Raymond James Financial Inc

NYSE:RJF

Earnings Call Analysis

Fiscal 2023: Record Earnings Amid Challenges

Despite facing an unpredictable economy and market volatility, the company managed to produce record earnings for fiscal 2023, indicating robust business diversity. Notably, the Private Client Group expects a downturn from a 2% decline in fee-based accounts, also influenced by market-sensitive revenues in the Bank segment. Despite near-term headwinds, the company sees growth potential, buoyed by surging advisor recruitment and solid capital markets, including a flourishing M&A pipeline. Growth in securities-based loans offsets mortgage volume deceleration. Net interest income is impacted by loan demand and deposit costs, but the firm is positioned to capitalize on higher third-party bank fees and maintained stability amidst rate increases. Fixed-income brokerage remains sluggish, awaiting rate stabilization.

Brokerage and Investment Banking Performance

In a fiscal environment where certainty was hard to come by, brokerage revenues showed a steadfast performance, remaining flat at $480 million year-over-year, thanks to a balanced offset between lower fixed income brokerage revenues in the Capital Markets segment and higher brokerage in the Personal Client Group (PCG). However, investment banking was not as unyielding, with revenues dipping by 7% year-over-year to $202 million. Sequential gains saw a 34% increase, fueled by thriving M&A and advisory revenues along with a robust quarter for public finance. While the immediate future remains ambiguous due to market volatility and geopolitical tensions, there is a cautious optimism for improved M&A environments with the hope for more robust activity in the next 6 to 12 months.

Diverse Revenue Streams and Interest Income

The story takes an inquisitive turn with 'other revenues' falling by 33% to $54 million compared to the same quarter last year, primarily impacted by declining revenues from affordable housing investments and closings pushed to fiscal 2024 owing to elevated interest rates. On the brighter side, net interest income and fees from third-party banks have remained nearly flat at $711 million, defying the anticipated 5% sequential decline. Despite a fall in the net interest margin to 2.87% in the Bank segment, yields increased significantly, suggesting an adjusted income that may only be 5% lower in the upcoming fiscal first quarter, absent any changes in short-term interest rates.

Compensation, Capital, and Share Repurchase

Compensation costs reflected the current economic pressures, with expense totaling $1.89 billion and the compensation ratio hitting 62%. In the face of such expenses, and regulatory provisions cutting earnings by $0.26 per diluted share, the firm's belief in complete reserve adequacy for the issues in question is evident. Despite these challenges, the company continued to demonstrate financial robustness by repurchasing 8.35 million shares of common stock for $788 million within the fiscal year, signaling confidence in its value and leaving approximately $750 million available for future repurchases.

Risk Monitoring and Potential Growth

In the backdrop of inflation, supply chain constraints, and the possible onset of a recession, thorough monitoring of impacts on the corporate loan portfolio is underway, with a keen eye on the fraught commercial real estate and office portfolios. Nevertheless, the company's extensive experience, strong competitive positioning, and healthy capital levels bode well for future growth opportunities across its diverse business segments.

Advisory Movements and Pipeline Growth

Movement among advisors has surged, with a notable influx of large teams into the company's pipeline, bolstering its capital markets and investment banking divisions. Despite the drag from fixed income, strategic investments over the last five years have fortified the firm's market share and positioned it for potential growth as market conditions stabilize.

Asset Management Optimism Amid Headwinds

The fiscal quarter greets the Asset Management segment with a slight headwind, as financial assets under management opened 2% lower than the previous quarter. Yet, the steadfast growth of fee-based accounts in PCG and symbiotic growth drivers such as Raymond James Investment Management keep the optimism for long-term asset growth very much alive.

Bank Segment Prospects and Lending Outlook

The Bank segment is seeing a deceleration in securities-based loan payoffs, hinting at a resurgence in growth and lending. With an improved spread environment and ample liquidity, there's an anticipation for a rebound in lending as soon as market activities gather momentum.

Earnings Call Transcript 2023-Q4

[Kristina Waugh, executive]

Good afternoon and welcome to Raymond James Financial's Fourth Quarter and Fiscal 2023 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 and thank you for joining us today.

With us on the call today are Paul Reilly, Chair and Chief Executive Officer; and Paul Shoukry, Chief Financial Officer. The presentation being reviewed today is available on our 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, anticipated in timing and benefits of our acquisitions and our level of success integrating acquired businesses; divestitures, anticipated results of litigation and regulatory developments or general economic conditions.

In addition, words such as may, will, could, anticipate, expects, believes or continue or negative of such terms or other comparable terminology as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Please note 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 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 presentation and press release. Now I'll turn the call over to Chair and CEO, Paul Reilly. Paul?

[Paul Reilly, executive]

Good evening, and thank you for joining us today. I've spent a lot of time in these last few weeks in front of our advisers. First, traveling with our top-producing independent advisers on a great trip. Great to see the success in their business and the positive nature of how they feel about the firm.

And then attending our RCS conference, our RIA division and clearing firm. Again, that division is over 10% of our Private Client Group assets now, and it's great to see the growth and the enthusiasm there also.

Now turning to our results. Despite the challenging environment, which included a regional banking crisis, heightened volatility and rapidly rising interest rates, we generated record net revenues and earnings for the last fiscal year. That's our third consecutive year of record results in very different market environments was achieved by staying true to our core.

We put clients first, we act with integrity, we value independence and think long term. These core values are more than words on a page, they are lived day in and day out by our advisers and associates. This dedication and focus provides stability during tough economic times and what makes me confident about our continued success in the future.

Reviewing fourth quarter results, starting on Slide 4. The firm reported record quarterly net revenues of $3.05 billion and net income available to common shareholders of $432 million or $2.02 per diluted share.

Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $457 million or $2.13 per diluted share. The increase in asset management revenues and interest-related revenues drove significant revenue growth over the prior year with net revenues increasing 8%.

Quarterly results were negatively impacted by elevated provisions for legal and regulatory matters, including an incremental $55 million provision related to the previously disclosed SEC industry sweep on off-platform communications. This provision resulted in an impact during the quarter of $0.26 per diluted share.

We generated strong returns for the fiscal fourth quarter with an annualized return on common equity of 17.3% and annualized adjusted return on tangible common equity of 22.2%. A great result, particularly given our strong capital base.

Moving on to Slide 5, the year-over-year client asset growth was strong driven by organic growth in all of our affiliation options, along with market appreciation. We ended the quarter with a total client assets under administration of $1.26 trillion, PCG based assets and fee-based accounts of $683 billion and financial assets under management of $196 billion.

With our continuing focus on retaining, supporting and attracting high-quality financial advisers, PCG consistently generates strong organic growth, which was evident again this year, with domestic net new assets of $14.2 billion in the fiscal fourth quarter, representing a 5% annualized growth rate on beginning of the period, domestic PCG assets.

For the fiscal year, domestic net new assets of $73 billion reflected a 7.7% annual growth rate, which is a leading result in the industry. During the fiscal year, we recruited to our domestic independent contractor and employee channels, financial advisers with approximately $250 million of trailing 12 production and nearly $38 billion of client assets to their previous firms. These results do not include our RIA and custody services business, RCS, which had another strong year in recruited results.

More importantly, we continue to maintain a very low regrettable attrition levels of financial advisers at about 1%. These factors contribute to our annual NNA growth of 7.7%.

Total clients' domestic suite and enhanced savings program balances ended the quarter at $56 billion, down 3% compared to June of 2023. The enhanced savings program with its competitive rate and robust FDIC insurance coverage continued to attract significant cash this quarter, partially offsetting a decline in client suite balances largely due to quarterly fee billings and cash sorting activity. Total bank loans increased 1% from the preceding quarter to $44 billion reflecting muted loan demand to our target markets, giving rising rates and the macroeconomic uncertainty.

Moving on to Slide 6, Private Client Group generated record results with quarterly net revenues of $2.27 billion and pretax income of $477 million. Year-over-year, results were lifted by strong asset-based revenues and the benefit of higher interest rates and interest-related revenues and fees.

The Capital Markets segment generated quarterly net revenues of $341 million and a pretax loss of $7 million. Revenue declined 15% compared to the prior year quarter mostly driven by lower fixed income brokerage and investment banking revenues. However, we were pleased to see a sequential improvement in M&A and advisory revenues this quarter.

Additionally, our public finance business had improved results with debt underwriting [ grow 32% ] sequentially. The extremely challenging market environment, particularly for investment banking, has strained the near-term profitability of segment results. And as we explained previously, the segment results are negatively impacted by amortization of share-based compensation from prior years as well as growth investments. We remain focused on managing controllable expenses as near-term revenues are depressed.

The Asset Management segment generated pretax income of $100 million on net revenues of $236 million. The increases in net revenues and pretax income over the preceding quarter were largely the result of higher assets in PCG fee-based accounts at the beginning of a quarterly billing period and strong net flows in Raymond James Investment Management which generated $920 million of net inflows during the fiscal fourth quarter and $2.2 billion of net inflows in the fiscal year. The bank segment generated net revenues of $451 million and pretax income of $78 million.

Fourth quarter NIM for the bank segment of 2.87% and declined 4 basis points compared to a year ago quarter and 39 basis points compared to the preceding quarter, primarily due to a higher cost mix of deposits. We continue to add diverse higher-cost funding sources with our enhanced savings program and consequentially shifted more of a lower-cost suite funding to third-party banks. In a few minutes, Paul Shoukry will discuss this further.

While this negatively impacted the bank segment NIM, there is an offset in higher RJBDP third-party bank fees, so still a net positive for the firm overall while also providing advisers an attractive depositive alternative to offer their clients.

Looking at fiscal 2023 results on Slide 7, we generated record net revenues of $11.6 billion and record net income available to common shareholders of $1.7 billion, up 6% and 15%, respectively, over the prior year's records. Additionally, we generated strong returns on common equity of 17.7% and adjusted returns on tangible common equity of 22.5% for the fiscal year.

On Slide 8, the strength of the PCG and bank segments for the fiscal year primarily reflects the benefit of strong organic growth in the Private Client Group, the successful integration of TriState Capital and the benefit from higher short-term interest rates. When compared to the record activity levels in the year ago period, weaker capital markets results reflect the challenging environment for investment banking and fixed income brokerage revenues despite incremental revenues from the SumRidge acquisition, which we completed in June of of 2022.

And now I'll turn it over to Paul Shoukry for a more detailed review of our fourth quarter results. Paul?

[Paul Shoukry, executive]

Thank you, Paul. Starting on Slide 10, consolidated net revenues were a record $3.05 billion in the fourth quarter, up 8% over the prior year and 5% sequentially. The Asset management and related administrative fees grew 12% compared to the prior year quarter and 5% sequentially due to the higher assets and fee-based accounts at the end of the preceding quarter. This quarter, fee-based assets declined 2%, which will be a headwind for our asset management and related administrative fees in the fiscal first quarter of 2024.

Brokerage revenues of $480 million were flat year-over-year and increased 4% sequentially. Year-over-year, the lower fixed income brokerage revenues in the Capital Markets segment were offset by higher brokerage revenues in PCG. I'll discuss account and service fees and net interest income shortly.

Investment Banking revenues of $202 million declined 7% year-over-year. Sequentially, the 34% increase was driven predominantly by higher M&A and advisory revenues as well as a solid quarter for public finance. We are cautiously optimistic that the environment for M&A is improving, and we continue to see a healthy investment banking pipeline and solid new business activity.

However, there remains a lot of uncertainty in the pace and timing of deals launching and closing given the heightened market volatility and geopolitical concerns. So while we may not see a significant improvement in the next fiscal quarter, we are hoping for better results over the next 6 to 12 months.

Other revenues of $54 million were down 33% compared to the prior year quarter, primarily due to lower revenues from affordable housing investments. The pipeline for that business remains strong, but several closings slipped to fiscal 2024 due to higher interest rates.

Moving to Slide 11, Clients' domestic cash sweep and enhanced saving program balances ended the quarter at $56.4 billion, down 3% compared to the preceding quarter and representing 5.1% of domestic PCG client assets. Advisers continue to serve their clients effectively, leveraging our competitive cash offerings.

The enhanced savings program grew approximately $2.4 billion in deposits this quarter. A large portion of the total cash coming into ESP has been new cash brought to the firm by advisers, highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability.

As many eligible clients have now taken advantage of this product, the pace of flows into the enhanced savings program has understandably decelerated. Through Monday of this week, sweep and ESP balances are down approximately $620 million for the month of October, as growth in ESP balances was more than offset by the quarterly fee billings, as expected. We continue to believe we are closer to the end of the cash sorting dynamic than we are to the beginning. However, until rates stabilize, we would not be surprised to see further yield-seeking behavior by clients.

Sweep balances with third-party banks were $15.9 billion at the quarter end, giving us a large funding cushion when attractive growth opportunities surface. The strong growth of enhanced savings program balances at Raymond James Bank has allowed for more balances to be deployed off balance sheet.

While this dynamic has negatively impacted the bank segment's NIM because of the geography of the lower-cost suite balances being swept off balance sheet, it ultimately provides clients with an attractive deposit solution while also optimizing the firm's funding flexibility. Looking forward, we have ample funding and capital to support attractive loan growth.

Turning to Slide 12. Combined net interest income in RJBDP fees from third-party banks was $711 million. Nearly flat from the immediately preceding quarter as a sequential decrease in firm-wide net interest income was offset by higher RJBDP fees from third-party banks.

If you recall, on our last earnings call, we anticipated a 5% sequential decline in these interest-related revenues. So we are pleased with the better-than-expected results which was partly a function of higher-than-anticipated yields on RJBDP third-party balances.

The bank segment's net interest margin decreased 39 basis points sequentially to 2.87% for the quarter. While the average yield on RJBDP balances with third-party banks increased 23 basis points to 3.6%.

While there are many variables that will impact actual results, Absent any changes to short-term interest rates, we currently expect combined net interest income and RJBDP fees from third-party banks to be around 5% lower in the fiscal first quarter as compared to the fiscal fourth quarter and that's just based on spot balances after the fee billings this quarter.

As experienced over the past 2 quarters, this guidance may prove to once again be conservative if cash sweep balances stabilize around current levels and/or if the bank assets grow more than anticipated during the rest of the quarter. But as we have always said, instead of concentrating on maximizing NIM over the near term, we are more focused on preserving flexibility and growing net interest income and RJBDP fees over the long term, which we believe we are still well positioned to do.

As many of you may recall, our expectation has always been that the industry would overearn on interest income early on in a rising rate environment and then experienced some normalization of interest earnings as clients redeploy their cash to higher-yielding alternatives.

Moving to consolidated expenses on Slide 13. Compensation expense was $1.89 billion, and the total compensation ratio for the quarter was 62%. The adjusted compensation ratio was 61.4% during the quarter, which we are very pleased with, especially given the challenging environment for capital markets.

Non-compensation expenses of $576 million increased 1% sequentially. As Paul Reilly mentioned earlier, the fiscal fourth quarter included the incremental provision related to the previously disclosed SEC industry sweep on off-platform communications of $55 million, resulting in an impact during the quarter of $0.26 per diluted share. Combined with the provision in the fiscal third quarter, we are confident that we are now fully reserved for this matter.

The bank loan provision for credit losses for the quarter of $36 million increased $2 million over the prior year quarter and decreased $18 million compared to the preceding quarter. I'll discuss more related to the credit quality in the bank segment shortly.

In summary, while there has been some noise with elevated provisions for legal and regulatory matters this year, adjusted non-compensation expenses, excluding loan loss provision and those legal and regulatory provisions came in very close to our annual expectation of $1.7 billion, reinforcing that we remain focused on managing expenses while continuing to invest in growth in ensuring high service levels for advisers and their clients.

Slide 14 shows the pretax margin trend over the past 5 quarters. In the current quarter, we generated a pretax margin of 19.2% and adjusted pretax margin of 20.3%, a strong result given the industry-wide challenges impacting capital markets in the aforementioned legal and regulatory provisions.

On Slide 15, at quarter end, total assets were $78.4 billion, a 1% sequential increase. Liquidity and capital remain very strong. RJF Corporate cash at the [ parent ] ended the quarter at $2.1 billion, well above our $1.2 billion target.

The Tier 1 leverage ratio of 11.9% and total capital ratio of 22.8% are both more than double the regulatory requirements to be well capitalized. The 11.9% Tier 1 leverage ratio reflects nearly $1.5 billion of excess capital above our conservative 10% target which would still be 2x more than the regulatory requirements to be well capitalized.

Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth. We also have significant sources of contingent funding. We have a $750 million revolving credit facility and nearly $9.5 billion of FHLB capacity in the bank segment.

Slide 16 provides a summary of our capital actions over the past 5 quarters. During the fiscal year, the firm repurchased 8.35 million shares of common stock for $788 million, an average price of $94 per share. As of October 25, 2023, approximately $750 million remained available under the Board's approved common stock repurchase authorization.

While we didn't complete any repurchases in the fourth quarter due to self-imposed restrictions, just to be prudent, given our knowledge of the aforementioned SEC platform matter, we remain committed to our planned repurchases to offset dilution from the TriState Capital acquisition and the share-based compensation as we previously discussed.

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 1.17%. The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1.07%.

The bank loan allowance for credit losses on corporate loans as a percent of total corporate loans held for investment was 2.03% at quarter end. We believe this represents an appropriate reserve but we are continuing to closely monitor any impacts of inflation, supply chain constraints, higher interest rates and a potential recession on our corporate loan portfolio. Given industry-wide challenges, we continue to closely monitor the commercial real estate portfolio and more specifically, the office portfolio. We have prudently limited the exposure to office loans which represents just 3% of the bank's segment's total loans.

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

[Paul Reilly, executive]

Thank you, Paul. As I said from the start of the call, I am pleased with our results for the fiscal 2023 and our ability to generate record earnings even in challenging market conditions. The record results this fiscal year once again highlight the strength of our diverse and complementary businesses. And while there is still near-term economic uncertainty, I believe we are in a position of strength and are well positioned to drive growth over the long term across all of our businesses.

In the Private Client Group, next quarter results will be negatively impacted by the 2% sequential decline in assets in fee-based accounts. Near term, we expect some headwinds to interest-sensitive earnings at both PCG and the bank segment given ongoing cash sorting activity.

However, I am optimistic we will continue delivering industry-leading growth as current and prospective advisers are attracted to our client-focused values and leading technology and product solutions. Our adviser recruiting activity has picked up significantly over the last 2 months with record numbers of large teams in the pipeline.

In the Capital Markets segment, as we saw this quarter, there are some signs of improvement in investment banking, and we continue to have a healthy M&A pipeline and good engagement levels. But while there's still reason for optimism, we expect the pace and timing of transactions to be heavily influenced by market conditions and would expect activity to likely pick up over the next 6 to 12 months.

And in the fixed income space, the dynamics of last year persist. Depository clients are experiencing declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity. We hope once rates and cash balances stabilize, we can start to see an improvement. So while there are some near-term challenges, we believe the capital markets business is well positioned for growth given the investments we've made over the past 5 years, which have significantly increased our productive capacity and market share.

In the Asset Management segment, financial assets under management are starting the fiscal quarter down 2% compared to the preceding quarter, which should create a headwind to revenue. We remain confident that strong growth of assets in fee-based accounts in the Private Client Group segment will drive long-term growth of financial assets under management. In addition, we expect Raymond James investment management to help drive further growth through increased scale, distribution, operational and marketing synergies.

In the bank segment, we remain focused on fortifying the balance sheet with diversified funding sources and prudently growing assets to support client demand. We have seen securities-based loan payoffs decelerate and are starting to experience growth. 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 tepid. However, spreads have improved and with ample cash sitting on third-party banks and lots of capital we are well positioned to lend once activity increases.

In closing, entering fiscal 2024, we believe our strong competitive positioning in all of our businesses, along with our ample capital and liquidity has us well positioned to drive future growth. I want to thank our advisers and associates for their continued perseverance and dedication to providing excellent service to their clients each and every day, especially in uncertain times when clients need trusted advice the most. Thank you for all you do.

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

[Operator]

[Operator Instructions] Our first question comes from Dan Fannon with Jefferies.

[Daniel Fannon, analyst]

I was hoping you could expand upon the record backlog you talked about for advisers joining our platform, maybe some context around the size and scope of that? And also, it seems like there is more industry movement. You mentioned attrition being very low for the year. Just wondering if you're seeing any uptick in terms of attrition across your platform more recently, as you mentioned, more adviser movement across the industry.

[Paul Reilly, executive]

Well, good question. I think that, first, the attrition still stayed around 1%. That's slightly up from last year, but it's in the same ballpark, kind of rounding so we're happy to see that given the market has been very, very competitive.

If you look at industry data, adviser movement is down about 15% industry-wide if you believe the data. But what we're seeing in terms of what we're not seeing a number of advisers, we're seeing in size of team.

So just last month, we added a bank platform of $3 billion in assets, 27 advisers. And when we look at the backlog, especially in the last 2 months, the number of teams that are generating $10 million to $20 million of revenue, we've never had so many come through at once so that has been a really big pickup that's in the pipeline, not to saying we're going to close them all, but we've never had this many at one time where we're down to the final kind of negotiating lines. So -- as well as people that have committed -- we haven't announced.

So it's been a pickup from a little slower activity. But I would say that between last year and this year, it's just last year with larger teams at the end of this year. It's just a significant number of very large teams that are in the pipeline.

[Daniel Fannon, analyst]

And then just a question as you think about this coming fiscal year and expenses, if the capital markets activity remains somewhat depressed or around these levels, should we think about noncomp expense? Or I guess, how should we think about noncomp expense and levers that you think or you're looking to pull to potentially improve the profitability and/or even maintain profitability in a more challenged revenue environment?

[Paul Shoukry, executive]

Yes. I mean for capital markets specifically, most of the expenses or comp expenses, we have continued to invest in that business even through this difficult environment, we were opportunistic as we explained in our Analyst Day and adding about a dozen MDs, particularly to our health care group and other groups so we're still investing in the business long term. We think it's attractive, we have a great platform there.

Really, if you look at the losses that the segment generated this year, $150 million of it or $135 million of it or so was related to growth expenses and retention expense, deferred comp expenses that we're advertising throughout the year. So more than the entire loss of the segment was really growth related or deferred comp related.

So overall, for the firm, non-compensation expenses, we expect will continue to grow. We manage them very well this year when we talked about excluding the legal and regulatory and the loan loss provision, very close to that $1.7 billion target we laid out a year ago, and we expect it to continue growing from this level because a lot of those costs are growth expenses, whether it be the FDIC insurance expense as we continue to put more deposits at the bank, et cetera.

So they were negatively impacted this year by legal and regulatory after a very benign year last year. But net-net, we would continue to expect non-compensation expenses to grow while also being very focused on managing the controllable expenses that we can manage while still ensuring high support levels for advisers and their clients.

[Operator]

Our next question comes from Kyle Voigt with KBW.

[Kyle Voigt, analyst]

So just with the nearly $1.5 billion of excess capital, above that 10% target. You mentioned the suspension repurchases in the quarter due to knowing about the regulatory matter. I guess when we think about the pace of repurchases in fiscal 2024, Paul, should we still think about that $300 million to $350 million per quarter run rate? Or should we expect a little bit of a catch-up, given there were no repurchases last quarter and given how much excess capital you have on the balance sheet?

[Paul Shoukry, executive]

I think when you think about excess capital, I would just start with the capital prioritization framework that we've been following almost since our inception, really, which is, first and foremost, to use the excess capital to invest in growth. So Paul talked about the prospects that we have for organic growth, which we're pretty bullish on right now just given the pipeline, not only in PCG, but really across our businesses. And then we're also active on the acquisition front, looking at opportunities that are a good cultural fit, first and foremost, but there would also be good strategic fits and pricing across all M&A right now is challenging because there are gaps between buyers and sellers.

But we feel like we can -- through continued dialogue, find good opportunities there over time. And then to the extent that we can't invest the capital in growth, and we have our ongoing dividend, which is 20% to 30% of earnings.

And then buybacks. And we do have to play some catch-up on the buyback since we didn't do any this quarter. I think we have about $250 million more to offset the issuance associated with TriState acquisition in 2 years of share-based compensation. So we'll get back to doing that. And then we have a commitment to offset dilution going forward, which is about $200 million a year. But if we have the excess capital which we currently have and we deem the price to be attractive, then we would obviously be opportunistic about and beyond that offsetting dilution.

[Kyle Voigt, analyst]

And then just for a follow-up, just want to touch on the admin comp line within the PCG segment moved lower sequentially in the quarter. came in a bit lower than expected. I guess if we take a step back and look at the full year, that admin comp grew by more than 15%, which is a similar rate to fiscal 2022 although I think there were some acquisitions in there and some unusual or higher-than-expected raises that went to effect over that period. I guess as we look out to fiscal 2024 or over the medium term, just how should we think about growth in that admin comp line on a normalized basis?

[Paul Shoukry, executive]

You touched on it. I mean, that 16% growth in PCG admin comp does include growth investments, Charles -- a full year of Charles Stanley's in there as well as all of the support staff for all of the advisers that we bring on board that their compensation goes into the admin comp as well.

So we invest in the platform and this year, we had on, top of that as you pointed out, we are very generous in passing on the financial success with the associates in the form of higher raises last year. and that's reflected in these numbers as well.

Looking forward, we are, again, focused on -- expected continued growth in this line item, certainly would expect it to sort of be a reduction in the growth rate from what we experienced this year given the aforementioned factors.

[Operator]

Our next question comes from Brennan Hawken with UBS.

[Unknown Analyst]

This is Ben Rubin, filling in for Brennan. I first want to ask about the composition of the loan book. We did see some growth in the loan book and the balance sheet for the first time in several quarters. I guess my first question is how are you thinking about balance sheet growth on the loan side in fiscal year 2024, maybe on commercial versus consumer underwriting? And then also what type of balance sheet growth does your NII guide interpret as we look to the next quarter?

[Paul Shoukry, executive]

Yes. The near-term NII guide factors in very modest loan growth, just given the environment still being pretty, in terms of the demand being pretty muted, particularly on the corporate side now. But we were pleased to see the growth during the quarter and a lot of it was driven by securities-based loans and residential mortgages. And while we expect mortgage volume to decelerate given much higher rates now, we are optimistic about the securities-based loan portfolio in both Raymond James Bank and TriState as we look forward over the next 12 months, and that's based on 2 factors.

The first is the payment, the repayments of those balances have really stabilized as you would expect, accelerated significantly as rates will rise, I think, almost doubling in some cases over the last 12 months. And so that has stabilized, and we are starting to see new origination.

And on the TriState Capital side, a lot of benefit from what they call transitions or essentially existing clients bringing on in recruiting new advisers. So we are optimistic about that portfolio going forward over the next 12 months.

[Paul Reilly, executive]

I would just add, we are open for business. We've more than adequate cash in the buffer and certainly the capital, and it's really just the loan demand. So hopefully, the SBLs continue to go from being repaid to started to grow as we saw the indication last quarter.

The mortgage business is obviously slow. And the commercial loans were open to it, but it's a very slow market, and spreads are widening for the deals that are coming out. But again, it's more of a muted market. So we saw this quarter, we're open for business. We just have to find the loans that we're comfortable with.

[Unknown Analyst]

And then for my follow-up, I'll kind of touch back on what Dan's first question about net new assets. So net new asset growth in the quarter was 5%, it's a bit below the high single-digit percentages you guys have been printing in recent years.

I was just wondering if you can give me some color if there was any noise, any adviser departures that were lumpy that may have impacted the quarter and whether or not this, let's call it, mid-single-digit range is more appropriate? Or should we kind of -- is it some revert back to the high single digits once the adviser market, if it does improve from here?

[Paul Reilly, executive]

I think for the quarter, I mean we -- it's been a dynamic year in a lot of ways in terms of as you look at adviser count. I think that we had one program as we previously talked about that we exited from the platform, we kept 60% of advisers, 40% last and it costs us $4.6 billion in assets and 60 advisers, but we think from a profitability in long term, it was the right program.

If you look just this month, again, adding a $3 billion bank program and 27 advisers, just a number crude. There are a lot of big projects like that. So we're still optimistic whether we can get the double digits we had in a couple of quarters. It's a big number, depending on the markets. But we expect to do very, very well, but that will be up to kind of recruiting and what happens to the capital markets. So I don't know if you have any [ bad ] call.

[Operator]

Our next question comes from Steven Chubak with Wolfe Research.

[Steven Chubak, analyst]

So wanted to start off with a question on spread revenue came in better than your guidance in the quarter. It also trended better than what we saw at some of your peers. And given you have a larger proportion of client cash that swept to third-party banks, to what extent did the spread revenue benefit from improved pricing from those partner banks provide any incremental boost? We know banks are seeking out alternative sources of liquidity. There's a lot of demand for that, whether you benefit from any improved pricing on some of those third-party sweeps.

[Paul Shoukry, executive]

I think our better performance than many peers is really just a reflection of our long-term focus on kind of maintaining a flexible approach that's focused on giving clients as much FDIC insurance as possible. And you see that with the growth in the enhanced savings program balances, which give us more flexibility in that dry powder that effectively puts more sweep balances with third-party banks as we await growth of the bank's balance sheet, as Paul discussed earlier.

And that dynamic, as you pointed out, Steve, is absolutely correct. The banks, the demand from third-party banks is only increasing by the week. And as contracts renew, we are able to renew at more favorable terms. So that played a role, a bigger picture of what really played a role. One is us just maintaining that sort of long-term flexible approach to managing the balance sheet and offer clients as much FDIC coverage as we possibly can to our various products.

[Steven Chubak, analyst]

And for my follow-up, I wanted to drill down in terms of some of the October deposit trends, Paul, that you had cited. Given the sensitivity of spread revenue to changes in deposit mix. I was hoping you could provide some additional granularity disaggregating the sweep and ESP deposit levels and maybe help size the impact of the adviser payout?

[Paul Shoukry, executive]

When you say the adviser payout, are you referring to the quarterly fee billings? Or what are you [indiscernible]

[Steven Chubak, analyst]

[ Quarterly Fee billings ], which honestly, I care less about that. I really just was hoping to get the ESP and sweep deposit levels disaggregated given the sensitivity.

[Paul Shoukry, executive]

So we were down a couple as of days ago, $600 million, but this does bounce around from day to day. I mean we had a $200 million positive day yesterday.

[Paul Reilly, executive]

At quarter end, we had $500 million so we -- the balances are at numbers we're not used to, a high and low coming in and out.

[Paul Shoukry, executive]

But we -- the enhanced savings program is up probably $200 million to $300 million so far this month. And so the net -- the offset to that would obviously be the sweep balances which, frankly, are doing much better than we would have expected given that we had the quarterly fee billings earlier this month as well. So net-net for cash to be down $500 to $600 million when you add those two components, considering the $1.2 billion of quarterly fee billings, we're pretty pleased with our situation right now. But, again, it's day-to-day, it can change today or tomorrow. So we're going to monitor it closely.

[Paul Reilly, executive]

Important thing for us. I mean, just not on earnings, but the fact that we have so much money to third-party banks that we could use if we wanted it. And we're really [ teleporting ] where we haven't been borrowing so we have a lot of comfort to be able to go ahead and still have all the flexibility we need. But there has been the mix change with ESP, with higher deposit costs, as what you can see net-net.

[Operator]

Our next question comes from Mark McLaughlin with Bank of America.

[Mark McLaughlin, analyst]

I was hoping you could provide us with some more color around deposit cost mix and specifically the pickup in money market and savings account yield?

[Paul Shoukry, executive]

Yes. So I think we just sort of covered the growth in enhanced savings program balance for us. I mean, in terms of the deposit cost, that is the biggest factor because that does cost somewhere around 5%. And so to the extent that the mix of the total client cash balances shift to those enhanced saving program balances, you're picking up probably 350-or-so, 3.5 percentage points of cost effectively. So I would say that's probably the biggest factor in the higher deposit costs. And why you saw the NIM really contract sequentially was largely due to us intentionally growing the higher cost deposits.

But again, a lot of A lot of that is geography because effectively, what we have done is raise the higher cost deposits at the bank segment through the enhanced savings program and then essentially shifted more of the lower-cost suite balances to third-party banks. And so that shows the NIM at the bank segment contracting sequentially, but you see the corresponding benefit to the firm with third-party fees, which shows up in the PCG segment. And that's why, as Steve pointed out, we were able to generate better than expected and better than industry trends, at least on the sequential basis.

[Mark McLaughlin, analyst]

Also for my follow-up, how is feedback and adoption for RCS been? I was curious on what the mix between outside advisers joining the platform was versus the transition of existing advisers on the platform.

[Paul Reilly, executive]

I think that the growth has been great. We're over 10% now of our assets in the RCS division. When we first probably opened it, we had a bigger movement of internal people who wanted to go [indiscernible] just switch platform, which again, as part of the noise and adviser count when advisers move from our employer or independent division, we count them as advisers and went [ straight to ] the RCS, they're not registered, they're RIAs so they're one firm, right? So we drop them out of the adviser count.

But the assets have stayed, I think the proof point in that is the growth, the NNA and assets, which I think for the year and for the quarter have been above most of the players in the market. It's the seed and the recruiting outside has picked up to now that we've gotten the platform much more robust and increase the technology significantly. Hopefully, the long-term growth will come from the outside, but we do have people here if they want to operate in the RIA format, they're welcome to switch affiliation options, but that has slowed down over the last couple of years from the initial opening of it where more people can [indiscernible]

[Operator]

Our next question comes from Jim Mitchell with Seaport Global.

[James Mitchell, analyst]

Maybe, Paul, I mean, you talked a lot about sorting, I guess, starting to decelerate ESP growth decelerating. You have some pricing benefits on third-party sweeps. If we look beyond the first quarter or next quarter in terms of the guidance on rate sensitive revenue, do you start to see things stabilizing? I guess I'm not asking for specific guidance, but if you can kind of help us think through the puts and takes and when we start to see those revenues maybe potentially stabilize.

[Paul Shoukry, executive]

I don't think anyone can really tell you exactly when cash sorting will fully stabilize across the industry. I know a lot of firms have been trying to convince you of that for the last 12 to 18 months but we try to be pretty transparent with you guys. And so what we have said in the last 3 months, at least is that we feel like we're closer to the end of the sorting dynamics in the beginning and are seeing that in the numbers. But we're not going to sort of declare an end to that dynamic until we have several months of data to support that.

But to your point, longer term, we are excited about the position that we're in now with the strong capital position with the $16 billion almost of cash with third-party banks that gives us a lot of dry powder to really grow the balance sheet when the attractive opportunities come. And we think we'll be in a position of strength there because not a lot of other firms in our space will have the capital and funding to pursue that attractive growth.

So we're in a great position. Again, it's a reflection of that long-term client focus, the flexible balance sheet that we've always strived to maintain even when being criticized for it over the last few years, but it puts us in a pretty good position now.

[Paul Reilly, executive]

I think, Jim, I think for us to really be able to call it in is really when interest rates stabilize. If the fed was starting to raise rates again, that ultimately -- the securities then it hits money market funds, and you have a higher risk competitors, you have to raise rates. I mean that's really the dynamic and it appears that the Fed is closer to the end of the cycle of doing that and rates stabilize, I think sorting will stabilize also.

[James Mitchell, analyst]

And maybe just a follow-up on the credit side, some pretty big additions to reserves, you said you feel comfortable. I guess what changes that? You mentioned macro. Just trying to think through how you're feeling about the credit provision story there, given that loan growth has been pretty flattish.

[Paul Reilly, executive]

We think credits are -- we like the profile, we like the risk, we've always try to be proactive on adding to reserves to make sure we're well reserved and often are ahead of movements. The one thing we don't control sometimes is our models, some of our macroeconomic models were based on movies, if they change their outlook that has an impact to us.

But we try to stay ahead of the credit [indiscernible]-- as you could see in '09 through a very tough credit period, we did pretty well, but we're pretty credit tough. Maybe what's different this cycle and starting in COVID, we have sold off loans, so we didn't like the credit yield trade-off and risk trade-offs and we continue to do that kind of a one-off basis. So that's been an extra tool that we've used to manage credit. So we're feeling pretty good now if the economy spins out of control, but we've got other issues. But it seems like even if things slow down, which they may, as long as people are employed and buying, we think we'll get through it pretty well.

[James Mitchell, analyst]

So the additions are more macro-driven rather than specific concerns internally?

[Paul Shoukry, executive]

Yes. I would say the additions this quarter were sort of a number of items of specific loans where we, as Paul said, try to get in front of it with additional reserves when possible. There are also a modest amount, I think charge-offs were flat sequentially. So we -- nothing dramatic, we feel good about the portfolio overall, but we try to get ahead of things, especially when the market environment is as unpredictable as it is, as Paul said.

[Paul Reilly, executive]

For last quarter, the macro has a bigger impact than it did this quarter. It wasn't a big macro outlook change this quarter [indiscernible]

[Operator]

Our next question comes from Devin Ryan with JMP Securities.

[Devin Ryan, analyst]

Do you want to just touch on the fixed income businesses briefly? So our debt underwriting obviously had its best quarter in some time. It can be a little bit of seasonality there. But did have a better result than some peers. So just curious whether that's some idiosyncratic deals or if you're actually seeing conditions for that business maybe starting to improve a little bit from depressed levels? And then I guess, conversely, the fixed income brokerage business took a little bit of a step lower from already pretty tough level. So just whether you see any catalyst on the horizon that could drive better results there as well.

[Paul Reilly, executive]

I think the fixed income debt certainly, the activity was up. We did have a pretty big deal in the quarter also. So that was part of the pickup and it's long-term client where we're in the rotation. We have a big hard turn for kind of the big underwriting. So it's a little bit of both, I would say it, but certainly the base deal had an impact.

And I just -- the lack of interest rate kind of as Paul talked about with the depositories without excess cash, they're waiting for stabilizing too. So that part of our franchise has certainly been slow. And I think in general, the trading has been -- as you look at spreads, whether in AAA [ munis ] or mortgage securities or stuff that have very high spreads right now. People are just waiting for rates to pick up because certainly, the spreads there are higher than they've been in a while, but the activity is not [ weighed ] out. So I think people are waiting to feel like they know where interest rates are going to stabilize. And until then, it's going to be a tough business, maybe a little better. It's hard for it to get a lot lower, not impossible. But when it really picks up is I think you're going to have to see more of a stabilized outlook in interest rates.

The [ big ad ] has been somewhere just done extremely well since joining us too so they've been a great addition and well ahead of what we would expect in a traditional business been at lows given this interest rate environment.

[Devin Ryan, analyst]

And then just follow-up briefly just on kind of corporate M&A. I hear all the comments around growth opportunities of capital and obviously opportunistic buybacks. But just more broadly, how you would just characterize the flow of deals you're seeing across the firm right now? And then just where the appetite is at the moment, just given the higher cost of capital how much of that calculation and maybe appetite for M&A has changed because you guys clearly have been acquisitive over the last several years here.

[Paul Reilly, executive]

I think that, first, cost of capital is impacting deals. So it's two things. First, it's pricing. So with the buyers, the cost of capital is saying, well, this is significantly higher and pricing has been slower to come down, which isn't unusual in other M&A cycles that I look through. The price is the slowest to adjust and so that -- we have empathy for our M&A bankers.

As we look at things, too, we have the same thing when you look at -- debt was free and you layer on a 7 or 8 or not, whatever, the cost of rate is and especially for a lot of M&A firms where it's more higher risk debt. I mean, it impacts the pricing, it just has to. So we see that both in the M&A business, it's back up. So you can see people doing deals now in the fourth quarter. We don't expect the next quarter to be a lot different. But backlogs that people are waiting, but that gap, which I think a lot of it is from lending pricing and the cost of capital is impacting it, and you see it in all the firms. And I'd say the same thing when we run numbers, it has an impact even with our excess capital, so we have to replace it. It makes it tougher unless most prices adjust a little bit. Our cost of capital falls, it's going to be harder or people just waited out long enough and go, okay, the lower prices, the new price, it's going to take one of those factors to really pick up. So that's why we give more of a 6- to 12-month outlook in our M&A business just we think that the market is starting to see that, but let's see if it adjusts or not I don't think it's gonna happen overnight.

[Operator]

Our final question comes from Michael Cyprys with Morgan Stanley.

[Michael Cyprys, analyst]

Just a question on the bank capital rules. We've seen some proposals from the banking regulators, including the Basel III end game proposal. Just curious how you see that impacting the opportunity set for your Capital Markets business, given you're under the $100 billion asset threshold. Just curious if you could get the opportunity set for yourselves. But then as you look out over the coming years, I'm sure eventually you probably hope you cross $100 billion and grow to that level. Just how do you think about that impacting potentially your capital markets business, which areas you think might be more impacted? How do you think about preparing for that?

[Paul Reilly, executive]

Well, a couple of things. First, our $78 billion and 1% growth. It's going to take a lot of time to hit $100 billion. And I think people forget that one of the big jumps in our assets is because of the TriState acquisition.

We have no plans to acquire another bank. In fact, it took us 5 years of looking to acquire TriState, which was the perfect fit to join the family. But we're not looking for other banking franchise. Almost anything else we do [ doesn't ] significantly drive our asset size. So we think we've got -- certainly, I'd say, 5-year, you have to cross and then you get a year to comply. So -- and it couldn't be much longer.

So I -- most of all the rules that you cited, there are $100 billion. And so I think we have time to do that. Now having said that, we're already internally doing studies on the impact of reporting requirements, the capital requirements the technology, everything that's going to be impacted in the regulatory expectations, which do change, so when we cross $100 billion. So we have both inside and outside help. We've been hiring some people. This is kind of 5 years in the [ thing ]. So we're not taking it for granted, we know we'll grow. But as you said, almost a $100 billion became the old $500 million before they change the rule, and $250 billion. So it has brought a lot of those rules down for significantly higher lift, but I think right now, that's in the future for us, still always.

[Paul Shoukry, executive]

And just to add one thing to that time line. One of the reasons it will be -- we expect there to be around that long is because one of the things we did during COVID is really accommodated client cash balances on the balance sheet through the securities portfolio. And so we expect over the next year, for example, for a lot of the bank's loan growth to be essentially funded with securities that mature out of that portfolio. So you don't get as much net growth even from the loan growth because it's a repositioning of those assets.

[Paul Reilly, executive]

Thanks Paul, that's a good clarification because we still expect to grow the bank loan portfolio, but it's just being funded on balance sheet, not off balance sheet.

[Michael Cyprys, analyst]

And just a follow-up on that point, as banks that are impacted by the rules either pull back in certain areas or reprice certain products, how do you think about the opportunity set for you guys to step in, given that the rules apply for you for many years. Where do you see the biggest opportunity set for your Capital Markets business or more broadly from these rules impacting a lot of banks?

[Paul Reilly, executive]

I think that if you look at acquiring capital markets businesses or fixed income businesses or asset management businesses really don't significantly impact our asset size. So what would really impact it is acquiring a bank because we're acquiring balance sheet, those businesses, especially the M&A, fixed income, we -- even today, we operate when we -- when [ Morgan Keegan ] joined us 7 or 8 years ago, we had a billion of inventory, they had 1 billion in inventory. Today, we have less -- we've operated well under a billion in inventory. So I don't -- we think there's a lot of room to acquire a lot of those businesses in that space without really altering -- trajectory, I talked about to $100 billion. It's the banking side that impacts the balance sheet, really and that's not our focus.

[Operator]

This concludes our Q&A session. I will now turn the call back to Paul Reilly for closing remarks.

[Paul Reilly, executive]

So first, I appreciate the time. It's been really outside of kind of the regulatory charge, it would have been a really outstanding quarter but still is a very good quarter. And so we're focused still going into an uncertain market, but we've always, I think, in our business have outperformed because of our capital and cash and especially in down markets, it would be nice to be enough capital markets and interest rates to come in and then it will be kind of an easy year, but we always assume we have to work for it every year.

Market is competitive so we're just doing what we've done. We've been managing expenses, a lot of people say we won't even do the managing expenses. We have been doing that, especially over the last few quarters and plan to continue to do that. So we can see growth to support those. So appreciate you joining the call and all the time you spent with us, and we'll talk to you soon.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.