Q2 2020 Earnings Call
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To date additional six zero cost.
Options for financial release and resources.
And the mental health of our associates.
Dealing with the stress up 19, so just the stress in general.
[laughter] working.
It's work.
Moving to see.
In addition to maturing.
They do have are supposed to another priorities maintains a continuous service.
Clients during these challenging times.
During the quarter, we experienced.
[music] client activity for example, our top 10 trading days over all occurred in March we saw retail orders more than doubled transaction volumes more than triple one institution volumes.
Absolutely.
Our ability to provide continuous serviced weren't boxers quiet without any significant disruption is a testament to the investments we made our technology and mobile apps over the last 10 years.
This important even during these scary and challenging conditions.
Our committed experienced support teams demonstrated our long standing service for spirit, and supporting advisors and clients even isn't working barb.
And true to our mission of Raymond James We continue supporting our community.
Canada UK during these challenging times.
The commitment from our.
Companies executives.
Our surpassed $2 million.
<unk> for those that need and we anticipate to anymore.
Our associates over the same prudent personally stepped up to support their communities.
I didn't know what.
We're also supporting our communities through food and supply to nations eight.
Thanks.
Markets.
Again, I cannot stress how proud I am.
Raymond James Associates, and advisors quickly transitioning to our business continuity protocols and continued providing excellent service or.
Moving to supply for.
Despite what's mulcher was quarter, our second quarter financial performance was solid reflecting a relevant resiliency of our diversified client focused business model. We generated record quarterly net revenue of 2.07 billion, which was up 11% over prior years fiscal second quarter.
And 3% over the preceding quarters.
The growth in net revenues was primarily attributable to be getting a corner with record PCG assets de based account.
As well as higher brokerage revenue due to the surgery market volatility in March.
We generated quarterly net income of 169 billion.
Dollar 20 per diluted share, which was down 35% compared to the not in.
Prior years fiscal second quarter, and 37% compared to the preceding quarter.
The significant decline a quarterly net income was largely caused by the 109 million bank loan loss provision the valuation losses, our private equity investments.
On an annualized basis, our return on equity for the quarter was 9.9%.
Return on our tangible common equity or ROTC he was 10.8.
Moving to slide five.
A significant declines in the equity markets in March resulted in a decrease of client assets and live clients shifting assets to cash.
Maybe just 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 children's place orders, we reached a record number of private client financial advisors of 8148 that increase.
286, corporate March 2019.
88 over December 29.
These net additions the financial advisors as a function strong retention and recruiting results and we really only had two four months than normal recruiting activity before the yeah that makes it.
Net loans reached 21.8 billion up 8% over the prior years fiscal second quarter, 2% over the preceding quarter.
The bank loans was largely attributable to about 300 million of corporate revolver fundings and continued growth in residential mortgage BCG quiet.
Now on the segment results starting on slide six the private going client group generated record quarterly net revenues of 1.5 billion, primarily driven by higher asset management fees. As these speeds are below a balances at the beginning of the quarter and higher brokerage revenues is trading volumes spiked in March.
Growth of asset management brokerage revenue was partially offset by the negative impact of lower short term interest rates.
Our Jay Bdcs and from third party banks net interest income.
Record quarterly pre tax income for the segment was 170 million up 29% year over year basis, and 11% sequentially.
On the bottom of the slide while client assets declined belong 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 a trailing 12 months production.
Approximately 550 billion up assets prior firms of affiliated with Raymond James which is a spectacular results.
Moving to slide seven revenue in the capital markets segment, 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 pretax income decline largely due to losses on trading inventories during the quarter as there was significant year over year decline in M&A revenues compared to the very strong results from the prior years fiscal second quarter.
On the next slide the asset management segment generated net revenue of 184 million in pretax income of 773 million during the quarter, but were flat with a record levels achieved as a proceeding sport.
Results in this segment reflected a portion of a steep equity markets in March as financial assets under management or build based on the combination of balances at the beginning in the quarter balances at the end of the quarter and average balances during the quarter.
Financial assets under management fell to 128.2 billion decreases a 7% on a year over year basis, 50% sequentially, primarily attributable to decline in equity markets as the S&P 500 index declined 20% during the quarter as well as net outflows flows for Carolyn tower.
Advisers.
On slide nine Raymond James Bank generated net revenues of 210 million, a 3% decline from the preceding quarter. Despite continue asset growth largely attributable to a 21 basis points decline in the bank's net interest margin during the quarter, reflecting the short term interest rates.
Federal rate club reserves slash interest rates close to zero in the month of March.
We expect continued NIM pressure is all shukri will detail a little later.
Pre tax income a 14 million declined 90% to both prior years fiscal second quarter is a proceeding quarter, primarily due to higher back loan loss provision, which it's a good segue into the next slide.
Slide 10 provides it this year Raymond James Bad credit metrics since the financial crisis, you can see the Raymond James back consistent with the banking industry has enjoyed several years of positive credit trends since the financial crisis.
And the second quarter alone portfolio continued to perform well as indicated by the low level of nonperforming assets, which actually decrease due to a corporate loan pay off earlier in the quarter. There also net charge offs during the quarter.
But as the cope with 19 crisis caused economic conditions to rapidly into deteriorate at a really unprecedented pace and scale, we increased the allowance for loan loss reserves, resulting in the bank's loan loss provision of 109 million or.
As a result loan loss.
Allowance for loan losses, as a percentage of total loans decreased to 1.47% from 1.1% the preceding quarter.
You can see our allowance for loan losses peaked at around 2.4% fiscal 20.
Well our portfolio is much more diversified now, which Paul will discuss later on the call. We're also in the unprecedented economic environment.
So there are simply too much uncertainty to know how much credit deterioration will be caused by cobot 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.
4.08 billion during the first half of fiscal 2028% over the first half of fiscal 2019, notably all four core operating segments generated record net revenues during the first six months. So this will your earnings for.
Earnings per diluted share of $3.09 declined 12% compared to the first half a penny 19 again, primarily due to the bank's loan loss provisions.
I will give an outlook.
At the other book at the end of this call, but for now I'll turn it over to call Shukri for more detailed review the financial results Paul Thanks, Paul and I'm being told that Oh opening up for a few minutes was missed because the operator forgot to switch us over to the overall lines. So maybe ask Paul to.
Pizzas industry remarks, and the outlook.
Starting with revenues on slide 13, as I've stated, we generated record quarterly net revenues of $2.7 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, 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 billion were strong as there was a surge in trading activity in both private client group and the capital markets segment in March.
Account in service fees of 172 million declined 10% year over year basis, and 3% sequentially, primarily reflecting a decrease in our JBT Pts from third party banks due to lower short term interest rates.
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 a private equity investments in the fiscal <unk> fiscal second quarter of $39 million and as you will see on the upcoming Ics expense.
Detailed slide 22 million of the valuation loss is attributable to non controlling interest and has presented as an offset in other expense. So the net impact to pre tax income and valuation losses associated with a private equity investments was $17 million for the quarter, representing close to a 20% decline those valuations.
The remaining value of these legacy private equity investments that is attributable attributable to Raymond James was around $80 billion as of March 31st 2020.
Moving to slide 14 coins domestic cash sweep balances, which are the primary source of funding for our interest earning assets in the balances with third party banks that generate RJ BWP ended the quarter at a record $52.9 billion, representing 7.6% of domestic PCG client assets as mark.
Volatility in the steep declines in the equity markets in March led to clients shifting assets to cats are then quarterly fee payments. These balances have remained relatively resilient. Thus far in April. However, we have shifted about $4 billion. These cash balances from Raymond James Bank to third party banks.
Since the ended the quarter.
The surgeon cash balances in March highlight the advantages of our multi being sweet program, which offers up to $3 million, an FDIC capacity to clients. While also providing the from 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 RJ PDP 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 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 years fiscal second quarter. Despite loan growth at Raymond James Bank, and the surgeon cash balances this quarter.
On the bottom of the slide shows our banks NIM decreasing to 3.02% this quarter. It 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 banks NIM to decline to somewhere around 2.5%.
Over the next quarter or two depending on where linerboard settles out.
On the bottom right portion of the slide you can see that average yield on RG PDP 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.
While these balances ended the quarter at $20.4 billion.
We shipped a significant amount of balances from Raymond James Bank in April where they were earning about 10 basis points at the Federal reserve a roughly five basis points net of FDIC insurance premium. So there is currently approximately $23.5 billion balances in the third party banks, reflecting the $4 billion shifted from Raymond James Thanks.
In the fiscal third quarter since the fiscal third quarter net of the outflows related to quarterly billings and enable.
Now I'll discuss expenses on slide 16.
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 negatively impacted by lower non compensable revenues in the private client group, primarily due to lower short term interest rates.
Losses on training inventories and the upper Michigan after mentioned valuation losses on private equity investments the private equity valuation losses reduced revenues by $39 billion had a negative impact of over 125 basis points to the total compensation ratio as there is no direct compensation associated with.
Private equity valuation adjustments. So if you look at the $71 million sequential increase in total compensation.
Got a vast majority of it is attributable to direct payouts to financial advisors in the private client group and direct payouts on the higher brokerage revenues in the capital markets.
[noise] onto non compensation expenses noncompensation expenses during the quarter of 407 million increase 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 Thirtyth, we do not implement Cecil until.
Tober first of this year. So the provisions this quarter really reflect our intent that downgrading credits in taking more allowances for the loans that are most directly exposed to the cobot 19 crisis.
As I noted earlier other expense included a $22 billion offset related to the non controlling interest of the valuation losses on the private equity investments.
Excluding that MPCI offset other expenses would have been hired 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, we still had desktops and increasing bandwidth and licenses to facilitate remote working arrangements. There were also offset from lower travel costs in March due to cope with 90.
We expect those travel expenses in 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 PNM.
So really I think there may have been some confusion on a few the reports last night at our expenses being higher than expected the compensation was higher due to higher revenues in the street anticipated in the compensation ratio was negatively impacted by over 125 basis points by the private equity valuation losses, and the Noncompensation expenses of 407.
1 million were higher than the 325 million, we guided to last quarter solely due to the 109 million dollar.
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 provisions and lower short term interest rates on last call. We established target of 67.5% for the compensation ratio about 320.
5 billion per quarter from non compensation expenses, 17% for the pre tax margin, but those targets are no longer balance given the significant changes in the market environment near zero short term interest rates in the higher bank loan loss provisions due to covert 19, assuming we have some market, but 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 a date, but we may postpone it theres 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 search and client cash balances about $7 billion, which was a positive Raymond James Bank. The significant balance sheet growth causes here, one labor leverage ratio declined to 14.
2%, which is still well well above the regulatory requirements and as I mentioned earlier in April we already shifted approximately $4 billion into cash balances up 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 one 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 success successfully raised $500 million 10 years senior notes in March at 4.65%, which is included in the two.
$1 billion.
Well the debt markets were really only accessible to the blue chip companies in March we were able to get around $2.5 billion to subscriptions in the first three hours after launching the transaction a real testament to our strong balance sheet and long term conservative focus.
We also had an undrawn 500 million dollar unsecured committed revolver, which doesn't mature until 2024.
So with a total capital ratio of 25.3% tier one leverage ratio of 14.2% in cash at the parent around $2 billion, we have substantial amounts of capital and liquidity plenty of flexibility to be offensive turning this global endemic and also opportunistic.
Slide 19 provides a summary of our capital actions over the past five quarters, where we returned approximately 750 million back to shareholders through dividends and repurchases under the board's authorization.
During the fiscal second quarter different we purchased approximately 2.5 million shares of common stock for nearly $202 million at an average price of approximately $79 per ship share buybacks have been suspended since mid March and as a quarter end $537 million remains available under the board's previously disclose repurchase authorization.
We believe it was prudent to suspend buybacks during this pin demick, even though we do have a significant amounts of capital and liquidity.
On the next two slides, we provide additional detailed the bank's loan portfolio.
Slide 20 provide some detail on Raymond James banks asset composition.
Hi chart, you can see we haven't really well diversified portfolio with a focus over the past few years to really grow residential mortgages and securities based loans for private client group clients as well as significantly increased the size of the securities portfolio, which ended the quarter at around $4 billion and are 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 significant amount of diversification as well for example, within the Cnine category no industry category represents more than 4.1% of total loans you can see energy represents about 1.7% of total loans.
I will detail in the next slide airlines represent 1.5% entertainment leisure represent 1.2% restaurants represent 1.1% aiming only represents 0.7% of total loans.
Within commercial real estate, almost 50% or to reach which typically have diversified underlying real estate portfolios and the other 50% or to mostly stabilized properties with an average loan to value, 60% and then just to touch on the residential mortgage portfolio. Most of these loans are private client from clients across the country. The average loan to value is only.
64% and the average credit score of 760 to say really high quality portfolio.
So again, we feel good about our banks portfolio, but with that being said it's important to remember that we are really experienced an 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 experienced.
Second credit deterioration due to the coven 19 and then.
The next slide detailed Raymond James Banks energy exposure, which again only represents about 1.7% of total loans, but $382 million of Outstandings as of March 31st as you can see there are no DMP loans in this portfolio as a credit is mostly the midstream distribution companies and convenient stores, so a little less direct.
Commodity pricing pressure, but again, if oil prices continue to decline in all players in the supply chain could be negatively impact.
So with that I'll turn the call back over to Paul Reilly to discuss our out Paul.
Oh I don't know says we're going through the opening again I know there they work cost cut it or just should we skip it just gives it okay and for those who didnt near the forward statement I know you can find it on our website.
Pardon anyway so.
So thanks, Paul I want our reiterate the first our primary.
Priority number one priority is to ensure that health and safety of our associates advisors and clients.
Conditions may appear to have improved in some parts of the world We must be mindful, we're still in the middle of global Health crisis.
Since from Merck is working from home arrangements worked so well we continue to provide excellent service for our clients. We have a 95% of our associates are working from home and we've had no technology disruptions. So we've been able to services work from home, which is a testament to our associates and their focus on clay.
Service, and we're going to be very slow and deliberate about bringing associates back into the office.
And when we believe the conditions are say, we will slowly move them in a phase cautious manner.
For our near out term for our near term outlook similar to the rest of the comment I think you should expect significant near term headwinds for business and the private client group segment, while our financial advisors recruiting pipelines remain strong and we have ramped up virtual recruiting and onboarding activities.
Traditional recruiting efforts will be impacted by the travel restrictions and even comfort levels of this person meetings the near term impact on recruiting results is uncertain, but it seems likely but even with the strong pipeline there will be delays and there will be disrupted until restrictions are lifted and people.
Well traveling in the medium person that got.
Meanwhile, the segment is going to be negatively impacted by starting fiscal third quarter with a 14% sequential decline of assets.
No.
Furthermore results will also be negatively impacted by the yield a third party R.J. BDP 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.
And 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 and while brokerage revenue 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 spikes in volatility, which is certainly possible.
And the asset management segment results will be negatively impacted by our lower financial assets under management as well as the net outflows and Carol on tower advisors.
And at Raymond James Bag, we expect them to decline from around 3% in the for the fiscal second quarter is somewhere around 2.5% over the next quarter or two reflecting the fed rate cuts in March and based on current LIBOR rates.
Other than funding the corporate revolver draws which have been slow 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 and leveraging our balance sheet to support our private client group clients with residential mortgages security.
Based loans.
We had a large bank loan provision this quarter and I know many will ask how much more do we expect the frankly.
There is way too much uncertainties no at this point remember, we're only starting to see borrower financials for March quarter, which still included two good months before March.
Endemic really showed up.
We took as much provision as we could reasonably justify the second quarter, but also expect to take more going forward as 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 are all reminded the latest last financial crisis half the battle of long term outperformance in our industry is surviving currency extreme stress.
As Paul detailed we have a substantial amount of capital 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 liquidity to be opportunistic and front footed when things stabilize.
Our growth priorities remain unchanged, our top priorities organic growth, which is primarily driven by retaining and recruiting advisors in the private client group as well as continued to add senior talent and our other businesses such as investment bank.
We also continue to pursue acquisitions, which we will be well positioned for as soon as an economy recovers and market stabilize historically these types of environments produce valuations it could be attractive to both buyers and sellers over the long term a good example that was our Morgan Keegan acquisition in 2012 after that.
Financial press.
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 at are consistent with our long term values. These are the same values that help guide us and withstand past economic downturns and deliver superior returns.
As shareholders over time.
It's difficult to predict the severity of economic deterioration as a result Workovers 19.
I believe we're well positioned with our diversified business mix long term focus conservative principles.
With our strong capital liquidity position, we can proactively pursue strategic acquisitions with a consistent and disciplined approach and while our strong capital position in systems infrastructure not been critical our success full response to the pandemic and resulting market disruptions as a testament for people.
I just want to thank all of our associates and advisors together with a 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 and turn it over to Vincent and open the line for questions.
At this time I would like to inform everyone in order to ask your question. Please press Star then and number one on your telephone keypad.
And they'll be star and the number one I know telephone keypad, we'll pause for just a moment to compile the queuing Boston.
First question comes from the line, it's Steven Chubak from Wolfe Research. Your line is now open. Please ask your question.
Hi, good morning.
Hey, Steve.
Paul Paul involve hope you guys are doing well.
No I appreciated.
Some of the clarifying remarks on expense.
Notice higher credit costs were the primary cooperate of elevated non comps versus expectations.
Just taking a step back no recent calls you've talked about efforts to bend the cost curve slowed the pace of non comp growth. We started to see some early signs of than recent quarters, but even when I back out the higher provision and the anti noise. It looks like core revenues were up about 5% non comps were up 7% sequentially.
I'm just trying to understand how much of the Noncomp inflation was maybe onetime in nature and then with revenue slated to contract from here just given the covered 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 Noncompensation number that you're basing the sequential growth.
Last quarter of 299 million was kind of seasonally low and so we've guided for the year to get to about $1.3 billion 325 per quarter, which would have been.
An increase of us 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 and even with those two items. You 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 tracked well, we actually had a conference institutional conference. We still had in early March before the cobot crisis really broke out.
But we did obviously travel.
Expenses did decrease as March progressed in the Cobot Shelton place orders went into place so and some of that was offset by purchasing laptops et cetera. So I would tell you. The noncomp expenses, excluding the provisions kind of came in in terms of various line items, where we would have expected.
And where we talked about last quarter now without being said as as we progressed from here.
Damage will shift a little bit as.
Travel and conferences, we canceled a lot of the conference the two big private client group conferences. This year, so that dynamic will ship from here and then in terms of any further actions on costs beyond that people in the compensation being our biggest costs.
It's really.
During the crisis has not when you make those type of changes so we'd be more clarity instability before we make a broader changes in that.
Hi, Thanks, very helpful color on that Paul and.
Just one for me on credit.
And the provision outlook now relative to a lot of your bank comps you actually bill.
No healthier level of provision, despite having arguably love our exposure to the higher its industry categories.
How should we think about the pace of provision build over the course of this year you suddenly alluded to GFC stress as maybe being the right paradigm here for thinking about loan loss reserve levels should we infer that it cobot stress continues to negatively impact economic growth that we should be contemplating similar bill.
Towards 2% slots or how should we really frame that as we think about the trajectory over the remainder of this year.
I mean, obviously, there's a lot read ironed out.
Obviously, there's a lot of uncertainty going forward as you've heard from all the other banks and when you. When you look at that allowance for loan losses, which for US is about 1.5%.
And you compare to other banks, you really have to look at the various loan categories.
We don't have a credit card portfolio for example, some the banks.
But allowances of 8% to 10% on those type of portfolios, but within our corporate and see our portfolio.
No around 2.4% allowance for loan losses, which we believe that based on what we're seeing the industry is.
Healthy number.
And so.
But going forward as healthy as we think that is.
We could get worse from here, if the economic conditions.
You know continued to be.
Continued to deteriorate so.
Hi, there and just one quick clarifying question.
Paul I believe that you indicated that the third parties. We program is yielding about 30 Bips I was just hoping you could speak to how these agreements or structure given a lot of banks are flushed with cash given client de risking and aggressive Q way 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 pricing on some of these agreements.
Well 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.
Somewhat related to the significant levels of revolver fundings over the last month and so we've added significant capacity with third party banks at attractive rates are there typically no one or two year type agreements up for us there.
As of right now they are floating rate agreements that are based off of a fed funds target are fed funds effect.
Great. Thanks, so much for taking my questions.
Next question comes from the line of Greece Hirings from Wells Fargo. Your line open. Please ask your question.
Thanks, guys.
Another one on the provision.
Yeah I appreciate there's a lot of uncertainty but can you.
Talk to us a bit about the potential ramifications are impacts to you from the implementation of Cecil.
However.
Yes, again too early to tell we're building out all the models and even when we run sort of a sort of.
Well runs now with the models that we have this pretty significant very early variations, especially since.
The coven crisis, and what macroeconomic scenario as we could use.
We would probably air on using some of the more conservative scenarios, but again too early to tell and by time, we implemented in October 1st conditions and assumptions are going to be a lot different so even for the banks that have already implemented c. So what we're hearing on.
From peers and other earnings calls is that Theres, a lot of uncertainty and variability with assumptions as they're using.
Okay.
And I know you guys are.
Yes, so we think a lot of deposits to third party banks, but what is your your appetite to grow the securities portfolio and this type of an environment with where yields are today.
Yes, we set up 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.
Just over 4 billion dollar so that would represent a 50% increase.
Which is a significant increase for the rest of the fiscal year, and we'll probably get to the $6 billion current pace, maybe a few weeks before the end the fiscal year, but obviously a lot can change between now and then.
In terms of the incremental balances that came in a in the last four weeks, we were taking them off balance sheet now just provides much flexibility as possible.
We wouldn't want to make a big change in our balance sheet strategy in the middle of a global pandemic, so and certainly not with the cash and just came in in the last three to four weeks. So we're open to it last time Warner zero rate environment, We Didnt have a securities portfolio. Our agency mortgage backed securities portfolio at all now we do and we have a lot of expertise we have.
We use our in house team the.
A strategic investment management services team to help us with it so we feel really good about.
Our securities portfolio and as a cash balances remained resilient as we get through the $6 billion. It still makes sense for us in for shareholders and certainly consider a growing its even beyond that.
Okay. Thank you.
Next question comes from the line as a dozen Ryan from JMP Securities. Your line is now open. Please ask your question.
Great. Good morning, guys how are you.
Hey, Devon.
Good.
I guess first question just on the the NIM.
In the bank appreciate the color there that's roughly what we were expecting in terms of the progression.
We think about kind of beyond the next couple of quarters, you do you see that.
Moving lower via further from there just based on the current rate curve or how should we think about that as the 2.5% kind of where effectively in in that range of bottoms out or are there other kind of puts and takes that would.
In fact, if we were to kind of run this out a little further next year too.
Yes, I mean, obviously, there's going be a lot of variables. There in terms of how the asset growth and which categories that asset growth comes from going into next year too. So as best as we can tell right now two and half percent give or take obviously like where move 20 basis points just in the last.
Seven days, so there's a lot of volatility even in the base rate.
But I think as based on what we know that now thats about as far as we're willing to guide.
Okay Fair enough. Thanks, Paul and then a follow up here just on.
You talked a little bit about M&A and the opportunities that can come about and as a result of dislocation and.
As I, just think about tie that into.
The technology investments at the firm has made.
In recent years and kind of how about differentiates you or when you.
I've been thinking about talking to financial advisors in recruiting and just in this work from home environment, how much more important technology is today probably than ever before how how how is that playing into.
Kind of the.
Offering to advisers as you're doing these virtual.
Critics sessions with them and just kind of.
<unk> essentially presenting the platform to them and then in terms of the M&A consolidation opportunity is that maybe one of the drivers here, where some of the firms that are smaller maybe underinvested.
And we're seeing the technology is going to be probably a lot more important than even anyone thought.
Six months or years ago, So just love some thoughts on that but how it applies to both recruiting and M&A as well.
So from recruiting season, I'm, sorry that doesn't that.
This early we've had a few political color recruiting sessions that have worked we are committed backlog is good but the joining days of slip.
If we don't want to go in an open an office right now in most cases, although we've had some virtual openings.
So it's early to tell you know really what that impact is going to be in terms of recruiting there's nothing like a face to face meeting, especially when many people are joining us for a value proposition and are really see the technology demonstrated a buyer.
You know with people its.
Such more impactful so I.
I think getting in front of people will be key to resuming recruiting at the kind of the pace as we have and so my guess is it'll be disrupted.
In terms of you know a for the group for the financial services vendor is for advisors. Most firms did fairly well in terms of work from home technologies may not have been it's possible, but they've been able to do that and financially self clearing firms probably struggled.
Well, if they didn't have a lot of capital the first week or two that settles 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.
Firms are gonna 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 wouldn't expect in the private client groups is any rapid movement.
And you know, we wish those firms well there friendly firms to us, but hopefully someday if they make a decision will join us.
I think there's probably more opportunity yes. This crisis. This theres a slow return in M&A.
We've had discussions.
Investment banking and M&A space for a while now in pricing tended to be the issue and we'll see without pricing. This drags out I think people will get more interested if its short term and M&A bounces back, but I think there will be less opportunity. So were very actively keeping up the dialogue.
Oregon.
And we're just going to have to see again, just like the crisis, it's too early to tell slow a slow recovery will.
Be more probably reserves.
Slower market and that may be more M&A opportunity in a faster recovery.
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 so it seems like forever, but we're six weeks generally so its a.
Being at home and so you count the days a little they seem a little slower, but it hasn't been a lot of time, where we are those pandemic so far.
Yeah.
I hear you there okay well. Thanks appreciate it I'll leave it there thanks for taking my questions.
Thanks.
Next question comes from the line as that Craig Siegenthaler.
From Credit Suisse. Your line is now open please ask your question.
Good morning. This has got them so one stepping in for Craig.
Hey, good question.
Well what drove this is into raised 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 a billion a half dollar cash.
Revolver, the secured committed but we think some of the biggest and help is annual institutions. So we really need cash in the first answer was probably not.
But we decided to I've never seen a from go broke too much cash or from the past couldn't executed opportunity because it too much cash. So we we looked at the pros and cons and decided that are extreme capital levels that we've had or an asset to us.
And we would it hasn't got the debt. So now we're a 2 billion in cash in a.
About half a billion dollar on drawn a line of credit. So we feel we did it.
This crisis is more severe than we imagine will still be fine multiples of the cash capital going in the.
Prices.
If there is a 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.
No overnight committed line.
Thank you gave us to execute very quickly at a time, where it was very uncertain execute so again.
We felt being liquid was probably more important than the extra interest costs. So we went.
Just a bond offerings.
Thank you.
Next question comes from the line of.
Alex Goldstein.
From Goldman Sachs. Your line is now open please ask your question.
Great. Thanks, Good morning, guys.
A 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 Mac ramp up on that you considered whether its GDP growth is something that we can help sensitized to what degree if we see further deterioration in portfolio or in the economy, we could see additional reserve build so kind of what's the baseline assumption.
In any sensitivity around additional a deterioration.
So this out and districts Weve, Alex we we don't implement Cecil until October Onest. So it's not so formulaic for us yet because we have at September thirtyth fiscal year end. So our Cecil implementation starts to 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 do it makes a decision on a bottoms up basis.
Those reserves were generated made mainly on the industries that we thought to sectors that were very cold.
Affected so that's where most of all that reserving.
Gotcha.
And then I guess unrelated just back to the conversation around expenses and comp.
I appreciate your comments around the comp rate, obviously being skewed this quarter by the private equity dynamic that's pretty clear, but I guess, if you look at some of the segments.
The comp rate and capital market, 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.
Yeah within the capital market segment that comp ratio was negatively impacted this quarter by revenue mix.
And 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 is not the same direct compensation associated with those trading losses as we have with the.
Significant growth in commissions, we hadn't 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 kind of stepping back answering your overall question, obviously, there's going to be negative pressure our upward pressure on the comp ratio just due to lower interest rates and the negative impact that lower interest rates has on non compensable revenues. The net interest income and RJ BDP from third party banks to kind of.
Be down based on the guidance, we just provided and those don't have direct compensation associated with it. So you can look back before the 2015 period under zero rate environment, obviously that put upward pressure on our comp ratio, but we're not because of all the volatility with other line items and the impact.
Revenue mix, we're not in a position now to provide a new target.
Thanks to its important to note that those trading losses. So a lot of that were generated by.
We and our unique kind of balance sheet, one of our strongest sectors has been in the on the non taxable Muni finance.
Even though that portfolio is almost entirely investment grade anodyne those securities traded.
Well this.
Downturn.
It's not so we went ahead and lower those I think we at the lowest inventory we've ever had and fixed income right. Now. We went ahead and sold amount not generating some trading losses, but as what must have left us very liquid nimble.
Got it okay that that kind of makes sense can I just didnt one more around just the capital return dynamics and the balance sheet management. So obviously nice if you guys do successful that offering but just given the significant model liquidity on the balance sheet can you give us some thoughts around kind of rationale behind going out and raising long term debt today before and you.
Activity or or anything else there should be thinking about there. Thanks.
I think if you looked at our capital one of our clear messages, we had a lot more capital cash.
Even today were very unlevered compared to most our competitors. So one of the challenges we have even if let's say the world continued and we are buying back stock, we would add to raise that liquidity or if we didnt acquisition, we would raise debt or equity.
For liquidity, so I think what you see as best as being a little more aggressive.
Getting our cash liquidity more in line with our capital so that we have flexibility.
We felt in the market.
Market has recovered as a starting to do better but we've also seen periods for the market wasn't opened for periods of time and felt that even at that cost. It was a good trade off the out more liquidity more in keeping with the capital we have to give us flexibility, whether we end up doing an acquisition or buying back.
There's a eventually.
We have the cash build execute on.
Great. Thanks for taking all the questions.
Thanks.
Last question comes from the line of Bill Katz from Citi. Your line Feldman. Please ask your question.
Hi.
It's actually really galim for adults.
Thanks for taking this question.
Okay. That's helpful.
I just had a question Rob.
My pleasure.
I'm wondering what are the current equity.
Well thanks.
Okay April and what were you factor.
And the May going.
I think for M&A in capital markets.
Yes.
Confidence, where the economy is going so.
Surprisingly.
The backlog is very resilient.
People are still talking are waiting.
I think if you see an economic recovery starts to happen that M&A transactions will pick up if you see a very slow recovery or a recurrence of.
Oh, the virus, you're going to see M&A activity really fall. So again, it's very economic dependent.
In a fixed income.
I think it preserves we did very well we did have trading losses as I described later, but are you in the profitability. That's segments. Good certainly March from a commission basis was outside.
Outsize for everybody.
Greece volatility, but even as volatility settle down we still have.
Reasonably good volumes in our fixed income.
Great sales business, so I'm feeling pretty good about that sector.
Alright, thank you so much.
No further questions. Please continue.
Okay, and we'd like to I'm, sorry, I missed the opening but we open.
We think about all those everyone affected by code.
Directly and indirectly as were recognized the us in our industry is able to work from home ever really blessed with other people going after jobs right now and Oh, We certainly hope you and your families are doing well. So thank you for joining today.
Maybe you could hear the opening of the recorded yes.
Yes, the recording will put online.
Record opening and have an online for everybody, including the forward looking statement.
Thank you thanks.
This concludes today's conference call. Thank you for participating in May now disconnect have a brittany.
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