Raymond James Financial Inc (RJF) — Q1 2020 Earnings Call Transcript

Thank you, Myra. Good morning everyone and thank you for joining us on this call. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman and Chief Executive Officer; and Paul Shoukry, Chief Financial Officer. The presentation they will review this morning is available on Raymond James’ Investor Relations website. Following their prepared remarks, the operator will open the line for questions. Please note 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, anticipated results of litigation and regulatory developments or general economic conditions. In addition words such as believes, expects, could, and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q which are also available on our IR website. During today's call, we also use certain non-GAAP financial measures to 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 schedules accompanying our press release and presentation. With that, I would like to turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?

Thanks, Kristie, and good morning, everyone. I appreciate you joining us today. If I mention Paul during this call, I’m referring to Paul Shoukry, who has now taken over as CFO and will address that portion of the call. As always, I will start with an overview before handing it over to Paul for more detailed information and updates on our guidance. As we mentioned in our last call, we decided to wait on guidance until the interest rate changes were announced and we understood their impact. After his segment, Paul will return the call to me for an outlook discussion. Overall, I am very pleased with our first quarter results, especially considering the significant challenges posed by the recent interest rate cuts, which are estimated to negatively impact our pre-tax earnings by about $140 million annually. As shown on Slide 3, we reported quarterly net revenues of $2 billion, representing a 4% increase from last year's fiscal first quarter, although it is a 1% decrease from the previous quarter's record. Our quarterly net income reached a high of $268 million, or $1.89 per diluted share. Our return on equity for the quarter was 16% on an annualized basis. While we have typically refrained from sharing this metric because we believe return on total equity is more relevant, we are now disclosing return on tangible common equity, or ROTCE, as it is commonly used in our industry. For the quarter, we achieved a 17.5% return on tangible common equity on an annualized basis, which we find very attractive, especially given our strong capital position. On Slide 4, you can see that along with these solid financial results, we also set records for several key business metrics, including client assets under administration of $896 billion, PCG assets in fee-based accounts of $444.2 billion, financial assets under management of $151.7 billion, total PCG financial advisors at 8,060, and net loans at RJ Bank at $21.3 billion. While growth in client asset metrics was certainly supported by equity market appreciation, we also believe that the substantial growth, such as a 31% year-over-year and a 9% sequential increase in PCG assets in fee-based accounts, reflects significant market share gains driven by our consistent, industry-leading retention and recruitment of Private Client Group financial advisors. For instance, firms that have reported thus far show year-over-year increases in fee-based assets ranging from 18% to 23%, which is lower than our growth rate. Client domestic cash balances at the end of the quarter were $39.5 billion, down 16% year-over-year from the peak reached in the same quarter last year due to increased market volatility in December 2018, but up 5% sequentially partly due to year-end tax planning. Client cash balances have seemed to stabilize over recent months, but keep in mind that at the start of each quarter, quarterly fee billings affect cash balances, and during the first calendar quarter, we usually see seasonal declines due to income tax payments. Now, let's move to segment results starting on Slide 5. The Private Client Group achieved record quarterly net revenues of $1.4 billion, mainly driven by the growth of assets in fee-based accounts, though this was somewhat countered by lower short-term interest rates affecting net interest income and RJBDP fees from third-party banks. The segment's quarterly net income was $153 million, down 7% year-over-year but up 7% sequentially. The year-over-year decline in pre-tax income was primarily due to lower net interest income and RJBDP fees, which were impacted by decreasing short-term interest rates, a topic Paul Shoukry will elaborate on shortly. The sequential improvement in pre-tax income was driven by increased revenues and reduced non-comp expenses, which Paul will also discuss once I complete my section. Importantly, as indicated at the bottom of the slide, client assets and advisor numbers experienced positive trends, growing to 8,060 despite the usual surge in planned retirements each December quarter. In that quarter alone, 69 advisors retired or departed, yet we retained the majority of their client assets. Our net addition of financial advisors during this quarter stands out compared to other firms in the industry, as most reported declines in net advisors both year-over-year and sequentially. More importantly, the quality of advisors joining Raymond James is noteworthy, as we are attracting large, high-quality practices, with some in the $5 million to $10 million production range. Over the past four quarters, advisors with over $300 million of trailing 12-month production and over $40 billion in assets from their previous firms have affiliated with Raymond James, which is an outstanding achievement. Our recruiting pipeline remains strong across all affiliation options. Moving to Slide 6, the Capital Markets segment experienced mixed results in this quarter; while revenue and pre-tax income increased year-over-year, they decreased sequentially compared to the fiscal fourth quarter. Fixed income brokerage revenue and both equity and debt underwriting revenues were robust during the quarter, while M&A revenues and equity brokerage revenues fell compared to the same quarter last year. On the next slide, the Asset Management segment recorded record quarterly net revenues and pre-tax income, with financial assets under management reaching a record $151.7 billion, marking increases of 20% year-over-year and 6% sequentially. These record results were fueled by equity market growth, net new financial advisors, and increased utilization of fee-based accounts, which offset modest net outflows from Carillon Tower Advisers during the quarter. On Slide 8, Raymond James Bank reported a record quarterly net revenue of $216 million, slightly higher than the previous quarter, with loan growth helping to mitigate a seven basis points sequential decline in the bank's net interest income margin, again due to lower short-term interest rates. Pre-tax income rose 23% year-over-year and 3% sequentially, aided by a loan loss benefit of $2 million for the quarter. Despite loan growth and an increase in credit size loans during the quarter, a higher concentration in residential mortgages, which typically have a lower allowance than commercial and industrial loans, combined with payoffs of certain lower-rated corporate loans, resulted in this loan loss benefit. Net loans at the end of the quarter reached a record $21.3 billion, an increase of 7% from December 2018 and 2% from September 2019. Now I will turn it over to Paul Shoukry, who will provide more detail on our financial results.

Thanks. Before discussing the numbers, I want to express my gratitude to Jeff Julien, who is here with us this morning. Jeff has been an excellent mentor and friend over the years, and while I have big shoes to fill, I'm fortunate that he has agreed to stay on for a year to assist with the transition. So thank you, Jeff. In addition to the presentation for this call, we have also provided a financial supplement for the first time this quarter, which includes similar metrics as the earnings release but spans five rolling quarters. I will also highlight some other requested additions to our disclosures during my prepared remarks. As always, I appreciate your feedback and suggestions that help us improve our disclosures. Starting with revenues, we generated quarterly net revenues of $2 billion, which is up 4% year-over-year and down 1% from the record set in the previous quarter. Importantly, around 75% of our net revenues are asset-based, giving us relatively good predictability. Asset management fees rose by 10% year-over-year and 3% sequentially, aligning with a 3% sequential increase in assets in fee-based accounts from the prior quarter. Assets in fee-based accounts grew 9% during the fiscal first quarter, which will show up in the Private Client Group segment in the second quarter, as most of these assets are billed at the beginning of each quarter based on end-of-quarter balances. Also, about 13% of this line item is influenced by financial assets under management, primarily in the Asset Management segment, which derive from a mix of beginning, ending, and average assets over the quarter. Given one fewer billing day in the second quarter compared to the first quarter and a 6% sequential increase in financial assets under management, we anticipate asset management fees will grow approximately 7% to 8% next quarter sequentially. Brokerage revenues for the quarter were $460 million, which is quite strong as fixed-income brokerage revenues performed well again this quarter. While brokerage revenues in the Private Client Group and institutional equity brokerage revenues improved sequentially, both remained subdued since PCG brokerage commissions are affected by the shift to fee-based accounts, alongside cyclical and structural challenges impacting equity brokerage revenues across the industry, especially for firms like ours that take less balance sheet risk. Accounting service fees of $178 million decreased by 4% year-over-year and 1% sequentially. The decline compared to the fiscal first quarter of 2019 was largely due to the removal of the money market sweep option last June, affecting the Asset Management segment, along with lower fees from third-party banks related to reduced short-term interest rates and lower average cash balances. This will be elaborated on in the next couple of slides. However, we did see an increase in mutual fund and annuity service fees due to more mutual fund positions and higher balances. Investment banking revenues were $141 million, an increase of 3% from last year's first quarter but down 10% from the prior quarter. Both debt and equity underwriting revenues were strong, but M&A revenues declined both year-over-year and sequentially. Last fiscal year, we reached approximately $600 million in investment banking revenues, which was a record and a 19% increase from the previous year. We would be satisfied to match that result this year if market conditions remain favorable, which would imply an average of about $150 million in investment banking revenues per quarter, so we have some ground to cover after the first quarter. I'll talk about net interest income shortly, but regarding other revenues, they saw a significant drop this quarter. The main factors for this decline were lower tax credit fund revenues, which had a very strong fourth quarter, and a modest valuation loss on private equity investments compared to gains in both the first and fourth quarters of 2019. Moving on to client domestic cash sweep balances, which fund our interest-earning assets and generate RJBDP fees, these ended the quarter at $39.5 billion, the lowest percentage of domestic Private Client Group client assets recorded. These balances have stabilized since the third quarter of 2019 and rose by 5% during the first quarter due partly to typical tax positioning at the end of the calendar year. Unless we see significant market volatility, we anticipate challenges for these balances in the second quarter due to quarterly fee billings and income tax payments. On the following slide, we present our firm-wide net interest income and RJBDP fees from third-party banks, as both are directly affected by changes in short-term rates. As illustrated, the three rate cuts totaling 75 basis points since August have pressured these revenue streams, contributing to a $25 million decline from the peak in the second quarter of 2019, despite loan growth at Raymond James Bank. The average yield on RJBDP fees during the quarter was 1.64%. Prior to the three rate cuts, the average yields reached 2% in the second quarter of 2019, indicating a deposit beta average of about 50% for those recent cuts. The current level of client domestic cash sweep balances and the reduction of our spread from 2% to 1.64% suggests an annual pre-tax earnings impact of roughly $140 million, which would account for about 10% of our adjusted pre-tax income in fiscal year 2019, reflecting a negative impact of approximately 100 to 150 basis points on the compensation ratio and pre-tax margin. The net interest margin at Raymond James Bank dropped by seven basis points from the prior quarter to 3.23%. If short-term rates hold steady, we expect the bank's NIM to remain around this level for the second quarter, assuming a similar asset mix, as the negative impact of a higher mix of lower risk and lower yielding residential mortgages should be offset by a drop in cash sweep rates we're implementing this week. We expect the average yield on RJBDP fees to remain around 1.6% to 1.65%. Next, I'll discuss expenses. First, on compensation expense, which is the most significant expense, the compensation ratio rose from 65.2% to 67.2%. This increase was largely due to our revenue mix, as compensable revenues in the Private Client Group, which are linked to advisor payouts, have become a larger portion of net revenues, while non-compensable revenues have decreased. The reduction in short-term interest rates has put pressure on a significant portion of non-compensable revenues. Meanwhile, compensable revenues in the Private Client Group—covering asset management fees, brokerage revenues, and investment banking revenues—were up 3% sequentially, with these revenue streams averaging a payout of around 75%. Thus, when compensable revenues in PCG rise faster than other sources, you can expect the compensation ratio to increase. To clarify this dynamic, we've started breaking out PCG Financial Advisor compensation and benefits in our earnings release and supplement, which constituted $25 million of the $31 million sequential increase in the firm's total compensation this quarter, or roughly 80% of the overall increase. This trend is likely to continue into the second fiscal quarter with a 9% rise in assets within fee-based accounts observed during the first quarter. Given the growth in financial advisor compensation and the reset of payroll taxes at the start of each calendar year, we anticipate the compensation ratio to be about 67.5% for the fiscal year, representing a 100 basis point increase from our previous target. This adjustment is primarily driven by lower short-term interest rates and the shift in revenue mix towards a higher proportion of compensable revenues in PCG. As for non-compensation expenses, they totaled $299 million for the quarter, reflecting a 14% decline from the previous quarter, which included $19 million in goodwill impairment, and a 10% drop from the same quarter last year, which featured a $15 million loss tied to our European equities research business sale. As there were no major recognition events or conferences during the quarter and considering the loan loss benefit, we expect non-compensation expenses to trend upwards throughout the year. Currently, we estimate that non-compensation expenses for fiscal 2020 will be around $1.3 billion, averaging approximately $325 million per quarter. However, we anticipate variability around this estimate from quarter to quarter. If revenue growth exceeds expectations, it could result in higher non-compensation expenses as well as specific line items like sub-advisory fee expenses that are directly linked to revenue growth. A total of $1.3 billion in non-compensation expenses for fiscal 2020 reflects around 2% growth compared to fiscal 2019, which included the aforementioned non-GAAP items. We view this as a solid outcome, especially considering the growth we are experiencing, as we are strongly focused on managing expense growth while continuing to invest in future opportunities. The pre-tax margin for the fiscal first quarter of 2020 was 17.9%. Based on the expense guidance I’ve shared, we expect the pre-tax margin to be around 17% for fiscal 2020, indicating a 100 basis point decline from the target provided under Analyst and Investor Day prior to the three recent rate cuts. This is our best estimate at this time, knowing that circumstances can change quickly in our line of work. In summary, we have returned over $1 billion to shareholders through dividends and repurchases under the Board's authorization over the past five quarters. In the fiscal first quarter, we repurchased 11 million shares, but we remain committed to offsetting stock-based compensation dilution, estimated at $150 million to $200 million annually. Additionally, given our strong capital and liquidity position, we will consider significantly boosting our repurchases if stock prices drop to favorable levels, starting at roughly 1.8 times book value. We have $739 million left in our share repurchase authorization. Given the robust growth of our capital, we will increase our focus on utilizing or deploying our capital through higher dividends, more aggressive buybacks, corporate development opportunities, or accelerating the growth of our balance sheet, such as by expanding the bank's securities portfolio more rapidly. Now, I’ll turn the call back over to Paul Reilly to discuss our outlook.

Thanks, Paul, and thanks for a lot of guidance update there. But as again, as you recall from our last call, we said given the upcoming interest rate changes, we couldn't predict, we would hold off until this quarter. And you can see most of these changes were just caused by the interest rate changes. So we provided as much detail. Typically we would do it at our Investor and Analyst day. So we could explain things in person. But given the cuts since our last call, we felt it was time to update it sooner than later. In summary, we had three rate cuts since our last Analyst and Investor Day in June, which has an impact on our pre-tax income about $140 million. So we needed to adjust our comp ratio and pre-tax margin targets by 100 basis points. Unlike many of the other firms we’re in growth mode in almost all of our businesses and their expenses associated with growth. For example, we've been consistently adding financial advisors on a net basis, whereas most larger firms have consistently been losing advisors on a net basis. That creates a very different dynamic for our expense trajectory as we’re adding to our transition assistance and retention amortization reflected in the compensation that alone is about $265 million in 2019 representing 3.5% net revenues and $100 million larger than just four years prior. We're also adding support at the branches and at the home office, expanding the size of our branch footprint, paying internal and external recruiters, paying for ACAT fees to transfer accounts and so on. Growth is expensive, but we believe it represents a very good long-term result for our shareholders. And given this growth, I think a 2% growth in non-comp expenses is good expense management. With the benefit of hindsight, we probably could have done a better job explaining our expense growth over the past three years as we've been investing heavily, not just in our technology, but in our compliance and supervision infrastructure originally to get ready for the DOL rule, which has since been vacated, but also to support the future growth in a responsible manner by improving our solutions for advisors and their clients. And now I'm really glad we did make those investments as the SEC’s best interest standard is out and other fiduciary requirements become effective this year. If we had not made those significant investments over the past few years such as implementing Mantas and Actimize and other technologies for AML compliance and supervision, we would have struggled more in our implementation efforts for regulation BI. But I believe we're in the late stages of that infrastructure and personnel build-out, which is why we are confident we’ll be able to decelerate our expense growth going forward despite the significant growth we're experiencing across our businesses. Importantly, once we complete the build-out, we’ll be able to support a much larger number of financial advisors and clients on our infrastructure which should result in scale economies over time. And that growth really starts with the Private Client Group, which is obviously our largest business. We’re consistently producing best-in-class growth in this business. As I said earlier, over the past four quarters, financial advisors with $300 million plus of production and $40 billion of assets as their prior firms have affiliated with Raymond James and our recruiting pipeline remains very strong across all of our affiliation options. This quarter represents a better start than last year's first quarter where we’re flattish in the number of advisors. The first quarter of every year has a significant number of retirements which is typical at year-end. We’re off to a good start with this quarter averaging above last year's quarterly average. The strong recruiting and most importantly our strong retention of existing advisors has helped PCG assets and fee-based accounts grow 31% on a year-over-year basis and 9% on a sequential basis which is among the very best results, if not the best result we've seen in our industry on an organic basis. The 9% sequential growth is expected to provide a nice tailwind to our revenues in the fiscal second quarter. In Capital Markets, we've become accustomed to M&A achieving new records each year, as we've been investing heavily in that business. Activity levels in our banking business are still healthy, but we'd be very happy if we can match last year’s $600 million in fiscal 2020. On the sales and trading side, we’re still seeing positive trends on fixed income side of the business but we expect the equity side of the business to remain challenged as business continues to shift to low touch trading and balance sheet providers. The asset management business could continue to benefit from the growth of assets in fee-based accounts in the Private Client Group segment which has offset the challenging flow environment for Carillon Tower Advisers due to the shift from actively managed products to passively managed products. We’re entering the second quarter with fiscal assets under management up 20% year-over-year and 6% sequentially. In Raymond James Bank, we’re continuing to experience very strong loan growth in the Private Client Group, particularly residential mortgages, given the low rate environment. While residential mortgages have lower yields than our corporate loans, they have the dual benefit of having very attractive risk adjusted returns, while also strengthening our client relationships. Given where we are in the market cycle, we’ll continue to be extremely selective with loan growth particularly in the corporate loan categories. On capital, as Paul Shoukry explained, we’re fully committed to deploying our excess capital. We have been extremely engaged in evaluating corporate development opportunities but pricing in many of these has continued to be a challenge at this point in the market cycle. We’ll continue pursuing those opportunities in a deliberate manner but also be more aggressive in our other capital levers; including repurchases or growing the balance sheet. So overall, I'm cautiously optimistic entering the second quarter as we have had record client assets, a record number of financial advisors, a record net loans at RJ Bank. The activity levels for financial advisor recruiting remains strong, investment banking pipelines remain healthy. But given lower short-term interest rates and how far we are into the bull market, the longest ever, we’re still being focused on managing expenses. So with that, I'm going to open it up to questions and turn it over to Myra.

So, I had a question on recruiting. I mean, you grew your advisors a healthy 3% clip over the last year, you did have some retirements in the fourth quarter. But can you provide a little more color on where those advisors are coming from, and if you’re seeing increasing competition for advisors from the different groups like the wire houses and other independent brokers, and also why are a lot of those big banks failing in the competition for advisors now though?

I believe the difference in our approach at Raymond James is that we prioritize our advisors as clients, providing them with an environment that allows them to serve their clients best without any pressure to sell specific products. There are no quotas or incentives for our managers; our focus is solely on what's best for the advisors. We've maintained an appealing platform for a long time, and in light of the evolving technology and recent tightening in payouts and structures by banks, many advisors feel restricted and have been transitioning to us as well as other firms. Consequently, regional firms like ours have benefited from the challenges faced by larger wire house firms. The trend appears to be ongoing, and most of our recruitment has come from wire house firms. We are not experiencing any slowdown in our backlog; last year was nearly a record year, and we are currently on a similar trajectory. While I cannot say whether we will achieve another record, our interest in backlog and growth remains steady. This has been our strategy for several years, and we anticipate maintaining it in the short to mid-term.

Thanks Paul, and I had two or three questions in there. So I'll get back in the queue.

Hi, I was wondering if you could talk about the puts and takes in the non-comp line. I know you mentioned that for the full-year, the non-comp line should be around $1.3 billion. But I was wondering, how much room you have in the longer-term, maybe over the next couple of years to bring that line down a little bit. And maybe you can talk to some of the puts and takes by line?

I can give you an overview and I’ll have Paul to talk about the puts and takes. You've seen that line really taking away the accounting change last year, really decelerating over the last couple of years. So last year was a deceleration and this year is a further deceleration. But again sometimes with the accounting change where we had to gross up expenses on revenue recognition, some people lose on that. So we continue to manage it down. And we think we've become better and more efficient with the systems, and actually the systems investing actually help the advisors, also with their client management. So that's been the relationship. The large build-up started really a few years ago and it's been decelerating. Now, Paul, do you want to talk about any particular line item?

That’s right. And to add more color to what Paul stated, last year, the non-comp expenses grew 9% as reported but over half of that was due to the two non-GAAP items in the prior-year as well as the gross up of expenses due to revenue recognition. So, if you look at kind of the apples-to-apples that represented a significant deceleration, and we're looking to kind of maintain non-comp expense growth around the same level this year to get to $1.3 billion. Obviously started off low in the first quarter just given the loan loss credit and other items, so business development was relatively low given no conferences or recognition trips size, and we expect that to sort of build up throughout the year. But the last thing I would say on this is a lot of these lines, investment sub-advisory fees, professional fees associated with banking deals, et cetera are directly tied to revenue growth. So as much as we want to contain the growth that we can contain, we also want to fully appreciate the expense growth that is directly tied to revenue growth.

Got it. And then separately on the NIM side, I know you mentioned that and the NIM should be relatively flat going into the fiscal second quarter. But I was wondering if you could speak to the outlook more for the full-year, is there a little more room to bring down costs in the deposit side? With betas around 50%, is there still more room maybe as you go into the second half of next quarter or even into the fiscal third quarter, is there room to bring deposit costs down?

No, I think NIM is remaining stable in the second quarter, which reflects a cut we're implementing this week of approximately 5 basis points. Assuming rates remain stable, I don't believe there is much additional room to lower deposit costs from our current average after this reduction. The only other point I would bring up regarding NIM is that if we increase the growth of our securities portfolio at the bank, which is a possibility, it would generally lower the bank's NIM since we would be taking cash off the balance sheet that is currently earning 1.64%. Bringing it on balance sheet would provide a benefit for the firm overall, but it would put pressure on the bank's NIM because the securities portfolio, which carries no credit risk, has a lower yield than the credit portfolio.

Yes, that's one thing that as we move assets, if we grow the bank's balance sheet, it's better off with a consolidated firm that it will show lower NIM because it's higher interest spreads and we would earn off balance sheet but it’s the NIM in the bank would be impacted so.

So neutral to slightly better to pre-tax margins and it would be slightly detrimental to NIM, is that right?

Right, yes.

Yes, slightly better to pre-tax and but slightly detrimental to NIM in the banks.

So I guess first question here just a follow-up on the organic growth. Question in PCG, so clearly you guys are making a lot of investments to ramp the infrastructure in recent years and I think that’s driving or helping to support the industry leading organic growth. But I just wanted to dig in a little bit more on kind of commentary being kind of in the late stages of this infrastructure expansion as I get that also had some expense implication. So really the question is have you guys been at all capacity constraint on how fast you can recruit just not having the full infrastructure in place, and as you had ramp the infrastructure that can allow you potentially to close more advisors faster, so potentially there's a scenario where organic growth could accelerate, is that kind of one piece and I'm also asking a flavor for, from a geographic perspective, where you're seeing the most momentum and just an update on kind of the North, East and West and how you feel the market share is there?

Regarding the first question, the pace at which we can onboard new advisors depends on two main factors. First, we need to be able to find quality advisors willing to join us, and we do have certain criteria for acceptance. Therefore, the pipeline is a significant consideration. Second, we are currently below market in terms of recruitment. Although competition intensified last year, we have maintained our recruiting results without increasing our transition assistance like many competitors have. The key challenge for us is how quickly we can expand and integrate new advisors without compromising the service quality for our existing advisors, as retention is a crucial driver of our numbers. Our primary focus has not been solely on recruitment; we have also invested heavily in supervision and compliance to support our growth as a larger firm. Following our AML issues a while back, we committed to enhancing our systems and have heavily invested in platforms like Mantas and Actimize, which are costly but necessary. Mantas is fully operational, and Actimize is nearing completion, along with significant growth in our supervision and compliance teams. This infrastructure is highly scalable, and we anticipate that it will support our ability to bring on new advisors efficiently without requiring much additional investment. We may have used some of our interest rate spreads to strengthen our infrastructure during favorable conditions, positioning us well currently. Looking ahead, we foresee these improvements reflected in non-competitive areas. We don’t expect a decrease in transition assistance as we are already among the industry’s lowest in what we provide, even while remaining competitive. The ACAP fees associated with moving accounts are industry-standard expenses and are unlikely to disappear solely for recruitment purposes. However, we believe these expenses will yield strong returns on equity and exceptional long- to mid-term benefits for the business.

On geography, we continue to increase I think certainly the Northeast; we're seeing a much more activity given our investments there. And the West is growing, I mean, we're growing; I would say that our percent share is still very low. So what I like is that our flags are being expanded. I think we've done better than Northeast and the West, but we're growing percentage wise, the highest in those markets. But again, we have if we can get our market share in the rest of the country in the West and Northeast; we have a lot of growth for a lot of years if we can just achieve that over the next, three to five years, we've got plenty of recruiting opportunities. So we're making progress. Recruiting is interesting, because it's a long process. Very rarely do you get someone who's just going to leave if they do leave quickly. Sometimes there's an issue, so you're cautious. And we have recruits that we said, well, I was here in 2009 and I should have come in and they join us. I have been here for two years before they make the move. So it takes a while to build the momentum and pipeline, I think we're doing a good job in both of those markets making progress. And I still think we have acceleration opportunity there.

Great. Thanks for all the color. And just a quick follow-up. So on the comp ratio and margin targets that you put out there, I understand that business mix is going to be a big input and was this quarter as well. Do those targets comp ratio and just kind of overall margin and the outlook, does that assume any additional Fed cuts or equity market appreciation from here?

No, I think it's a static analysis of today's interest rate environment in this market. This is what we would expect. The only way to really impact that is to substantially change our mix or change our path. We like the mix, and it will fluctuate depending on the quarterly payouts, which we handle sparingly. However, when necessary, we make those adjustments. As we evaluate BI and other factors, we will continue to assess them as we always do.

So Paul, welcome to the first official call as CFO, I appreciate the detailed update on expenses and capital, I was really hoping you could speak to maybe now you're in the new seat, what some of your priorities are, and specifically wanted to unpack your comments in just a couple of areas, the appetite to maybe reduce gearing to the short end of the curve, and how you might look to grow the securities book, which I think you alluded to, capital return appetite if your stock is trading a little bit above that 1.8 times book value threshold and maybe just some enhanced disclosure on organic growth, so securities book, capital returns, and organic growth disclosure.

That’s a complex question, Steven, but I appreciate it. Regarding the securities portfolio, we have significantly expanded it over the past few years. We're currently evaluating our off-balance sheet cash, the insights from the forward curve, and our available capital to grow assets on our balance sheet. We are considering a modest increase of approximately $3 billion to $5 billion over time to accelerate the growth of additional securities. Importantly, we do not intend to take on credit risk in that portfolio; it will primarily consist of agency mortgage-backed securities with a duration of three to four years. Currently, this could provide an incremental yield of about 30 basis points above what we earn off-balance sheet, though that figure fluctuates daily. As for repurchases, we will maintain our consistent approach. We have previously indicated our intention to offset dilution, and as demonstrated last year, we possess ample capital, liquidity, and authorization to increase our repurchases if the stock price falls to what we see as opportunistic levels. We are committed to this strategy as well as addressing other priority expenses we've covered in detail.

I think one of the challenges right now too for the industry is that our focus is Reg BI is effective June 30. So as we look at IT and ops time, it's all focused on being making sure right now that we're compliant, and have our systems up, there are process and disclosure and other document changes that are required, so any excess capacity, or it’s really first priority, but any excess capacity, we've had to do these other things, have been focused on BI till we get them done. To do them effectively we have to start rolling things out. We’re starting to roll things out already, because we have to have them up and running and in place and done by June 30, not start doing them at June 30.

Hi and just one follow-up for me on expenses. You guys cited some progress in slowing the pace of core non-comp, that certainly is evident but the elevated comp pressure is continuing to weigh disproportionately on the margin. As we look ahead with NIM stabilizing in 2Q, revenue growth coming from more compensable activities within PCG. I'm just trying to think about longer-term, how should we view that incremental margin as those dollars come on, and most of the growth comes from fee generating activities. Now just trying to think about the earnings growth algorithm beyond 2020?

I think given the current rate environment and market environment, which obviously are the two big factors that would impact your margins, along with revenue mix, but I think 67.5% as of right now to the best we can tell 67.5% for the comp ratio and 17% for the pre-tax margin is the best visibility we have given our current revenue mix. So to the extent that we market environment changes, interest rate environment changes, our revenue mix changes then we would adjust those targets.

The first quarter was affected by a decrease in M&A and tax credit funds, which are cyclical, in contrast to the PCG business. This had an impact on us, but the significant change was in interest rates, which is just a mathematical matter. I'm surprised that we could experience a 10% decline in our pre-tax figures and a considerable drop in revenue due to those three factors, yet nearly recover it in just one quarter. However, the only way to truly address this is by reviewing payouts across our system. We compensate individuals based on production, which is essential for driving growth in both production and profit. We welcome growth in that ratio; if we can increase revenues even more, we can enhance our margins. It's important for us to ensure that our compensation is competitive and fair, and as circumstances evolve over time, we'll continue to reassess that.

Thank you for your questions and for the detailed disclosure. I’d like to revisit the discussion on margins. Regarding the private clients segment, what is your outlook for the long term beyond fiscal 2020, particularly regarding margin potential and the factors influencing that? Additionally, how does the 75% payout you mentioned earlier compare to market standards?

Yes, I would tell you in terms of the private client group margin, a lot of it really depends on geography. So to the extent that we have movement to fee-based accounts continue, which we've had obviously, a lot of the benefits get reflected in our asset management segment to the extent that we sweep more cash to Raymond James Bank, which we're considering doing even more so with the growth in the securities portfolio that would increase the margin at Raymond James Bank relative to Private Client group. So, really, we kind of look at the margins on a consolidated basis. We think that's the most meaningful especially when comparing across firms because a lot of firms have their bank and their asset management fee-based platform in their wealth management segment. So we expect it again on a consolidated basis, our best guess right now is 17% or better for the pre-tax margins. And then a payout, the payout is just a function of the mix between our employee channel and on the independent contractor channel where contractors are paid in the 80% range. And so when you blend the two is where you get the 75% type payout on the production, not the overall revenues to the firm, but the revenues that are compensable to the advisors on average generate.

We'd like to highlight that most of our return on equity is generated from the bank, which is our largest capital deployer. We also appreciate the investment in the Private Client group, particularly in areas like transition assistance and technology. Overall, we are pleased with the businesses we operate in and the resulting mix.

Maybe we could just follow-up on the comp in PCG a little bit, if I look at for the year-over-year sequentially, if I look at total comp not just sort of the compensation for the advisors, but I look at total comp relative to compensable revenue sequentially in year-over-year. Total comps growing faster than revenue. And so you're getting negative leverage or negative incremental margins out of the total comp line and can you just kind of help us understand what's driving the total comp, is it just is absolutely the other comp, is that just recruiting that maybe at some point going to slow because I would think at some point, you need to get positive incremental margins off revenue, even if it's not just the FA Advisors?

Yes, the biggest driver of that, as I talked about earlier is the build-up of support. Those AML compliance and supervision all three of those functions we've made starting three years ago almost significant investments really accelerated that growth over the last couple of years and now it's decelerating. So that's the leverage we think we'll get out so maybe in some areas have to play a little catch-up, but we've really built it for the future. And I think that's where our non-comp leverage is going to come from. So that's an awful lot of it.

Yes, I think it's important to note that when we discuss compensable versus non-compensable revenues on a year-over-year basis, the Private Client group is experiencing 4% growth in total revenues. However, this translates to a 6% increase in compensable revenues, which includes factors like production, the number of advisors, and the number of accounts. This growth will significantly contribute to both the payout and the necessary infrastructure support. Though the 6% growth is still below the 8%, which refers to the administrative non-financial advisor compensation in the Private Client group, its higher rate can be attributed to the reasons Paul mentioned. Looking back three years, to illustrate that we're in the advanced stages of this infrastructure development, that line group saw a 17% growth in fiscal 2018, followed by 12% last year, and an 8% year-over-year growth for the quarter, which aligns with our budget expectations for the year. The growth has substantially declined as we are nearing the completion of this build-out in the Private Client group.

And so that should continue to sort of further slow and not be so tied to revenue. Is that fair?

Yes.

Could you elaborate on the potential for balance sheet growth? If you decide to pursue that, how quickly would you be able to add assets to the balance sheet?

You can grow the securities portfolio by $2 billion or $3 billion quite quickly. It's something we're considering moving forward with, but we are still discussing it internally. If we do decide to proceed, I would expect the initial couple of billion to happen fairly soon. However, we are still in discussions about it.

Okay, well, great. Well, thank you for joining us. And again we normally like to do this on Investor and Analysts Day but again holding off last year, we said we wanted to wait and see what happened, how many rate cuts are, I could provide you the data because you can see right now because had there been one more cut or one less cut, it would have significantly impacted our comp ratios or earnings or mix. So wish we could have gotten to you a little bit sooner, but we got it to you as fast as we could. And thank you for joining us this morning. Right, Myra, thank you.