Good morning, and welcome to the earnings call for Raymond James Financial fiscal first quarter of 2016 results. 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, Vice President of Finance and Head of Investor Relations at Raymond James Financial. Please go ahead.

Thank you, Kayla. Good morning, and thank you all for joining us on this call this morning. As always, we appreciate your time and interest in Raymond James Financial. After I read the following disclosure, I'll turn the call over to Paul Reilly, our Chief Executive Officer; and Jeff Julien, our Chief Financial Officer. Following their prepared remarks, they will ask the operator to open the line for questions. Certain statements made during this call may constitute forward-looking statements. Forward-looking statements include but are not limited to information concerning strategic -- future strategic objectives, business prospects, anticipated savings, financial results, industry and market conditions, demand for our products, acquisitions, our ability to successfully hire/integrate financial advisers, anticipated results of litigation and regulatory developments, our liquidity and funding sources or general economic conditions. Words such as believes, expects, anticipates, projects, forecasts and future or conditional verbs, as well as any other statement that necessarily depends on future events are identified -- are intended to identify forward-looking statements. There can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to carefully consider the risks described in our most recent Form 10-K, which are available on the SEC's website at sec.gov. So with that, I'll turn the call over to Paul Reilly, CEO of Raymond James Financial. Paul?

All right. Thank you, Paul, and good morning. I know that many of you in the Northeast are now bracing for a storm. And I'm not sure we're bracing for a storm here in St. Pete, but we're certainly watching the financial markets, which are extremely turbulent. Before I get into the results, I first want to thank our advisers. We need to remember that our business is focused on helping clients, and they certainly are doing a great job working with them in this very, very difficult market and climate. And if we take care of clients long term, our business will be just fine. So I want to start off with that thank you. I know at the end of last quarter, I told you it was just a typical solid Raymond James quarter where we continue to produce. I guess you'll be happy to hear I don't view this as a typical, solid Raymond Jame quarter -- Raymond James quarter. The financial results were disappointing, but they were really caused by a number of market factors. Certainly, the headwinds and turbulence in the market, a timing of some of the expenses that hit that we'll cover and hopefully some expenses that are nonrecurring that have to do with kind of reserves for events. Since we're focused on the long term, before I get into the numbers, I want to talk about, really, the highlights of the quarters and why, at the end of the quarter, we still show an improving and strengthening franchise. First, we had a record number of advisers of 6,687, up 351 for the year and 91 net advisers, sequentially. So we continue to show great momentum in recruiting, really due to our ability to support our systems and primarily our culture, where people…

Thanks, Paul. I'm going to focus on some of the larger line items and some of the bigger variances from the consensus model here. Securities commissions and fees line. Actually, all the models adjusted pretty well for the beginning billings being at a lower level than the preceding quarter. And commission levels were fairly close to what was projected. Investment banking, as Paul talked about, was a big miss. As you look at the detail in the press release, every component of investment banking, which is underwriting, M&A, fixed income, tax credit funds, et cetera, all were down from the preceding quarter. So that one was a significant miss relative to expectations. Investment advisory fees were pretty much on top of expectations. But again, aided, as Paul mentioned, by the performance fee in the quarter. Net interest income was below the consensus projection, most likely related to the lower than -- lower net interest margin at the bank, which went -- fell to 2.9% versus 3.03% last quarter. Really a result of a couple of things: Lower fees recognized -- first of all I'll mention, it doesn't take much to move our net interest margin around. About $350,000 is a basis point to our NIM, so if you have a couple of million dollars in fees, you can see what it can do in a quarter to the net interest margin. But there's also -- some of the fee realization was less in this quarter than it had been. And secondly, it has to do with asset mix as commercial real estate’s become a little bit bigger percentage of the portfolio, which has a slightly lower yield than the C&I loans. And SBLs could be a portion of that as well as those grow more rapidly. Account and service fees.…

All right. Thanks, Jeff. Let me just give a little further kind of reminder, although we've covered it in pieces, of kind of where we are going forward. The Private Client Group for the quarter, where we had headwinds coming in, should have tailwinds in terms of beginning assets anyway, we're up 6%. So certainly the billing, the advanced billings, will be up versus last quarter. And Jeff talked about the interest rate help the segment will receive also. Now they're not without tailwinds in the Private Client Group. The equity markets certainly performed so far this quarter, are going to impact trails, commissions on mutual funds, which are calculated basically on daily kind of balances. And certainly, syndicate activity hasn't really picked up in January, which will have impact also. Also, I want to remind you also that the first quarters for the calendar year is always the fun quarter for us because we have the restarting of payroll taxes, postage and printing for all the statements that always hits this quarter also that kind of penalize this quarter versus the other quarters. In Capital Markets, I wish I could tell you much more about the underwriting. The underwriting business was tough for us. It is in the marketplace. Certainly, January hasn't been a great month for the industry or for us. And I can't predict what will happen in the markets. Certainly hadn't been fun in the last month, but we will see. So that will continue to remain a headwind. The M&A backlog is strong and the tax credit fund backlog is kind of at record levels, but they are lumpy businesses, they are transactional businesses. We can't predict the timing of when deals close or hit or can't say that really bad markets don't impact buyers…

[Operator Instructions] Your first question comes from the line of Joel Jeffrey with KBW.

Just in terms of the energy provision, can you give us the percentage, the total reserve against the loan book within that portfolio?

Joel, it's Steve Raney. Yes, the total energy reserves is $18.7 million. That's about 10% of our total reserve. And that reserve is 4.2% against our energy loans. Our outstanding energy loans as of 12/31 was $444 million across 32 borrowers. So...

I just want to also just emphasize here that we certainly can't predict the future and certainly on individual credits. But a lot of people want to use percentage. Our mix is different. We have 1 E&P loan. It's an investment-grade facility, so we're not heavy on E&P. We're certainly not into reserve lending. Most of them are midstream suppliers. Many have -- still have take-and-pay contracts. But again, we don't assume that's going to last forever if there's a long downturn. But again, classifying something as energy or oil and gas is -- we have other things in that bucket besides oil and gas credits. So they're not all alike. I think that we're being very proactive and responsible in how we're reserving for that. But I can't tell you there won't be more.

Okay, appreciate the color. And then there may be some overlap in this as well, but as you think about your Canadian loans, I know that's grown a bit recent years, can you talk about the reserves you have on those loans?

Yes, Joel. There's no energy exposure at all to any Canadian companies.

Hydroelectric...

Yes. I mean, other than -- we have some power infrastructure, wind and solar, but no traditional energy exposure. We have about $1 billion in loans across a very large number of Canadian borrowers, 50-plus borrowers, only 2 of which are criticized currently. So it's a very diverse portfolio across corporates and some commercial real estate. I don't have the actual dollar amount off the top of my head in terms of reserves against that Canadian portfolio, but it mirrors the U.S. domestic portfolio very closely.

Okay, great. And then just lastly for me, on the Private Client, the reserve you took, I know you said it was $10 million, can you talk a little bit about what those were tied to and how much that $10 million is above what you typically reserve for in a quarter?

Yes, I think the $10 million increase usually goes up $1 million or $2 million or down $1 million or $2 million a quarter and just gets buried in the numbers. This was a bigger increase and we don't specifically talk about any legal or regulatory matters, but the -- it was just a little lumpier. And so versus if it was a normal quarter, you might have seen it gone $2 million up or down. This quarter, there was $10 million because of a couple of items. And again, hopefully, they're not recurring. And again, we try to reserve that adequately for anything we know about.

Your next question is from the line of Devin Ryan with JMP Securities.

I would maybe start on the DOL fiduciary rule. It seems that we're moving closer a finalization. So curious if you guys are doing anything proactively to prepare for various scenarios. I know that it's not certain yet and the devil will be in the details, but can you do anything to get ahead of any potential changes? And also, are you seeing any changes in the competitive landscape as we move toward a final rule? Maybe more sellers or anything else notable there?

I think that we can prepare and that it's almost like a what-if scenario because we don't know the rules. So we have a team that's focused on what happens if we can't charge commissions, what our fee-based accounts look like, what happens if certain items are excluded, how would we react. We're a part of the industry group, FSI, and [indiscernible] particularly are -- have working groups of firms just doing kind of what-if scenarios on the industry. And so we're actively engaged in that. Having said that, the DOL has really told us nothing, I mean, concrete. We haven't seen anything. And there's a belief that it's going to be rushed through to OMB and the President to get it -- make sure it's enacted before he goes out. I don't know what it's going to look like. So again, we've been consistent. We've been consistent thinking it's not good legislation for clients. We've been consistent saying, although well-intended, it's not good for clients. We've been consistent saying we believe it's going to come out this year despite our industry and client kind of fight against the rule. And -- but we just don't know exactly what it's going to say yet. So we're preparing the best we can, but we're not changing technology or programming or anything till we know what the rule says.

Okay. A question for Steve on the bank NIM. How much were corporate loan fees in the quarter? And it sounds like this was a lighter-than-normal quarter, so trying to get a sense of if that's a trend, if we should expect lower corporate loan fees moving forward. And the 3% NIM commentary, does that reflect any additional Fed action? Or is that kind of the status, Steve, from here?

Yes, Devin. It was about $6 million this last quarter compared to about $8 million the prior quarter. And can be rather lumpy. We get unanticipated payoffs, and sometimes, we just use the exit credits because of repricing that's recurred over time. We have seen the fee trend come down, I would say, over the last couple of years. You may remember, we had the rather large discount in the Canadian portfolio that we acquired that back in 2012. That's pretty much gone now. So of the $6 million number, once again, it can be a rather volatile and lumpy. Not quite sure what to expect for the next couple of quarters, but that's probably kind of a good number. That 3% number really doesn't include any additional Fed actions at this point. We are going to get the benefit of this quarter of the increase in the LIBOR rate. LIBOR's doubled in the last 30 days or so. It's around 40 basis points now. A month ago, it was 20 or so. In the November and into early December, it was around 20 basis points. We have a look of LIBOR-based loans, but our securities-based loans as well as a lot of our corporate loans are LIBOR-based, so we'll get the benefit of that. And we're not going to be chasing any yield. So we're going to stick to our underwriting and pricing discipline. So once again, I think that number of around 3% is kind of a good number going forward without any Fed action.

And a lot of the corporate borrowers on 90-day LIBOR, so as they hit their reset dates throughout the quarter. So this quarter we're sitting in may not get the full benefit on this corporate portfolio, but -- until they all reset, which would be in the June quarter.

Okay. Got it. Okay. And with respect to recruiting, another great quarter there. It looks like a number of pretty big teams have been joining. Historically, I believe the recruiting can be disrupted when volatility picks up. So do you feel like we need to see a recovery in markets keep that momentum going? I'm trying to think about recruiting relative to the comments that the expectation is that the pipeline's solid and that it should remain active.

It's interesting. I think that recruiting's helped by 2 factors. So it's a push and a pull. We've seen in January even some acceleration in joins. So again, it's still early. Historically, when markets are off, advisers tend not want to go to clients and say, "Your account's down 20%, and oh, by the way, I'm changing." But we haven't seen that yet at all. So could it impact us? Absolutely. Has it impacted us yet in terms of pipelines or commit dates or joins? It hasn't. So certainly, we're short into the January and there's been awful lot of action into January. So historically, we've seen that. Potentially, it's there, but we're not experiencing that right now at all. So ...

Okay, that's great. And then just last one on the regulatory charge, is that for a disclosed event? Or is there anything else you can provide on that expense in the quarter?

A couple of items and, it's no disclosed event. So...

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

Could you talk a little bit about your expectation for comp in fiscal 2016? You said you were right at 68% in the quarter, so curious with all the different pushes and pulls across your business line, how are you thinking about that line in '16, maybe, at either absolute level or as a percentage of net revenue?

If we can continue revenue growth, which we obviously didn't in this particular quarter, but if we can get back to a resumption of revenue growth, we think it should drift down into the high 67s, probably about what most of you had modeled for the year, I would guess, because we don't -- we'll get some modest leverage from the growth in revenues despite the fact that we're hiring a lot of producers with variable comp. So -- again, if we don't get revenue growth, we have a fairly big machine here. So we might get some slippage like we did a little bit this quarter. So the 68 is still our target number for the year. We're optimistic that with revenue growth, we can do a little bit better.

Okay, that's helpful. And then, on the banks, I know as the reserve ratio itself picked up a couple of basis points and, perhaps, this has reflected in the qualitative increase for the energy portfolio, is there any sort of systematic change in your expectation of where you want to run that reserve ratio as you think about the exceptional loan growth that you're seeing relative to the economic cycle?

No, Bill. It's really ground-up, loan level and then as we mentioned, qualitative factor around the energy portfolio. So we really don't build it in terms of reserves to loans. Kind of top-down, it's really ground-up.

It's harder to predict in the future how all the energy loans are performing, but we put the reserve on given the energy markets. So who knows what the right number is? It depends how long price is stable, not necessarily that they dip and come back. It's a ...

Okay. With all else being equal and no other changes, 1.35 is about the right ratio making no other assumptions then?

Given the current loan mix.

Yes, yes.

And then final question. You mentioned, I think, you used the word torrid in terms of the pipeline, you mentioned no change in January as well, which is nice to hear. Can you talk a little bit about where you are seeing the FAs and platforms coming from and where you picking up market share with some of the underlying dynamics around that?

That still tends to be -- the wire houses tend to be the best providers of good FAs for us. So there's certainly other firms, but they tend to be the vast majority and as they change platforms and billings and approaches and more institutionalization to their businesses, alternative channels. We still have a lot of people that don't like that model and are coming to us. So I don't see that changing in the short term.

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

So I guess this first question is for Steve. I was certainly pleased that you've already built reserve levels for your energy book north of 4%. What we've been hearing from some of the regional and universal banks here is some sensitivity around the additional reserve build that would be needed in the event that oil prices stay below $30 a barrel versus the same period. I don't know if you -- presumably you got to run those sensitivities and then if you can share your findings? Or just some guidance?

Once again, we'll continue credit by credit, loan by loan out of the 32 borrowers that are in this sector. And each company has its own characteristics and as we've conveyed, many of them are not as exposed directly to the well head given their business model, where they've got these takes or pay contracts. That being said, I would anticipate continued reserve adds, if we continue to have these commodity prices as low as they are and continuing on. So not really able to provide any additional guidance other than that at this point. We'll just -- we're obviously monitoring each one very closely, so ...

I understand. And maybe just as a follow-up to the comments, Steve, just thinking about the commodities complex more broadly, can you quantify the exposure that you have to the metals and minings space and your degree of comfort with some of the exposures that you might have in the portfolio?

Yes. In mining and materials, our total loans are $52 million across 3 borrowers, so watching those very closely. The 2 of those 3 borrowers are criticized, so we've actually got heightened reserves against those loans already. So we continue to watch that very closely, alongside oil and gas as well.

All right. And just one more quick follow-up for me, just switching over to the, I guess, the main discussion from earlier. You gave helpful guidance on the 3%. I just wonder if you guys what that assumes in terms of the forward curve. It sounds like it doesn't require further rate increases, but just wanted to confirm that.

That is correct. I would mention, Steven, we have seen an increase in cash balances around the firm given all the volatility and the heavy recruiting that had brought additional advisers and clients to the firm. So you may remember, going back a couple of years, for several periods, we were reporting 2 NIMs; one, our actual reported net interest margin and one, adjusted for what cash balances are at the bank that are there kind of parked for taking this current client cash balances. There deposits spread on those balances, but it's at a lower margin. Our last dollar tonight, it's invested at the Federal Reserve, earning 50 basis points. So to the extent that we have additional client cash balances that reside at Raymond James Bank, our reported NIM would be lower, but our adjusted NIM, once again, absent that cash balances, we think, is around 3% going forward for at least the next couple of quarters.

And while it doesn't assume an additional Fed action, it assumes the bank over time gets the full benefit of the hike that's already happened, which they haven't yet.

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

Apologize if I missed this, but did you provide any color in terms of the number of criticized loans within energy, I think, it was 5 a couple of quarters ago? I'm just not sure if you've provided an update there.

It is -- let me give that piece of data here. 5 out of the 32 are criticized.

And how much in total?

I don't have that -- I have the figures. I need to add it up -- I do have that. It's $81 million of the $444 million.

That's helpful. And then, within the Capital Markets business, obviously, on a sequential basis, material revenue declined and year-over-year saw the material decline. Pretax income held in a little bit better than we would have expected. I'm just wondering, were you guys able to offset the decline with a little lower compensation? Was there any material pullback in non-comp? I'm assuming some of the -- just the variable comp helped there. I'm just wondering if you can provide any color?

I think there are 2 pieces to that. One is variable comp. The Fixed Income business is extremely variable comp model and the equity capital market is a little less because of the research and other embedded costs. But we also have good trading profits in Fixed Income, which helps in that number too. Those disproportionately fall to the bottom line versus commission. So both of those factors helped mitigate it. But there's no doubt when business is down, comp is down, so -- for all of us. But that -- those were 2 factors that really impacted it for this quarter.

Got it. And then, nice to see that the capital being deployed to buybacks just given where the share prices were. I mean, what's the appetite moving forward, if kind of this market turmoil continues and there's more pressure on the share prices from here?

We have -- the board authorized $150 million, which we used $75 million in the plan and we will be talking to the repurchase committee about what the other strike prices are in that plan, so -- as we come out of the blackout after this. So I think, we've always -- we have taken the position that we're willing to buy back stock when the prices are right. So I think that attitude still exists today. So we've been pretty disciplined about it, maybe a little criticized at the peak of the market. But maybe in retrospect, we're fairly prudent. So we'll continue to operate accordingly.

Your next question is from the line of Daniel Paris with Goldman Sachs.

So the bank balance sheet continues to see healthy growth and for the second quarter, you've added pretty nicely to securities portfolio. Just curious why growing consensus that long and rates stay lower for longer. Are you more incentivized to keep adding securities to the balance sheet? And is there anything bigger picture you can give us to kind of size the balance sheet capacity from here? Some sort of target capital ratio? Anything along those lines?

As it relates to the securities portfolio, it grew nominally and will continue as the balance sheet grows to just grow the balance a little bit. I would see we're at about $425 million. I would see it, maybe, grow into $500 million over the next 12 months or so. But yes, it's rate dependent. We're staying a little short. The duration of what we've been adding is in the 2.5 to 3-year range. It does -- it's a lower yield, but obviously, that's part of our liquidity strategy as well and it's a much higher yield than just the overnight cash and overnight liquidity. But it will still get a -- it's still relative to most other institutions. It's going to be a smaller part of our balance sheet composition going forward.

In terms of the overall capacity, there's a lot of capacity that take client cash balances. So if those continue to come in, we can continue to house them at bank. And as Steve mentioned, we would report dual NIMs, one with entire cash balances and one without those that we really haven't requested for growth. But in terms of growth in the normal course with the lending being the primary asset deployment, the real constraint there then is that we have a policy or a guideline that wants to -- so the bank -- we don't the bank to be more than 35% of the overall firm's capital, lest it change the characteristic or character of who Raymond James Financial is, so we're about 33.6%, I think, at the end of the December. We also have been keeping the capital ratios a little higher than we had in the past at the bank to facilitate its future growth, but that's really kind of going to be the constraint about the bank growing a lot faster than the overall firm.

And we don't -- we're not capital constrained at the bank at this point. So we think there's room for continued growth as we've been experiencing. But again, that can change, so -- but I don't think that's a deterrent right now.

And we're not really proponents of the leveraging up the bank balance sheet with securities strategy, although it's been suggested to us by numerous people. And while it has actually worked very well for a couple of our competitors in the past, we're dealing with going forward and we don't like taking the duration risk of those instruments on our balance sheet, even if it's somewhat short term. I mean, our portfolio has an average duration probably under 2 years. I mean, it's very short-term type stuff. We're not buying long-term securities in that portfolio in there and they're all typically government agency type stuff that we've been buying. So it has no credit risk really associated with it either. We're really in the securities to accomplish the liquidity requirements at the bank, not as a true investment strategy or a gross up strategy.

And for right or for wrong, certainly, our financial modeling standpoint would stay more aggressive, would be positive, but we also remember '09 that our strategy didn't really pay off for people. So we're staying very balanced. And again, our agency model, we know we're not trying to take equity risk or rate risk and trying to stay neutral.

Understood. That's helpful. And maybe just as a follow-up, I was wondering if you could share your initial observations following the first Fed hike? It looks like most money market funds have started to recapture fee waivers and large banks are passing on very little of the rate hike, at least on the consumer side of things. So wondering if you think the rate benefit for you may prove to be nonlinear; i.e., the first 25 or 50 could be much more valuable than the next 25 or 50, assuming we ever get the rate hike?

I think unlike our competitors, we've always had -- I'm not saying they don't, but I mean, we've always been very disciplined on sharing with clients. We did up our client rates. We haven't seen anybody really follow. Now you can say we doubled them for the lowest accounts from 1 to 2 basis points. It's not -- it's real money to us, but it's also symbolic to clients in upper tiers or higher. But we did pass on some of that to clients and that's part of our philosophy. So it could be nonlinear, but we -- part of our long-term success is treating clients well and we continue to want to do that. If it's slightly -- it maybe slightly nonlinear just as we watched the interest rate markets. There's no guarantee that rates won't come down again either. So we haven't been aggressively moving them up. One, there isn't competitive pressure. And secondly, and more importantly, we're just concerned about what could happen to rates in the shorter term, so we watch what the Fed and the markets do.

Got it. Okay. And I think, maybe, last one for me, if I can squeeze this in. In the last quarter, we talked about some of the trade-offs between investing in the business and generating near-term leverage, operating leverage. Jeff, I think you talked about some of the moving parts on the comp side, but are there things you could do on the non-comp side to ratchet down if we stay in this kind of challenging equity market environment?

Sure. I mean, we're in a process actually before the equity market went down at looking at, because of just which I think has paid off very good investments in our people and systems and processes that saying after 6 to 7 years of growth, it's time to always look at those expenses. So we're looking at our travel, our conference expenses, how many people are attending. Our conferences and trips are world-class, which is good, but can we rein some of that in, and we've been working on that. And certainly, the markets have accelerated that. So what were -- the philosophy is we can't cut support for advisers, that's #1, unless the markets are really bad, and then people would understand. So there's no plans there. We want to invest in the growth parts, the recruiting, but the rest of it as we know is all up including sort of technology investments, the speed at which we put some systems and processes in place. So we are looking hard at those. We were looking at them. We're looking much harder at them now to get those enacted. The one wild card here is we do have to integrate Alex. Brown and the new Alex. Brown advisers, so that's going to be a cost. We have to do that well. I think we showed in Morgan Keegan with a little criticism upfront that we were a little heavy in operating costs through the integration. But I think in retrospect, we made the right bet in keeping 92% of the trailing 12s, so we were offered retention. We need to do the same thing with the Alex. Brown advisers. Long term, it'll be measured by their successful integration and how many people stay with us, not by some of the shorter-term cuts. So that expense as those through the integration costs and when people join us will probably be a little elevated until we get the integration and then we'll do what we do with Morgan Keegan and right size the combined entity, not one side or the other if there's excess expenses.

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

Just a follow-up on the earlier question on deposit pricing. What's the deposit pricing assumption on the $8 million to $10 million benefit that you referenced earlier from the first 25 basis points Fed hike? I believe your prior assumption was to pass through 60% to clients. So are you passing on 60% through the first hike? Or is there potential upside to that $8 million to $10 million benefit, if deposit pricing is a little bit better than the prior?

Right. As pointed -- as asked earlier, there maybe a little front-loading to the extent that we don't get to that 60% that quickly, but on offsetting that, the bank repricing doesn't happen right away either on the revenue side. So the net of those 2 factors are kind of leading us to the -- that $8 million to $10 million type number per quarter here for the next few quarters.

Okay, got it. Just wanted to get your updated thoughts on robo-advisors. I mean, many of your peers are investing in enhanced robo-advisors capabilities to help financial advisers deal with the DOL and help with client acquisition of smaller clients. Curious if Raymond James would need to make similar investments?

Yes, we do. The robo-advising phenomena, I'm sure that first, we already do a lot of asset allocation in our asset management groups. So the question is, if we make that more automated than it is today, then we certainly are giving clients access and advisers already access to our systems. Do we enhance that? Do we buy or rent the robo-advisors? Certainly. Most of the asset managers that have bought them have volunteered to rent them to us. And right now, we don't view it as a strategic imperative for our business, is that we're focused on the high -- on people with assets that we still believe that robo-advising phenomena today is still for basically clients without a lot of money. We do have some high net worth clients that put a little bit in there. It will be interesting when they compare their performance results with managed results and also the help they get in this kind of market through robo-advisors. Again, we're not overly worried about the trend. We do believe the technology, just like on online trading. As the technology improves, there are pieces of technology that we use, but we don't view it as a fundamental threat to our business.

Okay. And just lastly, Fixed Income continues to just recover and seems to defy all the trends we've seen at the bigger banks. I appreciate your model is different, but curious if you could provide, maybe, some color on what's driving the strength you're enjoying? You winning new clients? Or are you -- do you think of gaining market share?

I think it's just execution. We're an agency business. So our inventory moves very, very quickly. We have a big muni book that we move very quickly. And we are top 10 underwriter. I think it looks like we finished the year at 8, in terms of origination and public finance. So we know the markets, we know the issues. We move them very quickly and across the board, we've done very well. We had some proprietary kind of systems and products that help clients and our model is just different. And these people are laying off, we're not. We're not overcapacity at all. We're performing well. Having said that, I'd much rather have a steep yield curve and a lot of volatility at business we do a lot better. Doesn't look like that. Maybe, we'll get the volatility part, but we're certainly not getting the steep yield curve part. So given the market, we're performing well. We're just not a high yield or new issue business outside of the muni space that a lot of the major banks and competitors really focus on. They're just different businesses.

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

Just a quick follow-up on the discussion about the discretionary expenses that you guys are taking a look at. Can you help us frame up the potential size of those expenses, maybe, as a percent of your total expense base would be helpful?

I don't think we can quantify that quite yet. I mean, we just started the intense process a couple of weeks ago. But I think the first part is -- of the exercise was reining in expense growth. You'd have natural growth with comp increases every year, which is certainly comps a big part of our expenses. And those comp increases, salary increases hit first quarter also with payroll taxes. So if the question is how do you rein in that expense growth? Then just by cutting back discretionary expenses. We're looking at the total technology spend. It's not that we're mothballing projects, but we may extend or invest a little -- defer into the next year, stretch out projects. So we don't have a number for it, but I can tell you we're very focused on it right now, and I'm sure this time next quarter, we could be a lot more definitive than we are right now.

And some of the biggest costs, we talked about conferences and trips and things like that, some of those are contractually committed to, so there's not a lot we can do about some of them other than regulate attendance a little more closely.

Got you. Okay. And then, the other question I had was on the recruiting expenses you guys incurred this quarter. Did you guys have any of those similar expenses in prior quarters? And if not, just wondering what made this particular quarter so unique where you'd actually be accruing that much for the advisers you are on-boarding?

No, I don't think there's a lot of uniqueness. There is a lumpiness by when people happen to join. But they just pop out when revenue is down. When revenue is up, there's a small percentage of revenue. When revenue is down, they are an increasing percentage of revenue and it's just -- I think they were kind of hidden costs to the outside viewer and we've had several commentary from you about expense containment and growth and I think those are some of the costs that you don't see line item by line item that had been there most quarters.

And Paul was just giving you a flavor for some of the items that are in that. I mean, the business development line only went up marginally from the prior preceding quarter. So and, obviously, those expenses were present in preceding quarter as well. So -- and they will continue to be, if the recruiting stays on track.

Got it. And obviously, that's a good thing long term.

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

Just a question on capital return. More broadly, you have a $250 million debt coming due this year. How do we think about the trade-off between stock buybacks and retiring that, or do you have the capacity to do both? Just trying to think through that issue.

Yes, we separate those 2 issues. Our buybacks in terms of what we think is a good use to capital and then how we fund it is through debt or equity. Probably safe to say we won't be raising equity anytime shortly in this market. But the -- we're -- our initial plans are looking at a refinancing of that debt, but it's all subject to both our appetite for investing in a business, which is a little bit on the markets. We certainly have Deutsche Bank coming up and so we will certainly in the summertime look at, as Deutsche Bank nears, at refinancing that and then looking at our whole balance sheet financings, which could be more or less depending on how we see the markets at that time.

For the immediate term, we certainly have the capacity to do buybacks and retire that of current resources.

Okay. But at least, at this point, you're thinking more refinancing to keep flexibility?

We probably even, we believe, have the ability to do the Alex. Brown transaction out of existing resources as well. But given our conservative nature in terms of capital levels and liquidity levels, there's a -- that would be more or less our targeted timing to have some other financing in place.

The downside of -- these markets aren't fun to work in, but -- and we're not wishing for a sustained down market, but those markets also bring opportunities. So -- and historically, we've done pretty well investing in down markets that paid off. So we want to keep that flexibility, but not at any cost. So again, as we get closer to that, we'll look at it much more tightly. We're not worried. We have enough capital and cash to not do it. But my guess is, if you ask for a predictive call, it would be the refinance that at this point. But I can't tell you if markets stay way down and there aren't a lot of opportunities. We may revisit that.

And one other factor that is in our thinking is that in March of '17, we have the ability to call the $350 million of retail debt that's out there at 6.9%, so that's -- so thinking about that as well, obviously.

My guess is it's not a good time to go for 30-year debt today in the financial services industries. So we're -- we're part of that's what the market will. I know we have access to the markets, but we'll look at just what financing and costs and the markets look like ...

We have the luxury of picking our timing somewhat here, so we'll try to optimize that to the best we can.

Your next question is from the line Hugh Miller with Macquarie.

Just had 1 question on an area that wasn't touched upon. With regard to the Alex. Brown deal, how should we be thinking about kind of the time horizon and once you start to get the bulk of the commitments from advisers? Is it just kind of leading off to the very end when it closes in the September quarter? Or would you anticipate you start to get a good sense of how many people will be joining ahead of that?

The early indications as we have 2, only 2 advisers in the whole group, which were very small, under $300,000, leave. Those are very early and I think had nothing to do with us. So, so far, so good. And we don't take it for granted. And I would say, within another 60 days or so, we should have at least a good indication, but one thing I learned at running a recruiting business is the measure they said is always bums in seats. It doesn't matter who signs, it matters who shows up and then sitting down in their chair the day after. So we don't -- and we don't take for granted even when they're here that they're here forever. It's part of the reason I think our retention is so well, so we focus on it. So I think that's subject to anything can happen in the market and situations that will impact that. So we're going to work really hard like everyone's at risk every day, but I think we kind of operate that way with our advisers too. So a lot of work ahead of us. So far, the early indications are very good. We don't think we'll keep 100%, but we think we'll do pretty well. And as we get closer, we'll know more.

Your next question is a follow-up from the line of Devin Ryan with JMP Securities.

Just a quick follow-up on the NIM outlook. I know there's a lot of moving parts here and any change in mix impacts that as well, but are you able to underwrite to higher yields? Or do you expect stress the credit market persists and that drives up corporate bond yields across the spectrum? Just trying to think through that 3% NIM outlook and if that could migrate up if short-term rates don't move and we just have a higher risk premium?

Yes, Devin, that's absolutely a scenario that can play out. We've seen that in prior distressed periods. And we've even seen already a couple of isolated situations where we've seen some -- in particular, some foreign banks shedding some high-quality loans that at not huge discounts, but some discounts, that are improving our yields on those particular credits. So I would not say that we've seen that to be too widespread yet though.

Okay. But is incremental yield coming on today above or below 3%?

I would say it's right on top of -- some above it, some below, just to get in the mix. So we grew assets and grew loans across all categories. Our securities-based loans tend to be lower than the average NIM. Our mortgage loans are kind of right on top of the average NIM. Our corporates are a little bit higher. So in our tax exempt loans, on the tax adjusted basis are higher so -- and once again, it's the asset composition and the asset mix that influences that quite a bit as well. So -- we are excited about the Alex. Brown team joining us in September. We think that will be accretive to the bank's loan production, particularly in our mortgage banking and our securities-based lending business.

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

Two separate questions. First one, again, there's a lot going on, I presume, with market volatility season and what have we, but if you look at the commission for our advisor trend, that seems to be tailing off a little bit. I'm just wondering if you could talk about maybe some of your underlying dynamics that might be driving that? And then secondly, I was just puzzled by your comments on why you wouldn't want to lock in some 30-year paper, given what's been happening with the yield curve, maybe you could expand your thinking on that, that would be helpful.

The commissions are 2 things. It's tailing off because of the fee. We bill off balances of client assets. So when the balances were down, the billings were down. So I don't think there's anything more and, certainly, syndicate was down transactionally, so I don't think it's -- I think that's an equity market trend, not an inherent trend for advisor productivity. I'm sorry, your second question? I missed that.

I'm sorry. Just a follow-up on your comments that this would not be the time to lock in 30-year paper. Is that your view on rates? Is it view on the business conditions. So curious why would the rates sort of flatten pretty significantly year-to-date, you wouldn't be a little more nimble in locking that in, just curious to your thinking?

Yes. That was more of a bad joke on just the acceptance of 30-year financial services paper this week. It's probably not high in the market.

We don't think the asset types there.

If the stock market's any predictor of what the long-term debt markets, although I believe -- I always said if you like our equity should love our debt because of our conservative nature and how we operate in the 112 quarters of consecutive profitability. We just don't think -- we think rates are good. We just don't think there's a lot of appetite right now given the markets.

At this time, there are no further questions.

Well, great. I appreciate you guys staying on. I knew there's a lot of questions again in the quarter. I know in the essence, on the surface, it was disappointing and a lot of that driven by markets. Hopefully, we explained both the market and the cost dynamics. I'm very comfortable with the position of the franchise, and I also understand our responsibility to manage in these times. So a great group of advisers, who are going to focus on continuing to help our clients and to watch the business. If markets deteriorate, we'll react. If they steady out a little bit, I think our focus on managing discretionary expenses, growth and focusing on investments while we can still recruit great advisers is the right long-term strategy for the firm. So thanks for your time, and talk to you again soon.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.