Q4 2022 Raymond James Financial Inc 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 Christian <unk> 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.
<unk> been 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 benefits of our acquisitions our level of success in integrating acquired businesses divestitures anticipated results of litigation and regulatory developments impacts.
The COVID-19, pandemic or general economic conditions.
In addition words such as May will should could plans intends anticipates expects believes estimates or continue 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 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 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.
Before I discuss our fourth quarter and fiscal year earnings I want to start by acknowledging the heartbreaking devastation, our friends and neighbors as well as over 200 associates on Florida Central Gulf Coast.
Spirit's a month ago from Hurricane Ian.
While it has been difficult to bear witness to their pain and loss.
Also I've been humbled by the resilience of our associates advisers in the community there.
Our Raymond James family impacted by the storm is safe.
Just as notable I can't adequately express my gratitude for our Tampa Bay area Associates, who despite facing an uncertain path from a category four hurricane worked diligently from remote locations to continue delivering our service first promise. Additionally.
Additionally, our associates at our corporate locations in Memphis in South field, and Denver Rose to the occasion covering for their coworkers and pitching and where they could and working weekends to catch up.
For those without power or other hardships at the home office was opened to provide a comfortable and clean place to go.
When the home office reopened the camaraderie was obvious and uplifting, we provided emotional and mental health resources to associates delivered a 500 dollar relief checks to all associates and impacted counties and provided additional time off to help them manage their personal situations.
Associates collected two semi trucks of supplies, which were sent to our Fort Myers branch system to be distributed by advisors and associates in their areas. We've heard several heartwarming stories from recipients in these essential supplies.
Which in itself shows how the collective efforts and generosity truly made a difference for those who needed it most.
The firm also responded by raising more than $1 million from corporate executive leadership and associate donations to assist the recovery of support are those in need through the Red Cross and are friends of Raymond James Charity, who directly help associates with needed emergency funds for repairs and recovery.
If I sound surprised I'm not the.
The preparation perseverance in response to the storm reflected the long history of Raymond James' service culture, and I'm, especially proud to represent our team today.
Now moving to our results I'm very pleased with the results for the fourth quarter and fiscal year, especially given the challenging market conditions.
The significant decline in equity markets during the year, we still generated record net revenues and record pre tax income for the fourth quarter and fiscal year.
Throughout the fiscal year, we remain focused on the long term and continue to invest in our businesses, our people and our technology to help drive growth across our businesses.
In the private client group strong retention and recruiting of financial advisors contributed to industry, leading growth with domestic net new assets of 9% over the fiscal year. Furthermore, the Charles Stanley acquisition completed earlier in the year significantly expanded our presence in the U K, which is a very attractive.
Active market for wealth management.
And capital markets annual investment banking results were very strong only 3% lower than the record results achieved in fiscal 2021.
Record M&A revenues helped offset the very challenging underwriting environment, we continue to see strong pipelines for M&A as the expertise we have added both organically and through niche acquisitions has been performing extremely well.
We completed the acquisition of some ridge partners on July one, which has enhanced our fixed income platform with technology, driven capabilities and a fantastic team with extensive experience dealing with corporates.
This business thrives on rate volatility. So some ridge generated really fantastic results since we closed on the acquisition of July .
However, after a record year last year, our legacy fixed income operations, serving depository has been challenged as the fed intensifies its monetary tightening initiatives.
And the bank segment loans grew 73% year over year, and 3% during the quarter, reflecting attractive growth across nearly all loan categories.
The acquisition of Tristate capital Bank. This year added a best in class Third party securities based lending capability, while also diversifying our funding sources.
It is an uncertain conditions such as these that reminds us the importance of focusing on and making decisions for the long term.
As evidenced this quarter with a sharp increase in net interest income and our J B D. P fees, we are well positioned for the continued rise in short term interest rates with diverse and ample funding sources strong loan growth high concentration of floating rate assets and ample balance sheet flexibility given.
Solid capital ratios, which are well in excess of regulatory requirements.
While some of these attributes may be underappreciated in certain market cycles. The value of our long term approach has really resonated in more volatile in an uncertain market environment, we've experienced since the onset of the COVID-19 pandemic.
In the fiscal fourth quarter. The firm reported record net revenues of $2.83 billion record pre tax income of $616 million and net income available to common shareholders of $437 million or earnings per diluted share of $1.98.
Net income was negatively impacted by the elevated tax rate this quarter due primarily to non deductible losses on corporate owned life insurance that we utilized to fund nonqualified benefit plans.
Excluding $30 million of expenses related to acquisitions quarterly adjusted net income available to common shareholders was $459 million or $2.08 per diluted share.
Year over year and sequential revenue growth was driven primarily by 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 asset management and related administrative fees and total brokerage revenue largely due to the.
Klein and equity markets.
Quarterly net income available to common shareholders increased 2% compared to the prior year's fiscal fourth quarter, reflecting the April mentioned revenue growth, which was partially offset by higher non compensation expenses and higher tax rate.
<unk> quarterly net income grew 46% driven primarily by the benefit from higher short term interest rates to the net interest income and our J B D. P fees from third party banks, along with lower bank loan provision for credit losses as the prior quarter included the 26 million initial provision for credit loss.
Says on loans arising from the acquisition of Tristate capital Holdings.
Annualized return on common equity for the quarter was 18, 7% and adjusted annualized return on tangible common equity was 24.1% an impressive result, especially given the challenging market environment and our strong capital position.
Moving to slide five.
We ended the quarter with total client assets under administration of 1.09 trillion dollars P. C. G assets in fee based accounts of $586 billion and financial assets under management of $174 billion.
Equity market declines in the quarter, including a 5% sequential decline in the S&P 500 index negatively impacted client asset levels.
We ended the quarter with 8681 financial advisors and P. C G.
Net increase of 199 over the prior year period, and 65 over the preceding quarter.
And remember the year over year increase the adviser count was impacted by transition of advisors to our our I E and cuts the service Division, where we typically retain the assets, but we don't include the advisor in our accounts.
In the fiscal year, we had 222 financial advisors moved to Rcs 166 of which came from one firm adjusting.
Adjusting for these transfers the numbers of financial advisors increased 421 year over year, a really strong result.
Our focus on supporting advisers and their clients, especially during uncertain and volatile markets lead us to strong results in terms of advisor retention as well as our recruiting of experienced advisors to the Raymond James platform through our multiple affiliation options.
Over the trailing 12 month period, ending September 30th 2022 we recruited to our domestic independent contractor and employee channels financial advisors with nearly $320 million of trailing 12 production and approximately $43 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 $95 billion over the fiscal year ending September 30th 20, twenty-two representing 9% of domestic client assets at the beginning of the period.
Fourth quarter domestic P. C. G net new assets growth was eight 3% annualized.
Total client domestic cash sweep balances declined 12% to $67.1 billion or 7% of domestic P. C G assets under administration.
Paul Shoukri will discuss this more later, but I'd like to highlight that these are lower cost deposits as we have not yet utilized high yield savings accounts to preserve balances.
Total bank loans grew 3% sequentially to a record $43.2 billion, reflecting attractive broad based growth at both Raymond James Bank and Tristate capital Bank.
Moving to slide six the private client group generated record results with quarterly net revenues of $1.99 billion and pretax income of $371 million.
While asset based revenues declined the segment's results were lifted by the benefit from both higher short term interest rates.
The capital markets segment generated quarterly net revenues of $399 million and pre tax income of $66 million.
Capital market revenues declined 28% compared to the prior year period, mostly driven by lower investment banking revenues and fixed income brokerage revenues largely due to the volatile and uncertain markets.
The asset management segment generated net revenues of $216 million and pretax income of $83 million the.
The declines in revenues and pretax income were largely attributable to lower financial assets under management as net inflows into fee based accounts in the private client group were offset by fixed income and equity market declines.
The Bank segment, which includes Raymond James Bank in Tristate Capital Bank generated quarterly net revenue of $428 million, which is a record result in pre tax income of $123 million.
Net revenue growth was mainly due to higher loan balances and significant expansion of the banks net interest margin to 2.91% for the quarter up 50 basis points from the preceding quarter once again, reflecting the flexibility and floating rate nature of our balance sheet.
This quarter also included a full quarter of Tristate capital results, which have continued to be solid.
Looking at the full year fiscal 2022 results on slide seven we generated record net revenues of $11 billion and record pretax income of $2 billion, both up 13% over fiscal 'twenty one.
Record earnings per diluted share of $6.98 increased 5% compared to fiscal 2021. Additionally.
Additionally, we generated strong annualized return on common equity of 17% and annualized adjusted return on tangible common equity of 21.1%.
Moving to the fiscal year segment results on slide eight private client group asset management and bank segments generated record net revenues in the private client group produced record pre tax income during the fiscal year.
Again, reinforcing the value of our diverse and complementary businesses.
And now for more detail review of the fiscal fourth quarter results I'm going to turn the call over to Paul Shoukri Paul.
Thank you Paul.
Starting with consolidated revenues on slide 10 record quarterly net revenues of $2.83 billion grew 5% year over year and 4% sequentially.
Asset management fees declined 6% compared to the prior year's fiscal fourth quarter, and 10% compared to the preceding quarter.
Equity markets declined further during the quarter, resulting in a 3% sequential decline in private client group assets and fee based accounts.
This decline will create a headwind for asset management and related administrative fees in the fiscal first quarter, which I expect to be down close to 4% sequentially in the fiscal first quarter of 2023.
Brokerage revenues of $481 million declined 11% compared to the prior year's fiscal fourth quarter, and 6% compared to the preceding quarter as lower activity in asset base Trail revenues in P. C. G as well as decreased fixed income brokerage revenues more than.
Offset the addition of some ridge, which generated strong revenues in the quarter.
As Paul touched on we expect this to be a tough environment for our legacy fixed income business as depository clients have quickly transitioned from having excess deposits to invest in securities to experiencing deposit run off as a result of the fed's actions.
I'll discuss accountant service fees and net interest income shortly.
Investment banking revenues of $217 million declined 3% compared to the preceding quarter, a solid result, given the challenging and uncertain market environment.
And while our pipelines are strong there remains a lot of uncertainty given the heightened market volatility that could impact investment banking revenues positively or negatively in the coming quarters.
Therefore, our best guess right now is that we could achieve a similar level of average quarterly investment banking revenues in fiscal 2023.
That we experienced over the last two quarters.
Obviously, a lot of variables can and probably will impact that estimate but that would result in a 20% decline in investment banking revenues in fiscal 2023.
That would still represent a much higher level of investment banking revenues, then we generated prior to the pandemic as we have made significant investments to the platform over the past few years, which has significantly increased our productive capacity and market share.
Primarily due to higher affordable housing investment business revenues, which achieved record results in fiscal 2022.
Moving to slide 11.
Clients' domestic cash sweep balances ended the quarter at $67.1 billion down, 12% compared to the preceding quarter and representing 7% of domestic P. C. G client assets.
As of this week. These balances have declined to just under $64 billion, reflecting the quarterly fee payments, which were paid in October as well as additional cash sorting activity during the month.
When comparing trends across the industry. It is important to note that these two cash sweep balances do not include high yield saving balances nor do we have a money market sweeps option. So it is sometimes difficult to make apples to apples comparisons across the industry.
Most of the decline in our sweep balances were experienced in the client interest program at the broker dealer, which was really the last in first out destination of the excess deposits over the past couple of years.
As we have been explaining for at least a year now we anticipated a significant decline in these cash balances as the fed started increasing short term interest rates.
So we kept the CIP balances invested in deposit accounts and short term treasuries.
The Raymond James Bank deposit sweep program continues to be a relatively low cost source of stable funding and now with the addition of Tristate capital Bank's independent deposit franchise, we have a more diversified funding base.
And while this additional funding source may not have seen this valuable several months ago I think everyone. Now appreciates just how precious deposits are and the importance of having multiple funding sources.
Turning to slide 12.
Combined net interest income and RJ BD P fees from third party banks was $606 million up 206% over the prior year's fiscal fourth quarter and 64% from the preceding quarter.
This strong growth reflects the immediate impact from higher short term rates, given the limited duration and high concentration of floating rate assets on our balance sheet.
While it can sometimes seem appropriate to take more duration and bet on rates, our long standing approach to maintain a high concentration of floating rate assets is proving to be a significant tailwind in this rising rate environment.
You can see on the bottom portion of the slide the bank segments net interest margin increase is substantial 50 basis points sequentially to 2.91% for the quarter and that's on top of the 40 basis point sequential increase in NIM in the preceding quarter.
The average yield on our JBT P balances with third party banks increased nearly 100 basis points to 1.85%.
Both the NIM and average yield from third party banks are expected to increase further with the anticipated rate increases.
Somewhere around 2.5%.
But these projections will obviously be impacted by the actual deposit beta we experience.
As we have done this cycle, we will continue to put clients first and focus on staying on the more generous end of the spectrum for our clients.
So far the cumulative deposit beta since the fed started increasing rates in March has been around 25%.
With the most recent increase in September having a deposit beta of about 35%.
Less than the 50%, we expected, but still much more generous to clients than the vast majority of our competitors.
Moving to consolidated expenses on slide 13.
Beginning with our largest expense compensation.
The total compensation ratio for the quarter was 62.1%, which decreased from 67, 5% in the preceding quarter.
The adjusted compensation ratio was 61.5% during the quarter.
The sequential decline in the compensation ratio largely reflects a significant benefit from higher net interest income in our JBT P fees from third party banks.
Non compensation expenses of $456 million, which includes $13 million of acquisition related expenses included in our non-GAAP earnings adjustments decreased 3% sequentially.
This quarter reflected a full quarter of expenses for both Tristate capital and some ridge partners, which sequentially added just over $25 million of incremental non compensation expenses, excluding the bank loan loss provision for credit losses.
The bank loan loss provision for credit losses decreased to $34 million, primarily due to the 26 million dollar initial provision associated with the Tristate capital acquisition in the fiscal third quarter.
This quarter's bank loan provision primarily reflects sequential loan growth along with a weaker macroeconomic outlook used and the Cecil models.
So as you can see we remain focused on the disciplined management of all compensation and non compensation related expenses, while still investing heavily in growth and ensuring high service levels for advisors and their clients.
Slide 14 shows the pretax margin trend over the past five quarters.
In the fiscal fourth quarter, we generated a pretax margin of 21.8%.
And an adjusted pre tax margin of 22, 8%.
Really excellent results.
And just to get ahead of it I know many of you will ask me, if we will update our 19% to 20% pre tax margin target that we laid out at our analyst and Investor day in May.
Since we exceeded it this quarter.
While that is certainly a reasonable ask given the market uncertainty and ongoing cash sorting dynamic we think it's appropriate to wait at least a few more months to update all of our targets.
But without being said I think our solid results this quarter highlight the benefit of our diversified business model. The upside we preserved a higher short term interest rates and our consistent focus on being disciplined on expenses.
On slide 15 at quarter end total assets were <unk> $81 billion a six.
<unk> sequential decrease primarily reflecting the decline in the client interest program cash balances I mentioned earlier.
Liquidity and capital remain very strong.
R. J F corporate cash at the parent ended the quarter at $1.9 billion, well above our 1.2 billion dollar target.
The tier one leverage ratio of 10.3% and total capital ratio of 25% are both more than double the regulatory requirements to be well capitalized.
The spot tier one leverage ratio at the end of the quarter is actually closer to 10, 5%. So our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.
The effective tax rate for the quarter increased to 28, 7% up from 27, 5% in the preceding quarter.
Primarily due to nondeductible losses on the corporate owned life insurance portfolio.
Going forward, we still believe around 24% to 25% is an appropriate estimate to use in your models.
But in rapidly declining equity markets the effective tax rate increases as we experienced this quarter and last quarter.
And vice versa, when equity markets increase.
Slide 16 provides a summary of our capital actions over the past five quarters.
Since the closing of the Tristate acquisition on June 1st through October 26, we have repurchased approximately 2.1 million common shares for $200 million are approximately $96 per share under our board authorization.
As of October 26, 2022, approximately $800 million remained available under the board approved share repurchase authorization.
Which we typically revisit annually in the upcoming board meeting.
We remain committed to offset the share issuance associated with the acquisition of tristate as well as the share based compensation dilution.
Of course, we will continue to closely monitor market conditions, and other capital and cash needs as we plan for these repurchases over the coming quarters, but I do want to emphasize this 1 billion dollar objective for fiscal 2023.
Lastly on slide 17, we provide key credit metrics for our bank segment, which now includes Raymond James Bank in Tristate Capital Bank.
The credit quality of the loan portfolio remains healthy with most trends continuing to improved.
Criticized loans as a percent of total loans held for investment ended the quarter at just 1.14%.
The bank loan allowance for credit losses, as a percentage of total loans held for investment ended the quarter at 0.91% down from one point to 7% at September 2021, and nearly flat sequentially.
The year over year decline in the bank loan allowance for credit losses as a percentage of total loans held for investment largely reflects the higher proportion of security based loans boosted by the acquisition of Tristate capital Bank.
Securities based loans, which account for approximately 35% of net loans are generally collateralized by marketable securities and therefore, typically do not require an allowance for credit losses.
If you look at the bank loan allowance for credit losses on corporate loans held for investment as a percentage of the total corporate loans. It was 1.73% at quarter end.
Compared to most other banks. We believe this represents a healthy reserve, but we are continuing to closely monitor any impacts of inflation supply chain constraints and a potential recession on our corporate loan portfolio.
Paul.
Thank you Paul.
As I stated at the start of our call I am pleased with our results and while there are many uncertainties I believe we're well positioned to drive growth across all of our businesses.
In the private client group next quarter results will be negatively impacted by the expected, 4% sequential decline of asset management fees and related administrative fees that Paul described earlier.
Focusing more on the long term I'm optimistic we'll continue delivering industry, leading growth as current and prospective advisers are attracted to our client focus values and leading technology and production solutions. Additionally.
Additionally, this segment will also continue to benefit from higher short term interest rates, although we expect cash sorting will continue as the fed increase as short term interest rates.
And the capital market segment, the M&A pipeline remains strong, but the pace and timing of closings will be heavily influenced by market conditions.
Over the long term I am confident we are well positioned for growth given the significant investments we've made over the past five years.
In the fixed income space the favorable environment, we've experienced over the past couple of years has shifted to.
Depository clients once flush with cash and facing limited opportunity for loan growth are now experiencing declines in deposits and have less cash available for investing in securities.
This dynamic will lead to a challenging environment in fiscal 2020 three.
While this headwind exists we expect some ridge partners to enhance our current position in the rapidly involving fixed income and trading technology marketplace and summary, typically benefits from elevated rate volatility.
And the asset management segment, the financial assets under management are starting the fiscal year lower due to the decline in equity and fixed income markets. However, 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 Raymond James Investment management formally Carillon tower associates to help drive further growth through increased scale distribution operational and marketing synergies.
The bank segment is well positioned for rising short term interest rates and we have ample funding and capital to grow the balance sheet prudently.
We will continue to operate Tristate capital Bank is a separately chartered bank and respect its relationships with its clients, which coupled with our strong capital and funding should foster its ongoing growth.
Most importantly, the credit quality of the bank's loan portfolio remained strong.
As always I want to thank all of our advisors and associates for their perseverance and dedication to providing excellent service to their clients each and every day.
Just as you've observed over the past two years, which had been filled with tremendous uncertainty and challenges we will stay rooted in our commitment to take care of advisers and clients, making decisions for the long term and maintain a strong and flexible balance sheet.
We believe with this approach we should be able to continue delivering strong results through different market environments and drive results for our associates advisers and shareholders just as we have for the past 60 years.
With that operator will you. Please open the line for questions.
Thank you very much.
And if you'd like to register your question. Once again, please press the one by the four on your telephone.
Tom prop tech nausea request.
Question has been asked so I could draw your frustration expressed a one or by day three.
One more in please our first question.
I will proceed with our first question on the line from a non Ghazaliya with Morgan Stanley go right ahead.
No that was it.
Right.
Good morning, Hey, I was wondering can you talk about what your assumptions are for deposit betas in your NIM guidance for next quarter, because it looks like you're not even within the <unk>.
75 basis point increase in the fed funds rate in November and a significantly higher average fed funds rate.
Next quarter versus the prior quarter I think you guided your NIM rising only 25 basis points or so so I guess the question is what are you baking in for a deposit beta is and is there some element of conservatism embedded in there.
Yeah as you know modern we do like to provide conservative guidance in that three 5%.
Admittedly as somewhat conservative it's only factoring in the November increase and the market's obviously expecting in December increase as well and so sofa tends to lead those type of increases as we saw last quarter. So we had 50 basis point sequential increase two quarters ago, and the NIM 40 base.
40 basis points this quarter.
And we're guiding 25 basis points, but it certainly could be higher than that going forward, we were expecting deposit beta.
As rates kind of continue to increase to get closer to 50%.
The last incremental increase for us it was 35% and cumulatively it was 25% and we've been really leading most of the industry focusing on clients and sharing and being generous with clients as the rates have increased.
And so going forward, 50% frankly, it might be too conservative as well just because of where when you look at competitors were certainly well ahead of competitive most of our competitors on the sweep rates.
Got it and then on a third party bank deposits.
So through this earnings season that many banks are relying more on wholesale funding. So I guess the question is what are you seeing in terms of demand from third party banks and.
Where should we expect that our body bank.
Theory to go if the fed stabilizes at four 5% and is there a boston ability that youre able to earn a higher spread on those deposits as you renegotiate new contracts next year.
Then the typical I think fed funds past 12, five basis points or so that you've typically an alright.
Yes, I think absolutely you know the demand is way up.
And.
As you pointed out if you look at almost all of our competitors. If you really looked at it with just what's happened to cash sweeps theyre all in the same ballpark. It's just most of the other firms have gone into high yield savings to supplement their cash or money market sweeps. So we haven't done that so.
We may but to date, we feel like we have ample low cost funding with our with our sweeps and we do see the demand going up which will impact rates and Paul I'll, let you address the rate dynamic.
Yes.
The trough in the last year or so the demand from third party banks was obviously very weak and the pricing was kind of in that fed funds effective range, which was down 20 basis points or so from the peak spreads.
A couple of years prior so.
Quickly seeing that demand resume that's the first step, but now we're starting to see prices.
And the economics improve on the spread but again 20 basis point spread improvement if that's sort of the potential to get back to the last.
Peak spread two years ago.
In comparison to the base rate improvement that we get from the federal reserve on those balances. So net net a significant tailwind though on those balances.
So it sounds like in terms of the fee rate.
You could be well above the two percentage points or so that he picked up during the prior cycle.
So so if you compare the end of.
If this rate hike cycle should we expect so you're right about the two percentage points that you saw last cycle.
Yes, I mean, we're already guiding just for this upcoming quarter to two 5% as an example.
Yes.
Alright, perfect. Thank you.
Thank you very much. We'll proceed with our next question on the line from Gerry O'hara with Jefferies go right ahead.
Perhaps.
Just a little bit of context or color on the advisor recruiting.
Market I know, it's obviously been a.
Another kind of challenging quarter from a volatility standpoint, so would just love to get a little bit of color as to as to what youre seeing industry wide in terms of those.
Those dynamics.
Okay.
I think I've been now what 12 dozen years in this job and everybody always asks me that recruiting.
It seems to be getting more competitive. So my response is it's kind of always been competitive and we've been on a good roll. So we still see it as very active.
We even then Oh nine we thought recruiting our best year would go off because of the great dislocation, but it was actually resulted in our best couple of years until the recent few years. So it's still a very active it's very competitive and.
It continues to be such that as you can see with our kind of 400 advisors added this year if you adjust for.
DRA channel.
The people that moved our advisor count we've had another very very strong year.
Really the largest teams we've ever recruited continue to come in and so the average is going up also not just market, but just the attraction of our platform for high net worth and ultra high net worth advisors.
As well as you know the advisers that we've recruited for throughout our history. So we're still still a big part of our strategy. We think that will still be strong backlog is strong and.
Don.
We won't last forever, but it looks pretty good in the short to mid term.
Fair enough and then perhaps one for for.
Paul Shoukri.
Can you, maybe just comment a little bit.
We obviously saw.
An increase from <unk> to <unk> on the non comp side of expenses.
That actually came off a little bit in <unk>, but can you, perhaps maybe help us think a little bit about how the how that.
Kind of run rate might look going into the next couple of quarters.
Yes, Jerry most most of the sequential increase was really attributable to having a full quarter of results for both tristate capital in summary to which sequentially added about.
$25 million of non compensation expenses.
Expenses, so that was the primary driver of the sequential increase which we expected.
Looking forward I think if you.
Look at this quarter as a baseline and I think there's around $410 million of non compensation expenses. When you adjust out for the loan loss provision and for some of the acquisition related expenses that we break out in our non-GAAP schedule.
Looking forward I would say that would be potentially our best guess right now for fiscal 'twenty three is that number totaling around $1 $7 billion.
Fiscal 'twenty, three which of the $410 million base represents.
Somewhere around one 5% growth sequentially each quarter in 2003, and most of that growth will really be coming from our technology investments, we're still heavily investing in technology to support advisers and their clients.
And really all of the businesses and functions across the firm so thats going to continue to be a cigna.
Significant focus for us going forward.
And then youre going to see kind of on a year over year basis growth in business development expenses as the first half of fiscal 'twenty two.
<unk> and conferences, obviously, we're still suppressed by the Covid pandemic, so youll see that normalized for the full year.
Okay, great. Thanks for taking my question is smart.
Thank you very much.
Our next question on the line from Alex Blaustein with Goldman Sachs.
Ahead.
Hey, guys. Good morning, Thanks for the question.
So maybe first just focusing on some of the bank dynamics I guess, if we look at the last cycle Bank NIM peaked at around three 5% in.
Not to pinpoint you to any specific quarter, but I guess when you zoom out a little bit in taking your conservative posture on the deposit betas, but it doesn't sound like they're going up about 50%.
If you think about tristate now in the mix that's more loan heavy so obviously higher yielding and the absolute level of rates is higher so should we be thinking closer to 4% Bank NIM. Once the fed is done or how are you thinking about that sort of run rate.
On the other end of that cycle.
Yes.
Lot of moving parts I would say one of the differences now versus in the last cycle is that our concentration of securities based loans are higher.
That has a typically has a lower NIM associated with it.
They are fully collateralized with liquid marketable securities. So the risk adjusted returns are very attractive but.
Typically a lower NIM through cycles relative to corporate loans and so there's a lot of moving parts. There I think just like I shared with mining on the BD P fees I think this time around I mean rates are expected to be higher than they were last cycle, just the base rates and so.
Given the.
The loan mix higher rates, a lot of different variables, but I don't think we can call three 5% necessarily a ceiling, but I don't think we're also ready to say that it can achieve 4% either I think we need to kind of see where cash sorting and cost of deposit trends play out.
Got it alright fair enough.
Just staying on the balance sheet theme for a minute.
Obviously, you had the right call and not extending duration, a year or two ago and keeping the balance sheet fairly floating but if you look at what's going on today security yields are quite attractive.
And maybe theres, a little bit more upside, but that's a fairly good return on invested capital as you kind of look what the market rates are today.
What are your thoughts about.
Building securities portfolio from here, maybe extending duration, a little bit just to lock in what looks like a pretty attractive rates of return.
Yes, so we're not against the securities portfolio, but our first thing is to fund our growth in loans and securities becomes the next part of it so.
We agree they're attractive.
After after being beat up for not locking in rates over a number of years for you know we're not after waiting it out and now having the balance sheet, we're not ready to call that we've reached peak rates and we're going to start locking in so I think at least in the near term, we're going to be flexible as the fed.
Probably has a couple of rate hikes, and then we'll look at it.
If things settle down we made balance balancing a little more but.
Our first funding is for growth and then any excess funding, which we're certainly happy to put in securities. Because you are right to have a very good spread right now, yes, I think I think kind of looking forward, we've really built up the securities portfolio in the last couple of years.
Theres no real Theres very little third party bank demand. So we kind of brought it onto the balance sheet doesn't that combination but.
Now with the cash sorting dynamics with loan growth being solid.
I would expect some of that buildup in securities to really run off over the next year to fund that loan growth that Paul talked about and some of that loan growth has duration as well I mean, so you saw the mortgage portfolio grew sequentially during the quarter pretty nicely.
Horatian, obviously associated with that portfolio that gives us that same type of protection, but to the extent that we take duration our preference has been to take it to support client relationships.
And to the extent that we have excess cash beyond the loan growth then we would certainly.
Investment Securities because it is a good return as is the cash we sweep off to third party banks as well so right now.
They have a lot of different options and Thats just the power of the flexibility that we have.
Got it alright, thanks, I won't ask the pretax margin question, just just to remind that there was a plus at the guidance next to 'twenty. When you guys gave it last time I just wanted to make sure that it's still there.
Yes, it was over 20 told.
Told you so.
Okay.
Sure. Our next question on the line from Steven Tabak Wolfe Research go right ahead.
So wanted to start with a question on FIC.
You alluded Paul some of the headwinds to the business. It's been run rating the last couple of quarters at about 100 million.
This most recent quarter. You noted included some ridge partners contribution as well as the fed continues to remove excess liquidity from the system do you anticipate further pressure on this $100 million baseline or is that a fair run rate that we can underwrite looking out to next year.
You can see the dynamic.
We have a great fixed income franchise, but really in the Munich.
Very very strong and they're focused on the same dynamics. The whole industry is so as cash tightens theyre going to fund loans first and security second just like US. So yes that could have pressure now theres other parts of the business, but it will certainly have pressure on that run rate if it gets tighter and again the other hand some.
Bridges.
Maybe timing is everything but this is kind of the perfect market for them to perform they are just.
Really killing it right now, but everything's in their favor, but everything is a headwind for that banking part of the franchise that we're so good at so so it could come under more pressure also.
Great and just for my follow up maybe on the comp ratio.
Certainly a nice positive surprise, especially relative to the guidance I understand Paul or can appreciate your reluctance to update the 19% to 20% plus margin target.
But wanted to get a sense as to how we should think about your philosophy around comp given so much of the revenue growth is going to come from less compensable areas, what's a reasonable expectation for where the comp rate should be running if rates stay higher for longer.
Well, we are where we have done even with our advisors and associates, we paid them.
We think its fairly on their production and we havent paid on interest that would interest went away.
Didn't change their payouts and comp obviously it affects management's comp.
So our plan right now is that interest rates will continue to be non compensable.
So certainly impact some of the bank, but generally to the extent there is more interest spread and margin comp will go down to the extent that normalizes or goes the other way the ratio will go up but there is no no change fundamentally and how.
We're paying based on it so again interest spreads will drive it down for a period of time.
I think spreads right now.
Like in any cycle, probably outsized for I don't know if theyre out how long that stays year or two years quarter.
But it will return, but where our comp philosophy is the same so you should see improvement in spreads and interest rates improve.
I think the one thing I would add is.
The compensation philosophy kind of fun.
Outside of the sort of advisor force that Paul was talking about was too.
Help to share the success of the firm with our associates.
And we are in a high inflation environment and so whereas we're entering year end, we are leaning in to being generous to our associates and sharing in the success with our associates just as we always do.
Those yearend increases wont really be reflected until the second fiscal quarter first calendar quarter of the fiscal year and thats when payroll taxes reset of course, but as Paul said.
The interest spreads have been a significant benefit to our compensation ratio down to this kind of 62% range.
Okay.
The napkin math would suggest when you try to back out some of the non compensable portions of revenue.
And again.
It reflects a full quarter of results from both Tristate capital and some rich so.
Salaries across the board and we're leaning into being generous with that given the competitive labor environment inflationary pressures and the success that we're having as a firm. So we really wanted to.
Sure that success with the associates, who made it all possible.
And that again and we're also continuing to hire.
All of our businesses to support.
And continue the great growth that we've had across our businesses and so that that would really be reflected throughout fiscal 'twenty three.
Helpful color, Thanks for taking my questions.
Thank you very much Chris.
Next question on the line from Jim Mitchell.
Per global Great ahead.
Jimmy there Mr. Mitch Mitchell Your line is open for your question.
Hello can you hear me.
I can hear you now.
Okay sorry.
So deposits are down to about 6% of client assets based on sort of the guidance for October alright client cash I should say.
Can you remind us of the historical average for cash levels, maybe a low and high range.
I'm, just trying to think through where that starts to bottom out.
It's a pretty wide range.
I think the peak of that range was in the mid teens in 2009, but of course, that's because cash increase in market.
End markets decreased substantially, but I would say the trough was somewhere in that 5% range, maybe a little lower than 5% in 2019. So.
To your point, we're at 6% I think the 25 year historical average is probably in the 7% to 8% range. So it's a pretty wide range.
Yeah, absolutely as a matter of if they get right now we've been fortunate and have managed it well as you know we've been.
Focused on the flexible balance sheet, but you need cash to operate the business. So if you see if you.
You see runs.
We've talked about even offering high rate savings and others. We just have been implemented.
Haven't felt like we need to but if we see cash getting to levels that concern us. We will do that we also have tristate now who is a very good source of funding they've got a very strong net funding operation.
Which was one of the reasons for the.
I think it was a year ago, we were talking about or concerned about cash in the future. So it's.
So we've got we've got alternatives now, but absolutely you need cash to run this business and.
You wanted to be able to service your client cash at some point.
We look at our cash balances they havent left the system, that's gone more into fixed income or our money in money markets on our platform. So they are still in the system.
Just haven't kept them into the pure cash for.
Great. Thanks.
Our next question on the line is from Devin Ryan with JMP Securities go right ahead.
Yes, Kevin.
Most questions have been asked.
Want to come back to the balance sheet a bit here and just think about.
Your mix, maybe following up on <unk>.
Alex's question, just deposits, obviously, becoming more scarce here and so when you think about the mix moving forward are there beyond you may be thinking about.
Securities Book, you are there other areas maybe in the loan book or just more broadly where there's room for optimization.
Maybe areas to drive the risk adjusted NIM higher from here all else equal.
So they are probably always is estimated so part of what we're doing is we're going through our budgeting.
Exercise to say, where do we want to deploy capital.
We've got a with the banking business a broader bank business Tri State is an independent business with its third party platforms and the question is between that and Raymond James Bank, where do you allocate capital in the portfolio really to optimize.
Partly the balance sheet from our standpoint, but really to allow.
Freedom for example for Tri State to service their customers. So we're going through that to make sure that the capital allocations makes sense, both for those businesses and for us. So.
There always is in the periods of rapid transition right now, it's a little bit harder to do it but we're in a lot of discussion on it.
I would say.
Just to reinforce that we really don't manage the balance sheet allocation to necessarily maximize NIM.
We do it to maximize risk adjusted returns.
We believe that securities based loans, both at Raymond James.
Thank to our own clients.
Tristate capital to their independent clients.
As the best risk adjusted return.
So that that is kind of the priority to the extent that the demand is there and which we think that over time that should continue to be a good tailwind for us.
And then and then we look at the other loan categories. We like the mix that we have right now with 35% of our loans and securities based loans.
So that's kind of how we're thinking about it.
Yep, Okay. Thanks.
Thanks, Paul and then.
A follow up here just want to talk little bit about the investment banking outlook I appreciate.
There is always a little bit crystal ball.
In there and you guys are going to err on the side of conservatism just given the uncertainty in the market, but you want to make sure I understand how youre thinking about it.
You have equity issuance is going to be market centric, but market stabilize that probably would improve and then your M&A business is structurally larger so.
All else equal that the business trajectory over time is higher than fixed income it feels like maybe could remain a bit under pressure if rates remained higher so just trying to think about how much of maybe that theres more muted near term outlook is just purely market centric versus.
Maybe the flip side would be maybe every business doesn't snap back to where it was.
Over the last year or two because rates are higher or are there. Some other structural dynamic in the market to change. So I just wanted to kind of parse through both the cyclical versus anything that maybe a little bit more impaired for.
A continued period.
I think if you look at I'll go in reverse order in the fixed income business I mean, the challenge for traditional fixed income business in a rising rate market is when do people invest kind of in the long term and that will happen as rates come up I think that.
That business will do well.
So people have been buying shorter term as they start buying longer term, it's more profitable for us to and but you got to get rates to a point where people think rates are there to really start doing that.
Certainly the increase in rates will help but we're just at a pause really until that happens. So I think that's more timing.
M&A is a little harder.
Backlogs good clients are good.
Even now right now its up for us and it's up in Europe for the industry.
And.
If you look at European dynamics with rates.
Inflation everything you go well how could that be so I mean, there is still cash theres still strategic investors.
And our growth on our platform and who we've added and we are continuing to grow and we believe in it but that one is harder to predict I mean, it's been stronger I think that most people have predicted.
The backlog is still strong, but when people close or not or when that stops is just that's a tough one so.
When you come off of the last two years with almost unprecedented M&A is that a baseline or is that.
Peak forever, which probably isn't but.
Again, we're still very very high on that business.
But that was kind of hard to say, what what triggers that to <unk>.
New or what triggers it to slow down or stop for a while.
Okay, alright, thanks very much.
Right.
Thank you.
Our next question on the line with Cal void from K B W.
Hi, good morning.
Given the level of sorting right now and the pressure that may put on on total available funding as you look out a couple of years just completely understand the cautiousness and the tone around the size of the U S book and maybe letting some of that run off in order to support loan growth. So just two follow ups on that what is the current duration of the portfolio.
And how much of that portfolio would run off per year. If you didn't reinvest at all in the portfolio and can you also remind us are there specific minimums that you need to hold in terms of the CIP and third party bank sweep.
Just just so we have that is as the sorting process continues here.
Yes, I would say in the securities portfolio.
Probably back end loaded a little bit but.
And again, we're going to use a lot of that to fund the loan growth as current plans.
There is a baseline for CIP of cash balances. There. If you kind of look back at 2019, I think there's probably $253 billion of cash there.
For a variety of reasons and so.
That's kind of a good way to think about the floor there for those balances.
Really with with PDP.
That's a function of providing clients FDIC insurance trying to maximize their FDIC coverage as much as we possibly can given the.
The constraints and the demand from third party banks.
And so is there is there I guess given the your clients' allocation.
Yeah.
Certain number of charters that you can you can provide FDIC insurance with yourself. So is there a certain amount of minimum there I guess on the third party bank side is it a few billion dollars that needs to be held there or.
Is it some number that's that's smaller than that.
The way, we think about the minimum on the PDP balances is essentially providing some level of funding buffer.
Don't want to.
Overextend the funding as we've seen in the industry, it's challenging when you overextend the funding to your own banks and you don't have a buffer there and that's one of the things that we're thinking through is what do we want that buffer to be now our balance sheet is much more liquid than it used to be 10 years ago. When we established the 50% buffer that some of you are aware of so we think thats.
Much too conservative but.
What kind of currently now that we've completed the acquisition of Tristate capital understanding their balance sheet. We're currently in the midst of determining what the appropriate buffers, but we're going to just as we always do err on the side of conservatism there as well.
Understood that's really helpful.
I had one follow up related to you.
Administrative comp I think on last quarters call. You mentioned, there was an off cycle bonus paid in the fiscal third quarter, which caused the PCB segment admin comp to be elevated but we saw another $15 million sequential increase in that PSEG admin comp line in the fiscal fourth quarter. So just wondering what drove that and how much of that is.
As onetime in nature if at all.
Yeah, I'm not sure.
I think it was a five 5% sequential increase and again that that bounces around based on benefit accruals that we adjust for it particularly at the end of the fiscal year, making sure we're fully.
Funded and accrued for.
Benefits and other things so.
There's nothing that I could point to specifically that would.
Describe that other than just sort of natural growth and.
Changes to the accruals et cetera.
Okay understood. Thank you.
Thank you very much.
Let's see what our final question for today is from the line of Bill Katz. The credit Suisse go right ahead.
Okay.
Good morning. This is Michael Kelly on for Bill. Thank you for taking my question.
Most questions have been asked but I did have one follow up on the.
Our loan mix.
Paul and Paul are you seeing any shift in demand for the SPL. It looks like at the end of period basis, they dipped a little bit.
The resi was pretty resilient, but are you seeing any shift in demand with the higher interest rate environment that we should be worried about near term.
And your long term outlook is quite positive for the balance sheet I think that yes.
Some of that SPL, Jeff was really pay a lot of people use that as GAAP funding. So.
Part of the mortgage demand where people went from S field.
Paid those off and as a mortgaged homes and other things so.
We think the demand is there.
Not only is there for our clients. So they can tri state is growing their market share with new relationships too.
<unk> opportunity. So I think spl's over time are still even short term and longer term so very very positive.
Question becomes is.
Rates continue to go up.
Was that really cheap source of funding maybe not people are less likely to borrow but.
I still think that business is doing doing well. So I think you see a blip you saw a blip this quarter early on that.
Great. Thanks, and then if I just had one more follow up as a percentage of <unk> you still are.
<unk> as a percentage of a UA behind.
Behind some of your wire house peers do you see that gap closing over time.
We've just never been as aggressive in pushing that through our organization I mean.
So our products spl's, even a relatively new product for us compared to our competitors. So.
And we certainly don't have quotas for anyone.
Presented are required them to present or even branch managers with quota so.
Because of that our debt concentration historically has been lower than certainly our wire house competitors.
And we continue to gain share but we.
We do it more through natural means from the advisor really has to initiate that versus us going out and pushing it or selling it to advisers. So.
But our comps and it is.
Going up but we're just not progressive and that haven't been it's just part of the culture for a long time.
Great. Thank you it makes sense.
Thank you very much.
And really that was the final question and I'll turn it back to you for any closing remarks.
Great I appreciate everybody being on the call and although.
Strong end of the year.
So environment outside of the equity markets and interest rates and cash sorting and everything else. So it's hard to call.
We're still that's when we really appreciate the flexibility we have in the balance sheet and our capital base and everything else to be able to navigate so odd.
Optimistic about the future don't know what's going to happen.
As you get GDP and you get people still raising rates of inflation, it's going to be an interesting quarter.
The quarters, but that's what it is you can see that our advisors are still 90 clients say, 97% satisfied with their advisors has pretty high rate and they need us more now than ever so with that appreciate your time and we'll talk to you soon.
Thank you very much and thank you everyone that does conclude the call for today. We thank you for your participation you disconnect. Your lines have a good day everyone.
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