Good morning, and welcome to the earnings call for Raymond James Financial's Fiscal 2015 First Quarter Results. My name is Felicia, and I will be your conference facilitator today. This call is being recorded and will be available on the company's website. Now I will turn it over to Paul Shoukry, Vice President of Finance and Head of Investor Relations at Raymond James Financial.

Thanks, Felicia. Good morning. On behalf of our entire leadership team, I want to thank you for joining the call this morning. We really do appreciate your time and interest in Raymond James Financial. After I read the following disclosure, I'll turn the call over to Paul Reilly, our Chief Executive Officer, and Jeff Julien, our Chief Financial Officer. Following their prepared remarks, they will ask the operator to open the line for questions. Certain statements made during this call may constitute forward-looking statements. Forward-looking statements include information concerning future strategic objectives, business prospects, anticipated savings, financial results, industry or market conditions, demands for our products, acquisitions, anticipated results of litigation and regulatory developments or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, projects, forecasts; and future and conditional verbs such as will, may, could, should and would as well as any other statements that necessarily depends on future events are intended to identify forward-looking statements. There can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to carefully consider risks described in our most recent Form 10-K, which is available on the SEC's website at sec.gov. So with that, I'll turn the call over to Paul Reilly, CEO of Raymond James Financial. Paul?

Thanks, Paul, and good morning, all. I've got a little cold here. You'll have to excuse my voice. While we're here in St. Petersburg focused on recruiting, we can watch the word leaders focused on solving the world's problems, but it's a little bit warmer here in St. Petersburg than in Davos. I'd like to start by saying first, I think that it's a solid start to our fiscal year, especially considering the volatility and uncertainty in the whole Capital Markets segment. Quarterly net revenue of $1.25 billion is up 6% over prior year and down from the 3% from the preceding quarter, but they still -- part of that is based on an adjustment we'll talk about. And we're also comparing it to last quarter, which was an exceptional investment banking quarter. Pretax income of $203 million, which is a 16.2% pretax on net revenue. Net income of $126 million or $0.87 per diluted share. Our ROE annualized hit 12% on a conservative and, some would argue, prudent capital base, given the state of the economy. And particularly 12%, given the rate environment, we believe is very good on our capital base. Most importantly, our key drivers of our business are up: record quarterly AUA of $483 billion, down from last month but a quarter record; record quarterly assets under management of $66.7 billion; net loans of $11.8 billion; and maybe most importantly, which drives those other factor, is a net 71 addition of financial advisors in the quarter alone. Going to the Private Client Group, quarterly net revenues of $845 million, up 8%, but down 2% from the previous quarter, 8% over last year. Now $19 million of that revenue, Jeff will address, the $10.5 million kind of mutual fund adjustment, which adjusted in this quarter but you…

Thanks, Paul. Paul touched on several line items, but -- so I'll try to just hit the ones that he did not touch on. When you compare this quarter to last year's quarter in general, most of the revenue and expense line items are pretty self-explanatory. Commissions and fees are up obviously, largely PCG and just our general size with more advisors, more assets, et cetera. He touched on advisory fees. We did have a performance fee last December as well, in fact, about twice the size of the one this year. So that's an even more impressive gain in advisory fees over the prior year. Interest is up on the revenue side and net side, just as -- primarily as a result of the bank's growth. Finally all that loan growth we had is kicking in to net interest. Account and service fees is going to continue to grow just as our general size grows. I know we said last quarter maybe 108 [ph] was the right run rate and that's kind of where everyone had modeled it. But the fact is, between all the various types of fees that go in there with IRA fees, transaction fees and some rep fee accounts, all kinds of fees that are assessed around the organization -- actually, the fees we get from other banks in our bank sweep program, remember, that's not interest, that's fees to us. All those things fall into that line. So that's going to continue to grow as our overall asset base grows. Paul has touched on trading profits and the factors there. Other is down pretty significantly from last year. But last year, we had a bigger private equity gain in the quarter than we did this year. And we also had $5.5 million of gains…

I'll give you kind of a little bit of a forward look. Again, once I'll repeat the good -- the areas that's the key drivers of our business, which is related to the Private Client Group, are all very positive. So assets under administration, since we bill quarterly in advance, we get some tailwinds from that. Our assets under management are up. Net loans took the provision this quarter, but of those loans should be producing next quarter. Recruiting remains robust, and this is the kind of peak recruiting season this next quarter or so in terms of visits. So it takes a while between a visit and a sign on, but that's been going very good. And Private Client Group, productivity of the advisors continues to go up. So we should have a tailwind in that area. This also impacts asset management in the bank. So for us, the key is our culture is that -- I think one of the reasons that our net additions are so good is that we're very focused on making this a very friendly place to work and that's our #1. It allows us to keep people. It allows us to offer less transition assistance than other firms do to bring people in because people want to be here. We continue to invest heavily in our tech spend so when it gets down, I think the annual run rate we still hold to. I believe we're becoming a leader, really, in the FA desktop technology. Asset management continues to grow with net flows driven by PCG recruitment. Again, the 40% margin, I think, was a blip. That 30% margin's more a normal run rate for it. Bank growth is always tougher to predict. As Jeff said, last quarter wasn't really big through November and then we had a great December. Been a little slower start in January, so it's always hard to predict what's going to happen there. The NIM increase of 2 basis point, I think, spells that -- hopefully, that spreads are widening a little bit. But...

On that, I think we're still comfortable with the mid-teens guidance in overall net loan growth for the year. And I think we're still comfortable with 3%-ish net interest margin for the year, even though we've seen some gradual improvement here.

And then Canada will have some impact next quarter. The 25 bp decrease does affect our variable rate loans in Canada. It's about a $600 million book. So -- but all in all, I think, we're in good shape from those businesses. Capital Markets is a tough one. Volatility increase has certainly helped institutional commissions. But volatility sometimes makes it harder to go to market, depending if it's volatile trending up or volatile trending down, but -- so that has some questions. And we do have a very good oil and gas midstream energy practice, one of our biggest practices. Certainly in terms of financings, could impact us short term if oil prices stay down. Certainly, M&A aspect, which we do a fair amount of also, would be up. And the Canadian business is certainly impacted because it's a commodity-based practice. But even within that, we're growing our platform. We added a consumer team last quarter. This quarter had -- added a life sciences team and a new head of M&A in Canada. Public finance, coming off a great year, still a tough market. We went from actually 10 to #8 in the league tables for full credit to lead on negotiated issues. For the first time, hit over $10 billion last year, but still a tough market. Fixed income trading profits are more difficult as you get a flatter yield curve. Institutional commissions certainly have increased. There's been a lot of questions, I guess, for everyone in general on energy exposure. So I'll talk a little bit about ours. If you look at our loan book, there's about 3.4% of our loans are broadly in the energy sector. We only have one loan to an E&P company, and it's an investment-grade rated facility. And that we have -- we…

[Operator Instructions] And your first question comes from the line of Devin Ryan with JMP Securities.

So I just want to dig in a little bit on the NIM in the bank. And I guess, the puts and takes there, because I know there's a lot of moving parts with -- clearly, some rate pressure here but then the loan growth has been so outsized and not all that has been reflected yet. So I guess the question is, does it go up structurally with the loans that you brought on? And then kind of the offset is the more recent rate pressures, things are a little off. But I'm just trying to think through kind of some of the moving parts to how you stayed at 3% or even if that may even go up a little bit from here?

Devin, it's Steve Raney. As Jeff alluded to, the 3% is kind of a good target, I think, for the balance of the year. I would say right now we're seeing actually maybe a slight widening in corporate credit spreads. Residential spreads have probably pulled in a little bit, but things are relatively stable right now. So we're pretty confident that, that number's going to be pretty flat for the balance of the year when you blend it all together. I'm sorry, Devin, I was just going to remind everybody, the vast majority of our loans are floating rate, LIBOR-based loans, both our corporate loans as well as our growing securities-based loans where we're making loans to Raymond James clients secured with their Raymond James brokerage account. So those 2 loan components are almost exclusively LIBOR-based floating rate loans.

Got it. And then with respect to the debt underwriting business, I mean, I know there's some pressure this quarter, as you alluded to. But I mean, I guess, the revenues just look pretty soft given that you had some pretty nice improvement there the past few quarters. So just a little more color there would be helpful. Was there seasonal factors? Or was it related to just kind of the macro backdrop? And the outlook for that business specifically, just given that kind of we took a decent step back here this quarter?

I can tell you, we're -- our pipeline is strong. We've moved up in market share. It's just the macro market. So when it increases, we'll do well. We're well positioned. We have a good team. We're continuing to expand the team, actually, and grow in the market. So there's nothing -- it's hard to tell. The backlog is very good in the business, but it's just new issues are down across the board. So...

Got it. Okay. Fair enough. And then just lastly here. With respect to the -- just a cleanup item, the commission adjustment that occurred, the corresponding expense, I mean, was that in the independent channel or the traditional channel? I'm just trying to get a sense because I know that, that can have a big impact in terms of what the commission rate is that was netted against it. So I'm just trying to get kind of a better sense of the actual earnings impact.

We just made a broad assumption at this point of half and half. And then took us -- I think it was about -- blending in to about a 60% charge to -- or payout rate.

Your next question comes from the line of Chris Allen with Evercore.

Just wanted to talk a little bit about the communication information processing line. You guys provided some color there. In the last quarter, there was -- you talked about being on a bit of a hiatus in terms of capital projects. I mean, we're just trying to think about how that line should look going forward. It is kind of a good run rate right now? Or should that start to creep back up again?

I think it will start to creep back up. Remember, Paul mentioned that the next quarter -- it's not just IT. It's really all -- what we call, all communication. So we put some of these mailing costs and things like that in there as well, which are seasonally high in the March quarter. With 1099 year-end statements and shareholder information, that's over a $2 million charge just because of that. And to the extent that we've kept up our spend rate, which we are still investing heavily in technology to stay current here, some of the things that we've been working on will start to amortize. Some of that will be kicking in. So I would certainly expect it to creep back up toward the -- where we had been guiding previously, which was the low to mid-60s. But it's -- again, it's a little hard -- bit of a hard number to put our thumb on it, so I can empathize for your situation.

Got it. And then I appreciate the color just in terms of the energy exposure in the loan book. Just wondering how big of a component the Capital Markets business has energy been historically. I mean, it sounds like stuff out of Canada is a little bit weak right now and you provided disclosure on the Canadian overall revenues. I'm just wondering, within the bank, how big is -- I'm sorry, within the Capital Markets piece, how big energy is.

It depends when.

15% last.

The last year was 15%. It goes up and down. Real estate's our biggest practice, followed by energy. But depends how those cycles are doing.

And of that 15%, a good portion of that was advisory based as well. So it wasn't all underwriting. 15%, 20%.

I mean, I would imagine this current pullback's going to create some opportunities longer term within that business, so not all bad.

Yes.

Just the near term, obviously, is a challenge. And then just one other question. Just within the bank, looks like other income, that was about $4 million roughly, $3.5 million to $4 million. So I was just wondering if there's anything onetime in there? Or is it -- just because it was a big jump from what we calculated last quarter.

Yes, Chris, one of the things that we alluded to earlier was the sale of a OREO property, a property that we had foreclosed on, where we sold it for more than we had written it down to. That was about a $550,000 contribution. There's a bunch of other items that are comprised in there. Foreign exchange, we mentioned in the September quarter that we don't have any other foreign exchange. We've moved the loans, the Canadian-denominated loans to the Canadian finance companies, so they're -- we're really fully hedged now. So we don't have that volatility in the bank's earnings going forward. So those were the contributing factors.

That was a loss -- negative in the September quarter.

In the September quarter, right.

Your next question comes from the line of Christian Onwugbulu with Crédit Suisse.

Just a follow-up on the tech spend, but a bit of a broader question. You've done a very good job in terms of improving solutions for advisors. But I'd like to get your latest thoughts on what areas you're targeting for future investments. And also, any thoughts on any additional investments you did for things like data security?

Well first, I'll take them in reverse. We take data security very, very seriously. And we've had -- both our auditors and another consultant kind of review our security. And we get high marks for our size. We've -- Bella and her team, and the person that heads our data security, have done a great job. As you all know in this environment, we think we're as safe as you can be, but nobody is bulletproof. So we're very active in it, with active monitoring. And so it has been a focus area. And I guess the bad guys get better and we continue to spend more, but we feel like we are as state-of-the-art as anyone in this area. Certainly, we can't spend what the biggest firms spend, but nor do we have as -- the broad global exposure. In technology, we continue to -- we've focused a lot on the FA desktop and reporting. We're spending more time now on cash movement, whether it's taking a picture of a check and depositing it or making it easy to journal or make our trading systems easier, integrating a lot of our data platform so that we can do more data mining and -- on the underlying systems and be able to add new modules. So it's pretty broad based. We started out with a plan, a 5-year plan. We're halfway through it. We're right on every place we are and we continue to improve and get better. So it's certainly just upping the quality of the system all the way across to make our advisors' lives easier and to be able to manage the business better.

Okay. Makes sense. And then on the fixed income business, I appreciate it's very hard to forecast, but your results have held in pretty well here. If the environment stays as it is today, just love to get your latest thoughts on how you see kind of revenue trajectory there over the next year or so?

Gosh, I would've been wrong calling the bottoms for a while. So I guess the worst case scenario is that the short-term rates go up a couple of hundred bps and we have a flat yield curve through the 10-year and -- for fixed income. However, if we were voting for it, it would be very good for Raymond James consolidated. So certainly, volatility is helping trading, but the flatter the yield curve, the harder it is on trading profits and on -- and even on commission volumes long term. So a low flat curve is the worst case. And if you had to predict, it looks like we're moving closer to that than farther from it right now. So we like volatility and the steeper yield curve. So you're going to have to make the predictions on that business. But we've got a great team and great distribution. They're very active with the clients. And so you're right, we've done better than most. But I can't tell you what the macro trends are. I can't say I see anything short term that's going to make the business look a lot better. And I -- as I tell our people internally, and I believe this, we have an A team in a D market, and we're still at double-digit margins and with terrible markets. So I don't see short-term relief, but we've got a good team.

Okay. And just lastly for me, Jeff, just remind us, of your client cash, how much client cash you have currently on the platform. How much of that is being swept to third parties and what kind of yields you're getting on that sweep?

Yes, we're up to about $32.5 billion. It has actually increased as we brought on new clients and new financial advisors from the end of September. We have probably $28 billion of that $32.5 billion sitting in our bank sweep program; $10.5 billion of that, roughly, going into our own bank; and the balance to unaffiliated banks. You know what the spread is in our own bank because we've talked about the NIM. The spread from outside banks, it's a pretty big range, but we're seeing some upticks in that. There's more demand from outside banks. So we've seen an increase. We're over 30 basis points now on average, and we're seeing all of the new contracts that come up for renewal. And the new banks that we're bringing on are at higher rates than the ones that are running off. So we've seen a little turnaround there, really started about 6 to 9 months ago where banks actually now want deposits again. They aren't quite as easy to come by as they were in the past.

Your next question comes from the line of Bill Katz with Citigroup.

This is actually Neil Stratton filling in for Bill this morning. I just want to ask a question about the Private Client Group. You mentioned the robust recruiting trend. So the 2-part question is, a, where is the growth coming from? And then b, how does the productivity compare of the incoming recruits versus the -- sort of the overall platform?

A couple of things. First, the growth in general comes from wire houses for people who are, I'd say, from acquired firms as deals build off and they're seeking kind of the cultures they grew up in. So that's general. But also, we've had -- we've focused on opening up the West and Northeast. It's a big focus of ours starting a couple of years ago and it's starting to pay off. So 1/3 of our recruiting growth has come just on the West Coast and Northeast. Now they happen to be amongst the biggest markets or we'd have very low penetration. So we see huge opportunity there and have signed some very large teams and continue to have a lot of interest in the West and Northeast. And if you look at our platform, we have national advertising, national servicing call centers. So the marginal cost, we're already incurring the costs and not getting the leverage on a lot of those areas. So we think there's a really very big opportunity there. It's coming across all of our platforms, employee, independent and our RIA channel, which we kind of reinvigorated. It's picking up in its backlog of recruits, too. So it's really across the board. And we see that if you'd measure it by home office visits, which are people who are serious enough to come kick the tires here in St. Pete and us also interview them, that's up. So it continues to increase. So we think the backlog's very, very good. In terms of productivity, it's higher. And maybe 25% higher on average. And we've also seen, for us, million-dollar teams should be big. In the last quarter, I think, we had 3 teams over $5 million join us just within 6 weeks alone. So we tend to get bigger teams. That doesn't mean we don't get smaller producers that are high quality and on their way up. We're just as interested in them, but the average is certainly up, so it helps move up our productivity numbers.

Okay. And my second question is just the outlook for the comp to net revenue ratio. I think in your prepared remarks you mentioned a 68% ratio. Is that still the sort of the target for fiscal '15? And how would that sort of move sort of quarter-to-quarter, if you can provide any color on that?

I think that's probably still a good run rate to use for this year, for the entire year. What will happen to improve that over time, and it may improve slightly over that this year, is as revenue growth continues, eventually you get some economies of scale in the infrastructure you have here as opposed to -- it's not all variable comp. There are some fixed comp elements to that. So it really is going to come with scale over time as revenues grow. And like I said, it may happen this year if revenues continue to increase from the prior year.

Our most challenged quarter is usually next quarter when FICA kicks in across the board. And that usually burns off in the third quarter -- part way through the third quarter. So typically, the pressure on that ratio, given steady business across, is in the next quarter -- this quarter.

Your next question comes from the line of Steven Chubak with Nomura.

So I just had a follow-up question on the FIC business. Just given, I guess now, the shape of the yield curve and the rate pressures that have persisted on the long end, whether we should be thinking about $10 million as the run rate for net trading profits, at least in the near to intermediate term, assuming a static curve, which I know is a big if.

They've come in really for a couple of years. That run rate's probably reasonable. I can't tell you it has been -- it hasn't been an increasing net profit, I think, trading profits. This quarter was challenged and we had an unusual situation because of Canada that impacted trading profits. In Canada, everything in equity capital markets is a bought deal, and you got 5 days of exposure versus an overnight exposure. We got in on a deal, which was an energy credit, where we -- it wasn't all place. We weren't the lead left, but we're the lead right. Oil prices went down and we were caught in the position. So that's kind of a one-off thing. That happens every few years, we'll end up in a position on a deal. They do a great job there. But with oil coming in, we got caught on that one. So that's $3 million. That's an unusual item. The rest of it, I think, is kind of steady.

Yes, if we had to pick a range, too, I'd say that, that would be the low end of the range. So if you want to be real conservative, I guess you could use that number.

Yes, but the $3 million's a one-off. So...

Okay. Understood. That's really helpful. And then just, I guess, a follow-up to a question earlier on the communications expense. I just want to make sure that we're modeling it appropriately. Should we be thinking about low to mid-60s as the -- or as annualized $250 million or so, given that it came in at about $10 million less than we had anticipated? Should we assume that an incremental $3 million gets tacked on to the normalized rate? Or should we just assume somewhere in the low 60s going forward, at least over the next 3 fiscal quarters?

For all the reasons I enumerated earlier, it's a little difficult for us to tell. I think low 60s for the -- going forward is probably a reasonable estimate at this point.

Okay, and then just one final one for me, maybe for Steve on -- at the bank. Thinking about the provision trajectory, it did increase consistent with the guidance you guys had given last quarter. Should we assume that this is a reasonable run rate expectation given some of the guidance you had given on loan growth for at least the remainder of the year?

Well, with -- it would -- we're forecasting loan growth to be slower for the balance of this year relative to the December quarter, and we would expect provisioning to be aligned with that loan growth. So...

Does that 130 to 100 -- sorry, does the 130 to 140 basis point provision expectation still hold? Or is there any remixing issues that we need to consider?

No, that's about right. Yes, the blend of the business is -- does impact that. Our residential provisioning is lower than our corporate lending provisioning, as is our securities-based lending is lower as well. So -- but I would say that's kind of a good 125 to 140 basis point provisioning on loan growth.

Your next question comes from the line of Hugh Miller with Macquarie.

So I guess starting with a couple of questions for Steve. I appreciate the color you gave on the NIM and kind of the widening of credit spreads and how that has kind of been helpful to offset some of the pressure on the yield curve. Wanted to get your take on kind of deposit pricing competition when we start to get into an eventual rising rate environment. It seems to be, I guess, 2 schools of thought that we've been hearing where some people are expecting that banks will kind of use that increase as a means to kind of lift their NIMs and not really compete as much on deposit pricing; where others are expecting some of the larger banks to have to compete actively because of their liquidity coverage ratios. Was wondering how you anticipate things might shake out when we do see rates rising and how competitive deposit pricing competition is likely to be?

Yes, Hugh, there's a lot of unknowns, given that this is totally uncharted waters for all institutions, given the regulatory framework that you just referenced. And the rate setting that takes place, that impacts us, is really kind of a firm-wide discussion. We'll certainly be looking at what the competitors are doing. I think that there is some sentiment that as rates rise, when we get back to maybe more normalized rate environment, that not all of that will go to the depositors. But that's yet to be determined in terms of what the competition is doing. We want to do what's fair for our clients, first and foremost. But we do think that rising rates on the short end, that probably would help our net interest margins around the firm, not only at the bank but the fees -- the spread on other cash that Jeff referenced, where we only have about $10.5 billion of the $32-plus billion of client cash balances being deployed at the bank currently.

Even if it gets more competitive, I think the assumptions that we're operating under already sort of take that into account. Because I've not heard anybody be as conservative as we are in terms of client sharing of a rise in rates at this point.

I definitely appreciate the additional color you guys have been giving. It's very helpful. And then some questions on the Capital Markets side. I noticed the hiring that you guys made with the director up in Canada for M&A, and I was wondering if you could just talk about the opportunities you're seeing up there. And historically, how much business you guys have produced for Capital Markets in the Canadian region?

It has certainly been mixed. It was -- Canada is better than us in '08, '09. '11 was very strong year for them, and it's been slower since, because it's commodity based. So the one thing we do know is, in Canada, too much has been on financings and we haven't really had an active M&A business. Our M&A work -- whereas half our revenue here is roughly in the U.S, it's been episodic in Canada and there's no reason for that. There's plenty of business. So we've been looking either for a firm or a leader now for a couple of years and finally was able to recruit someone after couple of years' effort, and we think we have the right person to build out an M&A business. So we think that will certainly help smooth out the Canadian Capital Markets business. And I don't know if we were projecting. He's just on board Monday, so I mean, not predicting any short-term impact from that, but I think Craig's a strong person and a good player and we'll build a team around it. I think that will help us and smooth out the Canadian business, which basically is just a financing business right now.

Okay. That's helpful. And was wondering if you could talk a little bit about the risks and opportunities with energy-related capital markets in both underwriting and M&A. I guess we've been seeing a little bit of a pickup in some secondary issuance in energy as people are shoring up their balance sheets. And there's just some discussion about potential near-term lull announcement activity as people are kind of hoarding capitals levels at this point, but longer term expectations are pretty strong. I was wondering what your view is, and what you're hearing with discussions with clients and how concerned they are relative to their expectation to be opportunistic.

I think that our view is kind of reflective of that. That first, we're very well positioned in the downstream energy business in particular. And debt financings may be off for a little bit here, but M&A activity will pick up. And when that is, I don't know. And now a big deal was announced yesterday, right? So who knows? So -- but we're in the mix and I -- certainly clients with cash are looking at these prices and looking for opportunities, and producers that are more leveraged are worried about it. So I mean, there's certainly interest on both sides. When you get a deal or how long companies feel like they can hold out or when people think the bottom is, who knows? But I do think that if oil prices stay in the 50-ish level for some period of time, then M&A activity will pick up significantly. So -- and we're lower than that now, but we think M&A is a good opportunity and that eventually financings will come back, too. So -- but I can't predict when that will happen.

Okay, I appreciate that insight. And then last question for me. If you could just give us a little bit more color or insight on to kind of the economics per transactions that were a little less than what we've seen before? And is it just kind of a function of where things shook out in certain sectors, where maybe you don't have as dominant a position in? Or was there anything in particular you guys noticed that would cause that to be the case this quarter?

It's just in the positioning and where it shakes out. You have -- used as an extreme example, last quarter, Alibaba went out and everyone, even if you had a teeny piece, got a pretty good fee. If you're in the syndicate at any level, in something that size, people do well. And one of the smaller sizes or if you're not the lead, with multiple-lead book runners and smaller co-manager positions, if you're in that co-manager position on smaller deals, you're getting a lot less fee per deal. And in the September quarter, we were on -- we had more lead deals and a lot bigger transactions. And in this quarter, about the same number of transactions. I think we had 3 or 4 less lead positions, but the deals were smaller. So I don't think it's endemic of anything. It's just when the transactions hit and the sectors they hit in.

Okay. And I guess, just one quick follow-up. As we think about the backlog from a nonenergy-related standpoint, are there certain sectors that you guys are seeing more interest and activity in, relative to others?

I think the interest is still there. So I don't know where people across the board in our business is. Real estate's our biggest practice. But I think if you look at transactions across the board, there are more. So the other thing that some people kind of ignore, which is a decent-sized business versus tax credit deal, and it's doing really well and we had a bad quarter in terms of closing. We recognize our fees on partnership closings and they're lumpy. We had a very good September quarter. And this quarter was off just because partnerships didn't close, but the backlog's very, very good. So that also -- that and Canada exacerbated what was a weaker quarter. Those 2 made it look a lot weaker than I think it really was.

Your next question comes from the line of Joel Jeffrey with KBW.

Certainly appreciate some of the color you gave on the bank's exposure to the energy sector. Just wondered if I can dig in just a little bit deeper. This may be a bit too specific for you guys, if you're willing to answer. But when you think about sort of the provision levels that you've got on these loans, would it be essentially relatively higher than what you're seeing on the average of the portfolio? Or could you give us any more specifics on kind of how you think about provisioning for these?

Yes, Joel, we have 38 borrowers in the energy space that comprise the exposure. We had -- there's $403 million of outstanding loan balances in it. There's 38 borrowers at the end of December. Two of the 38 are in criticized categories. So we have substantially higher reserves on those 2 names. We -- it goes without saying, we've been very diligent here in the last several months reviewing name by name, credit by credit and also, certainly gathering intelligence from our investment banking colleagues and equity research colleagues that have a lot of expertise in this business. So we did downgrade even in the past category, a few names. So I would say, on average, that portfolio has higher provision, higher reserves associated with it than our other sectors as a result of the recent commodity price pressures. So that's kind of the process and we're watching these names very closely for sure. So...

But not -- again, I think we're not -- share your concern given prices. But we're not -- we think the names are well -- have good balance sheets, well financed. And certainly, prolonged downturns put pressure on everybody.

Yes. 75% of the exposure, as Paul mentioned, is to midstream names that typically don't have as much commodity risk associated with them, but continue to watch those as well.

Okay. Great. And then just, Jeff, if you could sort of give a little bit more color. I want to make sure I understand the commission adjustment. Did you say you guys -- you could have taken pieces of these charge over the past year or so? And kind of why is now the appropriate time to do it?

We didn't know the -- we weren't aware of the issue until we heard about it at other firms, but it relates to 5 years' worth of activity. This adjustment relates to any potential issues going back 5 years. But what we -- and again, it was a systemic -- systematically produced number for all potential transactions that might fall in this particular category. So it is 5 years' worth of activity, but we didn't -- weren't aware of the issue until just recently. And that's why it's kind of a -- it looks like a bigger number than it should be. And related to 1 quarter, it would be almost nothing.

It's a small number going back over time compared to our total commissions. It's just when we found it, we took -- we recognized it and we just found it and estimated it and so it hits this quarter. But it's -- if you amortize that over 5 years, it's a very small number and a very small part of our commission.

Yes, just -- what we're trying to do is give color to those of you trying to do run rates and things like that. That, that $10 million figure certainly should be a onetime hit to that line item.

And just so I'm clear, what exactly was this specific issue that it's addressing?

I don't want to go into a lot of the specifics because it's still very early in the process, but it has to do with which share class of mutual funds were used for certain accounts.

Okay. Great. And then just lastly for me, in terms of the performance fees for any asset management business -- I apologize if I missed this before. What generated that?

We have 2 accounts that we're still getting performance fees on and they, I guess, both outperformed their benchmarks for the year. It's based on a calendar-year performance, which is why it hits in the December quarter each year. But it was less than last year. It was over $10 million last year or roughly $10 million last year. It was about $5 million, $5.5 million this year, relates to 2 accounts that have a performance fee associated with them, 1 that has noncontrolling interest associated with it. So it doesn't all fall to the bottom line for us, but most of it does.

Your next question comes from the line of Chris Harris with Wells Fargo Securities.

Another question on the NIM. The guidance you guys are giving here, flat for the year, clearly, I think is a very good outcome given how much the yield curve has flattened. And I guess we're saying, some of that is being supported by higher loan spreads. So I'm wondering, in an environment where loan spreads come back in, do all of a sudden you have kind of a risk to that NIM guidance? And really just trying to figure out whether that 2.70s NIM number we had talked about a couple of quarters ago would come into play under that scenario.

Chris, our existing book's floating, so the impact really isn't there. The question is what happens on new loans and new production and what spread we're willing to invest money in the bank in. So certainly, if we continue to invest and decided to make -- we thought the return versus risk was worth it and you continued in a decreasing spread environment, it would impact NIM negatively. If it stayed flat, we run as we are. If rates went up, it should -- and spreads widen, we'd go the other way. But it wouldn't immediately impact the business. It would depend on the new production and what you blend in.

And how much you participate.

I mean, we'd pass on deals all the time because we don't think the return's adequate for the risk we're taking. So...

Just because the 10 years' yield is down doesn't mean it's going to compress. And in fact, usually the 10-year yield comes down when its economic problems and people are fleeing to safety, so it actually can widen corporate spreads, which is kind of what we've seen here recently. So I wouldn't tie corporate spreads to the 10-year except maybe inversely.

Right, but I was just wondering if loan spreads came back down, whether we'd get into that 2.70 zone.

It would, if we participated. And over time, it would have to -- we'd have to run off what's in the portfolio and replace it with the lower spread.

Okay. Right, so there would be some time for it to have a big an impact. All right. Follow-up question on the recruiting. Great quarter for you guys. It sounds like the pipeline is really good. I'm just wondering, was there anything that happened this quarter to create such a large number, the 70-plus advisors that you added? Or might this be kind of a decent run rate for you going forward given how good the pipeline looks?

No. If you look at it, it has been lumpy. Last quarter wasn't as big and 2 quarters was big. I mean, so it's just when they show up and we're only partially in control of that. They have to decide to come over and so it's -- that certainly -- if we could -- if you told me we could repeat this quarter 3 more times, I'd take it. I'd sign up for it right now, so it was an exceptional quarter. But I'll tell you, the pipeline's very good and we think that we're going to -- our targets are to do more than we did last year, and last year was our second-best year. And so far, we're on our targets. But it could stop tomorrow. It could go up. And a lot of that's not just dependent on us, it's dependent on the markets. And frankly, a lot of it's dependent on what competitors, the large banks do, because that has more impact on investor -- on advisors leaving than what we do or don't do. Yes, or don't do.

When these advisors come on, do you guys get all the assets right away? And so in other words, as all these assets come over, is there a lag effect that happens, so an advisor...

There's a lag. And for the larger advisors, we say we get 70%-ish in the first year and then the rest comes on after that. And they typically are growing their business because they're good advisors. So it doesn't all come over day 1. It takes a while for them to come in, yes.

Your next question comes from the line of Alexander Blostein with Goldman Sachs.

Just wanted to pick your brains on the capital management strategy. I know it comes up every once in a while, but plenty of capital that you guys deployed at the bank prudently, but the share count continues to creep up slightly. So any updated thoughts on, I guess, a, at what point would you consider deploying some capital into the buyback as the multiple, at least in the earnings basis, is not egregious? And I guess, secondarily, maybe an update on, as you bring all these new FAs in, does that partially impact the creep in the share count? And maybe just kind of what is the annual creep in the share count from RSUs and things like that?

I'll let Jeff -- our increase in share count's pretty steady. I'll let Jeff address that. It really has more to do with year-end comps than FAs, per se. But if you look at capital, we are deploying a good chunk lately in bank growth and FAs, bringing FAs on. So if you look at free cash, it's -- between bonuses and bringing people on, it's down a bit. We still have capital to employ. We're still looking at acquisitions. We're very disciplined. As I've said before, we've looked at a lot of them and if we can't put -- they're not the right fit and certainly, first, culture; secondly, strategic; and third is price. We've had a number of conversations where price doesn't work. So we're -- we still think we can deploy capital, but we're very, very disciplined, which people should feel happy with. And if we think we truly have excess capital we can't use, we'll look at alternatives of deploying it. At this state, we think we can use our capital wisely.

And in terms of share count, we typically have been -- we had been in the -- between in that 1% to 1.5% a year type dilution. Really, almost exclusively, all the equity we issue has been retention oriented. We use both incentive and nonqualified options as well as restricted stock units, and we use them for producers. We use them for management people. We use them for highly compensated people. Whatever category they fall in as a portion of their comping shares and shares. So it's really meant to keep people in their seats long term, which has been a successful program for us. Because certainly in the FA world, you know our turnover statistics are lower by far than the industry averages.

Your next question comes from the line of Jim Mitchell with Buckingham Research.

Just maybe just a question on flows and what you're seeing on your retail customer base. It seems if we kind of try to back into what the net flows were, it seems like over the last 2 quarters, they've slowed from the first half. And just trying to -- is that just simply a function of market volatility or anything else? Just any insight you have on sort of what your customer flow dynamic is right now. And how you see that developing as you add or accelerate the recruitment effort?

Yes, I can't say I've seen any slowing. I mean, a lot of it -- a lot of our net flows are dependent on our recruiting, which has gone well. And so when you get good quarters with lots of people, as they bring on their assets, it'll pick back up some. So I can't say I see anything overall that says our expected net flows should change.

Jim, one thing you sort have to be careful with when you project flows as you're using maybe one index, one stock market index, and our clients have a diversified portfolio of fixed income cash and equities, and even within equities, it's not all represented by the S&P 500. There's international, there's small cap, et cetera. So sometimes your analysis could be skewed if you're using just the S&P 500 to track flow, to estimate flows in PCG, is what I would tell you.

No, that's fair. So you could resolve that by just giving us the numbers.

If we knew them, we would tell you.

We track those very closely in asset management. For assets under management, we track flows and -- but we don't -- we haven't tracked it as closely on the overall. It just -- if lot of FAs affiliated with us in this last quarter, their assets may come over largely in this next quarter. So there's a lag effect to that as well.

I put that in, we know the best. We think the trends are there, but I -- when people say, "Can you -- what's the 10 year going to do?" And I always say, "If knew that, I wouldn't be working." So who knows?

And I guess, any major shifts in how your clients have been allocating any -- over the last quarter or 2? Is it more equities? Less equities? Just curious.

Equity inflows have been okay. I mean, so we actually -- so it's not huge, but it's not...

Overall mix hasn't changed much in the last 2 quarters.

No.

Or really in the last year. Most of the mix change has been more from market appreciation. We have a financial planning orientation here. So our client base doesn't tend to follow equities or fixed income to the extent that some other trading firms do with more stable asset mix.

Your next question is a follow-up from the line of Bill Katz with Citigroup.

This is Neil, again, from Citi. Just had a quick question. Given the NIM guidance you've given for the bank, do you have an outlook for the NIM for the -- for RJF when you include all the interest-earning assets of the firm?

We don't think of it in NIM terms.

Yes, we really don't.

That's -- again, that's a difficult calculation, Neil, because a lot of the cash balances shift from on balance sheet to off balance sheet. And once they shift to off balance sheet to other banks and -- that doesn't show up in interest income, that shows up as fee income. So it's a little bit of a difficult calculation, just based on the mix of whether that cash is being deployed on balance sheet or off balance sheet.

We focus a lot on total net interest earnings at the holding company level. We don't really focus much on spreads. I mean, it's impacted by inventory levels, how much of inventory we finance, a lot of other factors that I think would render a NIM at the holding company a little less meaningful than it does at the bank.

And there are no further questions at this time.

Great. I know -- I think we ended up in a very good start for the year. I know the frustration is -- predicting a lot of this is around capital markets and -- both globally and domestically. That's just difficult to predict what the economy's going to do. But again, I start by saying that shorter term, it's always hard to look at numbers. And this next quarter tends to have some elevated expense just by the nature of our business. But longer term, if you look at the growth in assets, the growth in loans, the growth in advisors, those are the things that drive a vast majority of our business and they're all very positive. So I feel good about our positioning for the long term and certainly for the year. Next quarter, it's just -- the rest of the business is variable and transaction oriented and hard to predict. I wish we could give you better guidance. If we had a stronger feel, we'd know, but it's just hard to predict in this economy. So with that, we appreciate your time. We look forward to the next quarter and we're going to go back to work. Thank you, Felicia.

Thank you. And this concludes today's conference call. You may now disconnect.