Raymond James Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2022

There are 13 speakers on the call.

Operator

Good morning, and welcome to Raymond James Financial's 4th Quarter Fiscal 2022 Earnings Call. This call is being recorded and will be available for replay on the company's Investor Relations website.

Speaker 1

Now I will turn it over to everyone and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chair and Chief Executive Officer and Paul Shuckery, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James Investor Relations website. Now let's turn to Slide 2.

Speaker 1

Please note certain statements made during this call may constitute forward looking statements. These statements include, but are not limited to, Information concerning future strategic objectives, business prospects, financial results, anticipated benefits of our acquisitions, Our level of success in integrating acquired businesses, divestitures, anticipated results of litigation and regulatory developments, impacts of the COVID-nineteen pandemic or general economic conditions. In addition, words such as May, will, should, could, plans, intends, anticipates, expects, believes, estimates or continue or negative of such terms or other comparable terminology as well as any other statement that necessarily depends on future events are intended to identify forward looking statements. Please note, there can be no assurance that actual results will not differ materially from those expressed in the forward looking statements. We urge you to consider the risks described in our most recent Form 10 ks website.

Speaker 1

During today's call, we will use certain non GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non GAAP measures to the most comparable GAAP measures may be found in the schedule of our Chief Financial Officer and CEO, Paul Riley. Paul?

Speaker 2

Good morning, and thank you for joining us today. Before I discuss our Q4 fiscal year earnings, I want to start by acknowledging heartbreaking devastation, our friends and neighbors as well as over 200 associates on Florida's Central Gulf, bear witness to their pain and loss. I also have been humbled by the resilience of our associates, advisors and the community there. Fortunately, Our Raymond James family impacted by the storm is safe. Just as notable, I can't adequately express my gratitude Worked diligently from remote locations to continue delivering our service first promise.

Speaker 2

Additionally, our associates at our corporate Locations in Memphis and Southfield and Denver rose to the occasion, covering for their coworkers and pitching in where they could and working open to provide a comfortable and clean place to go. When the home office reopened, the camaraderie was obvious and uplifting. We provided emotional and mental health resources to associates, delivered a $500 relief check to all associates in impacted counties, Selected 2 semi trucks of supplies, which were sent to our Fort Myers branch system to be distributed by advisors and associates in their areas. We've heard several heartwarming stories from recipients in these essential supplies, which in itself shows how the collective efforts And Generac responded by raising more than $1,000,000 from corporate, executive leadership and associate donations To assist the recovery and support of those in need through the Red Cross and our friends at Raymond James Charity, We directly help associates with needed emergency funds for repairs and recovery. In response to the storm reflected the long history of Raymond James service culture, And I'm especially proud to represent our team today.

Speaker 2

Now moving to our results. I'm very pleased with the results for the Q4 fiscal year, especially given the challenging market conditions. Despite the significant decline in equity markets during the year, We still generated record net revenues and record pretax income for the Q4 fiscal year. Throughout the fiscal year, we remain focused on the long term and continue to invest in our businesses, our people and our technology to help drive growth across our businesses and the private with domestic net new assets of 9% over the fiscal year. Furthermore, the Charles Stanley acquisition completed earlier in the year significantly expanded our presence in the UK, which is a very attractive market for Wealth Management.

Speaker 2

In Capital Markets, both achieved in fiscal 2021, Record M and A revenues helped offset the very challenging underwriting environment. We continue to see strong pipelines for M and A As the expertise we've added both organically and through niche acquisitions has been performing extremely well, hence our fixed income platform With technology driven capabilities and a fantastic team with extensive experience dealing with corporates. This business thrives on rate volatility, so Sumrich generated really fantastic results since we closed on the acquisition in July. However, after a record year last year, our legacy fixed income operations serving depositories has been challenged as the Fed intensifies its monetary tightening initiatives. In the Bank segment, loans grew 73% year over year and 3% during the quarter, reflecting attractive growth across nearly all loan categories, third party securities based lending capability, while also diversifying our funding sources.

Speaker 2

It is an uncertain condition such as these that reminds us the importance of focusing on and making decisions for the long term. As evidenced this quarter with a sharp increase in short term interest rates with diverse and ample funding sources, Strong loan growth, high concentration of floating rate assets and ample balance sheet flexibility given solid capital ratios, which are well in excess of regulatory requirements. Our long term approach has really resonated in more volatile and uncertain market environment We've experienced since the onset of the COVID-nineteen pandemic. In the fiscal Q4, the firm reported record net revenues of 2.8 $3,000,000,000 record pretax income of $37,000,000 or earnings per diluted share of $1.98 Net income was negatively impacted by the elevated tax rates this quarter due primarily to non deductible losses on corporate owned life insurance that we utilize to fund non additions. Quarterly adjusted net income available to common shareholders was $459,000,000 or $2.08 per diluted share.

Speaker 2

Year over year and sequential revenue growth was driven primarily by the benefit Of higher short term interest rates on both are at the declines in asset management and related administrative fees and total brokerage revenue, largely due to decline in Equity Markets. Quarterly net income available to common shareholders increased 2% compared to the prior year's fiscal Q4, reflecting a higher tax rate. Sequentially, quarterly net income grew 46%, driven primarily by the benefit from higher short term interest rates to the net interest income And our JBDPCs from 3rd party banks, along with lower bank loan provision for credit losses on loans arising from the acquisition Annualized return on common equity for the quarter was 18.7%, And adjusted annualized return on tangible common equity was 24.1%, an impressive result. Turning to Slide 5. We ended the quarter with total client assets under administration of $1,090,000,000,000 PCG assets in Fee based accounts of $586,000,000,000 and financial assets under management of $174,000,000,000 Equity market declines in the quarter, including a 5% sequential decline in the S and P 500 index, negatively impacted client asset levels.

Speaker 2

We ended the quarter with 8,006 81 financial advisors in PCG, a net increase of 199 over the prior year period And 65 over the preceding quarter by transition of advisors to our RIA and custody service division, where we typically retain the assets, but we don't include the advisor in our accounts. In the fiscal year, We had 2 22 financial advisors move to RCS, 166 of which came from 1 firm. Adjusting for these transfers, the numbers of financial advisors increased 421 year over year, a really strong result. Our focus on supporting advisors and their clients, especially during uncertain and volatile markets, led us to strong results in terms of advisor retention as well as our over the trailing 12 month period ending September 30, 2022, we recruited to our domestic independent contractor and employee channels, financial advisors with nearly $320,000,000 of trailing 12 production and approximately $43,000,000,000 of client assets at their previous firms. And highlighting our industry leading growth, we generated domestic PCG net new assets of nearly $95,000,000,000 over the fiscal year ending September 30, 2022, representing 9% of domestic client assets at the beginning of the period.

Speaker 2

4th quarter domestic PCG net new assets growth was 8.3% annualized. Total client domestic cash sweep balances declined 12% to $67,100,000,000 or 7% of PCG assets under administration. Paul Shukri will discuss this more later, but I'd like to highlight that these are lower cost deposits as we have not yet utilized high yield savings accounts to preserve balances. Grew 3% sequentially to a record $43,200,000,000 reflecting attractive broad based growth at both Raymond James Bank and TriState Capital Bank. Moving to Slide 6.

Speaker 2

The Private Client Group generated record receipt 71,000,000 While Asset Based revenues declined, the segment's results were lifted by the benefit from both higher short term interest rates. The Capital Markets segment generated quarterly net revenues of $399,000,000 and pretax income of 60 periods, mostly driven by lower investment banking revenues and fixed income brokerage revenues, largely due to the volatile and uncertain markets. The Asset Management segment generated net revenues of $216,000,000 and pretax income of $83,000,000 As net inflows into fee based accounts and the Private Client Group were offset by fixed income and equity market declines. The bank segment, which includes Raymond James Bank and TriState Capital Bank, generated quarterly net revenue of $428,000,000 which is a record result and pretax income of $123,000,000 Net revenue growth was mainly due to higher loan balances and significant expansion of the bank's net interest margin to 2.91 percent for the quarter, up 50 basis points in the preceding quarter, once again reflecting the flexibility and floating rate nature of our which have continued to be solid. Looking at the full year fiscal 2022 results on Slide 7, we generated record net revenues of $11,000,000,000 and record pretax income of $2,000,000,000 both up 13% over fiscal 2021.

Speaker 2

Additionally, we generated strong annualized return on common equity of 17% and annualized adjusted on tangible common equity of 21.1%. Moving to the fiscal year's segment results on Slide 8. Private Client Group, Asset Management and Bank segments generated record net revenues and the Private Client Group produced record pretax income during the fiscal year, again reinforcing the value of our diverse and complementary businesses. And now for more detailed review of the fiscal 4th quarter results, I'm going to turn the call over to Paul Shoukry.

Speaker 3

Paul? Revenues of $2,830,000,000 grew 5% year over year and 4% sequentially. Asset management fees declined 6% compared to the prior year's fiscal 4th quarter and 10% compared to the preceding quarter, in line with the guidance we provided on last quarter's call based on fee based assets. Equity markets declined further during the quarter, resulting in a 3% sequential decline in Private Client Group assets and fee based accounts. This decline will create a headwind for asset management and related administrative fees in the fiscal Q1, which I expect to be down.

Speaker 3

Brokerage revenues of $481,000,000 declined 11% compared to the prior year's fiscal Q4 and 6% compared to the preceding quarter as lower activity and asset based trail revenues in TCG as well as decrease from revenues in the quarter. As Paul touched on, we expect this to be a tough environment for our legacy fixed income business as depository clients have quickly transitioned from having excess deposits to investment securities To experiencing deposit runoff as a result of

Speaker 4

the Fed's investment

Speaker 3

banking revenues of $217,000,000 declined 3% compared to the preceding quarter, a solid result given the challenging and uncertain market environment. And while our pipelines are strong, there remains a lot of uncertainty given the heightened market volatility. Therefore, Our best guess right now is that we can achieve a similar level of average quarterly investment banking revenues in fiscal 2023 that we experienced over the last two quarters. Obviously, a lot of variables can and probably will in fiscal 2023. That would still represent a much higher level of investment banking revenues than we generated prior to the pandemic as we have made significant investments to the platform over the past few years, which has significantly increased our productive capacity and 1% sequentially, Primarily due to higher affordable housing investment business revenues, which achieved record results in fiscal 2022.

Speaker 3

Moving to Slide 11, clients domestic cash sweep balances ended the quarter representing 7% of domestic As of this week, these balances have declined to just under $64,000,000,000 reflecting the quarterly fee payments which were paid in October as well as additional cash shorting activity during the moat. These cash sweep balances do not include high yield saving balances nor since across the industry. Most of the decline in our sweep balances were of the excess deposits over the past couple of years. As we have been explaining for at least a year now, We anticipated a significant decline in these cash balances as the Fed started increasing short term interest rates. So we've kept the CIP balances in Investor Relations.

Speaker 3

James Bank deposit suite program continues to be a relatively low cost source of stable funding. And now with the addition of TriState Capital Bank's independent deposit franchise, we have a more diversified funding base. And while this additional funding source may not have seen the Tsar and the importance of having multiple funding sources. Turning to Slide 12. Combined net interest income and RJBDP fees from 3rd party banks was $606,000,000 up $200,000,000 from the preceding quarter.

Speaker 3

This strong growth reflects the immediate impact from higher short term rates given the limited duration and high concentration of floating rate assets on our balance sheet. While it can sometimes seem appropriate to take more duration and bet on rates, Our long standing approach to maintain a high concentration of floating rate assets is proving to be a significant tailwind In this rising rate environment. You can see on the bottom portion of the slide, the bank segment's net interest margin increased a substantial fifty basis points sequentially to 2.91% for the quarter. The average yield on our JBDP balances with 3rd party banks increased nearly 100 basis points to 1.85%. Both the NIM and average yield from 3rd party banks are expected to increase further within But these projections will obviously be impacted by the actual deposit beta we experienced.

Speaker 3

As we have done this cycle, we will continue to put clients first and focus on staying on the more generous end of the spectrum for our clients, Around 25%, with the most recent increase in September having a deposit beta of about 35%, Less than the 50% we expected, but still much more generous declines than the vast majority of our competitors. Moving to consolidated, the total compensation ratio for the quarter was 62.1%, which decreased from 67.5% in the preceding quarter. The adjusted compensation ratio was 61.5% The higher net interest income and our JVDP fees from 3rd party banks. Non compensation expenses of $456,000,000 which includes $13,000,000 of acquisition related expenses included in our non GAAP earnings adjustments decreased 3% for both TriState Capital and Sunridge Partners, which sequentially added just over $25,000,000 of incremental non compensation expenses, excluding The bank loan loss provision for credit losses. The bank loan loss provision for credit losses decreased to $34,000,000 primarily due to the $26,000,000 initial provision associated with the TriState Capital acquisition in the fiscal Q3.

Speaker 3

This quarter's bank loan provision Primarily reflects sequential loan growth along with a weaker macroeconomic outlook on the disciplined management of all compensation and non compensation related expenses, while still investing heavily in growth and ensuring high service levels for advisors and their clients. Slide 14 shows a pretax margin trend over the same period of 20 1.8 percent And an adjusted pretax margin of 22.8%, really excellent results. And just to get ahead of it, I know many of you will ask me if we will update our 19% to 20% pretax margin target that we laid out At our Analyst and Investor Day in May, since we exceeded it this quarter, while that is certainly a reasonable ask, Given the market uncertainty and ongoing cash sorting dynamic, we think it's appropriate to wait at least a few more months to update all of our targets. But with that being said, I think our solid results this quarter highlight the interest rates and our consistent focus on being disciplined on expenses. On Slide 15, at quarter end, total assets were $81,000,000,000 A 6% sequential decrease, primarily reflecting the decline in liquidity and capital remained very strong.

Speaker 3

RJF corporate cash at the parent ended the quarter at $1,900,000,000 well above our $1,200,000,000 target. The Tier 1 leverage ratio of 10.3 percent of the regulatory requirements to be well capitalized. The spot Tier 1 leverage ratio at the end of the quarter is actually closer to 10.5%. So our capital levels continue to provide Significant flexibility to continue being opportunistic and invest at 28.7%, up from 27.5% in the preceding quarter, primarily due to non deductible losses on the corporate owned life insurance portfolio. Going forward, we still believe around 24% to 25% The effective tax rate increases as we experienced this quarter last quarter and vice versa when equity markets increase.

Speaker 3

Slide 16 provides a summary of our capital actions over the past 5 quarters. Since the closing of the TriState acquisition on June 1 through October 26, we have repurchased approximately 2,100,000 common shares for $200,000,000 or approximately $96 per share under our Board authorization. As of October 26, 2022, approximately $800,000,000 remained available under the Board of Board meeting. We remain committed to offset the share issuance associated with the acquisition of TriState as well as a share based compensation dilution. Therefore, we expect to repurchase on average $250,000,000 per quarter in fiscal 2023 or $1,000,000,000 total for the fiscal year.

Speaker 3

Of course, we will continue to closely monitor market conditions and other capital and cash needs as we plan for these repurchases over the coming quarters, but I do want to emphasize this $1,000,000,000 objective for fiscal 2023. Lastly, on Slide 17, we provide key credit metrics for our bank segment, which now includes Raymond James Bank in TriState Capital Bank. The credit quality of the loan portfolio remains healthy with most trends continuing to improve. Criticized loans as a percent of total loans held for investment Ended the quarter at 0.91 percent, down from 1.27% at September 2021 and nearly flat sequentially. The year largely reflects the higher proportion of security based loans boosted by the acquisition of TriState Capital Bank.

Speaker 3

Securities based loans, which account for approximately 35% Net loans are generally collateralized by marketable. If you look at the bank loan allowance for credit losses on Corporate loans held for investment as a percentage of the total corporate loans, it was 1.73% at quarter end. Compared to most other banks, we believe this represents a healthy reserve, but we are continuing to closely monitor any impacts of inflation, supply chain constraints and a potential recession on our corporate loan portfolio. Now I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Speaker 2

Thank you, Paul. As I stated at the start of our call, I'm pleased with our results. And while there are many uncertainties, I believe we are well results will be negatively impacted by the expected 4% sequential decline of asset management fees and related administrative fees that Paul described earlier. Focusing more on the long term, I'm optimistic we'll continue delivering industry leading growth as current and future solutions. Additionally, the segment We'll also continue to benefit from higher short term interest rates, although we expect cash sorting will continue as the Fed increases short term interest rates.

Speaker 2

In the Capital Markets segment, the M and A pipeline remains strong. I am confident we are well positioned for growth given the significant investments We've made over the past 5 years. In the fixed income space, the favorable environment we've experienced over the past couple of years has shifted. Depository clients, once flush with cash, less cash available for investing in securities. This dynamic will lead to a challenging environment Fiscal 2023.

Speaker 2

While this headwind exists, we expect Sunridge Partners to enhance our current position in the rapidly involving fixed income and trading technology market. In the Asset Management segment, the financial assets are starting the fiscal year lower due to the decline in equity and fixed income markets. However, we are confident that Strong growth of assets and fee based accounts in the Private Client Group segment will drive long term growth of Financial Ally Carillon Tower Associates to help drive further growth through increased scale, distribution, operational and marketing synergies. The bank segment is well positioned for rising short term interest rates, and we have ample funding and capital to grow the balance sheet prudently its relationships with its clients, which coupled with our strong capital and funding should foster its ongoing growth. Most importantly, the credit quality of the bank's loan portfolio remains strong.

Speaker 2

As always, I want to thank all of our advisors and associates. Just as you've observed over the past 2 years, which have been filled with tremendous uncertainty and challenges, We will stay rooted in our commitment to take care of advisors and clients, making decisions for the long term and maintain a strong and flexible balance sheet And drive results for our associates, advisors and shareholders, just as we have for the past 60 years. With that, operator, will you please open the line for questions?

Speaker 5

Thank you very much. I'll proceed with our first question on the line from Manan Khozalia with Morgan Stanley. Go right ahead.

Speaker 6

Hi, good morning. I was wondering can you talk about what your assumptions are for deposit betas in your NIM guidance for next quarter. Because it looks like even with a 75 basis point increase In the fed funds rate in November and a significantly higher average fed funds rate next quarter versus the prior quarter, I think You guided your NIM rising only 25 basis points or so. So I guess the question is, what are you baking in for deposit betas? And is there some element of

Speaker 7

As you know, Manav, we do like to provide conservative guidance and that 3.15% Immediately, it's somewhat conservative. It's always factoring into November tends to lead those type of increases as we saw last quarter. So Yes, we had 50 basis points sequential increase 2 quarters ago in the NIM, 40 basis points this quarter. And we're Guiding 25 basis points, but certainly could be higher than that going forward. We were expecting deposit beta As rates kind of continue to increase to get closer to 50%.

Speaker 7

On the last incremental For us, it was 35%. And cumulatively, it was 25%. And we've been really leading most of the industry, focusing on Clients and sharing and being generous with clients as the rates have increased. When you look at competitors, we're certainly well ahead of Most of our competitors on the sweep rates.

Speaker 6

Got it. And then On 3rd party bank deposits, we saw through this earnings season that many banks were relying more on wholesale funding. So I guess the question is, what are you seeing in terms of demand from 3rd party banks? And where should we expect that 3rd party bank A fee rate to go if the Fed stabilizes at 4.5%. And is there a possibility that you're able to earn a higher Spread on those deposits as you renegotiate your contracts next year than the typical I

Speaker 2

think absolutely. The demand is way up. And As you pointed out, if you look at almost all of our competitors, if you really looked at just what's happened to cash sweeps, we're all in the same ballpark. It's just Most of the other firms have gone into high yield savings, to supplement their cash or to money market sweeps. So we haven't done that.

Speaker 2

So we may, but to date, we feel like we have apples low cost funding With our sweeps and we do see the demand going up which will impact rates and Paul I'll let you address the rate dynamic.

Speaker 7

Yes. I mean, at the trough in the last year or so, the demand from 3rd party banks was up 20 basis Point or so from the peak spreads a couple of years prior. So we're quickly seeing that demand resume. That's the first step. And now we're starting See prices and the economics improve on the spread.

Speaker 7

But again, the spread 2 years ago It pales in comparison to the base rate improvement that we get from the Federal Reserve on those balances. So net net significant tailwind On those balances.

Speaker 6

So it sounds like in terms of the period, You could be at the so if you compare the end of this rate hike cycle, should we expect a fee rate above the 2 percentage points or you sell off cycle?

Speaker 7

Yes. I mean, we're already guiding just for this upcoming quarter to 2.5% as

Speaker 8

an example. As I said, yes. Okay. All right. Perfect.

Speaker 8

Thank you.

Speaker 5

Thank you very much. We'll proceed with our next question on the line from Jerry O'Hara with Jefferies. Go right ahead.

Speaker 9

Great. Thanks. Perhaps just a little bit of context or color on the advisor I know it's obviously been another kind of challenging quarter from a volatility standpoint. So we'd just love to get a little bit of color As to what you're seeing industry wide

Speaker 2

in terms of those dynamics? Yes. I think I've been now, what, 12 dozen years in this job and everybody always asks me the recruiting market seems to be getting more competitive. And So my response is it's kind of always been competitive. Even in 2009, we thought recruiting our best year would go off because of the Great dislocation, but it was actually resulted in our best couple of years until the recent few years.

Speaker 2

So it's still very active. It's very competitive And it continues to be such, but as you can see with our kind of 400 advisers added this year, if you adjust for The RIA channel, the people that moved our advisor count, we've had another very, very strong year. And really the largest Teams we've ever recruited continue to come in and so the average is going up also, not just market, but just The attraction of our platform for high net worth and all that our history. So we're still a big part of our strategy. We think it will still be strong.

Speaker 2

Backlog is strong and probably won't last forever, but it looks pretty good in the short to midterm.

Speaker 9

Fair enough. And we obviously saw an increase from 2Q to 3Q on the non comp Side of expenses, that actually came off a little bit in 4Q. But can you perhaps maybe help us think a little bit about how that What

Speaker 2

kind of run rate might look going into the next couple of quarters?

Speaker 7

Yes, Jerry, most of the sequential increase It was really attributable to having a full quarter of results for both TriState Capital and Sumridge, which sequentially added about $25,000,000 of non compensation expenses. So that was the primary driver of the Sequential increase which we expected. Looking forward, I think if you look at this quarter as a baseline and think there's around $410,000,000 of non compensation expenses when you adjust out for the loan loss provision Ian, for some of the acquisition related expenses that we break out in our non GAAP schedule. And looking forward, I would say $1,700,000,000 in fiscal 2023, which up to $410,000,000 base represents Somewhere around 1.5% growth sequentially each quarter in 2023. And most of that growth will really be coming From our technology investments, we still heavily invest across the firm, so that's going to continue to be a significant focus for us going forward.

Speaker 7

And then you're going to see kind of on a year over year basis growth in business development expenses as the first half of fiscal 'twenty two. Travel and conferences, obviously, we're still suppressed by the COVID pandemic, so you'll see it. Great.

Speaker 10

Thanks for taking my questions, Mark.

Speaker 5

We'll get to our next question on the line from Alex Blostein with Goldman Sachs.

Speaker 11

Hey, guys. Good morning. Thanks for the question. So maybe first just focusing on some of the bank dynamics. I guess if we look at the last cycle, Bank NIM peaked at around 3.5%.

Speaker 11

And not to pinpoint you to any specific quarter, but

Speaker 7

I guess when you zoom out a

Speaker 11

little bit and Taking your conservative posture on the deposit betas, but it doesn't sound like they're going up about 50%. If you think about TriState now in the mix, That's more loan heavy, so obviously higher yielding and the absolute level of rate is higher. So should we be thinking closer to 4 And bank NIM once the Fed is done? Or how are you thinking about that sort of run rate on the other end

Speaker 8

of that cycle? Yes.

Speaker 7

There's a lot of moving parts. I would say one of the differences now versus in the last cycle is that our concentration of Securities based loans are higher. Now that has a typically has a lower NIM associated for active, but Typically a lower NIM through cycles relative to corporate loans. And so there's a lot of moving I think just like I shared with Monan on the VDP fees, I think this time around, I mean, rates are expected to be higher than they were last cycle, just The base rates and so given the loan mix, higher rates, a lot of different variables, but I don't think we can call 3.5% So you're sealing, but I don't think we're also ready to say that it could achieve 4% either. I think we need to kind of see where cash sorting and Cost of deposit trends play out.

Speaker 7

Got it.

Speaker 11

All right. Fair enough. Just staying

Speaker 6

On the balance sheet theme for

Speaker 8

1 minute, you guys obviously had

Speaker 11

the right call on not extending duration a year or 2 ago and keeping the balance sheet fairly floating. But if you look at what's going on today, security yields are quite attractive and maybe there's a little bit more upside, but that's a Fairly good return on invested capital as you kind of look what the market rates are today. What are your thoughts about building securities portfolio from here, Maybe extending duration a little bit just to lock in what looks like pretty attractive rates of return.

Speaker 2

Yes. So we're not against Securities portfolio, but our first thing is to fund our growth in loans and securities becomes the next part of it. So We agree they're attractive. After beating the balance sheet, we're not Ready to call that we've reached peak rates and we're going to start locking in. So I think at least in the near term, we're going to be flexible as the Fed Probably has a couple of rate types and then we'll look at it.

Speaker 2

And if things settle down, we may balance in a little more. But Our first funding is for growth and then any excess funding, which we're certainly happy to put in securities because you're right, they have a very good spread right now.

Speaker 7

Yes. I think kind of looking forward, we really built up the securities portfolio in the last couple of years. There is no there's very little third party bank demand. So we kind of brought it on to the balance sheet as an accommodation. But now with the Securities to really run off over the next year to fund that loan growth that Paul talked about.

Speaker 7

And some of that loan growth has duration as well. Mean, so you saw the mortgage portfolio grew sequentially during the quarter pretty nicely. There's duration obviously associated with that Folio that gives us that same type of protection, but to the extent that we take duration, our preference has been to take it to support client relationships. And to the extent that we have excess kind of cash beyond the loan growth, then we would certainly invest in Securities because it is a good return as is the cash we sweep off to 3rd party banks as well. So right now we have a lot of different options and that's just the power of flexibility that we have with the cash balances and the flexibility that we preserve frankly through the last couple of years.

Speaker 11

Got it. All right. Thanks. I won't ask the pretax margin question. Just a reminder, there was a plus at the guidance next to 'twenty when you guys gave it last time.

Speaker 11

I just wanted

Speaker 2

to make sure that it's still there. Yes, it was over 20.

Speaker 5

Told you so. A question on the line from Steven Chubak, Wolfe Research, go ahead.

Speaker 10

Hi, good morning.

Speaker 2

Hey, Steve. So I wanted to start with

Speaker 10

a question on FICC. You alluded, Paul, to some of the headwinds to the business. It's been run rate in the last couple of quarters at about 100,000,000 This most recent quarter, you noted included some Rich Partners' contribution as well. As the Fed continues to remove excess liquidity from the system, Do you anticipate further pressure on this $100,000,000 baseline? Or is that a fair run rate that we can underwrite looking out to next year?

Speaker 2

You can see the dynamic are we have a great fixed income franchise, but really In that banking space, it's very, very strong, and they're focused on the same dynamics the whole industry is. So as cash tightens, They're going to fund loans 1st and securities second, just like us. So yes, that could have pressure. Now there's other parts So the business that will certainly have pressure on that run rate if it gets tighter. And again, on the other hand, they are just Really killing it right now, but everything is in their favor, but everything is a headwind for that banking part of the franchise that we're so good at.

Speaker 2

So it could come under more pressure also.

Speaker 10

Great. And just for my follow-up, maybe on the comp ratio, Certainly a nice positive surprise, especially relative to the guidance. I understand, Paul, or can appreciate your reluctance to Update the 19% to 20% plus margin target, but wanted to get a sense as to how we should think about Your philosophy around comp given so much of the revenue growth is going to come from less compensable areas, what's a reasonable expectation for where the comp rate We'll be running if rates stay higher for longer.

Speaker 2

Well, where we have been even with our advisors and associates, we paid them What we think is fairly under production and we haven't paid on interest. Now when interest went away, we didn't change their payouts and comp. Obviously, it affects Management's comp. So our plan right now is to keep the interest rates will continue to be non compensable. And so certainly impacts some of the bank comp.

Speaker 2

But generally, to the extent there's more interest spread and margin comp will go down. To the extent that normalizes It goes the other way, the ratio will go up. There's no change fundamentally in how we're paying right now or Like in any cycle, probably outsized for I don't know if they're out how long that stays, year, 2 years, quarter, But it will return, but we're our comp philosophy is the same. So you should see improvement as interest spreads Yes.

Speaker 7

I think the one thing I would add is the compensation philosophy kind of from outside of the Sort of advice, of course, that Paul was talking about was to help to share the success of the firm with our associates. And we are in a high environment and so whereas we're entering year end, we are leaning into being generous to our associates and sharing in success with our associates just as we always do. And so those year end increases won't really be reflected until The 2nd fiscal quarter, the 1st calendar quarter of the fiscal year and that's when payroll taxes reset of course. But As Paul said, the interest spreads have been a significant benefit to our compensation ratio down at

Speaker 10

To be mindful of, I do think the admin comp was running a little bit higher than we had anticipated or at least based on what some of The napkin math would suggest when you try to back out some of the non compensable portions of revenue?

Speaker 7

Again, that Reflects full quarter results from both TriState Capital and Sunridge. So I think this baseline going forward is a good baseline to start off with. But again, we will increase salaries across the board and we're leaning into being generous with that given the Competitive labor environment, the inflationary pressures and the success that we're having as a firm. So we really want to share that Success with the associates who've made it all possible. And that again and we're also continuing to hire in all of our businesses to support And continue the great growth that we've had across our businesses.

Speaker 7

And so that would really be reflected throughout fiscal 2023.

Speaker 10

Helpful color. Thanks for taking my questions.

Speaker 5

Thank you very much.

Speaker 7

Jim, are you there?

Speaker 5

Mitchell, your line is open for your question.

Speaker 11

Hello. Can you hear me?

Speaker 3

I can hear you.

Speaker 11

Okay. Sorry. Client cash, I

Speaker 4

should say.

Speaker 11

Can you remind us of the historical average for cash levels, maybe a low and high range? Just trying to think through where that starts to bottom out.

Speaker 7

It's a pretty wide range. I think the peak of that range market and markets decreased substantially, but I would say the trough was Somewhere in that 5% range, maybe a little lower than 5% in 2019. So To your point, we're at 6%. I think the 25 year historical average is probably in the 7.5%

Speaker 11

to more aggressively defend Cash balances and deposits to fund the balance sheet?

Speaker 2

Yes, absolutely. I mean, if they get low right now, we've been fortunate and have managed it well. As you know, we've been Focused on the flexible balance sheet, but you need cash to operate the business. So loans and others, we just haven't implemented it, Haven't felt like we need to, but if we see cash getting to levels that concern us, we will do that. We also have Pricepaid now, who is a very good Source of funding.

Speaker 2

They've got a very strong net funding operation, which was one of the reasons for the acquisition, which I don't think You understood. You said, well, so much cash, why would you have it? And I think it was a year ago, we were talking about our concern about cash in the future. So it's So we've got alternatives now. But absolutely, you need cash to run this business.

Speaker 2

And you want to be able to service your client cash. And at some point, We

Speaker 10

look at

Speaker 2

our Canner platform, so they're still in the system. We just haven't kept them in the pure cash form. Great. Thanks.

Speaker 5

Thank you very much. We'll go to our next question on the line. It's from Devin Ryan with JMP Securities. Go right ahead.

Speaker 2

Good. Most questions have been asked. I want to come back to the balance sheet a bit here and just Think about your mix, maybe following up on Alex's question, just deposits Obviously, becoming more scarce here. And so when you think about the mix moving forward, are there beyond maybe thinking About securities book, are there other areas maybe in the loan book or just more broadly where there's room for optimization Maybe areas to drive the risk adjusted NIM higher from here, all else equal. Well, there probably always is.

Speaker 2

So part of what we're doing is we're going through our budgeting broader bank business. TriState is An independent business with its 3rd party platforms. And the question is between that and Raymond James Bank, where do you allocate capital in the portfolio really to optimize Not partly the balance sheet from our standpoint, but really to allow for all allocations to make sense both for those businesses and for us. So There always is. In the periods of rapid transition right now, it's a little bit harder to do it, but we're in a lot of discussion on it.

Speaker 7

I would say just to reinforce that we really don't manage the balance sheet allocation to necessarily maximize NIM. We do it to maximize risk adjusted returns and we believe that securities based loans, both at Raymond James And to our own clients and at TriState Capital to their independent clients is the best risk adjusted return. So that is kind of the priority to the extent that the demand has been and then we look at the other loan categories. We like mix that we have right now with 35% of our loans and securities based loans. So that's kind of how we're thinking about it.

Speaker 2

Yes. Okay. Thanks, Paul. And then a follow-up here. Just want to

Speaker 10

talk a little bit about the investment banking.

Speaker 2

How is it going to, I think, air on the side of conservatism, given the uncertainty in

Speaker 5

the market, but I just want to

Speaker 2

make sure I understand how you're thinking about it. You have equity issuances. Is it going to be market centric, but Market stabilized, that probably would improve. And then your M and A business is structurally larger. So it feels like maybe could remain a bit under pressure Rates remain higher.

Speaker 2

So just trying to think about how much of maybe this more muted near term outlook is just purely market centric versus Maybe the flip side would be maybe every business doesn't snap back to where it was Over the last year or 2 because rates are higher, there's some other structural dynamic in the markets has changed.

Speaker 5

So I just want to

Speaker 2

kind of parse through both the cyclical versus anything that may be A little bit more impaired for a continued period. I think if you look at, I'll go in reverse order, the fixed income business. I mean, The challenge for traditional fixed income business in a rising rate market is that business will do well. People have been Buying shorter term, as they start buying longer term, it's more profitable for us too. And but you got to get rates to a point where people think rates are there to really start doing And certainly, the increase in rates will help, but we're just at a pause really till that happens.

Speaker 2

So I think that's more timing. M and A is a little harder. Backlog is good, clients are good. Even now, right now, it's up for us and it's up in Europe for the industry. And if you look at European dynamics with rates and inflation, everything, you go, well, how could that be?

Speaker 2

So I mean, there's still cash, there's still strategic investor continuing to grow it. We believe in it, but that one's hard to predict. I mean, it's been stronger, I think, than most people have predicted. With the backlog still strong, but when people close or not or when that stops, it's just that's a tough one. So When you come off of the last peak forever, which it probably isn't, but again, we're still very, very high on that business.

Speaker 2

But that one's kind of hard to say what triggers it to continue or what triggers it to slow down or stop for a while.

Speaker 5

Thank you. We'll proceed to our next question on the line with Kyle Voigt from KBW.

Speaker 8

So

Speaker 12

just given the level of sorting right now and the pressure that may put on total available funding as you look out A couple of years. Just completely understand the cautiousness. So just two follow ups on that. Was what is the current duration of AFS portfolio? And how much of that Would run off per year if you didn't reinvest at all in the portfolio?

Speaker 12

And can you also remind us, are there specific minimums That you need to hold in terms of the CIP and the third?

Speaker 7

Yes. I would say in the securities portfolio, the Average duration is somewhere around 4 years now with the securities portfolio. So if you think about kind of a normal distribution, you might have somewhere around 20% to 25% runoff a year, probably back end loaded a little bit. But and again, we're going to use A lot of that to fund the loan growth is current plans. There is a baseline for CIP of cash balance If you kind of look back at 2019, I think there's probably $2,500,000,000 or $3,000,000,000 of cash there for a variety of reasons.

Speaker 7

And so Maybe that's kind of a good way to think about the floor there for those balances. And really with BDP, That's a function of providing clients FDIC insurance, trying to maximize their FDIC coverage as much as possibly can given all the constraints and the demand from 3rd party banks.

Speaker 12

And so is there I guess Given your clients' allocation and that you only have certain number of charters that you can provide FDIC insurance with yourself. So is there a certain amount Minimum there, I guess, on the 3rd party bank side? Is it a few $1,000,000,000 that needs to be held there? Or is it

Speaker 8

some number that's smaller than that?

Speaker 7

Really, the way we think about the minimum on the BDP balances is essentially providing some level of funding buffer. We don't want to Overextend the funding as we've seen in the industry, it's challenging when you overextend the funding to your own banks and you don't have a buffer there. And One of the things that we're thinking through is what do we want that buffer to be now that some of you are aware of. So we think that's much too conservative, but We're kind of currently now that we've completed the acquisition of TriState Capital, understanding their balance sheet, We're currently in the midst of determining what the appropriate buffer is, but we're going to just as we always do here on the side of conservatism there as well.

Speaker 12

Understood. That's really helpful. I just have a nature, if at all.

Speaker 7

I'm not sure. I think it was a 5% sequential increase. And again, That bounces around based on benefit accruals that we adjust for, particularly at the end of the fiscal year, making sure we're fully funded and Crude for on benefits and other things, so natural growth and

Speaker 4

Changes to the accruals, etcetera.

Speaker 12

Okay. Understood. Thank you.

Speaker 5

Thank you very much. I'll proceed with our final question for today is from the line of Bill Capp, The Credit Union. Good morning for Bill.

Speaker 8

Thank you for taking

Speaker 4

my question. Most questions have been asked, but I did have one follow-up on the loan mix, Paul on Paul. Are you seeing any shift in demand for the SBLs? It looks like on an end of period basis, they dipped a little bit. The resi was pretty resilient, but I understand your long term outlook is Quite positive

Speaker 2

for the balance sheet. I think that yes. Some of that, SBL that was really pay up. A lot of people use that as GAAP funding. So Part of the mortgage demand where people went from SBL to pay those off and as they mortgage it there for our clients, I think TriState Growing their market share with new relationships too has a huge opportunity.

Speaker 2

So I think SBLs over time are still Even short term and longer term, still very, very positive. The question becomes as people are less likely to borrow, but I still think that business is doing well. So I think you see a blood saw a blood this quarter really on that.

Speaker 4

Great. Thanks. And then if I just had one more follow-up. As a percentage of AUA, you still kept closing over time?

Speaker 2

We've just never been as aggressive in pushing debt through our organization. I mean that So our products, SBL is even a relatively new product for us compared to our competitors. So Byram, the presenter, even branch managers with quotas. So because of that, our debt concentration historically has been Lower than certainly our wirehouse competitors. And we continue to gain share, but We do it more through natural means than the advisers.

Speaker 2

So but our content is going up, We're just not aggressive in that, haven't been. It's just part of the culture for a long time.

Speaker 12

Great. Thank you. Makes sense.

Speaker 5

Thank you very much. And Mr. Riley, that was a final question. Although

Speaker 2

very strong end of the year, It's an environment outside of the equity markets and interest rates and cash sorting and everything else that's hard to call. We're still that's when we really appreciate the flexibility we have in the balance sheet happen. As you get GDP and you get People still raising rates and inflation. It's going to be an interesting quarter, a couple of quarters, but that's You can see that our advisors are still 90 clients, say 97% satisfied with their advisors. It's pretty high risk.

Speaker 2

And we'll talk to you soon.

Speaker 5

Thank you very much and thank you everyone. That does conclude the call for today. We thank you for your participation and please disconnect your lines.

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Earnings Conference Call
Raymond James Q4 2022
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