Good morning and welcome to Raymond James Financial’s Fiscal First Quarter 2020 Earnings Call. My name is Myra and I will be your conference facilitator today. This call is being recorded and will be available for replay on the company’s Investor Relations website. Now I will turn it over to Kristie Waugh, Head of Investor Relations at Raymond James Financial.

Thank you, Myra. Good morning everyone and thank you for joining us on this call. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman and Chief Executive Officer; and Paul Shoukry, Chief Financial Officer. The presentation they will review this morning is available on Raymond James’ Investor Relations website. Following their prepared remarks, the operator will open the line for questions. Please note certain statements made during this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated results of litigation and regulatory developments or general economic conditions. In addition words such as believes, expects, could, and would as well as any other statement 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 our most recent Form 10-K and subsequent Forms 10-Q which are also available on our IR website. During today's call, we also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our press release and presentation. With that, I would like to turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?

Thanks, Kristie, and good morning, everyone. Thanks for joining us. During this call, if you hear me refer to Paul, I’m not referring to myself in third person because Paul Shoukry has now taken over the CFO reins and will be going over that part of the call. As usual, I'll give an overview and I'm going to turn it over to Paul who will cover more of the details and update our guidance. As we indicated on our last call, before the interest rate changes, we were going to hold off on guidance until those rate cuts were announced, and we knew how deep they would be. After that, Paul will then turn it over to me to discuss the outlook. So overall, I'm really pleased with our results for the first quarter, especially given the significant headwinds from the three recent interest rate cuts, which will have an estimated negative impact on our pre-tax earnings of approximately $140 million annually. As outlined on Slide 3, we generated quarterly net revenues of $2 billion which were up 4% from the prior year's fiscal first quarter and down 1% from the record set in the preceding quarter. We generated record quarterly net income of $268 million or $1.89 per diluted share. On an annualized basis, our return on equity for the quarter was 16%. And while as you know, we've been reluctant to disclose this metric because we believe return on total equity is the most relevant and we do not have any preferred equity. We are now disclosing return on tangible common equity or ROTCE as that has become a common metric in our industry. On an annualized basis, we generated a 17.5% return on tangible common equity during the quarter, which we believe is very attractive especially given…

Thanks. Before jumping into the numbers, I just want to thank Jeff Julien, who's sitting in the room with us this morning. Jeff has been a fantastic mentor and friend over the past several years. And certainly I have big shoes to fill, but fortunately, Jeff has agreed to stick around for a year to help me with the transition. So thank you, Jeff. I want to point out that in addition to the presentation, we're using for this call, we also provided a financial supplement for the first time this quarter which provides similar metrics as earnings release, but over five-rolling quarters. I'll also point out some other requested additions to our disclosures throughout my prepared remarks. As always, thanks to all of you for your feedback and suggestions to help us continuously enhance our disclosures. Starting with revenues on Slide 10, as Paul stated, we generated quarterly net revenues of $2 billion, which were up 4% on a year-over-year basis and down 1% compared to the record achieved in the preceding quarter. Notably about 75% of our net revenues are asset-based providing relatively good predictability. Asset management fees were up 10% on a year-over-year basis and 3% sequentially, consistent with a 3% sequential increase of assets in fee-based accounts in the preceding quarter. Assets in fee-based accounts were up a substantial 9% during the fiscal first quarter, which will be reflected in the Private Client Group segment in the second quarter as most of these assets are billed at the beginning of each quarter based on balances at the end of the preceding quarter. Also remember about 13% of this line item is driven by financial assets under management primarily in the Asset Management segment, which are built based on a combination of beginning, ending, and average assets…

Thanks, Paul, and thanks for lot of guidance update there. But as again, as you recall from our last call, we said given the upcoming interest rate changes, we couldn't predict, we would hold off until this quarter. And you can see most of these changes were just caused by the interest rate changes. So we provided as much detail. Typically we would do it at our Investor and Analyst day. So we could explain things in person. But given the cuts since our last call, we felt it was time to update it sooner than later. In summary, we had three rate cuts since our last Analyst and Investor Day in June, which has an impact on our pre-tax income about $140 million. So we needed to adjust our comp ratio and pre-tax margin targets by 100 basis points. Unlike many of the other firms we’re in growth mode in almost all of our businesses and their expenses associated with growth. For example, we've been consistently adding financial advisors on a net basis, whereas most larger firms have consistently been losing advisors on a net basis. That creates a very different dynamic for our expense trajectory as we’re adding to our transition assistance and retention amortization reflected in the compensation that alone is about $265 million in 2019 representing 3.5% net revenues and $100 million larger than just four years prior. We're also adding support at the branches and at the home office, expanding the size of our branch footprint, paying internal and external recruiters, paying for ACAT fees to transfer and accounts and so on. Growth is expensive, but we believe it represents a very good long-term result for our shareholders. And given this growth, I think a 2% growth in non-comp expenses is good expense management. With…

Thank you. [Operator Instructions]. Please note that analysts are allowed one question and one follow-up question only. Our first question comes from the line of Craig Siegenthaler from Credit Suisse. Your line is open. Please go ahead.

So, I had a question on recruiting. I mean, you grew your advisors a healthy 3% clip over the last year, you did have some retirements in the fourth quarter. But can you provide a little more color on where those advisors are coming from, and if you’re seeing increasing competition for advisors from the different groups like the wire houses and other independent brokers, and also why are a lot of those big banks failing in the competition for advisors now though?

Well, I think it's just the shift in philosophy that Raymond James has a platform where we still have the advisors as our clients. We give them an environment that allows them to do what's best for their clients and with no product push. We have no quotas on any product, managers don't have any incentives. I mean, we really want advisors to do what's best for them. So we've had an attractive platform for a long time, and I think in today’s leading technology, and I think the banks as they've tightened some of both their payouts or structures and a lot of advisors feel like there's less flexibility they've been leaving not just for us, but for other places. So, I think the regional firms and us have been the beneficiary of the cost of the -- of a larger wire house firms. And that trajectory has continued, so that's where most of the recruiting has come, it is from the wire house firms. We don't see any slowdown in backlog. Last year was a near record from the year before, and we're kind of on the same pace. So whether it's a record or shorter record, I don't know. But as of today, we still see the same interest in backlog than growth. So, that's been our strategy for a number of years and we don't see it changing in the short-term to mid-term.

Thanks Paul, and I had two or three questions in there. So I'll get back in the queue.

Myra. Next question?

We have our next question from the line of Manan Gosalia from Morgan Stanley. You may ask your question. Your line is open.

Hi, I was wondering if you could talk about the puts and takes in the non-comp line. I know you mentioned that for the full-year, the non-comp line should be around $1.3 billion. But I was wondering, how much room you have in the longer-term, maybe over the next couple of years to bring that line down a little bit. And maybe you can talk to some of the puts and takes by line?

I can give you an overview and I’ll have Paul to talk about the puts and takes. You've seen that line really taking away the accounting change last year, really decelerating over the last couple of years. So last year was a deceleration and this year is a further deceleration. But again sometimes with the accounting change where we had to gross up expenses on revenue recognition, some people lose on that. So we continue to manage it down. And we think we've become better and more efficient with the systems, and actually the systems investing actually help the advisors, also with their client management. So that's been the relationship. The large build-up started really a few years ago and it's been decelerating. Now, Paul, do you want to talk about any particular line item?

That’s right. And to add more color to what Paul stated, last year, the non-comp expenses grew 9% as reported but over half of that was due to the two non-GAAP items in the prior-year as well as the gross up of expenses due to revenue recognition. So, if you look at kind of the apples-to-apples that represented a significant deceleration, and we're looking to kind of maintain a non-comp expense growth around the same level this year to get to $1.3 billion. Obviously started off low in the first quarter just given the loan loss credit and other items, so business development was relatively low given no conferences or recognition trips size, and we expect that to sort of build up throughout the year. But the last thing I would say on this is a lot of these lines, investment sub-advisory fees, professional fees associated with banking deals, et cetera are directly tied to revenue growth. So as much as we want to contain the growth that we can contain, we also want to fully appreciate the expense growth that is directly tied to revenue growth.

Got it. And then separately on the NIM side, I know you mentioned that and the NIM should be relatively flat going into the fiscal second quarter. But I was wondering if you could speak to the outlook more for the full-year, is there a little more room to bring down costs in the deposit side? With betas around 50%, is there still more room maybe as you go into the second half of next quarter or even into the fiscal third quarter, is there room to bring deposit costs down?

No, I think NIM is staying stable in the second quarter, reflects a cut that we're making this week of about 5 basis points. I don't know assuming rates stay stable, I do not believe that there's much more room to take deposit costs down from our current average cost after this 5 basis point cut. And the only other item I would mention on NIM is if we do accelerate the growth of our securities portfolio at the bank, which is on the table, that would all else being equal bring down the bank's NIM as we're taking the cash off balance sheet at what's earning today 1.64%. Bringing it on balance sheet would get a pickup for the firm overall. But that would be -- create pressure for the bank's overall NIM because the securities portfolio which doesn't have credit risk would have a lower yield than the credit portfolio.

Yes, that's one thing that as we move assets, if we grow the bank's balance sheet, it's better off with a consolidated firm that it will show lower NIM because it's higher interest spreads and we would earn off balance sheet but it’s the NIM in the bank would be impacted so.

So neutral to slightly better to pre-tax margins and it would be slightly detrimental to NIM, is that right?

Right, yes.

Yes, slightly better to pre-tax and but slightly detrimental to NIM in the banks.

Our next question comes from the line of Devin Ryan from JMP Securities. Your line is open. You may ask your questions.

So I guess first question here just a follow-up on the organic growth. Question in PCG, so clearly you guys are making a lot of investments to ramp the infrastructure in recent years and I think that’s driving or helping to support the industry leading organic growth. But I just wanted to dig in a little bit more on kind of commentary being kind of in the late stages of this infrastructure expansion as I get that also had some expense implication. So really the question is have you guys been at all capacity constraint on how fast you can recruit just not having the full infrastructure in place, and as you had ramp the infrastructure that can allow you potentially to close more advisors faster, so potentially there's a scenario where organic growth could accelerate, is that kind of one piece and I'm also asking a flavor for, from a geographic perspective, where you're seeing the most momentum and just an update on kind of the North, East and West and how you feel the market share is there?

So on the first question; I think that the -- how fast we ramp advisors has to do with first, can we find quality advisors that want to come and that we accept? We have an -- we have people that we don't accept too. So pipeline is one issue. Secondly, is we're still below the market. Competition increased significantly last year, but we're able to match still the same recruiting results without increasing our transition assistance like many of our competitors have. So the question really for us is how fast can we grow and assimilate advisors without hurting the service levels of existing advisors because I think what really is driving our numbers is retention. So that's focus number one. Most of the investment hasn't been on what I call pure recruiting. I think we do have the platform, if it went up, and we could find more advisors, we could onboard them. A lot of the investment has been on the supervision and compliance side. And that was in reference to those just are growing to be a larger firm. Certainly, our AML issue a few years ago, if you remember, we decided that we were going to ramp up all of our systems both AML compliance and supervision invested heavily in Mantas and Actimize and other systems which are very expensive. But we Mantas fully up and running and Actimize almost there and a large headcount growth in supervision and compliance. So that will help us ramp people. That part of the infrastructure is very scalable. And I don't think we'll have to increase it, or it'll increase much lower than we can ramp and support advisors. So that part has been the biggest build really starting a couple of years ago. And maybe in a way we invested some of the interest rate spreads to build to our infrastructure when we had that opportunity. So we're in good shape there. So I think you'll see it more in the non-comp. And I think the transition assistance we don't see going down, we're already amongst, probably the lowest in the industry than competitors in what we pay competitive but it is lower. And the ACAP is an industry expense that when people came over, we pay for the accounts to move that’s industry kind of standard. And those kind of fees won’t go away purely for recruiting. But again, we believe those have good ROEs and exceptional long-term mid to long-term benefits to the business.

Geography?

On geography, we continue to increase I think certainly the Northeast; we're seeing a much more activity given our investments there. And the West is growing, I mean, we're growing; I would say that our percent share is still very low. So what I like is that our flags are being expanded. I think we've done better than Northeast and the West, but we're growing percentage wise, the highest in those markets. But again, we have if we can get our market share in the rest of the country in the West and Northeast; we have a lot of growth for a lot of years if we can just achieve that over the next, three to five years, we've got plenty of recruiting opportunities. So we're making progress. Recruiting is interesting, because it's a long process. Very rarely do you get someone who's just going to leave if they do leave quickly. Sometimes there's an issue, so you're cautious. And we have recruits that we said, well, I was here in 2009 and I should have come in and they join us. I have been here for two years before they make the move. So it takes a while to build the momentum and pipeline, I think we're doing a good job in both of those markets making progress. And I still think we have acceleration opportunity there.

Great. Thanks for all the color. And just a quick follow-up. So on the comp ratio and margin targets that you put out there, I understand that business mix is going to be a big input and was this quarter as well. Do those targets comp ratio and just kind of overall margin and the outlook, does that assume any additional Fed cuts or equity market appreciation from here?

No, I think it's kind of a static analysis of today's interest rate environments in this market. This is what we would expect. The only way to really impact that is to substantially change our mix or change our path. And I think we like the mix and it'll come and go depending on the quarter payouts, we always -- we do those sparingly. But when we need to do them we do. So as we look through BI and other things, we'll look at that as we always do.

Our next question comes from the line of Steven Chubak from Wolfe Research. Your line is open. Please go ahead.

So Paul, welcome to first official call as CFO, I appreciate the detailed update on expenses and capital, I was really hoping you could speak to maybe now you're in the new seat, what some of your priorities are, and specifically wanted to unpack your comments in just a couple of areas, the appetite to maybe reduce gearing to the short end of the curve, and how you might look to grow the securities book, which I think you alluded to, capital return appetite if your stock is trading a little bit above that 1.8 times book value threshold and maybe just some enhanced disclosure on organic growth, so securities book, capital returns, and organic growth disclosure.

That’s a dense question there, Steven, but thank you.

I’m still going to take my follow-up.

In terms of the securities portfolio, I mean we've actually grown it substantially over the last few years here. And we're just looking at the amount of cash; we have off balance sheet, what the forward curve is telling us and the amount of capital we have to and the capacity to grow assets on our balance sheet. And it's something that we're considering doing and being modest maybe $3 billion to $5 billion is sort of over a period of time in terms of accelerating the growth of incremental securities. And again, we're not looking to take credit risk in that portfolio. This would be mostly agency mortgage backed securities with duration of three to four years. And with that you would get somewhere around today, it changes every day, but today around 30 basis points of incremental pickup over what we earn off balance sheet. In terms of repurchases, I mean we're going to stay consistent with what we've been doing for a very long time we're going to -- we said, we're going to offset dilution and then as we have shown last year, where we have plenty of capital, liquidity and authorization to increase our repurchases if the price drops to what we consider opportunistic levels, and that's something that we're going to remain committed to doing as well. And then obviously, the other priorities expenses, which we've discussed in pretty good detail already.

And just the enhanced disclosure on organic growth?

Well, I mean, we are working -- I think just referring specifically to the net new asset metric that is something we are working on. But I think over the last two or three quarters, the number of inbound requests for that has subsided somewhat because when you look at the 31% year-over-year growth in assets and fee-based accounts, I think everyone has acknowledged that among the highest, if not the highest in the industry. So I think we're getting credit for the organic growth. But at the same time, we appreciate the sort of desire to have an easier sort of metric to track in that regard. So it's something we are looking at. But kind of tying back to your first question on expense growth, nothing is free. And so we're doing in the context of our other IT priorities that we have across the firm.

I think one of the challenges right now to for the industry is that our focus is Reg BI is effective June 30. So as we look at IT and ops time, it's all focused on being making sure right now that we're compliant, and have our systems up, there are process and disclosure and other document changes that are required, so any excess capacity, or it’s really first priority, but any excess capacity, we've had to do these other things, have been focused on BI till we get them done. To do them effectively we have to start rolling things out. We’re starting to roll things out already, because we have to have them up and running and in place and done by June 30, not start doing them at June 30.

Hi and just one follow-up for me on expenses. You guys cited some progress in slowing the pace of core non-comp, that certainly is evident but the elevated comp pressure is continuing to weigh disproportionately on the margin. As we look ahead with NIM stabilizing in 2Q, revenue growth coming from more compensable activities within PCG. I'm just trying to think about longer-term, how should we view that incremental margin as those dollars come on, and most of the growth comes from fee generating activities. Now just trying to think about the earnings growth algorithm beyond 2020?

I think given the current rate environment and market environment, which obviously are the two big factors that would impact your margins, as along with revenue mix, but I think 67.5% as of right now the best we can tell 67.5% for the comp ratio and 17% for the pre-tax margin is the best visibility we have given our current revenue mix. So to the extent that we market environment changes, interest rate environment changes, our revenue mix changes then we would adjust those targets.

First quarter was impacted by lower M&A and tax credit funds, which are core -- I mean they're cyclical; they're never, versus the PCG business. So that that impacted us, but the interest rate is the big change and that's just -- that's just math. I mean, I'm kind of amazed that we could lose 10% of our pre-tax and that much revenue from those three changes and make it up almost make it up in one quarter. So but I don't again, the only way to really change that is looking at payouts across our system. But we pay folks for production. That's where it's all going. But at least that expense is good growth, its production and profit growth. So we'll take the growth in that ratio, we can grow the revenues even faster and add to the margin. So we want to make sure they're competitive and fair. And as things shift and change over time, we will look at that.

Our next question comes from the line of Bill Katz from Citi. Your line is open. Please go ahead.

Okay, thank you very much for taking the questions. Thanks for the enhanced disclosure. So just coming back to margin discussion a little bit more. As you look at the segment level for private clients sort of wondering what's your long-term outlook beyond fiscal 2020 and sort of where that margin might get you and what are the drivers there? And then related to that 75% payout that you had -- you mentioned earlier in your prepared comments, how is that relative to market levels?

Yes, I would tell you in terms of the private client group margin, a lot of it really depends on geography. So to the extent that we have movement to fee-based accounts continue, which we've had obviously, a lot of the benefits gets reflected in our asset management segment to the extent that we sweep more cash to Raymond James Bank, which we're considering doing even more so with the growth in the securities portfolio that would increase the margin at Raymond James Bank relative to Private Client group. So, really, we kind of look at the margins on a consolidated basis. We think that's the most meaningful especially when comparing across firms because a lot of firms have their bank and their asset management fee-based platform in their wealth management segment. So we expect it again on a consolidated basis, our best guess right now is 17% or better for the pre-tax margins. And then a payout, the payout is just a function of the mix between our employee channel and on the independent contractor channel where contractors are paid in the 80% range. And so when you blend the two is where you get the 75% type payout on the production, not the overall revenues to the firm, but the revenues that are compensable to the advisors on average generate.

Okay, it’s helpful.

Okay.

And then just -- well I’m sorry to interrupt you, and this is my follow-up, you sort of mentioned that corporate development is bit of a priority but pricing is a little heavy. So I was wondering where you get maybe get some help at least from a backdrop or call perspective of where you're most focused, whether it be in sort of bolstering the private client side or other segments of the business. And then conversely, as you look at your business and think about the mix year or two years from now are there any businesses that you’re in today that you could maybe de-emphasize a little bit or bolster ROE?

We'd like -- if you look at where the most of our ROE is generated or capital is deployed, that’s first from the bank, which is our biggest capital deployer. And we like, we'd like where that is in Private Client group where it’s really transition assistance and investment in that business, including technology. So we kind of like the businesses we're in and the mix. We're honestly open Private Client Group is our anchor business. So we always look to that first, but we're actually open to things that will grow any of our segments, we like the businesses; we think they're performing relatively well now to the market. And if there's opportunity because we're not capital bound right now, we would do something first as economic sense to shareholders but it has to first make the business better not just bigger, we avoid things just to be bigger that don't really have good ROE to the shareholders. So we're focused on all four, we continue to be in dialogue. But I would say over the last year we've had more dialogue that ended without anyone trading because we just felt the market was too fast was too high and I think the market agreed on a lot of those assets -- the assets was just too high. So we’re not going to do something just to do something.

We have our next question from the line of Jim Mitchell from Buckingham Research. Your line is open. Please go ahead.

Maybe we could just follow-up on the comp in PCG a little bit, if I look at for the year-over-year sequentially, if I look at total comp not just sort of the compensation for the advisors, but I look at total comps relative to compensable revenue sequentially in year-over-year. Total comps growing faster than revenue. And so you're getting negative leverage or negative incremental margins out of the total comp line and can you just kind of help us understand what's driving the total comp, is it just is absolutely the other comp, is that just recruiting that maybe at some point going to slow because I would think at some point, you need to get positive incremental margins off revenue, even if it's not just the FA Advisors?

Yes, the biggest driver of that, as I talked about earlier is the build-up of support. Those AML compliance and supervision all three of those functions we've made starting three years ago almost significant investments really accelerated that growth over the last couple of years and now it's decelerating. So that's the leverage we think we'll get out so maybe in some areas have to play a little catch-up, but we've really built it for the future. And I think that's where our non-comp leverage is going to come from. So that's an awful lot of it.

Yes, and I think the other thing you have to do going back to our whole dialogue around compensable versus non-compensable revenues on a year-over-year basis, Private Client group is showing 4% growth in total revenues. But it's really 6% growth in compensable revenues and the compensable revenues is the production, the number of advisors and number of accounts, et cetera. And that's really what's going to drive both the payout and the support in infrastructure needs. So the 6% still is lower than the 8%. And the 8% being the administrative non-FA comp in the Private Client group business. And that is the reason is higher is for the reasons that Paul mentioned. But if you kind of look back three years to support the fact that we're sort of in the later stages of this infrastructure build-out, three years ago that line group 17% in fiscal 2018, the admin comp in PCG grew 17%, last year it grew 12%, year-over-year for the quarter it grew 8% and that's sort of what we're budgeting for the year. So it's come down substantially, as we've -- are in the later stages of this build-up in Private Client group business.

And so that should continue to sort of further slow and not be so tied to revenue. Is that fair?

Yes.

Okay, and then -- maybe just a follow-up and just talking more about the balance sheet potential balance sheet growth. Would that be sort of slow more impactful in 2021? If you decide to do that, or if you do decide to go ahead with it, how quickly could you put assets on the balance sheet?

You can grow the securities portfolio $2 billion, $3 billion pretty rapidly, Jim. So it's something that we decide to move forward with which is something that we're still having to discuss internally. I would expect the first couple billion if we do decide to move forward with it to occur pretty quickly. But again, we're still -- it's still -- we're still in discussions on that.

That completes our question-and-answer session. I’ll turn the call back to Paul Reilly.

Okay, well, great. Well, thank you for joining us. And again we normally like to do this on Investor and Analysts Day but again holding off last year, we said we wanted to wait and see what happened, how many rate cuts are, I could provide you the data because you can see right now because had there been one more cut or one less cut, it would have significantly impacted our comp ratios or earnings or mix. So wish we could have gotten to you a little bit sooner, but we got it to you as fast as we could. And thank you for joining us this morning. Right, Myra, thank you.

That does conclude our conference for today. Thank you all for participating. You may now disconnect. Have a great day.