Raymond James Financial, Inc.

Good morning, 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 Sugri, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to slide two. 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 timing, and benefits of our acquisition, including acquisition of Charles Stanley Group PLC, completed on January 21, 2022, as well as our announced acquisitions of Tri-State Capital Holdings and Sunridge Partners. and our level of success in integrating acquired businesses, divestitures, anticipated results of litigation and regulatory developments, impacts of the COVID-19 pandemic, or general economic conditions. In addition, words such as may, will, should, could, scheduled, plans, intends, anticipates, expects, believes, estimates, potential or continue, or a negative of such terms, or other comparable terminology, as well as any other statement 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 the forward-looking statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our investor relations website. During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our press release and presentation. Now, I'm happy to turn the call over to Chair and CEO, Paul Reilly. Paul?

Good morning. Thank you for joining us today. I'm going to begin on slide four. I am very pleased with our results for the fiscal second quarter and the first half of the fiscal year, especially given the challenging market conditions. We continue to invest in growth across all of our businesses. In the private client group, excellent retention and recruiting of financial advisors contributed to best-in-class growth with domestic net new assets of 11 percent over the 12-month period. Furthermore, the Charles Stanley acquisition, which closed during the quarter, significantly expanded our presence in the UK, which is a very attractive market for wealth management. In the capital markets business, while investment banking revenues were negatively impacted by the heightened market volatility during the quarter, we continue to see strong pipelines. As the expertise we have both added organically and through niche acquisitions has been performing extremely well. In the fixed income business, we announced the pending acquisition of Sumridge Partners during the quarter, which will enhance our platform with technology-driven capabilities and a fantastic team with extensive experience in dealing with corporates. Raymond James Bank grew loans an impressive 7% during the quarter, reflecting attractive growth across all of the loan categories. The tri-state capital acquisition, which is expected to close by the end of our fiscal third quarter, will add a best-in-class third-party securities-based lending capability while also diversifying our funding sources. They will also bring a diversified asset manager in Chartwell, which will be a great addition to our multi-boutique model in asset management. So as we always do in any market cycle, we continue to invest for the long term, always put in clients first. It's in uncertain market conditions such as these that remind us the importance of focusing on and making decisions for the long term. While our strategy may not always be popular over short-term periods, today I believe we are well positioned for the expected increases in short-term rates with record clients' domestic cash suite balances, strong loan growth at Raymond James Bank, high concentration of floating assets, and an ample balance sheet flexibility given solid capital ratios, which are all well in excess of regulatory requirements. Turning to results, in the fiscal second quarter, the firm reported net revenues of $2.67 billion and net income of $323 million, or earnings per diluted share of $1.52. Despite higher asset management and related administrative fees reflecting the strong year-over-year growth in PCG assets and fee-based accounts, diluted EPS declined 10 percent compared to the prior quarter, primarily due to bank loan loss provisions for credit losses during the current quarter to support the strong loan growth compared to a benefit in the prior year quarter. This quarter also had a higher effective tax rate which Paul Shukri will explain later on the call. Excluding $11 million of acquisition-related expenses, quarterly adjusted net income was $331 million, or earnings per diluted share of $1.55. Annualized return on equity for the quarter was 15%. And adjusted annualized return on tangible common equity was 17.2%. An impressive result, especially in this very low-rate environment and given our strong capital position. Moving to slide five, we ended the quarter with total assets under administration of $1.26 trillion and record PCG assets and fee-based accounts of $678 billion. These figures include the assets from the acquisition of Charles Stanley, which was completed on January 21st. Excluding the impact of the acquisition, total client assets under administration declined 2.8 percent compared to the immediately preceding quarter. Financial assets under management of $194 billion decreased 5 percent sequentially as net inflows were more than offset by declines in equity markets during the quarter. We ended the quarter with a record 8,730 financial advisors a net increase of 403 over the prior year period and 266 over the preceding quarter, which includes the 200 Charles Stanley financial advisors. Our focus on supporting advisors and their clients has led us to strong results in terms of advisor retention as well as recruiting experienced advisors to the Raymond James platform throughout our multiple affiliation options. Over the trailing 12-month period ending March 31, 2022, we recruited to our domestic independent contractor and employee channels financial advisors with approximately $340 million of trailing 12 production and approximately $53 billion of client assets at their previous firms. And highlighting our industry-leading growth, we generated domestic PCG net new assets of approximately $106 billion over the four quarters ending March 31st, 2022, representing approximately 11% of domestic PCG assets at the beginning of the period. Second quarter domestic PCG net new asset growth was nearly 9% annualized. Client domestic cash suite balances grew 4% sequentially to a record $76.5 billion. Raymond James Bank continued to generate impressive loan growth, up 22% year-over-year and 7% during the quarter, to a record $27.9 billion. This growth was driven by securities-based loans and residential mortgages, largely to PCG clients, as well as strong corporate loan growth. Now moving on to the results on slide six. The private client group generated quarterly net revenues of $1.92 billion and pre-tax income of $213 million. On a year-over-year basis, revenues grew 17 percent and pre-tax income grew 11 percent, primarily driven by higher assets and fee-based accounts. The capital market segment generated quarterly net revenues of $413 million and pre-tax income of $87 million. Capital markets revenues declined 5% over the prior year period, primarily driven by lower fixed income brokerage revenue and equity underwriting revenues. Sequentially, quarterly net revenues decreased 33%, driven by lower investment banking revenues, primarily due to the impact of increased geopolitical and macroeconomic uncertainties. As I referenced earlier, in March, we announced the acquisition of Sumridge Partners, a technology-driven fixed income market maker specializing in investment-grade and high-yield corporate bonds, municipal bonds, and institutional preferred securities. This acquisition is further evidence of our continued commitment to providing cutting-edge technology to advisors, clients, and stakeholders. We currently anticipate the acquisition to close in the fourth quarter of 2022, subject to regulatory approval. The asset management segment generated net revenues of $234 million and pre-tax income of $103 million. On a year-over-year basis, revenues grew 12% and pre-tax income grew 18% over the fiscal second quarter of 2021, primarily as a result of higher assets under management. Raymond James Bank generated quarterly net revenues of $197 million and pre-tax income of $83 million. Net revenue growth was primarily due to higher asset balances as the bank generated attractive growth in its loan portfolio along with net interest margin expansion. Despite revenue growth, pre-tax income declined 25% compared to a year-ago quarter caused by the bank's loan loss provision for credit losses in the current quarter, reflecting strong loan growth compared to the bank's loan benefit for credit losses in comparative periods. Looking to the fiscal year-to-date results on slide seven, we generated record net revenues of $5.45 billion during the first six months of fiscal 2022, up 19% over the same period a year ago. Record earnings per diluted share of $3.61 increased 14% compared to the first six months of fiscal 2021. Additionally, we generated strong annualized return on equity of 18.1% and annualized adjusted return on tangible common equity of 20.6% for the six-month period. Moving to the fiscal year-to-date segment results on slide eight, The private client group, capital markets, and asset management segments all generated record net revenues and record pre-tax income during the first six months of the fiscal year, again, reinforcing the value of our diverse and complementary businesses. Now, for a detailed review of our second quarter financial results, I will turn the call over to Paul Shoukry. Paul?

Paul Shoukry Thanks, Paul. Starting with consolidated revenues on slide 10, quarterly net revenues of $2.67 billion grew 13% year-over-year and declined 4% sequentially. Record asset management fees grew 25% over the prior year's fiscal second quarter and 6% over the preceding quarter. Private client group assets and fee-based accounts ended the quarter relatively unchanged compared to December 2021. However, adjusting for the acquired assets of Charles Stanley PCG assets and fee-based accounts declined approximately 3%, creating a headwind for asset management revenues in the fiscal third quarter. So I would expect somewhere around a 3% sequential decline in this line item in the upcoming fiscal third quarter. I'll discuss account and service fees and net interest income shortly. Skipping ahead to investment banking revenues, as Paul described, this line item declined significantly compared to the preceding quarter. But at $235 million, it was still a very strong quarter compared to our results prior to fiscal 2021. Given the heightened market volatility, we would not be surprised to match this quarter's results for the next two quarters, which would result in the investment banking revenues ending fiscal 2022 close to the record set in fiscal 2021. While our pipelines are strong, there's a lot of uncertainty over the next two quarters that could impact investment banking revenues positively or negatively for the rest of the fiscal year. Other revenues of $27 million were down 47% compared to the preceding quarter, primarily due to lower revenues from affordable housing investments, previously known as tax credit funds. The pipeline for the business is very strong, but the timing of closings is more uncertain given the rapid cost increases impacting affordable housing developers. Moving to slide 11, clients' domestic cash suite balances ended the quarter at a record $76.5 billion, up $3 billion, or 4%, over the preceding quarter and representing 7% of domestic PCG client assets. Notably, $17 billion, or 22% of total cash suite balances, are held in the client interest program, the vast majority of which are invested in very short-term treasuries and could be redeployed to generate much higher yields over time, either at our own bank or with third-party banks as interest rates increase and demand for cash balances recover. Turning to slide 12. combined net interest income and BDP fees from third-party banks was $224 million, up a robust 9% from the preceding quarter. This growth is largely a result of strong asset growth in the higher net interest margin at Raymond James Bank, which increased nine basis points to 2.01% for the quarter. The increase of the bank's NIM during the quarter was attributable to a higher yielding asset mix given the strong loan growth, as the March interest rate increase really won't start benefiting the bank's NIM until the fiscal third quarter. For example, following the March rate increase, the bank's current spot NIM is around 2.15 percent. The average yield on RJBDP balances with third-party banks increased to 32 basis points in the quarter, and the spot rate is just over 50 basis points, reflecting the March rate increase. Both the NIM and the average yield from third-party banks are expected to increase further with additional rate increases as less than 25% of the firm's interest-earning assets have fixed rates, and those assets have an average effective duration of less than four years. And all of the deposit sweep relationships with third-party banks are floating-rate contracts, so we should have significant upside from rising short-term interest rates. To that point, let me walk through how we are positioned to rising short-term interest rates. Based on current clients' domestic cash suite balances, which decreased by over $2 billion to $74 billion thus far in April, largely due to the quarterly fee billings and income tax payments, using static balances and an instantaneous 100 basis point increase in short-term interest rates, which includes the 25 basis point rate increase in March, we would expect incremental pre-tax income of nearly $600 million per year, with approximately 65% of that reflected as net interest income and 35% reflected as accountant service fees. This estimate assumes a blended deposit beta of around 15% for the first 100 basis point increase, commensurate with what we experienced in the last rate cycle. Importantly, this analysis does not incorporate the tri-state capital acquisition, which should provide incremental upside to higher short-term interest rates, as the vast majority of their $13 billion of balance sheet assets are also floating rate assets, as they have always shared a similar approach to limiting duration risk. Moving to consolidated expenses on slide 13, starting with our largest expense, compensation, The compensation ratio for the quarter was 69.3%, which increased from 67.7% in the preceding quarter but remained below the year-ago period compensation ratio of 69.5% and below our 70% target in a low interest rate environment. The sequential increase was mainly the result of lower capital markets revenues which led to the revenue mix shift towards higher compensable revenues in the PCG segment as advisor payouts, particularly to independent advisors who cover their own overhead expenses, are typically higher than the associated compensation of our other businesses. On a sequential basis, the compensation ratio was also impacted by the reset of payroll taxes that occurs in the first calendar quarter of each year as well as annual salary increases and continued hiring to support our growth. Non-compensation expenses of $388 million increased 14% sequentially, predominantly driven by the bank loan provision for credit losses compared to a loan loss release in the preceding quarter, as well as higher communication and information processing expenses. Excluding the bank loan provision and acquisition-related expenses, which creates some noise in the comparison, non-compensation expenses of $356 million grew 3% over the preceding quarter. Also keep in mind, expenses included just over two months of results for Charles Stanley, which closed on January 21st. So overall, we have remained focused on the discipline management of all compensation and non-compensation related expenses while still investing in growth and ensuring high service levels for advisors and their clients. Slide 14 shows the pre-tax margin trend over the past five quarters. In the fiscal second quarter, we generated a pre-tax margin of 16.2% and an adjusted pre-tax margin of 16.6%. in line with our 16 percent target in this low interest rate environment. Based on the expectation for the additional increases in short-term interest rates, we will revisit our pre-tax margin and compensation ratio targets at our upcoming Analyst and Investor Day scheduled for May 25th. Hopefully, by then, we will have more clarity on other important variables, such as the outlook for investment banking revenues, the level of business development expenses as conferences and travel continue to ramp up, and the impact of recently closed and pending acquisitions. On slide 15, at the end of the quarter, total assets were $73.1 billion, a 7% sequential increase, reflecting the addition of approximately $3 billion in assets, mostly segregated client cash balances from Charles Stanley, as well as solid growth of loans at Raymond James Bank. Liquidity and capital remain very strong. RGF corporate cash at the parent ended the quarter at $2.2 billion, increasing 59% during the quarter, primarily due to significant special dividends from our well-capitalized subsidiaries during the quarter. The total capital ratio of 25% and a Tier 1 leverage ratio of 11.1% are both more than double the regulatory requirements to be well capitalized, providing significant flexibility to continue being opportunistic and invest in growth. The effective tax rate for the quarter did increase to 25.4%, up from 20.1% in the preceding quarter. The primary drivers of the sequential increase are the favorable impact from share-based compensation that vested in the preceding quarter and non-deductible losses on our corporate-owned life insurance portfolio due to equity markets that are used to fund our non-qualified benefit plans compared to non-taxable gains on these portfolios in the preceding quarter. Slide 16 provides a summary of our capital actions over the past five quarters. As of April 27, 2022, $1 billion remains available under the Board-approved share repurchase authorization. Due to regulatory restrictions, we do not expect to repurchase common shares until after closing the tri-state capital holdings acquisition, currently expected to occur by the end of the fiscal third quarter. As we explained on prior calls, Our current plan is to offset the share issuances associated with the transaction after closing. But given the heightened market volatility, we'll obviously keep a watchful eye on market conditions between now and then. Lastly, on slide 17, we provide key credit metrics for Raymond James Bank. The credit quality of the bank's loan portfolio remains healthy, with most trends continuing to improve. The bank loan loss provision of $21 million was primarily driven by strong loan growth during the quarter. The bank loan allowance for credit losses as a percentage of loans held for investment ended the quarter at 1.17%, down from 1.5% at March 2021, and essentially unchanged from 1.18% at December 2021. Now, I'll turn the call back over to Paul Reilly to discuss our outlook. Paul? Paul Reilly Thank you, Paul.

As I said at the start of the call, I am pleased with our results, and while there are many uncertainties, I believe we are well positioned to drive growth across all our businesses. In the private client group, next quarter results will be negatively impacted by the expected 3% sequential decline of asset management and related administrative fees that Paul described earlier. However, focusing more long-term, our recruiting pipelines remain strong, and combined with solid retention, I am optimistic we will continue delivering industry-leading growth as advisors are attracted to our client-focused values and leading technology platform. Furthermore, the addition of Charles Stanley provides an opportunity to accelerate our growth in the U.K. wealth management market through multiple affiliation options similar to our advisors' choice offerings in the U.S. and Canada. In the capital market segment, M&A pipeline remains robust, but closings will be heavily influenced by market conditions throughout the remainder of the fiscal year. And while market uncertainty and geopolitical concerns loom in the near future, I am confident we have made significant investments over the past five years to strengthen our platform and to grow our team and productive capacity, positioning us well to grow over the long term. In the fixed income space, although depository clients are still flush with cash and searching for yield optimization opportunities, we expect results to be more volatile over the next few quarters given elevated interest rate uncertainty. Additionally, we expect the pending acquisition of some rich partners to enhance our current position in the rapidly evolving fixed income and trading technology marketplace. In the asset management segment, while the financial assets under management are starting the fiscal third quarter lower due to equity markets, we are confident that strong growth of our assets and fee-based accounts in the private client group segment will drive long-term growth of financial assets under management. In addition, upon the close of tri-state capital, We expect Chartwell Investment Partners, which will operate as a subsidiary of Carillon Towers Associates, to help drive further growth through increased scale, distribution, and operational and market synergies. And Raymond James Bank should continue to grow, as we have ample funding and capital to grow the balance sheet. Raymond James Bank is well positioned for rising short-term rates, and we expect Tri-State Capital to further enhance this benefit to the firm given their floating rate asset concentration and their leading position in third-party SBL business. Before closing, I want to call your attention to our annual corporate responsibility report that was released during the quarter. The report, which can be found on our investor relations website, highlights our foundational commitments to our people, sustainability, community, and governance, and illustrates our long-standing approach to doing business. rooted in our values, and brought to life through our people-driven culture. This report summarizes many of the inspiring things that our advisors and associates across the firm do to contribute to their communities and the things we do as a firm to help the environment. As always and foremost, I want to thank our advisors and their associates for their perseverance and dedication to providing excellent service to their clients each and every day. With that, operator, please open the line up for questions.

Thank you very much. And if you'd like to register a question, once again, it is the one followed by the four on your telephone keypad. Your three-tone prompt to acknowledge requests. If a question hasn't been answered to draw your registration, here's the one followed by the three. You're using a speakerphone to flip your handset before entering your request. One moment, please, for our first question. And we'll proceed with our first question on the line from Alex Blastein with Goldman Sachs. Go right ahead with your question.

Hey, good morning, everybody. Thanks for taking the question. So I wanted to start with the question around capital. You guys saw the tier one leverage drop down over 100 basis points, quarter to quarter at the holding company level. It looks like it's all coming from the broker-dealer. The cash balance is picked up there and liabilities did as well. Maybe flesh out a little bit sort of what happened, what drove the increase this quarter that's kind of weighing on tier one leverage a bit here. And then more importantly, is that something you expect to reverse pretty quickly? And I guess regardless, should we still expect you guys to buy back all the stock that you expect to issue on the back of tri-state closing?

Yeah, thanks, Alex. I think you know, before going into sort of the quarter to quarter movements, just stepping back, um, at 11% tier one leverage ratio, uh, we're still well over two times the regulatory requirement to be well capitalized at 5%. So, you know, just important to note that we still have a significant amount of capital, uh, to continue investing in growth, growing the balance sheet and growing our businesses. Um, and with that being said, uh, Since the beginning of the fiscal year, our client cash balances have increased over 15%, which is an amazing number if you think about it. We're six months into our fiscal year. And most of that has come, as you mentioned, to the broker-dealer in the client interest program, the vast majority of which are used to fund short-term treasuries. We're talking 30-day, 60-day type treasuries pursuant to the segregated asset SEC rules. So These are the first cash balances that will be redeployed, either on balance sheet or off balance sheet, as demand from third-party banks, you know, recover after the increase in short-term interest rates. And just to kind of dimension that impact to our Tier 1 leverage ratio, you know, before the pandemic, these balances were hovering right around $2 billion. So at $15 billion of really overflow is what I would call this, and the client accommodation, that's eating into about 300 basis points of the tier one leverage ratio. And frankly, when we set the 10% target a little less than a year ago, we don't look at this impact on this portion of the balance sheet the same as we do other portions of the balance sheet. Because again, they're invested in 30 or 60 day treasuries, which are obviously highly liquid. So it's really just geography in terms of putting this on the balance sheet here versus putting it with third-party banks where it's not on the balance sheet and doesn't eat into the tier one leverage ratio, which we will do when their demand resumes, or funding our own bank, which we would earn a higher spread on, obviously, than we do on 30-day treasuries. So hopefully that answers your question there.

Got it. So don't want to put words in your mouth, but it sounds like the 10% tier one leverage minimum is is not quite the minimum. In absolute terms, we should really think about, you know, where, you know, that balance sits and where that sort of comes from and how that impacts capital ratios a little bit more dynamically. Is that right?

Yeah, I mean, I think that's a good way of thinking about it.

Okay, great. And then just piggybacking on the point you made around the building cash levels, obviously we've seen that across the industry, but with rising rates, the conversations around cash sorting obviously picking up pretty materially. In the last cycle, if my math is right, I think you guys have seen about a 15% to 20% decline in sort of peak to trough cash balances across the franchise. Given the changes in the customer mix and how much you've grown, is that still the right framework to think about? How much could leave in this cycle? Understanding the pace of rates is likely to be much faster this time around.

Yeah, I think you're right. In the last cycle, it was around a 15% to 20% decline. But I mean, remember, we just in the last six months increased balances by 15%. So if we see a decline over the next year or two as rates rise, and really the decline happens after the first 100 basis points, then it's not really that big of a deal considering we just got that in the last six months here, and it's sitting in short-term treasuries. And remember, that's decline in cash balances will be more than offset by the increase in short-term interest rates based on our assumptions. And the other factor that you need to consider is when you do have a decline in cash like that due to cash sorting, the value of that cash becomes more valuable. So as an example, today the spot yield of our balances with third-party banks is right around 50 basis points, which is right around Fed Funds' target. Before the pandemic, we were getting Fed funds target plus 10 or 15 basis points. So, you know, the spread on not only those balances, but also loans in a more cash tight environment, the cash becomes more valuable. And that offsets a portion of the impact from declining cash balances in the system as well.

Great. If I could just give you one more busy morning, obviously, between a bunch of calls here. But Tri-State, so I believe you initially targeted $3 billion of sort of funding replacement on their balance sheet once the deal closes. Is that still the case? I think in the first year you targeted, you said, about $3 billion. Why wouldn't you go a little faster, given that their deposit beta, I think, is going to be a lot higher than yours?

Yeah, I mean, you asked about the – cash sorting issue, just, you know, in the prior question. So, you know, we're going to look at, they bring in diversified funding sources. They have very good depository clients, many of which are also clients on the asset side, and they're going to continue running independently, of course. So, you know, we're going to do what makes the most sense for both them and us. We're not beholden to the assumptions we used in the due diligence and valuation process, and nor are we going to make decisions to boost short-term results that may compromise long-term results. So we're going to, you know, as we do with all of our decisions, make them based on what's best for our investors over the long term.

Great. Thanks for entertaining all the questions.

I just want to reiterate, you know, Tri-State, you know, operating as an independent subsidiary has to take care of its clients' cash needs and commitments, too. So it's not just math, right? They'll have a lot of client balances to manage and And the $3 billion was just a rough estimate of the excess where we could replace them without, you know, they felt without impacting their business.

Thank you very much. We'll get to our next question on the line from Stephen Chowback with Wolf Research. Go right ahead.

Hi. Good morning, Paul. So I wanted to start off with just a question on Tri-State. The rate backdrop is clearly much more constructive since the deal was first announced. And given the revenue upside is coming from less compensable spread income, I was hoping you could provide some thoughts on the updated TSC accretion expectations based on the current forward curve and how we should be thinking about where PPNR margins could potentially settle out with higher rates and a fully integrated TSC deal as we think about your normalized earnings power?

I think there's a lot baked into that question. You know, and I don't think it's, you know, there's a lot that has changed since we announced the acquisition and the 8% to 12% type accretion. But, you know, I don't think maybe at the analyst investor day, we can get into more detail with all the different variables. You know, one thing I will say is is that their loan growth since we announced the transaction, and they're separate public companies, so I also don't want to get too much into their own results or what the upside is to higher rates going forward for their results until after we close the transaction. But I think I can say that the loan growth since we announced the transaction has been much stronger than we were projecting. Of course, we try to use conservative projections, but they've had really continue to have strong loan growth since announcing the transaction. So that, coupled with the higher increases in short-term rates that we're expecting, and again, vast majority of their assets are floating rate assets, certainly are nice tailwinds for us going forward.

And Paul, I mean, any insight you can share just in terms of how we should think about that terminal PPNR margin? I think the big debate is you're going to be integrating this deal. The accretion tailwinds have certainly been favorable over the last few quarters. You did note the loan growth is also coming better. The big debate is how much of that revenue you're going to allow to fall to the bottom line versus get reinvested back in the business. I just want to get some sense as to how we should be thinking about peak margin potential over the next couple of years.

Yeah, Steven, I would say that the peak margin potential is going to be driven more by the increase in short-term interest rates and the impact that has on our $75-plus billion of client cash balances than any particular transaction that we've closed or that is pending. So I would say I would look at that, and as I said earlier on the call, That impact in the first 100 basis points we're projecting to be somewhere in the $600 million range. So it's obviously significant accretion to earnings for us in the first 100 basis points.

Very helpful. And then just if I could squeeze in one more just on the securities portfolio. I know historically you guys have tended to favor more short-end versus long-end gearing. Certainly, given the pace of Fed tightening that's anticipated, that's going to serve you pretty well here. But given the forward curve is actually starting to bake in, a couple of Fed cuts a few years out, wanted to get some perspective on whether there's any appetite to actually extend duration, given some of the higher MBS proxies in particular. which could potentially protect you in the event, looking a couple of years out, that the Fed does in fact start easing and maybe we don't have the soft landing that many of us were hoping for.

Yes, so at this point, I think we've undertaken some criticism for being flexible. And flexibility just isn't maximizing short-term earnings for us. It's maximizing the business model to be able to take advantages of acquisitions, investments, and you know, keeping flexible in difficult times, which right now is uncertain. So after waiting, we're certainly not ready to lock in short-term rates or longer-term rates while we're in the middle of a, you know, what we think will be an increasing interest rate cycle. But that doesn't mean at some point in the future where we think, you know, with asset liability management, we wouldn't lock in a portion. But that's not on the near-term goals right now.

Understood. Thanks so much for taking my questions.

Thank you. Thank you very much. We'll get to our next question on the line from Manan Ghazalia with Morgan Stanley. Go right ahead.

Hey, good morning, Paul and Paul. I wanted to get your thoughts a little bit more on the deposit beta and the 15% assumption for this cycle. So first, if you can remind us where deposit rates peaked in the last cycle. And then, if I think about the differences this time around, on a macro level, we're getting a much faster pace of rate hikes than last time. Inflation is higher. The Fed's going to shrink their balance sheet sooner. And for Raymond James specifically, the bank is a lot larger, and you have the upcoming acquisition of Tri-State. So with that in mind, what are your thoughts on how the deposit beta dynamic will play out and what that will do to deposit rates this cycle?

I mean, there are a lot of differences this cycle versus last rate cycle. So your guess is probably as good as ours. We're going to be very competitive and try to be generous with our clients. The 15% of kind of assumption slash guesstimate that we have for the first 100 basis points, which includes the first rate increase in March, where the deposit beta was obviously extremely low across the industry, assumes that there's a pickup in deposit beta with the subsequent increases. So in the last rate cycle, we peaked out at around 60 basis points on average for the cost of funds in the sweep. And that's when Fed funds target topped out at about 2.5%. Usually the investable cash, going back to the cash sorting topic, gets invested in short-term alternatives like purchase money market funds. I think we have the best purchase money market fund platform in the industry for our clients who are looking to optimize their yields. So that's kind of how we're thinking about it in terms of bifurcating the cash in the account and how we pass on in the sort of operational cash component of the accounts. But We're obviously going to look at the competitive environment as rates rise and try to be fair and competitive with our clients.

I think if you look, too, that all cycles are different and things happen different. So the first thing is you have to be flexible and responsive. We've done a good job even planning out various scenarios and cycles, but we do well in advance. So our best guess right now is it will be like the last cycle, just faster. So we may have to move faster. quicker, but we think the relative spreads and things will still be there. We certainly have a lot more cash. And economically, even though when you lose balances, you still gain that interest income because of the rate differential. So, you know, it should be positive at least through the next couple of raises. And then longer term is whatever longer term is.

Yeah, I guess a follow-up to that is, you know, what the rate sensitivity, the $600 million will look like for the next 100 basis points, right? Because, you know, we're going to get several rate hikes in short order, you know, presumably by the time, you know, we get to June, July, we'll be talking about the next 100 basis points. So, you know, any thoughts on what that $600 million should look like? You know, just based on your comments, I'm assuming we need to haircut that a little bit, but, you know, would love your thoughts on that.

I think what most people are assuming is that the incremental benefits with incremental rate hikes are going to decline significantly, still be a benefit net-net, but decline relative to the first 100 basis points as the lag catches up and the deposit betas increase. But again, if we're guessing on the first 100 basis points, then we're certainly going to be guessing on the second 100 basis points, so time will tell.

Got it. And just one quick clarification, and sorry if I missed this earlier, but can you quantify if there was any material hit to AOCI this quarter?

Certainly, I don't think I would call it material. You saw that our equity, balance sheet equity, was flat during the quarter despite strong earnings, net of dividends. So I think the AOCI impact was somewhere around $300 million for the quarter. And that's, again, a testament to our aversion to taking too much duration risk. We keep that securities portfolio very short, and we're actually shortening it now. We're buying treasuries now with sort of two-year lives today just to position ourselves, as Paul said, to give us even more flexibility going forward given all the uncertainty around rates.

Great. Thanks so much. Thank you. We'll get to our next question on the line. From Bill Katz with Citigroup, go right ahead.

Okay, Jimmy, thank you very much for taking the questions this morning and your prepared commentary. Just coming back to capital for a moment. So, Paul, if I hear you correctly, some of the sort of pressure on the Tier 1 leverage ratio sequentially probably abates a little bit, just given how client cash will move around a little bit. And you obviously get the favorable impact from higher rates and notwithstanding a flat investment banking outlook and the deal with TSC. You mentioned maybe some caution around buyback. I'm sort of curious why that would be the case at this point in time, given what should be pretty fat capital ratios, net of everything.

Yeah, the only cautionary isn't backing out of our plan to buy back the TSC purchase price. It's just we're in a very uncertain economic environment, and if things tanked, we'd have to look at if the market really tanked and you know, no telling what happens or if the geopolitical thing really heightens and becomes global, we'll be more cautious and more on pace now. If the price, if that happens and stock prices were affected, you know, we'll probably still be able to accomplish it. But we're just, we always look at the macro outlook. Number one for us is safety and flexibility. And secondary is execution. So it was nothing more than a broad cautionary, you know, in a world that Anything could go right now. In the worst cases, we'd take a look at it because capital and liquidity stay number one, but we still plan to execute that buyback, all things being predictable.

And maybe the one thing I would add to that is whether we buy back that stock in one or two quarters following closing or three to four quarters following closing, it seems like a long time in the models, but for us it's a blip. We make decisions for the next three to five years, not for the next three to five quarters, and the timing of the buybacks really doesn't impact results all that much a year to two years out. So if it makes more sense, given all the factors that Paul just described, to wait a couple quarters, then we'll wait a couple quarters. We're going to err on the side of caution just as we always do.

Okay, thank you. And then maybe just a two-part unrelated question. I apologize for nesting it this way, but On the P&L, communications had a pretty big sequential step up, and I think business development similarly had a pretty flack relative to sort of good organic growth. Any geography changes here? Any impact from Charles Stanley that you can help us maybe unpack a little bit?

Yeah, you nailed it. It's really a lot of the impact from Charles Stanley. They had... around $45 million of total expenses reflected in the quarter since they closed. And, you know, a big portion of that hit the communication information processing line. So I think that's what you're really seeing there is just the impact from the two months of Charles Stanley acquisition and some of those line items.

Gotcha. And then just a related question is, I sort of appreciate we've all tried to get at the pre-tax margin discussion. As you look at your core business today, I think one of the things you've talked about is you've been spending pretty regularly now over the last couple of years to sort of build the scale and the opportunity set. Is there anything in the core businesses that you've been under-investing in? And I'd be curious, would you be willing to change the payout grid on the private client side to accelerate growth even more, or is sort of a 75% blended payout a reasonable thought process from here? Thank you.

Well... I think we've spent well on our infrastructure and it's very leverageable. The systems that we've put in on, you know, all the back office have been a significant investment. We are, you know, we have increased our technology run rate, you know, again this year. So we're, you know, we'll continue to invest in technology as we move all of our systems forward. And the next big investment's really around our client apps because we've felt that we've more work to do but a leading the leading wealth planning desktop so now we're putting that same technology to the client app so the advisor and client have that same intimacy so but outside of that no i think we're well invested we're not really looking at anything and we've invested now i mean people asked if we're ever going to acquire anything and we've got three in the hopper one closed and to hopefully to close soon. So we've got a lot going on, and we think we've been investing well across the firm and believe in long-term growth will be great with these acquisitions. They weren't focused on short-term growth, although once integrated, I think they'll do very well.

Thank you very much. Thanks, Bill.

Thanks, Bill.

I appreciate our next question. On the line from Kyle Voigt from KBW. Go right ahead.

Hi, good morning. Maybe just getting some clarity on the PCG asset management revenues and the guidance of that being likely down 3% or so in fiscal 3Q. I guess we're seeing those fee-based assets essentially flat over the past two quarters, and I understand that's really due to adding the Charles Stanley assets. So organically, they're down 3%. But I guess the question is, I guess where are those Charles Stanley revenues coming through in that segment then? Because given what you said, it would imply that none of those revenues are really coming through that asset management line.

I think it's just a function of timing, Kyle. So we did have those revenues coming through those lines for just over two months of the quarter, but the assets weren't really reflected until the end of the quarter. So all we're saying is that despite the assets being flat sequentially, those revenues will decline somewhere around 3% starting next quarter because we already have accounting for those revenues at least two months of it so far this quarter.

Got it. Thanks. And then just given how yields trended through the calendar first quarter, just wondering if you had any details regarding how the AFS portfolio trended through the quarter and So maybe anything on end-of-period AFS balances would be helpful. And I guess, do you view the securities reinvestment rates right now as attractive enough to really start moving some of those CIP deposits into the bank to ramp up growth in that securities portfolio more meaningfully?

We're doing that modestly. I mean, we're shortening the duration with treasuries to two years from the three to four years that we were buying in the agency mortgage back. The incremental spread on what we're buying versus what's running off from the legacy portfolio is just north of 1%. So, you know, we think it's somewhat attractive. I mean, that comes with duration, and we want to stay flexible, as Paul pointed out before. So we're not going to, you know, do that in a dramatic way. But we do have a lot of cash in CIP that is invested in very short-term treasuries and the 30- to 60-day treasuries. And so to the extent that we can deploy some of that incrementally into the bank to earn a higher yield and sort of wait until this demand from third-party banks recover, then we think that that would be a good tradeoff. But it's not going to be too significant, I would say, in terms of growth of the securities portfolio. But we do expect ongoing growth between now and the end of the fiscal year.

Got it. And then just a follow-up question on that one is that CIP is now sitting at $17 billion in balances. Is there a certain percentage of those balances? We should think about you wanting to migrate and deploying the bank versus moving off balance sheet to free up capital. Given what you just said, is it fair to think about a majority of those? You really want to move off balance sheet into the third-party sweep?

Yeah, I guess we don't have any sort of predetermined objectives in terms of where it goes. You know, we think that there's, you know, we know that the balance 15 billion of those balances are 13 billion today because they have declined by a couple billion so far in April due to fee billings and tax payments is sort of what we consider overflow balances that would prefer FDIC insurance when capacity recovers for that with third-party banks and or when Raymond James Bank needs that capacity as well. So over time, we would expect somewhere around $10 billion or north of $10 billion of that to get redeployed from CIP to third-party banks, Raymond James Bank, or redeployed into higher-yielding alternatives for clients.

Got it. Thank you. Thank you very much. We'll get to our next question on the line. This is from Devin Ryan from GMP Securities. Go right ahead.

Hey, good morning, guys. How are you? Hey, Devin. Apologies, I hopped on a minute late, and I know there's been a lot of questions on pre-tax margin and expenses. I don't think you hit this yet. I'm just trying to think about just the comp ratio, and I appreciate we're going to get a lot more details on May 25th. But when we look back a couple years ago, comp ratio was 65%, 66% when rates were more normalized. Without making a call on capital markets and kind of considering a few of the small acquisitions you've done, I just want to think about maybe what's structurally different today. You know, a lot of conversation in the market around expense inflation and higher base salaries and base overall compensation. So is that meaningful to change kind of the narrative of the comp ratio or the mix being so different that it changes kind of the way we should be thinking about comp going forward and the structure relative to a prior period of kind of more normalized rate environments?

Yeah, so, you know, this quarter's comp ratio wasn't a surprise to us given capital markets were down. And given that, you know, a lot of our FICA and other stuff hits this quarter, which has always been elevated. So we felt that was certainly in line. And certainly, you know, we've had a rate rise, but it really didn't come through the quarter. It was at the end of the quarter. So as rates go up, those comp ratios will go down because they're non-compensable. They'll be pretty significant. And again, capital markets... If it recovers from the pace it is, it will drive it down also. So we're looking, you know, we feel pretty good about where it's headed and the interest rate environment. And we do see pressure. Our recruiting has actually been pretty good. There is market pressure. So my guess, it will be a slight headwind for everyone, but we don't see it being a significant number. But, you know, we're looking at that and looking at the adjustments. sensitive to people that aren't in the top part of their payouts, making sure they're compensated so that they can, you know, kind of survive a high inflationary environment. But, you know, so that would be on the other side somewhat, but it's going to be well outpaced by, I think, interest spreads and a more normalized return to capital markets.

Right. Okay. Thanks, Paul. And then just one, thinking about kind of the UK opportunity, obviously with Charles Stanley now closed, I appreciate it's still very small for Raymond James. But can you remind us, Paul, how you're thinking about the addressable market in the UK for the firm and whether you're having dialogue with other firms there? I know you were talking to Charles Stanley for some time and knew them well. So are there more opportunities like that? How should we think about the expansion in the UK, organic versus inorganic? And really, I guess the thought is, does Charles Stanley now having that kind of deal, not necessarily behind you, but completed, does that set you up for more deals in the region?

So strategically, it's a very fragmented market. You know, with Charles Stanley, I think it puts us close to the top 10 just outside and So we think there's a lot of opportunity. Charles Stanley really has high quality people, high quality back office, but they've been slower on growth mainly because they've been more capital constrained. We've had a much smaller but a much quicker growing, probably an industry leading growth in terms of inorganic recruiting in the UK market. So we hope the combination that we can, between their support our capital and our ability to recruit and grow, hopefully to combine the best of all those worlds now. It's going to take a while to integrate that, right? I mean, we've closed, but we know we have a year-long project just to look at systems integration, best of class, making sure that we, as always, our focus is first retention. We don't want to mess up our consecutive series of integrations where we've kept the people And part of that is we're very, very thoughtful in how we put things together. We don't slam them together. We haven't assumed anybody or any system was going to come out on top, and they're doing teams on both sides. I think a great job of looking at that, and then we will integrate the system. So it'll take a while to gear that up, but we think both. So we're not going to look at any acquisitions during that integration period, but After it's integrated up and running and we get it running as we'd like to, I think there are opportunities in that market, and you can see that RBC entered the market with an acquisition. So I think others see that opportunity too. But it's going to take a little while to integrate it. It's, I guess, the bottom line, but we're very optimistic and really like the people.

Yeah. Okay. That's great. One last one here just on – on the capital market side of business, or I guess the institutional side, the M&A pipelines are strong, as I heard. You guys have a pretty diverse focus there, which maybe insulates more from volatility in other parts of the market. I guess, what are you guys seeing in terms of closure rates? How much are deals getting pushed out and then new deals filling back into the pipeline? Trying to think about the push and pull in that business. I appreciate that it It can change to the extent markets remain volatile or vice versa, but just the comfort in kind of the, I don't know, the next 12 months for the M&A advisory business coming off of, you know, obviously a great, you know, prior 12 months.

Yeah, so comfort is a hard word to use in this environment right now. You know, we think at this run rate, even in this environment, we can continue, but certainly there's a lot of upside. What we're seeing is most deals in pause, not canceled. pipeline. We see new deals coming in. And to the pipeline, so I would call, you know, strong, maybe it's more robust. We've had a very good pipeline. And the problem is it's been paused. So part of that is a little bit market, market valuation, certainly on the underwriting side, but the M&A side a little bit. And then, you know, the uncertainty has had people sit back and wait and making sure that, you know, with the political uncertainty globally, that that's not really going to hurt the market. So I would say right now, it's, you know, pause deals that are still in the pipeline. Now, if there's, if, you know, the geopolitical thing heats up, you may, some of those pause may turn to cancel or if the market really tanks, but the market stays steady and people get more comfortable geopolitically, I think there's a lot of upside too. So, So it's just hard to call because those are the two impacts.

Yep, appreciate it. Okay, I'll leave it there. Thanks so much, guys. Thanks, Devin.

Thank you very much. We'll get to our next question on the line from Jim Mitchell with Seaport Research. Go right ahead.

Hey, good morning. Maybe just quickly on the reserve ratio, I think you bounced around 115 to 1.2% the last two quarters. Is that the right sort of target for you guys, given the mix of loans right now? And so as we think about provisioning going forward, try to stick to that level?

Yeah, I think that is, given the mix of our assets, you know, 1.2% seems reasonable. That was roughly the percent that we saw in the provision, you know, this quarter. But again, we're using CECL models. So If macroeconomic conditions deteriorate, you could see provision increase and vice versa if macroeconomic conditions improve.

Was CECL contribute in any way to this, or was it just all growth?

Most of it was growth-related. As you saw, we had really strong growth at the bank this quarter.

Right. And can you remind... Remind us what your betas were in the second 100. I appreciate you can't predict it, but maybe in the last cycle, what the betas were in the second 100 basis points?

Yeah, if my memory serves me correctly, I think we're closer as an industry to the 50% range for the last couple of increases as we got from 200 to 250 basis points on the Fed funds target. That's sort of what I recall off the top of my head.

Okay, that's great. All right, thanks for taking questions.

Thanks.

Thank you very much.

And we'll proceed with our final question for today from the line of Chris Allen with Compass Point. Go right ahead.

Good morning, guys. Thanks for taking my question. I think most of it has been covered. I guess I wanted to quickly just follow up on the Sunridge Partners deal. The press release makes it sound like an electronic market maker on electronic trading platforms, but looking at their website, it seems a bit more potentially advisor-facing. So maybe give us some color there and whether this deal is more driven by the need for technology improvements on the fixed income trading side or whether there's other synergy opportunities moving forward.

Yeah, I think there's a lot of pieces to it. culturally and risk management-wise as we've been talking them for quite some time. We think they're a great fit. And what it adds strategically for us is the weakest part of our fixed income platform has been the corporate area. We're just versus our competitors. We're a lot smaller in the corporate bond area. So they bring really great expertise there. Secondly, they do have trader-assisted technology. where they're able to sort and execute trades with a lot of analytics. And we believe that that system can be migrated to other parts of our business, too, to help tech enable the trading, which is important. Their focus has really been on institutional clients, although they do have an app with some advisor facing, but it's relatively small. But we really like the app, so we think it may be something we can convert to the advisor side of our business. So there's lots of pieces we really like. We really like the people, the risk management, and the technology we think can be really spread to lots of parts of our fixed income business.

Good. Thanks, Chris.

Thanks, Chris. Well, I appreciate everyone coming on today. I know it's a crowded day. I think that given our discipline that we're really into a market with rising rates that will do really well. We have plenty of capital to deploy even with our three acquisitions. And, you know, we'll stay true as we always have to, you know, our guiding conservative principles. But I think given – I think we're still in good shape to make all the commitments unless something weird happens in the market. But if it does, again – with all of our capacity and flexibility, I think relatively we'll be in good shape. So appreciate you joining us, and we'll talk to you next quarter.