ServisFirst Bancshares Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 13 speakers on the call.

Operator

Welcome to the Q2 2023 Earnings Call. My name is Chris, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, the conference is being recorded.

Operator

I will now turn the call over to Alicia Charity. Alicia, you may begin.

Speaker 1

Thank you, and good morning. Welcome to Ameriprise Financial's 2nd quarter earnings call. On the call with me today are Jim Cracciolo, Chairman and CEO and Walter Berman, Chief Financial Officer. Following their remarks, we'll be happy to take your questions. Turning to our earnings presentation materials That are available on our website, on Slide 2, you will see a discussion of forward looking statements.

Speaker 1

Specifically, during the call, you will hear references to various non GAAP financial measures, which we believe provide insight into the company's operations. Reconciliation of non GAAP numbers To their respective GAAP numbers can be found in today's materials and on our website. Some statements that we make on this call may be forward looking, reflecting management's expectations about future events and overall operating plans and performance. These forward looking statements speak only as of today's date and involve a number of risks and uncertainties. A sample list of factors and risks that could cause actual results to be materially different from forward looking statements Can be found in our Q2 2023 earnings release, our 2022 annual report to shareholders and our 2022 10 ks report.

Speaker 1

We make no obligation to publicly update or revise these forward looking statements. On Slide 3, You see our GAAP financial results at the top of the page for the Q2. Below that, you see our adjusted operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis. Many of the comments that management makes on the call today will focus on adjusted operating results. And with that, I'll turn it over to Jim.

Speaker 2

Good morning, everyone, and thank you for joining today's call. As you saw in our press release, Ameriprise overall delivered a strong second quarter to round at a very good first Given our complement of businesses, we consistently generate good returns and strong earnings. Advice and Wealth Management continues to lead our growth, Well, we had another quarter of solid client engagement and flows. We also saw good earnings from our bank, reflecting our ability to create a Sustainable and attractive revenue stream in this interest rate environment. In our Asset Management business, we continue to experience headwinds in this environment and remain focused on adjusting appropriately.

Speaker 2

In terms of the market environment, the S and P 500 and international equity markets have rallied more recently through the end of July. However, they were only up 2% year over year on average for the quarter. Fixed income marks remain unfavorable, particularly in Europe. While inflation has come down, it's still above the Fed's targeted rate. As we saw yesterday, the Fed increased 25 basis Points and Sette will continue to assess additional information in determining the extent of additional policy firming that may be appropriate to return to a 2% inflation rate.

Speaker 2

With that as a backdrop, Ameriprise continues to benefit from our diversified business mix as well as higher interest rates in our bank and certificate companies. Assets under management and administration increased nicely, Up 9% to $1,300,000,000,000 reflecting our organic growth and positive markets. Total adjusted operating net revenue was up 10 To $3,800,000,000 the combination of strong revenue growth, particularly from our spread business as well as well managed expenses Drove earnings to $807,000,000 up 23 percent with EPS up 30% to $7.44 And our return on equity was outstanding and reached a new record of 51%, a level that few financial firms have achieved. Now let's turn to business highlights. In Wealth Management, we delivered another excellent quarter as we serve clients well with goal based advice and deliver a highly satisfying experience.

Speaker 2

We continue to drive very good asset growth with total client assets up to $833,000,000,000 and total client flows of $9,400,000,000 up 10% year over year. Our client acquisition growth was also strong, especially in the $500,000 to $5,000,000 client range. This is an area where we consistently had good momentum and it's a key growth opportunity for us. We're leveraging our strategic investments Our fully integrated technology suite streamlines many of our advisors' administrative tasks and frees up their Time to go deeper with clients and to navigate the complexities within their financial situations. For example, we introduced an important capability It enables advisors to generate highly personalized presentations centered on client goal achievement.

Speaker 2

Since the launch, it has helped To build on our already strong client satisfaction, net flows and practice growth for our advisors who are incorporating it into their practices. And it's reduced meeting prep time as much as 70% and allows more time for client acquisition. We're also beginning to use AI and analytics to further enhance how we engage and work with clients. With AI, we can serve up real time information to help Advise has identified a possible next best opportunity for clients based on their needs. Backed by our exceptional support, Advisors satisfaction, retention and growth are all excellent.

Speaker 2

Ameriprise Advisors consistently have some of the highest productivity growth In the Q2, it increased nicely again, up 7% to $874,000 per advisor. We're also incorporating the use of data and analytics in how we identify productive advisors who are a good fit to recruit to the firm and more likely to make the switch. It was another strong quarter for recruitment with the addition of 99 experienced advisors. We're consistently bringing in large highly productive advisor This is from across the industry. In the spring, I spent time with our top 10% of advisers both tenured At Ameriprise and more recently experienced advisors who have joined us, they repeatedly shared that our advanced capabilities and technology, Combined with our excellent leadership, coaching and marketing support gives them a tremendous advantage in how they serve clients and run successful practices.

Speaker 2

They are very proud to affiliate with Ameriprise and energized about the direction of the company and the opportunities in front of us. During the quarter, clients remain cautious seeking yield as they continue to maintain higher balances in cash oriented products. Cash continued to increase as clients continue to hold cash and we ended the quarter with about $70,000,000,000 in cash and cash equivalents. Wrap assets under management increased 14% to over $450,000,000,000 reflecting positive flows And market appreciation that occurred at the end of the quarter. The more recent increase in markets will be a benefit as we go through the quarter.

Speaker 2

For the first time since the beginning of the year, we saw signs in June that clients are starting to move some funds back into the market, Which brings me to the bank. Ameriprise Bank continues to perform well with assets growing to nearly $22,000,000,000 It's a strong complement to our business and an attractive way to Gain spread revenue in this rate environment. Bank and certificate balances grew over $0.50 to $33,000,000,000 The cash balances in these accounts are very rational today, and we feel comfortable with our position. We will continue to build out our banking capabilities and are in the Process of introducing other savings products later this year. This will help advise us further deepen client relationships and bring in more assets from other banking institutions.

Speaker 2

With our latest research, in addition to our core client segments, We found that the Ameriprise value proposition and brand are very appealing to high net worth investors as Well as millennials who are hungry for advice and seeking guidance from advisors who truly understand them and their priorities. These are market And this was also reinforced by the complement of external accolades and recognition we continue to earn. The way we work with clients defines Ameriprise, and I believe our reputation is a competitive advantage. During the quarter, Ameriprise was named by Kiplinger's Read us as the overall winner in the Wealth Management category. We earned the highest ratings for each of the 4 criteria: the trustworthiness of our advisors, The quality of financial advice provided, the likeliness to recommend the firm to others, and we earned the highest rating in overall satisfaction.

Speaker 2

Ameriprise also ranked on Newsweek's Magazine 2023 Most Trustworthy Companies in America list for the 2nd consecutive year. And we earned top performer recognition in understands me and shares my values from hearts and wallets. And speaking of values, Ameriprise culture is another very important positive. Advisors who have joined us with decades in the business tell us that our company is unique And not like any other they've been part of. They're impressed by things like our supportive growth culture and their accessibility to senior leadership.

Speaker 2

Finally, in terms of profitability for Wealth Management, it was another strong quarter across the board and that includes margin, which reached a new record of 31.2%. Moving to Retirement and Protection, we have high quality, well risk managed books Generating strong consistent earnings of 13%, driven by the repositioning of our investment portfolio last year given the rate climate. Our free cash flow and return on capital remain excellent. The team is concentrated on accumulation products that align with our clients' needs and the business. In our Life business, we're focused on our variable universal life and disability products that are appropriate for this environment.

Speaker 2

Protection Sales were up nicely, increasing 18% with the majority of sales in higher margin accumulation VUL products. And in variable annuities, Our structured product continues to attract strong interest combining with our variable annuities without living benefits. Sales are down from a year ago in part Due to decision to exit guarantees. Here again, we're using intelligent document processing and robotics to make processes more efficient, Things like automating our processes and underwriting decisions. We're seeing the benefit in the pickup in sales.

Speaker 2

As we discussed, We feel good about our product portfolio both for clients and the business, which consistently delivers good returns. Moving to asset management. As you know, we manage the business prudently. Like other active managers, we're facing reduced flows in this environment. The business continues to operate well and generates good fees, and we're adjusting for headwinds accordingly.

Speaker 2

In terms of investment We continue to have excellent longer term performance in equities, fixed income and asset allocation strategies with over 75 Our 1 year performance has improved across the board. This includes some of our larger franchises, including U. K. Equities, where we're benefiting from our quality positioning and on fixed income given our strength in credit. In terms of flows, I'll start with global retail, where we continue to experience a level of outflows.

Speaker 2

In North America, we remain in net outflows, but we had nice improvement in fixed income. In fact, we are better than the industry in taxable bond. Meanwhile, we continue to see outflow pressures in equities, largely from lower gross sales as redemptions have improved. We continue to focus our advisor segmentation strategy to drive good engagement in North America. In EMEA, retail flows in both UK and Continental Europe remain under pressure.

Speaker 2

However, in institutional, we were in net inflows, excluding legacy insurance partner flows Now I'd like to give you a brief update on our EMEA acquisition and executing the integration in Europe. Wanted you to know that it does take time due to the complexity of the legal entity structures as well as regulatory and employment considerations. We made it through a number of important steps and we have now moved to the next level of consolidation, including the co location of our teams to our existing real estate and the near completion of some of the major technology migration work. Given the environment, we're taking a very focused look across the business globally to further reduce expenses. This includes identifying and stopping less growth driven activities and also redeploying resources where we see opportunities In summary, we're controlling what we can control and making the necessary changes to adjust in this environment.

Speaker 2

Reflecting on the firm overall, Ameriprise delivered a strong first half of the year and we're well positioned to continue to navigate and grow. Our complement of businesses provides nice contributions and synergies. We consistently generate good appropriate earnings in total and good cash to invest and return to shareholders at attractive levels. We returned $638,000,000 of earnings to shareholders in the quarter, which represented nearly 80% of our earnings. In addition, as you saw, our Board approved a new $3,500,000,000 Share repurchase authorization that reflects the strength of the business.

Speaker 2

Across the firm, we continue to make good investments in our businesses. And as always, we are sharply focused on execution. And while we manage expenses very well, we will be For additional expense opportunities as we move into 2024 to adjust to the environment. From a people perspective, Our team is highly engaged. In fact, in the quarter, Forbes Magazine named Ameriprise 1 of America's Best Large Employers.

Speaker 2

The list ranks the 500 U. S. Companies Most Highly Recommended as a Top Place TO Work. With that, I'll turn things over to Walt to provide

Speaker 3

Thank you. As Jim said, results this quarter Results reflect Wealth Management core and cash business momentum as well as continued expense discipline. In total, our Wealth Management business grew to 68% of the company's earnings, up from 56% a year ago As a result of a 49% growth in Wealth Management earnings, Asset Management faced headwinds similar to the industry in terms of flows And Fixed Income Market Declines and Retirement Protection Solutions delivered Good 13% earnings growth primarily from our decision to reposition the investment portfolio late last year. Across the firm, we continue to manage expenses tightly relative to the revenue opportunity within each segment. While we continue to make investments in the bank and other growth initiatives, particularly in Wealth Management, We are taking a disciplined approach on discretionary expenses across our businesses.

Speaker 3

Excluding mark to market impacts on share based Compensation expense, G and A was up only 4%. However, G and A in the first half of twenty twenty two Was unusually low as a result of the pandemic. Our G and A expenses remain on track with our expectations. Balance sheet fundamentals remain strong. Our portfolio is well positioned.

Speaker 3

Our hedging remains highly effective and we have strong capital and liquidity positions. This allowed us to return $638,000,000 of capital to shareholders There's a strong return of 79% of our operating earnings. Let's turn to Slide 6. Assets under management and administration ended the quarter at $1,300,000,000,000 up 9% AUMA benefited from Strong client flows and equity market appreciation partially offset by lower fixed income markets. Revenue growth was strong at 10% from higher interest earnings and cumulative benefit of client net inflows With average equity markets up only 2%.

Speaker 3

The impact of 6% equity market appreciation in June Will be reflected in our Q3 AWM results given the billing of our wrap business is based on beginning of the month balances. Pre tax earnings increased 24% from last year, with meaningful benefits from strong client flows, Higher interest rates and well managed expenses. Let's turn to individual segment performance beginning with Wealth Management on Slide 7. Wealth Management client assets increased 13% to $833,000,000,000 driven by strong organic growth in client flows along with higher equity markets. As you are aware, there has been significant volatility since Q1 of 2022, which we have navigated well.

Speaker 3

Our client and ramp assets have remained consistent with our industry peers over this period. Our client flows continue to be strong at 9,400,000,000 up 10% from last year. Client money has gone into a combination of wrap and non advisory accounts as clients continue to be In a defensive posture, our flexible model and broad offerings allow advisors and clients to pivot as market and client preferences shift. While the money stays within the system gives us potential upside going forward. Revenue per advisor reached 874 In the quarter, up 7% from the prior year from high spread revenue, enhanced productivity and business growth.

Speaker 3

Turning to Slide 8, I'd like to provide an update on client cash levels. Our client cash balances comprised of cash sweep and certificates have returned to more historic levels at 42,000,000,000 which translate to about 5% of total client assets. The financial benefit from cash remains unchanged Despite a lower volume of cash, as we have seen a significant lift in the interest rate earned at the bank and certificate business, Our fee yields have increased nearly 3 50 basis points from a year ago and picked up 40 basis points sequentially, resulting in very strong interest earnings growth. I would like to note that we continue to see new money flows into money markets And broke it CDs, albeit at a lower level in June, which brought our total cash level to 70,000,000,000 This creates a significant redeployment opportunity as markets normalize for clients to put money back to work and wrap and other products on our platform. While there is some seasonality with cash levels, particularly with tax payments in March April, Cash remains an important component of the client's asset allocation.

Speaker 3

Like others in the industry, balances are stabilizing. Our sweep cash has an average size of $7,000 per account and 65% of the aggregate Cash is now in accounts under $100,000 and we have seen a very limited movement out of these accounts. In the quarter, we moved approximately $1,000,000,000 from off balance sheet cash onto the bank's balance sheet. We continue to evaluate the opportunity to bring additional balances onto the bank balance sheet as we move forward. Lastly, we continue to manage our investment portfolios prudently.

Speaker 3

Our bank portfolio is AAA rated With the 3.4 year duration, the overall yield on the portfolio is 4.6% and rising With the new money yield on investments in the 2nd quarter of 6%. Our certificate company portfolio is highly liquid With over half of the portfolio in cash, governments and agencies, it is AA plus rated on average with a 1 year duration. As I noted last quarter, the portfolio yield lag Decline crediting rates as new money moved into this business. This quarter, the portfolio yield increased 33 basis points. In total, the certificate company portfolio is now yielding 5.5% with new purchases in the quarter at that level as well.

Speaker 3

On Slide 9, we delivered extremely strong results in Wealth Management on all fronts. Profitability increased 49% in the quarter with strong organic growth and the benefit of the higher interest rates. Pre tax operating margin reached a new high of 31.2%, up 7.30 basis points year over year and up 60 basis points sequentially. As I mentioned before, the benefit from the June market appreciation of over 6% Will be a tailwind for quarter three results given we build our wrap business based on the beginning of the month balances. Adjusted operating expenses increased 3% with distribution expenses up 1%, reflecting higher asset balances.

Speaker 3

Consistent with our expectations, G and A is up 9% in the quarter. This is off a very low base Last year given the impact of the pandemic and we continue to make investments for growth. We expect AW1 full year 2023 G and A growth To be in the mid single digits. Let's turn to Asset Management on Slide 10. We are managing the business well through a challenging environment that is impacting the industry.

Speaker 3

Total AUM increased 3% To $617,000,000,000 primarily from higher equity markets, partially offset by lower fixed income markets. Asset Management, like other active managers, was an outflow in the quarter. Reinvested dividends We're $2,000,000,000 lower in the current quarter. However, underlying net new sales were fairly consistent to last year. Like others, We experienced pressure from global market volatility and a risk off investor sentiment.

Speaker 3

Investment performance has been another critical area of focus And we are seeing improvement including in fixed income strategies. Overall, 5 10 year performance remains very strong. And as Jim said, We had improvement in the 1 year numbers. On Slide 11, you can see Asset Management financial results reflecting the market environment. As anticipated, earnings declined to $162,000,000 as a result of deleveraging, net outflows and lower performance fees in the quarter.

Speaker 3

The margin was down sequentially to 30%. Importantly, we continue to manage the areas we can control. Expenses remain well managed. Total expenses declined 2% with G and A up only 2%. As Jim said, given the environment, we are taking a very focused look across the business globally to further reduce expenses.

Speaker 3

This includes identifying and stopping less growth focused activities and redeploying resources where we can see an opportunity to support our margin. Let's turn to Slide 12. Retirement and Protection Solutions Continue to deliver good earnings and free cash flow generation, reflecting the high quality of the business. In the quarter, Pretax adjusted operating earnings was $189,000,000 up 13% from the prior year, primarily as a result of higher investment yields from the portfolio repositioning we executed last year. However, Earnings in the current year were unfavorably impacted by $7,000,000 from a model update resulting from a system conversion And timing of earnings recognition for payout and news, which is expected to normalize.

Speaker 3

We continue to view Normalize annual earnings of $800,000,000 as a reasonable expectation for this business. Overall sales declined 10% related to our decision to discontinue sales of variable annuities with living benefit riders a year ago. However, protection sales improved and remain concentrated in high margin asset accumulation BUL, which now represents over 1 third of the total insurance in force. Now let's move to the balance sheet on Slide 13. Our balance sheet fundamentals remain strong and our diversified high quality investment portfolio remains well positioned.

Speaker 3

In total, the average credit rating of the portfolio is AA, with only 1% of the portfolio in below investment grade securities. VA hedge effectiveness remained very strong at 98%. Our diversified business model benefits from significant and stable free cash flow contributions from all of the business segments. This supports the consistent and differentiated level of capital returns to shareholders. During the quarter, we returned $638,000,000 to shareholders and still ended the quarter with $1,300,000,000 of excess capital and $2,100,000,000 of holding company available liquidity.

Speaker 3

We remain committed to continuing to return capital to shareholders and announced a new 3,500,000,000 share repurchase authorization through September 30, 2025. With that, we'll take your questions.

Operator

Thank The first question is from Alex Blostein with Goldman Sachs. Your line is open.

Speaker 4

Hey, good morning, everybody. Thanks for the question. Maybe we could start with a question on AWM. I want to zone in on kind of the interplay between net new asset growth, Jim, that you talked about and cash. So to your point, lots of capital, obviously sitting in the sidelines in money market Funds, treasuries and as Fed funds peaks, it's likely that some of that cash is going to make its way into investment products.

Speaker 4

So what are your expectations for AWM net new asset Growth into the second half, particularly within advisory? And then at the same time, do you think any of that reallocation of cash Could put incremental pressure on the $30,000,000,000 of brokerage suite balances, which I think were down about 10% sequentially or are they pretty kind of troughy sort of at operational levels at this point? So as part of that maybe just an update on kind of where that $30,000,000,000 sits in July as well?

Speaker 2

Okay. So Alex, I think we've continued to have very good client flows quarter to quarter. This quarter, they were up 10% from last year. But remember, in the Q2, you always have some adjustment because of tax payments. So if you look at Even where we had some of the cash sorting in the second quarter, a significant amount was due to those tax payments coming out in April.

Speaker 2

And that also then hits your client net flows on a consistent basis like the cash. Having said that, I would say we continue to see that client Slow activity being good, our client engagement is good. But to the point you just referenced that we mentioned, Your consistent level has gone more into cash as a holding because of the current yield, right? Now, this market has maintained itself a bit better than people expected. I think there was a surprise about how the market has So much now it's starting to broaden a bit rather than just based on a few stocks.

Speaker 2

And so if that does continue and there's a settlement in a sense of Even fixed income yields feeling like they're not going to continue to rise at this point. There might be a shift back as we're beginning to see Into fixed income products other than cash for a longer duration as well as in equities. And so now where does that money come from? Our belief is that we've never held this amount of cash balances before, right? And so 70,000,000,000 It's up to like 9% of our total assets here and some of that will come back from those positional cash areas.

Speaker 2

Regarding the sweep per se, we all hold a certain level of cash in those accounts because of Usage, just like a checking account and certain things like that. So we're not thinking that a large amount or the significant amount will In fact, we see the cash sorting slowing as we go into this down through the beginning of the Q3 here. And so My belief is it will come more from positional cash. And because of the size of the balances we're maintaining, Now I can't I don't have a perfect crystal ball, but when money comes back in, then more is actually held in a sweep for transactional activity that occurs. So that's really how we're thinking.

Speaker 4

I got you. That's helpful. Any update on where that $30,000,000 is in July, just tactically?

Speaker 3

Well, in July, yes, we saw it has slowed the way we anticipated and we're just observing now, but we feel comfortable with this slowing that we're seeing.

Speaker 4

Okay, great. And then my second question just around the asset management dynamics that you described. Obviously, it sounds like you're adjusting the expense base to the sort of headwinds we're seeing across the industry. I mean, maybe put a little more granularity about kind of what that means, what are your expectations for G and A growth within the asset management business for the second half, and it sounds like that will continue into 20 4. And I guess bigger picture, flow is a challenge that's been the story for some time.

Speaker 4

But the markets to your point earlier operate, so the revenue base Could actually grow despite the flow challenges. How does that inform this quarter kind of G and A reallocation dynamics? Could G and A be Sort of flat to down even in that scenario or the upward market will just naturally put some pressure on the cost base?

Speaker 2

Yes. So what we're really focused on is and I think if you looked at the Q2, G and A was actually down 2%, but because of the share price Appreciation and the plans, etcetera, it ended up up 2%, but the underlying was actually down. And we expect that to continue and we're taking a much more concerted effort now that we've gone through some of the major Integration activities that we had to do in Europe, even though that's not complete, now we can take a more holistic view of our global expense base, which we are across all areas. And we think there is some good opportunity for us to really target for reduction expenses as we move forward into 2024 and that's really our focus.

Operator

Great. Super helpful. Thanks, guys. The next question is from Brennan Hawken with UBS. Your line is open.

Speaker 5

Good morning. Thanks for taking my questions. I'd like to start on the pending Comerica So could we get an update there? Are the assets still around $18,000,000,000 or has that changed due to market Tailwinds or otherwise. And is this base of assets similar to other Bank deals that we've seen where there's more of a bias to brokerage than advisory and or cash allocations similar to what you have in AWM.

Speaker 3

So it's Walter. As it relates to Car America is totally on track and the Activity levels and certainly the assets that we announced at the when we made consummated the Arrangement is on track also and its characterization, yes, cash is a component, but it is Within the ranges of the transaction. So we feel very comfortable with it and we're talking for the Q4.

Speaker 5

Okay. So hasn't really changed from where I'll try. Got it. Perfect. Okay.

Speaker 5

Thank you. And then Have you as we start to see the sort of fluid environment and the forward look for rates and With the potential for lower rates as we move into 2024, maybe I was hoping for an update on the maturity profile of the CDs within the certificate company. And how are you thinking about managing those balances and maybe either pulling back on rate or leaning in depending on the outlook and the idea At some of those rates and that funding would be locked in a potentially declining rate environment?

Speaker 3

So if you You mentioned the certificate. I would probably focus more on the bank, because the bank is really where we have now the advantage of investing and having duration. As you've seen, our yield right now is 4.6%. We certainly see that increasing as We have maturities and other things. So we feel quite comfortable that as the environment, I don't know where it's going to go up, don't know where it's going to go down, stay the same.

Speaker 3

But we are well positioned to have That stability of earnings there and that the yield that we see at the bank, which is the majority of where we've gone out for investing We'll prevail as we look over the near term. So we're in very good position from that standpoint.

Speaker 5

Yes. No, I Totally appreciate that. And I hear you. I was more thinking about managing on the cost side of it.

Speaker 2

On the certificate side, as we would say, we sort of match a sort of like based on the yield we provide for those things. So we sort of look To sort of keep a certain spread on that based on when they the money coming in or where we look at it when it's matured.

Speaker 3

Yes. The spread, as I indicated, increased because obviously, our investments are catching up with the rate and it's short duration, it's 1 year. So from that standpoint, we will adjust it both from the rate decline to credit union rate and certainly our investments, but we feel very comfortable with the spread They are as it's incorporated.

Speaker 5

Right. And the spread is durable in both declining environments as well as rising Yes.

Speaker 3

We will maintain a certain degree of spread, but obviously it just as rates go up and down.

Speaker 5

Great. Thank you for taking my questions.

Operator

The next question is from Erik Bass with Autonomous Research. Your line is open.

Speaker 6

Hi. Thank you. For Asset Management, do you still think that 31% to 35% margin is the right target to think about near term and Given the expense actions you've talked about as well as the benefit from rising markets, do you think you could get back to that level in the second half of this year?

Speaker 2

Yes. I can't listen, I can't predict the Q3 per se, but we're not changing that targeted rate and we definitely believe that we can be within that targeted rate. I can't A quarter, but I would probably say, yes, we feel comfortable with that as we go to the second half, but into 'twenty four.

Speaker 6

Perfect. And then can you update us on the plans to launch a brokered CD product and any other bank products for the second half of the year? And What your expectations are for the type of assets that those could attract?

Speaker 2

Yes. So we did soft launch a brokered CD, in the Q2 and that's starting to take hold here. We also put out a base savings Product, again, that's beginning to take hold. And we have plans for the The end of Q3 to actually put some incentives type activity there to bring in new cash from outside the firm And also a preferred type of savings product in the Q4. So we're sort of getting how They are positioned on the platform and then how we sort of roll that out from soft launches, etcetera.

Speaker 2

But yes, we will have a set of those

Speaker 6

Thank you. And how would you sort of tier the margin expectation on that relative to the other cash products or certificates?

Speaker 2

So what I would say, 1st of all, you got to separate the suite, which is a different animal from various savings products. But I'll let Walt to

Speaker 3

answer that. The margin as we have certainly reserve count at the CIRTS and the margin in the bank is similar. It's a little higher, but the margin is good. And then we're competitive on each one of the products as we look at the CD and obviously Rates there are certainly being driven by regional banks and others, but we will remain competitive. But the margins there are lower As you would expect.

Speaker 3

Got it. Thank you. Right.

Speaker 5

Yes. Thank you.

Operator

The next question is from Suneet Kamath with Jefferies. Your line is open.

Speaker 7

Thanks. Good morning. Just Going back to the bank for a second. So our understanding is that you'll have, I think, dollars 1,400,000,000 of assets Sort of maturing and rolling into new assets in the second half and then a similar amount in the first half of next year. So would it be possible to get So the current yields on those assets, just so we can kind of think through when that reinvestment occurs, how much upside you guys would have?

Speaker 3

Yes. I would say you're right. It will probably you saw where it is today 4%, 6% range. With that, We're getting in the ranges high fives, low sixes and so that should go up. I can't tell you what rates are going to be, but if Great to stay where they are, actually move around 40 basis points, 40 basis points by the end of the year.

Speaker 7

So you're saying an incremental 40 basis points to 50 basis

Speaker 8

Yes, you'll get to around 5.

Speaker 5

Yes. Got

Speaker 7

it. Okay. And then I guess

Speaker 3

Yes, I just want to clarify that since rates stay the way they are today, okay, and then spread.

Speaker 7

Yes. Got it. Okay. And then I guess you're talking about this now $70,000,000,000 cash number. And I think last quarter that was maybe 60,000,000,000 Obviously, there's a portion of that that you guys have kind of in that $42,000,000,000 range.

Speaker 7

So as we think about that incremental 28,000,000,000

Speaker 9

I know some

Speaker 7

of that's in other companies' products, but what's a reasonable expectation in terms of how much of those assets you guys think you could ultimately Have in your own products?

Speaker 2

So I think what I would say is, I think a Good amount could come back, but not just into our own savings type products, but more importantly into the wrap Type of business again. If you recollect before the sort of period where people got a little more concerned, We had roughly a majority of our client flows going into RAP. And so I believe right now we're at a sort of a low point of the amount of cash being deployed into wrap. And I do believe part of That went to positional cash, and that positional cash will start to come in. And remember, I think the investments Some fixed income is much lower than it's been in a long time because of the yields going up on the duration and people not wanting to get whipsawed.

Speaker 2

And so that money will come back in and that does go into wrap accounts as well because it's more of a balanced portfolio that they utilize.

Speaker 7

Got it. And then if I could just speak one more in. Jim, I thought your comment about high net worth and millennial opportunities sounded like it was new. Is that Opportunity is something that you can attack sort of organically or are there capabilities that you'd need to acquire in order to capitalize on that growth opportunity. Thanks.

Speaker 2

No, Suneet. We're already for instance, we're already bringing in high network clients nicely, But we have not made that a more concerted effort in the franchise yet. But now we are Putting more deploying around that, and we do have most of the capabilities, if not all of them. I mean, there's always some bells and whistles we add, but we have added to a Product platform, alternative platform, etcetera. We have now and the advice part of what we have Actually worked very well for high network client.

Speaker 2

And what we found is when we did our Research that we are considered up there for high network clients or prospects similar To any of the private houses out there that catered to them or the major wire houses that catered to them. So we don't have a disadvantage there and it's one that we're building up the focus of our advisors To really understand and see that, so that they can target it more. And then on the millennial side, we've made a lot of investments in our digital capabilities And the engagement way of doing that, that we will also be really starting to focus more on for bringing in younger Clients, either through some of the younger advisers we bring, but more even direct in some of our things because we have remote channels set up to work with clients that way. And so, I feel very good about those opportunities giving us further expansion efforts.

Speaker 7

Got it. Okay. Thank you.

Operator

The next question is from Steven Chubak with Wolfe Research. Your line is open.

Speaker 9

Hey, good morning. It's Michael Anagnostakis on for Steven. I just wanted to circle back To the rate sensitivity picture here, I guess given the shape of the curve, maybe you could provide some updated color on your rate Can you help us size the impact to your earnings from rate cuts on the static balance sheet? And how do you expect your deposit betas to differ On the way down versus the way up given your certificate percentage and low cost sweep deposits funding the bank. Thank you.

Speaker 3

So again, from the standpoint on rate going down, we do have since we are now Having substantial amounts in the bank, that would give us insulation from that standpoint. For the portions that would be subject to Short term of the Fed Fund reductions, on that basis, you can imagine it's a straight calculation for every Percentage going down. So it's factored into our analysis and we've Seeing the cycle going up and going down, but the mathematics are on that basis, we have $6,000,000,000 $7,000,000,000 sitting in On the balance sheet, you can do the calculation on a 1% change. As it relates to the SERDS, the SERDS really do adjust. It's a matter like on the way up, we lose them until it catches up and the way down, we'll gain, because we'll have the investments there and we certainly have the liquidity to cover it.

Speaker 3

So therefore, It's a positive to us on the search side when it's going down because of the investments and just like we've had the catch up situation now when it's been going up.

Speaker 9

Got it. And then I did want to flip on to expenses here. I guess, How should we be thinking about long term G and A growth for the firm, given some of the reduction efforts you're undertaking, A more fully funded bank and a progress on BMO, if you could help us think about the growth between the wealth segment and the firm as a whole, That would be great. Thank you.

Speaker 2

So I would let me start and Walter can compliment. So overall for the firm, When we talk about G and A per se, I would say it's relatively it's going to be relatively flat. And remember, you got merit and credit and other things that Are part of that, but it will be relatively flat overall based on what we're looking to do. If you think about where There may be a little more versus a little less, maybe a little more in the AWM because of the growth of that business and maybe and a bit less on the asset Management side, meaning that there will be expense reductions. But overall, if I look at that across the firm, including all the various groups, It will be relatively flat absorbing the inflationary expenses that occur, while we continue to make good investments in the business.

Operator

The next question is from Tom Gallagher with Evercore ISI. Your line is open.

Speaker 8

Good morning. First question is, why did Ameriprise withdraw its application early this month To convert to a state chartered industrial bank and a national trust bank, have there been any changes in Regulation or rules related to your current structure or any, can you give some perspective on that?

Speaker 2

I think it is

Speaker 3

a matter of certainly the situation as you look at the FTCF Board and what they felt about with the Regional bank situation would they really want to now expand into a state and we just felt the probability It was not there and we're quite comfortable with the SSB at this stage. We withdrew it rather and it was just Again, they were working on decisioning it and we just felt that we would withdraw based on the look lines of circumstances. We still have the Again, the capability, so it doesn't really affect us, but that's the story. With the regional bank and the other situations, the environment just We felt it was not there.

Speaker 8

And Walter, do you expect there to be any changes On capital where you might have to hold more or is that less certain? Just any perspective on that.

Speaker 3

Yes. From our standpoint, as part of our steady state planning, certainly the differential, no, if anything, you probably would have a tick up on the state The situation and we certainly understood that. But no, the short answer to the question is no. We do not because of this Situation with the state or with the FSP, we do not anticipate other than the Fed is evaluating, right, based on the situations That they've seen. And we would be just like anybody else in our with the size of our balance sheet impacted for that level.

Speaker 8

Got you. Next question, just can you comment on any updates on risk transfer On the RPS side, is that still it sounded like you went through a more thorough process, you emerged from it saying You didn't like the pricing, yet you're seeing a lot of competitors in the life insurance space Do further risk transfer deals, so that trend continues and it's pretty good pricing actually on some of the recent deals. So curious If that's changed at all your perspective, whether the competitor pricing or where do you stand on overall risk transfer? Thanks.

Speaker 3

I think one point where we stand with holdings, certainly we feel very comfortable with what we have and as we look at it and then yes, certainly Evaluated situations, as we've always said, we've looked at it. Many of the stuff in the past has been Yes, we've seen some changes there. And certainly, we are not going outbound. When certain inbounds come in, we evaluate it. So but we are very comfortable where we are right now.

Speaker 8

But now would you say nothing's really changed On your view that there's still too wide of a bid ask spread relative to what you think the value of your book is versus the type of pricing that's out there?

Speaker 3

Certainly, we've seen changes shifting with the books that are going. But again, we don't do a detailed analysis in every accident. We'll evaluate facts and circumstances as it relates to us.

Speaker 2

Yes. I mean, we haven't gone through an in-depth of what's recently occurred and what may Happen in the market. I think from our perspective right now, we have a very solid business there. We have a very low risk profile for that business. As Walter said, it's going to continue to generate roughly $200,000,000 of PTI, a quarter, dollars 800,000,000 for a year.

Speaker 2

Most of that is free cash flow for us. That's how we think about it. But if there are opportunities that arise, we'll always have to entertain them.

Speaker 8

Okay. Thanks.

Operator

The next question is from Craig Siegenthaler with Bank of America. Your line is open.

Speaker 10

Thanks. Good morning, everyone. So next quarter, you're going to have your annual insurance liability unlocking exercise. And Last year resulted in a large negative adjustment with the bear market effect on the variable annuity book. This year markets were up a lot, interest rates are up a lot.

Speaker 10

So my question is, Should we get a reversal in the unlocking last year just given the bull market that we're in? And also, could there be a release in the long term care block just given that interest rates are a lot

Speaker 3

Yes. The interest rates will tap, but listen, there is balance between the equity markets and the equity in the interest markets. So we From that standpoint, are looking at our available cap. That's why we came out of our ratio looking at it because you're looking at it from an LDTI standpoint. And then from our standpoint, That's why we've determined it is not the driver of it.

Speaker 3

So the element is statutory from that standpoint. So We feel comfortable. The market is there. The interest rates, certainly, we you've seen our position. Our excess capital has not changed Sequentially, so we right now, it's we are navigating the situation and we feel very confident.

Speaker 3

So As rate as environments change, we have the ability to certainly absorb and adjust for it. And yes, if we get benefits, we will evaluate Certainly, our positioning.

Speaker 10

Thanks, Walter. My fault and I think I know your answer here, but I just kind of want to hear it anyway. You stopped selling fixed annuities, you insured your book to KKR's Global Atlantic, We've watched the alts acquire these books pretty aggressively and now interest rates are back to healthy levels, ROEs on these portfolios are higher And the product isn't that complicated. It's really just credit quality to match duration. So don't you have a competitive advantage with your large distribution channel in wealth?

Speaker 10

And you seem pretty happy with your decision, but don't higher interest rates versus the last 15 plus years change the calculus On the fixed annuity basis, Tim?

Speaker 3

Well, yes, listen, fixed annuities Certainly gotten back in favor from that standpoint and we will evaluate it, but it also has implications from balance sheet standpoint in surrender, out of surrender and certainly Portfolio, we feel very comfortable with, like you said, with the reinsurance situation and there, but we are constantly evaluating. We will go back Manufacturing or not. And right now, I think we're comfortable where we are. But certainly, yes, there are advantages to it and it ebbs and flows. We do know that, right?

Speaker 3

As rates go up and down, you have implications from liquidity and other standpoints with that portfolio. That's why we basically felt very comfortable reinsuring it.

Speaker 10

But it's

Speaker 3

certainly we continue RPS Group continues to evaluate and make recommendation on it and as we look at it. But We are I can say right now, we're good.

Speaker 10

Thanks.

Operator

The next question is from Ryan Krueger with KBW. Your line is open.

Speaker 11

Hi, thanks. Good morning. You mentioned the 50 the 40 to 50 basis points of yield uplift Within the bank, would you expect much if any higher deposit costs or interest costs Along with that or should that predominantly drop the bottom line?

Speaker 3

That factored in. That was I was giving you actually the asset earning rate on that going And that was the question. That was what I was referring to.

Speaker 5

As far

Speaker 11

as that, we would adjust that

Speaker 3

to cost the funds for the bank as we look at the situation where it sources, which is probably coming out of the sweep accounts.

Speaker 11

Okay. And then you've seen the certificate balance Increase this year, I think you're rolling out more products within the bank. At some point, should we expect some of the certificate balances To roll off and move into the bank? And if so, is there much of a margin difference between the 2?

Speaker 3

If you look at it from that standpoint, the March bound on certificates in the bank should be comparable. And yes, we have built up and we just as Jim indicated, we launched our bank certificate product, so we will certainly have that offering to people. But right now, we're not anticipating big shifts coming in, but we certainly are giving them the capability within the short product.

Speaker 11

Okay. Thank you.

Operator

The next question is from Jeff Schmitt with William Blair. Your line is open.

Speaker 12

Hi, thanks. I have another question on brokerage sweep rates. They appear to be pretty flat from last quarter and the deposit beta seems to have slowed for the industry. And just wondering if there's potential for you to increase your sweep rate If the Fed keeps raising interest rates or are competitive levels such that you may not need to raise it much anymore?

Speaker 3

Listen, we have a very robust valuation system that goes on to ensure we offer competitive Great. And we are now evaluating the team is now evaluating. Yes. So you will see as we look at the competitive environment and landscape that we will Evaluate then the our deposit beta and increase rates accordingly to ensure that we offer our clients competitive rates. That's a very

Speaker 5

focused program we have. Yes.

Speaker 12

Okay. And then just on capital return, I think it's running at 80% of operating earnings in the first half. I know in the past you've sort of targeted 90% or at least for the full year. I mean should we expect To move up to that or is there any reason it's sort of running below that long term target?

Speaker 3

Well, right now we established for this year, we said our target for this year is Going to be 80%. Obviously, you can go up and down in the quarter. We're still a little comfortable with that right now, staying with that guidance.

Speaker 12

Okay. Thank you.

Operator

We have no further questions at this time. And this concludes today's conference. Thank you for participating. You may now disconnect.

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Earnings Conference Call
ServisFirst Bancshares Q2 2023
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