Good morning and welcome to the Earnings Call for Raymond James Financial Fiscal Third Quarter of 2019. My name is Jessa and I will be your conference facilitator today. This call is being recorded and will be available on the company's website. Now, I will turn it over to Paul Shoukry, Treasurer and Head of Investor Relations at Raymond James Financial.

Thank you, Jessa. Good morning and thank you all for joining us on the call. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman and Chief Executive Officer; and Jeff Julien Chief Financial Officer. Following the prepared remarks, the operator will open the line for questions. Please note certain statements made during this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated results of litigation and regulatory developments and general economic conditions. In addition to words such as believes, expect, could and would, as well as any other statements that necessarily depends on future events, are intended to identify forward-looking statements. Please note there can be no assurance that actual results will not differ materially from those expressed in those statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Form 10-Q, which are available on our website. During today's call, we'll also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedule accompanying our press release. With that, I'll turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?

All right. Thanks Paul. Good morning, everyone. Thanks for joining us. As usual, I'm going to give a brief summary of our results for the third quarter 2019 and then I'll turn the call over to Jeff, who will give more detail. And then I'll come back to discuss our outlook and open up for questions. Overall, I am pleased with our results for the third quarter, despite some elevated expenses and decline in Investment Banking revenues that were both largely timing-related, business metrics were strong and I'm encouraged by the solid performance in a number of key areas during the quarter. Quarterly net revenues of $1.93 billion increased 5% over the prior year's fiscal third quarter and increased 4% over the preceding quarter. We generated quarterly earnings per diluted share of $1.80, lifted by higher Private Client Group fee-based assets and higher net interest income, primarily at Raymond James Bank compared to a year ago period. We ended the period with record results for client assets under administration of $824.2 billion, financial assets under management of $143.1 billion and total Private Client Group financial advisers of 7,904, as well as record net loans for RJ Bank of $20.7 billion. Annualized return on total equity for the quarter was 16.1%. And while it isn't a metric that we use, the world does seem to be moving towards measuring and reporting on return on tangible common equity. And if you looked at our discussion in our last Analyst and Investor Day in June, our adjusted return on tangible equity on annualized basis for the preceding quarter would have been approximately 180 basis points higher than the adjusted return on equity. Given a fairly consistent metric, we think that same result would be similar this quarter. Through the first nine months of…

Thank you, Paul. On the revenue side of the P&L, virtually all line items had only minor variances from your consensus model this time which is pleasing to see I guess in that we've gotten the story across accurately particularly with the new line items from a year ago. So, I'm going to limit my comments to adding color to a couple of the larger dollar changes from the preceding quarter. First is our largest revenue line item with the asset-based fee revenues that we saw that nice double-digit gain of 12% from the -- sequentially which was exactly in line with the growth in the PCG fee-based assets in the March quarter which is the relevant time period as these are billed quarterly in advance. Implication there of course is that the 4% growth in these assets for the current quarter, the June quarter should be indicative of Q4 growth in that line item, although it won't always be a perfect correlation like it was this time. The other large variance dollar-wise was the Investment Banking revenues which again, I think all of you estimated fairly closely. The sequential decline of course was more due to the fact that we had a record M&A quarter in March not that this current quarter was weak, it was just coming off of a record which was a hard act to follow. So that was actually down. M&A revenues were down $40 million for the quarter. The details of course are in the press release on Page 11, if you have the same pagination as I do in the Capital Markets P&L. The bottom line for revenues is that total net revenues of $1.927 billion up 4% sequentially were just smack on line pretty much with the consensus model. On the expense…

Great. Thanks Jeff. Well, first in the Private Client Group segment, we're entering the fourth quarter with fee-based assets, accounts up 5% on a sequential basis. And remember substantially all of the assets are billed based on beginning balances in the quarter. So billings should look pretty good in this segment. Of course the offset, which you have decline as discussed is any decline in client cash balances and increased allocations to other investments and certainly whatever happens to interest rates. But overall we continue to experience very good financial adviser retention and recruiting. And in fact, although we may not hit our record for last year, we may come pretty close. And our recruiting pipeline is really extremely solid. And our employee side has really picked up where the independent has -- had led the way the first couple of quarters. In the Capital Markets segment, while the timing of closings are always difficult to predict in M&A, the pipeline is very, very strong. And I think we're optimistic in that area. Fixed Income results have improved last two quarters. And the rate environment is generally still conducive for trading activity, especially as interest rates move. However, we did go through the process of rightsizing the Fixed Income business somewhat and expenses during the year. So that certainly has helped their margins and should continue to. The Asset Management segment, we entered the fourth quarter with financial assets under management of 6% year-over-year and 3% sequentially, which had also helped billings. Increased utilization of fee-based accounts in the Private Client Group as well as good return performance in Carillon Tower should help here. The Raymond James Bank, we started the fourth quarter with record loan balances and attractive net interest margin. I think the bank remained very, very disciplined…

Thank you. [Operator Instructions] Your first question comes from the line of Craig Siegenthaler from Credit Suisse. Please go ahead.

Hey, thanks. Good morning, everyone.

Good morning, Craig.

So I just wanted to ask a question on the bank after the recent decline in interest rates. But from your seat how do you compare the relative returns between deposits allocated to the Raymond James Bank and also third-party banks? And also how do you determine the size of the Raymond James Bank?

Well, we look at return on our equity no matter where we put it. We get just under 200 basis points on our sweep and earn 373 spread on our bank. So we just look at the return on capital how we allocate it and look at controlled growth in the bank. So we have some internal governors on how large we'd like the bank to be all of it for the business. But I think you're going to see a very similar strategy as we go forward that you've seen over the last few years both in size and how we deploy.

Got it. And just as my follow-up, we saw a little bit of a slowing in the break rate broker trend in the March quarter partly due to the backdrop including government shutdown. But I'm just wondering have you seen a pick-up in the migration of advisers away from wirehouses and smaller broker-dealers given the improving equity market backdrop we've seen year-to-date?

Honestly, we haven't seen a lot of slowdown. So we are again at pace to be nearer last year's record. You can see it by the number of advisors that we have now. If you look at the pipeline of commits and visits it's very, very robust. So if anything there may be an increase certainly in the employee side. Independent's been really active the first three quarters, but the employee side is really active. And again it usually comes and goes with market. But I'd say in all of our affiliation options we're having very good results on recruiting.

Thank you.

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

Steve, hello. Are you on mute?

Yes, sorry, I was muted. My apologies. So much coughing in the background earlier, so figured --

No problem.

Appreciate some color on the high comparable per role in the quarter. I'm just wondering in terms of the revenue outlook, if I look at Street expectations just given the forward curve, people are anticipating I think rightfully so continued fee momentum helped by strong organic growth. But the Fed easing cycle which is beyond your control will weigh on NII and spread revenue. And as you think about your ability to maybe hold the line on comp is that something that's achievable given the expectation for multiple rate cuts in the back half? And just trying to thinking about your philosophy if the growth from here is primarily driven by fee income versus NII.

Really we think we're going to get -- given the market we should have good fee income growth. Now, the only difference between those revenue streams is we have a comp cost to fee income growth and not really any comp cost in net interest. So, even though I think this -- the fee income growth will be -- should be good certainly with a 5% tailwind going into the quarter, certainly any offset on net interest is going to hurt. But again I think any of those adjustments are going to be more short-term than long-term and are just -- if markets move up or down we get impacted. But I think we'd do a good job of managing through those so...

It depends on what you're projecting. If you're projecting Fed rate cuts then I think you're right in not assuming that NII is going to be a revenue driver. If you're projecting maybe one cut only or no cuts, then it's going to be dependent on how well we're able to hold onto or grow cash balances.

I understand. Just as a follow-up to the expense remarks you just made one of the other big areas of debate is any flexibility that you guys have to maybe manage non-comp lower at least slow the pace of non-comp inflation you've made a lot of investments in systems and technology over the last couple of years. That's clearly helped accelerate organic growth. Is there any potential to flex that as the NII backdrop becomes a bit more challenging?

I think we always have the opportunity certainly on revenue outlook in the medium term to impact expenses comp and non-comp. So, you can see in Fixed Income we did that and we went from a market where we're just breakeven to 15% ROE. Part was market helped but a lot of that was cost discipline. And if we see those trends in other areas of the business we're going to have to look at more cost discipline for sure. But you're right a lot of our somewhat elevated expenses are to get on and to stay ahead of our adviser growth. So, whether that's support or compliance supervision or systems it's had a big payoff on net adviser growth. But it does hit short-term comps. So, I think to help us on comp I mean on to the numbers it'd be great to slow down recruiting. I don't think it's a great long-term benefit so -- but we always have those flexibilities. And I think we've shown that discipline. In any slowdown or recession we've reacted pretty well on cost and certainly we'll do that if we think it's needed to be done.

Thanks Paul. And just one follow-up for me on account and service fees. You quoted the spread on off-balance sheet cash at 200 basis points. It looks like some intra-quarter volatility in terms of the movement in balances impacted the calculated fee rate. I'm just wondering given where the balances exit the quarter in June, what's the right jumping off point for account and service fee revenue? This seems to have been the biggest source of shortfall versus consensus expectations, so just want to make sure that we're modeling that appropriately.

Again, it depends how you want to model client cash balances. That's the line item that will be most impacted by whatever fluctuation you want to assume in client cash balances. We've had run off obviously that's had a negative impact on that line item because external bank sweeps are the ones that are impacted first because we're going to continue to finance the growth of Raymond James Bank as long as we can. So, the external banks are the -- get the remainder if you want to call it that. Then to the extent that keeps dropping that's going to be the line item affected more than net interest earnings.

All right. Thanks very much.

Your next question comes from the line of Jim Mitchell from Buckingham Research. Please go ahead.

Hey, good morning. Just maybe you talked about as a recruitment could be close to last year's record. But when I look at year-over-year net growth, it's about a little less than half of last year's growth. So I'm just trying -- are you sort of indicating that second half I guess additions could be a lot stronger or am I missing something I guess in that analysis?

So when we look at it, I know you guys look at FA count, we look at trailing 12s recruited. And I think that's the measure. If you look at 2009, we had a lot of individuals, but in last year it wasn't even close in trailing 12. So we look at the trailing 12 recruited rather than look at the advisory count itself. [Technical Difficulty]

And I would also caution you instead of looking at advisory growth to see how well we're doing I mean certainly look at the total asset growth. I mean a lot of the runoff of advisers are people that don't make it in the business, people that retire, reasons they leave. In a lot of cases, their assets stay here with their team or with some other advisers. So, it's really the asset growth that's more important, and with our recruiting metrics and records we're talking about really part of the gross production we're creating as Paul said.

I do think that too and especially we saw the impact in the first quarter, our first quarter, because we've had a lot of retirements as the industry has. So what we measure when we talk about recruiting, we're talking about the gross number. But as you look into the net number, an awful lot of those retirements or unfortunately we got people or passed away, we've kept the asset. So they've gone on to other advisers. And so that's really what we track. And that's why we look at kind of non-regretted attrition. Certainly, if someone passes away, it's regretted. It's a death in the family. But if we keep the assets from a financial standpoint, it isn't as negative. It certainly is to the people and us and the people we know, so.

Right. So, it's just a higher quality FA you're bringing on. Is there a way to think about the timing of last year's versus this year's? If last year was close to record, do you have 75% of the assets and fees over or is there still -- is it 100%, 50%? Just trying to think of how much more you have from last year's recruiting class versus the new kind of recruiting trailing 12 months you're getting this year?

It's hard to tell. It's so individualized. We think in the first six months to a year, we get a majority of them and it may trail for a little bit while after, and then the growth is really due to their growth of production. Most all these teams that we recruit aren't just because they have assets. It's because they're looking to grow. So, it's so individualized. But you're going to see momentum as you've seen in the past. Assets are still coming over from our recruiting. And those -- we keep the pipeline filled we're going to continue to have that push.

It's certainly reasonable to assume something like a 6-month lag of assets coming in versus production recruited. So, I mean if you have a -- last year's record production year, we kind of get the benefit a lot of those assets coming in this year. And this year is the same way with next year's assets.

Great. Okay. And Jeff, maybe one just follow-up on deposit, your deposit costs were down 8 basis points quarter-over-quarter. Obviously, the change in the relationship pricing was that -- was driving them. Just -- is that all impacted in this quarter? Is there some -- a little bit of on an average basis? Do we get a little bit more next quarter or is there some or -- and/or is there some other dynamic that centered it lower than basis points?

That's substantially all of it. It didn't happen exactly at the beginning of the quarter, but I would -- that's about what we modeled in as the impact. So I wouldn't assume any future benefit from that.

And I do think that especially when you look at the bank that -- where LIBOR is predicted and you get benefit going up, because LIBOR moves usually before Fed funds, I think the bank has seen a lot of that loan repricing already. So any change in the cost of funds should be under total deposit and not in negatives.

Great. Okay, great. Thanks.

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

Hi, good morning. This is Brian Wu on for Bill Katz. Appreciate the comments on client cash sorting. Any update you can provide on client cash in July?

We've continued to see -- I think -- I don't have the exact number. It's been another $1 billion or so, I think through today runoff of -- into -- mainly into position of money market funds. These are the – in – oh, yeah, I'm sorry. And of the big part of that as Paul mentioned is that the beginning of every quarter we have the quarterly fee taken out of accounts. That's generally just an account subtraction. Over the course of the quarter money coming into the accounts through dividends interest whatever and repositioning – positions it for the next quarter. So that number coming out in fees is about $700 million to $800 million at the beginning of each quarter right now. So that's really been the primary reason, we see a decline so far in July. But we see that every quarter, and again it builds back up over the course of the quarter.

Got it. And how should we think about the funding mix for the bank, if client cash continues to run off?

It's entirely possible that our bank's going to be entertaining other funding sources aside from our sweep program over time. We're already – we've already looked at some. We've done one CD issuance through our syndicated desk, a secondary market CD. We're looking at alt – immediate – or we're looking already at alternative funding sources at the bank level preparing for the eventuality that sweep balances are not available given our internal limitations or in general to continue to support the growth of the bank. And we don't – if we do the math, we'll have to see whether it makes sense for us to run the bank in place, or whether it makes more sense for us to continue to grow the bank with external funding sources. I think the answer's going to be the latter, but we don't know that for a definitive fact yet. So we are exploring alternative funding sources of various types at the bank. We have been for the better part of the year actually in anticipation of what you're talking about.

Yeah, so agree everything with what Jeff said. And the only caveat is right now we are funding basically almost exclusively internally and cash sweep balances moderate the exit or grow we're going to be fine. If they continue to go down at some point you've got to have alternatives and that's what we're exploring.

Great. Thank you for taking my question.

Your next question comes from the line of Chris Harris from Wells Fargo. Please go ahead.

Thanks, guys. How do you think interest rate cuts will affect the customer cash balances? I ask that question because a lot of people think it would actually help to stabilize those balances. I'm just wondering, if you guys would agree with that?

Our premise, which I don't know why your – always people ask us to predict what's going to happen with interest rates given our –.

Or balances.

Or balances. But I think too right now the attraction has been positional money markets and the spread between that and FDIC insurance. And I think that, if rates come in and that spread decreases that the cash sweep is going to be even a better option than the money markets if rates have come in. So I think we agree with that. But we'll see what happens.

I am in the camp that it will help stabilize the balances at least by the second rate cut or so. The first one may not have a big impact or maybe even the second one. But beyond that, if there are that many rate cuts I think – I certainly think it will minimize the differential that they can get elsewhere.

All right. That's great. And my follow-up question relates to the bank, excellent credit quality again this quarter. Bigger picture how would you guys characterize the risk profile of the bank today? And specifically wondering, how you think the loan portfolio the risk profile of that compares to say how the loan portfolio looked in 2007.

So I think that the biggest difference the bank is much more diversified. And back in pre-2008, 2009 we were almost purchase mortgages or C&I was really our portfolio. So today C&I is certainly is a much smaller percentage. It's much more diversified, but I believe the credit quality in the C&I and other parts of the equation is good. So I view we're in good shape and more diversified in our product portfolio.

And we didn't have an SBL portfolio in 2007, which is extremely a good source of business for us. Most of our mortgages now are originated versus purchased. So – and we have extremely good credit quality within our client base as you can imagine. And we have a tax-exempt portfolio, which we didn't have in 2007, which are loans to investment-grade municipalities. So it's – I think in – it's more diversified and probably on average much better quality than it was in 2007. And remember, we survived 2008 or 2009 without particular ugly -- with no real ugly hiccups. So it just -- to be in even better shape now, I think we're very well-positioned.

But we're also cognizant that anything can happen, so we watch it very, very carefully so.

Very good. Thank you.

Your next question comes from the line of Devin Ryan from JMP Securities. Please go ahead.

Great. Good morning, everyone.

Good morning

First question just on private client commissions. So they increased 2% from last quarter. We were thinking they could have been something a little bit better than that just with trailing commissions increasing from the move higher in average daily balances like in mutual funds which I think were only up about 1%. So I'm just curious, if there's any lag in there sometimes the accounting can be a little bit funky. Or was it just lighter transactional activity like new sales being slower which offset some of the benefits of the average daily balance increases?

I think it's just a continuation of the trend towards fee-based assets away from commissionable activity in the Private Client Group side. The people we're recruiting are heavy users of fee-based alternatives. And it's just been a continuing trend you've seen that -- if you map that for the last two to three years, I think you'd see a pretty steady decline in commissionable activity in PCG. No real change there.

Yes, okay. Got it. And then just a follow-up here on M&A opportunities, I know we touched on this a bit at the Investor Day, but even since then there's press out that USAA may be looking to sell their wealth management business. I know that's a different business, but just something notable activity in kind of financials Investment Banking, so just wanted to get a little perspective on your corporate development function business development. How active is it right now? And how are you guys kind of thinking about M&A kind of balancing views that are out there that we may be late cycle versus long-term opportunities that would come along?

Look Devin, I would describe us as active as ever looking at all sorts of opportunities. And I would view the market as a lot of people or more people looking maybe at a possible transaction. The problem is that, I think some of that in certain categories are driven by a belief that it's late cycle. The pricing doesn't necessarily -- it reflects peak growth. So, you still got that delta, so it may take a little bit of adjustment before pricing realizes. So through our view, if we look at transactions, first they have to fit. There are a lot of transactions that happen that just don't fit our model. So, they just aren't good fits for us. But the -- and some are just culturally aren't good fits. But I would say the biggest -- there is more interest that I think the pricing has to reflect kind of reality and not peak because they think there's going to be a cycle change, so those are the challenges. But we're very active in talking to folks though.

Another silver lining to the market correction whenever it comes along with increased cash balances.

Great. Would -- I guess just on that point, I've always had the impression that Raymond James doesn't need to be the high bidder because -- especially in wealth management because your retention tends to be quite a bit better, so the earn-outs over time, the seller may actually do better even at the lower price. So how does that play in? And is that an accurate thought process?

I don't know. We've never tried to be the high bidder, so we're in -- what's most impressive about I think to us on recruiting results especially at the high end, our retention agreements are substantially -- offers are substantially lower than other firms and yet people still join us. I would say when it comes to M&A that depends. If it's public company or something it's hard to be not near the high bidder and I'd say there are some that are private that we always ask ourselves are we being too conservative, but we've seen a number of things where we were first choice spiritually second by price in the line with a number of other people. But somebody had a bid that was 30% to 50% higher. So you can't beat outlier bids just to win a deal. And I think that's been more the frustration than anything for us where we were preferred, but the premium someone else was willing to pay was just too high. So we just again remained disciplined and said our job is to have an ROE for shareholders not just to be bigger.

Yeah. Great. Thank you.

Thank you.

Our last question comes from the line of Alex Blostein from Goldman Sachs. Please go ahead.

Hey, good morning. Thanks. Paul a question to you regarding some of the earlier comments you made on the call and that kind of echoes your comments at the Investor Day as well just around the more competitive recruiting practices out there. How are you guys thinking about that impacting your guys' franchise? Should we think about the cost of bringing in new financial advisers going up all the time for Raymond James or you guys are going to try to stay disciplined, which may ultimately result in slightly lower net new asset growth?

So I think the results so far as we've -- I'd say, we've had some slight increases at times to close the gap, but we certainly haven't matched. We've stayed very, very disciplined yet the result is that this year will be close to last year's record even though we've seen a high an increase of the number of competitors offering substantially more. So our focus is that although we lose some really good people that we would like the people that join us are joining us for the right reasons, it's not just the biggest check. Certainly, we think what we offer is very fair to the adviser and long-term they can do just as well and what we think we can help them with their practice. And it's hard when you really want someone to stay disciplined, but we stay disciplined and just say overall it's the right thing to do for the advisers that are here. And bring in the new advisers at a fair price. And it helps reinforce the culture and we get the people that I think are joining for the right reasons. So it's just like M&A. You're -- there's something you may really want, but if it gets out-priced, you're better off just sitting on the sideline, and it's hard to do especially at -- if we are near the end of the cycle, it's always the worst and the hardest, so maybe it's an indication it is. So we just felt through our discipline and not being arrogant, we really -- we always second-guess ourselves and say, are we doing it right and I think we're doing the right thing. And our results have been -- I think this year will be almost as good as last year's even with this competitive pricing.

Right. All makes sense. A couple of follow-ups for Jeff. I guess on the rate sensitivities you talked about a 25 basis point cut is five basis points to 10 basis points, I guess compression in the NIM. Are you guys talking about the back NIM only or are you talking about the overall company NIM? And if it's just the bank maybe give us [Technical Difficulty] vast majority, but that would be helpful to get the full picture.

It would be felt partly by the bank and it would be felt partly in the account and service fees in the Private Client Group. So it would be kind of a split between those two segments, which are a direct, but it's hard to tell the exact proportion. Depends what we do on the grid of what we pay to clients, but they both feel it those two segments.

Right. And then the last just clean up in terms of bank funding sources just to follow-up to one of the earlier questions of the $14 billion that sits in third-party bank sweep today how much of that is ultimately still available to be moved through AJ before triggering any restrictions?

Well, so far that's been an -- more of an internal restriction than a market so most of our competitors put a lot more of their cash sweeps. I do think you're seeing one of the benefits of our discipline that we've had. You've read a number of firms that had restrictions on what they could do, because they've leveraged up their sweeps so much it's hit other trigger points and whether it's buying back stock or flexibility. So we still have room. So we're getting closer to our internal numbers, but we have the ability to raise that I think comfortably still for a while. But again, we're not going to do -- what other people have done. We don't think -- we think it limits flexibility.

Yeah. We have some internal limitations that are the first triggers that we will hit, but then there are some external triggers too, such as we don't want to violate clients' ability to get the $3 million of FDIC insurance and put so much in our bank that they don't go through the waterfall, et cetera. Those numbers are a little less than half of that $14 billion could still be directed to our bank and also without triggering some penalty rates, because we do have some contractual commitments, which are running off over time here with some third-party banks that we won't fall below a certain, but I guess a safe number to use would be a $6 billion type number in that. And we're not trying to dodge the question, but we have some internal constraints that would again be triggered before that comes into play.

Super. Great. Thanks very much, guys.

Is that it? Well, great. So we appreciate you all joining us and I think we're as I've -- ended up in good shape. I think most of the indicators -- all indicators are really positive outside of the cash balances. We'll see what happens with this rate cut, if there's a rate cut this month. And we'll talk to you next quarter. So thank you very much for joining us.

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