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Edited Transcript of RJF earnings conference call or presentation 24-Jan-19 1:15pm GMT

Q1 2019 Raymond James Financial Inc Earnings Call

ST. PETERSBURG Feb 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Raymond James Financial Inc earnings conference call or presentation Thursday, January 24, 2019 at 1:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey Paul Julien

Raymond James Financial, Inc. - Executive VP of Finance & CFO

* Paul Shoukry

Raymond James Financial, Inc. - Senior VP of Finance & IR and Treasurer

* Paul Christopher Reilly

Raymond James Financial, Inc. - Chairman & CEO

* Steven M. Raney

Raymond James Financial, Inc. - President & CEO of Raymond James Bank, N.A.

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Conference Call Participants

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* Alexander Blostein

Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst

* Christian Bolu

Sanford C. Bernstein & Co., LLC., Research Division - Equity Analyst

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Devin Patrick Ryan

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* James Francis Mitchell

The Buckingham Research Group Incorporated - Research Analyst

* Steven Joseph Chubak

Wolfe Research, LLC - Director of Equity Research

* William R. Katz

Citigroup Inc, Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the earnings call for Raymond James Financial's Fiscal First Quarter of 2019. My name is John, and I will be your conference facilitator today. This call is being recorded and will be available on the company's website.

Now I will turn it over to Paul Shoukry, Treasurer and Head of Investor Relations at Raymond James Financial.

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Paul Shoukry, Raymond James Financial, Inc. - Senior VP of Finance & IR and Treasurer [2]

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Thank you, John. Good morning, and thank you all for joining us on this call. We appreciate your time and interest in Raymond James Financial. After I read the following disclosure, I'll turn the call over to Paul Reilly, our Chairman and Chief Executive Officer; and Jeff Julien, our Chief Financial Officer. Following the prepared remarks, they will ask the operator to open the line for questions.

Certain statements made during this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, acquisitions, our ability to successfully recruit and integrate financial advisers, anticipated results of litigation and regulatory developments or general economic conditions.

In addition, words such as believes, expects, plans and future conditional verbs such as will, could and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Please note these forward-looking statements are subject to risks and there can be no assurance that actual results will not differ materially from those expressed in those statements. We urge you to consider the risks described in our most recent Form 10-K.

During the call we will also use certain non-GAAP financial measures that provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedule accompanying our press release.

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

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [3]

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All right, great. Thanks, Paul, and good morning, everyone. I know you're having a lot of weather up there in the Midwest and Northeast, and I want you to know we're empathetic here. Our temperature has plunged from 80 yesterday to 70 today. So anyway, hopefully, it will rebound as the market did a little bit in January.

I'm going to go over the first quarter fiscal results and then I'm going to turn it over to Jeff who's going to give you some more detail, kind of color on the numbers and then I'll be back for a quick outlook. So overall, as we look at last quarter, we certainly had elevated volatility, market declines in December, market uncertainty. Given all that, I think we had a very strong quarter. Now there are lots of moving parts, so I hope we can provide some clarity to you on the call.

Overall, we had a record quarter net revenue of $1.93 billion, up 12% over the prior year's quarter and 2% over the preceding record quarter last quarter. We had broad-based growth in revenues. We had record quarterly revenues for the Private Client Group, the Asset Management Group and RJ Bank.

The quarterly net income of $249 million or $1.69 per diluted share was up 15% over last year's quarter but down 5% over the preceding quarter. But if you recall, both the prior quarter and the preceding quarter were impacted by adjustments, including the Tax Act. So if you look at it more apples-to-apples, the adjusted net income of $264 million or $1.79 per diluted share for the quarter, this excludes a $15 million loss from the disposition of our European equity research business. Given MiFID II and our scale, we just felt it was not a good investment for us. However, I want to note, we're continuing our highly successful North American equity research sales in Europe, which we've done for decades successfully. This also has no impact on our growth and investment in our European Investment Banking operations.

But with that $15 million adjustment, we had adjusted net income was up 10% over last year's quarter -- adjusted net income quarter and up 5% over the preceding quarter's adjusted net income.

On the capital front, with the decline in markets during the quarter, which was very punitive for financial stocks, it gave us a great window for repurchases. We repurchased 6.1 million shares of common stock or $458 million at an average price of $75.70. I know a lot of investors were sometimes frustrated believing that we weren't going to return equity, but I really think our patience and long-term view really pays off for shareholders and it should be a good return.

Additionally, not only on repurchases, but we focused on growing our business both organically and looking for strategic acquisitions. As we've stated, we've been searching in the market for acquisition opportunities but have stayed true to our discipline on our priorities being a cultural fit, strategic fit, something we can integrate and last but not least, and maybe sometimes the hardest, the price has to be a good return for shareholders.

Yesterday we announced such an acquisition, Silver Lane. They're a boutique M&A firm with excellent expertise and relationships in both the asset management business and wealth businesses and we expect to close by April 2019. Liz and her team are fantastic, and we welcome them to Raymond James.

Overall we believe we gave an outstanding annualized return. We had a 15.9% return on total equity or a 16.9% on an adjusted basis on total equity, not on tangible equity, so I think that compares very favorably to our industry.

Turning to the segments. Private Client Group, record quarterly net revenues of $1.36 billion. A record quarterly pretax of a $164 million. Now for the quarter, most of our client -- essentially all of our client asset are billed quarterly in advance on a beginning balance. That certainly helped us. And that more than offset the decline in brokerage fees for that -- for the quarter. Private Client Group was also helped by short-term interest rates and higher cash balances due to the volatility in December. Also, Private Client Group increased its account and service fees to Raymond James Bank, the -- what we charge the bank for cash deposits. And that benefit the Private Client Group by $16 million for the quarter, but decreased Raymond James' pretax by $16 million and Jeff will explain kind of that charge and how it's calculated.

Our domestic cash sweep balance was $46.8 billion, up 14% over last year's quarter and 6% over the preceding quarter. The decline of the equity markets negatively impacted our assets -- our client assets under administration of $690.7 billion were basically flat with a year ago and down 9% sequentially. Our Private Client Group assets and fee-based accounts of $338.8 billion were up 7% from a year ago and down 8% sequentially, and we'll talk about the impact going forward a little bit later.

The total number of advisers of 700 -- 7,815, was up 278 over a year ago but only up 2% last quarter -- 2 advisers, I'm sorry, over last quarter. Now recruiting was down a little bit off of last year's record pace but still very robust and very strong pipelines. The real story for the quarter as you always have some regrettable attrition in advisers that are asked to leave, but the real story for the quarter is, we had 65 planned retirements, deaths or people that left the business, which was elevated. Now in those situations, we retain the books as the books are given to other advisers or sold to other advisers. So the usually high number of retirements, which generally occurs after September 30 because of our fiscal year-end and the incentives and payouts, people tend to leave in this quarter was higher than normal.

The pipeline though has stayed very strong for recruiting, and we're still chasing our kind of 2019 records, but the pipeline is very, very good. Moreover, our retention remains I think extremely strong of our existing advisers.

On the Capital Markets side, net revenues of $253 million and quarterly pretax of $12 million. Now that $12 million was impacted by the $15 million loss associated with the European equities business sale. M&A was very strong. Less than last quarter's record, but still a very strong quarter. And market volatility certainly helped with institutional equity brokerage, which was up 27% sequentially. Fixed income, like the rest of the industry, has remained very challenged due to the flat yield curve and low long-term rates. Brokerage revenue was down 23% over last year's quarter and 4% sequentially.

The Asset Management business, with a record quarterly net revenue of $174 million, matching last year's record pretax -- last quarter's pretax of $64 million. Our financial assets under administration of $126.5 billion was down 3% over last year and 10% sequentially. Again, largely due to the equity market declines in December.

Carillon Tower Associates did experience some net outflows primarily due to 2 large account cancellations. One we knew about well in advance and one more recent. Asset management though continued to experience inflows in the fee-based accounts in the Private Client Group and also really driven by recruiting.

Raymond James Bank net revenues of $203 million was up 23% over last year's quarter, and 4% sequentially, really driven by continued loan growth to the Private Client Group and Capital Markets segments, really across many segments and certainly helped by higher short-term interest rates. The quarterly pretax income of $110 million was impacted by a higher loan loss provision and that increased fee I mentioned from the Private Client Group.

Now the loan loss provision was attributable really to loan growth and provision for certain downgrades in the quarter limited to a small number of credits across multiple industries. There is no indication of overall credit quality. We just try to stay ahead on the reserve for credit, for loans. In fact, if you look at our criticized loans as a percentage of total loans, they declined from 1.32% a year ago, 1.18% last quarter to 1.13% this quarter. So you see a declining percentage of criticized loans.

So at this point I'm going to turn it over to the longest-serving S&P CFO in the country, Jeff Julien.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [4]

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Thank you, Paul, I think. First and foremost, this quarter was obviously -- this is being the first quarter we've presented in this new revenue format. So for those of you who didn't have the benefit of the tutorial that we put on in December about this as well as the 8-K that we filed that sort of mapped the old line items to the new, let me just state real quickly, the Asset Management related administrative fees line, about 80% of that line represents the Private Client Group portion of fees from fee-based accounts, which are billed quarterly in advance. It used to be in the line item called securities, commissions and fees. And the other 20% of that line item is what used to be investment advisory fees, which relate to the assets under discretionary management. Of those, about 55% are billed in advance, 25% on average balances and about 20% on ending balances.

The line item brokerage revenues now, which consists of securities, commissions and principal transactions, includes the Private Client Group commission-based activity, other than underwritings, which fall now into Investment Banking. Also includes the institutional commissions, other than those related to our underwritings, which fall into Investment Banking. And also includes the line item that was formerly there known as trading profits. All those are now caught up in what are called brokerage revenues. And then the Investment Banking line item are what the Investment Banking fee revenues that were always in that line as now includes the commissions, both Private Client Group and institutional, on underwriting activity. And on -- change is a -- we are now grossing up the expenses related to transactions as we used to net them and give you a net revenue number. Now those are grossed up in this line item. They're also in other -- in the professional fees expense. That was about $6 million this quarter.

A change in this line item, Tax Credit Fund revenues. That activity used to be in this line item. Now those revenues are now moved to other revenues. So a lot of moving parts. And partly because of that, we thought it would be helpful, not just to you but to us, to put in the segment P&Ls in the earnings release. We've always included them in the SEC filings, but I think it's useful to look at those as much as it is the overall income statement now to see where the variances really came from. But based on the models that we've seen from those of you who cover us, I would say it looks by and large like you understand and understand the changes and they were reflected for the most part properly, I believe.

One other change I mentioned, the professional fees. That's a new line item on the expense side. Other was getting a little bit large, so we found the largest line item in there that we could break out separately. Those professional fees include legal, outside legal fees, outside accounting fees, audit increase and non-IT-related consulting fees. And we'll present that as a separate line item, as to help provide some color for things that go into other.

All that in mind, turning to a comparison to what we'll call the consensus model. Actually, asset management related administrative fees, we're actually very close to your estimates for the quarter. Brokerage revenue actually came in a little behind. There's no question that the commissionable activity in the Private Client Group side of the business continues to decline as there continues to be a shift toward fee-based activity. We did have a little bit of a spike in the quarter in the institutional equity side due to market volatility, but I'm suspicious that maybe some of the commissionable activity related to underwritings maybe in your models stayed in that line, when in fact they are now to be included in the Investment Banking line.

Speaking of which, the Investment Banking came in well ahead of your consensus, perhaps partly because of that commission location, but also because toward the end of the quarter, once again, we had very strong M&A activity mostly in the last couple of weeks of the quarter. I guess people trying to meet year-end -- calendar year-end deadlines for the tax and other reasons.

The only other item on the revenue side that was -- came in significantly ahead of projections was the net interest earnings. We did have a pretty significant surge in client cash balances, about $5.75 billion in the sweep balances for the quarter. That obviously fueled some of this net interest earnings. I will state that about -- as of today, about $2 billion of that has turned around and gone back out through fee billings for us or for redeployment into the market or into other higher-yielding positional cash alternatives, so it's been ebbing and flowing, but at that point in time we had a significant inflow.

Further, we passed through I think about 50% of the September Fed rate hike to clients, which is higher than most of the competition. We have yet to react to the December Fed rate increase as is the case with most of the Street, but we're -- so going into this quarter, we -- our spread has increased as well as balances going into the March quarter. But we'll see how that plays out for the rest of the quarter. But our overall net revenues were just 1% ahead of the net consensus, so a pretty accurate forecasting there.

On the expense side, communication -- total comp expense came in at about 65.5% on the comp ratio, about 100 basis points lower than our target. We're not really going to adjust our target at this time, although we -- as we typically only do it once a year, but that's a good result. It has a lot to do with the mix of revenues for the quarter with the net interest earnings kicking in and et cetera. So we'll talk a little bit more about that when we go talk about your going forward outlook.

Communication info processing actually came in lower than you expected, but it's actually kind of in line with what we expected because lo and behold, we have reclassed a $4 million a quarter item down to other expense, really a fee we pay to an outside party just for omnibus record keeping, which is important to us, obviously because omnibus fees that we get from mutual funds is a significant revenue item, but would -- we actually pay a third party to do all that omnibus record keeping for us. And like I said, it's about $4 million a quarter. So the guidance we gave you on the communication and info processing of averaging about $100 million will probably end up being something less than that for the year on average. And certainly starting out low, we expect it to build throughout the year a little bit, but that $4 million a quarter item will now be down into the other line.

I mentioned professional fees that have been broken out. That also includes, by the way, that $6 million gross up of deal expenses that we mentioned that's happened in the -- for the first time this quarter. So that looks inflated, but so is the revenue side.

Paul talked about the loan loss provision. I don't really have any more to add to that. We still feel that the overall credit situation is in very good shape at the bank. A lot of these "downgrades", they're still within the past category. We have a grid that has about 9 levels within the past category. And as they climb up that grid, there's a higher provision taken even though that the metrics are well within the past guidelines.

Then the other expense. It's still somewhat elevated. As I mentioned, we took the professional fees out, which was the biggest individual line. The other 2 line items that are of significance, if you remember, we used to have a line item called clearance and other costs for clearance and brokerage fees. That's in there. That's probably the largest line item. And then the other one is still our continued legal, our reserves or charges that we're taking as we go along and still have many items still in process, kind of like the bank loan loss provision, I'd say we try to stay ahead of that as best we can.

A list of other items I think are worthy of noting. The share repurchases clearly had some impact on EPS. In the December quarter, you could see the decline of a couple of million shares in weighted average, fully diluted shares for the quarter versus the preceding quarter and it'll have even a greater impact in the March quarter as a lot of those shares were purchased later in the quarter.

The comp ratio I've mentioned, but on a look-forward basis, I will caution that one of the things that happens seasonally every year is we get a FICA reset in the March quarter. That traditionally looks like -- again, this year we'll have something around a $7 million to $10 million impact on the March quarter versus the December quarter. As all those that were over the FICA limit now are subject to it again for at least a period of time.

The tax rate actually came in very close to guidance and consensus, but that was actually the net effect of a couple of items. We did have some significant losses in our COLI portfolio, which normally would drive the tax rate up as those are nondeductible losses. But in the December quarter, we also have the benefit of the equity vesting of our -- of a large number of equity awards. We traditionally award our retention and compensatory awards in the December quarter following our fiscal year-end and they have 3-, 4-, or 5-year vesting periods. So as those vest, we get the tax deduction on the appreciated value and that's -- as we've mentioned in prior calls, that's always the biggest in the December quarter and that more or less offsets the COLI loss impact for the quarter. So that 25%-ish rate still looks right where we would be for the rest of the year, plus or minus future COLI impact.

Capital ratios actually declined for the first time. Actually, our capital declined. We're not used to seeing shareholders' equity lower than the previous quarter, but obviously the share repurchases were the reason for that and the capital ratios declined a little bit, but obviously still in a place where people would say we're very, very healthy.

The bank net interest margin, there was a slight decline, but it's really due to holding the higher cash balance during the quarter. Because of the spread in cash balances that I mentioned earlier, we may get a temporary boost in the March quarter. But long term, I think we're kind of in the same place in terms of guidance on the bank's net interest margin around this level. And I think that at least a couple of reports focusing on the net interest income growth as opposed to the bank's NIM I think is important. Sequentially, the bank's net interest earnings were up 4% quarter-over-quarter. So whether it's in a large number of -- a larger balance of lower-yielding assets or deployed into higher-yielding loans, and we're trying to maximize the net interest income growth.

Lastly, Paul mentioned this transfer charge between the bank and Private Client Group for the sweep balances. Effectively, at -- just so you know, at the bank, those are basically omnibus accounts. The bank doesn't do any of the record keeping on those. It's all the raising of the money, supporting of the accounts, the omnibus accounting, et cetera, et cetera. It's all done at the broker-dealer and there's a per account charge from the bank back to the Private Client Group for the provision of those deposits. And you based on -- to reflect current economics, we adjusted that rate starting October 1. I mentioned this last call and I told you it'd be around $60 million it looked like for the year. For this particular quarter, you can see this on the Private Client Group income statement, the fee from Raymond James Bank increased $16 million. About $14 million of that $16 million was due to this rate change and the balance was due to increase in the number of accounts. So I think that is something that -- no consolidated effect as these eliminate, but certainly impacts the P&Ls of those 2 segments to some extent.

Little long-winded, I apologize, but a lot of changes going on this particular quarter. With that, I'm going to turn it back to Paul for an outlook going forward.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [5]

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Thanks, Jeff. I'm sure everybody found that exciting, so don't apologize.

A little bit of outlook. Given the market and it's kind of hard to give a little bit of -- give outlooks, but we can tell you what we know and what we think we see. So in the Private Client Group, certainly our fee-based assets are down 8% during the quarter, so that's going to lower our starting fee billing, so that's certainly going to be headwind in the Private Client Group. However, the increase in cash balances and although $2 billion were redeployed, roughly half of that is in our fees that are paid out in cash usually to clients. There's also probably a lot of tax harvesting where people go out of the market and come back in at the end of the quarter and other deployments into cash. We don't know what's going to happen with that net increase but if you take that net increase and add it to the higher short-term interest rates, that could supplement the -- could replace that revenue. It depends what the balances are going to be, we'll have to see during the year. And a reminder, those cash balances aren't compensatory, so they do have a positive impact on the net. It's a better net revenue and it also will have a positive effect on lowering the comp ratio. So we'll just have to see where that balance comes out.

Financial recruiting pipeline is robust across all channels, and our retention, if people leave, they tend to leave at the end of the quarter in the fiscal year because it's a cleaner time and there's no indication of anything, but retention continuing as we really focus on making this a great place for our advisers.

Capital markets, the M&A pipeline is still very strong. The big question is probably underwriting between the markets and the government shutdown at the SEC. Who knows? So -- but certainly the M&A pipeline looks good. Silver Lane, we're excited about that addition, but -- closing by April, that financial event will really impact more next quarter in terms of revenue and expenses given closing -- if it closes before that.

Fixed income, like the rest of the industry, will be challenged, I think. As long as the yield curve is flat and long-term rates are low, that's going to continue to be a tough business. I believe our people are doing a great job at managing the costs and managing inventories at a very good risk level. So I think they're doing everything they could -- can do.

The Asset Management business, our starting financial assets under management are down 10% sequentially. So we're starting lower. We had some recovery in January. Jeff talked about how they are billed. So it's hard to predict. Certainly they're going to start at a lower revenue base and the rest of the billings will depend on the markets. Flows for asset management should be helped by continued client recruiting. So given everything, the net -- we should have net inflows with recruiting.

RJ Bank, we expect to continue loan growth. January is down a little bit, but I think if you look at the C&I markets and our Private Client Group markets, we see attractive loans at attractive margins. So my guess is we'll see growth there, and we're pleased with the credit quality and certainly rising interest rates as the portfolio resets should help, too. So we think that will be a tailwind for the bank.

Capital deployments. We'll continue our buyback philosophy of looking at managing dilution, but also opportunistic buybacks. And we will be patient but we will act when we have an opportunity. The full impact, as Jeff mentioned, the stock repurchases in terms of fully diluted shares we'll be seeing next quarter, so that should be a tailwind too for the numbers. And we continue to aggressively look for acquisitions, yet impressive on the looking, but very disciplined on pulling the trigger on those.

So Jeff also mentioned the first quarter market, the kind of headwinds on expenses typically elevated, especially like FICA and meeting fees. We have a big Equity Capital Markets meeting in March, which will hit this quarter. So I'm very optimistic really about our positioning. We are looking to manage our costs in these volatile markets, but still invest long term in areas like technology and other areas that are important. So our -- recruiting is very attractive, and we'll continue to look for acquisitions to deploy capital where they make sense. So with that...

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [6]

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Let me add -- if I can, Paul, just 2 more quick comments for those doing modeling going forward. In the communication info processing line, if you remember, there's a seasonal factor that I forgot to mention that in the March quarter we always have our 1099 mailings and our year-end summary statements to clients, et cetera, et cetera. That generally adds about $2 million to that communication line in the March quarter, just as a reminder. And Paul mentioned the meetings in the business development line.

We've kind of given guidance that it's going to be between $45 million and $50 million lower at the beginning of the year, higher at the end of the year. I think we came in right on that. It should build as the year goes as the later quarters of our fiscal year are more replete with trips and conferences than the early quarters. In fact, this quarter we had almost none of that. So we do expect that expense line item to build as we've given guidance before throughout the year.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [7]

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All right. Okay, John, we're going to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is coming from the line of Devin Ryan from JMP Securities.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

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Okay, good. So first question just on capital. Obviously, we all saw the aggressive repurchases in the quarter. And so just trying to think about after that pace and that level, how you guys would frame the excess capital position of the company today. Like, how do you feel like you're capitalized and then how much is excess? And then with the stock price where it is here, understanding it can move, how are you thinking about kind of toggling between repurchases or kind of building capital for M&A? And just the last piece of that question is, we all saw the clear buy and steal in the markets. I'm curious if that sparks more activity on the M&A side and wealth management?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [3]

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So I would define our capital as less than it was a quarter ago. We repurchased. Certainly, we have excess capital. We prefer to deploy it in that position and we are working hard on them, but I'll tell you that the pricing is important. We just don't -- whether it's recruiting, a lot of firms above their front money and we just have not followed suit. So it's kind of the same in acquisition. If we believe people are overpaying, I'm not referring to any particular acquisition, but we're going to hold back. So we're going to stay disciplined.

We felt the stock was at very attractive price and had we not run out of [10c5] part of that during the blackout period, we might have had more, but we're just going to stay disciplined. I don't think you're going to see a big change, we're going to opportunistically buy when it's a good price and be aggressive. And when it's not, we're not going to do it just to do it. So our preference has always been acquisitions. We do look at a lot. And when we find them, we'll pull the trigger. So I don't see a big change in our approach. I just hope we demonstrated we are willing to do it when we have the opportunity.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [4]

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Absolutely, okay. Quick follow up here just on the legal reserves that have been affecting results the last few quarters. Can you just -- I know there's a methodology there in terms of kind of the accrual, but can you just give us any sense of the magnitude? Has it been similar in recent quarters? Was it similar this quarter to last quarter? And I know there's kind of list of things that you're accruing for, do you think we're in kind of a new normal of higher legal reserves or we're just trying working through the existing list? And ultimately what I'm getting is just trying to think about modeling kind of the other expense. I know that's lumpy, but kind of how we should be thinking about that taking in consideration the regulatory and legal reserves?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [5]

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Yes, we kind of -- we have a methodology when we have claims come in, depending on the size. We put an in initial reserve and -- like -- just almost like a bank loan. And then as we get in more information, we evaluate it and say, okay, given legal advice and everything else, what do we think is an appropriate reserve and we don't -- we'd rather have it adequately reserved than non-reserved. So we try to stay ahead of it and that's hard to do. So hopefully this is elevated, but I can't tell you it's not. But we try to stay ahead of the cases that we know about and know what's around the corner. But hopefully these last couple of quarters has been elevated and we think it will go down some, but...

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [6]

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And I don't know if it's possible to give any orders of magnitude or just given some guidance on the other expense just with or excluding legal or anything you can do to help us with that?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [7]

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No, we've said it's been elevated about $10 million-ish. I don't know if that's a run rate, means we'll get all $10 million or it's going to be $5 million or $6 million in the environment. Downturns in the industry tend to bring out more cases. So it's hard to model, but I think it's been running about $10 million higher than we thought. But I don't know if that's -- if I would credit the whole $10 million long term, it's just too hard to tell.

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Operator [8]

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Your next question is coming from the line of Christian Bolu from Bernstein.

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Christian Bolu, Sanford C. Bernstein & Co., LLC., Research Division - Equity Analyst [9]

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Just firstly, question on the 65 advisers that retired or I think died you mentioned, can you give us more detail on just the process and economics tied to those assets? Is Raymond James buying the book and allocating back to advisers? How do the economics work? And if you've given the books back to your advisers, do they have a slightly different payout ratio given they are not the ones that built the book? Just trying to understand the whole process, economics, et cetera.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [10]

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Yes. So in our firm, clients own their books, so we don't. So typically on a planned retirement versus a death, which generally isn't planned, the adviser would sell their books or give their books to their team or to another adviser if they're selling their practice. So with those planned retirements, there's generally a succession and they're either -- the session's already started and the books are moving, the adviser officially retires or there's a sale and they get out of the business. So most advisers will transition over time, but when they drop their registration and out, they come off our list. So there's no real change in economics to us. The buying adviser or the recipient adviser may have different economics or maybe paying the successor adviser, but there's no difference to Raymond James. And that's usually the same -- hopefully, not all advisers have a catastrophic plan if it's unexpected or a retirement plan filed with us. And those again would go to the successor advisers and the economics would be the same to the firm. So we're not buying them and then reselling them. They're really the advisers who are essentially doing that.

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Christian Bolu, Sanford C. Bernstein & Co., LLC., Research Division - Equity Analyst [11]

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Got it, very helpful. And then just a follow up on the earlier question around capital return, what -- I guess, parent capital, parent cash, it used to be the restriction here. So how much parent cash is left? And then Tier 1 leverage at the bank, is 7% still the best way to think about the minimum -- management minimum?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [12]

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Cash has been more limiting than capital, but we're -- I think we have pretty good cash. And if you look forward outside of given the severe downturn, cash will continue to build and capital will continue to build. So we're cognizant of that, both in our looks to deploy capital. So I don't -- I can't really give you a number on excess capital.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [13]

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I don't think that's very material. We disclosed that in the Qs. I mean, it's still in the neighborhood of $1 billion, which is kind of our target cash on hand at the parent level.

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Christian Bolu, Sanford C. Bernstein & Co., LLC., Research Division - Equity Analyst [14]

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Got it, okay. And then just a couple clean-up questions here for me. On the European research business, any chance you can give us like the revenues and cost for that business? Just trying to figure out the financial impact going forward. And then on Silver Lane, similar, any color on revenues, expenses and maybe historic growth rates of that business?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [15]

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Yes, that business wasn't a large business and operated at a loss, but it wasn't a huge number. So I think your -- I couldn't tell you what they are off hand, but I don't think they're big enough to impact.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [16]

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I don't think you'll notice it.

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Christian Bolu, Sanford C. Bernstein & Co., LLC., Research Division - Equity Analyst [17]

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Okay. Are both of them European research and Silver Lane?

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [18]

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In European, we don't think you'll notice the European loss of that.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [19]

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Silver Lane we haven't disclosed anything yet, so in terms of revenue or financials or the...

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Christian Bolu, Sanford C. Bernstein & Co., LLC., Research Division - Equity Analyst [20]

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Just so I'm clear, which one -- what's run at a loss, European research or Silver Lane?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [21]

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European research. The European equity research was not a profitable business for us and we didn't have scale, especially in MiFID. The U.S. research business in Europe is profitable. It's been there for decades. Again, not a huge number relevant to the whole firm, but it's been a very good business. And the European M&A business has been -- is growing and hopefully we'll continue to grow that, so. But the European equities business, the part that we disposed of, was not a large number and it wasn't profitable. But again, not in the numbers.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [22]

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And we certainly hope you'll notice Silver Lane in the M&A line item.

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Christian Bolu, Sanford C. Bernstein & Co., LLC., Research Division - Equity Analyst [23]

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I will.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [24]

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Yes, we have high expectations; been a very good business and good people.

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Christian Bolu, Sanford C. Bernstein & Co., LLC., Research Division - Equity Analyst [25]

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Okay. Any chance we get any sort of revenue expense numbers ahead of time, just to give us a ballpark here?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [26]

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Yes, we'll see what we'll disclose here. So we're still [in early] phase with Silver Lane, yes.

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Operator [27]

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Your next question is coming from the line of Steven Chubak from Wolfe Research.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [28]

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Wanted to start off with a question on the comp ratio. Jeff, I appreciate the fact that you're hesitant to adjust your comp target of 66.5%, just given the time of year. Having said that, the reported comp continues to surprise positively, not just this quarter but 4 consecutive quarters of comp below 66% even when it's serving higher adviser recruiting, which you cited as well as the FICA expense in the year ago March quarter. And I was hoping you could just provide some color on some of the drivers that you're seeing of those sustained comp surprises, whether we should expect to see a decline in the comp ratio versus 2018, which came in closer 69% -- 65.9%, I believe. Just given some of the positive momentum, it feels like you should be in a position, given some of the tailwinds you cited to deliver some positive comp leverage.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [29]

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Chris, I think the simple thing is just interest -- Steve, I'm sorry. It's just interest. And interest doesn't have a -- really a comp cost to us. So the surprises have been as that becomes a bigger part of the revenue, it's positively impacted that ratio.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [30]

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It could well come in at or below what last year fiscal year was. I mean, the biggest -- a big swing factor in that is how much independent contractor production there is. We have that dynamic where there are more at an 80%-type payout level, which is distorting our comp ratio relative to peers. But recruiting, which has been very good there, production is accelerating in the contractor side relative to the employee side. That distorts it to some extent as well the mix of other revenues that come in. Right now the mix is such that it's going to be trending downward. We'll have this FICA impact that I mentioned this next quarter. But when we revise our targets, which we typically only really do annually rather than every quarter, we're giving you an outlook, but we typically only formally at the investor analyst day kind of revise our outlook for the coming 12 months. I mean, it may go -- well go down at the time.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [31]

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Got it. Maybe just a question on loan growth. Continued at a healthy pace this quarter overall, but we did see a pretty decent decline in C&I. It was just a bit of a surprise given industry C&I lending in the Fed H8 data actually suggested broad-based strength. And I was hoping, just given some of the late cycle feeders surrounding commercial loan risk, you have pretty heavy gearing to the asset class. I was hoping you could speak to your appetite to grow the loan book from here, especially in light of the higher provision build and some of the credit downgrades we saw in the quarter?

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Steven M. Raney, Raymond James Financial, Inc. - President & CEO of Raymond James Bank, N.A. [32]

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Steve, this is Steve Raney. Good morning. Yes. So the C&I book, as you know, it's our biggest asset class. We do expect to grow it over time. I would expect it to grow at a slower rate than our private client banking assets, the residential mortgages and SBL. We're just continuing to be very selective. I would say the C&I market has probably been and has continued to be more volatile than the rest of the sectors that we focus on. And just -- we're going to be real disciplined relative to returns that we can generate in that business and really focused a lot on how we can be accretive to the rest of the firm, particularly Investment Banking clients. But we'll continue -- we've got a big infrastructure, a lot of expertise around C&I lending and that will be -- continue to be a big focus for us, growing at probably a slower rate than the rest of the asset class.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [33]

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It's not that we're not seeing C&I deal flow, it's just that, as Steve mentioned, we're just being really selective on which credits. I mean, spreads tightened during the quarter. They've since loosened again. They tightened during quarter. We're not -- if they don't meet our hurdle rates or they're too levered or they're in industries we're not fond of, et cetera, we pass. And we still decline a significant percentage of loans that are introduced to us.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [34]

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Got it. And I'm sure speaking for other investors, that's what we've been hearing. I think they'll appreciate that discipline given where we are in the cycle. Just one more follow up for me on the deposit outlook. Positive repricing trends have surprised positively. 50% data is certainly better than what we had expected and I was hoping you could provide some color, just on how you're thinking about deposit pricing from here given the favorable beta trends. And more specifically in the environment where the Fed actually pauses in '19, do you expect deposit pricing to continue to grind in higher in that type of an environment?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [35]

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Again, we can give you every prediction. We've been wrong since we've started predicting. We do know we raised, we're near the top of about most categories, so we have been aggressive on this last increase because we think we're treating clients fairly. Having said that, spreads are records and positional money market funds are paying higher rates and that's going to be a competitive pressure. So we are going to react to the market in what we have to do to compete effectively. And we've been surprised as the rate increases of the industry have been slower overall, but for short-term cash, if that's where clients want to put their money, and we're not just going to raise rates to raise them. But I think we've been pretty disciplined. You see that.

I think we -- we always get in trouble when we say what we think versus how we react. I mean, we are trying to be competitive and fair, but we're not trying to be leaders just to pull everybody along, which I think everybody thought we were going there. So we'll continue to be as disciplined as we have been and my suspect is that any time there's wide spreads, over time they get narrowed. So we'll -- but we'll see. I mean, it's lower than we thought.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [36]

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Since we have such a poor batting average, I'll give you my outlook. I would say if the Fed is really finished for now, and short-term rates are where they are for the rest of this fiscal year, my guess is there will still be selective increases to client rates over the course of the year, which will bring spreads in a little bit from where they are today, maybe not materially but in a little bit.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [37]

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And we'll hope Jeff is wrong again, but we'll see.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [38]

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Yes, and I'd actually like to see one more increase, then we'll be where we need to be.

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Operator [39]

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Next question is coming from the line of Alex Blostein from Goldman Sachs.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [40]

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I had a question for -- first question on just net new assets trends. Paul, you mentioned what you're seeing terms of the headcount growth, MFAs for this quarter being slightly flattish, but was wondering if you could talk a little bit more about net new asset trends, backing into it feels a little bit more subdued versus what we've seen in prior quarters. Is it essentially just market volatility or is there something else going on? And more importantly, if you guys could highlight what you're seeing so far in January in terms of new assets and FA recruiting?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [41]

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Yes. So FA recruiting, again, I think the pipelines are robust. I think we're coming off a record year. So I'm not going to say after we set an all-time record that we can match it. We hope we beat it, but we're a little behind last year. We see no reason why we still won't have robust recruiting. So I don't think flows -- certainly times where we have less recruiting in a quarter the asset build may be a little slower, although it takes advisers a while to bring over all their assets. So I don't think you see anything outside of a month that was down for the reasons we said and market volatility where people are more cautious. I think it's more of a short-term trend. We expect recruiting to have a very good year. May not be the record of last year, but we still think it will be a very good year.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [42]

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Got you. And then I guess on expense outlook side, I heard you, obviously, the commentary around the comp rate, but if we are in a bit of a choppier market backdrop and obviously the first quarter fees are starting off at a lower run rate, can you guys talk a little about the flexibility on the noncomp side? And what are some of the things you could do to protect the margins for the business if the markets are a little choppier from here?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [43]

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Yes. So we've already -- we can manage expenses, just in a volatile market we've kind of slowed down hiring of some positions. Although we're still in the net add position, just as we have been. We're already in this market, the slower -- the open positions and seeing what do we really need to drive the business long term versus what's nice to have and we've gone through that exercise. A big expense is IT. And our position right now is where we are in the markets is those investments are going to be very positive to the future, so we want to do those. If the markets got much worse, we could delay projects, certainly slow that down. Certainly, our bonuses and most of the people in the firm, including advisers who are tied to their production are certainly variable. So if results come off because of market certainly both headcount replacement and bonuses will be different than they are in good years. So there's some built-in expense adjustments and we're modifying kind of some of the builds, but we're not doing anything at this point that I would call really getting in, cutting things that we think are strategic or long term.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [44]

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The other line where we've got some significant degree of flexibility is in the business development. We can, in really bad times, obviously, we took steps to delay trips or conferences and things like that, but there's also some branding expenses and image advertising and things like that that we can make decisions on in that line item every year as well. So there's some discretionary spend there and in IT and certainly in the administrative comp lines.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [45]

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I think, also, we've also historically have performed very well in downturn so both in -- I think our comp model is pretty variable and we're also fine because of our capitalization have always found opportunities at good prices. So we -- it's more fun in the uptimes, but we're not afraid of managing through the downtimes. It's just not as much fun.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [46]

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Yes, that makes sense. Just a clean-up question on the bank side. So Jeff, heard your comments around the deposit betas and I guess you're implying you think there might be a little of pressure in the near term as kind of December hike catches out. On the asset side of the balance sheet, if we are going to start talking about lower interest rates, what's the appetite to maybe extend duration a little bit to lock in slightly better rates today versus I guess waiting to just kind of see what happens with the curve?

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [47]

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Funny you mentioned that, we had that conversation yesterday in the bank's Alco meeting. I think that while there may be -- first of all, we got to believe we're getting paid to do it. And right now, if you go out an extra year or two, you're really not picking up much in the way of yield. But secondarily, we're loath to go out for anything that has a lot of extension risk. So while the securities portfolio weighted average life may tick up a little bit, we don't want the extension risk to tick up much because we could be wrong about rates just as we have been so far. So we're not really out to take much more duration risk than we already are in this -- in the company. It's just not our way to bet on rates one way or the other. So it will probably continue, my guess, our fairly short-term ladder. We're certainly not going out long.

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Steven M. Raney, Raymond James Financial, Inc. - President & CEO of Raymond James Bank, N.A. [48]

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But we are continuing to grow the securities portfolio as we've been doing. We're going to continue on the path but probably not doing it via going out a little bit longer on the curve, as Jeff just mentioned.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [49]

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Just don't get paid to do it. I mean, the rates keep going. I mean -- they may go -- short rates may go to 5% or 6%. We don't know.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [50]

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If we find the spread and opportunity that we think is a reasonable risk, we will, but we see no reason to do it. I think that our view right now being really aggressive is just borrowing against long-term earnings and moving them up short term because you're taking a risk, certainly if rates move up. So they will some day. Haven't yet, but -- and we just try to manage the business as neutral as we can.

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Operator [51]

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Your next question is coming from the line of Jim Mitchell from Buckingham Research.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [52]

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Just maybe going to the bank, I appreciate the commentary on cash balances coming down a couple billion. How do we think about the bank as you try to grow deposits and securities portfolio? If I look at the period-end balance sheet, it was up $2 billion. Average balances were up $1 billion. So should we -- given your desire to keep growing that, should we assume that's some pretty good momentum from an average balance perspective into 1Q or are you seeing deposit runoff there, I guess, is the first question. And secondly, on the deposits, in the growth in the securities portfolio, how much do you have left in that sort of targeted $6 billion growth number or has that changed?

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [53]

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We're -- I'll answer the last one first. We're about halfway to the $6 billion. And again, we can accelerate or decelerate that as opportunities arise, but there's not -- no real magic to the time frame or even the $6 billion amount if the opportunities present themselves to do something different. In terms of balance sheet growth, I think the cash balance swings around as client cash balances come into the firm and on-balance sheet or go off-balance sheet or out of the firm. It really has to do -- the main driver of our total balance sheet growth has been net loan growth, which is projected to be maybe in the 8% to 9% per year on the bank's balance sheet, so $1.5 billion to $2 billion a year. That's really where the growth is going to be. Like I said, cash is in and out. Cap is to be high at the end of December, but that's really going to be the driver right now of the overall firm's balance sheet growth.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [54]

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Have you seen any of that cash come back down after the spike in December in the bank as well?

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [55]

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Yes, I mentioned that earlier. Of the $5.75 billion that came in, in the December quarter, we had about $2 billion up through today flow back out. Hardly any (multiple speakers)

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [56]

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Split between the sweep accounts and the bank?

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Steven M. Raney, Raymond James Financial, Inc. - President & CEO of Raymond James Bank, N.A. [57]

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Jim, we control that, the amount that comes to Raymond James Bank with the third-party banks receiving the difference. So we keep to a certain extent control. As Jeff was just alluding to the growth rate of the loans portfolios as well as securities, we want to be able to fund those assets as well as keep an ample amount of liquidity, and we can control that level that comes to our institution.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [58]

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And we anticipate being able to fund the bank's growth unless there's a major downturn in cash.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [59]

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But typically, the swings have been kind of both at the same time until we do a rebalancing.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [60]

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Right. And then maybe a follow up on expenses. If recruiting after a record year is sort of flat, even -- maybe even down a little from a record year, how much of a positive or lack of a negative is that for expenses? Or do you still have sort of follow on growth in recruiting expenses? Or should we expect recruiting expenses to turn flat this year versus last year?

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [61]

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I think you saw a little bit of that in the December quarter when you saw the business development expense line down below where we had guided at the $45 million to $50 million range. But because there's less movement in ACAT fees and headhunter fees and all the fees associated with that, it's -- but it's only a minor setback. I mean, there still was pretty good recruiting on the top line. It was just the retirements, et cetera, on the backside going out, so. But if it did truly slow down, you'd see a modest impact on that business development line, but that's not as big a factor in that line item as trips and conferences and some of the other bigger expenditures.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [62]

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And I guess you don't see much change in the amortization right away?

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [63]

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Not after the rise.

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Operator [64]

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Your next question is coming from the line of Chris Harris from Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [65]

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Yes, with respect to the PCG brokerage revenues, we know customer cash balances went up a lot in the quarter and presumably that was customers moving out of the market. Why wouldn't that have a bigger benefit on that line item?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [66]

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So it's not in brokerage accounts. A lot of it are fee-based accounts just going to cash, too. So they're still in fee-based accounts. And so there isn't brokerage commission on that. It's just kind of reduction in the fees that we're paying. So just as more and more gets into fee-based accounts because the activities is getting fee based and you just don't see it.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [67]

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Right. As you -- if you follow that, I mean, there's this reallocation within fee-based account, so the revenue still is impacted in the asset management fee line currently.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [68]

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You got to remember, also within brokerage revenues, Chris, it's not all transactional. The mutual funds, the variable annuities are market based, too. So the trailing commissions are negatively impacted in down equity markets.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [69]

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Yes. Okay, understood. And then just one quick follow up, in capital markets, good to hear that the backlog and M&A is still robust. Yet, based on the size of that backlog, do you guys think you can still have growth in high banking revenues this year if the government shutdown persists for some period of time?

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [70]

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I think we can have growth in M&A, whether we have growth in underwriting -- if the government stays shut down, that would be hard to do. Now we don't have a -- we -- not that we're coming off a huge number from last year, it wasn't the best year for underwriting anyway, so -- but certainly, if it stays shut down, it's going to have an impact. There will probably some catch up if the market's reasonable, if it opens up. It's hard without the SEC. Not too many people are going to shoot with them closed.

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Operator [71]

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Your next question is from the line of Bill Katz from Citigroup.

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William R. Katz, Citigroup Inc, Research Division - MD [72]

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Just a couple of cleanups for me at this point. If I look at the advisory yield on those assets, that ratio seems to be blending lower on a pretty persistent basis. Obviously, a lot of market volatility in the last quarter or so. How do you think about the direction of that ratio between asset gathering and the yield just given mix or business conditions or pricing? Just trying to get a sense of how to think about that line item going forward.

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [73]

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Well, if you get a choppy market like this, you'll see probably higher allocations to fixed income. So you're going to see probably a little lower fees, plus the addition of the Scout Reams, which is largely institutional fixed income. As that becomes a bigger part of our assets under management, I think that's been a big reason for the lower trend to this point. And it depends on people's risk-on, risk-off appetites for the most part. And where we focus -- where we're focusing our business. It's always -- historically, it's been a small mid-cap equity operation for us. And it's now certainly a bigger percentage, fixed income.

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William R. Katz, Citigroup Inc, Research Division - MD [74]

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Yes. Maybe I wasn't clear with my question, I apologize. I was just thinking maybe on the -- within the private client business, if you look at the split between the advisory assets and brokerage assets, then you look at the related revenues, I think that ratio has been blending down on the advisory side. So I'm wondering if there's something about the incremental assets that are coming in that are just priced more similarly to Ray Jay, or it's just the impact of a volatile choppy market and the ins and outs of assets and client activity?

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Jeffrey Paul Julien, Raymond James Financial, Inc. - Executive VP of Finance & CFO [75]

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I think over time with -- we've been recruiting larger and larger financial advisers and also have larger and larger clients. And so on average in the fee-based accounts, if you have a larger account, it's going to have a lower yield. Now the absolute dollars are obviously higher, but yield for larger accounts and fee-based are going to be on average higher than smaller accounts. I think that's a trend you've seen over time. And then the yield is also impacted by the shift to cash as well. There is a billing mechanism that adjusts for certain levels of cash in fee-based accounts.

Any other questions?

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Operator [76]

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We have no further questions at this time. You may continue.

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Paul Christopher Reilly, Raymond James Financial, Inc. - Chairman & CEO [77]

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Great. Okay. Well, we know there's a lot of moving parts here, but I believe we have a strong quarter -- we had a very good quarter and although they're choppy markets, I think we're in good position. And we appreciate you joining the call, and we're going to get back to work.

Thank you, John.

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Operator [78]

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Thank you. And this concludes today's conference call. You may now disconnect, and thank you all for participating.