Welcome to the earnings call for Raymond James Financial Fiscal Third Quarter of 2016. My name is Raquel and I will be your conference facilitator today. This call is being recorded and will be available on the Company's website. Now I will turn the call over to Paul Shoukry, Head of Investor Relations at Raymond James Financial. Sir you may begin.

Good morning. Thank all of you for joining us on the call. 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 the 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, anticipated savings, financial results, industry or market conditions, demand for our products, acquisitions, our ability to successful hire, integrate financial advisors, anticipate a 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 other conditional verbs, as well as other statements that necessarily depends on future events are intended to identify forward-looking statements. There can be no assurance that actual results will not differ materially from those expressed in those forward-looking statements. We urge you to carefully consider the risks described in our most recent form 10K and subsequent forms 10-Q which are available on the SEC's website at SEC.gov. During today's call we'll also use certain non-GAAP financial measures to provide information pertinent to our management's view on ongoing business performance. These non-GAAP measures should not be considered replacements for and should be read in conjunction with, the corresponding GAAP measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures may be found in the schedule accompanying our press release. With that, I'll turn the call over to Paul Reilly, CEO of Raymond James Financial. Paul?

Great. Thanks Paul and good morning everyone. I feel like it's kind of boring after watching the Republican Convention the last few days. We hit our 114th quarter of consecutive profitability which wasn't, I guess, a huge surprise. But the great thing about Raymond James, I think, we're very steady. As I look at the quarter I think the first reaction, I mean, it's just a very solid quarter in a very volatile environment this last quarter. If you look from the big picture, all the strategic drivers of our business look in good shape. Record net revenues of $1.36 billion, up 3% over last year's quarter and 4% sequentially, record client assets under administration of $534.5 billion, up 7% over last year's quarter and 4% sequentially. Record number of financial advisors, up 327 over last year and 69 sequentially. Record net loans of $14.8 billion, up 23% over last year's quarter and 3% sequentially and record financial assets under administration of $71.7 billion, up 2% over last year's quarter and 4% sequentially. And these are the drivers that you really look for in the forward going business. As many companies have struggled to grow revenue, we've continue to grow revenue which I think is a good long term indicator and all these records are really driven by organic growth and the market. So these are without some of the acquisitions that we announced that are coming up. Speaking of those acquisitions, as you know, as we're not a very acquisitive Company, but we look at opportunities where there's a culture fit, they drive our strategy, we believe they can be implementable and a good price we believe for shareholders. And we're going to be closing hopefully a couple during this quarter. The first one we've talked about is the…

Thanks, Paul. The consensus model for the quarter was fairly accurate. The majority of the line items were within 1% or 2% of actuals. Not a lot of line items to focus on here, but I will touch on a few. On the revenue side, pretty close percentage-wise, but a big absolute number, about $16 million ahead of the consensus model. And again PCT driven by the higher asset fees and the volatility that we had in June with the uncertainties surrounding the Fed move and the Brexit vote actually helped institutional commissions, both equity and fixed income. So we had a pretty good June in that regard. And similarly in Investment Banking we had somewhat of an underwriting recovery in June, although the run rate for the quarter is still low by historical measures. But we did kind of recover somewhat in June to a reasonable number. And that somewhat surprised, I guess, some of the models a little bit in the Investment Banking side as M&A was fairly flat and jumping all the way down to trading profits, paul's talked on that. This was, I think, sort of an outlier good quarter for us in trading profits. I'd like to think not. Maybe we'll get better, but I certainly think that all the stars were in line here for us to hit a number like that in trading profit. So it was a pleasant surprise, even for us, to see the magnitude of that by the end of the quarter and a lot of it again happening in June, and then the other revenues that's driven, as you can see in the detail in the press release, largely by Private Equity valuation gains of $13 million this quarter. More than half of that, by the way, goes to…

All right. Thanks, Jeff. First just let me address the segments and I'll give you an overall. In the Private Client Group, certainly you know with record assets it's a good tailwind for us. And Private Client Group, recruiting continues to be robust and we're keeping our historic retention levels. So the trend, certainly from the revenue standpoint, looks very good there. We will likely close on Alex Brown and 3Macs sometime in September. Timeframe, they could slip, but that's the target. Now, those will impact revenue, but you know in our acquisition strategies we don't go slashing costs right away. That our goal is to integrate, keep advisors around, make sure they're stable and then we right-size costs. So that may have -- they're smaller acquisitions, but it may have some margin impact, certainly not short term margin expansion, but we believe they're both two very good investments. We also have some potential upside it transactional revenues pick up, both through syndicate and Equity Capital Markets and just the equity markets in general. Again can't predict markets. In the Capital Markets side, fixed income and public finance backlogs and the business look good and we continue to think they'll look good, but the $30 million trading profit number is a record and unlikely to continue and hopefully the markets don't gyrate so much that it makes that easy, so looking forward. The other side, the Equity Capital Markets, the underwriting and M&A backlog look promising. Certainly underwriting calendar looks better than it has in a while. But we all know those markets can turn also. But where there may be some headwinds on public finance, there may be some -- versus this quarter, some tailwinds in Equity Capital Markets. Asset Management, given a reasonable market should continue to grow,…

Yes. On the acquisition expenses when I guided up now to the high $30 millions, that's really just for the Deutsche Bank Alex Brown transaction. The 3Macs transaction in Canada will also have some acquisition-related costs. A lot of that's contract termination and severance and things like that. So, but that total for that transaction's estimated to be a little less than $10 million and that will hit some in the September quarter and some in the December quarter. We're hopeful, because we're not big proponents of non-GAAP presentations, we're hopeful that we can get all of these costs either incurred or accrued by the end of the calendar year. They may slip into March a little bit, but hopefully we can get most of them done by the end of the calendar year so we don't have to continue with that presentation going forward from that point.

Great. Thanks, Jeff. And now we'll open up for questions. Raquel?

[Operator Instructions]. Your first question comes from the line of Christian Bolu with Credit Suisse. Christian, your line is open.

So just firstly on litigation expenses, I guess a couple quarters now of these outsized litigation costs. I don't know, just longer term should we think of issues here as maybe driving structural higher expenses for the firm? And are there any parts of your business model that maybe needs to be modified or changed in some way to satisfy regulators? And specifically on AML, I mean, best you know are we done here? Or are you having discussions with other states?

No. So first, these two weren't totally unrelated. So, one of the AML issues was related to the case and it was a specific case and a specific issue in the State of Vermont with a specific group of investors. So we don't think those are happening all over. Now, you ask if they're structural? I think there is in our industry structural regulatory expenses and certainly a more aggressive stance by regulators. Fines are up in the industry. However, certainly not at this level. I think hopefully they unusual levels. But there will be some fines. And the 50 people in headcount and AML additions is just one example of the increasing regulatory costs, but those are in the numbers today. There is a structural elevated costs in regulatory.

And for us they show up largely in compensation expense and systems. The only thing that's showing up in this other expense, really, are external litigations and fines and things like that. The structural element that's going to be ongoing is embedded in the comp and systems lines.

And then just on mutual funds, I believe in the release you spoke to a pickup in mutual funds service fees in the quarter. Can you give some more color around this, just because there seems to be more of a trend to what passes generally industry-wide? So was the quarter rise more higher asset levels or if you see just greater uptick on your mutual fund products?

I thing is just asset based, both through recruiting and growth. It's just a rise in the level of assets has caused the growth in that number for the quarter.

And then just some quick modeling questions, I don't know if you could give us like the total client cash balances. How much of that were in the deposit sweep programs. And then what kind of rates you're getting on that third-party sweep?

Not really much change from where it's been, Christian. It's still hovering around $38 billion. I think probably $32 billion of that is in the bank sweep program, but $13 billion of that $32 billion is going to our own Bank. So there again, these numbers are not much different than they were a quarter ago. Post the Deutsche Bank Alex Brown transaction we will have different numbers, as there's somewhere between $5 billion and $6 billion of cash balances that will be coming onto our books in that transaction and the spreads really haven't changed much either, by the way.

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

Maybe just a follow-up here on kind of thinking about the DOL, I mean, you mentioned Paul talking to fund families or starting to. I'm just curious if the negotiations around things like revenue share have already started? I guess first question then, client focus has always been a big deal for Raymond James and you guys already aren't selling many products that are viewed as more lucrative by the industry. So I'm curious if you see any changes or expecting any changes to the types or even the number of products that you're selling in a post-DOL world?

Yes, Devin. I mean, it's too early to answer that. I think what my contention has always been is that you have fund families that want us to work with them. We've got to make sure clients are charged appropriately. And that over time there'd be some equitable redistribution that would impact, some may impact clients because it's regulatory. We certainly don't want them to carry the burden. Some of the broker-dealer may impact advisors in the fund family. I would say we don't have an ask, so I don't think there's negotiation. I do think there's a willingness and an understanding that they will contribute to this. And I don't think there's a resistance to it. It's just how and how do you structure it? How you keep it level for the firm, the client, the advisor, to meet kind of the DOL requirements? So it's complex. I don't see resistance. But I can't say we all have asked yet. We got to know what we're going to do before we have a solid ask.

And then in Private Client, I mean, it just seems a persistent theme here is subdued client engagement. Historically that doesn't correspond with record high markets. Maybe not seeing quite as much in your results because of the recruiting strength, but I'm just curious what you guys think is different this time and what may change the skepticism? I know macro uncertainty is high. I'm just curious if you kind of feel like there's just more of a lasting impairment, just with the financial crisis still relatively fresh?

Part of it, there is a number of elements to it. So first, certainly equity syndicate being down is an impact. So you almost have to move that as a separate piece. There's also movement to fee-based accounts. So that certainly takes it out. But we're kind of digging into that number too and trying to figure out if this is systemic or market-oriented. I think most individual clients have been afraid of the market. And with all this volatility, it's hard to blame them. And we teach long term investment anyway. So whether you could say there's a structural change or this is a market one, I don't know if it's been a long enough run. But we're certainly, like everyone else in the industry, looking very hard at that right now.

Last quick one here just on the bank for Steve. I'm not sure if I missed this, but the NIM outlook just with the flattening of the curve here? And then provision. Understood the commentary, you still seemed a little bit light. I don't know if you can kind of hash out some of the moving parts. I know last quarter you highlighted the qualified reserves was maybe a little bit high, especially with some interest rate related companies. So not sure if that played any part as well. Thank you.

Yes, we would expect, at least over the last couple of quarters as we sit here today, for the spreads in our loan portfolio to be pretty stable. And as Paul alluded to earlier, part of the contribution to the reduced provision expense relative to the gross loan increases was the loan mix and the fact that we really grew our private client banking assets, securities based lending and mortgage loan assets more rapidly than our corporate loans. And we also net/net, you may have seen we had a reduced level of criticized loans in the quarter which reduced reserves on those particular loans that were either payoffs or in one case we did have one upgrade of a loan from criticized status, but the bulk of it was just paydowns in criticized loans that contributed to that reduction in that asset category.

Good. So you didn't do anything to the qualified reserve, just with the--

Qualitative reserves, there is no--

I assume you call it qualitative reserve?

Exactly.

Your next question comes from the line of Conor Fitzgerald with Goldman Sachs.

I guess just the first one on that net new asset inflows which seem like there were pretty strong this quarter, I guess. Can you give us a little color on where exactly the growth is coming from?

Yes. The growth is, I think, if you look at the assets in general, market certainly helped. We thought the number would be different than -- the last week certainly changed our outlook of the number in June. If you remember the market then and recruiting, and so we've had, as you can see by the results, very strong recruiting, a very strong pipeline and you add those two together, they really drove the client asset number.

And just any more color on specifically where you're having the most recruiting success?

The independent channel has been the strongest this year. And that comes and goes. Certainly when you add Alex Brown and 3Macs to that it's going to catch up. But they seem to go in fits and starts. The recruiting in Raymond James Associates, employee is above last year and that was a very good year. But the independent channel particularly has had a very, very strong year. So we're happy with both of them. But the independent's stronger right now.

No real concentration of where they're coming from.

And then maybe switching over to the loan book, several banks have kind of talked about increased regulatory scrutiny on commercial real estate. I guess two questions. One, are you having any change in dialogue with kind of your regulators on CRE? And maybe more applicable to you, but if other banks are kind of pulling back and that creates an opportunity that spreads wide in that space, is that an opportunity for you to kind of grow your loan book there?

Kind of we're clearly in the middle of that dialogue and getting direction at various regulatory meetings that were in on the focus on commercial real estate. Our balance sheet compositional, although we've grown our commercial real estate book, is a little bit different. Some of the banks that have significant concentrations, their multiples of their commercial real estate exposure as it relates to their percentage of total loans relative to ours. Ours is still pretty small. And I think you know about half of our commercial real estate are loans to REITs that tend to be a lot more diversified. And the regulators would acknowledge those have historically been less problematic than the project finance real estate. So our real estate concentration and percentage of total assets and total loans is relatively low compared to other institutions. There could be some opportunities, to your point that as others are pulling back. But we're going to continue to be very cautious and not change our underwriting standards on commercial real estate, so.

And then just last one from me would be more on a longer term philosophical one. But you guys mentioned higher costs kind of in closing some of the M&A transactions than you would've thought. Something we obviously hear from a lot of companies these days. I'm just wondering, knowing that was kind of the benefit of hindsight, how does this impact your propensity to do deals in the future?

First, I think we've been very good about predicting our closing costs and net/net Alex Brown was just more complex. The 3Macs or the Morgan Keegan, we brought the broker-dealer and knew what we had and controlled both ends of a transition. And the Alex Brown business, both by part of the reason we're in it is for the ultra-high net worth access and the technology standpoint, the connections, the systems, were just more complicated. And the agreements with Deutsche Bank are more complicated. So the agreements drove the legal costs. And the sophistication and complexity drove the technology cost. So yes, we underestimated it. And Alex Brown was very strategic for us and their growth. But it wasn't 100% down the fairway, what you'd call Morgan Keegan and 3Macs. It was a little stretch in some areas for us on purpose and we were just a little shy. So I think we've done a good job estimating generally conservatively on those costs and we weren't perfect on this one, but $10 million out of $500 million investment isn't going to sway our ROE analysis too much.

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

Like to come back to the discussion on commissions at PCG, is there anything that you guys are doing internally that might be having an impact on that number? And one of the things I was just thinking about is if perhaps you've raised the bar for sales of higher commission products. And if that is happening, whether that is having an impact on that number?

We've always had a pretty high bar on those and always have been cautious. If anything, with high commissions going way, way back. And Tom's in the room and he beats that drum all the time. So I don't think that's changed. There's been continual growth to fee-based. So that's part of it. And again, you'd have to segment out the syndicate business which has been almost dead which certainly a part of it. And part of is there's been less transactions. So I don't think there's been a change in philosophy or a push to do something that's caused it. I think the natural migration to fee-based along with the muted equity markets have just contributed to that.

Any financial statistics you guys might be able to share with us as it relates to 3Macs? Maybe revenue and perhaps pretax margin, if you can provide that?

Yes, I don't think we've written that up to provide it in some kind of format, but we have disclosed they're 70 advisors and they're about on our average $6 billion of assets in Canada. Our Canadian margins have been near our Private Client Group margins in the U.S. and we'd expect the same thing. That business has been lower margin, really because of back-office costs relative to the size. And we think over time, in that first year that we'll be able to drive a lot of those costs and achieve the margin. But again, we're sensitive both to the people, the culture, making sure we get it right before we're just going to slash cost cutting there.

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

Just sticking with the DOL theme for a moment, behaviorally what are you hearing from the financial advisors as everybody starts to distill the implications of fiduciary form? And I guess the core question is, are you seeing any kind of pickup in migration to advisory platforms versus more of a historic brokerage model?

A little bit. Maybe a little bit. We told the advisors to wait for an answer. I think that some people have come out of the box with a solution have had to backtrack. And I think our message has been very clear to our advisors. They know we're sincere about it. We want a solution that's good for clients, keeps as much advisor flexibility as we can and fair to the firm. That's the way we've always approached everything. Until we know what we're going to do, the worst thing you do is go to clients, tell them one thing and then you change it again and then you changed it again when the law is finalized or understood the product. So there's plenty of time to make those changes. In April, implementation is to go to your clients and change either commission accounts or fee-based. There's plenty of time to do that. So the key is to get it right. Luckily I think we have a lot of trust with our advisors and clients. And our long term history has been to do the right thing. So I think in the most part, they're nervous because they hear stuff but they realize that it's the right track. So far it's been business as usual.

Okay. And just a point of clarification, you've mentioned 92% of the advisors have signed off on Deutsche Bank. Can you give us an update on where the related assets might be associated with those?

Well, the percentage of assets is very similar. I can't tell you what the total assets were. We will find out soon on the closing. But we don't get weekly or monthly reports.

Somewhere between $45 billion and $50 billion for the 92%.

And then just finally, thank for taking the questions. Stepping back, I think a number of your somewhat close peers have been increasingly embracing sort of technology and Robo-Advisors and you've been sort of pretty clear in your strategy of not doing that. Any shift in your thinking in terms of leveraging any online platforms for client acquisition or servicing in the Private Client Group?

We've been very clear that we aren't going to have a separate robo-advisor that just intermediates our advisors. We have never said that we were not going to enable technology that could let clients use that channel. We have an investment central today that manages small accounts for advisors. We've always had in the plans since our plan of the future to take what we already do in asset management and make it more of a direct portal to clients and make it an automated system. The question for robo-advice was there any real advantage under the DOL rules to put another system in temporarily or intermittently to help with that? I think that's probably no, but unclear. But I would say at first a lot of people ran to that because of it. We will have a client FA-oriented solution, but it isn't a solution that takes it away from the advisor and is a competing channel. So we're not saying no robo-advisor-like platform. We're in the advisory business. We will have technology that will help them gather and manage assets easier, as all of our technologies really associated with. So it's really a nuance on robo-advisors. When Scott Curtis spoke at his conference, he had two titles, Raymond James Considering Robo-Advisors. The same interview was, Raymond James Will Never Have A Robo-Advisor. I think it's caught up in the terminology. We will, I believe, have the technology. I just don't think it's going to be a robo direct away from the advisor type of technology.

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

So just, I guess, a follow-up on the DOL. We've been hearing a little bit about the potential for the industry to kind of standardized transactional-based commissions across certain product lines for retirement accounts. I wanted to get your thoughts as to whether or not, I guess, you view that as a viable solution for the DOL's fiduciary standard and what potential of limitation challenges there could be if things kind of go that direction?

There so many alternatives. Again, I know you guys want an answer. I'd love to give you one. I think it's unclear. You can do anything within the BIC if you wanted to. But I'm not sure that's smart or good. And we're just looking at all the analysis. I know people have looked at, can you standardize fees in mutual funds on fee-based platforms. Can you standardize commissions, there are a lot of possible things, but we're not at the point where ready to say what's the right solution for our clients, advisors and us yet. We're just not ready. So we're certainly in dialogue with the industry. So we know generally the options of what people are thinking. We're dialogue with our advisors and we have a big group here that's working on it full time and analyzing the alternatives. And we're systematically starting to make the basis of decisions, what I call them the macro decisions. But we've got a long way before we nail it down or give you a detailed answer like that. It's possible. But we're not there.

Okay. I definitely appreciate the insight and just another question following up on kind of the sluggish retail dynamics that you guys had referenced. I understand the syndicate calendar certainly plays a factor there. We have kind of seen, if you look at some of the retail investor sentiment indexes, a pickup over the last four quarters kind of more towards a four-month high, kind of nearing back towards historical norms. It sounds like from your dialogue that you're not really seeing any change in that retail engagement in July relative to what we may have saw in June. Is that accurate?

Yes. July is early. We're in the middle of July. We're not reporting on that. I would say we see certainly muted activity this calendar year compared to historic norms. I'm not sure we're ready to call that a structural change, but we're in the middle of analyzing it and make sure we understand the components. And when people are slower into the market we can theorize all sorts of things. We're trying to get as objective as we can on it. So we see the trend. We see it in the industry. We're not immune from it. And so we're looking at it. But certainly the retail investor has been nervous in this market and you can't blame them. We've had a lot of ups and downs this last year.

And then last for me. You guys just referenced seeing a little bit more success in the independent channel, obviously mentioning with Deutsche Alex Brown deal and the 3Macs that would kind of change that. But from just kind an organic recruiting environment, is there just more of a willingness for independents to change firms or are you seeing a mix shift where you are seeing kind of in-house advisors at other firms that are adopting the independent channel and coming over to Raymond James in the independent channel?

There are a couple of dynamics. First, last year we said was our second-best recruiting year ever. So first, the employee channel's doing better than last year. They are not having a bad year. They are having a very good recruiting year. The independent channel's just having an amazing year and part of that is position of competitors. So I think we're getting more than our fair share. The report said that recruiting was down 40% in the industry. We're certainly not seeing that. I think we're just in the right place at the right time and the platform's right. So the independent channel I think has been just a bigger share gain. We're getting to see more and more joining, but the employee channel's up over last year. So, even though it certainly isn't lackluster and we're I think at a pace that we can bring advisors on and successfully. And frankly if it got too much higher we might even have some concerns about onboarding. But right now we're in good shape. And you get these relative swings. So I wouldn't -- and these swings may last couple years. But it doesn't mean they last forever. So we've watched it go back and forth for a long period of time.

[Operator Instructions]. Your next question comes from the line of Steven Chubak with Nomura.

This is actually Sharon Leung for Steven this morning. My first question is, Steve, you'd alluded to the possibility at Investor Day of deploying some of your excess capital in securing the securities book, at least marginally. Given the recent pressure at the long end of the yield curve, in your view does this still represent like an attractive opportunity moving forward?

Yes. Actually, we're still analyzing that. Obviously the rate environment has changed that dynamic a little bit. Jeff mentioned the cash balances, the total client cash balances, the bulk of which are at third-party banks. Those are pretty stable right now, but he also mentioned that were getting ready to get this influx of cash from the Alex Brown clients. So that analysis still continues. We don't want to take a lot of duration risk. We're not interested in really going out too far in the yield curve to just try to pick up more yield. So anything we would do would be relatively short in duration. But we do think that dynamic where we could move some additional cash to the Bank and have a little bit larger securities portfolio without taking any credit risk, we would do things that would be in the agency and very high-grade munis perhaps, but primarily agency-oriented mortgage-backed securities. That analysis probably is still valid and we're still continuing to pursue that. As you see, we haven't implemented that yet. But we're continuing to analyze it.

And it would require nominal additional capital.

And then just a follow-up on provision, so provision expenses came in below expectations in the quarter, like you noted. In the past you've guided to provision in the range of 125 to 150 basis points of loan growth per quarter. I guess provision came in below that guidance range this quarter. I was wondering if that guidance still held moving forward?

Yes. Actually, it's really going to be based on the types of loans that we're growing. When we add securities-based loans and residential mortgage loans, the provision expense and the associated loan loss allowance is lower than our corporate loans. So each quarter that had that new asset composition and the new growth tends to be different. Our corporate growth this last quarter was muted which drove that reduced provision expense percentage. When we have a quarter where corporate loan growth is higher than the other asset categories, then that mix will be different the next quarter, so.

And of course in any given quarter we could have credit issues in either direction and we could have qualitative reserve impacts. So those are hard to predict, obviously going forward. But on the growth side I think Steve's comments are correct.

[Operator Instructions]. There are no further questions.

Thank you, Raquel. We appreciate you all joining the call. I'm very proud of our results. I think growing assets and revenue in this kind of market is really the long term indicator of success. We certainly had some unusual expense items and certainly environment has -- between technology and regulatory, it's certainly a challenging environment from an expense standpoint. But we're doing a good job of managing it. With the acquisitions coming onboard this year and I think our positioning. I'm very confident that we will do well, given the market any market environment. So, I'm proud of the team. We know we have to earn it every quarter and I appreciate you attending the call this morning. So, thank you.

Thank you, ladies and gentlemen. This concludes the earnings call for Raymond James Financial Fiscal Third Quarter of 2016. You may now disconnect.