Q3 2019 Earnings Call
Let's say now I will turn it over to Paul Shukri, Treasurer, and head of Investor Relations at Raymond James Financial.
Thank you Jeff.
Good morning, and thank you all for joining us on the call. We appreciate your time and interest in Raymond James Financial.
Well that's on the call today are Paul Reilly, Chairman, and Chief Executive Officer, and jumped Julien Chief Financial Officer.
Following the prepared remarks, the operator, we'll open the line for questions.
Please note certain statements made during this call may constitute forward looking statements forward looking statements include but are not limited to information concerning future strategic objectives business prospects financial results anticipated results of litigation and regulatory developments or general economic conditions. In addition words, such as believes expects Fred and would 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 those forward looking statements. We urge you to consider as described in our most recent Form 10-K and subsequent forms 10-Q, which are available on our website.
During today's call. We'll also use certain non-GAAP financial measures to provide information forget to our management's view a bond going.
A reconciliation of these non-GAAP measures the most comparable GAAP measures may be found in the schedule accompanying our press release.
With that I'll turn the call over to Paul Reilly cheer, Chairman and CEO of Raymond James Financial all right. Thanks, Paul Good morning, everyone. Thanks for joining us as usual I'm going to give a brief summary of our results for the third quarter 2019, and then I'll turn the call over to job will give more detail and then I'll come back to talk discuss our outlook and open up for questions.
Overall, I'm pleased with our results for the third quarter.
Despite some elevated expenses and decline in investment banking revenues that were both largely timely timing related.
Business metrics were strong and I'm encouraged by the solid performance of a number of key areas during the quarter.
Quarterly net revenues of 1.93 billion increased 5% over the prior year's fiscal third quarter increased 4% over the.
Preceding quarter.
We generated quarterly earnings per diluted share of $1.80 lifted by higher private client group fee based assets and higher net interest income primarily at Raymond James Bank compared to a year ago period.
We ended the period with record results for client assets under administration of 820.
4.2 billion financial assets under management of 143.1 billion and total private client group financial advisors of 7904 as well as record net loans for RJ Bank of 20.7 billion.
Annualized return on total equity for the quarter was 16.1%.
And while it isn't a metric that we use the world does seem to be moving towards measuring and reporting on return on tangible common equity.
And if you looked at our discussion at our last analyst and Investor Day in June our adjusted return on tangible equity on annualized basis for the preceding quarter would've been approximately 180 basis points higher than the adjusted return on equity given a fairly consistent metric. We think that same result would be a similar this quarter.
Through the first nine months of the fiscal year, we generated record net revenue of 5.72 billion, which was up 6%.
Net income was 769 million, which was up 29% and adjusted net income of 784 million, which was up 10% over the first nine months.
And notably all four of our core segments generated record net revenue during the first nine months compared to last fiscal year.
Now turning to the segment results and the private client group, we generated net revenue of 1.35 billion and pretax income of $140 million during the quarter.
Revenue growth of 6% over both the prior years third quarter.
And the preceding quarter was largely driven by higher assets under management and related admin fees as we continue to experience very strong growth for the private client group assets and fee based accounts.
These fee based account assets ended the quarter at a record 398 billion, representing 51% of total client assets in the segment and reflecting growth of 16% over June of 2018, and 5% growth over March of.
2019.
This growth has been driven by strong net additions of financial advisors equity market appreciation and increased utilization of fee based accounts, which we believe is a long term trend that our industry will continue to see.
Most importantly financial advisor retention and recruiting remains solid.
Resulting in us achieving a record number of financial advisors was 7904 at the end of the period healthy net increases of 185 over June 2018, and 42 over March of 2019.
Even in the increasingly competitive recruiting environment, our clients faced facing culture multiple affiliation options options and robust service solutions continue to resonate with existing and prospective advisors.
Now, let me touch on some headwinds in the.
For the segment.
First our client domestic cash sweep balances of $38.2 billion declined 9% from the prior quarter largely due to quarterly fee payments tax related seasonality an increased allocation to other investments.
We believe the decline in cash balances was slightly elevated this quarter as the conversion of the money market sweep option in June caused advisors and clients to increase their allocation to other investments such as position on money market funds.
Cash sweep balances have decreased in June July with quarter quarterly fee payments that are made during the first month of each quarter.
The segment also experienced elevated business development expenses this quarter due to the timing of conferences revenue recognition events for advisors and increased advertising expenses reflected in the other segment.
This resulted in similar sequential increase in business development expenses that we experienced.
In the year ago period, which Jeff will touch on.
The capital market segment.
Generated net revenues of $251 million and pre tax income of $24 million for the quarter.
While fixed income had another relatively strong quarter segment results were negatively impacted by large sequential decline in M&A revenues.
As you recall the M&A M&A had a record first half of the year and even after this quarter have that has a record all time, we believe that the M&A pipeline remains very strong and the timing of closings is inherently lumpy, but we're optimistic about this business.
The asset management segment generated record revenues of $177 million and record pre tax income of 65 million during the quarter.
Financial assets under management ended the quarter at a record 143.1 billion an increase of 6% over June of 2018, and 3% over March of 2019.
Overall, the growth of financial assets under management continues to be largely driven by equity market appreciation and positive flows associated with the increased utilization of fee based accounts in the private client group segment, which is more than offset the net outflows experienced by Caroline towers advisors, given the extremely challenging market for actively managed products.
And the bank Raymond James Bank generated record quarterly net revenues of $215 million and record quarterly pre tax income of $138 million during the fiscal third quarter.
Record net loans of 20.7 billion grew 9% year over year and 3% sequentially.
The growth in loans during the quarter was driven by the Cnine portfolio residential mortgage loans and securities based loans to our private client group.
RJ banks net interest margin modestly expanded to 337 basis points in the fiscal third quarter up seven basis points over a year ago third quarter and two basis points over the preceding quarter, Jeff will get into more detail on what affected the NIM.
Importantly, the credit quality, the bank's loan portfolio remained strong including the pay off of a handful of criticized loans that contributed to the loan loss benefit of 5 million. This quarter. Despite strong net loan growth during the quarter.
So overall, a strong quarter a record first nine months for the fiscal year now I will turn it over to John who will provide more color on the financial results Jeff.
Thank you Paul.
On the revenue side of the CNL.
Virtually all line items had only minor variances from your consensus model. This time.
Which is pleasing to see I guess in that we've gotten the story across accurately, particularly with the new line items from a year ago.
So I'm going to limit my comments to adding color to a couple of the larger dollar changes from the preceding quarter.
The first is our largest revenue line item with the asset based fee revenues.
We saw that nice double digit gain of 12% from the sequentially, which was exactly in line with the growth in the PCG fee based assets in the March quarter, which is the relevant time period. As these are built quarterly in advance.
Implication there of course is that the 4% growth in these assets for the current quarter the June quarter.
Should be indicative of.
Q4 growth in that line item, although we won't always be a perfect correlation like it was this time.
The other large.
Variants.
Dollar wise was a investment banking revenues.
Which again I think all of you.
Estimated fairly closely.
The sequential decline of course.
It was more due to the fact that we had a record M&A quarter in March not that this current quarter was particularly it was weak.
It's just coming off of a record which was a hard act to follow.
So that was actually down.
M&A revenues were down $40 million for the quarter. The details of course or in the press release on page 11, if you have the same pagination as I do.
And the capital markets PML.
The bottom line for revenue the total net revenues of <unk> billion 927 up 4% sequentially work just smack on line pretty much with the consensus model.
On the expense side got really two positives in two negatives to talk about.
I'll just go in order they are presented in the TNL.
Competence compensation, our comp ratio was up to 66.3, which is.
A little higher than it has been in recent quarters.
There are couple of factors involved in that one of course is that drop in M&A revenues that we just talked about and.
You know that have a very high incremental margin as you add those the productivity.
Those.
Bankers.
Second would be we're starting to see a little bit of.
The effect of that.
Fairly aggressive hiring weve done over the last year or so in the compliance supervision areas. This falls into the PCG segment predominantly.
That that hiring pace of course has slowed by now but.
It's starting to we're getting the full effect of the previous hiring now in our in our PML.
And third.
A third factor is the independent contractor portion of our private client group segment, which is.
Somewhat larger than the employee portion as you can see by the.
Relative at Bay counts in the press release.
Actually grew faster on a percentage basis, even though larger to start with it grew faster on a percentage basis this quarter than the employee side did as well so.
That.
Has a much higher payout attendant to those revenues.
Which is going to have an impact on the comp ratio and all these things are part of the reason that we didnt really change our target at the most recent.
Analyst Investor Day last month, we left that at 66 and a half so were were still under that the course for the quarter and for the year.
Communications and information processing.
Thats continuing to trend well below where we had guided at the beginning of the year.
We had talked about it averaging in the high ninetys or so for the year it looks like it's going to be more to.
Low to mid Ninetys or our low ninetys on average.
It's not that we're necessarily spending significantly less than we anticipated, but it's really that more of it's being spent on large capitalizable projects spend than we had expected.
And you can sort of see that it's.
If you look at the fixed asset detail in our of our balance sheet in our case as you can see that we have a capitalized software number that's grown pretty steadily over the.
Course of these last few years and of course, the amortization of those.
It comes into the PML guidance that we've given in the current period in future periods.
But I will I will also mention here that in keeping with our principal of conservatism I would tell you that we only capitalize on what we have to.
For gap and we when we're assigning useful lives to the sometimes purchase sometimes developed software we do try to try to.
Air toward the low end of any reasonable range.
So lets future amortization of course is going to be continue to be a factor in and earnings.
And then business development well above our guidance I think we had talked about this.
Somewhat exhaustively a year ago, we had a similar experience but for different reasons.
At that time, we said, we really kind of expect this line item to average between 45 and $50 million per quarter for the year and it would be on the low end of that in the first two quarters and the high end of that and the second two quarters, while our I think our annual guidance is still pretty accurate on that but the ranges just wider than we thought in the first two quarters, we were below the 45 million.
And this quarter were well above the top end of that little rain. So really I think our guidance is right, but the range is probably more like 40 to 55, rather than 45 to 50.
So things impacting this quarter of course as Paul already mentioned we had.
Multiple.
Epay recognition events as well as our largest conference of the year.
And then we also this year had $5 million worth of advertising time compared to virtually none in the first two quarters and we're expecting a similar number.
And that the advertising number in that advertising line for this coming quarter.
So bottom line I think that we'll be right on it for the fiscal year just.
Like I said, a wider range than we had initially anticipated.
And the other positive for the quarter was the bank loan loss provision.
We actually had.
Several criticized loans pay off during the quarter.
Effective that more than offset the provision related to the $550 million of net loan growth that we had during the quarter.
And you can actually see that decline in criticized loans. If you look at the bank detail again on my page 16 of the release.
Where we have some of the banks statistics, they were down about $50 million for the quarter.
Net interest.
Paul touched on a little bit the banks net interest margin actually improved a little bit by two basis points and again on page 17 of the release, there's detail about the banks net interest margin.
But.
One of the main factors was when we changed from.
Crediting clients cash balances based on their aggregate assets with the firm to based on their aggregate cash balances with the firm.
The bank turned out to be the primary beneficiary of that as a.
Our generally the first bank in our waterfall and they have some people that have small accounts are smaller cash balances.
Our almost always in our bank first so they've got the majority of the small accounts and whats, obviously engender a lower crediting rate than the larger balances. So they actually had a nice or decline in cost of funds than we experienced and the overall firm.
Another factor and that you may see it you'll see a decline in the yield on.
The corporate side of of loans and that has to do with LIBOR really LIBOR being predictive of a fed rate cut.
And moving down pretty substantially during the quarter.
And that our commercial loan portfolio is largely tied to LIBOR that all loans Hadnt reprice that those that did and the new ones that came on where we are tied to a LIBOR that had moved whereas our cost of funds side other than this change in methodology has not really changed.
So.
Slight improvement was really the net of those two things for the quarter.
I will comment that our spread on funds swept to unaffiliated banks still remains about where it was a little under 200 basis points in that I will remind you is reflected an accountant service fees not in net interest.
Cash sweep balances dropped 8.5% in the quarter.
I think we talked about this again it at the recent analyst day.
Where we had.
Given our salesforce and clients about four months notice that we are going to be eliminating the money market funds sweep and.
As of that date in June approached.
A number of people took the opportunity to reposition to to generally to mostly to position on money market funds.
Effect on June 11th.
And although the total sweep balances are down the one that's that we track really probably the most closely right now is RJ BDP line of that which finances are our banks growth.
That I mentioned net of the net of the run off to other investments and position will fund so.
As Tom mentioned, we continue to see some runoff of sweep balances, although its moderating a little bit now.
Which going forward, obviously will affect both account and service fees and possibly to a lesser extent net interest earnings going forward.
So we'll have to see if some of the speculation is right that.
You know that hopefully we're getting near a bottom in terms of people who are moved what they would call investable cash in our sweet balances really are constituted primarily of what we would call.
Operational funds.
Common question, we get of course is what would the impact of a fed rate cut b.
You know I would just tell you that.
We intend to maintain our competitive position at or near the top of our peer group in virtually all of the strata of account sizes.
Yes, so our our impact is going to be largely dependent on what the competition does but as I mentioned to analyst day. My best guess is that if there is a 25 basis point rate cut next week that there'd be something between 60, and 80% deposit beta associated with that which would mean, a 15 to 20 basis point decline to clients, but would have been modestly negative impact to the firms that follow that deposit beta in our case would compress our spread by five to 10 basis points and again as we remind you each basis points about a million dollars a quarter to us.
So five or 10 basis points, you can do the math.
I want to wrap it up just talking about the segment results on page eight of the release I mean for the quarter three of our four primary operating segments showed sequential improvement in both revenues and pre tax income.
What I would call our three.
M&A quarter in March.
So they actually show just a slight decline from the strong March quarter.
But.
Month's results you see revenue improvement in all four primary operating segments and pre tax improvement in all all except PCG, which has been bearing the brunt of the negative impact of these declining cash sweep balances we continue to.
Finance that growth for the bank.
And.
Cash balances are coming out of.
External banks, where that spread will go to the private client group.
And so and they also bearing obviously that some of these elevated expenses and comp that we talked about and business developments. So.
Bottom line is for nine months when you look at the year over year improvement we have had.
A little bit of help from interest rates during that period, and we certainly have had some help from the market. Although remember the beginning of this year, we had a pretty severe decline in December and 14% decline in the S&P. So we didnt really have three good quarters of FY billings, we really only had two.
Out of the three yet, we're still showing pretty nice improvement year over year and.
With that I'll, let Paul talk a little bit more about the outlook for Q4.
Thanks, Jeff.
Well first on the private client group segment, we're entering the fourth quarter with fee based asset accounts up 5% on a sequential basis and remember substantially all the assets are built based on beginning balances for the quarter.
So billing should look pretty good in that segment of course, the offset with Jeff decline. This discusses any declining client cash balances.
And increased allocations other investments.
And certainly whatever happens to interest rates, but overall, we continue to experience very good financial advisor retention and recruiting.
And in fact, although we may not.
Hit our record for last year, we may come pretty close and our recruiting pipeline is really extremely solid and our employees side has really picked up for the independent as.
Had led the way the first couple of quarters.
And the capital markets segment, while the timing of closings are always difficult predicted that M&A pipeline is very very strong and I think we're we're optimistic in that area fixed income results have improved the last two quarters and the rate environment is generally still conducive for trading activity.
Especially as interest rates move.
However, we did go through the process of Rightsizing, the fixed income business up somewhat than expenses during the year. So that certainly has helped their margins and should continue to.
The asset management segment.
We entered.
And entered the fourth quarter with financial assets under management up 6% year over year, and 3% sequentially, which should also help us buildings.
Increased utilization to fee based accounts in the private client group of wells.
Good return performance and Carol on towers should help here.
The Raymond James Bank, we started the fourth quarter with record loan balances and attractive that interest margin I think the bank remains very very disciplined in its loan portfolio I see that a numbers than that.
Our credit was non core but when we added two expenses in the last couple of quarters. They were certainly were considered core I think it was just a measure of good credit discipline.
And so I think there were very feel very good about the banks positioning.
Our capital levels, obviously remain very strong with a total capital ratio for the third quarter, 25%.
We continue to deliberately deploy our capital in the third quarter, we purchased a little over a million shares for $85 million and through the first nine months of fiscal 19, we've repurchased 7.7 million shares for $591 million at an average price of 70 670 per share that leaves us with 373 million of availability under the 505 million share repurchase authorization, which was increased by the board of directors in March of 2019.
We will continue to be proactive and offsetting share based compensation dilution, while remaining opportunistic with incremental repurchases.
Following the last two investment so last year's overlaying.
Advisors and clarify thus we will continue to be very active in pursuing opportunities to grow our business and larger ones, but only if they can meet our criteria of the strong cultural fit a good strategic fit and something we can integrate at a price that's reasonable we're working very very hard to this and continue to follow the same guidance, we've been giving you.
So overall, we've entered the fourth quarter of fiscal 2019, we have a lot of Tailwinds record number of private client group advisors record PCG fee based assets and 5% higher than the start of the preceding quarter.
Record high spreads on cash balances record net loans at RJ Bank and a strong pipeline for financial advisor recruiting and M&A, but we certainly have headwinds including.
Declining cash balances and what happens there and certainly and the impact of potential rate changes, which we obviously can't control, but we'll react to.
So with that I'm going to turn it over to adjust and open the line for questions.
Justin.
Thank you at this time, if you would like.
Good question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Craig Siegenthaler from Credit Suisse. Please go ahead.
Hey, Thanks, good morning, everyone.
And Greg.
So I just wanted to ask a question on the bank. After the recent decline in interest rates Spike.
From your seat how do you compare the relative returns between deposits allocated to the Raymond James Bank and also third party banks.
Well, we've looked at we look at return on our equity no matter, where we put it the we get just under 200 basis points on our sweet and earn.
We have 373 spread on our bank. So we just look at the return on capital how we allocated.
And look at a controlled growth in the bank. So we have some internal governors on how large we'd like bank to be relative to the business but.
I think youre going to see.
Very similar strategy as we go forward that you've seen over the last few years, both in size and how we've deployed.
Got it and then just as my follow up we saw a little bit of a slowing in the breakaway broker trend in the March quarter, partly due to the backdrop, including the government shutdown, but I'm just wondering have you seen a pickup.
In the migration that advisors away from wire houses and smaller broker dealers, given the improving equity market backdrop leasing year to date.
Honestly, we haven't seen a lot of slow down. So we are again on pace to be near last year's record you can see by the number of advisors that we have now if you look at the pipeline of commits and visits its very very robust so.
If anything there may be an increase certainly in the employee side independents.
Really active the first two quarters, but the employee side, it's really active and again.
At usually comes and goes with market, but I'd say in all of our affiliation options, we're having very good results on recruiting.
Thank you.
Your next question comes from the line of Steven Chubak from Wolfe Research. Please go ahead.
Dave.
Hey, Hello are you on mute, yes, sorry, I was muted in my apologies.
So much coughing in the background earlier.
No problem.
Appreciate some color on the high comp accrual in the coroner I'm just wondering in terms of the revenue outlook. If I look at street expectations, just given the forward curve.
People are anticipating I think rightfully. So continued the momentum helped by strong organic growth.
But the fed easing cycle, which is beyond your control will weigh on NII and spread revenue as you think about your ability to maybe hold the line on comp I mean, thats something thats achievable given the expectation for multiple rate cuts in the back half.
And just trying to think about your philosophy, if the growth from here is primarily driven by fee income.
Versus Eni.
Well you know, we think we're going to get.
Given the market, we should have good fee income growth now the only difference between those revenue streams as we have a comp costs to fee income growth and not really any comp cost the net interest so given both.
The fee income growth will be.
Net interest is going to hurt but.
Again.
It depends on what you're you're projecting that you're projecting fed rate cuts and I think you're right and not assuming that eni is going to be a revenue driver.
If you are projecting.
Maybe one cut only are no cuts.
Then it's going to be dependent on how well we're able to.
I understand just as a follow up to the expense remarks, you just made on one of the other big areas that debate is any flexibility that you guys have to maybe manage noncomp lower at least slowed the pace of non comp inflation you made a lot of investments in systems and technology over the last couple of years. That's clearly help accelerate organic growth is there any potential to flex that as the eni backdrop becomes even more challenging.
I think we always have the opportunity certainly on.
Revenue outlook and in the medium term.
To impact.
Expenses comp and non comp. So you can see in fixed income, we did that and where you.
We went from a market, where we are just breakeven to 15% ROI. We part was market help but a lot of that was cost.
If we see those trends and other areas of the business, we're going to have to look at more cost discipline for sure.
But you're right a lot of our.
Somewhat elevated.
Expenses are to get on and stay ahead of our advisor growth, so whether that support for compliance supervision or systems.
It's had a big pay off on that advisor growth, but it does hit short term comp so.
I think.
To help us on comp I mean on the numbers would be great to slowdown recruiting I don't think it's a great long term benefits, though but we always have those flexibilities and I think we've shown that disciplined in any slowdown or recession, we've reacted pretty well on costs and certainly.
We'll do that if we think it's needed to be done.
Thanks, Paul and just one.
All for me on account service fees.
Again, it depends how you want to model client cash balances it but that's the line item that will be most impacted by whatever fluctuation you want to assume and client cash balances. We've had run off obviously, that's had a negative impact.
On that line item because.
External bank sweeps are the ones that are impacted first because we're going to continue to finance the growth the Raymond James Bank as long as we can.
Get get the remainder if you want to call it that and to the extent that keeps.
Dropping that's going to be.
That's going to be the line item affected more than net interest earnings.
Got it thanks very much.
Your next question comes from the line of Jim Mitchell from Buckingham Research. Please go ahead.
Hey, good morning.
Just maybe.
You talked about.
Thats a recruitment.
Could be close to last year's record, but when I look at year over year net growth, it's about a little less than half of last year's growth. So I'm just trying to it are you sort of indicating that.
Second half.
I guess additions could be a lot stronger or am I missing something I guess in that.
So when we look at it I know you guys look at Bay Count, we'd look at trailing Twelves recruited.
And.
I think thats the measure.
If you look at zero nine we had a lot of individuals but.
Last year, what close and trailing 12, so we look at the trailing 12.
With that we look at the advisor so.
Were referring to and I would also caution you instead of looking at advisor growth to see how well we're doing I mean, certainly look at look at the total asset growth I mean, a lot of the lot of the run off of advisors are people that don't make it in the business people that retire.
All said I do think that two and especially you saw the impact in the first quarter, our first quarter, because we've got a lot of retirements as the industry has so what we measure when we talk about recruiting we're talking about the gross number but as you look into the net number.
Fortunately Weve had people are passed away we've kept the assets so they've gone on to other advisors and so thats really what we track and Thats why we look at.
Kind of non regretted attrition.
Certainly if someone passes away its regretted took up in the family, but if we keep the assets.
This negative.
Certainly is to the people in us and the people we know.
Close to record.
75% of the assets and fees over or is there still.
So 100% 50, just trying to think of how much more you have from last year's recruiting class versus.
It's hard to tell it so and individualized do we we think in the.
For six months.
Two a year.
We get.
The majority of them in and May trail for a little bit while after and then the growth is really due to their growth.
Production most all these teams that we recruit.
Just because they have assets is because they are looking to grow so.
It's so individualized, but youre going to see you're going to see momentum as you've seen in the past.
Assets are still coming over from our recruiting and.
Those once we keep we keep the pipeline filled we're going to continue to have that push it. It's certainly reasonable to assume something like a six month lag of assets coming in versus production recruited so.
If you have any.
Last year's record production year, we got a benefit a lot of those assets coming in this year and this year's same way with next year's assets.
Okay, and Jeff maybe one just follow up on deposit your deposit costs were down eight basis points quarter over quarter. Obviously the change in the relationship pricing was was that was driving that.
Just is that all all impacted in this quarter or is there some a little bit of on an average basis do we get a little bit more next quarter or is there a somewhat or and or is there. Some other dynamic that sort of thing.
Lower ASP.
That's substantially all of it didnt happen exactly at the beginning of the quarter, but.
I would thats about what we modeled in as the impact so I wouldn't assume any future benefit from that.
And I do think that especially when you look at the bank.
Where LIBOR is predicted and you get benefit going up.
Because LIBOR moves usually before but as bonds.
I think the bank has seen a lot of that loan repricing already so any any change in the cost of funds.
I should that should be a neutral to positive not a negative.
Right, Okay, great. Thanks.
Your next question comes from the line of Bill Katz from Citi. Please go ahead.
Hi, Good morning. This is Brian we will on for Bill Katz.
I appreciate the comments on playing catch sorting any update you can provide on the on current cash in July .
We've continued to see I think.
It's not the exact number has been about another $1 billion or so I think through third today run off.
Of into mainly into position on money market Fund these are the.
And.
Yes.
Right.
Oh, yes, sorry, and that's a big part of that as Paul mentioned is at the beginning of every quarter we have.
The quarterly fee taken out of accounts as generally just an account subtraction over the course of the quarter.
Money coming into the accounts through dividends interest whatever and repositioning physicians that for the next quarter. So that number coming out and fees is about $7 million to $800 million at the beginning of each quarter right now so.
That's really been the primary reason, we see it as we've seen a decline so far in July , but we see that every quarter and again it builds back up over the course of the quarter.
Got it.
And how should we think about the funding mix for the bank. If current cash continues to run off.
Well, it's it's entirely possible that a you know our banks going to be.
We're looking at all immediate or looking already at alternative funding sources at the bank level preparing for the eventuality that the sweet balances are not available.
Given our internal limitations or in general to continue to support the growth of the bank and we don't if we do the math well have to see whether it makes more sense for us to run the bank in place or whether it makes more sense for us to continue to grow the bank with external funding sources I think the answer is going to be the latter, but we don't know that for.
Definitive fact, yet so we are exploring alternative funding sources of various types at the bank, we had been for the better part of the year actually in anticipation of what you are talking about yes, so agree everything with the chipset and the only caveat is right now.
We are funding.
Basically almost exclusively internally.
You know cash sweep balances moderate the exit or grow we're going to be fine.
They continue to go down at some point you got to have alternatives and that's what we're exploring.
Great. Thank you for taking my question.
Your next question comes from the line of Chris Harris from Wells Fargo. Please go ahead.
Thanks, guys.
How do you.
How do you think interest rate cuts will affect.
The customer cash balances I asked that question because.
You know a lot of people think would actually help to stabilize those balances and just wondering if you guys.
I would agree with that.
Our premise, which you know.
I don't know why are people always people ask us to predict what's going on with interest rates given our their balances are balances but.
I think too right now the attraction has been positioned on money markets and the spread between that and FDIC insurance and I think that if rates come in and that spread decreases.
That.
The cash sweep is going to be even a better option than the money markets at rates that would come in so I was I I think we agree with that but we'll see what happens.
Yeah I'm in the camp that that it will help stabilize the balances.
At least by the second rate better. So the first one may not have a big impact or maybe even the second one but beyond that if there are that many rate cuts.
I think I, certainly think it will minimize the.
The differential that they can get it elsewhere.
Alright, Thats great and.
And my follow up question relates to the bank.
Excellent credit quality again this quarter.
Bigger picture, how would you guys characterize the risk profile of the bank.
Today, and I was specifically wondering how you would think that the loan portfolio. The risk profile of that compares to say how the loan portfolio looked in 2007.
So I think that the biggest difference the banks is much more diversified.
And back and pre.
Oh, eight or nine were almost.
Purchase mortgages or C. and I was really our portfolios. So today you know I certainly.
A much smaller percentage, it's much more diversified, but I believe the credit quality of the cnine other parts its equally as good. So I view, we're in good shape and more diverse and we did product we didn't even have an SBL portfolio in 2007, which is extremely.
Good good source of business for US most of our mortgages now originated versus purchase a and we have extremely good credit quality within our client base.
As you can imagine.
And we have a tax exempt portfolio, which we didnt have in 2007 with certain loans to investment grade municipalities. So it's.
I think and it's a more diversified and probably on average much better quality.
Than than it was in 2007, and remember we survive 2008 or nine without.
Particular, ugly with no real ugly hiccups.
So it has to be in even better shape now I think we're very well positioned but we're also cognizant that anything can happen. So we watch it very very carefully.
Very good thank you.
Your next question comes from the line of Devin Ryan from JMP Securities. Please go ahead.
Great Good morning, everyone.
Evan.
First question just on private client commissions.
So the increased 2% from last quarter, we were thinking and they could have been something a little bit better than that just with your trailing commissions increasing.
From the move higher and average daily balances like in mutual funds, which I think were only up about 1%. So im just curious if there was any lag in there sometimes I know the accounting can be a little bit funky.
Or was it just the lighter transactional activity like new sales being slower, which offset some of the benefits of the the average daily balance increases.
I think just to assist a continuation of a trend toward fee based assets away from Commissionable activity in the private client group side in other people were recruiting are heavy users of.
Fee based alternatives.
And we just it's just been a continuing trend you see not to be too much.
After that for the last two to three years, I think you'd see a pretty steady.
Decline in a commissionable activity and PCG.
No no real change there.
Yeah Okay.
Got it thanks, and then just a follow up here on M&A opportunities.
We touched on this a bit at the Investor day.
But even even since then you know Theres press out that USA, maybe looking to sell their wealth management business I know that's a different business.
But but just something notable activity in kind of financials investment banking.
So just wanted to get a little perspective on your corporate development function business development, how active is it right now.
And how are you guys kind of thinking about.
M&A kind of balancing views.
That are out there that we may be late cycle versus.
Long term opportunities that would come along.
The Devon I would describe those as active as ever.
Looking at all sorts of opportunities and I would.
View the market is a lot of people there are more people.
Looking maybe at a possible transaction.
The problem is that.
I think some of that in certain categories are driven by a belief late cycle, but pricing doesn't necessarily it reflects you know Pete growth. So you know so you still got that Delta. So it may take a little bit of an adjustment before pricing realizes so through our view if we look at transactions.
First they have to fit there are a lot of transactions that happened that just don't fit our model.
So they just aren't good fits for us, but the and some just culturally aren't good that's but I would say the biggest.
There is there is more interest, but I think the pricing has to reflect kind of reality or not.
Pete because they think there is going to be a cycle change to those the challenges, but we're very active in talking to folks another silver lining to the market correction whenever it comes along with increased cash balance.
[laughter] right.
Well I guess just on that point.
Yeah, I've always had the impression that Raymond James doesn't need to be that the high bidder, because especially in wealth management because you're.
Retention tends to be quite a bit better. So the you know the earn out over time, you know that the seller may actually do better even at a lower price. So how does that play in and is that an accurate thought process.
Well I don't know we've never tried to be the high bidder. So were and what's most impressive about I think to us our recruiting results, especially at the high end.
Our retention agreements are substantially offers are substantially lower than some other firms and yet.
People still join US I would say when it comes to M&A. It depends if it's public company or something it's hard to be not near the high bidder and I'd say there is some that.
Our private.
We always ask ourselves are we being too conservative, but we've seen a number of things were.
We were you know first choice spiritually.
Second by price in the line with a number of other people, but somebody you know had a bid that was 30% to 50% higher. So you can't you can't beat outlier bids just to win a deal and I think that's been more of the frustration than anything for us where we are preferred but the premium someone else was willing to pay it was just too high. So we just again remain disciplined and set our our job is to have an ROI for shareholders not just to be bigger.
Yes.
Great. Thank you.
Thank you.
Our last question comes from the line of Alex Blostein from Goldman Sachs. Please go ahead.
Hey, good morning. Thanks.
Paul question too regarding some of the earlier comments you made on the call and that kind of echoes your comments at the Investor day as well.
Just around the more competitive recruiting practices out there.
How are you guys thinking about that impacting your guys. Just franchise should we think about the cost of bringing new financial advisors going up over time for Raymond James.
Or you guys are going to try to stay discipline, which may ultimately result in slightly lower net new asset growth.
So I think you know the result, so far as we've I'd say, we've had some slight increases at times too.
Close the gap, but we certainly havent matched we stayed very very disciplined yet. The result is that this year will be close to.
You know last year's record, even though we've seen.
Hi.
An increase of a number of competitors offering substantially more so our focus is that although we lose some really good people that we would like.
The people that join us are joining us for the right reason, it's not just the biggest Chuck.
Certainly we think what we offer is very fair the advisor.
In long term they can do just as well and what we think we can help them with their practice and it's hard.
When you really want someone to stay disciplined, but we stay disciplined and just say.
Overall, it's the right thing to do for the advisors that are here and bring in the new advisors at a fair price and it helps reinforce the culture and we get the people that I think are joining for the right reasons. So it's just like M&A either Theres something you may really want but if it gets out priced.
We're better off just sitting on the sideline and it's hard to do especially as.
If we are near the end of the cycle, it's always the worst than the hardest. So maybe it's an indication that is so we've we've just held to our disciplined and not being arrogant and we really.
You know, we always second guess ourselves and say are we doing it right and I think we're doing.
The right thing and our results have been I think this year will be almost as good as last year's Eve.
It is competitive.
Pricing.
Great I'll make sense.
Couple of follow ups for Jeff.
I guess on the rate sensitivities, you talked about a 25 basis point in time.
Is five to 10 basis points I guess compression on the NIM.
Are you guys talking about the bank NIM.
Only or are you talking about the overall company NIM.
And if it's just the bank maybe give us some sensitivity around the overall NIM I know the bank is that ask US majority, but there would be helpful to get the full picture.
It would be felt partly by the bank and it would be helpful.
Felt partly in the account and service fees in the private client group, so it'd be kind of a split between those two segments, which.
Direct report, it's hard to tell the exact proportion depends what we do on the.
On the the grid of what we pay to clients.
But they both feel that those two segments.
Right.
And then the last just clean up in terms of bank funding source is just a follow up to one of the earlier questions.
Of the $14 billion at some third party banks, we have today.
How much of that is ultimately still available to be moved your AJ before triggering any restrictions.
Well.
And so far thats been more of an internal metrics than a market. So most of our.
Competitors put a lot more of their cash sweeps I do think.
You are seeing one of the benefits of our disciplined that we've had.
You read a number of firms have had restrictions on what they could do because they've leveraged up their sweeps so much its.
That other trigger points and whether it's buying back stock or flexibility. So we still have room.
So you know, we're getting closer to our internal numbers, but you know we have the ability to raise that I think comfortably still for a while but again, we're not going to.
We're not going to.
That other people have done we don't think we think it limits flexibility, yes, we have so as promised we have some internal limitations that are the first triggers that we will hit but then there are some external triggers to such as if you don't want to violate clients ability to get the $3 million of FDIC insurance and put so much in our bank that.
You know they don't go through the waterfall et cetera, how does those numbers are a little less than half of that $14 billion could still be directed to the to our banking and also without triggering.
Some penalty rates because we do have some contractual commitments, which are running off over time here with some third party banks that we won't fall below certain but.
I guess, a safe number to use would be a $6 billion type number in that I mean, we're not trying to Dodge the question, but we have some internal constraints that would again be triggered before that comes into play.
Super Great. Thanks, very much guys.
Got it.
Well great. So we appreciate you all joining us and.
I think we're as I I ended up good shape I think most of the indicators all the indicators are really positive outside cash balances, we'll see what happens with this.
Rate cut if theres a rate cut this month and we'll talk to you next quarter. So thank you very much for joining us.
Thank you. This concludes today's conference call you may now disconnect.
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