雷蒙詹姆斯金融 (RJF) 2014 Q2 法說會逐字稿

Good morning.

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

At the 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)

(Technical difficulties) Certain statements made during this call may constitute forward-looking statements.

Forward-looking statements include information concerning future strategic objectives, business prospects, anticipated savings, financial results, industry or market conditions, demand for our products, acquisitions and divestitures, anticipated results of litigation, and regulatory developments or general economic conditions.

In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, 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.

There can be no assurance that actual results will not differ materially from those expressed in the forward looking statements.

We urge you to carefully consider the risks described in our most recent form 10-K and subsequent forms 10-Q, which are available on the SEC's website at sec.gov.

Good morning, everyone.

This quarter, we think we had very strong operational metrics.

But we had a number of factors going against us this quarter.

We had three fewer trading days, two fewer calendar days, which affected interest.

We had numerous branch closings.

You have to remember our concentrations in the Southeast and the Midwest, we had a lot of branch closings due to weather.

The transaction-based businesses were a little slower.

M&A was off, although not a horrible quarter.

Tax credit funds was low, but that's, when deals close, a good backlog.

Public finance has been challenged as -- the whole market with new issuances.

And on the expense side, and I'll leave those for Jeff.

Whether it's FICA, our data center move, which was planned, but over budget.

But it was very successful.

Had an impact.

TV advertising and other expenses actually weighted down the quarter.

Some of these are seasonal.

Some of these are unique events.

If you look at this quarter versus last quarter, last year, or the first two quarters, our first six months combined versus the first two quarters of last year, revenue was up 3% or 6%, respectively.

But net income was up 31% to 33% on a GAAP basis.

So we believe we're in good position that the average of the two quarters has really been more indicative of our operational run rate for the first half of this year.

Going forward, we have record client assets under administration of $458 billion.

Record assets under management of $62 billion.

Our bank loans crossed $10 billion.

Record advisor productivity and advisor count is growing with good backlogs.

We think we're in good position.

By segment, quickly, and I'll let Jeff get into the details after this and I'll give you a little outlook.

The Private Client Group had excellent results, especially with the weather and trading days.

Record net revenue of $812.2 million, up 12% over prior year and 5% over the preceding quarter.

Record pretax of $77.1 million, 44% over last year, 8% over the proceeding quarter.

Very good results, again, with record private client assets under administration of $434 billion.

Average productivity up.

Advisor count up 24.

And everything very solid quarter in the Private Client Group and well positioned.

The Capital Market business net revenue of $224.4 million, it's really flat from year ago and down 7% sequentially.

Pretax $165.5 million up 26% year over year, down 8% sequentially.

ECM had a good underwriting quarter, with revenue up 16% from the proceeding quarter -- a 19% from the preceding quarter.

M&A was softer.

It was softer than a good December quarter, which was softer than a great previous September quarter.

But it wasn't a bad quarter.

Backlog still looks good in that business.

And again, timing is important in terms of when deal closes.

And if you look at the backlog, we feel that the M&A business, which we had a very good year last year, probably will be up this year.

Institutional commissions were flat.

Probably the most challenged business because of the market is Fixed Income.

Commissions that continue to be challenged and down slightly this quarter.

We continue to have very solid trading profits.

They've done a good job, with good risk management of generating trading profits for us.

Public Finance, although we were up slightly, and new issuance is just down and it's a tough market.

So as long as this low interest rate environment hangs around, that Public Finance market segment will be challenged.

But we have a great franchise.

It's well-positioned.

So I think we're performing well given the market.

Asset Management with net revenues of $87.5 million, up 26% year over year, down 9% sequentially because of the performance fee last quarter.

Pretax to $29.9 million, up 43% year over year, down 6% sequentially but up if you factor out the performance fee from last quarter.

Again with record assets under administration of $62 billion, up 22% year over year or 3% sequentially.

Very good performance.

Very strong inflows and we're well-positioned.

The Bank, I'm going to let -- I know we get a lot of questions I'll just make some general comments.

Great growth.

Production was about the same, but payoffs were slower, this last quarter.

Looks like the rate compression is slowing down, which has been a challenge.

Hopefully we're near the bottom.

Credit quality improved so the provision was low due to improved credit quality both due to payoffs and we sold some loans.

So we're -- really the credit quality is really very strong there.

So with that, that's kind of the overview of the highlights for the quarter.

I'm going to turn it over to Jeff and I'll close it up with a little outlook by segment.

Jeff?

Thanks, Paul.

My walk around our segments really is that, as Paul pointed out, PCG was kind of the star performer this quarter.

Number of records.

Average production, client assets, record revenues, pretax, wrap fee assets, a whole bunch of metrics, also a 9.5% margin in that segment, which we sort of expect to continue at that rate or better at least for the rest of this fiscal year.

So that we should exceed our target that we set at the beginning of the year.

Asset Management as you would expect sort of follows the market up, excluding the performance fee.

They also had record performance for the quarter, excluding the performance fee in the prior quarter, which led to the records.

Capital Markets, there's a good detail on that on page 9 of your press release with some of the selected metrics.

I think you'll see it was sort of a mixed bag within the Capital Markets segment.

Overall I'd say an okay -- a good quarter but not stellar and not terrible.

So it's kind of in the middle of where we would expect in this kind of market environment.

In the Bank, the loan growth is good.

We had a nice reduction in criticized loans.

That has helped.

We're -- can't expect the provision to stay at these levels indefinitely, if we continue to grow loans.

We are optimistic that the NIM compression is near the bottom.

The Other segment for the quarter looks weak compared to the prior quarter and the prior-year quarter.

I'll remind you that prior-year quarter included the sale of the Albion investments within our private equity portfolio.

And the immediately preceding quarter also had about $10 million of private equity proprietary capital type gains.

In this quarter, we had no such gains.

So and also in the prior quarter, previous quarter, we had the ARS redemptions for about $5.6 million.

So comparatively it doesn't look good, but it's not as bad as it looks.

We talked about a number of factors.

If you'll remember just by way of reminder, last quarter we had, as I just mentioned private equity gains, the ARS redemptions.

We had the Eagle performance fee of almost $10 million and we also had some tax benefits that cause us to have a fairly low tax rate.

So, all those things were in our favor.

We didn't really have any unusual items that went against us in that particular quarter.

So although we reported $0.81 in December, we sort of cautioned that, when adjusting for some of these items that were unusual, either in character or magnitude, that we were really pretty close to where the consensus estimate was for that quarter.

While we say the same thing about this quarter, it just worked the opposite way.

We have a number of factors.

Some seasonal, but that always hit in the March quarter and some unique to this particular quarter.

Some of the recurring ones include the resetting of FICA, which is a big number than we had focused on.

The difference in FICA expense alone from the December quarter to the March quarter, was $9.5 million.

That increment will dissipate over the course of the year as people hit the now $117,000 FICA limit as they go through the year.

That actually added 8/10 of a percent to our comp ratio for the quarter, versus the preceding quarter.

So that was a big factor.

That will hit every March.

We always have elevated mailing costs in the March quarter for two reasons.

One is we have the printing and mailing of our annual report and proxy for our annual meeting in that quarter.

And we have the 1099s that we mail at the end of the year to our several million accounts.

The total cost of production and mailing of all that is in excess of $2 million.

That always hits in the March quarter.

Another thing that hits, well that is symptomatic of the March quarter, is some revenue related items, which -- well let me finish expense related items.

I'll apologize.

Some unique items we had, elevated television airing of our commercials.

That was also a couple million dollars.

That won't necessarily go to zero in future quarters, but we typically will not run that level in any given quarter.

This was sort of an abnormally high period.

Paul mentioned the data center relocation.

We moved our primary processing center from St.

Petersburg to Denver.

There was actually, most of the costs were not people picking up machines and putting them in trucks.

Most of the cost related to testing the systems to make sure we could accurately and continuously process the business from a new location, which was a big undertaking.

And that, as Paul said, incurred a little bit more expense than we had anticipated.

And then another thing unique to this quarter on the revenue side, we had the weather related branch closings.

Hard to quantify, but clearly had some impact on the business.

As retail branches were down because of weather for several days at a time.

We do have a shorter quarter.

Three fewer trading days this quarter, two fewer calendar days.

That both has an impact.

That's an always an item in March.

And then a lumpy businesses that we talked about.

M&A, which, while not weak, was weaker than had been running in the preceding couple of quarters.

The $10 million of elevated expenses that will be quote unquote, nonrecurring, going forward.

And using one quarter of the FICA amount, although it will probably burn off faster than that, were incurred in this quarter roughly 50% datacom, 25% business development with the TV ads, and 25% in the admin line with the FICA.

That coupled with the revenue impacting items that I mentioned, when you look at all those things I would say, again, that when adjusted we were pretty darn close probably to the consensus estimates again for the quarter.

And, as Paul mentioned, we sort of view the six months as a good picture of our current run rate.

To give you an indication of that for the second quarter, the comp ratio was 68.9%, but for the six months it was 68.5%.

Again, probably a truer number.

The pretax margin on net revenues was 14% in the second quarter, but when you look at the six-month period it was 14.6%.

ROE for the March quarter 10.9% for the six-months, 11.7%.

EPS came in at $0.72, but when you look at the six-month that's $1.54 or $0.77 for the quarter.

Back to my comment about on a normalized, if there is such a thing, basis being pretty close to consensus.

We were happy to see the advisor count go up this quarter.

In PCG we do have good recruiting momentum and Paul will talk about that in the going forward comments.

One other thing I do want to mention that is not in the press release, but that we follow very closely and talk about whenever we present at conferences, is our level of recurring revenues.

We reached a new milestone this quarter, it was over 62% of our revenues this particular quarter.

And which brought it to over 60% about 60.5% for the six months.

So that's a new high for that metric and we're glad to see that going forward.

So I'll turn it to Paul for some going forward comments.

First I'm going to make some going forward comments, but since there's been so many questions on order flow, I wanted to hit that one head on before I do that.

First, we do not direct order flow based on hard dollar payments received from market makers.

Our order flow is directed to firms that provide the best execution.

Now there is sometimes we do receive nominal benefits in our cash equities and payments in our options business, but they're very minor and small in the overall scheme of things.

So a lot of people have asked the impact of payment for order flow and it really doesn't have an impact on us financially.

I'd like to make one more comment before Paul goes forward.

I apologize.

With respect to the impact on EPS of our outstanding shares, two things, one again is a seasonal factor.

Our biggest equity issuance is -- are in the December quarter when we do year end equity awards or portions of bonuses that are paid in equity et cetera.

So you always see a little spike in shares in the March quarter versus the preceding.

But what really impacted the dilution when you look at the six months this year versus last year, outstanding shares were up 2.7%.

Well that's a big increase.

It hasn't -- our normalized dilution's about 1.5% a year.

The reason for that increase is the stock price going up.

We use -- to factor dilution you use the treasury stock method and obviously you're buying back a lot fewer shares.

When the stock price is at those highs.

So that's -- the elevated stock price is a positive and a negative, I guess, in that regard.

But that did impact dilution.

I have Tom James in the office, he thinks the stock price is more positive than negative.

So let me just give you kind of a look forward a little bit.

Our Asset Management business is a great position.

We've not had just going up but record AUM because of the market but we've had great inflows.

Part of that's really driven by our Private Client Group business also, with record client assets under administration, record productivity and we've got a very good recruiting pipeline.

So we've added not only we have a lot of people coming in, a lot of large advisors.

I think we've really kind of [cracked] of being a place that people with large books and big firms look at us as a great destination.

So we take the time, we work hard in recruiting every day.

But those business, I think if you look short to midterm, are in great shape.

The Bank, we've had good loan growth.

Now the cautionary part there is spread tab compressed.

We see the compression slowing.

If they stop compressing, or expand, that's good, but usually those cycles take a bit.

The other thing was the provision.

We've had -- because credit qualities increased, our provision was pretty low this quarter given all the loan production.

And of course that's not going to continue forever.

So we think that with the growth of the loan book and those two factors, we may be kind of flattish in earnings there.

But on the Bank and it really depends on spreads.

But we'd expect to get some growth.

But we'll have those two headwinds and we'll see where they balance given what happens to spread in the marketplace.

On the Capital Market side, we like our franchises, I think have done a great job of building them.

We're well-positioned.

If you look at pipeline alone, we've got a very good pipeline in M&A.

Last year was kind of a record year for us in M&A.

And we could do better.

Same with the equity underwriting business, but that's going to be very market dependent as we go forward.

So the pipeline's there, but the market has to cooperate in order for us to be executing on that.

In the Fixed Income, we love the franchise we have.

The commission rate -- condition volume's challenged in the market.

And we're not immune from that.

So I think we're doing a great job with our accounts.

But as volumes are down we don't see any short-term relief on the commissions as long as this rate environment is what it is today.

So I think moving rates will help us, but we're going to have to wait for that.

In the meantime, we continue to generate good solid trading profits I believe with good risk management and cost control.

In Public Finance, we've been rated a top 10 issuer in these last couple of years, but issuance is slow.

So we've got another very good franchise, good location, we continue to grow, but again, that's going to be market dependent.

And the tax fund credit business I would consider our backlog, vibrant.

It's been a great business.

This quarter was off just based on closings, but that's business we feel very good about and think we'll continue to perform.

So with that I just want to remind you of our guidance.

I think our first quarter got people forgetting that our guidance had been that we thought by the end of this fiscal year we'd be at a 68% comp ratio as a run rate and a 15% net margin.

We still believe that.

I think the first quarter people thought we had checked the box and we tried to warn we hadn't yet.

But we believe that if you look at the average of these quarters we're making great progress.

And that is still where we expect to be by the end of the fiscal year.

So with that, I know we spent a lot of time, we had a lot of items going this quarter, but now we'd like to open up for questions.

So, Jody, could you open it up for questions, please?

(Operator Instructions) Steven Chubak, Nomura

Hi, good morning.

So I guess we'll just start off with a couple of question on the Bank.

We have seen core expenses at the Bank, excluding the provision, actually rise fairly steadily over the last couple of quarters.

Historically you had been running within a pretty tight range of $18 million to $22 million a quarter.

It stepped up to $25 million last quarter.

And actually in the most recent quarter, it had increased to $28 million.

And I didn't know if the increase was simply a function of higher regulatory and compliance burden for those banks in excess of $10 billion, such as yourselves of assets.

And should we be assuming this elevated run rate persists on a go forward basis?

Hey Stephen, this is Steve Raney.

Good morning.

Good morning.

The bulk of that increased expense is related to additional FDIC charges for the higher deposit level that we have given the size of the balance sheet.

And there's also an internal charge that the Bank expenses based on the deposits that we have.

So the bulk of that increase is really just related to the overall size of the Bank's balance sheet

And variable.

So it'll grow as the Bank grows.

Okay.

Thanks for that.

Steve, we do have I would say slightly elevated expenses that I would attribute to the regulatory framework.

Our audit and compliance departments are bigger now, but it's relatively nominal.

We're at 170 FTE at the Bank now.

So it's still relatively small on a comparative basis our expense levels and FTEs are very low relative to the size of the enterprise.

Okay.

So presumably what's going to be driving expense rate going forward is simply going to be the growth of the balance sheet?

That's correct.

Okay.

And I suppose focusing more on the credit side now.

Clearly the credit trends have been impressive.

If we look at the dollar allowance, it's been stable for the last few quarters while you've added $1.2 billion of loans.

I suppose what I'm trying to glean is what through the cycle charge off or provision rates should be contemplating?

And I guess what should we be modeling in the near-term versus the longer-term?

Yes, a couple of comments on that.

We did have substantial improvement in credit quality.

That trend continued.

There's really not a whole lot left in terms of -- in our criticized category.

We actually only have eight commercial loans that have a loan balance currently that are in a criticized category.

So it makes it challenging to -- I wouldn't forecast more release of reserve related to our criticized assets.

At least maybe nominally, but it won't be significant.

So if we continue to grow loans, I would expect that we'll actually be adding to our allowance on a relative basis.

So --

And based on our loan mix, it might be at 130, 140 basis points, on average, increase in loans.

Something like that.

Okay.

The wild card I want you to remind you all of is that we do get a SNC exam.

That's right, this quarter.

That comes in and we don't know what it will be.

Sometimes we agree, a lot of times that we don't, but it is what it is.

Historically if you look back the last four or five years, every year in the June quarter we get the Shared National Credit exam results.

There are usually a handful of loans out of our 400 that are subject to a Shared National Credit exam, that we have a difference in the ratings.

Sometimes ours are more harshly rated.

We don't upgrade them based on the Shared National Credit exam.

We do always have a handful of loans that are more harshly graded by the regulators.

And we downgrade those loans so we usually add some provision expense on some allowance related to those downgrades in the June quarter.

Okay.

Thanks for that.

Just one more on the loan growth outlook.

And Paul, I appreciate a lot of the detailed color you had given earlier in terms of the general market backdrop and pricing.

What we've heard from a lot of the big banks was that they were beginning to retrench a bit given that they felt as though they were not being adequately compensated for taking the credit risk on the commercial side at current pricing levels.

And assuming the backdrops stays, on a go forward basis, is similar to the current market, how should we be thinking about loan growth trajectory on a go for basis?

That one's hard to say.

We're hoping that people, having this view, which we share, that as spreads are coming in you've got to get paid for risks, will actually have the effect of maybe spreads coming out a little bit.

So which we hope the impact is.

In terms of loan balance growth our production's been pretty steady the last few quarters and it's up so much this quarter just because payoffs and refinancings were down.

I would also just mentioned that this quarter really showed the power of the diversification of our various business units inside the Bank.

We did -- made our first tax-exempt loan during the March quarter.

That's business that's directly referred to us by our Public Finance practice.

So it's loans to high credit quality municipalities, large not-for-profits, higher education, hospitals, and the like.

Our Canadian business grew by $100 million in the quarter.

Our loans to REITs in some project financed real estate, along with our normal C&I or commercial and industrial loan book grew.

Our SBLs, we closed 450 units in the March quarter of loans in our securities based lending business for $330 million of loan commitments.

And we closed 170 mortgage loans during the quarter.

So we've got a lot of different businesses inside the Bank now.

So we're not really relying on any one business to drive it.

So --

Alright, thanks.

That's it for me.

Thank you for taking my questions.

Joel Jeffrey, KBW

Good morning, guys.

Morning, Joel.

Thinking about -- I mean you guys have done a really nice job of growing your sort of tier one capital and the ratio continues to improve.

In terms of the growth in that, just wondering, is there a point in time where your sort of start to think more about returning capital either through buybacks or increasing the dividend?

Or do you really focus more on building out growth capital?

I don't want to sound like a broken record, Joel, but I'll go over -- our view right now is first we tend to be more heavily capitalized than a lot of our competitors.

That's the philosophy.

But at some point if we have cash we can't deploy, we'll have to look at returning it.

Our view right now is, we have opportunities to invest cash in niche acquisitions.

We talked about some of the areas we've look at.

We've looked at particularly Asset Management and we feel over a reasonable period of time we can deploy it.

If we can't, we'll have to focus on how we return it.

But our goal right now is we think there are opportunities to deploy that capital inside the business.

Okay.

An then just, Paul, I appreciate the comments you made in terms of the outlook and particularly ECM being kind of market dependent.

But just wondering given the volatility we've seen and coming off the strong quarter you had in ECM.

Have you seen any kind of issuer hesitancy in terms of bringing deals to market or has the outlook changed at all just given what's gone on in the markets over the past month or so?

I don't think so.

I think we've had, I'd say a ridiculously strong market over the last year.

And we've had a little bit of correction this quarter.

But I think our read right now is the issuers are lined up just waiting.

If there's a good market, they'll go.

So I don't see it any different than we saw it a quarter ago.

Okay.

Great.

Thanks very taking my questions

Devin Ryan, JMP Securities

Hey good morning, guys, how are you?

Hey Devin.

So, just a question on Fixed Income.

Obviously it's kind of continued to be soft.

And appreciate the commentary around the need for, I guess, higher rates.

I mean I get that you guys have a pretty [nichy] Fixed Income business with a lot of focus on depositories and municipalities.

But just trying to get a little more color.

Is there anything else here that you think could drive better activity?

And then just outside of that, is there anything else going on behind the scenes of the Company where you're trying to boost growth within the Fixed Income business broadly?

Whether it be adding to other areas that you may see as better growth drivers or is it more just staying the course and hoping that we get a little better rate environment that could drive better client volumes?

I would say that first, rates and volatility are -- [and per visits] are the big driver's in Fixed Income.

So volatility has been kept in a pretty short range and rates have stayed low.

And so we need the both of those.

I think moving rates, a changing environment, would help that business significantly.

We have looked at growing the business.

We're pretty committed to keeping our risk profile the same.

So we don't need to expand.

If you look at our core franchises whether it's the Bank depository, the Muni space, or the Govi space where we're pretty comfortable in our position.

So as we look at other businesses outside, we are looking at a number.

But they've got to stay within our risk profile.

If they don't -- some of the businesses we look at or the opportunities we look at in the marketplace, get outside of our risk profile.

So I don't think you're going to see us expand much in what we're doing now.

But we are looking at adjacency's.

We just haven't found anything compelling at this point.

We are expanding in the UK.

I can't say it's a huge profitable venture for right now.

We've got a good team and we've gotten a base, and it's a start up.

We've had that initiative on since pre-Morgan Keegan and it's continued to try and grow it as we have in our both -- in our Capital Markets and our Private Client Group where we had an equivalent of an independent kind of franchise there in London.

And looking at growing that also.

Thanks.

And just with respect to FA recruiting.

You had a nice quarter.

It's sounds like you're pretty optimistic there.

So can you shed any more light I guess into the outlook for additions and maybe how that could play out over the year just based on the conversations you guys are having?

How -- are the office visits up over last year?

Just any color with respect to that.

And then what other areas at the firm, outside of the financial advisor, private wealth management area are you looking at to add people?

We are, we have think 150 openings right now in our Company so we are -- or higher.

If you look at the recruiting pipeline, you could say it's up from last year.

It's very, very good.

The first of the year is a time when it's probably the most active time in terms of people coming down both because of the year end change and it's a nice place to come visit in the winter.

But that pipeline still looks good and it's better than last year.

Our results are better than last year.

Our pipeline is better than last year.

Our RA initiative is relatively new.

And that pipeline's good.

Without a lot of results.

We've had a couple join, but we're hopeful that, that and are hybrid select model will both increase.

So that pipeline has been growing, but it takes a while to actually close.

So you're, probably a good year process by the time you bring someone in and the time they sign up just for lots of reasons.

Most -- very good advisors are slow because they're worried about their clients and they want to make sure it's a good transition.

So the pipeline looks good and it's been good.

Areas outside the firm as I've talked Asset Management we see as a growth opportunity.

We like the M&A space whether it's in Europe, Canada, or the US.

Continue to grow with we see opportunities there.

And there's some others that we look at in and out.

So we have a good corporate development effort now.

I can tell you we looked and talked to a lot of people, but we're very selective.

But that pipeline is actually pretty good now too.

We don't count on it.

And nothing's the size of Morgan Keegan.

There are much [nichier] types of opportunities.

But we're much more active and aggressive at sourcing, selecting and talking to people.

Great.

I appreciate all that color.

And just lastly, I apologize if I missed this, but I guess a question for Jeff, just on the numbers.

The account and service fee bump in the quarter, was that driven just by more accounts, more assets?

Or is there something else going on there?

Just trying to kind of gauge the sustainability of what was a really nice quarter for that line.

No.

It predominantly is that.

We've renegotiated some of our arrangements with some of the providers that we share fees with in that regard.

We've had to elevate our accruals in that level.

So I think that what you're seeing is that coupled with the implementation of some of the account and service fees that we talked about a couple of quarters ago with some of the client fee changes that have been implemented and will continue to be implemented throughout the year.

So I think that it's more a higher run rate than we have been at in the past.

Okay.

Great.

Thanks for the color.

I'll just make one comment on the number of 150 job openings.

I will make a comment that some number of those, not a majority, but some number of those would be to replace some consultants that we're employing particularly in some of the technology areas.

So it won't necessarily result in pure incremental expense as we bring some people on.

We had turnover too, so I mean you've got to replace.

I'm assuming of the 150 the majority of that is probably non-producing type of roles though, right?

Correct.

We don't post for financial advisors.

Thanks.

Thank you.

(Operator Instructions) Jim Mitchell, Buckingham Research.

Hi.

Good morning.

Two questions.

First on the comp ratio, I think Jeff, if I look back in the third, your fiscal third quarter last year, I think if you suggested if you hit your targets of 15% pretax margin, et cetera, that would imply, I guess on at revenue base, a comp ratio near 66.5%.

You did 68.1% last year and now we're looking to hold it flat this year despite revenues being up.

Do you think there's more opportunity there over time, or is it just maybe you've stepped up investment spending?

Had do we think about where that comp ratio could come out as revenues grow?

The comp ratio bounces around based on where we hire people.

Obviously contractors, if they have a good recruiting and a good production period, they have a much higher payout.

Based on our current mix of businesses and the current sources of revenues, to get to that 15% margin, we'd need to be at about 68% comp ratio by the end of the year.

The one ratio that we're really I guess in our minds now changing our internal target on, would be the Private Client Group margin where we started the year with the 9% target.

We'd be pretty disappointed if it ends up at 9% now.

Given the run rate currently.

But we also need that on the increased revenues to get to the 15% margin.

So 68% is our target for the end of the year.

I can't tell you exactly of the top of my head, what a year ago went into the number.

I don't really remember.

At this point.

Okay.

Well, fair enough.

And maybe just getting onto the retail, the Private Client side.

Can you give a sense on the commissions and fees line which jumped nicely.

Is that more kind of annuity like fee-based revenues or was it more trading?

How do we think about that line going forward?

Within the Private Client Group segment almost 70% of their revenues are recurring.

So they have a very, very heavy fee emphasis, trails, things that are not transaction oriented.

Most of the trading volume when we record number of trades, which we have to record to the exchanges and report, a lot of those are incurring in wrap fee accounts.

So not really generating revenues.

So clearly, the biggest driver has been the increase in assets.

We had a good increase from October 1 to January 1 in billings.

Which everyone was aware of and built into their models.

As well as continued recruiting and people bringing in new assets going forward.

So it's really has to do more with asset levels than it does trading volume.

So most of the sequential improvement was asset levels is what you're saying?

Yes.

Okay.

And if we kind of do the back of the envelope it looks like you might have had close to $5 billion plus in net inflows.

Is that a fair number to think about?

I don't know that on the top of my head.

I mean we've had new FAs and we've had new, versus -- you're talking about versus appreciation?

Right.

I don't know the breakdown in total client assets of that number.

I know it within Asset Management but I don't know it within Private Client Group.

Okay that's fine.

Certainly, you can assume that it grows.

Generally it rises about 50% of the S&P because of a little over half of our client assets are equity related.

Great.

Okay.

I mean that's kind of where comes out.

Which would it mean it's mostly flows this particular quarter right.

Right.

That's helpful.

And just one big picture question.

I mean your sense of retail engagements.

Seems like it's been picking up, but what's your sense of where we are from a risk-taking perspective among your retail clients?

Cash as a percentage of assets is actually down, which is interesting for us.

The cash balances have been kind of flat this quarter and we're used to them always going up.

So if you look at where they're flowing, you would say equity kind of large and mid-cap.

And Fixed Income, short duration.

But having said that, I would still talk about the retail and the individual investor is cautious.

So trying to get some return on their assets, but cautious in the marketplace.

So it's up, but I wouldn't call it, they're all in.

Right.

Okay.

Alright, thanks for taking my questions.

Sure.

(Operator Instructions) Alex Blostein, Goldman Sachs

Great.

Thank you.

Good morning, everybody.

Hey, I apologize if you guys covered this already, but I wanted to kind of run through the expense structure just one more time.

So I guess if we think about the truly seasonal impact, Jeff, I think that comes out to be somewhere around $10 million range that we should expect to come down.

Is that going to happen I guess all in the second quarter or sorry your fiscal third quarter or kind of like over the course of the year?

And then I was hoping you guys could quantify the actual dollar amount you spent on data center reallocation.

The $8 million to $10 million range number I have you is stuff that should disappear right away.

The FICA I took one quarter of it just assuming it dissipates ratably over the rest of the year.

But that wasn't all necessarily seasonal.

It also included the running of the television ads and data center relocation, which don't happen every March.

But the rest of it does happen every March.

The data center relocation was about a $2 million total cost to us.

Not a total cost but just kind of an overtime testing cost that was elevated.

But the data center cost a little bit more than that.

Obviously we're going to have cost of running it going forward.

And we had the cost of building it in the past, but this quarter that was the elevated relocation expense.

Okay I got it.

Sorry, to dumb it down expenses stepped down by about maybe $8 million or so next quarter?

That's my belief based on these factors.

Great.

Thanks.

That's not saying nothing new can arise that we don't know about today, but based on what we know that would be correct.

No, I get it, all else equal.

So the second question that I had for you guys was around the Fixed Income trading environment.

It looks like Muni fund flows have gotten better this year.

I think they're positive from a net year-to-date basis for the industry.

It's obviously a very big player in the public finance space and the meeting space.

What impact is that having I guess on the Fixed Income business for you guys?

And if the strength continues, what kind of results I guess we should expect from Fixed Income trading?

The Muni, if you look at the retail trading because of the interest in Muni's it's actually performed fairly well.

The institutional, the corporate, and the corporate kind of other businesses that have really hit.

So I think that you're seeing what you're seeing in the run rates right now we see as continuing until there's a change in the markets.

So the retail, I call retail kind of commissions part of the business, okay.

And the institutional part very tough.

Got it.

And then the last one for me, guys.

I mean obviously lots of focus in the market on the higher interest rate backdrop potentially down the road.

You guys have provided sensitivity to, I believe, somewhere around 100 basis point rise in interest rates.

Presumably there could be some further net interest margin expansion at the Bank, if rates continue to rise beyond 100 basis points.

Have you given any more thought on what the ultimate offside to pretax income or revenues could be for the franchise as a whole beyond the first 100 basis point?

Yes, on the first 100, it's hard to quantify.

It depends on how much free cash we're holding.

We obviously would earn more our own corporate cash.

As rates continue to rise from there.

But beyond that, it's a fairly nominal number.

Say it's somewhere between $10 million and $20 million, for every 100 basis points beyond that for the next, up to about 300.

The Bank's going to operate off a spread more than just what the rate is.

It's not overly materially after the first 100.

It's really the biggest factor is the earnings on our own free cash.

Got it.

Okay.

Great.

Thanks so much for taking the questions.

(Operator Instructions)

Are there no further questions, Jody?

Yes, sir, there are no further questions.

Great.

Well, again, we think this was a good quarter.

And we know that the first quarter and the second quarter bumped around, but as an average I think we're about where we'd expected to be.

Well-positioned with the markets are with us.

We feel good about where we are.

So thank you for joining us and we'll talk to you again soon.

Thank you.

That concludes today's conference call.

You may now disconnect.