Raymond James Financial Inc

NYSE:RJF

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to the earnings call for Raymond James Financial's Fiscal First Quarter of 2018 Analyst Call. My name is Tamara, and I will be your conference facilitator today. This call is being recorded and will be available on the company's website.

Now I will turn it over to Paul Shoukry, Head of Investor Relations at Raymond James Financial.

[Paul Shoukry, IR]

Thank you, Tamara. Good morning, and thank you all for joining us on this call. We appreciate your time and interest in Raymond James Financial. After I read the following disclosure, I will 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, anticipated results of litigation and regulatory developments. In addition, words such as believes, expects, will, could and would that necessarily depend on future events are intended to identify forward-looking statements. Please note forward-looking statements are subject to risks, and there can be no assurance that actual results will not differ materially from those expressed in those statements. We urge you to consider the risks described in our most recent Form 10-K, which is available on our website.

During today's call, we'll also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedule accompanying our press release.

With that, I'll turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?

[Paul Reilly, Chairman & CEO]

Great. Thanks, Paul, and good morning, everyone. Well, this earnings release marks our 120th consecutive quarters of profitability, so 30 years of quarterly profitability. That's a quarter since Black Monday, when we had a small loss because Tom kept the retail trading desk over to help clients. So it's a big benchmark for us. It shows long-term performance. And as we work towards our 121st consecutive quarter, it's comforting to know that the federal government has funded itself all the way until February 8. But despite what happens in the markets, we seem to be able to perform based on our kind of overall long-term strategic outlook. We're pleased with the results this quarter. Private Client Group, Asset Management and the bank, all had record net quarterly revenues and pretax income. The Capital Markets' quarter was disappointing but as we'll speak about a little later, I think a lot of that was really timing related.

For the quarter, we had record quarterly net revenue of $173 billion, up 16% over a year ago and 2% on the preceding quarter. And quarterly net income of $118.8 million, down 19% or 39% sequentially, but really affected by the estimated discrete tax impact of $117 million.

If you exclude that tax impact and the $4 million related acquisition expenses, our adjusted net income of $238.8 million or $1.61 per diluted share was up 33% from a year ago and 9% sequentially.

Quarterly annualized ROE of 8.4% and adjusted quarterly annualized ROE of 16.8%, which is really very good considering our low leverage and strong capital position.

Maybe more importantly for the business, our quarter ended with records in all of our key business drivers, record number of financial advisers, record asset under administration of $727.2 billion, record assets under management of $130.3 billion and record net loans at the bank of $17.7 billion. As you look to the segment, Private Client Group, as I already said, had a record quarterly net revenue and pretax, really driven by just continued retention of our advisers and still very, very solid recruiting momentum. We continue with our growth in fee-based assets. And before we get too carried away, we had a little help from the markets and interest rates with the vibrant equity market and the tax law change. But with that, our fee-based assets accounts grew 32% year-over-year and 8% sequentially, and our client assets under administration up 46% over a year ago. So all very strong numbers.

Although year-over-year cash is still down, we had a nice sequential uptick in client cash at $44.3 billion, which has also helped drive interest earnings, as Jeff will talk more about. Asset management record quarterly revenue up 32% year-over-year and 15% sequentially, record pretax profits of 37% year-over-year and 18% sequentially, again, all strong numbers. And that's a combination of organic growth, increased private client penetration, rising markets and inflows, and of course, the Scout and Reams acquisition, which added $27 billion to our AUM.

We're thrilled to welcome Scout and Reams to our Carillon Towers Associates, which is now comprised of Eagle, ClariVest, Cougar and Scout and Reams. The bank had record net revenues and pretax, as stated earlier, really driven by net record loans of $17.7 billion, up 12% year-over-year and 4% sequentially. And this growth was diversified against our residential mortgage, SBL and tax-exempt loans. It's good growth across the board. More importantly, the credit quality continue to improve. Credit size loans were down 11% really due to payoffs. The bank's NIM down to 308, 3 bps down, but Jeff will talk about it. A lot of this was really attributed to the tax law change than cash balances.

Capital Markets was a very difficult quarter. Net revenue is down 7% year-over-year, 18% sequentially. Pretax down 78% year-over-year and 89% sequentially. The year-over-year decline has been really -- a lot of it's challenged institutional, fixed income and equity commissions. That's been due to the whole industry. We had low volatility and a flattening yield curve.

Sequentially, though, the numbers were really driven by investment banking being down, particularly M&A. We had a very strong September 30 quarter and they tend to average out. And a lot of the, we think, the underperformance is really just timing of closing, so the M&A tends to be a very lumpy business.

So overall, good results, we believe, strong performance. I'll talk a little bit about the outlook for those segments after Jeff goes through a little detail in some of the numbers. Jeff?

[Jeffrey Julien, EVP of Finance, CFO & Treasurer]

Thanks, Paul, and good morning, everyone. I'm pleased to say that the variances from the consensus model were fairly minor with a couple of exceptions this quarter and only one item was a negative variance. So I think that does well for us getting the story out and you understanding the story. On the top line, our big headline numbers, securities commissions and fees, the consensus was reasonably close. We had a very modest fee there mainly because of transaction-based volume, including in the institutional segments we're a little better than they were in the previous quarter than the preceding quarter. But I think on a fee basis, everything's pretty close as we disclose fee-based assets.

The negative variance and what everyone's commented on in their comments so far as investment banking line, which was down 50% sequentially, was a fairly weak quarter for virtually all the divisions in Capital Markets and there are some detail of that line item in the press release. But you can see that if you look at last year, we had a similar start so there may be some seasonality at play here. But this follows, obviously, a very strong September quarter for us. It looks sequentially quite slow. And we made some comments in the press release that it's not a matter of activity levels, it's more a matter of timing when individual revenues get recognized.

On the expense item, really looking at Page 5 of the press release at the moment, on the expense side, communication and information processing was lower than we were guiding you to last call. And we would say that our outlook is that we do think it'll trend higher on a quarterly basis for the rest of the year and we're sort of staying with our high 80s per quarter guidance that we gave you. Maybe last quarter, this one was a little lower, just has to do with the timing of new systems coming on stream, et cetera. So I think the high 80s is still a good number for modeling purposes there.

The other expense that beat pretty handily was business development, and that's also a timing question. They're a timing of when we run flights of our commercials. They're timing of visits, which is seasonally around the holidays, get a little slow in terms of some of the recruiting activities. There's also timing of conferences in December. We really have no major conferences where we do in all the other quarters. So we would still stay with the high 30s to $40 million per quarter type estimate on that line, even though it was lower than that in this particular quarter.

Another expense that was under projection was the bank loan loss provision. We had almost $700 million of net loan growth in the quarter. So with our -- given our reserve is a little over 1%, you would assume if the mix was the same, it'd be about a $7 million loan loss provision for the quarter. That didn't happen, obviously, and that was mainly because we had -- we received payoffs for about 5 or 6 criticized loans during the quarter. The sponsor stepped up or the projects were able to refinance, et cetera. So that released a lot of reserves in the quarter. And you can see that in the decline in criticized loans and criticized assets.

I think the 1% of projected net loan growth is probably still the right way to model that line item going forward.

And then the 800-pound gorilla is income taxes. I think the consensus model that we had, I think, was before people even tried to adjust. We issued an 8-K on January 11, talking about how the interest rate would work for us for the year where we used a blended federal statutory rate of 24.5% for this fiscal year. Our actual effective rate for the quarter adjusted was 24.1%, and the reason that is low. So federal is 24.5, obviously, there's state taxes on top of that. So we think 28%, if I had to pick a number for the rest of this year, 28% is probably about the right blended rate to use for modeling. The reason it was 24% this quarter had to do with our seemingly ever-present COLI gains, at least for the last year. And then, as you know, in our first fiscal quarter, we have the equity comp benefit and we've talked about that in the past. It's not quite as lucrative as it was when rates were 35%, but it'll still mean about $10 million or so of benefit in the December quarter going forward.

And then the onetime charge, we were estimating $120 million when we put out the 8-K. We're currently estimating $117 million. The reason it's an estimate is it depends on when some of these deferred items are realized because at this year, obviously, they'd be realized at the higher rate than next fiscal year when we really will be at 21% federal statutory rate. But that was refined to $117 million. A little over $100 million of that relates to revaluation of our deferred tax asset, the biggest items in there being deferred compensation, a bank loan loss provision and, to a lesser extent, legal provisions. And then the balance of it was deemed foreign repatriation from our Canadian subsidiary.

So for this year, again, I'd use -- for modeling purposes, I would probably use 28%. And then for next fiscal year and forward, I'd probably use a blended rate of 25% plus or minus whatever you want to assume for COLI and other things that might happen in the quarter. But for statutory rates, those would be good items to use.

A couple of other things. You may notice on the P&L, we no longer have a line item called clearance and floor brokerage. It was a fairly small number. It's may or may not -- maybe a required line item on broker-dealer financials, but it's certainly not in ours, holding company level financial. So we've merged that into the other line so that won't be a separate line going forward.

Investment advisory fees, I should note Paul mentioned the Scout, Reams acquisition, which closed in mid-November. That aided investment advisory revenues by about $9 million for the December quarter. So you could assume, at least for the current level of assets, about $18 million a quarter of revenues from that. It may be slightly dilutive to the asset management segment margin, but not dramatically so. So that's pretty close. I think we told -- we mentioned $70 million to $75 million annually when we did the transaction last year. So that's falling right in line with that.

Net interest income, obviously, a record number there, $192 million for the quarter, the deposit beta getting all the hype. By the way, when we talk about the deposit beta for us, it doesn't pertain to that $44 billion that Paul mentioned. It pertains to about $24 billion of that. And then there's about $2 billion that's in various money market funds and then the rest is swept to Raymond James Bank, which shows up in the Raymond James Bank net interest margin separately. So we're really talking about direct earnings on the $24 billion. And some of that is not an interest. It's in account and service fees from external banks as we've talked about in the past, but still impacts the P&L.

Since the December rate hike, we've moved to raise rates to clients twice, but the total amount of that move on a weighted average basis is just a little under 10 basis points. So our retained spread has grown to about 130 basis points on that $24 billion. We are now seeing frequent but fairly small adjustments from the competitors. So if nothing happens in March or June or whatever the next potential hike is, my guess is there'll be some compression of that. If there's another hike in March and/or June or other times, we may be able to take advantage of a little bit of the lag effect and maintain this beta for a period of time. But for now, we're certainly enjoying a historically high and potentially unsustainable spread on these cash balances. So that was a beat slightly.

On the RJ Bank net interest margin, we've added a page to the press release, Page 9, which is basically the computation of the bank's net interest margin on a quarterly basis. We get a lot of questions about that. I think we put that in our Q, but we have it ready in time. We'll just include it in the press release. And you can see the two factors. Obviously, we had a little bit of lift from the client -- from the raise in rates for 0.5 month at the bank as well. But the real reason that the NIM decline was two things, it was higher average cash balances as we sweep more cash on balance sheet in preparation for continued loan growth and securities portfolio growth; and secondly, the revaluation of the taxable equivalent yield for the tax-exempt portfolio was a pretty big factor. And you can see that in that table pretty apparently. So that was an impact of the Tax Act on the NIM.

Our comp ratio for the quarter was 66.8%, a little better than our stated 67% target, but worse than the preceding quarter. This one was driven mainly because of the embedded comp in the Capital Market segment, which then we just did not have the revenue production from that segment this quarter. So as a result, that segment had a high average comp and that high comp ratio and that drove the entire firm's comp ratio up just a little bit. So if they get some normal activity, we would think that we might get back to the low 66s again, like they were in the preceding quarter.

We did mention in the last quarter and quarters before that we made a grid adjustment to Private Client Group. What I would tell you was it yielded virtually no benefit to us in this particular quarter. What's happened is since we started formulating that grid adjustment 3 or 4 quarters ago, there's been enough bracket creep from people with good production with help from the markets because a lot of our assets, as you know, are fee based. That virtually ate up the benefit that we would have seen in one of the divisions and the other divisions phasing theirs in over time. So we haven't -- we didn't -- aren't really seeing any benefit from that except it would have been higher if we hadn't done it, I guess, is the benefit that we saw, but it didn't really have a direct impact looking at the ratio compared to prior periods.

A couple of things on Page 8 of the press release, Paul mentioned the ROE of 16.8%. I mean, that's the highest I can remember in a long, long time for a quarter here in the adjusted pretax margin of 18.3%. Obviously, both those things were interest rate aided, interest spread aided. And then in our case of the ROE, tax rate aided as well. We'll be fine-tuning our targets in this area now that the Tax Act has passed. And we'll be updating our targets and we'll let you know when we have some better feel for all the impacts to the Tax Act. It's not just the rate to us, but it impacts some of our businesses as well as it impacts tax credit bonds, impacts public finance and the municipal bond area can impact tax-exempt lending at the bank. So we've got to look at the impacts on all these businesses to try to fine-tune our targets.

Also on that page, you can see the capital ratios. They're all modestly lower, both at the holding company and the bank, than they were in the preceding quarter, mainly due to the asset growth of the company for the quarter, over about $1.2 billion in total assets. But we didn't really have the accompanying capital growth, mainly because of the discrete tax charge that Paul mentioned. So that we didn't get -- capital didn't keep up with the asset growth because of that charge. But going forward, I would not expect that to be the case, particularly as we had a lower tax rate going forward.

I do want to make sure that everyone noted the footnote by the growth in financial advisers, footnote 11. We -- if you remember last year, we had a recategorization of some advisers out. We actually subtracted about 100 because they were in predominantly nonproducing roles. This quarter, we did -- we had the opposite in another division of the company, where we've had people that met certain test for production assets. They're all on a team meeting with -- whatever the various tests are that they really truly are full-time producers and put into that category now. We're not trying to show the highest number possible. We have a lot more registered people than that. We could show a higher number. We could show a lower number. But what we try to really do is show what the people that we think are their primary mission is, full-time adviser production. And so we're trying not to distort average assets and average production in numbers like that. So that adjustment was made. It was still a decent recruiting quarter.

Actually, in both divisions, we just had in the employee side a larger than normal number of retirements and people leaving the business. And some switching divisions and other things that cause them to look flat for the quarter. But in the contractor division, we had a nice recruiting quarter of 70 or so advisers.

Last comment I'll make, one thing you can't see and hear is the percentage of recurring revenues for the quarter. It actually reached a high, partially aided by poor investment banking revenues, which are all transaction based. But it hit 73.9% for the quarter. So for the quarter closing in on three quarters of our total revenues in the category we call recurring.

So with that, I will turn it back over to Paul for some outlook comments.

[Paul Reilly, Chairman & CEO]

Great, and thanks, Jeff. First, just the overall market and business confidence is, obviously, is high right now. So don't know how long it lasts and certainly subject to other things, including government staying open and global issues. But everything looks positive right now.

There are several tailwinds really coming into the quarter as we talked, again, just our primary drivers are at records. Adviser and advisory recruitment is still strong. Our assets under administration, asset under management will lead -- should lead to higher billings in the quarter. And we expect the bank loans record to continue to grow but more at a modest pace. Certainly, the interest rate changes should help us into the quarter and we'll see where it kind of goes going forward. There's been a lot of talk about the Tax Act and the effect of the philosophy of companies and what to do with those earnings, and this won't be a shocker for anyone who's followed Raymond James very long as it doesn't really affect our overall philosophy. Our focus stays first on our clients, our advisers, our associates and shareholders. Our strategy is still to focus on organic growth and be very disciplined about acquisitions. We continued to look for acquisitions in the market. And if we find things that culturally fit to our business at a reasonable price, we'll do that. I don't think the Tax Act really changes that.

Our dividend payout ratio has stayed in the 25% to 30% range. I'm sure the board will review, now that that's up going forward, what to do there, but our payout ratio has been very consistent for many, many years. We've only purchased shares opportunistically when it made sense for the company. I don't think this act changes any of that. Now if we get to the point we feel like we can't deploy capital effectively, we'll look at other ways of returning it. But so far, we feel like we've been able to do this. And this philosophy has driven our long-term performance, and I think we see no reason to change really the basis of how we operate.

We have not announced any major things for associates. We have traditionally looked what other firms have done both on minimum wage, and for most of our employees, they get over 7%, putting deferred programs for them this year already. We gave bonuses really in the last two years, and this year, we gave bonuses for those impacted, which is a big part, in Irma. And we'll continue to look at this year where we have an associate survey out now on all of our benefit plans, what the fair thing to do is, but we don't -- we're not going to do anything knee-jerk just because it passed. We'll continue to look and see what's fair and make sure that our associates are treated well and fairly and the shareholders.

One of the changes I think we're starting to feel is really some change in the regulatory tone overall. We all know about the delay now in the DOL. The SEC now is in conjunction with the DOL and working with FINRA, and the industry input is looking at a standard to go across all accounts that's more holistic and, in their words, really focuses on preserving choice for clients and their advisers. So DOL, the most draconian parts of that have been delayed and we think probably won't get enacted. And we'll have some overstaying or mirroring type of, we believe, something from the SEC. They said it's a high priority.

The tones from the regulators on top has changed. You hear very consistent we are your regulators, we're going to regulate. But they're looking at a more balanced, cost-effective, cost benefit type of approach. Now that may take a while to get down through the system, but you really can't feel it maybe in the lack of new rules that were coming out left and right before the administration change.

One of the things I think that has had bipartisan support, both in the last administration and this, is lifting the $50 billion threshold, which obviously, as we get closer to that, would be a positive for us also.

A lot of industry press on the broker protocol. Some firms have announced that they were leaving the broker protocol. And at Raymond James, we are just steadfast supporters of broker protocol. We recognize the importance of the adviser-client relationship and don't believe it's our place to interfere with that. Also, the impact of leaving that broker protocol in place, it really kind of forces us to focus on making this the best platform.

At Raymond James, one of our foundations has been we focus on clients first, next on the advisers, even to the point that we give book ownership to our employee advisers. We say if you want to leave and go to a firm and you're in good standing, we'll help you move them. And that forces us to really be the best platform for them and their clients, and we believe it's a positive.

We also believe that clients deserve the right, it's their right, to choose what adviser they have and what platform they're on, and we believe it's not our job to interfere with that right. So we continue to be strong supporters of the broker protocol and believe it's just an inherent right of clients and advisers.

To close, outlooks in the division, Private Client Group. Our strong adviser growth and pipeline, together with higher quarterly fee billings, should bode well for the coming quarter. And cash spreads have certainly still helped the Private Client Group, and again, without any major changes, there should be a lift in that to the Private Client Group segment. Asset management, same factors are really driving them and with the addition of Scout and Reams fully on the platform for a quarter. And again, record assets under management should bode well for the quarter.

RJ Bank, we continue to expect disciplined growth. This quarter was a high growth number for a lot of factors, including tax-exempt loans where a lot of people wanted to refinance before the tax law changed. But so the growth was higher than normal, but we will keep the same model we've had and look at as long there's good loans, good ROEs, we -- I think you'll still see the kind of growth you've seen in the past.

Capital Markets, I think that challenging on institutional commissions and equities and in fixed income should continue. That's been a challenging part. But M&A, the underwriting and equity on -- the whole equity underwriting and M&A business looks -- the backlog looks good. So I think you'll see more of -- to our old guidance for the year. We have no reason to change that.

Near term, we think public finance as a tax credit business may be still a little impacted getting back up, but the markets will find their equilibrium. So the tax credit, as long as there are CRA requirements, it'll be a balancing of sellers and buyers for those tax credits and may have some impact on profitability. But we assume those will work through the pipeline. Might take a little bit, another quarter to do that, but we feel pretty good about the long-term outlook.

Jeff talked about the expense ratios, and I think our guidance really still hold on expenses. The comp ratio was a little elevated because M&A was down, which has a lower comp payout. But the guidance, I think, holds. And remember that we have FICA reset year-end mailings and all those things that hit us in the first quarter.

So I believe we're in great shape. Our positioning's good. We don't feel like we're super managers because of these numbers. We realize we have market help, so we stay disciplined, realizing that markets aren't always this robust. We'll enjoy them while they happen. I think we're in a good place to monetize them, but we always focus what happens if it goes the other way to make sure we're in good shape.

So with that, I'll turn it over to Tamara for questions.

[Operator]

[Operator Instructions]. Your first question is from the line of Devin Ryan.

[Devin Ryan, JMP Securities]

Maybe the first question here, just -- and it's a few parts, but I want to dig in a little more around kind of the tax reform commentary and some of the benefits. So capital is building, sounds like the philosophy is very consistent. But I guess, the first part of the question is, do you feel like it moves the ball forward at all on M&A? Obviously, that's a priority. So does it feel like maybe some things are moving closer as a result to having uncertainty or for any other driver? That's part one. And the second part is on spending. Do you lean in more on any specific projects or technology spending? Just trying to think about how you may look to spend some of that. And then the last part of the question is around just competition and it doesn't seem like there's any obvious areas where the benefit could be computed away. Maybe lending, but just trying to think about anything I might be missing there in your business.

[Paul Reilly, Chairman & CEO]

Yes. I think, Devon, one of the things that's good here, just because we have more money, we don't feel obligated to spend it. So on acquisitions, we really look -- we continually look. We have a corporate development function. I think the ones we've done so far, we need more time in the last three to show they paid off or four, but we think we did very good strategic cultural acquisitions and we continue to look.

Obviously, the more capital you have, if they're a little bigger, maybe you're -- you feel like you can do them, but I don't think it fundamentally changes anything there. We have a very robust technology spend, but the one thing about technology, we never run out of ideas or more ways to spend it. But I think our guidance is, for this year, is about what we can do well. If there's overspends, it may be for consulting help or stuff. I think we've got a full plate of technology and the guidance we've given you is a good guidance.

So our view is just because tax rates are down doesn't mean we should change the fundamentals of the business at all. So the question will be over the next year or so or two if we're accumulating capital faster we can deploy it, what do you do with shareholders? So far, we feel that capital ratio is built slightly but it's been in the range and we found areas to invest it, and hopefully, we can invest it to make it a better platform and business. And if we can't, we'll look at Plan B but I don't think it changes anything short term.

[Devin Ryan, JMP Securities]

And then areas that -- things might be computed away or some of the benefit could be computed away over time?

[Paul Reilly, Chairman & CEO]

No. I mean, there is all -- there's talk about how, in lending, it will be all given back to clients. I'm not sure we see that yet. Just like interest rates weren't all given back to clients in the industry. We're the first to raise a number of times and no one followed. So now we're in maybe the middle or upper middle of the pack. But I don't see any rush on loans or any part of our business to give away tax. We always associate -- we always look how our associates are treated. I think we've adjusted that and we may have some adjustments, but that'll be more on the fairness market comp, making sure we're treating our people well, which I think we always have. So I don't see anything from our management team. We just came in an off-site and I don't see anything that jumps out on us where we feel like that because of this found money, we should do anything different right now.

[Devin Ryan, JMP Securities]

Got it, okay. And then with respect to the broker protocol, I think Raymond James is pretty clear in its position here. But obviously, the status of the actual protocol seems like it's a little bit fluid here in the firms that are in and/or out of it. And so I'm just curious, now that several or even a few kind of large firms have now backed away, is your appetite to recruit from those firms lower? I know that there's obviously been over time firms that are not in it and you still recruit from them. So I'm just curious kind of does that create more complexity in recruiting at all? Do you still feel confident in kind of playbook to recruit from firms that are not in the protocol?

[Paul Reilly, Chairman & CEO]

Yes. I think that there's a number of firms that we recruit from are non-protocol and we just make sure we follow and the advisers are instructed and taught that they have to follow the letter of the rule. And as long as they do that, they're still free to move and their clients can follow them, subject to whatever contracts they have and following protocol. So I think we're just very clear on those folks what it takes to come over, and we've been doing it for years. We disagree that, I think, protocol was really raised by the industry given regulatory concerns on clients have the right to choose their adviser and know where their advisers are going. And there may be some regulatory intervention on this, too, that will help reinforce the protocol. So our -- people have always said our book ownership policy was going to hurt our retention, and our retention's been really world-class. And again, we think it's quite the opposite when you lock people in. It gives you an excuse not to perform well.

And we don't think that's a good factor for us or our clients. So it hadn't hurt us so far. We book ownership protocol. We haven't seen anything really in the pipeline. Might be a little slower getting the first members over under the new rules, but so far, so good. So I don't see any drastic change.

[Devin Ryan, JMP Securities]

Okay, great. And then just last year, tax credits and debt underwriting, I mean, do you have any sense of how long it could take the markets to adjust tax reform? Do you think it's purely timing or maybe more so for the tax credits business? Do you think it drives a structural change to that market and then trying to think about some of the other inputs, infrastructure if we do kind of move a plan forward here without actually being a catalyst for the debt underwriting side? I'm just trying to think about some of the moving parts.

[Paul Reilly, Chairman & CEO]

Yes. I think in public finance, there'll be a little bit of input, a little bit of volume change just because of things that aren't available. But did -- I don't think it will be that significant. The tax credit business, we already have had the slowdown since they've talked about reform change and no one wanted to speculate on what the rate was going to be and there's a gap between buyers and sellers. The project developers wanted the old rate and the banks didn't want to take the risk on the new rate. Now we know what the rate is. So that'll adjust economics. May hit our margins some and it's going to reprice. And as long as there's CRA needed, I mean, this wasn't bought on a competitive to other investments. It was bought for CRA and a reasonable return. And I think that will reprice and now people know what the rates are and we get through that phase, we think that business should be fine under current rules.

[Operator]

The next response is from the line of Ann Dai.

[Yian Dai, KBW]

The first one, I just wanted to zero in on expenses quickly and see if there were any meaningful amount of expenses, whether in comp or some other expense lines that might have essentially been pulled forward into fourth quarter with the tax reform and that you might not expect to recur.

[Jeffrey Julien, EVP of Finance, CFO & Treasurer]

Yes. No, there was nothing that we did in that regard. As you know, our effective tax rate is for the entire fiscal year. So by the time the law got passed, we are already in the lower rate the environment. So we really didn't have the same opportunity that calendar year and the company's had. So we -- with expenses felt like they felt, we did know -- had no reason to do any manipulation. It'll be the same rate in March or June as it was in the December quarter.

[Yian Dai, KBW]

Okay, makes sense. And another quick question on MiFID. Now that we're just -- were a few weeks into 2018, can you give us an updated view into the discussions that you're having with clients around MiFID II? And just give a sense for what you think the impact might be to the equities business on a year-over-year basis.

[Paul Reilly, Chairman & CEO]

So I'm not sure we're prepared to really talk about what the impact will be. Certainly, the discussions are there. And certainly, as we've always said, it's not going to be a positive, right? So it's any time you're negotiating and you have something like MiFID, it's a reason to drop what you pay people. So I think it's early. As an overall part of our business, Raymond James as a whole, it's not that big. But certainly, it's not going to be a positive impact. But it's too early to tell you what that's going to be right now.

[Yian Dai, KBW]

Okay, understood. Last thing's on CRE. Just looking at the yield decline in the CRE portfolio, was that driven by new loans and a reflection of where the market is today? Or was that decline more from repayment of old loans or roll-off of higher-yielding stuff?

[Steven Raney, President & CEO of Raymond James Bank]

Yes. Ann, it's Steve Raney. Yes, it's kind of the normal flow. I would say, there's been maybe more pressure in commercial real estate in terms of spreads that the market is demanding now. And as you know, we have a lot of clients that are REITs that tend to be lower price than the project finance loans and our loan growth in REITs was a little bit higher in the quarter. So it was repayments of prior loans. Jeff cited that we had a couple of criticized loans that were in the commercial real estate category that paid off in full and then replaced with new loans at lower spreads.

[Operator]

Your next response is from the line of Steve Chubak.

[Steven Chubak, Nomura Securities]

So was hoping to dig in a little bit more and early clarify some of the tax guidance on the 25%. And Jeff, I know that the 21% federal rate, the state and local has run on average on an adjusted basis for the lower deduction about 3% to 4%. So it tells us that you're essentially assuming no benefit from additional tax credits, which is since a lot of the benefits appear to have been preserved even with the change in the tax law, whether it's things such as low-income housing credits, I'm just wondering what level of future credits do you think would be reasonable to assume going forward and to what extent is that contemplated in your tax guidance.

[Jeffrey Julien, EVP of Finance, CFO & Treasurer]

Yes. Well, we have kind of things that go in both directions. I mean, we have -- I mentioned that we get the benefit of the equity comp provision in December quarter of each year. That's going to impact that rate. COLI can work either direction, depending which direction the equity markets go. The new law also isn't all positive. There are some clawbacks to the lower rate. We lose some of our meals and entertainment deduction. We -- next year, not this fiscal year, but next year, we'll have some equity comp impact -- equity comp -- have some executive comp impact, my bad, going forward. And in fact, because our bank is over $10 billion, we have a phaseout of some of our FDIC premium deductibility. So everything's not just change the rate and it's done.

There are some other factors, and we're having to do a little bit of -- obviously, we don't know what the markets are going to do for COLI and -- but the other things, we do have a reasonable handle on. And so that weighted average -- and that's a weighted average statutory rate with these things that we're aware of is the guidance I'm giving you. The big swing there in either direction is going to be what our $300 million-or-so COLI portfolio does on any given quarter, but I think everyone's sort of used to that now and the impact on rates. And -- but if the markets are relatively flat, that shouldn't have a huge impact. So those all factored into our estimate of the rate I would use for modeling going forward.

[Steven Chubak, Nomura Securities]

Great. It's extremely helpful. I had a follow-up just relating to some of the discussion around capital management priorities. As I think back to, it was 1Q '16, when your stock was trading at north of a 20% discount to the market. You guys got pretty aggressive and actually bought back shares. I know it's a very different environment then. But just looking at the improvement in your earnings profile, you're actually trading on a tax-adjusted basis, just taking your new guidance at an even higher discount today. And I'm wondering, what valuation levels are your guys looking at when considering the potential for additional share repurchase? I'm just trying to understand some of the dynamics given the pace of capital build that we're expected to see, what we should be expecting and the bank growth targets you've already outlined, whether you guys might have more appetite to actually initiate a share repurchase program.

[Paul Reilly, Chairman & CEO]

So once again, I think the discounts you're referring to are to the S&P, not to the financials. So we're -- we look at share repurchases just as opportunistic and where we can earn a return. We don't look at it to manage capital. So as -- just as a mechanism, a short term, to do something with earnings. So everything we do is very long term. And so the rule's just been passed. We understand. We should have, right? If the markets don't turn, we just can't assume the markets are going to continue to be constructive and we're going to make all that extra money. But we'll look and we're not going to do anything for a quarter. We're going to look as we go. We're going to look at our growth and our acquisition opportunities. And if we can use the capital, we'll use it that way. If we can't use it, we'll look at alternatives. So we don't feel in any rush to do anything different and our philosophy hasn't changed.

We just may have a little more capital to do things with. So I think speculation that we're going to buy shares now just because we have much -- we have more capital isn't -- doesn't fit our philosophy that we've had for many, many years. So I know we are under pressure before we repurchase shares to repurchase shares, and when we waited and did what we did, everyone said, well, you guys are pretty smart about it. Now all of a sudden, we're down because we're not doing it right again really fast. So we're going to hold our philosophy. And I think part of this long-term growth and return that we've had in out-performance has been because we look long term, not just how can we do something for the next quarter or two. So you're going to see the same type of behavior. We just have -- may have a little more capital. If the markets hold up, to do -- to look at.

[Steven Chubak, Nomura Securities]

And just one final one from me on the deposit beta commentary. I'm just trying to parse it a bit since I know you guys have tended to be fairly conservative in terms of some of the guidance that you've given. I mean, it looks like the messaging, though, from your peers has suggested that the positive beta from here should track more in line with historical levels. They've cited somewhere in the range of 50% to 60%. It felt like with some of the remarks, that essentially the competitive dynamics are really going to dictate or anchor what you guys do on the deposit side. Not necessarily relying on what we've seen historically in the last rate cycle. I mean, is that a fair reasonable expectation? So long as competitors are running within that range, that you guys aren't going to deviate materially from that?

[Paul Reilly, Chairman & CEO]

I'd say we have two principles. One, we're going to be competitive. If we have to be the business, we are going to be fair to clients. And I think that our view has been, at some point, there will be a demand for cash and rates will get more competitive than they are today. So that may or may not happen. The spread between client deposits and other alternatives, whether the government funds and others widening, and at some point, interest rate markets are competitive like any other ones. So I think it's pretty speculative to say that we're just going to give away half of the future increases. At some point, if history's been -- is going to hold true at all, that's going to get much more competitive. And there are times when those rates are double years ago, right, when rates were very, very high. So we will just see. We'll -- that's why we're conservative in guidance. We don't know. But we're certainly -- we're not in a race just to be the highest. I think we're being very thoughtful, being very competitive, but we don't want to be fair also.

[Operator]

Your next response is from the line of Chris Harris.

[Christopher Harris, Wells Fargo Securities]

We may have to go back a bit in time to answer this question. But wonder if you guys could help us understand what the environment was like for adviser recruiting prior to the broker protocol. And I think getting that perspective would help us try to gauge what things might look like if protocol were to dissolve for some reason.

[Paul Reilly, Chairman & CEO]

That's a good question. It's been around a long time now, and we're a different firm than we were back then, too. So with our size and scale, I don't think we were the -- today, we are one of the alternatives from people leaving bigger firms. Back then, we did recruit but certainly not to the level and size we do today. So the market's very, very different. I don't know if you can draw that conclusion. We can certainly look at how we recruit from non-protocol firms today, and they don't seem to -- it doesn't seem to get in the way. So I don't know if I'd be prepared to go back in a different firm. It's a very good question and maybe we ought to talk about that a little bit and think through it here. But it was a different time. We were a different firm, it's a different market. 60 firms that took us public, there's eight names left. They're all not in the Private Client Group business. I mean, it's a dynamic market. But good question, I just don't have a good answer for that right now. But we don't -- again, what I can tell you is that our pipeline looks very good for recruiting.

[Christopher Harris, Wells Fargo Securities]

Got you, okay. And then another sort of related question I was wondering about, firms that make the decision to get out of protocol restrict adviser and client movement. Do you think that ultimately might be able to be challenged under fiduciary standards?

[Paul Reilly, Chairman & CEO]

I think that I know that we've raised it. I know some of the regulators are looking at it, which we believe the clients have an endemic right to know where their adviser is and to choose advisers, whether they leave us or join us. So I actually think and I know at one point regulators were looking at it when the industry came up with protocol. And we certainly are raising it. And another, I think that's the place to -- for it really to be solved just to say what's the right of a client. And it's hard for me to imagine, talk to yourself as clients with your adviser your accounts. Do you feel like you should know where your adviser goes or have the right to choose? And I think it's a fundamental right of investors. So we'll see where that develops out and if regulators take a stand on it or not. But we just think it's the right thing to do.

[Operator]

Your next response is from the line of Bill Katz.

[William Katz, Citigroup]

A couple of tactical questions, a lot of the big picture questions already asked. As you think about the interplay on the business for the NIM, just wondering if could give us sort of an update on how you sort of think the NIM plays out over the next couple of quarters as you potentially redeploy some of the pickup of cash you may have gotten from the strong growth in the business.

[Jeffrey Julien, EVP of Finance, CFO & Treasurer]

I think the NIM will -- barring anything else, it should go back into that 3.10% to 3.20% range that we were sort of guiding to. I mean, we'll get a full quarter of the benefit of the rate hike in December that some of that does and near to the bank is well. And at least I don't know, Steve can comment, I don't haven't seen the Tax Act cause any particular compression there of loan rates at this point.

[Steven Raney, President & CEO of Raymond James Bank]

Yes. Bill, we haven't noticed anything yet. Obviously, it's still early days in terms of spread compression that I would attribute to that. I mean, we've seen credit spreads obviously come in quite a bit over the last couple of years, so just given a lot of demand for loans, but I would not attribute any changes here recently to any of the tax law changes nor is our strategy changing in terms of the types of credits that we're going to pursue nor do we expect to have a lot higher average cash balance than we had this past quarter, nor do we expect to expand the securities portfolio aggressively in the face of rate hikes. So those won't be factors that drag on it particularly going forward either.

[William Katz, Citigroup]

Okay. And just sort of circling back to capital management again, sorry to beat the dead horse. But it sort of seems like with the tax reform, that you'll have a nice step function up in the ROE of the company, even if markets sort of stabilize from current -- past growth. So certainly, it seems you are going to build a fair amount of capital. So is it really just something on the spending side that you've been delaying that might pick up a little bit? Didn't sound like that from your prepared comments are in technology. Just trying to understand in the give and take around the capital generation and the return of the company.

[Paul Reilly, Chairman & CEO]

Once again, I think the theoretical capital generation, assuming the markets are good, it gives us the opportunity. We're going to look at strategic acquisitions. We certainly are -- the biggest use of our capital right now is probably recruiting, and that's certainly been a big driver of our metric. We can think that will continue and we just don't look at doing anything outside at the moment. Technology, we have a pretty aggressive technology spend and a lot on the plate. I'm not sure how much we could really speed that up just because of capacity and competing systems that rely on each other as you're -- if you want to put out a new system, it's relying on a number of other systems, so they have limiting factors. And I don't see anything yet, doesn't mean it won't come or won't happen as we look and study this or see market reactions that would say just because we have the money, I think it's the worst reason in the world is just to spend it, right? So I don't think shareholders like it either, that because we have extra money, we'll decrease the ROE -- projected ROE because we could spend it on something. No, it has to be a good spend and I just don't see where we would inject the delta in tax savings right now on an area that would be great for shareholders outside of earnings. If we find it, we'll do something, but it's not apparent to me.

[Operator]

Your next question is from the line of the Conor Fitzgerald.

[Conor Fitzgerald, Goldman Sachs Group]

Just wanted to ask on the cash buildup in the bank, just a little sense around how quickly you think you can get the extra $350 million deployed. And if you just comment on what type of reinvestment yields you're seeing in your securities portfolio today.

[Jeffrey Julien, EVP of Finance, CFO & Treasurer]

We can control the growth pretty readily with the securities portfolio. We're -- I mean, that certainly could fund our growth for substantially a quarter or so. We don't have a specified target. We're just trying to stay ahead of our growth in the bank on loan activity. I think this was, as Paul mentioned, this was sort of an exceptionally high growth quarter. I don't think I would annualize the growth for this particular quarter in loans.

[Steven Raney, President & CEO of Raymond James Bank]

No, I would say low double digits. 10% to 12% would be a great target for us for the next 12 months. And the types of yields we're looking at in the securities portfolio right now are kind of the -- once again, in terms of the duration that we're looking at, it's kind of in the 2.75% range. Once again, we're planning to stay relatively short on the securities.

[Jeffrey Julien, EVP of Finance, CFO & Treasurer]

Yes. And the reason it didn't grow much last quarter is we're staying so short. There are huge pay-downs every quarter of the portfolio. So it's -- net basis, it's going to be a little hard, particularly if we slow down on the buy side a little bit in the face of rising rates.

[Steven Raney, President & CEO of Raymond James Bank]

As a reminder, everything we're doing is agency-backed. No credit risk in the securities portfolio.

[Jeffrey Julien, EVP of Finance, CFO & Treasurer]

And the average life is generally a little over three years.

[Conor Fitzgerald, Goldman Sachs Group]

And Paul, appreciate your commentary around no obvious sources for tax reform to get computed away. But what about your appetite for growth or recruiting? Like most businesses, you obviously think about decisions when you're hiring somebody partly on an after-tax return basis or earn-back basis. It just seems like mathematically, at least, a lower tax rate should increase your upside for growth or at least what you're willing to pay the recruited advisers. Do you think that flows through at all?

[Paul Reilly, Chairman & CEO]

Yes. So first, I mean, our pipeline is very, very strong and I -- it's like anything else. You can unleash growth and you make bad decisions. So we look at the ROE. It's interesting in, if I was an investor, I wouldn't mind higher ROE instead of people just spending it just to spend it. So I mean, we're going to focus where we get good ROE. Most advisers come over and they're paid on transition as a function of their trailing 12s. So you also have to look at the markets. Is the market going to continue to grow robustly from here for the next seven years while you get that ROE back? So sure, you can raise it and we can make great models to show why it's a good investment. But also, since we are not the highest payer in transition assistance on purpose, we lose some people because it's a great selector of people that really want to be here and really believe in who we are. So we think what we pay is fair. It's certainly behind a lot of our competitors, and yet, we're having this growth.

So we don't see any reason to fundamentally change. Yes, because the ROE will be up a little bit on transition assistance? Yes. Are we going to automatically raise it just because it happened? No, we will do it because we feel like it's a good investment and we need to do it for competitive reasons. So again, we're not looking to give away the savings, but we're certainly open to investing it when we find good investments.

[Conor Fitzgerald, Goldman Sachs Group]

That's helpful. And then, sorry, just one last one for me. Total capital this quarter was 23.4% versus kind of the 20% target. If I'm interpreting your commentary around the call, we should just think about that as 20% is the target, but when times are good, you're perfectly happy running with excess for some unspecified period of time?

[Paul Reilly, Chairman & CEO]

I think that, honestly, part of our return and stability in 120 quarters is because we've had higher capital. We often get compared to banks. And a bank model on capital is very different than a broker-dealer model on capital. Capital doesn't -- it doesn't equate to cash, and it's a much more volatile cash business. So you need to have reserves for those bad times. So are we comfortable being in the high teens? Yes. Are we comfortable we have a target out there that's conservative? No, we could be in the high teens if we felt we had good opportunities to invest in something, but we're not going to leverage up the balance sheet just to do things because we can. We're going to wait for good opportunities that are long term and we believe are conservative and fit our model. So we're not in a rush. However, we also -- excess capital doesn't help us on the balance sheet. People forget that we're also measured as the executive team. Half of our -- part of our bonus goes into equity, half of that goes into an ROE-adjusted return where we can make money in ROE.

So we could do plenty of things to try to leverage up the ROE, but we don't. We try to do what's right for the firm and keep the right balance. So I know people in good times always ask us, well, when are we going to buy back stock? And I think our -- to us, there's no reason to change our long-term view. It's been successful. If we have opportunities for acquisitions, we'll do them. If we have opportunities to invest, we'll do them thoughtfully. We're not going to announce because something that happened a few weeks ago hold change in strategy. We're going to be thoughtful about it. We'll see how the markets evolve. And if we have cash we can't use, then we'll do something with it. It may change our philosophy on shareholders, but we're not ready to say our approach has changed at point.

[Operator]

Your next response is from the line of James Mitchell. Okay, there are no further questions in the queue at this time.

[Paul Reilly, Chairman & CEO]

Right. Well, thank you. Again, feel very good about our quarter, our positioning and our markets. Certainly, the Tax Act and changes, you've asked a lot of questions on it. We're digesting it too, but we're going to do it very thoughtfully, and like I think we've always done is invest long term for shareholders. And certainly, the markets look very constructive in the future, but we also get concerned when comments overall get pretty euphoric because that's usually when some bad things could happen in the market. So we don't take our eye off the ball what happens if markets go down. It's great they're expanding. We hope they do for a long time for our clients and for us. But we're going to keep to take a balanced view and just do the best we can to manage the business. So appreciate your time this morning, and look forward to talking to you next quarter.

[Operator]

Thank you again for joining us today. This concludes today's call. You may now disconnect.