雷蒙詹姆斯金融 (RJF) 2016 Q1 法說會逐字稿

Good morning, and welcome to the earnings call for Raymond James Financial fiscal first quarter of 2016 results. My name is Kayla and I will be your conference facilitator today. This call is being recorded and will be available on the Company's website.

Now I would like to turn the call over to Paul Shoukry, Vice President of Finance and Head of Investor Relations at Raymond James Financial. Please go ahead.

Thank you, Kayla. Good morning and thank you all for joining us on this call this morning. As always, we appreciate your time and interest in Raymond James Financial. After I read the following disclosure, I will turn the call over to Paul Reilly, our Chief Executive Officer, and Jeff Julien, our Chief Financial Officer. Following their prepared remarks, they will ask the operator to open the line for questions.

Certain statements made during this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning futures strategic objectives, business prospects, anticipated savings, financial results, industry or market conditions, demand for our products, acquisitions, our ability to successfully hire and integrate financial advisors, anticipated results of litigation and regulatory developments, our liquidity and funding sources, or general economic conditions.

Words such as believes, expects, anticipates, projects, forecasts and future conditional verbs, as well as any other statement that necessarily depends of future events, are intended to identify forward-looking statements. There can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to carefully consider the risks described our most recent Form 10-K, which is available on the SEC's website, at SEC.gov.

So with that, I'll turn the call over to Paul Reilly, CEO of Raymond James Financial. Paul?

Thank you, Paul, and good morning. I know that many of you in the Northeast are bracing for a storm. And I'm not sure we're bracing for a storm here in St. Pete, but we're certainly watching the financial markets, which are extremely turbulent.

Before I get into the results, I first want to thank our advisors. We need to remember that our business is focused on helping clients, and they certainly are doing a great job working with them in this very, very difficult market and climate. And if we take care of clients long-term, our business will be just fine. So I want to start off with that thank you.

I know at the end of last quarter, I told you it was just a typical solid Raymond James quarter, where we continued to produce. I guess you'll be happy to hear I don't view this as a typical solid Raymond James quarter. The financial results were disappointing, but they were really caused by a number of market factors. Certainly, the headwinds and turbulence in the market, the timing of some of the expenses that hit that we'll cover, and hopefully, some expenses that are nonrecurring that have to do with reserves for events.

Since we're focused on the long term, before I get into the numbers, I want to talk about really the highlights of the quarters and why, at the end of the quarter, we still show an improving, strengthening franchise. First, we had a record number of advisors of 6,687, up 351 for the year and 91 net advisors sequentially. So we continue to show great momentum in recruiting, really due to our ability to support our systems and primarily our culture, where people love the environment here at Raymond James. And that has resulted in, more importantly, very low attrition, which gives consistency to our firm and to our clients.

Second is client assets under administration crossed $0.5 trillion -- I finally get to use the word $0.5 trillion -- at $500.4 billion, year-over-year up 4% in essentially flat markets. And if you look at our competitors, we've been leading the pack in that statistic, and we still have a great pipeline of recruits that will continue, I believe, to drive that number, subject to the equity markets.

Third, the bank net loans are up to $13.7 billion. That's 16% year-over-year and $745 million over September. And with that growth -- growth in these kind of markets always cause some concern, but we're very comfortable with the disciplined underwriting and improving credit metrics, although always cautious in watching the markets.

We also announced the acquisition of the US Private Client Service unit of Deutsche Bank. That unit had, at the time, $500 billion in assets, 200 great advisors -- I'm sorry, $50 billion in assets, 200 great advisors -- plus support staff, under the leadership of Haig Ariyan and his team. And we're very, very happy as we've met the vast majority of those advisors and believe they'll be a great fit and help us continue our strategic growth into the Northeast and high, ultra high net worth segment of our business.

And last but not least is, looking back, we continued strong capital discipline. Even with all the opportunities over the last two years, I think that the Deutsche Bank Private Service Unit showed great discipline in the pricing, and since January, repurchasing 1.5 million shares under a plan that we filed before the blackout period. So I am proud of our team, of our culture and our progress towards our strategic initiatives.

Now I'd like to talk about the quarterly results. The first quarter, the net revenue of $1.27 billion was up 2% year-over-year and down 5% sequentially. The revenue drop was really focused on a couple of items, primarily. First is our assets under administration. We're down 4% to start off the quarter. That's because of the markets ending in last September 30, where our client assets were down 4% due to equity markets. We still had net inflows and advisors. That gave us -- since we bill quarterly in advance, that gave us some headwinds, certainly in the billing.

We had core markets and investment banking, November and December were very tough on underwriting, remembering that we have a very strong energy business, which certainly was on the sidelines, from a banking perspective. Real estate and other groups were slow across the industry. We had, third factor was our lower PE gains. September quarter was very high, a very good quarter for us. If you look at the rest of the businesses, there were ups and downs. But these items alone, these three items, account for the $66 million shortfall.

The quarterly net income, $106.3 million or $0.73 per diluted share. Besides the revenue impacts I just covered, there are certain expense categories. Some of these I would call investment expenses due to growth, and others, hopefully, one-time types of expenses on some reserves.

So in the investments related to growth, recruiting financial advisors. When you recruit in up markets, the numbers look good. When the revenue goes down, it exposes the expenses. But these are good investments. So for example, in recruiting financial advisors, we had $3 million in ACATS, or client transfer fees, for the quarter alone in bringing in accounts for advisors, $2 million for the quarter alone in outside recruiting fees, not including our internal recruiters and amortization of transition assistance, and certainly some systems development cost. So when you look at that, you can see the type of investment we're making to grow the franchise certainly becomes more apparent in these kind of markets.

Second, we had a $10 million provision for legal and regulatory reserves for a couple of items that hit the quarter. Those are normally part of our normal expenses. They just happened to be heavy this quarter. And hopefully, they're not recurring items. But that certainly elevated the expenses in that category for the quarter.

And we also had a $4.5 million qualitative reserve on energy credits which, Jeff, and I'm sure you'll have questions for Steve later. All of our energy loans are performing. I think our mix is different. It's a small percentage of our portfolio. But again, using judgment that we did put reserves on top of that.

So the revenue declines and the expenses combined for a below target 13.2% pre-tax margin and a 9.3% ROE for the quarter, certainly below our targets. Let me talk briefly on the segments.

On the Private Client Group, we already described the revenue and expense impact. Again, the revenue on a 4% lower starting assets, and lower syndicate business, with investment banking off, the new issue credits are certainly down. And we talked about the legal regulatory reserve, both of those really impacting PCG. Recruiting continues at a torrid pace, really, with fantastic retention. Year-over-year assets under administration growth in essentially flat markets up 3%; fee-based assets up 9%, really best in class.

Capital Markets, really a tale of two cities. Equity capital markets, really anemic underwriting environment for everybody, especially in November and December, but especially impacted by our energy business being a good percentage of our business certainly held down results. Although M&A for the industry was a reasonable quarter, we were off. And there's no structural reason for it. It's a lumpy business.

It was slow in the quarter. As we look at the pipeline, I can't tell you why it was slow in the quarter. It's just they close when they close, and you have good quarters and off quarters, and it was just an off quarter for us.

Similarly, our tax credit funds were down from a record quarter in September, a record pipeline there. It's just, again, a lumpy business and we recognize that income when those deals closed. And again, that quarter there's nothing structural, they were just down.

The other side of the business, the fixed income, was really exceptional results. Given the market conditions many people had structured, had losses or significantly low results and had laid off people. Ours is actually the opposite. Commissions were up, trading profits were up, and they've continued to perform very well in a very difficult marketplace.

Asset Management growth, the growth in PCG supported AUM growth. We had a record quarterly net revenue of $100 million. Our bottom line was supplemented by a $3.5 million performance fee. Now remember, a year ago we had a $5 million performance fee for the same quarter a year ago. But again, good results in our Asset Management division, and we'll give a little more color on assets a little bit later.

RJ Bank performed well, net loans at $3.7 billion, quarterly net revenue of $108 million. Credit quality continued to improve on all the credit metrics. And once again, we talked about our energy reserve.

So those are the highlights. I'm a little light on numbers, because I know we'll get a lot of questions on this call and they're in the release. And Jeff -- I'm going to turn it over to Jeff to cover some of the more details and then get back to you on outlook going forward. So Jeff?

Thanks, Paul. I'm going to focus on some of the larger line items and some of the bigger variances from the consensus model here.

In the Securities Commissions and Fees line, actually all the models adjusted pretty well for the beginning billings being at a lower level than the preceding quarter, and commission levels were fairly close to what was projected.

Investment Banking, as Paul talked about, was a big miss. As you look at the detail in the press release, every component of Investment Banking, which is underwriting, M&A, fixed income, tax credit funds, et cetera, all were down from the preceding quarter. So that one, though, was a significant miss relative to expectations. Investment Advisory Fees were pretty much on top of expectations, but again aided, as Paul mentioned, by the performance fee in the quarter.

Net interest income was below the consensus projection, most likely related to the lower net interest margin at the Bank, which fell to 2.9% versus 3.03% last quarter, really a result of a couple of things. Lower fees recognized -- first of all I'll mention, it doesn't take much to move our net interest margin around. About $350,000 is a basis point to our NIM. So if you have a couple million dollars in fees, you can see what it can do in a quarter to the net interest margin.

But there's also -- so some of the fee realization was less in this quarter than it had been. And secondly, it has to do with asset mix, as commercial real estate's become a little bit bigger percentage of the portfolio, which has a slightly lower yield than the C&I loans, and SBLs could be a portion of that, as well, as those grow more rapidly.

Accountant service fees -- I'll get back to interest later on about giving you some forward-looking expectations, given the interest rate change in December -- accountant service fees were slightly under projections. A lot of that is tied to asset values. And while I think commissions were adjusted appropriately, perhaps some of the fees that we get related to asset values in mutual funds and in terms of annuity portfolios were not necessarily adjusted. We estimate that until we get the actual payments. Maybe we've underestimated, maybe we haven't. We're typically pretty close, but we try to take into account market activity during the period, as we will in the current quarter.

Trading profits were strong, actually probably stronger than we would project they will stay at going forward. We guided typically toward a $15 million to $18 million a quarter type number, and still think that's probably good guidance going forward.

Then the Other, you can see in the detail, again in the press release, we only had $1 million of Private Equity valuation gains this quarter versus much larger numbers in preceding quarters. And I think that's one of the lowest quarters we've had in a while. But again, given what the markets are doing, valuations may take a different tact going forward, as well. So that's, again, something we guided toward the fact that can't count on that recurring for the indefinite future.

Pretty close on comp and benefits. We're actually happy to stay at our 68% comp ratio, given the decline in revenues for the quarter, but we didn't do much better than that. So we were pretty much right on top of our target there.

Communications and info processing was slightly elevated this quarter. Again, we have a lot of regulatory work underway. And later on in the year, we actually expect this to moderate a little bit, as some of the resources are deployed over to the Alex Brown conversion and other things. So we still think our $70 million per quarter average for the year is probably reasonable guidance on this particular line item; it just happened to spike a little bit in this particular quarter.

Jumping down to business development, Paul talked about some of the items. It's predominantly driven by PCG, where you can see the exit fees, ACTA fees, costs related to home office visits, costs related to putting transitions people on the road, payments to outside recruiters, et cetera. Some of those caused the slight increase from the consensus on that. But that's an expense we're willing to incur. As long as we can continue to recruit 90 advisors net per quarter, that's, I think, a good investment for us to make long term.

The loan loss provision, we've talked about. We had a little higher growth, probably, than you were projecting. And once again, we had the third month phenomenon, where we give you the statistics through two months, but we don't give you the third month until the earnings release and, of course, in December, again, the Bank had a pretty good month. And then we took this additional reserve for the energy portfolio to be cautionary for the potential that energy prices remain at low levels for an extended period of time.

The other expense, it was about $7 million or $8 million higher than the consensus. And that was really related to this approximately $10 million reserve for various legal and regulatory matters that Paul mentioned in the Private Client Group segment.

The tax rate was a little bit lower than expected for the quarter. That has to do with predominantly two things. Tax-exempt interest, our level of tax-exempt interest is growing a little bit as we have more tax-exempt loans on the books at the Bank, as well as depending on the levels of municipal inventories we keep during the quarter. The other thing is the gains on the [COLI] portfolio. The S&P was up about 6.5% in the December quarter, so we had some gains in that portfolio which are non-taxable. Obviously, that worked the other way, worked against us in the preceding quarter, in September, and we'll see about this quarter.

A couple other points I'd like to make. We set out a separate line item for the acquisition integration costs related to Alex. Brown. You can see we had about $1.9 million in that line item for this particular quarter. We think -- and this is really somewhat of a swag -- but we think over the course of this integration, it may get to a $25 million to $35 million type number. And if it becomes significant enough, we may decide to go back to a non-GAAP presentation. But for now, the math is pretty simple, so we didn't this particular quarter. But we will continue to isolate what we consider incremental nonrecurring costs and put them in that line item so you can treat them accordingly.

Secondly, I said I'd get back to interest. With the 25 basis point hike in the Fed funds rate in December, that will benefit two line items, predominantly. It will benefit the accountant service fees line, where we get fees from outside banks for our bank sweep program; and it will benefit the interest earnings line.

Our total, if you remember, we said was about $150 million for a 100 basis point rise. It's roughly pro rata. So cash balances from clients, given the market activity in September, August, as well as now cash balances have increased somewhat, so our $150 million will probably be a slightly higher number. So for ease of math, we'll say it's $160 million, so I can use a nice round $40 million per quarter.

And it's roughly pro rata, so we should get something like 25% of that benefit on a quarterly basis going forward. So we're projecting, if nothing else happens to interest rates, we're projecting about a $8 million to $10 million benefit per quarter going forward, starting with the quarter we're sitting in now. And it will be split roughly 55/45 between the accountant service fees line and the net interest line. And if the Fed moves again in either direction, we'll have to revisit that.

Lastly, I'd like to point out that all of our capital ratios remain very strong. In fact, they were up slightly at the RJF level, given the increase in shareholders equity. They were actually down slightly at the Bank. The Bank, mainly because of the growth in the loan portfolio.

And lastly, I'm reminded, going back to interest for one second, guidance on NIM, although Steve probably would address this anyway, we think this hopefully is a little bit of a low point, like we got lucky and called the low point last cycle. Hopefully, this is a low point. We actually think our 3% NIM guidance for the year is probably still pretty good, on average. Given what we know today, it should tick back up into the high 2.90s and then get back into the low 3s for the rest of the year, just again, based on what's in place today.

Obviously, the loan portfolio is a little bit of a moving target. We can't anticipate prepayments and things like that. We also can't anticipate what the Fed might do with additional rate moves. But based on what's in place today, I think we're still pretty comfortable with that guidance at this point. With all that detail, I will turn it back over to Paul.

Thanks, Jeff. Let me give you a little further reminder, although we covered it in pieces, of where we are going forward.

The Private Client Group for the quarter, where we had headwinds coming in, should have tailwinds in terms of beginning assets anyway. We're up 6%. So certainly, the advance billings will be up versus last quarter. And Jeff talked about the interest rate help the segment will receive also.

Now they're not without tailwinds in the Private Client Group. The equity markets, certainly performance so far this quarter, are going to impact trails, commissions on mutual funds, which are calculated basically on daily balances, and certainly syndicate activity hasn't really picked up in January, which will have impact also.

I also want to remind you also that the first quarter for the calendar year is always the fun quarter for us, because we have the restarting of payroll taxes, postage and printing for all the statements that always hit this quarter, also, that penalize this quarter versus the other quarters.

In Capital Markets, I wish I could tell you much more about the underwriting. The underwriting business is tough for us. It is in the marketplace. Certainly January hasn't been a great month for the industry or for us. I can't predict what will happen in the markets. Certainly hasn't been fun in the last month, but we will see. So that will continue to remain a headwind.

The M&A backlog is strong and the tax credit fund backlog is at record levels. But they are lumpy businesses. They are transactional businesses. We can't predict the timing of when deals close or hit or can't say that really bad markets don't impact buyers and sellers in M&A, or even pricing and tax credit funds. All that should be a positive right now. So given that, I think the backlogs are strong in those two segments, but the timing is certainly lumpy and uncertain.

Fixed income continues to perform well. Certainly, the trading profits and commission levels were very strong last quarter, maybe a little more difficult to achieve, but still should be solid, maybe not quite at the levels where we sit in January. But again, we're only a few weeks into a quarter.

Asset Management will continue to benefit from the strong recruiting momentum in terms of net asset flows. Eagle has had very healthy gross sales. Certainly, like the industry, has been challenged with outflows in the equity piece. So given that piece, we should see growth, but Asset Management is impacted, in that it has a 66% exposure to the equity markets, and certainly downward equity markets will put pressure on that business, if they maintain.

Raymond James Bank, I think, is in a great position. We're pretty comfortable with our ability to grow. We are continuing very disciplined underwriting.

And in terms of oil and gas, I can't tell you what's going to happen on the prices. Maybe we can tell you where they're going to open today, but that's about it. We understand this is an industry that has long up and down cycles. You can probably ask Steve the questions. A little over 3% of our loans are in energy segment. But only one of those loans is an E&P loan. It's an investment grade facility. They're all performing. Most of them are midstream deals.

But certainly, they're not immune from long-term oil cycles. And if this is a short-term blip, I think we'll be fine. If it's a long-term downturn, they certainly are going to be impacted over time. And I could predict oil prices, but I probably will do as well as I did in predicting interest rate rises, so I won't.

Overall, we have strong recruiting. I expect that to continue. We've had great retention, and hopefully, that will continue. I am pretty confident in that. And they are both great asset growth drivers, subject to the equity markets. Certainly it's going to impact that, although I think the momentum in terms of people will be positive, subject to the ups and downs of the equity market.

Long term, we run this business for long term, so we'll continue to invest in recruiting. And more importantly than anything, we'll continue to support our advisors to make sure they do a good job for clients. But we are focused on reining in discretionary spending during this period of time. Certainly, we've had a period of long-term investment which has paid off, but we are paid to manage the business and we will be looking hard at discretionary spending.

We're not looking at any big cuts at this time, but as to make sure that we do control expense growth, certainly into this market, since the market continues downward, and as long-term, we will continue to manage the business. That's what we're paid for, that's what our investors expect.

And if you look at Raymond James, we've historically outperformed in down markets, mainly because of our conservative, agency client focused business, but also because we do what we have to do. So it's not a foregone conclusion that we'll outperform, but I think I'm pretty confident of us and the team in that we will react.

So with that, I thank everyone for being on the call today. I hate to have record attendance because of the quarter versus just our interest in us, but that's great. We appreciate your time. And I'm going to turn it over to Kayla to open it up for questions.

(Operator Instructions)

Joel Jeffrey, KBW.

Just in terms of the energy provision, can you give us the percentage, the total reserve against the loan book within that portfolio?

Joel, it's Steve Raney. Good morning. Yes, the total energy reserves is $18.7 million. It's about 10% of our total reserve. And that reserve is 4.2% against our energy loans. Our outstanding energy loans as of 12/31 was $[444] million across 32 borrowers.

I just wanted to also just emphasize here that we certainly can't predict the future and certainly on individual credits. But a lot of people want to use percentage. Our mix is different. We have one E&P loan. It's an investment grade facility. So we're not heavy in E&P. We're certainly not into reserve lending. Most of them are midstream suppliers. Many still have take-and-pay contracts.

But again, we don't assume that's going to last forever if there's a long downturn. But again, classifying something as energy or oil and gas is -- we have other things in that bucket besides oil and gas credits. They're not all alike. I think that we're being very proactive and responsible in how we're reserving for that, but I can't tell you there won't be more.

Okay. Appreciate the color. And then maybe there's some overlap in this as well, but as you think about your Canadian loans, I know that's grown a bit in recent years, can you talk about the reserves you have on those loans?

Joel, there's no energy exposure at all to any Canadian companies, other than we have some power and infrastructure wind and solar, but no traditional energy exposure. We have about $1 billion in loans across a very large number of Canadian borrowers, 50-plus borrowers, only two of which are criticized currently. So it's a very diverse portfolio across corporates and some commercial real estate. I don't have the actual dollar amount off the top of my head in terms of reserves against that Canadian portfolio, but it mirrors the US domestic portfolio very closely.

Okay. Great. And then just lastly for me, on the Private Client, the reserve you took, I know you said it was $10 million. Can you talk a little bit about what those were tied to and how much that $10 million is above what you typically reserve for in a quarter?

I think the $10 million increase, it usually goes up $1 million or $2 million, or down $1 million or $2 million a quarter and it just gets buried in the numbers. This was a bigger increase and we don't specifically talk about any legal or regulatory matters. But it was just a little lumpier. And so versus if it was a normal quarter, you might have seen it gone $2 million up or down. This quarter, it was $10 million because of a couple of items. And again, hopefully they're not recurring. And again, we try to reserve adequately for anything we know about.

Devin Ryan, JMP Securities.

Maybe starting on the DOL fiduciary rule. It seems that we're moving closer to a finalization. So curious if you guys are doing anything proactively to prepare for various scenarios. I know that it's not certain yet and the devil will be in the details. But can you do anything to get ahead of any potential changes? And also, are you seeing any changes in the competitive landscape as we move toward a final rule, maybe more sellers or anything else notable there?

I think we can prepare, in that it's almost like a what-if scenario, because we don't know the rules. So we have a team that's focused on what happens if we can't charge commissions, what our fee-based accounts look like, what happens if certain items are excluded, how would we react. We are part of the industry group, FSI and SIFMA, in particularly have working groups of firms just doing what-if scenarios on the industry. And so we're actively engaged in that.

Having said that, the DOL has really told us nothing concrete. We haven't seen anything. And there's a belief that it's going to be rushed through OMB and the President to make sure it's enacted before he goes out. I don't know what it's going to look like. So again, we've been consistent. We've been consistent in thinking it's not good legislation for clients. We've been consistent saying although well intended, it's not good for clients. We've been consistent saying we believe it's going to come out this year, despite our industry and client fight against the rule, but we just don't know exactly what it's going to say yet. So we are preparing the best we can, but we're not changing technology or programming or anything until we know what the rule says.

A question for Steve, on the Bank NIM. How much were corporate loan fees in the quarter? And it sounds like this was a lighter than normal quarter, so trying to get a sense of if that's a trend, if we should expect lower corporate loan fees moving forward. And the 3% NIM commentary, does that reflect any additional Fed action or is that the status state from here?

Devin, it was about $6 million this last quarter, compared to about $8 million in the prior quarter. And it could be rather lumpy. We get unanticipated payoffs and sometimes we just choose to exit credits because of repricings that's occurred over time. We have seen the fee trend come down, I would say, over the last couple of years. You may remember we had a rather large discount on the Canadian portfolio that we acquired back in 2012. That's pretty much gone now. So of the $6 million number, once again, it can be a rather volatile and lumpy, not quite sure what to expect for the next couple of quarters. That's probably a good number.

That 3% number really doesn't include any additional Fed actions, at this point. We are going to get the benefit this quarter of the increase in the LIBOR rate. LIBOR has doubled in the last 30 days or so. It's around 40 basis points now. A month ago, it was 20 or so. Into November and into early December, it was around 20 basis points. We have a lot of LIBOR-based loans, but they're securities-based loans, as well as a lot of our corporate loans are LIBOR-based. So we'll get the benefit of that. And we're not going to be chasing any yield, so we're going to stick to our underwriting and pricing disciplines. So once again, I think that number of around 3% is a good number going forward, without any Fed action.

And a lot of the corporate borrowers are on 90-day LIBOR. So as they hit their reset dates throughout the quarter, so this quarter we're sitting in may not get the full benefit on the corporate portfolio, but until they all reset, which would be in the June quarter.

And with respect to recruiting, another great quarter there. It looks like a number of pretty big teams have been joining. Historically, I believe the recruiting can be disruptive when volatility picks up. So do you feel like you need to see a recovery in markets to keep that momentum going? I'm trying to think about recruiting relative to the comments that the expectation is that the pipeline is solid and that it should remain active.

It's interesting. I think that recruiting is helped by two factors. It's a push and a pull. We've seen in January even some acceleration in joins. So again, it's still early. Historically, when markets are off, advisors tend not to want to go to clients and say, your account is down 20%, and oh, by the way, I'm changing. But we haven't seen that yet at all. So could it impact us? Absolutely. Has it impacted us yet in terms of pipelines or commit dates or joins? It hasn't. Certainly, we're short into January and there's been an awful lot of action into January. So historically, we've seen that, potentially it's there. But we're not experiencing that right now at all.

Last one, on the regulatory charge. Is that for a disclosed event or is there anything else you can provide on that expense in the quarter?

A couple of items and it's no disclosed event.

Bill Katz, Citigroup.

Could you talk a little bit about your expectation for comp in FY16? You said you were right at 68% in the quarter. So curious, with all the different pushes and pulls across your business lines how you're thinking about that line in 2016, maybe at either an absolute level or as a percentage of net revenue.

If we can continue revenue growth, which we obviously didn't in this particular quarter, but if we can get back to a resumption of revenue growth, we think it should drift down into the high 67's, which is probably about what most of you had modeled for the year, I would guess. We'll get some modest leverage from the growth in revenues, despite the fact that we're hiring a lot of producers with variable comp. Again, if we don't get revenue growth, we have a fairly big machine here, so we might get some slippage like we did a little bit this quarter. The 68% is still our target number for the year. We're optimistic that with revenue growth, we can do a little better.

On the banks, I noticed the reserve ratio itself picked up a couple basis points. Perhaps that's just reflecting the qualitative increase for the energy portfolio. But is there any systematic change in your expectation of where you want to run that reserve ratio, as you think about the exceptional loan growth that you're seeing relative to the economic cycle?

No, Bill, it's really ground-up, low level and then, as we mentioned, those qualitative factor on the energy portfolio. So we really don't build it, in terms of reserves to loans, top down, it's really ground-up.

It's hard here predicting the future. All the energy loans are performing. But we put the reserve on, given the energy market. So who knows what the right number is. It depends how long prices stay low, not necessarily that they dip and come back.

Okay. But all else being equal, no other changes, 135 is the about right ratio of making no other assumptions then?

Given the current loan mix.

And one final question -- thanks for taking all my questions this morning -- you mentioned, I think you used the word, torrid, in terms of the pipeline. You mentioned no change in January, as well, which is nice to hear. Could you talk a little bit about where you're seeing the FAs and the platforms coming from, where you're picking up market share, what are some of the underlying dynamics around that?

It still tends to be, the wire houses tend to be the best providers of good FAs for us. So there are certainly other firms, but they tend to be the vast majority. And as they've changed platforms and billings and approaches and more institutionalization to their businesses, alternative channels; we still have a lot of people that don't like that model and are coming to us. So I don't see that changing in the short term.

Steven Chubak, Nomura Securities.

This first question is for Steve. I was certainly pleased to see that you've already built reserve levels for the energy book north of 4%. What we've been hearing from some regional and universal bank peers is some sensitivity around the additional reserve build that would be needed in the event that oil prices stay below $30 a barrel for a sustained period. I don't know if you --presumably, you guys have run those sensitivities and didn't know if you could share your findings or give some guidance.

Once again, we'll continue credit by credit, loan by loan, out of the 32 borrowers that are in this sector. And each company has its own characteristics. And as we've conveyed, many of them are not as exposed directly to the wellhead, given their business model where they've got these take-or-pay contracts. That being said, I would anticipate continued reserve adds if we continue to have these commodity prices as low as they are and continuing on. Not really able to provide any additional guidance other than that, at this point. We're obviously monitoring each one very closely.

Understood. And maybe just as a follow-up to your comment, Steve, just thinking about the commodities complex more broadly, can you quantify the exposure that you have to the metals and mining space and your degree of comfort with some of the exposures that you might have in the portfolio?

In Mining and Materials, our total loans are $52 million across three borrowers. So watching those very closely. Two of those three borrowers are criticized, so we've actually got heightened reserves against those loans already. So, continue to watch that very closely, alongside oil and gas, as well.

That's helpful color. I appreciate it. And just one more quick follow-up for me, just switching over to the NIM discussion from earlier. Helpful guidance on the 3%. I just wanted to get a sense as to what that assumes in terms of the forward curve. It sounds like it doesn't require further rate increases, but just wanted to confirm that.

That is correct. I would mention, Steven, we have seen a increase in cash balances around the firm, given all the volatility and the heavy recruiting that have brought additional advisors and clients to the firm. So you may remember going back a couple of years, that for several periods we were reporting two NIMs; one, our actual reported net interest margin and one, adjusted for what cash balances are at the Bank that are there, parked for taking those client cash balances. There's a positive spread on those balances, but it's at a lower margin.

Our last dollar tonight gets invested in the Federal Reserve earning 50 basis points. So to the extent that we have additional client cash balances that reside at Raymond James Bank, our reported NIM would be lower, but our adjusted NIM, once again, absent that cash balance, we think is around 3% going forward for at least the next couple of quarters.

And while it doesn't assume an additional Fed action, it assumes the Bank, over time, gets the full benefit of the hike that's already happened, which they haven't yet.

Chris Allen, Evercore.

Apologize if I missed this, but did you provide any color in terms of the number of criticized loans within energy. I think it was five a couple of quarters ago. I'm just not sure if you provided an update there.

It is -- let me give that to you, Chris, I've got it here. 5 out of the 32 are criticized.

And how much in total?

I don't have that. I have the figures. I'd need to add it up. I'm sorry, I do have that. It's $81 million, $81 million of the $444 million.

Within the Capital Markets business, obviously on a sequential basis, so material revenue declined year-over-year, so your material declined, pre-tax income held in a little bit better than we would have expected. I'm just wondering, were you guys able to offset the decline with lower compensation? Was there any material pullback in non-comp? I'm assuming some of the variable comp helped there. I'm just wondering if you can provide any color.

I think there are two pieces to that. One is variable comp. The fixed income business is extremely variable comp model; and the equity capital markets, a little less, because of the research and other embedded costs. But we also had good trading profits in fixed income, which helped in that number, too. Those disproportionally fall to the bottom line versus commission. So both of those factors helped mitigate it. But there's no doubt, when business is down, comp's down, for all of us. But those are the two factors that really impacted it for this quarter.

Nice to see the capital being deployed to buybacks, just given where the share prices were. What's the appetite moving forward, if this market turmoil continues and there's more pressure on the share prices from here?

The Board authorized $150 million, which we used $75 million in the plan, and we will be talking to the Repurchase Committee about what the other strike prices are in that plan, as we come out of the blackout after this. I think we always have taken the position that we're willing to buy back stock when the prices are right. So I think that attitude still exists today. We've been, I think, pretty disciplined about it, maybe a little criticized at the peak of the market. But maybe in retrospect, we're fairly prudent. And we'll continue to operate accordingly.

Daniel Paris, Goldman Sachs.

The Bank balance sheet continues to see healthy growth, and for the second quarter, you've added pretty nicely to the securities portfolio. Just curious if why growing consensus that long end rates stay lower for longer, are you more incentivized to keep adding securities to the balance sheet? And is there anything bigger picture you can give us to size the balance sheet capacity from here, some sort of target capital ratio or anything along those lines?

Daniel, as it related to the securities portfolio, it grew nominally and we'll continue, as the balance sheet grows, to grow the balance a little bit. I would see, we're at about $425 million, I would see it maybe growing $500 million over the next 12 months or so. But it's rate dependent. We're staying a little short. The duration of what we've been adding is in the 2.5 to 3-year range. It's a lower yield, but obviously, that's part of our liquidity strategy, as well and it's a much higher yield than just the overnight cash and overnight liquidity. But it's still, relative to most other institutions, it's going to be a smaller part of our balance sheet composition going forward.

In terms of the overall capacity, there's a lot of capacity to take client cash balances. So if those continue to come in, we continue to house them at the Bank, and as Steve mentioned, we would report dual NIMs, one with the entire cash balances and one without those that we really haven't requested for growth. But in terms of growth in the normal course, with the lending being the primary asset deployment, the real constraint there, Dan, is that we have a policy or a guideline that once -- we don't want to Bank to be more than about 35% of the overall firm's capital, lest it change the characteristic, or character of who Raymond James Financial is. So we're about 33.6%, I think, at the end of December. We also have been keeping the capital ratios a little higher than we have in the past at the Bank to facilitate its future growth. But that's really going to be the constraint about the Bank growing a lot faster than the overall firm.

We're not capital constraint at the bank, at this point. So we think there's room for continued growth, as we've been experiencing. But again, that can change. But I don't think that's a deterrent right now.

And we're not really proponents of the leveraging up the Bank's balance sheet with securities strategy, although it's been suggested to us by numerous people. And while I know it has actually worked very well for a couple of our competitors in the past, we 're dealing with going forward and we don't like taking the duration risk of those instruments on our balance sheet, even if it's somewhat short-term.

Our portfolio has an average duration probably under two years. It's very short-term type stuff. We're not buying long-term securities in that portfolio. And they're all typically government agency type stuff that we've been buying, so has no credit risk really associated with it, either. And we're really using the securities to accomplish the liquidity requirements at the Bank, not as a true investment strategy or a gross up strategy.

For right or for wrong, certainly a financial modeling standpoint would say more aggressive would be positive. But we also remember 2009, where that strategy didn't really pay off for people. So we're staying very balanced. And again, our agency model, we're not trying to take equity risks or rate risks and trying to stay neutral.

Maybe as a follow-up, was wondering if you could share your initial observations following the first Fed hike. It looks like most money market funds have started to recapture the fee waivers and large banks are passing on very little of the rate hikes, at least on the consumer side of things. So wondering if you think the rate benefit for you may prove to be nonlinear, i.e. the first 25 or 50 could be much more valuable than the next 25 or 50, assuming we ever get a Fed rate hike.

I think unlike our competitors, we've always had a -- I'm not saying they don't -- but we've always been very disciplined on sharing with clients. We did up our client rates. We haven't seen anybody really follow.

Now you can say we doubled them for the lowest accounts from 1 to 2 basis points. It's real money to us, but it's also symbolic to clients. And up the tiers are higher. But we did pass on some of that to clients. And that's part of our philosophy. So it could be nonlinear, but part of our long-term success is treating clients well and we continue to want to do that.

It may be slightly nonlinear, just as we watch the interest rate markets, and there's no guarantee that rates won't come down again, either. We haven't been aggressively moving them up. One, there isn't competitive pressure. Secondly, more importantly, we're just concerned about what could happen to rates in the shorter term as we watch what the Fed and the markets do.

And maybe last one for me, if I could squeeze this in. Last quarter, we talked about some of the trade-offs between investing in the business and generating near-term leverage, operating leverage. Jeff, I think you talked about some of the moving parts on the comp side. But are there things you could do on the non-comp side to ratchet down if we stay in this kind of challenging equity market environment?

Sure. We're in a process, actually, before the equity market went down, at looking at, because of just, which I think has paid off, very good investments in our people and systems and processes, that saying after six, seven years of growth, it's time to always look at those expenses. So we're looking at our travel, our conference expenses, how many people are attending. Our conferences and trips are world class, which is good, but can we rein some of that in. And we've been working on that. And certainly, the market has accelerated that.

So the philosophy is, we can't cut support for our advisors. That's number one, unless the markets are really bad, and then people would understand. So there's no plans there. We want to invest in the growth parts, the recruiting. But the rest of it, as we know, is all up, including some technology investments, the speed of which we put some systems and processes in place. So we are looking hard at those. We were looking at them, but we're looking much harder at them now to get those enacted.

The one wild card here is we do have to integrate Alex. Brown, the new Alex. Brown advisors, in. So that's going to be a cost. We have to do that well. I think we showed in Morgan Keegan, with a little criticism upfront, that we were a little heavy in operating costs through the integration. But I think in retrospect, we made a right bet in keeping 92% of the trailing 12s where we offered retention.

We need to do the same thing with the Alex. Brown advisors. Long-term, we'll be measured by their successful integration and how may people stay with us, not by some of the shorter term cuts. That expense, as those, through the integration costs and when people join us, will probably be a little elevated until we get the integration, and then we'll do what we did with Morgan Keegan and right size the combined entity, not one side or the other, if there's excess expenses.

Christian Bolu, Credit Suisse.

Just to follow up on the earlier question on deposit pricing. What's the deposit pricing assumption on the $8 million to $10 million benefit you referenced earlier from the first 25 basis point Fed hike? I believe your prior assumption was to pass through 60% to clients. So are you passing on 60% of the first hike, or is there potential upside to that $8 million to $10 million benefit, if deposit pricing is a little bit better than --

As asked earlier, there may be a little front loading to the extent that we don't get to that 60 net quickly. But offsetting that, the Bank repricing doesn't happen right away either, on the revenue side. So the net of those two factors are leading us to that $8 million to $10 million type number per quarter here for the next few quarters.

Just wanted to get your updated thoughts on robo-advisors. Many of your peers are investing in enhanced robo-advisor capabilities to help financial advisors deal with the DOL and help with acquisition of smaller clients. Curious if Raymond James would need to make similar investments.

We view the robo-advising phenomena, I'm sure that first, we already do a lot of asset allocation, our Asset Management Group. So the question is, if we make that more automated than it is today, then we certainly are giving clients access, and advisors already access, to our systems. Do we enhance that? Do we buy or rent a robo-advisor? Certainly, most of the asset managers that have bought them have volunteered to rent them to us.

And right now, we don't view it as a strategic imperative for our business. We're focused on people with assets that we still believe that robo advising phenomenon today is still for basically clients without a lot of money. We do have some high net worth clients have put a little bit in there. It will be interesting when they compare their performance results with managed results and also the help they get in this kind of market through robo-advisors. Again, we're not overly worried about the trend. We do believe the technology, just like online trading, as the technology improves, there are pieces of technology we use, but we don't view it as a fundamental threat to our business.

Lastly, fixed income continues to recover and seems to defy all the trends we've seen at the bigger banks. I appreciate your model is different. But curious if you could provide maybe some color on what's driving the strength you're enjoying. Are you winning new clients, or do you think you're gaining market share?

I think it's just execution. We're an agency business. Our inventory moves very, very quickly. We have a big muni book that we move very quickly. And we are top 10 underwriter -- I think 8. It looks like we finished the year eighth in terms of origination of public finance. So we know the markets, we know the issues. We move with them very quickly. And across the board, we've done very well. We have some proprietary systems and products that help clients. And our model's just different. And as people are laying off, we're not. We're not over capacity at all. We're performing well.

Having said that, I'd much rather have a steep yield curve and a lot of volatility in that business. We'd do a lot better. It doesn't look like that's -- maybe we'll get the volatility part, but we're certainly not getting the steep yield curve part. So given the market, we're performing well. We're just not a high-yield or new issue business, outside of the muni space, that a lot of the major banks and competitors really focus on. They're just different businesses.

Chris Harris, Wells Fargo.

Just a quick follow-up on the discussion about the discretionary expenses that you guys are taking a look at. Can you help us frame up the potential size of those expenses, maybe as a percent of your total expense base, would be helpful?

I don't think we can quantify that quite yet. We just started the intense process a couple of weeks ago. But I think the first part is, the exercise was reigning in expense growth. You have natural growth with comp increases every year, which is certainly comps a big part of our expenses. And those comp increases, salary increases, hit first quarter, also, with payroll taxes. So if the question is, how do you reign in that expense growth? And just by cutting back discretionary expenses. We're looking at the total technology spend. It's not that we're mothballing projects, but we may extend or invest a little, defer into the next year, stretch out projects. So we don't have a number for it. But I can tell you, we're very focused on it right now. And I'm sure this time next quarter, we can be a lot more definitive than we are right now.

And some of the biggest costs, we talked about conferences and trips and things like that. Some of those are contractually committed to, so there's not a lot we can do about some of them, other than regulate attendance a little more closely.

The other question I had was on the recruiting expenses you guys incurred this quarter. Did you guys have any of those similar expenses in prior quarters? And if not, just wondering what made this particular quarter so unique where you'd actually be accruing that much for the advisors you are onboarding?

I don't think there's a lot of uniqueness. There is a lumpiness by when people happen to join, but they just pop out when revenue is down. When revenue is up, they're a small percentage of revenue. When revenue is down, they are an increasing percentage of revenue. And it's just, I think they were hidden cost to the outside viewer. We've had several commentary from you about expense containment and growth. And I think those are some of the costs that you don't see line item by line item that have been there most quarters.

I think Paul was just giving you a flavor for some if the items that are in that. The business development line only went up marginally from the prior preceding quarter. And obviously, those expenses were present in the preceding quarter, as well. And they will continue to be, if the recruiting stays on track.

Got it. And obviously, that's a good thing long-term. Thanks, guys. Appreciate it.

Jim Mitchell, Buckingham Research.

Just a question on capital return more broadly. You have a $250 million debt coming due this year. How do we think about the trade-off between stock buybacks and retiring that, or do you have the capacity to do both? Just trying to think through that issue.

We separate those two issues, our buybacks, in terms of what we think is a good use of capital, and then how we fund it is through debt or equity. It's probably safe to say we won't be raising equity any time shortly in this market. But our initial plans are looking at a refinancing of that debt. But it's all subject to both our appetite for investing in the business, which is a little bit on the markets. We certainly have Deutsche Bank coming up. And we will certainly in the summertime look at, as Deutsche Bank nears, refinancing that. And looking at our whole balance sheet financings, which could be more or less depending on how we see the markets at that time.

For the immediate term, we certainly have the capacity to do both buybacks and retire that debt out of current resources.

But at least at this point, you're thinking more of refinancing to keep flexibility?

We probably even, believe it or not, have the ability to do the Alex. Brown transaction out of existing resources, as well. But given our conservative nature in terms of capital levels and liquidity levels, that would be more or less our targeted timing to have some other financing in place.

The downside of these markets aren't fun to work in, and we're not wishing for a sustained down market, but those markets also bring opportunities. And historically, we've done pretty well investing in down markets that have paid off. So we want to keep that flexibility, but not at any cost. So again, as we get closer to the event, we'll look at it much more tightly. We're not worried. We have enough capital and cash to not do it. But my guess is, if you asked for a predictive call, it would be to refinance that, at this point. But I can't tell you if markets stay way down and there aren't a lot of opportunities, we may revisit that.

And one other factor that is in our thinking is that in March of 2017, we have the ability to call the $350 million of retail debt that's out there at 6.9%. So thinking about that, as well, obviously.

My guess is it's not a good time to go for 30-year debt today in the financial services industry. So part of that's what the markets will -- I know we have access to the markets, but we'll look at just what financing and costs and the markets look like.

And we have the luxury of picking our timing somewhat here. So we'll try to optimize that the best we can.

Hugh Miller, Macquarie.

Just had one question on an area that wasn't touched upon. With regard to the Alex. Brown deal, how should we be thinking about the time horizon in which you start to get the bulk of the commitments from advisors? Is it leading up to the very end when it closes in the September quarter or would you anticipate that you'd start to get a good sense of how many people will be joining ahead of that?

The early indications, as we've had only two advisors in the whole group, which were very small, under $300,000 leave, in which those were very early and I think had nothing to do with us. So far, so good. And we do not take it for granted. And I would say within another 60 days or so, we should have at least a good indication. But one thing I learned in running a recruiting business is the measure they said was always bums in seats. It doesn't matter who signs, it matters who shows up and is sitting down in their chair the day after.

And we don't take for granted even when they're here, they're here forever. That's part of the reason I think our retention is so well, so we focus on it. I think that's subject to anything can happen in the market and situations that will impact that. So we're going to work really hard like everyone's at risk every day. But I think we operate that way with our advisors, too. So a lot of work ahead of us. So far, the early indications are very good. We don't think we'll keep 100%, but we think we'll do pretty well, and as we get closer, we'll know more.

Devin Ryan, JMP Securities.

Thanks for squeezing me in here. Just a quick follow-up on the NIM outlook. I know there's a lot of moving parts here and any change in mix impacts that, as well. But are you able to underwrite to higher yields or do you expect to have stress in the credit market persist and then that drives up corporate bond yields across the spectrum? I'm just trying to think through that 3% NIM outlook and if that could migrate up if short-term rates don't move and we just have a higher risk premium.

Devin, that absolutely is a scenario that could play out. We've seen that in prior distress periods. We've even seen already a couple of isolated situations where we've seen some, in particular some foreign banks shedding some high quality loans at not huge discounts, but some discounts, that are improving our yield on those particular credits. I would not say that we've seen that to be too widespread yet, though.

But is the incremental yield coming on today above or below 3%?

I would say it's right on top of, some above it, some below, just given the mix. We grew assets and grew loans across all categories. Our securities-based loans tend to be lower than the average NIM. Our mortgage loans are right on top of the average NIM. Our corporates are a little bit higher. And our tax-exempt loans, on a tax adjusted basis, are higher. So once again, the asset composition and the asset mix will influence that quite a bit, as well.

We are excited about the Alex. Brown team joining us in September. We think that will be accretive to the Bank's loan production, particularly in mortgage banking and our securities-based lending business.

Bill Katz, Citigroup.

Thanks for the extra time. Two separate questions. First one -- and again, there's a lot going on, I presume, market volatility, seasonality, what have you -- but if you look at the commission per advisor trend, that seems to be tailing off a little bit. I was wondering if you could talk about some of the underlying dynamics that might be driving that.

And then secondly, I was puzzled by your comments on why you wouldn't want to lock in some 30-year paper, given what's been happening with the yield curve. Maybe you could expand your thinking on that. That would be helpful. Thank you.

Commissions are about two things. It's trailing off just because of fee -- we bill off of balances of client assets. So when the balances were down, the billings were down. So I don't think there's anything more. And certainly syndicate was down, transactionally. I think that's an equity market trend, not an inherent trend per advisor productivity. And I'm sorry, your second question, I missed that.

I'm sorry. Just a follow-up on your comments that this would not be the time to lock in 30-year paper. Is that your view on rates, is it view on the business condition? I'm curious as to why, with rates flattening pretty significantly year-to date, you wouldn't be a little more nimble and lock in that. I'm curious your thinking.

That was more of a bad joke on just the acceptance of 30-year financial services paper this week is probably not high in the market.

And we don't think the asset type's there. (Laughter)

If the stock market is any predictor of what the long-term debt markets, although I believe, and I always said, if you like our equities, you'll love our debt, because of our conservative nature and how we operate and the 112 quarters of consecutive profitability. We think rates are good. We just don't think there's a lot of appetite right now, given the markets.

Thank you. At this time, there are no further questions.

I appreciate you guys staying on. I knew there's a lot of questions. Again, in the quarter, I know, in essence, on the surface, was disappointing and a lot of that driven by markets. Hopefully, we explained both the market and cost dynamics. I'm very comfortable with the position of the franchise and I also understand our responsibility to manage in these times.

Got a great group of advisors, looking to focus on continuing to help our clients and to watch the business. If markets deteriorate, we'll react. If they steady out a little bit, I think our focus on managing discretionary expenses, growth and focusing on investments while we can still recruit great advisors is the right long-term strategy for the firm.

Thank you for your time and talk to you again soon.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.