Q3 2022 Raymond James Financial Inc Earnings Call
[music].
Good morning, and welcome to the Raymond James Financial's third quarter fiscal 2022 earnings call. This call is being recorded and will be available for replay on the company's Investor Relations website, now I will turn it.
Over to Christie was senior Vice President of Investor Relations at Raymond James Financial Good morning, everyone and thank you for joining US. We appreciate your time and interest in Raymond James financial with US on the call today are Paul Reilly Chair and Chief Executive Officer, and Pulse you agree Chief Financial Officer.
The presentation being reviewed this morning is available on Raymond James' Investor Relations website.
Following the prepared remarks, the operator will open the line for questions.
Calling your attention to slide two.
Please note certain statements made during this call may constitute forward looking statements. These statements include but are not limited to information concerning future strategic objectives business prospects financial results anticipated timing and benefits of our acquisitions our level of success in integrating acquired businesses.
Divestitures anticipated results of litigation and regulatory developments impacts of the COVID-19, pandemic or general economic conditions.
In addition words such as May will should could plans intends anticipates expects or believes or negative of such terms or other comparable terminology as well as any other statement that necessarily depends on future events are intended to identify forward looking statements.
Please note that 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 forms 10-Q and forms 8-K, which are available on our Investor Relations website.
During today's call. We will 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 maybe found in the schedules accompanying our press release.
And presentation.
Now I'm happy to turn the call over to chair and CEO , Paul Reilly Paul.
Good morning, and thank you for joining us today I know with our recent acquisitions. The numbers are a little more complicated, but I am pleased with our results for the fiscal third quarter and the first nine months of the fiscal year. Despite.
Despite challenging market conditions, we have continued to invest in our business our people and technology to help drive growth across all of our businesses.
In the private client group excellent retention and recruiting of financial advisors contributed to industry, leading growth with domestic net new assets of 9.4% over the trailing 12 month period.
And our capital markets business, while investment banking revenues were negatively impacted by continued market volatility during the quarter. We continued to see strong pipelines as the expertise we have added both organically and through niche acquisitions has performed very well in fixed income we completed the acquisition of.
Some ridge partners just after the quarter on July one, which will enhance our platform with technology driven capabilities and a fantastic team with extensive experience in dealing with corporates in June we completed the acquisition of Tristate capital Holdings, including Tristate Capital Bank and Chartwell investment.
<unk> partners, adding $11.8 billion of loans and 9.4 billion in financial assets under management.
In addition to Tri state's contribution to our loan portfolio Raymond James Bank grew loans at an impressive 8% during the quarter, reflecting attractive growth across almost all loan categories. So as we always do in any market cycle. We continue to invest for the long term always putting the client first.
Yeah.
And while the decrease in fee based assets from the equity market declines during the quarter will negatively impact asset management and related administrative fees in the fourth quarter, we are well positioned for increases in short term rates, given our attractive growth of earning assets the majority, which float with the short end.
The curve.
Furthermore, we have maintained a flexible balance sheet with solid capital ratios well in excess of regulatory requirements.
Turning to results on slide four I fully appreciate there were a lot of moving parts this quarter, which Paul sugary will explain in more detail in.
In the fiscal third quarter. The firm reported net revenues of $2.72 billion and net income available to common shareholders of $299 million or earnings per diluted share of $1.38.
Year over year and sequential revenue growth reflects primarily the benefit of higher short term interest rates on both our J B D. P fees from third party banks and net interest income, which more than offset the declines in total brokerage revenues and investment banking revenues, resulting from the challenging market.
Ironman.
The decline in net income available to common shareholders was primarily attributable to increased business development expenses and a higher bank loan provision for credit losses during the current quarter, which reflects the strong growth at Raymond James Bank, a weaker macroeconomic outlook and the 26 million.
S dollar initial provision for the credit losses on loans acquired from Tristate capital Bank as Paul will discuss in more detail.
Excluding $65 million of expenses related to acquisitions quarterly adjusted net income available to common shareholders was $348 million or $1.61 per diluted share.
Annualized return on equity for the quarter was 13, 3% and adjusted annualized return on tangible common equity was 18.1% an impressive result, especially given the challenging market environment and our strong capital position.
Moving to slide five sharp equity market declines in the quarter, including a 16% sequential decline in the S&P 500 index negatively impacted client asset levels.
We ended the quarter with a total client assets under administration of 1.13 trillion dollars and P. C. G assets in fee based accounts of $607 billion.
Financial assets under management of $182 billion, which includes Chartwell investment partners decreased 6% sequentially as a decline in equity markets more than offset net inflows in the acquired assets during the quarter.
We ended the quarter with 8616 financial advisors, a net increase of 203 over the prior year period, and a decrease of 114 compared to the preceding quarter Reis.
Our results this quarter reflect the transfer of 188 advisors, primarily from one firm to our our I Eh and custody services Division our Rcs during the quarter.
While transfers to Rcs impact the adviser count the client assets typically remain custody that the firm.
Excluding these transfers the number of financial advisors increased 74 from the preceding quarter, reflecting our continued low accretable restriction and strong recruiting.
Our focus on supporting advisers and their clients, especially during volatile markets has led to strong results in terms of advisor retention as well as our recruiting of experienced advisors to the Raymond James platforms through our multiple affiliation options over the trailing 12 month period ending June 32022.
We recruited to our domestic independent contractor and employee channels financial advisors with approximately $300 million of trailing 12 production and approximately $47 billion of client assets at their previous firms.
And highlighting our industry, leading growth we generated domestic P. C. G net new assets of nearly $98 billion over the four quarters ending June 30, 2022 representing 9.4% of domestic P. C. G assets at the beginning of the period.
Third quarter domestic P. C. G net new asset growth was 5.4% annualized a strong result, given the impact of client tax payments in the quarter.
Bank loan growth continues to be strong Raymond James Bank generated impressive loan growth of 26% year over year, and 8% sequentially to a record $30.1 billion.
Additionally, Tristate capital Bank brought over $11.8 billion of loans this quarter, which represents a record for them as they have continued to generate very attractive loan growth across their portfolios moving on to segment results on slide six the private client group generated record results.
<unk> with quarterly net revenues of $1.96 billion and pretax income of $251 million.
While asset based revenues decline the segment results were lifted by the benefit from higher short term interest rates.
The capital markets segment generated quarterly net revenues of $383 million and pre tax income of $61 million.
Capital markets revenues declined 14% over the prior year period, and 7% sequentially, mostly driven by lower fixed income brokerage revenues in equity underwriting revenues due to the volatile and uncertain markets.
The asset management segment generated net revenues of $228 million and pretax income of $93 million. The sequential decline in revenues and pretax income and the asset management segment were primarily attributable to the negative impact on financial assets under management from the <expletive>.
Klein and equity markets.
The Bank segment, which now includes Raymond James Bank, and Tristate Capital Bank.
Generated quarterly net revenues of $276 million, which is a record result, and pre tax income of $74 million remember we closed on tristate capital on June 1st. So this quarter only reflects one month of their results.
Net revenue growth was mainly due to higher loan balances and significant expansion of the banks net interest margin to 2.41% for the quarter up 40 basis points from the preceding quarter.
Despite revenue growth the bank's segment's pretax income declined primarily due to the 84 mentioned higher bank loan loss provisions in the quarter.
Looking at the fiscal year to date results on slide seven we generated record net revenues of $817 billion. During the first nine months of fiscal 2022 up 16% over the same period a year ago.
Record earnings per diluted share of $4.99 increased 8% compared to the first nine months of fiscal 2021.
Additionally, we generated strong annualized return on common equity of 16.3% and annualized adjusted return on tangible common equity of 20.1% for the nine month period moving to the fiscal year to date segment results on slide eight all four core operate.
<unk> segments generated record net revenues and the private client group capital markets and asset management segments generated record pre tax income during the first nine months of the fiscal year.
Again, reinforcing the value of our diverse and complementary businesses.
And now for a more detailed view of the third quarter and year to date results I will turn the call over to Paul Shoukri Paul.
Thank you Paul.
Starting with consolidated revenues on slide 10.
Quarterly net revenues of $2.72 billion grew 10% year over year and 2% sequentially.
Asset management fees grew 13% over the prior year's fiscal third quarter and declined 3% compared to the preceding quarter in line with the guidance we provided on last quarter's call.
As a.
Gulf of the steep declines in the equity markets during the quarter private client group assets and fee based accounts ended the fiscal third quarter down 11% compared to March 2022, creating a significant headwind for asset management revenues in the fiscal fourth quarter.
Brokerage revenues of $513 million declined 7% compared to the prior year's fiscal third quarter, and 9% compared to the preceding quarter.
The decline in brokerage revenues was largely due to lower asset based trail revenues in the private client group as well as decrease brokerage revenues in the capital markets segment.
I know some other financial services firms posted year over year increases in institutional fixed income brokerage revenues, but remember we intentionally do not have a meaningful presence in the much more volatile interest rates commodities and currency trading businesses, which benefited many of those larger firms this quarter.
<unk>.
I'll discuss accountant service fees and net interest income shortly.
Banking revenues of $223 million declined 5% compared to the preceding quarter.
While our pipelines are strong there's a lot of uncertainty given the heightened market volatility.
Given the market environment, we are really pleased with the investment banking result, this quarter and our best guess right now is that we could achieve a similar result in the fiscal fourth quarter. If the markets remain relatively resilient over the next couple of months.
Moving to slide 11.
Clients' domestic cash sweep balances ended the quarter at $75.8 billion down, 1% compared to the preceding quarter and representing 7.8% of domestic P. C. G client assets.
As of this week. These balances have declined to approximately $73 billion, reflecting the quarterly fee payments, which were paid in July and comprised of roughly half the decline this month as well as some continued cash sorting activity during the month turning.
Turning to slide 12, combined net interest income and our J B D. P fees from third party banks was $370 million up an astounding, 102% over the prior year's fiscal third quarter and 65% from the preceding quarter.
This revenue growth is largely a result of higher loan balances in the bank segment as well as higher short term interest rates, which really reinforces our long standing approach of taking limited duration risk with a high concentration of floating rate assets.
You can see on the bottom left portion of the slide the bank segments net interest margin increase a substantial 40 basis points sequentially to 2.41% for the quarter.
The average yield on our J B D. P balances with third party banks increased 88 basis points in the quarter.
Both the name and the average yield from third party banks are expected to increase further from the recent and anticipated rate increases.
For the fiscal fourth quarter factoring in the rate increase this week and some assumptions around deposit beta and other variables. We would expect the average yield on our JBT P from third party banks for the fiscal fourth quarter to average around 1.7%.
As for the bank segments NIM.
We expect it to average around 2.7% for the fiscal fourth quarter, which would reflect around two months of this week's interest rate increase and a full quarter of tristate capital's contribution.
But these projections will obviously be impacted by the actual deposit beta we experience.
We will continue to put clients first and focus on staying in the more generous end of the spectrum for our clients.
So far our cumulative deposit beta since the fed started increasing rates in March has been around 20%.
But that has accelerated with each subsequent increase to about 30% with the June increase.
We would expect the deposit beta to continue increasing with each incremental rate increase.
Moving to consolidated expenses on slide 13.
Let me point out a significant change we made this quarter to our presentation of expenses.
Namely we eliminated the acquisition related expense line item and now are including all the expenses and their respective line items.
At the same time, we are now capturing more acquisition related expenses, and our non-GAAP adjustments, including items, such as amortization of acquired identified intangible assets.
Acquisition related retention and a bank loan provision item I will discuss in more detail shortly.
For example, this quarter $65 million of expenses related to acquisitions are included in the non-GAAP adjustments.
As detailed on the reconciliation table on slide 21.
Which provides the amount of associated expense per line item as well as a five quarter history.
We hope these refinements, which I know had been very common across many of our peers are responsive to many of your request and help you gain a better understanding of our operating results.
And as always we will emphasize our GAAP results alongside any adjusted results we disclose.
So turning to our largest expense compensation.
The total compensation ratio for the quarter was 67.5%, which decreased from 69, 3% in the preceding quarter.
We also introduced an adjusted total compensation ratio this quarter.
Which adjust for acquisition related retention and compensation as outlined on slide 23.
The adjusted compensation ratio was 66, 8% during the quarter.
The sequential decline in the compensation ratio largely reflects the benefit from higher net interest income and our JBT P fees from third party banks.
Non compensation expenses of $469 million.
Which includes $47 million of acquisition related expenses included in our non-GAAP earnings adjustments increase.
Increased 21% sequentially.
Business development expenses increased to $58 million, reflecting the advisor recognition events and conferences as well as increased pent up travel during the quarter.
To put this in perspective.
Higher to Covid the fiscal third quarter was typically the high watermark for this line item.
And in the fiscal third quarters of both 2018 and 2019 this line item totaled $57 million.
And since then our business in revenues have grown substantially including through several acquisitions.
The bank loan provision for credit losses increased considerably to $56 million.
A big portion of this increase was a 26 million dollar initial provision associated with Tristate capital acquisition.
Where purchase accounting requires us to establish an initial allowance for loan losses associated with the acquired loans as the pre closing allowance does not transfer over.
To help you with comparable to prior periods, we did adjust for this portion of the bank loan provision and our non-GAAP results.
The remaining portion of the bank loan provision during the quarter around $30 million was primarily associated with the 8% sequential loan growth at Raymond James Bank, and a weaker macroeconomic outlook.
Other expenses increased to $85 million for the quarter.
The majority of the sequential increase was attributable to increased expenses associated with acquisitions during the quarter, which are included in our non-GAAP adjustments.
So I know there's been a lot of noise over the past couple of quarters with the Charles Stanley in Tristate capital acquisitions, but the main takeaway unexpected as we remain focused on the disciplined manage of all compensation and non compensation related expenses, while still investing heavily in growth and ensuring high service levels for advisers.
<unk> and their clients.
Slide 14 shows the pretax margin trend over the past five quarters.
The fiscal third quarter, we generated a pretax margin of 15.3% and an adjusted pretax margin of 17, 7%.
While the market environment has certainly become more challenging since our analyst and Investor day in May we still believe the 19% to 20% pre tax margin target. We laid out is appropriate given the significant benefits of higher short term interest rates, assuming the market stays relatively resilient at current levels.
On slide 15 at the end of the quarter total assets were $86 $1 billion, an 18% sequential increase reflecting the addition of tristate capital as well as solid growth of loans at Raymond James Bank.
Liquidity and capital remains very strong.
RJ F corporate cash at the parent ended the quarter at $2 billion well above the 1.2 billion dollar target.
The tier one leverage ratio of 10, 8% and the total capital ratio of 21.4% are both more than double the regulatory requirements to be well capitalized providing significant flexibility to continue being opportunistic and invest in growth.
Also I would note that the tier one leverage ratio includes just one month of tristate capital assets and doesn't yet reflect the assets from some ridge, which closed on July 1st.
So the spot tier one leverage ratio following the summer Ridge acquisition is below 10%.
Well well above the 5% regulatory requirement.
And as I said on the last quarter's call. We don't view the client cash we are accommodating on the balance sheet at the broker dealer and the client interest program, which ended the quarter at $13.7 billion. The same as our other balance sheet assets.
So we still have ample balance sheet flexibility after adjusting for those excess cash balances on the balance sheet.
I am very pleased with the progress we have made deploying capital over the past two years since we first disclosed our capital targets really reinforcing our priority to utilize capital to invest in long term growth across all of our businesses and deliver attractive returns to our shareholders.
The effective tax rate for the quarter increased to 27.5% up from 25.4% in the preceding quarter, primarily due to higher nondeductible losses on the corporate owned life insurance portfolio.
Slide 16 provides a summary of our capital actions over the past five quarters.
Following the closing of the Tri State acquisition on June 1st we began repurchasing common shares under our board authorization.
We repurchased approximately 1.14 million common shares for $100 million or approximately $88 per share.
As of July 27, 2020 to approximately $900 million remained available under the board approved share repurchase authorization.
As we explained on prior calls and at Analyst Investor Day in May our current plan is to offset the share issuance associated with the acquisition of Tri state over the next few quarters and I believe our action in June demonstrates this commitment.
But we will continue to closely monitor market conditions and other capital needs as we evaluate further repurchases over the coming quarters.
Lastly on slide 17, we.
We provide key credit metrics for our bank segment.
And remember these metrics reflect our newly formed bank segments, which includes Raymond James Bank in Tristate Capital Bank.
The credit quality of the loan portfolio remained strong and most trends continued to improve crude.
Criticized loans as a percent of total loans held for investment ended the quarter at 1.63% down from 4.07% at June 2021, and 2.63% at March 2022.
So now I'll turn the call back over to Paul Reilly to discuss our outlook Paul.
Thank you Paul as I said at the start of our call I am pleased with our results and while there are many uncertainties I believe we are well positioned to drive growth across all of our businesses and.
In the private client group next quarter results will be negatively impacted by the expected, 11% sequential decline of asset management and related administrative fees that Paul described earlier, however, focusing more long term our recruiting pipelines remain strong and combined with solid retention I'm optimistic.
We will continue to deliver industry, leading growth as advisers are attracted to our client focused values and leading technology platform. The.
This segment will also continue to benefit from higher short term interest rates.
And the capital market segment, the M&A pipeline remains robust, but the pace and timing of closings will heavily influence on market conditions over the long term I am confident we are well positioned for growth as the significant investments we made over the past five years strengthened our platform and increased our team.
And productive capacity.
In the fixed income space, we expect some ridge partners to enhance our current position in the rapidly evolving fixed income and trading technology marketplace.
In asset management segment, while financial assets under management are starting the fiscal fourth quarter lower due to the equity markets. We are confident the strong growth of assets in fee based accounts in the private client group segment will drive long term growth of financial assets under management. In addition, we expect Caroline.
Tower advisors with its New addition of Chartwell investment partners to help drive further growth through increased scale distribution and operational and marketing synergies.
And the bank segment is well positioned for rising short term interest rates as we have ample funding and capital to grow the balance sheet prudently.
And most importantly, the credit quality of the bank segments loan portfolio remains strong.
As always I want to thank our advisors and all of our associates for their perseverance and dedication to providing excellent service to their clients each and every day.
With that operator, I'm going to open it up for questions. Thank you.
Thank you if you would like to register a question or comment. Please press. The one followed by the four on your telephone.
Here are three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press. The one followed by this three one moment please.
The first question comes from Jerry O'hara of Jefferies. Please go ahead.
Great Thanks, and good morning.
I was hoping you might be able to just help unpack a little bit of the comments around the cash sorting in the quarter and just sort of maybe give us a.
Sense of what you saw and perhaps what we might or might expect and that and that dynamic. Thank you.
Thanks, Jerry good morning.
Yeah actually the cash balances in the quarter stayed relatively resilient as you saw only down about.
About 1% for the quarter.
Now in the month of July we have seen a decline in client cash balances were at about 73 billion now almost half of that was from the quarterly fee billings, which I'll come out.
The first month of the quarter and then the other portion kind of reflects the cash sorting that we've been expecting for quite some time now as rates start to increase and just to put it into context, just a year ago. We were at $63 billion of total client cash balances, which were elevated from there.
Pre COVID-19 days, so I don't think it should be surprising to see some cash sorting as rates increase going forward.
Okay.
Great. Thanks, and then maybe just a follow up on expenses Paul the you know the.
Appreciate the the sort of commentary around the growth of the business in the quarter being typically something of a high watermark, but can you maybe help us just sort of think about how that might trend on a run rate basis over the next couple of quarters, given obviously sort of increased 10, a and in some of the some of the other.
They're sort of normalization expense pressures that we're seeing I apologize if I missed it but I think that'd be helpful.
Yes, certainly business development expenses were much higher this quarter, you know last quarter.
It seems like an eternity, but we were still dealing with omicron. So people really weren't traveling at the beginning of the quarter.
This quarter, we have our biggest advisor conference for the independent adviser.
Business so we.
And this is a quarter we've had historically, even pre COVID-19, which is why it usually is the high watermark quarter and people are starting to travel again theres a lot of pent up travel out there.
People wanting to see each other in person again, so I think when you look at just stepping back and looking at non compensation expense in the aggregate.
On a GAAP basis, it ended at $469 million for the quarter now.
Now about $47 million of that were non-GAAP adjustments related to acquisitions.
So that gets us down to an hour.
Adjusted basis for non-GAAP .
Non compensation expenses about $422 million we.
We still have two more months of tristate capital to reflect there. So that's about $10 million. If you look at there are $15 million run rate, but some of the expenses. This quarter were elevated so maybe a good sort of jumping off point plus or minus a few million dollars as we look at the next couple of quarters.
I know the line item are those higher than people maybe.
Anticipated, but I think you also have to remember if you compare it to the 19 in 'twenty numbers that was about 3% of revenue in those in that.
At quarter, it's about 2% of revenue at this time I mean, so we've grown significantly I think we're managing the cost very well. So it just based upon those percentages I don't think we're back to where we were you can see we're managing expenses, but our big conferences in our.
Biggest.
Adviser events.
Uh huh.
Have occurred in this quarter, so it's not atypical so.
Understood. Thanks for taking my questions. This morning.
Thanks, Jerry Thank you.
The next question comes from Alex Blaustein of Goldman Sachs. Please go ahead.
Hey, guys. This is Michael on for Alex.
So I think we kind of want an update on the timing and size of how youre thinking about swapping tse's deposits with with RJ asked deposits.
Any updated color you can give us there would be great. Thanks.
First I'll, let Paul talk about that but I think you guys, we can deploy cash and either bank.
And.
It's really almost irrelevant, whether it's in Tri state of Raymond James Bank.
First is the suite. So we have we have a lot of options and flexibility to maximize the earnings on cash as the banks are looking for bank sweeps again, where they werent before so you know.
It's a question I know you all keep asking we've already made some progress on that but part of it really depends on Tri States you know.
Wyatt says, they're operating for their clients and they have depository relationships, there too, but we're making progress and I'll, let you get into a little more of the detail, but I think strategically as you go forward you should look at how much it's deployed and not necessarily on what you know which franchise so Paul.
I think you covered it very well Paul and you know we've already.
Supplemented their deposit base with about $1 billion of our deposits and we have plans to supplement with another billion, but as Paul said, they're running an independent business. They have their clients, we want to certainly honor their relationships with their clients and.
And frankly over the next few years those deposits are in those diversified funding sources could be very valuable to us as an organization. Overall. So we're not focused on the short term accretion of a standalone business, we're really focused on maximizing flexibility and earnings for the organization overall.
Yeah.
Great. Thanks, so it sounds like the kind of initial commentary you guys gave when the acquisition was closed as just kind of what we can still expect.
I'd say the trend is the trend is that way right. So I just we could change based on you know where we can deploy the cash and what they need.
So far we're on her out and kind of deploy them.
Alright, Great and then maybe one quick follow up but you guys gave us the guidance for the fiscal fourth.
<unk> NIM, maybe you could help us think about like a good jumping off point for NII in a flush that out a little bit. Thanks.
Yeah, I mean, we gave you kind of the biggest component with the NIM average.
For the quarter for the fiscal fourth quarter, we're expecting it to be about two 7% which would be yeah.
Just 30 basis points higher than the two 4% that had average this particular quarter. So and we've had some nice growth in earning assets both from Raymond James Bank on a standalone basis, which grew.
8% sequentially and then of course, adding on Tri state. So I think those kind of give you. The the main inputs to calculate our net interest income and then the BD P fees, which are substantial as well are they averaged 88 basis points this quarter.
Cash at swept over to third party banks, and we said that with the rate increase that was announced yesterday and some assumptions around deposit beta that we expect that to increase to one 7% on average for next quarter, So really significant tailwind coming from net interest income and our JBT.
<unk> fees from third party banks and I think the important thing is here is we've been criticized for quite some time for not taking more duration I know a lot of our peers have done that but.
Our longstanding approach of staying flexible and not trying to time the rates that the markets and the bond curves.
<unk> has is going to serve us very well in this rising rate environment.
Great. Thank you guys.
Thank you.
The next question comes from Steven Chu Bank of Wolfe Research. Please go ahead.
Hey, Paul since you ended on that responds talking about your decision to manage.
The bank in such a way, where you have more short and gearing I know that serving you quite well certainly in this upcoming tightening cycle at the same time the market is starting to price and rate cuts.
Beginning in 'twenty, three and the last fed easing cycle. The decision to maintain that sensitivity did create a fair amount of earnings volatility you cited some peers that have overextended themselves taking on too much duration.
I happen to agree with that statement and I think that they're getting punished as a result in this type of environment, but there's also a balance that could be schrock, where you maintain some healthy mix of fixed versus floating rate assets.
Curious, if that's something you'd be amenable to to protect that earnings right I downside, if and when the fed V N D J.
Yes, Steven you, you'll remember this well because you're very close to it.
We 2015, we had no securities at all on the bank's balance sheet.
So yeah, we do we have been more balanced and diversified in that regard and I think we plan on continuing to be more balanced and diversified but.
Almost all of our deposits are floating rate deposits. So you know to take on much more duration would essentially be making a bet.
Between an a mismatch between the assets and the deposit so our focus is to to your point be more diversified and we are a much more diversified than we were just five or six years ago with our securities portfolio and we also have jumbo mortgages on the balance sheet that has some duration to it a tax exempt loans et cetera, but are.
We will I think you should expect us to continue to be exposed more exposed to the short end of the curve just given the nature of our deposit base, which is floating.
That's really helpful color, Paul and for my follow up just on some of the deposit beta commentary.
Think about how you guys manage deposit costs last cycle, you were trending more in line with the industry in terms of overall beta so far you've been running a little bit ahead of peers I believe the word that you used on the call was you'd be generous with deposit rates.
What data should we be modeling beyond the fiscal third quarter and you know what's driving the decision to be more competitive on pricing. This cycle is that reflective of some of the cash sorting headwinds you cited or something else yeah, I just think that.
We knew a bunch of rate increases were coming right. So.
A lot of people you can take two approaches you can maximize your return, but our belief when everybody was talking about how much cash and there was too much cashes that as businesses grew and you know rates went up and you can see what's happened in the public markets, where people haven't had access there would be more demand for cash and we're seeing that in.
And the bank suite program, even the biggest banks are coming back into the bank suite program, which tells you everyone's looking to liquidity. So our view was we could be more aggressive we'd have chances on further increases to modify.
You know were not to be as aggressive if we could see a cooling down or going the other way, but just to make sure that we first treated clients fairly but we did a good job of retaining cash balances I mean, we've lived through cycles. When cash was really tight in the industry and some people are already putting out you know.
High yield savings and other C DS in deposits to fund.
Now right. So they're sweep rates may be lower but they're also adding higher cost deposit. So we're just trying to look long term on it take care of clients and.
Yet we know in a rising rates if they keep rising we always had time to adjust so Paul I don't know if you want to comment on changing data or not but.
It's hard to hard to tell until we have a right setting committee it'll certainly be what it was at least you know historically it may be a little higher.
I think you've covered it well Paul.
Thanks, Paul and Paul I appreciate you taking my questions.
Thanks, Steve.
Thank you.
The next question comes from Kyle Voigt K B W. Please go ahead.
Hi, good morning.
Maybe the first question is on <unk>.
P C G segment expenses.
Total segment revenues were up 15% compensable revenues I think were up 10%.
But when you look at the P. C. G administrative comp expenses, they were up 22% year on year and I know some of that maybe related to inorganic growth I guess when you look year on year, you haven't had the organic growth rate for those expenses and any more color as to kind of what's driving that level of growth both year on year or even the <unk>.
$17 million sequential increase we saw in.
In that line item. Thank you.
Yeah, So that was actually a good catch because oh, we haven't specifically drawn out in the numbers that we've all been concern you know about our associates and the impact of inflation in this environment.
And a number of firms have done kind of across the board comp adjustments are common across the board salary adjustments and we decided to take a different course, which we did this quarter is to give really just a off cycle bonus or lower paying associates to help them cope with the inflow.
<unk> cost of gasoline housing and everything else and not to an automatic salary adjustment really for two reasons as you know salaries are forever, but more importantly, as we wanted to do it thoughtfully.
Across all of our associates and our year end process, which is actually a number of months is to make sure that you know people are rewarded accordingly, and that the salaries of benchmark to market instead of just doing a race now.
That it is hard to do an unrated for those who shut in of we gave kind of a one time bonus in that really.
Hit the segment.
But it really is taking care of our associates are doing an unbelievable job who've been great. Our turnover certainly been up but it's been lower than the industry.
They've been doing a good job for us and we felt we owed them to do this which should take them to the year end until we get through our normal cycle adjustments. Paul I don't know if you want to go through any more in terms of numbers or anything else.
That that was the biggest impact of that number.
Yes, I mean, I guess could you quantify the impact of that bonus pool.
Yeah in total for the firm is about just under $15 million for the firm and P. C. G takes the majority of it just because they are by far the largest business and have the most associates.
Got it that's helpful.
And then my follow up is just on the adviser Count you noted that there was a switch of a 188 advisors with most of them from one firm moving to your or a division.
Can you just help us understand how large those switches were from an AUM standpoint.
And then any more color on the switch can you kind of remind us of the changing economics when migrations like that happen. Thank you.
Well first strategically you know, we've set up and really bolstered our alright.
Offering just because it was you know it has been the fastest growing segment in the industry and the.
The good news is when people have switched to our I E. They haven't gone to any of our custodian competitors they've most almost virtually 100% of stayed at Raymond James So it's been a good retention tool.
This was really one big firm, whose business model is changed we knew it was coming planning on it for a year. The good news is again next day with Raymond James their assets constituted with us.
But and they are a model, they're not FINRA license in a way we counted visors are producing advisers, who have a FINRA license, but once they go into the or a space, we can't count that anymore. So if you look at it since really the.
A year and a half it's been about 250 advisers. There was a big group that moved at the end of the year relatively big but it's usually three or four advisors a quarter and this was a one off movement that really focused on kind of a changing business strategy for them. So.
You know I think it was.
It's not certainly business as usual, it's one of the largest firms on the platform that went our way and we don't see people will continue to move but it's not any different than the movement between the rest of our channels.
Thank you.
The next question comes from Jim Mitchell Seaport Research. Please go ahead.
Hey, good morning.
Paul maybe just on the the Tri State deal now that it's closed I think since you announced the deal obviously rates are a lot higher you've had looks like better loan growth that tri state.
So is there any way to think can you at least give us maybe a sense of accretion benefits is it more than you expected and is the timing sooner or is that the way to think about it or if there's any kind of.
Greater specificity that would be helpful.
Yes, I think Youre right Jim.
All of the sort of.
Some of the major factors, including interest rates, which is a significant factor are increasing much faster than we originally anticipated which is a great tailwind, but most importantly is that our tri state has been doing a fantastic job serving their clients through the announcement and through the closing and integration.
And they had been able to continue growing their business slight nicely with their clients.
And were you know frankly, a lot of our efforts are staying out of their way because they were doing such a great job.
With their client relationships that you know and they're handling a lot of change all at once.
You know dealing with their clients.
That's been all more positive than we originally anticipated.
We anticipated and a great kudos to the tristate capital team for being able to pull that off.
Now with that being said our earnings base is going to be higher in a higher rate environment as well so the accretion dilution analysis says.
Puncture into both the numerator and the denominator being our earnings base. So you know.
It's hard to compare apples to apples and frankly, Paul and I aren't really concerned about short term accretion you know where we're looking at this we determinant of success of a transaction over the next five to 10 years and and what that really entails is keeping their franchise and their client relationships intact, which is going extremely well.
It's great to have the interest rate tailwind and it's great to see the growth that they're having but again, we're not overly focused on what the near term accretion is going to be but we're extremely excited by the success that they've had thus far in early innings.
But I guess it sounds like Oh go ahead, it is better and we're pleased.
But you're right. So it sounds like Youre, saying theres not a lot of Theres no real negative surprises on the expense side or anything that the upside in revenues is falling to the bottom line.
Yes, that's correct.
Okay.
And then on the buyback.
Is that you said a few quarters is that the the rate pace that you think you can do with say the next three or four quarters, you can kind of.
Offset the dilution or.
Or the issuance.
I think we're gonna be paid all gonna be patient, we're going to be patient.
That sounds like a reasonable timeline, but depending on other capital needs our balance sheet growth. The other factors, we could do it faster or slower than that but we're gonna be as I said from the start and as Paul said from the start we're not going to be in a rush to buy it back it kind of gets us to the same place a year from now whether we do it you know.
Quickly or we do it in a more deliberate manner.
Sure I think the plan the plan is around your timeframe, but again, you know getting deploying capital if you.
<unk> had big bank growth that was very profitable you had an acquisition you had something else you could redeploy some of that capital, but the plan right now is.
And there's no plans on any of that right now, but I mean the plan.
It would be to kind of stick to that course, but we'll watch and if the economy really turns down sharply then it may slow it down.
I think everything being equal that's the plan.
Right makes sense. Thank you.
Thank you.
The next question comes from Devin Ryan JMP Securities. Please go ahead.
Hey, good morning, guys how are you.
Great Hey, Devin.
Most have been asked here, but I did want to dig in a little bit more on.
Advisory recruiting or you know kind of the pipeline remained strong, but theres been a lot of change in the environment.
And so I'd love to just get a little more context on some of the trends you guys are seeing there. So one hand, you have markets down films.
Films production down, but you have higher interest rates makes.
The businesses more profitable.
A firm level. So what are you guys I guess seeing a what were our expectation shifting at all on the advisory side.
And then competitively what are you seeing and then the fact that markets are choppy and sometimes it's hard for advisers to leave.
You know when they are.
Inundated and talking to clients and so I'm, just curious kind of thematically how the advisor recruiting pipeline is evolving and what you guys are seeing competitively in the market.
Yeah, Devin I think that you know first it's always been competitive.
If you look at our kind of our record growth. It's a it's probably not all in it's not really just an adviser count, but it's the size of the businesses that have been joining our platform very very large teams one's just a few years ago, we would never see and I really.
It's kind of a testament to the platform that was built into the high net worth and ultra high net worth space and I think the when Alex Brown joined US they brought kind of a lot of knowledge and focus to us on building the platform for the entire firm so.
So the recruiting is going very well you know it goes in cycles. The independent channel was kind of on fire in the employee channel has been the one this year that's doing you know really really well.
And I think that's more of a sign of the economy.
It's where people are joining and the risk they're taking we have not seen a slowdown.
We thought we would see more people typically when advisors commit the pipeline.
It'll slip we thought we'd see a lot more slippage and we havent really maybe a little more so advisers are still coming.
Once once they make that decision, we rarely see them decide not to leave their firm.
So.
The pace is still very very good.
It's competitive it's always been competitive.
We always seem to have in certain space as certain competitors are really jump out in the market and but I think we pay a fair transition assistance and.
Can't say, it's the highest in the market, but we were we compete very well because of the value proposition. So so far so good it's been you know.
If we had any concerns about it it still looks very very solid right now.
Great. Thanks, Paul.
As a follow up here or come back to something we talked about in late May at your analyst day, and you guys spoke about kind of a focus on new non compensable revenues in expanding theirs and I think you know.
Admin extension.
Being one in pilot and business consulting group.
There's others.
Interesting opportunity it feels like from the outside but love to just get some thoughts around I guess one how these are going in the early days and then two could these actually become material financial contributors you know a few years out I. Appreciate you have to scale them and there has to be adoption, but is the goal to have them become meaningful.
Revenue drivers or is it more just around kind of the differentiation of the platform, adding more service and creating kind of more stickiness to the advisor relationship because you're getting more integrated with them.
I think it's more almost a louder than the former I think that strengthening the platform by offering those services. It makes the platform more attractive and people.
Easier to transition.
The uptake on the services has been.
Much better than we thought.
Even existing advisors, who have big businesses whether.
You know, they're they're having like everyone. The war on talent or someone gets sick and let you know it has to be out of the office or we're finding an uptake of those services and they are very very happy with them. So we're in the early scaling days and.
I doubt, it's gonna be a line item like brokerage revenue, but it's going to be you know.
Something that certainly is going to positively impact the margins for those businesses and.
So it's early.
We're still scaling them, but so far it's very very good but you know we're just a few quarters really into it so.
But the reception even of existing advisers is higher than we thought.
Yeah I appreciate that it's early but thanks for the color.
I'll leave it there thanks guys.
Thank you.
And our final question comes from Manan <unk> of Morgan Stanley . Please go ahead.
Hey, good morning, guys I apologize if you've already covered this but.
My question is on third party bank deposits and you know what we're seeing from other banks. This quarter is that our deposit growth is flowing in even shrinking and shot cashes and that would mean that.
The demand for your deposits from third party banks is that likely to increase even further from here.
Can you talk about how you're thinking about that and also that the 14 billion or so you have in the CIP program. You know I recognize that you have a need for those deposits for your own business now, but I was wondering how nimble you can be between CIP, a third party bank deposits and Andy around bank.
Great.
Monitor we can be very flexible with the deposits to your point the CIP balances on the balance sheet are really overflow balances for when we weren't able to sweep the third party banks because they didn't have the demand and so as that demand picks up which it has been picking up still early.
Days, but we're definitely seeing a change in tone.
Even from the big banks, who historically have not been as I'm eager to get those type of deposits, we're starting to see significant demand from those banks as well so.
So as we start seeing those that demand pick up we would be able to sweep more from CIP to those third party banks all else being equal so, but we do have a lot of flexibility it's great to see the demand come back we knew that demand would eventually come back and so that's why we wanted to stay flexible with those deposits.
But can you also be flexible between third party bank deposits in your own bank, depending on what what level of loan growth you are seeing at your own bank.
Yeah, absolutely I mean, the 25 billion, that's what third party banks now in the 14 billion, that's with client interest program and programs and that has declined somewhat since the beginning of July as I said in the comments, but.
Those deposits over time, a good portion of a very large portion of those deposits over time could be used to fund the balance sheet growth to the extent that we find.
A good risk adjusted returns on the balance sheet, and then to the extent that we can grow loans to our private client group clients et cetera. So yeah, but again, we have a lot of flexibility and a lot of capacity.
Yeah.
Okay, Great and then my second question is just you know how.
How are you thinking about SBA loan growth that.
You have your own offering and now also Tri state, which are managing as a separate business, but it still gives you exposure to a similar long product and as we see it as fresh and volatility across both equity and fixed income markets how.
How should we think about loan growth in that segment, you know given that rates are moving higher.
And that loan book has a low credit risk is the plan to meet all the demand you have for that portfolio and maybe slower some of the growth in C&I and CRE as a recession risks rise or I mean, I I just wanted to get a sense of like how you're prioritizing our loan growth in this environment and what you're seeing in terms of demand.
Well first the you know it's a good question, but the if you look at what's going to happen in rising rates I think that it's still a cheaper source of borrowing for most clients. So we anticipate.
You know rates get higher and higher and higher and maybe people don't borrow but in this environment. It's still you know a.
A very effective way of and low cost way to borrow from our standpoint, we'd love two things about Spl's one is.
The liquidity because it's callable secondly, it's very secured in the slow risk and has frankly, the best spreads right now so but also it supports clients. So.
We continue to focus on that segment, we can see.
Speed up and you know.
Any part of the loan segment, we've done it before I think we're one of the few banks sold a lot of Covid COVID-19 loans.
To reduce risk on the balance sheet and there are times, we have taken a different parts of the portfolio and slowed it down for a while.
Most of the portfolio even.
C&I is a very liquid portion and the term b.
Loans and so we do manage the balance sheet. So we're very happy that our SP all loans are in demand and growing and we plan to support that.
We will look at the relative contribution of each item, depending on where we see the risk return tradeoff is long term in the market. You know if we are offering if the market starts offering risky credit only then.
You slow down that segment so yep.
The Tri state market is very different from ours or our markets internal their markets external.
The other firms and so those are very separate.
Our run separately, but we like the SPL loans in both categories in both banks.
And have the capital and the cash to fund them too, which is important and we have a lot of flexibility in funding.
Great. Thanks for taking my questions.
And that was our final question I'll turn the call back over to our speakers for any closing remarks.
Yeah, So I want to thank everybody for attending and I know.
The numbers were a little bit more difficult with a lot of the acquisition related expenses and changes. So I appreciate the effort I know, but the questions on the ride up she put a lot of time into it. So I want to thank you and again as always take our advisors and associates are all they've done to generate these numbers. So it's.
Easy to present them when they are doing such a great job. So thank you and we'll talk to you next call.
Thank you. This does conclude the conference for today, we thank you for your participation and ask that you. Please disconnect. Your lines. Thank you and have a good day.
Yeah.
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Okay.
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Okay.