Raymond James Financial - Q2 2024

Transcript

Kristie Waugh (Head of Investor Relations)

Good evening and welcome to Raymond James Financial's Fiscal 2024 Second 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. With me on the call today are Paul Reilly, Chair and Chief Executive Officer, and Paul Shoukry, President and Chief Financial Officer. The presentation being reviewed today is available on Raymond James Investor Relations website. Following the prepared remarks, the operator will open the line for questions. 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, 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 statement that necessarily depends on future events, are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K, and subsequent Forms 10-Q, and Forms 8-K, which are available on our website.

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

Paul Reilly (Chairman and CEO)

Thank you, Kristie. Good evening, everyone, and thank you for joining us today. Once again, we delivered strong results in the quarter. Highlighting our diversified platform, we generated record results for the fiscal second quarter and the first six months of the fiscal year. We continue to invest in our business, our people, and technology to help drive growth across all our businesses. Before discussing quarterly results, I want to highlight an important announcement made last month. Following a multi-year succession planning process, the Board of Directors appointed Paul Shoukry, our CFO, as President of Raymond James. Following a transition period, Paul is expected to become the firm's CEO sometime during the fiscal year 2025, becoming only the fourth Chief Executive in the company's 60+ year history. Paul has been an exceptional leader and a major contributor to Raymond James' steady growth and financial stability.

I am confident he will continue to guide the firm with the same conservative, long-term approach, and laser focus on our advisors and client-first culture that has helped shape our success over the many years. In addition, we're proud to announce that other key leadership appointments to take effect October 1, 2024. Private Client Group President Scott Curtis will become COO of Raymond James Financial, moving into the role following the retirement of Jeff Dowdle at the end of the fiscal year. Tash Elwyn, current Raymond James & Associates CEO, will become President of PCG. Global Equities and Investment Banking President Jim Bunn will become President of the Capital Markets segment. These expanded roles are a direct reflection of the significant leadership and contributions that Scott, Tash, and Jim have made over the years.

I am confident, along with Paul, they will continue delivering on our mission to help clients achieve their financial objectives. Now, to review the second quarter results starting on Slide five. The firm reported record quarterly net revenues of $3.12 billion, an increase of 9% over the preceding year quarter, primarily due to higher asset-based revenues. Quarterly net income available to common shareholders was $474 million, or $2.22 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $494 million, or $2.31 per diluted share. The quarter included the favorable impact of a legal and regulatory net reserve release of $32 million, predominantly driven by a reduction in the reserve related to the SEC off-platform communications matter. We generated strong returns for the quarter, with annualized return on common equity of 17.5% and annualized adjusted returns on tangible common equity of 21.8%.

A great result, particularly given our strong capital base. Moving on to Slide five. Client assets grew to record levels during the quarter, driven by rising equity markets and solid advisor retention and recruiting in the Private Client Group. Total client assets under administration increased 6% sequentially to $1.45 trillion. Private Client Group assets and fee-based accounts grew to $799 billion, and financial assets under management reached $227 billion. Domestic net new assets were $9.6 billion, representing a 3.2% annualized growth rate on the beginning of the period domestic Private Client Group assets. This quarter does reflect some seasonality typical in the first calendar quarter. As we've seen before, net new assets can be volatile quarter to quarter as we onboard newly recruited advisors and have advisors retire or leave the platform from time to time.

With our robust technology capabilities, client-first values, and long-time multiple affiliated options, PCG continues to attract high-quality advisors to the platform. For example, during the quarter, we recruited to our domestic independent contractor and employee channels financial advisors with approximately $80 million of trailing 12-month production and $12.8 billion of client assets at their previous firm. Fiscal year to date, trailing 12-month production of recruited advisors is up 45% and related assets up 77% over the prior six-month period. There is a lag between recruiting results and net new assets as it takes some time for clients to transition to the Raymond James platform, but we are encouraged by the recruiting success so far this fiscal year. These results do not include our RIA and custody services business, which also continues to have recruiting success and finished the quarter with $161 billion of client assets under administration.

Looking to our fiscal year-to-date results, domestic net new assets were $31.2 billion, representing a 5.7% annualized growth rate on the beginning of period domestic PCG assets. A strong result compared to our peers. Total clients' domestic cash sweep and Enhanced Savings Program balances ended the quarter at $58.2 billion, up slightly over December 2023. Bank loans were essentially flat from the preceding quarter at $44.1 billion as loan demand remains relatively muted given higher rates. Moving on to Slide six. Private Client Group generated record quarterly net revenues of $2.34 billion and pre-tax income of $444 million. Year-over-year, results were driven by higher asset management fees reflecting the nearly 20% growth of assets in fee-based accounts at the beginning of the current quarter compared with the same prior year period.

The Capital Markets segment generated quarterly net revenues of $321 million and a pre-tax loss of $17 million. Net revenues grew 6% compared to a year ago quarter, primarily due to higher M&A and debt underwriting revenues. Sequentially, revenues declined 5% due to lower fixed income brokerage revenues and M&A and advisory revenues, partially offset by higher debt underwriting revenues. The pre-tax loss in Capital Markets of $17 million reflects the impact of amortization of deferred compensation granted in preceding periods, which totaled $20 million this quarter. While the timing of closings remains difficult to predict, we are encouraged by the healthy pipelines and new business activity in M&A. We continue to expect investment banking revenues to improve along with the industry-wide gradual recovery. The asset management segment generated pre-tax income of $100 million on record net revenues of $252 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 $424 million and pre-tax income of $75 million. Bank segment net interest margin of 2.66% declined eight basis points compared to the preceding quarter, primarily due to the higher cost mix of deposits as the Enhanced Savings Program balances replaced a portion of the lower cost RJ BDP cash sweep balances. Looking to the fiscal year-end date. Results on Slide seven. We generated record net revenues of $6.13 billion and record net income available to common shareholders of $971 million, up 8% and 4% respectively over the prior year's record. Additionally, we generated strong annualized return on common equity of 18.3% and an annualized adjusted return on tangible common equity of 22.8% for the six-month period.

On Slide eight, the strength of the PCG and asset management segment for the first half of the year primarily reflects the strong organic growth in PCG with robust equity markets. Now I'll turn over to Paul Shoukry, our CFO and soon-to-be CEO for the second quarter results. Paul?

Paul Shoukry (President and CFO)

Thank you, Paul. Starting on Slide 10. Consolidated net revenues were $3.12 billion in the second quarter, up 9% over the prior year and up 3% sequentially. Asset management and related administrative fees grew to $1.52 billion, representing 16% growth over the prior year and 8% over the preceding quarter. This quarter, PCG fee-based assets increased 7%, which will be a strong tailwind for asset management and related administrative fees in the fiscal third quarter. Brokerage revenues of $528 million grew 6% year-over-year, mostly due to higher brokerage revenues in PCG, which were partially offset by lower fixed income brokerage revenues as depository clients continue to experience flat to declining deposit balances and have less cash available for investing in securities.

Remember, in our fixed income business, we do not have the same exposure to the higher volatility currency and credit products that have benefited many of the larger players in our industry during the quarter. I'll discuss account and service fees and net interest income shortly. Investment banking revenues of $179 million increased 16% year-over-year and declined 1% sequentially. Compared to the prior year quarter, second quarter results benefited from stronger debt underwriting revenues in both fixed income and public finance, as well as improvement in M&A and advisory revenues, which continue to be subdued. Moving to Slide 11. Clients' domestic cash sweep and Enhanced Savings Program balances ended the quarter at $58.2 billion, up slightly over the preceding quarter and representing 4.6% of domestic PCG client assets. Sweep balances were essentially flat and ESP balances increased 3% sequentially, both outperforming our expectations on the last call.

Since the beginning of this quarter, domestic cash sweep balances have declined about $1.7 billion, mostly due to quarterly fee billings along with income tax payments. Turning to Slide 12. Combined net interest income and RJ BDP fees from third-party banks was $689 million, down 1% from the preceding quarter, largely reflecting one fewer billable day. Again, this result outperformed our guidance on last quarter's call given the more stable client cash balances. Going forward, net interest income and RJ BDP third-party fees will largely be dependent on the level of short-term interest rates, the stability of client cash balances, and the trajectory of loan growth, which has been subdued in this rate environment. Fortunately, we are well positioned for the eventual recovery in loan growth with ample capital and funding flexibility. Moving to consolidated expenses on Slide 13.

Compensation expense was $2.04 billion and the total compensation ratio for the quarter was 65.5%. Excluding acquisition-related compensation expenses, the adjusted compensation ratio was 65.2%. As is typical in the first calendar quarter, compensation expenses were impacted by annual salary increases and the reset of payroll taxes. All in, an adjusted compensation ratio close to 65% is in line with our current target and is a satisfactory result given the challenging environment for the Capital Markets segment. Non-compensation expenses of $466 million increased 1% sequentially, largely due to higher communications and information processing expenses and a higher bank loan loss provision, which were partially offset by a favorable legal and regulatory net reserve release of $32 million in the quarter, which Paul mentioned earlier.

For the fiscal year, we still 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. Keep in mind, many of our non-compensation expenses, such as investment sub-advisory fees, represent healthy growth that follows the corresponding revenue growth. Slide 14 shows the pre-tax margin trend over the past five quarters. This quarter, we generated a pre-tax margin of 19.5% and adjusted pre-tax margin of 20.4%, a strong result, especially given the challenging market conditions impacting capital markets. As a reminder, our current targets provided at our Analyst & Investor Day last May are for pre-tax 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 our upcoming analyst investor day scheduled for May 23rd. On Slide 15. At quarter end, total balance sheet assets were $81.2 billion, a 1% sequential increase. Liquidity and capital remain very strong. RJF corporate cash as a parent ended the quarter at $2 billion, well above our $1.2 billion target. We remain well capitalized with Tier 1 leverage ratio of 12.3% and a total capital ratio of 23.3%. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth. The effective tax rate for the quarter was 21.8%, reflecting the favorable impact of non-taxable corporate-owned life insurance gains in the quarter. Looking ahead, we believe 24% is an appropriate estimate for the effective tax rate.

Slide 16 provides a summary of our capital actions over the past five quarters. During the quarter, the firm repurchased 1.7 million shares of common stock for $207 million at an average price of $122 per share. Including $43 million of shares repurchased in April, we completed the expected $250 million of share repurchases since January 1st and fulfilled the repurchase commitment associated with the dilution from the TriState Capital acquisition. As of April 19th, 2024, approximately $1.14 billion remained under the board's approved common stock repurchase authorization. Going forward, we expect to continue to offset share-based compensation dilution and to be opportunistic with incremental repurchases. We are committed to maintaining capital levels in line with our stated targets and will discuss more on our overall capital management strategy at our upcoming analyst investor day.

Lastly, on Slide 17, we provide key credit metrics for our bank segment, which includes Raymond James Bank and TriState Capital Bank. The credit quality of the loan portfolio is solid. Criticized loans as a percentage of total loans held for investment ended the quarter at 1.21%, up from 1.06% from the preceding quarter. The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1.06%. The bank loan allowance for credit losses on corporate loans as a percentage of the corporate loans held for investment was 2.05% at quarter end. We believe this represents an appropriate reserve, but we continue to closely monitor economic factors that may impact our loan portfolios.

Before I turn the call back over to Paul, I just want to say that I am absolutely honored to be named president and future CEO of this great firm. I'm excited to partner with my colleagues and friends, Scott Curtis, Tash Elwyn, and Jim Bunn, in their expanded roles to continue leading Raymond James with the same values that guided Bob James, Tom James, and Paul Reilly since our founding. I am optimistic about our future as all of our businesses have critical mass, significant headroom for continued growth, and a highly competent management team that embody our firm's advisor and client-first values. Now I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Paul Reilly (Chairman and CEO)

Thank you, Paul. As I said at the start of the call, I'm pleased with our results for the fiscal second quarter and through the first half of the fiscal year, generating record results and ending the quarter with record client assets. While there is still economic uncertainty, I believe we are in a position of strength to drive growth over the long term across all of our businesses. In the Private Client Group, the next quarter results will be positively impacted by the 7% sequential increase of assets and Fee-Based Accounts. Our advisor recruiting activity remains robust, and I'm encouraged by a record number of large teams in the pipeline. We are focused on being a destination of choice for our current and prospective advisors, which we believe over the long term should continue to drive industry-leading growth.

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 could expect activity to pick up over the next six to nine months. In the fixed income business, the overall dynamic of the past year remained unchanged. 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 rate and cash balances stabilize, we will start to see an improvement. Overall, despite some of the near-term challenges, we believe the investments we've made in the Capital Markets business have positioned us well for growth once the market and rate environment become conducive.

In the asset management segment, financial assets under management are starting the fiscal third quarter up 5% 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 diverse funding sources and prudently growing assets to support client demand. We have seen securities-based loan payoffs decelerate, and 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, with ample client cash balances and capital, we are well positioned to lend once activity increases and our conservative risk guidelines. In addition to driving organic growth across our businesses, we also remain focused on the corporate development efforts for opportunities that may meet our disciplined M&A parameters. In closing, we are well positioned entering the fiscal third quarter with a strong competitive positioning in all of our businesses and solid capital and liquidity base to invest in future growth. As always, I want to thank our advisors who drive this business, 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)

Absolutely. And everyone, if you would like to ask a question today, please press star one on your telephone keypad. If you're using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Once again, that is star one if you have a question. We'll go first today to Alex Blostein, Goldman Sachs.

Alex Blostein (Managing Director and Senior Equity Research Analyst)

Hey, good afternoon. Thanks for the question. Congrats to both of you guys. Well deserved. I wanted to start with a question around comp maybe. I understand there are some seasonal factors that impacted the quarter, but maybe help break down how much the seasonal lift was specifically this quarter. It feels a little bit heavier than normal. And then, Paul, I think I heard you say that you're kind of on target to 65% comp rate for the year, but then you also said you're still shooting to be below 65% for the year. So maybe just kind of help reconcile where you guys are ultimately doing that for the full year. Thanks.

Paul Shoukry (President and CFO)

Yeah, Alex, appreciate that. What we said was that the target that we announced the last analyst investor day was 65%, and so that's sort of where we've been trending in the first two quarters. But what it does for the rest of the year is going to be largely dependent on the Capital Markets segment. That's a big driver because typically that would have a lower comp ratio associated with it than the other segments and help the firm's overall comp ratio. And that wasn't the case this quarter, as you can calculate. So we were pleased to be able to generate close to a 65.2% adjusted comp ratio despite the challenges in that capital market segment.

In terms of the reset of the payroll taxes and the increase in salaries that's typical for the calendar first quarter of each year, I would say that probably had an impact around $30 million-$35 million in the quarter, so meaningful impact in the quarter. Of course, the salary increases will continue throughout the year, but probably 2/3 of that or so was related to the payroll tax reset, which will decline throughout the course of the calendar year.

Alex Blostein (Managing Director and Senior Equity Research Analyst)

I gotcha. Thanks for that. My second question around recruiting activity and if we look at the net new assets disclosed in the quarter, organic growth is trending at a lower end from what we've seen from you guys historically. And I guess double-clicking into that, it looks like the independent headcount continues to be pretty range-bound. So maybe kind of walk us through what's been sort of pressuring the net new asset growth so far this year, your expectations for the rest of the year, and then specifically what you're seeing in the independent channel that's been keeping the headcount relatively flat. Thanks.

Paul Reilly (Chairman and CEO)

I think you're seeing the same trends. The teams we're hiring are larger, so we're bringing in more assets. We're on a great roll in terms of assets and trailing 12. We do have headcount that moves to our RIA channel, and that takes them out of headcount because they're not licensed. So even with that movement, we keep the assets, but we're not keeping the headcount. We'll try to give you more granularity on investor day and analyst day. Then you have ins and outs. We do have some outs. The ins take time to onboard. So the assets usually take, when you see a robust quarter like this, say, $1 million of trailing 12, it can take nine months to a year to get all those assets over. Our expectation is that recruiting will continue and continue strong.

I think part of the transparency is we need to give you a little more transparency on the RIA and how to think about that. We've struggled with a measurement to give you so you can see through those.

Alex Blostein (Managing Director and Senior Equity Research Analyst)

Great. All right. Thank you, guys.

Paul Shoukry (President and CFO)

Thanks, Alex.

Operator (participant)

Next question is Steven Chubak, Wolfe Research.

Michael Anagnostakis (VP)

Hey, good afternoon. This is Michael Anagnostakis on for Steven. I did want to ask one just on cash sweep. I appreciate the commentary on how things have trended to start the quarter. It was certainly nice to see that sweep cash was flat in 1Q. But now tax season is behind us, are you seeing signs that cash sweep is building and reflecting positively? Maybe just speak to your level of confidence that we could see absolute sweep cash balances build from here. Thanks.

Paul Shoukry (President and CFO)

Yeah. I mean, we had tax season. We also had a record quarterly fee billing that came out of the cash balances already. And so when I look at today's report, cash sweep balances so far in April are down $1.3 billion, which is less than the impact from the fee billings. Now, we had a decline in the Enhanced Savings Program so far this April too. And again, that could have been impacted. We have tracked significant payments to the IRS with tax season here. And if you look at the last couple of quarters, after the fee payments were made, cash kind of built throughout the quarter. And you saw that certainly in this past quarter where cash sweep balances ended relatively flat quarter-over-quarter, which far exceeded our expectations that we shared on the last call.

So we are hopeful that balances are stabilizing, and so we'll kind of continue monitoring it from here.

Michael Anagnostakis (VP)

Got it. And maybe just pivoting to DOL. Paul, on the last earnings call, I recall that you were relatively comfortable with Ray J's positioning and that you expected the industry to challenge the new rule. With the final DOL rule now published, maybe you could update us on your views in terms of what the rule in its finalized state means for the industry as well as any implications for Ray J that you would highlight. Thanks.

Paul Reilly (Chairman and CEO)

Well, yeah. So I appreciate the question. Digesting 500 pages of a regulatory rule is even more complicated than trying to get through our earnings release and analyze it. So it's early. The early read is actually from the rule itself is there's nothing that pops out that's overly problematic, actually, maybe surprisingly so. I think the industry's concern will be two. One is that does the Department of Labor even have the authority to oversee these accounts? And that doesn't have to do with this rule. I don't think the rule itself will have a high impact. But do we want another regulator to concede their statutory authority for the regulator to oversee those accounts? And the other thing is if the rule is talking about really complying with best interest standards, why is there an extra rule?

The rule itself is, I think, much more manageable than the draft rule was. Again, that's an early read. The devil's always in the detail, but I don't think the rule itself and what it requires to do today doesn't look too problematic at all.

Michael Anagnostakis (VP)

Totally appreciate that. Congratulations to you both. Thanks for taking my questions.

Paul Shoukry (President and CFO)

Thank you.

Operator (participant)

Next question comes from Michael Cho, JPMorgan.

Michael Cho (VP and Equity Research Analyst)

Hi. Good evening. Thanks for taking my question. My first one, I just wanted to follow up on M&A again. I mean, we talked through a healthy pipeline looking ahead. But just in the quarter, again, you all talked through some seasonality and some lumpiness. I was just curious if there's anything else you can call out or any more color around nuances between maybe some of the affiliation models that you talked through and maybe anything to call out in terms of how maybe attrition is trending as well.

Paul Reilly (Chairman and CEO)

Yeah. If you look for the first six months, I think compared to the industry in the fives, we did pretty well. So this quarter was slower in terms of the number. Typically, this is a little lower, but maybe a little lower than we would have thought in terms of the number itself. But the recruiting's going well. The movement to RIA, you can see that net new assets growth was pretty robust. I mean, net asset growth was pretty robust. So I think it actually was a we have quarters where things are down and quarters where things are up. And I just think it was down a little more than we anticipated from a measurement standpoint. But the recruiting, not only in what we brought in this quarter, but what we have in the pipeline, I think we have a relatively good chance of closing.

I can't remember ever being stronger. So the numbers will be impacted by, in terms of advisor count, how many go to RIA, and then hopefully, the ones that do will choose to stay with us. We've had a pretty good record on it so far.

Michael Cho (VP and Equity Research Analyst)

Okay. Thank you. No, fair enough. And then just switching gears to the capital markets business, I mean, I realize some of that is driven by the deferred comp that you called out and maybe still recovering in the environment. So with that backdrop potentially improving from here and Raymond James's history of investing in talent as well, I mean, how would you frame your willingness to go after incremental talent in the advisory business over the next, call it, nine to 12 months?

Paul Reilly (Chairman and CEO)

Yeah. So we've done a lot of adjusting in terms of the costs and lowering the costs in that business, but we've also done some hiring. So the business is very leveraged the upside of revenue comes up. I mean, so the margin two years ago was, what, 50% or something. I mean, so now it's not so I mean, there's leverage for the revenue to grow to really help with that margin. So the question is just the market. And we're open always to bring in talent. I think we showed in 2009 in the worst part, we were hiring when other people weren't, and it really paid off for our growth for the whole next decade.

And so that is the blessing of a really strong capital position is that we have the opportunity even in tough markets to hire, carry, and really position talent to bring us forward. We've done some public finance hiring that we're already seeing payoff from in this quarter and this coming quarter that if you looked at just the results of public finance, you wouldn't have done it. But we are, again, great believers in the business, the platform. And if there's great talent out there, we're willing to take the long-term investment and channel liquidity and capitalize if we're to do that.

Michael Cho (VP and Equity Research Analyst)

Perfect. Thank you so much.

Paul Shoukry (President and CFO)

Thank you.

Operator (participant)

The next question is Brennan Hawken, UBS.

Brennan Hawken (Managing Director and Senior Equity Research Analyst)

Good afternoon. Thanks for taking my questions, and congrats to both of you. Curious about the idea now that we're starting to see capital markets get going, activity begin to pick up, how should we think about incremental margins in that business for you given how weak the profitability has been? I would assume that they would be pretty good, but could you help us get a sense of what an incremental dollar of revenue would mean from an incremental margin perspective?

Paul Shoukry (President and CFO)

Yeah. I think maybe the only thing we can really point to is the margins peaking out in the mid-20s. I think it was 25%, 26% in 2021, 2022 in that time period. And so there's a lot of upside to the margins from where we are today. And just remember, this quarter was impacted by $20 million of deferred comp amortization from those record years as well, which will run off over the course of the next 12-18 months because those are three-year deferrals typically. So there's a lot of upside. We have a very strong franchise now in investment banking. The pipelines and the leading activity levels are good. Closings are difficult to predict just in this market environment, but we think there's a lot of upside to both the top and bottom line in our capital markets segment.

Paul Reilly (Chairman and CEO)

If we did, we'd be taking a lot different actions, and we've taken so far. I think we've prudently cut expenses and making sure that we have the right people on the field. But we think we have a great team, and as the market recovers, believe they'll do very well.

Michael Anagnostakis (VP)

Sure. Fair enough. And then thinking about the improving environment, if we continue to see signs of recovering strength in your core businesses, will that increase confidence and improve the likelihood for a better outlook for capital returns and buybacks?

Paul Reilly (Chairman and CEO)

Yeah. I think our capital philosophy hasn't changed in that we would love to add to the business, invest in the business first. And certainly, our recruiting is an ongoing large investment, which is certainly, I don't think anyone thinks is a bad investment. We're looking for M&A opportunities and are active in the markets but can't predict the timing. And we're not. Certainly, we've committed to dividends and buybacks and be opportunistic.

But we don't want the capital levels. We think that these levels are high, and we want to manage them. And so we will be meeting with the board, and I think by the Analyst & Investor Days, may have better insight to how we may do that. But to the profitability, we're not trying to hoard capital. It doesn't benefit us. But we'll always be higher probably than most firms, but this is a pretty robust level.

We acknowledge that. So, I think our commitment for those on this call thinking we'd do a buyback that averaged $120-plus, you wouldn't have thought we would have done that even a quarter or two ago. So we are trying to manage the levels.

Michael Anagnostakis (VP)

Appreciate that color.

Operator (participant)

The next question is Dan Fannon, Jefferies.

Dan Fannon (Managing Director and Senior Equity Research Analyst)

Thanks. Good evening. Just to follow up on that last question, can you talk about M&A and really what you think makes the most sense in terms of strategic fit from a product, geography, or scale perspective?

Paul Reilly (Chairman and CEO)

Yeah. We could go into a long, I mean, that's a hard question to answer quickly. I mean, our primary geographies are North America and then Europe. We look for the best opportunities. In each business, the opportunities are different. In our Private Client Group, it's really North America and the U.K. Our M&A Group is much broader. We're on the continent, not really in Asia, but not against M&A capability more than we have today. Asset Management, particular products, and we can go on and on and on. So we think in all the areas of the firm, there are areas that we can grow that strategically help us through acquisition, but that would be a lot longer and a lot more detailed than that general question. So each business has different needs. M&A, we think there are areas that we could expand.

In the Private Client Group, we think our geographies we've done well in the Northeast but could do more, and we're really focused on growing in the West more robustly. So the answer's a lot of areas if we can find the right opportunities and make them a reasonable return for shareholders that we would execute on.

Dan Fannon (Managing Director and Senior Equity Research Analyst)

Understood. And then as you think about NII going forward, and you had mentioned the kind of cash trends and some stabilization there, on the loan growth side, any signs of pickup and potential demand there? Or as you think about the rest of this year, what are the kind of most sensitive factors as we think about that line item in terms of up or down?

Paul Shoukry (President and CFO)

Yeah. As you know, loan growth has been tepid not only for us but for the really entire banking industry since rates started rising over the last 12-16 months. A lot of that is due to just the higher rate environment and a lot of corporations and investors coming into this environment flush with cash. We are optimistic about loan growth going forward. We don't know exactly when that inflection point will hit, but we do think that there's demand building up both for companies who will eventually get back engaged in M&A and other investing activities as well as Private Client Group investors.

So one of the reasons that we are maintaining strong capital and funding positions and a lot of flexibility is to be in a position of strength when that loan growth does resume because it is just a matter in our minds, just a matter of timing for when that loan growth recovers. And so we're well positioned for it. We don't know when that will come back, but we're optimistic about the growth going forward.

Dan Fannon (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Up next is a question from Mark McLaughlin, Bank of America.

Mark McLaughlin (Research Analyst)

Good afternoon. Thanks for taking my question, and congratulations to you both. I wanted to get your take with regard to advisor movements. What have you guys been seeing on your ends in terms of advisors leaving wirehouses and also competition between independent broker-dealers? Is there anything to call out?

Paul Reilly (Chairman and CEO)

Just that the competition is still robust. I mean, the advisor movement, especially of large teams, has been where we've been focused has been big. I think private equities investment into the RIA space has caused more movement too and to outside of the independent broker-dealers and employee broker-dealers. So that's kind of a new factor in force. So part of the reasons why a decade ago, we started investing to have our RIA channel so we could be competitive. So yeah. I mean, I can't remember a time where there hadn't been a lot of competition, but we still see wirehouse movement in our favor. I think that you're seeing more people not reporting advisor count for that reason, but we see a lot of activity. But it's competitive. There are a lot of people out there competing, and at the end of the day, it's not just money.

I think what people think the highest bidders get it. If you look at ours, we just saw the latest industry source. We're still lower than most firms by a fair margin in our transition assistance, but it's clearly up from a couple of years ago, so reflecting the competition. So it's competitive, but we believe our platform is what lands people and our culture. And so far, it's continuing. But it's not easy. It's hard work.

Mark McLaughlin (Research Analyst)

Thanks. I appreciate that color. And then I'm sure we'll get an update on this at the investor day, but with respect to RCS, what are you guys seeing in terms of advisors moving, especially the size of those advisors? I realize for the most part, it's usually advisors once they reach kind of sort of a critical mass. Are you seeing the size of the advisors wanting to move over to RIA kind of move down in scale?

Paul Reilly (Chairman and CEO)

In the market, there's certainly a lot of movements of the smaller teams that want to become RIAs and big teams that have the infrastructure to be RIAs. So the movement's really kind of across the board. Larger teams, one of the positives and challenges of RIAs is that you can affiliate with a firm but have multi-custodians. So I think that if you look at large RIAs at some of the big custodial firms, they still move assets sometimes. So you don't have to have the firm affiliate with you to be an asset gainer too. So the dynamic of that, it's a much more dynamic industry in that way. It's kind of all or none in the registered rep side, and it's a fight for wallet on the RIA side.

Mark McLaughlin (Research Analyst)

Great. Thank you.

Operator (participant)

We'll now take a question from Kyle Voigt, KBW.

Kyle Voigt (Managing Director and Senior Equity Research Analyst)

Hi. Good evening. I just have a couple of follow-ups. Maybe first, just to follow up on Dan's M&A question. And I guess just to be clear on the capital point, do you feel like you have enough capital flexibility today with the current leverage ratios to act on the M&A opportunities that you're seeing in the market? Or is the near-term guidance on buybacks to offset dilution and imply continued near-term capital build due to maybe wanting a bit more flexibility due to the size of the acquisition opportunities that you're seeing?

Paul Reilly (Chairman and CEO)

I think we're in the ballpark of flexibility. The question just is that question, do you see something where it could be bigger? But you can't just wait and wait and wait with total capital. We've drifted up once, if I remember right, Paul, 14% or something. And people are saying, "What are you doing?" But we had three deals that we executed in one year that brought it down. So it hit 10 then, and it's been building back up. So if it was as smooth and we could forecast it, it'd be really easy, right? But if M&A kind of hits, deals sometimes come almost out of the blue or someone just decides they're going to sell. And so that's why if we average up, sometimes we feel like the market will have opportunities that we can foreshadow. But that doesn't mean we're right.

There's one thing to enter into a discussion. It's another thing for a seller to agree it's time and to pick us and to close. So that's the challenge. But many of the deals that we have closed is because we could execute, and we were not only were they attractive to us, but there was a certainty of closing both financially and that we had enough cash on hand that it wasn't a leap that we and the financing because we're not leveraged isn't a leap that we can close very, very quickly. So I wish I could give you a science to it. There's a little more art to it, and we would love to be as clear as we can on this. But if we had the magic formula, we would let you know or at least package it and sell it to our competitors.

Kyle Voigt (Managing Director and Senior Equity Research Analyst)

That's very helpful. Thank you. And then just for a follow-up on the loan balances, I think you gave some commentary on SBLs a few quarters ago that you were actually seeing some decent demand. And some of the acceleration in that book of the growth of that book that you were seeing in the calendar third quarter was due to some paydown slowing. So I guess a bit surprising to see that growth has stalled out here in the past quarter. Just wondering if you could provide any additional color on what's happening in the SBL book specifically, which is flatlined here. And then do you think the market really just needs to wait for rates to move lower before demand broadens again?

Paul Shoukry (President and CFO)

It was flattened for us, as you point out, sequentially, as it was, I think, for the rest of the industry, at least those who've reported thus far. So I'm not sure you necessarily need to wait for rates to decrease. It's just maybe a stabilization of rates even as borrowers get used to sort of the new norm. So I think that's really what we're seeing as we transition from historically low rates to our current levels at an unprecedented pace. It's just a lot of people are still getting used to and companies are still getting used to this level of rates.

Kyle Voigt (Managing Director and Senior Equity Research Analyst)

Great. Thank you very much, and congrats again to both of you.

Paul Shoukry (President and CFO)

Thanks, Kyle.

Operator (participant)

Your next question comes from Michael Cyprys, Morgan Stanley.

Michael Cyprys (Managing Director and Head of Brokers, Asset Managers and Exchanges Equity Research)

Hi. Thanks for taking the question. Just wanted to ask on organic asset growth. I think in the past, you've suggested that most of the growth and the negative that you're seeing is from recruiting. Just curious how you think about an opportunity set over time from maybe providing advisors with more services to enhance their efficiency and unlock growth from the installed advisor base to grow same-store sales.

Paul Reilly (Chairman and CEO)

I think our focus internally is first to our existing advisors, both technology and capabilities, to make sure they're spending as much time as they can with their clients and acquiring new clients. It makes the advisors happy. It means their clients are happy, and it's the cheapest growth for us. So our focus and it develops the platform for other advisors to want to come to. So the tools we put out, the technology we put out, the back-office modernization, all of that is to help advisor productivity. And that does drive a lot of our growth and what we do and keeps advisors here. This is a market, and frankly, the market's been this way for a while where almost any advisor could leave and get a lot of money for their book and start somewhere else. But they stay here because of that.

So that's a big focus of ours. That's where we pay a lot of attention. Number one is on retention. And I think part of our growth rates have been driven by our retention rates too and our recruiting. So I'm not sure if there's more to the question, but it's kind of focus number one is to make the existing advisors happy and productive.

Michael Cyprys (Managing Director and Head of Brokers, Asset Managers and Exchanges Equity Research)

Great. And then just on the loan book, just curious where you think you're underpenetrated as you look at the portfolio today. And if you look out over the next couple of years, how would you sort of like the composition and size of the book to evolve? And are there any additional capabilities you feel you may need to build out?

Paul Reilly (Chairman and CEO)

Yeah. There's two pieces to that. Are we underpenetrated compared to wirehouses in terms of loans, the clients? You would say yes. But our other thing is we take a position with advisors. Your job is to do the right thing for your clients. And if our loans are if you like our mortgage loans, use them. If you don't, if something's better else for your clients, use it. So our job is to provide competitive products. And your advisor's job is to figure out what's appropriate for their client to use. So we do not put quotas. We do not put incentives. Some people have product incentives for their top trips, or their managers have quotas to try to hit. We have none of that. We just want advisors to do what's best for the business.

And then we try to develop compelling products and services that they and educate that they can use to help their clients. So our numbers industry-wise are lower, but we understand why because we're not pushing it. We do it through education, not through trying to use incentives to get them to do it. So now you can talk about from a capital allocation standpoint, that might be different from our side at what loans we'd like to grow. The good news is for us is we like the Private Client Group loans, the SBLs, the mortgages, the other things that they have not only SBLs have our best risk-adjusted return. They're secured, and they're good for clients, and they're flexible for clients. So we're matched up that way.

Our challenges are more where do we want to go on whether it's the commercial banking section or how much do we want to invest in securities and other that are more of a financial decision and long-term investment. Penetration is a good question. We are lower, but we don't try to force it. We want our advisors to do it if it's the right thing for their clients.

Michael Cyprys (Managing Director and Head of Brokers, Asset Managers and Exchanges Equity Research)

Great. Thank you.

Operator (participant)

Next up is Bill Katz, TD Cowen.

Bill Katz (Senior Equity Research Analyst)

Okay. Thank you very much, and congratulations, everybody. Question for you just on the NIM, the Net Interest Margin. Just sort of wondering if you could talk a little bit about maybe where the exit level might be for the new quarter. And just given sort of the reinvestment rates of what might be rolling on, rolling off, and in a world of a tepid type of loan backdrop for now, how do you sort of see that playing out if the sorting starts to ease a little bit as well? Thank you.

Paul Shoukry (President and CFO)

Yeah. I would say a lot of the shift in cash balances from on-balance sheet to third-party banks that really occurred in the last couple of quarters. So the NIM going forward is going to be more driven by, one, the absolute level of rates and what happens with short-term rates going forward, and also two, the asset mix to the extent we're a little heavy right now on the bank balance sheet and cash balances, going back to the comments I made earlier about wanting to be in a position of strength when loan demand recovers. And so that brings down the NIM, all else being equal. But it's at least a push, if not a modest positive, to NII, Net Interest Income, and earnings.

But in the meantime, it does drag down the NIM a bit as we hold more cash balances than we think we would need on a run-rate basis. So as far as the jumping-off point, I think it is a relatively stable number from where we were this quarter. We're not proactively shifting cash balances off balance sheets of third-party banks like we were doing over the last couple of quarters. So I think that's all fairly well reflected this quarter.

Bill Katz (Senior Equity Research Analyst)

Great. That's helpful. Just try and triangulate combination of the senior executive leadership changes, your comments, Paul Shoukry, about sort of the platform being in a very good spot with scale. Where are you investing right now as you think through maybe the comp or non-comp side? And how might the strategic vision be evolving as you sort of migrate to the next generation of leaders? Thank you.

Paul Shoukry (President and CFO)

Yeah. I mean, we have been consistently investing in all of our businesses. First and foremost, the largest business by far is our Private Client Group business. We don't anticipate that changing. That's where the vast majority of our investment dollars go. We also invest heavily in growth and the capital markets, asset management, and the bank businesses. They're all great businesses. If you look at the last three years and even the first half of this fiscal year, being able to generate record revenues and earnings in very different market environments is a testament and a reflection of having a diversified business model. We're going to continue to invest in very high service levels, continue to invest in technology to enhance the service levels and create more efficiencies for advisors so they could spend more time with clients, as Paul was touching on earlier.

So kind of maybe a long-winded way of saying there's not going to be a dramatic change because everything is really working very well and has been since our founding in 1962, being focused on essentially the same businesses that we're focused on today. So that's sort of the kind of plan going forward.

Bill Katz (Senior Equity Research Analyst)

Thank you. Congrats again.

Operator (participant)

Our final question today will come from Devin Ryan, Citizens JMP.

Devin Ryan (Director of Financial Technology Research and Senior Equity Research Analyst)

Hey. Yeah. Thanks so much for squeezing me in. And obviously, want to echo the congratulations as well to Paul Shoukry and the others on the leadership team not on the call. And to Paul Reilly as well. The stock, I think, was trading at about $10 when you joined in 2009. I remember those days pretty well. And so unquestionably, a successful run and a well-earned transition. So congratulations. I want to real quick a couple here on just fixed income brokerage. You had the very significant step-up in the first quarter off of the back half of 2023, and then that took a step back again in the second quarter.

Just curious, was that just a shift in activity in depositories just with the changes in rate expectations, or was there something else going on there and just how to think about that business relative to maybe the second quarter jumping-off point?

Paul Shoukry (President and CFO)

Yeah. A couple of quarters ago, the rates came down quite the yields came down quite a bit and gave depositories a repositioning opportunity. And on the call last quarter, I think we talked about that repositioning opportunity being somewhat episodic in nature. And throughout the course of this quarter, rates actually went up again. And so the underlying factors that Paul discussed on the call in his prepared remarks was that depositories are still struggling to grow deposit balances or keep deposit balances flat. And so they're going to be prudent and slow to reinvest in securities in this environment. And that's the largest part of our fixed income business. So we continue to expect some headwinds there until deposit balances start growing again and banks feel more confident investing in their securities portfolio.

Meanwhile, SumRidge has been nice in that it has diversified the fixed income revenue streams with its corporate trading technology-enabled capability. But that business thrives on volatility. And this past quarter, spread and rate volatility wasn't as significant. So they didn't have sort of the uplift that they had in preceding quarters.

Devin Ryan (Director of Financial Technology Research and Senior Equity Research Analyst)

Okay. Terrific. I'll just leave it there in the interest of time here and follow up offline. But thanks very much. Appreciate it.

Paul Shoukry (President and CFO)

Thanks, Devin.

Operator (participant)

At this time, I would like to hand the conference back to Paul Reilly for any additional or closing remarks.

Paul Reilly (Chairman and CEO)

Great. We appreciate you all coming on. And good quarter. We're already on to the next quarter. And I think we've got some good tailwinds. So we look forward to it. And I'm not sure I look forward to hearing all these generational comments, how old I am, how ready Paul is. But he is ready. And so I think you're going to see a lot of good things from Raymond James. So thanks for joining us today.