Raymond James Financial Inc (RJF) — Q2 2020 Earnings Call Transcript

Good morning, and thank you for joining us today. Before we begin, I just want to note that our thoughts are with all of those impacted, both directly and indirectly by the COVID-19 virus. This has been a difficult time for all of us, and we certainly hope you and your families are doing well. The financial services industry has certainly had its ups and downs reputationally over the many years. But I can tell you today I am proud of our industry. Even through this pandemic time where we're focused on getting associates at home, we help keep the markets opened. The industry has helped with the administration of the Government programs and helping businesses and people get much needed cash. We have shared best practices on protecting employees and associates, and everyone connected to the crisis was just trying to help during this national emergency. And furthermore, I think the government, especially the Treasury and Federal Reserve, has been unbelievable in supporting the markets during this very difficult time. Values are critical during good times, but they are the guiding light in times of crisis. As we navigated through this crisis, our top priority was clear: the health and safety of our associates and advisors as well as our clients. We've treated and followed every case in the RJ family to ensure that our associates and their families were well equipped to handle the impact. We quickly transitioned nearly 95% of our associates to working remotely and closed all employee branches while providing continuous service to our clients. We've also taken additional steps to support our associates, particularly those who were directly impacted by COVID-19. With 14 days of additional sick time, zero cost for telemedicine options for financial relief, and resources for the emotional and mental health of our associates, some dealing with the stress of COVID-19 and some dealing with stress and challenges in the home environment with working from home while kids were telecommuting to school. In addition to ensuring the health and safety of our associates, another priority is to maintain continuous service to support our clients during these challenging times. During the quarter, we experienced unprecedented levels of client activity. For example, our top 10 trading days ever all occurred in March. We saw retail orders more than double, transaction volumes more than triple and institutional volumes up seven times on some days. Our ability to provide continuous service to our advisors and clients without any significant disruptions is a testament to the investments we've made in our technology and mobile apps over the last 10 years. Just as important, even during these scary and challenging conditions, our committed and experienced support teams demonstrated our long-standing service-first spirit in supporting advisors and clients, even in the work-at-home environment. And true to our mission at Raymond James, we continued supporting our communities in the U.S., Canada, and U.K. during these challenging times. In fact, the commitments from our companies and executives surpassed $2 million to help provide relief for those in need, and we anticipate doing more. Our associates, over the same period of time, have personally stepped up to support their communities. I expected no less. We are also supporting our communities through food and supply donations to aid local food banks and clinics in our markets. Again, I cannot stress how proud I am of our Raymond James associates and advisors for quickly transitioning to our business continuity protocols and continuing to provide excellent service to clients. Moving to slide 4. Despite a tumultuous quarter, our second quarter financial performance was solid, reflecting a relative resiliency of our diversified and client-focused business model. We generated record quarterly net revenue of $2.07 billion, which was up 11% over the prior year's fiscal second quarter and 3% over the preceding quarter. The growth in net revenue was primarily attributable to the beginning of the quarter with record PCG assets and fee-based accounts, as well as higher brokerage revenue due to the surge of market volatility in March. We generated quarterly net income of $169 million, or $1.20 per diluted share, which was down 35% compared to the net income in the prior year's fiscal second quarter and 37% compared to the preceding quarter. The significant decline in quarterly net income was largely caused by the $109 million bank loan loss provision and valuation losses in our private equity investments. On an annualized basis, our return on equity for the quarter was 9.9%, and return on our tangible common equity or ROTCE was 10.8%. Moving to slide 5. The significant declines in the equity markets in March resulted in a decrease of client assets and led to clients shifting assets to cash, driving new client cash balances to surge 34% sequentially to a new record of $52.9 billion. And despite the disruption in March due to the nationwide shelter in place orders, we reached a record number of private client financial advisors of 8,148, a net increase of 286 over March 2019, and 88 over December 2019. These net additions of financial advisors are a function of stronger retention and recruiting results, and we really only had two full months of normal recruiting activity before the pandemic hit. Net loans reached $21.8 billion, up 8% over the prior year's fiscal second quarter and 2% over the preceding quarter. The growth in bank loans was largely attributable to about $300 million of corporate revolver funding and continued growth in residential mortgages to PCG clients. Now, on the segment results starting on slide 6. The private client group generated record quarterly net revenues of $1.5 billion, primarily driven by higher asset management fees, as these fees are billed on balances at the beginning of the quarter and higher brokerage revenues as trading volumes spiked in March. Growth of asset management and brokerage revenue was partially offset by the negative impact of lower short-term interest rates, both on RJBDP fees and from third-party banks and net interest income. Record quarterly pre-tax income for the segment was $170 million, up 29% year-over-year and 11% sequentially. On the bottom of the slide, while client assets declined along with equity markets, you can see we continued our consistent trend of growing the number of financial advisors, which has become increasingly rare in our industry. In fact, over the last four quarters, financial advisors representing over $300 million of trailing 12-month production. Approximately $550 billion of assets in prior firms have affiliated with Raymond James, which is a spectacular result. Moving to slide 7. Revenue in the capital markets segment increased primarily due to higher equity and fixed income brokerage revenues in March, as well as equity underwriting revenues during the quarter. Despite the higher revenues, the segment's pre-tax income declined largely due to losses on trading inventories during the quarter, as there was a significant year-over-year decline in M&A revenues compared to the very strong results in the prior year's fiscal second quarter. On the next slide, the asset management segment generated net revenue of $184 million and pre-tax income of $73 million during the quarter, both flat with the record levels achieved in the preceding quarter. Results in this segment reflected a portion of a steep decline in equity markets in March, as financial assets under management are built based on a combination of balances at the beginning of the quarter, balances at the end of the quarter, and average balances during the quarter. Financial assets under management fell to $128.2 billion, a decrease of 7% on a year-over-year basis and 15% sequentially, primarily attributable to a decline in equity markets as the S&P 500 index declined 20% during the quarter, as well as net outflows for Carillon Tower Advisors. On slide 9, Raymond James Bank generated net revenues of $210 million, a 3% decline from the preceding quarter, despite continued asset growth, largely attributable to a 21 basis point decline in the bank's net interest margin during the quarter reflecting the short-term interest rates as the Federal Reserve slashed interest rates to close to 0 in March. We expect continued NIM pressures, as Paul Shoukry will detail a little later. Pretax income of $14 million declined 90% compared to both the prior year's fiscal second quarter and the preceding quarter, primarily due to higher bank loan loss provisions, which is a good segue into the next slide. Slide 10 provides a history of Raymond James Bank's key credit metrics since the financial crisis. You can see that Raymond James Bank, consistent with the banking industry, has enjoyed several years of positive credit trends since the financial crisis. In the second quarter, the loan portfolio continues to perform well, as indicated by the low level of non-performing assets, which actually decreased due to a corporate loan payoff earlier in the quarter. There were also no net charge-offs during the quarter. But as the COVID-19 crisis caused economic conditions to rapidly deteriorate at an unprecedented pace and scale, we increased the allowance for loan loss reserves resulting in the bank's loan loss provision of $109 million for the quarter. As a result, the allowance for loan losses as a percentage of total loans increased to 1.47% from 1.01% in the preceding quarter. You can see our allowance for loan losses peaked at around 2.4% in fiscal 2010, while our portfolio is much more diversified now, which Paul will discuss later on the call; we are also in an unprecedented economic environment. So there is simply too much uncertainty to know how much credit deterioration will be caused by COVID-19. However, if economic conditions continue to deteriorate, we do anticipate continuing to add to our allowance for loan losses. Looking at the fiscal year-to-date results on slide 11. We generated record net revenue of $4.08 billion during the first half of fiscal 2020, up 8% over the first half of fiscal 2019. Notably, all four core operating segments generated record net revenues during the first six months of the fiscal year. Earnings per diluted share of $3.09 declined 12% compared to the first half of 2019, again primarily due to the bank's loan loss provisions. I will give an outlook at the end of this call, but for now, I'm going to turn it over to Paul Shoukry for a more detailed review of the financial results.

Thanks, Paul. And I'm being told that the whole opening for a few minutes was missed because the operator forgot to switch us over to the overall lines. So I'll maybe ask Paul to repeat his industry remarks and the outlook. Starting with revenues on slide 13, as Paul stated, we generated record quarterly net revenues of $2.07 billion, which were up 11% on a year-over-year basis and 3% sequentially. Asset management fees were up 28% on a year-over-year basis and 5% sequentially. PCG assets and fee-based accounts declined 14% during the fiscal second quarter, which will be reflected in the third quarter as these assets are billed at the beginning of each quarter, based on balances at the end of the preceding quarter. Brokerage revenues during the quarter of $515 million were strong, as there was a surge in trading activity in both private client group and the capital markets segment in March. Account and service fees of $172 million declined 10% on a year-over-year basis and 3% sequentially, primarily reflecting the decrease in RJBDP fees from third-party banks due to lower short-term interest rates. Paul already discussed investment banking results, and I'll discuss net interest income on the next two slides, but quickly on other revenues, which were down substantially this quarter, reflecting valuation losses associated with our private equity investments in the fiscal second quarter of $39 million. As you will see on the upcoming expense detail slide, $22 million of the valuation loss is attributable to non-controlling interest and is presented as an offset in other expenses. So the net impact of pre-tax income and valuation losses associated with the private equity investments was $17 million for the quarter, representing close to a 20% decline in those valuations. The remaining value of these legacy private equity investments attributable to Raymond James was around $80 million as of March 31, 2020. Moving to slide 14, client domestic cash sweep balances, which are the primary source of funding for our interest-earning assets and the balances with the third-party banks that generate RJBDP fees ended this quarter at a record $52.9 billion, representing 7.6% of domestic PCG client assets as market volatility steep declines in the equity markets in March, led to clients shifting assets to cash. Other than quarterly fee payments, these balances have remained relatively resilient thus far in April. However, we have shifted about $4 billion of these cash balances from Raymond James Bank to third-party banks since the end of the quarter. The certain cash balances in March highlight the advantages of our multi-bank suite program, which offers up to $3 million of FDIC capacity to clients while also providing the firm significant flexibility to move the balances on or off-balance sheet as appropriate. On slide 15, the top chart displays our firm-wide net interest income and RJBDP fees from third-party banks on a combined basis, as these two items are directly impacted by changes in short-term interest rates. As you can see, the rate cuts totaling 225 basis points since August have put significant pressure on these revenue streams, which on a combined basis are down $36 million compared to the prior year's fiscal second quarter, despite loan growth at Raymond James Bank and the surge in cash balances this quarter. On the bottom of the slide, it shows our bank's NIM decreasing to 3.02% this quarter. But as you all know, the last 150 basis points of cuts occurred in March. So we will continue to experience NIM compression in the fiscal third quarter. We would expect the base NIM to decline to somewhere around 2.5% over the next quarter or two, depending on where LIBOR settles out. On the bottom right portion of the slide, you can see that the average yield on RJBDP fees from third-party banks fell to an average of 1.33% during the quarter. But again, given the timing of the rate cuts in March, we would expect this yield to decline further to around 30 basis points starting in the fiscal third quarter. And while these balances ended the quarter at $20.4 billion, we shifted a significant amount of balances from Raymond James Bank in April, where they were earning about 10 basis points of the Federal Reserve, or roughly 5 basis points net of FDIC insurance premium. So there's currently approximately $23.5 billion of balances with third-party banks, reflecting the $4 billion shift from Raymond James Bank in the fiscal third quarter since the fiscal third quarter and net of the outflows related to quarterly billings in April. Now I'll discuss expenses on slide 16. First, compensation expense, which is by far our largest expense. The compensation ratio increased sequentially from 67.2% to 68.8% during the quarter. The compensation ratio was negatively impacted by lower non-compensable revenues in the private client group, primarily due to lower short-term interest rates, losses on trading inventories, and the aforementioned valuation losses on private equity investments. The private equity valuation losses reduced net revenues by $39 million and had a negative impact of over 125 basis points to the total compensation ratio, as there's no direct compensation associated with private equity valuation adjustments. So if you look at the $71 million sequential increase in total compensation, a vast majority of it is attributable to direct payouts to financial advisors in the private client group and direct payoffs on the higher brokerage revenues in the capital markets segment. On to non-compensation expenses, non-compensation expenses during the quarter of $407 million increased substantially, due primarily to the large loan loss provision of $109 million in the quarter. As for the loan loss provision, I just want to remind you all that due to our fiscal year end on September 30, we do not implement CECL until October 1 of this year. So the provisions this quarter really reflect our intent of downgrading credits and taking more allowances for the loans that are most directly exposed to the COVID-19 crisis. As I noted earlier, other expenses included a $22 million offset related to the non-controlling interest of valuation losses on the private equity investments. Excluding that NPI offset, other expenses would have been higher during the quarter, largely due to legal reserves in the private client group segment. But almost all the other expense categories came in close to where we expected. While there were some elevated expenses associated with buying laptops for the relatively small portion of our associates who still had desktops and increasing bandwidth and licenses to facilitate remote working arrangements, there were also offsets from lower travel costs in March due to COVID-19. We expect those travel expenses and conference expenses, as those have been canceled over the next several months, to remain lower than normal over the near term. Most of those expenses show up as business development expenses on the P&L. So really, I think there may have been some confusion on a few of the reports last night about our expenses being higher than expected. The compensation was higher due to higher revenues than we've anticipated, and the compensation ratio was negatively impacted by over 125 basis points by the private equity valuation losses. And the non-compensation expenses of $407 million were higher than the $325 million we guided to last quarter, solely due to the $109 million loan loss reserve. Slide 17 shows the pre-tax margin trend over the past five quarters. Pre-tax margin was 11.6% in the fiscal second quarter of 2020, negatively impacted by the large bank loan loss provision and lower short-term interest rates. On the last call, we established a target of 67.5% for the compensation ratio, about $325 million per quarter from non-compensation expenses, and 17% for the pre-tax margin, but those targets are no longer valid due to the significant changes in the market environment, near-zero short-term interest rates, and the higher bank loan loss provisions due to COVID-19. Assuming we have some market clarity by June, we will aim to provide new targets then at our upcoming Analyst Investor Day, which we now plan on holding virtually. We will let you know as soon as we finalize the date, but we may postpone it if there's still too much market uncertainty to provide updated targets. On slide 18, at the end of the fiscal second quarter, total assets were nearly $50 billion, growing 24% sequentially. This significant increase was largely attributable to the surge in client cash balances, about $7 billion of which were deposited at Raymond James Bank. The significant balance sheet growth caused the Tier 1 leverage ratio to decline to 14.2%, which has been well above the regulatory requirements. As I mentioned earlier, in April, we already shifted approximately $4 billion of the cash balances off of Raymond James Bank's balance sheet to third-party banks, reducing the size of the balance sheet, which will have a positive impact on the Tier 1 leverage ratio. Liquidity is very strong as well. Cash at the parent company was about $2 billion. To further strengthen our liquidity position during a time of unprecedented economic disruption, we successfully raised $500 million in 10-year senior notes in March at 4.65%, which is included in the $2 billion. While the debt markets were really only accessible to blue-chip companies in March, we were able to get around $2.5 billion in subscriptions in the first three hours after launching the transaction, a real testament to our strong balance sheet and long-term conservative focus. And we also have an undrawn $500 million unsecured committed revolver, which doesn't mature until 2024. So with a total capital ratio of 25.3%, a tier 1 leverage ratio of 14.2%, and cash at the parent of around $2 billion, we have substantial amounts of capital and liquidity with plenty of flexibility to be defensive during this global pandemic and also be opportunistic. Slide 19 provides a summary of our capital actions over the past five quarters, where we returned to approximately $750 million back to shareholders through dividends and repurchases under the Board's authorization. During the fiscal second quarter, the firm repurchased approximately 2.5 million shares of common stock for nearly $202 million at an average price of approximately $79 per share. Share buybacks have been suspended since mid-March and as of the quarter end, $537 million remained available under the Board's previously disclosed repurchase authorization. We believe it was prudent to suspend buybacks during this pandemic, even though we do have a significant amount of capital and liquidity. On the next two slides, we provide additional detail on the bank's loan portfolio. Slide 20 provides some detail on Raymond James Bank's asset composition. In the pie chart, you can see we have a really well-diversified portfolio with a focus over the past few years to really grow residential mortgages and securities-based loans to private client group clients, as well as significantly increase the size of the securities portfolio, which ended the quarter at around $4 billion in all agency-backed securities. So we have a much more diversified portfolio now than we did before the last financial crisis. And then within each category, we have a significant amount of diversification as well. For example, within the C&I category, no industry category represents more than 4.1% of total loans. You can see energy represents about 1.7% of total loans, which I will detail in the next slide. Airlines represent 1.5%, entertainment and leisure represent 1.2%, restaurants represent 1.1%, and gaming only represents 0.7% of total loans. Within commercial real estate, almost 50% are to REITs, which typically have diversified underlying real estate portfolios, and the other 50% are to mostly stabilized properties with an average loan to value of 60%. Just touching on the residential mortgage portfolio, most of these loans are for private clients and clients across the country. The average loan-to-value is only 64%, and the average credit score is $762 million. So a really high-quality portfolio. So again, we feel good about our bank's portfolio. But with that being said, it's important to remember that we are really experiencing unprecedented global economic disruption. So as confident as we are about the composition of the loan portfolio and our loan underwriting and monitoring processes, we also acknowledge that we could experience significant credit deterioration due to the COVID-19 pandemic. The next slide details Raymond James Bank's energy exposure, which again only represents about 1.7% of total loans, with $382 million outstanding as of March 31. As you can see, there are no E&P loans in this portfolio, as the credit is mostly with midstream distribution companies and convenience stores. So a little less direct commodity pricing pressure, but again, if oil prices continue to decline, then all players in the supply chain could be negatively impacted. So with that, I'll turn the call back over to Paul Reilly to discuss our outlook.

Yes. I don't know if it's worth going through the opening again. I know there were cuts in or should we skip it. And for those who didn't hear the forward statement, I know you can find it on our website. Thank you, Paul. I want to reiterate that first, our primary priority, our number one priority is to ensure the health and safety of our associates, advisors, and clients. While conditions may appear to have improved in some parts of the world, we must be mindful that we're still in the middle of the global health crisis. Since our work-from-home arrangements worked so well, we continue to provide excellent service to our clients. We have 95% of our associates working from home, and we've had no technology disruptions. So we've been able to service the work from home, which is a testament to our associates and their focus on client service, and we're going to be very slow and deliberate about bringing associates back into the office. When we believe that conditions are safe, we will slowly move them in a phased, cautious manner. For our near-term outlook, similar to the rest of the economy, I think you should expect significant near-term headwinds for our business. In the private client groups segment, while our financial advisors' recruiting pipelines remain strong, we have ramped up virtual recruiting and onboarding activities. Traditional recruiting efforts will be impacted by the travel restrictions and even the comfort levels of in-person meetings. The near-term impact on recruiting results is uncertain, but it seems likely that even with the strong pipeline, there will be delays, and they will be disrupted until restrictions are lifted and people feel comfortable traveling and meeting in person again. Meanwhile, the segment will also be negatively impacted by starting fiscal third quarter with a 14% sequential decline of assets in fee-based accounts. Furthermore, results will also be negatively impacted by the yield of third-party RJBDP balances declining to around 30 basis points due to the rate cuts in March, which will only be partially offset by higher client cash balances. In the capital markets segment, we have a pretty healthy investment banking pipeline, but we expect significant near-term disruptions, certainly at least for the next couple of months. While brokerage revenues surged along with market volatility in March, volatility has declined thus far this quarter. And we'd expect brokerage revenues to decline as well, barring another spike in volatility, which is certainly possible. In the asset management segment, results will be negatively impacted by lower financial assets under management, as well as the net outflows in Carillon Tower Advisors. At Raymond James Bank, we expect NIM to decline from around 3% in the fiscal second quarter to somewhere around 2.5% over the next quarter or two, reflecting the Fed's rate cuts in March and based on current LIBOR rates. Other than funding the corporate revolver draws, which have been slowed down significantly thus far in March, we have also made the decision to suspend growing the corporate loan portfolio until we have more economic stability and clarity. But we will continue leveraging our balance sheet to support our private client group clients with residential mortgages and security-based loans. We had a large bank loan provision this quarter, and I know many will ask how much more do we expect. But frankly, there is way too much uncertainty to know at this point. Remember, we are only starting to see borrower financials for the March quarter. We still included two good months before March in the above, and the pandemic really showed up. We took as much provision as we could reasonably justify in the second quarter, but we also expect to take more going forward if the economy doesn't recover quickly. So not a lot of great news over the short term, but I'm much more optimistic about our long-term outlook. As we're all reminded in the last financial crisis, half the battle of long-term outperformance in our industry is surviving periods of extreme stress. As Paul detailed, we have a substantial amount of capital and liquidity. So not only are we confident in our ability to withstand a very severe economic downturn, we're also optimistic that we have sufficient capital and liquidity to be opportunistic and front-footed when things stabilize. Our growth priorities remain unchanged. Our top priority is organic growth, which is primarily driven by retaining and recruiting advisors in the private client group, as well as continuing to have senior talent in our other businesses, such as investment banking. We also continue to pursue acquisitions, which we will be well positioned for as soon as the economy recovers and markets stabilize. Historically, these types of environments produce valuations that can be attractive to both buyers and sellers over the long term. A good example of that was our Morgan Keegan acquisition in 2012 after the financial crisis. Before we open the line for questions, I just want to add, while there are many uncertainties right now, I know Raymond James will continue to operate consistent with our long-term values. These are the same values that help guide us, withstand past economic downturns and deliver superior returns for shareholders over time. It's difficult to predict the severity of economic deterioration as a result of COVID-19. I believe we are well positioned with our diversified business mix, long-term focus, and conservative principles. With our strong capital and liquidity position, we can proactively pursue strategic acquisitions with a consistent and disciplined approach. And while our strong capital position and systems infrastructure have been critical, our successful response to the pandemic and resulting market disruptions is a testament to our people. I just want to thank all of our associates and advisors again for their remarkable contributions and unwavering focus on serving clients during this unprecedented crisis. I've never been more proud to be part of the Raymond James family. With that, I'm going to turn it over to Vincent to open the line for questions.

Hey, good morning, Paul. Paul, I hope both you guys are doing well. Just I appreciated some of the clarifying remarks on expense, and you noted higher credit costs were the primary culprit of elevated non-comp versus expectations. I guess taking a step back on recent calls you've talked about efforts to bend the cost curve slow the pace of non-comp growth. We started to see some early signs of that in recent quarters. But even when I back out the higher provision and the NCI noise, it looks like core revenues were up about 5%, non-comps were up 7% sequentially. So I'm just trying to understand how much of the non-comp inflation was maybe one-time in nature? And then with revenue slated to contract from here just given the COVID pressures you cited, how should we think about the pace of non-comp growth in a contracting revenue environment?

Yes, Steve, as you may recall from last quarter, the non-compensation number that you are facing, the sequential growth on last quarter of $299 million was kind of seasonally low. And so we guided for the year to about $1.3 billion or $325 million per quarter, which would have been an increase of somewhere around in the low single digits on an apples-to-apples basis on an annual basis. So everyone was sort of looking at that $325 million this quarter. And again, even with those two items you've mentioned, we would have been lower than that for the quarter. Now again, a lot of that is due to some of the conferences and travel - we really had a conference or institutional conference. We still had in early March before the COVID crisis really broke out, but we did obviously travel expenses did decrease as March progressed and the COVID shelter in place orders went into place. And some of that was offset by purchasing laptops etc. So I would tell you that the non-comp expenses, excluding the provisions came in terms of the various line items where we would have expected and where we talked about last quarter. Now with that being said, as we progress from here, the dynamics will shift a little bit as travel and conferences. We've canceled a lot of the conferences, the two big private client group conferences this year. So that dynamic will shift from here. And then in terms of any further actions on costs beyond that, people and the compensation being our biggest costs, it's really during the crisis, is not when you make those types of changes. So we need more clarity and stability before we make broader changes in that.

Thanks. Very helpful color on that, Paul. Just one for me on credit and the provision outlook, relative to a lot of your bank comps, you actually built up your level of provisions despite having arguably lower exposure to the higher risk industry categories. Now, how should we think about the pace of provision build over the course of this year? You subtly alluded to GFC stress as maybe being the right paradigm here for thinking about loan loss reserve levels. Should we refer to that if COVID stress continues to negatively impact economic growth that we should be contemplating similar builds towards 2% plus or how should we really frame that as we think about the trajectory over the remainder of this year?

Yes. Obviously, there's a lot of uncertainty going forward, as you've heard from all the other banks. And when you look at that allowance for loan loss, which for us is about 1.5%, and you compare it to other banks, you really have to look at the various loan categories. We don't have a credit card portfolio. For example, some of the banks put allowances of 8% to 10% on those types of portfolios. But within our corporate and CRE portfolio, around 2.4% allowance for loan losses, which we believe and based on what we're seeing in the industry is a healthy number. And so but going forward as healthy as we think that is, it could get worse from here if the economic conditions continue to deteriorate.

All right. Just one quick clarifying question, Paul. I believe that you indicated that the third-party suite program is yielding about 30 basis points. I was just hoping you could speak to how these agreements are structured, given a lot of banks are flush with cash, given client derisking and aggressive QE. I'm just wondering if the banks start to have less appetite for deposits or if you're sensing that at all? And how that might impact the pricing on some of these agreements?

I'll tell you early on, the last month or so, we've actually seen just the opposite. The demand from the banks and even some of the biggest banks in the country has been very strong. I think some of that is somewhat related to the significant level of revolver fundings over the last month. And so we've added significant capacity with third-party banks at attractive rates. They're typically one or two-year type agreements. And for us as of right now, the floating rate agreements that are based on Fed funds target or Fed funds effective.

Thanks guys. Another one on the provision, I appreciate there's a lot of uncertainty, but can you talk to us a bit about the potential ramifications or impacts to you from the implementation of CECL in October?

Yes. I guess it's too early to tell. We're building out all the models. Even when we run sort of parallel runs now with the model that we have, there's pretty significant variations, especially since the COVID crisis. And what macroeconomic scenarios we could use, we would probably air on using some of the more conservative scenarios. But again, too early to tell. And by the time we implement on October 1, conditions and assumptions are going to be a lot different. So even for the banks that have already implemented CECL, what we're hearing from peers and other earnings calls is that there's a lot of uncertainty and variability with the assumptions that they're using.

Okay. And I know you guys are sweeping a lot of deposits to third party banks. But what is your appetite to grow the securities portfolio in this type of an environment with where yields are today?

Yes. As we said on the last few calls, we have a target to grow the securities portfolio to $6 billion by the end of the fiscal year. We actually ended the quarter at just over $4 billion. But that would represent a 50% increase, which is a significant increase for the rest of the fiscal year. We'll probably get to the $6 billion at the current pace, maybe a few weeks before the end of the fiscal year. But obviously, a lot can change between now and then. In terms of the incremental balances that came in in the last four weeks, we're taking them off-balance sheet now just to provide as much flexibility as possible. We wouldn't want to make a big change in our balance sheet strategy in the middle of the global pandemic. And certainly not with all the cash that just came in in the last three to four weeks. So we are open to it. Last time we were in a zero rate environment, we didn't have a securities portfolio or agency mortgage-backed securities portfolio at all. Now we do, and we have a lot of expertise. We actually use our in-house team, a strategic investment management services team to help us with it. So we feel really good about our securities portfolio. And as the cash balances remain resilient as we get through the $6 billion, if it still makes sense for us and for shareholders, we will certainly consider growing it even beyond that.

I guess first question just on the NIM guidance in the bank. I appreciate the color there. That's roughly what we were expecting in terms of the progression. As we think about kind of beyond the next couple of quarters, do you see that moving lower if you're further from there, just based on the current rate curve or how should we think about that? Is it 2.5% kind of where effectively in that range it bottoms out or are there other kind of puts and takes that would affect if we were to kind of run this out a little further in the next year or two?

Yes. I mean, obviously, there's going to be a lot of variables there in terms of how the asset growth and which categories that asset growth comes from over the next year or two. So as best as we can tell right now, 2.5%, give or take obviously, LIBOR moved 20 basis points just in the last seven days. So there's a lot of volatility even in the base rate. But I think based on what we know now, that's about as far as we're willing to guide.

Okay. Fair enough. And then a follow-up here just on you talked a little bit about M&A and the opportunities that can come about as a result of dislocation. And as I just think about tying that into the technology investment that the firm has made in recent years, how that differentiates you or when you've been thinking about talking to financial advisors and recruiting just in this work from home environment? How much more important technology is today probably than ever before? How is that playing into kind of the offering to advisors as you are doing these virtual recruiting sessions with them? And just kind of essentially presenting the platform to them? And then in terms of like the M&A consolidation opportunity, is that maybe one of the drivers here where some of the firms that are small or maybe under-invested and we're seeing that technology is going to be probably a lot more important than even anyone thought six months ago or a year ago? So just love some thoughts on that, both how it applies to both recruiting and M&A as well?

So from recruiting, Steve, I am sorry, Devin, that it's early. We've had a few, what I call telerecruiting sessions that have worked. Our commitment backlog is good, but joining dates have slipped. People don't want to go in and open an office right now, in most cases, although we've had some virtual openings. So it's early to tell really what that impact is going to be in terms of recruiting. There is nothing like a face-to-face meeting, especially when many people are joining us for a value proposition. And to really see the technology demonstrated live with people, that's much more impactful. So I think getting in front of people will be the key to resuming recruiting at the kind of pace we have. And so my guess is it will be disrupted in terms of the financial services industry's for advisors, most firms did fairly well in terms of work from home. Their technology may not have been as stable, but they've been able to manage that. And financially, self-clearing firms probably struggled without capital in the first week or two, but that's settled down too. So I think it's going to be a little bit longer term where people have to see that strategically as we recruit because of our systems. I think firms are going to have to say, you know what, we're just too far behind between regulatory and recruiting and technology that we need to go somewhere else. So I would not expect in the private client group space any rapid movement, and we wish those firms well. They're friendly firms to us, but hopefully, someday, if they make that decision, they'll join us. I think there's probably more opportunity, if this crisis, if there's a slow return in M&A. We've had discussions in the investment banking and the M&A space for a while now and pricing tended to be the issue. And we'll see what happens to pricing if this drags out. I think people will get more interested. If it's short-term and M&A bounces back, then I think there'll be less opportunities. So we're very actively keeping up the dialogue, and we're just going to have to see, again, just like the crisis, it's too early to tell, a slow recovery will need more probably reserves and a slower market, but maybe more M&A opportunity, and a faster recovery may make the loan portfolio much more robust and the market goes up, but maybe M&A opportunities won't be as available. So it's just too hard to tell. It seems like forever, but we're six weeks in really. So it's being at home, you count the days a little slower, but it hasn't been a lot of time than where we are in this pandemic so far.

This is Gautam Sawant stepping in for Craig. A question, what drove the decision to raise an additional $500 million? And how do you feel about your liquidity and capital position with $2 billion of cash at the parent level?

So what drove it was honestly, we debated with about $1.5 million of cash revolver that's secured and committed by the banks, some of the biggest and healthiest financial institutions. So we really need cash. And the first answer was probably not, but we decided I've never seen a firm go broke because they had too much cash or a firm that couldn't execute an opportunity because they had too much cash. So we looked at the pros and cons and decided that our extreme capital levels that we've had are an asset to us, and we wouldn't have to cut the debt. So now we're $2 billion in cash and a $0.5 billion undrawn line of credit. So we feel we did it. If this crisis is more severe than we imagine, we'll still be fine. Multiples of the cash and capital that we had going into the '09 crisis, '08, '09, if there's an acquisition opportunity, we are ready to go. Part of our Morgan Keegan acquisition happened because we were able to execute, both with our cash on hand and a committed in an overnight committed volume that a bank gave us to execute very quickly at a time or where it was very uncertain it could execute. So again, we felt being liquid was probably more important than the extra interest cost. So we went ahead and did the bond offering.

Great, thanks, good morning guys. Couple of questions, so I guess just going back to credit dynamics and the provision in the quarter. Can you help us understand, I guess, some of the macro inputs that you considered, whether it's GDP growth or something that we can help sensitize to what degree, if we see further deterioration in the portfolio or in that economy? We could see additional reserve builds. So kind of what's the baseline assumption? And any sensitivity around additional deterioration?

So Alex, we don't implement CECL until October 1. So it's not so formulaic for us yet because we have a September 30 fiscal year end. So our CECL implementation starts at the beginning of our next fiscal year. So it's not quite as formulaic. We're still under the incurred loss model, where we're really trying to go loan-by-loan and make the decision on a bottoms-up basis.

And those reserves were generated mainly on the industries that we thought were very COVID affected. So that's where most of that reserving came from.

Got you. And then I guess unrelated just back to the conversation around expenses and compensation. Appreciate your comments around the comp rate, obviously being skewed this quarter by the private equity dynamics. That's pretty clear. But I guess if you look at some of the segments, the comp rate in capital markets specifically picked up pretty materially at around 63% in the quarter. So I guess maybe what drove that? And then taking a step back, can you help us think about what the comp rate for the firm should look like for the rest of the year?

Yes. Within the capital markets segment, that comp ratio was negatively impacted this quarter by revenue mix. We don't break it out anymore after revenue recognition changes last year, but we did have some trading losses on inventories in the capital markets segment, where there's not the same direct compensation associated with those trading losses as we have with the significant growth in commissions we had in the segment during the quarter. And of course, on a year-over-year basis, M&A was down significantly from a very strong year ago quarter. So it's really attributable to the revenue mix and particularly the trading losses on the inventories. In aggregate though, just kind of stepping back to your overall question, obviously, there's going to be negative pressure or upward pressure on the comp ratio just due to lower interest rates and the negative impact that lower interest rates have on non-compensable revenues. The net interest income and RJBDP from third-party banks is going to be down based on the guidance that we just provided, and those don't have direct compensation associated with it. So you can look back before the 2015 period in a zero rate environment, obviously, that puts upward pressure on our comp ratio. But we're not because of all the volatility with the other line items and the impact of revenue mix, we're not in a position now to provide a new target for that.

I think too, it's important to note that those trading losses, so a lot of them were generated by fixed income. We, in our unique kind of balance sheet, one of our strongest sectors has been in the nontaxable muni finance. And even though that portfolio was almost entirely investment-grade. In '09 those securities traded well. In this downturn, they did not. So we went ahead and lower those. I think we have the lowest inventory we've ever had. And fixed income right now. When we went ahead and sold them out, and that generated some trading losses, but it left us very liquid and nimble.

Thanks Alex.

Great. Sorry if you missed the opening. But we hope and think about all of everyone affected by COVID directly and indirectly as we're recognized that us and our industry are able to work from home that we're really blessed because other people don't have their jobs right now, and we certainly hope you and your families are doing well. Thank you for joining today, and maybe you can hear the opening on the recording.

So we have the recording and we'll put it online. We'll rerecord the opening and have it online for everybody, including the forward-looking statements.