Q3 2020 Raymond James Financial Inc Earnings Call
[music].
Good morning, and welcome to Raymond James Financial fiscal third quarter 2020 earnings call.
My name is bridge, it and I will be your conference facilitator today.
This call is being recorded and will be available for replay on the Companys Investor Relations website.
Now I will turn the call over to Christy well head of Investor Relations at Raymond James Financial. Please go ahead.
Thank you Bridget good morning, everyone and thank you for joining us on this call. We appreciate your time in interest in Raymond James Financial what does on the call today, our Paul Reilly, Chairman and Chief Executive Officer, and Paul should agree Chief Financial Officer, the presentation being the view. This morning is available on Raymond James.
After relations website.
Following their prepared remarks, the operator, we'll 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 objective business prospects financial results anticipated results of litigation and regulatory developments.
Impacts of the Kogan 19, pending <unk> or general economic conditions.
In addition words, such as believes expects could and would.
Any other statements that necessarily depends on future events are intended to identify forward looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward looking statements.
We urge you to consider the risks described in the most recent form 10-K in 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 view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures maybe found in the schedule. The accompanying our press release and presentation with that I'm happy to turn it over to Paul Reilly.
Women CEO of Raymond James Financial Paul.
Thanks, Christy and good morning, everyone and thanks, so much for joining US. This is our second called during the cold and crisis and but the first one were a little more geographically scattered so technology internet willing and able flows hopefully to happen good call here.
I'm really proud of how the phone has performed during this period with the Kobin crisis, social Justice issues, our associates and advisors have been amazing advisers that focus blunder clients growing their business with great new apps that numbers.
Our associates of a really worked hard to support them.
All of Raymond James It's come together to discuss and make commitments on the social Justice issue in August as Raymond James cares month to see how we're helping those needy and smaller groups and virtual is really inspiring.
They're getting into the numbers, despite lower short term interest rate to an economic uncertainty associated with code at night team.
I'm really pleased with the results for the third quarter.
Fixed income generated record revenues and pre tax income P.C.G. assets and fee based accounts increased 16% sequentially.
We continue to recruit numerous high quality financial advisors, reaching a new record of 8155.
251 over June 2019.
We recruited 113 financial advisors domestically during this quarter alone, which represents 71 million of trailing 12 production at their prior farms all the strong independent make them with our offices close for much of that.
We're also entering the fourth quarter of a healthy investment banking pipeline.
Even with these market changes on certainty you're continuing to focus on servicing our advisors and clients and growing all of our businesses.
We generated quarterly net revenue of 1.83 billion, which was down 5%, it's compared to prior years fiscal third quarter, and 11% compared to the preceding quarters.
Over year decline in quarterly not room revenues was largely driven by the impact of short term interest rates as we all know Oh thought net interest income and our JBT p. fees for the third party backs.
Sequentially quarterly net revenues declined due to both short term interest rates and lower asset management related administrative fees, which are primarily based on the private client group entering the quarter with fee based accounts so lower.
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 years school third quarter, largely due to the bank loan loss provision of $81 million during the quarter compared to a 5 million dollar benefit in the prior years fiscal third quarter.
Despite a sequential decline in quarterly pre tax income net income increased 2% sequentially. That's significant non taxable gains on the corporate owned life insurance portfolio will reduce 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 ROTC he was 10.9%.
Moving to slide four is equity markets rebounded from the March lows client assets under administration grew 13% sequentially to 877 billion and P.C.G. assets in fee based accounts grew to 16% sequentially to a near record 443.
In which will provide significant tailwinds for asset management fees in the fiscal fourth quarter.
Following the surge in March quiet cash balances remain relatively stable ending the quarter at 51.9 billion.
And despite the continued disruption caused by travel restrictions and office closures. We reached a record number of P.C.G. financial advisors of 8155 251 over June about a 2019 and seven over March 2020.
This is a good result, compared to many firms which has experienced did not decline.
We accomplish this.
Despite many of these offices being closed during the quarter and we've had many advisors commit but pushed or commit dates back waiting for the offices to reopen.
No bank loans of 21.2 billion grew 3% over the prior years third quarter fiscal third quarter, but declined 3% compared to the preceding quarter.
The sequential decline includes proactive sales of corporate loans totaling 355 million, which will discuss in more detail on the call.
The bank continued to experience healthy gross and residential mortgages and security based lending to our private client group clients.
Moving to the segment results starting on slide five and private client group generated quarterly net revenues of 1.25 billion.
Quarterly net revenues declined 8% compared to the prior years fiscal third quarter, and primarily due to lower our JBT Pcs from third party bags, a decline in that interest income and lower brokerage revenues.
The 16% sequential decline in quarterly net revenues was attributable to be a core menu items as well as lower asset management fees and related administratively administrative fees, which were primarily based on the private client group assets and fee based accounts being lower at the beginning in the quarter.
Quarterly pre tax income for the segment was down 91.
35% on a year over year basis, and 46% sequentially.
P.C.G. assets increased along with the equity markets and wall recruited production increase sequentially sequentially. The net addition of financials advisors was negatively impacted by the code at 19 crisis, which disrupted a lot of the transitions, particularly in the employed channel due to office closures.
And showed and slogan that addition of trainees as testing centers were closed during the quarter, but are now open.
It's also important to note that in that number a number of club.
Advisors.
Leading for retirement.
Leading the industry are moving to our or a channel affect the total net advisor account, but we retain almost all of 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 business for visits for perspective advisors have transitioned to 100% to virtual advisor recruiting activity. That's continue to recover in the pipeline remains solid across all of 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 up affiliated with Raymond James domestically, which has a very strong result.
Moving to slide six the capital markets segment generated record revenues driven by higher fixed income brokerage revenues that underwriting revenues, which more than offset lower M&A rather than us.
The 71% year over year increase in fixed income brokerage revenues and the record results for fixed income really reflect our leading position in the small to midsize depository client segment, which has experienced an increase in activity.
Meanwhile, M&A at <unk> revenues declined due to economic uncertainty and decreased activity across certain industries. However clients remain engaged in the fourth quarter pipeline looks good.
On the next slide the asset management say segment generated net revenues of 163 million and pre tax income 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.
Primarily attributable to higher equity markets as the S&P index appreciated 20% during the quarter.
Which was partially offset by net outflows Caroline tower advisors.
On slide eight Raymond James Bank generated net revenues of 178 million or 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.
Pre tax income of 14 million.
Declined 90% to the prior third quarter fiscal third quarter and was flat sequentially the year over year and decline in a pre tax income was primarily due to the 81 million dollar bank loan loss provision during the quarter.
On slide nine we can look at the history of Raymond James bags key met at key credit metrics. During the financial crisis, you can see that Raymond James James Bank consistent with the entire.
Banking industry enjoyed several years of positive credit trends, thus the financial crisis.
All nine performing assets declined during the quarter net charge offs were 72 million, including 61 million related to proactive sales a corporate loans during the quarter.
The other 11 million of charge offs were attributable to one corporate loan.
The allowance for loan loss losses, as a percentage of total loads increase to 1.56% from 1.47% in the preceding quarter and for the corporate portfolios the allowance for loan losses, the percentage to see it I loans ended the quarter a 2.4%.
And the first CRT loans, 2.8%.
This economic conditions.
Continued to deteriorate, we would expect adding to the 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 the fiscal 2020.
3% over the same period.
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 complimentary businesses.
Earnings per diluted share at $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.
And now for a more detailed review the financials and turn it over to Paul Chagrin Paul.
Thanks, Paul.
Starting with revenues on Slide 12, it's 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 will 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 the sequential decrease in fee based assets and the person.
Enter into fiscal third quarter, which will be reflected in the fourth quarter. As these assets are built the beginning of each quarter based on balances at the end of the preceding quarter, but remember the asset management line has also driven by financial assets under management, which increased 13% sequentially.
[noise] account service fees of 134 million $134 million declined 27% year over year, and 22% sequentially, primarily reflecting a decrease in RGB DP fees from third party banks due to lower short term interest rates, which I will detail shortly.
Nothing down the 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 largely due to the equity market decline last quarter.
Moving to slide 13 client clients 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 our JBT PPS 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.
And as we've mentioned on the prior quarters 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 overtime as we plan on continuing purchases purchases of agency backed securities which.
Quarter at $5.6 billion and will also resume corporate loan growth when there's less market uncertainty surrounding the covert 19 pandemic.
On slide 14, the contract displays our Firmwide net interest income and RJ BDP 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, I put significant pressure on these.
Revenue streams, which on a combined basis are down 120 million compared to the prior years fiscal third quarter. Despite loan growth at Raymond James Bank, and the significant year over year, increasing client cash balances.
Given that these revenues are not directly compensable. The significant decline has created headwinds for a compensation ratio in pre tax margins as we will discuss on the next few slides.
On the bottom of slide 14, it shows are banks NIM decreasing to 2.29%. This quarter. This sequential decline was predominantly caused by the rapid decline in LIBOR, which is about.
Well, we're now than it was during the last earnings call based on LIBOR at the current level, we would expect the banks and them to declined 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.
The bottom right portion of the slide you can see that that yield on our JBT PPS I'm 33rd 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.
So when we think about bank NIM going forward as we shipped more cash from third party banks to Raymond James Bank to growth.
<unk> opened up even though we would earn more on a consolidated basis.
For example, today, we aren't around 30 basis points with third party banks as I just described.
And we're earning around 1% on new securities purchases at the bank, so somewhere around a 65 basis point pickup for the firm net of FDIC insurance expense.
But of course, we are taking some duration risk and tying up some capital in return for that benefit.
Moving onto expenses on slide 15.
First compensation expense, which is by far our largest expense.
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 revenues streams, we discussed on the last slide.
Partially offsetting that negative impact was a lower compensation ratio in the capital market segment. Thanks to very strong fixed income brokerage revenues.
[noise] onto non compensation expenses noncash 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 cobot 19.
Taking a step back for a moment when we entered the year, we were well positioned from market and economic disruptions and continue 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 in the uncertainty that comes with a 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 firm wide process of evaluating both compensation and noncompensation 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 integrated in April is processes to continue enhancing the advisor client experience base.
I'm 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're 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 fiscal third quarter of 2020 negatively impacted by lower short term interest rates in the large bank loan loss provision.
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 surgeons 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 dollar 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, but we are intentionally maintaining even more cash than we typically hold given the high degree of market uncertainty.
So with cash at the parent to more than $2 billion total capital ratio of 26% in 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 backed by that 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 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.
But we will still wait for more market clarity before we do a larger amount of opportunistic repurchases.
On the next to slide we provide additional detailed the bank's loan portfolio.
Slide 19 provide some detailed Raymond James banks asset composition in the Pie chart, you can see we have a really well diversified portfolio with the focus over the past few years to really grow residential mortgages and securities based loans to private client group clients as well as significantly increased the size of the securities portfolio.
We have not yet set a new target, but we do plan a continuing purchases of these securities which are mostly agency backed.
So we haven't but much more diversified portfolio now than we did before last financial crisis and 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 cobot expose industries have decreased sequentially as we prepare for proactively sold certain loans.
This slide includes some other 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 the global pandemic. So as confident as we are about the composition of the loan portfolio when our loan underwriting and monitoring processes. We have acknowledge we have to.
Acknowledge that we could experienced significant credit deterioration if economic conditions continue to deteriorate.
Moving on to slide 20 during the quarter, we Opportunistically sold 355 million a corporate loans associated with industries that we believe our most vulnerable to the cobot 19 crisis.
Having a secondary market to proactively reduced credit exposures is a real advantage of our cnine 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, but we believe proactively taking that had 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 selectively selling corporate loans in the secondary market to further reduce our exposure to certain sectors. Thus far in July we have sold approximately $100 million at corporate loans.
In these sectors at an average price of 93%.
93%, a 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 considerations, we postponed the analyst Investor day again, given the continued economic and market uncertainty around the coven 19 crisis. It takes it makes it difficult for us to provide much mean meeting full forward looking commentary. So we did not want to waste your time.
However, we know analysts and investors have been asking us to disclose net new assets and since we and on providing that our analyst Investor Day I'll go ahead and cover that now.
As you can imagine technology priorities have shifted significantly since the cobot pandemic, but we have been able to make some good progress on this metric thanks to the fantastic team working on it but it will still take us a more work before we would consider providing this metric on a regular basis.
We define net new asset that total domestic again domestic PCG client inflows, which includes financial advisor recruiting less total domestic PCG client outflows inflows also include dividend Reinvestments in interest well 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 drain the covert 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 all.
Great. Thanks, Paul and I know Theres a lot to cover.
This call. So I'll go through a little outlook on will open for questions.
So that's where the outlook will continue to face headwinds from lower short term interest rates in the uncertainty around the cobot died endemic.
And the private client group, our financial advisor recruiting pipeline is strong across all of our affiliation options in the segment is going to benefit by starting to fiscal fourth quarter with a 16% sequential increase of assets and fee based accounts.
And just to note in that recruiting that we've had a lot of people who have committed.
Much earlier in the March April may timeframe, who have deferred there openings in moving.
Before they joined because of the pandemic. So hopefully those will show up this coming quarter also.
And the capital market segment, despite muted M&A activity in the fiscal third quarter clients remain engaged and we have a pretty healthy investment banking pipeline. So we wouldn't be surprised to see an improvement M&A revenues in the fiscal fourth quarter, if the market remains relatively stable.
And fixed income and brokerage revenues have remained strong thus far in July.
Always difficult to repeat the record like last quarter, but we knew them to be very very strong quarter for that segment not yet given the market trends.
And asset management results will be positively impacted by higher financial assets under management as long as the equity market continues to remain resilient.
And Raymond James Bank, we expect them to decline as Paul said from 2.29%.
And the fiscal third quarter is somewhere around between 2.1 and 2.2 over the next two quarters, reflecting current LIBOR rates and a higher mix of agency backed securities now remember when we move a cash from our third party bags to the bank and agency backed securities The Bank NIM.
We'll go down, but we'll generate overall for the from higher interest income and therefore, we think it represents an attractive risk adjusted return.
For the firm.
We're continuing to sell certain corporate loans as Paul mentioned, and we've been very selective in making new corporate loans given the high degree uncertainty, but we're continuing to our to do something new corporate loans, but continuing to originate residential and securities based loans to our private client group clients.
We have significant capacity, an appetite to resume corporate loan growth when we have more economic certainty.
With our substantial amount of capital and liquidity, we're confident in our ability to withstand a severe downturn, while being opportunistic in front footed as things stabilize our growth opportunities remain doesn't change always retaining and recruiting organically financial advisors that are private client group and as you've heard from.
Paul a few minutes ago organic private client group domestic annualized net new asset growth of 7.3% has been strong. Despite the coca challenges. Additionally, we are committing and of the continued to add senior talent other businesses such as investment banking.
We also continue to pursue acquisitions actively economic softness.
Typically services surfaces attractive acquisitions as there was during Morgan Keegan.
In 2012, little more complicated by covert and and traveling and those kind of issues.
I also want to address social unrest following the trial.
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 advisors, regardless of their race gender or sexual orientation.
But the recent social unrest really emphasized the need for us to be even more vocal in public with our advocacy.
We just didn't want to write a check but rather wanted to use financial commitments to activate our associates to really make a difference.
So that in addition to our financial commitment.
Released the pledge to the Black community, which was signed not just by me, but all members of our.
Executive Committee are operating committee and our board of directors as well as many other associates across the firm.
One major component of that pledges to an increase black diversity throughout the firm, which will require significant effort that we know will not be cheap achieved overnight, but we are absolutely committed to delivering on this pledge I just want to thank our leadership team.
Black financial Advisors network, and our mosaic inclusion network group for all their contributions in those to the so many associates raise their hand, and say I want to help and make a difference.
Before we open the lines for questions I, just want to add I believe we are well positioned with our diversified business mix long term focus and conservative principles to really 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 of our associates and our advisors again further invaluable contributions during these trying times and a focus on serving.
With that operator, you can open the line for questions.
Thank you as a reminder to register questions or comments. Please press one for on your telephone.
Our first question comes from Devin Ryan of JMP Securities.
Please proceed with your question.
Great Good morning, everyone.
Hey, Devin.
First question here just on the net interest income from outlook over if we can maybe the next couple of years.
If we were to hold LIBOR study I appreciate the NIM.
Going to see pressure just on the Remixing.
The bank.
Good to be I think partially a function of how fast the securities book grows. So I'm just trying to think about parameters around how much you would move from third party banks.
I mean, how quickly.
How much.
As we look beyond maybe even the upcoming quarter. The corporate book could shrink further and then you are their loan areas that could grow reasonably that could maybe provide a little bit an offset on the NIM like residential mortgages or something else.
Yeah, well, it's going to be hard to provide guidance over the next one or two years, Devon, 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 library LIBOR is.
We haven't set a new target yet for how much were willing to grow the securities portfolio, There's a lot of variables there and frankly.
Making a total shift and 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 actually still $52 billion now roughly even after income tax payments and the fee building in early July or mid July.
But that could change tomorrow, so certainly not willing to go out in one to two years, but as far as a corporate loan growth goes it was down I think $700 million net during the quarter, Yeah, we sold $355 million worth but there's also a lot of net pay downs and we remain very similar.
Active.
And making new corporate loans.
As we get more market clarity, we certainly have an appetite in the expertise to grow that portfolio and we can we can do it pretty rapidly if the market conditions get better so.
Got a lot of moving parts can't go out one to two years, but at least over the next one or two quarters, we think 2.1% to 2.2% NIM as good guy as good as guests as we have right now.
Yeah, Let me just add the one thing I know you understand this stuff and then.
But as we do move more from BDP to the bag.
The NIM they have a little compression, but our overall net interest income will be up will pick up.
You know 60 plus basis points on that move.
You know insurance so it's the NIM they'd be down but overall net interest income will be up you know given todays environment. So thats. The reason we would do it we think it's a good risk adjusted return tradeoff.
Right and just a clarification. So I know historically there has been parameters around you the amount of cash you're comfortable having you know center liquid and with third party banks with the short duration versus.
In the bank, which historically was more of a alone.
Central Bank and so as you're building more of a securities portfolio and growing that are you more comfortable I'm just given the more liquid nature of the securities to kind of I guess go beyond kind of historical parameters around the mix of cash held.
Outside the firm.
Yeah, I mean, I can say that as we go ahead.
Go ahead, Paul Yes, I mean, I think so we we have we grew the securities portfolio and that over a billion dollars. This quarter last time, we were in zero rate environment, We had almost no securities at all so.
Our appetite for some duration has increased.
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 and so.
We'll continue moving deposits from third party banks to the bank's balance sheet, but we want to do it.
In a way that Sam.
Over the long okay great.
Got it okay. Thanks, Paul.
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 kind of continue to invest in areas that you want to kind of 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 were not prepared to provide any timelines on todays call were far along in the process and really we're looking at almost every single expense line item both compensation.
And Noncompensation expenses.
Okay terrific. Thank you very much.
Thank you. Our next question comes from the line of much man Gus Talia of Morgan Stanley. Please proceed with your question.
Hi, good morning.
I was wondering if we look at your pre tax margins for this quarter on excuse my dad, the elevated provision top a weight mail back into roughly 15% number for this quarter and that.
Maybe there is another 1% or so of headwind.
Some additional NIM pressure there you see.
Is that is that a good way of thinking about your long term pre tax margins as a starting point I mean this rate environment and then maybe you guys were modeling at no Bacon some benefit from the.
Expense initiatives that you're looking at.
Yeah, I think you know in fairness, we also had subdued.
Business development expenses this quarter I think there were down something like $30 million year over year. This is typically the quarter when we hit our high watermark, just given the timing of our.
Recognition events and conferences.
So yes, there's 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. So there's some puts and takes again, we're not ready to provide.
Given the uncertainty in these moving parts a long term margin target, but yes, we are focused on those expense efficiencies as well as you said.
Got it and I guess and on the on the provision side can you give us an update on how you're thinking about provisions of the bank and I know you mentioned that you could have a little bit more of a belt, if the environment deteriorates, but.
If it does then are you comfortable with where there is other levels are at the bank right now and I know, you're not accounting on a seasonal yet but.
Maybe if you can give any initial guidance. So what do you think that see so true up will look like at the end of next quarter.
Yeah, we try to be as proactive as we can as we always do with reserving the loans for the loans at the bank. So we feel good about our our allowances now what up for that especially in the corporate portfolio see an ice 2.4% the allowance in the CR rate portfolio as a 2.8% allowance so.
With that being said.
If economic conditions continued to deteriorate and.
Some of the stimulus measures, which are temporary in nature don't get extended and who knows what's going to happen. So we.
There's there's certainly a potential for more I'll allowances across the entire industry, but at this juncture, we just don't know right now so.
So goes into effect October 1st frankly, I don't even know what our provision is going to be in the September quarter under our existing methodology. So we're really aren't in a position to provide much guidance.
Understood So yes.
Yes, I would say I would add one thing is that you have to recognize too.
Most financial institutions haven't been selling loans. So if you were to take the sales of those loans instead of selling them just put a reserve against them our reserves it from what they would have been much higher.
So you know we've been proactively de risk in areas that we spend.
You know in the transportation and hospitality and gaming and areas. We think are have more exposure.
We've been actively reducing risk, but again, we just followed what most 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 up in front, but again it just depends on the outlook you know in a steady state we wouldn't be adding that the.
And that gets worse, we will add so we're just gonna have to watch and it's just too unpredictable.
Okay, great. Thank you.
Our next question comes from the line of Steven Chubak of Wolfe Research. Please proceed with your question.
Hi, good morning.
So what.
Wanted to start off with just a question Paul on that the the strategy regarding loan portfolio cells and as we look ahead.
How large is the remaining pool of loans that you are looking to evaluate for potential sale. If you could you speak the timeline also for when you look to execute those.
And whether the increase in criticized loans that we saw in the corridor.
Is that what's driving our recent decision to execute on some of those or what's the I guess the prevailing factors that are driving the strategy from here.
Yes, So you know probably not a shock for most people the Raymond James has taken a little different approach as we just look at the industries that we think are very coated dependent.
And so on a risk reward basis.
There are loans that we are in certain industries. We're just not comfortable that we think theres more downside upside so.
One way to do it is just increase your reserves and increase your criticized loans on your balance sheet.
And just ride through it but that also limits your flexibility both regulatorily and the drag long term and on those highly risk areas are the ones, we decided just to lighten our exposure.
And so that's than our strategy.
Those loans performed better and some of these industries don't go through prolong bankruptcy restructurings, we will have made a bad long term but.
The.
If the cases.
Very long restructurings.
It's going to be a tough slug forum, we made a good.
We are willing to do that and what we viewed with the most at risk industries. So we're looking we have a list of about another $100 million loans again, the market's been good Thats why we light in the weeks as Paul said, 93%, whether we would do those are go more I don't know, we're evaluating that as we go and booking up.
Pricing risk you know long term.
Versus reserves.
Kind of tradeoffs and once again had we just added them to reserves, we've been more flexible.
But we think it's the right thing to do from a risk structure based and so we started out of the box quickly we've slowed down a little bit, but we're we're still looking.
Thanks, I color, Paul and just a follow up for me regarding the securities portfolio. I was hoping you can give us some sense as to.
How we should think about potential pace of additional purchases I know you've been reluctant to commit to that but also just given your historical reluctance I would say to take on additional duration risk why the willingness to <unk>.
To take this on now during this covert 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.
It's actually relatively low relative to prior historical periods.
Yeah, well, we have a significant amount of cash with third party banks now $25 billion. So we have more capacity now than we've had historically.
And frankly, the demand a third party banks is continuing to evolve you know there was a significant demand in March when there was a lot of revolver fundings and that has that dynamic as changes you know.
And so that demand is not as strong as it was in March and so yeah, we're willing to take some duration not as much duration as many of our peers, but we're willing to take some incremental duration for that that yield pick up but we havent again that they a glide path just yet, but we were comfortable with that.
Taking on some more duration and certainly.
We hope are wrong, but we certainly don't think that short term rates are going to increase anytime soon especially after peering Powell again yesterday. So again, hopefully we're wrong, because we're still going to be much more exposed to the shortage short end of the curve.
Hi, I'm just one quick follow up if I may just on the non comps you delivered a positive surprise there given the lower Biz Dev and other expense, we had been seeing similar trends at peers. So putting aside the future expense initiatives I know youre not ready to speak to how should we think about the appropriate jumping off point for that.
Our non comp X provision based recognizing that TMT conference band is going to be on pause versus same period of time.
Yeah, well, excluding the kind of elevated provisions we were Alan.
Guiding to about 325 million.
Quarter for this fiscal year, and obviously, we have been well below that excluding the provisions largely due to as you mentioned lower business development expenses.
We want that we expect that to go up over time, not next quarter, but as soon as people are more comfortable traveling we expect business development expenses to increase.
But one of the things that we're looking at as a part of our overall expense initiatives is.
We've learned that a lot of our advisors are perfectly comfortable a happy doing some of these regional workshops.
And other product focused sessions are virtually versus.
Physically in person at various locations across the country. So.
The private client group leadership team is also looking at this is a long term opportunity to certainly.
Transition to a more virtual events as well, which could help business development expenses. So again, we're looking closely at below the long term opportunities coming out of this crisis.
Yes, but it'd be a mistake to think theyre, all going away the conferences or get togethers.
Sure.
The educational trips for the top advisors are all part of our culture and.
Our ability to have feedback with our advisors. So going forward I think that will find theres a lot of trips why would I take this two day trip list or virtually but but some of those coffered skus, we do anticipate coming back when it's safe to do so.
That's great. Thanks, so much for taking my questions.
Thank you. Our next question comes from the line of Chris Harris of Wells Fargo proceed with your question.
Thanks, guys.
Paul You mentioned day.
Reinvestment rate around 100 basis points for agency MBS today.
Is it fair to assume.
Thats ultimately where the yield on the entire Securities book will go ascending static rates.
So.
When might you expect that to occur over what timeframe.
Yes, I mean, we.
We have an average duration the securities we buy is roughly three years and so.
The existing books that has an average yield of about 2%.
And I I'd say the average life on the existing book remaining life is probably a couple of two to three years because again the vintage is relatively new the portfolio as we've grown it.
So it will take some time for that reinvestment yield to sort of reset as we add securities.
Got it Okay and just one quick question on the asset management segment.
Yeah, those revenues were down 11% sequentially.
And I know is a volatile quarter in terms of AUM moving around but that the cline seems to be more than than potentially average AUM declined.
So is there something else that's going on in that segment that ER.
Drop the revenues a bit.
Yeah that that a U M. Chris includes both kind of institutional assets under management as well as assets under management retail assets under management. So I would say roughly 65% of those assets are built based on the beginning of the period assets. So you can't just look at it on the average basis. So.
That's what's driving the.
The variance that you're describing.
Okay. Thank you.
Thank you and our next question comes from the line of Jim Mitchell of Seaport Global. Please proceed with your question.
Hey, good morning, guys.
Just maybe a quick question on capital management.
What I understand the uncertainty is keeping keeping holding you back but how do you think what are the markers you're looking for is it just.
We have to wait for vaccine for you to feel comfortable putting capital to work what are the markers I guess or is there a macro markers that youre looking at and I guess as the ancillary does that also mean that your as much as you want to do acquisitions, you're holding back to put capital to work there until you have clarity as well.
So I think you know in order of.
We would have no qualms whatsoever doing an acquisition that we had the right. One so we think we have.
One of your capital and.
An ability to to an acquisition for the right one an integrated so we don't see that's not an issue.
In terms of stock buybacks.
Great.
Our goal is to go ahead, and minimize dilution restart that program, but I think both given the uncertainty and honestly, even though you have political and regulatory pressure right now in stock buybacks. We don't think it's just really prudent.
To start that yet, but more importantly, driven by the economics.
We do enter into a second around book coated.
Issues like we're seeing in the south if we do have a really really tough winter. We made we may need those so if we're buying a producing asset.
We're very comfortable doing that but we're going thats going to be a little more conservative on outside of dilution doing proactive.
Stock buybacks, and thus pandemic time, so whether that the vaccine or ceiling trailing off for people getting comfortable with the operating environment I can't say I. That's one of those things I think we'll know when we feel it but I can't give you an objective.
This is the answer.
Okay. That's helpful and and then just maybe a on the compensation in in PCG.
When I look at sort of ebay compensation to compensable revenues the percentage did seem to drop quite a bit in the quarters, which was a little surprising it might just not thinking about that right theres something unusual there I'm just trying to get a sense of that sustainable.
In terms of the lower payout.
No the I'm not sure we could speak offline on how that how you're doing the math, but the up the payout.
Still right around 75%, so it's been pretty pretty stable sequentially.
Okay I'll take a look we'll talk offline. Thanks.
Thank you.
And our next question comes from the line of Alex Blostein of Goldman Sachs. Please proceed with your question.
Hi, good morning, everyone. Thanks for taking the question.
So a couple of follow Us I guess.
If you look in the long ball.
Guys talk about the signs of loans the you're ultimately value increased sales I know you saw 355 and you sold another 100, so far this quarter on what's the total amount of kind of riskier loans to you're looking to potential Sal.
What are the yields on those loans and maybe you can talk a little bit about how these loans ultimately.
I mean, they're way to onto your balance sheet, whether these were originated or purchased.
Yes, So again I said, we had about another hundred that we were looking at selling and.
These are risk reward.
These were loans or.
ER syndicated loans and in January we had we call on pizza parties. The lenders don't think so we get them. The show go through the loan portfolios. The most leverage to the least performing and we really.
Once you're doing an evening on each section of the portfolio and they're really put blenders through what I call, it's almost like that.
Flight simulator, we try to crash the pilot.
What they do we really go through.
And push really hard how are these loans how are they underwritten and I'll tell you I felt as good as I had been put nears about the underwriting.
I think they were underwritten while they were strong what we didn't underwrite them for was a pandemic and places having zero revenue in January within say, the airlines weren't going to fly or nobody what's going to fly knowing what's going to travel and hotels are going to shut down and restaurants are going to shut down so it's.
Those areas of those loans.
Thank the underwriting a strong that's just.
We had a circumstance we've never seen them recent you know.
100 years, probably almost in the country. So.
Thats, how they got onto the balance sheet. So I don't blame our team I think they were very conservative. We're just in a very very unusual time as.
Paul said one of the advantages of the loans, we did they were marked.
We're able to settlement, 93% of par and.
The last 200 million and then so some of those loans have reserves on and on top so the loss of selling as even less than that might be three or 400 basis points. So we just viewed the tradeoff in the room. So that next 200 million we sold is more worth.
It's it's more worth to take the loss now than to hold onto the risk and hope that they would turn around.
What most people think it's going to be a longer haul and the pandemic. So.
The yield is no I think.
Comparable to the rest of the loan portfolio they weren't the highest yielding loans. They were one underwritten some of them are lower yielding loans. They were to high credits and industries that just got hit really hard independently.
Yes, I think just yield the range of the yield is somewhere around LIBOR, plus 175 to LIBOR plus 300 to the loans that we sold that kind of range.
Right that make them into I guess my question ultimately like is the 100 million that you mentioned is that a clean up and Thats kind of down are you guys will be of we'll be looking to sell down more.
Yeah, we're open to selling down I think what we've done as we've looked at the loans that were most concerned of they were really more concerned about the industry.
Some place the credits we were aggressive on very quickly I think the loans now are almost opportunistic as loan pricing recovered. We said we could get these credits off our balance sheet with almost no loss and we decided to go ahead and do that so.
They are more opportunistic and again, we have 100 million that we're looking at we've done a 100 million Doesnt say, we will do the hundred doesn't say, we won't do more of that will do an evaluation.
And again, we've made a handful of new loans too because we'd like the industries the spreads and the risk so.
We just haven't opened up widely but we're still we are still opened on the.
Originating in the corporate portfolio to but we're just a lot more.
Yeah.
Lot more critical to make sure. We think those are good loans given the environment.
[laughter].
Got it Okay makes sense and just a quick follow up.
Thanks for the net net new asset this quarter at American just you guys give that out there I guess when you talk about the pipeline and the strong momentum you continue to happen recruiting can you talk a little bit about the mix I know how that mix might have changed between the employee channel given the kind of the work from home dynamics and the independent channel. So just kind of as Youre looking out the next 12 months.
And the assets that I come kind of coming into our Raymond James.
How does that makes comparative historical kind of employee versus independent levels.
Yeah during the quarter was much stronger as an independent channel and the reason as you know most of them have their own branches and offices. So.
There's no reason you know to put off what move they just.
It can change honestly, sometimes it's actually easier right now because clients or at home you can find them to do the transition so.
That has been more robust in the quarter than the employee channel now having said that the recruiting in the employed channel and the commits have been good but a lot of been delayed because we shut our offices.
And we're in now into limited reopening.
Eliminating the number of people in the branches and so we now have.
A voluntary basis. So we now have the offices open where people join them. One just joined that we announced this week.
No the when the week before so we do have people joining but we have an awful lot of people that have decided to.
Put off their joins a lot of until September now and that some of these have been signed up since April may June and they said, they're coming they just don't want to transition till.
They feel that they're in a comfortable spot to depend on that so that's the so I think the employee side, we'll do a little catching up.
Once people feel comfortable about going into an office.
That makes us thanks for taking all the questions.
[noise] [laughter]. Thank you.
And our next question comes from the line of Chris Allen of Compass Point. Please proceed with your question.
Morning, guys. Most my questions have been as I guess, just a quick one.
On the fixed strength, you noted continuing on into July and brokerage side.
Most of the areas, we look at it seems like things are slowing down a little bit maybe just give us some color there.
How your business holding up from a small market share perspective as well.
Helpful sense.
So I think that you know there was a rush in fixed income both and.
Repositioning and for frankly, you know for for credit under a lot writing debt underwriting.
And so I think you've seen that slow down a little bit, but a lot we have a very.
A leading position with small and midsized banks as loan activity is kind of slowed down.
They had been investing more in securities in redoing their security so although I think we're not.
If you asked me to guess the hard to repeat last quarter's record, it's always hard to.
Drew repeated record, but I think it's going to be very strong fixed didn't come up for us So and all signed so far shows it's very strong. So we expect another good quarter and we anticipate just on closing that capital markets with the M&A transactions.
We'll be up but you never know for closings for an M&A deals.
I guess, all you want even with the good pipeline that's when they close on what gets them away, but so we feel pretty good about that segment for this quarter and than in the private client group segment asset management since the assets or peg and that should be a pretty good quarter too. So.
In terms of revenue increases for those.
Thanks, guys that's it for me.
Thank you.
And our next question comes from the line of Craig Siegenthaler of Credit Suisse. Please proceed with your question.
Good morning, everyone and hope you are all loans stays healthy.
I wanted to start off with recruiting.
Do you have the number of gross or net a number of financial advisors, adding each of the mines 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.
Yeah, we're we're not going to provide kind of monthly or.
Kind of we of course track that internally, but we haven't provided that externally at a what I would tell you is what Paul said is that the recruit recruiting momentum really rebounded throughout the quarter as we've adjusted to our.
Virtual home office visits and we are all doing Paul's doing them I'm doing.
The home office visits virtually and they're going pretty pretty well so.
We feel really good about the activity levels again across all our affiliation options but.
Aren't going to provide month to month statistics on those.
Got it thanks, Paul and just one follow up on reserving up can you provide us some color where at least what to expect from the Cecil loan loss reserve build that's coming in the October quarter, I think seasonally this one maybe different than the others and I'm just interested in the underlying process relative to the reserve that was just.
Building, both in March and June quarters.
Yeah, and again, we still have another quarter under the incurred loss a process for provisions and up and we don't even know what that's going to be yet so.
Yeah, we will have to wait and see that I know the even though for the big banks the macro assumptions are changing rapidly so too.
The macro assumptions and projections are going to look like even in October it seems like it's right around the corner, but every week things change change dramatically. So.
Yeah, we'll wait and see kind of how things progress between now and then.
Yes.
Thank you wrong, but.
The problem with Cecil is the macros change all the time. So I mean, if you took a point in time today, we wouldn't see a huge change, but you don't know right, so but that could change tomorrow, so but right now we would instantaneous we did it today, we don't think there.
So.
Thank you.
And our final question for today comes from the line of William Katz of Citi. Please proceed with your question.
Hi, everyone.
Actually really speaking on behalf of William.
So thank you for taking a question.
So just appreciate.
Color on July like any.
Hi, this initial.
Color on client engagement not shakes.
Hello.
Yeah. Thanks for the question.
Yes, it's pretty broad one in terms of the client engagement across our businesses as Paul said in his outlook comments.
In the private client group business. The fee based assets are going up should provide us a tailwind for asset management revenues and recruiting activity remains.
Remains healthy.
In capital markets segment, the M&A pipeline entering into the fourth quarter.
As a looks good weeks, we expect M&A revenues to be up assuming that the market environment remains relatively resilient here through the rest of the quarter.
And the fixed income activity well work hard to a repeat a record as Paul said that a depository client segment in particular remains a very engaged so.
We feel good about the client activity levels, but.
We will provide more details would go along here.
Thank you.
Okay, then I would just like the thank you all for participating I know, it's that's your jobs are hard [laughter] you know given all that so many extraneous market factors depend on vectren everything else and working remotely so I know it's hard.
Her for all of us, but we really appreciate you taking the time, we'll try to provide as much color as we can and hopefully get an analyst.
They scheduled the as soon as we candidates we get a little more color to this next month or so or so so thank you very much for joining us.
Thanks, everybody that debt.
And that does conclude today's presentation. We do thank you for your participation and ask that you. Please disconnect. Your lines have a great rest of the day everyone.
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