Raymond James Financial - Q1 2024

Transcript

Kristie Waugh (SVP of Investor Relations and FP&A)

First quarter earnings call. This call is being recorded and will be available for replay on the company's investor relations website. I'm Kristie Waugh, Senior Vice President of Investor Relations. Thank you for joining us today. With me on the call today are Paul Reilly, Chair and Chief Executive Officer, and Paul Shoukry, Chief Financial Officer. The presentation being reviewed today is available on Raymond James' Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to slide two. Please note that certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, industry or market conditions, anticipated timing and benefits of our acquisitions, and our level of success integrating acquired businesses, anticipated results of litigation and regulatory developments, and general economic conditions.

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

Paul Reilly (Chair and CEO)

Thank you, Kristie. Good evening. Thank you for joining us today. Who would have thought, given all the uncertainty over the past year, we would have ended the last fiscal year with record results and generated record earnings per share and record client assets this quarter? This is a testament to our focus on executing on our strategic priorities, which are rooted in our advisor and client-focused cultures. These priorities have remained consistent over many years. They are to drive organic growth throughout our businesses, invest in technology and service capabilities, and to maintain focus on strategic M&A and effective integrations. Through our relentless focus on these priorities, we have maintained long-term success across changing market environments. Now, to review the first quarter results, starting on slide four.

The firm reported quarterly net revenues of $3.01 billion, an increase of 8% over the prior year quarter, primarily due to higher asset-based revenues. Quarterly net income available to common shareholders was $497 million, or a record $2.32 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $514 million, or $2.40 per diluted share. Both records. We generated strong returns for the quarter, with annualized return on common equity of 19.1% and annualized adjusted return on tangible common equity of 23.8%. A great result, particularly given our strong capital base. Moving to slide 5. Client assets grew to record levels this quarter, driven by strong advisor retention and recruiting results, along with the strong market.

Total client assets under administration increased 9% sequentially to $1.37 trillion. Private Client Group assets and fee-based accounts grew to $747 billion, and financial assets under management reached $215 billion. PCG continues to generate strong organic growth, evidenced this quarter with domestic net new assets of $21.6 billion, representing a 7.8% annualized growth rate on beginning-of-period domestic PCG assets. Advisors are attracted to our robust technology capabilities and client-first values, and through our long-established multiple affiliation options, they can find the right fit for their business. During the quarter, we recruited to our domestic independent contractor and employee channels, financial advisors with approximately $60 million of trailing 12 production and $13 billion of client assets at their previous firms.

These results do not include our RIA and custody services businesses, which also continue to have recruiting success and finished the quarter with $147 billion of assets. Despite strong recruiting activity, the financial advisor count was sequentially flat, mostly due to an elevated number of retirements, which are seasonally higher in the first quarter, but where the firm typically retains the vast majority of assets through previously established succession plans. In addition, advisors moving to our RIA channel are excluded from the advisor count since they no longer carry a FINRA license with us. We announced that the President of our PCG Independent Contractor Division, Jodi Perry, transitioned to a newly created role of National Head of Advisor Recruiting....

Jodi has generated outstanding results in every role she has held in her nearly 30-year career with Raymond James, and I am confident she will continue to strengthen this key growth engine for the firm. This key leadership appointment continues to highlight the importance and focus on advisor recruiting. With this transition, we are excited about Shannon Reid becoming the PCG Independent Contractor Division President and joining the firm's executive committee. Shannon's most recently served as Senior Vice President of our Northeast Division. She has an impressive background and has been a stellar leader in an important market. Total client domestic sweep and Enhanced Savings Program balances ended the quarter at $58 billion, up 3% over September 2023. Balances were boosted by growth in both the Enhanced Savings Program as well as the client sweep balances.

Bank loans increased 1% from the preceding quarter to a record $44.2 billion, although loan demand remains relatively muted given higher rates. Moving to Slide six, Private Client Group generated quarterly net revenues of $2.23 billion and pretax income of $439 million. Year-over-year results were driven by higher asset management fees, reflecting 18% growth of assets in fee-based accounts. The Capital Markets segment generated quarterly net revenues of $338 million and a pretax income of $3 million. Investment banking revenues grew 15% compared to a year ago quarter, due to higher M&A and underwriting revenues. Sequentially, robust fixed income brokerage revenue growth largely offset weaker M&A and affordable housing investment results. While fixed income results were stronger during the quarter, investment banking activity industry-wide appeared to be on a gradual recovery.

The uncertain market environment, along with the impact of the amortization of share-based compensation granted in the preceding periods, has strained the near-term profitability of segment results. We remain focused on managing controllable expenses. The Asset Management segment generated pretax income of $93 million on net revenues of $235 million. Results were largely attributable to higher financial assets under management compared to the prior year quarter, due to market appreciation and net inflows into PCG fee-based accounts. The Bank segment generated net revenues of $441 million and pretax income of $92 million. Bank segment net interest margin of 2.74%, declined 13 basis points compared to the preceding quarter, primarily due to a higher cost mix of deposits as Enhanced Savings Program balances that replaced a portion of lower RJBDP cash sweep balances.

Now, I'll turn it over to Paul Shoukry for a more detailed review of the first quarter results. Paul?

Paul Shoukry (CFO)

Thank you, Paul. Starting on slide eight, consolidated net revenues were $3.1 billion in the first quarter, up 8% over the prior year and down 1% sequentially compared to the record set in the preceding quarter. Asset management and related administrative fees grew 13% over the prior year and declined 3% compared to the preceding quarter. The sequential decline was largely the result of lower fee-based assets at the beginning of the quarter compared to the beginning of the preceding quarter. This quarter, fee-based assets increased 9%, which will be a strong tailwind for asset management and related administrative fees in the fiscal second quarter. Brokerage revenues of $522 million grew 8% year-over-year, mostly due to higher transactional activity in PCG.

Sequentially, brokerage revenues increased 9%, the result of higher institutional fixed income brokerage revenues as client activity increased and the trading environment was more favorable. I'll discuss account and service fees and net interest income shortly. Investment banking revenues of $181 million increased 28% year-over-year. Sequentially, the 10% decline was driven predominantly by lower M&A revenues. We are cautiously optimistic that the environment for M&A is improving, and we continue to see a healthy investment banking pipeline and solid new business activity. However, there remains a lot of uncertainty and we are hopeful a gradual recovery will lead to better results over the next six to nine months. Other revenues of $38 million were down 30% compared to the preceding quarter, primarily due to lower affordable housing investment revenues compared to the seasonally high fiscal fourth quarter.

Moving to Slide nine. Clients' domestic cash sweep and Enhanced Savings Program balances ended the quarter at $58 billion, up 3% compared to the preceding quarter, and representing 4.8% of domestic PCG client assets.... Advisors continue to serve their clients effectively, leveraging our competitive cash offerings. Many clients have now taken advantage of the attractive Enhanced Savings Program and other high-yielding products. Thus, the pace of flows into this program has decelerated as we expected, growing approximately $900 million or 7% this quarter. A large portion of the total cash coming into ESP has been new cash brought into the firm by advisors, highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability.

While we are encouraged by the modest sequential growth of client cash balances during the quarter, which was helped by seasonal tailwinds in the fourth calendar quarter, we continue to expect some further yield-seeking activity by clients. Through Monday of this week, Sweep and ESP balances are down approximately $1.5 billion for the month of January, primarily due to quarterly fee billings of $1.35 billion. RJBDP Sweep balances with third-party banks were $17.8 billion at quarter end, up 12% from September 2023. The strong growth of Enhanced Savings Program balances at Raymond James Bank has allowed for more balances to be deployed off balance sheet with third-party banks.

While this dynamic has negatively impacted the Bank segment's NIM because of the lower-cost sweep balances being swept off balance sheet, it ultimately provides clients with an attractive deposit solution while also optimizing the firm's funding flexibility by providing a large funding cushion for when attractive growth opportunities emerge. Looking forward, we have ample funding and capital to support attractive loan growth. Turning to slide 10. Combined net interest income and RJBDP fees from third-party banks was $698 million, down 2% from the preceding quarter due to lower firm-wide net interest income resulting from NIM compression, but outperforming our expectations on the last earnings call as client cash balances were more stable than we expected at that time.

The Bank segment's net interest margin decreased 13 basis points sequentially to 2.74% for the quarter, and the average yield on RJBDP balances with third-party banks increased 6 basis points to 3.66%. While there are many variables that will impact actual results, absent any changes to short-term interest rates, we currently expect combined net interest income and RJBDP fees from third-party banks to be about 5% lower in the fiscal second quarter compared to the fiscal first quarter, just based on spot balances after the fee billings this quarter and our expectation of some continued client cash sorting activity. Hopefully, we can outperform this expectation again this quarter, but we believe it's prudent to err on the side of conservatism, given the continued uncertainty around client cash balance trends.

We remain focused on preserving flexibility and growing net interest income and RJBDP fees over the long term, which we believe we are well positioned to do. Moving to consolidated expenses on slide 11. Compensation expense was $1.92 billion, and the total compensation ratio for the quarter was 63.8%. Excluding acquisition-related compensation expenses, the adjusted compensation ratio was 63.4%. Looking ahead, the impact of salary increases effective on January 1st, and the reset of payroll taxes at the beginning of the calendar year will be reflected in the fiscal second quarter. Non-compensation expenses of $462 million decreased 20% sequentially, largely due to elevated provisions for legal and regulatory matters in the preceding quarter, whereas this quarter was a relatively quiet quarter for legal and regulatory reserves.

The bank loan provision for credit losses for the quarter declined to $12 million. I'll discuss more related to the credit quality in the Bank segment shortly. We remain focused on managing expenses while continuing to invest in growth and ensuring high service levels for advisors and their clients. For the fiscal year, we expect non-compensation expenses, excluding provision for credit losses, unexpected legal and regulatory items, or non-GAAP adjustments, to be around $1.9 billion. This implies incremental non-compensation growth throughout the year as we continue to invest in growth and ensure high service levels for advisors and their clients throughout our businesses. And remember, many of the non-compensation expenses, such as investment sub-advisory fees, represent healthy growth that follows the corresponding revenue growth. Slide 12 shows the pre-tax margin trend over the past five quarters.

This quarter, we generated a pretax margin of 20.9% and an adjusted pretax margin of 21.7%. A strong result, given the industry-wide challenges impacting capital markets. As a reminder, our current targets provided at our Analyst and Investor Day last May, are for a pretax margin of 20+% and a compensation ratio of less than 65%. We still think these targets are appropriate, and we will provide an update as needed at the next Analyst and Investor Day, scheduled for May 22. On slide 13, at quarter-end, total balance sheet assets were $80.1 billion, a 2% sequential increase. Liquidity and capital remain very strong. RJF corporate cash at the parent ended the quarter at $2.1 billion, well above our $1.2 billion dollar target.

We remain well capitalized, with a Tier 1 leverage ratio of 12.1% and a total capital ratio of 23%. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth. The effective tax rate for the quarter was 21%, reflecting a tax benefit recognized for share-based compensation that vested during the period. Going forward, we still believe that 24%-25% is an appropriate estimate to use in your models. Slide 14 provides a summary of our capital actions over the past five quarters. During the quarter, the firm repurchased 1.4 million shares of common stock for $150 million at an average price of $107 per share.

As of January 24, 2024, approximately $1.39 billion remained available under the board's approved common stock repurchase authorization. Our current plan, which is subject to change, is to repurchase at least $200 million of shares in the fiscal second quarter to complete the remaining repurchases associated with the dilution from the TriState Capital acquisition. Following the second quarter, we expect to continue to offset share-based compensation dilution and to be opportunistic with incremental repurchases. Lastly, on slide 15, we provide key credit metrics for our Bank segment, which includes Raymond James Bank and TriState Capital Bank. The credit quality of the loan portfolio is solid. Criticized loans as a percentage of total loans held for investment ended the quarter at 1.09%.

The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1.08%. The bank loan loss allowance for credit losses on corporate loans, as a percentage of corporate loans held for investment, was 2.06% at quarter end. We believe this represents an appropriate reserve, but we continue to closely monitor economic factors that may impact our corporate loan portfolio, including the commercial real estate portfolio. Within the CRE portfolio, we have prudently limited the exposure to office loans, which represent just 3% of the Bank segment's total loans. Now, I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Paul Reilly (Chair and CEO)

Thank you, Paul. As I said at the start of the call, I am pleased with our results for the first fiscal quarter, generating record earnings per share and ending the quarter with record client assets. While there is still economic uncertainty, I believe we are in a position of strength and are well positioned to drive growth over the long term across all of our businesses. In the Private Client Group, next quarter results will be positively impacted by the 9% sequential increase of assets in fee-based accounts. Near term, we expect some headwinds to the interest-sensitive earnings at both PCG and the Bank segment, given ongoing cash sorting activity and uncertain rate environment. However, we are already seeing some of the higher yield competitor rates coming in.

Despite this, I believe our effort and focus on being a destination of choice for our current and prospective advisors will continue to drive industry-leading growth. Our advisor recruiting activity remains robust, including a record number of large teams in the pipeline. In the Capital Markets segment, we continue to have a healthy M&A pipeline and good engagement levels, but our expectations for a gradual recovery are heavily influenced by market conditions, and we would expect activity to likely pick up over the next six to nine months. In the fixed income business, we saw improvements in this quarter with higher activity, but the dynamics of the past year persist. Depository clients are experiencing flat to declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity. We hope that once rates and cash balances stabilize, we will start to see an improvement.

Despite some of the near-term challenges, we believe capital markets business is well positioned for growth once the market and rate environment become conducive.

...In the Asset Management segment, financial assets under management are starting the fiscal second quarter up 9% over the preceding quarter, which should provide a tailwind to revenues. We remain confident that strong growth of assets and fee-based accounts in the Private Client Group segment will drive long-term growth of financial assets under management. In addition, we expect Raymond James Investment Management to help drive further growth over time. In the Bank segment, we remain focused on fortifying the balance sheet with diversified funding sources and prudently growing assets to support client demand. We have seen securities-based loans payoffs decelerate and are starting to experience growth. We expect demand for these loans to recover as clients get comfortable with the current level of rates. With little activity in the market, corporate loan growth has been muted.

However, spreads have improved, and with ample client cash balances and capital, we are well positioned to lend once activity increases in our conservative risk parameters. In addition to our focus on organic growth across our businesses, we have also ramped up corporate development efforts. In closing, we are well positioned entering the second fiscal quarter with strong competitive positioning in all of our businesses and solid capital and liquidity base to invest in future growth. As always, I would be remiss if I did not thank our advisors and associates for their continued dedication to providing excellent service to their clients. Thank you for all you do. That concludes our prepared remarks. Operator, will you please open the line for questions?

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Michael Cho from JPMorgan. Your line is open.

Michael Cho (VP of Equity Research)

Hi, good evening. Thanks for taking my question. For my first question, I just wanted to touch on net new assets, and clearly there seems to be a pickup in NNA, and you continue to call out a robust recruiting backdrop. And the question is, you know, what do you think is driving that NNA acceleration now? And how much do you think a more stable macro outlook could contribute toward NNA acceleration from here?

Paul Reilly (Chair and CEO)

Well, historically, like, this quarter is a pretty good NNA number. So you know, what's really driving it is still great retention, recruiting, and most of our recruiting, you know, the advisor count number is a little misleading now because we're recruiting more and more larger, very large teams, fewer number, but larger teams. This quarter, we had a lot of retirements, but the retirements, seasonally, we do, at the end of the year. But in the retirements, almost all of them have transition plans, so we keep the assets, which drives the advisor count number down. And when people transfer to the RIA division, which happens every quarter, we take them out because they don't have a federal license.

So if you look at the net assets, net new assets, you go over the last few years, and then we continued to be, you know, near the top of the market or at the top of the market, and it's really just the great retention and robust recruiting. And as we recruit larger and larger teams, a lot of those teams are, their businesses are still growing significantly, and it's really generating net new assets. And of course, there's market help, right? As the market goes up, you bring people over, the assets are higher. So, but we feel pretty comfortable, and as we announced, we brought over Jodi Perry to really even add more robustness to our recruiting efforts, which were kind of diversified or spread out between the channels, but really bring them together to a more unified effort.

We think, we think we can do better than we have been doing.

Michael Cho (VP of Equity Research)

Okay, great. Now, thanks for all that color. I just want to switch gears on the capital markets side of the business, specifically investment banking. I mean, you continue to invest in talent there, despite the choppy backdrop over the last 18 months. And I think you've called out a higher quality banker or a higher producing banker at Raymond James now, you know, five, you know, versus previous periods. I mean, how should we think about something like revenue per MD going forward in a more normalized environment if the backlog starts to flow through at some point?

Paul Reilly (Chair and CEO)

Well, back in the last, the peak of the last market, you know, we exceeded $10 million per MD. So, I mean, we generate a very, very high productive number. You know, if you go back a few years, we were a couple of $1 million per MD, and that really is the difference, or part of that's the market. But certainly part of that was the high-quality MDs recruited, and the teams that joined us. So I don't know what that number is in a good market. I think we could still produce that number or better. We continue to recruit people in, some of the businesses that we felt were subscale or didn't have the senior people that we wanted. And I think the productivity is still there.

So, if we had a market as robust as we did a couple of years ago, we could top that $10 million, but certainly we'd be, you know, much higher in the high single digits, I think, in a reasonable market. But again, the market, as we've said, is we see slow improvement, but nothing that's really moving quickly up, but moving up steadily.

Operator (participant)

Your next question comes from the line of Devin Ryan from JMP Securities. Your line is open.

Devin Ryan (Managing Director, Equity Research)

Thanks much. Good evening, Paul and Paul.

Paul Reilly (Chair and CEO)

Hey, Devin.

Paul Shoukry (CFO)

Hey, Devin.

Devin Ryan (Managing Director, Equity Research)

So first question, if we go back to your early, your calendar 2023, you guys had built a fair amount of liquidity, and maybe gave up some interest income short term. And I think the view was that lending spreads could widen out, and so you wanted to have some capacity, and obviously, there was also a reason to be conservative at that time. But it did seem like some of the that maybe the headwinds to spread revenues was more of a timing dynamic and intentional. So, you know, looking at today, you still have a lot of excess liquidity to grow loans, if you see attractive risk-adjusted returns. So I'm just curious if kind of that view still holds that you had kind of through most of, you know, calendar 2023.

And then are those better spreads materializing as maybe you thought they would, or are you still waiting for that? I'm just trying to think about the interplay with that and then accelerating lending activity into that as well. Thank you.

Paul Reilly (Chair and CEO)

Yeah, I think there's two pieces to that, Devin, is that we have seen spreads widen. The problem is the market hasn't been really robust in the area that we like to lend in. We have a target, you know, both in industries, borrowers, that's fairly conservative. And that pipeline of new loans, as you can see from other banks, too, has just slowed down. So we're still waiting for that kind of resurgence in activity, which we think will happen at some point. But that's really been the... You know, we're ready to lend. We're also seeing the SBL loans and things, which was deteriorating. We're seeing that, you know, the payoffs really decreasing. We're seeing some growth there now, too.

We're starting to see the beginning of growth in those portfolios, but certainly, the market isn't giving us, you know, that opportunity to put on loans at the same rate we, you know, we did, you know, in, like, early 2023 or certainly 2022.

Devin Ryan (Managing Director, Equity Research)

Okay. Thanks, Paul. Then, just to follow up on the institutional fixed income brokerage, obviously, you know, really material improvement in the quarter and you're kind of run rate over $400 million. Last year, you did mid $300s, and, yeah, just looking at, like, 2023 relative to 2021, you're down over 30%, even though you have SumRidge today, and arguably a bigger, better business. So would love to just think about kind of the some of the momentum that you saw in the quarter in the depositories or maybe becoming more active again, and just how to think about kind of what a normalization in that business looks like. Is it, call it a little bit over $400 million run rate that we saw in this quarter, or is it something better?

And is this quarter kind of a good jumping off point? Because it is such a stark change from the prior quarter. Thanks.

Paul Reilly (Chair and CEO)

Yeah. So it's first a pretty fickle market. You know, SumRidge has done well the whole time. They traded on volatility. So if you look at volatility, you could probably look at their results. They're really good, very hedged, very focused corporate trading strategy, and consistently have executed since day one, and their business has not been off. It's done well. Our traditional depository business, which is a big part of our franchise, as they got cash squeezed, it slowed down. Two things were happening. A lot of banks already had plenty of fixed rate, you know, maturities, and they weren't looking for more, you know, bonds, and they were worried about their liquidity. I think what happened in December is liquidity looked like it was easing some, and rates looked like they were going to come down.

They got much more active. So I think that environment, which has been okay beginning of the year, but it's too early to tell, is what happens with rates. If people really think these are peak rates and liquidity continues to you know, feel settled, they'll get more active or at least be active as they are today. But I don't see the return to two years ago until the market really gets a lot better and a lot stable. But the guys, they've, they've performed very, very well, and it's just... If rates go up, it's going to be a, you know, a, it's going to be a headwind. If rates go down some or the view of rates going down materializes or people get confident, I think it will pick up.

Operator (participant)

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

Dan Fannon (Managing Director, Equity Research)

Thanks. Good evening. Wanted to follow up on your comments around cash sorting and your expectation that you expect that to continue. And curious if that's just some of the seasonal cash coming back into the market that maybe built up in December, and/or what other factors you think that are going to continue to have that be an ongoing trend beyond the billing and other things you mentioned so far in January?

Paul Shoukry (CFO)

Yeah, you touched on them. I mean, we in the December quarter typically have sort of seasonal tailwinds with tax loss harvesting, maturities, and those type of things. And then throughout the year, you know, quarterly fee billings alone this quarter were north of $1.3 billion. And we'll, you know, hopefully see that continue to grow throughout the year. And then we also, you know, have the headwind as we enter April with income taxes as well. So rates are still high there, out there. They've come in a little bit, as Paul said, just with the expectation for lower rates. So we have seen some declines across the industry, but really, money market funds are the yields there are really the biggest competitor we have, if you will.

You know, those yields are still attractive, and so we still have to have attractive alternatives to bring in new cash to compete against the money market funds. As I said in the last couple of calls, I think we're much closer to the end of that sorting dynamic than we, you know, get closer and closer. I feel like every quarter, but we're not gonna declare that it's over until we have several months of history to prove it out.

Paul Reilly (Chair and CEO)

I think that if, you know, people look at, you know, kind of the data there is, we'll say, if rates come down, you know, will that spread increase quickly? Well, you know, on normal sweeps, they kind of follow Fed funds. But really, if you look at money markets, they're more, you know, they're buying bonds, and it takes two-three weeks for them to adjust. So if you consider them some of the competition for rate, it's going to take a few weeks at least, you know, for that to sort through before there's, you know, before rates start moving at the more expensive, you know, people who are investing in higher yielding types of certificates. But it'll be moving in the right direction if rates fall.

Dan Fannon (Managing Director, Equity Research)

Thank you. Then just as a follow-up, within PCG, insurance and annuity products have been growing and a bigger contributor. Just curious, with the DOL's proposal, how you think that these products might be impacted or momentum, and that might be impacted by the proposal?

Paul Reilly (Chair and CEO)

So first, there's always been scrutiny on those products, you know, over time, and we believe we have good products and systems to, you know, to manage that. And the DOL, you know, we had put in systems to comply with a fairly similar law in the beginning. Then we had to take them out as we just, you know, as the industry defeated the rule. The second interpretation of questions came out, and the industry defeated the rule. So we'll have to see in court, and we'll have to see what this rule finishes with before we look at the impact, and my guess is the industry will challenge the rule again. So we've won twice. We'll...

You know, my guess, my guess, you know, I think there'll be a substantial challenge with a lot of things that could challenge what is proposed today, and so we'll have to see. So I'm kind of early to speculate on that until it's finalized, until we see if it really can withstand the third court challenge.

Operator (participant)

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

Kyle Voigt (Managing Director, Equity Research)

Hi. Good evening. Sorry about that. So first on the balance sheet, just given how much sweep cash you have sitting off balance sheet at this point, at $18 billion, and the excess capital you're currently running with, combined with the shape of the forward curve, would you consider beginning to grow the securities portfolio again over the next few quarters and start to lock in some yield, or do you still have a preference to allow that to run off?

Paul Shoukry (CFO)

Yeah, Kyle, you know, our position on taking duration on the balance sheet has remained, you know, very consistent through different rate cycles, which certainly positioned us well, you know, this time last year, which is really to keep more of a floating rate balance sheet and not try to time rates one way or the other. To the extent that we do take duration on the balance sheet, we really want it to be to support and accommodate client needs, you know, mortgages and those tax-exempt loans, et cetera. And so we're really not looking to try to time what might happen to rates. I know the forward curve has been wrong more than right in the last two-three years and has misguided a lot of other firms.

And so we're just gonna remain flexible and really focus on accommodating clients versus making bets for our own benefit.

Paul Reilly (Chair and CEO)

You know, we've heard a lot of people speculate over at the top rates, but we went from no rate cuts to three, to people speculating six, to speculating, well, maybe we won't get one per month, you know. So we just don't want to really play that game, and I think one of the keys to our consistent performance is, you know, we're not, we're not making bets. We're just consistently running the business. So, you know, we really don't look at the locking in rates like that. And right now, the spread, you know, on the sweep rates is very, very good and compelling anyways.

Kyle Voigt (Managing Director, Equity Research)

Yeah, understood. Maybe just a question on the non-comp expense guidance of $1.9 billion. I think that implies a 10% increase or so in the average non-comp expenses for the remaining three quarters versus the first quarter run rate. I know there's some variable expenses that you laid out in terms of the investment advisory fees, but just wondering if you could expand a bit on some of the other areas where you may be ramping investments through the remainder of the year.

Paul Shoukry (CFO)

Yeah, this quarter was pretty low, almost across the board. You know, IT, the technology expenses, we typically pull back on external support during the December quarter just because it's a little bit slower, you know, for those vendors as well, even to bring people in. It's a relatively quiet quarter for conferences and trips, and so we-- And it was also a relatively favorable quarter for legal and regulatory. And so I think as the year progresses, we should expect to see growth to get to that $1.9 billion sort of guidance.

As a reminder, that excludes some of the non-GAAP items, which most of you exclude, as well as the bank loan loss provision, and unexpected, you know, legal and regulatory reserves, because it's just hard, it's impossible for us to, you know, try to forecast those over the next three quarters.

Paul Reilly (Chair and CEO)

That was kind of our initial guidance, was the 1.9. So we're just... it, it is lumpy, but we, we still think that's a good number.

Operator (participant)

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

Brennan Hawken (Managing Director and Senior Equity Analyst)

Good evening. Thanks for taking my questions. Curious if you could maybe disclose what portion of your client asset base is in retirement accounts. And also, when you think about recruiting, you know, typically, how much of those assets tend to come in the form of retirement accounts, IRAs, and the like?

Paul Shoukry (CFO)

Yeah, we'll provide more of that breakout at our Analyst Investor Day in May. When we last went through this in 2016, the last time we disclosed this metric, it was about 1/3 of the assets were in IRAs and retirement accounts. But we haven't provided any real disclosure on that since then, so we'll plan on doing that at the Analyst Investor Day.

Brennan Hawken (Managing Director and Senior Equity Analyst)

Okay. Thanks for that, Paul. And then when you think about NNA, which had a nice jump here this quarter, was there bank activity or within the bank channel here in the quarter that might have caused some of the significant quarter-over-quarter changes? And, you know, generally, what's your outlook for growth coming from that channel in the near term?

Paul Reilly (Chair and CEO)

It's there wasn't anything lumpy in the bank channel. That tends to be a lumpier one just because of the, you know, with advisors, there's many, many, so they average out. But the banks, we don't expect anything lumpy. It's part of our growth platform. And, you know, I think our NNA has continued to be very, very solid. So we, we like the trajectory, and this is, you know, I think, a very strong number, both, you know, given the environment and giving our competitors this quarter, and, and still believe we have, you know, opportunity to keep. We don't forecast a number, but think we can be right at, right at the top of NNA.

Brennan Hawken (Managing Director and Senior Equity Analyst)

Okay, thanks for taking my questions.

Paul Reilly (Chair and CEO)

Thanks, Brian.

Operator (participant)

Our next question comes from a line of Bill Katz from TD Cowen. Your line is open.

Bill Katz (Senior Equity Analyst)

Okay, thank you very much. Good evening, and I appreciate you taking the questions. Maybe to mix up the topics a little bit, I was wondering if we could circle back to capital return. Just given the fact that you have a very strong capital position, you mentioned sort of mixed dynamics on the loan side or lending side. Why not pick up the pace of capital return through buyback? And then maybe as a subsector to that—subsection to that, what, what is your incremental thinking of inorganic opportunities, at this point, and what might you be looking at? Thank you.

Paul Reilly (Chair and CEO)

So we think, you know, first, we were a little late into the quarter because we had a self-imposed blackout, given, you know, an accrual for our off-platform communication. So we got a little late jump, and so we weren't in a rush. You know, we had a good period in that market, so we didn't try to catch up. But we're committed to, you know, next quarter, the $200 million, which I think will catch us up on the TriState commitment and continue on our dilution. And as we go forward to be opportunistic, we are trying to balance. As we've said, we've put a new head of corporate development.

We're seeing a lot of opportunities in the market, and, you know, we want to make sure that just like I remember, forget the timing, two years ago, people were saying, "You're ever going to spend the cash?" When we got over 12%, and we did six acquisitions in 18 months, right? And got our ratio down to 10%. So... And the reason we could do them is we had the capital on the balance sheet. And, we think there are opportunities. The problem is, you never know if they're actionable. You can talk a lot, but we're certainly out in the market and looking. And so we just try to balance those two.

The good news is, you know, we have strong earnings, so we understand we'll keep adding capital base, but we are just trying to balance the two of them. We think $200 million is a good target. If we get to the point where we don't think there are, you know, accretive acquisitions, that would be accretive to the positioning of the firm, not just the earnings, we will buy back stock. We're not trying to hoard capital. You know, our issues, at least half of them are we, you know, TSR based. So we're, you know, we're not trying to hoard capital just for fun. We just think it's the right thing to do, looking at the potential opportunities.

Bill Katz (Senior Equity Analyst)

Okay, just to follow up, maybe talk about margins for a moment. I appreciate, though, we'll look forward to the Investor Day in the spring. But just conceptually, though, to the extent that the investment banking backdrop were to pick up, how do we think about the incremental margin in both the segment and how that might translate down to the holding company at this point in time? Obviously, you're right about breakeven, if you will. I'm just trying to think through the puts and takes of some pressure on NII, offset by maybe a little bit more countercyclical pickup in the IB, and then how that might filter down to profitability. Thank you.

Paul Shoukry (CFO)

Yeah, Bill, I think, in the Capital Markets segment, you know, when they were operating at record levels over the last couple of years, you know, two years ago, they, I think, hit a maximum margin or a record margin of around 26%. And so that just shows you the upside potential for that segment. Now, that was both the equity side and the fixed income side of the business, you know, running on all cylinders, which is somewhat atypical across the industry, just given, the countercyclical nature of some of those businesses. But, you know, we-- there's a lot of upside from, you know, we're just breaking even this quarter in capital markets to, what the potential is, and that we proved it- proved out a couple of years ago.

And that obviously would help the overall margin of the firm. We're still saying it's a 20%+ margin target for the firm at this juncture. But we'll update that as appropriate at Analyst Investor Day in May. But, you know, we have a diversified business, so there's always puts and takes. And, you know, what we don't try to do is sell you on a story that just adds the incremental margin of everything happening to the plus side without, you know, factoring in potential offsets. And so we think that's a more balanced approach. But, you know, obviously, all else being equal, if we had the same exact sort of performance from the other businesses with the upside potential of capital markets, that would be accretive to the margins overall for the firm.

But, we're just reluctant to guide that now, given all the uncertainty, particularly around cash sorting dynamics, which is a huge driver of margins. The cash balances and where interest rates are, is a big driver of margins for the firm. So, you know, we're going to be conservative there until things stabilize.

Operator (participant)

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

Steven Chubak (Managing Director and Senior Equity Research Analyst)

Hi, good evening, Paul and Paul. Wanted to start off with a question on deposit price betas and pricing flags amid rate cuts. Just one of the challenges that we collectively are grappling with is that your mix of deposits is quite different than peers. You have a lower concentration of higher beta savings deposits that should carry very high deposit betas with rate cuts. At the same time, your current payout on your sweep deposits is actually much more competitive than your peer set. So I was hoping you could frame separately what your expectation is for deposit pricing flags on the ESP piece versus the sweep deposits within the bank channel.

Paul Shoukry (CFO)

Yeah, I mean, the ESP balances, we would expect the correlation of the movement of those rates to, you know, be much more aligned with what happens with Fed Funds Effective. And I think that's what, you know, advisors and clients expect, not only at Raymond James, but across the industry as well, for those higher-yielding products. You say it's different in terms of mix of deposits than others in the industry, but you also have to remember, with the TriState acquisition, and they have $18 billion of deposits now, which are higher cost deposits and likely higher beta deposits, too, both on the upside and on the downside of rates.

So it gives us, you know, more similar sensitivity than just looking at the sort of PCG-related deposits, which we feel good about. And then, as you point out, the BDP, the sweep deposits, we were much more generous than most of our competitors on the way up, which gives us more kind of cushion on the way down as well with those deposits. So as Paul said, it's going to be a competitive dynamic, something that we'll look at as, as rates move, but we feel really good about the position we're in right now.

Steven Chubak (Managing Director and Senior Equity Research Analyst)

That's great color, Paul. And for my follow-up, it's related to what Bill had just asked, but I was hoping to pin you down with an explicit number in terms of how to think about incremental margins. Because the offset from lower rates is clearly expected to come from the capital market side of the business. The concern is that NII is not compensable. But if we actually look at what you guys did during the period of robust capital markets activity, you cited the 25% plus type margins. The incremental margins were actually close to 50% during that period. So just want to get a sense, if we do have a more meaningful ramp in capital markets activity, is a 50% incremental margin a reasonable assumption consistent with what we saw during the COVID period?

Paul Shoukry (CFO)

Yeah, I mean, I guess what I would say is, if you kind of look at the revenues now versus the revenues at the peak of capital markets, and, you know, being break even now versus getting a 26% margin during the peak of capital markets, I mean, it's pretty linear. There's a lot of incremental margin as you grow revenues from the current base to where we were at that point in time. So, it also depends on, frankly, the mix of revenues in capital markets, how much comes from, you know, M&A versus underwriting versus fixed income. All those businesses have different incremental margins, too. So we could make up a simplistic number for modeling purposes, but frankly, I think it'd be false precision.

And we also know that the dynamics that may help the capital markets business may be dynamics that, you know, may positively or negatively impact our other businesses. So, with generating a 20%+ margin, and generating record earnings in the last three years in very different market environments, you know, is something that really reinforces the value of having our diversified business model and being able to generate, you know, return, return—adjusted returns on tangible common equity of, you know, over 20%, 23%, this quarter, you know, on our strong capital basis, without the support of capital markets, is something we're really happy about.

Operator (participant)

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

Jim Mitchell (Managing Director and Senior Equity Analyst)

Hey, good evening. Maybe just a quick question on the brokered sweeps. You know, your yield went up, net yield went up again. You've had pricing power. How long do you think the pricing power can last? I mean, deposits in the industry have seemingly stabilized for banks. Does that start to erode some of that pricing power? What's your outlook on the sweep pricing?

Paul Shoukry (CFO)

Yeah, we're still seeing a lot of demand for these deposits, you know, across the banks that we deal with. So we still think that there's, you know, pricing power. But in fairness-

...The pricing power we're talking about is 5 basis points-10 basis points, which on the balances of $17 billion is meaningful, but it pales in comparison to what's happening with the base rates nowadays, you know, so, and what might happen going down or up. So we still think there's pricing power. There's a lot of demand for these deposits, but, you know, we're, we're hopeful that over the next year or two, we're using more of these deposits to, to grow the balance sheet and support clients with loan activity, which generates higher yields and returns for the firm overall.

Jim Mitchell (Managing Director and Senior Equity Analyst)

Right. Makes sense. And then maybe as a follow-up on just sort of the large team pipeline, sort of at a record. I think you highlighted that last quarter as well. How much of that is... What is your win rate among the large teams? Do you feel like it's getting better? And how much is in the pipeline versus actually in the door, I guess, when I think about just as you win new mandates and new client, new clients and FAs?

Paul Reilly (Chair and CEO)

Yeah. I don't know if I have those exact numbers. I will say, you know, we didn't see $10 million teams a year or two ago. Now we see $20 million and $30 million teams that are. The batting average is pretty good, but there's a lot of competition. You know, it's, we're not the highest payer, but we still. We're still doing really, really well. Yeah, we have a lot in the door, but right now, when we say in the pipeline, they're non-committed. We're in the middle of, you know, we're right there, neck and neck, and, you know, we're. I think we have a pretty good read on who will come in or not, or who are close, and you just stay at it, so. But it's a large number, and we're actually, honestly, a little surprised.

I think it's both the growth of our firm and our platform, the high net worth, you know, initiatives that we've had and what we've built really, since Alex. Brown has joined us, with their help, being a place where people in the high net and all ultra-high net worth feel very comfortable. And then our technology and our systems and culture, you know, it's all combined to add it to a place where, frankly, if you'd asked us a couple of years ago, we would say, you know, we wouldn't have told you we'd expected $10, $20, $30 million teams, multiple teams, you know, at one time. So our job is to get them in the door, right? So the good ones. And so that's what we work hard on.

Operator (participant)

Your next question comes from the line of Mark McLaughlin from Bank of America. Your line is open.

Mark McLaughlin (Equity Research Analyst)

Good evening, guys. Thanks for taking my question. For my first one, I was curious, how do you view your use of transition assistance and loans to financial advisors? I know some of your competitors use that a lot in terms of generating growth. How do you view your competitiveness in that space?

Paul Reilly (Chair and CEO)

Yeah, first, everyone uses them, so if you wanna recruit with zero transition assistance, good luck. I mean, you might bring some people in, but not much. I mean, advisors feel there's a value to their practices and want a fair, you know, return on those. So that is part of recruiting for all the firms. You know, not so much in the RIA channel, but certainly in the employee and independent channel. We've consistently, you know, since my time and before, have not been the highest on purpose. And, you know, we want. We've always said it's part of self-selection, that we want people to come because they believe it's the right place, not for the highest check. Now, having said that, in the last few years, transition assistance has gone up.

So we've had to make adjustments, but I mean, we're rarely ever the highest offer. I mean, we rarely match the highest offer, and we still have a very good batting average. So, but it's part of the business.

Operator (participant)

Your next question comes from a line of Alexander Blostein from Goldman Sachs. Your line is open.

Alexander Blostein (Managing Director, Equity Research)

Hey, good evening, guys. Thanks for taking the question. Paul, I was wondering if you could just expand a little bit on the comment you made earlier to Bill's point around building excess capital position and the fact that the last time you guys were over 12% Tier 1 leverage, you went out and did a significant number of deals. So, maybe articulate a little bit more what the M&A pipelines look like with business today, and what areas within Raymond James look most interesting from an inorganic perspective. Thanks.

Paul Reilly (Chair and CEO)

Yeah. Well, honestly, there are a lot of opportunities in all of our business segments. We've been, we think there's inorganic opportunities. The challenge is you just don't know, you know, some are on the market. Many we keep in touch with and, you know, say: Is this a good time for you to look at, you know, teaming with us versus competing with us? And I think during the last year, with everything going on, discussions are up. Now, when you can close those or when they're actionable or... And frankly, you know, in this market, we're, you suffer a little bit from what our own M&A business does, that the sellers' price expectations adjust much slower than the buyers do. So just taking our industry with cash sorting, right?

We've always said conservatively, we'd expect cash sorting to continue, which it has over the last year. And many people are saying, "Well, cash sorting is over, and this should be our, you know, this should be the EBITDA you value us on." So we just say, "No, we don't think so." And, you know, so, so part of that sometimes solves over timing, or part of that, people say: Well, at, at this valuation, we're not going to sell, and that happens in all the segments. But the number of dialogues are up... the interest, I mean, sustained dialogues.

and some we walk from, some they walk from, some we just say, "Hey, maybe it's not the right timing price-wise." And that was no different than the dynamic a few years ago, and then all of a sudden, you know, four we were after for a while, and two came out of the blue almost, but we found all closed. So, we can't predict that timing, and, and don't want to even try 'cause, there's nothing concrete to predict it. But when there's enough activity, you wanna make sure you have enough capital, that if that time does come, that you can execute.

Operator (participant)

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

Michael Cyprys (Managing Director, Equity Research)

Hi, good evening. Thanks for taking the question. Wanted to come back to some of your comments on the recruiting backdrop. I was hoping you might be able to elaborate a bit on the competitive environment today versus, say, six or 12 months ago for recruiting, and how you might expect that to evolve if rates come down over the next year or two.

Paul Reilly (Chair and CEO)

Yeah, the recruiting, since, you know, my 15th year, I think, in this role, I mean, since I've been here, everybody told me recruiting was gonna slow down, and it's just picked up. You know, there's the aging advisor, there'd be no more advisors left, and we see. You know, we see teams in their forties that have bigger books than we've ever, you know, seen before. So I think the recruiting potential is gonna stay there. I think we have a unique value proposition, given our, you know, size on one hand, with and our, you know, our A ratings across the three rating agencies, our capital. On the other hand, allowing independence and freedom, advisors to own their books so they can leave if they wanna leave.

The technology platform and wealth, we think, is second to none, and that's what the industry awards would say. You know, so you gotta keep competing, and it hasn't slowed down yet. Probably the biggest change in the competitive landscape has been, you know, RIA roll-ups that pay prices that we can't quite figure out, and it's a bet on aggregating and being able to go to market at some point, when even though those private multiples are much higher than the public multiples. So that's a new competitor. It's kind of led price. Now, people are selling their firms versus, you know, having people still kind of owning their businesses. So that's the newest dynamic in an area which is... I call it a new competitor, but again, it's the advisor's choice, right? How do they want to practice?

If they want to own their business and get all the support with leading technology, we're a great place. If they want to sell their business, you know, at a, you know, pretty high multiple, to roll-ups, who are trying to aggregate and then, you know, monetize later. I mean, that's certainly a viable market option that wasn't really there three years ago.

Operator (participant)

There are no further questions at this time. Mr. Paul Reilly, I turn the call back over to you for some final closing remarks.

Paul Reilly (Chair and CEO)

Well, great. I just want to thank you all for attending. I think we're in great shape with certainly good tailwinds, with that asset number being up 9%. The markets may be of surprise to us all, continue to be robust, but if they continue, we're in great shape there. And the cash dynamic will sort itself at some time. If the forward curve's right at all, even if it's delayed, that'll ultimately be a tailwind, you know, when that happens. But right now, we just, as you know, we're conservative, so we always look at it as, like, hit Paul about his 5% decline in the last few quarters. We haven't quite hit that yet, and you get it again, but we don't know.

So we try to be conservative, and if rates do moderate or come in, you know, we'll get some tailwinds there for the industry. So thanks for joining, and we'll talk to you again.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.