Good morning and welcome to the earnings call for Raymond James Financial’s Fiscal First Quarter of 2017. My name is Kayla, and I will be your conference facilitator today. This call is being recorded and will be available on the Company's website.

Now I would like to turn the call over to Paul Shoukry, Head of Investor Relations, at Raymond James Financial. Please go ahead..

Thank you, Kayla. Good morning and I thank all of you for joining us on the call this morning. As always, we appreciate your time and interest in Raymond James Financial. After I read the following disclosures, 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, but are not limited to, information concerning future strategic objectives, business prospects, financial results, acquisitions, our ability to successful recruit and integrate financial advisors, anticipate results of litigation and regulatory developments, or general economic conditions.

In addition, words such as believes, expects, plans, and future or other conditional verbs, such as will, could and would, as well as any other statements that necessarily depends on future events are intended to identify forward-looking statements.

Please note that forward-looking statements are subject to risks and 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 available on our website.

During today's call we'll also use certain non-GAAP financial measures to provide the information pertinent to our management's view on ongoing business performance. These non-GAAP measures should be read in conjunction with and not as a replacement for the corresponding GAAP measures.

A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedule accompanying our press release. Now I will turn the call over to Paul Reilly, CEO of Raymond James Financial.

Paul?.

Thanks Paul, and good morning everyone. Paul told me this morning that we are going to have huge – there is really huge crowds on this call. So I don't know if that is based on real facts or alternative facts, but as I read some of the analysis of our release, I want to make sure that we get as clear as we can [Indiscernible] the real facts there.

First, I am very proud of the quarter and the accomplishments. I think the underlying businesses maybe safe. Capital markets in a tough quarter have done very, very well. We had record quarterly net revenue of 1.49 billion, up 17% over year ago quarter and 2% sequentially.

We had second best quarterly net income of 146.6 million, up 38% over last year’s quarter and down 15% sequentially due primarily to a lot of adjustments that our legal reserve will talk about a little bit, and that results in a dollar per fully diluted share. During the quarter, we had the Alex Brown and 3Macs acquisitions close and integrate.

At Alex Brown we are still over 90% of the advisors and 3Macs 100%. That is an easy one to calculate – had come over and are with us. If you take out those integration expenses our adjusted net income was 155.6 million, up 45% from last year’s quarter down 16% sequentially, or $1.07 per fully diluted share. So we had a lot of positives going on.

We had a record quarter of net revenue in the private client group, asset management and RJ Bank, and we had record quarterly pretax in both asset management and RJ Bank.

Maybe more importantly as our key future revenue drivers ended up with new record client assets under administration of $116.9 billion, financial assets – $616.9 billion, I guess I mispronounced it. Thanks Jeff.

Financial assets under management of $79.7 billion, and net loans of $15.8 billion and we have a Fed interest rate hike that really came in December that hasn’t really come through the quarter, which should impact us positively next quarter. I think it is just showing a solid execution of our business strategy and our long-term focus.

Two items that hit really the quarter before I get into the segments that Jeff will cover first is the [effective tax rate] of 29% that was really due to stock comp accounting, which he will go into, and a legal reserve, which could have been a more explicit increase, which is over $30 million that impacted the quarter kind of the other way.

With that let me get into kind of the segments. The private client group had a record quarter of net revenue of 104 billion, up 19% over year ago and 8% sequentially, really driven by organic growth. Recruiting remained very strong and retention as well as the 3Macs and Alex Brown acquisitions.

We had quarterly pre-tax of $74.3 million, up 6%, but down 31% sequentially, again legal reserves and some overhead during the Alex Brown and 3Macs acquisitions. We had a footnote, but probably it could have been clearer.

We ended advisor count at 7128 advisors, up 441, and it could have appeared without reading the footnote that we are down 18, but as the footnote referred to we actually refined how we counted advisors, and more of a focus on branch managers when they were producing versus non-producing branch managers.

And if you really look at an apples to apples we were up 80 in the quarter versus the adjustment we did in the account. So again, we had a good increase of advisors of 80 for the quarter. Client assets under administration $585.6 billion, up 24% over last year's quarter and 2% sequentially.

Prior to that client group assets and fee based accounts actually rose quicker at 240.2 billion, up 26% over last year’s quarter and 4% sequentially. So a tailwind both in assets and again the Fed interest rate rise in December not really fully impacting that number yet. It was a disappointing area with certain capital markets.

Our net revenues of $233 million were up 3% over a year ago’s quarter, but down 18% sequentially. Interesting in the number, institutional commissions and trading profits were solid.

The institutional commissions got a positive impact over the changes after the Trump election, but investment banking revenues were hit hard down 42%, primarily part of it structural, part of it cyclical with the IPO market certainly off last year.

We had some bumps in tax credit, which we will talk a little bit with great business and a great backlog, but we also had proposed tax changes after the Trump election where it took some time to kind of sort out and get through that system.

With that impact really as a result of that down revenue the pretax income was 21.4 million, down 15% over a year ago and down 60% from a record quarter in the previous quarter. Asset management, record net revenues of $114.1 million, up 14% from a year ago’s quarter, 7% sequentially.

Record pretax income of 41.9 million, up 26% over year ago’s quarter and 19% sequentially, and with record assets under management, as I said previously of 79.7 billion. This was driven by the growth of the advisors, certainly equity market appreciations and even some net positive – small net positive flows for [Indiscernible] Eagle.

Under the bank, record net revenues of $138 million, up 27% over last year's quarter and 3% sequentially, record pretax income of $104.1 million, up 58% over last year’s quarter and 7% sequentially really driven by across the board balanced loan growth and consistent net income margins.

We had record net loans of $15.8 billion, up 15% over last year’s quarter and 4% sequentially, and credit quality really improved between pay-offs and even selling some criticized loans, where criticized loans were down 18% from a year ago’s quarter and 26% sequentially.

So overall we are very pleased with the bank results and really very pleased with the first fiscal quarter. So with that I will turn it over to Jeff to have him get into some details..

Thanks, Paul. Let me talk about some of the line items and the variances from what we will call a consensus model that you all have provided to us. Actually our biggest revenue line item, the commissions and fees, were pretty close.

We did a little better as we had a little better quarter in terms of commissionable product sales than were anticipated, but all in all we were very close. I would say you all did a very good job of anticipating the impact of a full quarter of Alex Brown and 3Macs on that line item.

Investment banking was the biggest miss in terms of percentage for the quarter.

there is detail in the press release that shows the weakness in underwriting, M&A and the tax credit funds business compared to the preceding quarter, particularly those businesses all are a little bit lumpy as you all know, and as Paul mentioned, we think that the businesses have a lot of upside from this current quarter, but December is kind of a seasonally weak quarter anyway, but this was a little bit weaker than we had expected as well.

Account and service fees, we were a little higher than the model and what that really reflects is the immediate impact of the interest rate hike on the bank deposit program and the fees we received from the banks participating in that program was a little over $3 million impact for the quarter.

Trading profits, I know we steered you downward in our operating statistics releases during the quarter and fixed income trading profits, and indeed in November, post-election when we had athen the hand rate spike, trading days were very difficult there and we – but they had a very, very good December, which pulled them out and for the quarter $20 million that we showed was a fair amount above the consensus that you all ended up with and that we sort of steered you towards.

Other revenues, again as detailed in the press release, showing a private equity valuation gain for the quarter of about $10.6 million, which was also lumpy and we don't know when to expect it, but some of the private equity funds and things that we are still owners of had valuation gains along with the rise in the stock market during the quarter.

On the expense side, comp was reasonably close. I would point out that our comp ratio for the quarter was 67.4%. So comfortably under our 68% target that we are still operating under. Communication information processing was a little lower than we had been guiding you towards.

I think we are giving guidance in the $75 million to $80 million a quarter, and I think we will reiterate that guidance for the balance of the year. This quarter was unusually light.

It had a lot to do with the timing of when projects come on-stream and begin amortizing and how much of the project work is being capitalized versus expense and things like that. It is a little hard for us to predict with great accuracy, but I think the 75 to 80 is probably still a pretty good number.

And if we don't spend the IT resources on regulatory, we will find other things to use them for. We have a long list of items that are requesting attention. So I don't think it will go down even if regulatory demands abate somewhat.

Investment sub-advisory fees interestingly were higher than you had projected and the real reason for that is the fee-based assets that were brought it from Alex Brown, particularly they already had relationships with outside managers, and a lot of them were already on our platform and some we added.

So they came over – [mapped over] just sort of directly and stayed with those outside managers. So, a lot of those fee-based assets that came over continue to use outside managers as opposed to our proprietary managers. That is what gives rise to the outside managers sub-advisory expense.

The bank loan loss provision, a credit for the quarter in the face of $618 million of net loan growth in the quarter does look unusual. Paul pointed out the declining criticized loans. We had payoffs, paydowns in some sales.

Actually some of our criticized loans during the quarter as well as one nice recovery that we had previously charged off – again like I said that is us getting ahead of the game somewhat but a lot of those things came home to roost in the December quarter, and so all of those things were enough to overcome the provision that would have been associated with the $618 million of net loan growth in the quarter to give rise to a small credit.

The other expense we have talked about that Paul mentioned is some significant legal reserves in there this quarter. We hope that is a non-recurring thing, but we always have legal reserves of some magnitude, but this was a particularly large quarter for that. Paul mentioned the tax rate of 29%.

I assume that the analyst community at least is aware of the change in equity accounting for the – I would call it the windfall that you get when equity awards are deductible when they invest as opposed to when they start amortizing in their books from grant date forward, but then they are deductible when they invest and typically that is five years later typically for us.

The stock is higher than it was at grant price, so you have a bigger tax deduction than you have run through your book, expense over that time and that gives rise to this tax windfall in the past that amount was simply a credit to book value, a credit to equity, but now the guidance that that will run through the tax provision but there truly is less taxes that you will pay in the quarter the divesting occurs.

So most of our awards are made at the end of the fiscal year in the November timeframe and typically like I mentioned have a five-year vests associated with them. So the amount that – it will typically be a December quarter phenomenon for us to see this tax benefit as long as the stock price is higher than it was five years earlier.

This year it was a particularly big number because of the stock price versus where it was five years ago. If the stock price were not to move from where it is today for the next couple of years that number would be about a $10 million type tax benefit in the next two years in the December quarter.

But a lot of it depends both on the stock price, and it also depends on how many units are outstanding based on who is still with us at that time, but the turnover has not been a big factor here. So those are the line items. Some other points I would like to mention.

From a big picture standpoint and I have read the comments that have come out starting last night and I would say that generally they are pretty on point.

I would say if you try to strip out all the noise that we had in the quarter with the tax benefit, with the unusually high legal provision, with the bank loan-loss provision being a credit, of the PE gain and all those types of things. I think your comments are sort of right.

We are not too far off from where the consensus was on what you would call an operating run rate basis. But as I will talk about in a minute, we still have a lot of tailwinds going into the next quarter. Other ratios I will mention that are in the press release, the pre-tax margin non-GAAP was 14.7.

Well below our target, but obviously that relates to the legal provisions taken during the quarter. Otherwise we might have been closer above our target there. The non-GAAP ROE was 12.4% for the quarter, which we think is acceptable given the climate, but again that included the offset of all of these factors I mentioned before.

Shareholders equity, by the way, crossed $5 billion for the first time.

So a little bit of a milestone there for us, and I will point out that our capital ratios all improved slightly during the quarter as we had earnings and equity credits that from other stock compensation expense, another thing that affects equity, that grew faster than our total assets. So going forward a couple of comments.

The impact of the rate hike, as I mentioned, it was a little over $3 million in the December quarter.

That is a little bit of guesswork still in terms of going forward, but at this point in time based on what we are seeing in the competitors and the rates on money market funds et cetera, I am anticipating above and beyond the December quarter an additional $15 million to $18 million to pre-tax earnings split between interest earnings and the account and service fees.

We have raised rates to clients. So since that rate hike and I am guessing we will probably do so again during the quarter sometime, but how far and how fast is the unknown. Going into the March quarter, we do have some headwinds.

We mentioned this last year, we do have a [FICO] reset that has typically cost us somewhere between $8 million and $10 million versus December [Indiscernible] March quarter to December quarter and then that number drifts down lower throughout the year as people get over the [FICO] limit.

So we are guessing that that will have a negative impact on comp expense in March. We also have a lot of our year-end mailings of 10-99s, our annual reports, et cetera, et cetera and that number was somewhere between all the printing and mailing cost for that was somewhere around $2 million and that will hit in the communication info processing line.

We do anticipate about another $5 million to $10 million of integration cost from the acquisitions we've done and then we are hopeful that the numbers going forward will be so immaterial that we will stop using that line item after the March quarter. But that should be about the number to wrap up Alex Brown and 3Macs.

And lastly, we mention the tail winds on the fee-based assets and those are disclosed as well. That the billings and the again in the March quarter going to January, we're somewhere around 4% higher than they were in October. So, that certainly a good starting point for the commissions and fees going forward into the March quarter.

Those are my comments I want to point out. So, with that I'll turn it back to Paul..

Great, thanks Jeff. I'll make a just a little bit of kind of outlook on where we see the businesses for the quarter. First the private client group. We're continually driven by strong recruiting and a strong retention.

We always focused on retention first, the fact that we're not selling coals to people like the firm and stay here as the most important fill in and that helps us recruiting or recruiting pipeline and results are continuing to be very strong as we've been kind of a destination for the people of this last couple of years.

So, that combined with the record client assets starting the quarter that you have talked about and the rising short-term interest rates last quarter should be very positive. Jeff talked about our communication and technology lines will be there.

We continue to invest in seaborne technologies and some things we don’t spend a lot of time talking about is our capabilities or advisors can do most of the things on their iPhones, through industry leading apps today. We'll announce early what we're doing on the client side.

We had a plan three years ago, but everyone seems to be going robo, but we believe in electronic delivery to clients always been in our plans and we'll talk about how we're addressing that in this week. And I believe we have a very good solid technology platform going forward.

And we continue to add solutions for on loans and other products and high network solution. So, we continue to invest in our private client group business and the outlook looks very strong. Capital markets are headwinds and tailwinds. Fixed income and public finance have done very well, well positioned.

Preliminary look at public finance shows that certainly in the top, then maybe number eight for credit delay and underwritings last year. Doing very well. The problem and the challenge in that business is that is a business with inventory and rising interest rates, there is a buy up that inventory virtue.

So, we can hedge part of it from the look we can. The quick turn and the credit quality and the movement of that inventory remains very important. It's easier and downward markets for trading profit than it is in upward markets but I believe they continue to do a good job. Equity underwriting came off of very slow quarter.

So, it should be up this quarter. But there are some challenges both structurally in that market, is more competition and more book runners and syndicate members in terms of share of fees for that type of business. M&A backlog looks good but it's a lumpy business, so we can't tell you which quarter that will fall in.

Tax credit business, we believe we're the largest underwriter of tax credit deals now. Our backlogs very good but certainly proposed tax law changes, certainly have an impact on the business that sells both really based on CRA credits to banks and effective after-tax shield after-tax credit.

So, that is created from re-pricing and I think this flows since last quarter. We feel very good about that business but there is going to be, there might be a little bit of a interim challenge here as like the three price, but it looks good. Asset management are very strong.

Recruiting and retention continue to give a strong asset flows and the market certainly has been in our favor. They're trying to then to move to more to fee-based accounts which has also has helped that business.

So, the record assets under management is a big positive going into the quarter and I think our net recruiting should continue to help drive that business. RJ bank continues to do well, solid discipline loan growth. We had growth over seen in mortgage and or tax exempt lending.

Certainly we're always cautious such a credit environment, it's been very constructive lately. But we've seen good in credit, good and bad credit cycles.

We've been through it, so we stay very diligent on what we're adding to the portfolio and the management of the loan portfolio and again our focus is when we like the credits we will continue to grow and then the market moves away from us, we will slow it down. So, net I think our forward drivers, all up here positive with record AUA.

Asset under administration record, assets under management record, net loans and the fed interest rate changes should all have positive momentum for the quarters. Certainly, despite statement mailings and 99's and all those first quarter expenses will come though which will be a drag.

Although we weren’t planning on doing any walls, we were looking at building a building for expansion and we end up buying three buildings on our campus to expand our growing needs, which have a little bit of an impact but not huge. Last thing, I know people are going to ask about the Department of Labor.

All indications are that the administration is moving to certainly suspend the role, delay it and maybe rewrite it. So, we have moved and continue to move to be in compliance should we have to be.

I would say the indications today is that we will be delayed and if you ask me to guess more likely change, I do believe even though well intended that there are some issues that really impact clients and the building for clients to get advice. And we certainly welcome at least an improvement to the role and maybe a different approach to it.

But we'll find out more as the administration continues to sign many orders of [AML] in the last week. So, with that I'll appreciate you joining the call and I'm going to turn it over to Kaela for questions..

Thank you. [Operator Instructions] Your first question comes from the line of Devin Ryan with JMP Securities..

Hi guys, good morning everyone..

Hi, Devin..

Hi, Devin..

So, you increased the securities portfolio in the bank, which was discussed last quarter but capital just continue to build throughout the quarter. How should we think about the trajectory of maybe continuing to do that in the bank and any other kind of thoughts around capital utilization and that would be helpful. Thanks..

Those are multiple fronts. We're continuing the overtime build the securities portfolio and that plan hasn’t changed. We continue to buy more securities. Again, more conservatives and kept the duration very short.

So, we do go have a board offsite and in a month and in February and we will discuss capital deployment at that meeting whether it to be the bank and some of the opportunities and not so. We continue to look at potential acquisitions, I think we're very disciplined.

We focused really in M&A space, so we did an acquisition in Europe for merger for an M&A business and have looked at other opportunities. And we've looked in asset management even though we know the markets challenged, we believe there are certain segments of the business that active management still valued and we continue to analyze those.

So, we keep looking at capital deployments that offer the right opportunities..

Just to be clear, Devin, and growing the securities portfolio in the bank is not particularly capital intensive. The kind of securities we're buying are governments and agencies typically that are 20% risk where it didn’t rather acquire a whole lot of capital growing the loan portfolio more quickly, other things would be more capital intensive..

Yes, understood. Thanks, very much. And then within accountant service fees, you had some upside that you kind of spoke through.

But when we look at Alex Brown and the 3Macs deal, are those being optimized yet in terms of how they run into account service fees, meaning al the customer cash balances that were brought on from those deals, are they already deployed in the kind of third party bank sweeps or is there any upside from third party mutual funds or manufactures just around, the on the bus fees or things like that.

I was just trying to think about if there is a tailwind, maybe still account from those acquisitions in that line..

And the balances. The balances we deployed pretty quickly into the suite programs and other vehicles. So, that there -- so the assets are pretty much, that part of it's optimized at this point in time.

So, I don’t think there's a lot to begin there, like the game going forward is going to be from rate changes and shreds, not from further deployment of the assets..

Look at those businesses to remind you because the amount of retention were all the advisors really coming over have retention on both of those deals that it's really not going to help TPG margins, it's going to challenge them in a short term.

But from a firm standpoint, certainly the cash and very active lending business and very high network plans is going to have a positive impact on that side. So, Alex Brown is really settled in now and starting they're recruiting to fill up their offices. So, it's going to take some time as we set during the acquisitions that really make it accretive..

Yes. This type of conversion we did here when we mapped all the Wrap fee accounts mapped over to our asset management platform and the cash mapped over to suite progress. There wasn’t as all we're bringing in on advisor by advisor and they had a mega bunch of elections and then things moved after the fact.

And this was all done pretty much on conversion day September..

Got it. Okay, that's helpful. And then just a last quick one here. So, I appreciate the color on the legal reserved. I know that came kind of about for quarter-to-quarter, but there's always use your some levels you mentioned to me.

How should we think about, I mean, how much it was incremental would you say relative to then what's normal to kind of think about from ROA perspective, given that there's always something in there?.

Yes, that's we had -- a lot of it is driven by a particular issue. But that rise we said three main list, what we call above normal, that it doesn't mean there can't be other charges or other cases or issues that come from time-to-time. But that certainly, most of that incremental rise which itself what I call historical what we expect run rates.

But there are challenges and that can bounce up and down..

Got it, okay. I'll hop back in the queue. Thanks a lot, guys..

Okay..

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

Hi, good morning. So, Jeff, I -- on the last call you had spoken of 17% margin benchmark or expectation with a benefit of the December rate hike. And clearly this quarter you fell a bit short in part because of the timing and the hike and also the elevated legal charge.

I was wondering giving some of the tailwinds that you highlighted in your prepared remarks, where there 17% was still the appropriate jumping off point or benchmark we should be contemplating for the remainder of this year?.

I don’t remember that say. I remember that we were at 16, I remember at the last half of last year was our -- or again..

Is it?.

You're saying with this rate hike, we would be at 17?.

Yes, that's exactly right. So, the guidance for '16 was out the rate hike. And then about a 100 basis point benefit when you saw the benefit of the rate hike in December which ultimately materialized..

Yes. But the rate hike at December barely hit the numbers in the quarter..

I'm thinking about the remainder of the year..

Yes. I mean, I don’t think that's an unreasonable goal. There are a lot of factors at play obviously and the market being the biggest one. But based on where everything is right now, again this quarter would have been significantly different without the elevated legal charges which is a pre-tax item.

But we had some other things going in the other way as well with the bank loan loss provision and private equity gain. So, but it wouldn’t have been way off, so with this additional rate hike, it really adds $15 million to $20 million per quarter going forward.

And if we get equity capital markets and that's quite a fund and others back to what we call more normalized margins and levels. Do I think that's attainable this year? Absolutely. Do I think I would take it to the bank? There are too many things that can happen to be that certain about it.

But based on the dynamics of what we got in place, absolutely, that's a reasonable target..

All right. And maybe just focusing on the NII contribution again, Jeff you mentioned on the last call in terms of the all strong guidance, $30 million benefit for the full-year on a core rise basis, this should have added about a $7.5 million. On top of the significant sequential uptake that we saw in loans and securities.

Now tell me if you could speak to some of the factor that may have dampened the pace of NII growth, since it only increased about $7 million this quarter. And maybe how we should be thinking about the jumping off point as some of those benefits show through in the March quarter..

Sorry, what increase we're having?.

I think Steven, when you talk about the guidance for the Alex Brown contribution, you have to look at both the NII and the account service fees for the cash that left off the balance sheet to third party banks that going impact accountant service fees not interest income..

Okay so it is $30 million rate benefit which shows up in both, got it. Okay.

Understood and just last one from me and might be a better question too for Steve but just given the duration profile and the securities look can you remind us what's the net yield take up that you are getting on the securities today given the steepening of the curve versus the what you are running on the cash rates?.

Yes it's Steven. It's about 100 basis points. It's obviously security specific some of that lower, some of that bit more but right now it's been 100 basis points. So that negatively impacts our imported net interest margin percentage but obviously increases our interest earnings..

Okay and how much excess capacity do you have at the bank in terms of the internal binding constraint that you think about whether it be liquidity or some of the capital ratio, it's actually support continue bankrupt.

I know you Jeff actually mentioned it wasn't capital intensive but cheer want to leverage is also another constraint you have to manage to and I was hoping you could maybe quantify that access that’s available to support future growth plans?.

$5 billion to $6 billion..

Yes, it's a big number because of the risk ratings of those assets, we have higher capacity, but as of then we’ve agreed deal on, we are going to review at the board meeting but we are well short of $2 billion I think in our poll, but the capacity is probably $5 billion to $6 billion..

Got it. Thanks for taking my questions..

Your next question is from the line of Christian Bolu with Credit Suisse..

Good morning Paul, good morning Jeff.

So I guess firstly Paul congrats on the announcement that you will be taking as Chairman, as you think about taking over this role I am curious what it means for kind of how the firm is managed?.

Well, I don't think there is a lot of difference. Tom sitting next to me and he is, can’t say we really thank. He is hard bound client focused and what we are doing is, founding board so I would actually think it's the genius move by Tom to give me more work but he still get around too what he did before.

So it's been a team effort and I don't think that will change though Tom is spending little more time as we see him in staff but he is in the office every day.

So the dynamics this has been a shift 09 from the day Tom has asked me to come in to slowly moving stuff over and I think we will see still it’s slow move and hopefully by five years from now you will be asking me the same question and it's just a more natural transition so it's all hands on deck and it's been a transition has been happening over a seven years and I think textbook one, so far this is what I think the succession planning does and I will have to go through at some point too and hopefully I can do it half as well as Steve has.

So I don't see any dramatic change and certainly not strategy or anything else..

Okay. Got it.

And then just on Alex Brown maybe progress update on how the integration is going and then more specifically how far long just getting to what that 10% margin target?.

Yes, so Alex Brown we are not really projecting 10% margin target for a while and it's really due to a number of factors first and it's something we have talked about whether we should publish acquisition retention and give you guys more insight.

We have every one of those advisers on the retention package so without that good margins, with that you really stop the margin. So it's going to be a long process over a number of years for that part of the business to hit those targets.

Certainly there are some bigger swings and parts of that business on when transactional volumes come out because of the semi-institutional ultra-high network the family office type of business that has impact when that type of business is up and we got to recruit, sell the branches we had to move out of every location or slip locations and we added room for recruiting and we are just recruiting takes a while we are going to get people through the pipeline.

So you shouldn't look at the business in the short term having the margins, we looked at the long term strategic investment and we want to be profitable we don't want to do things, we don't think we are going to make money on though, we have got a lot of work to do still to get it there..

We have talked before that it's not going to be accretive to the PCG segment but you got to understand that they brought significant assets into the asset management segment.

They have also introduced loans of all types through our bank so they are radiating throughout the rest of the organization even if those results aren't measured specifically in the private client group.

The only thing that's really left of magnitude is one or more two real estate moves that they have to accomplish that they’re going to have in a period of time post close to vacate certain premises currently under Deutsche Bank under leased. So net-net, I think we are little better certainly retention where we thought we would be.

Revenue would nay be little more challenge given last year just because of the markets and syndicates and everything else. But I think we are probably ahead on the people side and everything combing along.

It's just these integration take a few years to really get out and running and Morgan Keegan was no difference and it's been accreted and we have got work to do on Alex Brown, great group of people. I think they are settling in well and we just need to keep working at it..

Great. Thanks for the color. And then just a follow-up from question that has been asked a number of times on the potential for you to grow the AFS book of the bank.

I just can you just help us with how to think about how much excess capital you have? I guess that the total firm level should we think about tier one leverage or risk based capital constraint and then maybe any sort of numbers in terms of the minimum ratios you would want to run the format?.

This is the debate that I think a lot of people our view of excess capital is different in most. This is broker dealer space versus financial. There is a lot more of liquidity, risk and demands and so we tend to keep extra liquidity and it's looks dump until you hit 09 or period then you look smarter than you are which is just conservative base.

The banks certainly has leverage in the securities portfolio of the leverage capital just because the capital charge is low, both regulator like the liquidity and the security portfolio because they believe it's a secured type of environment because the agencies government oriented short term are less concerned about that investment than we would be if they were longer term or more risky securities.

So yet, we have room yes in our capital base but it's not as extreme as I think other people think..

I think from a regulatory perspective the tier one leverage ratio would be the one that trips first, but we have got internal constrains so we have talked about before that would trip even earlier that percentage from capital that we have want to have allocated to the banking segment as well as the percentage of client cash deposits that we want in our own institution.

So those would actually trip even before the regulatory ratios would trip..

And maybe just quick can you remind us you said the cash internal target, can you just remind what that is and for the bank and you talked about sort of capital being at the bank but as you move in towards things like securities which have very low risk rating does that is there a potential for that constraint to changing anyway?.

Yes. I think there is the chance there but we’re discussing with our board meeting about allocations. So, yes..

We have got a little over $40 billion in the bank this week program and we don't want more than half of that going through our own bank and our banks currently a little under $15 billion. So we have got $5 billion run way in that constraint..

Okay. Perfect. Well it seems like a very important board meeting ahead..

Well, they are all good and challenging. I don't see drastic changes but I think the discussions and the challenges are all good and again if you this is the balance certainly lot of things we could do to raise earnings very quickly in the short term I am not sure it's good for shareholders in the long term.

So we keep that balance of making sure that now we have looked at acquisitions and other things that would make the number look very good short term but we asked ourselves long term is that a good returns for shareholders and we are reminded all time it's not our money and we are investing other people's money.

Some of it is because we are shareholders but we try to keep that balance, the boards challenging us and I mainly look for to our offsite it's a lot of work and a lot of challenging but it's very good discussion..

Great. Thank you so much for all the color..

Thank you. Your next question is from the line of Conor Fitzgerald with Goldman Sachs..

Good morning. Maybe a two part question on corporate tax reform.

First just one thing, you said to be little corporate tax rates should we think about that having a one for one flow through onto your tax rate and then two, if we do get corporate tax reform how should we think about that in competition in your industry some management teams have indicated things of vast majority of the benefit would be away but curious for your thoughts on if you think being increased competition in your business and benefit of tax rates could be considered away?.

I know a lot of people said that they think that the lower tax rate will pass it through the loans spreads, I don't know if that's the case. We are certainly more diversified than that. 10% drop in the tax rates what $90 million somewhere there. And if you did some math somewhere in that range so I don't know we get arbitrated away or not.

I certainly, our portfolio is a piece of our business, big numbers but it's certainly diversified across the businesses and a lot of people focus on the rate but how you define that income taxable incomes are important too and what deductions are there or not there so there is a lot first they got to get through Congress, and secondly we don't know what it is but we focus on the headline rate.

So….

Impact on some of our businesses. Tax credited funds or tax exempt landing at the bank has been municipal bond trading that – all those businesses will be impacted..

Certainly yes. And then, you got the onetime net charge for the deferred tax assets too. So there is pretty complicated topic until it's hard for us overtime.

So honestly we look at that but we spend most of our time making sure we are running our core businesses well and the things that we don't have in control we left about although we do look at what the impact would be..

As we sit here today and favor to lower rates effective immediately by 10 percentage points from 35 to 25 our deferred tax asset revaluation were offset most of our first year benefit from the lower range than we obviously benefit pretty much on a straight pass through basis going forward depending on the impact on our businesses..

That's helpful color.

Thank you and then on the 15 to 18 million of growth from the Fed hike are you still assuming the same deposit bid in that 40% to 50% range or have you changed your assumption there?.

We have changed it to a little low lever declines payout than our ultimate our original target of the 60:40 split and we are basing pretty much what we are seeing in the competition. Our strategy there is to stay at the kind of the top of the group and we are there already.

No one else has moved since the Fed rate maybe one other party had moved but the rest have straight ones and twos all the way down in terms of basis points what they are paying to clients and all level. These are advertised rates.

We moved twice from the old rates move and the first rate move and once now from this one we are – our lowest rate is comparable to government money market fund rates and if they are higher cash balances or higher client relationships balances I should say we have been our system the rate scale up from there so at some point I think it's at the very front loaded game which is now how we thought was going to be.

And so we are recovering our most of our spread before we start passing through the clients at this point of time and candidly that maybe the new model firms may end up keeping more of the interest spread to help pay for regulatory compliance legal these other cost IT better out there.

It may just be a new dynamic in the model from what in place prior to the economic crisis back in 08 and 09 I mean that was bit, we maybe in a little bit different environment but so to answer your question, is yes we are changing that and we are expecting to keep a little bit more of the spread than we had originally intended..

Although it hasn't changed our long term philosophic view of sharing with clients. So I think the question overtime is how do you get there what happens to money market funds given all the things that have happened to money market funds what happens to rate.

But as the future regulations and sometimes regulation comes, money market funds maybe more competitive in rates go up so there is a lot of dynamics there and impacted but we ultimately believe we have responsibility to share with clients but we want to be also competitive in the rise and be deliberate in our rate.

So I think we are through a transition period right now for this year..

That's helpful and just a quick follow-up on that if your deposit rates are materially higher than peers do you think your competitive advantage?.

It's hard to say I mean we are talking about basis points here. It's not, we are not talking about huge dollars on a per account basis. So I don't think it gives us a huge competitive advantage in the recruiting world. It certainly puts the economic disadvantage so I don't think it's – it's not something that recruiter live with let’s put it that way..

Yes. But I would say tangible part is our advisers and our retention is viewed on a environment of being straight to them and our client so I agree we don't say we are paying too more basis points to your medium accounts.

It brings people over but I do think the additive of pureness and equity to advisers and clients is the big reason people stay here and that is – it isn't just that it's the piece of it and that story is a piece of it. So we try to be very balanced and we are not way ahead of market but we are ahead for that reason..

Thanks for taking my question..

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

Thanks. Hi guys..

Hi Chris..

Are you guys seeing a much of a behavioral change among your private client customers following the election and really just trying to wonder whether we could see some better activity rates, better sales cycle, there is nice uptake in confidence here..

It might be too early to say I would say. People are optimistic and scared at the same time so the only thing we could see is the little bit more movement of fee based accounts so I guess I can't tell you. Certainly it's been a better equity flows if you look at mutual funds it's not just us.

It's certainly some field actions only the positive versus more positive versus the previous trends but I think it's still early days and I would say only a very slight risk but it's not a significant shift..

Got it.

Okay and then in capital markets, you sound like you guys are little positive about the pipeline but to speak to commercial customers are you getting the sense that activity levels could potentially be delayed somewhat if you got companies wanting to wait to see what sort of changes will occur with tax and regulatory reform but it was really the election kind of the big unknowable and now that that's behind us potentially we should see activity pickup depending on obviously what the market do..

The M&A activity a big impact it seems like it's still going well.

I think the biggest challenge if you look at structural challenges the market is just the rise of private equity and companies thinking regulatory burden too much to go public and the private equity versus IPO market when you look at the close to 12 year, lower or something and IPOs has been impacted by that when you get companies as big as Snapchat, Facebook.

They get evaluations where they go public it's just the private equity as they lower cost less feasible alternatives and so I think that's impacted kind of the IPO and what the other thing is it's impacted secondary’s as the balance sheet and bought deals.

So it makes it much more difficult to compete so I think the sheer of the market is gone down because of that we are bullish I think we are saying off December number we think there is the positive trends as we have already been book runner in the couple of IPOs and we see something in the pipeline but I don't know how real buzz that business is what the impacts going to be.

I do think that regulatory change if and when it's coming if it favors capital formation, if it takes regulation off of IPOs and stuff may help that market but that's – that remains to be same. I think that part of the reform hasn't come up after tax rate, law and all sorts of other stuff has seen to be in front of that. But that's the special….

Thank you..

Your next question is from the line of Ann Dai with KBW..

Hi, good morning.

I was hoping to get a little deeper on the D well and just kind of looking behind the scenes on some of the changes there happening as you work towards, can you outline some of the more meaningful changes that you have made lately product structure commission structure or really any pricing in anticipation of the rule?.

Yes. I am not really in liberty to talk about really kind of those changes.

We have highlighted some potential ones to advisers but frankly we are waiting really on the rule if it's coming or not before we pull the trigger on them, and I believe that there are something in the rule but and looking at the rules we said we could do this better where this makes sense or other parts that we think is just a burden to clients and we take advice and frankly waiting.

So it's just as we have been slow to announce our changes not because we didn't want to tell people what we were doing but we certainly didn't want clients and our advisers to go through the pain of doing things to undo it.

We are lucky maybe but so far we have been right and we are still not ready to kind of push that out with advisers till we know and I think there is more and this is going to be delayed so we are waiting to see first of if there is a delay although we are -- to go if there is and second if there is delay and changes are made we certainly don't want advisers to make changes they didn't have to make or to go back and undo them with clients.

So we are in a analysis mode which we have been in for a long time..

Okay. Thanks for the color.

The other thing which is on loan growth you continue to grow -- during the quarter and I think it was maybe the last earnings call when you had given some guidance around expecting that growth to moderate over the next couple of years or maybe just not continue it kind of the case it happened so was there any impact from Alex Brown this quarter on loans and if you could just give us an update on your thoughts around the next year or so, year or two and if that guidance has changed?.

I would say that we are looking out – we would still think kind of low double digits intended 12% would be kind of good annualized run rate. Our product suite is just changed ever since slightly.

We are doing some larger mortgage loans to ultra-high network clients not only in the Alex Brown channel but in general we have been recruiting more productive advisers that are dealing with larger families or more families so that product has changed just ever since slightly.

So the loan growth of the last quarter was around 4% once again it's little bit opportunistic the corporate loan market in particular is the most volatile part of the business. We have seen periods when and right now as a matter of fact since the election the corporate market has gotten extremely aggressive.

We have seen some pricing, the secondary markets have looped up probably 100 basis points in price so we have taken other periods, pull back to be more aggressive when we think rates and the risk relative is and the rates are more attractive but in general I think 10% to 12% is a good number going forward..

Okay. Thanks a lot..

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

Hey good morning guys.

Maybe quick follow up on can you just give us the total number of client cash balances at this point appreciate any material change?.

Yes, Grant told us about $46 billion but there is fair amount of that $5 billion or $6 billion in various types of stage specific money market funds and things like that and then about $40 billion in the banks suite..

Okay.

And the deposit in the bank what do you?.

Deposits in the bank right now are about $15 billion from the banks suite program and they have to continue to draw on those balances as to support the growth of the loan and/or securities portfolio..

Okay.

So that's embedded in the 40?.

Yes, correct. Part of the 40, correct..

So should you still think we should think about every basis points around $ $4 million at the short end?.

$4 million per year. Yes. About a million per quarter..

And that was always guidance around the short end this is the steepening yield curve give you any additional upside and then high in the bank securities look or?.

Possibly may not I wouldn't say materially from that I would vary it materially from the previous guidance based on that..

Okay.

Maybe just a broader picture it seems like you guys if I try to take a step and market impact you very strong growth in fee-based assets can you kind of I guess, a discuss what’s the geography there, how much is maybe just transitioning from brokers accounts to fee based versus net growth from current customers new customers and how you think about the recruiting dynamic in those flows going forward..

I think part of it is recruiting certainly large, our recruiting has gotten larger I would say, we tend to have more fee-based and their platforms so that impacts.

The other thing and mainly the part of this is DOL we had a lot of other more accounts for advisers as we looked at the rules just said they were getting out of commission accounts because as we look at the deck and everything else just they [indiscernible] demand manage in our fee-based platform.

We did open up a smaller account kind of solution fee-based to help advisers and there has been a lot of that movement there too. So it's just and it's kind of across the board..

Geography and the financial there is a shift from a commission based account to fee-based account is that the most of the revenues stayed in the same line item than the commission and fee line item to the advisers. There is a small piece when it goes to a rap fee account it goes to the asset management segment for the administration of the account.

In terms of the overall magnitude it just depends on what the account was generating on a commission basis versus what the fee is that's assigned to that account but geographically not a big change in the statement but since you brought that up we will point out that we did also set a record high for recurring revenues this quarter at 68.75% so closing in 70% of our revenues that we could call recurring fee type revenues..

Right. And as we look at the recruiting pipeline you mentioned it's still very strong.

I mean how long do you think there is going, I think you have been growing at headcount for close to 5% plus or less year or two do you think you still have that kind of momentum?.

There seems to be it's hard to recruit at those levels and certainly there has been supplemented by not huge acquisitions but meaningful both of Alex Brown and 3Max joining us but recruiting pipeline looks very good.

And there seems to be a changing landscape year or two or one or two firms or people are now happy with the circumstances there whether strategy or movements or grader pushing out small accounts or something we have got a large flow in it and it is continuing right now so we think it happens for ever no, maybe there is cycles but it still looks very good for this year..

I would say that net growth of 350 headcount without acquisitions just mean, brick by brick recruiting and training programs. I think would be a little bit of stretch for us but that's a lot of bodies to recruit but it's certainly doable..

Okay. Thanks for all your help. Thanks..

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

I just wanted to follow-up on the prior conversation on the recruiting side of things.

I was wondering if you could just give us little bit color on just level right now of competition with the front line things like that and if we get into environment where we get more relaxed regulatory climate would you anticipate uptake in that competition or would you think maybe some of the larger peers would divert capital to other business lines and you can we wouldn't see that type of scenario?.

I can't say what other people would do. I can tell you what the market dynamic has been ironically we have all historically specifically versus larger firms offered less front money transition of system.

It's with the DOL proposed rules most of the major firms drop their back end bonus which was the significant delta between ours and theirs and we haven't changed ours so in a way we have become more competitive we have always based ours on what we thought was the fair reasonable returns to the firm and fair to the adviser so we have been very competitive.

There is some indications they maybe raising there a little more. But I think it's below as it was year ago but this is the highly competitive market. It has been a highly competitive market. It continues to be.

So right now I think the dynamics are still positive and are in favor based on technology kind of the culture we have created here and so we still have a lot of demand I don't know how that changes.

Last year we certainly you could make more money going to other firm up front that was certainly the highest but we did pretty well and it's a positive we lose some people that we would like to get but net people come for the right reasons when they are not coming just for the check they are going for the environment I think it's a positive to the people we are trying to recruit..

Certainly fair. That's very helpful.

And then one other question just in terms of obviously we are very focused on the potential for changes and with DOL as you look at on things are there other regulatory changes that could be meaningful for you business if there were some changes on the horizon I don't anticipate longer would be much of difference for you guys but are there any other things that we should be keeping eye on in terms of the any type of enhancements?.

Yes I think that certainly all regulations and even has an impact and first we should be regulated. I mean we are regulatory industry that has other people's money and regulation it's not negative I think the amount and type is important.

We get a lot of discussions about regulatory enforcement where there is not rule there is interpretation of rules so I think any time there is clarity, it makes it better for everybody and some of that reforms would be helpful.

It does have some positive impacts and certainly changes the private equity and investments all sort of things not as big as us as other people so the regulatory cost is continued to go up for everyone if that moderates that would be a positive but regulation alone in and go away.

We do believe that maybe there are areas that should be modified and DOL again but I believe well intended business and advise and that's one example and there some other areas too..

Thank you very much..

Thank you. And at this time there are no further questions..

Great. I appreciate everyone joining the call today and hope we could give you little more clarity than we maybe did in the release on some of the numbers and we are very positive and on the future and where we stand today and look forward to talking to you next quarter. Thank you..

Thank you. Ladies and gentlemen that does concludes today's conference call. Thank you for your participation and ask that you please disconnect your line..