Q3 2023 Raymond James Financial Inc Earnings Call
Good afternoon, and welcome to Raymond James Financial's third quarter fiscal 2023 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 Christine <unk> Senior Vice President of Investor Relations at Raymond James Financial.
Good evening, 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 today 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.
Ms prospects financial results anticipated timing and benefits of our acquisitions and our level of success integrating acquired businesses divestitures anticipated results of litigation and regulatory developments or general economic conditions.
In addition words such as May will could anticipates expects believes 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 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.
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 evening, Thank you for joining us today.
Last earnings call, we hosted our two major advisor conferences for both the independent and employee affiliation channels.
Also had our chairman's counsel recognition trip.
Our top employee advisors.
I'm, so proud of our advisors unwavering dedication to serving our clients and helping them to navigate these volatile and uncertain times.
Our advisors have also expressed their appreciation of our commitment to managing the firm with a long term.
And always striving to be a source of strength and stability for them and their clients.
It's these shared values that have resulted in our success through multiple cycles since our founding.
And what makes me confident about our continued success in the future.
Now turning to our results.
Despite the challenging environment and elevated market volatility since the federal reserve started raising interest rate, we generated record net revenues and earnings for the first nine months of the fiscal year.
Reviewing third quarter results starting on slide four.
<unk> reported record quarterly net revenues of $2.9 billion and net income available to common shareholders of $369 million or $1 71 per diluted share.
Excluding expenses related to acquisitions.
Adjusted net income available to common shareholders was $399 million or $1 85 per diluted share.
The increase in interest related revenues driven by higher short term interest rates drove significant earnings growth over the prior year.
Net revenues increased 7% and net income available to common shareholders grew 23%.
Quarterly results were negatively impacted by elevated provisions for legal and regulatory matters of approximately $65 million in bank loan provision for credit losses of $54 million, which was predominantly driven by significantly weakened macroeconomic.
Make assumptions for the Moody's CRE price index utilized NRC for models.
Notwithstanding these items, we had a solid quarter in a tough market environment we.
We generated strong returns with annualized returns on common equity of 14.9 per side.
<unk> adjusted returns on tangible common equity of 19, 7%.
We believe this is a leading result, especially considering our strong capital base.
Moving to slide five.
The strength of our PCT business really shine driving record assets this quarter.
We ended the quarter with record total client assets under administration of 1.28 trillion dollars record TCG assets in fee based accounts of $697 billion in financial assets under management of $201 billion.
With our continued focus on retaining supporting in attracting high quality financial advisers PCT consistently generate strong organic growth, which was evident again this quarter with domestic net new assets of $14 $4 billion, representing a $5.
4% annualized growth rate on the beginning of the period domestic P. C G asset.
However, I'll note net new assets in our advisor count were negatively impacted by an independent contractor relationship whose affiliation with the firm ended the fiscal third quarter.
This was a planned and mutual separation and more than 60% of the assets and advisors stayed with Raymond James.
The impact of the portion that moved off the platform. This quarter was $4 $6 billion in assets and 60 financial advisors through our net new asset metric would have been even stronger after adjusting for the separation, which we do not believe it will negatively impact our profitability.
During the prior 12 months, we recruited to our domestic independent contractor and employee channels financial advisors with approximately $282 million of trailing 12 month production and nearly $38 billion of client assets at their previous firms.
Total clients domestic sweet and enhanced savings program balances ended the quarter at $58 billion up 11% from March of 2023.
The enhanced savings program with its competitive rate and robust FDIC insurance continue to attract significant cash this quarter offsetting a decline in client suite balances largely due to quarterly fee billings and tax payments in April .
Total bank loans decreased 1% from the preceding quarter to $43 billion, primarily reflecting a modest decline in corporate loans as new origination demand continues to be tested in the market.
Moving to slide six private client group generated record results with quarterly net revenues of $2.18 billion and pre tax income of $411 million.
Year over year asset based revenues declined due to market declines. However, PCT results were lifted by the benefit of higher interest rates on interest related revenues and fees.
The capital markets segment generated quarterly net revenues of $276 million and a pre tax loss of $34 million.
Revenues declined 28% compared to the prior year quarter.
Mostly driven by lower investment banking revenues as well as lower fixed income brokerage revenues.
The extremely challenging market environment, particularly for investment banking has strained the near term profitability of this segment's results.
As we explained at analyst and Investor Day.
Segment results were negatively impacted by amortization share based compensation for prior years as well as growth investments.
However, we are focused on managing controllable expenses as near term revenues are depressed.
The asset management segment generated pretax income of $89 million on net revenues of $226 million.
The increase in net revenues and pretax income over the preceding quarter were largely the result of higher assets and fee based accounts.
The bank segment generated net revenues of $514 million and pre tax income of $66 million.
Third quarter NIM for the bank segment of $3, two 6% rose 85 basis points over the year ago quarter, but as expected decreased 37 basis points from the preceding quarter, primarily due to higher funding cost.
We continue to add diverse higher cost funding sources and shifted more of the lower cost sweep funding to third party banks.
This negatively impacted the segment's NIM, Paul shortly will walk us through how this benefits both clients and the firm overall.
Looking at the fiscal year to date results on slide seven we generated record net revenues of $8 $6 billion and record net income available to common shareholders of $1 $3 billion up 5% and 22% respectively over the prior year.
As records.
We aren't seeing many other firms that arent in the street generate record so far this year.
Additionally, we generated strong annualized return on common equity of 17, 9% and annualized adjusted return on tangible common equity of 22, 7% for the nine month period.
On slide eight the strength of the PCT and bank segments for the first nine months of the year, primarily reflects the benefit of strong organic growth in the private client group.
Successful integration of Tristate capital and higher interest related revenues.
When compared to the record activity levels in the year ago period weaker capital markets results reflect the challenging environment for investment banking and fixed income brokerage revenue despite incremental revenues from the summer edge acquisition.
And now I'll turn it over to Paul Shoukri for a more detailed review of our third quarter financial results.
Paul.
Thank you Paul.
Starting on slide 10.
Consolidated net revenues were a record $2 $91 billion in the third quarter up 7% over the prior year and 1% sequentially.
Being able to generate record quarterly revenues during a period when capital market revenues were so challenge across the industry reinforces the value of having diverse and complementary businesses anchored by the private client group business, which reached record client assets this quarter.
Asset management and related administrative fees declined 4% compared to the prior year quarter and increased 5% sequentially due to the higher assets in fee based accounts at the end of the preceding quarter, along with one additional billable day in the fiscal third quarter.
This quarter fee based assets grew 5% to a new record, providing a tailwind for asset management and related administrative fees in the fiscal fourth quarter.
Brokerage revenues of $461 million declined 10% year over year and 7% sequentially.
This year over year decline was largely due to lower fixed income brokerage revenues in the capital market segment as well as lower asset based trail revenues in P. C G.
I'll discuss accountant service fees and net interest income shortly.
<unk> banking revenues of $151 million declined 32% year over year and 2% sequentially.
As experienced across the industry, both underwriting and M&A revenues continued to be challenged this quarter.
We are optimistic that the environment is improving and we continue to see a healthy investment banking pipeline and solid new business activity.
However, there remains a lot of uncertainty and the pace and timing of deals launching in closing given the heightened market volatility.
So while we may not see significant improvement in the fiscal fourth quarter, we expect better results over the next six to 12 months.
Moving to slide 11.
Clients' domestic cash sweep and enhanced saving program balances ended the quarter at $58 billion up 11% over the preceding quarter and representing five 2% of domestic <unk> client assets.
Advisers continue to serve their clients effectively.
Leveraging our competitive cash offerings.
The enhanced savings program attracted approximately $8 $5 billion in new deposits this quarter.
A large portion of the total cash coming in to ESP has been new cash brought to the firm by advisors highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability.
The enhanced savings program balances exceeded 11 $9 billion. This week continuing to grow modestly and partially offsetting the decline in sweep balances largely due to the approximately $1 $3 billion of quarterly fee billings in July .
Yeah.
As I said on last quarter's call.
It feels like we are closer to the end of the cash sorting dynamic than we are to the beginning and.
And we have certainly seen a deceleration of the activity over the past several months.
However, we are not ready to declare the end of that dynamic.
We will need more time with stable balances and interest rates.
This quarter's sweep balances with third party banks increased seven 5 billion to $16 9 billion.
Giving us a large funding cushion when attractive growth opportunities surface.
These third party balances grew faster than we expected last quarter as a strong growth of enhanced saving program balances at Raymond James Bank allowed for more balances to be deployed off balance sheet.
While this dynamic has negatively impacted the bank segments NIM because of the geography of the lower cost sweep balances being swept off balance sheet. It ultimately provides clients with an attractive deposit solution. While also optimizing the firm's funding flexibility.
Looking forward, we have ample funding and capital to support attractive loan growth.
Turning to slide 12.
Combined net interest income and RJ <unk> fees from third party banks was $708 million.
Up 91% over the prior year quarter, and down 3% compared to the preceding quarter.
The sequential decrease in firm wide net interest income was partially offset by higher RJ BD P fees from third party banks.
If you recall on our last earnings call, we anticipated a 10% decline in these interest related revenues. So we are pleased with the better than expected decline of just 3%, which was partly a function of higher than anticipated growth of enhanced saving program balances.
The bank segments net interest margin decreased 37 basis points sequentially to $3, two 6% for the quarter and the average yield of RJ PDP balances with third party banks increased 12 basis points to 337%.
While there are many variables that will impact the actual results. We currently expect combined net interest income and RJ <unk> fees from third party banks to be around 5% lower in the fiscal fourth quarter compared to the fiscal third quarter as we expect some further contraction.
The bank segment net interest income to be partially offset by an increase in RJ PDP fees from third party banks.
As we have always said instead of concentrating on maximizing NIM over the near term we are more focused on preserving flexibility and growing net interest income and our JBT P fees over the long term, which we believe we are well positioned to do.
Moving to consolidated expenses on slide 13.
Compensation expense was $1 $85 billion and the total compensation ratio for the quarter was 63, 7%.
The adjusted compensation ratio was 62, 7% during the quarter, which we are very pleased with especially given the challenging environment for capital markets.
Non compensation expenses of $570 million increased 15% sequentially.
As Paul mentioned earlier the quarter included elevated provisions for legal and regulatory matters of approximately $65 million.
In our bank loan provision for credit losses of $54 million.
The $65 million of provisions for legal and regulatory matters was made up of several items that all hit this quarter.
Some of those items were closed out and publicly disclosed.
Some of the other items are still in process and we therefore will not be able to provide much more detail on those in this call.
Additionally, this quarter included seasonally higher conference and event related expenses.
The bank loan provision for credit losses for the quarter of $54 million.
<unk> $26 million over the preceding quarter.
Largely reflecting weaker assumptions for commercial real estate valuations and the Moody's CRE price index and in particular, the office price index, which resulted in higher allowances.
I'll discuss more related to the credit quality in the bank segment shortly.
In summary, while there has been some noise with elevated legal and regulatory matters over the past two quarters, none of the other non compensation expenses are coming in too much differently than we expected when we last provided guidance for the fiscal year.
But as you all know legal and regulatory expenses and provisions for loan losses, using the Cecil methodology are inherently difficult to predict.
Importantly, we remain focus on managing expenses, while continuing to invest in growth and ensuring high service levels for advisors and their clients.
Slide 14 shows the pretax margin trend over the past five quarters and.
In the current quarter, we generated a pretax margin of 16, 7% and an adjusted pre tax margin of 18, 1% a strong result, given the industry wide challenges impacting capital markets and the aforementioned provisions.
On slide 15 at quarter end total assets were <unk> 78 billion, a 2% sequential decrease largely reflecting lower client cash balances and CIP during the quarter.
Liquidity and capital remain very strong.
RJ you have corporate cash at the parent ended the quarter at $1 $7 billion, well above our $1 2 billion dollar target.
The tier one leverage ratio of 11, 4% and total capital ratio of 22% are both more than double the regulatory requirements to be well capitalized.
The 11, 4% tier one leverage ratio reflects over $1 billion of excess capital above our conservative, 10% target, which would still be two times, the regulatory requirement to be well capitalized.
Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.
We also have significant sources of contingent funding.
We have a 750 million dollar revolving credit facility, which was recently renewed an upsized in April .
And nearly $10 billion of FHL be capacity in the bank segment.
Slide 16 provides a summary of our capital actions over the past five quarters.
During the fiscal third quarter, the firm repurchased 331 million shares of common stock for $300 million at an average price of nearly $91 per share.
As of July 26, 2023, approximately $750 million remained available under the board's approved common stock repurchase authorization.
And we currently intend on continuing our planned repurchases as we have discussed previously.
Lastly on slide 17, we provide key credit metrics for our bank segment, which includes Raymond James Bank in Tristate Capital Bank.
The credit quality of the loan portfolio is solid.
Criticized loans as a percentage of total loans held for investment ended the quarter just point, 94%.
The bank loan allowance for credit losses, as a percentage of total loans held for investment ended the quarter at just 1.04%.
The bank loan allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was one 9% at quarter end.
We believe this represents an appropriate reserve, but we are continuing to closely monitor any impacts of inflation supply chain constraints higher interest rates and a potential recession on the corporate loan portfolio.
As we have done from time to time, when we believe there's an attractive risk reward during the quarter, we proactively sold approximately $450 million of corporate loans at an average price of around 98% of par value.
There continues to be a lot of attention on the commercial real estate across the industry given the challenge with property values and interest rates. So let me briefly cover our portfolio.
Across the bank segment, we have CRE and REIT loans of approximately eight 8 billion, which represents 20% of total loans.
Our office portfolio is $1.4 billion, only representing approximately 3% of the bank segments total loans.
Overall, we have deliberately limited the exposure to office real estate and we underwrote office loans with what we believed were conservative criteria.
But we will continue to monitor each alone closely given the industry wide challenges.
Now I will turn the call back over to Paul Reilly to discuss our outlook.
Paul.
Thank you Paul.
As I said at the start of the call I am pleased with our results for the first nine months of fiscal 2023, and our ability to generate record earnings during what continues to be a challenging environment.
And while there is still a near term economic uncertainty I believe we are in a position of strength and are well positioned to drive growth over the long term across all of our businesses.
And the private client group next quarter results will be favorably impacted by the 5% sequential increase of assets in fee based accounts.
And I'm optimistic over the long term, we will continue delivering industry, leading growth as current and prospective advisors are attracted to our client focused values, leading technology and product solutions.
And the capital market segment, there are some signs of improvement in investment banking and we continue to have a healthy M&A pipeline and good engagement levels.
While there is reason for optimism, we expect the pace and timing of transactions to be heavily influenced by market conditions and with more likely pick up over the next six to 12 months.
And the fixed income space.
So towry clients are experiencing declining deposit balances.
Less cash available for investing in securities putting pressure on our brokerage activity we.
We hope that once rates and cash balances stabilize we could start to see an improvement.
So while there are some near term challenges over the long term, we believe the capital markets business is well positioned for growth given the investments we've made over the last five years.
Significantly increased our productive capacity and market share.
We will continue to prudently manage expenses in these businesses as near term revenues continue to come under pressure.
Obviously, we'll have to take more significant action if the industry headwinds proved to be more long term.
And the asset management segment financial assets under management are starting the fiscal fourth quarter up 3%.
<unk> to the preceding quarter, which should provide a tailwind to revenues if markets remain conducive throughout the quarter.
We remain confident that 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 to help drive further growth through increased scale distribution and operational and marketing synergies.
And the bank segment, our focus over the next several months will continue to be fortifying the balance sheet with diversified funding sources and prudently growing assets to support client demand.
We have seen securities based loan pay offs decelerate and expect demand for those loans to essentially recover as clients get comfortable with the current level of rates.
With little activity in the market corporate loan growth has been tepid. However, we believe the yield environment has improved with ample cash sitting with third party banks and lots of capital we are well positioned to lead and once activity picks up.
In closing.
We have strong prospects for future growth given our strong competitive positioning at all of our businesses and our ample capital and liquidity.
I wanted to take this time to thank our advisors and associates for their continued perseverance and dedication to providing excellent service to their clients each and every day, especially in these uncertain times, our clients need trusted advice the most.
Thank you all for what you do.
And with that operator will you.
Please open the line for questions.
Thank you very much if you'd like to register a question. Please press the one followed by the four on your telephone you'll hear a three ton 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 the three.
To make sure we address as many questions as possible. Please limit yourself to one question and one follow up.
And our first question comes from the line of Steven.
<unk> with Wolfe research.
Please go ahead.
Hey, Paul and Paul.
Michael I'm not going to start to sign on for Stephen here.
I guess, just starting starting with one off on on maybe the balance sheet reinvestment strategy here.
You highlighted potentially capitalizing on some of the yield opportunities and loans down the road, but given improved improving sorting picture. The funding capacity you have on the off balance sheet cash and the fact that we're near peak rates is adding duration to lock in some higher yields here something that youre considering more actively.
Yes.
I think you've known us long enough.
We don't play the betting on interest rate game. So.
We we'd like a floating rate balance sheet. It served us well, even though maybe for a couple of years. We got criticized it made it easy to get through this last year and.
We certainly have some duration on our balance sheet and bank in terms of mortgages and other things, but again, where.
We're not looking at trying to make an interest rate that overall.
Okay. That's helpful and for my follow up maybe switching to the capital market side.
We're hearing a lot of your peers highlight green shoots as well as the potential recovery in DCM and ECM, but capital raising activity at Ray Jay was relatively weaker during the quarter is that just a function of the mix or were there other factors at play.
Now you said you expect better results in 2024, but how should we be thinking about the outlook for that business relative to what your peers have been highlighting thank you.
Yeah, I think we've all been in the same boat.
<unk> had.
The mix of our businesses are different so the timing of quarters, but we've already had a number of transactions closed for this quarter, but.
We see green shoots in that both activity level.
Backlog new deals.
Were all positive factors, but.
We just don't see a big rush to get everything done so, although we expect the business to improve.
Our history in our cycles, just tell us that they take a little longer than we would all like are a lot of what bankers expected. So I think we're gonna all track along and the industry on this hopefully it improves we will play along we're positioned well.
We have a lot of clients interested in a lot of mandates but.
We've had those for the last year. So quick question is what are people really.
We're able to transact.
And the market.
Did want to add something to your first question on banking, although we don't make duration plays we are seeing spreads widen and loans and.
We think theres, an opportunity to again by keeping our capital and cash that.
At the right time, and the right loans, we'll be able to grow more on spread and making interest rate bets strategy.
Got it thanks, Mike.
Yes.
Our next question comes from the line of Kyle Voigt with K B W.
Please proceed with your question.
Hi, good evening.
First question on cash and ESP balances.
Now having built back over $16 billion of third party deposits and noted in your prepared remarks that you have adequate liquidity for growing the balance sheet do you anticipate taking any steps in near term or have you already taken any steps yet to reduce some of the incentives in place to grow those ESP balances much further from current levels.
Hey, Kyle no.
We really again the ESP program is a product that we created to serve clients and to help advisors bring in assets from their clients and so I'm really what's what's driving our growth strategy with ESP is first and foremost client demand and advisors are asked.
Yes to keep this product available for their clients.
Of course, there is some capacity constraints, given we offer up to $50 million of FDIC insurance. So there is a network of banks and there is capacity constraints associated with that but yes.
We're not looking to sort of manage those balances down based on our near term needs long term. We know we are confident we will need the funding and so this gives us ample opportunity to grow the balance sheet when client the client demand for loans Resurfaces.
And the adjustment for us.
It's an easy adjustment for us too because you can adjust right.
<unk> gives you some attrition.
And you can stop the program, if you had to or slow it down.
So but as of right now.
Cash sorting has slowed but it hasn't stopped if you look at everyone's reports.
We will continue to lead the program opened to our advisers as long as we have capacity.
Understood and then for my follow up I was hoping we could dig into SPL demand a little bit during the Investor day. It seemed like you were hopeful that we are nearing a point, where SPL demand was starting to come back and it looks like balances remained flat quarter on quarter. After a few quarters of declining so first just wondering.
If you believe those balances have finally troughs.
Then given the recent equity market resurgence here or is that having any incremental impact on kind of clients' willingness to borrow against secure.
Securities.
Just if you could talk about SPL demand overall, and then any leading indicators I guess he might be seeing in the SPL demand side. Thank you.
Yes, I think we have certainly seen a deceleration of paydowns, which.
Is what really picked up as rates increase in borrowing cost increased.
We saw the expected pay downs over the last six to 12 months.
It's kind of particularly in June and even in July those pay downs have really slowed down and so we think this is a good baseline we're not smart enough to call a trough or a floor but.
We do we are optimistic that over the next six to 12 months.
If the markets stay relatively resilient that we will see kind of a pickup of demand off this level off these sort of levels going forward.
Great. Thank you.
The next question comes from the line of Alex Blaustein with Goldman Sachs.
Please proceed with your question.
Hey, good afternoon, Thanks, Hey, Paul I wanted to go back to your guidance on cash revenues are down 5% from this quarter at the same time cash balances seem to be stabilizing as you pointed out the sorting has been slowing down we got another rate hike the rate hike here today. So I'm just trying to understand the assumptions behind this guidance and as part of that can you give us an update on.
The RGB D P balances at the bank as well as at third party banks.
Yes, so a lot of pieces to that question Alex but.
Hopefully, 5% as a conservative guide last quarter, we guided down 10% and it actually ended up being down 3%. So we were very pleased to outperform our guide from last quarter.
Given the uncertainty we think it's always prudent to give conservative guidance around these type of things.
So youre right Theyre all they are a lot of puts and takes we would expect the BD P. P portion to be up just because the balances are up so significantly.
Quarter over quarter, so as long as that stays somewhat resilient over the course of the quarter.
We would expect those PDP fees to be up.
And then Conversely, with the interest income at the bank, we would expect pressure there just because we'll have a full quarter impact of all of the ESP balances that we raised.
During the third quarter and as we raise those balances we've moved to a lower cost balances from the bank to third party banks. So there is some geography involved in that from one to the other but when we put those things together and our best guests that balances going forward, which can change dramatically over the next couple of more.
<unk>.
That's where we come up with the.
The down 5% between both PDP fees and NII, but again.
We're hoping that we can exceed that guidance.
If things hold.
And then it turns on what we're seeing so far.
The month of July really the balances have stabilized I mean, we did see a decrease in the sweep balances due to the quarterly fee billings in July which is what you would expect but.
Outside of that we really have seen kind of up.
Sort of is absolutely a deceleration of cash sorting activity I mean outside of those declines from the quarterly fee billings cash sweep balances were fairly stable outside of those core.
Orderly fee billings and the ESP balances continued to grow.
Okay that makes them ourselves.
The second question to Paul Paul Senior on an investment banking I guess, so I hear your comments around the <unk>.
Pipeline is getting better and it sounds like you guys are hopeful that in six to 12 months revenue will sort of come back up here. So are you effectively implying that investment banking revenues will be in this kind of 150 ish million dollar range for the next couple of quarters and then if that's the scenario are there is there room to more aggressively manage the expense base.
To bring that business to profitability or breakeven even.
Even in that sort of scenario or you really need to see a much better revenue picture to become profitable and capital markets.
Well actually got us both pretty well there you are calling me old and Paul.
Sure.
Yes.
Sure.
I think that it's really hard to tell.
If you look at backlog and things you could say it'll start improving but.
I think a top of market robot goes youll see it with everybody. So I don't I don't know what our position would be that would make it a lot different in the market. When our returns. So we do have a lot more capacity, we invested a lot of those investments start with people that we recruited in.
Good acquisitions, when they kind of they are part of us now.
We've already looked at we've trimmed some costs and we think it'll continue longer term, we would we would do more but we're really trying to keep the team in place that we spent five years building I.
I think there'll be very very productive so.
Hopefully that everyone's green shoots turns into trees.
And so we're hoping for.
Paul gave six to 12 months before we think industry wide not just us it'll really start hitting but thats. The unknown. It really just that's the unknown.
We certainly have the capacity and once the market picks up I think we're well positioned clients are engaged.
But that's the million dollar question, we cant answer but.
If we ever got to the point, we thought it was more of a permanent or longer term.
Hiatus, we would manage costs as tightly as we could.
I Gotcha, alright, Thank you Bob.
Okay.
The next question comes from the line of Brennan Hawken with UBS.
Please proceed with your question.
Thanks for taking my question.
So.
I know Paul that you have on I won't go into junior senior.
Paul.
Oh Paul.
You commented that you were limited in what you can say on the legal charges was totally understandable not all resolved but.
Now this is the second corner ROE, we'd had some legal charges and is it right to assume we're probably going to see a third quarter. Because you said theyre not all resolved and so therefore should we expect some bleed into next quarter, how should we think about that.
Yes.
There could be certainly additional reserves and they'll probably will be additional reserves up in future quarters.
But we're hoping that there'll be.
Pretty big drop off from the 66 or so million dollars that we saw this quarter.
That was obviously unusual for us if you look back at our history. So.
Time will tell but.
It was obviously this quarter was obviously.
Elevated relative to sort of what do you look at for an average reserve for quarter for us.
Okay fair enough.
And then what.
Wonder if you could give a little bit of color around the.
The ending of the relationship with the independent contractor that you spoke about that impacted and then this quarter you know what.
It kind of counterparty was that and what what did this what what led to the decision by either them or you are to go in a different direction.
Yes, I think we're not going to.
Talk about firms or stuff, but I think that just based on our strategy. It was an independent contractor firm at normal kind of <unk>.
<unk>.
Just on their strategy and what they wanted to do in ours.
And I was looking at our profitability and I think what they thought they could.
Due and other things we just.
Thought it was better to have another home and.
We went ahead and we supported their move.
And we again.
Again, as we said we kept a lot of the advisers with advisors had a choice.
So Carlos just strategic differences in both of our businesses and profitability as we as we've said we don't think that the.
If there is a negative impact to our profitability on that change so.
So we.
We're both making our bets in both going in the direction, we think we're right.
Okay. Thank you for the color.
Okay.
The next question comes from the line of Jim Mitchell with Seaport Global Securities.
Please proceed with your question.
Alright, thanks, good afternoon.
Paul just maybe can you talk a little bit about.
Can you speak to the maturity profile of the <unk> book, it's still yielding around two a little over 2%.
Just great to get your thoughts on how quickly that portfolio runs off and and you know and you get a chance to reinvest that at higher rates.
Yes.
The average maturity on that portfolio is somewhere in the four year range.
So you know it takes some time for it to run off we're probably going to see it.
Maybe 1 billion and a half or so.
Our run off a year.
Current level so.
It will take some time.
And frankly, we grew that securities portfolio.
During the Covid period, because we had pretty significant increase in client cash balances as you recall.
And you know there really wasn't demand from third party banks. So we took it onto our own balance sheet to accommodate those cash balances.
Unfortunately, we've kept the vast majority of those as pulp indicated in.
Very very short term treasuries and didn't take too much duration risk.
And so now as we look forward, we're really going to grow that.
Let that securities portfolio run off so the liquidity.
In the balance sheet should be somewhere around 10% of the bank's balance sheets combined with.
I will let us reinvest a lot of those repayments to bank loans, which again as Paul said have higher spreads and higher yields on them. So.
There'll be a nice tailwind for us over the next several years hopefully.
Right and then when you just think about.
NII after that this coming quarter down I guess combined down five maybe NII down a little more how do you think about do you feel like once you kind of catch up and ESPN ESP balances are not growing as rapidly that that NIM starts to spin the bank starts to stabilize and NII as can be flat to up or.
Still think that further declines.
And just to be clear when we raise those ESP balances.
Cash is fungible to cast shall we move off balance sheet to third party banks is still making a higher spread than the cost of.
<unk> balances, while we sort of a wait investment in higher yield higher yielding assets and loans. So.
It's still on that.
A huge net positive, but it's still a net positive for us. So we offer the clients the product thats attractive allows advisors to.
Gain more wallet share from their clients and.
We hope we essentially.
Place that cash with third party banks until we have better investment opportunities. There's a lot of geography involved in terms of what shows up in NII in BD P fees, but we obviously look at it from a consolidated basis. So it's really a win for the clients a win for the advisors and a win for the firm.
It gives us a lot of capacity to grow the balance sheet.
Over time, so that's kind of how we're thinking about it.
Yes to the extent that we.
We can win.
When demand.
Turns for loans, both corporate loans and loans to the private client group clients.
Then.
He will certainly be a nice tailwind to our net interest income.
I think it's a great industry.
Yes.
If you look under screen wide there is still a competition for cash as long as there is an upward and the feds raising rates.
It's going to impact I think rates on both ends.
Until that dynamics once that dynamic stabilizes.
Or if it ever does go the other way, which some people predict we haven't bought the forward curve for over a year now but.
Once that does happen and our spreads should improve but that's we don't know so we're operating we know on the ESP balances.
Not cheap, but we still make a spread off of them. So it's positive in NII and so theres no harm and are raising them for clients and we make a little money too so.
And just to be fair.
And just to be clear one last comment on this is because I've got some questions over E Mail us.
We are guide to 5% guide that I provided on NII and PDP fees is really based on today's rate actions. So we're not trying to sell.
Factor in the forward curves or anything like that as Paul said I am not sure we totally by the forward curve I don't I'm not sure if we.
We're certainly not going to give guidance based on the fed cutting rates anytime soon.
Fair. Thanks, Thanks, Bob.
Sure.
As a reminder to register for a question. Please press one four and the next question comes from the line of Michael Cyprus with Morgan Stanley .
Please proceed with your question.
Hey, good afternoon. Thanks for taking the question I was hoping you might be able to provide some color on the marketplace for recruiting advisors today, how you see that evolving and how you might characterize the pipeline. Thank you.
So I think.
I think I've gotten this question almost every quarter now for 13 years since I've been CEO .
It's it's.
Competitive I mean, it's.
I think all firms are kind of in the market the costs have gone up somewhat certainly over the years.
So we have maintained our position not being the highest bidder in these cases and using it this positive selection, but its certainly competitive you have the broker dealer employee channels you have.
Firms and the.
Aggregators competing especially at the high end for all of their clients. So.
The good news for us as we continue to compete very well.
We continue the pipeline is strong.
The biggest change probably over the last two years as the number of just period large teams.
We talked to versus.
Years ago so.
But the pipelines great. It's been picking up every quarter, we had a slow start continue to pick up.
Each quarter end.
So we're optimistic but it is competitive.
Great. Thanks, So just a follow up question on the ESP balances just curious how you think about the duration of those ESP deposits versus your sweep deposits and other funding sources and how does that sort of how do you take them into consideration when you think about ultimately reinvesting and putting some of those deposits to work.
Yeah, well, it's a <unk>.
Relatively new product for us we launched it in March so.
We'll learn more as we have more experience with it and as rates stabilize and those sorts of things so.
We want there we always try to have cushions around kind of how we think about funding deployment and maybe even more so.
A bigger cushion when youre dealing with a new <unk>.
Deposit product in a volatile and uncertain rate environment.
You look at where we are today, we've had a target of third party balances of around $10 billion that we talked about just six months ago and now we're up to <unk>.
$16 billion or north of $16 billion of third party balances.
And the banks are still holding a very high cash balances more than they need in a normal environment.
So we have a significant funding cushion.
Opportunity over the next several months to really kind of have better history and understanding of the sort of the reinvestment of the enhanced saving product balances.
And I think you could also look at.
Most of the ESP balances came from cash balances elsewhere.
Any markets.
<unk> I mean, so it was really high.
If you look at the assets the cash yield player. It just happened to be secured.
With FDIC and people viewed it as more secure with FDIC insurance.
So.
It's not like it came out of everybody ran from equities and took the products. So.
If you look at the percentage of our assets and cash.
We're certainly not at were more closer to historic levels, and we are record levels or so.
But as Paul said, we are always more cautious with the new product and understand it can move and also are used to competing so.
We will see in the quarter, but again, we have a big cushion right now and Thats why we havent slowed down deposits just understanding that you know it could have a little more volatility, but we'll see.
Great. Thank you.
And our last question comes from the line of Devin Ryan with JMP Securities.
Please proceed with your question.
Great. Thanks, so much good evening, Paul and Paul.
I'll just keep it at one most who's covered here, but do you want to ask about corporate M&A for the firm and we.
We obviously saw recent press around a reasonably sized.
Independent broker that could be modeling a sale and so I thought that was interesting.
Without getting into details around where Raymond James might be interested specifically it would be great just to hear about.
What you guys are seeing in the marketplace because it would seem that.
Conditions could be getting better for you guys as well just with valuation for covering your stock comp as well.
Confidence is improving in the marketplace.
Some degree.
Just assume thats, a little bit of a better environment for M&A. So just love to talk about what you guys are seeing in the marketplace. Today. If you can what that pipeline of opportunities is looking like right now relative to a year ago.
Well, thanks, Devin as you know we've just hired.
Our new head of our corporate development practice, so we certainly.
It didn't do that could slow down.
I didn't see the article you're alluding to but we've always have had a course of.
Firms that we believe would fit us well.
In the private client group space, where we really.
Really no the mall and our focus Hasnt changed.
Bob.
No.
As we said the problem with most of their private are not for sale. So it doesn't help but we.
We stay close and whatever changes we wanted to either one of your first call. So.
We continue to.
Keep that strategy and then on the M&A.
Suraj, who has joined US as really focused on also other.
Opportunities we've looked at.
M&A firms that we talked to pre.
Market.
Adjustment there.
Because we thought valuations are way off.
New dialogue with those that we think still holds in the practice.
And again pricing has gotten much better there.
We've had a few asset.
Asset management space.
We've talked to and.
Could come up with pricing versus the market.
It's not unusual for us.
And looking at other ancillary technology fit in places like <unk>, which has really been a huge positive so our eyes not off the ball at all.
For M&A in fact, we always assume the tougher the market the better opportunity.
To really add people to the family.
Again, it has to be a culture fit.
Strategic be able to integrate it.
And then price and so we're pretty price discipline to so we're working away.
And we always have so but.
We were we didn't close any for a while and we closed three quickly so who knows.
Alright, good stuff. Thanks, so much guys.
Thanks, Kevin.
And there are no further questions Mr. Reilly I'll turn the call back to you.
Yes. Thank you for joining I know, it's always a busy time with everyone.
With earnings, but I really feel like we're in great shape, you can see our asset growth.
Our recruiting growth.
And certainly the capital markets is a tough market, but that will return to.
Have a great franchise in that business when the market returns that will return and we believe we can continue growing the other businesses. So.
Thanks for joining and we'll talk to you next quarter.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.
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