雷蒙詹姆斯金融 (RJF) 2015 Q4 法說會逐字稿

Good morning. Welcome to the earnings call for Raymond James Financial fiscal fourth quarter and FY15. I will be your conference facilitator. This call is being recorded and will be available on the Company's website. Now I will turn the conference over to Paul Shoukry, Head of Investor Relations at Raymond James Financial.

Good morning and thanks for taking your time out of your busy schedules to join us this morning. We certainly do not take your time or interest in Raymond James Financial for granted.

After I read the following disclosure I'll 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 strategic objectives, business prospects, anticipated savings, financial results, industry or market conditions, demands 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 conditional verbs such as will, make, 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 and the subsequent Forms 10-Q, which are available on the SEC website at www.SEC.gov.

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

Thanks Paul and thanks for that rousing opening to get us all awake and going here. (laughter) I want to make a few comments over the year and quarter and then I'm going to turn it over to Jeff who will get into details, and then talk a little bit about looking forward after Jeff is finished.

So let me start with the year. A lot of records: record net revenue of $5.2 billion, record net pretax of $798 million, record net income of $502 million or $3.43 per diluted share, record net revenue for each one of our core segments and record pretax earnings for all of our core segments except Capital Markets which had its second best year ever behind 2014. So, if you look at the year in summary net revenues up 7%, pretax up 7% in really a difficult market. As one of our directors said on the conference call, just another Raymond James year, as I believe continue to perform in difficult times.

By segment, the Private Client Group segment we ended up with a record number of financial advisors of 6,596, which also is a record net increase excluding acquisitions of 331 advisors over the prior year. That results in almost $225 million of Trailing 12 production, while keeping our regrettable attrition less than 1%. And as you know, advisor count and growth is a driver of our business, not only does it impact PCG, but our Asset Management and Bank segments as well.

The strong recruiting results enables us to grow client assets both in the Private Client Group and Asset Management, and despite a 2% to 3% decline in the equity markets we are up 1% in assets. And as you know from other firms reporting, we're in a very small group that was able to grow assets, I think one other so far. Just proof that we continue to gain share by offering a robust platform and keeping this great Raymond James culture.

In Capital Markets, a little more mixed. On the positive side, record M&A revenues for the year, record tax credit fund syndication fees and a record year in our Public Finance business. This is despite the challenging markets that everyone has talked about in fixed income, our institutional fixed income commissions actually increased 15% in 2015 and our trading profits remained resilient, especially compared to what we've heard from other firms. On the other hand, the equity underwriting was challenging. Industry volumes was down. Particularly for us with very strong energy and real estate sectors that which were even harder hit, the weakness caused underwriting revenues to be down 26% compared to last year.

You have to remember, as you know, that equity underwritings also negatively impacts our institutional commissions which were down 5% despite an increase in over-the-desk commissions. Further more, a decrease in equity underwritings negatively impacts Private Client Group. As new-issue sales credits in the segment were down 15% compared to 2014. If you add those impacts that underwriting impact was nearly $50 million negative to our comparison in FY14.

At the bank, record net loans just under $13 billion which represent a growth of 18.5%. In fact, just in the September quarter we grew by almost 8%, which should help future results. But, as you know, in the accounting conundrum of banks as you put on loans you put on loan loss reserves, and that $13.3 million impacted short-term results although the credit quality continues to improve. Nonperforming assets declined nearly 1/3, now representing 39 basis points of total bank assets versus 46 basis points last September.

So overall, we were able to grow both net revenues and pretax by 7% and hit almost all of our financial targets. Pretax margin was 15.3%, better than our 15% target. Our compensation ratio to net revenues was 67.8%, better than our 68% target. And the only target we missed was ROE of 11.5%, short of our 12% target. This was driven by our high capital levels which I know we'll discuss later whether I discuss them or not, as you will ask. But in the environment we think 11.5% ROE is attractive return for our shareholders, particularly on a relative basis and believe over time putting this capital to work can even elevate that return.

Let me touch on the fourth quarter. Record net revenues of $1.34 billion, net income of $129.2 million or $0.88 per diluted share. Record net revenues for Private Client Group, Asset Management and RJ Bank segments, and the second best net revenue year by the Capital Market segment which missed a record by only $537,000 behind the quarter set a year ago September. Pretax margins,15.4% with all segments showing sequential increase in pretax, except the bank, which again was due to the large loan loss provision.

So overall, our revenues exceeded expectations in the quarter and we were able to keep our comp ratio below 68%, although our expenses did grow faster and that was really driven by two items, to sound like a broken record once again, the loan loss provision of the bank and the other is our communication information processing expense of $70.4 million. And that was up year over year and sequential. And that is attributable really to two factors: as we continue to invest in our technology systems which we think has really been paid off in our recruiting, and we've increased some of our regulatory systems in order to really streamline that process as well.

In the Private Client Group, recruiting remains very vibrant. We added 89 net financial advisors which really enforced that our investments are paying off. Despite the strong recruiting results client assets were down 5% on a sequential basis due to a decline in the equity markets. We've already seen some recoveries this month, but as you know, our fee-based accounts are built on advanced and the balances at the beginning of the quarter and those fee-based assets were down 4% which should provide some starting headwinds next quarter.

In the Capital Market segment, all of our businesses performed well except Equity Underwriting again. In fact, M&A and Tax Credits had record quarters. Asset Management, financial assets under management declined by 7%, this was a decline in the market and the market declines particularly were punitive to small in mid-cap products where we have a focus on Eagles, and we had some outflows in the quarter accentuated by a large loss in the last week of the quarter of an institutional account. Once again, this will impact the December quarter as approximately 2/3's of our managed assets are billed in advance based on the balances.

So, and then, the bank again, very solid quarter in growth. I want to remind people we have a very disciplined and opportunistic loan growth. I know it's not growing straight line and while the production was good this quarter, really, the payoffs were significantly down which drove a lot of growth -- net growth in the quarter. So, I believe a very good ending quarter to a very good FY. And now I'll turn it over to Jeff to provide a little more detail on some P&L items. Jeff?

Thank you, Paul. We appreciate those of you who share your models with us, it enables us to put together a consensus model for the quarter which helps us determine which things we need to focus on, on this call. Please continue to do so or those of you that haven't, please adopt the practice because it's helpful to us to know what you're thinking.

I want to talk about some of the significant deviations from the consensus-expectation model for the quarter. And I'm calling significant things that are 5% or more away from expectations. Within the revenue section, virtually all the revenue items were ahead of expectations with the exception of our largest which is Securities, Commissions and Fees which really showed no growth from the preceding quarter. Whereas some growth was anticipated again not a 5% deviation, but as our biggest line-item worthy of mention. That was kind of a result of a mixed bag of items.

Equity secondary-market commissions were up institutionally given the volatility in the equity markets toward the end of the quarter. Fees in the Private Client Group were up as the billing base was about 2% higher than it was in the June quarter when we billed at the beginning of the September quarter. And now on the negative side, Fixed Income Institutional commissions were lower. Mutual fund trails, which are based on average assets for the quarter and adjusted downward and underwriting which impacted both Institutional and Private Client Group was weaker. So, all in all it came about flat with the preceding quarter.

Investment banking came in well above expectations. You can see in some of the detail provided in the press release it was really driven by the strong M&A and record tax credit fund quarter at $20 million, somewhat offset by the decline in equity underwriting fees. But very strong in terms of M&A and tax credit funds enough to overcome the underwriting weakness. Net trading profits came in kind of consistent with prior quarters, recent quarters at least, although for some reason perhaps based on others results it was projected down, came in pretty much in line with where it had been at a little $5 million or $6 million per month.

So fixed -- our fixed income trading has been fairly consistent throughout this market -- these market cycles. So, nothing spectacular there to talk about, just that it continued its current trend. And then in other revenues, again, we had some Private Equity valuation gains that were not projected. This was a little less than the preceding quarter and obviously the preceding quarter had pretty good size gain from some ARS redemptions that did not recur in this current quarter but nonetheless still a reasonable quarter in the other revenue section.

On the expense side, most of those, unfortunately, were also higher than expectations. First I'll talk about -- Paul has talked about comp, came in pretty much right on expectations and under our target comp ratio for the quarter and year. Communication and info processing came in a little higher than we had thought as well. We continue to incur some consulting fees on numerous projects, some developmental and some regulatory related. We're starting to see the amortization of some of the previously completed projects start to hit the books and when those come on line particularly for purchased software and things like that we end up starting with maintenance fees as well. So we would, as Paul talked about going forward we would certainly probably steer modeling toward the current run rate versus where we were in the prior year on average. We were between $66, $67 million a quarter last year with this probably the most recent quarter is more indicative of a run rate going forward for the present time.

We talked about the bank loan loss provision. I know be put out the monthly statistics and you saw $300 million in bank loan growth through two months of the quarter and we ended up with $935 million for the quarter, so obviously we had a very big month of September and that caught everybody by surprise in terms of the provision expense related to that growth, but in our way of thinking that's not a bad way -- not a bad expense to miss as long as it's growth related and not credit related. And then we had several other of the expense categories that were 3% to 4% higher, occupancy business development and other expenses and things like that and again we might steer you -- the occupancy is going to creep up as we open new locations as we continue to spread into the West and the Northeast business development is indicative of the high levels of recruiting that we're continuing to experience. And others -- kind of a mixed bag of a lot of things but again most of those categories we might steer you toward the current run rate as being somewhat indicative going forward.

Couple other points I would like to mention. We've mentioned the comp ratio, that was very pleasing to see that well under 68% for the quarter and for the year. Paul mentioned the pretax margin is above our targets 15.4% for the quarter, 15.3% for the year. The tax rate in this quarter, as you know, we had an equity market decline toward the end of the quarter which gives rise to some nondeductible losses in our corporate-owned life insurance. That has worked both ways over time, but generally been a very positive thing for the Company, as gains are non-taxable and losses are non-deductible in that portfolio. So, with the equity losses that elevated the tax rate slightly for the quarter but for the year 37.1% was pretty much in line with the 37% guidance I think we gave at the beginning of the year.

ROE, Paul mentioned also 11.5% for the quarter and for the year, the one target we really didn't achieve and I would certainly add that it was not a R problem it was more of an accumulation of E for the year that gave rise to that because you know we had very good earnings for the year. Our capital ratios which are set forth in the press release remained very strong. Shareholders equity has now surpassed $4.5 billion for the first time. So, that is both indicative of our capital and our liquidity position also remains very strong.

I'd be remiss not to mention that interest, it didn't really deviate much from expectations but at $113.5 million for the quarter, another record for the firm, that's indicative of the past bank growth and going forward will have additional bank growth, of course, plus because of the equity market decline toward the end the quarter we had a lot of customer cash flow in as some people exited the market and reallocated their portfolios more to cash. Cash went up about $3 billion in the last five weeks of the year to a $35 billion number for the firm overall, still just about 8% of Private Client Group assets, not indicative of stress times in any way but that certainly will boost interest earnings going forward even if we don't get rate increases.

Then lastly, I think everyone's aware of the repurchase of 1.1 million shares late in the fourth quarter. Obviously had very little impact on this past reporting period but it may not have a big impact going forward, either, but we did opportunistically exercise the repurchase committee and bought back $56 million worth of shares at the use of capital. So with that I've got a list of things to talk about looking forward, but I'm going to let Paul do that and I'll jump in if he doesn't cover everything on my list. (laughter)

Good, Jeff, you'll correct me. Correct me if I'm wrong. (laughter)

A little bit of outlook into the future. If you look at where we are today, first, the Private Client Group segment, as you guys know, it drives a lot of our business, not just that segment but certainly impacts Asset Management and the Bank. Our retention really remains best-in-class and we thank our advisors were choosing to stay with us and really keeping this great culture alive. The activity in recruiting remains vibrant so we came off of our second best year ever in terms of number of advisors, best year and net advisors. And we see a lot of high-quality teams still in the pipeline and I think both our platform is growing across all channels, both the Employee Independent, our Financial Institutions divisions and our [RA] division.

From what we see right now that growth should the very good this year. Approximately 75% of our revenues, though, for this segment are recurring in nature. This is a great model for our advisors and clients but it also means were dependent on market levels. About 50% of those client assets are exposed to the equity markets. About 50% of PCG security commissions and fees are derived from assets and fee-based accounts. So, with the quarter being off 4% in assets, December will be a little handicapped starting out.

Assets grow we should recover both from recruiting and hopefully the market but we'll see where that goes. And Capital Markets, M&A and Public Finance, still very robust, in fact, most of one month isn't a great indicator but we're off to a good start. We are hopeful that significant additions to our investment banking platform made during the year will start to bear fruit this year also. Our fixed income business continues to generate, I think what is exceptionally good results given the market. Of course, the big question is what happens to markets in 2016, so if anyone can provide us a chart on market volatility, market direction, commodity prices and interest rates we can be pretty precise on what will happen next year. But given that I think our model is very flexible and we seem to do well in most all markets.

Asset Management should continue to benefit from our strong recruiting and recruiting momentum and even past recruiting as assets continue to move over from people who have recently joined. Eagle, our growth sales have been healthy, but net flows were challenged by the cancellation and especially of a large account at the end of the year. Hopefully, that's not recurring.

The market decline in September is going to give us some headwinds. Our Financial Assets under management started the December quarter 7% lower so that will certainly impact the start of the quarter. Raymond James Bank we believe is well positioned for growth, I think any quarter we try to give you what loan growth is going to be we're wrong. But balances grew 18.5% over last year. Portfolio remains strong. Credit remains strong. Our net interest margins we think are resilient, around 3%. And for planning purposes we're looking at high single-digit or low double-digit growth, say 10%, but that will depend on what's available in the marketplace in terms of good quality credits.

A lot of people are going to ask about regulatory and DOL and despite how active we are -- on -- I have to say I kind of don't know. The good news on this is we've had almost 400,000 comments as an industry received by the Department of Labor. Secretary Perez has openly said last week that he is going to considerably revise the proposal. But frankly there are one or two provisions that have the most impact on us and if those are changed they won't have much impact on us. My guess is they will not all change and there will be some impact, I just can't tell you what that is until we see the final draft of the re-proposal in January and February. Good news. We seem to have congressional support on both sides to modify the rule, but I think that rule is going to pass in the way it's written no matter what we do from a political standpoint. I think Congress will be focused on other bigger fish to fry.

On capital I talked about capital deployment. You know that we have excess regulatory capital. We've also acknowledged we want to use it to grow our business. We've been active looking for things that have first, a good cultural fit, second, a good strategic fit, but will only pull the trigger if it's also good economics for our shareholder. Our goal is not to be bigger, it's to invest our capital wisely for good shareholder returns. We've also said we would be prudent in the use of excess capital and you can see this quarter we did our first opportunistic repurchase of about $56 million of common shares which is basically our first opportunistic purchase as the financial crisis. Our Management Team and our Board specifically proactively manages this and we discuss it on a ongoing basis.

So kind of in roll-up I'm proud of what our advisors and associates did for the quarter. I think it was a good result and we know that there may be challenging markets ahead of us but as long as we focus on the clients and their well-being which has been the history of Raymond James, that ultimately that will pay off for our clients, our associates, advisors and our shareholders. So, Jeff, I don't know if you have any other corrections or additions before I turn it over for questions?

A couple of other additions, thanks. Looking forward, we had another very, very good year in private equity gains. We had about $48 million, certainly I don't think we should expect those levels to continue going forward. So, I counsel people to be cautious on what they project there. We really think the growth going forward is going to come from our core business segments.

We added a lot of headcount in ECM and certainly in Private Client Group that we think will become productive here this coming year. As well as the bank loan growth kicking into interest earnings and coupled with the bank loan growth with these elevated cash balances, which if the market recovers may moderate somewhat, but should average the year quite a bit higher than they did in the preceding years. So even again without a boost in short-term interest rates, we should continue to see improvement in the net interest income lines.

All right, great. Thanks, Jeff. Therese, let me turn it over to you for questions.

(Operator instructions)

Stephen Chubak with Nomura.

I wanted to spend a little bit of time talking about the excess capital question, which I know comes up on every single call. Paul, I know in the last update or one of the more recent updates that you given. You talked about really liquidity being a constraint on capital return, and you noted that you retained excess of about $400 million or so. I just wanted to understand -- is that regulatory constraint or is that a self-imposed constraint that you are managing to?

Little of both. It is self-imposed to the extent that we don't go to the regulatory minimums. We've always kept excess capital to stay above regulatory minimums, but that's a number that we feel we can freely invest without any strain on our liquidity or operating model.

Okay. So, in the context of some of the ratios, at least on the liquidity side that the banks are managing to. I recognize you guys are in a CCAR bank specifically, but I know liquidity coverage ratio is something that many banks refer to. I didn't know if you guys knew where you stood on a metric like that, given your balance sheet composition.

Hey, Steve, it's Paul Shoukry here. We, as you said, are not required to disclose it publicly, but as you know, some of the rating agencies look at that, so we do look at that internally. We are not going to disclose it publicly, I don't think, until it is a requirement. But as you can imagine, we are well above the 100% requirement that the big banks are held to. So, I guess that's all I want to say on that.

And let me add to this. As we look at capital, if we were purely a bank, we wouldn't operating with these capital levels. I think you have to recognize that broker-dealers have significantly more capital fluctuation -- I mean liquidity fluctuation, than banks typically do except in stress periods on banks. So, you've got to be careful applying bank ratios to a broker-dealer firm.

I understand. Paul, one of the things you have referred to also in the past is that the management team itself is also tied to ROE targets. So ensuring that your incentives are properly aligned with the shareholders. I didn't know if you guys can remind us what those ROE hurdles are today.

Yes, we've talked about them before. Our long term one has always been 15%. In these markets, they've been 12%. So, this year our ROE -- our restricted stock will be punished by 11.5% versus 12%. It's an indexed scale. We are aligned, but again I think this management team looks long term. And our view still is we can put the capital to work. We'll see if we can, otherwise we'll have to figure out a way to return it to shareholders. But, our 12% target has been the target the Board has set the last couple of years given the environment. I doubt they'll reduce it.

When interest rates are at what we'd call a more normal level, that target will increase probably back to the 15% level.

Okay. Thanks for that color. One final one for me. Apologies if I missed this in the prepared remarks, but I did see that the financial service fees -- I know there is a seasonality component there and it did come in a bit stronger than expected. I didn't know if you could speak to what drove the some of the strength in the quarter and how we should be thinking about that heading into your next fiscal first quarter.

That bounces around from quarter to quarter, as you know, just depending on accruals of fees from mutual fund companies and other types of fees. For example, client transaction fees and fee-based accounts were up this order just given the market volatility, so that bumped up that line item for the quarter.

So, there are a lot of different items in that line item, so it's hard to isolate any one single item. But we do know, for example, client transaction fees were up this quarter just given the heightened market volatility.

Some are asset-based, some are account-based, like IRA fees and things like that, just based on having an account or a small account fees. We actually have a fee for accounts that are under economic levels for us to maintain. Some are asset based. So, it's kind of a mixed bag over the fees in that line item. Plus, the fees from the mutual fund that he's talking about we're constantly trying to put new mutual funds on an omnibus platform, which is higher revenues to us, and constantly renegotiating the contracts that we have in place with existing clients.

Okay, that's great color. I appreciate you taking my question.

Bill Katz with Citi.

This is actually Brian Daley filling in for Bill this morning. Coming back to the capital discussion, just wondering what your appetite is for the deals and maybe how we should think about the size? Then, some recent news articles out recently as well -- I'm not sure if you can speak to them?

First, we never talk to rumors about us or anybody else, so I can't speak to those. But, the size is almost irrelevant to the quality of the deal first. Morgan Keegan was our biggest acquisition in history, by a long shot, which is $1 billion. That was a big deal for us.

We tend to do things that are more modest and they have to be cultural fits, strategic fit and then price. We actively are in the market. We have a corporate development function. We talked to a lot of people. We've talked about a lot of focus on asset management as an area in some M&A.

So, we're active, and we want to deploy capital, but only if it has a good fit. We're not going to spend it just to be bigger. We've been consistent on that. We do believe we can deploy it on the right opportunity when we find it, but we just haven't found that opportunity yet.

Got it. Can you give us any indication to your activity levels into book here, particularly around PCG, maybe client flows?

Client flow has been pretty steady. I think they were down 1% on the equities, but the last was -- about last month, I think it was the month before when I saw the report. That's valuation driven alone. So, it's actually during the big sell off -- I forget how long it was now in August. I was actually surprised, pleasantly, that clients got their market advisors did their job and not having people panic. I haven't seen any movement in client flows.

If you look at overall flows, we don't regulate that necessarily for all PCG client assets. But one proxy for that is the flows into the non discretionary fee-based accounts and the asset management segment, which serves our private client group segment. We haven't finalized those flow calculations for this quarter yet, but for the first three quarters of the fiscal year they are annualizing at around 15% or16% flows for those non discretionary assets in the asset management segment.

Great. Thank you very much.

Joel Jeffrey with KBW.

I apologize if I missed this earlier. Could you give us a some color on the pick up in the criticized loans? I know last quarter you talked a little bit about that having some impact from the SNC exam, but just wondering why we're continuing to see that or if it's just a function of loan growth?

Hey, Joel, it's Steve Raney. Good morning. There's not really a general theme. We had some upgrades in the quarter, but we had three corporate loan downgrades that drove the increase in criticized loans. They were in different industries, so no real theme. As you know, we review each credit on a quarterly basis and as we see any deterioration in performance we proactively downgrade them and add reserves accordingly.

Are you seeing any degradation in the energy loans that you've made? And can you give us a sense again for the size of that as a portion of your portfolio?

Yes, Joel, that portfolio has been pretty stable over the last few quarters. And this quarter is consistent with that as well. It's about $450 million in loan outstandings across a broad spectrum in the energy space. As we communicated before, we really shied away from, I would say, the more risky -- many of the loans that have been criticized at some of the other banks in the exploration and production, E&P space, we only have credit in that sector and actually there's no loan outstandings to that investment-grade borrowers, so it's a very broad cross-section. Many of those loans are, too, what we think is less risky, less volatile and less susceptible to the true commodity price risk where they are more midstream in nature, take-or-pay contracts are in place.

We watch that very closely. We had added reserves across the board in that sector despite what we think is actually a well-constructed portfolio. One of the criticized loans that got added in the quarter, I mentioned three. One was in the energy space.

Great. And then in terms of just the pickup that we saw in the tax credit syndication revenues, is that just a seasonal thing? Because it did seem to be a bit higher than what we've seen even in recent past quarters.

It's seasonal when it closes, because when funds close we get the fees. They are just doing really well. We believe we are the largest syndicator of tax credit funds right now that's not syndicating them for internal use in banks, and it's doing well. Its backlog is very, very good. They are very good at what they do. But it is lumpy.

Okay. And then lastly for me -- again, if you mentioned this before I apologize, but I think last quarter you described the public finance pipeline as exceptional. Is that still the case given the rates getting pushed out?

Yes, the public finance has been really had just their strongest quarter this last quarter, and backlog looks good in the -- particularly the M&A backlog looks very good, probably even stronger.

Hugh Miller with Macquarie.

A couple questions. One first on the PCG side of the business. We were hearing about a large peer that was considering a garden-leave clause in their pay plan for 2016. Was wondering, are you guys seeing any benefit on the recruiting side for the pipeline because of that? Are brokers from that business considering making a change, or it has that not been impactful at all?

Well, I think -- I know that someone was considering it. I don't think it is been done. But anything like that is great for us. We can add a garden leave provision except that we tell the advisors they own the assets can leave anytime they want, so is not very effective for us.

But any time we see competitors trying to put in clauses like that, or what I call so institutionalize accounts by indirectly pushing products or product goals for managers, it's all been great for us and great for our recruiting. Because we've been boring and have kept the same kind of attitude and platform throughout our history that the advisors own the clients and that we are here to help them. So, I can't specifically address that one. I've heard it come up that recruits from places that there's been discussion, and certainly it doesn't hurt us when they do that.

I mean, am I thinking about it correctly in that initially you'd potentially see a benefit as people re-explore their options? But I mean, I guess I would have to think that it would be extremely difficult to then transition your book business once that was in place for the longer term. Could that create a meaningful headwind for people having a flexibility to pick and choose and move to new locations?

Sure, if it was instituted well and people had to sit out, I don't know for how long, and people actually sign the agreement. And, there wasn't an out because they changed pricing and fees in such a way it was a change in contract or we could go on and on and on and on. So, hypothetically yes.

Just like some institutions thought that giving a 250% retention bonuses would anchor their advisors down when those came off that hadn't been the case. So, I'd say theoretically, yes.

One, I don't know if they can implement it without a revolt. Secondly, if they do, what the terms or breach or changes would be. So, conceptually it would be something that helps people stick. Hasn't helped a lot in investment banking, which is common in Europe to have those for a long time. It's worked its way over here. But, in the private wealth, I think it would be a barrier if people could successfully put them in.

Got it. That's interesting color on the dynamics there. It's helpful. Shifting to a couple questions on the Bank. Obviously, we saw very strong growth on CRE and CRE construction. I was wondering if you can talk about if there's one of those two that was seeing stronger demand? You also mentioned the impact of lower prepays or repayments during the quarter. Can you just help us quantify the differential in the net loan growth and what that difference was between new originations versus slower repays?

Hugh, good morning. It's Steve Raney again. The real estate growth was really split really evenly between our loans to REITs and then loans to individual projects. As it relates to the repayments in the quarter and the growth, we actually only made about $250 million more in loans in the September quarter versus the June quarter. As Paul alluded to, the payoffs in the runoff in the September quarter was substantially lower.

Part of that runoff in the June quarter that was maybe our highest ever was somewhat self-imposed. There was a very large wave of repricings in the market, and some of those loans we just decided to exit because we didn't think the go-forward rate was the appropriate interest rate that we should be earning on that for that asset and that risk.

So, our runoff went down. Annualized runoff in the corporate portfolio in June was 44% and this last quarter it was about 15%, which was actually abnormally low. It's usually about 25%. That's what we've seen historically over the last few years.

Highly unusual to have two quarters linked together that were that different in terms of the runoff amounts, but that drove the substantial increase in loan growth for the quarter. Although we grew loans in all categories, our residential mortgage business grew, our securities-based lending business, our tax-exempt loan business, so growth in all categories.

Got it. That's certainly helpful. One other, what are you guys seeing in terms of the Canadian operations relative to the US?

A tale of probably two businesses up there to the private client group is doing good recruiting and margins are holding and have similar margins actually to here. Which is unusual, I think, it's unique to our competitors in Canada.

And the investment banking business, obviously, has been challenged in the commodity-based economy, so we see a little improvement but obviously that's a tougher market. We're building an M&A practice there, which we haven't had a specific one -- recruited a leader last year. And continuing to hire in a market where you can hire people, but private client group we expect to see some continued growth in the investment banking, my guess, although will be better, went through in a challenging period.

Great. Thank you. On the IT -- or on the expense side, you mentioned that some of the regulatory items were driving up some of the IT investment and also some of the consulting fees. Can you help us quantify that? As we think about heading into next year, should we continue to see an acceleration of that investment? Or should that level off?

We think, as Jeff, I think, said earlier, that the run rates probably a good rate, somewhere between where we were and that number, but I would err to the number we are running at.

There are no shortage of projects. It's just a matter of how many we can undertake at once. I think the most recent quarter is probably a good run rate to use going forward. We can control it enough to not let it accelerate much from there.

Okay. Then you mentioned that there seems to be a handful of a very key provisions within the DOL proposal that would make the most meaningful impact. Obviously, you mentioned that you are uncertain which way they are going to go with those. But can you help us understand the handful that you feel are the most important to focus on, would have the largest impact on clients in the industry?

First, the BIC exception for product commissions is -- the way it's written, it's almost unworkable for a lot of [securities] accounts. I think the DOL is focused on that. The concern is even if they adjust it, do they really understand the impact? Since they're not in the securities business for a living, do they really understand the impact it's going to have on the broker-dealer and can we work under it?

The other is that level fees is a -- certainly, there's been a discussion, DOL that had to be level across the Firm for all products. Which, you know, as you look at the [trails] and omnibus and all the fees associated with mutual funds, gets more complex especially around share classes. There's been some discussion that that may apply only to the advisor level, certainly a lot easier to deal with than dealing with across the firm.

Also an implementation timeline, they said about eight months, which is almost impossible to rely on some of the exemptions because our fund families tell us they can't provide the information. Much less us providing that in the detail and format they want. So those are probably the provisions on an overall basis. To the extent all those are workable, that's great. To the extent that they're better, but at the end in order to comply with the exemption you have to do most of the work anyway. It has a bigger impact.

That's helpful. Thank you. Last for me. You guys mentioned about seeing within the asset management segment kind of a substantial client loss of assets, maybe someone moving those assets. I think you mentioned like an institutional account. Can you just give us a sense of what was driving that decision, and was at all in one particular fund?

We have a great relationship where we've had great net flows that we had some outflows this year. That's kind of normal course of business. We had the Eagle Boston last year, that group left and we kept half those assets. That had an impact. Then we had a client that just in the end of the year, a 20-year client focused on the small and mid-cap, chose to go to a different manager. So that was probably the more surprise, but that happens.

We get good surprises and bad surprises. We just have to couple surprises going against us. And the last one at the end of the year on shorter-term notice was probably the harder one. I think fundamentally the business is in good shape, and we had good strong flows until that happened. So we'll just have to keep chipping away at it. We're certainly institutionally in lots of proposals, and if a couple of those come through it's good. If you lose some, that's bad. That's part of the business.

Jim Mitchell with Buckingham Research.

Could we maybe just talk a little bit about operating leverage? I think recruiting over the last two quarters has probably been the strongest since the merger and -- or acquisition of Morgan Keegan. We've seen, obviously, the investment spending upfront is pretty high, and so revenue growth --earnings growth has been slower than revenue growth, as expenses have grown a little faster. So had we think about the payback next year? You mentioned that recruiting still remains very vibrant. Does that mean we still are going to have to wait for returning deposited operating leverage? How do we think about that dynamic of investment spend versus return?

I think we gave you the expense guidance, what we can't give you is the market guidance. So, generally in a flat market alone, recruiting should drive growth. So, what happened to this quarter, obviously, is a big drop in the market. The recruiting -- it's hard to recruit at those levels to overcome that kind of market adjustment, even though they have recovered some this month.

Our view of the market grows at some kind of rate. Our recruiting should drive good numbers. If we continue this recruiting pace and the market continues to fall, obviously we can't overcome that since half the assets are tied or influenced by the equity markets. So that's the challenge is predicting the markets.

We're kind of keeping our operating targets the same right now and if the market is really good we'll do better. If interest rates rise, we'll do a lot better. If the market goes down, it's hard to chase it, but we'll be in a boat with a lot of people.

A lot of the operating expenses, too, we can cut costs. We haven't. At this point, we've chosen to kind of keep the numbers we've given you. But certainly, if the market goes down we have -- 68% of our revenues, as you can see, are variable pretty much, our comp and most businesses. And certainly we could cut back on a number of initiatives to save cost, but we haven't pulled the trigger yet.

Jim, I would say that in a flat equity and interest rate environment for the next year that even if we recruit at the same level as we did this year, we should see some pretty modest operating leverage improvement. And it's not true just in PCG, Capital Markets had some significant hiring this past year as well. Those people have not yet been as productive as they should be in the coming year. Because we do have a fair amount of fixed cost that we should gain some operating leverage on, but given the scale it would be fairly modest. Again, under those assumptions, as Paul said, with the help from the equity markets or interest rates, either one, we'll do much better.

Okay, that's helpful. That's it for me, thanks.

Devin Ryan with JMP Securities.

You always been very disciplined around deals. I know there's a very high bar internally, and you spoke to cultural and strategic and financial thresholds. But when you think about the financial attractiveness of a deal, what metrics are you guys looking at, or is there a hurdle rate? How to think about what makes a deal attractive financially?

Our goal is always to generate a 15% ROE and under reasonably conservative assumptions we want to be able to bring a business, integrate it and generate that kind of return off our investments. I know a lot of people will go a lot lower, saying is a strategic initiative or that revenue synergies are going to create all sorts of stuff. We tend not to do that. We're pretty -- look at the costs. Look at realistic retention rates and what we can grow the business, and if we think we can generate a return and it's strategically fit, we'll do it.

We are just not willing to roll the dice and hope. So, I don't think our returns are out of line. We're not trying to shoot for 25% ROE, but we're pretty fairly conservative in the assumptions. If there's a good business we can grow and can hit that 15% plus target, it's something we'll do.

Okay, great. Maybe shifting back to the recruiting momentum. Is it still primarily wirehouses, or can you give us any sense of the mix over the past year or so? How much has been wirehouses versus other independents? The trailing production -- we're not seeing it yet in results, but the trailing production of the financial advisors that have been hired. How does that compare to the existing, call it, average production of the platform?

Primary driver is still wirehouses. It seems to move around that the one with the honors tends to move a little bit. In the last year we've had one that's been significantly better. I'm not going to name names, but -- and seems to continue to provide us opportunities as they make changes. But, the independents -- in the independent channel, we've had more from non wirehouses. That's increased, but the significant driver has been wirehouse. The averages have continued to stay over our averages, so they've been net an increase in average production that you've seen in the improvement. I think it's driven by both our advisors becoming more productive and our recruiting to be above our averages.

Okay. Maybe last one for Steve. With respect to the net interest margin in the bank, can you maybe speak to some of the puts and takes? In the outlook you had a great quarter of loan growth, so how that will play on forward NIM relative to -- obviously, we are still in this really tough interest rate backdrop. So try to put that all together to think about where the net interest margin maybe goes from here in the near term and then longer-term view?

Yes, Devin, we've really seen some stabilization, I think, and we're hopeful that that's going to continue. As I mentioned, even in the prior quarter, we're going to be real disciplined around it, and if we have to forgo some opportunities because margins and the rates that are being afforded to us aren't acceptable then we'll have to take some pass on some loans. So that being said, right now, we're pretty encouraged by what we see in the terms of the stabilization after a period, as you know, of pretty significant compression. Right now, pretty stable outlook, at least for the next couple of quarters.

That's it for me. Thanks, guys.

Dan Paris with Goldman Sachs.

I just wanted to get your updated thoughts on growth of the Bank and on boarding of excess client cash. I noticed this quarter in particular there was some good growth in the securities book. I'm sure some of that is mark to market. But I wanted to know if we should read that into you getting more comfortable in deploying cash into securities potentially extending duration?

First, we're doing a little more at the Bank. But we do not believe it's a good play to leverage our balance sheet into securities and take a lot of interest rate risk and create more leverage in the Bank. We saw that movie in 2009, and we were glad we weren't in it. That we could watch it. We couldn't totally watch it, we had a few chapters ourselves. But we stayed out of the big theme.

And we know we can do it. We know we can increase leverage in the Bank. We know we can get some positive margin short term by taking some modest securities duration risk. We just try to stay neutral on interest rates to the extent we can. We're not interested in doing that. We'll be doing a little more of it, but I call it very modest. It's not a strategy to inflate the balance sheet and onboard cash and try to leverage up the balance sheet.

That's helpful. Maybe a follow-up, just want to get your thoughts on what's the right way to think about the loan loss provision from here? It seems like the reserves to loans has held pretty stable. Should we just assume the provision is kind of the plug in that equation, or if credit remains benign can we expect that kind of reserve ratio to migrate downwards?

A lot of the balance sheet mix stays about the same as it is. I think the 130 basis point type reserve level is going to be pretty consistent. If we slow down the commercial production side and some of the mortgage and SBLs become a little more dominant, it may drift downward a little. But as far -- based on our production estimates going forward, I think the mix will stay about like it is, so I'd say 130 basis points is about correct.

Then maybe the last one for me. Just want to make sure I have the message right on the non-comp side. Obviously, you're investing heavily in the business, which is good for long-term growth. I just want to get a sense of how quickly you can turn on and off those investments depending on the revenue backdrop? In other words, can we get non-comp leverage regardless of the revenue backdrop?

We are not going to -- we can -- if we thought there was marginal compression but it was a good strategic initiative, we don't operate quarter to quarter in our strategies, so we're not going to do it. If there's a bigger downturn in the market, we'll be much more aggressive about it. So our view is -- I know you guys have to focus on quarter to quarter.

We're focused on the year and five years and building a franchise and value for the shareholder, not by quarter. So, I would imagine -- and our numbers, with our anticipation is that were giving you guidance because we're not going to react to one quarter market. If we think there's a continued trend or continued cut then we will react as we have in the past.

We obviously went through this in 2008 and 2009 period, and we definitely have room to hunker down if it came to that. There's a whole lot of things you can do, but they do impact the levels of service or the levels of investment that you are making in the platform or as delaying projects or doing things. And gosh forbid you cancel trips or conferences and you start impeding the culture to some extent. So, we're very cautious to do any of those things.

We think a lot of our success, especially on large teams -- and some of the teams in the pipeline are the largest teams we'd ever recruited -- is a direct function of being able -- of our platform now. Technology platform we'll put up against anyone. It's not perfect. I'm not saying we're the best in all areas, but it's certainly -- from an advisor standpoint -- at the top of the class.

So, we're not going crazy. If we went by requests from the business units that number would be a lot higher, so I don't want you to be it's not managed. We think it's balanced. We could delay or slow projects -- and not all the projects are productive. Some go into accounting, HR and other things that you have to do to run your business. They don't impact the business, but most of them are business focused. And we can adjust a lot of numbers if the market turns down. Right now, our predilection is to stick with our run rates and think it's a good bet based on what we feel right now.

Understood. Thanks for taking my questions, guys.

Chris Harris with Wells Fargo.

I know this call is running long. I really just have one question, and it's on the recruiting in PCG. When you guys are talking to your advisors, the newer advisors that have been on-boarded, what are the biggest reasons those advisors are giving you as to why they're joining Raymond James? Then I'm curious, have those reasons changed at all over the last couple of years? Thanks.

I would say the reasons of the consistency is culture and the way we treat advisors. And more than anything, I'd say, one of the big -- so that's been consistent. What's changed or to -- especially Bank-based advisors feel like their institutions are trying to compete more and more with them and dictate how they do business real or perceived. But they feel that the multichannel approach and product, as they feel push, has accelerated in terms of people looking to us. An open platform that doesn't do any of that.

The second piece is technology. I think that the change -- we always had very good technology for the middle market advisor. I think today we have excellent technology for the high net worth advisor, and we're seeing these large teams. So, that difference has been a big differentiator on the inflows, also. I'd say it's a lot of the same with some additional tools that's made the difference to bring people over.

Got it, makes sense.

Andrew Del Medico with Autonomous.

Thanks for taking the question. You mentioned the two discussions around level fees at the advisor and the firm level. The way you guys read the rule currently, do you see that as being applicable at the firm level or at the advisor level?

No, it's certainly the way the rule was written it was arguably both. I think the clarification is, it wasn't meant to be as constraining. And we don't know the answer yet, until we see the revised rule. So, I would say that the DOL has had a lot of meetings and discussions with us, but the fear was that it would apply to both, for IRA accounts.

If it doesn't change, how would that impact on some of -- you mentioned a lot of the revenue streams that you see with mutual funds. How would that impact that, and are there any offsets you could use the way you sell to clients, et cetera, to regain those?

I think what it is -- it would have to be funds are also very concerned. This wasn't just broker-dealer versus funds, both sides were against this. I think that what you're going to see are new product classes, and from our internal asset management from funds that meet the requirements of IRAs.

So, it would be, I call, a little bit of retooling for both sides in order to meet the strict definition, which could be done. It won't apply to all their products, but the products sold into IRA accounts. But that remains to be seen. We understand that, from our discussions that that's going to be lessened and not be and issue or as much of an issue, but I can't tell you until we see it.

At this time I'm not showing any further questions.

Great. I know it's a lot going on, especially at your end, and a volatile quarter in the marketplace, but net-net we think we've had a very solid year and a good quarter given the market. The most important thing is our advisors are growing, our loans are growing. Assets were down, but that's really a market phenomena for the most part. We're very confident that with any kind of reasonable market that we'll continue to leverage this platform. And with the great work of great advisors to keep the culture here, I'm very positive.

Thanks for your time. We really appreciate your interest. We'll talk to you next quarter. Thanks, Therese.

You're welcome. Ladies and gentlemen, thank you for joining today's conference. I thank you for your participation. That does conclude the conference. You may disconnect.