Raymond James Financial, Inc.

Good morning and welcome to Raymond James Financial's fourth quarter fiscal 2022 earnings call. This call is being recorded and will be available for replay on the company's investor relations website. Now I will turn it over to Christy Waugh, Senior Vice President of Investor Relations at Raymond James Financial.

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 RILEY, CHAIR AND CHIEF EXECUTIVE OFFICER, AND PAUL SHUKRI, 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 benefits of our acquisitions, 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, 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-K and subsequent Forms 10-Q and Forms 8-K, which are available on our Investor Relations website. 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 schedules accompanying our press release and presentation. Now I'm happy to turn the call over to Chair and CEO Paul Riley. Paul?

Good morning, and thank you for joining us today. Before I discuss our fourth quarter and fiscal year earnings, I want to start by acknowledging the heartbreaking devastation our friends and neighbors, as well as over 200 associates on Florida's central Gulf Coast, experienced a month ago from Hurricane Ian. While it has been difficult to 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 for our Tampa Bay Area associates, who despite facing an uncertain path from a Category 4 hurricane, worked diligently from remote locations to continue delivering our service first promise. 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 weekends to catch up. For those without power or other hardships, the home office was 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, and provided additional time off to help them manage their personal situations. Associates collected two 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 generosity truly made a difference for those who needed it most. The firm also responded by raising more than a million dollars from corporate, executive leadership, and associate donations to assist the recovery and support of those in need through the Red Cross and our Friends of Raymond James Charity, who directly help associates with needed emergency funds for repairs and recovery. If I sound surprised, I'm not. The preparation, perseverance, and response to the storm reflected the long history of Raymond James service culture, and I'm especially proud to represent our team today. Now, moving to our results, I'm very pleased with the results for the fourth quarter and 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 pre-tax income for the fourth quarter and fiscal year. Throughout the fiscal year, we remained focused on the long term and continued to invest in our businesses, our people, and our technology to help drive growth across our businesses. In the private client group, strong retention and recruiting of financial advisors contributed to industry-leading growth 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. In capital markets, annual investment banking results were very strong, only 3% lower than the record results achieved in fiscal 2021. Record M&A revenues helped offset the very challenging underwriting environment. We continue to see strong pipelines for M&A, as the expertise we've added both organically and through niche acquisitions has been performing extremely well. We completed the acquisition of Sunridge Partners on July 1st, which has enhanced 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 some rich generated really fantastic results since we closed on the acquisition of 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. The acquisition of Tri-State Capital Bank this year added a best-in-class third-party securities-based lending capability while also diversifying our funding sources. It is in uncertain conditions 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 net interest income and RJBDP fees, we are well positioned for the continued rise 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. While some of these attributes may be underappreciated in certain market cycles, the value of our long-term approach has really resonated in more volatile and uncertain market environment we've experienced since the onset of the COVID-19 pandemic. In the fiscal fourth quarter, the firm reported record net revenues of $2.83 billion record pre-tax income of $616 million, and net income available to common shareholders of $437 million, 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 utilized to fund non-qualified benefit plans. Excluding $30 million of expenses related to acquisitions, quarterly adjusted net income available to common shareholders was $459 million, or $2.08 per diluted share. Year-over-year and sequential revenue growth was driven primarily by the benefit of higher short-term interest rates on both RJBDP fees from third-party banks and net interest income, which more than offset 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 fourth quarter, reflecting the aforementioned revenue growth, which was partially offset by higher non-compensation expenses and higher tax rates. Sequentially, quarterly net income grew 46%, driven primarily by the benefit from higher short-term interest rates to the net interest income and RJBDP fees from third-party banks, along with lower bank loan provision for credit losses, as the prior quarter included the $26 million initial provision for credit losses on loans arising from the acquisition of tri-state capital holdings. 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, especially given the challenging market environment and our strong capital position. Moving to slide five, we entered the quarter with total client assets under administration of $1.09 trillion. PCG assets and fee-based accounts of $586 billion, and financial assets under management of $174 billion. Equity market declines in the quarter, including a 5% sequential decline in the S&P 500 index, negatively impacted client asset levels. We ended the quarter with 8,681 financial advisors in PCG, A NET INCREASE OF 199 OVER THE PRIOR YEAR PERIOD AND 65 OVER THE PROCEEDING QUARTER. AND REMEMBER, THE YEAR OVER YEAR INCREASE, THE ADVISOR COUNT WAS IMPACTED 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 COUNTS. IN THE FISCAL YEAR, We had 222 financial advisors moved to RCS, 166 of which came from one 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 recruiting of experienced advisors to the Raymond James platform through our multiple affiliation options. 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 million of trailing 12 production and approximately $43 billion of client assets at their previous firms. And highlighting our industry-leading growth, we generated domestic PCG net new assets of nearly $95 billion over the fiscal year ending September 30, 2022, representing 9% of domestic client assets at the beginning of the period. Fourth quarter domestic PCG net new assets growth was 8.3% annualized. Total client domestic cash suite balances declined 12% to $67.1 billion, or 7% of domestic 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. Total bank loans grew 3% sequentially to a record $43.2 billion. reflecting attractive broad-based growth at both Raymond James Bank and Tri-State Capital Bank. Moving to slide six, the private client group generated record results with quarterly net revenues of $1.99 billion and pre-tax income of $371 million. While asset-based revenues declined, the segment's results were lifted by the benefit from both higher short-term interest rates. The capital market segment generated quarterly net revenues of $399 million and pre-tax income of $66 million. Capital market revenues declined 28% compared to the prior year period, 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 million and pre-tax income of $83 million. The declines in revenues and pre-tax income were largely attributable to lower financial assets under management, 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 Tri-State Capital Bank, generated quarterly net revenue of $428 million, which is a record result, and pre-tax income of $123 million. NET REVENUE GROWTH WAS MAINLY DUE TO HIGHER LOAN BALANCES AND SIGNIFICANT EXPANSION OF THE BANK'S NET INTEREST MARGIN TO 2.91% FOR THE QUARTER, UP 50 BASIS POINTS FROM THE PROCEEDING QUARTER, ONCE AGAIN REFLECTING THE FLEXIBILITY AND FLOATING RATE NATURE OF OUR BALANCE SHEET. THIS QUARTER ALSO INCLUDED A FULL QUARTER OF TRI-STATE CAPITAL RESULTS, WHICH HAVE CONTINUED TO BE SOLID. Looking at the full year fiscal 2022 results on slide 7, we generated record net revenues of $11 billion and record pre-tax income of $2 billion, both up 13% over fiscal 21. Record earnings per diluted share of $6.98 increased 5% compared to fiscal 2021. Additionally, we generated strong annualized return on common equity of 17%. AND ANNUALIZED ADJUSTED RETURN ON TANGIBLE COMMON EQUITY OF 21.1%. MOVING TO THE FISCAL YEAR SEGMENT RESULTS ON SLIDE 8, PRIVATE CLIENT GROUP, ASSET MANAGEMENT, AND BANK SEGMENTS GENERATED RECORD NET REVENUES AND THE PRIVATE CLIENT GROUP PRODUCED RECORD PRE-TAX INCOME DURING THE FISCAL YEAR. AGAIN, REINFORCING THE VALUE OF OUR DIVERSE AND COMPLEMENTARY BUSINESSES. And now, for more detailed review of the fiscal fourth quarter results, I'm going to turn the call over to Paul Shukri. Paul?

Thank you, Paul. Starting with consolidated revenues on slide 10, record quarterly net revenues of $2.83 billion grew 5% year-over-year and 4% sequentially. Asset management fees declined 6% compared to the prior year's fiscal fourth 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 percent 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 first quarter. which I expect to be down close to 4% sequentially in the fiscal first quarter of 2023. Brokerage revenues of $481 million declined 11% compared to the prior year's fiscal fourth quarter and 6% compared to the preceding quarter, as lower activity and asset-based trail revenues in PCG, as well as decreased fixed income brokerage revenues, more than offset the addition of summerage. which generated strong 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 the Fed's actions. I'll discuss account and service fees and net interest income shortly. investment banking revenues of $217 million 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 that could impact investment banking revenues positively or negatively in the coming quarters. Therefore, Our best guess right now is that we could 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 impact that estimate, but that would result in a 20% decline in investment banking revenues 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 market share. Other revenues of $80 million grew 167% sequentially, primarily due to higher affordable housing investment business revenues. which achieved record results in fiscal 2022. Moving to slide 11, clients' domestic cash sweep balances ended the quarter at $67.1 billion, down 12% compared to the preceding quarter, and representing 7% of domestic PCG client assets. As of this week, these balances have declined to just under $64 billion, reflecting the quarterly fee payments, which were paid in October, as well as additional cash-sorting activity during the month. When comparing trends across the industry, it is important to note that these cash-sweep balances do not include high-yield savings balances, nor do we have a money market sweeps option. So it is sometimes difficult to make apples-to-apples comparisons across the industry. Most of the decline in our suite balances were experienced in the client interest program at the broker-dealer, which was really the last in, first out destination 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 kept the CIP balances invested in deposit accounts and short-term treasuries. The Raymond James Bank Deposit Suite Program continues to be a relatively low-cost source of stable funding. And now, with the addition of Tri-State Capital Bank's independent deposit franchise, we have a more diversified funding base. And while this additional funding source may not have seemed as valuable several months ago, I think everyone now appreciates just how precious deposits are AND THE IMPORTANCE OF HAVING MULTIPLE FUNDING SOURCES. TURNING TO SLIDE 12, COMBINED NET INTEREST INCOME IN RJBDP FEES FROM THIRD PARTY BANKS WAS $606 MILLION, UP 206% OVER THE PRIOR YEAR'S FISCAL FOURTH QUARTER AND 64% FROM THE PROCEEDING QUARTER. 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 increases substantial 50 basis points sequentially to 2.91% for the quarter. And that's on top of the 40 basis points sequential increase in NIM in the preceding quarter. The average yield on RJBDP balances with third-party banks increased nearly 100 basis points to 1.85%. Both the NIM and average yield from third-party banks are expected to increase further with the anticipated rate increases. For the fiscal first quarter, factoring in an expected 75 basis point rate increase in November and some assumptions around deposit beta and other variables, we would expect the average yield on RJBDP from third-party banks for the fiscal first quarter of 2023 be somewhere around 2.5%, and the bank segments NIM to average around 3.15%. But these projections will obviously be impacted by the actual deposit beta we experience. 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. So far, the cumulative deposit beta since the Fed started increasing rates in March has been 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 to clients than the vast majority of our competitors. Moving to consolidated expenses on slide 13, beginning with our largest expense, compensation. 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% during the quarter. The sequential decline in the compensation ratio largely reflects a significant benefit from higher net interest income and RJVDP fees from third-party banks. Non-compensation expenses of $456 million, which includes $13 million of acquisition-related expenses included in our non-GAAP earnings adjustments, decreased 3% sequentially. This quarter reflected a full quarter of expenses for both tri-state capital and some rich partners, which sequentially added just over $25 million 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 million, primarily due to the $26 million initial provision associated with the tri-state capital acquisition in the fiscal third quarter. This quarter's bank loan provision primarily reflects sequential loan growth along with a weaker macroeconomic outlook used in the CECL models. So as you can see, we remain focused 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 pre-tax margin trend over the past five quarters. In the fiscal fourth quarter, we generated a pre-tax margin of 21.8% and an adjusted pre-tax 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% pre-tax 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 benefit of our diversified business model, the upside we preserve to higher short-term interest rates, and our consistent focus on being disciplined on expenses. On slide 15, at quarter end, total assets were $81 billion, a 6% sequential decrease, primarily reflecting the decline in the client interest program cash balances I mentioned earlier. Liquidity and capital remain very strong. RJF corporate cash at the parent ended the quarter at $1.9 billion, well above our $1.2 billion target. The Tier 1 leverage ratio of 10.3 percent and total capital ratio of 20.5 percent are both more than double 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 percent, so our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth. The effective tax rate for the quarter increased to 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% is an appropriate estimate to use in your models, but in rapidly declining equity markets, the effective tax rate increases as we experience this quarter and last quarter, and vice versa when equity markets increase. Slide 16 provides a summary of our capital actions over the past five quarters. Since the closing of the tri-state acquisition on June 1st through October 26th, we have repurchased approximately 2.1 million common shares for $200 million. or approximately $96 per share under our board authorization. As of October 26, 2022, approximately $800 million remained available under the board-approved share repurchase authorization, which we typically revisit annually in the upcoming board meeting. We remain committed to offset the share issuance associated with the acquisition of Tri-State as well as a share-based compensation dilution. Therefore, we expect to repurchase on average $250 million per quarter in fiscal 2023, or $1 billion total for the fiscal year. 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 BILLION OBJECTIVE FOR FISCAL 2023. LASTLY, ON SLIDE 17, WE PROVIDE KEY CREDIT METRICS FOR OUR BANK SEGMENT WHICH NOW INCLUDES RAYMOND JAMES BANK AND TRI-STATE 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 JUST 1.14%. THE BANK LOAN ALLOWANCE FOR CREDIT LOSSES AS A PERCENTAGE OF TOTAL LOANS HELD FOR INVESTMENT ENDED THE QUARTER AT .91%, DOWN FROM 1.27% AT SEPTEMBER 2021 AND NEARLY FLAT SEQUENTIALLY. The year-over-year decline in the bank loan allowance for credit losses as a percentage of total loans held for investment largely reflects the higher proportion of security-based loans boosted by the acquisition of Tri-State Capital Bank. Securities-based loans, which account for approximately 35% of net loans, are generally collateralized by marketable securities and therefore typically do not require an allowance for credit losses. 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?

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're well positioned to drive growth across all of our businesses. In the private client group, next quarter 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 prospective advisors are attracted to our client-focused values and leading technology and production solutions. Additionally, the segment will 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. In the capital market segment, the M&A pipeline remains strong, but the pace and timing of closings will be heavily influenced by market conditions. Over the long term, I am confident we are well positioned for growth given the significant investments we've made over the past five 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 and facing limited opportunity for loan growth, are now experiencing declines in deposits and have less cash available for investing in securities. This dynamic will lead to a challenging environment in fiscal 2023. While this headwind exists, we expect some rich partners to enhance our current position in the rapidly evolving fixed income and trading technology marketplace. and some typically benefits from elevated rate volatility. In the asset management segment, the financial assets under management 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 assets under management. In addition, We expect Raymond James Investment Management, formerly 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. We will continue to operate Tri-State Capital Bank as a separately chartered bank and respect 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. As always, I want to thank all of our advisors and associates for their perseverance and dedication to providing excellent service to their clients each and every day. Just as you've observed over the past two 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. We believe with this approach, we should be able to continue delivering strong results through different market environments 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?

Thank you very much. And if you'd like to register your question, once again, please press the 1 by the 4 on your telephone. Your three-tone prop technology request. If your question has been asked or to draw your registration, press the 1 or by the 3. One moment, please, for our first question. I'll proceed with our first question on the line from Manan Ghazalia with Morgan Stanley. Go right ahead.

Hi. Good morning. Good morning, Manan. Good morning, Hay. 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 conservatism embedded in there? As you know, Manan, we do like to provide conservative guidance, and that 3.15% admittedly is somewhat conservative. It's only factoring in the November increase, and the market's obviously expecting a December increase as well, and so SOFR tends to lead those type of increase.

forward, we were expecting deposit beta to

Got it. And then on third-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 third-party banks? And where should we expect that third-party bank 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 think, Fed funds plus 12.5 basis points or so that you typically earn?

Yeah, I think absolutely. You know, the demand's way up. And, you know, 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. We may, but today we feel like we have Apple's 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 dynamics.

So it sounds like in terms of the fee rate, you could be well above the 2 percentage points or so that you peaked at during the prior cycle? So if we compare the end of this rate hike cycle, should we expect a fee rate above the 2 percentage points that you saw last cycle?

Yeah, I mean, we're already guiding just for this upcoming quarter to 2.5% as an example. Oh, that's right, yeah, correct.

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

Great. Thanks. Perhaps just a little bit of context or color on the advisor recruiting market. 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

Yeah, 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. good role so we still see it as very active we you know even in oh nine 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 so it's still very active it's very competitive and you know continues to be such but as you can see with our kind of 400 advisors added this year it the RIA channel, the people that moved our advisor count. We've had another very, very strong year. And, you know, 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 ultra high net worth advisors, as well as, you know, the advisors that we've recruited for, you know, throughout our history. So, We think it'll still be strong. Backlog is strong. And, you know, probably won't last forever, but it looks pretty good in the short to midterm.

Fair enough. And then perhaps one for Paul Shukri. Can you maybe just comment a little bit? You know, we obviously saw an increase from 2Q to 3Q on the non-comp side of expenses. bit in 4Q, but can you perhaps maybe help us think a little bit about how that kind of run rate might look going into the next couple quarters?

or the sequential increase, which we expected. Looking forward, I think if you look at this quarter as a baseline, and I think there's around $410 million of non-compensation expenses when you adjust out for the loan loss provision and for some of the acquisition-related expenses that we break out in our non-GAAP schedule. Looking forward, I would say that Our base represents somewhere around 1.5% growth sequentially each quarter in 23. And most of that growth will really be coming from our technology investments. We're still heavily investing in technology to support advisors, their clients, and really all the businesses and functions across the firm. So that's going to continue to be a significant focus for us going forward. And then you're going to see kind of on a year-over-year basis growth. Okay, great. Thanks for taking my question this morning.

Thank you very much. We'll get to our next question on the line from Alex Blastein with Goldman Sachs. Go right ahead.

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%, and not to pinpoint you to any specific quarter, but I guess when you zoom out a little bit and taking your conservative posture on the deposit betas, but it doesn't sound like they're going up above 50%. If you think about tri-state now in the mix, that's more loan heavy, so obviously higher yielding and the absolute level of rates is higher. So should we be thinking closer to 4% bank NIM once the Fed is done, or how are you thinking about that sort of run rate on the other end of that cycle?

Given the loan makes higher rates,

Got it. Fair enough. Just staying on the balance sheet theme for a minute, you guys obviously had the right call on not extending duration a year or two 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 extend in duration a little bit just to lock in what looks like pretty attractive rates of return?

Yeah, so we're not against the securities portfolio, but, you know, our first thing is to fund our growth in loans, and securities becomes the next part of it. So we agree they're attractive, you know, after being beat up for not locking in rates over a number of years or, you know, or not after waiting it out and now having the balance sheet we're not. ready to call that, you know, 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 hikes, and then we'll look at it. And, you know, 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

portfolio in the last couple of years is there's very little third-party bank demand, so we kind of brought it onto the balance sheet as an accommodation. But now with the cash shorting dynamics, with loan growth being solid, we would expect some of that buildup in securities to really run off over the next year to fund that loan growth that Paul talked about. 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 third-party banks as well. So right now, we have a lot of different options, and that's just the power of the flexibility that we have with the cash balances and the flexibility that we preserved, frankly, through the last couple of years.

Got it. All right. Thanks. I won't ask the

Thank you very much. We'll pursue our next question on the line from Steven Chuback, Wolf Research. Go right ahead.

Hi, good morning. Hey, Steven. So I wanted to start with a question on FIC. You alluded, Paul, to some of the headwinds to the business. It's been run rating the last couple of quarters at about 100 million. 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 million baseline, or is that a fair run rate that we can underwrite looking out to next year?

You can see the dynamic. They 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 it's cash titans. They're going to fund loans first and security second, just like us. So, yeah, that could have pressure. Now, there's other parts of the business that will certainly have pressure on that run rate if it gets tighter. And, again, on the other hand, Sumridge is, you know, maybe timing is everything, but this is kind of the perfect market for them to perform. They are just, you know, really killing it right now. we're so good at. So it could come under more pressure also.

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 should be running if rates stay higher for longer?

Well, you know, where we have been, even with our advisors and associates, we've paid them what we think is fairly on their production, and we haven't paid on interest. Now, interest went away. We didn't change their payouts in comp. Obviously, it affects management's comp. So, you know, our plan right now is that interest rates will continue to be non-compensable. And so it certainly impacts some of the bank comp. But generally, to the extent there's more interest spread in margin, comp will go down. To the extent that normalizes or goes the other way, the ratio will go up. But there's no change fundamentally in how we're paying interest. based on it. So again, interest spreads will drive it down for a period of time. I think spreads right now are, like in any cycle, probably outsized. I don't know how long that stays, a year, two years, quarter, but it will return. But our comp philosophy is the same. So you should see improvement if interest spreads improve.

Yeah, I think the one thing I would add is about was to help to share the success of the firm with our associates and you

Okay. And anything on the admin cost side that we need 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.

Okay. increase salaries across the board, and we're leaning into being generous with that.

Helpful caller, thanks for taking my questions.

Thank you very much. Let's see our next question on the line from Jim Mitchell, C-Pro Global. Go right ahead. Jim, you there? Mr. Mitchell, your line is open for your question.

Hello, can you hear me? I can hear you now. Okay, sorry. So deposits are down to about 6% of client assets based on sort of the guidance for October, client cash, I should say. 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.

It's a pretty wide range. I think the peak

pretty wide range. Right. And is there a point where you have to, you know, more aggressively defend cash balances and deposits to fund the balance sheet?

Yeah, 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 know, you need cash to operate the business. So if you see runs that, you know, we've We've talked about even offering high-rate savings 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 Tri-State now, who is a very good source of funding. They've got a very strong net funding operation, which was one of the reasons for the acquisition, which I don't think few understood. They said, well, so much cash, why would you have it? You know, I think it was a year ago we were talking about our concern about cash in the future. So we've got alternatives now. But absolutely, you need cash to run this business. And you want to be able to service your client cash. And at some point, you know, we look at our cash balances. They haven't left the system. You know, they've gone more into fixed income or money markets on our platform. So they're still in the system. We just haven't kept them in the pure cash form.

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

Hey, good morning, guys. How are you? Good, Devin. Good. Most questions have been asked. I want to come back to the balance sheet a bit here and just think about UMIX and maybe follow 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 the securities book, are there other areas maybe in the loan book or just more broadly where there's room for optimization and maybe areas to drive the risk-adjusted NIM higher from here, all as equal?

Well, there probably always is. Definitely. You know, part of what we're doing is we're going through our budgeting exercises to say where do we want to deploy capital. We've got a, you know, with the banking business, a broader bank business. You know, Tri-State is an independent business with its third-party platforms, and the question is, you know, between that and Raymond James Bank, where do you allocate capital in the portfolio really to optimize not, you know, partly the balance sheet from our standpoint, but really to allow investors you know, freedom, for example, for Tri-State to service their customers. So we're going through that to make sure that the capital allocations make sense both for those businesses and for us. So there always is 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.

I would say just to reinforce that we really don't manage the own clients and at tri-state capital to their independent clients is the best risk-adjusted return. So that is kind of the priority to the extent that the demand is there, which we think that over time that should continue to be a good tailwind for us. And then we look at the other

Okay. Thanks, Paul. And then a follow-up here. I just want to talk a little bit about the investment banking outlook. We appreciate there's always a little bit of crystal ball in there, and you guys are going to, I think, err on the side of conservatism, just given the uncertainty in the market. But I just want to make sure I understand how you're thinking about it. You know, you have equity issuances is going to be market-centric, but market-stabilized, that probably would improve. And then your M&A business is structurally larger. So... You know, all else equal, you know, that the business trajectory, you know, over time is higher than fixed income. It feels like maybe it could remain a bit under pressure if rates remain higher. So just trying to think about how much of, you know, maybe there's more muted near-term outlook. It's just purely market-centric versus, you know, maybe the flip side would be maybe – you know, over the last year or two because rates are higher or there's some other structural dynamic in the markets has changed. So I just want to 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 when do people invest kind of in the long term? And that will happen as rates come up. I think that... that business will do well. You know, people have been buying shorter term. As they start buying longer term, it's more profitable for us too. But you've got to get rates to a point where people think rates are there to really start doing that. And certainly the increase in rates will help. We're just at a pause really until that happens. So I think that's more timing. M&A is a little harder. Backlog is good. Clients are good. You know, it's Even now, right now, it's up for us and it's up in Europe for the industry. And, you know, if you look at European dynamics with rates and inflation and everything, you go, well, how could that be? So, I mean, there's still cash. There's still strategic investors. And our growth on our platform and who we've added and we're continuing to grow it, we believe in it. But that one's harder to predict. I mean, it's been stronger, I think, than most people have predicted before. The backlog's still strong, but when people close or not or when that stops, that's a tough one. So when you come off of the last two years with almost unprecedented M&A, is that a baseline or is that a peak forever, which it probably isn't? But, again, we're still very, very high on that business. But that one's kind of hard to say what triggers it.

Okay. All right. Thanks very much.

Thank you. And proceed to our next question on the line with Cal Voigt from KBW. Go right ahead.

Hi. Good morning. So just given the level of sorting right now and the pressure that may put on total available funding as you look out a couple years, just completely understand the cautiousness and the tone around the size of the AFS book and maybe letting some of that run off in order to support loan growth. So just two follow-ups on that was what is the current duration of the AFS portfolio and how much of that portfolio would run off per year if you didn't reinvest at all in the portfolio? And can you also remind us, are there specific minimums that you need to hold in terms of the CIP and the third-party bank sweep, just so we have that as the sorting process continues here? Yeah, I would say in the securities portfolio, the average duration – 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. And again, we're going to use a lot of that to fund the loan growth as current plans. There is a baseline for CIP of cash balance. 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 we possibly can, given all the constraints and the demand from third-party banks.

And so is there, I guess, given your client's allocation and that you only have... certain number of charters that you can provide FDIC insurance with yourself. So is there a certain amount of minimum there, I guess, on the third-party bank side? Is it a few billion dollars that needs to be held there, or is it some number that's smaller than that?

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 that we're thinking through is, what do we want that buffer to be? Now, our balance sheet's much more liquid than it used to be 10 years ago when we established the 50% buffer 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 Tri-State 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, err on the side of conservatism there as well.

Understood. That's really helpful. I just had one follow-up related to administrative comp. I think on last quarter's call you mentioned there was an off-cycle bonus paid in the fiscal third quarter, which caused the PCG segment admin comp to be elevated. But we saw another $15 million sequential increase in that PCG admin comp line in the fiscal fourth quarter. So just wondering what drove that and how much of that is one time in nature, if at all? 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 accrued for on benefits and other things. So there's nothing that I could point to specifically that would describe that other than just sort of natural growth and benefits. changes to the accruals, et cetera.

Okay, understood. Thank you.

Thank you very much. I hope this was our final question for today. It's from the line of Bill Katz, the credit speech. Go right ahead.

Good morning. This is Michael Kelly on for Bill. Thank you for taking my question. Most questions have been asked, but I did have one follow-up on the loan mix. Paul and Paul, are you seeing any shift in demand for the SBLs? It looked like on an end-of-period basis they dipped a little bit. The resi was pretty resilient, but are you seeing any shift in demand with the higher interest rate environment that we should be worried about near-term? I understand your long-term outlook is quite positive for the balance sheet. I think that, yeah.

Some of that SBL dip was really – a lot of people use that as gap funding, so – Part of the mortgage demand where people went from SBL to, you know, paid those off and as they mortgaged homes and other things. So we think the demand's there, you know, and not only is it there for our clients, I think Tri-State is, you know, growing their market share with new relationships too has a huge opportunity. So I think SBLs over time are still, even short-term and longer-term, still growing very, very positive. The question becomes is, you know, the rates continue to go up. When was that really cheap source of funding? Maybe not. People are less likely to borrow, but I still think that business is doing well, so I think you saw a blip this quarter early on that.

Great. Thanks. And then if I just had one more follow-up, as a percentage of AUA, you still are the SBLs as a percentage of AUA behind some of your wire house peers. Do you see that cap closing over time?

We've just never been as aggressive in pushing debt, you know, through our organization. I mean, that, you know, so our products, SBL is even a relatively new product for us compared to our competitors. So, and we certainly don't have quotas for anyone to, you know, present it or require them to present it or even branch managers with quotas. So because of that, our debt concentration historically has been lower than certainly our wire house competitors. And, you know, we continue to gain share, but we do it more through natural means, and the advisor really has to initiate that versus us, you know, going out and pushing it or selling it to advisors. So... It's just part of the culture for a long time. Great. Thank you.

Makes sense. Thank you very much. Mr. Raleigh, that was the final question. I'll turn it back to you for any closing remarks.

Well, great. Appreciate everybody being on the call. And although, you know, very strong end of the year, you know, it's environment. outside of the equity markets and interest rates and cash sorting and everything else that's hard to call uh you know we're still that's when we really appreciate the flexibility we have in the balance sheet our capital base and everything else to be able to navigate so optimistic about the future don't know what's going to happen as you get gdp and you get people still raising rates and inflation you know it's going to be an interesting quarter a couple of quarters but that's when it You know, you can see that our advisors are still 90s. Clients say 97% satisfied with their advisors. It's a pretty high rate, and they need them up more now than ever. So with that, appreciate your time, and we'll talk to you soon.

Thank you very much, and thank you, everyone. That does conclude the call for today. We thank you for your participation. Have a good day, everyone.