Raymond James Financial Inc (RJF) — Q3 2020 Earnings Call Transcript

Thank you, Bridget. 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 being reviewed 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 development, impacts of the COVID-19 pandemic or general economic conditions. In addition, words such as believes, expects, could, and would as well as any other statements that necessarily depend 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 the most recent Form 10-K and subsequent forms 10-Q, which are available on our Investor Relations website. During today's call, we will 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 schedule accompanying our press release and presentation. With that, I'm happy to turn it over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?

Thanks, Kristie, and good morning, everyone, and thanks so much for joining us. This is our second call during the COVID crisis. The first one, we were a little more geographically scattered. So technology and internet willing, we should hopefully have a good call here. I'm really proud of how the firm has performed during this period with the COVID crisis and social justice issues. Our associates and advisors have been amazing. The advisors have focused on their clients, growing their business with great net new asset numbers. Our associates have really worked hard to support them. All of Raymond James has come together to discuss and make commitments on the social justice issue. August is Raymond James Cares month to see how we're helping those needy and smaller groups, which is really inspiring. Getting into the numbers, despite lower short-term interest rates and economic uncertainty associated with COVID-19, I'm pleased with the results for the third quarter. Fixed income generated record revenues and pre-tax income. PCG assets and fee-based accounts increased 16% sequentially, and we continue to recruit numerous high-quality financial advisors, reaching a new record of 8,155, up 251 over June of 2019. We recruited 113 financial advisors domestically during this quarter alone, which represents $71 million of trailing 12 production at their prior firms, all of this during the pandemic and with our offices closed for much of that period. We are also entering the fourth quarter with a healthy investment banking pipeline. Even with these market changes and uncertainty, we are continuing to focus on servicing our advisors and clients and growing all our businesses. We generated quarterly net revenue of $1.83 billion, which was down 5% compared to the prior year's fiscal third quarter and 11% compared to the preceding quarter. The year-over-year decline in quarterly net revenues was largely driven by the impact of short-term interest rates on net interest income and RJBDP fees to third party banks. Sequentially, quarterly net revenues declined due to both short-term interest rates and lower asset management and related administrative fees, which are primarily based on the Private Client group entering the quarter with lower fee-based accounts. We generated quarterly net income of $172 million, or $1.23 per diluted share, which was down 34% compared to net income in the prior year's fiscal third quarter, largely due to the bank loan loss provision of $81 million during the quarter compared to a $5 million benefit in the prior year's fiscal third quarter. Despite a sequential decline in quarterly pre-tax income, net income increased 2% sequentially, and significant nontaxable gains in the corporate-owned life insurance portfolio reduced the effective tax rate to 13.1% for the quarter from 29.3% in the preceding quarter. On an annualized basis, our return on equity for the quarter was 10%, and return on tangible common equity, or ROTCE, was 10.9%. Moving to slide four. As equity markets rebounded from the March lows, client assets under administration grew 13% sequentially to $877 billion, and PCG assets and fee-based accounts grew 16% sequentially to a near record $443 billion, which will provide significant tailwinds for asset management fees in the fiscal fourth quarter. Following the surge in March, client cash balances remained relatively stable, ending the quarter at $51.9 billion. Despite the continued disruption caused by travel restrictions and office closures, we reached a record number of PCG financial advisors of 8,155, which is 251 over June of 2019 and seven over March of 2020. This is a good result compared to many firms that experienced a net decline. We accomplished this despite many of these offices being closed during the quarter, and we've had many advisors commit but push their commitment dates back, waiting for the offices to reopen. Net bank loans of $21.2 billion grew 3% over the prior year's fiscal third quarter, but declined 3% compared to the preceding quarter. The sequential decline includes proactive sales of corporate loans totaling $355 million, which we'll discuss in more detail on the call. The bank continued to experience healthy growth in residential mortgages and security-based lending to our private client group clients. Moving to the segment results, starting on slide five. The Private Client group generated quarterly net revenues of $1.25 billion. Quarterly net revenues declined 8% compared to the prior year's fiscal third quarter, primarily due to lower RJBDP fees from third-party banks, a decline in net interest income, and lower brokerage revenues. The 16% sequential decline in quarterly net revenues was attributable to the aforementioned items as well as lower asset management fees and related administrative fees, which were primarily based on private client group assets and fee-based accounts being lower at the beginning of the quarter. Quarterly pre-tax income for the segment was down $91 million, down 35% on a year-over-year basis and 46% sequentially. PCG assets increased along with the equity markets. While recruited production increased sequentially, the net addition of financial advisors was negatively impacted by the COVID crisis, which disrupted many transitions, particularly in the employee channel due to office closures and slowed the net addition of trainees as testing centers were closed during the quarter but are now open. It’s also important to note that in the net number, a number of advisors leaving for retirement, leaving the industry or moving to our RIA channel affected the total of net advisor accounts, but we've retained almost all those assets during those transitions. The net advisor growth in the independent channel remains strong and is tracking closely with our fiscal 2019 results. As home office visits for perspective advisors have transitioned 100% to virtual, advisor recruiting activity has continued to recover and the pipeline remains solid across all our affiliation options. Over the past four quarters, financial advisors representing approximately $290 million of trailing 12 productions and nearly $43 billion of assets at their prior firms have affiliated with Raymond James domestically, which is a very strong result. Moving to slide six. The Capital Markets segment generated record revenues driven by higher fixed income brokerage revenues and debt underwriting revenues, which more than offset lower M&A revenues. The 71% year-over-year increase in fixed income brokerage revenues and the record results for our fixed income really reflect our leading position in the small to mid-sized depository client segment, which has experienced an increase in activity. Meanwhile, M&A revenues declined due to economic uncertainty and decreased activity across certain industries. However, clients remain engaged, and the fourth quarter pipeline looks good. On the next slide, the asset management segment generated net revenues of $163 million and pre-tax income of $60 million during the quarter. Financial assets under management grew to $145.4 billion, increases of 2% on a year-over-year basis and 13% sequentially, primarily attributable to higher equity markets as the S&P index appreciated 20% during the quarter, which was partially offset by net outflows at Carillon Tower Advisors. On slide eight, Raymond James Bank generated net revenues of $178 million, a 15% decline from the preceding quarter, largely attributable to the 73 basis point decline in the bank's net interest margin during the quarter, reflecting the rapid and significant decline of LIBOR. Pretax income of $14 million declined 90% compared to the prior year's fiscal third quarter and was flat sequentially. The year-over-year decline in the pre-tax income was primarily due to the $81 million bank loan loss provision during the quarter. On slide nine, we can look at the history of Raymond James Bank's key credit metrics during the financial crisis. You can see that Raymond James Bank, consistent with the entire banking industry, enjoyed several years of positive credit trends since the financial crisis. While nonperforming assets declined during the quarter, net charge-offs were $72 million, including $61 million related to proactive sales of corporate loans during the quarter. The other $11 million of charge-offs were attributable to one corporate loan. The allowance for loan loss as a percentage of total loans increased to 1.56% from 1.47% in the preceding quarter. For the corporate portfolios, the allowance for loan loss as a percentage of C&I loans ended the quarter at 2.4% and for CRE loans, 2.8%. If economic conditions continue to deteriorate, we would expect adding to these reserves, but certainly, the outlook is uncertain. Looking at the fiscal year-to-date results on slide 10, we generated record net revenues of $5.91 billion during the first nine months of fiscal 2020, up 3% over the same period. The Private Client Group, capital markets, and asset management segments generated record net revenues, and capital markets and asset management segments generated record pre-tax income during the first nine months of the fiscal year. Again, these results highlight the advantage of our diverse complementary businesses. Earnings per diluted share of $4.33 declined 18% compared to the first nine months of fiscal 2019, primarily due to lower interest rates and higher bank loan loss provisions. Now for a more detailed review of the financials, I'm going to turn it over to Paul Shoukry. Paul?

Thanks, Paul. Starting with revenues on slide 12. As Paul stated, we generated quarterly net revenues of $1.83 billion, which were down 5% on a year-over-year basis and 11% sequentially. I'll touch on a few of the revenue line items. Asset management fees were down 1% on a year-over-year basis and 14% sequentially, commensurate with a sequential decrease in fee-based assets in the fiscal third quarter, which will be reflected in the fourth quarter as these assets are built at the beginning of each quarter based on balances at the end of the preceding quarter. Remember, the asset management line is also driven by financial assets under management, which increased 13% sequentially. Account service fees of $134 million declined 27% year-over-year and 22% sequentially, primarily reflecting a decrease in RJBDP fees from third-party banks due to lower short-term interest rates, which I'll detail shortly. Jumping down to other revenues, they were up substantially from the preceding quarter as the second quarter included valuation losses of $39 million associated with our private equity investments, which was largely due to the equity market decline last quarter. Moving to slide 13. Clients' domestic cash sweep balances, which are the primary source of funding for our interest-earning assets and the balances with third-party banks that generate RJBDP fees, ended the quarter at $51.9 billion, representing 6.6% of domestic PCG client assets as client assets increased substantially while cash balances remained relatively stable throughout the quarter following the surge in March. As we've mentioned on the prior quarter's call, we shifted about $4 billion of cash balances from Raymond James Bank to third-party banks in April. But as we look forward, we will likely redeploy a portion of these balances back to the bank over time as we plan on continuing purchases of agency-backed securities, which ended the quarter at $5.6 billion. We will also resume corporate loan growth when there's less market uncertainty surrounding the COVID-19 pandemic. On slide 14, the COP chart displays our firmwide 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 of 2019 have put significant pressure on these revenue streams, which, on a combined basis, are down $120 million compared to the prior year's fiscal third quarter, despite loan growth at Raymond James Bank and the significant year-over-year increase in client cash balances. Given that these revenues are not directly compensable, the significant decline has created headwinds for our compensation ratio and pre-tax margins as we will discuss on the next few slides. The bottom of slide 14 shows our bank's NIM decreasing to 2.29% this quarter. The sequential decline was predominantly caused by the rapid decline in LIBOR, which is currently lower than it was during the last earnings call. Based on LIBOR at the current level, we would expect the bank's NIM to decline to 2.1% to 2.2% over the next quarter or two, which will also be impacted by how quickly we grow the securities portfolio at Raymond James Bank. On the bottom right portion of the slide, you can see that the yield on RJBDP fees from third-party banks fell to an average of 33 basis points during the quarter as we expected. We would expect average yields to remain close to 30 basis points over the near term. When we think about Bank NIM going forward, as we shift more cash from third-party banks to Raymond James Bank to grow, even though we would earn more on a consolidated basis. For example, today, we earn around 30 basis points with third party banks, and we earn around 1% on new securities purchases at the bank. This leads to a 65 basis point pickup for the firm, net of FDIC insurance expense. But of course, we are taking some duration risk in tying up some capital in return for that benefit. Moving on to expenses on slide 15. First, compensation expense, which is by far our largest expense, saw the compensation ratio increase sequentially from 68.8% to 69.6% during the quarter. The compensation ratio was negatively impacted by a higher proportion of compensable revenues as lower interest rates negatively impacted the non-compensable revenue streams we discussed on the last slide. Partially offsetting that negative impact was a lower compensation ratio in the Capital Markets segment, thanks to very strong fixed income brokerage revenues. On to non-compensation expenses. Non-compensation expenses during the quarter of $359 million decreased sequentially due to a lower loan loss provision and lower business development expenses as travel and conferences were halted by COVID-19. Taking a step back for a moment, when we entered the year, we were well positioned for market and economic disruptions and continued to effectively serve advisors and clients throughout the pandemic and resulting economic disruption. Our success weathering this difficult period has been enabled by the significant investments in our infrastructure over the past several years. However, the unexpected swing in interest rates and the uncertainty that comes with the global recession require us to evaluate ways to reduce costs and find efficiencies to remain well-positioned for future growth and success. To that end, we are currently engaged in a firmwide process of evaluating both compensation and non-compensation expenses to improve efficiency while maintaining our high service standards. Importantly, we plan to continue making growth investments during this period. For example, by recruiting financial advisors and other revenue-generating producers. We also continue investing in our support platform, robotic automation, and integrated and paperless processes to continue enhancing the advisor-client experience. Based on lessons learned during the crisis, we also anticipate our real estate needs will evolve as we consider more flexible strategies over the long term. So while we are far along in this process, we are not prepared to provide any efficiency targets, guidance, or timelines on the call today, but the goal is for these initiatives to yield significant efficiencies for the firm, which is critical so that we can continue investing in growth. Slide 16 shows a pre-tax margin trend over the past five quarters. Pre-tax margin was 10.8% in the fiscal third quarter of 2020, negatively impacted by lower short-term interest rates and the large bank loan loss provision. On slide 17, at the end of the fiscal third quarter, total assets were approximately $45 billion, declining 10% sequentially. This decrease was primarily attributable to shifting client cash balances from the bank to third-party banks, following the surge in March, as I discussed earlier. Our liquidity remains very strong. Cash at the parent was more than $2 billion and we also have an undrawn $500 million unsecured committed revolver, which doesn't mature until 2024. So right now, we have about $1 billion of excess cash at the parent over our conservative targets. However, we are intentionally maintaining even more cash than we typically hold, given the high degree of market uncertainty. With cash at the parent of more than $2 billion, a total capital ratio of 26%, and a Tier one leverage ratio of 14.5%, we have substantial amounts of capital liquidity with plenty of flexibility to be both defensive and opportunistic. Slide 18 provides a summary of our capital actions over the past five quarters, where we returned approximately $709 million back to shareholders through dividends and repurchases under the Board's authorization. Share buybacks have been suspended since mid-March, and $537 million remains available under the Board's previously disclosed repurchase authorization. With our strong capital and liquidity position, we plan on maintaining our current dividend, and we also likely will resume share repurchases of up to $50 million per quarter just to offset the share-based compensation dilution. However, we will still wait for more market clarity before we do a larger amount of opportunistic repurchases. On the next two slides, we provide additional detail on the bank's loan portfolio. Slide 19 provides some detail on Raymond James Bank's asset composition in the pie chart. You can see we have a well-diversified portfolio with a focus over the past few years to grow residential mortgages and securities-based loans to private client group clients, as well as significantly increase the size of the securities portfolio. We have not yet set a new target, but we do plan on continuing purchases of these securities, which are mostly agency-backed. We have a more diversified portfolio now than we did before the last financial crisis. Within each category, we have a significant amount of diversification as well, as you can see on the slide. As we talk about on the next slide, our concentration in some of these COVID-exposed industries has decreased sequentially as we proactively sold certain loans. This slide includes facts and statistics on other loan categories, but in summary, we feel good about the bank's loan portfolio. With that being said, it is important to remember that we are still in the middle of a global pandemic. So as confident as we are about the composition of the loan portfolio and our loan underwriting and monitoring processes, we acknowledge that we could experience significant credit deterioration if economic conditions continue to deteriorate. Moving on to slide 20. During the quarter, we opportunistically sold $355 million of corporate loans associated with industries that we believe are most vulnerable to the COVID-19 crisis. Having a secondary market to proactively reduce credit exposures is a real advantage of our C&I lending strategy. The average selling price of these loans was around 82% of par value, which resulted in charge-offs of $61 million during the quarter. However, we believe proactively taking that hit to reduce our credit exposure and downside in the most vulnerable sectors over the long term is prudent, given the high degree of economic uncertainty. We plan to continue selling certain corporate loans in the secondary market to further reduce exposure to certain sectors. Thus far, in July, we have sold approximately $100 million of corporate loans in these sectors at an average price of 93% of par value as prices in the secondary market have continued to improve significantly. Before I turn it over to Paul for his closing comments, I want to remind everyone that after much consideration, we've postponed the Analyst Investor Day again. Given the continued economic and market uncertainty around the COVID-19 crisis, it makes it difficult for us to provide meaningful forward-looking commentary, so we do not want to waste your time. However, we know analysts and investors have been asking us to disclose net new assets. Since we depend on providing that at our Analyst Investor Day, I'll go ahead and cover that now. As you can imagine, technology priorities have shifted significantly since the COVID pandemic, but we have been able to make good progress on this metric, thanks to the fantastic team working on it. However, it will still take us more work before we would consider providing this metric on a regular basis. We define net new assets as total domestic, again, domestic PCG client net inflows, which includes financial advisor recruiting, less total domestic PCG client outflows. Inflows also include dividend reinvestments and interest, while outflows include commissions and fee-based payments. Fiscal year-to-date, we have generated net new assets of $41 billion, an annualized growth rate of 7.3%. We believe this impressive result, even during the COVID pandemic, reinforces that Raymond James is one of the industry's leaders in growing organically. With that, I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Great. Thanks, Paul. I know there's a lot to cover on this call, so I'll get through a little outlook, and we'll open for questions. As for the outlook, we'll continue to face headwinds from lower short-term interest rates and the uncertainty around the COVID-19 pandemic. In the Private Client group, our financial advisor recruiting pipeline is strong across all our affiliation options. The segment is going to benefit by starting the fiscal fourth quarter with a 16% sequential increase in assets and fee-based accounts. Just a note: in that recruiting, we've had many people who committed much earlier in March, April, and May timeframe who have deferred their openings and moving before they joined because of the pandemic. We hope those will show up this coming quarter also. In Capital Markets, despite muted M&A activity in the fiscal third Quarter, clients remain engaged, and we have a pretty healthy investment banking pipeline. We wouldn't be surprised to see an improvement in M&A revenues in the fiscal fourth quarter if the market remains relatively stable. Fixed income and brokerage revenues have remained strong thus far in July. It's always difficult to repeat the record like last quarter, but we view them to be another strong quarter for that segment, again, given the market trends. In asset management, results will be positively impacted by higher financial assets under management as long as the equity market continues to remain resilient. At Raymond James Bank, we expect NIM to decline, as Paul said, from 2.29% in the fiscal third quarter to somewhere around between 2.1% and 2.2% over the next two quarters, reflecting the current LIBOR rate and a higher mix of agency-backed securities. Now remember, when we move cash from our third-party banks to the bank and agency-backed securities, the bank NIM will go down but will generate an overall higher net interest income for the firm. Therefore, we think it represents an attractive risk-adjusted return for the firm. We are continuing to sell certain corporate loans, as Paul mentioned, and we've been very selective in making new corporate loans, given the uncertainty. We have significant capacity and appetite to resume corporate loan growth when we have more economic certainty. With our substantial amount of capital liquidity, we are confident in our ability to withstand a severe downturn while being opportunistic and front-footed as things stabilize. Our growth opportunities remain unchanged, always retaining and recruiting organically financial advisors and in our private client group. As you've heard from Paul a few minutes ago, our organic private client group domestic annualized net new asset growth of 7.3% has been strong despite the COVID challenges. Additionally, we are committing and continue to add senior talent in other businesses such as investment banking. We also continue to pursue acquisitions actively. Economic softness typically surfaces attractive acquisitions as there was Droga Keegan in 2012, a little more complicated by COVID and traveling issues. I also want to address social unrest following the death of George Floyd during the quarter. At Raymond James, we've always been a firm focused on social justice and being a good home for all associates and advisors, regardless of their race, gender, or sexual orientation. The recent social unrest emphasizes the need for us to be even more vocal and public with our advocacy. We didn’t just want to write a check but rather wanted to use financial commitments to activate our associates to make a difference. In addition to our financial commitment, we released the pledge to the Black community, which was signed not just by me, but all members of our Executive Committee, our Operating committee, Board of Directors, and many other associates across the firm. One major component of that pledge is to increase Black diversity throughout the firm, which will require significant efforts that we know will not be achieved overnight, but we are absolutely committed to delivering on this pledge. I just want to thank our leadership team, our Black Financial Advisors network, and our Mosaic Diversity network group for all their contributions, as well as so many associates who have raised their hands and said they want to help and make a difference. Before we open the line for questions, I want to add that I believe we are well positioned with our diversified business mix, long-term focus, and conservative principles to emerge from this pandemic. With our strong capital and liquidity positions, we are proactively pursuing strategic acquisitions with a consistent and disciplined approach. Lastly, I want to thank all our associates and our advisors for their invaluable contributions during these trying times and for their focus on serving clients. With that, operator, you can open the line for questions.

Okay, great. Good morning, everyone. First question here, just on the net interest income outlook over, if we can, maybe the next couple of years, if we were to hold LIBOR steady. I appreciate that NIM is going to see pressure just on the remixing of the bank. That's going to be, I think, partially a function of how fast the securities book grows. And so I'm just trying to think about parameters around how much you would move from third-party banks? And how quickly, and how much as we look beyond maybe even the upcoming quarter, the corporate book could shrink further? And then are there loan areas that could grow reasonably that could maybe provide a little bit of an offset on the NIM, like residential mortgages or something else?

Yes. Well, it's going to be hard to provide guidance over the next one or two years, Devin. But at least for the next one or two quarters, we think the guidance of NIM of 2.1% to 2.2% is our best guess right now based on where LIBOR is. We haven't set a new target yet for how much we're willing to grow the securities portfolio. There are a lot of variables there. Making a total shift in asset strategy in the middle of a global pandemic is probably not the right time to do it with all the moving parts. Cash has been resilient. Client cash balances are still $52 billion now, roughly even after income tax payments and the fee billing in early July or mid-July, but that could change tomorrow. We aren't willing to go out one to two years. However, as far as corporate loan growth goes, it was down, I think, $700 million net during the quarter; we sold $355 million worth, but there's also a lot of net paydowns. We remain very selective in making new corporate loans. But as we get more market clarity, we have an appetite and the expertise to grow that portfolio, and we can do it pretty rapidly if the market conditions get better. There are a lot of moving parts, but over the next one to two quarters, we think 2.1% to 2.2% NIM is as good a guess as we have right now.

Yes. Let me just add one thing. I know you understand this, Devin. However, as we move more from RJBDP to the bank, the NIM may have a little compression, but our overall net interest income will be up. We'll pick up 60-plus basis points on that move. So it's true that the NIM may be down, but overall, net interest income will be up given today's environment. That's the reason we would do it. We think it's a good risk-adjusted return trade-off.

Right. And just a clarification because I know historically there have been parameters around the amount of cash you're comfortable having essentially liquid with third-party banks with a short duration versus in the bank, which historically was more of a loan-centric bank. As you're building more of a securities portfolio and growing that, are you more comfortable just given the more liquid nature of the securities to kind of go beyond kind of historical parameters around the mix of cash held outside the firm?

I think you could see that as we move forward. Go ahead, Paul.

Yes. I mean, I think so. We grew the securities portfolio net over $1 billion this quarter. Last time we were in a zero rate environment, we had almost no securities at all. So our appetite for some duration has increased. But we're still going to be more exposed to the shorter end of the curve, which is appropriate given our deposits are floating rate deposits. So for the most part. We'll continue moving deposits from third-party banks to the bank's balance sheet, but we want to do it in a logical way over the long period.

Got it. Paul, a quick follow-up here just on the expense process that you guys announced here. You went through some of the areas that you're going to continue to invest in, in areas that you want to hold expenses. It sounds like in, do you have any high-level thoughts right now just around some of the areas where some of those efficiencies could exist within comp or non-comp? And then just any thoughts on timing around the conclusion and execution of it?

Like I said, we're not prepared to provide any timelines on today's call. We're far along in the process. We're looking at almost every single expense line item, both compensation and non-compensation expenses.

Hi, good morning. I was wondering, if we look at your pre-tax margins for this quarter and exclude the elevated provision number, we baked it into roughly a 15% number for this quarter. There might be another 1% or so of headwind from additional NIM pressure that you see, is that a good way of thinking about your long-term pre-tax margins as a starting point in this rate environment? And then maybe as we're modeling it, baking some benefit from the expense initiatives that you're looking at?

Yes. I think in fairness, we also had subdued business development expenses this quarter. I think they were down something like $30 million year-over-year. This is typically the quarter where we hit our high watermark, just given the timing of our recognition events and conferences. There are some offsets, and also capital markets generated, I think, a 19% pre-tax margin, which is a very high margin, thanks to the record fixed income results. There are puts and takes. Again, we're not ready to provide, given the uncertainty in these moving parts of long-term margin target. But yes, we are focused on those expense efficiencies as well, as you said.

Got it. And I guess on the provision side, can you give us an update on how you're thinking about provisions of the bank? I know you mentioned that you could have a little bit more of a build if the environment deteriorates. But if it doesn't, are you comfortable with where the reserve levels are at the bank right now? And I know you're not accounting on CECL yet. But maybe if you can give any initial guidance on what do you think the CECL true-up will look like at the end of next quarter?

We try to be as proactive as we can with reserving the loans at the bank. So we feel good about our allowances now, especially in the corporate portfolio; C&I is at a 2.4% allowance and the CRE portfolio is a 2.8% allowance. With that being said, if economic conditions continue to deteriorate, and some of the stimulus measures, which are temporary in nature, don't get extended—who knows what might happen? There is certainly potential for more allowances across the entire industry. However, at this juncture, we just don't know right now. CECL is set to go into effect October 1. Frankly, I don't even know what our provision is going to be in the September quarter under our existing methodology. So we aren't in a position to provide much guidance under CECL yet.

Yes. I would say, I would add one thing is that you have to recognize too, that most financial institutions haven't been selling loans. So if you were to take the sales of those loans instead of just putting a reserve against them, our reserves would have been much higher. We've been proactively derisking areas that we think are exposed, such as transportation, hospitality, and gaming. We've been actively reducing our risk. But again, had we just followed what most of the industry did, our reserves would have even been higher. So we think for where we are, we've done a good job of trying to stay ahead.

Hey, good morning. So I wanted to start off with just a question, Paul, on the strategy regarding loan portfolio sales. As we look ahead, how large is the remaining pool of loans that you are looking to evaluate for a potential sale? If you could just speak to the timeline also for when you'd look to execute those and whether the decrease in criticized loans that we saw in the quarter is what's driving the decision to execute on some of those; or what's the prevailing factors that are driving the strategy from here?

Yes. It’s not surprising to most people that Raymond James has taken a different approach. We looked at the industries that we think are very COVID-dependent and decided, on a risk-reward basis, that there are loans in certain industries where we're just not comfortable because we think there’s more downside than upside. One way to do it is just increase your reserves and increase the criticized loans on your balance sheet and just ride through it. That also limits your flexibility, both regulatorily and long-term. Our strategy has been to lighten our exposure in those highly-risk areas. If those loans perform better and some of these industries do not undergo prolonged bankruptcy restructurings, we will have made a bad long-term bet. If they undergo long restructurings, then we made a good move. We're looking at about another $100 million in loans. The market's been good. That’s why we lightened up. As Paul said, it’s about 93% of par. Therefore, we believe that proactively taking that hit to reduce our credit exposure in the most vulnerable sectors over the long-term is prudent, given the high degree of uncertainty. We plan to continue selectively selling corporate loans in the secondary market to further reduce exposure to certain sectors. Thus far, in July, we've sold approximately $100 million of corporate loans in these sectors at an average price of 93% of par value as prices in the secondary market have continued to improve significantly.

Yes. So we have a list of about another $100 million in loans. The average yield on those loans is around LIBOR plus 175 to LIBOR plus 300, which means they were initially higher credits in industries that just got hit very hard by the pandemic.

And just a follow-up for me regarding the securities portfolio. I was hoping you can give us some sense on how we should think about the potential pace of additional purchases? I know you've been reluctant to commit to that. Given your historical reluctance to take on additional duration risk, why the willingness to take this on now, especially during this COVID environment, when the incremental spread between taking on that additional duration risk on an agency security versus what you're earning off-balance sheet at 70 basis points is relatively low compared to prior historical periods?

Yes. We have a significant amount of cash with third-party banks now: $25 billion. We have more capacity now than we’ve had historically. Frankly, the demand at third-party banks is continuing to evolve. There was significant demand in March when there were a lot of revolver fundings, and that dynamic has changed, as you know. So the demand is not as strong as it was in March. While we’re willing to take some duration, it’s not as much duration as many of our peers, but we are comfortable taking on some more duration for that yield pickup. We haven’t again set a glide path just yet, but we are comfortable with that as long as the market conditions make sense. We hope we’re wrong, but we don’t think short-term rates are going to increase anytime soon, especially after hearing Powell again yesterday.

Got it. And just one quick follow-up, if I may. Just on the non-compensations. You delivered a positive surprise there given the lower business and other expenses. We’ve been seeing similar trends at peers here. So, putting aside the future expense initiatives, I know you’re not ready to speak to them, how should we think about the appropriate jumping-off point for that non-comp ex provision base, recognizing that P&E conference spend is going to be on pause versus the same period of time?

Yes. Excluding the elevated provisions, we were guiding to about $325 million per quarter for this fiscal year. Obviously, we've been well below that excluding the provisions, largely due to, as you mentioned, lower business development expenses. We want that number to go up over time, not next quarter, but once people are more comfortable traveling, we expect business development expenses to increase. One of the things we’re looking at as part of our overall expense initiatives is that many of our advisors are comfortable doing regional workshops and product-focused sessions virtually, which could help business development expenses. We're closely examining the long-term opportunities coming out of this crisis.

But it would be a mistake to think they’re all going away—the conferences or gatherings—that’s part of our culture. So while they have gone away temporarily, we do anticipate some of these conferences will come back when it’s safe to do so.

Thanks, guys. Paul, you mentioned a reinvestment rate around 100 basis points for Agency MBS today. Is it fair to assume that ultimately where the yield on the entire securities book will go assuming static rates? And if so, when might you expect that to occur over what time frame?

Yes. We have an average duration of the securities we buy, which is roughly three years. The existing book has an average yield of about 2%. The average life on the existing book’s remaining life is probably a couple of two to three years because, again, the vintage is relatively new and the portfolio has grown. So it will take some time for the reinvestment yield to reset as we add securities.

Got it. And just one quick question on the Asset Management segment. Those revenues were down 11% sequentially. I know it was a volatile quarter in terms of AUM moving around, but that decline seems to be more than potentially average AUM decline. So is there something else that's going on in that segment that dropped the revenues a bit?

Yes. That AUM includes both institutional assets under management as well as assets under retail assets under management. I would say roughly 65% of those assets are built based on the beginning of the period assets. So you can’t look at it just on an average basis. That’s what's driving the variance that you’re describing.

Okay. Hey, good morning guys. Just maybe a quick question on capital management. What I understand the uncertainty is keeping me holding you back, but how do you think that what are the markers you’re looking for? Do we have to wait for a vaccine for you to feel comfortable putting capital to work? What are the markers, I guess? Is there macro markers that you're looking at? And does that also mean that you're as much as you want to do acquisitions, you're holding back to put capital to work until you have clarity as well?

I think we would have no comp whatsoever doing an acquisition if we had the right one. We think we have plenty of capital and an ability to do an acquisition for the right one and integrate it. So we don’t see that’s not an issue. In terms of stock buybacks, we agreed that our goal is to minimize dilution and restart that program. However, given the uncertainty and even the political and regulatory pressure around stock buybacks, it doesn’t seem prudent to start that yet. More importantly, driven by the economics, if we do enter a second round of COVID issues like we’re seeing in the South, and if we do have a really, really tough winter, we may need those. So if we’re buying a producing asset, we’re very comfortable doing that, but we’re just going to be a little more conservative about proactive stock buybacks in this pandemic time. Whether that’s a vaccine or watching the situation unfold, I can’t specify. It’s one of those things I think we’ll know when we feel it, but I can’t give you an objective answer.

That’s helpful. And then, just maybe on the compensation in PCG. When I look at sort of FA compensation to compensable revenues, the percentage did seem to drop quite a bit in the quarter, which was a little surprising. Am I not thinking about that right? Is there something unusual there? Just trying to get a sense of if that's sustainable in terms of the lower payout?

I'm not sure we could speak offline on how that, how you're doing the math, but the payout is still right around 75%. So it's been pretty stable sequentially.

Hey, good morning everyone, thanks for taking the questions. Just a couple of follow-ups. If you look at the loan book, can you guys talk about the size of loans that you're ultimately evaluating for sales? I know you sold $355 million and you sold another $100 million so far this quarter, but what's the total amount of kind of riskier loans that you're looking to potentially sell and what are the yields on those loans? How did these loans ultimately end up on your balance sheet? Were they originated or purchased?

Yes. So we have about another $100 million in loans we’re looking at selling. Again, these are risk-reward decisions. These were loans that are syndications. In January, we had what we call them pizza parties, we have the lenders stopping. We get them to show and go through the loan portfolios, most leveraged, least performing. We really push hard to evaluate how these loans were underwritten. I felt as good as I have in 10 years about the underwriting. I think they were underwritten well. They were strong. What we didn't underwrite them for was a pandemic causing zero revenue. We didn't assume the airlines weren't going to fly or that nobody was going to travel and restaurants would shut down. These areas of loans are a result of those circumstances—very unusual times. We can view the underwriting positively, but it is unusual what we’re experiencing now. In terms of pricing risk, we believe proactively selling these loans is prudent given the high degree of uncertainty. That’s why we sold these loans opportunistically. The last $100 million we sold is more opportunistically; the prices in the secondary market have continued to improve significantly. The average yield is around LIBOR plus 175 to LIBOR plus 300.

Yes. It makes sense. We plan to continue selectively selling in the corporate loans in the secondary market, given that the industries we’re concerned about see the greatest risk. Thus far, in July, we've sold about another $100 million of corporate loans in those sectors at an average price.

Good morning, everyone. I wanted to start off with recruiting. Do you have the number of gross or net financial advisors added in each of the months in the June quarter? And if you don't, could you provide any commentary on how recruiting trended in the quarter as you adapted to the virtual recruiting backdrop?

Yes. We're not going to provide kind of monthly, we track that internally. We feel really good about the activity levels across our affiliation options, but aren’t providing month-to-month statistics on those.

Got it. And just one follow-up on reserving. Can you provide us some color on or at least what to expect from the CECL loan loss reserve build that's coming in the October quarter?

Yes. We still have another quarter under the incurred loss process for provisions. We don’t even know what it's going to be yet, so we’ll have to wait and see. However, I know that even for the big banks, the macro assumptions change rapidly, so that will impact how we view CECL. It seems like it’s right around the corner, but every week, things change dramatically. We will wait and see how things progress.

Hi, everyone. This is actually Renee Marthaler speaking on behalf of William Katz. We just appreciate some more color on July and what you might be seeing regarding client engagement metrics and flows?

It’s a broad question in terms of client engagement across our businesses. As Paul mentioned in his outlook comments in the Private Client group business, the fee-based assets are projected to provide a tailwind for asset management revenues, as recruiting activity remains healthy. The capital markets segment M&A pipeline heading into the fourth quarter looks promising, with expectations for M&A revenues potentially increasing if the market remains stable. Fixed income activity continues to be robust, which should also contribute positively to the outcomes. We feel good about the client activity levels so far.

I want to thank you all for participating. I know your jobs are hard, given all the extraneous market factors and the unusual environment. We appreciate you taking the time. We'll try to provide as much color as we can and hopefully get an Analyst Day scheduled as soon as we can so we can get some color to just next month or so. Thank you very much for joining us.