雷蒙詹姆斯金融 (RJF) 2016 Q2 法說會逐字稿

Good morning, and welcome to the earnings call for Raymond James Financial second quarter FY16 results. My name is Stephanie, and I will be your conference facilitator today. This call is being recorded and will be available on the Company's website. Now I will 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, Stephanie. 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 on 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 those forward-looking statements. We urge you to carefully consider the risk [as] described our most recent Form 10-K, which is available on the SEC's website, at SEC.gov.

During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management view ongoing business performance. These non-GAAP measures should not be considered replacement for, and should be read in conjunction with the corresponding GAAP Measures. A reconciliation of these non-GAAP financial measures to most comparable GAAP measures may be found in the schedule accompanying our press release.

With that, I will turn the call over to Paul Reilly, CEO of Raymond James Financial. Paul?

Great. Thanks, Paul. Good morning everyone. You know the drill now. I will start and get some overview numbers and turn it over to Jeff for a little more detail, make some comments before we turn it over for question and answers.

Considering all the challenges this industry is facing, the competition, markets, the regulatory environments, the rising costs of people and healthcare, I have to say, I am pretty pleased with our results for the quarter. As you know at RJ we don't get overly excited about a good or bad quarter. I don't know if that's because Jeff and I are CPAs by background, but I think it's more that we really do take a long-term focus. And I think as I go through what we have achieved you will see that we have good long-term metrics here.

Revenues for the first half of the year were up 2% over our record start of last fiscal year. So we're off to a good start. I really don't want to take credit for that. We can't forget it's our advisors and people and managers in the field that really make that happen. The net income for the first six months of $232 million were adjusted $237 million is just $3 million less than our record start for last fiscal year of the same time period. That delta is really -- most of that was in the technology spend. In the loan loss provision, which a lot of that was driven by growth and some extra reserves in the energy portfolio, which I'm sure we will talk about.

And I think we've also seen some very solid discretionary expense management. So I want to give kudos to our managers who have worked hard on that. Maybe one most important metrics for us is the growth in our FAs. We hit 6765, up 381 from a year ago. And up another 78 over last quarter. Again, we like to talk about the fantastic recruiting results. But I think the real result we should be proud about is the retention. As advisors choose to stay and work with us here at Raymond James.

That all resulted in record assets under administration of $513.7 billion up 4% year over year. While the markets were actually slightly down for the same period. And I think that's really a best-in-class result as we look across the market. We had record net loans at Raymond James Bank of $14.3 billion. That's a 19% increase year over year. With very strong credit quality, nonperforming assets actually went down 15% percent year over year. And again, we will talk about the energy portfolio, which is one of the areas that we watch closely.

And we are on track with our acquisition of the US Private Client Services Group at Deutsche Bank as we call it the soon to be formed Alex Brown. With over 90% of the advisors who have signed on now. We don't think that's ever a done deal. In fact, actually when people are here we have a lot of work to do, and I can tell you from everything we know everything is on track. And we're very proud of that result as we've had virtually almost 100% of the advisors here in St. Pete. And the more we meet the more I am convinced this is a great fit for Raymond James, but also a great fit for those advisors. This will be a mutually beneficial combination. So overall, pleased with the results.

On a consolidated basis, net revenues of $1.31 billion were up 2% year over year, 3% sequentially. Net income of $125.8 million. Up 11% year over year, and 18% sequentially. Non-GAAP adjusted net income of $129.7 million up 14%, and 21% sequentially. And non-GAAP diluted EPS of $0.90, 17% year over year, and 23% sequentially. Now, a lot of that has been a result of hard work. But we've also been helped by the rise of short-term interest rates last December. Both in the bank, and in our client class cash balances. And, discipline on managing the growth and discretionary spend in our business.

Let me hit the segments really quickly as an overview. Our private client group at $880 million net revenues of the quarters is up 1% year over year. As compared to last year's quarter, and 1% sequentially. We entered the quarter with a higher fee-based assets. And the reason that growth was not higher is commissions are down. And a lot of that is just the equity markets, our syndication and activity was low. And investor activity was low for the quarter. We also had lower mutual fund balances, as the market was down during the timeframe. So that dragged net revenues there. Account and service fees were driven by the higher interest rates. Pretax of $83 million is up 10% year over year, and 20% sequentially.

The one area that probably has opened up and down results was our capital market. Net revenues of $237 million was up 1% year over year, and 5% sequentially. And pretax profits of $28.1 million was up 35% year-over-year, and 12% sequentially. Now there are a lot of moving parts and that. The fixed income division has formed superbly in this market. It has done very, very well institutional commissions of $80 million are up 7% year over year, and up 12% sequentially. They have continued to perform very, very well and kudos to them.

In the equity capital markets area it is still challenging. As you know, during the first-quarter the IPO market, especially in January and February were very, very quiet. It was better March, so business was very difficult. That was a challenging quarter for them. And our tax credit business had a great quarter with syndication fees up 80%. Which, I wouldn't do that as a run rate, but their deals are lumpy as a spiky quarter. But they are still on projection to have a record year.

Asset management, the assets under management at $68.8 billion is down 1% year over year, and up 1% sequentially. We've had tailwinds in the asset management group supported by great recruiting. And when advisors come over, often bring over balances to our managed platform. But the headwind has been the outflows in our Eagle asset management business. So, net it has been a slower growth quarter. Revenues are $96.8 million up 3% year-over-year, and down 3% sequentially. Pretax income of $31.1 million flat year over year, and down 7% sequentially. Raymond James Bank was the star, and I hate to see Steven sitting across from me and smiling a little bit. Record results, top and bottom line. And in loans, net revenues of $125 million, up 22% year over year and 16% sequentially. Pretax $85 million up 1% year over year, and 29% sequentially.

Driven a lot by our loan growth, we hit a record of $14.3 billion up 19% year over year. [And then] because interest rate raise in December went from 290 basis points to 309. So certainly, that short-term rate hike helped results. And good credit management, and again, we will discuss energy which continues, I think, to be a challenge but we believe we are addressing it appropriately.

With that, I will turn it over to Jeff to go over some of the detail line items. Jeffrey.

Thanks, Paul.

Looking at some of the specific P&L line items, we generally by the way around here, talk about things in terms of segments. We don't actually focus as heavily on the line items. But it's helpful to see how the segment results translate into these various line items, which is how we report in the P&L. The commission line was relatively flat. The 10th page of the press release will give some good detail and you can see that the flat Private Client Group commissions sequentially which Paul just talked about -- the factors influencing that. And then we had some good institutional fixed income commissions offsetting a slight decline in equity commissions.

Similarly, on the same page, there is a good breakdown of the investment banking line item. And again, it reflects most of the things Paul talked about. Underwritings are down, underwriting revenues are down from last year and last quarter. Even the last quarter was fairly slow. It was down further, but that other primary factors in that line item all saw increases. The M&A fees, fixed income, our public finance revenues and tax credit funds had a very strong quarter. As a result, the overall segment and that line item showed an increase from the preceding quarter.

Investment advisory fees, I think we mentioned on the call a quarter ago, that Eagle had seen some significant institutional accounts leave. And that is weighing on that investment advisory line at the moment. Coupled within the December quarter, we had a $3.5 million performance fee that only hits in the December quarters each year. So that distorts it even a little further.

Interest is one of the factors that probably was throwing the models off the most this quarter. Its interest and its accountant service fees, which is where some of those revenues go when we talk about the spread that we would earn from rising rates. The fact is, we did last quarter, steer you toward $8 million to $10 million quarter from the first 25 basis point increase. That was without any knowledge on what the rest of the world would do with respect to passing rates through to clients to where we want to stay close to the forefront, if not in the lead, at being competitive there. The fact is, no one's done much of anything. As a result, we're realizing more benefit from that first 25 basis point rise than we expected to. If things stay as they are, we'll see somewhere close to double that amount from this first 25 basis point rate increase. But bear in mind any of those factors can change. The Fed may move again, the world may get more competitive with clients. But based on where things are today, it looks like the amount is going to be more like twice per quarter, what we thought it would on this first 25. Which means it will be less on one of the future rate increases.

Accountant service fees, I talked about it. It is almost entirely -- there are number things in there, but the biggest factor by far is the banks we program where we get fees from the client cash balances swept to other banks. Which is part of what was driven by the rate increase. There are other things in there like mutual fund fees et cetera. But they didn't change much quarter to quarter. Net trading profits were down slightly from a very large profitable December quarter. And other revenues, there were some [PE models] (inaudible) on press release page 10 also. There were some modest private equity valuation gains this quarter, versus almost none last quarter, which kicked in, which helped a little bit in that particular line item. And there was a whole bunch of other lesser factors that played into that line item. Not all of which will be recurring either.

Net revenues for the quarter were up 3% sequentially, and 2% over the prior year. So a pretty good result. In the expense side, actually, one of the misses I would say, we had was in comp. Even though our comp ratio came in at 67.7%, which is below our target. It was a little bit above your models. I think some of that was driven by an under appreciation of the impact of the January affect for us which is really twofold. One, is all the raises kick in for all of the salaries around the firm. And secondly, we have a reset of the FICA which we talked about last year in this quarter and the sequential affect the FICA resetting, for all the financial advisors and everyone else, that was over the limit throughout the year, it was about a $6 million increase in the March quarter over the December quarter. And then there was some additional comp with the revenues being higher than projected.

On the other side of the ledger, a positive impact versus your models was communications and data processing. I would say that line item in business development, both of which were substantially below consensus models, really had to do with something that Paul talked about last time, which was really a little stricter discretionary cost management. We were concerned about heading into a choppy or downward revenue cycle. And clearly revenues are not up dramatically. So we had taken a number of steps to limit the discretionary spends like travel and number of conferences and things like that. One of those things, is some of the long list of IT projects that people had requested. Some of those have been deferred so that's predominantly what you are seeing in there. And some of those resources have been allocated over to the Alex Brown acquisition at this point time.

For the year-to-date it's $140 million which is right on top of the $70 million per quarter that we guided to. And I think that's probably still good guidance for the balance of the year. It's a little lumpy there as things start amortizing or stop amortizing and things like that. But, I think that we would not really alter that guidance at this point. The terms of the business development line, I think this was probably a little aberrationally low. We probably would still be in high $30 million to $40 million per quarter on that particular line item. There's a little lumpiness there in terms of timing of some of conferences and things like that.

The bank loan loss provision was substantially higher than last quarter but pretty much in line with where you all thought it would be. A number of factors in that but it's mainly driven by growth as well as the bolstering of some of the energy names. And Steve can provide more detail on the exact provision there for five moving parts in there including the SNC exam and other things that happened during the quarter that we can go into. But really the main theme there is it's net loan growth of $615 million for the quarter coupled with us putting some more reserves on the energy portfolio. The reserve there now stands at 7% of outstandings I think.

Acquisition related only was about $6 million this quarter. We know we guided you toward $25 million to $30 million for the year. And I think that's probably still a good estimate based on people's projection of the timeline and when expenses will be incurred. We should see that accelerate as we get closer to the closing date. So we think that $25 million to $30 million estimate for the overall acquisition and integration is probably still pretty good number. Not much change in other expense. And the tax rate was in line. We got a little help from Coley but not much.

On page 12 of the press release. A couple of other things I want to make sure we get on the record here. The record Assets Under Administration of $513.7 billion a record high. A record high for financial advisors at 6,765 on that page also. Shareholders equity was actually down slightly. Really just simply driven by the $144.5 million share repurchase during the quarter, about 3.2 million shares. That actually helped EPS by a $0.01 as well, but it kept our capital level relatively flat for the quarter. As a result, the non-GAAP ROE was 11.2% for the quarter. 10.3% year-to-date. So we're over that 11% hurdle. But we should start creeping up as we start to get some interest help.

On the pretax margin side, we did achieve over 15%. But I would tell you that capital markets is lumpy. We've not had good equity capital markets. We have had good fixed income. We had a really good quarter in tax credit funds. So that bounces around somewhat. But the 12% margin or 11.7 % actually that they turned in this quarter as a blend, is probably okay; acceptable. But we would like to see some improvement there in equity capital markets side for sure.

Private Client Group came in at 9.4%. Which is in nice improvement from the December quarter. But still not our double digits that we would expect, particularly with some of the help from the rise in interest rates. And again, they are some of the ones that are penalized and helped by some of these costs that we've talked about. The real factor in this particular quarter, even though it went up a lot, it would've gone up more if it had not a lot of revenue growth in this segment. I would think that we would have a good shot hitting the double-digit margins for the balance of the year, if the markets continue to cooperate.

Our capital ratio has actually declined slightly. That's really just a result of continued balance sheet growth. Particularly in the loan portfolio, where we didn't have any capital growth because the share buyback. So you saw equity flatten on a higher balance sheet, which drove the capital down. It's just under 22% total capital ratio now.

The last point I'd like to make is, on April 15 as they came due we did retire $250 million of corporate debt that was five-year notes at 4.25% that we issued in 2011. We have not refinanced those. We simply paid them off. As of today, our liquidity has been reduced accordingly. But we're still in very good shape, both in capital and liquidity at this point in time.

With that I will turn it to Paul for some forward-looking information.

Thanks Jeff.

As we look forward I think first, record number of (inaudible) days thanks to the great retention and recruiting, it's going to help drive, given a cooperative market, the Private Client Group. And certainly, if we're successful on the, to be formed Alex Brown division, where so far, signs have been over 90%, that should be a great driver for us. In the Capital Markets area, fixed income has been very consistent in performing very well in this market. As public finance, where I think on year end rankings, we were 8[%] in total credit to lead nationally. A lot of this is driven by our combination with Morgan Keegan. Which has been four years ago now, believe it or not it. Has really put us at fixed income public finance businesses, a major player.

Tax credit funds had a great quarter, but it's a spiky quarter even though we look at them having their best year. If you look at the backlog. It's still good outlook for the tax credit funds. And Equity Capital Markets is the question. It has certainly been better in March and April, has been better than March. But I wouldn't call it robust. And especially with energy markets we're going to have to see what happens. So, although it is improved I would say that is the one business where we see potential headwinds still. The Asset Management, again, our internal platforms will benefit from our strong recruiting as they have been. The Eagle net sales has been very heavy, but we still have experienced net outflows in a challenging market. RJ Bank who has had very strong growth as you can see. We're looking more for a 10% target looking forward in the growth rate. And you know that adding loans, net loans, is spiky due to loan payoffs and production. But we expect continued growth.

Our energy reserves are [now] 7% to our total outstanding so we think our reserves are underlying, but certainly continued. Low oil prices over time will have to probably revisit that and add to it if prices stay low. And I'm sure you have questions for Jeff. We've achieved these results, while investing heavily in our advisors and client facing platforms. Cyber security, our regulatory systems as expectations continue to increase. It's nice to see that we have the scale to be able to do all of these things simultaneously. It's certainly a challenge in the market, achieving that balance.

Since someone may, on the off chance ask me about the Department of Labor rule, I will try to comment a little bit ahead of time here. First, this was 1000 page rule which I would describe as a guideline almost more than a rule. It's very hard to interpret. If you want to oversimplify it, in most areas it allows you to do about anything under a [bid] but you are up to later suits. So, what you do and how you do it is a thing of considerable thought. Our approach has been to say, how can we best serve the clients, and keep the flexibility of our advisors to serve our clients? And that is a dynamic process. I think if you really talk to anyone in the industry, we have one of the leading law firms, consulting firms, we're involved in the trade groups. No one really understands the full impact yet.

And I'm sure there will be rising costs. We can't give you a number. But the other hand there's only so much we can do. If the deal [ends] up being a little major recruiting -- I mean process, we will have to put other things off. It is sure to result in some net spend. But I don't think it's kind of numbers that are huge right now because there's only so much we can do at the time. And will just have to reallocate resources and probably move some other projects that we have scheduled in Tech and Ops later. Because as you make changes to one system, it impacts the other systems, so it's very hard to do it simultaneously. I cannot really give you a number. I'm sure you'll ask again, but again we're dealing with it. We will comply. We will be in process, it won't be free. But I don't think it's going to be earth shattering numbers. But it's still early at this time.

I want to end again, by thanking our advisors. In these choppy markets, it's easy to get distracted and our advisors have done a great job on focusing on helping our clients. And that's really why we are in business. And also, I don't do this very often, but thanking the management team. In this environment, to be able to control costs and grow the business is really quite a feat and I really give them credit.

With that, let's open it up for questions.

(Operator Instructions)

Devin Ryan, JMP Securities.

Good morning, everyone.

Devin.

Clearly another great quarter here on the financial advisor recruiting front. Love a little more perspective around the outlook and window and anything you can give us on the home office visits. And also layering in around the DOL as well. I'm just curious if you anticipate any change in trajectory? Maybe a slowdown on the independent side just as folks are trying to figure out what the actual real changes in the business will be going forward? So I'm curious if you think that will create a little bit of an air pocket in people in motion -- trying to figure out what the DOL actually means for their business?

I would say, Devin, right now, as recruiting is up, home office is up, visits are up, everything is up for many factors. In fact, the one that is up the most is the independent contractor channel. I would say, from advisors wanting to move, it has not slowed down at all. Joins and commits are up. And very solid pipeline, as good of a pipeline as we've ever had. We don't see the slowdown in movement.

Will it get to a point where advisors say, well, do I want to wait a couple months? Because if I have to repaper for DOL and repaper to move, might I wait a little bit? Maybe, but we don't see that indication now. We certainly are focused when we recruit on looking at books and see how much is in IRAs that may be subject to some change and not. But right now, the pipelines are great. And all the forward indicators are up. Overlapping.

Got it. That is great color.

And one around capital management thought process. You guys have been doing a lot on all fronts. Obviously, Alex. Brown, the recent debt retirement, some share buybacks. I'm just curious -- one, how do you think about excess liquidity capital today? And two, what are the priorities? And are you still looking at thinking about doing acquisitions? And how does the pipeline look there?

I would say that, first, we do have the Alex. Brown transaction coming up. And we will look at our capital structure and make decisions on how we finance or pay for that. We do have plenty of opportunities in the market. So I would say from corporate development it's very positive.

We also have a lot on our plate. We're trying to choose our opportunities, I would say sparingly right now, because we have a lot of things to deliver. And focusing on the DOL impact of not hurting the business impact. I'm talking about just the process of change. Anytime you have that you're going to spend focus on it. I don't think our capital structure or guidance has really changed from what we have told you before. We have been pretty consistent on it. We think we can deploy capital. Certainly in Alex. Brown we will. In these markets we always focus on liquidity. We think we have good liquidity right now, but if we do Alex. Brown and others, that gets tighter in liquidity. And we will make arrangements for that.

Okay. Got it. And just doing a quick modeling thing.

I appreciate the strength and [NIIs] some of commentary around the first rate hike. Has all of the benefit of that flowed through at this point? Were there any corporate loan fees? And I know this can be lumpy. And then separately, also thinking about modeling -- on commissions on a go-forward basis, I'm assuming that the trails should have a pretty nice step up. All else equal because of the recovery in markets point to point. Just a few of those things I would appreciate it.

On your point about corporate loan fees, Devin -- in the NIM, which increased nicely 19 basis points over the prior quarter. And virtually all of that net was driven by the rate hike. There were higher corporate loan fees from the very low December quarter, which had a positive impact. But there was also a negative impact that just about offset that from the bank having higher-than-projected cash balances throughout the middle of the quarter. Not at the beginning or the end, but in the middle of the quarter, we saw a big influx of client cash balances that swept to our bank. And they don't earn very much on cash balances, as you know, so that actually dragged down the NIM to offsetting the corporate loan fee increase. Net, the increase was really because of the hike.

Got it. And is that the full results including the account service fees?

Yes, I would say virtually all the first rate hike is in this quarter. Maybe of the a little bit more would come on in the second calendar quarter. But I think, from the bank's perspective, where most of the interest earnings are showing up, I think we guide to a little higher NIM somewhere around this level for the rest of the year. All the factors that I mentioned in there can change, though. They could get excess cash; they could have loan fees go up or down; the Fed could move on gross rates again; or we could end up increasing rates to clients if the competitive landscape changes. So, any of those factors can change, but based on where things are today, I think where it was is probably a good level for the balance of the year.

Got it. And the trails on commissions?

Trails -- they were actually a little weaker this particular quarter because of mutual funds. I will call it the markets swoon in the middle of the quarter, because trails are based on average balances for the quarter. So certainly the equity-based funds saw a little bit of a decline in trails. So to the extent that we don't see another equity market swoon, those could actually recover a little bit from where they were this quarter.

Great. Okay. Thanks a lot guys.

Yes.

Christian Bolu, Credit Suisse.

Good morning, guys.

Just curious how you're thinking about the 15% pretax margin target? The firm is substantially bigger and short-term rates are substantially higher than where they were when these targets were set. What's holding you back from raising the target?

I think on a non-GAAP basis it was about 15.6% this quarter. I think continuing on a non-GAAP basis, it probably should be in the 16%-plus range now that we've gotten the benefit of that first rate hike, given the magnitude of the benefit we are seeing. And we would probably shoot for that for the balance of the year. Whether we officially set it as a target or not, certainly our goal is to improve it from here.

Given some help in the equity markets for capital markets, we should do that.

Okay. Great.

And on a fixed income business -- I feel like I ask this one every quarter -- but it feels like you just continue to defy what we see at the bigger banks. Curious how you think the market is here? I think you've calculated it as a B market on an A to D scale. Where are we now in terms of the market environment? And any thoughts on what we can think about in terms of the outlook for that business?

I think the outlook into the present market is, I don't foresee any short-term drivers for change. I think you have the big banks, who are in the debt origination business, which we're really not, to any degree. Certainly have been impacted on the taxable [debt] is certainly off. The big banks have also, because of capital requirements, have lowered their inventory. So I think we are a more go-to market, which helps us turn them more quickly. And we just have to manage it, so that the markets never stop, and you have less [people to inventory]. You don't end up with them all. So we think our risk management is very strong. And I don't see any factors right now -- if the ECB held rates today, I don't see any factors right now that would say in the short term it should look any different.

One of the things that helped this past quarter was some of the volatility you saw in the 10-year bouncing around, which helps activity a little bit.

Okay; and is there any seasonality in our business? Should we should think about for the first quarter or the March quarter as being stronger? Or do you foresee fairly stable trends moving forward?

I don't think there's seasonality in terms of a first quarter being exceptionally strong.

I think the opposite. Some of these annual costs that creep in.

Again, I don't see anything that would say -- we wouldn't expect anything different right now. And anything can happen. We think we will continue good performance.

Okay. Fair.

And lastly, clean up. On cash management, how much cash do you guys have just now? Client cash? And what kind of spreads are you getting on the off-balance-sheet cash?

We anticipated that we would -- just to tell you why we're off on our forecast and what we're guiding people to -- we were predicting client cash balances of around $34 billion to $35 billion for the year. During the March quarter they spiked and peaked at almost $40 billion. They are back to about $38.5 billion as we sit here today. Most of that is in the bank sweep program. Our own bank has had an appetite for a lot of it. But on that off -- we are getting in the high 40%s in the bank's sweep program. Off-balance-sheet programs.

Great thank you for the color. Congrats on a strong quarter.

Steven Chubak, Nomura.

Thank you very much. Good morning, gentlemen.

Jeff, the first question I had is on the last remark you made on the client cash that's off balance-sheet. You noted the yield you're getting us in the high 40%s. Can you remind us where that stood before the initial December rate hike?

It was in the high 20%s. They are almost all floating rate. We basically saw a 25 basis point increase in the rate. Actually the fund effective only went up 24 basis points, actually. So we actually saw a 24 basis point rise in the earnings side and we passed about 4 basis points of that through to clients so far.

And I want to give a little color why it may be a little better than maybe others, the two. We have been pretty disciplined about not fixing rates, leveraging the bank with fixed-rate securities and others. We have kept it pretty matched, floating business compared to others. Those rates came through, and frankly, we raised rates when the rates came through and no one else did. We've had two rate rises and most people have done none. And we have just said, well, it's kind of crazy to be way out in front of the market. And on top of that, balances spiked. So, you add all three together, (inaudible) some of what we do is certainly competitively driven. And we ended up with better earnings from that.

All right; assuming with the next rate hike, how much of that should you expect to retain? I assume the step up will be more modest, but it will be contingent on competitive dynamics.

I think you look at it and that's absolutely right. If historically one of our benchmarks is always mutual funds. And that will be interesting in the environment with rates and liquidity and all that -- who is going to be the competitive rate setter for interest rates? We assume at some point the market is going to move and pass it on. And I would guess at the next interest rate hike you would see that.

The next hike, money market funds would actually get off the 0 to 1 basis point train, and pass something through to clients. But that remains to be seen.

So it would be less. We certainly would have larger percentage to clients than we did so far.

And Paul, maybe one on the DOL. I appreciate your comments on the expense items, some of the color that you have given. What do you view as the greatest potential threat, focusing on what some of the potential revenue impacts can be? Based on the proposal? There's been some discussion around revenue sharing fees, the declining commissions, and are there any potential mitigants that you also see on the horizon? And one that has been highlighted by you in the past is the accelerated conversion to higher fee advisory.

Even moving to fee advisory is a [bit] under the DOL rule, which means you're taking a fiduciary move with your client to put them on a fee-based platform. There's no free lunch in here. And frankly, people should do what is in the best interest of the client. So that's fine. We don't object to that. The problem in the rule is, you're almost caught no matter what you do. If your account stays where it is, you are grandfathered; as soon as you change anything, you're un-grandfathered.

The rule is very complicated. I think the early assumption by a lot people was the rule wasn't bad. Then the rule was horrible. The truth is, it's a little better. And the adjustments, and what takes time is not going to come from just the firm. There are going to be changes in client fees and charges. There could be a change in advisor fees and comp. I think the funds and the way we do business with each other will change over time, too. Those are all of the moving pieces that no one knows. I would say, at the end of the day, I don't see anyone in the chain -- clients want advice, so we have to make sure that we're comfortable for the liability we are assuming now, that we can on very small accounts, whether it is worth it.

Mutual funds still want to use us as a platform. They are going to be supportive. There is just going to be a change across the business on how everybody does business. That will take a few months to even figure out. Everyone's in dialogue. I think some people's view was everything was going to fall on the company to absorb all these costs and compression and all this. And I don't think that's the way it's going to work. We are still a few months away. We are in dialogue with all of our partners. We are examining, first, how we can serve clients the best and do the best job for them. Secondly, keeping the flexibility of that phase. And third, what is the impact to us and our product suppliers and other partners? And what's the right way to structure this so it's fair and it's compliant.

For people that have reacted -- I know some people have made changes. Some, this rule this was a good excuse to further their platform objectives. And I'm not saying that is bad. But it just fit right in. And for us, our focus has always been our clients and advisor flexibility, so we're not going to jump out. And we have time to do this right, and we will do it right. So I wish I could give you more color than that. We are working very hard. We have a lot of people, a lot of outside help, and I think we'll come through it fine. I just can't tell you what exactly it will look like. All of those things are under threat? Yes, they are under threat. But I don't think they are static. It's very dynamic.

Understood; there is a lot to digest. So I appreciate the color. I will hop back into the queue.

Bill Katz, Citigroup

I just want to come back to a couple of math topics and I apologize if I'm not following along. If you look at many of the banks across the sector, NIMs have improved a little bit, even some your peers, but not to the same magnitude. Can you review your balance sheet a little more in terms of how much is floating rate versus fixed rate? Just trying to understand the sequential improvement a little bit better.

Are you talking about at the bank level?

Yes.

Of our $16 billion balance sheet, all about $1 billion is floating rate. And then the $1 billion that is not, to the extent that its got any significant term to it, (inaudible) we hedge anything that goes out very long term. So we are very insulated from interest rate moves.

Bill, some of our residential mortgage loans -- we tend to do adjustable-rate mortgages that are 5s, 7s and some 10s that have -- they are fixed for that period.

(Inaudible) we put in the fixed in the rate. Where there's some short-term fixed [up] and then there's longer-term fixed up. Longer-term fixed up, which we call 7 years or longer (multiple speakers) -- that's the $1 billion I was talking about. We hedge a substantial portion of that. And then, the vast majority, which is the corporate loan portfolio, is all floating rate.

I think that's the [route] of the delta when you compare. We are very interest-rate --

We have such a high percentage of floating rate loans to deposits versus other banks, which have bigger resi portfolios and bigger security portfolios than we did, and have fixed rate [to them] we would naturally benefit a little bit more

That's helpful. And following up on the provisioning discussion, I heard you say you are still provisioning about the reserve about 7% of the energy book. If you do the math, that provision incremental would be even higher than what you reported at the aggregate level -- the 9.6%. Is there any reversals elsewhere in the portfolio to bring the net down? I'm just trying to understand that in the construct of a bit of a step off the [criticized] loan portfolio.

A growing portion of the reserve is qualitative in nature. We did add to the energy. But there are other factors in the qualitative reserve that we could lighten up on. I would point to the one example, without giving any specific numbers is, we had a [course] number qualitative reserve relates to companies that are most sensitive to rapid rises in interest rates. Six months ago, when the talk was, the Fed was going to raise four times this year, et cetera -- that was a bigger risk for companies that were more interest-rate sensitive. That specter has waned somewhat as we've gone on. That is an example of a qualitative reserve that we didn't need to have as much allocated to.

We also had several criticized loans pay off in full. There are other improvements in the credit quality; the residential portfolio continues to improve. There are a lot of factors there, Bill, but you are right -- we actually increased our reserves against the energy portfolio by $13 million. It now stands at $31.7 million as we reference at 7% of our outstandings. We feel very comfortable that we are on top of that situation.

Last one for me -- thank you for taking all the questions this morning.

To go back to your last guidance on rates. (Inaudible) Where do you stand if you were to get a full 100 basis point rate hike now? What percentage of that 100 basis points do you think you have incrementally from here?

In our statements right now there's probably 45% of the full amount that we would anticipate from the 100. In other words, it's not 25/25/25/25 with each rate hike; it is more front-loaded than that, based on where we are today. We have another half at least to go if they raised by the full 100. The number we gave you for the full 100 is probably still a good number.160 now -- it's probably a little higher number because cash balances have grown. But that $160 million-ish type number is probably still accurate for the 100 basis -- again, it depends on what the money market fund rates are and the competitors' rates at that time. That's still about where we would expect to be; we are just getting further along from the first rate hike than we had anticipated. We are just a little short of half, I guess, is the answer to your question.

That's very helpful. Thanks so much.

Chris Harris, Wells Fargo Securities, LLC.

Thanks, guys.

Just want to follow up on a question that was asked earlier about the margin. Thinking about it for the year, maybe in the second half you talked about maybe being comfortable with 16%. Is that a good target, even inclusive of what expenses might come out as it relates to DOL and the Alex. Brown integration? Or would that perhaps skew you guys hitting that number?

For the Alex. Brown integration expenses we're going to show on a non-GAAP basis, so it is exclusive of those. And you also have to remember, what's going to pressure margins is, recruiting is absolutely fantastic. But it does pressure margins, in terms of our upfront transition assistance and the amortization of that. So that continues to grow. We think a great ROE and a great return on investment.

I think that's a target -- the 16% is probably a reasonable target. The growth in our other growth investments are going to impact that. Our history, if we look at our few acquisitions, they always take time to get up and running also, and to get through the cost of the systems. At Morgan Keegan we are very heavy for a year in terms of staffing. And my guess, this year will be heavy also as we get through the integration process. I don't think the target Jeff had put out is unreasonable, but it's not a layoff either.

We've got some higher-than-projected expenses with the DOL and other things. But we're also getting a little more help on the interest and accountant service fees than we had expected. Net/net, I think that's a reasonable goal to shoot for.

Okay; very good.

Just the one follow up from me, and that relates to the loan growth. Any commentary you guys might be able to share with us about where you are originating those loans? And perhaps what the outlook is for the remainder of this fiscal year for that?

Chris, it's been pretty broad over all of our sectors that you see. We grew loans in all of our categories: residential, securities-based lending, our tax exempt business, commercial real estate; and then our large corporate C&I book. So, we have grown loans, as Paul mentioned, 19% year over year. We don't expect to grow that rapidly over the next 12 months. I think something in the low double digit, high single-digit -- 9% to 11% -- would be a good target for us for the next 12 months.

All right; thank you.

I would mention, Chris, we are expecting some positive growth coming out of the Alex. Brown advisor channel. We are excited about getting ready for that opportunity. And we would expect growth in our mortgage banking business, as well as our securities-based lending business, and our margin lending business, too, coming out of that business. It should be very helpful for those businesses.

Which will all hit for FY17.

Hugh Miller, Macquarie.

I appreciate you taking my questions. I wanted to follow-up with Steve at the bank.

As we think about, obviously asset quality is still very sound. But looking at the uptick in NPAs and the criticized loans, can you give us a sense of what types of credits you are seeing migrating there?

Sure. We actually have three full-par payoffs in our criticized portfolio this last quarter that we have downgraded five loans during the quarter, three of which were in the energy sector. We now have, out of the 32 energy loans, eight of them are criticized. That continues to be the largest concentration of criticized loans in the portfolio. There is no other real trends. Everything else is unique to the client and company's situation that's in that portfolio.

Still a very good quality on a relative basis. Our level of criticized loans are relatively low still. So, continue to obviously watch the energy sector, in particular, very closely. And trying to be very proactive in terms of how we are provisioning against those exposures

That is helpful; thank you.

And sticking with the energy theme as a follow up -- as we think about the potential for eventual consolidation in that space, and we think about your capital markets vertical there, is there anything you are seeing in terms of dialogue with CEOs and companies about appetite for M&A? Concern and potential demand for that?

Yes, I think that typically in sectors when you have these issues, there is the bid and the asked, and people not trying to hold out, and get through as long as they can before they do something -- or feel like they have to do something. I think that dynamic is still going on. And as you can see, there has been some financings in energy. Most recently, so we are seeing for those that are in a strong balance sheet, there is some access. And there certainly are some people looking at the consolidation opportunities, which gives us M&A opportunities. But I would say that discussions are more active, but it hasn't really shown too much up in the markets yet.

Thank you very much.

Doug Doucette with KBW.

I think most of my questions have been asked; I just have one quick one.

In terms of the increase in the pretax income, is there any way that you could tell us the amount that was attributable to the higher rate environment?

Since we have the first full quarter, I would say somewhere in the high teens. It's a little bit difficult because there is bank growth and client cash balance growth and other things during the quarter. But somewhere in the mid to high teens.

Okay. Thanks.

Jim Mitchell, Buckingham Research Group.

Good morning, guys. Just a couple of questions.

With the significant pickup in FA hires over the last few quarters, the year-over-year growth rate has been accelerating. First question is, is there a higher AUM per FA associated with that as you get into the Northeast? And two, have most of the assets been brought over? Or is there still quite a bit to go? Trying to get a sense of what we should think about new AUM flows over the next couple of quarters.

First thing, the average assets recruited are higher than our existing average in general. And as we do focus more for those who are in the higher-end markets, either out West or Northeast, they tend to be higher-end advisors. We are certainly recruiting higher-end advisors in other places, too. It takes maybe a year for a lot of people to get all of their assets over. A good chunk come in the first six months. But if you look at the pipeline, we keep recruiting, so I don't know if there's any net change as people coming in are starting to bring assets over. And we have the new recruits starting to bring assets over. And that pipeline has been pretty steady to slightly rising. So I think the trend should continue, given the market's cooperation. It I think for the forward-looking quarter, we have those assets then and we should get better billings off of those fee-based assets, plus the recruiting should give us a good lift if the markets stay okay.

Okay; that is helpful.

And maybe, Jeff, I appreciate the comments on the comp ratio. You guys are actually lower than me, given seasonality expectations. But you guys declined quarter-over-quarter on a comp ratio. Is that mostly because of the benefits of the rate hikes? And should we expect that comp ratio as FICA and other things slow down to trend down from here over the next couple of quarters?

Yes; we are not going to change that 68% target on comp ratio. You're right. The rate hike -- there's both a volume and rate variance here. I mean, obviously the balances are up both at the bank and client cash balances, but the rate definitely helped. As the bank became a bigger part, the bank's got a very low comp ratio compared to other parts of the firm. Overall, the mix and the rate hike -- now the rate hike is going to be with us the rest of the year, too. But we expect the other parts of the business to pick up on a relative basis to the bank. So I think the 68% is probably still where we would shoot for, for the year.

Okay. I got it.

Your rate sensitivity does not include the balances from Alex. Brown, right?

Correct. Because --

There are none here.

There will be. And that will be a FY17 budgeting issue, and how we deal with all of that. But they obviously won't have much of an impact on this fiscal year.

But there's still about -- what? -- about $5 billion to $6 billion.

Right, of cash balances; that is correct.

Okay. While that's all for me. Thanks. I will see you in a few weeks.

Daniel Paris, Goldman Sachs

Two areas I want to focus on around energy and the DOL. I know limited visibility on both, but I will try anyway. On the 7% reserve on the energy book -- can you give us the pieces? What was the outstanding energy loan balance? And can you give us the unfunded revolver balance on the energy book?

Sure, Daniel.

The outstanding balance of March 31 in the energy portfolio is $451 million. That's, once again, 32 borrowers. Our total commitments came down by $28 million on the quarter, and now the total commitments is $742 million. So the difference there is the amount of unfunded commitments.

Got it. That is helpful thank you.

If oil stays where we are today, do you feel like you are fully reserved, based on your best estimate? Or will we stay at this level for a long period?

I don't think anyone is fully reserved if oil stays low for a long period of time. There are certainly companies that are leveraged or asset-rich, who are using cash or other things, are going to struggle. I'd say if we have sustained oil prices at this level, there will be additions to reserves.

Okay. Got it.

Maybe if I could shift over to the DOL -- I understand is very early days and very unclear. One area that stood out to me, with the DOL, was specifically talking about the ability to pitch for a 401(k) rollover business. Can you give me a sense of, A, if you agree with that? And B, what percent of your organic growth the past few years has come from 401(k) to IRA rollovers?

First, you are allowed to pitch for 401(k) rollover business. You fall into the BIC and you enter into a [fiduciary] position that you have to be giving that advice to roll over in the best interest of the clients. If you look at most of the standards, it says, you about can do anything as long as it is in the best of the clients. And be ready to prove you did. That's really what the rule over-boiled-down says. Certainly it has been an area of 401(k)s because people do retire and want it managed and roll over. I don't know if it is a huge percentage of our business -- I could not give a percentage, but certainly it has been a part of everybody's business.

I don't think it will go away if the standard is raised. The standard is to make sure what is good for the client is fine. There's nothing wrong with that. That should be the standard. I think the DOL, in their historic position, had, had a bias saying that it generally was not the best interest of the client. I think the new rule basically says, we're not trying to force the lowest fee platforms, but just make sure you're recommending what's in their best interest. So any time a person goes from not having a fee to having a fee, you can argue, they are biased. I just think you have to prove that it's a reasonable recommendation in looking at the client.

And so it will continue. I think there may be more liability associated with it. Certainly more documentation, which a lot of these costs are going to be in process and documentation.

Okay. Got it. That's really helpful. Maybe just one more.

I know you guys tend to be very disciplined on capital in general and acquisitions. Curious if you think the final DOL rule makes more likely for you to pursue wealth deals for smaller players who maybe will struggle with some of the compliance costs that you've just outlined here?

I think that's the potential outcome. And frankly, we like that there are independent firms in the industry. We don't want to be the only non-big bank-owned firm. We look at our cost, and certainly any type of layer of layer of regulation really increases costs, especially if you cross $1 billion. And then you cross $50 billion, you get another level. Certainly, it's tough on the industry and tough on players when you have this much regulatory costs. We feel it, and I'm sure our friends and competitors, but friendly competitors in the other firms who share our similar values, it's got to be tougher on them. We're not hoping regulation drives them out of business. But if they make the determination that it's too costly and they want to join someone who is of like-minded culture for those firms, we would welcome them. I'm not sure that's a good result for the industry.

Got it. Thanks a lot for taking my questions.

Thanks.

Steven Chubak, Nomura.

One quick ticky-tack question for me. I didn't know if you guys have provided what you expect the step up in FDIC assessment fees to be, beginning in the back half of this year?

We actually expect ours to be slightly down from where they are. The mega banks are going to be the ones that feel it a little more than us. We will get the full step down, then partially back up because of our size. So we actually expect ours to drop, but not materially.

It will be a small number.

A basis point or fraction thereof.

Okay. Minor step down but nothing material.

Correct.

Perfect. Thank you very much.

At this time there are no further questions.

Great. Thank you all very much. I know you had a lot of questions so we wanted to allow the time. Most importantly, last quarter, I know people thought was a little weaker and this quarter a little stronger. But what we focus on is long term. And as I said the end of last quarter, that all of the indicators and recruitment assets were positive. I feel the same thing about this quarter. I'm not going to take [over believe] this is a long-term business, and the good news is our forward indicators are positive. We have a great team of people here working hard and we have to earn it every quarter.

I appreciate your time and interest this morning. We will talk in three months.

Thank you.

Thank you.

That does conclude today's conference call and you may now disconnect.