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Raymond James Financial Inc. (NYSE:RJF)

F1Q 2014 Earnings Call

January 23, 2014, 8:15 AM ET

Executives

Paul Reilly - Chief Executive Officer

Jeff Julien - Executive Vice President, Finance and Chief Financial Officer

Steve Raney - President and Chief Executive Officer, Raymond James Bank

Analysts

Steven Chubak - Nomura

Chris Harris - Wells Fargo Securities

Joel Jeffrey - KBW

Christian Bolu - Credit Suisse

Alex Blostein - Goldman Sachs

Chris Allen - Evercore

Devin Ryan - JMP Securities

Jim Mitchell - Buckingham Research

Operator

At this time, I would like to welcome everyone to Raymond James Financial Quarterly Analyst Call. (Operator Instructions)

Certain statements made in the press release and comments made in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning future strategic objectives; business prospects; anticipating savings; financial results, including expenses, earnings, liquidity, cash flow and capital expenditures; industry or market conditions; demand for and pricing of our products; acquisitions, divestitures and recruiting pipeline; fixed income business outlook; anticipated results of litigation and regulatory developments or general economic conditions.

In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future or conditional verbs such as will, may, could, should, and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our filings with the Securities and Exchange Commission from time to time, including our most recent Annual Report on Form 10-K and subsequent Forms 10-Q, which are available on raymondjames.com and the SEC’s website at www.sec.gov. Any forward-looking statement speaks only as of the date on which that statement is made. We expressly disclaim any obligation to update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made.

The press release and comments made in this conference call may also include non-GAAP financial measures. An indication of and a reconciliation to the corresponding GAAP measures accompanies the press release, which is available under the Investor Relations page of our website at www.raymondjames.com. An audio replay of the conference call will be available until 5 o'clock PM Eastern Standard Time on July 15, 2014 under the Investor Relations page of our website at www.raymondjames.com.

Thank you. I will now turn the conference over to Mr. Paul Reilly, Chief Executive Officer.

Paul Reilly

Thank you, Judy, and good morning everyone. And most things seem sunny here today as we report our quarterly net revenues of $1.2 billion, a record pre-tax of $179 million, net income for the quarter of $116.6 million or $0.81 per diluted share. This marks our 104th consecutive quarter of profitability, a record we're proud of, especially in our industry.

We believe we had a strong start to the fiscal year this fiscal year '14. Now if you just look at the stats from quarter-to-quarter and net revenues up 5% for the preceding quarter, pre-tax income up 10%, client assets under administration up 5%, you’d think we just take a victory lap and just say what a great quarter it was, and it was a very good quarter. But there was a also a number of favorable items that all just happened to hit this quarter that made a strong quarter look, from an ongoing operating basis, maybe a little stronger than it really was.

We did earn these one-time fees, but we can't expect them to recur every quarter. So we'll spend some time on the call giving color on those.

Overall, the Private Client Group and Asset Management had very good quarters. I'll characterize the Equity Capital Markets Group having a good quarter. The Bank, as usual, performed solid, which I would call an okay quarter. And we still had headwinds in public finance and fixed income due to a challenging market, especially in the institutional commission area, but bolstered by strong trading profits.

We also had a very good Other quarter. And so we're going to talk about some of those items. Those items made our margin 15% and our comp ratio of 68% look a little better than they probably are on a pure operating basis, and we'll talk about that. As we told you, we're committed to reach those goals from an operating basis on a sustainable basis by the end of the fourth quarter this year, and we're still committed to that.

Overall in this segment, Private Client Group was pretty much good news all around, revenue up 5% sequentially over last quarter, pre-tax up an 11%. We saw an improvement in margins, but probably more importantly for the business as we look forward we had record Private Client Group assets under administration of $423 billion, up 5%. Our advisor productivity continued to rise and really strong recruiting pipeline in the Private Client Group. So all told, we think we have good momentum in that segment.

Under Asset Management, we had record net revenue of $96 million, which is up 19% over the last quarter and a record pre-tax of $31.8 million. Our assets under discretionary management were up 8%. So those results were both affected by the market appreciation, but also strong net inflows of assets into our Asset Management Group. However, as we talked about in the release, we had a $9.8 million performance management fee, of which half really impacts our bottom line. And it's not that we don't earn those, we just don't earn them every quarter, and this one was of greater magnitude than probably at this time last year.

The Bank had very good loan growth, almost $500 million in net loan growth for the quarter. Our criticized loans decreased. On the positive, the loan loss provision was muted for the quarter due to a combination of a number of factors. We had some loan pay-offs of criticized loans. We sold some loans that we got [hard for] [ph] that had some reserves. We didn't like the credit quality as much. And we had improved credit metrics. So despite the loan growth, the loan provision was down from a normal rate. The loan growth will help offset the interest compression, which we're still experiencing at the Bank.

On the Capital Markets side, ECM had a good month, off the record of the last quarter and certainly off the record of the M&A quarter a year ago, but very, very solid results really from good financing markets and also we talked about the commission that we had our Analysts’ Best Picks sales, which actually drove commissions for the quarter.

The fixed income markets remain challenging. We had a rough quarter for institutional commissions and public finance deals, which I think the industry had. We see that market still challenged, but with strong trading profits both from a good retail activity and we stayed in the market, I think, as people have lowered inventories and have de-leveraged we've been in the markets and continue to generate good trading profits despite lower commission levels.

We talked about Other, which had a very good quarter, had some of the cautions. On our private equity side, we had $10 million of gains. $6 million were non-consolidated, $5.5 million gain on the sale of our Jefferson County Sewers auction rate securities. Again, both of those are earned, but lumpier in this quarter. And also our tax rate was down. Our tax rate due to some refunds due and a change in our state filing position in the state and as the markets go up, we get the COLI benefit. And we're looking forward that the tax rate we think is closer to 37% target tax rate, given a good market. But this quarter, it was lower than that. So that added to the earnings for the quarter.

So all in all a good start to the fiscal year. We're very pleased with our positioning. I'm going to turn this over to Jeff and talk a little about, after Jeff speaks, kind of the outlook and the segments in this quarter. Jeff?

Jeff Julien

Thanks, Paul. I have a very similar outlook on how the quarter went. We're very pleased in general with the start to the year. We had some very big positives to take away from this quarter. The asset levels, both under administration and management, certainly give us a good headwind or a good tailwind into the next quarter. And equally important in the release, as Paul mentioned that fee-based assets surpassed $150 billion which is obviously a big driver of our ongoing securities, commissions and fees.

Paul mentioned the Bank loan growth, that's faster than I know we had forecast in the last call or two. Production did pick up a little bit, but pay-offs lowered a little bit as well. So a combination of those two factors are giving us a good start there. You would expect with that kind of loan growth a little larger provision I know. But again, given some of the pay-offs and upgrades of some of the previously criticized assets, we continue to experience low provision expense.

The recruiting pipelines and other positive takeaway and Paul mentioned that probably again as we look into the coming quarters, it's as active as it's been in some time. And then I think the overall expense control, particularly in IT, based on what we know today, we think that this level of IT expenditure, this low $60 million type number for the quarter is about a run rate. Obviously if any regulatory requirements change or some competitive pressures, et cetera, that could change. But based on what we know today, that's probably a pretty good run rate.

But this quarter wasn't without a couple of negatives. The fixed income markets still aren't cooperating. On the commission front, we've managed to continue to realize pretty good trading profits. We're not sure if that's going to be sustainable over the rest of the year or not, but so far so good on that front. And then the other negative I guess in the interest of fair disclosure is the tightening spreads, both in the Bank and in our overall earnings on client cash balances around the firm largely to Bank suite program as those contracts continue to burn off from prior years and get renewed at lower rates.

Paul mentioned the comp ratio of 68%. That's actually still a good target for the year I think for us. We had a very good quarter this quarter and some of these what you would call some of the unusual items that kicked in the revenues that caused the ratio to look a little lower than otherwise have been this quarter. But that's still, I think, a good target for us for the year if we can keep it at the 68% level, down nicely from where we were last fiscal year.

If you look at the margins in our businesses, in your Private Client Group, we talked about having a 9% target for the year. Well, they exceeded that obviously in the first quarter, 9.2%. Some of that was due to nice revenue growth, which should continue given the equity market lift going into this next quarter, but also the expense control side, like I mentioned, which largely falls into the Private Client Group segment in our public reporting.

Capital Markets had a 13.8% margin for the quarter, which is not bad, given the fixed income environment. So Equity Capital Markets is doing okay. I probably wouldn't describe it as hitting home runs, but they're keeping busy and have a reasonable amount of business. Asset management had a 33.2% margin. So that performance fee that we've mentioned, about half of which is ours on bottom line have a pre-tax line helped them surpass the 30% margin target for the quarter. So we had these things.

And then the other Paul mentioned, the auction rate securities will get $5.5 million gain from that. And we had some private equity help, which we had almost every quarter, but this one may be a little larger than our average, excluding the (inaudible) transaction last year. But we've had some of that pretty much on a recurring basis. And with those things all rolled together helped the company to achieve its 15% target for the year. These are still our targets for the year. I mean we're not saying, okay, we've already hit the 15%, so let's change it to 15.5%. I mean we still think that the 68% comp ratio and the margin targets we gave you for each business and the 15% for the overall firm are still where we'd like to be on a run rate basis at the end of the fiscal year.

Our tax rate in terms of bottom line obviously was a help. Paul gave you the right guidance. I think 37% is kind of what we would counsel you to use in modeling going forward for this year. If the market stays high, we'll continue to benefit from the non-taxable gains in our corporate-owned license portfolio however and then obviously the other way in our market correction.

I think that covers most of the big picture comments. We did do a comparison to sort of the analyst models to see where we were way off-base relative to the average of the model. And actually we're pretty close on a lot of them and they're all very explainable, which we've already talked about. The performance fee caused us to be over in investment advisory fees. Trading profits were better than most we're anticipating. In the other income, we had the private equity gain and the ARS redemption proceeds. So those kind of where the differentiating factors on the revenue side.

The one that stands out a little bit is the account and service fees that actually declined slightly from last quarter. There's really a couple of reasons. One is I would say September was abnormally high as we did some catch-up entries in that quarter that we didn't really elaborate on it and seen that material at the time related to some of the Morgan Keegan accounts that we brought over. So we're comparing to sort of an abnormally high. And the other part of that is I mentioned the compressing spread on client cash balances in our Bank suite program. Remember that's a fee income to us, not interest earnings to us from these outside banks. And that did compress several basis points this quarter to last, while the balance has stayed relatively flat. So that actually caused a slight decline as well.

On the expense side, there were only a couple of items that were significantly off. Obviously the bank loan loss provision, which continues to come in at lower levels than would be normally indicated by the loan growth. And other expense was up a little higher. There's a couple of things. We had a little more legal expense. That wasn't a big driver. The bigger driver is we're doing a better job now of estimating and spreading across the four quarters of the year some of the valuation adjustments that happen annually in the tax credit funds that we consolidate into our books.

We usually we've had a spike in the March quarter related to that, but we can sort of estimate them pretty well. So there is no reason for us to have that spike. We can make that ratable throughout the year, and I will also remind you that virtually all of that comes out to non-controlling interests. So it's not really our item to the pre-tax line, but it does distort the other expense line item.

The one other thing I'll mention is for those who looked at the balance sheet saw our assets decline by almost about $1.3 billion from last quarter to this quarter. The real reason for that is at the end of December, we undertook a project to move about $1.75 billion of client cash balances out of what we call our client interest program on our own balance sheet into the Bank suite program. We hadn't been able to do that earlier, because we were up against capacity constraints in the Bank suite program. But we had some new banks join and some existing banks agreed to take larger deposits. So now we are able to accommodate clients' wishes for FDIC insurance and move another group of accounts off of our balance sheet into this Bank suite program.

So you saw us come out of the brokerage client deposits on the liability side and generally out of the segregated assets or the reserve account on the asset side. So that plus the bank loan growth were really the two big shifts in the balance sheet from last quarter to this quarter.

Paul Reilly

Thanks, Jeff. Just in terms of little bit of our view of the outlook, Private Client Group certainly, with their assets up 5%, should start off the quarter with some tailwinds and the same with Asset Management with a 9% increase in those assets were the new record of almost $450 billion of assets under administration and $60 billion of assets under management. However we don't expect our performance fees that usually come at the end of the year to be next quarter. So as you look at Asset Management, you can adjust those expectations.

The Bank loan growth was good. We never know on pay-offs to decline. I think we give you direction if something else happens in that quarter. But overall, this is a very competitive market, but we've been able to grow loans. But there is a pressure on spreads. It will continue. And I'll talk about interest rates a little bit more.

The provision has been low, but it won't remain low forever if we grow loans. So we've had again improving credit quality that's reduced the provision. But at some point, that provision as we grow loans is going to have to come up to match loan growth. The good news is credit quality continues to improve.

On the Capital Markets side, the Equity Capital Markets, the overall market volumes remain challenged. We've done well. We've had a good lift this quarter by the Analysts' Best Picks. The financing markets appear positive and deals should still get done as long as the markets are good. M&A backlog looks good for us. I would call it strong, although traditionally, January and the first quarter are generally weaker in M&A markets, because a lot of deals get done by year-end. But as long as the markets stay good, I think the Equity Capital Markets outlook remains positive.

Fixed income is just challenged with low short-term rates and the expectation of long rates to increase is just leaving a lot of investors on the sidelines watching. And those commission levels still remain challenged and I think will for some time. The offset has been very good trading profits. But if rates start to rise and if commissions don't improve, volumes, it will be hard to maintain those kind of trading profits in that environment. So we stay very, very cautious.

Public finance issuance was down last quarter. We got a raise in the top 10 public finance issuers as the whole market was down. We expect it to improve. But when governments, which we think have the need to finance, start financing, we don't know. So we're cautious in the short term, but more positive in the medium to long term.

So interest rates will rise, I think, and the question is when. We're well positioned to benefit from them, but until they do, especially with all the cash in the market, I think that spreads will continue to be challenging. We thought we had some relief from them last quarter. They look like they're getting to hurt again. And again, rates will rise some day as our position, we don't when. So in this environment, spreads will continue to be challenging.

Cost discipline is very good. We talked about that through the whole Morgan Keegan integration, and you could see them show up in numbers last quarter and this quarter. And we are committed to managing that and you can see it in the run rate.

So overall, we think the markets look constructive. There could be a correction in the Equity Capital Markets, but we believe the economy is in reasonable shape and expect constructive market, but again cautious given the reasons we talked about there. Overall, we feel great about our position. I think the integration is behind us. It's great to see we are acting as one team and we are operating as one team within a greater leadership. Our position is good. We feel great about our people and our firm overall.

So with that, I'll turn it back to Judy and we'll take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steven Chubak from Nomura.

Steven Chubak - Nomura

On the last earnings call, you noted that revenues at the Bank had recovered to $90 million level, as items were, I'm using your words, abnormally penalized in the past including SBA loan mark-downs as well as FX movements had reversed. This quarter, Bank NII was flattish and total revenues at the Bank came down $7 million. And I was hoping if you could clarify what drove the revenue decline this quarter.

Steve Raney

Steven, this is Steve Raney. There're some things in other income that in effect really went against us in the December quarter relative to the September quarter. It was a rather significant loan fee that was recognized in the September quarter, resulting from a loan pay-off in the Canadian portfolio that we bought a couple of years ago.

The SBA loans that you referenced, the lower cost of market adjustment, there was a big positive back in the September quarter. We didn't see a similar improvement in that mark in the December quarter. That was about $1.4 million difference quarter-over-quarter. The foreign exchange impact and the strengthening U.S. dollar relative to Canada had about $3 million impact. We've already talked about the provision expense. There was about $3.5 million change quarter-over-quarter. Our Bank and life insurance had a $0.5 million difference quarter-over-quarter.

So all those things combined resulted in the other income line being dramatically lower than the September quarter. So our core business remained very stable. As we had already mentioned, the net interest income, the small decrease in net interest margin was offset by higher average earning assets. But our loans on an average basis were up about $200 million. Point to point, it was $500 million. So hopefully that clarifies the difference for you on the other income line.

Steven Chubak - Nomura

And I guess digging into the commercial lending side in particular, we're clearly seeing competition intensify and a general loosening of underwriting standards across the industry. I didn't know if you could speak to some of the competitive dynamics you're seeing in the market and your outlook for commercial loan growth, given what's been a historically conservative or disciplined approach to underwriting?

Paul Reilly

Yeah. That dynamic has really been in place now for a better part of two years. We continue to be extremely selective. We're really under no pressure at all to really grow loans or loosen our standards in order to grow loans. There's been enough volume and there's actually been an increase, I would say, in the M&A markets that have driven some of the transactions. We did have our most productive quarter. We did 89 transactions this last quarter. The higher watermark was the June quarter of last year that had 79 transactions. So yeah, in our unique model, there is still enough availability of new transactions that meet our credit standards.

So I know we grew loans over 5% this last quarter. I don't think that pace will continue. But we're more optimistic just given the economic environment and deal flow that we're currently seeing, and we’re going to do that without loosening our standards.

Steven Chubak - Nomura

Transitioning to the Capital Markets side, we saw that revenues were flat quarter-on-quarter and the contribution from some of the higher margin areas such as [inaudible] trading profits and M&A results are flat sequentially. And yet, the segment margin did decline 300 basis points. I didn't know if you could speak to some of the expense accrual trend that we're seeing within this segment in particular.

Paul Reilly

I think it's the two things. First, you get comp true-ups during the year-end, which are harder to predict and M&A, so we kind of I mean with the equity capital markets. So in the first quarter, I think the P&L is a little harder. And secondly, September quarter, I think, was our second best M&A quarter. And M&A, we tend to have better margins. We had a decent December quarter. It wasn't a bad quarter, but September was a very big quarter for us. And that drives comp down. So you are probably seeing most of the delta really in comp margins that drive that. Again, it’s a transaction based - a lot of transactions in that business. So it's a little lumpier.

Operator

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

Chris Harris - Wells Fargo Securities

So you guys called out the recruiting pipeline and just kind of curious to get your thoughts, what does a good recruiting year look like for Raymond James in terms of advisor additions? And I know you guys historically tend to focus on quality, not quantity. So just wondering if you could share a little bit of what we might expect for the balance of the year.

Paul Reilly

Recruiting and net recruiting are two numbers. And I don't know if I can quantify honestly. I think the goal is actually $75 million in our businesses in each segment in our Private Client Group and our employee and independent contracted groups at similar targets, roughly that run rate of new recruiting. We also have rolled out our new RAA. It's on a new business, but I guess the reformatted business that we're hoping to add to those numbers, but it's early days. I think it's allowed us to fill our recruiting pipeline between getting people in and bringing them over.

So that's kind of the run rate number we're targeting, but we're just as focused on the net number of assets, the way they keep growing is not to lose them and our retention has been very good. And so we're focused not really on the numbers, but we really look at assets.

Jeff Julien

And when recruiting, we're also reinvigorating the training effort in the firm, partially in response to some of the succession planning for ageing financial advisors, but also we've had some success with that in prior years and it was a good time to get that going again.

Chris Harris - Wells Fargo Securities

And one follow-up question on the Bank maybe for Steve. I'm wondering if you could share maybe your NIM target for the year. And then in addition to that, given the puts and takes you guys have with loan growth and pay-offs, do you feel comfortable that you could maintain this level of revenue for the balance of the year, or do you think it could go potentially higher?

Steve Raney

Chris, it is hard to predict that. I mean as it has played out, the NIM compression has slowed, but there's still pressure on it. So we do think that over the balance of this year, we're going to continue to see net interest margins come in, but maybe at a slower pace than you saw NIMs come in year-over-year over 50 basis points. We don't think we're going to see that level of compression. I would say maybe another 20 to 25 basis points over the next year is maybe kind of a good number, offset hopefully by higher average earning assets and more loans.

So I know there's been some volatility in our other income line. The net interest income line, we're focused on all of it, but there are some things that are really outside of our control on some of the other income line. I'd like to think that we're going to be actually able to grow net interest income slightly. So therefore, the increase in earning assets would more than offset the net interest margin compression. But I would say there's risk in that prediction just because there is a lot of unknown and uncertainty.

Paul Reilly

That's a hard one to predict. It looked like we were going to get some relief from that, and that's come back in and who knows what else went out. So we're subject to the markets. But today, from a standing start, which seemed to be off every time we predict, the market has moved another way. It looks like compression will still get some of that light compression.

Operator

Your next question comes from the line of Joel Jeffrey from KBW.

Joel Jeffrey - KBW

Just to dig in a little bit deeper on the trading gains, I appreciate the color you gave. Can you just give us a little bit more clarity on precisely on what securities experienced the meaningful gains and is this going to be a sustainable trend, or it's just due to higher volumes in those securities or is there any kind of one-time issue?

Paul Reilly

Yeah, most of the trading profits have come through the muni book. Certainly that was true in last quarter. So there are two pieces to it. One is the retail activity was okay just because I think people have repositioned, giving longer from shorter, which we think is a good thing for retail clients. They're going shorter. And then in the institutional side of the market, if you talk to people, a lot of people got frightened in June with the rate corrections, which none of us liked, but we're pretty steady. And we've stayed in the markets. I think people have backed out a little bit. And since we're turning inventories really twice the weeks, we feel pretty comfortable in our position.

And we have some rates, the 10-year came in during the quarter, which anytime that happens when you own stuff, you make a little more money on it. So overall, that's where it's coming from. And again, the concern is that as commission volumes stay low that that's going to be under pressure. January, same trends continued both on conditions and the trading profits are pretty good. I don't know how long that holds up.

Jeff Julien

In the past, Joel, we have guided in the $12 million to $15 million, I think, per quarter in trading profits. I don't necessarily think we would change that guidance going forward. This past quarter, we had some additional help from some emerging markets trading. They all were going in the right direction this time on top of the majority of it, which was provided by fixed income.

Joel Jeffrey - KBW

The diluted share count continues to rise. I think it's up a little under 3% year-on-year, and I know you guys have historically looked to buy back stock when you're at about 1.5 times book. But has there been any sort of change in how you're thinking about this, given the valuation of the stock? And then how should we think about future share count growth?

Jeff Julien

Well, it's something as we've grown, we've had share count growth. A lot of people have asked us about capital. We like to deploy the capital in the growth areas in the business. And we're consistently looking over opportunities, but we're conservative and we're so analyzing kind of what the options are there. So I'd say you're going to continue unless we do something differently to see a little bit of dilution in the share count. We'll look at opportunities to deploy capital and when we determine we have excess capital, what we'll do with this.

Operator

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

Christian Bolu - Credit Suisse

On the fixed income business, by your words, activity remains sluggish there. Just curious on your thoughts on resource allocations in that division. Should we expect that to be resized in the light of weaker industry trends?

Paul Reilly

We went through a significant resizing when we combined Morgan Keegan with Raymond James. We sized it hopefully for a growing market. And it obvious that didn't happen. We made some cuts. And then again last year, we sized it. So I feel very comfortable with size. It's a pretty variable model in terms of costs. We do have salaries, but they're generally low and it's really more of a variable cost model in general. We have some fixed cost guarantees basically from the acquisition that come off in April. And so I think the sizing of the fixed income business for now we're very comfortable. We've very, very good people. And we've proven in the operations both in the top market. In June, I think we outperformed by losing less in trading profits. And that's due both to our very good traders and our very good salespeople.

And I think we've shown that we've outperformed in this sluggish market. So I feel good about the people we have, but that model is pretty variable. I mean obviously if there is a dramatic change or you think you're down for a extended period of time, you ought to look at cost. But we tend to rise temporary downturns through and done over higher in big boom times. So we're more long-term player than trying to adjust for short-term profitability.

Jeff Julien

And further to your question of resource allocation, we're running that business on about half the inventory levels as we were running it at the peak in these, kind of averaging between $500 million to $600 million in total outstanding, where it was well over $1 billion at its peak before we further streamlined that. It's not using as much capital in that regard.

Christian Bolu - Credit Suisse

Just moving on to retail, you sound very constructive. And in light of some of the positive comments we've had from your peers, I was just curious as to what you and the team are seeing in terms of retail engagements just so far this year.

Paul Reilly

There is no doubt there has been a movement in the equities. And if you look at our economist review, it's a rather overweight equities and underweight fixed income in general for the individual investor. So you're seeing some movement in there. I'd get concerned when the retail investors are chasing a positive market. You don't want them to get into the peak. On the other side, if you look at retail, it is not positive on the equity markets. And in fact, our December sentiment actually went down under 30% for the investors who were positive about the short-term equity market.

So you're seeing a mixed bag. I think there is movements in the equities. Some of that is the push out of fixed income a little bit. And looking for dividend yield, some of it is watching the rise in the market. So there's definitely inflows into equities out of fixed income.

Jeff Julien

When you look at our client base and their mix of investments, it has shifted a little bit toward equities, but we attribute most of that to appreciation and portfolios, not actual money movements.

Christian Bolu - Credit Suisse

Can you give broader client cash management strategy just in the context of kind of the excess capital you're sitting on, what would drive you to the more opportunistic in terms of deploying that client cash within the Bank?

Paul Reilly

We look at that pretty regularly. It's hard for us to do much different than we're doing without taking either credit or duration risk. And even a modest amount of that just seems like in stressed times, whenever something can go wrong, it's a little bit of our risk aversion that's causing us from trying to catch bigger spreads on that client cash. But we have looked at exactly what you're talking about on several occasions. And maybe to some modest extent, to the extent that we can find acceptable investments on the asset side.

And we know a lot of the competitors and we could see in the releases of middle firm securities to raise their spreads. We try not to take those rate risk and we've always been conservative. Our strategy is like that, a little slower or not earning as much. But when markets move, we look a little smarter. Again, we tend to be on the conservative long-term side. So we do some of that to be modest. We're more worried about long-term impact.

Operator

Your next question comes from the line of Alex Blostein from Goldman Sachs.

Alex Blostein - Goldman Sachs

A couple of things here, first on competition. Jeff, can you remind us on how much of the RSU amortization from the Morgan Keegan deal that I think expires in April amounts to? So kind of in dollar terms, how much will sort of this drop-off in amortization for you starting I guess in May?

Jeff Julien

Yeah. We've got some RSU amortization, but most of those were three year, not two year. But we've got some management. So it's really what ties some of the guaranteed payouts and things we're using in place of RSUs. I want to say it amounts to on an annualized about $4 million or so. I remember the number that was given to us by fixed income.

Alex Blostein - Goldman Sachs

And how much of that drops off in three years?

Jeff Julien

In three years, it'll be a bigger number. It's running about $6 million to $7 million a year right now in the RSU amortization.

Alex Blostein - Goldman Sachs

Can you talk a little bit about which client you're seeing most pressure in and what type of broad environment do we need to see exploration and fixed income results?

Paul Reilly

Well, the bulk of our fixed income business, I mean our really franchise is in the muni business and the mid-bank in place that are very, very strong. We're in the corporate business. So it's more of an accommodation business for us. I wouldn't call it our pure profit drivers. So it's that space both the bank mid-tier banks and their investments and loans and the muni business that really drive our levels in our fixed income practice, as well as our retail.

Alex Blostein - Goldman Sachs

Did you see an improvement in those areas or what kind of environment do you guys need to see? I don't know if there are one or two metrics, but whether it flows into the new funds or steeper yield curve, or what kind of environment should yield better results?

Paul Reilly

Definitely a steeper yield curve and volatility. I guess you'd say the worst part for that business would be a slow, steady creep of rates, where people just wait and wait and wait. And the best environment is when the rates jerk up and it shocks people. It's bad on trading profits maybe for the short-term, but long-term, people move and your commission volumes go up and you make it back. So we'd rather see steep rate increases in a slow, steady couple of basis points every month. That's kind of the torture environment for fixed income business. So steep and volatility is good for fixed income.

The best news is when they're doing bad, the equity markets are doing really well and the overall firm does better. But definitely rates have to move. They're absolutely low. And so rates moving up help that business to reposition their securities portfolios.

Alex Blostein - Goldman Sachs

When you look at consolidated net interest income for the whole entity, and that's a pretty decent source of net interest income for you guys. So can you talk about the balances you saw in the December quarter and maybe what you're seeing for January?

Jeff Julien

Yeah. We're not seeing a lot of movement in balances. But we have to look at jointly with securities base lending at the Bank, because that's kind of an alternative with sort of a lot of the same purposes. On a combined basis, they're certainly growing. But SPL at the Bank is growing faster than traditional margin lending at the brokers firm. The reason that the net interest earnings were up a little bit over the last quarter in the Private Client Group segment was we talked last quarter about a number of fee changes that were being implemented around the firm that would lead to some increased revenues this year kind of being phased in over the course of the year. But one of the changes that went in on October 1 was a change in our margin schedule. And that did have some immediate impact to the tune of $1.5 million to $2 million per quarter, which did show up in this first quarter in the Private Client Group net interest spread. Some of the other fees will hit some of the other line items over the course of the year as they are phased in January and April.

Operator

Your next question comes from the line of Chris Allen from Evercore.

Chris Allen - Evercore

Just wanted to ask about the Private Client Group margin. I realized sort of the 9% target in one quarter into the year. You don't want to revise that yet. But moving forward, just given what client assets have ended the growth in fee-based assets and what seems to be a decent recruiting pipeline, is there any reason not to expect incremental margin expansion from here?

Paul Reilly

The impact to recruiting is you got to charge against income too. So as you amortize those payments, so as you recruit, it's actually a drag on short-term margins. So obviously if the market continues to go up, you're going to get margin extension on the revenue. But I think it's kind of early to call. We changed our grid and our employee size this year and those effects are still coming through. We've done a number of fee changes that are still coming through. So I wouldn't declare one quarter as the number that we should live off. I think we got to look that play out. Markets are good.

Chris Allen - Evercore

The $1.75 billion in customer cash is moved to the Bank suite program. Is there any economic benefit?

Paul Reilly

It's roughly a push in terms of economics. Otherwise, we might have had second thoughts. But it is where clients want it. But it does move the revenues on that money from what was interest earnings to us in our segregated asset account moves it to now the fee income from the other banks. So it'll be a couple of million dollar year shift from one item to the other, but in terms of economics to the overall premise about a push.

Chris Allen - Evercore

I know you guys mentioned a bunch of the special items. Any color in terms of what those numbers would look like ex the items? Obviously there's some compensation that's included with the performance fee in private equity. So I'm just trying to get a handle on that.

Paul Reilly

I mean where we'd hoped over the course of the year, remember I said to get us down to that 68% type comp ratio was going to require some revenue help. We'd like to see that as an operating revenues, not special items. And we're starting to see that in some of the divisions. So certainly it was a big improvement from last year's average and trending the right way, but it probably wasn't quite as good as it looked, but we are still hopeful that we can get to that level on a sustainable run rate by the end of the fiscal year.

Chris Allen - Evercore

The cash balance is still over $2.5 billion. And once you axe out the corporate debt, it came to over $9 in cash per share. And I realized you guys are going to be reassessing capital and thinking about investing for growth. I'm just wondering if there's a minimum cash level that's kind of necessary to firm, so this seems pretty high at present.

Paul Reilly

We have talked about this in some of our conferences. We do have cash targets. All that cash that you see in our balance sheet is not ours. A lot of it is client cash at the Bank, for example, that's just not invested yet. We actually have at our corporate about a little over $1 billion that we call free cash. We do have internal targets that are somewhat less than that. We kind of set that as a percent of overall shareholders' equity. So it gravitates up over time. But by those measures, we have some excess cash and capital at this point in time, not huge numbers, but in the couple of hundred million dollars range. And that's kind of what we said publicly.

Operator

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

Devin Ryan - JMP Securities

Within the equity underwriting business, the revenues there were a bit softer than I would have expected, given the strength that we've seen across the street. So just curious to know if there is anything maybe that you guys experienced from a sector exposure perspective and maybe waited on your results a bit and then just how to characterize your backlog specifically in the equity issuance business?

Paul Reilly

I wouldn't have characterized them as soft, but we play extremely well in certain sectors, the REIT, the downstream energy space. There's number of other spaces, growing technology, healthcare and those markets are all differential depending on who is financing, what deals at what time and what space. So I would say our backlog is good. I think I fell good about what they did in the quarter and I think the backlog looks good in a good market. So when certain sectors hit or certain areas we specialize in and the markets grew, were better. And when other sectors do better, maybe it will take up a few more deals. I thought they did a good job in the quarter and I think the outlook looks good.

I would tell you I feel good about the business. And as long as the market is open, I think they're fine. They weren't record, but they were good. And M&A wasn't record, but it was good. And I think the backlog is good. We'll just have to see. And M&A especially is lumpy. So when they lose, you get big fees.

Devin Ryan - JMP Securities

And then just another question on capital allocation and thoughts, I mean from an acquisition perspective, are you guys seeing any interesting opportunity? I'm curious to know what the volume looks like of opportunities that are coming to you guys in this market, and then are there any segments specifically? You guys highlighted in the past Asset Management where you've actually done a couple of deals, but are there any areas where you feel like you'd be interested in doing something if the right opportunity came across your desk?

Paul Reilly

Yeah, I'd say first Asset Management is the one that we've highlighted, because they've probably been most active consistently on and they're still interested in deals. As you know, we're highly selective and tend to be long-term. We talked about a number of Private Client Group we'd love to have, but you could count them on one hand and they're probably not for sale. So we tend to be long-term and focused on those kind of deals. And we're not going to buy something just to grow. We get a lot of people that bring stuff to us for size and we just say we're not interested. So we're selective.

We've wanted to extend in Canada where we seem to be profitable when the other non-fixed banks are challenged. But again, you got to find the right opportunities at the right price. And we've been more active in looking at the U.K. in M&A and Private Client. But again, that has been successful in marrying up what we're interested in with the opportunities. But we continue to work at it, work on the contacts. And again, we're not transactional-based. We'll continue to look at those deals. And at the right place, the right time, if doesn't, we're not going to buy.

Jeff Julien

You make it sound a little more passive than it is. It used to be outside of Asset Management. They just react to deals that were shown to us. But we do have a proactive effort now in addition to the ongoing effort in Asset Management to look at potential targets in all of our spaces.

Paul Reilly

We have corporate development function. We have targets. We do have conversations. But again, we're only going to do the right deals at the right price and firms with our culture that fit long-term. And if we could find more Morgan Keegans, we do them, but there's not just a lot out there that fits that way and certainly not of that size.

Devin Ryan - JMP Securities

With the respect to the headcount, I thought I missed this, but what drove this small sequential decline from last quarter? And then with respect to your comments on the backlog, it sounds like things are picking up. And so just curious if you can provide any perspective around expectations for timing just based on where you guys are in discussions if you expect that you could be closing on more individuals? Is it going to be this quarter or does it look like it's first half of the calendar year, or just any perspective based on where the conversations are?

Paul Reilly

Year-end you tend to have more activity. We also put new grid in for RJA combined Raymond James and Morgan Keegan. And it was tough around the lower end of producers and where we try to continue to upgrade, and you can see it in our productivity. We tend to lose people to lower end. And for economic reasons, they go to firms where lower volumes and they get a little better payouts and what we think is appropriate for our strategy. So that's where you're really seeing the numbers.

If I could tell on recruitment, when people join, everyone is almost like an M&A deal. You got to convince them over and then they time it. Sometimes they move so much, they don't come. They generally move out a little bit. So I don't think you're going to see any lumpiness. I think you're going to see a good, steady. From what we can tell on the pipeline and good steady increase in terms of the number of people coming over. So we kind of measure that by pipeline, how many people are we talking to, how many people come into the home office. And I think we can just tell you that those activity levels are all up.

Operator

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

Jim Mitchell - Buckingham Research

I don't know if you can give any color on what net inflows look like into the retail brokerage business and/or asset management, that would be great.

Paul Reilly

I don't have the numbers here. You would expect in Asset Management, they're up 9%. 5% to 6% of that would have been market lift and the rest of net flows. We had very good net flows in that business. An d it just continues, partly as advisors get more into it, Morgan Keegan continues to invest more in our Asset Management business. Our outside businesses are going good. So we get good net flows.

Jim Mitchell - Buckingham Research

Maybe just one quick follow-up on the Capital Markets division, that's the one area that pre-tax margins are a little bit below your target. Is the amortization coupled with better revenues, or do you think there's still some more that you can get done there to hit your targets?

Paul Reilly

Fixed income is tough right now. So you're going to get some margin drag from there. And as I explained a little bit earlier, in the Equity Capital Markets business, I think it's hard with comp ratios to predict what they really should be. So that's kind of a lumpy business. So we kind of estimate them and correct them. As we get through the year-end when we get a better view on volume, so that's some work to do to get those margins up and there might be a little bit of cost. We continue to analyze kind of our total cost in Equity Capital Markets. But they're doing well. They're positioned well. So I think you'll see an improvement. Again, in that business, the Capital Markets business, it's hard to get a trend off of one quarter.

Operator

At this time, there are no further questions.

Paul Reilly

Thank you. I would like to make one further comment before we get off the call. First, thanks to all for joining. The other one is really to thank Chet Helck. Chet has been invaluable in growing our Private Client Group business. He was an innovator in RJF. He took over and ran that and has jointly overseen our Private Client Group business and we had great growth, great advisors joined us under his leadership. And he has proactively put succession in place a couple of years ago with Scott for doing a great job. And I have seen too many people for a couple of years to hang on. So he says you got the team in place and I want to go on and enjoy life a little bit. So I appreciate him for his leadership, his development and promotion of people internally. Part of all of our jobs is to make sure that organization succeeds well beyond as we bring succession in. So he's been invaluable. We'll miss him. He's left a great legacy here and just wanted to thank him and let you all know that the Private Client Group is in great hands.

So with that, thank you all for joining and hope it warms up there for you in the Northeast by our next quarterly call and certainly by the Super Bowl, because I'll be up there next weekend. So warm it up.

Operator

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

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