Raymond James Financial Inc (RJF) — Q4 2015 Earnings Call Transcript

Thanks, Terese. Good morning and thank you for taking your time out of your busy schedule 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 will turn the call over to Paul Reilly, our Chief Executive Officer; and Jeff Julien, our Chief Financial Officer. Following their prepared remarks, they will ask the operator to open the line for questions. Certain statements made during this call may constitute forward-looking statements. Forward-looking statements include information concerning future 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, may, could, should and would as well as any other statements necessary depend on future events are intended to identify forward-looking statements. There can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to carefully consider the risks described in our most recent form 10-K and subsequent Forms 10-Q which are available on the SEC’s website at sec.gov. So with that, I will turn the call over to Paul Reilly, our CEO of Raymond James Financial, Paul?

Thanks, Paul, and thanks for that rousing opening to get us all awake and going here. I want to make a few comments over the year and quarter and then I am going to turn it over to Jeff who will go into details and then talk a little bit about looking forward after Jeff’s finished. So let me start with the year, 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 kind of summary, net revenue is 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 continues to perform in difficult times. By segment, the private client group segment which ended up with a record number of financial advisors of 6,596 which were also our 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 graddable 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 enable 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 were up 1% in assets. And as you know from other firms reporting we’re a very small group that was able to grow assets, I think one other so forth. Just proves 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 funds syndication fees and a record year on our public finance business. And 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 were down, particularly for us with very strong energy and real estate sectors that were even harder hit, the weakness caused underwriting revenues to be down 26% compared to last year. And you have to remember as you know that equity underwritings also negatively impact our institutional commissions which were down 5% despite an increase in over-the-desk commissions. Furthermore, decrease in equity underwritings negatively impacts private client group as newly issued sales credits in the segment were down 15% compared to 2014. If you add those impacts, that underwriting impact was nearly $15 million negative to our comparison in fiscal '14. At the Bank, record net loans just under $13 billion which represented 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. Non-performing assets declined nearly a third now representing 39 basis points of total bank assets versus 46 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 and this was driven by our high capital levels which I know we’ll discuss later whether I discuss them or not because you will ask but in the environment we think 11.5% ROE is an 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 were 1.34 billion, net income of a 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 for the Capital Markets 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 increases 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 are 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 a loan loss provision in 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's attributable really to two factors, as we're continuing to invest in our technology systems which we think has really been paid off in our recruiting and we have increased some of our regulatory systems and our early streamline that process as well. In the private client group, recruiting remains very vibrant. We had an 89 net financial advisors which really enforced our investments are paying off. Despite the strong accreting results, client assets were down 5% on a sequential basis due to a decline in the equity markets. Before we've seen some recoveries this month but as you know our fee-based accounts are built in advance and the balances we are getting in the quarter in those fee-based assets such were down 4% which should provide some starting headwinds starting next quarter. In capital market segments all of our businesses performed well except for 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 and midcap products where we have a focus on equals and we had some outflows in the quarter accentuated by a large loss in the last week of a quarter of an institutional account. Once again this will impact the December quarter to approximately two thirds of managed assets are built in advance based on the balances. So and then at the bank again very solid quarter of growth. I want to remind that we have a very disciplined and opportunistic loan growth. I know it's not growing in a straight line and while the production was good this quarter, really the payoffs were significantly down which drove a lot of net growth in the quarter. So I believe a very good evening quarter to a very good fiscal year. And now I will turn it over to Jeff to provide a little more detail on some P&L items. Jeff?

Thank you, Paul. We appreciate those who share their models with us; it helps us create a consensus model for the quarter which guides our focus for this call, so please keep sharing. For those who haven't shared yet, we encourage you to adopt this practice as it helps us understand your perspectives. I will discuss some significant deviations from our consensus expectation model for the quarter, specifically those that are 5% or more away from expectations. In the revenue section, almost all items exceeded expectations, except for our largest line, which is securities, commissions, and fees, showing no growth from the previous quarter when growth was expected. While not a 5% deviation, it is noteworthy because it's our biggest line. This stagnation resulted from various factors: equity secondary market commissions rose due to the volatility in the equity markets towards the end of the quarter. Fees in the private client group increased as the billing date was around 2% higher than in the June quarter. On the downside, fixed-income institutional commissions decreased, mutual fund trails adjusted downward based on average assets for the quarter, and underwriting, impacting both institutional and private client groups, was weaker. Overall, this resulted in revenue being flat compared to the previous quarter. Investment banking exceeded expectations significantly, driven by strong M&A activity and a record tax credit fund quarter at $20 million. This was somewhat offset by declines in client equity underwriting fees, but the strength in M&A and tax credit funds was enough to counter the underwriting weakness. Consistent profits came in similar to recent quarters, although they were projected lower perhaps due to other results. Fixed income trading has maintained consistency throughout market cycles, so there is nothing particularly noteworthy to highlight there. In other revenues, we had some unexpected private equity valuation gains, a bit less than the previous quarter, which had a substantial gain from some ARS redemptions that did not recur this quarter. However, it was still a reasonable showing in the other revenues section. On the expense side, most items were also higher than expected. Compensation came in right on target and under our target compensation ratio for the quarter and year. Communication and information processing costs were slightly higher than anticipated, as we continue to incur consulting fees for various projects. We are beginning to see the amortization of previously completed projects, which impacts our maintenance fees going forward. Last year, we averaged between $66 million and $67 million per quarter, and the most recent quarter is more indicative of our current run rate. We discussed the bank loan loss provision and noted $300 million in growth through the first two months of the quarter, culminating in $935 million for the quarter. We experienced a surprising surge in September related to that growth. In our perspective, that's a manageable expense to miss as it aligns with growth rather than credit issues. We also noticed several other expense categories were 3% to 4% higher, including occupancy, business development, and others. We may see occupancy costs rise as we open new locations in the west and northeast. Business development expenses reflect our ongoing high levels of recruitment. Overall, many of these categories suggest a current run rate that could be indicative of future trends. A couple of additional points to highlight: it's gratifying to see the compensation ratio well below 68 for both the quarter and the year. Pre-tax margins exceeded our targets, coming in at 15.4 for the quarter and 15.3 for the year. The tax rate for this quarter was slightly elevated due to equity market declines, as gains are non-taxable, and losses are non-deductible. For the year, the tax rate of 37.1% aligns closely with our earlier guidance of 37%. Return on equity was reported at 11.5% for the quarter and year. While we didn't fully achieve our targets, it was more about accumulation than a ROE issue, given our strong earnings for the year. Our capital ratios are robust, and shareholders' equity has exceeded $4.5 billion for the first time, showing strength in both our capital and liquidity positions. Interest income remained largely in line with expectations, totaling $113.5 million for the quarter, a record for the firm. This reflects the prior bank growth, and moving forward, we expect additional growth, particularly as client cash flow supports this despite market declines. Cash levels increased by about $3 billion in the last five weeks of the year, reaching a total of $35 billion for the firm, which represents about 8% of private client group assets and indicates stress times. However, this will enhance interest earnings going forward even without rate increases. Lastly, we completed the repurchase of 1.1 million shares late in the fourth quarter. While it had little impact on this reporting period, it will influence future periods. We strategically exercised the buyback, purchasing shares for $56 million, contributing to our capital. With that, I’ll hand it over to Paul to discuss future items, and I’ll jump in if he misses anything from my list.

Alright. Good, Jeff. You are correct, if I don’t get everything on. So a little bit of outlook into the future. If you look at where we are today, first, the private client group segment rides a lot of our business, not just that segment, but certainly impacting asset management and the bank. Our retention remains best-in-class, and we believe our advisors are choosing to stay with us, really keeping this great culture alive. The activity in recruiting remains vibrant. We came off our second-best year ever in terms of the number of advisors, best year in net advisors, and we see a lot of high-quality teams still in the pipeline. Our platform is growing across all channels, including employee, independent, financial institutions divisions, and RA divisions. From what we see right now, that growth should be very good this year. Approximately 75% of our revenues from this segment are recurring in nature. It’s a great model for advisors and clients but also depends on market levels. About 50% of those client assets are exposed to the equity markets, and 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 challenging to start. Asset growth should recover from both recruiting and hopefully the market, but we will see where that goes. In Capital Markets, M&A and public finance are still very robust. We are hopeful that significant additions to our investment banking platform made during the year will start to bear fruit this year. Our fixed income business continues to generate exceptionally good results given the market. Of course, the big question is what happens to markets in 2016? If anyone can provide us a chart on market volatility, market direction, commodity prices, and interest rates, we can be pretty precise about what will happen next year. Our model is very flexible, and we tend to do well in challenging markets. Asset management should continue to benefit from our strong recruiting momentum, even from past recruiting as assets continue to move over from those who have recently joined. Our gross sales have been healthy, but net flows were challenged by the cancellation, especially of a large account at the end of the year. We hope that’s not recurring. The market decline in September will give us some headwinds. Our financial assets under management started the December quarter 7% lower, which will certainly impact the start of the quarter. We believe Raymond James Bank is well-positioned for growth. Loan balances grew 18.5% over last year, and our portfolio remains strong along with credit. We think our net interest margins are resilient around 3%. For planning purposes, we're looking at high single-digit or low double-digit growth, around 10%, but that will depend on what’s available in the marketplace in terms of good quality credits. A lot of people will ask about regulatory developments. Despite how active we are, I don’t have good news on this front. We have had almost 400,000 comments as an industry received by the Department of Labor. Secretary Perez has openly said he will considerably revise the proposal, but frankly, there are one or two provisions that have the most impact on us, and those changes won’t have much impact on us. My guess is they won’t all change, and there will be some impact, but I just can’t tell you what that is until we see the final draft of the re-proposal in January and February. The good news is 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 politically. Congress will likely be focused on other bigger issues. On capital deployment, we have excess regulatory capital, and we want to use it to grow our business. We have been actively looking for things that have a good cultural fit and a good strategic fit. We will only proceed if it’s also favorable for our shareholders. Our goal isn’t to be bigger; it’s to invest our capital wisely for good shareholder returns. We have also said we would be prudent in the use of excess capital, and you saw this quarter we did our first opportunistic purchase of about $56 million of common shares since the financial crisis. Our management team and Board proactively manage and discuss these matters. Overall, I am proud of what our advisors and associates did for the quarter. I think it was a good result, and we know there may be challenging markets ahead of us, but as we focus on the clients and their wellbeing—consistent with the history of Raymond James—it will ultimately pay off for our clients, our associates, advisors, and shareholders. Jeff, I don’t know if you have any corrections or additions before I turn it over to questions?

We had another very good year in private equity gains, totaling about $48 million. However, I advise caution when projecting future levels, as they may not continue at this rate. We believe that future growth will primarily come from our core business segments. We have increased our headcount in ECM and the private client group, and we expect these teams to become productive in the coming year. Additionally, the growth in bank loans will contribute to interest earnings, and while these elevated cash balances may moderate if the market recovers, they should average significantly higher than last year. Even without a boost in short-term interest rates, we anticipate continued improvement in net interest income.

Thanks, Jonathan. Terese, let's turn it over to you for questions.

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

Well, a little of both. I mean our self-imposed to the extent that we don't go to the regulatory minimums, we've always tapped the excess capital to save above regulatory minimums, but that's the number that we feel we can freely invest without any strain on our liquidity or operated model.

Okay, so in the context of some of the ratios that we found on liquidity side that the banks are managing to and 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 to that.

Hey Steve, its Paul Shoukry, yes we are, 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're not going to disclose it publicly, I don't think it's still a requirement but as you can imagine we are well above the 100% kind of requirement that the big banks are held to. So, I guess that's all I'll say on that.

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

I understand, Paul. One thing you mentioned in the past is that the management team is also linked to the ROE target. Are you confident that your goals are in line with those of the shareholders? Can you remind us what the current ROE hurdles are?

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

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

And then just one more final one from me and apologies if I missed this in the prepared remarks, but I did see as a financial service fees, I know that there's a seasonality component there and if they come in, if it's stronger than expected. I didn’t know if you could speak to what drove some of the strengths 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 quarter 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 kind of isolate any one single item but we do know for example client transaction fees were up this quarter just given the heightened market volatility.

So, some are asset-based, some are account-based like IRAC's and things like that, just based on having an account or small account fees, we actually have to fee for accounts that are under economic level for us to maintain and 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 are constantly trying to put new mutual funds on our platform which is higher revenues to us and constantly renegotiating the contracts that we have in place with existing funds.

Hi, this is actually Brian Delly filling in for Will this morning. How's it going? So, I guess coming back to the capital discussion, just wondering what your appetite is for the deals and maybe how we should think about the size and then some recent news article about recently as well I'm not sure if you can speak to them.

Yes. 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 yield first. Morgan Keegan was our best acquisition in history kind of by a long shot which is a $1 billion that was a big deal for us. So we tend to do things that are more modest and they have to be cultural fit, strategic fit and then price, so we actively are in the market, we have a corporate development function we talk to a lot of people, we've talked about a lot of focus on asset management as an area and some M&A. So we're active and we want to deploy capital but only if it has a good fit, so we are not going to spend it just to be bigger. And we’ve been consistent on that, so 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. And then can you give us any indication to activity levels into 4Q in particularly around PCG maybe client flows?

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

I think if you look at overall flows we don’t calculate that necessarily for all PCG client assets but one proxy for that is the flows into the nondiscretionary fee-based accounts in 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 were annualizing at around 15% or 16% flow for those nondiscretionary assets in the asset management segment.

I apologize if I missed this earlier. But can you give us some color on the pickup in the criticized loans. I know last quarter you talked a little bit about that having some impact from indiscernible but just wondering that why we're continuing to see that and if it's just a function of loan growth?

Hey, Joel. Steve Raney, good morning. There was not really a general theme, we had some upgrades in the quarter where we had three corporate loan downgrades that drove the increase in criticized loans, they were in different industries, so several themes as you we review each credit on a quarterly basis and we see a deterioration in performance we proactively downgrade into that and that reserve so accordingly.

And have you seen any degradation in the energy loans that you made and can you give us a sense again for the size of that or the portion of your portfolio?

Yes, Joel. The portfolio has remained stable over the past few quarters, and this quarter is consistent with that trend, exceeding $450 million in loans across various segments of the energy sector. As we've previously mentioned, we have avoided the riskier loans that have faced criticism at other banks. The challenges in expiration and production are linked to one credit in that sector, and we currently have no loans outstanding to that investment-grade borrower. Our loans are focused on what we consider to be less risky and less volatile areas, which are less exposed to commodity price fluctuations. Many of these loans are based on midstream contracts that offer take-or-pay arrangements. We monitor this closely and have increased reserves across the board in that sector despite believing that it is a well-structured portfolio. One of the criticized loans added this quarter was related to the energy sector.

Okay, great. And then in terms of just the pick-up that we saw in the tax credits syndication revenues, is that just the seasonal thing but does 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 and 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 and its backlog is very-very good. They are very good at what they do. But it is lumpy.

Okay. And then just lastly from me and again if you have mentioned this before I apologize but I think last quarter you described the public finance pipeline as exceptional, is it that still the case given the rates you haven’t pushed out?

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

Good morning. Couple of questions I guess one first one the PCG we were hearing about kind of a large peer that was considering kind of a garden leave clause in their pay plan for 2016. I was wondering, are you guys seeing any benefit on the recruiting side for the pipeline because of that or brokers from that business kind of considering making a change or is that not been impactful at all?

I believe someone was looking into it, but I don't think it has been implemented. However, we welcome anything like that, as it allows us to include a garden leave provision, although we inform the advisors that they own the assets and can leave whenever they choose. This isn’t particularly appealing for us. Nevertheless, whenever we observe competitors trying to introduce such clauses or what I refer to as institutionalizing accounts by indirectly compelling managers towards certain products or goals, it has been beneficial for our recruiting. We have maintained a consistent approach and philosophy throughout our history, emphasizing that advisors own their clients and that we are here to support them. I can’t specifically comment on that instance, but I have heard discussions about it among recruits from firms where this has been a topic, and it certainly doesn’t negatively impact us when these situations arise.

Am I understanding this correctly? Initially, there may be a benefit as people revisit their options. However, I would think it would be quite challenging for them to transition their business once that is established. In the long run, could that create a significant obstacle for people trying to choose and relocate to new places?

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 that was a change in contract or we can go on and on and on and on. So hypothetically, yes. Just like some institutions thought we’re giving 250% retention bonuses would anchor their advisors down. When those came off, that hasn’t been the case. So, I would say theoretically, yes. One, I don't know if they can implement it without a revolver; and secondly, what 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 people can successfully put them in.

That's interesting information on the dynamics there. It's helpful. Now, regarding the bank, we observed robust growth in commercial real estate and construction. Could you shed light on whether one of these areas experienced stronger demand? Additionally, you mentioned the effect of lower prepayments during the quarter. Could you help us quantify the difference in net loan growth between new originations and the slower repayments?

Good morning, this is Steve Raney. The growth in real estate is quite balanced between our loans to REITs and loans to individual projects. In terms of repayments for the quarter and overall growth, we issued about 250 million more in loans in the September quarter compared to June. Additionally, as Paul mentioned, the payoffs and runoff in the September quarter were significantly lower. The high level of runoff in June was partly due to our own decisions, influenced by a wave of loan re-pricings in the market. We opted to exit some loans as we did not believe the future rates were appropriate based on the associated risks. As a result, our runoff decreased significantly. The annualized runoff for the corporate portfolio was 44% in June, while it dropped to about 15% this quarter, which is unusually low, as we typically see around 25% based on historical data from the last few years. It’s quite rare to have two consecutive quarters with such a stark difference in runoff amounts, but this contributed to the considerable increase in loan growth for the quarter. While we experienced growth across all categories, our residential mortgage and tax-exempt loan businesses also showed positive growth.

One other, what are you guys seeing I guess in terms of the Canadian operations relative to the U.S.?

We have essentially two distinct businesses within our private client group. One side is performing well in terms of recruitment and maintaining solid margins, which is somewhat unique compared to our competitors in Canada. On the other hand, our investment banking segment is facing challenges due to the commodity-driven economy. While we are observing signs of improvement, the market remains tough. We are in the process of developing an M&A practice, which we did not have before, and we've brought in a leader for this area last year, continuing to recruit talent in a market where hiring is viable. We anticipate ongoing growth in the private client group, while the investment banking sector should perform better once we navigate through this difficult period.

And then 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 and as we think about heading into next year, should we continue to see an acceleration of that investment or should that level off?

We believe, as Jeff mentioned earlier, that the current run rate is likely a solid figure, approximately within a certain range, but I would encourage you to consider the rate at which we are operating.

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

And then you mentioned that there seems to be a handful or very key provisions within the DOL proposal that would make kind of the most meaningful impact. Obviously you mentioned that you’re uncertain which way they’re going to go with those. But can you just help us understand the handful that you feel are the most important to focus on have the largest impact on clients and the industry?

First, the big exception for product commissions is the way it’s written; it’s almost unworkable for a lot of sized 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. But do they really understand the impact it’s going to have on the broker dealer; can we work under it? The other is that level fees is certainly there has been a discussion DOL is that to be level across the firm for all products, which if you look at trails and on the bus and omnibus and all the fees associated with mutual funds, it’s more complex especially around share classes, there has been some discussion that that may imply only to the advisor level, certainly a lot easier to deal with and dealing with across the firm. Also an implementation timeline of this about eight months, which is almost impossible to rely on some of exemption, because our fund families tell us, they can’t provide the information, much less, thus providing that in the detailed format they want. So those are probably the provisions on an overall basis. To the extent all of those are workable, that’s great; to the extent that they’re better, but at the end in order to comply with the exception, you have to do most of the work anyway has the bigger impact.

And then last for me, you guys mentioned I guess about seeing with any asset management segment kind of a substantial client loss of assets, maybe someone moving those assets. I think you mentioned an institutional account. Can you just give us a sense of what was driving that decision and was it all in one particular fund?

We have a great relationship or we’ve have great net flows and we had some outflows this year. I mean that’s kind of a normal course of business. We have the Eagle Boston last year that group left and we had half those assets that had an impact. And then we had a client that just in the end of the year, a 20-year client focused on the small and mid-cap shut us to go with different manager, so that was probably the more surprise but that happens. And we get good surprises and bad surprises. We just had a couple surprises going against us in the last month at the end of the year. I’m sure a term notice was probably the harder one. But I think fundamentally the business is in good shape and we had good strong flows until that happened. So, we just have to keep chipping away at it. And we’re certainly institutionally in lots of proposals and if couple of those come through, it’s good and if you lose some, that’s bad. And that’s part of the business.

Good morning, guys. Could we maybe just talk a little bit about operating leverage? I think recruiting over the last two quarters has I guess probably been the strongest since the merger or acquisition of Morgan Keegan. And we’ve seen obviously 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, how do 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 to positive operating leverage at least, how do we think about I guess that dynamic of investment spend versus return?

We are unable to provide specific expense guidance, but we can share our outlook for the market. Typically, in a stable market, recruitment should fuel growth. This quarter, we've experienced a significant market decline, making it challenging to recruit effectively to counter such a downturn, despite some recovery this month. Our perspective is that if the market grows at a certain rate, our recruitment efforts should yield positive results. However, if we maintain our recruitment pace while the market continues to decline, we won't be able to offset that since many of our assets are affected by equity markets. This presents a challenge for us. We're keeping our operational targets steady for now, and if the market improves, we'll perform better; increased interest rates would also enhance our performance. Conversely, if the market drops, it will be difficult to keep up, but we still expect to outperform many competitors. Additionally, we have flexibility in operating expenses to cut costs if necessary. While we haven't made any reductions yet, we could adjust our initiatives to save money, given that a significant portion of our revenues is variable, which provides us with the option to scale back if the market worsens.

Tim, I would say that in a stable equity and interest rate environment over the next year, if we recruit at the same rate as this year, we should experience some modest improvement in operating leverage. This is not just the case in PCG; capital markets also saw significant hiring this past year, and those employees have not yet reached their expected productivity for the coming year. We do have a considerable amount of fixed costs on which we should gain some operating leverage, but under these circumstances, the improvement will likely be modest. However, with support from equity markets or interest rates, we could perform much better.

You've always been very disappointed around deal, and 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 attracting this as a deal, what metrics are you guys looking at or is there a hurdle rate or how should we think about what makes the deal attractive financially?

Our goal is to achieve a 15% return on equity based on conservative assumptions. We aim to integrate the business effectively and earn that level of return on our investments. While some may suggest lower targets, we focus on actual costs, realistic retention rates, and potential business growth. If we believe we can generate a satisfactory return that aligns with our strategic objectives, we will proceed. We're not overly optimistic about returns. We're not aiming for a 25% return on equity; rather, we maintain conservative assumptions. If there's a solid business opportunity that allows us to reach our 15% plus target, we will pursue it.

Could you provide an update on the recruiting momentum? Is it still mainly focused on wire houses, or can you share any insights on the mix over the past year? Specifically, how much has been from wire houses compared to other independents? Additionally, we're not currently seeing the results from the trailing production of the financial advisors who have been hired. How does that compare to the average production of advisors currently on the platform?

The primary driver is wire houses, which tend to fluctuate. In the past year, we’ve had one that has performed significantly better. I won’t mention any names, but it continues to create opportunities as they make changes. In the independent channel, we have seen more growth from non-wire houses, but the main driver has still been wire houses. The averages have remained above our overall averages. Thus, the increase in average production, as you have noticed in the improvement, is likely due to both our advisors becoming more productive and our recruiting efforts surpassing our averages.

And maybe a last one for Steve regarding the net interest margin in the bank. Can you discuss some of the factors in the outlook? You experienced strong loan growth this quarter, so how will that impact the forward net interest margin in the near term and over the longer term?

There have been some technical difficulties with stabilization, but we are hopeful that this will improve. As I mentioned in the previous quarter, we would be quite disappointed if we need to pass on some opportunities due to margins not being acceptable. In that situation, we may need to pursue different paths with certain loans. However, we are currently encouraged by the stabilization we've seen after a significant period of compression. Overall, our outlook remains fairly stable for at least the next couple of quarters.

Hey, good morning guys. I just wanted to get maybe your updated thoughts on growth of the bank and onboarding of the excess client cash. I noticed this quarter in particular there were some good growth in securities book, I'm sure some of that is mark-to-market but I wanted to know if we should read that as you are getting more comfortable deploying cash and securities essentially extending duration.

Let me first mention that we are taking some additional actions at the bank, but we don’t think it’s wise to leverage our balance sheet and securities, which would expose us to significant interest rate risk. We experienced this during the financial crisis in '09 and are grateful that we avoided that situation. While we know it's possible to increase leverage in the banks and achieve some short-term margins by taking on a bit of securities duration risk, we prefer to remain neutral on interest rates as much as possible. We are not pursuing that path aggressively; instead, we consider any adjustments we make to be very modest, and we are not attempting to inflate the balance sheet or dramatically increase our cash leverage.

Got it, that's helpful. And then maybe a follow up, so I want to hear your thoughts on what's the right way to think about the loan loss provision from here. I mean it seems like the reserves the loans have held pretty stable. Should we just assume the provision it's time to plug in that equation or if credit remains benign, can we expect that kind of reserve ratio to migrate downwards?

Well as the balance sheet mix stays about the same as it is I think the 130 basis points type of reserve levels going to be pretty consistent if we slowdown the commercial production side and some of the mortgage and SPLs become a little more dominant, they may dip downward a little bit but as far as based on our production estimates going forward I think the mix will stay about like it is, but I'd say 130 is about correct.

Okay, got it. And then maybe just last one from me. So I want to make sure I have the message right on the non-comp side obviously you are investing heavily in the business which is good for the long-term growth, I just want to get a sense of how kind of quickly you can turn on or off those investments depending on the revenue backdrop. I know the risk can we get kind of non-comp leverage regardless of the revenue backdrop?

Yes. We can adjust our strategies if we see slight margin compression, but we believe in the importance of long-term initiatives. Our focus is on annual and five-year growth rather than quarterly fluctuations. While we understand the need to monitor quarterly performance, our strategy prioritizes building a strong franchise and delivering value to our shareholders. We're providing guidance based on our insights, and we will not react hastily to one quarter's margins. If we observe a persistent trend or more significant cuts, we will respond as needed, as we have in the past.

Yes. We went through this in the '08, '09 period and as we definitely have room to hunker down if that came to that and there is a whole lot of things you can do, but they do impact at the levels of service or the levels of investment that you are making and the platform or as delaying projects or doing things and then God forbid you sample trips or conferences and you started being the culture to some extent. So we're very cautious to do any of those things.

We believe a significant portion of our success, particularly with larger teams and some of the teams in our pipeline, is a direct result of our platform. Our technology platform can compete with anyone; it's not flawless and does not excel in every area, but from an advisory perspective, it is top-tier. We're not being overly ambitious; if we adjusted based on feedback from the business units, that figure would be much higher. We want to clarify that we are managing this carefully, and believe it's balanced. However, we could delay or slow down projects. Not all projects are productive; some involve discounting and other necessary operations that don't affect the business. Yet, I can assure you that we can adjust many numbers if the market were to decline. At this point, our intention is to maintain our current run rates, which we believe is a wise decision based on our current outlook.

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

I think the key reasons are rooted in our culture and how we engage with advisors. One significant factor is our consistency, especially as we observe changes among bank-based advisors who are increasingly working to compete with us and control their business operations. Despite these pressures, many advisors appreciate our multi-channel and open platform approach that avoids those constraints. Additionally, technology has evolved significantly; we have always provided strong technology for smaller market advisors, but now we offer excellent solutions for high-net-worth advisors as well, particularly for larger teams. This technological advancement has really set us apart and contributed to our ability to attract new advisors. Overall, the core reasons remain the same, but the enhanced tools and resources have made a notable difference in bringing new advisors to us.

We understand that it's a busy time, especially at the end of the year and during a volatile quarter in the market. However, we believe we've had a strong year and a solid quarter considering the market conditions. Most importantly, our advisors are seeing growth, our loans are increasing, and while our assets decreased, that is largely due to market dynamics. We are optimistic that, given a stable market, we will continue to make the most of our platform and that our dedicated advisors will uphold our culture. I feel positive about our position, and I appreciate your interest. We look forward to speaking with you next quarter. Thank you, Terese.