Raymond James Financial Inc

NYSE:RJF

Earnings Call Transcript 2022-Q2

[Operator]

Good morning and welcome to Raymond James Financial’s Second Quarter Fiscal 2022 earnings call. This call is being recorded and will be available for replay on the company’s Investor Relations website.

Now, I will turn it over to Kristie Waugh, Senior Vice President of Investor Relations at Raymond James Financial. Please go ahead.

[Kristie Waugh, SVP, IR]

Good morning, everyone. And thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chair and Chief Executive Officer and Paul Shoukry, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James Investor Relations website. Following the prepared remarks the operator will open the line for questions.

Calling your attention to slide two. Please note certain statements made during this call may constitute forward looking statements. These statements include but are not limited to information concerning future strategic objectives, business prospects, financial results, anticipated timing and benefits of our acquisition, including acquisition of Charles Stanley Group PLC, completed on January 21, 2022, as well as our announced acquisitions of Tristate Capital Holdings and some rich partners, and our level of success and integrating acquired businesses, divestitures anticipated results of litigation and regulatory developments, impacts of the COVID 19 pandemic or general economic conditions. In addition, words such as may, will, should, could, scheduled plans, intends, anticipates, expects, believes, estimates, potential or continue or negative of such terms or other comparable terminology, as well as any other statement 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 10K and subsequent Forms 10-Q and Forms 8-K, which are available on our Investor Relations website.

During today’s call, we will also use certain non-GAAP financial measures to provide information pertinent to our management’s view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be 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?

[Paul Reilly, Chairman & CEO]

Good morning. Thank you for joining us today. I’m going to begin on slide four. I am very pleased with our results for the fiscal second quarter and the first half of the fiscal year, especially given the challenging market conditions. We continue to invest in growth across all of our businesses in the Private Client Group. Excellent retention and recruiting of financial advisors contributed to best in class growth, with domestic net new assets of 11% over the 12 month period. Furthermore, the Charles Stanley acquisition, which closed during the quarter significantly expanded our presence in the UK, which is a very attractive market for wealth management. In the capital markets business, while investment banking revenues were negatively impacted by the heightened market volatility during the quarter, we continue to see strong pipeline. As the expertise we have both added organically and through niche acquisitions has been performing extremely well.

In the fixed income business, we announced the pending acquisition of SumRidge Partners during the quarter, which will enhance our platform with technology driven capabilities and a fantastic team with extensive experience in dealing with corporates. Raymond James bank grew loans an impressive 7% during the quarter, reflecting attractive growth across all the loan categories. The Tristate capital acquisition, which is expected to close by the end of our fiscal third quarter, we’ll add a best in class third party securities based lending capability, while also diversifying our funding sources. They will also bring a diversified asset manager in Chartwell, which will be a great addition to our multi boutique model and asset management. So as we always do in any market cycle, we continue to invest for the long term, always putting clients first.

It’s an uncertain market conditions such as these that remind us the importance of focusing on and making decisions for the long term. While our strategy may not always be popular over short term periods. Today, I believe we are well positioned to the expected increases in short term rates with record clients domestic cash sweet balances, strong loan growth at Raymond James bank, high concentration of floating assets, and an ample balance sheet flexibility, given solid capital ratios, which are all well in excess of regulatory requirements.

Turning to results, in the fiscal second quarter the firm reported net revenues of $2.67 billion and net income of $323 million or earnings per diluted share of $1.52. Despite higher asset management and related administrative fees, reflecting the strong year-over-year growth in PTT assets and fee based accounts, diluted EPS declined 10% compared to the prior quarter, primarily due to bank loan loss provisions for credit losses during the current quarter to support the strong loan growth compared to a benefit in the prior year quarter. This quarter also had a higher effective tax rate, which Paul Shoukry will explain later on the call.

Excluding $11 million of acquisition related expenses, quarterly adjusted net income was $331 million or earnings per diluted share of $1.55. Annualized return on equity for the quarter was 15% and adjusted annualized return on tangible common equity was 17.2%, an impressive result, especially in this very low rate environment, and given our strong capital position.

Moving to slide five, we ended the quarter with total assets under administration of $1.26 trillion, and record PCG assets and fee based accounts of $678 billion. These figures include the assets from the acquisition of Charles Stanley, which was completed on January 21. Excluding the impact of the acquisition, total client assets under administration declined 2.8% compared to the immediately preceding quarter, financial assets under management of $194 billion decreased 5% sequentially, as net inflows were more than offset by declines in equity markets during the quarter.

We ended the quarter with a record 8,730 Financial Advisors, a net increase of 403 over the prior year period and 266 over the preceding quarter, which includes to 200 Charles Stanley financial advisors. Our focus on supporting advisors and their clients has led us to strong results in terms of advisor retention, as well as recruiting experienced advisors to the Raymond James platform throughout our multiple affiliation options.

Over the trailing 12 month period ending March 31, 2022, re recruited to our domestic independent contractor and employee channels, financial advisors with approximately $340 million of trailing 12 production and approximately $53 billion of client assets at their previous firms. And highlighting our industry leading growth we generated domestic PCG net new assets of approximately $106 billion over the four quarters ending March 31, 2022, representing approximately 11% of domestic PCG assets at the beginning of the period.

Second quarter domestic PCG net new asset growth was nearly 9% annualized. Client domestic cash rebalances grew 4% sequentially to a record $76.5 billion. Raymond James bank continued to generate impressive loan growth up 22% year-over-year, and 7% during the quarter to a record $27.9 billion. This growth was driven by securities based loans and residential mortgages largely to PCG clients as well as strong corporate loan growth.

Now moving on to the results on slide six, the Private Client Group generated quarterly net revenues of $1.92 billion and pretax income of $213 million. On a year-over-year basis, revenues grew 17% and pretax income grew 11% primarily driven by higher assets and fee based accounts. The capital market segment generated quarterly net revenues of $413 million in pretax income of $87 million. Capital Markets revenues declined 5% over the prior year period, primarily driven by lower fixed income, brokerage revenue and equity underwriting revenues. Sequentially, quarterly net revenues decreased 33% driven by lower investment banking revenues primarily due to the impact of increased geopolitical and macro economic uncertainties. As I referenced earlier, in March, we announced the acquisition of SumRidge Partners, a technology driven fixed income market makers specializing in investment grade and high yield corporate bonds, municipal bonds and institutional preferred securities. This acquisition is further evidence of our continued commitment to providing cutting edge technology to advisors, clients and stakeholders.

We currently anticipate the acquisition to close in the fourth quarter of 2022, subject to regulatory approval. The asset management segment generators net revenues of $234 million dollars and pretax income of $103 million. On a year-over-year basis, revenues grew 12% and pretax income grew 18% over the fiscal second quarter of 2021, primarily a result of higher assets under management. Raymond James bank generated quarterly net revenues of $197 million in pretax income of $83 million. Net revenue growth was primarily due to higher asset balances as the bank generated attractive growth and its loan portfolio, along with net interest margin expansion. Despite revenue growth, pretax income declined 25% compared to a year ago quarter caused by the bank’s loan loss provision for credit losses in the current quarter, reflecting strong loan growth compared to the bank’s loan benefit for credit losses in comparative periods.

Looking to the fiscal year to-date results on Slide seven, we generated record net revenues of $5.45 billion during the first six months of fiscal 2022, up 19% over the same period a year ago. Record earnings per diluted share of $3.61 increased 14% compared to the first six months of fiscal 2021. Additionally, we generated strong annualized return on equity of 18.1% and annualized adjusted return on tangible common equity of 20.6% for the six month periods.

Moving to the fiscal year to date segment on slide 8, the Private Client Group capital markets and asset management segments all generated record net revenues and record pretax income during the first six months of the fiscal year, again, reinforcing the value of our diverse and complementary businesses.

Now for a detailed review of our second quarter financial results, I will turn the call over to Paul Shoukry. Paul.

[Paul Shoukry, CFO]

Thanks, Paul, starting with consolidated revenues on slide 10, quarterly net revenues of $2.67 billion grew 13% year-over-year and declined 4% sequentially. Record asset management fees grew 25% over the prior year’s fiscal second quarter, and 6% over the preceding quarter. Private Client Group assets and fee base accounts into the quarter relatively unchanged compared to December 2021. However, adjusting for the acquired assets of Charles Stanley, PCG assets and fee base accounts declined approximately 3%, creating a headwind for asset management revenues in the fiscal third quarter. So I would expect somewhere around a 3% sequential decline in this line item in the upcoming fiscal third quarter.

I’ll discuss accounting service fees and net interest income shortly. Skipping ahead to investment banking revenues as Paul described, this line item declined significantly compared to the preceding quarter. But at $235 million, it was still a very strong quarter compared to our results prior to fiscal 2021. Given the heightened market volatility, we would not be surprised to match this quarter’s results for the next two quarters, which would result in the investment banking revenues ending fiscal 2022 close to the record set in fiscal 2021. While our pipelines are strong, there’s a lot of uncertainty over the next two quarters that could impact investment banking revenues positively or negatively for the rest of the fiscal year.

Other revenues of $27 million was down 47% compared to the preceding quarter, primarily due to lower revenues from affordable housing investments previously known as tax credit funds. The pipeline for the business is very strong, but the timing of closings is more uncertain given the rapid cost increases, impacting affordable housing developers.

Moving to slide 11, clients’ domestic cash sweet balances ended the quarter at a record $76.5 billion dollars, up $3 billion or 4% over the preceding quarter and representing 7% of domestic PCG client assets. Notably $17 billion or 22% of total cash sweep balances are held in the client interest program, the vast majority of which are invested in very short term treasuries and could be redeployed to generate much higher yields over time, either at our own bank, or with third party banks as interest rates increase and demand for cash balances recover.

Turning to slide 12, combined net interest income and VDP fees from third party banks was $224 million, up a robust 9% from the preceding quarter. This growth is largely a result of strong asset growth and the higher net interest margin at Raymond James Bank, which increased nine basis points to 2.01% for the quarter. The increase of the bank’s NIM during the quarter was attributable to a higher yielding asset mix given the strong loan growth, as the March interest rate increase really won’t start benefiting the bank’s NIM until the fiscal third quarter.

For example, following the march rate increase, the bank’s current spot NIM is around 2.15%. The average yield on RJBDP balances with third party banks increased to 32 basis points in the quarter, and the spot rate is just over 50 basis points reflecting the march rate increase both the NIM and the average yield from third party banks are expected to increase further with additional rate increases as less than 25% of the firm’s interest earning assets have fixed rates. And those assets have an average effective duration of less than four years. And all of the deposits sweep relationships with third party banks are floating rate contracts. So we should have significant upside from rising short term interest rates.

To that point, let me walk through how we are positioned to rising short term interest rates based on current clients domestic cash sweep balances which decreased by over $2 billion to $74. billion thus far in April, largely due to the quarterly fee billings and income tax payments using static balances and an instantaneous 100 basis point increase in short term interest rates, which includes the 25 basis point rate increase in March, we would expect incremental pretax income of nearly $600 million per year, with approximately 65% of that reflected as net interest income and 35% reflected as accountant service fees.

This estimate assumes a blended deposit beta of around 15% for the first 100 basis point increase commensurate with what we experienced in the last rate cycle. Importantly, this analysis does not incorporate the TriState capital acquisition, which should provide incremental upside to higher short term interest rates, as the vast majority of their $13 billion of balance sheet assets are also floating rate assets, as they have always shared a similar approach to limiting duration risk.

Moving to consolidated expenses on slide 13, starting with our largest expense compensation, the compensation ratio for the quarter was 69.3%, which increased from 67.7% in the preceding quarter, but remained below the year ago period compensation ratio of 69.5% and below or 70% target in a low interest rate environment. The sequential increase was mainly the result of lower capital markets revenues, which led to the revenue mix shift towards higher compensable revenues and the PCG segment. As advisor payouts, particularly to independent advisors who cover their own overhead expenses are typically higher than the associated compensation of our other businesses.

On a sequential basis, the compensation ratio was also impacted by the reset of payroll taxes that occurs in the first calendar quarter of each year, as well as annual salary increases and continued hiring to support our growth. Non-compensation expenses of $388 million dollars increased 14% sequentially, predominantly driven by the bank loan provision for credit losses, compared to a loan loss release in the preceding quarter, as well as higher Communication and Information Processing expenses. Excluding the bank loan provision in acquisition related expenses, which creates some noise in the comparison, non-compensation expenses of $356 million grew 3% over the preceding quarter. Also keep in mind, expenses included just over two months of results for Charles Stanley, which closed on January 21.

So overall, we have remained focused on the discipline management of all compensation and non compensation related expenses, while still investing in growth and ensuring high service levels for advisors and their clients.

Slide 14 shows a pretax margin trend over the past five quarters. In the fiscal second quarter, we’ve generated a pretax margin of 16.2% and an adjusted pretax margin of 16.6%, in line with our 16% target in this low interest rate environment. Based on the expectation for the additional increases in short term interest rates, we will revisit our pretax margin and compensation ratio targets and our upcoming analyst and investor day scheduled for May 25. Hopefully by then we will have more clarity on other important variables, such as the outlook for investment banking revenues, the level of business development expenses as conferences and travel continue to ramp up in the impact of recently closed and pending acquisitions.

On slide 15, at the end of the quarter, total assets were $73.1 billion, a 7% sequential increase, reflecting the addition of approximately $3 billion in assets, mostly segregated client cash balances from Charles Stanley as well a solid growth of loans at Raymond James bank.

Liquidity and capital remain very strong, RJF corporate cash at the parent end of the quarter at $2.2 billion increasing 59% during the quarter, primarily due to significant special dividends from our well capitalized subsidiaries during the quarter. The total capital ratio of 25% and a tier one leverage ratio of 11.1% are both more than double the regulatory requirements to be well capitalized, providing significant flexibility to continue being opportunistic and invest in growth.

The effective tax rate for the quarter did increase to 25.4%, up from 20.1% in the preceding quarter. The primary drivers of the sequential increase are the favorable impact from share based compensation that vested in the preceding quarter and non deductible losses on our corporate own life insurance portfolio due to equity markets that are used to fund our non qualified benefit plans compared to a non taxable gains on these portfolios in the preceding quarter.

Slide 16 provides a summary of our capital actions over the past five quarters as of April 27, 2020, $1 billion remains available under the board approved share repurchase authorization. Due to regulatory restrictions, we do not expect to repurchase common shares until after closing the TriState capital holdings acquisition currently expected to occur by the end of the fiscal third quarter. As we explained on prior calls, our current plan is to offset the share issuances associated with the transaction after closing. But given the heightened market volatility, we’ll obviously keep a watchful eye on market conditions between now and then.

Lastly, on slide 17, we provide key credit metrics for Raymond James bank. The credit quality of the bank’s loan portfolio remains healthy with most trends continuing to improve. The bank loan loss provision of $21 million was primarily driven by strong loan growth during the quarter. The bank loan allowance for credit losses as a percentage of loans held for investment into the quarter at 1.17%, down from 1.5% at March 2021, and essentially unchanged from 1.18% at December 2021.

Now I’ll turn the call back over to Paul Reilly to discuss our outlook. Paul.

[Paul Reilly, Chairman & CEO]

Thank you, Paul. As I said at the start of the call, I am pleased with our results and while there are many uncertainties, I believe we are well positioned to drive growth across all our businesses in the Private Client Group, next quarter results will be negatively impacted by the expected 3% sequential decline of asset management and related administrative fees that Paul described earlier. However, focusing more on long term or recruiting pipelines remain strong and combined with solid retention. I am optimistic we will continue delivering industry leading growth as advisors are attracted to our client focus values and leading technology platform.

Furthermore, the addition of Charles Stanley provides an opportunity to accelerate our growth in the UK Wealth Management markets through multiple affiliation options similar to our advisors choice offerings in the US and Canada. In the capital market segment, M&A pipeline remains robust, but closings will be heavily influenced by market conditions throughout the remainder of the fiscal year. And while market uncertainty and geopolitical concerns loom in the near future, I am confident we have made significant investments over the past five years to strengthen our platform, and to grow our team and productive capacity, positioning us well to grow over the long term and the fixed income space. Although depository clients are still flush with cash and searching for yield optimization opportunities. We expect results to be more volatile over the next few quarters given elevated interest rate uncertainty. Additionally, we expect the pending acquisition of some rich partners to enhance our current position in the rapidly evolving fixed income and trading technology marketplace.

In the asset management segment, while the financial assets under management are starting the fiscal third quarter lower due to equity markets, we are confident that strong growth of our assets and fee based accounts in the Private Client Group segment will drive long term growth of financial assets under management. In addition, upon the close of tri state capital, we expect Chartwell Investment Partners, which will operate as a subsidiary of Caroline towers associates to help drive further growth through increased scale distribution and operational and market synergies. And Raymond James bank should continue to grow as we have ample funding and capital to grow the balance sheet. Raymond James bank is well positioned for rising short term rates and we expect Tristate capital to further enhance this benefit to the firm, given their floating rate, asset concentration, and their leading position and third party SPL business.

Before closing, I want to call your attention to our annual corporate responsibility report that was released during the quarter. The report, which can be found on our Investor Relations website, highlights our foundational commitments to our people, sustainability, community, and governance, and illustrates our long standing approach to doing business rooted in our values, and brought to life through our people driven culture. This report summarizes many of the inspiring things that our advisors and associates across the firm do to contribute to their communities, and the things we do as a firm to help the environment. As always and foremost, I want to thank our advisors, and their associates for their perseverance and dedication to providing excellent service to their clients each and every day.

With that, operator, please open the line up for questions.

[Operator]

Thank you very much. [Operator Instructions] And our first question on the line from Alex Blostein with Goldman Sachs. Please ahead with your question.

[Alex Blostein, Goldman Sachs]

Hey, good morning, everybody. Thanks for taking the question. So wanted to start with the question around capital. You guys saw the German leverage dropped down over 100 basis points, quarter over quarter at the holding company level, it looks like it’s all coming from the broker dealer. The cash balance has picked up there and liabilities that as well. So it’d be flush out a little bit sort of what happened, what drove the increase this quarter that’s kind of weighing on your on leverage a bit here? And then more importantly, is that something you expect to reverse pretty quickly? And I guess regardless, should we still expect you guys to buy back all the stock that you expect to issue on the back of Tristate closing?

[Paul Reilly, Chairman & CEO]

Yes, thanks, Alex. I think, before going into sort of the quarter to quarter movements, just stepping back at 11% tier one leverage ratio, we’re still well over two times the regulatory requirement to be well capitalized at 5%. So just important to note that we still have a significant amount of capital to continue investing in growth growing the balance sheet and growing our businesses. With that being said, since the beginning of the fiscal year, our client cash balances have increased over 15%, which is an amazing number. If you think about it, we’re six months into our fiscal year. And most of that has come as you mentioned, to the broker dealer in the client Interest Program, the vast majority of which I use to fund short term treasuries, we’re talking 30 day 60 Day type treasuries pursuant to the segregated asset SEC rules. So these are the first cash balances that will be redeployed either on balance sheet or off balance sheet, as demand from third party banks recover after the increase in short term interest rates and just kind of dimension that impact to our tier one leverage ratio.

But before the pandemic, these balances were hovering right around $2 billion. So $15 billion of really overflow is what I would call this in the client accommodation, that’s eating into about 300 basis points of the tier one leverage ratio. And frankly, when we set the 10% target little less than a year ago, we don’t look at this impact on this portion of the balance sheet the same as we do other portions of the balance sheet because again, they’re invested in 30 or 60 day treasuries, which are obviously highly liquid. So it’s really just geography in terms of putting this on the balance sheet here versus putting it with third party banks, where it’s not on the balance sheet and doesn’t even do tier one leverage ratio, which we will do when their demand resumes, or funding our own bank, which we would earn a higher spread on obviously, than we do on 30 day treasuries. So hopefully that answers your question there.

[Alex Blostein, Goldman Sachs]

Got it. So don’t want to put words in your mouth. But it sounds like the 10% tier one leverage minimum is not quite the minimum in absolute terms, we should really think about, where you know, that that balance sits and where that sort of comes from and how that impact capital ratios a little bit more dynamically, alright.

[Paul Reilly, Chairman & CEO]

Yes, I mean, I think that’s a good way of thinking about it. Okay,

[Alex Blostein, Goldman Sachs]

great. And then just piggybacking on the point you made around the building cash levels Obviously, we’ve seen that across the industry, but with rising rates, the conversations around care starting, obviously picking up pretty materially. In the last cycle, if my math is right, I think you guys have seen about a 15 to 20% decline in sort of peak to trough cash balances across the franchise. Given the changes in the customer mix and how much you’ve grown, is that still the right framework to think about how much could leave in this cycle, understanding the pace of rates is likely to be much faster this time around?

[Paul Reilly, Chairman & CEO]

I think you’re right, in the last cycle, it was around a 15 to 20% declined, but I mean, remember, we just in the last six months increased balances by 15%. So if that’s, if we see a decline over the next year or two, as rates rise, and really the decline happens after the first 100 basis points, then it’s not really that big of a deal, considering we just got that in the last six months here. And it’s sitting, in short term treasuries, and remember that declining cash balances will be more than offset by the increase in short term interest rates based on our assumptions. And the other factor that you need to consider is when you do have a decline in cash like that, due to cash sorting, the value of that cash becomes more valuable. So as an example, today, the spot yield of our balances with third party banks is right around 50 basis points, which is right around Fed funds target. Before the pandemic, we were getting fed funds target plus 10, or 15 basis points. So the spread on not only those balances, but also loans. In a more cash tight environment, the cash becomes more valuable. And that offsets a portion of the impact from declining cash balances in the system as well.

[Alex Blostein, Goldman Sachs]

Great, one more busy, busy morning, obviously between a bunch of culture but Tristate, so I believe you initially targeted $3 billion of sort of funding replacement on their balance sheet once the deal closes. Is that still the case? I think in the first year, you’re targeting us at about 3 billion? Why wouldn’t you go a little faster given that their deposit data, I think is going to be a lot higher than yours?

[Paul Reilly, Chairman & CEO]

Yes, maybe you asked about the cash sorting issue, just you know, in the prior question. So you know, we’re going to look at, they bring in diversified funding sources, they have very good depository clients, many of which are also clients on the asset side, and they’re going to continue running independently, of course. So we’re going to do what makes the most sense for both them and us. We’re not beholden to the assumptions, we use the due diligence and valuation process, and nor are we going to make decisions to boost short term results that may compromise long term results. So we’re going to, as we do with all of our decisions, make them based on what’s best for our investors over the long term.

[Alex Blostein, Goldman Sachs]

Great, thanks for entertaining all the questions.

[Paul Shoukry, CFO]

I just want to reiterate, Tristate operating as an independent subsidiary has to take care of its clients cash needs and commitments to so it’s not just math, right, we just they need they’ll have a lot of client balances to manage. And in the 3 billion was just a rough estimate of the excess where we could replace them without, they felt without impacting their business.

[Operator]

Our next question on the line from Steven Chubak of Wolfe Research, go ahead.

[Steven Chubak, Wolfe Research]

Good morning, Paul’s. So wanted to start off with just a question on Tristate. The rate backdrop is clearly much more constructive since the deal was first announced. And given the revenue upside is coming from less compensable spread income, I was hoping you could provide some thoughts on the updated tsp accretion expectations based on the current forward curve, and how we should be thinking about where PPR margins could potentially settle out with higher rates and a fully integrated tsp deal as we think about your normalized earnings power?

[Paul Reilly, Chairman & CEO]

I think there’s a lot baked into that question. And I don’t think it’s, there’s a lot that has changed since we announced the acquisition and the 8% to 12% type accretion, but I don’t I don’t think maybe at the analyst investor day, we can get into more detail with all the different variables. You know, one thing I will say is that their loan growth, since we announced the transaction and their separate public company, so I also don’t want to get too much into their own results or what the upside is to higher rates going forward for their results until you know, after we close the transaction, but I think I can say that the loan growth since they, since we announced the transaction has been much stronger than we were projecting of course, we tried to use conservative projections but they’ve had really continued to have strong loan growth since announcing the transaction. So that coupled with the higher increases in short term rates that we were expecting, and again, the vast majority of their assets are floating rate assets, certainly nice tailwinds for us going forward.

[Steven Chubak, Wolfe Research]

Any insight you can share just in terms of how we should think about that, that terminal PPN, our margin, I think the big debate is you’re going to be integrating this deal. The accretion tailwinds have certainly been favorable over the last few quarters, you didn’t note the loan growth has also come in better. The big debate is how, how much of that revenue, you’re going to allow to fall to the bottom line versus get reinvested back in the business. And just want to get some sense as to how we should be thinking about peak margin potential over the next couple of years.

[Paul Reilly, Chairman & CEO]

I would say that the peak margin potential is going to be driven more by the increase in short term interest rates and the impact that has on our 75 plus billion dollars of client cash balances, then, you know, the any particular transaction that we’ve closed door that is pending. So you know, I would say I would look at that. And as I said earlier on the call that impact in the first 100 basis points, we’re projecting to be somewhere in the $600 million range. So it’s obviously significant accretion to earnings for us in the first 100 basis points.

[Steven Chubak, Wolfe Research]

Very helpful. And then just if I could squeeze in one more just on the securities portfolio, I know historically, you guys have tended to favor, more short end versus long and gearing, certainly, given the pace of Fed tightening that’s anticipated, that’s going to serve you pretty well here. But given the forward curve is actually starting to bake in a couple of Fed cuts a few years out, wanted to get some perspective on whether there’s any appetite to actually extend duration, given some of the higher MBS proxies in particular, which could potentially protect you, in the event, looking a couple of years out that the Fed does, in fact, start easing and maybe we don’t have or we don’t have the soft landing that many of us were hoping for.

[Paul Reilly, Chairman & CEO]

So at this point, we’ve, I think we’ve undertaken some criticism for being flexible. And flexibility just isn’t maximizing short term earnings. For us. It’s maximizing the business model to be able to take advantages of acquisitions investments, and, you know, keeping flexible and difficult times, which right now is uncertain. So after waiting, we’re certainly not ready to lock in short term rates or longer term rates, while we’re in the middle of what we think will be an increasing interest rate cycle. But that doesn’t mean at some point in the future, where we think you know, with asset liability management, we wouldn’t lock in a portion. But that’s not that’s not on the near term goals right now.

[Steven Chubak, Wolfe Research]

Understood, thanks so much for taking my questions.

[Operator]

Thank you very much. We’ll get to our next question on the line from Manan Gosalia with Morgan Stanley. All right ahead.

[Manan Gosalia, Morgan Stanley]

Good morning, bowling ball. I wanted to get your thoughts a little bit more on the deposit beta and the 15% assumption for this cycle. So first, if you can remind us where deposit rates peaked in the last cycle. And then if I think about the differences this time around, you know, on a macro level, we’re getting a much faster pace of rate hikes than last time inflation is higher, the Feds going to shrink their balance sheets sooner. And for Raymond James, specifically, the bank is a lot larger, and you have the upcoming acquisition of tri state. So, you know, with that in mind, you know, what are your thoughts on how the deposit beta dynamic will play out? And, you know, what, what that will do to, to deposit rate to cycle.

[Paul Reilly, Chairman & CEO]

I mean, there are a lot of differences, this cycle versus last rate cycle. So, you know, your guess is probably as good as ours, we’re going to be very competitive and try to be generous with our clients, you know, the 15% kind of assumptions slash guesstimate that we have for the first 100 basis points, which includes the first rate increase in March, where the deposit beta was obviously extremely low across the industry assumes that there’s a pickup in deposit beta with the subsequent increases. So in the last rate cycle, we peaked out at around 60 basis points on average for the cost of funds in the sweep. And that’s when fed funds target topped out at about 2.5%.

So usually the investable cash going back to the cash sorting topic gets invested in. In short term alternatives like purchase money market funds, I think we have the best purchase money market funds platform in the industry, for our clients who are looking to, you know, optimize their yields. So that’s kind of how we’re thinking about it in terms of bifurcating the cash in the account. And you know, how we pass on in the sort of operational cash component that they accounts. But we’re obviously going to look at the competitive environment as rates rise and try to be fair and competitive with our clients.

[Paul Shoukry, CFO]

I think if you look to that, you know, all cycles are different, and things happen different. So the first thing is you have to be flexible and responsive. We’ve done a good job, even planning out various scenarios and cycles, what we do well in advance. So our best guess right now is it’ll be like the last cycle just faster. So we may have to move quicker, but we think the relative spreads and things will still be there, we certainly have a lot more cash. And economically, even though when you lose balances, you still gain that interest income because of the rate differential. So, should be positive, at least to the next couple of raises, and then longer term is whatever longer term is.

[Manan Gosalia, Morgan Stanley]

I guess a follow up to that is, what the rate sensitivity that the 600 million will look like for the next 100 basis points, right, because, you know, what, we’re going to get several rate hikes in short order, you know, presumably by the time you know, we get to the June July, we’ll, we’ll be talking about the next 100 basis points. So any thoughts on what that 600 million should look like? Just based on your comments, and assuming we need to hack our data a little bit, but you know, what, I would love your thoughts on that.

[Paul Reilly, Chairman & CEO]

I think what most people are assuming is that the incremental benefits with incremental rate hikes are going to decline, you know, significantly still be a benefit net, net, but decline relative to the first 100 basis points as the lag catches up in the deposit betas increase. But, again, if we’re guessing on the first 100 basis points, then we’re certainly going to be guessing on the second 100 basis points, so time will tell.

[Manan Gosalia, Morgan Stanley]

Got it and it just one quick clarification, and sorry if I missed this earlier, but can you quantify if there was any material hit to AOCI this quarter?

[Paul Reilly, Chairman & CEO]

Now, certainly, I don’t think I would call it material. You saw that our equity balance sheet equity was flat during the quarter despite the strong earnings net dividend. So I think the AIA OCI impact was somewhere around $300 million for the quarter. And that’s, again, a testament to our aversion to taking too much duration risk, we keep that securities portfolio very short. And we’re actually shortening and now we’re buying treasuries now with sort of two year life today, just to position ourselves, as Paul said, to give us even more flexibility going forward, given all the uncertainty around rates.

[Operator]

Thank you. We’re going to turn next question on the line from Bill Katz with Citigroup, go ahead.

[Bill Katz, Citigroup]

Okay, thank you very much for taking the questions this morning and you’re prepared commentary. I’m just coming back to capital for a moment. So Paul, if I hear you correctly, some of the some of the pressure on the tier one leverage ratio sequentially probably abates a little bit, just given how client cash will move around a little bit. And you obviously get the favorable impact from higher rates. And now we’re standing a flat investment banking outlook. And the deal with TSE, you mentioned maybe some caution around buyback so I’m curious why that would be the case at this point in time given what should be a pretty fat capital ratios, net of everything?

[Paul Reilly, Chairman & CEO]

The only caution areas and you know, backing out of our plan to buy back the TSE purchase price, it’s just we’re in a very uncertain economic environment and if things tanked, we’d have to look at, if the market really tanked and, no telling what happens or if the geopolitical thing really heightens and becomes global, we’ll be more cautious and more on pace now. That’s the price of that happened and stock prices were affected, we’ll probably still be able to accomplish it but we’re just we always look at the macro outlook number one for us is safety and flexibility and secondary is execution. So it was nothing more than a broad cautionary you know, in a world that anything could go right now. In the worst case as we take a look at it, but because capital and liquidity stay number one, but we still plan to execute that buyback, all things being predictable.

[Paul Shoukry, CFO]

And maybe the one thing I would add to that is, whether we buy back have stock and one or two quarters following closing or three to four close quarters following closing, it seems like a long time in the model. But for us, it’s a blip. And we make decisions for the next three to five years, not for the next three to five quarters. And the timing of the buybacks really doesn’t impact results all that much, a year to two years out. So if it makes more sense, given all the factors that Paul just described, to wait a couple quarters, and we’ll wait a couple of quarters, we’re going to err on the side of caution, just as we always do.

[Bill Katz, Citigroup]

Okay, thank you. And then maybe just to port unrelated question, I apologize for nesting it this way. But on the on the P&L, communications had a pretty big sequential step up. And I think business development simply had a pretty, pretty flat currency relative to sort of good organic growth. Any geography changes here, and he unpacked and Charles Stanley, that you can help us maybe unpack a little bit?

[Paul Reilly, Chairman & CEO]

You nailed it, it’s really a lot of the impact from Charles Stanley, you know, they had around $45 million of total expenses reflected in the quarter since they closed and a big portion of that hit the communication information processing line. So I think that’s what you’re really seeing there is just the impact from the two months of Charles Stanley acquisition some of those line items.

[Bill Katz, Citigroup]

And then just the related question is, so appreciate we’ve all trying to get at the pre tax margin discussion. But as you look at your core business today, I think one of the things you’ve talked about, you’ve been spending pretty regularly now the last couple of years to sort of build the scale and the opportunity set. Is there anything in the core businesses that you’ve been under investing in? And I’d be curious, would you be willing to change the payout grade on the private client side to accelerate growth even more? Or sort of a 75 cent blended payouts a reasonable thought process for me? Thank you.

[Paul Reilly, Chairman & CEO]

Well, I think we’ve spent well on our infrastructure, and it’s very much leverageable. The systems that we’ve put in, all the back office have been a significant investment. We have increased our technology run rates, again this year, so we’re, we’ll continue to invest in technology. Because we move our all of our systems forward and the next big investments really around our client apps, because we’ve felt that we’ve gotten more work to do but a Leading the Leading wealth planning desktop, so now we’re putting that same technology to the client app. So the advisor and client have that same intimacy. So but outside of that, no, I think we’re well invested. We’re not really looking at anything. And we’ve invested now, I mean, people asked if we’re ever going to acquire anything, and we’ve got three in the hopper, one closed and to hopefully to close soon. So we’ve got a lot going on. And we think we’ve been investing well across the firm and, and believe in long term growth will be great with these acquisitions. They weren’t focused on short term growth, although once integrated, I think they’ll do very well.

[Operator]

Our next question on the line from Kyle Voigt from KBW. Go ahead.

[Kyle Voigt, KBW]

Hi, good morning, maybe just getting some clarity on the PCG Asset Management revenues. And the guidance of that being likely down 3% or so in fiscal three Q. I guess we’re seeing this debased assets essentially flat over the past two quarters. And I understand that’s really due to adding the Charles Stanley assets. So organically down there down 3%. I guess the question is, I guess where are those Charles Stanley revenues coming through in that segment? Because given what you said, it would imply that none of those revenues really come through that asset management line.

[Paul Reilly, Chairman & CEO]

I think it’s just a function of timing, Kyle, so we did have those revenues coming through those lines, you know, for just over two months of the quarter, but the assets weren’t really reflected until the end of the quarter. So all we’re saying is that, despite the assets appearing being flat sequentially, those revenues will decline somewhere around 3%. Starting next quarter, because we already have accounting for those revenues, at least two months of it so far, this quarter.

[Kyle Voigt, KBW]

Got it. Thanks. And then given how yields trended through the first or through the calendar first quarter, just wondering if you had any details regarding Holly’s AFS portfolio trends of the quarter, so maybe any anything on and a period AFS balances would be helpful. And I guess do you view the securities reinvestment rates right now is attractive enough to really start moving some of those CIP deposits into the bank to ramp up growth in that securities portfolio? Little more meaningfully.

[Paul Shoukry, CFO]

We’re doing that modestly. I mean, we’ve shortening the duration with treasuries to two years from the three to four years that we were buying in the agency mortgage back and the incremental spread on what we’re buying versus what’s running off from the legacy portfolio’s just north of 1%. So, we think it’s a trap somewhat attractive. I mean, that comes with duration. And we want to stay flexible, as Paul pointed out before, so we’re not going to do that in a dramatic way. But we do have a lot of cash and CIP that invested in very short term treasuries in the 30 to 60 day treasuries. And so to the extent that we can deploy some of that incrementally into the bank, to earn a higher yield, and sort of wait until this demand from third party banks recover, then we think that that would be a good trade off, but it’s not going to be too significant, I would say in terms of growth of securities portfolio, but we do expect ongoing growth between now and the end of the fiscal year.

[Kyle Voigt, KBW]

Got and then just a follow up question on that. One is that CIP is now sitting at 17 billion and balances. Is there a certain percentage of those balances, we should think about you wanting to migrate and deploying the bank versus moving off balance sheet to free up capital? Given what you just said, is it fair to think about a majority of those you really want to move off balance sheet into the third party sweep?

[Paul Reilly, Chairman & CEO]

I guess we don’t have any sort of predetermined objectives in terms of where it goes, we think that there’s, we know that about 15 billion of those balances are 13 billion today, because they have declined by a couple billion so far in April due to FY Billings and tax payments, is sort of what we consider overflow balances that, would prefer FDIC insurance, when capacity recovers for that in with third party banks and or when Raymond James bank needs that capacity as well. So, over time we would expect, somewhere around 10 billion or north of 10 billion of that to get redeployed from CIP to third party banks, Raymond James bank or redeployed into higher yielding alternatives for clients.

[Operator]

And our next question on the line is from Devin Ryan from JMP Securities.

[Devin Ryan, JMP Securities]

Good morning, guys. How are you? Apologies, I hopped on a minute late. And I know there’s been a lot of questions are on the pre tax margin and expenses. I don’t think you hit this yet. I’m just trying to think about just the comp ratio. And I appreciate we’re going to hit a lot more details on May 25. But when we look back a couple years ago, your comp ratios 65 66%, when rates were more normalized, without making a call on capital markets and kind of considering a few of the small acquisitions you’ve done, I just want to think about maybe what structurally different today, a lot of conversation in the market around expense inflation and higher base salaries and base overall compensation. So is that meaningful to change kind of the narrative of the Comp ratio war, the mix being so different, that it changes kind of the way we should be thinking about comp going forward and the structure relative to prior period of kind of more normalized rate environment.

[Paul Reilly, Chairman & CEO]

So, this quarter’s comp ratio was a surprise to us, given capital markets were down and given that, a lot of our FICO and other stuff hits this quarter, which has always been elevated. So we felt that was certainly in line. And certainly, we’ve had a rate rise, but it really didn’t come through the quarter, it was at the end of the quarter. So as rates go up, those comp ratios will go down, because they’re non compensable, though, there’ll be pretty significant. And again, capital markets, it said recovers from the pace it is it’ll drive it down also. So we’re looking, we feel pretty good about where it’s headed, and in the interest rate environment, and we do see pressure, our recruiting has actually been pretty good. There is market pressure. So my guess it will be a slight headwind for everyone, but we don’t see it being a significant number. But we’re looking at that and looking at the adjustments and sensitive to people that aren’t in the top part of their payouts, making sure they’re compensated so that they can, kind of survive a high inflationary environment, but so that would be on the other side somewhat, but it’s going to be well, outpaced by I think interest spreads and, and a more normalized return to capital markets.

[Devin Ryan, JMP Securities]

Thanks, Paul. And then just one thing, the back kind of the UK opportunity obviously with Charles Stanley now closed. I appreciate it’s still very small for Raymond James. But can you remind us, Paul, how you’re thinking about the addressable market in the UK for the firm? And, and whether you’re having dialogue with other firms there? I know you were talking to Charles Stanley for some time and knew them well. So are there more opportunities like that? Yes, as we think about the expansion in the UK, organic versus inorganic, and really, I guess the thought is the straw Stanley now having that kind of deal, not necessarily behind you, but completed, does that set you up for more deals in the region.

[Paul Reilly, Chairman & CEO]

So strategically, it’s a very fragmented market, with Charles Stanley, I think it puts us close to the top 10, just outside. And so we think there’s a lot of opportunity, Charles Stanley, really, has high quality people high quality back office, and but they’ve been slower on growth, mainly, because they’ve been more capital constrained, we’ve had a much smaller but a much quicker growing probably an industry leading growth in terms of inorganic, recruiting in the UK market, so we hope to combination that we can between their support our capital, and our ability to recruit and grow, hopefully, to combine the best of all those worlds. Now, it’s going to take a while to integrate that, right. I mean, we’ve closed but we’ve got to, we know we have a yearlong project just to look at systems integration, best of class, making sure that, as always, our focus is first retention, we’ve had, we don’t want to mess up our, our consecutive series of integrations where we’ve kept the people.

And part of that is we’re very, very thoughtful in how we put things together, we don’t slam them together, we haven’t assumed anybody or any system was going to come out on top, and they’re doing both teams on both sides, I think, a great job of looking at that, and then we will integrate the system. So it’ll take a while to gear that up. But we think both. So we’re not going to look at any acquisitions during that integration period. But after its integrated up and running, and we get it running as we’d like to, there’s, I think there are opportunities in that market. And you can see that RBC enters the market with an acquisition. So I think others see that opportunity too. It’s going to take a little while to integrate. It is, I guess, the bottom line, but we’re very optimistic and really liked the people.

[Devin Ryan, JMP Securities]

That’s great. One last one here, just on the capital market side of business, or I guess, institutional side in the M&A pipelines are strong, as I heard, you guys have a pretty diverse focus there, which maybe insulates more from volatility and other parts of the market? I guess what are you guys seeing in terms of closure rates, how much are deals getting pushed out, and then new deals, filling back in into the pipeline, trying to think about kind of the push and pull in our business, I appreciate that, it can change the extent markets remain volatile, or vice versa. But just that the comfort in kind of the I don’t know, the next 12 months for the M&A advisory business coming off of, obviously a great prior 12 months.

[Paul Reilly, Chairman & CEO]

Yes, so comfort is a hard word to use in this environment right now. We think at this run rate, even in this environment, we can continue, but certainly there’s a lot of upside, what we’re seeing is most deals in pause not canceled in the pipeline, we see new deals coming in and into the pipeline. So I would call, strong, maybe it’s more robust, we had a very good pipeline. And the problem is it’s been paused. So part of that is a little bit market and market valuation, certainly on the underwriting side, but the M&A side a little bit, and then, the uncertainty is had people sit back and wait and making sure that, with the political uncertainty globally, that that’s not really going to hurt the market.

So I would say right now, it’s, pause deals that are still in the pipeline. Now, if there’s, if the geopolitical thing heats up, you may some of those pauses may turn to cancel or if the market really tanks but the market stays steady, and people get more comfortable geopolitically, I think there’s a lot of upside to so. So it’s just hard to call because those are the two impacts.

[Operator]

Next question is from Jim Mitchell with Seaport Research.

[Jim Mitchell, Seaport Research]

Maybe just quickly on the reserve ratio, I think you’ve bounced around 115 to 1.2% the last two quarter is that the right sort of target for you guys, given the mix of loans right now? And so as we think about provisioning going forward, try to stick to that level.

[Paul Reilly, Chairman & CEO]

Yes, I think that is given the mix of our assets. 1.2% seems reasonable. That was roughly the percent that we saw in the provision this quarter. But again, we’re using Cecil models. So macro economic conditions deteriorate, you can see provision increase, and vice versa, macro economic conditions improve.

[Jim Mitchell, Seaport Research]

Was there any was Cecil contributed in any way to this? Or was it just all growth?

[Paul Reilly, Chairman & CEO]

Most of it was growth related, as you saw, we had really strong growth in the bank this quarter.

[Jim Mitchell, Seaport Research]

Right. And can you remind us what your betas were in the second 100? I appreciate there’s, it’s you can’t predict it. But maybe in the last cycle, what the betas were in the second 100 basis points?

[Paul Reilly, Chairman & CEO]

Yes, if my memory serves me correctly, I think we’re closer as an industry to 50% range for the last couple of increases in as we got from 200 to 250 basis points on the fed funds target. That’s sort of what I recall off the top of my head.

[Operator]

Thank you very much. I will proceed with our final question for today from the line of Chris Allen with Compass Point. Go right ahead.

[Chris Allen, Compass Point]

Morning, guys. Thanks for taking my question. I think most of us have been covered, I guess I want to quickly just follow up on the SumRidge Partners deal. The press release, make it sound like an electronic marker maker, I’m sorry, market maker on electronic trading platforms. But looking at their website, it seems a bit more potentially advisor facing, maybe give us some color there. And whether this deal is more driven by the need for technology improvements on the fixed income trading side, or whether there’s other synergy opportunities moving forward.

[Paul Reilly, Chairman & CEO]

I think there’s a lot of pieces to at first, culturally and risk management wise, as we’ve been talking them for quite some time. We think they’re a great fit. And what it adds strategically for us as the weakest part of our fixed income platform has been the corporate area, we’re just versus our competitors were a lot smaller in the corporate bond area. So they bring really great expertise there.

Secondly, they do have trader assisted technology, where they’re able to sort and execute trades with a lot of analytics. And we believe that that system can be migrated to other parts of our business to help tech enable the trading, which is important. They, their focus has really been on institutional clients, although they do have an app with some advisor facing but it’s relatively small. But we really liked the app. So we think it may be something we can convert to our, to the adviser side of our business. So there’s lots of pieces we really like we really like the people, the risk management, and the technology we think can be really spread to lots of parts of our fixed income business.

So appreciate everyone coming on today. I know it’s a crowded day. I think that given our discipline, that we’re really into a market with rising rates that will do really well we have plenty of capital to deploy even with our three acquisitions. And, we’ll stay true as we always have to, our guiding conservative principles, but I think given I think we’re still in good shape to make all the commitments unless something weird happens in the market. But if it does, again, with all of our capacity and flexibility, I think relatively we’ll be in good shape. So appreciate you joining us and we’ll talk to you next quarter.

[Operator]

Thank you very much. And it does conclude the conference call for today. We thank you for your participation and ask you to disconnect you lines, have a good day.