyst days in the past.

Yes, we do provide that.

Actually in the book.

Actually, that’s in…

Is that in your, I don’t think you give it in your releases, though. Maybe it’s…

It is on our monthly releases.

The fee-based client assets?

Yes.

So are you looking for client assets?

Yes, fee-based retail brokerage client assets.

We have total client assets and we have assets under management, but fee-based I don’t have a separate number for.

Almost all of the assets under management are fee-based these days on the retail side. No, those are, but we have both managed and unmanaged.

I can go back to the investor day. I think you guys do provide some color with it there, and I can make some assumptions. Okay. That’s very helpful. So I guess what you’re saying, then I mean, that the fee-based revenues in retail and asset management will be…

The number I gave you that sort of 19% increase in fees would include that. So…

No, I understand, yes. What I’m trying to gather is what were those revenues this quarter? So we can sort of get an idea of what they would be next quarter?

About a third of the securities commissions and fees is wrapped fee-based.

That’s perfect. Thank you very much.

Not all of it is discretionary asset managed accounts, but various wrapped fee programs.

Asset based fees.

Okay. I remember you guys mentioning that you were slowing down the hiring, and I could be wrong and then it looks like you…

What we did was, we cut our front money offers in both firms, so that the transition assistance that we give in the independent contractor side was much lower anyway, but on the front money for employees, we also have cut back substantially. As I said, it hasn’t slowed down our. Our home office visits, I think we’ve done 360 of them so far this year for just the employee-based firm. The activity, as I said, is about the same in both in terms of net adds, so it’s still robust. We couldn’t increase it even if we wanted to because of the difficulty of trying to do all the transition work that we’re doing now, given our own penchants for keeping costs pretty much under control. So it’s unlikely that you would see us ramp the 250 financial advisors a quarter, for example.

No, I mean the reason why I ask is, because it’s a big ramp this quarter. Is it because this was a great time with the Morgan Stanley and Citigroup deal and Merrill Lynch Bank of America? Or is it you guys saying, “Hey, we’re feeling a little bit better; let’s go out and do more now”. Which one was it?

No, it’s the former. It’s the conditions in the marketplace, probably as chaotic as they’ve been in anytime I can remember, especially amongst those kinds of brokers that you would consider long termers that have decided to leave with 20 year histories and things like that, those kinds of financial advisors. Part of it is a momentum thing; once you hire some groups of these large teams, they tend to influence others that they know at the firm and other people move as a result. Now, I would tell you, as you know, from the Morgan Stanley/Citi deal, those that stick around and get the top producers, now, that stick around and get their 60% or 70% retention deals in January, are going to be less likely to move after January for some period of time. So, I actually think that, at least in the case of those firms, that activity will slow down. Of course, that’s the intent of the deal. However, up until then, I really don’t see it slowing down the pipeline remains pretty active and there are plenty of other firms that people are concerned UBS. Some of the independent contractor firms, the individuals are going through changes that they don’t like and there are opportunities for them to leave. So, we expect that we will continue to be beneficiaries of this trend, which have enabled us to run at three-to-one accounts in verses accounts out kinds of calculations here at the firm for sometime.

Way off on the investment banking, looking at the number of deals you guys had done this quarter, it looks like it’s almost impossible to have a number this low. Is there anything going on with fee pressure, or are basically the big underwriting banks coming in and lowering fees and you’ve got to fall in line with that. It just seems like, with the strength and number of deals and I know the values are lower it just seems like such a low number.

No fee pressure in the marketplace to speak of. The issue is one where we will get invited in with a 5% share in an underwriting as opposed to ones where we are doing 40% and are the lead underwriter. A lot of them are overnight deals and in the overnight deals, you typically don’t charge as much, either and you do take some market risk in some of those transactions. So, in theory, your net fees might be lower, but they are not down from what they were. There are just more of those than there used to be. In fact, the pricing benefit has largely been for the client purposes where you will see those deals priced 10%, 12% beneath closes overnight, just to ensure that you have a successful offering in what might be described as a weak market for new money. I was surprised by this also, so you understand your own analysis of this are questions that we asked around here ourselves and have spent sometime looking at, but I suspect that when more normal activity returns here, we will be back with the same kind of revenue sources as before I’m not really negative on this front at all. I think this is a great opportunity for us.

Doug, just by way of clarification, about 40% of that securities, commissions and fees line are asset-based fees, but bear in mind that the institutional commissions are also in that same line item on the P&L. So, if you look at Private Client Group proper, it’s a little over half coming from asset-based sources at this point.

So, about 40% of that 406 is some sort of fee-based wrap type of pricing?

Your next question comes from Steve Stelmach - FBR.

Just circling back on the bank, you guys are obviously trying to take the tail risk off the bank as much as you can regarding to capital, you put $35 million down at the beginning of this quarter. You are bringing asset levels down. You’re not that far away from your target capital ratio of 12%. What gets you there? Is it just paydowns from here on out, or do you think capital.

No, earnings we think a combination of retained earnings and we don’t think we will need to add any more capital to get to this point in the relatively short term.

Steve, we think we will get the 12% by the December quarter.

I guess my next question was sort of timing on that and then just out of curiosity, it doesn’t sound like it was a capital issue, but I think you’ve mentioned in the past about $100 million of available capital elsewhere in the business. Is that still a good number?

More. Yes, we have a $100 million line in addition. So, from those numbers that you recall, and actually, we’ve been running pretty good cash balances, so we’re in good shape.

Then just lastly, circling back on costs, maybe I’m reading too much into it, but it sounds like you’re a little bit more focused on costs this quarter. Is that because you don’t have to pay the upfront fees? Are you guys being a little bit more cautious on the cost side? Again just reading a little bit too much into that in the economy.

Yes, recruiting costs are not the costs that most of those are amortized over the note lives. So the real recruiting front end costs are more related to ACAT’s fees, other costs of just supporting the effort or opening new branches and those kinds of things. We have substantially restricted new branches. So that will affect current operating costs. We really want to fill vacant seats. If you are operating with a scarce resource in terms of budgeting capital to be used for fled money, you want to spend it in the most effective fashion, which means fill up vacant capacity. We’re making good ground up on that front. You don’t worry about that at the independent contractor level, but you do worry about that for employees. We just have put a clamp down on all expenses here at the home office and in the branches to try to protect margins in the face of declining revenues in those areas. This is what’s happening all over American industry, I would tell you and the reason why profits are up in the face of relatively flat revenues. There’s only so much of that you can do. We’re not going to be able to squeeze more margin out. We need more revenues going forward. We should have more revenues, given the net additions to people that we have anyway. So, what I would tell you is that if we just maintain the market environment we have today. I’ve no reason to believe that that’s any more likely than having another retrenchment in the market after the recent run ups, but I do feel that the overall plum for going forward say, for the next six months is a lot more positive than it was six months ago. So whether the market in the short run is up or down. I think the general trend is beginning to feel like it’s an upward trend. So I’m positive about the outlook, but I don’t see a lot more squeeze on the cost side.

Just one last follow-up on the bank; what’s your hope? Is bank holding company status sort of a 2090 event, at least you’re hopeful for, or is it more of a 2010?

I wish I knew. I’d like to tell you that it’s going to be done in September, because this is the combination of the process, but I’ve been fooled so much by the process, certainly not within our control to determine this. I don’t know what the objectives of the regulators are. I know there weren’t many people in the pipeline and it seems like what they did was just stop. So, in light of all this uncertainty and in obvious sympathy for the problems that they have to face throughout their existing memberships, I would tell you that they have their hands full. We probably don’t deserve or merit much attention in times like this, and we in the sense of anybody like us. Obviously, as you know from some of the regulatory treatment on financing and things like that, firms of our size aren’t exactly on their radar screen anyway. So this isn’t about fairness. This was preserved the financial system. I give, as I have consistently, relatively high ratings to the fed and the treasury and what they have done. These 2020 hindsight complaints on individual moves are probably not deserved, given the exigencies that existed at the time. I actually think the TARP program involved with the stock investments will turnout to be successful. It is not a bailout. It will be a profit for the government So I’m not going to lament the fact that I happen to be too small to be on the radar less than, I guess Ford could complain that they’ve been disadvantaged as an automotive company. They haven’t got the same cheap financing, the same care and concern, because they were able to stay in there and maintain themselves. I don’t want to see them penalized for that. I don’t think that would be fair, but the fact is that’s the way the system works when you have problems like this. We have to grin and bear it and I know how hard all these regulators work, although I certainly would agree that Paulson’s treatment of Lewis or others treatment of Lewis probably wasn’t correct. People shouldn’t have been ordered to take TARP money to make it look good, like a beneficial program, mainly because it didn’t work. If it had worked and everybody had said TARP’s great; it’s not bailout; it’s a wonderful program and we all should support it, as they wished when they had those 12 firms take money right off the bat, it would have been good, but the fact is, it didn’t work anyway and it’s unfortunate that they did it. So, but, look you just can’t second guess those things. I understand what happened and I still respect those people, even though I would describe that as a mistake.

Your next question comes from Joel Jeffrey - KBW.

I know you guys have talked a lot about the added capacity that you’ve got in the private client business and I guess timing does become the big issue. Is there an economic indicator or a point time or anything that would give you an indication as to when you believe you are actually going to start to really realize the upside to these numbers?

When is the market going to have a firmer tone and be consistent again? I would tell you, I suspect that’s going to happen sometime in 2010. If it happens sooner, more power to it. As I said, if I were a timer, I wouldn’t need to talk to you on the telephone. My ability to see in that crystal ball is as cloudy as ever. I just know it's going to happen and I know when we look back on it, it will seem like a short period of time, but when we look forward at it, given what we’ve been through, when you are still resting from having bailed for the last keep the ship afloat for the last six months, you don’t tend to start talking about trying to enter the next 12 meter race. I just think we need to be a little patient and expect this to happen. I think that I’d describe this as kind of a taste of this last quarter is a taste of what really could happen if things really started to run, that this was I just gave you an indication with a slight ramp up in revenues when, in fact, we have grown our productive capacity 10% in terms of people power over the last year. At the same time, the assets that were generating revenues and the revenues productivity of the existing sales force is down 25 or 30. So, it doesn't take a genius to figure out when you come out of this and everybody is convinced you are out of it, if it all happened at once, your revenues ought to go up 40%, but I don’t think it will happen that way. I think it’s going to be a slower ramp. So, I wish I could help you with that one, but your guess is at least as good as mine on this one.

Then just looking at the bank, how much your commercial and CRE portfolio is scheduled to mature in the next six months?

A small amount in terms of actual maturity dates, Joel. I would say in the next six months, maybe 10% or 15%, most of these loans, particularly the corporate ones, a year to 18 months prior to the maturity date, the borrower is working on a renewal or they don’t want to get up to the maturity date to work on that, so...

A lot of those lenders, that’s fine. We don’t have a problem with that. We’re not trying to run it down that fast. That’s not the game plan. We actually think that the retained earnings will be good. By the way, we didn’t mention, that public securities portfolio increased in value $27 million during the quarter and I would tell you, to me, that’s remarkably low. That still leaves $120 million when our stress tests indicate, apart from the write-offs we’ve already taken. We don’t see much loss out there at all or money good. So I suspect that doesn’t make much difference in total capital calculations, but it does make a difference in the holding company’s book value calculations.

I know you guys put some more capital down into the bank as well. Just out of curiosity, what was the real driver behind that? Would it be better served to be capital that was more accessible at the broker level or something like that? Or was it just done to give investors a sign of confidence?

The regulators have generally indicated throughout the industry a preference for their, while they call you well capitalized at 10, I would say in their minds they’ve moved it up to 11 and may move it up higher. So, this is as much pay attention to what the trends appear to be, but I would tell you our own evaluation. The reason we did the deep dive where we did our own sensitivity testing here and stress testing, was based on trying to determine what we thought the capital level ought to be to protect yourself, even in the 1% downturn case, to be more than adequately capitalized and our answer to that was 12%. So, we’ve already established, when we began this program, I actually told our MBAs who worked on that, I would be more comfortable with 12% and that wasn’t based on any massive mathematical model that I had put together. It was more just a feel for what adequate capital appeared to be based on the performance of what had happened out there in the marketplace. If anything, I was more comfortable after they finished their stress testing. Not less comfortable, it didn’t cause me to raise the number, but it didn’t even reaffirm the number, necessarily. It was maybe it’s too aggressively high, but that’s what I’m comfortable with. So for the moment, we’re going to do that, a long way from where Jeff would have told you when he worked on all these things in terms of designing models for bank performance. In today’s spread environment, you can earn more than adequate returns with these kinds of levels, so why would you take more leverage risk? Anyway I would tell you, if people don’t respect the risk associated with leverage now, they never will.…

Then just lastly, in the CRE portfolio, are retail and hospitality still the two largest components of that?

Yes. That’s correct, although they are the largest.

Out of the $1.3 billion, retail is the biggest at $250 million.

I think we have demonstrated with the people that we do investment banking for and work with, that they have added equity capital even at rates that you might have thought they wouldn’t have. I would rather not have, but they were worried enough about the outlook in the commercial real estate areas to add capital. So I actually think, I feel much better now than I did. Some of the ones, I was worried about actually raised money. So this is good. If we’re really bottoming out in the economy, these guys are going to comeback much like the financial services stocks.

I guess, I just looking at your last numbers, I guess retail had been $320 million, so that’s down about $70 million quarter-on-quarter?

That’s correct.

Is hospitality down about the same amount?

It may be $275 million or so Joel, something like that.

Your next question comes from Hugh Miller - Sidoti.

Obviously, I think you guys were a little bit more proactive in the quarter with the hiring of financial advisors than I would have expected. I was wondering if you could talk a little about maybe what you saw with this particular group or with the environment that caused you to be so proactive.

Actually, I would tell you that a lot of that is pipeline, that it does take time to recruit these people. A lot of them already committed in prior quarters for this quarter addition, but it isn’t substantially above the rate that we’ve been experiencing in terms of people. That the effectiveness of the independent contractor recruiting effort is now, just reaching full capacity. As we reported to you about, I don’t know, a little over a year ago, we had essentially a couple years ago, maybe we had essentially begun rebuilding the recruiting staff at RJFS, and we had moved one of our lead guys out of RJA over there to run that recruiting and he had hired a new team and replaced some of them, kind of built the team into what I now consider to be a first class recruiting group and they have become much more effective. Surprisingly, I would tell you, even to me, the reluctance that one might expect from employee large producers to move to independent contractor status seems to actually have gone down, not up. In other words, the forces driving them out of their current locations have led them to question whether they ought to be employees or whether they ought to build their own business or whether they ought to join an employee-based firm like ours, which has a much longer demonstrated commitment principally to the Private Client Group, that we have hired far more people than one might have guessed. As I described last night in talking to around 200 of our reps, the fact is that we have benefited from acts of others rather than just our own management skills in terms of building up our recruiting teams or in better marketing our firm and I don’t want…

Just as a quick follow-up to that, are you noticing that there are certain firms that you are being more successful from a recruiting standpoint in gaining inroads and hiring advisors from?

Pretty much those major firms that I mentioned, we’re obviously not picking off any one of them. Whoever wants to come see us, we will talk to.

Just a quick question on the bank there, I was wondering if you maybe able to give us a little bit of color or comments on the composition of the charge-offs in the quarter. Obviously, a chunk of that was from the loan sale, but aside from that, any color that you could provide on what types of loans? How many loans and so on had comprised the charge-offs?

Sure, Hugh. Out of the $34 million, a little over a third of that was related to that one sale. About $6.9 million of the $34 million was residential loan charge-offs. There were also three charge-offs related to residential A&D loans, that’s been the most problematic part of our portfolio. That balance has been reduced now to about $55 million of total residential A&D loans. The balance was a charge-off to a building supply company that was about $6 million, so totaling $34 million.

I know that obviously, it was a more moderate increase in the nonperforming assets during the quarter, but any sense of the marginal increase there and where that was coming from?

Yes. All of the increase in nonperforming was in the residential and one commercial development loan, along with $15 million of residential mortgage loans that went into nonperforming status during the quarter.

By the way, still a very small percentage of the overall residential portfolio. So as I said, the problems have generally been focused in this commercial real estate sector. You need to realize that those things have been marked here off or substantially decreased. So when they tell you $55 million, it’s not $55 million of still assets value at 100%, quite the contrary. So we don’t expect a tremendous addition to any of this and if it were, it wouldn’t even be very large numbers.

Tom, to elaborate on that, out of the $150 million of nonperforming loans, $60 million is residential loans. $90 million is in our commercial real estate space, but the $90 million has already had $56 million of charge-offs against it. So it significantly reduced our book balance in that category.

I’d like to, in the absence of another request, I want to thank you for taking so long to participate with us this morning. Hopefully, we have helped you understand these quarterly results and what’s happening here at the firm and our outlooks. I wish I knew what I would be reporting to you next quarter. I look forward to meeting together with you next quarter to once again hopefully report good results. Thank you so much for participating.