雷蒙詹姆斯金融 (RJF) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Earnings Call for Raymond James Financial's Fiscal Fourth Quarter of 2018.

My name is Phyllis, 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 turn it over to Paul Shoukry, Treasurer and Head of Investor Relations at Raymond James Financial.

Thank you, Phyllis.

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

We appreciate your time and interest in Raymond James Financial.

After I read the following disclosure, I'll turn the call over to Paul Reilly, our Chairman and Chief Executive Officer; and Jeff Julien, our Chief Financial Officer.

Following the 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 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 will not differ materially from those expressed in those statements.

We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q which are 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 of ongoing business performance.

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

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

Paul?

Thanks, Paul, and good morning, everyone.

So we certainly have had an interesting week in the market, especially for financials.

And I know a lot of you will have some questions kind of on our quarter.

So I'd like to start first with kind of just a perspective on the quarter and the year.

The bottom line, we had a good quarter.

We had record revenue and record profits.

And on the back of a very good year, again, with record revenue and record profits.

But most importantly, we ended with record level of client assets under administration, record financial assets under administration, record level of bank loans, record number of FAs.

And these are the metrics that really drive our business going forward.

I believe we're in good shape heading into 2019 fiscal year.

However, the equity market volatility and direction certainly raises some questions, and certainly we'll talk about cash balances and deposit betas throughout the industry, have some question.

First, let me reflect on the quarter and the year, and then I'm going to turn it over to Jeff Julien, who is going to go over some detail and line items and will discuss maybe some run rates from some of those line items.

First for the quarter, we had record net revenues of $1.9 billion, up 12% year-over-year and 3% over the preceding quarter.

We had record net income of $262.7 million, or $1.76 per fully diluted share, and adjusted net income of $250.8 million, or $1.68 per diluted share, up 14% year-over-year and 8% over the preceding quarter.

The variants to the consensus models were somewhat entirely driven by 2 lines: our valuation write-downs, which I'll let Jeff talk about; and really our other expenses.

Really the biggest line variance was legal and regulatory.

And that is always one that's hard for us to estimate throughout the year.

We always have various cases and we have to evaluate them as we get more information.

And we try to reserve on what we believe is the right levels as we get more information.

We often adjust those reserves.

So we believe the run rate is lower than what we've experienced in the last 2 quarters.

But it's an inherently unpredictable and episodic type of line.

So it makes it very hard for us to predict or give you guidance on a quarterly basis.

Turning to the fiscal year, our revenue -- our net revenue of 720 -- sorry, 700 -- $7.27 billion, up 14% over last year.

And our net income of $856.7 million, up 35% over last year.

And if you look at our adjusted net $964.8 million, it's up 26%.

Now lower tax rate certainly helped almost everyone over the last year in all industries, but if you take a look, even our pretax income of $1.3 billion was up 42% over last year and our adjusted pretax was up 17% over last year.

So good solid even nonadjusted tax earnings for the firm.

If you look at our ROE of 14.4% and our adjusted ROE of 16% for the year, we had very good, I think, ROEs considering our strong capital position.

And again, we measure our ROEs on total capital, not on tangible.

Most importantly, as I said before, we ended the fiscal year with record quarterly client assets under administration of $790.4 billion, up 14% year-over-year and 5% sequentially.

Record quarterly financial assets under management of $140.9 billion, up 46% year-over-year which was aided by the Scout and Reams acquisition, but up 4% sequentially.

Record quarterly financial advisers of 7,813 up over 6% year-over-year and over 4.5% really just from organic recruiting, a fantastic record recruiting year, which I'll talk a little bit more later.

And net loans of $19.5 billion, with strong credit metrics.

And so overall, all of our future growth drivers are in good shape.

I'm going to spend a second on the 4 segments before I turn it over to Jeff.

Private Client Group record revenue for the year and the quarter, up 15% over 2017.

Record pretax year, but down quarterly due to other expenses that we'll get into a little bit with Jeff.

We had record recruiting.

And by our count, over 300 million in trailing 12.

And just to put that in perspective, that's a little bigger than the Alex Brown acquisition and that was just through recruiting.

And on top of that, with the regrettable attrition still staying under our 1% target.

So really fantastic kind of organic growth in Private Client Group.

Fee-based accounts, up 24% year-over-year and 7% sequentially.

In the Capital Markets business, we had record Investment Banking revenue of $155 million for the quarter or $441 million for the year.

It was really driven by record M&A for the quarter and the year and great performances particularly by our tech services, health care and real estate, where we had our largest fee, plus really our Mummert acquisition has really increased our cross-border activity.

Tax Credit Funds really surged.

They had 60% of their production really in this quarter for the year, and that's because we had really a delay.

If you remember with the Tax Act changes, people were slow to kind of tax adjust the value of credits.

And as that worked its way through, we've really caught back up and we think we'll see kind of a similar run rate not for the quarter, but over the year, next year.

But it was a little bit of a catch-up quarter for them.

Equity underwriting remains challenged given our historical strength in real estate and energy, which has had headwinds.

It was a challenging year for us there.

Public Finance was almost flat, which is a big plus given the advanced refundings, almost 30% of the Public Finance business kind of went away with the Tax Act.

Fixed Income still remains very, very challenging both with low rates and a flat yield curve.

But I'm very proud of our team.

They've done a great job of managing costs and inventories, given a very, very difficult environment.

Asset Management, record quarterly and yearly net revenues and pretax.

We had record quarterly financial assets under management.

It was up 46%, aided again by the Scout and Reams $27 billion during the year, but even sequentially another 4% gain.

Raymond James Bank, record net revenue and pretax for the quarter and the year, record net loans, as I talked about earlier, up 15% year-over-year and 3% even sequentially.

So NIM improved during the year, a little -- slightly in last quarter, I'll let Jeff get into that.

There's a lot of moving parts.

But very good credit quality, as criticized loans were down 12% for the year.

So overall, great metrics, strong year and quarter despite 2 items that Jeff will now go into some more details before I talk about -- a little bit more about outlook.

So Jeff?

Thank you, Paul.

Let me jump right in, I have a fairly long list today.

Starting with our largest revenue item.

There is some detailed breakdown between PCG and Capital Markets on Pages 9 and 10 of the release of securities commissions and fees.

You could see for Private Client Group, we had nice gains for the quarter year-over-year and sequentially.

The shift to fee-based accounts, which really peaked about a year ago in light of it at that time pending DOL rule has continued for the first part of this past year.

And so it's at a slower rate now, but there's still a bias toward fee-based assets.

And so basically, within that PCG line item, fee growth overcame what we've seen for the last several quarters in the way of a transaction decline or decline in transactional-based revenues.

So the fee growth has continued.

By way of kind of looking forward, you can see that fee-based assets in Private Client Group accounts were up 7% sequentially June to September, which gives us kind of a good start billing-wise for the December quarter as those are all built quarterly in advance.

And on those same pages within Capital Markets, you can see the continued weakness.

The year-to-date comparison on Page 10 really shows it best as both the Equity and Fixed Income declined year-over-year on the commission side.

Paul mentioned the Investment Banking line which came in ahead of expectations driven by record M&A fees both for the quarter and year-to-date.

There's certainly the fourth quarter surge in Tax Credit Funds fees was a contributor as well.

But again, if you look at the year-over-year detail on Page 10, you can see underwriting revenues down 27% for the year, which certainly presents an opportunity for us going forward.

Investment advisory fee, although a very large number, it's pretty highly predictable and very correlated obviously to assets under management.

And that was pretty much right in line with expectations of everyone.

So not a lot to say about that line item itself.

I do have quite a few things to say about interest however, and there are several interrelated factors.

Let me first start with sweep balances, which are shown on Page 12 of the release.

You can see they're down about $2 billion for the year as clients have been seeking higher-yielding alternatives.

And this is not unique to us.

This is industry-wide, but that certainly has implications for our net interest earnings as well as account and service fees as I'll talk about in a second, as well as longer-term considerations, we use that generally as the financing vehicle for our Bank's growth.

With respect to geography, 47% of the sweep balances are now going to Raymond James Bank, which is on balance sheet.

We're actually comfortable going somewhat higher in terms of percentage to the Bank.

It's for purposes of growing the liquid securities portfolio.

And by comparison, many of our peers are substantially higher in terms of the percentage of their cash balances being swept to their proprietary banks.

And that obviously at the Bank level, generates interest income.

Those balances swept outside banks, which are off-balance sheet, actually generates fee income for the company, and that's included in the account and service fee line.

On Page 12, you can see the shift as we continue to grow Raymond James Bank throughout the year, the decline in cash balances I mentioned earlier, really was fully absorbed by the third-party banks, which actually lowered over the course of the year, lowered our fee income in that account and service fee line.

The third aspect of interest earnings has to do with rate spreads, and our friend, the deposit beta.

With respect to third-party banks, we had an interesting dynamic this most recent quarter, which actually was picked up in a couple of your reports, in that the -- we had about 30% of our earnings side within the outside bank sweeps tied to LIBOR.

The rest tied to the fed funds effective rate.

Interestingly, those 2 have not moved directly in sync.

The spread between LIBOR and fed funds effective rate actually narrowed in July on the June rate increase and stayed more narrow during the September quarter than it had been previously.

Conversely, we benefited from an extraordinarily wide spread between the 2 in the December and March quarters.

So as a result, that fee from outside banks not only was impacted by lower balances, but it was also impacted by those that are tied to LIBOR relative to our deposit rate were being paid, the narrowing of that caused another compression to some extent in that.

And that caused what I would say those are the primary reasons that there was -- we missed your expectations on the account and service fee line between the balances and the compression of that spread between LIBOR and fed funds effective.

With respect to the NIM at the Bank, that's also impacted by that same LIBOR fed funds dynamic.

Again, their deposits are -- and our Bank sweep program are based, generally, we set those rates pretty statically throughout the quarter across all of our deposit products, CIP and the Bank sweep, sweep internally and those that are growing externally.

But they -- a lot of their assets, particularly their C&I loan portfolio is pegged to LIBOR.

And when that tightens relative to fed funds, you're going to see the same dynamic.

And that really was the reason that the Bank net interest margin compressed a few basis points during the quarter.

And you can really see that very clearly on Page 13, where we have the interest rate analysis for the Bank.

You can see that the C&I loan portfolio, the yield on those assets went up only 4 basis points, whereas the cost of funds went up significantly more than that versus the preceding quarter.

And that's just a result of that dynamic that I just mentioned.

Let me talk about the deposit beta.

For the last 2 federated hikes, we've averaged about 50% deposit beta.

Going forward, we actually continue to believe that at some point, there will be some compression in spreads likely when the fed is through with this cycle of raises.

So at some point, we believe the deposit beta will be greater than a 100.

I don't know when that will occur.

I think I mentioned in Analyst Investor Day, and I think I'm still of the opinion that as long as the fed is continuing their quarterly rate hikes, then we have at least an opportunity to maintain something close to our existing spreads.

But when -- again, when that music stops, my guess is, there will still be competition for those deposits, and at that point, I think we might start seeing compression.

So it's just a matter, in my opinion of when that happens, whether it's in fiscal '19, '20 or possibly never.

So other revenues, as Paul pointed out, that was one of the 2 line items that caused really the entire miss for the quarter.

It was obviously negatively impacted by this private equity valuation write-down, really related to 3 separate investments.

There wasn't a one investment only involved.

It was partially offset by noncontrolling interests and several smaller items which were all negative for the quarter.

But it wasn't just the $11.9 million net write-down.

I mean, we become accustomed, unfortunately, maybe even complacent that we've been realizing numbers between typically a few million and up to $10 million -- and $10 million or $12 million per quarter profits from all these private equity investments.

So it's really the swing from going from about $5 million or $10 million gain in the quarter to a $12 million loss, which really was the difference in that line item versus expectations.

So it's $15 million to $20 million cling.

On the expense side, compensation -- comp ratio came in very nicely for the quarter at 65.2% and came in at 65.9% for the year.

We're actually going to stay with our target of 66.5% or less.

For now, we have some aggressive hiring plans in certain support areas as we continue to grow the sales force.

PCG comp has moved up slightly due to grid creep as people have become more productive.

And we're hiring FAs at higher and higher levels of production.

And certainly, with the successful hiring, we have more amortization of front money deals, and those are good expenses because they relate to growth, so.

But it will cause some pressure on the comp ratio, so we're going to stick with our previous target for now.

The communication and info processing line, we ended the year to slightly above our guidance.

We came in at $91.5 million for the quarter.

We thought it would be 90-ish, but in total dollars, it was up 18% over 2017.

We do not see a similar rate of increase for next year.

We think it'll probably be more in the 10% range.

For next year, we have a number of things underway, of course, involving FA desktop, on-boarding systems, enterprise financial reporting systems, data security, regulatory tools, et cetera, et cetera, a lot of which are in progress and not going to stop.

So when we sorted it all out and looked at what's going to come online and begin amortizing and things like that for next year, right now, our best estimate is that, that line will be up about 10% as I mentioned, which takes us from this $91 million level to about $100 million a quarter for next year.

But again, that's subject to what the market's doing and our overall results are doing.

Some of that's controllable, a lot of it is not.

In the business development line, I'm happy to say it came right in line with our previous quarter's revised guidance, where I said it will be between $45 million and $50 million a quarter trending towards the higher end in the June and September quarters when we got the majority of our conferences and trips, and lower in the other quarters, it came in at $48 million-ish I think, $47 million for the quarter, right in the middle of that range which was a good result.

So I think, that we're going to stick with that guidance for next year.

December will probably be the lowest of the year, and June and September will still be the 2 that are the highest.

And March is somewhere in the middle because it's got some -- March and December should be on the low end and June and September should be on the high end, kind of similar to this year.

The bank loan loss provision was somewhat consistent with expectations.

Looked a little high when you look at the net loan growth with our 1% allowance, and particularly in light of the improved credit metrics which are shown on Page 12 of the release.

But the fact is, during the quarter, we had a couple of what I'll call special reserves, particularly, I'll mention one related to the hurricane-affected areas in the Carolinas from Florence.

And this coming quarter, we'll evaluate whether we need to do something similar for Michael for whatever loans we have outstanding in the Panhandle.

But beyond that, there were not a lot of surprises in the loan loss provision.

And then in other expenses, Paul touched on this line to some extent.

We thought that the preceding quarter's regal and regulatory reserves were elevated well.

We managed to surpass that a little bit this quarter.

There are other things in there obviously, besides legal and regulatory reserves, but that's the dominant factor, but there are consulting fees and some of the recurring expenses that just continue to go up as we grow.

But for next year, when we look at what our expectations might be, excluding any outsize legal reserves, which are of course an unknown, we would expect this line to average in the high 70s to $80 million, up from what was our previous run rate of $72 million a quarter for last year, ended up being a lot higher than that with these last 2 quarters.

So another one that's up about 10% or so from a year ago in terms of run rate.

I'd like to touch on the tax rate for a moment.

The adjusted tax rate for Q4 was a little bit high at 28.8%.

But for the year, because of some adjustments we made still trying to perfect or refine our estimates relative to the Tax Act.

But the adjusted rate of 26.7% for the year was actually slightly below our 27% to 28% guidance number.

For 2019, bear in mind, given our September fiscal year end, we had a blended tax rate for federal purposes of 24.5% last year.

That drops to 21% for fiscal '19.

So we'll get the full benefit of that lower federal statutory rate, plus we're -- so we're basically projecting a combined state and federal rate of somewhere between 24% to 25% for next year.

That's without taking into account whatever might happen with COLI.

And I'll just remind everybody, while the federal rate was lower to 21%, it's not really the effective rate because several items have now become nondeductible, including a lot of entertainment expenses, a good portion of our FDIC premiums, some executive comp, et cetera, et cetera, things that were deductible that are no longer.

So the 21% really isn't 21%, but it's certainly going to be lower than it was this year.

So versus our targets that we set forth last year, I'm kind of pleased to say they were all met except for the Private Client Group margin.

And we've talked about some of the things that impacted that.

That's obviously, where the legal and regulatory accruals are hitting.

Interestingly, the shift of client cash sweeps to Raymond James Bank actually is a cost, if you want to call it that, the Private Client Group because they earned the entire account and service free from outside banks.

But when we shifted it to the bank, they get reimbursed just for the administrative costs of maintaining the sweep accounts, et cetera, so it actually ended up with lower revenue.

So that shift from outside banks to Raymond James Bank actually, but was a negative to the Private Client Group segment, not to the company as a whole.

For 2019, I want to just mention, we have kind of recomputed the appropriate charge from the Bank to Private Client Group.

We're generating and maintaining all these sweep balances and accounts and the recomputation's going to result in about a $60 million additional payment from the Bank to the Private Client Group next year, which will -- no consolidated impact on the company at all, but that will impact the segments for those of you who model on a segment basis.

And lastly, as I mentioned before, there has been some comp increase in PCG from the grid creep and the rate amortization of notes.

So bottom line, we're going to maintain our targets this time, but that's based on current deposit beta and our current spread kind of being maintained throughout the fiscal '19.

And probably more at risk, a flattish equity market, because obviously, the quarterly billings and all are a big part of Private Client Group revenue stream.

A couple of other points.

One, share repurchases, we've mentioned that we've regained repurchasing shares during the September quarter.

We ended up purchasing just over 400,000 shares as we begin to offset dilution.

We've talked about this in the past, and now we hope to continue that throughout the year and to get closer to offsetting dilution for the entire year.

Lastly, the revenue recognition standard, we're about the last adopter, I guess, given our fiscal year.

This standard will actually not have a real big impact on revenues and expenses.

It'll have no impact at all to the segments at the bottom line.

But what will change is the look in line items within our P&L.

So with some time in late November, we'll be providing an 8-K, we're filing an 8-K which will provide 8 quarters of our results -- trailing 8 quarters in a new format.

And obviously, we'll make ourselves available to discuss what's -- what the composition of each of those new line items is, et cetera, with any of you who have questions on that.

So there will be a little bit of a new look and feel, but shouldn't be a lot of change to the overall results.

Paul?

Thanks, Jeff.

So we have a lot going on, and I'm sure questions, so I'll try to sum up fairly quickly.

As we look for the quarter at the segments, the Private Client Group.

First, we're starting up with fee-based assets up 7%.

In that business, we do bill quarterly in advance, so we should have some tailwinds in that segment from that.

But of course, we'll see what happens with client cash in this market, which will have some effect on interest and Jeff talked about the change to the Bank.

But maybe more importantly is the recruiting pipeline still remains robust.

We're coming off a record year.

It took us from '09 and maybe in the down year to our best year to beat our recruiting record.

But certainly, the backlog looks very, very good.

And expect recruiting to still continue at a robust pace.

In Capital Markets, we're optimistic about the M&A backlog.

Again, a little bit of that's market-dependent.

So hopefully, this week was a little bit of an anomaly.

And underwriting, coming off maybe a little base, looks like it's improving.

So we're hopeful that we get a little bit lift off that bottom.

Fixed Income is still really tough.

I mean, with the flat yield curve and these rates, even with the volatility we've experienced lately, it's still just a tough market where people are watching and waiting.

So we expect that still to be a tough part of that segment.

And weakness in institutional commissions and trading profits with this curve, we expect to continue in the segment.

Asset Management, we are coming off a great year.

We believe we'll still have continued inflows, especially as we recruit financial advisers and they continue to join.

Now one of the tailwinds maybe there is that business is built on average balances or quarter end balances, so the market could have -- take a toll on that, depending what it does here going forward.

The Raymond James Bank, we had record loans and an attractive NIM.

Short-term increases in September should help, but again, the LIBOR movement Jeff talked about this really going to be the biggest impact on spreads there.

But we're looking at still remaining very disciplined in our underwriting and keeping the position.

So we'll just see what happens in that market as we go forward.

But again, feel good about that.

So net-net, I believe we're well-positioned coming off the year and into the quarter.

The business is in good shape.

But we're cognizant owing to a 10-year bull market, and markets could correct for a period of time, certainly, it affects our business.

And cash dynamics are certainly interesting.

A lot of times when you have these corrections, cash comes up.

We'll see what happens.

But it's been -- we're seeing pressure on interest rates throughout the financial system.

So again, the cash and interest beta will certainly impact results.

We are in a conservative capital position.

So we always ask ourselves, what happens?

Are we ready for bad markets?

I believe we're in good shape to be opportunistic, if it's a tough market and good financial position.

So with that, I'll thank you for joining the call, and I'll turn it over to Phyllis.

And we'll get to your questions.

Phyllis?

(Operator Instructions) Your first question comes from the line of Steven Chubak with Wolfe Research.

So Jeff, I just want -- I'm starting off with a question on the account and service fee line.

Though you guys provided some really helpful detail there, and it looks like the revenues are down about 8% sequentially.

The balances on third-party sweep down a commensurate amount.

I know you had talked about LIBOR driving some more muted expansion in that third-party sweep yield.

I'm just wondering as we look ahead, if fed funds and LIBOR move in tandem and beta is stable below 100%, would it be reasonable to expect some additional expansion in that yield at least in the near to intermediate term?

Yes.

Certainly, it's possible.

You got to bear in mind that account and service fee that we show there is net.

That's net of what's paid to clients, it's net of the servicing fee we pay to the company that promontory that does the action.

So it's also certainly impacted by the deposit beta, but is it reasonable to expect that?

Yes, certainly it's possible.

I don't know how to handicap it.

Long term, they kind of move in tandem, but short term, the spreads come in and out.

So...

And it's okay, and that's only 30% of those balances; the 70% are tied to the fed funds effectively, which is more correlated with how we set deposit rates.

Understood.

And I'm sorry guys I can't help myself, but I have to ask the question on share buyback and capital deployment.

So if you look at the last time you had done some meaningful share repurchase, it was fiscal 2Q '16.

Shares were trading a little bit above 12x.

Now you're trading at meaningful discount to those levels.

Nice to see some share buyback in the quarter, although realistically, your capital ratios continue to drift higher and didn't make much of a dent in the share count.

And just given all the positives that you highlighted in terms of what you're seeing in your business, recruitment, organic growth, how you're thinking about the stock at these levels?

Maybe what's the rationale for not pursuing more aggressive buyback here?

Well, we think our stock yesterday was lower than it was a couple of weeks ago, so.

But the...

How much better at this point?

Yes.

Our capital plan hasn't changed.

We kind of told you we were on to a share dilution repurchase program which we're committed to.

We haven't changed that strategy unless the board decides differently.

But I assume we're going to continue on that.

And we're looking for still opportunistic deployments of capital.

We've been active in looking for those opportunities, but we're pretty disciplined on that.

So one good side of a down market it may create, more of those opportunities, the market recovers, that's fine.

We're going to stay disciplined.

And so I think you're going to see us target to repurchase, do enough repurchases to take dilution and be opportunistic if we think that the stock drops at really attractive prices.

So that we haven't changed that plan that we announced last year, so.

Yes.

I mean, the buying back dilution, of course, to something around I'll say just under 2 million shares a year, so 1.8 million to 2 million shares a year.

So if that gives you some kind of guidance, I don't know if it will ratable for quarter, obviously as the stock gets less expensive, probably you'd see it accelerating and vice versa.

Got it.

And maybe just as we think about capital management, Paul, you made some remarks about how the markets come in, you might see some potential properties or assets trading at more attractive valuations.

What's your appetite for M&A at the moment?

And where do you see the most attractive opportunities for deployment here?

Our appetite for M&A hasn't changed, but it's -- we're still looking for opportunities in the Private Client Group, Asset Management and merger and acquisitions.

And when we find the right opportunities that are cultural fits, are strategic and a good price, we'll execute.

So it just tends that pricing sometimes gets more competitive in down markets and it gives us opportunity.

So we're not rooting for a terrible market.

So we have opportunities.

But if that happens, I think we're well-positioned.

So we've been active this year.

We just have to find the right opportunities.

So we're talking to firms that we think that add to our capacity and strategically and execution ability all the time.

So that hasn't changed.

So we just have to find the right trigger.

Not that we're rooting for a bad market, but 2 of the silver linings are that, that creates some good opportunities typically in the acquisition space.

But a second, it does, as Paul mentioned earlier, it typically raise clients allocations to cash, which would certainly be a welcome reprieve from the trend we've experienced.

Understood.

I mean, just one quick follow up for me.

Jeff, since you made that last remark on client cash dynamics, and since we've seen the correction here in October, and it's been at least sustained for a number of weeks, have you seen any changes in terms of client cash allocations?

Not yet, but it's just pretty early to see that.

Actually for the last several months, we've kind of seen a bouncing along at the same level.

So maybe we've kind of at the bottom anyway.

Really what's happening is as we continue to have successful recruiting results, new clients and cash balances coming in and somewhat been offsetting those that are moving to higher-yielding alternatives.

But if we're going to see a reallocation, we haven't seen it in a meaningful way yet, but it's still pretty early in this volatility cycle here.

It's only about a week in.

So we'll know a lot more in a few weeks.

Your next question comes from the line of Jim Mitchell with Buckingham Research.

Maybe just talk a little bit, I think you noted, Jeff, that you think you would be willing to kind of go grid to above your sort of self-imposed cap of 50% of client deposits on the balance sheet.

Is there a new limit?

How do we think about what that capacity is?

I mean, certainly, you have enough capital to do it.

So how do we think about what your internal kind of thought process is around to how big you could do that?

We kind of view the 50% limitation really as a constraint on what the bank deploys in the loans, which are less liquid if they're going to just turn around and invest in liquid short-term securities, high quality and not really any credit risk to them, yes, that they still are a source of liquidity if the bank needs it.

So we're sort of excluding those from the computation all together.

But you did trigger another thought in my mind, Jim, is that one of the guidance numbers we've typically talked about has to do with the Bank's NIM.

If you drift down a few basis points this quarter and back to the previous question regarding the LIBOR, fed fund spread is a little hard to predict.

But my guess is particularly if we continue to grow the securities portfolio ratably over time, that the Bank's NIM is going to be kind in this is 320 to 325-ish range, that's maybe is a bigger range and that maybe is 315 to 330 type of range given our loan mix and depending how fast the securities portfolio grows over time.

So that's kind of where we think that would be.

Sorry to deviate from your question.

And just remember, that we talked about the NIM coming in at the Bank, if we put it into securities.

But overall, we'll have higher earnings, that's why we're...

Higher earnings and higher ROE, just the lower NIM.

Right.

So you're not seeing much of an impact in this quarter from sort of the increase in LIBOR that we saw flattened out into 3Q, but it has sort of increased of late.

But it's sort of a mix issue is what you're saying on it...

Yes.

We haven't seen it yet, but bear in mind, all the loan repricings are typically either at 30-day anniversaries or 90-day anniversaries, depending on whether they picked the 1 or 3-month LIBOR as their base.

So a lot of those even didn't hit from last quarter's rate hike and we haven't hit until they repriced more recently, and a lot of them -- those continue to hit throughout the quarter, which is -- so you lag a little on the up on the way up, but you also lag a little on the way down, which actually would help you.

So those are anniversaries and those don't reprice overnight.

Okay.

Maybe just one other question on the FA recruiting.

You talked about, I guess, for the full year, the level of recruiting was trailing 12 months, about $300 million in production.

How much of that has been on-boarded already?

Is there still quite a bit of pipeline to go around the new FAs?

There is always kind of a year -- kind of something -- it's interesting, some people can bring it over right away, I mean, in the first 90 days, and some, but typically take a year-ish.

And so as you hire and you're lagging in so there's still some tailwinds behind that.

And in this year, we had a lot that were in last year's number, but still came on during the course of this year.

So we might be almost close to that if the recruiting stays at the same, okay?

It's just spread out a little bit.

Your next question comes from the line of Bill Katz with Citi.

On the potential yields coming off of the client assets, if you can maybe talk to some of the trends you're seeing between the managed fees portfolio versus the brokerage.

It looks like retail revenues overall were a little bit softer, where we were thinking about.

I'm just trying to understand if there's any sort of pricing pressure activity issues going on within the assets themselves?

I'm not quite totally sure -- Bill, with the question.

I think where we're seeing, we're cash movements in the money markets and other instruments.

We don't have a lot of the big banks have tiered programs where they go into their demand deposits to their super -- money market to their super money markets or their CDs to the -- and you can see the big banks certainly pricing going up in our deposit program.

So far you can see we're average about half of that deposit beta.

The cash we're losing, it looks, I mean, out of the sweep, really looks like it's going into money markets within our system.

So we're unless off of those, but that pressure continues.

But I'm not sure exactly what you're drilling on that...

Yes.

I think, maybe you're talking about the revenues, this is Paul Shoukry.

The revenue yield on fee-based accounts versus commission-based accounts in the Private Client Group.

I think for the fee-based accounts, that revenue yield has been pretty consistent over time as those accounts grow in size both with market appreciation and just larger clients.

You'd see that yield come down just based on the larger account sizes.

In the commission-based accounts, as Jeff mentioned in his opening remarks, they have been pretty subdued in terms of transactional commissions, but then you get the market appreciation.

So when you look at the revenue yield with subdue transactional commissions over higher asset levels, then the yield does go down on those, to your point.

The only caveat I would add to that is that when you get market volatility like we've had, typically that does increase transactional activity to some extent.

Again, it's too early for us to know that.

But if that stays -- remains the case throughout the quarter, we may see a slight pickup even in transactional activity, we'll have to wait-and-see.

But if fee-based continues to grow, so the percent of sales is less impacted than it used to be.

Sorry, my question wasn't clear.

Second question is, you've given I think some sort of view of how you sort of see the quarters playing out in terms of the business development.

But I didn't hear -- maybe I missed this, I'd like to apologize, did you give a growth rate that you expect to see relative to the seasonal pattern?

Well, that $45 million to $50 million a quarter range is up from where we used to have it in the low 40s.

So it's yet another expense that's up probably 10%-plus.

Just again, that has a lot of controllable expenses in it.

However, I will point out that if our fortunes reverse here, to some extent there are a lot of conferences, trips, things like that, that are in there advertising branding, things like that, that we can control, and that one is a more controllable line item.

But based on our current level of operations, we still think that, while averaging in that $40 million or $42 million range as it did last year, it's probably going to be between $45 million and $50 million for the year, and that is an increase from where it has been running.

I think that one of the dynamics that when people talked about our expense growth, when you recruit FAs, you don't get all the revenue day 1, but you have them on the branch, you hire their assistants, you hire the support, you need compliance oversight, we have a lot of expenses that we have to on board them, I mean we have a lot of expenses that really almost are a little ahead of the revenue flows.

So you're good to see -- as long as we're continuing to recruit, you're going to see those kind of expense growth continue too.

So that's what I call the cost of doing the business.

And until those -- the assets are over and the branches are filled and all of that, you really don't get any leverage off of that, so.

Your next question comes from the line of Devin Ryan with JMP Securities.

I guess, another expense question here.

I heard the comments on all the ranges that you gave.

And it sounds like all of that's based on the expectation of another new strong recruiting pipeline as well.

And so want to post a hypothetical here.

To the extent you had a quarter where you didn't recruit any financial advisers, which hopefully isn't near, can you maybe just give us any sense of how much lower expenses would be?

Or maybe said differently, when you have these big recruiting quarters like the last several, and again, I know there's a lot of kind of lumpy expenses and it's not always mechanical, but can you remind us kind of the big buckets that are impacted?

Just really trying to think about some of the incremental expense in the system here as the function of what is the really good situation on recruiting?

Devin, on the quarter, it's pretty hard to react since we're building infrastructure and costs up as part of the business plan in anticipating the recruiting.

So if the music stopped, you would -- some of the transition expenses and stuff would stop.

But we'd still have support, we'd still have all the things, recruiting, kind of like, we all call, semi-fixed costs in place.

Over time, we would adjust -- we adjust in terms of headcount.

We can adjust in terms of bonuses, payouts.

But over a quarter, if the music stopped, it wouldn't -- the expenses wouldn't really be any lower.

If you're asking on the first year or so, if you're talking about if recruiting should really slow down dramatically, you'd see probably lower less in the business development with fewer headhunter fees and ACAT fees and things like that.

And you would see -- eventually you would see less in confidence, we had less amortization of some of the signing deals.

But also you take a while for that thing to work through the stake to really have a meaningful impact on a lot of other line items.

Yes.

Understood.

No, I appreciate that.

And then just a follow-up here, just maybe a little historical perspective around financial adviser recruiting when we hit at the volatility that the last for, maybe we can call it, several months, when we have a little period of sustained volatility.

Does recruiting get impacted or what's kind of the psyche of advisers?

And then maybe a step further, in an economic downturn, does recruiting shift or would you expect it would shift as people take a pause?

There's 2 pieces.

Our best year until this year was in '09.

So you certainly tells your advisers you're willing to move, and in fact, we actually had to put a limit on recruiting back and then just what we could handle.

So certainly, I think advisers, during times of volatility, they're going to question, they are spending a lot of time with clients, so explaining what's going on.

So there may be an episodic slow down for a period of time, but I don't think it really changes much our recruiting spend, and over the last decade, it's continued to grow since the recovery.

So you could have episodic periods where people are going to slow down just because they're distracted or busy.

And we also, though, have a lot of people that are attracted to our value proposition versus where they are today, and I don't think that changes.

But certainly, it can be interrupted for a short period of time.

Yes, Devin.

It seems like it used to be more sensitive to economic environment than it is today.

Now I think it has -- it seems to have more to do with what's going on at the competition or where they're currently are than it used to.

Because typically, they didn't move that much in good times.

They didn't want to upset their revenue stream and risk not the clients not coming over, et cetera, et cetera.

But we've had good times for a lot of years and it hasn't slowed down the recruiting at all because it's had more to do with what's happening at the firm that they're at.

So it seems to be have more to do with them feeling like they're in the right place to do their business than it does with the particular environment at this point.

It could have an impact.

It's just too early to tell how sustained and what the expectations are.

But I don't think it has -- it really would be more of a pause during the changes -- so I think they're changing the trend at this time.

And then, I apologize if I missed this, but just quick on the tax credits business.

I know you kind of get back to the full year level just on the back of this last quarter.

And so I know that's a lumpy business.

But just for modeling purposes, how should we think about, maybe a starting point, is this kind of $50 million-ish kind of level you guys have been doing, still kind of a reasonable level or just any other help you can give us there would be appreciated.

Yes.

I think that's -- it probably won't be very different than the annual run rate this year.

I mean, it's really driven by bank's need for CRA credits and that hasn't gone away.

So we would think it wouldn't deviate significantly from the current annual run rate.

This last quarter was a catch-up from a lot of things that they had in progress.

So I wouldn't annualize the last quarter.

And at this time, there are no further questions.

Well, great.

Well, thanks, Phyllis.

We appreciate everyone joining the call, and we're anxiously watching the market -- we're not really anxious, but we're watching the markets like everyone else.

So looking forward to this interesting quarter, but believe we're in a strong position to execute no matter where the markets go.

So thanks for your time this morning.

Thank you.

That does conclude today's conference.

You may now disconnect.