雷蒙詹姆斯金融 (RJF) 2015 Q1 法說會逐字稿

Good morning and welcome to the earnings call for Raymond James Financial's FY15 first-quarter results. My name is Felicia and I will be your conference facilitator today. This call is being recorded will be available on the Company's website. Now I will turn it over to Paul Shoukry, Vice President of Finance and Head of Investor Relations at Raymond James Financial.

Thanks, Felicia, and good morning. On behalf of our entire leadership team, I want to thank you for joining the call this morning. We really do appreciate your time and interest in Raymond James Financial. After I read the following disclosure, I will turn the call over to Paul Reilly, our Chief Executive Officer; and Jeff Julien, our Chief Financial Officer. Following their prepared remarks, they will ask the operator to open the line for questions.

Certain statements made during this call may constitute forward-looking statements. Forward-looking statements include information concerning future certain strategic objectives, business prospects, anticipated savings, financial results, industry or market conditions, demand for our products, acquisitions, anticipated results of litigation and regulatory developments, or general economic conditions. In addition words such as believes, expects, anticipates, intends, plans, projects, forecasts, and future or conditional verbs such as will, may, could, should, and would, as well as any other statements 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, which is available on the SEC's website at SEC.gov. So with that, I'll turn the call over to Paul Reilly, CEO of Raymond James Financial. Paul?

Thanks, Paul, and good morning, all. I have got a little cold here. You will have to excuse my voice. While we are here in St. Petersburg focused on recruiting, we can watch the world leaders focused on solving the world's problems, but it's a little bit warmer here in St. Petersburg than in Davos.

I'd like to start by saying, first, it's a solid start to our fiscal year, especially considering the volatility and uncertainty in the whole capital markets segment. Quarterly net revenue of $1.25 billion is up 6% over prior year and down 3% from the preceding quarter, but part of that is based on an adjustment we'll talk about, and we're also comparing it to last quarter, which was an exceptional investment banking quarter. Pre-tax income of $203 million, which is a 16.2% pre-tax on net revenue, net income of $126 million, or $0.87 per diluted share.

Our ROE annualized hit 12% on a conservative, and some would argue prudent capital base, given the state of the economy and particularly, 12%, given the rate environment, we believe is very good on our capital base. Most importantly, our key drivers of our business are up. Record quarterly AUA of $483 billion, down from last month, but a quarter record; record quarterly assets under management of $66.7 billion; net loans at $11.8 billion; and maybe most importantly, which drives those other factors, is a net 71 addition of financial advisors in the quarter alone.

Going to the Private Client Group, quarterly net revenues of $845 million, up 8% but down 2% from the previous quarter, 8% over last year. Out of $19 million of that revenue, Jeff will address the $10.5 million mutual fund adjustment, which adjusted in this quarter, but you could have spread over the last five years; and 6% plus in some syndicate and insurance and other commissionable products that was down in the quarter. Pre-tax income of $93 million, which is 30% over last year's quarter; and 11% pre-tax margin to net revenue. So a strong performance by the Private Client Group, which keeps marching on.

Retention keeping our goods advisors is job one and we had good results in the quarter. Recruiting is job two, with 158 additional advisors over last year's quarter and 71 over the sequential quarter. The pipeline of our HOV, which are home office visits, is very robust and we look forward to a good recruiting season. Client assets under administration are $459 billion. 38% of that is in fee-based accounts. In fact, our total recurring revenues in the Private Client Group segment are hitting about 75%.

Capital Markets, quarterly net revenue of $232 million, down 3% from last year and 11% sequentially, but again, in last quarter we had a record investment banking revenue year. M&A stayed very good at $47 million, but other investment banking revenue was down. The number of deals in the US were essentially flat. We had a few less lead deals in that quarter and our fee per deal and our revenue per deal that we participated in was down. This was compounded by very weak conditions in the canadian capital markets and energy-based economy, which has been tough going. Our tax credit funds were also down about $6 million due to timing, not to run rates, just when we close deals, so they all impacted the quarter. Volatility helped our institutional commissions, up 10% sequentially in equities and 12% in fixed income.

Our trading profits were down, but again, some unusual factors. $2 million of that was due to fixed income, softer previous quarter, but $3 million was really a write-down in Canada due to an energy-related deal and a [bought] deal that we were [right lead] on, so those impacted trading profits.

Asset management is humming along, for record quarterly assets of $66.7 billion, 10% over the [private] year, both by a market appreciation and net flows, about $800 million of net flows on managed accounts for the last quarter. Record net revenue of $99.6 million benefited from a $5 million performance fee. We had a record pre-tax of $39.8 million, which gave us a 40% margin but that is due to those factors and we expect that to move more towards that 30% margin target.

RJ Bank, record net loans, up $850 million sequentially, part of that driven by an acquisition over the $207 million residential portfolio. Record quarterly net revenues of $100.5 million; pre-tax of $66.4 million, up 20% over last year's quarter. NIM improved 2 basis points over last quarter, essentially flat with last year.

The loan-loss increases were almost entirely due to loan growth, not credit issues. In fact, our credit metrics continue to improve. If you looked at nonperforming asset as a percent of total loans, they declined from 60 bps from 69 bps a year ago, and criticized loans were down also. With that, I'm going it over to Jeff who will go into some more of the detail numbers. Jeff?

Thanks, Paul. Paul touched on several line items, so I will try to just hit the ones that he did not touch on. When you compare this quarter to last year's quarter, in general, most of the revenue and expense line items are pretty self-explanatory. Commissions and fees are up, obviously, largely PCG and just our general size, with more advisors, more assets, et cetera.

He touched on advisory fees. We did have a performance fee last December, as well, in fact about twice the size of the one this year, so that is an even more impressive gain in advisory fees over the prior year. Interest is up on the revenue side and net side, just primarily as a result of the bank's growth. Finally, all that loan growth we had is kicking in to net interest.

Account and service fees is going to continue to grow, just as our general size grows. I know we said last quarter, maybe $108 million was the right run rate and that's where everyone had modeled it, but the fact is, between all the various types of fees that go in there, with IRA fees, transaction fees, and some rep fees, fee accounts -- all kinds of fees that are assessed around the Organization. Actually, the fees we get from other banks in our bank sweep program, remember that is not interest, that's fees to us. All of those things fall into that line, so that's going to continue to grow as our overall asset base grows. Paul has touched on trading profits and the factors there. Other is down pretty significantly from last year, but last year, we had a bigger private equity gain in the quarter than we did this year and we also had $5.5 million of gains from ARS redemptions that we not have this year.

On the expense side, there's just a couple of things that deserve mention. One is versus last year, first quarter, communication and information processing is down pretty significantly. Also down just slightly from last quarter, the preceding quarter, and certainly versus your estimates and I know that's because of our guidance toward a bigger number; while we have a -- you might think this is a fairly easy line item for us to budget, but the fact is, while it's not difficult to budget total spend, it's a little difficult for us to judge when and how things will be capitalized versus expensed, when things are completed along the way.

Then it's also difficult, as other example, in various projects, if we use employees to do the project, whether it's a maintenance projects or whatever, it can be an expense item. If we hire outside consultants to do it, it falls in the IT expense line. So it's a little difficult for us to get the P&L impact on that line item, although we certainly talk about total spend at the budget meetings quite a bit.

Business development is going to continue to increase, largely due to recruiting efforts. Investment advisory sub-advisory fees, obviously a growth in assets where we are the advisor and we sub-advise in some of our programs to unaffiliated managers. The bank loan-loss provision is up pretty dramatically from both last year and last quarter and I don't think $9.4 million provision expense should really shock anyone in light of $846 million in net loan growth in the quarter.

That's not all corporate loan growth; it's in the various categories. I know through November, we had only had $300 million of net loan growth from the September, so obviously, we had a very, very active December in loan growth at the bank including a pool purchase of residential loans and that led to the bigger production and the bigger provision for the quarter. And then the other expense, that's another item that's going to get bigger just as we get bigger. There are a number of individual small items that go into that particular line item.

Versus the preceding quarter, the securities commissions and fees, as Paul mentioned, they were up nicely on the Capital Markets side, but down sequentially on the Private Client Group side. That decline of about $19 million was about one-half, or a little more than one-half of that was made up by this mutual fund adjustment, which relates to our going back five years, related to share classes used in retirement accounts.

We've heard that this was going on at other firms, so we voluntarily went back a five-year period. That is a systemically generally worst-case type number. When we scrub it, we may have some positive adjustments to that going forward, but for now it is about a $10.5 million type item that we've chosen to reverse out of commissions. Again, it covers over a five-year period looking back; and then appropriately, we took the corresponding reverse load expense, commission expense related to that.

Investment banking, we had a huge September quarter, record quarter for us in September, so obviously, you would expect a good decline there. Again, Paul mentioned, it's pretty active, just the economics per transaction were a lot lower than they were in the preceding quarter. We talked about investment advisory fees. They are obviously tracking assets. And we had a performance fee this time. Interest is still generated at the bank predominantly, in terms of the increase. The other revenues are actually up nicely. We had a little more PE gains and we also had this particular quarter, a sale of an REO property at the bank for a profit, which kicked in there.

On occupancy and equipment, it may look odd that that would decline. If you remember, it was a little bit high in the preceding quarter. We talked about a couple of factors in terms of some maintenance work that was being done at one of our facilities in Southfield and some things like that, that made a little bit higher than the run rate last quarter, so it's really kind of on track.

And then the other expense, one other item I will mention that's ratcheting up other expense. We actually have several of our tax credit fund deals that have been purchased by our own bank as part of their CRA program and it's a good after-tax return to the bank. The accounting has been changed on those such that if you buy them from a third party, the tax effect of what would have been a pre-tax loss all gets netted down below in the tax line. However, since we're buying from an affiliated party on a consolidated basis, we end up showing that as a loss, a pre-tax loss, on our statement and then correspondingly, we get a tax benefit. So not a huge factor. We only have three transactions that we own at the bank, but just one more nuance that's going to impact us.

Let me just talk about three other things. Our pre-tax margin, obviously came in well above our 15% target for the quarter at 16.2%. And perhaps, our internal target may ratchet up over time here, given the state of our businesses and the fact that we're seeing the leverage from the increased revenues in these businesses that we've talked about over the years.

Comp ratio was down to 67.2%, but remember we had a couple of adjustments. We had some -- this mutual fund, the expense side of that was reversed in there. We also, in every December quarter, reverse whatever over-accruals we had from the prior-year in incentive compensation pools. That's a factor every year. We try to keep it under $10 million, but it's there every December quarter for us, to some extent. Without those things, it would have been in the high 67%s, and again that 68% is an annual number, annual target for us, not necessarily to happen every quarter. This one's, because of the incentive comp reversals, is typically a little lower, and then next quarter would be a little higher with FICA restarting and other things that we talked about a year ago.

Lastly, the tax rate was 37.8%, a little higher than was projected. I would say, we try to, every quarter, look at what our annual tax rate is going to be, based on what we know for the year-to-date. We don't know a whole lot by the end of December for the whole fiscal year, but one of the things we do know is what the [coley] gain or loss is, and it was a nice gain for the quarter; it was about $6 million gain for the quarter.

But we assume for the balance of the year that it's not going to change. We don't assume that, that's going to be $6 million per quarter, so on a bigger pre-tax income base, we have less effect from that. And we somewhat conservatively estimate all of the annual impacts, just because we don't want any negative surprises, or to minimize the negative surprises toward the end of the year in terms of the tax rate. But for those modeling forward, if you assume a flat market rate environment, or flat choppy, that 37.5% type tax rate probably is still a pretty good estimate to use going forward. Paul?

I'll give you a little bit of a forward look. Again, once I'll repeat the good -- the [areas] of the key drivers of our business, which is related to the Private Client Group, are all very positive, so assets under administration, since we bill quarterly in advanced, we get some tailwinds from that. Our assets under management are up. Net loans [took] the provision this quarter, but those loans should be producing next quarter.

Recruiting remains robust and this is the peak recruiting season, this next quarter, so in terms of visits. It takes a while between a visit and a sign-on, but that's been going very good. In Private Client Group, productivity of the advisors continues to go up, so we should have a tailwind in that area. This also impacts asset management in the bank.

For us, in the key is our culture. One of the reasons that our net additions are so good is that we're very focused on making this a very friendly place to work and that's our number one. It allows us to keep people and allows us to offer less transition assistance than other firms do to bring people in, because people want to be here.

We continue to invest heavily in our tech spend, so it when it gets down, the annual run rate, we still hold to and believe we're becoming a leader really in the [SA] desktop technology. Asset management continues to grow, with net flows driven by PCG recruitment. Again, the 40% margin was a blip, that 30% margins were a normal run rate for it.

The bank growth is always tougher to predict. As Jeff said, last quarter it wasn't really big through November and then we had a great December. We had a little slower start in January, so it's always hard to predict what's going to happen there. The NIM increase of 2 basis points spells that hopefully that the spreads are widening a little bit but --

On that, we're still comfortable with the mid-teens guidance in overall net loan growth for the year. We're still comfortable with 3%ish net interest margin for the year, even though we've seen some gradual improvement here.

Then Canada will have some impact next quarter, the 25 bp decrease does affect our variable-rate loans in Canada. It's about a $600 million book. But all in all, we're in good shape from those businesses.

Capital Markets is a tough one. Volatility increases certainly helped institutional commissions, but volatility sometimes makes it harder to go to market, depending if it's volatile trending up or volatile trending down. So that has some questions and we do have a very good oil and gas midstream energy practice. One of our biggest practices, certainly in terms of financings, could impact us short-term if oil prices stay down. Certainly M&A aspect, which we do a fair amount of also, would be up. And the Canadian business is certainly impacted because it's a commodity-based practice.

But even within that, we're growing our platform. We added a consumer team last quarter. This quarter, added a life sciences team and a new head of M&A in Canada. Public finance, coming off a great year, still a tough market. We went from actually 10 to number eight in the league tables, full credit to lead on negotiated issues. For the first time hit over $10 billion last year, but still a tough market. Fixed income trading profits are more difficult as you get a flatter yield curve. Institutional commissions certainly have increased.

There's been a lot of questions for everyone in general on energy exposure, so I'll talk a little bit about ours. If you look at our loan book, there's about 3.4% of our loans are broadly in the energy sector. We only have one loan to an E&P company and it is an investment-grade rated facility. And we do have some servicers, small exposures, but most of them are midstream companies and we feel pretty comfortable with our loan exposure.

We have been stressing it and don't feel, unless oil prices stay down for a very long time, that we'll have a negative impact. So we like our credit exposure. Certainly, oil prices are good for consumers long-term, so we have a big consumer-based business here, so it may show up in other parts of our business. In short term, could have an impact on our investment banking, financing part of our business but that creates an M&A opportunity.

The next quarter, in some ways, is the tougher quarter for us. It's sometimes, when a lot of deals close by year-end, you don't know what's going to happen in the first quarter in banking. Certainly, our comp ratio will be higher for a number of reasons, not just the reversal going away, but FICA hits us in this quarter. As you remember, if you go past, it's one of the increased costs. We also send out lots of statements at the end of the quarter, and there's a few million bucks impact on that, that hits us in this quarter for annual reports and client statements.

So with that, the basics of the business are really strong. I like being here at Raymond James with our position, in terms of growing assets, capital, and advisors. Short-term, it's hard to tell in this type of environment with both in the global economy and what's happening in the US. We feel very, very comfortable in our position for the year, but it's hard to predict what's going to happen next quarter. So with that, Felicia, we'll open it up for questions.

(Operator Instructions)

Devin Ryan, JMP Securities.

Hey, good morning, everyone. How are you?

Devin.

I just want to dig in a little bit on the NIM in the bank and the puts and takes there because I know there's a lot of moving parts with clearly some rate pressure here, but then the loan growth has been so outsized and not all of that has been reflected yet. So the big question is does it go up structurally with the loans that you brought on and then the offset is there more recent rate pressure as things roll off? I'm just trying to think through some of the moving parts to how you stay at 3% or even if that may even go up a little bit from here?

Hey, Devin, good morning. It is Steve Raney. As Jeff alluded to, the 3% is a good target for the balance of the year. I would say, right now we're seeing actually maybe a slight widening in corporate credit spreads. Residential spreads have probably pulled in a little bit, but things are relatively stable right now, so we're pretty confident that, that number is going to be pretty flat for the balance of the year when you blend it all together.

Okay. Got it. Thanks. And then--?

As a reminder to the vast -- I'm sorry, Devin, I was just going to remind everybody, the vast majority of our loans are a floating rate, LIBOR-based loans, both our corporate loans, as well as our growing securities-based loans, where we're making loans to Raymond James clients secured with their Raymond James brokerage accounts, so those two loans components are almost exclusively LIBOR-based, floating-rate loans.

Got it. Thanks, Steve. Then with respect to the debt underwriting business, I know there was some pressure this quarter, as you alluded to, but the revenues just look pretty soft, given that you've had some pretty nice improvement there the past few quarters, so just a little more color there would be helpful. Was there seasonal factors or was it related to just the macro backdrop and the outlook for that business, specifically, just given that we took a decent step back here this quarter?

All I can tell you is our pipeline is strong. We've moved up in market share; it's just a macro market, so when it increases, we'll do well. We are well-positioned. We have a good team. We're continuing to expand the team, actually, and grow in the market, so there is nothing -- it's hard to tell. The backlog is very good in the business, but it's just new [issues] are down across the board.

Got it. Okay. Fair enough. Then just lastly here, with respect to the -- just a clean-up item. The commission adjustment that occurred, the corresponding expense, was that in the independent channel or the traditional channel? I'm just trying to get a sense because I know that can have a big impact in terms of what the commission rate is that was netted against it, so I'm just trying to get a better sense of the actual earnings impact?

We just made a broad assumption at this point of half and half and then took us -- it was about -- blended into about a 60% charge for our payout rate.

Got it. Okay. Great. Thanks, guys.

Chris Allen, Evercore.

Good morning, guys.

Hey, Chris.

Just wanted to talk a little bit about the communication and information processing line. You guys provided some color there and in the last quarter, there was a -- you talked about being on a bit of a hiatus in terms of capital projects. We're just trying to think about how that line should look at going forward. Is this a good run rate right now or should that start to creep back up again?

It will start to creep back up. Remember, Paul mentioned that next quarter -- it's not just IT, it's really all we call communications, so we put some of these mailing costs and things like that in there, as well, which are seasonally high in the March quarter with 1099s, year-end statements, and shareholder information. It's over a $2 million charge just because of that.

And to the extent that we've kept up our spend rate, which we are still investing heavily in technology to stay current here, some of the things that we've been working on will start to amortize, some of that will be kicking in. So, I would certainly expect it to creep back up toward where we had been guiding previously, which was the low to mid-$60 millions. But it's, again, it's a little bit of a hard number to put our thumb on, so I can empathize with your situation.

Got it. And then appreciate the color, just in terms of the energy exposure in the loan book. I'm just wondering how big of a component of the Capital Markets business has energy been historically? It sounds like stuff has been -- is a little bit weak right and you provided disclosure on the Canadian overall revenues. I'm just wondering, within the Capital Markets piece, how big energy is?

It depends when.

15% less.

The last year was 15%, but it goes up and down. Real estate is our biggest practice followed by energy, but it depends how those cycles are doing.

Of that 15%, a good portion of that was advisory base as well, so it wasn't all underwriting. 15%, 20%.

I would imagine, this current pullback is going to create some opportunities longer term, within that business, so not all bad, just near-term, obviously, a challenge. And then just one other question, just within the bank, it looks like other income, that was about $4 million roughly, $3.5 million to $4 million. I was just wondering if that was anything one-timer in there or it was it -- just because it's a big jump from what we calculated last quarter?

Chris one of the things that we alluded to earlier was the sale of an OREO property, a property that we had a foreclosed on, where we sold it for more than we had written it down to do. That was about $550,000 contribution. There's a bunch of other items that are comprised in there: foreign exchange, we mentioned in the September quarter that we don't have any other foreign exchange. We've moved the Canadian-denominated loans to the Canadian finance company, so they are -- we are really fully hedged now, so we don't have that volatility in the bank's earnings going forward, so those were the contributing factors.

That was a loss -- negative (multiple speakers) in the September quarter?

In the September quarter, right.

Got it. All right, guys. I'll get back in the queue. Thanks.

Christian Bolu, Credit Suisse.

Good morning, Paul. Good morning Jeff.

Good morning.

Just to follow-up on the tech spend, but a bit of a broader question. You've done a very good job in terms of improving solutions for advisors, but I'd like to get your latest thoughts on what areas you're targeting for future investments. Also any thoughts around any additional investments needed for things like data security?

Well first, I will take them in reverse. We take data security very, very seriously, and we've had both our auditors and other consultants review our security and we get high marks for our size. We've -- Bella and her team and the person that heads our data security have done a great job. As you all know, in this environment, we think we are as safe as you can be, but nobody is bulletproof, so we're very active in it with active monitoring and it's been a focus area and the bad guys get better and we continue to spend more, but we feel like we are as state-of-the-art as anyone in this area. We certainly can't spend what the biggest firms spend, but nor do we have as -- the broad a global exposure.

In technology, we continue to -- we've focused a lot on the FA desktop and reporting. We're spending more time now on cash movement, whether it's taking a picture of a check and depositing it, or making it easy to journal, or make our trading systems easier, integrating a lot of our data platforms so that we can do more data mining, and on the underlying systems, and be able to add new modules; so it's pretty broad-based.

We started out with a plan -- a five-year plan, we're halfway through it. We're right on every place we are and we continue to improve and get better. So it's certainly just upping the quality of the system all the way across to make our advisor life easier and to be able to manage the business better.

Okay. Makes sense. And then on the fixed-income business, I appreciate it's very hard to forecast, but your results have held on pretty well here. If the environment stays as it is today, just love to get your latest thoughts on how you see the revenue trajectory there over the next year or so?

Gosh, I would've been wrong calling the bottoms for a while, so the worst-case scenario is that the short-term rates go up a couple hundred bps and we have a flat yield curve through the 10-year and for fixed income. However, we're voting for it. It would be very good for Raymond James consolidated.

Certainly, volatility has helped in trading, but the flatter the yield curve, the harder it is on trading profits and even on commission volumes long-term. So, a low flat curve is the worst-case, and if you had to predict, it looks like we're moving closer to that than farther from it right now. We like volatility and a steeper yield curve, so you're going to have to make the predictions on that business.

But we have got a great team and a great distribution. They'e really active with the clients and so you're right, we've done better than most, but I can't tell you what the macro trends are. I can't say I see anything short-term that's going to make the business look a lot better. And as I tell our people internally, we believe this, we have an A team in a D market and they're still at double-digit margins and with a terrible markets, so I don't see short-term relief, but we've got a good team.

Okay. Thanks for the color there. And just lastly from me, Jeff, just remind us, in terms of client cash, how much client cash you have currently on the platform, how much of that is being swept to third parties and what kind of yields you're getting on that sweep?

We're up to about $32.5 billion. It's actually increased as we've brought on new clients and new financial advisors from the end of September. We have probably $28 billion of that $32.5 billion sitting in our bank sweep program, $10.5 million of that, roughly, going to our own bank, and the balance to unaffiliated banks. You know what the spread is in our own bank because we've talked about the NIM.

The spread from outside banks is a pretty big range, but we're seeing some upticks in that. There's more demand from outside banks so we've seen an increase. We're over 30 basis points now on average and we're seeing all the new contracts that come up for renewal and the new banks that we're bringing on are at higher rates than the ones that are running off. So we've seen a little turnaround there, really started about six to nine months ago, where banks actually now want deposits again, they aren't quite as easy to come by as they were in the past.

Great. That is very helpful. Thank you very much.

Bill Katz, Citigroup.

Good morning. This is actually Neil Stratton filling in for Bill this morning. I just wanted to ask a question about the Private Client Group. You mentioned the robust recruiting trends. Two-part question is, A, where is the growth coming from? And then, B, how does the productivity compare of the incoming recruits versus the overall platform? Thanks.

A couple of things. First, the growth in general comes from wire houses, for people who are, I'd say, from acquired firms, as deals build off and they are seeking the cultures they grew up in, so that's general. But also, we've focused on opening up the west and northeast. It is a big focus of ours starting a couple of years ago and it is starting to pay off, so one-third of our recruiting growth has come just on the west coast and northeast. They happen to be amongst the biggest markets where we have very low penetration, so we see huge opportunity there and have signed some very large teams and continue to have a lot of interest in the west and northeast.

If you look at our platform, we have national advertising, national servicing call centers. So the marginal cost -- we're already incurring the costs and not getting the leverage on a lot of those areas. We think there's a really, very big opportunity there and it's coming across all of our platforms -- employee, independent, and our RIA channel, which we've reinvigorated that is picking up in its backlog of recruits, too. So it's really cross the board and we see that if you measure it by home office visits, which are when people are serious enough to come kick the tires here in St. Pete and us also interview them, that's up. So it continues to increase, so we think the backlog is very, very good.

In terms of productivity, it's higher and maybe 25% higher on average. We've also seen for us, million-dollar teams should be big, and last quarter, we had three teams over $5 million join us just within six weeks alone. So we tend to get bigger teams that doesn't mean we don't get smaller producers that are high-quality and on their way up. We're just as interested in them, but the average is certainly up, so it helps move up our productivity numbers.

Okay. Thank you. And my second question is just the outlook for the comp-to-net revenue ratio. In your prepared remarks, you mentioned the 68% ratio. Is that still the target for FY15 and how would that move quarter-to-quarter, if you could provide any color on that? Thanks.

That is probably still a good run rate to use for this year, for the entire year. What'll happen to improve that over time, and it may improve slightly over that this year, is as revenue growth continues, eventually you get some economies of scale in the infrastructure you have here, as opposed to -- it's not all variable comps, there are some fixed comp elements to that. So it's really is going to come with scale over time as revenues grow, and like I said, it may happen this year if revenues continue to increase from the prior year.

But our most challenged quarter is usually next quarter when FICA kicks in across the board and that usually burns off in the third quarter, part way through the third quarter, so typically the pressure on that ratio, given steady business across, is in the next quarter.

Got it. Thank you.

Steven Chubak, Nomura.

Hi. Good morning.

Hey, Steve.

I just had a follow-up question on the [fixed] business. Just given now the shape of the yield curve and the rate pressures that have persisted on the long end, whether we should be thinking about $10 million as the run rate for net trading profits at least in the near to immediate term, assuming a static curve, which I know is a big if?

They've come in, really, for a couple of years, that run rate is probably reasonable. I can't tell you it's been -- it hasn't been increasing net profits -- trading profits. This quarter was challenged. We had an unusual situation because of Canada that impacted trading profits. In Canada everything in equity Capital Markets is a bought deal and you've got five days of exposure versus an overnight exposure.

We got in on a deal, which was an energy credit, where -- it wasn't [all place]. We weren't the lead left, but we were the lead right and oil prices went down, and we were caught in a position, so that is a one-off thing. That happens every few years, we will end up in a position on a deal. They do a great job there, but with oil coming in, we got caught on that one, so that's an unusual item. The rest of it is steady.

If we had to pick a range to -- I would say that, that would be the low end of the range, so if you want to be real conservative, you could use that number.

Yes, but the $3 million is a one-off.

Okay. Understood. That is really helpful. And then just a follow-up to a question earlier on the communications expense. I just want to make sure that we're modeling it appropriately. Should we be thinking about low to mid-$60 millions or as the annualized $250 million or so, given that it came in about $10 million less than we had anticipated. Should we assume that an incremental $3 million gets tacked on to a normalized rate or so we just assume somewhere in the low $60 millions, going forward, at least over the next three fiscal quarters?

For all of the reasons I enumerated earlier, it's a little difficult for us to tell. Low $60 millions for the -- going forward is probably a reasonable estimate at this point.

Okay. And then just one final one from me, maybe for Steve at the bank, thinking about the provisions trajectory, it did increase consistent with the guidance you guys had given last quarter. Should we assume that this is a reasonable run rate expectation, given some of the guidance you had given on loan growth for at least the remainder of the year?

Well, we're forecasting loan growth to be slower for the balance of this year relative to the December quarter and we would expect provisioning to be aligned with that loan growth.

Does that 130- to 140-basis point provision expectation still hold or is there any remixing issues that we need to consider?

No that's about right. The blend of the business does impact that. Our residential provisioning is lower than our corporate lending provisioning, as is our securities-based lending is lower, as well. But I would say that's a good 125- to 140-basis point provisioning on loan growth.

Okay. Perfect. That's it for me. Thank you for taking my questions.

Sure.

Hugh Miller, Macquarie.

Hi. Good morning.

Hey, Hugh.

Starting with a couple of questions for Steve. I appreciate the color you gave on the NIM and the widening of credit spreads and how that has been helpful to offset some of the pressure the yield curve. Wanted to get your take on deposit pricing competition when we start to get into an eventual rising rate environment.

It seems to be two schools of thought that we've been hearing, where some people are expecting that banks will use that increase as a means to lift their NIMs and not really compete as much on deposit pricing, where others are expecting some of the larger banks to have to compete actively because of their liquidity coverage ratios. Was wondering how you anticipate things might shake out when we do see rates rising and how competitive deposit pricing competition is likely to be?

Yes, Hugh. There is a lot of unknowns given that this is totally uncharted waters for all institutions, given the regulatory framework that you just referenced. The rate setting that takes place, that impacts us, is really a Firm-wide discussion. We'll certainly be looking at what the competitors are doing.

The various and [sentiment] that as rates rise, when we get back to maybe more normalized rate environment, that not all of that will go to the depositors, but that's yet to be determined, in terms of what the competition is doing. We want to do what is fair for our clients first and foremost. But we do think that rising rates, on the short end, they probably would help our net interest margins around the Firm, not only at the bank, but the fees, the spread on the other cash that Jeff referenced, where we only have about $10.5 billion of the $32 billion-plus of client cash balances being deployed at the bank currently.

Even if it gets more competitive, the assumptions that we're operating under--

Yes, very conservative.

Already take that into account, because I've not heard anyone be as conservative as we are in terms of client sharing, of a rise in rates at this point.

I definitely appreciate the additional color you guys have been giving. It's very helpful. Then some questions on the Capital Markets side. I noticed the hiring that you guys made with the director up in Canada for M&A and I was wondering if you could talk about the opportunities using up there, and historically, how much business you guys have produced for Capital Markets in the Canadian region?

It certainly been a mix. Canada did better than us in 2008 and 2009. 2011 was a strong year for them and it's been slower since because it's commodity based. The one thing we do know is, in Canada, too much has been on financings and we haven't really had an active M&A business. Our M&A work, where it's one-half our revenue here roughly in the US, it's been episodic in Canada and there's no reason for that. There's plenty of business.

So we been looking either for a firm or a leader now for a couple of years and finally was able to recruit someone after a couple of years effort and we think we have the right person to build out an M&A business. We think that will certainly help smooth out the Canadian Capital Markets business. I don't know if we were projecting -- he's just on board Monday, so not predicting any short-term impact from that. But Craig is a strong person and a good player and will build a team around it that will help us and smooth out the Canadian business, which basically is just a financing business right now.

Okay. That is helpful. And I was wondering if you talk a little bit about the risks and opportunities with the energy-related Capital Markets in both underwriting and M&A. We've been seeing a little bit of a pick-up in some secondary issuance in energy, as people are shoring up their balance sheets. And there's just some discussion about a potential near-term lull in announcement activity as people are hoarding capital levels at this point, but longer-term expectations are pretty strong. I was wondering what your view is and what you are hearing with discussions with clients and how concerned they are relative to their expectation to be opportunistic?

Our view is reflective of that, that first, we're very well-positioned in the downstream energy business, in particular, and that financings may be off for a little bit here, but M&A activity will pick up. When that is I don't know. A big deal was announced yesterday, right? So, who knows. But we're in the mix and certainly clients with cash are looking at these prices and looking for opportunities and producers that are more leveraged are worried about it.

So there's certainly really interest on both sides. When you get a deal or how long companies feel like they can hold out or when people think the bottom is, who knows? But I do think that if oil prices stay in the $50-ish level for some period of time, then M&A activity will pick up significantly. We're lower than that now but we think M&A is a good opportunity and that eventually financings will come back, too, but I can't predict when that will happen.

Okay. I appreciate that insight. Then last question for me is, if you could just give us a little more color or insight onto the economics per transactions that were a little less than what we've see before? And is it just a function of where things shook out in certain sectors, where maybe you don't have as dominant a position in, or was there anything in particular you guys noticed that would cause that to be the case this quarter?

It's just in the positioning and where it shakes out. You have -- use an extreme example, last quarter, Alibaba went out, and everyone, even if you had a teeny piece, got a pretty good fee, if you're in the syndicate at any level. Something that size, people do well, and when it's the smaller sizes, or if you're not the lead with multiple lead book runners and smaller co-manager positions, if you're in that co-manager position on smaller deals, you're getting a lot less fee per deal.

In the September quarter, we were on -- we had more lead deals and a lot bigger transactions and in this quarter about the same number of transactions. We're at three or four less lead positions, but the deals were smaller, so I don't think it's endemic of anything, it's just when they transactions hit and the sectors they hit in.

Okay. Just one quick follow-up, as we think about the backlog from a non-energy-related standpoint, are there certain sectors that you guys are seeing more interest in activity and relative to others?

The interest is still there, so I don't know where people across the board across in our businesses -- real estate is our biggest practice, but if you look at transactions across the board there (multiple speakers). The other thing that some people ignore, which is a decent-sized business versus tax credit deal, and it's doing really well. It had a bad quarter in terms of closing. We recognize our fees on partnerships closings and they're lumpy. We had a very good September quarter and this quarter was off just because of partnerships didn't close, but the backlog is very, very good so that also -- that and Canada exacerbated what was a weaker quarter; those two made it look a lot weaker than it really was.

That is very helpful. Thank you.

Joel Jeffrey, KBW.

Hi. Good morning, guys.

Hey. Joel.

Certainly appreciate some of the color you gave on the bank's exposure to the energy sector. Just wondering if I could dig in just a little bit deeper. This may be a bit too specific for you guys to be willing to answer, but when you think about the provision levels that you've got on these loans, would it be essentially relatively higher than what you are seeing on of the average portfolio or could you give us any more specifics on how you think about provisioning for these?

Joel, we have a 38 borrowers in the energy space that comprise the exposure of -- we had -- there's $403 million of outstanding loan balances and there's 38 borrowers at the end of December. Two of the 38 are in criticized categories, so we have substantially higher reserves on those two names. It goes without saying, we've been very diligent here in the last several months reviewing name-by-name, credit-by-credit and also certainly gathering intelligence from our investment banking colleagues and equity research colleagues that have a lot of expertise in this business.

We did downgrade, even in the past category, a few names, so I would say on average, that portfolio has higher provision -- higher reserves associated with it than our other sectors as a result of the recent commodity price pressure. So that's the process and we're watching these names very closely for sure.

But not again -- again, we're not -- share you concern, just given prices, but we think the names are well -- a good balance sheet that's well-financed and certainly prolonged downturns put pressure on everybody.

Yes, 75% of the exposure, as Paul mentioned, is to midstream names that typically do not have as much commodity risk associated with them, but continue to watch those, as well.

Okay. Great. And then just, Jeff, if you could just give a little bit more color. I want to make sure I understand the commission adjustment. Did you say you guys, you could have taken pieces of these charges over the past year or so in and why is now the appropriate time to do it?

We didn't know -- we weren't aware of the issue until we heard about it at other firms, but it relates to five years worth of activity. This adjustment relates to any potential issues going back five years. Again it was a systemic, systematically produced number for all potential transactions that might fall in this particular category. So it is five years worth of activity but we weren't aware of the issue until just recently and that's why it's -- it looks like a bigger number than it should be and related to one quarter, it would be almost a nothing.

It's a small number going back over time compared to our total commissions. It's just when we found it, we took the -- we recognized it and we just found it and estimated it and so it hits this quarter. But if you can amortize that over five years, you'd get a very small number and a very small part of our commissions.

What we are trying to give color to those of you trying to do run rates and things like that, that $10 million figure certainly should be a one-time hit to that line item.

Okay. And just so I'm clear, what exactly was the specific issue that it's addressing?

I don't want to go into a lot of the specifics because it's still very early in the process but it has to do with which share class of mutual funds were used for certain accounts.

Okay. Okay great. Then just lastly from me, in terms of the performance fees in the asset management business -- I apologize if I missed this before -- what generated that?

We have two accounts that we're still getting performance fees on and they both outperformed their benchmarks for the year. It's based on a calendar-year performance, which is why it hits in the December quarter each year. But it was less than last year. It was over $10 million last year or roughly $10 million last year. It was about $5.5 million this year. It relates to two accounts that have a performance fee associated with them and one that has noncontrolling interest associated with it, so it doesn't all follow the bottom line for us, but most of it does.

Great. Thanks for taking my questions.

Chris Harris, Wells Fargo Securities.

Thanks. Hey, guys.

Chris.

Another question on the NIM. The guidance you guys are giving, flat for the year, clearly a very good outcome given how much the yield curve has flattened, and I guess we're saying some of that is being supported by higher loans spreads. So I'm wondering, in an environment where load spreads come back in, do all of a sudden you have a risk to that NIM guidance? Really just trying to figure out whether that [270s] NIM number we had talked about a couple of quarters ago would come into play under that scenario?

Chris, our existing book is floating so the impact really isn't there. The question is what happens on new loans and new production and what spread we're willing to invest money in the bank in. Certainly, if we continue to invest and decided to make -- we thought the return versus the risk was worth it and you continued in a decreasing spread environment, it would impact NIM negatively. If it stayed flat, we would run as we are. If rates went up, it should -- and spreads widened, it would go the other way. But it wouldn't immediately impact the business, it would depend on the new production and what you bought in.

And how much you participate.

We pass on deals all the time because we don't think the return is adequate for the risk we're taking.

Okay. Fair enough

Just because at 10 years, yield is down, it doesn't mean it's going to compress. In fact, usually a 10-year yield comes down when it's economic problems and people are fleeing to safety, So it actually can widen corporate spreads, which is what we have seen recently. I wouldn't tie corporate spreads to the 10-year, except maybe inversely.

Right. But I was just wondering if loan spreads came back down, whether we would get into that [270] zone?

Chris, it would if we participated, and over time, we'd have to run off what is in the portfolio and replace it with the lower spread.

Okay. Right. So there would be some time for it to have a big impact. All right, a follow-up question on the recruiting. Great quarter for you guys. It sounds like the pipeline is really good. I'm just wondering, was there anything that happened this quarter to create such a large number, the 70-plus advisors that you added, or might this be a decent run rate for you going forward, given how good the pipeline looks?

No, if you look at it, it's been lumpy. Last quarter wasn't as big and two quarters was -- so it's just when they show up. We're only partially in control of that. They have to decide to come over, so that's certainly -- if you told me we could repeat this quarter three more times, I'd take it. I'd sign up for it right now.

It was an exceptional quarter, but I'll tell you, the pipeline is very good, and we think that we're going to -- our targets are going to do more than we did last year and last year was our second best year and so far we're on our target. But it could stop tomorrow, it could go up. A lot of that is not just dependent on us, it's depended on the markets, and frankly, a lot of it's dependent on what competitors at the larger banks do because that has more impact on advisors leaving than what we do, or don't do.

When these advisors come on, do you guys get all of the assets right away? In other words, when all these assets come over, is there a lag effect that happens, so an advisor--?

There's a lag and for the larger advisors, we say we get 70%ish in the first year and then the rest comes on after that, and they typically are growing their business because they are good advisors, so it doesn't all come over day one.

Okay. Thanks very much.

It takes a while for them to come in.

Alex Blostein, Goldman Sachs.

Hey, guys. Good morning. Believe it or not, I have questions left. Just wanted to pick your brains on the Capital Management strategy. I know it comes up every once in a while, but plenty of capital you guys deployed at the bank, prudently, but the share count continues to creep up slightly. Is there any updated thoughts on, A, at what point would you consider deploying some capital into the buyback as the multiple, at least on the earnings basis is not egregious? And secondarily, maybe an update on, as you bring all these new FAs in, does that partially impact the creep in the share count and what is the annual creep in the share count from RSUs and things like that?

I'll let Jeff -- our increase in share count is pretty steady -- I will let Jeff adjust address -- that really has more to do with the year-end comp than FAs per se. But if you look at capital, we are deploying a good chunk, lately in bank growth and FAs, bringing FAs on. If you look at free cash, between bonuses and bringing people on, it is down a bit.

We still have capital to employ. We're still looking at acquisitions. We're very disciplined. I've said before, we've looked at a lot of them and if we can't -- if they're not the right fit and certainly, first, culture, secondly, strategic, and third is price. We've had a number of conversations where price hasn't worked so we still think we can employ capital, but we're very disciplined, which people should feel happy with. If we think we truly have excess capital we can't use, we'll look at alternatives of deploying it. At this state, we think we can use our capital wisely.

In terms of share count, we typically have been -- we had been and between in that 1% to 1.5% a year dilution, really almost exclusively all the equity we issue has been retention oriented. We used both incentive and non-qualified options, as well as restricted stock units. We use them for producers; we use them for management people; we use them for highly compensated people, whatever category they fall in, as a portion of their comp each year is in share. So it's really meant to keep people in their seats long-term, which has been a successful program for us because certainly the FA world, you know our turnover statistics are lower by far than the industry averages.

Got you. Understood. Thanks so much.

Jim Mitchell, Buckingham Research.

Hey. Good morning, guys.

Hey, Jim.

Maybe just a question on flows and what you're seeing on your retail customer base. It seems if we try to back into what the net flows were, it seems like over the last two quarters, they've slowed from the first half. Just trying to -- is that just simply a function of market volatility or anything else? Just any insight you have on what your customer flow dynamic is right now and how you see that developing as you add or accelerate the recruitment effort? Thanks.

I can't say I've seen any slowing. A lot of our net flows are dependent on our recruiting, which has gone well, and so when you get good quarters with lots of people, as they bring on their assets, it will pick back up some. So I can't say I see anything overall that says our expected net flows should change.

Jim, one thing you have to be careful with when you project flows is you're using maybe one index, one stock market index, and our clients have a diversified portfolio of fixed income cash and equities, and even within equities, it's not all represented by S&P 500. There's international, there's small cap, et cetera. So sometimes your analysis could be skewed if you're just using the S&P 500 to estimate flows in PCG, is what I would tell you.

That's fair. You could resolve that by just giving us the numbers.

(Laughter) If we knew them we would tell you.

We track those very closely in asset management for assets under management. We track flows, but we don't -- we haven't tracked it as closely on the overall. If a lot of the FAs affiliated with us in this last quarter, their assets may come over largely in this next quarter, so there's a lag effect that as well.

Right.

I'd put that in, we know the best, we think the trends are there, but when people say what's the 10-year going to do, and I always say, if I knew that, I wouldn't be working, so who knows.

Right. And any major shift in how your clients have been an allocating over the last quarter or two? Is it more equities, less equities, just curious?

Equity inflows have been okay, actually, so it's not huge but it's not--

Overall, mix hasn't changed much in the last two quarters.

No.

Or really in the last year. Most of the mix change has been more from market appreciation. We have a financial planning orientation here so that our client base doesn't tend to follow equities or fixed income to the extent that some other trading firms do. We have a more stable asset mix.

Okay. That is helpful. Thanks.

Okay. You're welcome.

Bill Katz, Citigroup.

Good morning. This is Neil again from Citi. Just had a quick question. Given the NIM guidance you have given for the bank, do have an outlook for the NIM for RJF when you include all of the interest-earning assets of the Firm? Thanks.

We don't think of it in NIM terms.

We really don't. Again, that's a difficult calculation, Neil, because a lot of the cash balances shift from on balance sheet to off balance sheet, and once they shift to off balance sheet, to other banks, and that doesn't show up in interest income, that shows up as fee income. So, it's a little bit of a difficult calculation just based on the mix of whether that cash is being deployed on balance sheet or off balance sheet.

We focus a lot on total interest earnings at the holding company level. We don't really focus much on spreads. It's impacted by inventory levels, how much of inventory we finance, a lot of other factors that would render a NIM at the holding company a little less meaningful than it does at the bank.

Okay. Thank you.

There are no further questions at this time.

Great. I know we ended up at a very good start for the year. I know the frustration is predicting a lot of this is around Capital Markets and both globally and domestically. That's just difficult to predict what the economy is going to do, but again I start by saying that, shorter-term, it's always hard to look at numbers. Then this next quarter tends to have some elevated expense, just by the nature of our business, but longer-term, if you look at the growth in assets, the growth in loans, the growth in advisors, those are the things that drive a vast majority of our business and they're all very positive.

I feel good about our positioning for the long-term and certainly for the year. Next quarter it's just the rest of the business is variable and transaction-oriented and hard to predict. I wish we could give you better guidance. If we had a stronger feel, we'd know, but it's just hard to predict in this economy. So with that, we appreciate your time. We look forward to the next quarter and we're going to go back to work. Thank you, Felicia.

Thank you. This concludes today's conference call. You may now disconnect.