Raymond James Financial Inc

NYSE:RJF

Earnings Call Analysis

Raymond James Records Robust Growth and Strong Financial Results

Raymond James Financial reported record quarterly net revenues of $3.12 billion, a 9% increase year-over-year, driven by higher asset-based revenues. Net income available to common shareholders was $474 million, or $2.22 per diluted share. Adjusted net income excluding acquisition expenses was slightly higher, at $494 million, or $2.31 per share. The firm's annualized return on common equity was robust at 17.5%. Total client assets grew to $1.45 trillion, a 6% sequential increase. For the fiscal year-to-date, net new assets were $31.2 billion, reflecting a 5.7% growth rate. Additionally, the firm successfully recruited advisers, contributing to strong asset growth.

Introduction and Leadership Transition

The earnings call began with updates on leadership transitions. Paul Shoukry, the CFO, has been appointed President and is expected to become the CEO by fiscal year 2025. This move signifies stability and continuity in leadership, which is promising for future company performance. Additionally, other key leadership roles are transitioning within the Private Client Group and Capital Markets Segment, ensuring that experienced managers continue to steer the company's growth.

Financial Performance and Revenue

Raymond James Financial reported record net revenues of $3.12 billion for the second quarter, marking a 9% increase year-over-year and a 3% sequential rise. Key contributors to this growth were higher asset-based revenues. The company achieved a quarterly net income of $474 million, with an adjusted net income of $494 million when excluding acquisition-related expenses. These figures translate to $2.31 per diluted share, evidencing strong profitability.

Client Assets and Retention

Client assets under administration reached a record $1.45 trillion, a 6% sequential increase, driven by rising equity markets and solid advisor retention. The Private Client Group (PCG) assets in fee-based accounts grew to $799 billion, while financial assets under management hit $227 billion. Domestic net new assets stood at $9.6 billion, representing a 3.2% annualized growth rate.

Segment Performance

The Private Client Group posted record quarterly net revenues of $2.34 billion and a pretax income of $444 million. Despite a pretax loss of $17 million in the Capital Markets segment, driven by deferred compensation amortization, there are optimistic signs of recovery in investment banking revenues. The Asset Management segment earned a pretax income of $100 million on record net revenues of $252 million, mainly due to higher financial assets under management.

Revenue Drivers and Expectations

Asset management and administrative fees grew to $1.52 billion, up 16% year-over-year, providing a solid foundation for sustained growth. Brokerage revenues increased 6% to $528 million, while investment banking revenues rose 16% year-over-year to $179 million, albeit declining 1% sequentially. The cautious optimism for an industry-wide recovery in investment banking was reiterated, with potential tailwinds from improving debt underwriting and M&A advisory activities.

Expenses and Margins

Total compensation expenses for the quarter were $2.04 billion, with the adjusted compensation ratio close to 65%, reflecting annual salary increases and payroll tax resets. Non-compensation expenses were managed well, rising only 1% sequentially. The pretax margin for the quarter stood at 19.5%, showing strong operational efficiency despite challenges in the Capital Markets segment.

Capital Position and Share Repurchases

Raymond James maintains a strong capital position with Tier 1 leverage ratio at 12.3% and a total capital ratio of 23.3%. The firm repurchased 1.7 million shares for $207 million, fulfilling a repurchase commitment related to a recent acquisition. Approximately $1.14 billion remains authorized for further buybacks, reflecting a disciplined capital management strategy.

Future Outlook

Looking ahead, the company expects to continue leveraging its diversified business model to drive growth. The focus remains on organic growth and strategic acquisitions in primary geographies and key business areas. Loan growth in the banking segment is anticipated to recover as clients adjust to higher rate environments. The effective tax rate is projected to be around 24%, up from the current quarter's 21.8% due to nontaxable gains.

Earnings Call Transcript 2024-Q2

[Kristina Waugh, executive]

Good evening, and welcome to Raymond James Financial's Fiscal 2024 Second Quarter Earnings Call. This call is being recorded and will be available for replay on the company's Investor Relations website. I'm Kristie Waugh, Senior Vice President of Investor Relations. Thank you for joining us.

With me on the call today are Paul Reilly, Chair and Chief Executive Officer; and Paul Shoukry, President and Chief Financial Officer. The presentation being reviewed today is available on Raymond James' Investor Relations website. Following the prepared remarks, the operator will open the line for questions.

Calling your attention to Slide 2. 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, industry or market conditions, anticipated timing and benefits of our acquisitions and our level of success integrating acquired businesses, anticipated results of litigation and regulatory developments, and general economic conditions.

In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as may, will, could, should and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our website.

Now I'm happy to turn the call over to Chair and CEO, Paul Reilly. Paul?

[Paul Reilly, executive]

Thank you, Kristie. Good evening, everyone, and thank you for joining us today. Once again, we delivered strong results in the quarter. Highlighting our diversified platform, we generated record results for the fiscal second quarter and the first 6 months of the fiscal year. We continue to invest in our business, our people and technology to help drive growth across all our businesses.

Before discussing quarterly results, I want to highlight an important announcement made last month. Following a multiyear succession planning process, the Board of Directors appointed Paul Shoukry, our CFO, as President of Raymond James. And following a transition period, Paul is expected to become the firm's CEO sometime during the fiscal year 2025, becoming only the fourth Chief Executive in the company's 60-plus-year history.

Paul has been an exceptional leader and a major contributor to Raymond James' steady growth and financial stability. I am confident he will continue to guide the firm with the same conservative long-term approach and laser focus on our advisers and client-first culture that has helped shape our success over the many years.

In addition, we're proud to announce that other key leadership appointments to take effect October 1, 2024. Private Client Group President, Scott Curtis, will become COO of Raymond James Financial, moving into the role following the retirement of Jeff Dowdle at the end of the fiscal year; Tash Elwyn, current Raymond James & Associates CEO will become President of PCG; and Global Equities and Investment Banking President, Jim Bunn, will become President of the Capital Markets segment.

These expanded roles are a direct reflection of the significant leadership and contributions that Scott, Tash and Jim have made over the years. I am confident, along with Paul, they will continue delivering on our mission to help clients achieve their financial objectives.

Now to review the second quarter results, starting on Slide 5. The firm reported record quarterly net revenues of $3.12 billion, an increase of 9% over the preceding year quarter, primarily due to higher asset-based revenues. Quarterly net income available to common shareholders was $474 million or $2.22 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $494 million or $2.31 per diluted share.

The quarter included the favorable impact of a legal and regulatory net reserve release of $32 million, predominantly driven by a reduction in the reserve related to the FCC off-platform communications matter.

We generated strong returns for the quarter with annualized return on common equity of 17.5% and annualized adjusted returns on tangible common equity of 21.8%, a great result, particularly given our strong capital base.

Moving on to Slide 5. Client assets grew to record levels during the quarter, driven by rising equity markets and solid adviser retention and recruiting in the Private Client Group. Total client assets under administration increased 6% sequentially to $1.45 trillion. Private Client Group assets and fee-based accounts grew to $799 billion and financial assets under management reached $227 billion. Domestic net new assets were $9.6 billion, representing a 3.2% annualized growth rate on the beginning of the period domestic Private Client Group assets.

This quarter does reflect some seasonality typical in the first calendar quarter. And as we've seen before, net new assets can be volatile quarter-to-quarter as we onboard newly-recruited advisers and have advisers retire or leave the platform from time to time.

With our robust technology capabilities, client-first values and long-time multiple affiliated options, PCG continues to attract high-quality advisers to the platform.

For example, during the quarter, we recruited to our domestic independent contractor and employee channels, financial advisers with approximately $80 million of trailing 12-month production and $12.8 billion of client assets at their previous firm. Fiscal year-to-date, trailing 12-month production of recruited advisers is up 45% and related assets up 77% over the prior 6-month period.

There is a lag between recruiting results and net new assets as it takes some time for clients to transition to the Raymond James platform, but we are encouraged by the recruiting success so far this fiscal year. And these results do not include our RIA and custody services business which also continues to have recruiting success and finished the quarter with $161 billion of client assets under administration.

Looking to our fiscal year-to-date results, domestic net new assets were $31.2 billion, representing a 5.7% annualized growth rate on the beginning of period domestic PCG assets, a strong result compared to our peers.

Total clients' domestic cash sweep and Enhanced Savings Program balances ended the quarter at $58.2 billion, up slightly over December 2023.

Bank loans were essentially flat from the preceding quarter at $44.1 billion as loan demand remains relatively muted given higher rates.

Moving on to Slide 6. Private Client Group generated record quarterly net revenues of $2.34 billion and pretax income of $444 million. Year-over-year results were driven by higher asset management fees, reflecting the nearly 20% growth of assets in fee-based accounts at the beginning of the current quarter, compared with the same prior year period.

The Capital Markets segment generated quarterly net revenues of $321 million and a pretax loss of $17 million. Net revenues grew 6% compared to a year ago quarter primarily due to higher M&A and debt underwriting revenues. Sequentially, revenues [indiscernible] due to lower fixed income brokerage revenues and M&A and advisory revenues, partially offset by higher debt underwriting revenues.

The pretax loss in Capital Markets of $17 million reflects the impact of amortization of deferred compensation granted in proceeding periods which totaled $20 million this quarter.

While the timing of closings remains difficult to predict, we are encouraged by the healthy pipelines and new business activity and M&A. We continue to expect investment banking revenues to improve along with the industry-wide gradual recovery.

The Asset Management segment generated pretax income of $100 million on record net revenues of $252 million. Results were largely attributable to higher financial assets under management compared to the prior year quarter due to market appreciation and net inflows into PCG fee-based accounts.

The Bank segment generated net revenues of $424 million and pretax income of $75 million. Bank segment net interest margin of 2.66% declined 8 basis points compared to the preceding quarter primarily due to the higher cost mix of deposits as the Enhanced Savings Program balances replaced a portion of the lower-cost RJBDP cash suite balances.

Looking to the fiscal year-end date results on Slide 7. We generated record net revenues of $6.13 billion, and record net income available to common shareholders of $971 million, up 8% and 4%, respectively, over the prior year's record. Additionally, we generated strong annualized return on common equity of 18.3% and an annualized adjusted return on tangible common equity of 22.8% for the 6-month period.

On Slide 8, the strength of the PCG and Asset Management segment for the first half of the year primarily reflects the strong organic growth in PCG with robust equity markets.

And now I'll turn over to Paul Shoukry, our CFO; and soon to be CEO for the second quarter results. Paul?

[Paul Shoukry, executive]

Thank you, Paul. Starting on Slide 10. Consolidated net revenues were $3.12 billion in the second quarter, up 9% over the prior year and up 3% sequentially.

Asset management and related administrative fees grew to $1.52 billion, representing 16% growth over the prior year and 8% over the preceding quarter.

This quarter, PCG fee-based assets increased 7%, which will be a strong tailwind for asset management and related administrative fees in the fiscal third quarter.

Brokerage revenues of $528 million grew 6% year-over-year, mostly due to higher brokerage revenues in PCG which were partially offset by lower fixed income brokerage revenues as depository clients continue to experience flat to declining deposit balances and have less cash available for investing in securities.

Remember, in our Fixed Income business, we do not have the same exposure to the higher volatility, currency and credit products that have benefited many of the larger players in our industry during the quarter. I'll discuss account and service fees and net interest income shortly.

Investment Banking revenues of $179 million increased 16% year-over-year and declined 1% sequentially. Compared to the prior year quarter, second quarter results benefited from stronger debt underwriting revenues in both fixed income and public finance as well as improvement in M&A and advisory revenues which continued to be subdued.

Moving to Slide 11. Clients' domestic cash sweep and Enhanced Savings Program balances ended the quarter at $58.2 billion, up slightly over the preceding quarter and representing 4.6% of domestic PCG client assets. Sweep balances were essentially flat and ESP balances increased 3% sequentially, both outperforming our expectations on the last call.

Since the beginning of this quarter, domestic cash sweep balances have declined about $1.7 billion mostly due to quarterly fee billings, along with income tax payments.

Turning to Slide 12. Combined net interest income and RJBDP fees from third-party banks was $689 million, down 1% from the preceding quarter, largely reflecting one fewer billable day. Again, this result outperformed our guidance on last quarter's call, given the more stable client cash balances.

Going forward, net interest income and RJBDP third-party fees will largely be dependent on the level of short-term interest rates, the stability of client cash balances and the trajectory of loan growth which has been subdued in this rate environment. Fortunately, we are well positioned for the eventual recovery in loan growth with ample capital and funding flexibility.

Moving to consolidated expenses on Slide 13. Compensation expense was $2.04 billion, and the total compensation ratio for the quarter was 65.5%. Excluding acquisition-related compensation expenses, the adjusted compensation ratio was 65.2%.

As is typical in the first calendar quarter, compensation expenses were impacted by annual salary increases and the reset of payroll taxes. All in, an adjusted compensation ratio close to 65% is in line with our current target and is a satisfactory result given the challenging environment for the Capital Markets segment.

Non-compensation expenses of $466 million increased 1% sequentially, largely due to higher communications and information processing expenses and a higher bank loan loss provision, which were partially offset by a favorable legal and regulatory net reserve release of $32 million in the quarter, which Paul mentioned earlier.

For the fiscal year, we still expect non-compensation expenses, excluding provision for credit losses, unexpected legal and regulatory items or non-GAAP adjustments to be around $1.9 billion. This implies incremental non-compensation growth throughout the year as we continue to invest in growth and ensure high service levels for advisers and their clients throughout our businesses.

Keep in mind, many of our non-compensation expenses, such as investment sub-advisory fees, represent healthy growth that follows the corresponding revenue growth.

Slide 14 shows the pretax margin trend over the past 5 quarters. This quarter, we generated a pretax margin of 19.5% and adjusted pretax margin of 20.4%, a strong result, especially given the challenging market conditions impacting capital markets.

As a reminder, our current targets provided at our Analyst and Investor Day last May, are for pretax margin of 20% plus and a compensation ratio of less than 65%. We still think these targets are appropriate, and we will provide an update as needed at our upcoming Analyst Investor Day scheduled for May 23.

On Slide 15, at quarter end, total balance sheet assets were $81.2 billion, a 1% sequential increase.

Liquidity and capital remain very strong. RJF corporate cash at the parent ended the quarter at $2 billion, well above our $1.2 billion target. And we remain well capitalized with Tier 1 leverage ratio of 12.3% and a total capital ratio of 23.3%.

Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.

The effective tax rate for the quarter was 21.8%, reflecting the favorable impact of nontaxable corporate-owned life insurance gains in the quarter. Looking ahead, we believe 24% is an appropriate estimate for the effective tax rate.

Slide 16 provides a summary of our capital actions over the past 5 quarters. During the quarter, the firm repurchased 1.7 million shares of common stock for $207 million at an average price of $122 per share. Including $43 million of shares repurchased in April, we completed the expected $250 million of these share repurchases since January 1 and fulfilled the repurchase commitment associated with the dilution from the TriState Capital acquisition.

As of April 19, 2024, approximately $1.14 billion remained under the Board's approved common stock repurchase authorization. Going forward, we expect to continue to offset share-based compensation dilution and to be opportunistic with incremental repurchases.

We are committed to maintaining capital levels in line with our stated targets, and we'll discuss more on our overall capital management strategy at our upcoming Analyst Investor Day.

Lastly, on Slide 17, we provide key credit metrics for our Bank segment which includes Raymond James Bank and TriState Capital Bank. The credit quality of the loan portfolio is solid. Criticized loans as a percentage of total loans held for investment ended the quarter at 1.21%, up from 1.06% from the preceding quarter.

The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1.06%. The bank loan allowance for credit losses on corporate loans as a percentage of the corporate loans held for investment was 2.05% at quarter end. We believe this represents an appropriate reserve, but we continue to closely monitor economic factors that may impact our loan portfolios.

Before I turn the call back over to Paul I just want to say that I am absolutely honored to be named President [Audio Gap]

[Paul Reilly, executive]

[Audio Gap] pipeline and good engagement levels, but our expectations for a gradual recovery are heavily influenced by market conditions. And we could expect activity to pick up over the next 6 to 9 months.

And in the Fixed Income business, the overall dynamic of the past year remain unchanged. Depository clients are experiencing flat to declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity. We hope that once rate and cash balances stabilize, we will start to see an improvement.

Overall, despite some of the near-term challenges, we believe the investments we've made in the Capital Markets business have positioned us well for growth once the market rate environment becomes conducive.

In the Asset Management segment, financial assets under management are starting the fiscal third quarter, up 5% over the preceding quarter, which should provide a tailwind to revenues. We remain confident that strong growth of assets in fee-based accounts in the Private Client Group segment will drive long-term growth of financial assets under management. In addition, we expect Raymond James investment management to help drive further growth over time.

In the Bank segment, we remain focused on fortifying the balance sheet with diverse funding sources and prudently growing assets to support client demand. We have seen securities-based loan payoffs decelerate, and we expect demand for these loans to recover as clients get comfortable with the current level of rates.

With little activity in the market, corporate loan growth has been muted. However, with ample client cash balances and capital, we are well positioned to lend once activity increases [ and ] our conservative risk guidelines.

In addition to driving organic growth across our businesses, we also remain focused on the corporate development efforts for opportunities that may meet our disciplined M&A parameters.

In closing, we are well positioned entering the fiscal third quarter with a strong competitive positioning in all of our business and solid capital and liquidity base to invest in future growth.

As always, I want to thank our advisers who drive this business and associates for their continued dedication to providing excellent service to their clients. Thank you for all you do.

That concludes our prepared remarks. Operator, will you please open the line for questions.

[Operator]

[Operator Instructions] We'll go first today to Alex Blostein, Goldman Sachs.

[Alexander Blostein, analyst]

Congrats to both of you guys. Well deserved. I wanted to start with a question around comp maybe. I understand there are some seasonal factors that impacted the quarter, but maybe help break down how much is seasonal, what specifically this quarter? It feels a little bit heavier than normal. And then Paul, I think I heard you say that you're kind of on target to 65% comp rate for the year, but then you also said you're still shooting to be below 65% for the year. So maybe just kind of help reconcile where you guys are ultimately expect to end up for the full year.

[Paul Reilly, executive]

Yes, Alex, I appreciate that. What we said was that the target that we announced at the last Analyst Investor Day was 65%. And so that's sort of where we've been trending in the first 2 quarters, but that's going to -- what it does for the rest of the year is going to be largely dependent on the Capital Markets segment. That's a big driver.

Typically that would have a lower capital ratio -- comp ratio associated with it than the other segments have helped the firm's overall comp ratio, and that wasn't the case this quarter, as you can calculate. So we are pleased to be able to generate close to a 65.2% adjusted comp ratio despite the challenges in that Capital Markets segment.

In terms of the reset of the payroll taxes and the increase in salaries that's typical for the calendar first quarter of each year, I would say that probably had an impact around $30 million to $35 million in the quarter. So a meaningful impact in the quarter. Of course, the salary increases will continue throughout the year. But probably 2/3 of that or so was related to the payroll tax reset, which will decline throughout the course of the calendar year.

[Alexander Blostein, analyst]

I got you. My second question around recruiting activity. And if we look at the net new assets disclosed in the quarter, organic growth is trending at a lower end from what we've seen from you guys historically. And I guess double-clicking into that, it looks like the independent head count continues to be pretty range bound. So maybe kind of walk us through what's been sort of pressuring the net new asset growth so far this year, your expectations for the rest of the year? And then specifically, what you're seeing in the independent channel that's been keeping the head count relatively flat?

[Paul Reilly, executive]

I think you're seeing the same trends that the teams we're hiring are larger. So we're bringing in more assets. We're on a great role in terms of assets in trailing 12. We do have head count that moves to our RIA channel. And that takes them out of head count because they're not licensed. So even with that movement, we keep the assets, but we're not keeping the head count, and we'll try to give you more granularity on Investor Day -- Analyst Day.

Then you have ins and outs. So we do have some outs, in the end, take time to onboard. So the assets usually take when you see a robust quarter like the [indiscernible] trailing 12 that take 9 months to a year to get all those assets over. So our expectation is that the recruiting will continue and continues strong. And I think part of the transparencies we need to give you a little more transparency on the RIA and how to think about that. We've struggled with the measurement to give you -- so you can see through those.

[Operator]

Next question is Steven Chubak, Wolfe Research.

[Michael Anagnostakis, analyst]

This is Michael Anagnostakis on for Steven. I did want to ask one just on cash sweep. I appreciate the commentary, how things have trended to start the quarter. And it was certainly nice to see that sweep cash was flat in 1Q, but now tax season is behind us. Are you seeing signs of cash sweeps building, inflecting positively? And maybe just speak to your level of confidence that we could see absolute sweep cash balances built from here.

[Paul Reilly, executive]

I mean we had tax season. We also had a record quarterly fee billing that came out of the cash balances already. And so I look at today's report, cash sweep balances so far in April are down $1.3 billion, which is less than the impact from the fee billings. Now we had some decline in the Enhanced Savings Program so far is able to -- and again, that could have been impacted. We have tracked significant payments to the IRS with the tax season here.

So -- and if you look at the last couple of quarters after the fee payments remain, cash kind of build throughout the quarter, and you saw that certainly in this past quarter where cash sweep balances ended relatively flat quarter-over-quarter, which are exceeded our expectations that we shared on the last call. So we are hopeful that balances are stabilizing, and so we'll kind of continue monitoring it from here.

[Michael Anagnostakis, analyst]

Got it. And maybe just pivoting to DOL. Paul, on the last earnings call, I recall that you were relatively comfortable with [ Ray J's ] positioning and that you expected the industry to challenge the new rule. With the final DOL rule now published, maybe you can update us on your views in terms of what the rule in its finalized state means for the industry as well as any implications for Ray J that you would highlight?

[Paul Reilly, executive]

Well, yes, so I appreciate the question. Digesting 500 pages of a regulatory rule is a little more -- even more complicated in trying to get through our earnings release, so -- to analyze it. So it's early.

The early read is actually from the rule itself, is we -- there's nothing that pops out that's overly problematic. It actually maybe surprisingly so. I think the industry's concern will be 2. One is that does the Department of Labor even have the authority to oversee these accounts, and that doesn't have to do with this rule, I don't think the rule itself will have a high impact. But do we want another regulator to concede the statutory authority for the regulator to oversee those accounts.

And the other thing is that the rule is talking about really complying with best interest standard is or why is there an extra rule. So -- but the rule itself is I think, much more manageable than the draft will [indiscernible].

So again, that's an early read. The devil is always in the detail, but I don't think the rule itself and what it requires to do today doesn't look to be problematic at all.

[Michael Anagnostakis, analyst]

Totally appreciate that. And congratulations to you both.

[Paul Reilly, executive]

Thank you.

[Operator]

Next question comes from Michael Cho, JPMorgan.

[Y. Cho, analyst]

My first one, I just wanted to follow up on M&A again. I mean you talked through a healthy pipeline looking ahead. But just in the quarter, again, you all talked through some seasonality and some lumpiness. I'm just curious if there's anything else you can call out or any more color around nuanced discipline, maybe some of the [ foliation ] model that you talked through? And maybe anything to call out in terms of how maybe attrition is trending as well?

[Paul Reilly, executive]

If you look for the first 6 months, I think compared to the industry in the [ 5s ], we did pretty well. So this quarter was slower in terms of the number, typically it is a little lower but lower -- maybe a little lower than we would have thought in terms of the number itself, but the recruiting is going well, the movement to RIA, you can see that net new assets growth was pretty robust. And that asset growth was pretty robust. So I think it actually, it was -- we have quarters where things are down and quarters where things are up. And I just think it was down a little more than we anticipated from a measurement standpoint.

But the recruiting, not only in what we brought in this quarter, but what we have in the pipeline, I think we have a relatively good chance of closing, I can't remember -- remain stronger. So the numbers will be impacted by the -- in terms of adviser count, how many go to RIA and then hopefully, the ones that do will choose to stay with us. So -- and we've had a pretty good record on it so far.

[Y. Cho, analyst]

Okay. Fair enough. And then just switching gears to the Capital Markets business. I mean I realize some of that is driven by the deferred comp that you called out and maybe still recovering M&A environment. I guess so with that backdrop potentially improving from here and with Raymond James' history of investing in talent as well. I mean, how would you frame your willingness to go after incremental talent in the advisory basis over the next, call it, 9 to 12 months?

[Paul Reilly, executive]

Yes. So we have done a lot of adjusting in terms of the cost and lowering the cost in that business, but we've also done some hiring. So the business is very leveraged to the upside of revenue comes up. I mean so the margin 2 years ago, [indiscernible] 50% or something. I mean so now it's not. So I mean there's leverage for the revenue to grow to really [ help with ] that margin. So the question is just the market. And we're open always to bring in talent all. I think we showed in '09 and the worst part is when you were hiring when other people weren't really paid off for our growth for the whole next decade. And so that is the blessing of a really strong capital position.

[ I said ] we have the opportunity even in tough markets to [ higher carry ] and really position talent to bring us forward. We've done some fixed public finance hiring that we're already seeing payoff from in the last -- this quarter and this coming quarter that if you looked at just the results of public finance, you wouldn't have done it, but we're, again, great believers in the business on the platform. And if there's great talent out there, we're willing to take a long-term investment and liquidity and capitalize [indiscernible] to do that.

[Operator]

The next question is Brennan Hawken, UBS.

[Brennan Hawken, analyst]

Congrats to both of you. Curious about the idea now that we're starting to see Capital Markets get going, activity begin to pick up? How should we think about incremental margins in that business for you given how week the profitability has been. I would assume that they would be pretty good. But could you help us get a sense of what incremental dollar of revenue would mean from an incremental margin perspective?

[Paul Shoukry, executive]

Yes. I think maybe the only thing we can really point to is the margins peaking out in the mid-20s. I think it's 25%, 26%. And in [ 21%, 22% ] in that time period. And so there's a lot of upside to the margins from where we are today. And just remember, this quarter was impacted by $20 million of deferred comp amortization from those record years as well, which will run off over the course of the next 12 to 18 months because those are 3-year deferrals typically.

So there's a lot of upside. We have a very strong franchise now in Investment Banking, the pipelines and the leading activity levels are good. Closings are difficult to predict just in this market environment. But we think there's a lot of upside to go to the top and bottom line in our Capital Markets segment.

[Paul Reilly, executive]

And if we did, we would be doing -- we've been taking a lot of different actions. And we've taken so far. I think we've prudently cut expenses and making sure that we have the right people on the field, but we think we have a great [ payment ] as the market recovers, we believe they'll do very well.

[Paul Shoukry, executive]

Sure. Fair enough. And then thinking about the improving environment. If we continue to see signs of recovering strength in your core businesses, would that increase confidence and improve the likelihood for a better outlook for capital returns and buybacks?

[Paul Reilly, executive]

Yes. I think our capital philosophy hasn't changed in that. We would love to add to the business, invest in the business first. And certainly, our recruiting an ongoing large investment, which is certainly, I don't think anyone thinks of that investment. We're looking for M&A opportunities [ and are ] active in the market but can't predict the timing. And we're not -- certainly, we've committed to buy [ dilution ] back and be opportunistic, but we don't want the capital levels, [ we think ] that these levels are high, and we want to manage them in.

So we will be meeting with the Board. And I think by the Analyst and Investor Day, we may have better insight to how we may do that. But to the profitability, we're not trying to hoard capital [indiscernible] we will always be higher probably than most firms. But this is a pretty robust level. We acknowledge that.

I think our commitment, for those on this call, I think we do a buyback that averaged $120 plus, you wouldn't have thought we would have done that even a quarter or 2 ago. So we are trying to manage the level.

[Operator]

The next question is Dan Fannon, Jefferies.

[Daniel Fannon, analyst]

Just to follow up on that last question. Can you talk about M&A and really what do you think makes the most sense in terms of strategic fit from a product, geography or scale perspective?

[Paul Reilly, executive]

Yes, we could go into a long -- I mean that's a hard question to answer quickly. I mean there's -- our primary geographies are North America and in Europe that we look for the best opportunities in each business. The opportunities are different, in our Private Client Group, it's really North America, the U.K. Our M&A group is much broader, we're on the continent, not really in Asia, but not against M&A capability more than we have today in Asset Management, it's a particular product. We can go on and on and on.

So it's -- we think in all the areas of the firm, there are areas that we can grow that strategically help us through acquisition, but that would be a lot longer than -- a lot more detailed in that general question. So each business has different needs. In M&A., we think there are areas that we could expand. The Private Client Group, we think our geographies. We've done well in the Northeast but could do more, and we're really focused on growing in the West, more robustly.

So the answer is a lot of areas, if we could find the right opportunities and make a reasonable return for shareholders. [indiscernible].

[Daniel Fannon, analyst]

Understood. And then as you think about NII going forward, and you mentioned the kind of cash trends and some stabilization there. On the loan growth side, any signs of pickup and potential demand there? Or as you think about the rest of this year, what are the kind of most sensitive factors as we think about that line item in terms of up or down?

[Paul Shoukry, executive]

Yes. As you know, loan growth has been [ sensitive ] not only for us, but the really entire banking industry since rates started rising over the last 12 to 16 months. And a lot of that is due to just the higher rate environment and a lot of corporations and investors coming into this environment flush with cash.

We are optimistic about loan growth going forward. We don't know exactly when that inflection point will hit, but we do think that there's a demand building up both for companies who will eventually get back engaged in M&A and other investing activities as well as Private Client Group investors. So one of the reasons that we are maintaining strong capital and funding positions and a lot of flexibility is to be in a position of strength when that loan growth does resume because it is just a matter of, in our minds, just a matter of timing for when that loan growth recovers. And so we're well positioned for it. We don't know when that will come back, but we're optimistic about the growth going forward.

[Operator]

Up next is a question from Mark McLaughlin, Bank of America.

[Mark McLaughlin, analyst]

Congratulations to you both. I wanted to get your take with regard to adviser movements. What have you guys been seeing on your end in terms of advisers leaving wire houses and also competition between independent broker-dealers. Is there anything to call out?

[Paul Shoukry, executive]

Just that the competition is still robust. I mean, that the adviser movement, especially of large team, has been -- our [indiscernible] focus has been big. I think private equity investment into the RIA space has caused more movement to into outside of the independent broker-dealers and employee broker-dealers. So that's kind of a new factor in force. So part of the reason why a decade ago, we started investing -- to have our RIA channels, so we could be competitive.

So yes, I mean, I can't remember a time where there has been a lot of competition, but we still see wire house movement in our favor. I think that you're seeing more people not reporting adviser count for that reason. But we see a lot of activity. But it's competitive. There are a lot of people out there competing and at the end of the day, it's not just money. I think what people think the highest bidder is [ good ]. If you look at our -- we just saw the latest industry source, we're still lower than most firms by a fair margin in our transition assistance, but it's clearly up from a couple of years ago, so reflecting the competition.

So it's competitive, but we believe our platform is what lands people on our culture. And so, so far, it's continuing. But it's not easy. It's hard work.

[Mark McLaughlin, analyst]

I appreciate that color. And then I'm sure we'll get an update on this at the Investor Day. But with respect to RCS, what are you guys seeing in terms of advisers moving, especially the size of those advisers? I realize, for the most part, it's usually advisers once they reach kind of sort of a critical [ mass ], are you seeing the size of the advisers wanting to move over to RIA kind of move down and scale?

[Paul Shoukry, executive]

In the market, there's certainly a lot of movers and movements of the smaller teams that want to become RIAs and big teams that have the infrastructure to the RIA. So the movement is really kind of across the board, larger teams. One of the positives and challenges of RIAs is that you can affiliate with a firm, but have multi-custodians. So I think that if you look at that large RIAs and some of the big custodial firms, they still move assets sometimes. So you don't have to have a firm affiliate with you to be an asset gainer too. So the dynamic of that, it's a much more dynamic industry in that way. It's kind of all or none in the registered rep side. And it's a fight for wallet on the RIA side.

[Operator]

We will now take a question from Kyle Voigt, KBW.

[Kyle Voigt, analyst]

Just have a couple of follow-ups. Maybe first, just a follow-up on Dan's M&A question. And I guess, just to be clear on the capital point, do you feel like you have enough capital flexibility today with the current leverage ratios to act on M&A opportunities that you're seeing in the market? Or is the near-term guidance on buybacks to offset dilution and imply continued near-term capital build due to maybe wanting a bit more flexibility due to the size of the acquisition opportunities that you're seeing?

[Paul Shoukry, executive]

I think we're in the ballpark of flexibility. The question just is that question. If you see something where it could be bigger, but you can't just wait and wait with total capital. We've drifted up once, if I remember right, Paul, 14% or something. And people are saying, what are you doing? But we had 3 deals that we executed in 1 year that brought it down.

So it has been building back up. So if there was a [indiscernible] and we could forecast it to be really, right? But if M&A kind of [ fits ] deals sometimes come almost out of the blue or someone just decides they're going to sell. And so that's why if we average up sometimes it's -- we feel like the market will be -- we'll have opportunities that we can foreshadow, but that doesn't mean we're right. It's one thing to enter into a discussion. It's another thing for a seller to agree its time and pick out and to close. So that's the challenge.

But many of the deals that we have closed, [indiscernible] closed we could execute and we could -- we were -- not only were they attractive to us, but there was a certainty of closing both financially and that we had enough cash on hand that [indiscernible] that we in the financing because we're not leveraged as an [indiscernible] that we can close very, very quickly.

So I wish I could give you a science to that, there's a little more [ heart ] to it and we would love to be as clear as we can on this. But [ we have ] the magic formula. We would let you know early [indiscernible] to sell in terms of [indiscernible].

[Kyle Voigt, analyst]

That's very helpful. And then just for a follow-up on the loan balances. I think you gave some commentary on SBLs a few quarters ago that you actually see decent demand and some of the acceleration in that book or the growth of that book that you were seeing in the calendar third quarter was due to some paydown slowing. So I guess a bit surprising to see that growth has stalled out here in the last quarter. Just wondering if you could provide any additional color on what's happening in the SBL book, specifically which is flatline here?

And then do you think the market really just needs to wait for rates to move well before demand broadens again?

[Paul Shoukry, executive]

It was flattish [ for us ] as you point out sequentially as it was, I think the rest of the industry, at least those who reported thus far. So I'm not sure you necessarily need to wait for rates to decrease. It's just maybe a stabilization of rate even as borrowers get used to sort of the new norm. So I think that's really what we're seeing as we've transitioned from historically low rates to where our current levels at an unprecedented pace. It's just a lot of people are still getting used to and companies are still getting used to this level of rates.

[Kyle Voigt, analyst]

Great. And congrats again to both of you.

[Paul Shoukry, executive]

Thanks, Kyle.

[Paul Reilly, executive]

Thank you.

[Operator]

Your next question comes from Michael Cyprys, Morgan Stanley.

[Michael Cyprys, analyst]

I just wanted to ask on organic asset growth. I think in the past, you [ adjusted ] that moves to the growth and I think that you're seeing is from recruiting. Just curious how you think about an opportunity set over time from maybe providing advisers with more services to enhance their efficiency and unlock growth from the installed adviser base to grow same-store sales.

[Paul Reilly, executive]

I think our focus internally is first to our existing advisers, both technology and capabilities to make sure they're spending as much time as they can with their clients and acquiring new clients. It makes the advisers happy. It means our clients are happy, that's the cheapest growth for us. So our focus and a development platform to other advisers still want to come to. So the tools we put out, the technology we put out, the back office modernization, all of that is to help adviser productivity and that does drive a lot of our growth in what we do and keeps advisers here.

This is a market -- and frankly, the market has been this way for a while. We're [indiscernible] adviser could [ leave ] and get a lot of money for their book and start somewhere else, but they stay here because of that. So that's a big focus of ours. That's where we pay a lot of attention. Number one is on retention. And I think part of our growth rates have been driven by our retention rates too and our recruiting.

So I'm not sure if there's more of the question, but that's kind of focus. Number one is to make the existing advisers happy and productive.

[Michael Cyprys, analyst]

Great. And then just on the loan book. Just curious where you think you're underpenetrated as you look at the portfolio today, if you look out over the next couple of years, how would you sort of like the composition and size of the book to evolve? And are there any additional capabilities do you feel you may need to build out?

[Paul Reilly, executive]

There's 2 pieces to that. There's are we underpenetrated compared to wire houses in terms of loans to clients, you would say yes, but [ our other ] thing is we take a position with advisers, your job is to do the right thing for your clients. And if our loans are -- if you like, our mortgage loans, use them, if you don't, it's -- something is better else for your clients, use it. So our job is to provide competitive products. And the adviser's job is to figure out what's appropriate for their clients to use.

So we do not put quotas. We do not put incentives. Some people have product incentives for their top [ trips ] sort of the managers have quotas to try to hit, we have none of that. We just want advisers to do what's best for the business. And then we try to develop selling products and services that they can educate, that they could use to help the client.

So our numbers industry-wide are lower, but we understand why because we're not pushing it. We're -- we do it through education, not through trying to use incentives to get them to do it. So now you can talk about from a capital allocation standpoint, that might be different from our side, what loans we'd like to grow. The good news is for us is we like the Private Client Group loans, the SBLs, mortgages, the other things that they have not only SBLs have our best risk-adjusted return or secured and they're good for clients and they're flexible for clients. So we're matched up that way.

So our challenges are more where do we want to go on whether it's the commercial banking section or how much do we want to invest in securities, other that are more of a financial decision and long-term investments. So they're -- so penetration is a good question. We are lower, but we don't try to force it. We want our advisers to do it if it's the right thing for their clients.

[Operator]

Next up is Bill Katz, TD Cowen.

[William Katz, analyst]

Congratulations, everybody. Question for you just on the NIM, the net interest margin. Just sort of wondering if you could talk a little bit about maybe what the exit level might be for the new quarter? And just if -- just given sort of the reinvestment rates of what might be rolling on, rolling off and in a world of a tepid type of loan backdrop for now. How do you sort of see that playing out if the sorting starts to ease a little bit as well?

[Paul Shoukry, executive]

I would say a lot of the shift in cash balances from on balance sheet to third-party banks that really occurred in the last couple of quarters. So the NIM going forward is going to be more driven by, one, the absolute level of rates and what happens with short-term rates going forward and also to the asset mix, to the extent we're a little heavy right now on the bank balance sheet and cash balances. Going back to the comments I made earlier about wanting to be in a position of strength when loan demand recovers. So that brings down the NIM all else being equal, but it's at least a push, if not a modest positive to NII, net interest income and earnings.

But in the meantime, it does drag down the NIM a bit as we hold more cash balances than we think we would need on a run rate basis. So as far as the jumping off point, I think it is a relatively stable number from where we were this quarter. We're not shifting proactively shifting cash balances off balance sheet to third-party banks like we were doing over the last couple of quarters. So I think that's all fairly well reflected this quarter.

[William Katz, analyst]

Great. That's helpful. And just trying to triangulate a combination of the senior executive [ list of ] changes. Your comments, Paul, should agree about sort of the platform being in a very good spot with scale. Where are you investing right now as you think through maybe the comp or noncomp side? And how might the strategic vision be evolving as you sort of migrate to the next generation of leaders?

[Paul Shoukry, executive]

I mean we have been consistently investing in all of our businesses. First and foremost, the largest business by far is our Private Client Group business. And we don't anticipate that changing. So that's where the vast majority of our investment dollars go. But we also invest heavily in growth in the Capital Markets, Asset Management and the Bank businesses. They're all great businesses.

If you look at the last 3 years and even the first half of this fiscal year, being able to generate record revenues and earnings in a very different market environment has -- a testament and a reflection of having a diversified business model. So we're going to continue to invest in very high service levels, continue to invest in technology to enhance the service levels and create more efficiencies for advisers so they can spend more time with clients, as Paul was touching on earlier.

So kind of maybe a long-winded way of saying there's not going to be a dramatic change because everything is really working very well and has been since our founding in 1962, [indiscernible], being focused on essentially the same businesses that we're focused on today. And so that's sort of the kind of plan going forward.

[William Katz, analyst]

Congrats again.

[Operator]

And our final question today will come from Devin Ryan, Citizens JMP.

[Devin Ryan, analyst]

And obviously, I want to echo the congratulations as well on Paul Shoukry and the others on the leadership team now on the call. And to Paul Reilly as well. The stock, I think, was trading at about $10 when you joined in 2009. I remember those days pretty well. And so unquestionably, a successful [indiscernible] and a well-earned transition. So congratulations.

I just wanted -- real quick, a couple here on just fixed-income brokerage. You had a very significant step-up in the first quarter of the back half of 2023, then that took a step back again in the second quarter. I'm just curious, is that just a shift in activity and depositories just with the changes in rate expectations or is there something else going on there and just how to think about that business relative to maybe the second quarter coming [ off point ]?

[Paul Shoukry, executive]

Yes. With a couple of quarters ago, the rates came down quite, the yields came down quite a bit and gave depositories a repositioning opportunity. And on the call last quarter, I think we talked about that repositioning opportunity being somewhat episodic in nature. And throughout the course of this quarter, rates actually went up again. And so underlying factors that Paul discussed on the call in his prepared remarks to us that depositories are still struggling to grow deposit balances or deposit balance is flat. And so they're going to be prudent and slow to reinvest in securities in this environment. So -- and that's the largest part of our Fixed Income business.

So we continue to expect some headwinds there until deposit balances start growing again and banks feel more confident investing in their securities portfolio. Meanwhile, [indiscernible] has been nice in that it has diversified the fixed-income revenue streams with its corporate trading technology-enabled capability. And so -- but that business drives some volatility in this past quarter, spread and the rate volatility wasn't as significant. So they didn't have sort of the uplift that they had in preceding quarters.

[Operator]

At this time, I would like to hand the conference back to Paul Reilly for any additional or closing remarks.

[Paul Reilly, executive]

Great. We appreciate you all coming on and good quarter already on to the next quarter. And I think we've got some good tailwinds. So we look forward to it. And sure, I look forward to hearing all these generational comments about how old I am, how [indiscernible] followed, but he is ready. So I think you're going to see a lot of good things from Raymond James. So thanks for joining us today.

[Operator]

And once again, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect.