Raymond James Q3 2024 Earnings Call Transcript

Presentation

[Kristie Waugh, Senior Vice President, Investor Relations at Raymond James]

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

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

Call your attention to slide two. Please note that certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, industry or market conditions, anticipated timing and benefits of our acquisitions and our level of success in integrating acquired businesses, anticipated results of litigation and regulatory developments and general economic conditions.

In addition, words such as believes, expects, anticipates, intends, plans, estimate, projects, forecasts and future or conditional verbs such as may, will, could, should and would, as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our website.

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

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Thank you, Kristie and good evening. Thank you for joining us today. Last week, Paul and I attended our Summer Development Conference for our employee advisors. It's exciting to spend time with so many advisors who embody our client first culture. We hear firsthand what makes Raymond James a great place for advisors who value the breadth of our technology and product platform, so they can effectively serve their clients and importantly, a firm that provides advisors the tools they need to grow their businesses. Paul and I appreciate the passion and dedication of the thousands of advisors, who continue to serve their clients day in and day out.

Turning to our quarterly results, we once again delivered strong results in the quarter. Our diverse and complementary business combined to generate record results for the first nine months of the fiscal year. We continue to invest in our businesses, our people and our technology to help drive growth across all of our businesses.

Beginning on slide four, the firm reported record fiscal third quarter net revenues of $3.23 billion, an increase of 11% over the prior year quarter, primarily due to higher asset management and related administrative fees. Quarterly net income available to common shareholders was $491 million or $2.31 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $508 million or $2.39 per diluted share.

We generated strong returns for the quarter, with annualized return on common equity of 17.8% and annualized adjusted return on tangible common equity of 21.9%, a great result particularly given our strong capital base. During the quarter, we repurchased 2 million shares of common stock for $243 million, bringing our fiscal year-to-date total to 5.1 million shares for $600 million.

Moving to slide five, client assets grew to record levels during this quarter, driven by rising equity markets and solid advisor retention in recruiting and PCG. Total client assets under administration increased 2% sequentially to $1.48 trillion. Private client assets and fee based accounts grew to $821 billion and financial assets under management to $229 billion. Domestic net new assets during the quarter were $16.5 billion, representing a 5.2 annualized growth rate on the beginning of the period domestic PCG assets.

Our robust technology capabilities, client first values and long established multi affiliation options continue to retain and attract high quality advisors to the platform. This quarter, we recruited to our domestic independent contractor and employee channels financial advisors with approximately $92 million of trailing month production and $13.4 billion of client assets at their previous firms. Including RCS, we recruited client assets of $14.9 billion, making this our best quarter since 2021 in terms of recruited assets.

Fiscal year-to-date trailing twelve month production of recruited advisors is up 33% and related client assets are up 52% over the prior nine month period. These results do not include our RIA and custody services business, RCS, which also continues to have recruiting success and finished the quarter with $167 billion of client assets under administration. We continue to experience growth in RCS from external joins, as well as from internal transfers.

This quarter we reported record financial advisors of 8,782 and that does not include internal transfers to RCS of nearly 50 advisors, primarily all from one firm. While transfers to RCS lower the firm's advisor count, the client assets typically remain with the firm.

Looking at fiscal year-to-date results, domestic net new assets were $47.7 billion, representing a 5.8% annualized growth rate on the beginning of the period domestic private client group assets, a strong result compared to peer group. Total clients domestic sweep and enhanced savings program balances ended the quarter at $56.4 billion, down 3% from March of 2024.

We are pleased to see cash balances remain relatively flat in the quarter following fee billings paid in April. Bank loans grew 2% over the preceding quarter to a record $45.1 billion, primarily due to higher securities based loans, as demand for C&I loans remains muted.

Moving on to slide six, private client group generated record quarterly net revenues of $2.42 billion and pretax income of $441 million. Year-over-year results were bolstered by higher PCG assets under administration due to strong equity markets and net new assets brought into the firm. The capital market segment generated quarterly net revenues of $330 million and a pretax loss of $14 million.

Net revenues grew 20% compared to a year ago quarter, primarily due to higher debt and equity underwriting revenues. Sequentially, revenues increased 3%, primarily driven by the higher affordable housing investment revenues. Pretax loss and capital markets segment of $14 million reflects weak M&A results and the impact of amortization of deferred compensation granted in preceding quarters, which totaled approximately $20 million this quarter.

While the timing of closings remain difficult to predict, we are still optimistic about our healthy pipeline and new business activity in M&A. We continue to expect investment banking revenues to improve along with industry wide gradual recovery. The asset management segment generated pre tax income of $112 million on record net revenues of $265 million. Results were largely attributable to higher financial assets under management, compared to the prior year quarter due to market appreciation and net inflows into PCG fee based accounts.

The Bank segment generated net revenues of $418 million and pre tax income of $115 million. The Bank segment net interest margin of 2.64% declined just 2 basis points compared to the preceding quarter. Looking at the fiscal year-to-date results on slide seven, we generated record net revenues of $9.36 billion and record net income available to common shareholders of $1.46 billion, up 9% and 12% respectively, over the previous record set in the prior year.

Additionally, we generated strong annualized return on common equity of 18.2% and annualized adjusted return on tangible common equity of 22.5% for the nine month period. On slide eight, the strength of the PCG and asset management segment for the first nine months of the year primarily reflects the strong organic growth in PCG along with robust equity markets.

And now I'll turn the call over to Paul Shoukry for his remarks. Paul?

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

Thank you, Paul. First, I just want to echo Paul's comments earlier on how great it was to attend our Summer Development Conference last week, as well as our Elevate Conference earlier in the quarter and visiting several branches over the past few months. We truly have a fantastic group of financial advisors and associates, who put their clients first each and every day.

Now turning on to slide ten, consolidated net revenues were a record $3.23 billion in the third quarter, up 11% over the prior year and up 4% sequentially. Asset management and related administrative fees grew to $1.61 billion, representing 17% growth over the prior year and 6% over the preceding quarter. This quarter, PCG domestic fee based assets increased 3%, which will be a tailwind for asset management and related administrative fees in the fiscal fourth quarter. Brokerage revenues of $532 million grew 15% year-over-year, mostly due to higher brokerage revenues in PCG.

I'll discuss account and service fees and net interest income shortly. Investment banking revenues of $183 million increased 21% year-over-year and 2% sequentially. Compared to the prior year quarter, third quarter results benefited primarily from stronger debt and equity underwriting revenues. However, M&A and advisory revenues remain subdued.

Moving to slide eleven, 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 4.3% of domestic PCG client assets. So far in the fiscal fourth quarter, domestic cash sweep balances have declined about $1.25 billion, as cash inflows have partially offset quarterly fee billings of approximately $1.5 billion.

Turning to slide twelve, combined net interest income and RJBDP fees from third party banks was $672 million, down 2% from the preceding quarter. The Bank segment net interest margin was relatively flat at 2.64% for the quarter, while the average yield on RJBDP balances with third party banks decreased 18 basis points to 3.41%. The decline in third party yield was primarily due to a mix shift towards higher yielding sweep offerings.

Based on spot rates at the end of the third quarter and current balances, we would expect NII and RJBDP third party fees to be flat or perhaps down nominally in the fiscal fourth quarter. But of course, we are always monitoring the competitive environment, which has been notably dynamic in the space over the past few weeks. This guidance does not factor any incremental changes we may make to sweep rates based on these competitive dynamics or other factors.

Moving to consolidated expenses on slide 13, compensation expense was $2.09 billion and the total compensation ratio for the quarter was 64.7%. Excluding acquisition related compensation expenses, the adjusted compensation ratio was 64.4%. Non-compensation expenses of $494 million increased 6% sequentially, largely due to a favorable legal and regulatory net reserve release of $32 million in the preceding quarter that did not recur in the current quarter.

Generally, non-compensation expenses grew this quarter as expected to support growth across the businesses. For the fiscal year, we still expect non-compensation expenses, excluding provisions for credit losses, unexpected legal and regulatory items or non-GAAP adjustments to be around $1.9 billion, consistent with our previous guidance.

Slide 14 shows the pretax margin trend over the past five quarters. This quarter, we generated a pretax margin of 20% and adjusted pretax margin of 20.7%, a strong result especially given the challenging market conditions impacting capital markets. These results are in line with the targets provided at our recent Analyst and Investor day meeting in May.

On slide 15, at quarter end, our total assets were $80.6 billion, a 1% sequential decrease, as loan growth was offset by declines in cash balances and the continued runoff of the securities portfolio in the Bank segment. 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. With Tier 1 leverage ratio of 12.7% and total capital ratio of 23.6%, we remain well capitalized. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.

Slide 16 provides a summary of our capital actions over the past five quarters. During the quarter, the firm repurchased 2 million shares of common stock for $243 million at an average price of $122 per share. As of July 19, 2024, approximately $945 million remained under the board's approved common stock repurchase authorization.

Going forward, we expect to continue to offset share based compensation dilution and to be opportunistic with incremental repurchases. Given our present capital and liquidity levels, we currently expect to increase the pace of buyback activity, as we are committed to maintaining capital levels in line with our stated targets.

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 1.15%, down from 1.21% in the preceding quarter.

The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1%. The allowance percentage has trended lower, largely due to a loan mix shift towards more securities based loans and residential mortgages, which account for 34% and 20% of the total loan portfolio respectively. The bank loan allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was 2% at the quarter end. We believe this represents an appropriate reserve, but we continue to closely monitor economic factors that may impact our loan portfolios.

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

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Thank you, Paul. I am pleased with our strong results this quarter and looking forward we are well positioned with record levels of assets and bank loans starting off the fiscal fourth quarter. And while there is still economic uncertainty, I believe we are in a position of strength to drive growth over the long-term across all of our businesses. In the Private Client Group, next quarter's results will be positively impacted by the 3% sequential increase of assets and fee based accounts.

Our advisor recruiting activity remains robust and I am encouraged by a record number of large teams in the pipeline. We are focused on being a destination of choice for current and prospective advisors, which we believe over the long-term should continue to drive industry leading growth. In the Capital Market segment, we continue to have a healthy M&A pipeline and good engagement levels, but our expectations are for a gradual recovery and are heavily influenced by market conditions and we expect activity to pick up over the next few quarters.

And in the fixed income business, although we've seen some improvement in depository, results are still lagging historical levels. Depository clients continue to experience flat to declining deposit balances and have less cash available for investing in securities, putting pressure on the brokerage activity. We hope once rate and cash balances begin to stabilize and grow, we will start to see an improvement. Overall, despite some near-term headwinds, we believe the investments we've made in the Capital Markets Business have us well positioned for growth once the market and the rate environment become conducive.

In Asset Management segment, we remain confident that strong growth of assets and fee based accounts in the Private Client Group segment will drive long-term growth of financial assets under management. In addition, we expect Raymond James Investment Management to help drive further growth over time. In the Bank segment, we remain focused on fortifying the balance sheet with diverse funding sources and prudently growing assets to support client demand.

We have seen securities based loan pay-offs decelerate and demand for these loans increase as clients get more comfortable at the current level of rates. Corporate growth has been muted, as market activity remains low. However, with ample client cash balances and capital, we are well positioned to lend once activity increases within our conservative risk parameters.

In addition to driving organic growth across our businesses, we also remain focused on corporate development efforts. While we prefer to deploy capital through M&A, we plan to increase the pace of buybacks, as we continue to look for opportunities that may meet our disciplined M&A parameters. I expect you have several questions related to the industry news regarding cash sweep changes that occurred over the past few weeks. We have been monitoring these emerging developments closely like you have and frankly, probably have some of the same questions. We are prepared to attempt to answer any questions you may have.

In closing, we are well positioned entering the fourth quarter, with strong competitive positioning in all of our businesses and solid capital and liquidity base to invest in future growth. I want to thank our advisors and all of our associates for their continued dedication to providing excellent service to their clients. Thanks for all you do.

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

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of Michael Cho with J.P. Morgan. Your line is open.

[Michael Cho, Analyst at J.P. Morgan]

Hi, good evening. Thanks for taking my question and I will go ahead and start with regulatory fee. I mean, Paul, you mentioned -- you talked through the interest income and RJBDP fee kind of doesn't include potential considerations, you know, to maybe changes in rates on sweep cash, I mean and you mentioned competition. So again, how would you characterize the current changes in the competitive environment from your view, from your seat? And is there a way to frame the magnitude or even type of response by Raymond James, whether it's either competition or regulatory on this front? Thanks.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yeah, let me start, the other Paul, there are two Pauls here, but let me start by saying first, people are talking about, well, what's the difference to this program, that program, our suite programs are very, very different. So I want to set a stage first that if you look at our suite programs, we offer from 25 to 300 basis points. The programs that people have been talking about offer one basis point to 50 basis points. So we start off with a whole different value proposition. We have $3 million of FDIC per individual or $6 million joint in the suite. We have also in our programs, very competitive money market funds. They're institutional class, available to everyone, irrespective of the size of investments. And you can see how those have grown dramatically.

We have enhanced savings program, again offering high rates and up to $50 million of FDIC insurance, which you've also seen grow. And our advisors and clients, if you look at the shift, have taken appropriate actions to invest the money. So I don't know what's happening in some of the other programs. I can tell you, ours are well thought through, we think are very compliant. And as we look at the announcements and changes, they're not very specific yet, right? So we've prided ourselves subject to criticism, even from this group maybe at times, for having such high sweep rates.

But we've done it because we believe both it's the right thing to do and it's regulatorily was compliant with what we understand. So we're going to have to look at movements and each of the movements have been a little different. We don't even know totally what they apply to. So we don't see anything that we know of today that's forcing us to change rates. But we meet weekly and we're going to be competitive. So if the competitive landscape of rates change, we have to be competitive both for our advisors and our clients. So that was more of an unknown comment, Paul, saying if things happen, we're going to adjust. That is today we're looking at stuff, but with no current plans.

[Michael Cho, Analyst at J.P. Morgan]

Okay, great. Now thanks for the clarification and the thoughts there. I guess just for my second question, I just want to zoom out and ask a broader business question and have trajectory for Raymond James ahead. I mean, as you talk through, continue to hit record assets, record revenue, record bank loans and I realize you have some margin targets out there for the broader company and clearly there's some aspects and nuances happening real time, as you just talked through, Paul. But I'm just curious, how would you frame the trajectory for operating leverage in the business as this backdrop continues to reach record levels for Raymond James, despite maybe some rate normalization ahead?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yeah, I think that the operating leverage we, as we grow assets, we believe we can accomplish it. There were a number of factors. We've certainly, the whole industry has had a strong equity market, maybe until the last week or two, but cash spreads have also continued to support the businesses. But we believe that as we grow and especially our use of technology in the back office and I know that's one of Paul's keys focus as we transition over this next year to double down on that, we believe we can get operating leverage and still be able to keep our very high levels of support our advisors. And our latest survey gave us 95% satisfaction rate, almost 60% net promoter score on service.

So we believe that's a hallmark, but we believe with technology we can make it better and easier for them as we continue to spend more money, you know, in that part of the service. And the reason? Better service, but also much better leverage.

[Michael Cho, Analyst at J.P. Morgan]

Great. Thank you so much.

[Operator]

Your next question comes from the line of Devin Ryan with Citizens JMP, your line is open.

[Devin Ryan, Analyst at Citizens JMP Group]

Hey, good afternoon, Paul and Paul. How are you?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Good, Devin.

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

Hey, Devin.

[Devin Ryan, Analyst at Citizens JMP Group]

Good. I'll ask another one on the advisory cash rates, sounds like some of what's going on in the industry is news to you guys as well as you're following along. And so, I guess just what I'd love to know, if you can, what percentage of fee based accounts is in cash at the lowest rates? And then just also trying to understand competitive reasons that could drive kind of a change in your thinking, because obviously one of the firms that's moved -- you made their changes in April, which I'm assuming you guys probably evaluate frequently kind of price all that then. So just trying to think about what else could competitively change your view, especially now that the vast majority, if not all of the yield seeking cash has already been moved on to those higher yielding alternatives for customers, as advisors should have already done.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yeah, so if you look at our advisory suites, we'll just focus on those. It's about 2.5% of those assets are in cash. And to us, that's frictional cash. You can't find an institutional portfolio or anyone that doesn't have some cash in it at those levels for trading, for paying fees for whatever you do in them. So we view that as frictional or spending cash. The average cash amount in those counts are $8,900. I mean, so, I don't know where you go to a bank and get kind of our sweep rates at that amount of cash.

So the other thing, if you look at those accounts and you can tell the shift, because before rates started moving, it was just cash in those accounts. Total money market CDs and treasuries are 22,600 for those accounts. Sorry, the money market, money markets, CDs, treasuries combined are 22,600 in accounts. So you can see it's much more invested, certainly on higher yield instrument. So we believe that at $8.9 thousand or 2.5%, that's a very low rate of cash to have sitting for transaction. So, we think we're putting clients money to work with those numbers.

[Devin Ryan, Analyst at Citizens JMP Group]

Right, exactly. So, I guess that's kind of my -- I guess the root of the question that you've already seen that move, it's very small amount. You are playing a higher rate than some other programs, as you mentioned already. So competitively from here and we don't know exactly every action that's happened, but just the catalyst actually make meaningful change after you're already in the position that you're in, as you just described, Paul.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

I think the forces that could be happening if there was a squeeze on cash in the industry, where would you get the cash? You would offer higher rates to get it out of treasuries and money market funds and whatever. I think that cash is seeming to have stabilized pretty much everywhere, starting to, anyway who knows where that goes. We have a very clear buffer still for operating our business, but I think a demand for cash or if rates go up, you start to see that would pressure it. If better freights go down and there's plenty of cash, I don't see what really squeezes that outside of following the market as rates fall. So, I don't see anything else, barring some unusual thing in the industry.

[Devin Ryan, Analyst at Citizens JMP Group]

Yeah. Okay. Very helpful. Thank you, Paul. And then just quick follow-up on loan growth, really nice to see the, I guess, securities based loan demand that you guys referenced. And just curious if that's something that just as you're kind of maybe seeing a shift in appetite and people's comfort with where rates are, if that's something that you'd expect would continue, can that continue to fuel loan growth? I guess is the root of the question.

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

Hey, Devin, Paul Shoukry here. The securities based loan growth during the quarter, as you point out, was really nice to see and I think it was due to one, pay-offs and pay downs really decelerating since rate started rising. That was a big drag on loan growth in the SBL portfolio. So that has subsided. And also in borrowers and clients getting used to the new levels of rates. So that's also been, you know, they're tapping into their lines and borrowing more from their SBL.

So we're cautiously optimistic that that trend could continue going forward and long-term as you know, we're very bullish on the prospects for growth in securities based loans. We think it's a very attractive product for clients and we knew that there'd be some headwinds as rapidly as rates have risen, that there'd be some headwinds as clients get used to the higher level of rates. But going forward, we're growing more optimistic that we'll continue seeing growth in that portfolio.

[Devin Ryan, Analyst at Citizens JMP Group]

All right, thanks so much.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Thanks, Devin.

[Operator]

Your next question comes from the line of Steven Chubak with Wolfe Research. Your line is open.

[Steven Chubak, Analyst at Wolfe Research]

Hi. Good evening, Paul and Paul.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Good evening.

[Steven Chubak, Analyst at Wolfe Research]

I wanted -- this is a bit of a nitty gritty question just on the same topic of advisory sweeps. One, there's been some speculation that at least one wirehouse peer may have received some regulatory scrutiny of cash disclosures, it's disclosed in the filings. So we and others are admittedly scrutinizing some of these cash disclosures much more closely. Your disclosures note that Raymond James shares a portion of the revenue from sweep options with the advisor. So, admittedly, you're a firm with a longstanding reputation for putting clients first. But as conflicts are scrutinized more closely, is there a concern that, that method for which advisors are compensated does create some inherent conflict? And how should we think about that in terms of the go forward?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

No, that's a great question and let me explain the disclosure first. So, on advisory accounts, cash has no different payment in terms of the advisor than any other asset class. So if they have a million dollar account and they're charging 1%, they're getting $10,000 in fees. If there's zero cash in there, they're getting $10,000 in fees. If there's 5% cash, they're getting $10,000 in fees. There's no indirect incentives and trips or awards or points or anything. There is zero incentive in advisory account to do anything, but what's in the best interest of your client. And I assure you there's nothing from home office that even asks them about it.

We're, you know, we've been known and continued, you know, advisors should be doing the right things for their clients. And of course, we have supervision, making sure it doesn't go the other way, but, you know, we have a great group of advisors and by the movements, they're doing what they should be doing.

The disclosure really talks about some limited things and the brokerage side and let me explain that one, that we've had some, you know, fundraising programs like the ESP program, where for high rate money market types of rates, that we've allowed advisors to be compensated in those programs. They are not compensated a penny on the sweeps. So the only incentive that they have is to go is to put clients for compensation into higher rate accounts. They have zero compensation on the low rate account.

So, brokerages be like dropping a ticket into some of their investment. If they put it into those high rate accounts, they're doing the right thing for clients, it cost us more money. So we don't believe there's any conflict whatsoever. But the fact that we've done that, in limited cases, we put that disclosure in, you know, to cover that and regulatory wise, they like it very clear that, you know, instead of you could pay, that you are paying, but it's been a very a nuanced circumstance. But again, it's all for the very high rated, high rate types of programs.

[Steven Chubak, Analyst at Wolfe Research]

Now that's really helpful. Very fulsome response, Paul. So, thank you. One point I just wanted to clarify because you specifically mentioned it's not part of the advisor program, which is consistent with what we saw too, but it also notes that you don't share comp directly with the financial advisor, but the aggregate amount of cash gets credit to the overall payout rate and can cause your FA to receive higher comp on transactions and other unrelated activities. It's vague, I don't know what those activities could be. But if you could provide some context around that as well, just given the focus on this issue.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yeah. When you're looking at the focus of cash, that's the only thing I can imagine. That's the only thing where there's compensation at all for cash directly or indirectly just on those very small investment vehicles like ESP, that we've put into brokerage and that's it. I mean, there is no other -- advisors are have opportunities on asset growth and net new assets, but it has nothing to do with cash. I mean, it's -- if they bring in net new assets, we have a net new asset program that can benefit advisors, but it's not centered on cash.

[Steven Chubak, Analyst at Wolfe Research]

All right, I understood. That's very helpful. Color. If I could just squeeze in one more quickly. Just Paul Shoukry, the flat spread revenue guide was a bit better than we had anticipated, so certainly nice to hear. Was hoping you could unpack some of the factors to support the flat spread revenue quarter-on-quarter, just given there's been some upward pressure on funding costs. Tail end of sorting, but still some incremental sorting, however modest. So I was hoping you could provide some context on what some of the key assumptions are underpinning that?

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

Yeah. So kind of offsetting some of the funding cost pressures that you are describing there is our -- it is a loan growth that we experienced throughout the quarter and the continued asset growth that we would hope to experience going forward. So that's -- we said flat or maybe down nominally, but that's what's driving that guidance.

[Steven Chubak, Analyst at Wolfe Research]

Perfect. That's great color, thanks for taking my questions.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Thanks, Steve.

[Operator]

Your next question comes from the line of Dan Fannon with Jefferies. Your line is open.

[Daniel Fannon, Analyst at Jefferies Financial Group]

Thanks. Good evening. I guess one more question on this. Just in terms of the competitive backdrop, does your evaluation period, does this imply that you need to see additional changes across the industry for you to potentially react or are you still digesting these most recent moves and need to get more color on what they exactly were?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

I think are we digesting? Sure and we're watching. But I mean, I don't, again, we don't anticipate anything. As you learn things, you might make tweaks here or there, but we're just going to have to see what plays out as what we know today. But we'll talk about at our next cash meeting. But we have no plans going in to make changes at this point. But that doesn't mean we won't.

[Daniel Fannon, Analyst at Jefferies Financial Group]

Understood. And then just in terms of the backlog around recruiting, you mentioned record backlog of large teams, that's a comment I think you've been making for several quarters. So just curious if there's additional context thinking given the strong net new assets in the quarter, the funding kind of bring onboarding that you're seeing versus the replenishment of that backlog. If there's any other additional color that would be helpful?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yeah, we've been, you know, the recruiting is actually -- backlog has been picking up. It's extremely strong. I said the last few quarters, we're not surprised by it anymore, you know, but we were surprised the large number of 510, even $20 million teams. It's continuing and we continue to get new ones both joining committed and in the pipeline that I think we're competing very, very well for. So the recruiting activity remain strong and we're still very optimistic on it. And I think we're -- we don't see anything right now that's slowing down the pace. So that's been really good news for us.

[Daniel Fannon, Analyst at Jefferies Financial Group]

Understood. Thank you.

[Operator]

Your next question comes from the line of Brennan Hawken with UBS. Your line is open.

[Brennan Hawken, Analyst at UBS Group]

Good morning, Paul and Paul or, sorry, good afternoon. It's been a rather long day, sorry about that. You know, I'm going to start with another question somewhat related to the sweep. Is it possible for you to identify what portion of your advisory assets or the advisory assets, I should say, on the Ray J platform, where Ray J is considered a fiduciary?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

There's so many words. There's so many terms in fiduciary, right? There's ERISA fiduciary. There's best interest. There's, you know and they all have different responsibilities and rules and everything else. So I don't know the best number we could give.

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

Yeah, I mean, what we could say is that within all fee based accounts, we have about $15 billion of cash sweep balances and that excludes the custody business. And then, you know, within that, to Paul's point, it's very. There's some ERISA fiduciary, there's some other types of programs within that. But that's all fee based accounts.

[Brennan Hawken, Analyst at UBS Group]

Okay.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yeah and some of those are firm managed. Some of them are advisors with discretion and there's some with advisors without discretion where they have to clear everything, you know, with a client. So, you know, they -- so, but that, that's the total number if you looked at it.

[Brennan Hawken, Analyst at UBS Group]

Got it. The $15 billion is the sweep in the sum of all of those accounts?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yeah, yeah. And again, almost the average on those accounts is, you know, $8.9 thousand and then 2.5%. So it's not, you know, it's really the residual cash residing on average in those sweeps.

[Brennan Hawken, Analyst at UBS Group]

Sure.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

In those account.

[Brennan Hawken, Analyst at UBS Group]

Okay. Thanks for that. And then net new assets was pretty decent actually this quarter. Was curious whether you guys flagged the OSJ as a pending headwind? And I apologize if you touched on this and I missed it, but did that event that you flagged at the investor day come to pass? And what was the size of that as far as a net new asset impact?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

No, we anticipate one coming, it's probably in the next quarter. So that's the one we've been talking about, but it hasn't happened. It would be nice if it didn't, but we anticipate it will still happen, that's when we wanted to flag, but it has not happened yet.

[Brennan Hawken, Analyst at UBS Group]

Got it. Okay. So that's still cut. That's coming likely in the coming quarter?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yes, the fourth calendar quarter.

[Brennan Hawken, Analyst at UBS Group]

Okay. Thanks for taking my questions.

[Operator]

Your next question comes from the line of Kyle Voigt with KBW. Your line is open.

[Kyle Voigt, Analyst at KBW]

Hi, good evening. Maybe a question on the third party bank sweep yield, falling by 18 basis points sequentially and up 25 basis points points over the last two quarters. Just wondering if you could clarify there are any changes made to rates or tiers that partially drove that? And also clarify what's driving this in terms of mix shift towards the higher yield sweep offerings. Is that simply a shift of cash toward higher balanced tiers or is there something else driving the negative mix shift?

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

Hey, Kyle. Yeah, a lot of that is initiatives that we run where we offer kind of a higher rate for new cash that comes into the sweep program to the firm and/or maturities from money market funds, treasuries and those type of things where clients want the functionality of the sweep program, but want a comparable rate to move over and benefit from the FDIC insurance and the availability of the cash in the sweep program.

So, as we've kind of implemented those initiatives, we've been able to effectively bring over cash from those sources through the quarter, which, while it increases the average cost of the funding, it increases also the amount of funding that we have and it's still net attractive. So it's really a win-win-win initiative that we've put into place in the sweep programs.

[Kyle Voigt, Analyst at KBW]

Okay. Is there any way to quantify the percentage of those third party sweeps that are in this the newer high yielder or the money market fund kind of equivalent yield program or...

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

I think now it's roughly somewhere in the 15% to 20% range of the total suite balances that are in those type of programs.

[Kyle Voigt, Analyst at KBW]

Understood. Okay. Thank you. And then just as a follow-up, just on repurchases, you mentioned your desire to increase the pace of repurchases from here, you executed on about $240 million of repurchases in the prior quarter. Should we think about that ramping to $300 million or $350 million? Any way you can quantify the increase in that pace moving forward?

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

You know, we're not programmatic, so we don't -- we're not going to give you a hard number. A lot of factors play into it in terms of the sources and uses of cash and capital. But, yeah, we definitely intend on increasing the pace from $243 million, which I know is -- was higher than many people expected even during this past quarter. So, but we have lots of capital, lots of cash and, you know, we remain committed to, you know, keeping that within our targets over, you know, a reasonable period of time.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

As we said, if we couldn't find the -- we're still looking at M&A activity. It's, you know, our preferred, but if we couldn't find it, we'd return it. And, you know, we haven't been able to find them yet, so we're going to start being more aggressive on returning to keep the capital ratios back, you know, where we think they should be.

[Kyle Voigt, Analyst at KBW]

Got it. Thank you very much.

[Operator]

Your next question comes from the line of Bill Katz with TD Cowen. Tour line is open.

[Bill Katz, Analyst at TD Cowen]

Great. Thank you very much taking the question. I do want to pick up on that last question. So either Pauls and thank you both. Just in terms of the commentary of reallocate, maybe a little bit more buyback, is the deal pipeline at the strategic level? Is it just less fulsome? Is it just hard to make the economics work? Is anything shifting in the backdrop here that sort of pushes out that opportunity? And relatedly, if a deal were to come back, would you then forego or truncate the underlying buyback? Thank you.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

I think the very active, there's reasonable opportunities, some are pricey, but for us, it's the right culture, fit and integration. And frankly where as you can see by this quarter and the last few, our earnings are very, very strong. So as capital ratio tweaks up, we want to get it back in a proper range. So we think we can still be a lot more aggressive on the buybacks and still have ample capital if something happens. So it's just saying, we don't expect anything of a size, that there's no reason not to be more aggressive on returning it to you -- to shareholders.

[Bill Katz, Analyst at TD Cowen]

Okay, just to clarify, is 10% still the appropriate Tier 1 leverage ratio guidepost, as you think about? So, getting back to sort of normal capital ratios?

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

Yeah, 10% is still our target right now for Tier 1 leverage.

[Bill Katz, Analyst at TD Cowen]

Great. Terrific. And then sort of second question, just going back to your outlook for the stable NII and cash sweep dynamics. How should we think about any residual adverse mix shift into some of these higher fee products? And is there any leakage here that existing customers, they're not necessarily bringing new money in, but would look at that and say, hey, why can't I get that kind of rate? And sort of put a little more downward pressure on the net yield? And maybe the other way, I'd like to ask the question is, sorry to nest here so much, but what is now the net rate the client is ultimately getting here on the cash sweep? Thank you.

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

Yeah. So we offer, you know, our grid starts, as Paul said, from 25 basis points, goes all the way up to 3% on the cash sweep program. And, you know, there has been some migration and mix shift to the, you know, higher yielding programs and initiatives that we've offered, which are actually closer to 5%. And so what all of this is happening, what hasn't really been there for us or the industry is loan growth. And that's actually impacted our capital ratios as well, because our earnings have been very strong. But the loan growth across the industry has been muted.

So that's ultimately the driver of both NIM and more importantly, net interest income, which actually impacts the bottom line will be driven by loan growth, which will drive higher yields and higher earnings overall. And so that's kind of what we're, as a industry waiting for, we started seeing some improvement on the SBL side and we're optimistic that with more corporate activity, we'll start seeing more activity on the corporate side eventually as well.

[Operator]

Your next question comes from the line of Jim Mitchell with Seaport Global. Your line is open.

[Jim Mitchell, Analyst at Seaport Global Securities]

Hey, good morning. Good afternoon, sorry. Just maybe, Paul, can you talk about deposit betas in the face of rate cuts, how do you at least think your asset sensitivity look in the first 100 basis points? Can you kind of almost get a one for one offset or how are you thinking about betas?

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

It'll largely depend on the competitive environment, but because we have been generous in passing rates to clients and through these other programs that have near money market fund rates like enhanced savings program, etc, that we should have a lot of sensitivity to the downside as well in both the asset and on the funding side of thing. So we do feel like we have an ample amount of cushion. But again, it will depend on the competitive environment and the demand for cash across the industry as rates go down.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

If you have a sweep program, it's one to 50 basis points. You get a 50 basis point drop over two cycles. It's kind of hard to respond. We have plenty of room in ours and still be very competitive in the market today.

[Jim Mitchell, Analyst at Seaport Global Securities]

Right. So, Paul, when you think about next year and think about the forward curve on Fed funds, kind of a gradual, say, 150 bps, it seems like you guys might hold up a little bit better, especially if loan growth picks up and you still have some repricing in the securities portfolio, right, because the yields are still pretty low there. You put all that together, I know there's competitive pricing, but do you feel like you guys can hold in there pretty well next year on NII?

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

Yeah, putting aside whether I believe the forward curve or not.

[Jim Mitchell, Analyst at Seaport Global Securities]

Right. Fair enough.

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

We've generated record results now for the last three years and three quarters and those were in very different interest rate environments. And so we are confident in our ability to perform very well in any kind of interest rate environment because we have diversified and complementary businesses. So, for example, lower interest rates, at least in the last cycle, certainly supported our M&A business and our fixed income business and supported loan growth. We had records, securities based loan growth during the COVID period because partly due to the lower rate. So there's different things that benefit us in different rate environments, but to your point on a relative basis, because we have been so generous in passing on the rates to our clients and offering these other programs, we feel like we're relatively well positioned on that front as well.

[Jim Mitchell, Analyst at Seaport Global Securities]

Okay, thanks.

[Operator]

Your next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is open.

[Michael Cyprys, Analyst at Morgan Stanley]

Great, thanks for taking the question. Just circling back to the industry conversation on the movement in sweeps. Just curious more broadly how you see potential scope, maybe over time for an evolution in the way customers pay for services and away from cash sweep. Just curious, what other ways over time could you envision 10, 20 some years in the future, potentially in some hypothetical scenario where customers pay differently for services? And how might one still capture economics for the services they provide? What other ways might you be able to capture value?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yeah, well, I guess there's so many ways, it's hard to tell, right? You know, and, you know, a big source of growth and income used to be, you know, can be one fees and other things and they're -- they've become less of a factor over time. Certainly asset based fees, if you look at RAs and how they price versus the broker dealers, you know, asset based pricing is becoming more common. There's all sorts of ways and part of that depends on regulatory. You could have performance fees, you could have. I think it's hard to tell where it evolves. I think in the business, people talked about consulting fees or hourly rates. I don't think anyone likes a lawyer or accountants bill when they spell out hours.

So, I don't think it will go there, especially given the value of the relationship with an advisor where they, you know, it's very, it's -- everyone always thinks about the investment part and that is part of it, but a lot of it is really the advice, the family advisors and they become a big part of the lives of clients. So there's all sorts of stuff that they change anyway over time, maybe it will get more asset based. We certainly have countries that UK, Australia, where it's just direct charges to clients have to be in fees. So it's very clear, it could evolve all sorts of ways, but it's a very competitive, mature industry and I think that people will find a way to adjust.

We've had to adjust through zero interest rates and high interest rates and all sorts of things and we've kind of adjusted as we've gone along. So ten years out in our industry seems like forever, maybe it's because I'm old and Paul has to worry about it.

[Michael Cyprys, Analyst at Morgan Stanley]

Great, thanks for that. And just a follow-up question more broadly on cash sorting, cash rebalances. Just curious how close you think we are to bottom and eventually starting to see that grow again. What catalyst do you see on the horizon that might get us there? And how might the recent evolving competitive backdrop and industry discussions here and debates on sweep rate. How might that impact cash sweep balances just given the heightened focus and attention that it's getting?

[Paul Shoukry, President and Chief Financial Officer at Raymond James]

Yeah, I mean, we continue to believe that we're closer to the end of the sorting cycle than the beginning and some of the metrics that Paul discussed, you know, just in the fee based accounts, having $8,900 of cash per cash sweeps per account, whereas we have 22,600 of money market funds, CDs and treasuries. A lot of these clients to the extent they had investable cash balances have been invested in the higher yielding alternatives. We're not -- as we've always said since the very beginning and we're one of the first, if not the first to say it, we're not going to declare the end of the trend until we have several quarters of history to look back on and start seeing growth in the cash balances. And ultimately that growth will come from the stabilization of the runoff and the migration and the growth of the continued growth, which we've had phenomenal growth of client assets.

And as we retain, recruit advisors and those advisors bring on more client assets, there'll be cash associated with that and that ultimately will drive the growth and the balances.

[Michael Cyprys, Analyst at Morgan Stanley]

Great. Thank you.

[Operator]

Your final question will come from the line of Alex Blostein with Goldman Sachs. Your line is open.

[Alexander Blostein, Analyst at The Goldman Sachs Group]

Hey, guys, good afternoon. Thanks for taking the question. So appreciate all the detail and obviously, it's a dynamic backdrop, so we're all kind of navigating and learning from it. So appreciate that. There's still a ton of unknowns there. But I guess, as you think about that $15 billion sweep number that you provided and I think most of us understand that it is fairly small and it's largely operational. But I guess at the heart of the question, what we're all kind of trying to figure out is, why is transactional or operational cash, albeit small on a per account basis, but it's still part of the advisory relationship would be treated differently under the fiduciary standard of Reg BI. And why wouldn't that cash balance, again, albeit small, still receive sort of some of the higher yields that are available out there?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Well, I guess my quick answer would be, what do you get on your checking account. There's a cost to having it on the platform. There's a cost of servicing it. It's transactional, so it has more transaction. So there's a cost. I mean, if the standard for BI is you have to pay a rate that's way uneconomic to operate a business, I don't know what that means and I don't think that is the standard under BI. It's put clients first and be fair and take their interests at heart first. And I think that transactional cash -- 25 basis points, it's a lot more than you're going to get on your checking account is very reasonable.

So, I mean, there may be disagreements, I think a standard like that is, you know, is, you know, I wouldn't understand how you can come up with that. So it's...

[Alexander Blostein, Analyst at The Goldman Sachs Group]

I guess the difference is, like, the checking account is not a fiduciary relationship versus this seems to be one and I guess that's where the disconnect comes in and what could be the outcome of all of this?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

There are a lot of fiduciary accounts, I agree that, you know, you look at institutional asset managers, they have a fiduciary relationship, but they don't have zero cash in their portfolios. So, I mean, so if you want to benchmark it, other fiduciary relationships of this type of investments, it would be a real outlier to say all that cash has to be 100% invested, because it's not reality how accounts work, that would say we have to not only sort the cost, so we'd have to fund the transactions because there wouldn't be cash in the account or sell out securities, you know, in order to fund fees, transactions or other things. I mean, I just, I think that, to me, that's not a reasonable standard.

[Alexander Blostein, Analyst at The Goldman Sachs Group]

Got you. All right. Understood. All right, my quick follow-up, Paul, the other poll. Back to the discussion around third party bank sweep and the rate changes and the migration that you've seen there. Do you expect that to be largely done or there could be still some mix shift where some of the larger account balances will kind of push that yield a little bit lower.

And to what extent, I guess, is that, if at all, incorporated in your sort of flattish cash revenue trajectory for next quarter versus this quarter?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yeah, well, we have, I mean, the initiative itself, we have some levers on around largely rate, right? So to the extent that we want to continue bringing in cash from the outside rate is a big lever. We actually just announced that we're reducing the rate on the high yield portion of the program that brings in the new cash from the outside, because we have pretty big buffers now with over $17 billion of cash swept to third party banks that we can reposition and bring on to fund our own bank over time. So it really just depends on how much of the initiative that we want to continue to pull in that we actually, again, just announced that we're reducing the rate, it's still very attractive, higher than 5%. But we're not going to again declare completion of any type of trend until we have several quarters of history, otherwise, it's just speculation.

[Alexander Blostein, Analyst at The Goldman Sachs Group]

I got you. Sorry. And the reduction on the -- there was at ESP or is that the program that sits within third party bank suite?

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Yeah, that's sweep initiative. That's right.

[Alexander Blostein, Analyst at The Goldman Sachs Group]

Got it. Okay. All right. Thank you, guys. Appreciate it.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Thanks, Alex.

[Operator]

There are no further questions at this time. I'll turn the call to Paul Riley for closing remarks.

[Paul Reilly, Chair and Chief Executive Officer at Raymond James]

Well, appreciate all the questions and you're on the call. I want to remind everybody we had a very good quarter, but I understand all the questions on the cash suite. So, appreciate. I hope we were helpful in all of our responses and thank you for joining us.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Kristie Waugh, Senior Vice President, Investor Relations
• Paul Reilly, Chair and Chief Executive Officer
• Paul Shoukry, President and Chief Financial Officer

Analysts

• Michael Cho, J.P. Morgan
• Devin Ryan, Citizens JMP Group
• Steven Chubak, Wolfe Research
• Daniel Fannon, Jefferies Financial Group Inc.
• Brennan Hawken, UBS Group AG
• Kyle Voigt, KBW
• Bill Katz, TD Cowen
• Jim Mitchell, Seaport Global Securities
• Michael Cyprys, Morgan Stanley
• Alexander Blostein, The Goldman Sachs Group, Inc.