雷蒙詹姆斯金融 (RJF) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Earnings Call for Raymond James Financial's Fiscal Fourth Quarter of 2017.

My name is Darla, and I'll be your conference facilitator today.

This call is being recorded and will be available on the company's website.

Now I'll turn it over to Paul Shoukry, Head of Investor Relations at Raymond James Financial.

Thank you, Darla.

Good morning, and thank you all for joining us on this call.

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 Chairman and Chief Executive Officer; and Jeff Julien, our Chief Financial Officer.

Following the prepared marks, 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 future strategic objectives, business prospects, financial results, acquisitions, our ability to successfully recruit and integrate financial advisers, anticipated results of litigation and regulatory developments or general economic conditions.

In addition, words such as believes, expects, plans and future conditional verbs such as will, could and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Please note that forward-looking statements are subject to risks, and there can be no assurance that actual results would not differ materially from those expressed in those forward-looking statements.

We urge you to consider the risks described in the most recent Form 10-Q and subsequent forms -- 10-K and subsequent Forms 10-Q, which is available on our website.

During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view on ongoing business performance.

A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedule accompanying our press release.

With that, I'll turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial.

Paul?

Thank you, Paul, and thanks for that inspiring opening.

We appreciate you all joining the call.

We know there are a lot of releases out today, both in our industry and certainly some of the big -- biggest companies.

So I want to spend a second reflecting, if you had told me a year ago this September that Trump would be President; the market, which is up 25%; deposit betas would be at an all-time low, of course, I'm not sure I would have known what deposit beta was a year ago; that we would have these financial results; and the Cubs would win the World Series.

I don't know what I would have believed more.

If you really look back, it's been really an outstanding year, certainly due to the work of our advisers and our associates with our clients, and honestly with the help from the markets and the interest rate environment.

We had record net revenue of $6.3 billion, up 18% over the previous year; record net income of $636 million, up 20% over the previous year; and an adjusted record net income of $768 million, up 35% over the previous year.

Even and more impressively, maybe, is all 4 of our core operating segments had record net revenues and record pretax income for the year.

We finished the year with a 12.2% ROE and an adjusted ROE of 14.5%, which is really pretty amazing, giving our conservative leverage and capital ratios.

More importantly, we made huge investments.

Huge is, I guess, a new word that everyone's using.

In our adviser technology, we had robust recruiting and still great momentum.

We integrated Alex.

Brown, 3Macs and Mummert, which is ongoing.

And with the DOL and other regulatory initiatives, we still got all these things done.

So I really want to thank our associates, really, for all they did this year.

I'm going to divert a little because I think one of the most important things that's enabled our recruiting and retention has been our culture.

And we talk about it a lot.

But this year, we reinforced -- continue to reinforce our core values and it really showed up during the hurricanes this year.

And I want to use an example in Hurricane Irma, where we flew 175 associates, their families and their pets to Memphis, where we actually operated for a number of days as our headquarters as part of our BCP plan.

Not only were we to keep the -- we kept service levels up, and we were able to operate seamlessly.

To thank our employees, we gave our employees a $300 pretax kind of a just bonus for -- to help them with their shelter and their evacuation plans.

The firm committed to donations over $1 million.

Associates contributed over $0.5 million to the friends of Raymond James to help associates that were impacted.

And in Canada, they contributed $100,000 for the floods that really happened in B.C. and Québec.

So it really speaks volumes about the firm, why we're able to keep the retention and our focus on associates and they're focused on the firm.

Let me talk about fourth quarter results.

We had record quarterly net revenues of $1.69 billion, up 16% from the previous year's fourth quarter and 4% for the preceding quarter.

Record quarterly net income $193.5 million, which resulted in $1.31 fully diluted share, up 13% from the last year's fourth quarter and 5% over the preceding quarter.

Our adjusted quarterly net income was $217.3 million or $1.47 fully diluted share adjusted, which is up 12% from the last year's fourth quarter and 17% from the preceding quarter.

We had record quarterly net revenue and pretax income at Private Client Group, Asset Management and RJ Bank, all for the quarter records, except for Capital Markets, which compared to a record a year ago.

We had a quarterly ROE of 14.1% and a non-GAAP adjusted of 15.8%.

So it really was a spectacular quarter.

Maybe more importantly is -- looking forward is where we ended the quarter with record client assets under administration of $692.9 billion, financial assets under management of $96.4 billion, record loans at RJ Bank at $17 billion and a record number of advisers of 7,346.

So really great results.

If I just touched on the segments, Private Client Group, as I said, had records net revenue and pretax for the quarter.

We also had great recruiting and retention, keeping the levels up with a substantial backlog.

We had substantial growth in fee-based accounts, certainly helped by the market growth and the interest rate environment.

And during that time, we had the integration of Alex Brown and 3Macs.

We continued in Private Client Group and across the firm to make a substantial investment in our technology, including our advisers' desktops, the work we had to do for DOL.

We're out in our just beta-test of Connected Advisor, which is our answer to robo, not robo, but digitally connecting our advisers with their clients and rolling out efficiency initiatives like client onboarding.

In the Capital Market segment, net revenue was up 3% sequentially, but down 7% from last year's fourth quarter, which is a previous record.

And the quarterly pretax was up 27% sequentially, but down 17% from a record quarter -- last year's fourth quarter.

These results were mainly M&A driven and really a product of the investments we've made over the last 3 years in our M&A business.

And if you remember last year, we did the acquisition of Mummert & Company, and we've already seen the fruits of those cross-border successes from Mel Mummert and his team in very early days.

Equity underwriting was down for the quarter, but up 34% this year over last year.

This business does have headwinds as institutional equity commissions continues under structural pressures that has for years and compounded with a low volatility environment.

Fixed income, both in commissions and trading profits, again, was impacted for the same low volatility market and a flattening yield curve.

And Tax Credit Funds was negatively impacted, really due by the uncertain tax laws as developers and banks try to figure out what the real after-tax yield is going to be as all this tax rate discussion goes on.

Asset Management had a record about everything.

Financial assets under management was $96.4 billion, certainly due to net adviser growth and market appreciation and increased use of fee-based accounts, all the factors helped the flow into this segment.

And we even had a small positive net inflow into our Eagle/Carillon Tower's group.

We're still on track close on the Scout and Reams acquisition this quarter.

We expect that to add about $28 billion of assets under management, and we need to remember that that's going to significantly broaden our fixed income platform, but also the fees in that type of business are lower than the equity business as we look forward.

RJ Bank record net revenue and pretax for the quarter and for the year.

Net loans of $17 billion, up 12% year-over-year.

Interesting that the C&I portfolio was actually down 1% as we had been concerned a little bit about pricing and risk of the new deals.

The growth was really driven by Private Client Group, SBLs and mortgage and as well as our tax-exempt loans from our Public Finance business.

Net interest margins came in at -- from 314 bps to 311 bps.

And I think there is some really -- some misunderstanding on that.

They would actually be up if it wasn't for the excess cash and securities that we have been investing.

Our cash increase and balances impacted that 4 bps alone, took it down, as well as our securities portfolio.

So if you really were to look at the bottom line there, our net interest is up $11 million quarter-over-quarter 8% or 23% year-over-year.

So a lot of people keep focusing on that NIM, but that includes the cash and securities we keep investing in.

Actually, the loan NIM would have been up, not down, on an apples-on-apples basis.

So we continue to invest with using little capital to increase our net interest earnings in the firm.

And may be more importantly, total nonperforming loans are $44 million, down 49% year-over-year, 8% sequentially, and total credit size loans of $265 million, down 12% year-over-year or 2% sequentially.

So all-in-all, good shape.

So I'm going to turn it over to Jeff, who would give you some line items and some more details and talk a little bit about the outlook of these segments.

Jeff?

Thanks, Paul.

As usual, I try to compare our actual to the consensus models just to see where we didn't achieve the result expected by The Street.

In this case, most of our line items were fairly close.

So I only have a few to talk about today.

Commission fee revenues at absolute dollar amount, we actually came in slightly under expectations.

But it really is attributable to the decline in institutional commissions as you can see in the press release in detail.

PCG was pretty much right on, but it's only 1% under, so not a huge miss.

The biggest beat would be in the investment banking line.

You can see, again, in the press release the detail of particularly the strength of M&A piece, up 34% from the preceding quarter and up 54% year-over-year.

And a lot of that happened kind of late in the quarter.

So we weren't able to give you a lot of color on that throughout the quarter.

Except for those 2 line items, all the rest are within $2 million to $3 million of expectations, $4 million or $5 million ahead of consensus.

The only other thing I'll point out in the revenue side is that net interest income was actually several million ahead of expectations and account and service fees is the one that came in below.

I think that on a combined basis, they're very, very close.

And that really has to do with us moving more of the client cash balances on to our balance sheet out of the external banks, as we continue to fund the bank's growth.

On a combined basis, though, it appeared very close.

Several items to talk about on the expense side.

First, I'll talk about communication and information processing.

It took a little bit of a jump from the preceding quarter.

But for the year-to-date, on average for the year it was right on top of our guidance for the year.

Which was in the high 80s -- high 70s, I'm sorry, per quarter.

Going forward though, and this is a conscious decision on our part to continue and complete all the initiatives that we've got underway right now.

A lot of those are in process to enhance the competitive position of the FA desktop, make it easier for clients to come onboard with us, et cetera.

We also have some enhanced supervisory and compliance systems and there are several other projects underway.

And we're going to make the -- we made the conscious decision, at least, at this point to continue with all those and some of the ones that we're on the drawing board.

So right now I guess, our guidance for next year would probably be in the high 80s per quarter as opposed to the high 70s this past year.

Obviously, that's something that we can control to some extent.

And if the market decides not to cooperate, we could pull back a little bit on that.

But given where we are today, that is our current plan going forward.

The occupancy and equipment line also took a little jump from the preceding quarter.

There were some, what I'd call, kind of one-off items in there for the quarter.

But on an ongoing basis, this is just a natural consequence of growth.

As we bring on more people, we have to have a place for them to sit, we have to have furniture for them to sit on, and have to have PCs for them to operate on, et cetera, et cetera.

So not only are we increasing the branch footprint in our Private Client Group system, we actually are increasing some of the actual branches we currently own as they become whole and expand.

And we've also, as we talked about in the previous call, expanded our headquarters' footprint by about 300,000 square feet at the end of last calendar year.

And we've been doing some renovation work and are getting ready to occupy about another 100,000 square feet of that space.

So a lot underway.

But again, that one we don't have as much control over we do need to place for people to work.

So guidance for next year would actually be sort of about what we ran at this current quarter.

It's not this quarter, even though there were some one-offs, I think that's really more indicative of our run rate going forward.

The bank loan loss provision was, I'm sure, a bit of a surprise.

We did grow loans, about $376 million in the quarter.

But if you look at the nature of the growth, which is also in the press release on, so there are the bank details on Page 11, you can see that a lot of the growth came in, what you'd call, lower risk or lower reserve type of loans, which would be mortgages and SBLs.

So coupled with the fact that we sold some loans that have decreased in criticized assets, [thanks] for [indiscernible] us.

Some of those represent sales that we were able to take advantage of favorable secondary market conditions and exit some of the loans that were trending poorly.

And we actually managed to get prices above where we had them reserved.

So even though it's an actual loss and doesn't make me happy, it did have the anomalous effect of releasing some reserves and slightly more than the actual new provision put on for the loan growth, the latter being about $2 million only for the quarter, given the mix of loans.

The other expense, I'll just mention, it came in really close to consensus, but I did want to just point out what Paul was talking about, with all these hurricane related to expenses, we do not try to -- did not non-GAAP this item, but we did incur something very close to $2 million of incremental costs related to preparation for the hurricane that never hit us directly here in St.

Petersburg.

So between the payment to employees to help with their repairs and/or evacuation costs and our own deployment of people to alternative locations and things like that, it was about a $2 million number.

And then lastly, on the expense side line item that always seems to deserve mention lately is income taxes.

Once again, I went to a little COLI dissertation on previous call that when the markets are heading up, we're going to get the tax benefit.

We've got over $300 million of COLI on the balance sheet.

So when that is trending up, when it's probably a little more than -- it's probably 2/3 equities, something like that, and a lot of it's elected by participants, not our choice.

So if the equity markets are favorable, we're going to get a tax benefit.

And when they're unfavorable, we're going to have a higher tax rate.

So that continues to be a big factor that needs to be considered each quarter.

The other thing we've got now on an ongoing basis, you know our bank has its own CRA requirements and it invests in some of the low-income housing and tax credit projects that our own Tax Credit Funds group originates.

We have what -- 5 or 6 on the bank's books now.

So we're starting to get a fairly good size amount of credits from that.

And then there are other smaller things that happened throughout the year.

The biggest item that's new that we -- it didn't happen in fourth quarter, but it happened a little bit every quarter is, what I talked about last year, which is the guidance for reflecting the appreciation of equity awards in the tax provision now.

In the past, it was a straight credit to the equity section, now it's actually flowing through the tax provision.

Based on where the stock price is today, that looks like -- and I gave guidance a year ago, there will be about $11 million or $12 million a year.

Now right where the stock price is today, it's about $16 million a year, straight tax benefit that most of which, probably 80% to 90% of which will hit in the December quarter for us because that's -- after the end of for fiscal year is when most of those awards are granted and they have this other -- divesting dates on the anniversary.

So the December rate going forward will probably continue to be abnormally low, even 30-ish or sub-30-ish it was this past December because of that factor.

But on an annual basis, I guess our overall guidance, given all these factors, would sort of be in the 35% type range, combined state and federal, plus or minus whatever COLI does, given all other things that we've got and the magnitude that there are on our books for.

So that's sort of the story on taxes.

Some other items I'd like to mention.

The margins by business where I stuck my neck out, maybe, more than I should have at the Analyst and Investor Day, telling you what I've thought we could accomplish for the 6 months of the year.

Happy to say they were all surpassed.

I had given 12% margin guidance for PCG.

They came in for the -- this quarter at 12.2%.

They came in only at 11.4% for the year because they had a rough start, that's on a non-GAAP number, by the way, adjusted number.

Capital markets came in at 16.5% for the quarter versus the 15% that I had mentioned at the meeting.

We continue to try to be in excess of 30% in Asset Management, which came in at 37.1% for the quarter and 35.2% for the year.

And Paul already talked about the factors that are supporting the Asset Management growth right now.

So for the total firm, we're at -- on a non-GAAP basis, we had talked about perhaps a 17% type overall firm margin, it actually came in at 18.7% for the quarter and 17.6% for the year as we had a very favorable equity market and obviously, continued interest rate helps.

For the compensation ratio, it came in at 65.3 for the quarter, [frankly] sort of abnormally low, some of that boosted by the surge in some of the M&A fees and other things.

For the year-to-date, it was 66.4.

And we're actually pretty happy with that year-to-date number.

We do definitely want to continue to keep it below 67, but kind of our target in our minds is sort of 66.5 or better kind of where we finish this year if things stay like they are in terms of the environment.

So that's -- I don't think we're not calling 65.3 our new target just because we achieved that here in this one quarter.

The return on equity, as Paul mentioned, on adjusted basis for the year was 14.5%.

We're still comfortable right now with the 14% to 15% range.

A lot of variables will go into that, of course.

Of course, 15.8% for the quarter is an exceptionally good quarter for the ROE.

Capital ratios, which are on Page 10 of the press release, and I won't go through them all, but just suffice it to say they all improved a little bit with the exception of leverage ratio, which was down just a little bit.

They're all up because the balance sheet growth that we had during the quarter was in low-risk assets.

And so our increased capital was more than offset the risk weighting of the assets that were added, predominantly the cash -- higher cash balances on our balance sheet plus some SBLs and other low-risk weighted-type assets.

Paul mentioned the NIM at the bank.

I'd just like to repeat it here just for a second because they got a lot of mention in a lot of the comments I saw last night.

To me where the rubber meets the road on net interest at the bank is really is the top of Page 11, which is the net interest income that the bank had generated.

As Paul mentioned, we're not spending very much additional capital to expand the securities portfolio or add more cash on the balance sheet of the bank, but it's adding a lot to our net interest earnings.

The NIM we gave at 3.10% to 3.20% guidance, it would have been right in the middle of that range had we not had cash growth during the quarter at the bank of almost $0.5 billion on average.

And then it's further exacerbated a little bit by the securities portfolio, but that's sort of taken into account and in our guidance range.

Candidly if we -- cash happened to grow and loans happened to shrink because the risk reward trade-off is not appropriate in our opinion, and that NIM shrank into the low 3s, 3.05% or 6% or 7% or 8% or whatever, that wouldn't bother us as long as we're continuing to grow the net interest earnings at the bank in a prudent fashion.

So to me, the overall net interest earnings is a more important measure than the actual NIM, although the NIM certainly factors into that, which brings me kind of to the general discussion of the deposit beta, which, again, I get a lot of questions about.

Our -- we're currently at a spread with an excess of 110 basis points, which is historically, very, very high on client cash balances.

We are starting to see some deposit competition.

You're starting probably to see the same story as we are about people getting more aggressive to compete for deposits.

Some -- hard for me to predict where this is going.

If there's increased competition, we could see a little spread compression.

If they raise rates faster than people can raise rates to clients or faster people want to raise rates to clients, we could actually see it widen, but it's really hard to say right now.

My best guess -- and I again not had a good track record on this, but my best guess is there will be some compression in that spread through deposit competition over the course of the year.

We haven't seen it manifest itself yet.

But it seems very likely that, that may happen over the course of the year some time.

So all-in-all, I read the comments last night and I kind of was a little surprised at almost a negative tone to it, when in fact I look at the core operating results of our 4 primary segments and they all have good fundamentals working for them right now.

And there's a lot more favor.

The one exception would probably be it's still not that good of an environment for the Fixed Income division within capital markets.

But all of our other major businesses are doing very well.

So we have -- I wouldn't say this quarter is going to be easily replicated, but -- because M&A had a really, really strong quarter.

But a lot of the factors are in place, at least, for the very short term.

And with that, I'll turn it back over to Paul to give you a little more detail on the outlook.

And I agree with Jeff.

It's -- I thought it was an exceptionally good fourth quarter, and I'm sticking to story because I would just look at how the operations and the growth and the fundamentals that I think it was very, very good.

So I know people have high expectations of us.

We have high expectations also.

That's okay.

There are several tailwinds as we enter 2018.

If you look at the Private Client Group, our adviser headcount and recruiting pipeline continue to grow.

I think we have about $80 million in commits already for this next year.

Most of those will show up and we're continuing to recruit.

So in terms of the fundamentals and what's really been driving our Private Client Group business is retaining our great advisers and bringing more in.

Our start of fee-based accounts billings will be up 6% starting this quarter versus last quarter.

So again a positive.

We'll have some decrease in adviser payout.

We had told you before we had cut our grids a 100 basis point, but some of that was eaten up in 2 ways.

One is the progressive grid in our employee division.

And the markets keep going up, it eats into that 100 basis points.

So it's a smaller number.

And in the independent division, some of that grid change was phased in.

We had to make a product neutral grid to comply with DOL.

So we make it half of that or less this year, depending if markets continue to climb.

So we'll get some, but we certainly won't get all the pickup and it's not all bad news because it's a higher market.

The capital markets area is a little tougher.

ECMs coming off a record kind of M&A and has good backlog, but we're setting a high bar for 2018.

Continue to be optimistic.

And the M&A business looks good.

But I can remember calls where everyone was asking when M&A was going to come back.

So it doesn't last forever.

But that part looks good.

On the tailwinds -- on the headwinds section is certainly Tax Credit Funds.

That's the largest syndicator of tax credits.

This tax uncertainty is just affecting the market, where buyers and sellers are having a hard time pricing and there is a gap.

So until and unless tax law is changed, I assume when we've certainty that business will pick up until -- and if we won't get certainty, I think it's going to be sluggish.

Institutional equity and fixed income commissions will remain challenged.

I think structurally on the equity side, we have low volatility.

We're going to have some impact from MiFID II.

Ironically, here we are months away from implementation and we've very little guidance.

As I've said, I don't expect it to be a positive, a negative, but it isn't a big part of our business either.

Fixed income on the commissions and trading profits have held up relatively well compared to all of our competitors.

But with a flat yield curve and low volatility, they will remain depressed.

And John Carson, who had -- oversees with whole fixed income public finance area once told me the worst thing that can happen to the firm is that we have great fixed income years because that means the equity markets aren't performing.

So there is some of an offset.

They've done a good job in a tough market.

That certainly is a headwind in that business.

Asset Management.

AUM is starting 6% higher.

So again good start.

Scout and Reams, we expect to close sometime this quarter, which will certainly help.

But it will be slightly accretive.

But you have to remember because of the fixed income nature of that business, it does have lower margins than the rest of our business.

So we'll have some margin impact, but it should be slightly accretive overall, plus we'll have related intangibles that will start probably at least next quarter.

On the bank.

We've had very good growth.

Recently, we've been cautious on the C&I loan growth, just pricing and risk haven't made sense to us.

But I remind people, this quarter it was off.

But that's the business that turns on and off.

So we shut it down when we don't like the risk-price metrics.

And when it's good and there are good credits, we'll make loans.

I think that the Private Client Group related loans will continue to grow.

We had a good quarter and they look in good shapes.

We continue to plan to expand, as we've announced in the past, our agency-backed securities because it's an attractive risk-adjusted rate of return that increases liquidity and stable funding ratio, which is important to our rating agencies.

It'll generate more net income, but it'll compress NIM because they're lower rate securities, but they're additive interest rates, they aren't subtracting.

So I know there's some confusion over that.

I think all of you are pushing us to add to the securities portfolio, leverage the bank a little bit.

Now that we do, I think we've got to separate the loan NIM from the NIM that would be additional interest we generate by putting cash and securities in the bank.

So the first quarter is showing tailwinds.

And as Jeff says, we'll also have a tax benefit from the equities.

So first quarter of 2018, if things hold up, should look pretty good.

But the real question is, the rest of 2018.

And the big question mark is the stock market.

What's it going to do?

Some people say it's overvalued and it's going to come in.

Other people say, it's got ways to run.

We can't make that call from here.

Jeff talked about deposit betas that came in 20 bps, that's $80 million pretax to us.

If we get another rate expansion and the pressures so far on rates has been on the high end and not on the low end, maybe it will hold up for a while, but eventually I do think that has to come in.

So as we get in later -- as we get into the next calendar year, it's a little harder, just because of the markets, to really give you a lot of insight.

We have increased spend in technology.

And really it's just essential to our business that not only will it create efficiencies over time, but the cornerstone of our business has really been helping advisers serve their clients.

And these technology tools, Connected Advisor, which is now in beta testing, that will electronically help the next-generation advisers and smaller accounts to more efficiently connect them and give them better connection are all extremely important to attract and retain our advisers.

And I believe that those types of technologies are table stakes.

So although we're making a bet, I think it's a good bet.

And the investment we've made over the last few years has certainly significantly helped our recruiting and retention.

And we're making the bet that we need to be a leader in those areas where we choose to compete to continue the momentum that we have.

I believe we're extremely well positioned.

It shows up in our recruiting pipeline.

We have good momentum.

We have great people.

And we're in an industry that, maybe, always has uncertain markets, but certainly with the equity highs that we're at and the deposit beta, that's really the question mark.

But our term -- our focus right now is in long-term to continue to invest so that our firm is better in the future.

So with that, I'm going to turn it back to Darla for questions.

Darla?

(Operator Instructions) We have question from Steven Chubak with Nomura.

So I wanted to start off with a question on the AFS book.

And that you guys had spent some time highlighting the opportunity there and the fact that it is accretive to NII regardless of the damping NIM effect.

So certainly appreciate that dynamic.

But we did see the pace of growth slow a bit this quarter, and I'm sorry if I missed this, I jumped on a little late in the prepared remarks.

So I'm just wondering if there is any change in terms of your strategy and long-term growth targets for the securities book.

I think you had talked about $6 billion in the past.

And I'm wondering, given the pace of capital build that we've seen, whether you'd be inclined to actually grow it beyond that target?

Steve, I think that's still our target.

It may take us a little longer to get there than we had originally forecast.

The reason that the pace of growth slowed down, if you remember we had a pretty good sized decline in cash balances from the end of March to the end of June, and we talked about that last quarter, about $2.5 billion decline in cash balances -- client cash balances.

And we've got -- so we had a hard time, or it would have been a little awkward with some of our bank relationships to shift that much dollars out of some of the other banks over to our own bank quickly.

So we chose to do it on a more thoughtful basis, and we slowed the growth of the securities portfolio intentionally in the quarter coupled with the fact that it became a higher and higher probability of yet another rate hike, which buying -- even though they're short-term in nature buying some of these fixed-rate securities in the face of rate hikes is something that you can be cautious about.

And basically the next rate hike now is all priced in.

So we've sort of resumed.

We've also, as you can see on the cash balances by the end of the quarter, we had sort of fixed that.

So the second half of the quarter, we had a significant amount of cash balances on the bank's balance sheet, but it started out the quarter very slow.

But we're also being -- we have very -- pretty tight parameters on what we'll buy.

[That] we had a ALCO meeting yesterday.

There's a fairly narrow band of the securities that really fill all of our parameters in terms of extension risk and yield and being in the agency-backed world.

So we aren't taking any credit risk and the effective duration and things like that.

So it kind of fits and starts a little bit on that.

It's not going to be like we could invest a fixed dollar amount every week or something like that.

But the reason that it was slow was really because of, at the beginning of the quarterly the cash balances were -- had not recovered until later in the quarter.

So there's been no change in the strategy.

It's just a little -- it just got a little delayed this quarter.

We're still on course, Steven.

Got it.

And as you think, about the risk-reward potential from sweeping more into the bank, there has been some speculation that with the Fed balance sheet unwind, you could in fact see term premium rise.

If you do, in fact, see some steepening of the curve, I know it will benefit your fixed trading businesses certainly.

But as we start to think about how you're going to deploy some of that excess cash, could we see you guys exceed that $6 billion target in an effort to drive some higher returns?

I think for now right now that's our goal.

We'll reexamine when we get closer, but these securities turn over too.

So as rates rise, they'll turn.

We got $400 million a year in runoff right now.

They amortize then about 25% a year.

So it's a pretty quick turnover.

I actually think the steepening yield curve may actually help banks loan spreads as well, but that remains to be seen.

Right.

And just one last question for me on, how we should be thinking about the pretax margin outlook for 2018?

You guys certainly gave some very helpful color thinking about some of the comp dynamics, some incremental noncomps as it relates to communications expense.

But just given some of the tailwinds exiting the year, both in terms of asset growth that we've seen as well as growth at the bank, what's your reasonable expectation for margin expansion, if we continue to have relatively healthy markets and maybe even some help from the Fed in the form of rate hikes?

Again, it's not just the rate hikes.

It's really the spreads that make a difference to us.

I mean, if we could repeat of 17%-plus margin for next year, I think, on an expanded revenue base, we'd be pretty content with that, in light of the expense growth that we've talked about that we have planned.

Your next question is from Chris Harris from Wells Fargo.

I wanted to ask you about the outlook for the comp ratio.

If we think about 2018, you got a couple of things going on.

You've got a full year benefit of the rate hikes that have happened.

There is the PCG payout grid change that we've -- that you talked about.

You have got Scout and Reams coming on.

And so all those things, I think, are tailwinds to the comp ratio.

So I guess, what am I missing as to why it shouldn't be much better than the 66.5% that we're talking about this morning.

So there is an awful lot of this is mix.

So right now if you look at our fastest-growing of the PCG segments, it's been the Independent segment, which has a much higher payout.

So if that continues -- I mean, and they both are doing well and then come and go, but that's going to skew payouts up.

If this quarter we're helped by a really big M&A volume, which is lower than our average payout, so that brought them down.

There's so much delta mix -- in the mix that it's really hard to come out with any other number.

And we do have increasing costs.

With compliance and other things, we continue to grow overhead and...

And we also get a full year of all the compliance AML, risk management people that we brought upward for this year, and we're going to continue to add to that in terms of compliance or supervision staff.

So...

So in a really constructive market, could we do better?

Absolutely.

But we're not planning on -- I didn't plan on 25% increase in market this year.

We're not planning on it next year.

But if it happens, we'll certainly get the benefit out of it.

(Operator Instructions) Your next question is from Devin Ryan, JMP Securities.

Maybe just one on the outlook for some of the fixed income businesses.

There are a lot of moving parts there between what's going on with municipalities and taxes relative to the yield curve.

And we saw a marginal uptick in kind of the yield curve kind of towards the end of the quarter.

So I'm just curious as you put it all together, actually feels like we kind of have a low bar here for the fixed income, trading, underwriting tax credits kind of all in aggregate heading into fiscal '18?

So that's correct.

I think the question is certainly yesterday's rates caused some trading increases.

But how long do they last?

I think the curve is still flat as they rise short-term rates will the 10-year follow?

I mean there's just a lot of questions.

We -- I think that business has done really well with double-digit margins in a really tough environment.

It's down less than its competitors.

It's a great agency business.

A big segment of the fixed income business is also at other financial institutions.

And so certainly that has its own dynamics.

So their own securities buying.

So I don't see enough movement in the market to say that's going to really bounce back.

On the other hand, when they're down, equities usually stay constructive.

So if you had a really volatile fixed income market, I'm not sure the equity markets wouldn't be in, and give it back so for us.

So that's a challenge definitely.

Got it.

Okay.

That's helpful.

And then just a follow-up here around the outlook for some of the fees from product manufacturers and sponsorship revenues, et cetera.

Some firms are removing manufacturers that are not willing to pay for distribution.

And I'm just curious, you know there's, obviously, a lot of moving parts in here with DOL and I think renegotiations there, but also I think also not wanting to have people on the platform with a free launch.

And so I'm just curious kind of where you guys are in that -- your conversation with your third-party manufacturers and kind of what the outlook is more broadly, and if you see maybe some firms being removed because of that dynamic?

So for mutual fund partners we've taken 2 steps.

The first step is to make sure we're DOL compliant.

So we've renegotiated across the platform to make sure that we are compliant with DOL.

And I think we'll do that pretty much on a revenue-neutral basis as we close in on the end of the year.

And what we've told them in step 2 that we would strategically look next year at what we're doing with the overall platform.

I know some firms jumped right into it.

We felt it wasn't fair to our partners and it really didn't gave us adequate time for our advisers to do their planning.

So we're finishing up the negotiations of the contracts to make sure we're compliant by year-end during the transition period.

Even if it's delayed, we'll be in good shape and -- which we expect the DOL to be delayed.

But we'll still be in compliance.

And then step 2 is, we'll be looking at the overall, who is paying, what's fair, what's fair to clients, and how we price it?

That's going to be something we're looking at next year and the focus of our executive committee and board offsite actually.

So...

Got it, okay.

Maybe just a last quick one here, Apologies if this has been addressed, but a similar conversation around the tax cap on 401(k) contributions, and hopefully that doesn't happen.

But not sure how we should think about the considerations for Raymond James if that were to happen.

I don't believe you're an administrator.

But if we can think about what the implication of that could be just on the business?

Yes.

So my philosophical answer is that it's not good policy that we need more savings.

And even if they mean tests or whatever, I think eliminating the 401(k) deduction is not good policy.

From a firm standpoint, it's not a big part of our business.

So...

For an adviser much more than administrator.

So it doesn't have the impact as it does over the big firms that really do an awful lot of that.

(Operator Instructions)

Well, great.

If there's no other questions, I know it's a busy day for all of you.

We appreciate you jumping in on this call.

We had a big crowd, and I know there's lot of other call and releases that you're working on.

So thanks for joining us again, and we look forward to talking to you soon.

This concludes today's conference call.

You may now disconnect.