Raymond James Financial's CEO Discusses Q2 2014 Results - Earnings Call Transcript

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 |  About: Raymond James Financial Inc. (RJF)
by: SA Transcripts

Paul Reilly

[Call Starts Abruptly]

..that went our way and Jeff will remind us of a few in a minute. This quarter, we think we had very strong operational metrics. But, we have had another factors going against us this quarter. We had three fewer trading days, few fewer calendar days which effected interest and numerous branch closings. You have to remember our concentrations in the Southeast and then the Midwest; we had a lot of branch closings due to weather. The transaction-based businesses were a little slower M&A was off, although not a horrible quarter.

Tax credit funds was low, but that is a win deals close, good backlog, public finance has been challenging the whole market with new issuances. On the expense side, Jeff, I will leave those for Jeff whether its FICA, our data center move, which was planned, but over budget, but it was very successful had an impact, TV advertising and other expenses actually weighted down the quarter and some of these are seasonal, some of these are unique events.

If you look at this quarter versus last quarter last year or the first two quarters, our first six months combined versus the first two quarters of last year, revenue was up 3% or 6% respectively, but net income was up 31% to 33% on a GAAP basis. So we believe the – we are in good position, the average of the two quarters has really been more indicative of our operational run rate for the first half of this year.

Going forward, we have record client assets under administration of $458 billion record assets under management of $62 million. Our bank loans crossed $10 billion record advisor productivity and advisor count is growing with good backlog. We think we are in good position.

By segment quickly, and I will let Jeff get into the details after this and I will give you a little outlook. The private client group had excellent results especially with the weather and trading days, record net revenue of $812.2 million up 12% over prior year and 5% over the preceding quarter, record pre-tax is $77.1 million, 44% over last year, 8% over the preceding quarter very good results again with record private client assets under administration of $434 billion, average productivity up, advisor count up 24, everything very, very solid quarter, the private client group [is well-positioned] (ph).

The capital markets business net revenue of $224.4 million really flat from a year ago and down 7% sequentially, pre-tax $165.5 million up 20 – I'm sorry about – up 26% year-over-year down 8% sequentially. ECM had a good underwriting quarter with revenue up 16% in the preceding quarter, up 19% from the preceding quarter. M&A was softer, now was softer than a good December quarter which was softer than a great previous September quarter, but it wasn't a bad quarter.

Backlog still looks good in that business and again, timing is important in terms of when deal closes. And if you look at the backlog we feel the M&A business which was – we had a very good year last year probably will be up this year. Institutional commissions were flat.

Probably the most challenged business because of the market is fixed income, commissions continued to be challenging down slightly this quarter. We continue to have very solid trading profit. They have done a good job with good risk management of generating trading profits for us.

Public finance although the – we are up slightly and new issuances is just down and it's a tough market. So as long as the low interest rate environment hangs around the public finance market – the segment will be challenged, but we have a great franchise, it’s well-positioned. So I think we are performing well given the market.

Asset management with net revenues of $87.5 million up 26% year-over-year down 9% sequentially because of the performance fee last quarter. Pre-tax was $29.9 million up 43% year-over-year down 6% sequentially, but up if you factor out the performance fee from last quarter. Again, with record assets under administration of $62 billion up 22% year-over-year, 3% sequentially very good performance very strong inflows and we are well-positioned.

The banks, I know we get a lot of questions, I will just make some general comments, great growth, production was about the same but payoffs were slower this last quarter. Looks like the rate compression is slowing down which has been a challenge hopefully we are near the bottom.

Credit quality improved so the provision was low due to group credit quality both due to payoffs and we fold some loans. So we are – really the credit quality is really very, very strong there.

So with that that's kind of the overview of the highlights for the quarter, I'm going to turn it over to Jeff and I will close it up with little outlook by segments. Jeff?

Jeff Julien

Thanks, Paul.

My walk around our segments really is that as Paul pointed out, PCG was kind of the star performer this quarter, number of records, average production client assets, record revenues, pre-tax, rev free assets, whole bunch of metrics also 9.5% margin in that segment which we sort of expect to continue with that rate for better at least for the rest of this fiscal year, so that we should exceed our target that we said at the beginning of the year. Our asset management as you would expect sort of follows the market up excluding the performance fee they also had record performance for the quarter excluding the performance fee in the prior quarter which led to the records.

Capital markets, there is a good detail on that on Page 9 of your Press Release with some of the selected metrics, I think you will see, it was sort of a mixed bag within the capital market segment. Overall, I would say sort of a good quarter, but not stellar and not terrible. So it's kind of in the middle of where we would expect in this kind of market environment.

And the bank, the loan growth is good, but we had a nice reduction in criticized loans that has helped, can expect provisions to stay at these levels and definitely as we continue to grow loans. We are optimistic that the NIM compression is in the bottom.

And then the other segment for the quarter looks weak compared to the prior quarter and the prior year quarter I will remind you that prior year quarter included the sale of the Albion Investment within our private equity portfolio and the immediately preceding quarter also had about $10 million of private equity proprietary capital type gains.

In this quarter we had no such gains, so and also in the prior quarter – previous quarter we had the ARS redemptions for about $5.6 million. So comparatively, it doesn't look good. But it's not as bad as it looks.

We talked about a number of factors, if you will remember just by way of reminder last quarter we had, as I just mentioned a private equity gains ARS redemptions, we had the Eagle performance fee of almost $10 million and we also had some tax benefits that caused us to have a fairly low tax rate.

So all those things were in our favor, we didn't really have any unusual items that went against us in that particular quarter. So although we reported $0.81 in December, we sort of cautioned that when adjusting for some of these items that were unusual either in character or magnitude that we are really pretty close to where the consensus estimate was for that quarter.

Although, we will say the same thing about this quarter, it just worked the opposite way. We have a number of factors some seasonal that always hit on the March quarter and some unique to this particular quarter. Some of the recurring ones include the resetting of FICO, which is a bigger number than we had focused on.

The difference in FICO expense alone from the December quarter to the March quarter was $9.5 million that increment will dissipate over the course of the year as people hit the now $117,000 FICO limit as they go through the year that actually added eight tenths of a percent to our comp ratio for the quarter versus the preceding quarter. So that was a big factor that will hit every March.

We always have elevated nailing costs in the March quarter for two reasons, one is we have the printing and mailing of our annual report and proxy for our annual meeting in that quarter. And we have the 1099s that we mail at the end of the year to our several million accounts. The total cost of production in mailing of all that is in excess of $2 million it always hits in the March quarter.

Another thing that hits in the – while it is symptomatic of the March quarter is some revenue related items – finished expense related items, I apologize. Some unique items we had elevated television airing of our commercials that was also a couple of million dollars. We have one necessarily go to zero in future quarters. But we typically will not run that level in any given quarter this is sort of an abnormally high period.

Paul mentioned the data center relocation. We moved our primary processing center from St. Petersburg to Denver. There was actually most of the costs were not people picking up machines and putting them in trucks. Most of the cost related to testing of systems to make sure we could accurately and continuously process the business from a new location, which was a big undertaking and that as Paul said was incurred a little bit more expense than we had anticipated.

And then another thing unique to this quarter on the revenue side, we had the weather related branch closings, hard to quantify, but clearly had some impact on the business as retail branches were down because of weather for several days at a time. We do have a shorter quarter, three fewer trading day this quarter, two fewer calendar days that both has an impact that's an always item in March and then the lumpy businesses that we talked about. M&A which was not weak was weaker than it had been running in the preceding couple of quarters and tax credit funds and private equity were not big contributors at all.

So when you add all those things together, which is roughly $8 million to $10 million of elevated expenses that will be “non-recurring” going forward by using one quarter of the FICO amount although it will probably burn off faster than that.

We are incurred in this quarter roughly 50% data comp, 25% business development with the TV ads and 25% in the admin line with the FICA. That coupled with the revenue impacting items that I mentioned. When you look at all those things, I would say again, that when adjusted we are pretty darn close probably to the consensus estimates again for the quarter.

And as Paul mentioned we sort of view the six months as a good picture of our current run rate to give you an indication of that. For the second quarter, the comp ratio was 68.9% but for the six months it was 68.5% again, probably a [chewer] (ph) number. The pre-tax margin on net revenues was 14% in the second quarter, but when you look at the six month period it was 14.6%.

ROE for the March quarter 10.9% for the six months 11.7%. EPS came in at $0.72, but when you look at the six months its $1.54 or $0.77 a quarter back to my comment about normalized if there is such a thing basis being pretty close to consensus.

We are happy to see the advisor count go up this quarter. In PCG, we do have good recruiting momentum and Paul will talk about that in the going forward comments. One other thing, I do want to mention that is not in the press release, but that we follow very closely and talk about whenever we present at conferences is our level of recurring revenues. We reached the new milestone this quarter was over 62% of our revenues this particular quarter. And which brought over 60% about 60.5% for the six months. So that's a new high for that metric and we are glad to see that going forward.

So I will turn it back to Paul for some going forward comments.

Paul Reilly

First, I will – I'm going to make some going forward comments. But since there has been so many questions on order flow, I want to hit that one head on before I do that. The first, we do not direct order flow based on hot dollar payments received from market makers instead our order flow is directed to firms that provide the best execution.

Now, there is some times, we do receive nominal benefits than our cash equities and payments in our options business that they are very minor and small in the overall scheme of things. So a lot of people have asked the impact of payment for order flow and it really doesn't have an impact on us financially.

Jeff Julien

Kind of like doing one more comment before Paul goes forward, I apologize. With respect to the impact on EPS of our outstanding shares two things, one again is a seasonal factor. Our biggest equity issuances are in the December quarter when we do year-end equity awards or portions of bonuses that are paid in equity et cetera. So you will always see a little spike in shares in the March quarter versus the preceding. But what really impacted the dilution when you look at the six months this year versus last year outstanding shares were up 2.7% that's a big increase.

It has – our normalized dilutions about 1.5% a year, the reason for that increase is the stock price going up, you know we used factor dilution, you used the treasury stock method and obviously you are buying a lot fewer shares when the stock prices at those highs. So that the elevated stock price is a positive and negative, I guess in that regard. But that did impact dilution. I'm sorry.

Paul Reilly

I have Tom James in the office, do you the stock prices is more positive or negative. So let me just really kind of look forward a little bit. Our asset management business is in a great position, we have not just going out for the record AUM because of the market, but we have great inflows and part of that's really driven by our private client group business also with record client assets under administration. Record productivity and we have got a very good recruiting pipeline.

So we have added not only we have a lot of people coming in, a lot of large advisors, and I think we really kind of cracked being a place that people from – with large books and big firms look at us as a great destination. So take time, we work hard in recruiting everyday but those businesses I think if you can look through the short to mid-term are in great shape.

The bank, we have had good loan growth. Now the cautionary part there is spreads have compressed, we see the compression slowing, if a stock compressing or expand that's good but usually those cycle take a bit. And the other is the provision we have had because credit quality has increased. Our provision is pretty low this quarter given all the loan production and of course that's not going to continue forever.

So we think that with the growth of the loan book and those two factors and maybe kind of flattish in earnings there but on the bank and it really depends on spread. But we would expect to hit some growth and but we will have those two headwinds and we will see where they balance given what happens to the spreads in the marketplace.

On the capital markets side, we like our franchises, I think done a great job of building them and we are well-positioned. If you look at pipeline alone, we got a very good pipeline in M&A. Last year was kind of a record year for our M&A and we could do better. And same with the equity underwriting business but that's going to be very market dependent as we go forward.

So the pipeline is there, but the market has to cooperate in order for us to be executing on that. In the fixed income, we love the franchise we have. The commission rate, commission volumes challenged in the market and we are not immune from that. So I think we are doing a great job with our accounts. But volumes are down. We don't see any short-term release on the commissions as long as this rate environment is what it is today.

So I think moving rates will help us but we are going to have to wait for that. In the meantime, we continue to generate good solid trading profits I believe with good risk management and cost control.

Public finance, we have been rated a top 10 issuer in these last couple of years, but issuance as well. So we have got another very good franchise good location. We continue to grow, but again that's going to be market dependent and the tax fund credit business, I will consider our backlog vibrant. It's been a great business. This quarter was off just based on closings that business we feel very, very good about and think will continue to perform.

So with that I just want to remind you of our guidance I think our first quarter got people forgetting that our guidance had been that we thought by the end of this fiscal year, we would be at a 68% comp ratio as a run rate and 15% net margin. We still believe that. I think the first quarter people thought we have checked the box and we try to warn we hadn't yet. But, we believe if you look at the average of these quarters, we were making great progress. And that is still where we expect to be by the end of the fiscal year.

So with that I know we spend a lot of time and a lot of items going in this quarter but now we would like to open up for questions. So Jodi, could you open it up for questions please.

Question-and-Answer Session

Operator

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

Steven Chubak - Nomura

Hi. Good morning.

Paul Reilly

Good morning.

Steven Chubak - Nomura

So I just wanted to start with a couple of questions on the bank. We have seen core expenses at the bank excluding the provision actually raised fairly steadily over the last couple of quarters. Historically you have been running within a pretty high range of $18 million to $22 million a quarter, it steps up to $25 million last quarter and actually in the most recent quarter it increased to $28 million.

And I didn't know if the increase was simply a function of higher regulatory in compliance made in for those banks in excess of $10 billion such as yourselves of assets. And should we be assuming this elevated run rate persists on a go forward basis?

Steve Raney

Hey, Steven. This is Steve Raney. Good morning.

Steven Chubak - Nomura

Good morning.

Steve Raney

Bulk of that increased expense is related to additional FDIC charges for the higher deposit level that we have given the size of the balance sheet. And there is also an internal charge, the bank expenses are based on the deposits that we have. So the bulk of that increase is really just related to the overall size of the banks balance sheet.

Jeff Julien

And variable so it will grow as the bank grows.

Steve Raney

Yes. Quite exactly.

Steven Chubak - Nomura

Okay. Thanks for that. And –

Steve Raney

I mean, Steve we do have I would say slightly elevated expenses that I would attribute to the regulatory framework. Our audit and compliance departments are bigger now. But it's relatively nominal. We are at 170 FTE at the bank now. So it's relatively small and on a comparative basis. Our expense levels and FTEs are very low relative to the size of the enterprise.

Steven Chubak - Nomura

Okay. So presumably what's going to be driving expense rates going forward something going to be the growth of balance sheet?

Steve Raney

That's correct.

Steven Chubak - Nomura

Okay. And I suppose focusing more on the credit side now, clearly the credit trends have been impressive, if you look at the dollar allowance, it's been stable for the last few quarters, while you have added $1.2 billion of loans. I suppose what I'm trying to glean is what through the cycle charge-off or provision rate should we be contemplating? And that's what you have been modeling in the near term versus the longer term?

Steve Raney

Yes, couple of comments on that. We did have substantial improvement in credit quality that trend continue. There is really not a whole lot left in our credit side category. We actually have 8 commercial loans that have a loan balance currently that are in our credit advisor category. So it makes it challenging to – I wouldn't forecast more release of reserve related to our criticized assets at least maybe normally but it won't be significant. So if we continue to grow loans, I would expect we will actually be adding to our allowance on a relative basis. So…

Jeff Julien

And based on our loan mix that might be at 130 or 140 basis points on average increase in loans something like that.

Steve Raney

Yes.

Steven Chubak - Nomura

Okay.

Paul Reilly

The wild-care, I want to remind you all, if we do get a sneak example –

Steve Raney

That's right.

Paul Reilly

This quarter and that comes in we don't know what it will be. Sometimes we agree, a lot of times that we don't but it is what it is.

Steve Raney

Yes. Historically, if you look back in the last four or five years every year in the June quarter, we get the shared national credit exam results. There are usually a handful of loans out of 400 that are subject to the shared national credit exam that we have difference in the ratings, sometimes ours are more harshly rated. We don't upgrade them based on the shared national credit exam. We do always have a handful of loans that are more harshly graded by the regulators. And we got to downgrade those loans. So we usually have some provision expenses and some allowance related to those downgrades in the June quarter.

Steven Chubak - Nomura

Okay. Thanks for that. And just one more on the loan growth outlook and Paul, I appreciate a lot of the detailed color you had given earlier in terms of the general market backdrop in pricing. What we heard from a lot of the big banks was that they were beginning to retrench a bit given that they felt they were not being adequately compensated for taking the credit risk on the commercial side at current pricing levels. And assuming the backdrop stays, on a go forward basis, system work to the current market. How should we be thinking about loan growth trajectory on a go forward basis?

Paul Reilly

You know that one is hard to say. We are hoping that people having this view which we share that spreads comes in you got to get paid for risk slightly have the effect of maybe spreads coming out a little bit, so which we hope the impact is in terms of loan balance growth our production has been pretty steady in the last few quarters. And it's not so much this quarter just because payoffs and refinancings are down as well.

Steve Raney

I would also just mention that this quarter really shed the power of the diversification of our various business units inside the bank. We did made our first tax exempt long-term the March quarter that business, it's directly referred to us by our public finance practice. So its loans to high credit quality municipalities, large not-for-profit higher education, hospitals and like.

Our Canadian business grew by $100 million in the quarter. Our loans REITS in some project finance real estate along with our normal C&I, our commercial and industrial loan book grew. Our SBL, we closed 450 units in the March quarter of loans in our securities based lending business for $330 million of loan commitments. And we closed a 170 mortgage loans during the quarter.

So we got a lot of different businesses inside the bank now. So we are not really relying on anyone business to drive it.

Steven Chubak - Nomura

All right. Thanks. That's it for me. And thank you for taking my questions.

Jeff Julien

You bet.

Operator

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

Joel Jeffrey - KBW

Hey, good morning guys.

Jeff Julien

Morning, Joel.

Paul Reilly

Good morning, Joel.

Joel Jeffrey - KBW

Thinking about, I mean you guys have done a really nice job of growing your sort of Tier-1 capital on the ratio continues to improve. And just – in terms of the growth in that just wondering, is there a point in time where you sort of start to thinking more about returning capital either through buybacks or increasing the dividend or you really focus more on building a growth capital.

Paul Reilly

I don't want to sound like a broken record, Joel. But, I will go over again. Our view right now is, first, we tend to be more heavily capitalized lot of our competitors that's a philosophy. But, at some time, if we have cash, we can't deploy. We will have to look at returning it. And our view right now, as we have opportunities to invest the cash in niche acquisitions we talked about some of the areas we have looked about – we have looked at particularly asset management. And we feel over a reasonable period of time, we can deploy it. If we can't we will have to focus on how we return it. Our goal right now is we think there are opportunities to deploy that capital inside the business.

Joel Jeffrey - KBW

Okay. And then just – I appreciate the comments you made in terms of the outlook, particularly ECM being kind of market dependent. But just wondering given the volatility we have seen and coming off the strong quarter you had in ECM, have you seen any kind of issue or hesitancy in terms of bringing deals to market or has the outlook changed at all just given what's gone on the markets over the past month or so?

Paul Reilly

I don’t think so. I think we had – that's a ridiculously strong market over the last year and we got a little bit correction this quarter. But I think that our read right now is the issuers are lined up just waiting if there is a good market, they will go. So I don't see any difference when we saw it a quarter ago.

Joel Jeffrey - KBW

Okay, great. Thanks for taking my questions.

Jeff Julien

Sure.

Operator

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

Devin Ryan - JMP Securities

Hey, good morning guys. How are you?

Paul Reilly

Hey, Devin.

Devin Ryan - JMP Securities

So it's a question on fixed income obviously it's kind of continued to be soft and appreciate the commentary around the need for, I guess higher rates. And then I get that you guys are putting nichey fixed income business with a lot of focus on depositories and municipalities.

But just trying to get a little bit more color, I mean is there anything else here that you think could drive better activity. And then just outside of that or anything else going on behind the scenes of the company where you are trying to boost growth within the fixed income business broadly whether it would be, you adding into other areas that you may see is a better growth drivers or is it more just stay in the course and hoping that we get a little better environment that could drive better claim volumes?

Paul Reilly

Yes. I would say that first rates and volatility are – and yield curve are the big drivers of fixed income. So volatility has been kept in a pretty short range. And rates have stayed low. So we need both of those. And I think moving rates, changing environment would help that business significantly.

We have looked at growing the business. We are pretty committed to keeping our risk profile the same. So we don't need to expand and if you look at our core franchises whether its bank deposits or a muni sales or the [gov] (ph) sales, we are pretty comfortable in our position.

So as we look at other businesses outside, we are looking at a number – they got to step within our risk profile as they go. Some of the businesses we look at or the opportunities we look at the marketplace outside of our risk profile. So I don't think you are going to see us expand much more what we are doing now. But we are looking at adjacencies and just haven't found anything compelling at this point.

We are expanding in the U.K., I can't say it's a huge profitable venture right now. We have got a good team. And we have got the base and it's fired up. And we are – we have had that initiative on since pre-Morgan Keegan and continued to try to grow as we have in our both, in our capital markets and our private client group where we have equivalent of an independent kind of franchise there in London and looking at growing that also.

Devin Ryan - JMP Securities

Good. Thanks. And then with respect to FA recruiting and a nice quarter it sounds like you are pretty optimistic there. So can you shed any more light, I guess into the outlook for additions and maybe how they'd like to play out over the years just based on the conversations you guys are having. Are the office visits up over the last year; is there any color with respect to that?

And then what other areas at the firm outside of the financial advisor, private wealth management area, are you looking to add people?

Paul Reilly

We have 150 opening right now in our company. So we are a hirer. If you look at the recruiting pipeline and say it's up from last year and it's very, very good. First of the year is the time when is probably the most active time in terms of people coming down, if it's a year end change and it's a nice place to come visit in the winter. That pipeline still looks good. And it is better than last year. Our results are better than last year. Our pipelines are better than last year.

Our RAA initiative is relatively new in that pipeline is good without a lot of results. We have had a couple of joints. We are hopeful that and our hybrid select model will both increase. So that pipeline has been growing but it takes a while to actually close, it's a year – probably a good year across the time you bring someone in the time they sign-up just for a lots of reason.

Most really good advisors are slow because they are worried about their clients. And I think they are in a transition. But the pipeline looks good and it's been good.

Areas outside the firm as I talked, asset management we feel it's a growth opportunity. We like the M&A days whether its in Europe, Canada or the U.S. continue to grow and if we see opportunities there. And there is some others that we look at in and out. So we have a good corporate development effort now. I can tell you, we looked and talked to a lot of people but we are very selective in that pipeline is actually pretty good now too. But, we are not – we don't count on it and nothings the size of Morgan Keegan. They are much nichier types of opportunities but there were much more active and aggressive in sourcing, selecting and talking to people there.

Devin Ryan - JMP Securities

Great. Appreciate all that color. And then just lastly, apologize if I missed this, but I guess a question for Jeff, just on the number the accounting service fee bumped in the quarter was at driven just by more accounts, more assets or is there something else going on there, just trying to gauge the sustainability of what was a really nice quarter for that line?

Jeff Julien

No. Predominantly is that. We renegotiated some of our arrangements with some of the providers that we share fees with in that regard and had to elevate our accruals in that level. So I think that what you are seeing is that coupled with the implementation of some of the accounting service fee that we talked about couple of quarters ago was some of the client fee changes had it been implemented and will be continued to be implemented throughout the year. So I think that it's a – its more of a higher run rate than we had been out in the past.

Devin Ryan - JMP Securities

Okay. Great. Thanks for the color.

Jeff Julien

I will just make one comment on the number of 150 job openings, I will make a comment that that some number though it's not a majority but some number those would be to replace some consultant that we are employing particularly in some of the technology areas. So it won't necessarily result in pure incremental expense as bring some people on.

Paul Reilly

Or we have turnover to. I mean we got to replace.

Devin Ryan - JMP Securities

I was assuming that 150, the majority of that's probably non-producing type of roles, is that right?

Jeff Julien

Correct, correct. We don't post for financial advisors.

Devin Ryan - JMP Securities

Okay. Thanks guys.

Jeff Julien

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Jim Mitchell from Buckingham Research.

Jim Mitchell - Buckingham Research

Hi, good morning.

Jeff Julien

Hey, Jim.

Jim Mitchell - Buckingham Research

Two questions. First on the comp ratio, I think Jeff if I look back in the third, your fiscal third quarter last year. I think if you suggested if you hit your targets of 15% pre-tax margin et cetera that would imply, I guess on a flat revenue base, the comp ratio nearly 66.5%, you did 68.1% last year and now we are just looking to hold it flat this year despite revenues being up.

Do you think there is more opportunity there over time or is it just maybe you stepped up investment spending? How do we think about where that comp ratio could come out as revenues grow?

Jeff Julien

The comp ratio bounces around based on where we hire people obviously contractors that they are having good recruiting and a good production period. They have a much higher pay out. Based on our current mix of businesses and the current sources of revenues to get that 15% margin we need to at about 68% comp ratio by the end of the year.

The one ratio that we are really I guess in our minds now changing our internal target on would be the private client margin where we start the year with a 9% target. We would be pretty disappointed if it ended up at 9 now given the run rate currently. But, we also need that on the increased revenues to get to that 15% margin. So 68 is our target for the end of the year and I can't tell you exactly, some I had work a year ago went into that, a number I don't know really remember at this point.

Jim Mitchell - Buckingham Research

Okay. Fair enough. And maybe just going – getting onto the retail, the private client side. Can you give a sense on the commissions in fees line which jump nicely is that more kind of annuity like fee based revenues or was it more trading, how do we think about that line going forward?

Jeff Julien

Within the private client group segment almost 70% of their revenues are recurring. So they have a very, very heavy fee emphasis, trails, things that are not transaction oriented. Most of the trading volume when we record number of trades which we have to record to the exchanges and report a lot of those are occurring in (indiscernible) fee accounts. So not really generating revenues.

So clearly the biggest driver was – has been the increase in assets. We had a good increase from October 1st to January 1st in billings, which everyone was aware of and dealt into their models as well as continued our recruiting and people bringing in new assets going forward. So it's really as to do more with asset levels and it does trading volume.

Jim Mitchell - Buckingham Research

So most of the sequential improvement was asset level, is that what you are seeing?

Jeff Julien

That would be yes.

Jim Mitchell - Buckingham Research

Okay. If we kind of do the back of the envelop, it looks like you might have had close to $5 billion plus in net inflows, is that a fair number to think about?

Jeff Julien

Don't know that on the top of my head. We have had new FAs and we have had new – versus you are talking about versus appreciation?

Jim Mitchell - Buckingham Research

Yes.

Jeff Julien

Don't know the break down in total client assets of that number. I know within asset management. But I don't know within private client.

Jim Mitchell - Buckingham Research

Okay. That’s fine.

Jeff Julien

Certainly you can assume that it didn't rise. Generally it rises about 50% of the S&P because of little over half of our client assets are equity related.

Jim Mitchell - Buckingham Research

Great. Okay. Yes. That's kind of where it comes out.

Jeff Julien

It would, it mean it's mostly flows this particular quarter, right?

Jim Mitchell - Buckingham Research

Right. That's helpful. And just one big picture question, I mean your sense of retail engagements seems like its been picking up but what's your sense of where we are from a risk taking perspective among your retail clients?

Paul Reilly

Cash is a percentage of assets was actually down, which is interesting for us, the cash balances have been kind of flat this quarter and we are used to them always going out. So if you look at where they are flowing, you would say equity kind of large and mid-cap and fixed income short durations, but having said that I would still talk about the retail and investor, the individual investor is cautious.

So trying to get some return on their assets but cautious in the marketplace so it's up that I wouldn't call it, they are all in.

Jim Mitchell - Buckingham Research

Right. Okay. All right. Thanks for taking my questions.

Jeff Julien

Sure.

Operator

(Operator Instructions) Your next question comes from the line of Alex Blostein from Goldman Sachs.

Alex Blostein - Goldman Sachs

Great. Thank you, and good morning, everybody. Hey, apologize if you guys covered this already but I wanted to kind of run through the expense structure just one more time. So I guess if we think about the truly seasonal impact, Jeff, I think that comes out to be somewhere around $10 million that we should expect to come down. Is that going to happen I guess all in the second quarter or sorry, your fiscal third quarter or kind of like over the course of the year.

And then I was hoping you guys could quantify the actual dollar amount you spend on data center reallocation?

Jeff Julien

The $8 million to $10 million range number I gave you, stuff that should disappear right away. The FICA, I took one quarter of it just assuming it dissipates ratably over the rest of the year. But that wasn’t all necessarily seasonal. It also included running of a television add and data center relocation which don't happen every March. But the rest of it does happen every March.

The data center relocation was about $2 million total costs to us.

Paul Reilly

Out of total costs but just kind of an over time testing cost that was elevated to data center cost a little more than that.

Jeff Julien

Obviously, we are going to have cost of running it going forward. And we have the cost of building it in the past. But this quarter that was the elevated relocation expense.

Alex Blostein - Goldman Sachs

Okay. I got it. Sorry to dump it down like expenses step down by about maybe $8 million or so next quarter?

Jeff Julien

That's my belief based on these factors.

Alex Blostein - Goldman Sachs

Great. Thanks.

Jeff Julien

I'm not saying nothing new can arise that we don't know about today. But based on what we know that would be correct.

Alex Blostein - Goldman Sachs

Jeff, now I get it all else equal. So the second question, I have three guys around, the fixed income trading environment. I mean it looks like muni funds flows have gotten better this year. I think they are positive on net year-to-date basis for the industry and obviously you are a very big player in the public finance space, in the muni space, what impact is that having I guess on the fixed income business for you guys. And if the strike continues, what kind of results I guess, we should expect from fixed income trading?

Paul Reilly

As a muni, if you look at the retail trading because of the interest in muni – its actually performed fairly well. The institutional, the corporate and the corporate that kind of other businesses that are really did. So I think that you are seeing what you are seeing in the run rates right now, we see its continuing until there is a change in the market. So the retail, I call retail kind of commission part of the business okay on the institutional part very tough.

Alex Blostein - Goldman Sachs

Got it. And then the last one for me guys. Obviously, lots of focus in the market on the higher interest rate backdrop potentially down the road. You guys have provided sensitivity to – I believe somewhere around 100 basis point raise interest rates. Presumably that could be some further net interest margin expansion of the bank if rates continue to rise beyond a 100 basis points. Have you given any more thought on what the ultimate upside to pre-tax income or revenues could be for the franchise as a whole be on the first 100 basis points?

Jeff Julien

Yes. In the first 100, it's hard to quantify it depends on what free cash holding, we obviously would earn more on our own corporate cash as rates continue to rise from there. But beyond that, it's a fairly nominal number say somewhere between $10 million and $20 million for the every 100 basis points beyond that for the next – talked about 300.

Paul Reilly

Banks going to operate of a spread more than just what the rate it. So –

Jeff Julien

Yes. It's not overly material after the first 100, its really the biggest factor is the earnings on our own free cash.

Alex Blostein - Goldman Sachs

Got it. Okay. Great. Thanks so much for taking the questions.

Jeff Julien

Yes.

Operator

(Operator Instructions)

Paul Reilly

Are there no further questions Jodi?

Operator

Yes, sir. There are no further questions.

Paul Reilly

Great. Well, again, we think this was a good quarter and we know that the first quarter and the second quarter they have bumped around, but it's an average. I think we're about where we would expect it to be. Well-positioned markets are with us. We feel good about where we are. So thank you for joining us and we will talk to you again soon.

Operator

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

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