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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Earnings Call for Raymond James Financial's Fiscal Third Quarter of 2018. My name is Rae, and I will be your conference facilitator today. This call is being recorded and will be available on the company's Web site.
Now I will turn it over to Paul Shoukry, Treasure and Head of Investor Relations at Raymond James Financial.
Thank you, Rae, and thank all of you for joining us on the call this morning. We appreciate your time and interest in Raymond James Financial. After I read the following disclosure, I’ll turn the call over to Paul Reilly, our Chairman and Chief Executive Officer; and Jeff Julien, our Chief Financial Officer. Following their prepared remarks, they will ask the operator to open the line for questions.
Certain statements made during this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, acquisitions, our ability to successfully recruit and integrate financial advisors, anticipated results of litigation and regulatory developments or general economic conditions.
In addition, words such as believes, expects, plans and future conditional verbs as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Please note that forward-looking statements are subject to risks and there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Form 10-Q which are available on our Web site.
During today's call, we will use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these measures to the most comparable GAAP measures may be found in the schedule accompanying our press release.
With that, I'll turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?
Thanks, Paul. Good morning, everyone. I’m actually calling you from Orlando, Florida where we have our Private Client Group employee division’s summer development conference which is a conference full of educational and communicational opportunity for our advisors.
And unique to the Raymond James’ culture, we actually have slightly more children under 18 than advisors attending. It’s a family-oriented event. Really highlights the difference in the Raymond James culture and we believe it is part of the reason you see such low turnover statistics in our Private Client Group because of our culture.
This morning, I’m going to kind of give some highlights over the results and I’m going to turn it over to Jeff Julien who will go over some of the details especially in the expense items which I know you’re going to have questions about, and then I’ll close with a little bit about the outlook for next quarter before we turn it over to you for questions.
So in looking at the tone of really looking at the call, I think the results are better than they appear. The revenue drivers were all very strong and we did have certain elevated expense items that we believe were higher this quarter than they will be going forward and hopefully some of them were temporarily elevated, but we’ll get into that in a little bit.
First, I want to start by our revenue metrics I believe were very, very strong, 1.84 billion, up 13% over last year’s quarter and up 1% sequentially. In fact, we have quarterly net revenue records in three of our four business segments, including the Private Client Group, the Bank and Asset Management.
Capital Markets in the ECM side had very strong numbers which we’ll talk about in the segment, but really held back by a tough fixed income market environment where the fixed income division is really struggling given the environment; doing well versus competitors but struggling.
I think most importantly if you look at the end of the third quarter, if you look at our key go-forward drivers, we ended with record assets under administration of 754.3 billion, up 14% over last year’s quarter, up 3% sequentially even more than the market relative to that quarter.
We had assets under management of 135.5 billion, up 49% but of course that included the Scout and Reams acquisition versus a year ago quarter but up 2% sequentially, again good numbers given the market.
We had record number of FAs of 7,719, up 115 in this quarter alone. We’re in a record recruiting pace this year and record net loans at the Bank of $19 billion and also an interest rate hike in June which should trail through in the next quarter. So I’m very pleased overall with our revenue and asset growth and positioning going forward.
The sequential decline in our income I’m sure was a bit disappointing but let me touch on some of the reasons and Jeff will get into more detail so you’ll have perspective. Our quarterly net income of 232.3 million was up 27% over a year ago quarter, down 4% sequentially where we earned a $1.55 per fully diluted share, up 25% over a year ago quarter and down 5% sequentially. The sequential decline was really almost entirely resulting in two areas this quarter; one was business development and the other one was other expenses.
I would call the business development line mainly good kind of expenses. Part of it is the timing of our conferences and recognition events where we’re going to give more guidance on that because they are lumpy and they were elevated last quarter because of two big events. But also significant recruiting and on-boarding expenses, about 115 advisors plus a new correspondent from which all should be great investments going forward. These are lumpy as to timing and they’re really investments for the long term.
Other expenses were not as positive of the cost but they were really driven by legal and regulatory expenses. They were lumpy and hopefully not recurring. We believe that again the annual run rate will be a better number than this quarter. They just happened to be a number of things that lumped into this quarter. We also had some continuing consulting and audit fees. Since these fees are lumpy we believe going forward as a run rate that the year-to-date run rate is more accurate really than the quarterly run rate. But Jeff will get into those in detail.
Before I turn it to Jeff, I’ll briefly touch on our segments. The Private Client Group numbers were really driven by record recruiting pace and retention. Our retention continues to really be our strategic advantage keeping our great existing advisors. We’re on track for a record recruiting year really across all of our affiliation options.
Growth in fee-based assets were up 24% over last year’s quarter and 6% sequentially. Fee-based assets today account for about 48% of all our Private Client Group assets and about 16% of the total securities commissions in the segment. The rise in short-term interest rates in June really should help go forward as long as we can maintain cash balances that Jeff will talk about in a little bit. And again, I’ve already addressed kind of the business development and other expenses which were really incurred in this segment.
In the Capital Markets segment, the equity capital markets had a very good quarter, investment banking revenues of 115 million really driven by strong record M&A. And sometimes when you runoff a good quarter like we did this year, this quarter at M&A you worry about the backlog. The backlog remains very strong. In fact, our first month of July was good. However, institutional fixed income commissions and trading profits continue to be challenged. And as long as there’s low volatility in interest rates in this flattening yield curve, they should be continued to be challenged over the tough quarter for them.
In the Asset Management Group, they had both record quarterly net revenues and record quarterly pre-tax income. They ended the quarter with record assets under management of 135.5 billion and that was really driven first by great Private Client Group recruiting as recruits come over and they often move some of their clients’ money into those accounts. There is an increased use of fee-based assets as an industry trend and certainly with us and market appreciation.
Carillon Towers Advisors also managed a reasonable positive inflow for the year, especially given a challenging active management environment. And the retention of Scout and Reams assets continue to exceed our expectations. So we’re pretty – things look well in Asset Management.
The Bank had a record quarterly net revenue and a record quarterly pre-tax. Record loans of $19 billion, up 14% over last year’s quarter and 5% sequentially. The loan growth was broad based but we’ve had particularly good results in the Private Client Group related loans including our securities-based loans and mortgages continue to grow.
The NIM also increased to 330 bps, up 16 bps over last year’s quarter and 9 bps sequentially driven by lower than anticipated deposit betas and other factors Jeff will touch on. And more importantly, our credit quality metrics remained stable and in good shape.
So if you look at it, I think our revenue and business drivers are in good shape in the quarter. We’ve had some fluctuation expenses and I’m going to go ahead and turn it over for Jeff to address those items before I talk about outlook for next quarter. Jeff?
Thanks, Paul. My personal big picture view of this quarter is that with the exception of the two line items mentioned in the release and in Paul’s comments, results were very much in line with consensus expectations and certainly in line with to somewhat aggressive expectations that you all might have had in terms of all the asset levels and revenue levels, et cetera. So a lot of good things and to that we’ll talk about in more detail here.
Again, most all of the revenue and expense line items were closed with the exception of business development and other expenses were within single-digit millions of the consensus model, so not a whole lot of significant variances to talk about. But on the securities commissions and fees line, we continue to see that the trends toward increased fee-based assets and fewer and fewer transactional commissions, that continued this quarter.
And as you can see in the press release, fee-based assets in PCG were up 6% over the preceding quarter which certainly bodes well for the billings that occurred on July 1 which will be recognized throughout the fiscal fourth quarter.
Equity capital markets commissions rebounded sequentially really writing the better underwriting activity that occurred during the quarter. And then fixed income commissions I’d say both commissions and trading profits as this is on a separate line item continued to be fairly weak and we really don’t see – we see that weakness continuing at least in the short term here.
On the investment banking line, I mentioned the better underwriting sequentially and the M&A fees for the quarter of 84.7 million were actually a record M&A quarter for the firm. So a lot of activity happening again late in the quarter.
Tax credit funds I should point out had sort of an exceptionally low revenue quarter. That’s as we’ve talked about in the past sort of a lumpy business depending on the timing of closings, but given their activity levels we certainly expect to rebound to at least within the more normal levels in the fourth quarter as well.
On the overall investment banking line, we had talked about hoping to kind of match last year’s revenue number on that line. Last year was just a shade under 400 million. Now we’re trending at about right now 95 million a quarter, so we think that’s still within reach if we have a good close to the fiscal year. That’s not far off from that already.
Let me talk about net interest for a second. We’ve passed a little more than half of the June increase in rates through so far, so we do have some modest upside in spreads for Q4. But with respect to the March increase that we had, we also passed through a little bit more than half. So we did benefit a little bit from ever-widening spreads. Offsetting that of course are client cash balances which are not growing and we put that metric in the press release as well.
One of the dynamics that’s been happening in our firm as the Bank continues to grow, more and more of the client sweep cash has been directed to our Bank as opposed to outside banks. So we see a shift in geography here on the revenues away from account and service fees which are the fees we get from the independent banks in the sweep program and more in the interest earnings side which we generate in our own Bank.
So that shift you’ll see continuing to happen. So far the increased spread is more than offsetting that shift and we continue to see an increase in both line items. But at some point we may see a leveling off of the account and service fee line item with respect to the Bank sweep.
The Bank NIM for the quarter of 330 is up nicely from the 321 last quarter. Most of that is due to the higher spreads and the balance is really related to having less free cash on average on the Bank’s balance sheet over the course of the quarter and we actually have the net interest margin calculations also in the press release for you to see.
But there are a lot of factors that go into the net interest margin that didn’t really come into play this time. There’s acceleration of fees depending on the amount of payoff activity and there are other things as well. So at this point I think that and I’ve talked with Steve Raney who is here with us by the way for those of you who have detailed bank questions.
But I think at least for the short term we kind of anticipate a similar net interest margin at least for the fourth quarter. But longer term I’m continuing to beat the drum that at some point spreads are going to contract a little bit. And for our own modeling purposes we would probably put in something closer to the 320 longer term for the spread at the Bank.
The comp ratio came in at 65.7% which was well below our 66.5% target and interestingly exactly as the consensus model predicted at 65.7%. So comp certainly continues to be well controlled.
Communications and info processing we’ve guided towards the 90 million a quarter type number. It was 91 this quarter – it’s averaging 91, I’m sorry, this quarter this year-to-date. So we’re just slightly above guidance. It should be somewhat close to that for the year and then we’ll look at next year, maybe have some color by the time we do this call next quarter.
Business development is one of the ones we need to spend just a little time on. This is a line item – the cost in this line item used to be more rapidly spread over the course of the fiscal year but now given the timing in the calendar, it’s become a much lumpier item. The biggest costs in here are conference, recognition events and trips, advertising which is not a consistent. You don’t run flights of ads every quarter.
We certainly don’t produce new ads every quarter. And then the level of recruiting activity which has been somewhat consistent but even within recruiting there’s a lot of costs that aren’t always there. Sometimes they come from headhunters, sometimes they don’t, et cetera. So this one’s become one that’s going to unfortunately be lumpier than it has been in the past and much more difficult for us to give any guidance on.
Based on the way that our events are currently scheduled for the next year or two, which generally are booked, it looks like in terms of the conferences and recognition events that the June quarter will be the highest in that category for the next couple of years followed by the September quarter. And then a distant third would be December and March quarters where we have much fewer of those type of costs.
So we’re seeing the peak here in the June quarter that we just released. September quarter will be down from that in terms of this cost. And then I said December. If you remember last December, it was like $33 million, $34 million in that whole line item. So that’s a much lighter quarter in terms of activity in the conferences and recognition events.
So we look at that line item, the annual run rate for the year is about $44.5 million a quarter. Again, it’s going to be lumpy but if we’re looking at what we might think an annual run rate is, it will be between 45 million and 50 million on an average but there might be a quarter that’s hitting the 50s and there might be some that are at 40. So that’s close as we can get now given some of the lumpy factors that are now going into that line item.
The Bank loan loss provision was – we had $837 million of loan growth but over half of that was in residential mortgages and SBLs which have fairly low levels of reserves against them which is why the provision for the quarter at 5.2 million looks low relative to the allowance as a percent of loans which is a little over 1. So that continues to do well. And coupled with that, the Bank has continued to see improved credit metrics. And as loans get upgraded or if there are fewer problem loans, that has an impact on the allowance as well.
The other expense which is the other line item that is significantly out of whack here this quarter was primarily, as Paul mentioned, driven by legal and regulatory reserves in PCG. And as he mentioned, there’s a whole [Technical Difficulty] go into this line item. But the best that we can look at this line item, for the year-to-date it averaged $72 million a quarter and it was higher than that this quarter. And we think something in that range is probably closer to what we would expect for the near term. But it’s hard to predict some of the legal items that go into that particular line item. It’s even hard to predict sometimes some of the consulting engagements, et cetera. It just depends on the timing of when we decide to do certain projects.
Tax rate was right on the 27%, so that worked out correctly. This quarter actually it was at the low end of the guidance of 27% to 28%, but that’s also what you all had predicted, helped by about $8 million in COLI gains but to some extent this particular quarter. We think it will be in the 27% to 27.5% range again for next quarter. But then bear in mind for those of you modeling '19 and beyond, we think it will be in the 24% to 25% range as we get the last 3.5 percentage point benefit from the tax rate decrease that happened effective January 1 for most companies.
So let me talk about comparisons to the revised targets that we went through at the recent Analyst Investor Day. Most of them or several of them are very good and then there’s one glaring exception which flowed through to the overall firm results and I’ll start with the ones that came in okay.
Capital Markets margin we had guided down toward 10 from the previous 15 and actually came in at 9. I think 10’s probably still achievable with some better tax credit fund activity and continued good M&A type activity in the equity capital markets. It’s going to continue to be dragged down it looks like in the near term by the fixed income division.
Asset Management margin we had a target of 33% margins. We came in at 35%. So that one is running on track. The Bank net NIM is running at – we had 310 to 320 guidance, it came in at 330 which we think is probably right for the near term but longer term again we would head back toward 320. It’s actually 321 for the year-to-date in the Bank.
Comp ratio as we talked about came in at 65.7% and it’s 66.2% for the year-to-date which was better than our 66.5% target. So those are all running reasonably close to or better than targets.
The one that’s the outlier here is the Private Client Group margin which is where all these costs hit by the way both the business development costs and the legal and regulatory accruals, all hit in the Private Client Group. Their margin for the quarter came in at 10.3% which puts them at 11.8% for the year-to-date versus our target of 12.5% or better in that particular segment. So if they were to drag down and that of course drag down the overall firm margin.
We have an 18% plus target, came in at 17.3% for the quarter because of those costs and hit that 17.9% for the year-to-date. And then the firm ROE which we have a 16% to 17% target given the current environment came in at 15.4% for the quarter. We’re right on 16% for the year-to-date. So some misses all related to those two expense items and a whole lot of things that met or exceeded expectations. So that’s sort of the quick rundown.
I’m going to turn it back to Paul to give you an outlook for the fourth quarter beyond.
Thanks, Jeff. And just kind of a high view going into next quarter by segment first, the Private Client Group is entering the fiscal quarter with assets up 6% sequentially. And remember in that group we bill quarterly in advance. So that should give a good tailwind for the revenue and Private Client Group everything else being equal.
Retention and recruiting both tend to be very, very strong. So I think we’re in pretty good shape there. And even with two firms entering protocol, we’re on record recruiting pace. So things look good there.
We will see a little bit of geography shift as it looks like more cash balances will go from the Private Client Group sweep program to the Bank. So some of those earnings may go from Private Client Group to the Bank, but that should be neutral to the firm if we have maintained cash balances.
June rate hike will help a little bit and expenses should return to those annual averages. So I think with those numbers we’ll return more to what you would expect given this next quarter.
Capital Markets even coming off that record M&A. The pipeline looks very robust and I think the equity capital markets continue to perform. And unfortunately with the market both with lack of volatility and the flattening curve, the pressures on fixed income we believe will maintain. So you’ll have a tale of two cities in that segment with equity capital markets we believe should have a good quarter in fixed income or remain under pressure.
Asset management starts at up 2% sequentially. It should help billing over the quarter given the market holds. We also believe they should have continued growth as recruiting has been robust and as those advisors bring their clients over and put some of their assets in that segment we believe will have good growth there also.
And Raymond James Bank outlook looks promising. We’re starting with record loans and some tailwinds from the last rate hike. But again for all of these, things are volatile. Markets can change. Things can change. But given what we know today we’re at a very, very good starting point.
The last thing I’ll comment on is really our capital. We are aware of the growing capital levels. Our Board did authorize an increase to $250 million of our securities repurchase. And again, we said we were going to use – our target is to use 200 million for anti-dilution through the year and we think it’s a good timing and leave a little room for opportunistic repurchases should that happen.
Most of our capital continues to be invested in recruiting and infrastructure which has had very good returns. And as always, we’re evaluating a number of opportunities for firms to join us. But again, we’re very disciplined making sure there was a cultural fit, there’s a strategic reason and they generate good returns to the firm. And again, we can’t predict timing on any – if anything will or won’t happen when it comes to our corporate development because that’s very dependent on both parties coming to some agreement when we look at many of these opportunities.
So with that, I’m going to turn it over to Rae, our operator, for questions and answers. Rae?
[Operator Instructions]. Our first question comes from the line of Ann Dai. Your line is open. Please ask your question.
Hi. Thanks. Good morning.
Hi, Ann.
My first one – good morning. My first question is on recruitment for you guys. Obviously very strong recruitment in the quarter and it’s been strong year-to-date as well. So I guess I was hoping to dig into some of what’s driving that acceleration if there’s anything to call out there? Is there any impact actually to the contrary from the withdrawal of some firms to the broker protocol? Has that been having some of the opposite affect and help you guys? And also specifically if we look at the employee channel that that recruitment accelerated in the quarter, so anything there?
I think first of all, the recruiting trends have been very good for a number of years and they continue to increase. Hopefully as people, for two reasons, believe that our platform both in our attitude towards advisors and their clients is unique, especially from the larger firms and that we offer a platform that were large enough to be able to offer the technology and services they can get at larger firms yet have more of a culture of the smaller regional firm, that family feel, which is evident here in my 650 kids at our conference, which I don’t think you’re going to find most anywhere. So that has continued to resonate. And as many firms have tended to try to institutionalize their clients around their advisors and some advisors feeling like they’re competing with them, I think our message just resonates and has been picking up. On protocol, we did see some slowdown from a couple of those firms but the volume of discussions are very high and so far we’ve done very well in all the temporary restraining orders in cases where firms filed against advisors, we’ve been winning those. If advisors do it properly and honor their agreement, the transitions are happening. But overall we’re just in a good market environment as many of the other regional firms are doing well too, but we happen to be doing very well and I think it’s just our platform’s the right place at the right time in this environment.
Thanks, Paul. And just one clarification on recruitment and that impact on expenses this quarter. So was there anything specific to maybe the greater recruitment in employees or something else that was a larger driver of the recruitment in on-boarding expenses? I guess I’m just kind of curious. You guys are always kind of bringing new advisors on. So what was special about this quarter?
Well, first, it was a very large quarter. In June alone I think in the employee group, our projected recruits were over 40% happened in the June quarter. So the actual transitions occur even when people commit the actual transitions, June quarter has traditionally been our largest quarter. That makes sense after bonuses are paid and everything else, people tend to plan their movements to other firms. And the biggest charge against that, we have two. We do have transition assessments that we amortize with ACAT, the cost of moving their client accounts from their firm to our firm fits the P&L. So we had a big bunch. And we also signed on a very large correspondent firm where the cost of that move – it was the firm. It doesn’t show up in the number of advisors but it was a large firm in terms of assets and their advisors. And in that fee alone I believe was about $3 million --
Yes, it was over 4 billion in assets, funds with account costs over 3 million in ACAT fees --
Just to move that and that doesn’t show up in number of advisors at all. So that also was a spike. So you add those two together, that’s the big spike there.
Okay, that’s very helpful. Last one for me is on legal and regulatory. Sorry if you already covered this. I joined a little bit late. But what was the specific driver of that increase in reserve for this quarter?
It’s just numerous cases and issues that we go through all year and they – it’s the cost of doing business. There’s just a bunch of things that hit in this quarter where we increased the reserves to where we think they’ll cover the issues and it just go lumpy. There’s a bunch in this quarter. As we said on the call, we think the run rate that we’ve incurred in the last – first three months is more indicative of the run rate. So we just had a lumpy quarter for no particular reason. It’s just timing of when they happened.
Okay, I appreciate it. Thank you.
Thank you.
Thank you. Your next question comes from the line of Chris Harris. Your line is open. Please ask your question.
Thanks. I just wanted to follow up on that last question. Is it possible to quantify what the legal and regulatory items were in the June quarter?
We don’t comment on specific legal and regulatory. Jeff?
In total, we had reserves about $14 million or something that’s above and beyond what we would consider kind of a normal run rate. So it means that was virtually drove that line item by far. And the fact that we had virtually none in the March quarter by comparison. As Paul said, it just was a confluence of things that kind of all occurred or we thought they are appropriate to take some reserves against and that happened all in the same quarter here.
So I guess the 14 million was the elevated number for March from kind of what we – a typical run rate.
Got you, okay. That makes sense. And if you think about the quarterly run rate that you guys talked about being around $72 million, I know there is a little bit of elevated legal and regulatory, but it would still imply about 30% growth versus last year. So I’m wondering if there are other expenses within that bucket that are elevated. And to the extent they are, what exactly would those be?
There are a lot of professional fees, lots of consulting fees, obviously all of our audit costs and none of these things have been going down as you can imagine. I don’t have the list in front of me of all the items. I’m at the conference with Paul in Orlando.
But a big driver of those increases have been as we put in our developing new supervision and compliance systems and others we’ve brought consultants and look at the structure of those. And so we’ve had elevated professional fees this year also that are driving some of that.
Okay.
Maybe the group in St. Pete has some better color on what are some of the other larger line items are in there. We don’t have that in front of us.
Yes, no worries. I was just more curious for the big picture anyway. Just seems like a high rate of growth and it sounds like a lot of the expenses might be “the good expenses” related to your recruiting and your growth generally.
They are in business development. I would call those generally good expenses. The other tend not to be --
Others are overhead costs that just go up as we get bigger unfortunately.
Okay. A question related to recruiting. When you guys onboard an advisor, I imagine they’re not really at full production when they join. And so I guess I’m wondering how long typically does it take your average advisor to ramp to full production? And how much incremental revenues can typically happen and over what timeframe as that advisor starts ramping up?
Chris Harris, this is Paul Shoukry. Before hitting that question, I was just doing the math on your 30% increase. I think what you may be forgetting to do is adding the clearance and floor brokerage with other expenses which we combined since last fiscal year end. We can talk offline about it but I think the number is going to be much, much lower than 30% when you consider that. But we could talk offline.
On the advisors, advisors tend to come over and bring a good portion of their book in the first quarter maybe half cost and then their other half over the year and grow from there. So there’s definitely a lag effect. Each advisor is different and it takes time to get their accounts to transfer them. But our history has been kind of after the first year they kind of grow past where they were. Some of that’s new gross. Some of it is bringing their book over. So there is a lag effect.
Very good. Thank you.
Thank you. Our next question comes from the line of Jim Mitchell. Your line is open. Please ask your question.
Hi. Good morning.
Hi, Jim.
Maybe just a question on getting back to the business development expenses, I think you indicated you had a large correspondent firm and obviously elevated recruiting but also – you also had conferences and advertising. Is there a way to give us a sense of sort of the breakdown at least in a broad sense of how much was the one firm which might be one-time or the conferences? Just maybe a little more color around the sequential growth and what were the more specific drivers?
Like I said, unfortunately it’s going to be a very hard line item to give a lot of clarity on. We’ve been pretty close on the communications. That was hard too. But at least I think this is going to average somewhere between $45 million and $50 million average for the year. The June quarter will always be the highest always. For the near term, it will be the highest because that’s where the concentration of events is now and the September quarter will be next. If I had to pick a number and this is a swag and there’s a lot of factors that can change it, it’d probably be in the $50 million range next quarter and in the December and March quarters, it would be substantially lower.
There’s so many moving items. So conferences and events for this quarter, over $8 million and then maybe a 1 million --
And if we decide to do some new commercials and run twice of ads, that could be a multimillion dollar cost as well. Right now I can tell you that that should not be a significant factor in the September quarter. But beyond that, it could be.
The biggest challenge is – we could have done a better job of communicating when these events typically were smoother throughout the year. Now they are definitely lumpier in the third and fourth calendar fiscal quarters. So you’re just experience this quarter, next quarter and they were lower the quarter before. So we probably could have communicated a little bit better on that. But that’s really the big impact on our mind. And recruiting is just going to be when it happens. That $3 million fee was an unusually large fee but a very, very good correspondent firm. So that was the cost of transition.
Right, that’s helpful color. And maybe just talking about the net interest margin, Jeff, it seems like it could hang in there next quarter but still thinking spreads could come in further down. Maybe you can help us think about the duration of your balance sheet? It seems like it’s pretty short duration, flattening of the curve shouldn’t affect you too much. Just trying to think through how you think of sensitivity across the curve?
Yes, it’s extremely short. Even the securities portfolio at the Bank which is the one place we take some duration risk is we pull that into the two to two and a half year on all of our recent purchases, because as you point out you just don’t get paid to go out any further and we haven’t been growing it that aggressively in the face of rising rates anyway. So it’s extremely short, so we should continue to maintain these spreads as rates rise or if even if they drop.
And longer term we can take every once deposit beta forecast which I’m not sure based on anything because you think it will range from --
They range from over 100 --
Zero to 125 – I think everyone’s guessing. And we believe that longer term that those spreads should come in just on competitive factors. Like we’ve said, we’ve been positioning to be at kind of the higher end of the competitive markets but not leading, certainly not lagging by any manner. And they just haven’t yet. As long as the spreads remain as they have, we’ll do fine. But the view is longer term is the competition for cash increases that rates should. We just haven’t seen it yet. And you can ask our opinion. We’ve been wrong every time, so we’d rather not just guess.
I’ll rather keep saying spreads are contracted. That keeps them where they are. But if you see the client cash balance, those continue to contrast. That’s not just us. In fact, we’re probably doing a little better than the rest of the industry. But it has to do with deposit beta and the fact that clients are voting with their fee in some regard going to buy alternative cash investments, positional type as opposed to sweep funds where they can now get what they would consider more competitive rate.
Jim, this is Steve Raney. About $15 billion of our loans are LIBOR based. Floating rate loans, as Jeff mentioned, are extremely short.
And then there’s residential or short-term loans anywhere from three to five – five to seven-year arms I think, so they’ve got a short fixed rate period to them. And then the longest is the tax exempt portfolio which because those are sometimes up to 10-year fixed rate, we hedge a good portion of those.
All right, that’s all helpful commentary. I appreciate it. Thank you.
Thank you. [Operator Instructions]. Your next question comes from the line of Devin Ryan. Your line is open. Please ask your question.
Great. Good morning, guys. How are you?
Good, Devin.
Good. Maybe a follow up here just on some of the commentary on recruiting and the strength you’re seeing. It would be great to get a little bit of detail on what’s happening in the Northeast and West where I know those areas on focused and any anecdotes on kind of where market share is trending or how much of the recent growth in headcount is coming from those regions? Just trying to get some flavor for how you’re doing there and if any of this kind of uptick has been because you’re seeing more penetration?
We are seeing increased penetration on Northeast and West. We’d like to see more because we have a lot of market share opportunity there. So I would say it’s been so fairly broad-based geographically but it’s increasing in the Northeast and the West. And the other good news is Alex. Brown has gotten traction recruiting. We’re getting many more recruits also join that channel where if you look at Morgan Keegan, it took two years before they recruited everybody and anybody as they go settled in. I think Alex. Brown is we’re seeing momentum there after the year going into the second year. So if you really look at recruiting, it’s hard to isolate it against really all the channels are doing very, very well. And so it’s broad based and it’s mainly via house done [ph].
Okay, great. Thanks, Paul. And then just on the commentary around kind of what we’re seeing in customer cash balances here and the decline in aggregate. I know there’s a lot of moving parts here between money going to the markets and yields, even behavior as well. Can you look at other rate tightening cycles or have you to kind of get a sense of kind of how this behavior is on a relative to the past or maybe to help kind of get a sense of when we could start to see some stabilization? I’m just curious of kind of views on that or obviously there could be some reasons why this time is different. And so I guess that’s part one of the question. Then part two is just with some of the migration of revenues from account and service fees over to the Bank just with the movement that you highlighted the good loan growth, can you just give us what you’re yielding now in third party bank sweep just so we can kind of do the calculations there?
So in terms of your first question on cash balances, it’s hard to answer. I think we’re kind of in a unique cycle. But if you look more historically, our client cash rates were more tied to money market rates and we had our own money market funds and a lot of firms like ours kind of type. And I think with increased regulatory costs and instead of increasing fees, institutions have kept more of that cash balance so we’re getting spreads that for us are record high spreads. So it’s kind of hard to determine behavior. There are some people speculating that the hottest money are the people seeking yields move quickly and it’s going to slow down. I don’t have a model that will tell you that. And we have lost cash balances even with our recruiting brings new balances. So it tells you the stable cash balances have been moving. So it’s something we’re just going to have to watch and I think hard to predict.
Devin, we’ve tracked client cash balances ever since I’ve been here which is a fairly long time now and we only had I think – before this year we’ve only had one other year when cash balances ended the year lower than the started the year. But what’s different this time is the deposit beta. We have never had spread – never meaning as long as I’ve been here, we have never had spreads of this magnitude. We always had – we had a money market alternative sweep which we still do for people which was very popular at that time and we sort of – the rates around the industry were sort of pegged toward matching money market fund rates and money market funds now with money market reform act a couple of years ago where they engaged in fees and other negative implications to them are not as attractive a sweep option now for clients. So we have a government funded sweep for us. But the firm earning 150 plus basis point spreads on client cash is I’ve never seen it which is why I keep saying that at some point it’s got to at least come in a little bit from here and I’m sure that that’s causing us to see some of this decline in the industry, because it’s just somewhat unprecedented. And I think it may settle out. I think I’ve talked about this at the Analyst Day. I think it will probably eventually settle out at a level higher than it used to be because money market funds aren’t really viewed as the competition now. And the cost models have changed in all the firms with the amount of compliance in regulatory and technology costs, et cetera, that all the firms need to have to be competitive and stay within regulatory compliance. So while the old spreads may have been 70 basis points, say maybe it settles out between 100 and 125 someday, but for now it’s – and my opinion is still very elevated at the one and the half. That has not happened in my 35 years here.
It’s only 34.85 years, Jeff.
I hope I make it.
Thanks, Jeff. I appreciate all that color and the long-term perspective. I guess just a last quick one here I think I heard Steve Raney on. Just a little uptick in C&I and CRE balances. Is that just idiosyncratic in timing or are we seeing any kind of falling in terms of competition for kind of new loans or just trying to get a little more sense of the decent loan growth? I know the SBLs were pretty good but just the overall loan growth this quarter?
Hi, Devin. Good morning. Growth in the C&I and the commercial real estate is a little bit lumpier. There have been periods during the last year when prices have pulled in, in the secondary market. We’ve taken advantage of that. There are other times when prices are pretty high and we’re really on the sideline. So I would say right now the pipeline is actually for new deals kind of across the whole spectrum is actually pretty light but we’ll be opportunistic. I would that – in our C&I portfolio in particular, the growth rates have slowed down over the last few years but I would expect C&I and CRE loan growth over the next 12 months to be kind of high-single digits, maybe in the 8% to 10% range over the next 12 months.
And again, you’re looking at the net growth. The payoffs bounce around quite a bit too.
Yes, the C&I portfolio runoff is up 30% per year, so it’s a big hold at least here.
Yes, got it. Thanks, Steve. I appreciate it guys.
Thank you. [Operator Instructions].
Well, with that if there are no other questions --
Actually we have a follow-up question from Ann Dai. Your line is open. Please ask your question.
Hi. Thanks. Sorry to come in right at the end. I just had one follow up on your commentary about M&A. I know you’re always kind of out there evaluating the opportunities. I guess I’m just curious as to your perspective on the current landscape for it. So if we think about where we are versus a year ago, equity markets have run up but they are a bit more volatile today. DOL does not seem to be an issue anymore. We’ve still got meaningful pools of private equity capital out there. So how are you thinking about the landscape? Does it feel more constructive to you or less? And are there any changes to primary motivations on potential seller sides?
I think overall the M&A market still stays constructive. There’s a lot of equity, a lot of cash in private equity funds. I think part of the downturn in underwriting is that firms instead of going public have gone the private equity route. And when you can get as large as Facebook did before you go public I think that shows you what’s been happening in the private equity markets. They’ve gone up a little bit, down, still pretty constructive and most private equity firms look at a whole period and then to get out. So you add all those together I think in the near term the market looks pretty constructive. And certainly our experience in the segments we operate is the pipeline looks pretty good.
And how does that relate to maybe your view on acquiring for yourself?
So on our view, our view is as always the same. So it’s always going to be we look for strategic opportunities to expand the franchise but they have to be a cultural fit or we just won’t look at them. And then it gets down to price. And a lot of firms, because of the cultural fit question we talk to for many, many years, 3Macs; MacDougall, MacDougall & MacTier, my first meeting with them was in '09. I think Tom’s was 2000. So we look at the firm’s opportunities for a very – and wait hopefully for those firms that fit. We’re also opportunistic. Alex. Brown was more opportunistic and we moved quickly. Morgan Keegan was one we’ve been talking to for a couple of years. So we’re out there and we’re active. We have a corporate development function. So for us it’s not really the market cycle. We have the luxury of capital and we will pull the trigger if we find the firm that fits and it has good return for shareholders. And probably do that in up and down cycles. Certainly in down cycles you might get more firms that are looking to be acquired and the pricing’s a little better. But if we get the right pricing in this market long term, we’ll execute and continue to look.
But our strategic areas of focus really haven’t changed from what we’ve said in the past.
For Private Client Group, Asset Management where it fits where it’s not indexable [ph] and certainly the M&A business itself globally for the equity capital markets business. And we’re looking at niches in other segments but those are the primary focus.
Okay. That’s it for me. Thanks for taking all the questions.
Sure.
No problem. Any other ones, Rae?
There are no further questions, so you may continue.
Great. Well, I wanted to thank you all for the call and I wish we could give guidance when numbers go up and down, but we don’t control them all. But I think that the revenue drivers are all in great shape. I think we can explain the unusual – hopefully unusual claims and expenses this quarter and we look forward to the next quarter. So thank you for your time. Thank you, Rae.
This concludes today’s conference call. You may now disconnect. You’re welcome, sir.