雷蒙詹姆斯金融 (RJF) 2014 Q1 法說會逐字稿

Good morning.

My name is Jody and I will be your conference operator today.

At this time, I would like to welcome everyone to the Raymond James' Financial, quarterly analyst call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer session.

(Operator Instructions)

Certain statements made in the press release and comments made in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include information concerning future strategic objectives; business prospects; anticipated savings; financial results, including earnings, expenses, earnings, liquidity, cash flow and capital expenditures; industry or market condition; demand for and pricing of our products; acquisitions; investitures; and recruiting pipeline; fixed income business outlook; anticipated results of litigation and regulatory development or general economic conditions.

In addition, words such as believe, expect, anticipate, intends, plans, estimates, projects, forecast and future or conditional verbs such as will, may, could, should, and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions.

Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements.

We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our filings with the Securities and Exchange Commission from time to time.

Including our most recent annual report on form 10-K and subsequent forms 10-Q, which are available on RaymondJames.com and the SEC's website at www.SEC.gov.

Any forward-looking statement speaks only as of the date on which that statement is made.

We expressly disclaim any obligation to update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made.

The press release and comments made in this conference call may also include non-GAAP financial measures.

An indication of and a reconciliation to the corresponding GAAP measures, accompanies the press release, which is available under the Investor Relations page of our website at www.RaymondJames.com.

An audio replay of the conference call will be available until 5:00 PM Eastern Standard Time on July 15, 2014, under the Investor Relations page of our website at www.RaymondJames.com.

Thank you, I will now turn the conference over to Mr. Paul Reilly, Chief Executive Officer.

Thank you, Jody and good morning everyone.

Just to show you that we are empathetic to you, when it was in the 70's and sunny here when the blizzard hit the Northeast, so we are plunging into the 60's today on a sunny day.

So, we are empathetic with the weather that you are having up in the Northeast.

And most things seem sunny here today as we report our quarterly net revenues of $1.2 billion, a record pretax of $179 million, net income for the quarter of $116.6 million or $0.81 per diluted share.

This marks our 104th consecutive quarter of profitability, a record we are proud of, especially in our industry.

So, as we go to release, first we believe we had a strong start to the fiscal year this FY14.

If you just look at the stats from quarter to quarter, net revenue was up 5% for the preceding quarter, pretax income up 10%, client assets under administration up 5%.

You would think we'd just take a victory lap and just say what a great quarter it was, and it was a very good quarter.

But, there was also a number of favorable items that I'll just happened to hit this quarter, that made a strong quarter look -- from an operating, ongoing operating basis maybe a little stronger than it really was.

We did earn a lot -- we did earn these one-time fees, but we can't expect them to recur every quarter.

So, we will spend some time on the call giving color on those.

Overall, the private client group and asset-management had very good quarters.

I would characterize the equity capital markets group having a good quarter.

The bank, as usual, performed solid, which I would call and okay quarter.

And we still have headwinds in public finance and fixed income, due to a challenging market, especially in the institutional commission area.

But bolstered by strong trading profits.

We also had a very good other quarter and so, we are going to talk about some of those items.

Those items made our margin of 15% and our comp ratio 68% look a little better than they probably are on a pure operating bases, and we will talk about that.

As we told you, we are committed to reach those goals from an operating basis, on a sustainable basis by the end of the fourth quarter this year and we are still committed to that.

Overall, in the segment, private client group was pretty much good news all around.

Revenue up 5% sequentially, over last quarter.

Pretax up 11%.

We saw an improvement in margins, but probably more importantly for the business as we look forward, we had record private client group assets under administration of $423 billion, up 5%.

Our advisor productivity continued to rise, and very strong recruiting pipeline in the private client group.

So all told, we think we have good momentum in that segment.

Under asset-management, we had record net revenue of $96 million, which is up 19% over the last quarter and record pretax of $31.8 million.

Our assets under discretionary management were up 8%.

So, those results were both -- affected by the market appreciation, but also strong net inflows of assets into our asset-management group.

However, as we talked about in the release, we had a $9.8 million performance management fee, of which half really impacts our bottom line.

And it's not that we don't earn those, we just don't earn them every quarter.

And this one was of greater magnitude than, probably of this time last year.

The bank had very good loan growth, almost $500 million in net loan growth for the quarter.

Our criticized loans decreased.

On the positive, the loan loss provision was muted for the quarter, due to a combination of a number of factors.

We had some loan payoffs of criticized loans.

We sold some loans that we got par for that had some reserves or we didn't like the credit quality as much.

And we had improved credit metrics.

So, despite the loan growth, the loan provision was down, which you call from a normal -- a normal rate.

The loan growth will help offset the interest compression, which we are still experiencing at the bank.

On the capital market side, ETM had a good month.

Off the records, the last quarter, and certainly off the record of the M&A quarter a year ago, but very, very solid results.

Really, from good financing market and also we talked to you about the commissions that we had our analyst best picks sales, which actually drove commissions for the quarter.

The fixed income markets remain challenging.

We had a rough quarter for institutional commissions and public finance fields, which I think the industry had.

We see that market is still challenged, but with strong trading profits, both from good retail activity and we stayed in the market.

I think, as people have lowered inventories and have deleverage, we've been in the markets and continue to generate good trading profits, despite lower commission levels.

We talked about other, which had a very good quarter, hence some of the cautions.

In our private equity side, we had $10 million of gains, $6 million were non-consolidated, $5.5 million gain on the sale of our Jefferson County sewers auction rate securities.

Again, both of those earned, but lumpier.

That they appeared in this quarter.

And also, our tax rate was down.

Our tax rate, due to some refunds due and a change in our state filing position in the state, and as the markets go up, we get the COLI benefit and we are looking forward that the tax rate we think is closer to a 30% target tax rate given -- 37%, sorry, target tax rate given a good market.

But with this quarter, it was lower than that, so that added to the earnings for the quarter.

So, all in all a good start to the fiscal year.

We are very pleased with our positioning.

I'm going to turn this over to Jeff and talk a little bit about, after Jeff speaks, kind of the outlook in the segments in this quarter.

Jeff?

Thanks Paul, I have -- I have a very similar outlook on how the quarter went.

We are very pleased, in general, with the start to the year.

There are some very big positives to take away from this quarter.

The asset levels, both under administration and management, certainly give us good headwind -- or a good tailwind into the next quarter.

And equally important, in the release, as Jeff mentioned, that fee-based assets surpassed $150 billion, which is obviously a big driver of our ongoing service commissions and fees.

Paul mentioned the bank loan growth.

That's faster than I know we had forecast in the last call or two.

Production did pick up a little bit but paid off slow a little bit, as well.

So, the combination of those two factors are giving us a good start, there.

You would expect with that kind of loan growth a little larger provision, I know.

But, again, given some of the takeoffs and upgrades of some of the previously criticized assets, we continue to experience low provision expense.

The recruiting pipeline is another positive takeaway and Paul mentioned that.

Probably, again, as we look into the coming quarters, it's as active as it's been in some time.

I think, the overall expense control, particularly in IT, we actually -- based on what we know today, we think this level of IT expenditure, this low $60 million type number for per quarter is about our run rate.

Obviously if any regulatory requirements change or some competitive pressures, et cetera, that could change.

But based on what we know today, that's probably a pretty good run rate.

But, this quarter wasn't without a couple negatives.

The fixed income markets still aren't cooperating.

Particularly on the commission front, we've managed to continue to realize pretty good trading profits.

We are not sure if that's going to be sustainable the rest of the year or not.

But, so far, so good on that front.

Then, the other negative, I guess, in the interest of fair disclosure, is the tightening spreads.

Both in the bank and in our overall earnings on client cash balances around the firm, largely through our bank suite program as those contracts continue to burn off from prior years and get renewed at lower rates.

Paul mentioned the comp ratio, 68% -- excuse me -- that's actually still a good target for the year I think, for us.

We had a very good quarter this quarter and some of these, what you would call somewhat unusual items that kicked in to revenues that caused the ratio to look a little lower than might otherwise have been this quarter.

But that's still, I think, a good target for us for the year for we can keep it at that 68% level, down nicely from where we were last fiscal year.

If you look at the margins in our businesses, and the private client group, we talk about having a 9% target for the year.

Well, they exceeded that, obviously, of the first quarter at 9.2%.

Some of that was due to nice revenue growth, which should continue, even the equity market lift going into this next quarter.

But, also the expense control side, like I mentioned in IT, which largely falls into the private client group segment in our public reporting.

Capital markets had a 13.8% margin for the quarter, which is not bad, given the fixed income environment.

So, equity capital markets is doing okay.

I probably wouldn't describe it as hitting home runs, but they are keeping busy and have a reasonable amount of business.

Asset-management had a 33.2% margin, so, that performance fee that we mentioned, about half of which is ours, on the bottom line, from the pretax line, helped them to surpass their 30% margin target for the quarter.

So, you know, we had these things.

Then the other, Paul mentioned the option rate securities, we ha a $5.5 million gain from that.

We had some private equity help, which we have had almost every quarter.

But, this one may be a little larger than our average, excluding the Albion transaction last year.

But we've had some of that pretty much on a recurring basis.

With those things all rolled together, helped us as a Company achieve its 15% target for the year.

These are still our targets for the year.

We're not saying, okay, we have already hit the 15% so let's change it to 15.5%.

We still think that the 68% comp ratio and the margin targets we gave you for each business and the 15% for the overall firm are still where we'd like to be on a run rate basis at the end of the fiscal year.

The tax rate in terms of the bottom-line, obviously was a help.

Paul gave you the right guidance, I think, 37% is kind of what we would counsel you to use in modeling, going forward, for this year.

If the market stays hot we will continue to benefit from the non taxable gains in our corporate and life insurance portfolio.

However that obviously works the other way in our market correction.

I think that covers most of the big picture comments.

We did do a comparison to sort of the analyst models to see where we were way off base, relative to the average of the models.

And actually, we were pretty close on a lot of them and they are all very explainable, which we've already talked about.

The performance fee caused us to be over in investment advisory fees.

Trading profits were better than most were anticipating.

In the other income we had both a private equity gain and the ARS redemption proceeds.

Those kind of were the differentiating factors on the revenue side.

The one that stands out a little bit is the account service fees that actually declined slightly from last quarter.

There's really a couple of reasons.

One is I would tell you, September was abnormally high as we did some catch-up entries in that quarter that we didn't really elaborate on.

They didn't seem that material at the time, related to some of the Morgan Keegan accounts that we brought over.

So, we are comparing to sort of an abnormally high.

The other part of that, is I mentioned, the compressing spreads on client cash balances in our bank suite program.

Remember, that's a fee income to us, not interest earnings to us from these outside banks.

That did compress several basis points this quarter to last, while the balances stayed relatively flat.

So, that actually caused a slight decline, as well.

On the expense side there were only couple of items that were significantly off.

Obviously, the bank loan loss provision which continues to come in at lower levels than would be normally indicated by the loan growth.

And other expense was up a little higher.

There's a couple of things.

We had a little more legal expense.

That wasn't the big driver.

The bigger driver is we are doing a better job, now, of estimating and spreading across the four quarters of the year.

Some of the valuation adjustments that happen annually in the tax credit funds that we consolidate into our books, that usually we've had a spike in the March quarter related to that.

But we can sort of estimate them pretty well.

So, there's no reason for us to have that spike.

We can make that ratably throughout the year.

And it will also remind you that virtually all of that comes out through non controlling interests.

So, it's not really our item to the pretax line.

But, it does distort the other expense line item.

The one other thing I will mention, for those that looked at the balance sheet you saw our assets declined by almost -- by about $1.3 billion from last quarter to this quarter.

The real reason for that, is at the end of December, we undertook a project to move about $1.75 billion of client cash balances out of our, what we call our client interest program on our own balance sheet, and into the bank suite program.

We hadn't been able to do that earlier, because we were up against capacity constraints in the bank suite program.

But, we had some new banks join and some existing banks agree to take larger deposits.

So now we are able to accommodate client's wishes for FDIC insurance and move another group of accounts off of our balance sheet into this bank suite program.

So, you saw it come out of the brokerage client deposits on the liability side and, generally out of the segregated assets or the reserve account on the asset side.

So, that plus the bank loan growth were really the two big shifts in the balance sheet from last quarter to this quarter.

Thanks, Jeff.

Just in terms, a little bit, of kind of the review of the outlook, private client group certainly with their assets up 5%, should start off the quarter with some tailwinds.

The same with asset-management with the 9% increase in those assets.

So, we're at a new record of almost $450 billion of assets under administration, and $60 billion of assets under management.

However, we don't expect performance these usually come at the end of the year to be next quarter.

As you look at asset-management, you can adjust for those expectations.

The bank loan growth looks good.

We never know on payoffs.

Every time I think we give you direction something else happened that quarter.

Overall, it's still a very competitive market.

But, we've been able to grow loans.

But there is a pressure on spreads, it will continue.

I will talk about interest rates a little bit more.

The provision has been low, but it won't remain low forever if we grow loans.

So, we've had again, improving credit quality that's reduced the provision.

But, at some point, that provision of the grow loans is going to have to come up to match loan growth.

The good news is credit quality continues to improve.

The capital market side, the equity capital markets, the overall market volumes remain challenged.

We've done well.

We have good lift this quarter by the analyst best picks.

The financing markets appear positive.

Deals should still get done as long as the markets are good.

M&A backlog looks good for us.

I will call it strong, although traditionally January and the first quarter are generally weaker M&A markets, because a lot of deals get done by year-end.

But as long as the markets stay good, I think the equity capital markets outlook remains positive.

Fixed income is just challenged.

With low short-term rates and the expectation of long rates to increase, it's just leaving a lot of investors on the sidelines watching.

Those commission levels still remain challenged.

I think it will for some time.

The offsets been very good trading profits.

If rates start to rise and if commissions don't improve, volumes -- it will be hard to maintain those kind of trading profits in that environment.

So, we stay very, very cautious.

Public finance issuance was down last quarter.

We got rated in the top 10 public finance issuer but the whole market was down.

We expect it to improve, but when governments -- which we think have the need to finance -- start financing, we don't know.

We are cautious in the short term, but more positive in the medium to long term.

Interest rates will rise, I think.

The question is when.

We are well-positioned to benefit from them, but until they do, especially with all the cash in the market, I think the spreads will continue to be challenging.

We thought we had some relief from them last quarter, they looked like they were getting [firmer] again.

Again, rates will rise someday is our position, we don't know when.

In this environment, spreads will continue to be challenging.

Cost discipline is very good.

We talked about that through the whole Morgan Keegan integration, and you are seeing it show up in numbers last quarter and this quarter.

We are committed to managing that and you can see it in the run rate here.

So, overall, we think the markets look constructive.

There could be a correction in the equity capital markets.

But we believe the economy is in reasonable shape, and expect a constructive market.

Again, cautious, given the reasons we talked about there.

Overall, feel great about our position.

I think the integration is behind us.

It's great to see everybody acting as one team.

We are operating as one team with integrated leadership.

Our position is good.

Feeling great about our people and our firm overall.

So, with that, I will turn it back to Jodie and we will take questions.

(Operator Instructions)

Steven Chubak, Nomura.

On the last earnings call, you noted that revenues at the bank had recovered to the $90 million level as items where you were, and I'm using your words, abnormally penalized in the past including SBA loan mark downs as well as FX movements had reversed.

This quarter, Bank NII was rough -- was flattish and total revenues at the Bank came down $7 million.

I was hoping you could clarify what drove the revenue decline this quarter?

Steven, this is Steve Raney.

Good morning.

There is some things in Other income that, in effect, really went against us in the December quarter relative to the September quarter.

There was a rather significant loan fee that was recognized in the September quarter, resulting from a loan payoff in the Canadian portfolio that we bought a couple of years ago.

The SBA loans that you referenced, the lower cost of market adjustment that was a big positive back in the September quarter, we didn't see a similar improvement in that mark in the December quarter.

That was about a $1.4 million difference quarter over quarter.

The foreign exchange impact and the strengthening US dollar relative to Canada had about a $3 million impact.

As you've -- we've already talked about and the provision expense was about a $3.5 million change quarter over quarter.

Our Bank on life insurance had about a $0.5 million difference quarter over quarter.

So all those things combined resulted in the Other income line being dramatically lower than the September quarter.

So our core business though remains very stable, as we already mentioned.

The net interest income, the small decrease in net interest margin was offset by higher average earning assets.

But our loans were on an average basis were up about $200 million.

Point to point was about $500 million.

So hopefully that clarifies the difference for you on the Other income line.

No it does, thanks for that.

And I guess digging into the commercial lending side, in particular, we're clearly seeing competition intensify and our general loosening of underwriting standards across the industry.

And didn't know if you could speak to some of the competitive dynamics you're seeing in the market and your outlook for commercial loan growth, given what's been a historically conservative or disciplined approach to underwriting?

Yes, that dynamic has really been in place now for, gosh, the better part of two years.

We continue to be extremely selective.

We're really under no pressure at all to really grow loans or loosen our standards in order to grow loans.

There's enough -- there's been enough volume and there's actually been an increase, I would say, in the M&A markets that have driven some of the transactions.

We did have our most productive quarter.

We did 89 transactions this last quarter.

The prior high watermark was the June quarter of last year that had 79 transactions.

So in our unique model, there still is enough availability of new transactions that we -- that meet our credit standards.

So I know we grew loans over 5% this last quarter, I don't think that that pace will continue.

But we're more optimistic just given the over -- economic environment and deal flow that we're currently seeing.

Okay, thanks.

And we have to do that without loosening our standards.

Okay.

And then last one for me.

Transitioning to the Capital Market side, we saw that revenues were flat quarter on quarter.

And the contribution from some of the higher margin areas, such as fixed income trading profits and M&A was also flat sequentially.

And yet the segment margin did decline 300 basis points.

I didn't know if you could speak to some of the expense accrual trends that we're seeing within the segment, in particular.

I think it's a few things.

First, you get comp true ups during the year end which are harder to predict than M&A so we -- I mean with equity capital markets.

So in the first quarter, I think the P&L is a little bit harder.

But secondly, the September quarter I think was our second best M&A quarter, and M&A we tend to have better margins on versus -- we had a decent December quarter.

It wasn't a bad quarter, but September was a very big quarter for us and that drives comp down.

So you're probably seeing it most of the delta really in the comp margins that drive that.

And again, it's a transaction-based -- a lot of transactions in that business, so it's a little lumpier.

Okay, that's it for me.

Thank you for taking my questions.

Chris Harris, Wells Fargo Securities.

If you guys called out the recruiting pipeline and curious to get your thoughts.

What does a good recruiting year look like for Raymond James in terms of advisor additions?

I know you guys historically tend to focus on quality not quantity.

So wondering if you could share a little bit what we might expect for the balance of the year?

It's -- recruiting and net recruiting are two numbers.

I don't know if I can quantify, honestly, 50 to 75 -- I think the goal is actually $75 million in our businesses of new -- yes, in each segment in our Private Client group and our -- I mean in our employee and independent contracting groups.

Similar targets roughly that run rate of new recruiting.

We're also have rolled out our RIA, our new RIA, it's on a new business but I guess a reformatted business that we're hoping to add to those numbers.

But it's early in days.

It takes a while to fill up the recruiting pipeline between getting interest, getting people in and bringing them over.

So that's the run rate number we're targeting.

But we're just as focused on the net number of -- in assets because the best way to keep going is not to lose them and our retention has been very good.

And so we're focused not really on the numbers, but we really look at assets.

And to supplement recruiting, we're also reinvigorating the training effort in the Firm.

Partially in response to some of the succession planning for aging financial advisors, but also we've had some success with that in prior years.

And this is a good time to launch -- to get that going again.

Okay, that's helpful.

One follow-up question on the Bank, this is maybe for Steve.

Wondering if you could share, I know it's hard, but maybe your NIM target for the year.

And then in addition to that, given the puts and takes you guys have with loan growth and payoffs, do you feel comfortable that you could maintain this level of revenue for the balance of the year or do think it could go potentially higher?

Chris, it is hard to predict that.

As has played out, the NIM compression has slowed but there's still pressure on it.

So we do think that over the balance of this year, we're going to continue to see net interest margins come in but maybe at a slower pace than we saw.

You saw NIMs come in year over year over 50 basis points.

We don't think we're going to see that level of compression.

I would say maybe another 20 to 25 basis points over the next year is maybe a good number, offset hopefully by higher average earning assets and more loans.

So I know there's been some volatility in our Other income line, the net interest income line is obviously -- we're focused on all of it, but there's some things that are really outside of our control on some of the Other -- on the Other income line.

I'd like to think that we're going to actually able to grow net interest income slightly, so therefore the earning assets would -- the increase in earning assets would slightly offset -- more than offset the net interest margin compression.

But I would say there's risk in that prediction, just because there's a lot of unknowns and uncertainty.

Yes, that's the hard one to predict.

When the 10-year went out to 3 it looked like we were going to get some relief from that.

And it's come back in and who knows when it [goes] out, so we're subject to the markets.

But today from a standing start, which we seem to be off every time we predict because the markets move another way, it looks like compression is -- we'll still get some light compression.

Okay, great.

Thanks, guys.

Joel Jeffrey, KBW.

Digging a little bit deeper on the trading gains.

I'd appreciate the color you gave.

Can you give us a little bit more clarity on precisely what securities experienced the meaningful gains?

And is this going to be a sustainable trend or is this due to higher volumes in those securities or any time a one-time issue?

Yes, most of the trading profits have come from the muni book and certainly that was true in last quarter.

So there are two pieces to it.

One is the retail activity was okay just because I think people have repositioned getting longer from shorter, which we think is a good thing for retail clients, that they're going shorter.

And then in the institutional side of the market, I do think the phenomenon if you talk to people, a lot of people got frightened in June with the rate corrections, which none of us like, but we're pretty steady.

And we've stayed in the markets.

I think people backed out a little bit and since we're turning inventories really twice a week, we feel pretty comfortable in our position.

So -- and we had some rates -- the 10-year came in during the quarter, which certainly any time that happens, when you own stuff, you make a little more money on it.

So overall, that's where it's coming from.

And again, the concern is is that if commission volumes stays low, that that's going to be under pressure.

January, the same trends continued on both on core commissions but trading profits were pretty good.

I don't know how long that holds up.

In the past, Joel, we've guided in the $12 million to $15 million range, I think, for quarter end of trading profits.

I don't necessarily think we would change that guidance going forward.

This past quarter we had some additional help from some emerging markets trading, some RJ Limited, littler numbers, but they all were going on the right direction this time on top of the majority of it which was provided by fixed income.

Okay, great.

And then shifting a little bit, the diluted share count continues to rise, I think it was up a little under 3% year on year.

And I know you guys have historically looked to buy back stock when you're at about 1.5 times book.

But has there been any change in how you're thinking about this given the valuation of the stock?

And then how should we think about future share count growth?

Well it's something, as we've grown, we've had share count growth and a lot of people have asked us about capital.

In fact, we're having a Board retreat in a month and we're going to -- as consistently we like to deploy the capital into growth areas in the business.

And we'll be -- we're constantly looking over opportunities, but we're conservative.

And we're still analyzing what the options are there.

So I'd say that you're going to continue unless we do something differently to see a little bit of dilution in the share count.

But we'll look at opportunities over our Board retreat both to deploy capital and when we determine if we have excess capital, what we'll do with it.

Great.

Thanks for taking my questions.

Christian Bolu, Credit Suisse.

On the fixed income business, by your words, (inaudible) remains sluggish there.

Curious on your thoughts on resource allocation to that division and should we expect that to be resized in the light of weaker industry trends?

I think we went through a significant resizing when we combined Morgan Keegan with Raymond James.

We were -- we sized it hopefully for a growing market.

And when it was obvious that didn't happen, we made some cuts and then again last year, we sized it.

So I feel very comfortable with the size.

It's a pretty variable model, in terms of comp.

I mean there are salaries -- we do have salaries, but they're generally low and it's really more of a variable cost model in general.

We have some fixed cost guarantees basically from the acquisition that come off in April.

And so I think the sizing of the fixed income business, for now, we're very comfortable.

We have very, very good people and we've proven in the operations, both in the tough market in June I think we outperformed by losing less in trading profits and that's due both to our very good traders and our very good salespeople.

And I think we've shown that we've outperformed in the sluggish markets.

So, I feel good about the people we have.

But that model is pretty variable.

I mean obviously if there's a dramatic change, or you think you're down for a well extended period of time, you always look at cost.

But we tend to ride temporary downturns through and don't over hire in big boom times, either.

So we're more a long-term player than trying to adjust for short-term profitability.

And further to your question of resource allocation, we're running that business on about half the inventory levels as we were running it at its peak.

And we're averaging between $500 million to $600 million in total outstandings each night.

Whereas it was well over $1 billion at its peak before we further streamlined it.

So it's not using as much capital in that regard.

Okay, thanks.

Moving onto retail.

You sound very constructive.

And in light of some of the positive comments we've had from your peers, curious as to what you and the team are seeing in terms of retail engagement so far this year?

There's no doubt there's been a movement into equities.

And if you look at our economists, their view is they'd rather overweight equities than underweight fixed income in general for the individual investor.

Having -- so you're seeing some movement into there.

Part of it, you always get concerned when the retail investors chasing a positive market because you don't want them to get in at the peak.

On the other side, if you look at retail sentiment, it is not positive on the equity markets.

And in fact, our December sentiment actually went down under, I think it was under 30% for the investors were positive about the short-term equity market.

So you're seeing a mixed bag.

I think there is movements into equities.

Some of that is the push out of fixed income a little bit and looking for dividend yield.

Some of it is watching the rise in the market.

So there's definitely inflows into equities out of fixed income.

But I wouldn't say the average investor is racing to get loaded up on equity.

And when you look at our client base and their mix of investments, it has shifted a little bit toward equities.

But we attribute most of that to appreciation in their portfolios, not actual money movements.

All right, thank you.

I guess my last question is on -- can I get broader client cash management strategy?

In the context of the excess capital you're sitting on, what would drive you to be more opportunistic in terms of deploying that client cash within the Bank?

Thank you.

We look at that pretty regularly.

It's hard for us to do much different than we're doing without taking either credit or duration risk.

And even a modest amount of that it seems like in stress times, whenever something can go wrong, it does.

So I'd say it's a little bit of our risk aversion that's causing us from trying to capture bigger spreads on that client cash.

But we have looked at exactly what you're talking about on several occasions.

And may do it to some modest extent, to the extent that we can find acceptable investments on the asset side.

And we know a lot of the competitors and we can see in the releases have bought middle-term securities to raise their spreads.

And we've been -- we've always been a shop again that doesn't -- we try not to take those rate risks.

And we've always been conservative and it makes us -- on strategies like that look a little slower and not earning as much.

But when markets move, we look a little smarter.

And again, we tend to be on the conservative long-term side.

So we do some of that, it'll be modest.

We're not -- we're more worried about long-term impact than short-term impact.

Okay, makes sense and thanks for the thoughts.

Alex Blostein, Goldman Sachs.

A couple things here.

First on compensation.

Jeff, can you remind us on how much of the RSU and guarantee amortization from the Morgan Keegan deal that I think expires in April amounts to?

So in dollar terms, how much will this drop off in amortization free up starting I guess May?

Yes, we've got some RSU amortization that dies but most of those were 3-year, not 2-year.

But we've got some management, those were [3- year] too.

It's really what dies or some of the guaranteed payouts and things that we use in place of RSUs.

I want to say it amounts to on an annualized basis about $4 million, if I remember the number that was given to us by fixed income.

Got you.

And how much of that floor drops off in three years?

In three years it'll be a bigger number.

It's running about $6 million to $7 million a year, right now in the RSU amortization.

Got it.

And then -- thanks.

And then shifting gears a little bit to capital markets, clearly fixed income continues to be a little bit under pressure, here.

But can you talk a little bit about which client areas are you seeing most pressure in and what type of broad environment do we need to see acceleration in fixed income results?

Well the bulk our of our fixed income business, the real franchise is in the muni business and the mid-bank space is the place that we're very, very strong.

So, next is government.

We're in the corporate business, but it's more of an accommodation business for us.

I wouldn't call it our pure profit driver.

So it's that space, both the bank, the mid-tier banks and their investments and loans and the muni business that really drive our levels and our fixed income practice as well as our retail (inaudible).

Right.

So to see an improvement I guess in those areas, what kind of an environment do you guys need to see?

And I know there are one or two metrics you were to look for, but whether it flows into muni funds or (inaudible) what kind of environment should yield better results?

Definitely steep (inaudible) and volatility.

I guess you'd say the worst part for that business would be a slow, steady creep of rates where people just wait and wait and wait.

And the best environment is when rates jerk up and it shocks people.

I mean, it's bad on trading profits maybe for the short term, but long term people move and your commission volumes go up and you make it back.

So we'd rather see steep rate increases than a slow steady couple basis points every month.

That's kind of the torture environment for a fixed income business.

So steep and volatility is good for fixed income.

But as our fixed income brethren remind us that the best news is when they're doing bad because usually equity markets are doing really well and the overall Firm does better.

So it catches it can.

But definitely rates have to move, they're absolutely low.

So rates moving up help that business too as people reposition their securities portfolios.

Got you.

And then a last one for me.

When you look at the consolidated net interest income for the whole entity, can you tell us what you saw in margin balances at the broker?

We saw a couple of other players in the space put up pretty nice numbers there, and that's a pretty decent source of net interest income for you guys.

So can you talk about the balances you saw in the December quarter and maybe what you're seeing so far in January?

Yes, I don' think -- we're not seeing a lot of movement in balances.

But we have to look at that jointly with securities-based lending at the Bank because that's an alternative which serve a lot of the same purposes.

On a combined basis, they are certainly growing.

But SBL at the Bank is growing faster than traditional margin lending in the brokerage firm.

The reason that the net interest earnings were up a little bit this quarter over last quarter in the Private Client Group segment was because of -- we talked last quarter about a number of fee changes that were being implemented around the Firm that would lead to some increased revenues this year.

They're being phased in over the course of the year, but one of the changes that went in on October 1 was a change in our margin schedule.

And that did have some immediate impact, to the tune of $1.5 million to $2 million per quarter, which did show up in this first quarter in the Private Client Group net interest spread.

Some of the other fees will hit some of the other line items over the course of the year as they're phased in January and April.

Got it, great.

Thanks, guys.

Chris Allen, Evercore.

Wanted to ask about the Private Client Group margin.

I realize it's already at the 9% target and we're only one quarter into the year, you don't want to revise that yet.

But moving forward, given more client assets have ended the growth in fee-based assets and what seems to be a decent recruiting pipeline, is there any reason not to expect incremental margin expansion from here?

Well, only that recruiting is expensive (laughter).

Yes, the impact of recruiting is, because of transition assistance, you get a charge against income, too, as you amortize those payments.

So as you recruit, it's actually a drag on short-term margins.

So you're going to -- obviously if the market continues to go up, you're going to get better -- you're going to get margin expansion on the revenue.

But I think it's early to call.

We changed our grid and our employees side this year and those effects are still coming through.

We've had a number of fee changes that are still coming through.

So I wouldn't declare a one quarter as the number that we should live off of yet.

I think we got to let that play out.

But we're -- markets are good.

Another reasonable possibility.

Got it.

The $1.75 billion of customer cash has moved to the Bank [suite] program.

Is there any economic benefit to that?

That's a good question.

I meant to mention that, I have it written on my notes, here.

Actually on a -- it's roughly a push in terms of economics.

Otherwise, we might have had second thoughts.

But it's also -- it is what clients wanted.

But it does move the revenues on that money from what was interest earnings to us in our segregated asset account, moves it to now the fee income from the other banks in the promontory suite.

So it'll be a couple million dollar a year shift from one line item to the other.

But in terms of economics to the overall Firm, it's about a push.

Got it.

And then I know you guys mentioned a bunch of the, not one-time but somewhat special items, helping pretax margins in comp to revenue ratio.

Any color in terms of what those numbers would have looked like X the items?

Obviously there's some compensation that's included with the performance fee and private equity, so trying to get a hand on that.

I would guess it'd been in the mid-68s somewhere.

We had hoped over the course of the year, remember I said to get us down to that 68% type comp ratio, it was going to require some revenue help.

We'd like to see it out of some operating revenues, not special items.

We are starting to see that in some of the divisions.

So certainly it was a big improvement from last year's average and trending the right way.

But it probably wasn't quite as good as it looked.

But we are still hopeful that we can get to that level on a run rate, a sustainable run rate, by the end of the fiscal year.

Got it.

And then last one for me, at the end of last quarter, I don't think you guys didn't provide yet this quarter, but the cash balances stood over $2.5 billion.

And once you X out the corporate debt, it came up to over $9 in cash per share.

And I realize you guys are going to be reassessing capital and thinking about investing for growth.

I'm wondering if there's a minimum cash level that's necessary at the Firm, because it seems pretty high at present.

No, we've talked about this in some of our conferences.

We do have cash targets.

All that cash you see on our balance sheet is not ours.

A lot of it is client cash at the Bank, for example that's just not invested, yet.

We actually have in our Corporately about a little over $1 billion of what we'd call free cash.

We do have internal targets that are somewhat less than that.

We set that as a percent of overall shareholders equity, so it gravitates up over time.

But by those measures, yes, we have some excess cash in capital at this point in time.

Not huge numbers, but in the couple hundred million dollar range and that's what we said publicly.

Got it.

Thanks, guys.

Devin Ryan, JMP Securities.

Most of my questions have already been asked, but a few follow ups here.

So within the equity underwriting business, the revenues there were a bit softer than I would have expected given the strength that we've seen across the street.

So curious to know if there's anything maybe that you guys experienced from a sector exposure perspective that maybe weighed on your results a bit?

And then how to characterize your backlog specifically in the equity issuance business?

I wouldn't have characterized them as soft.

But I would say that we play very extremely well in certain sectors.

The REIT, the downstream energy space, there's a number of other spaces growing technology, healthcare, and those markets are all differential depending on who's financing what deals at what time and what space.

So I would say our backlog is good.

I think I felt good about what they did in the quarter and I think the backlog looks good in a good market.

So we get -- when certain sectors hit or certain areas we specialize in the market, we're better and when others sub-sectors do better, maybe other people pick up a few more deals.

But I thought they did a good job in the quarter and I think the outlook looks good.

Yes, no I appreciate that, it was more of a comment on the sequential quarter.

You guys have obviously picked up market share.

Think it had to do with whether we're lead manager or what position we're in the deals too.

Just because everybody's getting --

Rotate.

And getting lead table credit for everything these days.

It's hard to really say that the activity just because the number of deals on that were on the cover of is the same, you can't even equate to same revenue anymore.

I would tell you I feel good about the business.

And as long as the market is open, I think they're fine.

They weren't record, but they were good.

And M&A wasn't record, but it was good.

And I think the backlog is good and we'll just have to see.

And M&A especially is lumpy, the deals -- who knows when they close?

So when they close, you get big fees and you don't.

So --

Got you, okay.

And then another question on capital allocation and thoughts.

From an acquisition perspective, are you guys seeing an interesting opportunity today?

I'm curious to know what the volume looks like of opportunities that are coming to you guys in this market.

And then are there any other segments, specifically, you guys have highlighted in the past, Asset Management where you've actually done a couple deals.

But are there any areas where you feel like you'd be interested in doing something if the right opportunity came across your desk?

Yes, I'd say first Asset Management is the one that we've highlighted because we've probably been most active consistently on and are still interested in deals.

As you know, we're highly selective and tend to be long term.

So they're probably in most sectors, we talked about there are a number of Private Client Groups we'd love to have.

But most -- they're probably just -- you could count them on one hand and they're private and not for sale.

So we tend to be long term and focused on those kind of deals and let people know we're interested and we're not going to buy something just to grow.

We get a lot of people that bring stuff to us for size and we just say we're not interested because it doesn't fit us in the culture.

So we're selective.

We wanted to expand in Canada where we seem to be profitable when the other non-six banks are challenged.

But again, you've got to find the right opportunities at the right price.

And we've been more active in looking at the UK and M&A in Private Client.

But again haven't been successful in marrying up what we're interested in with the opportunities, but we continue to work at it, work on the contacts.

And again, we're not transactional-based.

We continue to look at those deals.

And at the right place, the right time one hits, if it doesn't, we're not going to buy them.

You make it sound a little more passive than it is.

We -- it used to be outside of Asset Management we did just react to deals that were shown to us.

But we do have a proactive effort now in addition to the ongoing effort in Asset Management to look at potential targets in all of our spaces.

We have corporate development function, we have targets.

We do have conversations.

But again, we're only going to do the right deals at the right price and firms with our culture that we fit long term.

And if we could find more Morgan Keegan's, we'd do them, but there just aren't a lot out there that fit that way and they certainly aren't of that size.

Great, thank you.

And then lastly with respect to the FA headcount, sorry if I missed this, but what drove the small sequential decline from last quarter?

And then with respect to your comments on the backlog, it sounds like things are picking up.

And so curious if you can provide any perspective around expectations for timing, based on where you guys are in discussions if you expect that you could be closing on a more individuals this quarter or if it looks like it's first half of the calendar year?

Any perspective based on where the conversations are.

I think you have a few things on the FA count.

At year end, you tend to have more activity.

We also put new grid in for RJA combined Raymond James and Morgan Keegan, it was tougher on the lower end of producers and where we continue to try to upgrade and you can see it in our productivity.

We tend to lose people at the lower end.

And for economic reasons, they go to firms where at lower volumes that they get a little better pay out than what we think is appropriate for our strategy.

So that's where you're really seeing the numbers.

If I could tell you on FA recruitment when people join, I'd love to.

It's almost -- everyone's almost like an M&A deal.

You've got to convince them over and then they time it and those dates move.

Sometimes they move so much they don't come and sometimes they -- but they generally move out a little bit.

So I don't think you're going to see any lumpiness.

I think you're going to see a good, steady -- from what we can tell in the pipeline, a good, steady increase in terms of the number of people coming over.

So we measure that by pipeline.

How many people we're talking to, how many people come into the home office.

And I -- we can tell you that those activity levels are all up.

Got it.

Okay, great, thanks, guys.

(Operator Instructions)

Jim Mitchell, Buckingham Research.

A follow up on flows.

I don't know if you can give any color on what net inflows look like into the retail brokerage business and/or Asset Management?

That would be great.

Yes, I don't have the numbers here.

You would expect in Asset Management they were up 9% that 5% to 6% of that would have been market lift and the rest net flows.

We've had very good net flows in Asset and it's just continued.

Partly as our advisors get more into it.

Morgan Keegan continues to invest more in our Asset Management business.

Our outside businesses are doing good in equal.

So, it's been -- we've had good net flows.

Okay, that's helpful.

And maybe one quick follow up on the capital markets division.

That's the one area that pretax margins are a little bit below your target.

Is that -- it's the amortization coupled with better revenues or do you think there's still some more cost savings you can get done there to hit your target?

I think it's first that fixed income is tough right now.

So you're going to get some margin drag from there.

And as I explained a little bit earlier on the equity capital markets business, I think the -- it's hard with comp ratios to predict what they really should be.

So that's a lumpy business.

So we estimate them and correct them as we get through the year end when we get a better view on volumes.

So we've got some work to do to get those margins up and there might be a little bit of cost.

We continue to analyze our total cost in equity capital markets, but no they're doing well, they're positioned well.

So I think you'll see it improve.

And I wouldn't get again in that business, in the capital markets business, it's hard to get a trend off of one quarter.

Right.

Okay, thanks.

At this time, there are no further questions.

I will turn it back over --

Okay, sorry Jody, thank you.

I would like to make one further comment before we get off the call.

First, thanks for all joining.

The other one was really to thank Chet Helck.

Chet had put -- has been invaluable in growing our Private Client Group business.

He was an innovator in RJFS when he took over and ran that and has jointly overseen our Private Client Group business.

And we've had great growth, great advisors join us under his leadership.

And he has proactively, he and Dennis, have put succession in place a couple of years ago with Scott and [Tosh] for doing a great job.

And he came in and said, look, it'll be 25 years and I want to go out on top.

The Firm's doing great.

I just came off as Chairman of SIFMA where he did an outstanding job.

He said I've got leadership in place and I've seen too many people hang on for a couple years just to hang on.

And he says, well you've got the team in place and I want to go on and enjoy life a little bit.

So I appreciate him for his leadership, his development and promotion of people internally.

To stay behind him, which is part of all of our jobs, is to make sure our organization succeeds well beyond us as we bring succession.

And so he's been invaluable, we'll him.

He's left a great legacy here and just wanted to thank you and thank him and let you all know that the Private Client Group is in great hands due to his foresight.

So with that, thank you all for joining and hope it warms up there for you in the Northeast by our next quarterly call, and certainly by the Super Bowl because I'll be up there next weekend.

So warm it up.

I'd rather watch from Florida.

(laughter).

Thank you, Jody.

Thank you, sir.

Thank you, that concludes today's conference call.

You may now disconnect.