Raymond James Financial - Earnings Call - Q3 2020
July 30, 2020
Transcript
Operator (participant)
Good morning and welcome to Raymond James Financial Fiscal Third Quarter 2020 earnings call. My name is Bridget, and I will be your conference facilitator today. This call is being recorded and will be available for replay on the company's investor relations website. Now, I will turn the call over to Kristie Waugh, Head of Investor Relations at Raymond James Financial. Please go ahead.
Kristie Waugh (Head of Investor Relations)
Thank you, Bridget. Good morning, everyone, and thank you for joining us on this call. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman and Chief Executive Officer, and Paul Shoukry, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James's investor relations website. Following their prepared remarks, the operator will open the line for questions. Please note certain statements made during this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated results of litigation and regulatory development, impacts of the COVID-19 pandemic, or general economic conditions. In addition, words such as believe, expect, could, 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 the forward-looking statement. We urge you to consider the risks described in the most recent Form 10-K and subsequent Form 10-Q, which are available on our investor relations website. During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our press release and presentation. With that, I'm happy to turn it over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?
Paul Reilly (Chairman and CEO)
Thanks, Kristie. Good morning, everyone, and thanks so much for joining us. This is our second call during the COVID crisis, and with the first one, we're a little more geographically scattered, so technology and internet's willing and able. We should hopefully have a good call here. I'm really proud of how the firm has performed during this period with the COVID crisis, the social justice issues. Our associates and advisors have been amazing. The advisors have focused on their clients, growing their business with great net new asset numbers. Our associates have really worked hard to support them, and all of Raymond James has come together to discuss and make commitments on the social justice issue. In August is Raymond James Cares Month. To see how we're helping those needy and smaller groups virtually is really inspiring.
Getting into the numbers, despite lower short-term interest rates and economic uncertainty associated with COVID-19, I'm really pleased with the results for the third quarter. Fixed income generated record revenues and pre-tax income. PCG assets and fee-based accounts increased 16% sequentially, and we continue to recruit numerous high-quality financial advisors, reaching a new record of 8,155, up 251 over June of 2019. We recruited 113 financial advisors domestically during this quarter alone, which represents $71 million of trailing 12 production at their prior firms. All of this during the pandemic and with our offices closed for much of that period. We're also entering the fourth quarter of a healthy investment banking pipeline. Even with these market changes and uncertainty, we are continuing to focus on servicing our advisors and clients and growing all of our businesses.
We generated quarterly net revenue of $1.83 billion, which was down 5% as compared to prior year's fiscal third quarter and 11% compared to the preceding quarter. The year-over-year decline in quarterly net revenues was largely driven by the impact of short-term interest rates, as we all know, both on net interest income and RJBDP fees of the third-party banks. Sequentially, quarterly net revenues declined due to both short-term interest rates and lower Asset Management and related administrative fees, which were primarily based on the Private Client Groups entering the quarter with fee-based accounts lower.
We generated quarterly net income of $172 million or $1.23 per diluted share, which was down 34% compared to net income in the prior year's fiscal third quarter, largely due to the bank loan loss provision of $81 million during the quarter compared to a $5 million benefit in the prior year's fiscal third quarter. Despite a sequential decline in quarterly pre-tax income, net income increased 2% sequentially as significant non-taxable gains in the corporate-owned life insurance portfolio reduced the effective tax rate to 13.1% for the quarter from 29.3% in the preceding quarter. On an annualized basis, our return on equity for the quarter was 10%, and return on tangible common equity, or ROTCE, was 10.9%.
Moving to slide four, as equity markets rebounded from the March lows, client assets under administration grew 13% sequentially to $877 billion, and PCG assets and fee-based accounts grew to 16% sequentially to a near record $443 billion, which will provide significant tailwinds for Asset Management fees in the fiscal fourth quarter. Following the surge in March, client cash balances remained relatively stable, ending the quarter at $51.9 billion. And despite the continued disruption caused by travel restrictions and office closures, we reached a record number of PCG financial advisors of 8,155, 251 over June of 2019, and 7 over March of 2020. This is a good result compared to many firms which experienced a net decline. We accomplished this despite many of these offices being closed during the quarter, and we've had many advisors commit that pushed their commitment dates back, waiting for the offices to reopen.
Net bank loans of $21.2 billion grew 3% over the prior year's fiscal third quarter, but declined 3% compared to the preceding quarter. The sequential decline includes proactive sales of corporate loans totaling $355 million, which we'll discuss in more detail in the call. The bank continued to experience healthy growth in residential mortgages and security-based lending to our Private Client Group clients. Moving to the segment results starting on slide five, the Private Client Group generated quarterly net revenues of $1.25 billion. Quarterly net revenues declined 8% compared to the prior year's fiscal third quarter, and primarily due to lower RJBDP fees from third-party banks, a decline in net interest income, and lower brokerage revenues.
The 16% sequential decline in quarterly net revenues was attributable to the aforementioned items as well as lower Asset Management fees and related administrative fees, which were primarily based on Private Client Group assets and fee-based accounts being lower at the beginning of the quarter. Quarterly pre-tax income for the segment was down $91 million, down 35% on a year-over-year basis and 46% sequentially. PCG assets increased along with the equity markets, and while recruited production increased sequentially, the net addition of financial advisors was negatively impacted by the COVID-19 crisis, which disrupted a lot of the transitions, particularly in the employee channel due to office closures, and slowed the net addition of trainees as testing centers were closed during the quarter but are now open.
It's also important to note that in the net number, a number of advisors leaving for retirement, leaving the industry, or moving to our RIA channel affect the total net advisor account, but we retain almost all those assets during those transitions. The net advisor growth in the independent channel remains strong and is tracking closely with our fiscal 2019 results. As home office visits for prospective advisors have transitioned to 100% to virtual, advisor recruiting activity has continued to recover, and the pipeline remains solid across all of our affiliation options. Over the past four quarters, financial advisors representing approximately $290 million of trailing 12 productions and nearly $43 billion of assets at their prior firms have affiliated with Raymond James domestically, which is a very strong result.
Moving to slide six, the Capital Markets segment generated record revenues driven by higher fixed income brokerage revenues, debt underwriting revenues, which more than offset lower M&A revenues. The 71% year-over-year increase in fixed income brokerage revenues and the record results for our fixed income really reflect our leading position in the small to mid-size depository client segment, which has experienced an increase in activity. Meanwhile, M&A revenues declined due to economic uncertainty and decreased activity across certain industries. However, clients remain engaged, and the fourth quarter pipeline looks good. On the next slide, the Asset Management segment generated net revenues of $163 million and pre-tax income of $60 million during the quarter.
Financial assets under management grew to $145.4 billion, increases of 2% on a year-over-year basis and 13% sequentially, primarily attributable to higher equity markets as the S&P Index appreciated 20% during the quarter, which was partially offset by net outflows to Carillon Tower Advisers. On slide eight, Raymond James Bank generated net revenues of $178 million, or 15% decline from the preceding quarter, largely attributable to the 73 basis points decline in the bank's net interest margin during the quarter, reflecting the rapid and significant decline of LIBOR. Pre-tax income of $14 million declined 90% to the prior third quarter, fiscal third quarter, and was flat sequentially. The year-over-year decline in the pre-tax income was primarily due to the $81 million bank loan loss provision during the quarter. On slide nine, we can look at the history of Raymond James Bank's key credit metrics during the financial crisis.
You can see that Raymond James Bank, consistent with the entire banking industry, enjoyed several years of positive credit trends since the financial crisis. While non-performing assets declined during the quarter, net charge-offs were $72 million, including $61 million related to proactive sales of corporate loans during the quarter. The other $11 million of charge-offs were attributable to one corporate loan. The allowance for loan losses as a percentage of total loans increased to 1.56% from 1.47% in the preceding quarter. And for the corporate portfolios, the allowance for loan losses as a percentage of C&I loans ended the quarter at 2.4%, and for CRE loans, 2.8%. If economic conditions continue to deteriorate, we would expect adding to these reserves, but certainly the outlook is uncertain.
Looking at the fiscal year-to-date results on slide 10, we generated record net revenues of $5.91 billion during the first nine months of the fiscal 2020, up 3% over the same period. Private Client Group, Capital Markets, and Asset Management segments generated record net revenues, and Capital Markets and Asset Management segments generated record pre-tax income during the first nine months of the fiscal year. Again, these results highlight the advantage of our diverse complementary businesses. Earnings per diluted share of $4.33 declined 18% compared to the first nine months of fiscal 2019, primarily due to lower interest rates and higher bank loan loss provisions. And now for a more detailed review of the financials, I'm going to turn it over to Paul Shoukry. Paul?
Paul Shoukry (CFO)
Thanks, Paul.
Starting with revenues on slide 12, as Paul stated, we generated quarterly net revenues of $1.83 billion, which were down 5% on a year-over-year basis and 11% sequentially. I'll touch on a few of the revenue line items. Asset Management fees were down 1% on a year-over-year basis and 14% sequentially, commensurate with the sequential decrease in fee-based assets entering the fiscal third quarter, which will be reflected in the fourth quarter as these assets are billed at the beginning of each quarter based on balances at the end of the preceding quarter. But remember, the Asset Management line is also driven by financial assets under management, which increased 13% sequentially. Account service fees of $134 million declined 27% year-over-year and 22% sequentially, primarily reflecting a decrease in RJBDP fees from third-party banks due to lower short-term interest rates, which I will detail shortly.
And jumping down to other revenues, they were up substantially from the preceding quarter as the second quarter included valuation losses of $39 million associated with our private equity investments, largely due to the equity market decline last quarter. Moving to slide 13, clients' domestic cash sweep balances, which are the primary source of funding for our interest-earning assets and the balances with third-party banks that generate RJBDP fees, ended the quarter at $51.9 billion, representing 6.6% of domestic PCG client assets, as client assets increased substantially while cash balances remained relatively stable throughout the quarter following the surge in March. And as we mentioned on the prior quarter's call, we shifted about $4 billion of cash balances from Raymond James Bank to third-party banks in April.
But as we look forward, we will likely redeploy a portion of these balances back to the bank over time as we plan on continuing purchases of agency-backed securities, which ended the quarter at $5.6 billion, and we will also resume corporate loan growth when there's less market uncertainty surrounding the COVID-19 pandemic. On slide 14, the top chart displays our firm-wide net interest income and RJBDP fees from third-party banks on a combined basis, as these two items are directly impacted by changes in short-term interest rates. As you can see, the rate cuts totaling 225 basis points since August of 2019 have put significant pressure on these revenue streams, which on a combined basis are down $120 million compared to the prior year's fiscal third quarter, despite loan growth at Raymond James Bank and the significant year-over-year increase in client cash balances.
Given that these revenues are not directly compensable, the significant decline has created headwinds for our compensation ratio and pre-tax margins, as we will discuss on the next few slides. On the bottom of slide 14, it shows our bank's NIM decreasing to 2.29% this quarter. This sequential decline was predominantly caused by the rapid decline in LIBOR, which is about lower now than it was during the last earnings call. Based on LIBOR at the current level, we would expect the bank's NIM to decline to 2.1%-2.2% over the next quarter or two, which will also be impacted by how quickly we grow the securities portfolio at Raymond James Bank. On the bottom right portion of the slide, you can see that the yield on RJBDP fees from third-party banks fell to an average of 33 basis points during the quarter, as we expected.
We would expect average yields to remain close to 30 basis points over the near term. So when we think about bank NIM going forward, as we shift more cash from third-party banks to Raymond James Bank to grow, even though we would earn more on a consolidated basis. For example, today we earn around 30 basis points with third-party banks, as I just described, and we are earning around 1% on new securities purchases at the bank. So somewhere around a 65 basis point pickup for the firm net of FDIC insurance expense. But of course, we are taking some duration risk and tying up some capital in return for that benefit. Moving on to expenses on slide 15. First, compensation expense, which is by far our largest expense. The compensation ratio increased sequentially from 68.8% to 69.6% during the quarter.
The compensation ratio was negatively impacted by a higher proportion of compensable revenues as lower interest rates negatively impacted the non-compensable revenue streams we discussed on the last slide. Partially offsetting that negative impact was a lower compensation ratio in the Capital Markets segment, thanks to very strong fixed income brokerage revenues. On to non-compensation expenses. Non-compensation expenses during the quarter of $359 million decreased sequentially due to a lower loan loss provision and lower business development expenses as travel and conferences were halted by COVID-19. Taking a step back for a moment, when we entered the year, we were well-positioned for market and economic disruptions and continued to effectively serve advisors and clients throughout the pandemic and resulting economic disruption. Our success weathering this difficult period has been enabled by the significant investments in our infrastructure over the past several years.
However, the unexpected swing in interest rates and the uncertainty that comes with a global recession require us to evaluate ways to reduce costs and find efficiencies to remain well-positioned for future growth and success. To that end, we are currently engaged in a firm-wide process of evaluating both compensation and non-compensation expenses to improve efficiency while maintaining our high service standards. Importantly, we plan to continue making growth investments during this period, for example, by recruiting financial advisors and other revenue-generating producers. We also continue investing in our support platform, robotic automation, and integrated and paperless processes to continue enhancing the advisor-client experience. Based on lessons learned during the crisis, we also anticipate our real estate needs will evolve as we consider more flexible strategies over the long term.
While we are far along in this process, we are not prepared to provide any efficiency targets, guidance, or timelines on the call today, but the goal is for these initiatives to yield significant efficiencies for the firm, which is critical so that we can continue investing in growth. Slide 16 shows the pre-tax margin trend over the past five quarters. Pre-tax margin was 10.8% in the fiscal third quarter of 2020, negatively impacted by lower short-term interest rates and the large bank loan loss provision. On slide 17, at the end of the fiscal third quarter, total assets were approximately $45 billion, declining 10% sequentially. This decrease was primarily attributable to shifting client cash balances from the bank to third-party banks following the surge in March, as I discussed earlier. Our liquidity remains very strong.
Cash at the parent was more than $2 billion, and we also have an undrawn $500 million unsecured committed revolver, which doesn't mature until 2024. So right now, we have about $1 billion of excess cash at the parent over our conservative targets, but we are intentionally maintaining even more cash than we typically hold, given the high degree of market uncertainty. So with cash at the parent of more than $2 billion, a total capital ratio of 26%, and a Tier 1 leverage ratio of 14.5%, we have substantial amounts of capital liquidity with plenty of flexibility to be both defensive and opportunistic. Slide 18 provides a summary of our capital actions over the past five quarters, where we returned approximately $709 million back to shareholders through dividends and repurchases under the board's authorization.
Share buybacks have been suspended since mid-March, and $537 million remains available under the board's previously disclosed repurchase authorization. With our strong capital and liquidity position, we plan on maintaining our current dividend, and we also likely will resume share repurchases of up to $50 million per quarter just to offset the share-based compensation dilution. But we will still wait for more market clarity before we do a larger amount of opportunistic repurchases. On the next two slides, we provide additional detail on the bank's loan portfolio. Slide 19 provides some detail on Raymond James Bank's asset composition. In the pie chart, you can see we have a really well-diversified portfolio with a focus over the past few years to really grow residential mortgages and securities-based loans to Private Client Group clients, as well as significantly increase the size of the securities portfolio.
We have not yet set a new target, but we do plan on continuing purchases of these securities, which are mostly agency-backed. So we have a much more diversified portfolio now than we did before the last financial crisis. And within each category, we have a significant amount of diversification as well, as you can see on the slide. As we talk about on the next slide, our concentration in some of these COVID-exposed industries has decreased sequentially as we proactively sold certain loans. This slide includes some other facts and statistics on other loan categories, but in summary, we feel good about the bank's loan portfolio. With that being said, it is important to remember that we are still in the middle of a global pandemic.
So as confident as we are about the composition of the loan portfolio and our loan underwriting and monitoring processes, we have to acknowledge that we could experience significant credit deterioration if economic conditions continue to deteriorate. Moving on to slide 20. During the quarter, we opportunistically sold $355 million of corporate loans associated with industries that we believe are most vulnerable to the COVID-19 crisis. Having a secondary market to proactively reduce credit exposures is a real advantage of our C&I lending strategy. The average selling price of these loans was around 82% of par value, which resulted in charge-offs of $61 million during the quarter. But we believe proactively taking that hit to reduce our credit exposure and downside in the most vulnerable sectors over the long term is prudent given the high degree of economic uncertainty.
We plan to continue selectively selling corporate loans in the secondary market to further reduce our exposure to certain sectors. Thus far in July, we have sold approximately $100 million of corporate loans in these sectors at an average price of 93% of par value as prices in the secondary market have continued to improve significantly. Before I turn it over to Paul for his closing comments, I want to remind everyone that after much consideration, we postponed the analyst investor day again. Given the continued economic and market uncertainty around the COVID-19 crisis, it makes it difficult for us to provide much meaningful forward-looking commentary, so we did not want to waste your time. However, we know analysts and investors have been asking us to disclose net new assets, and since we planned on providing that at our analyst investor day, I'll go ahead and cover that now.
As you can imagine, technology priorities have shifted significantly since the COVID pandemic, but we have been able to make some good progress on this metric thanks to the fantastic team working on it. But it'll still take us some more work before we would consider providing this metric on a regular basis. We define net new assets as total domestic, again, domestic PCG client inflows, which includes financial advisor recruiting, less total domestic PCG client outflows. Inflows also include dividend reinvestments and interest, while outflows include commissions and fee-based payments. Fiscal year to date, we have generated net new assets of $41 billion and annualized growth rate of 7.3%. We believe this impressive result, even during the COVID pandemic, reinforces that Raymond James is one of the industry's leaders in growing organically. With that, I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?
Paul Reilly (Chairman and CEO)
Great.
Thanks, Paul. And I know there's a lot to cover on this call, so I'll get through a little outlook and we'll open for questions. So as for the outlook, we'll continue to face headwinds from lower short-term interest rates and the uncertainty around the COVID-19 pandemic. In the Private Client Group, our financial advisor recruiting pipeline is strong across all of our affiliation options. And the segment's going to benefit by starting the fiscal fourth quarter with a 16% sequential increase of assets and fee-based accounts. And just to note in that recruiting that we've had a lot of people who have committed much earlier in the March, April, May timeframe who have deferred their openings and moving before they joined because of the pandemic. So hopefully those will show up this coming quarter also.
In the Capital Markets segment, despite muted M&A activity in the fiscal third quarter, clients remain engaged and we have a pretty healthy investment banking pipeline. So we wouldn't be surprised to see an improvement in M&A revenues in the fiscal fourth quarter if the market remains relatively stable. And fixed income and brokerage revenues have remained strong thus far in July. Of course, it's always difficult to repeat the record like last quarter, but we view them to be a very, very strong quarter for that segment again, given the market trends. In Asset Management, results will be positively impacted by higher financial assets under management as long as the equity market continues to remain resilient.
And at Raymond James Bank, we expect them to decline, as Paul said, from 2.29% in the fiscal third quarter to somewhere around between 2.1% and 2.2% over the next two quarters, reflecting current LIBOR rates and a higher mix of agency-backed securities. Now, remember, when we move cash from our third-party banks to the bank and agency-backed securities, the bank NIM will go down, but will generate overall for the firm higher net interest income. And therefore, we think it represents an attractive risk-adjusted return for the firm. We are continuing to sell certain corporate loans, as Paul mentioned, and we've been very selective in making new corporate loans given the high degree of uncertainty. But we're continuing to do some new corporate loans, but continuing to originate residential and securities-based loans to our Private Client Group clients.
We have significant capacity and appetite to resume corporate loan growth when we have more economic certainty. With our substantial amount of capital and liquidity, we're confident in our ability to withstand a severe downturn while being opportunistic and front-footed as things stabilize. Our growth opportunities remain unchanged, always retaining and recruiting organically financial advisors in our Private Client Group. And as you've heard from Paul a few minutes ago, our organic Private Client Group, domestic annualized net new asset growth of 7.3% has been strong despite the COVID challenges. Additionally, we are committing and have continued to add senior talent in other businesses such as investment banking. We also continue to pursue acquisitions actively. Economic softness typically surfaces attractive acquisitions as there was during Morgan Keegan in 2012, a little more complicated by COVID and traveling and those kind of issues.
I also want to address social unrest following the tragic death of George Floyd during the quarter. At Raymond James, we've always been a firm focused on social justice and being a good home for all associates and advisors, regardless of their race, gender, or sexual orientation. But the recent social unrest really emphasized the need for us to be even more vocal in public with our advocacy. We just didn't want to write a check, but rather wanted to use financial commitments to activate our associates to really make a difference. To that end, in addition to our financial commitment, we released a pledge to the Black community, which was signed not just by me, but all members of our executive committee, our operating committee, and our board of directors, as well as many other associates across the firm.
One major component of that pledge is to increase Black diversity throughout the firm, which will require significant effort and we know will not be achieved overnight, but we are absolutely committed to delivering on this pledge, and I just want to thank our leadership team, our Black Financial Advisors Network, and our Mosaic Inclusion Network group for all their contributions, and thanks to the so many associates who've raised their hand and said, "I want to help and make a difference." Before we open the lines for questions, I just want to add, I believe we are well-positioned with our diversified business mix, long-term focus, and conservative principles to really emerge from this pandemic. With our strong capital and liquidity positions, we are proactively pursuing strategic acquisitions with a consistent and disciplined approach.
Lastly, I want to thank all of our associates and our advisors again for their invaluable contributions during these trying times and a focus on serving clients. With that, operator, you can open the line for questions.
Operator (participant)
Thank you. As a reminder, to register questions or comments, please press 1-4 on your telephone. Our first question comes from Devin Ryan of JMP Securities. Please proceed with your question.
Devin Ryan (Director of Financial Technology Research)
Great. Good morning, everyone.
Paul Shoukry (CFO)
Hey, Devin.
Paul Reilly (Chairman and CEO)
Hey, Devin.
Devin Ryan (Director of Financial Technology Research)
First question here, just on the net interest income outlook over, if we can, maybe the next couple of years, if we were to hold LIBOR steady. I appreciate the NIM is going to see pressure just on the remixing of the bank. That's going to be, I think, partially a function of how fast the securities book grows. And so I'm just trying to think about parameters around how much you would move from third-party banks and how quickly, how much, as we look beyond maybe even the upcoming quarter, the corporate book could shrink further. And then are there loan areas that could grow reasonably that could maybe provide a little bit of an offset on the NIM, like residential mortgages or something else?
Paul Shoukry (CFO)
Yeah. Well, it's going to be hard to provide guidance over the next one or two years, Devin, but at least for the next one or two quarters, we think the guidance of NIM of 2.1% to 2.2% is our best guess right now based on where LIBOR is. We haven't set a new target yet for how much we're willing to grow the securities portfolio. There's a lot of variables there. And frankly, making a total shift in asset strategy in the middle of a global pandemic is probably not the right time to do it with all the moving parts. Cash has been resilient. Client cash balances are actually still $52 billion now, roughly, even after income tax payments and the fee billing in early July or mid-July. But that could change tomorrow. So certainly not willing to go out one to two years.
But as far as the corporate loan growth goes, it was down, I think, $700 million net during the quarter. We sold $355 million worth, but there's also a lot of net paydowns. And we remain very selective in making new corporate loans. But as we get more market clarity, we certainly have an appetite and the expertise to grow that portfolio. And we can do it pretty rapidly if the market conditions get better. So again, a lot of moving parts can't go out one to two years, but at least over the next one or two quarters, we think 2.1%-2.2% NIM is as good as the guesses we have right now.
Paul Reilly (Chairman and CEO)
Yeah. Let me just add the one thing. I know you understand this, Devin, but as we do move more from BDP to the bank, the NIM may have a little compression, but our overall net interest income will be up. We'll pick up 60-plus basis points on that move and that insurance. So the NIM may be down, but overall net interest income will be up given today's environment. So that's the reason we would do it. We think it's a good risk-adjusted return trade-off.
Devin Ryan (Director of Financial Technology Research)
Right. And just a clarification, because I know historically there's been parameters around the amount of cash you're comfortable having essentially liquid with third-party banks with a short duration versus in the bank, which historically was more of a loan-centric bank. And so as you're building more of a securities portfolio and growing that, are you more comfortable just given the more liquid nature of the securities to kind of, I guess, go beyond kind of historical parameters around the mix of cash held outside the firm?
Paul Reilly (Chairman and CEO)
Yeah. I mean, I think.
I can see that as we go.
Yeah.
Go ahead, Paul.
Paul Shoukry (CFO)
Yeah. I mean, I think so. We grew the securities portfolio a net over $1 billion this quarter. Last time we were in zero-rate environment, we had almost no securities at all. So our appetite for some duration has increased, but we're still going to be more exposed to the shorter end of the curve, which is appropriate given our deposits, our floating-rate deposits, so for the most part. And so we'll continue moving deposits from third-party banks to the bank's balance sheet, but we want to do it in a way that.
Devin Ryan (Director of Financial Technology Research)
Yeah. Okay. Great.
Paul Reilly (Chairman and CEO)
Over the long term.
Devin Ryan (Director of Financial Technology Research)
Got it. Okay. Thanks, Paul. Quick follow-up here just on the expense process that you guys announced here. You went through some of the areas that you're going to kind of continue to invest in and areas that you want to kind of hold expenses, it sounds like, in. Do you have any high-level thoughts right now just around some of the areas where some of those efficiencies could exist within comp or non-comp? And then just any thoughts on timing around the conclusion and execution of it?
Paul Shoukry (CFO)
Like I said, we're not prepared to provide any timelines on today's call. We're far along in the process. And really, we're looking at almost every single expense line item, both compensation and non-compensation expenses.
Devin Ryan (Director of Financial Technology Research)
Okay. Terrific. Thank you very much.
Operator (participant)
Thank you. Our next question comes from the line of Manan Gosalia of Morgan Stanley. Please proceed with your question.
Manan Gosalia (Banks Midcap Research Analyst)
Hi. Good morning. I was wondering, so if we look at your pre-tax margins for this quarter and exclude the elevated provision number, we're back at a roughly 15% number for this quarter. And then maybe there's another 1% or so of headwind from additional NIM pressure that you see. Is that a good way of thinking about your long-term pre-tax margins as a starting point in this rate environment? And then maybe as we're modeling it, baking some benefit from the expense initiatives that you're looking at?
Paul Shoukry (CFO)
Yeah. I think in fairness, we also had subdued business development expenses this quarter. I think they were down something like $30 million year over year. This is typically the quarter where we hit our high watermark just given the timing of our recognition events and conferences. So yeah, there's some offsets. And also capital markets generated, I think, a 19% pre-tax margin, which is a very high margin thanks to the record-fixed income results. So there's some puts and takes. Again, we're not ready to provide, given the uncertainty and these moving parts, a long-term margin target. But yeah, we are focused on those expense efficiencies as well, as you said.
Manan Gosalia (Banks Midcap Research Analyst)
Got it and I guess on the provision side, can you give us an update on how you're thinking about provisions at the bank? I know you mentioned that you could have a little bit more of a build if the environment deteriorates, but if it doesn't, are you comfortable with where the reserve levels are at the bank right now, and I know you're not accounting out of CECL yet, but maybe if you can give any initial guidance on what you think the CECL draw-up will look like at the end of next quarter.
Paul Shoukry (CFO)
Yeah. We try to be as proactive as we can, as we always do, with reserving the loans for the loans at the bank. So we feel good about our allowances now, especially in the corporate portfolio. C&I is 2.4% allowance, and the CRE portfolio is a 2.8% allowance. So with that being said, if economic conditions continue to deteriorate and some of the stimulus measures, which are temporary in nature, don't get extended, then who knows what's going to happen? So there's certainly potential for more allowances across the entire industry, but at this juncture, we just don't know right now. So CECL goes into effect October 1st. Frankly, I don't even know what our provision's going to be in the September quarter under our existing methodology. So we really aren't in a position to provide much guidance under CECL yet.
Paul Reilly (Chairman and CEO)
Yeah. I would say I would add one thing is that you have to recognize, too, most financial institutions haven't been selling loans. So if you were to take the sales of those loans instead of selling them, just put a reserve against them, our reserves even would have been much higher. So we've been proactively de-risking areas that we think, in the transportation and hospitality and the gaming and areas we think have more exposure. We've been actively reducing risk. But again, had we just followed what most of the industry did, our reserves would have even been higher. So we think for where we are, we've done a good job of trying to stay up in front. But again, it just depends on the outlook. In a steady state, we wouldn't be adding. If the economy gets worse, we will add.
We're just going to have to watch, and it's just too unpredictable right now.
Manan Gosalia (Banks Midcap Research Analyst)
Okay. Great. Thank you.
Operator (participant)
Our next question comes from the line of Steven Chubak of Wolfe Research. Please proceed with your question.
Steven Chubak (Managing Director)
Hey. Good morning. So why don't we start off with just a question, Paul, on the strategy regarding loan portfolio sales. And as we look ahead, how large is the remaining pool of loans that you are looking to evaluate for a potential sale? If you could just speak to the timeline also for when you'd look to execute those and whether the increase in criticized loans that we saw in the quarter, is that what's driving at least the decision to execute on some of those? Or what's the, I guess, the prevailing factors that are driving the strategy from here? Yeah. So probably not a shock for most people that Raymond James has taken a little different approach.
Paul Reilly (Chairman and CEO)
As we just looked at the industries that we think are very COVID-dependent and said on a risk-reward basis, there are loans that we are in certain industries we're just not comfortable that we think there's more downside than upside, so one way to do it is just increase your reserves and increase your criticized loans on your balance sheet and just ride through it, but that also limits your flexibility, both regulatorily and the long-term drag, and on those high-risk areas are the ones we decided just to lighten our exposure, and so that's been our strategy. If those loans perform better and some of these industries don't go through prolonged bankruptcy restructurings, we will have made a bad long-term bet. If the case is that they're very long restructurings and it's going to be a tough slog for them, we made a good bet.
And we're willing to do that in what we viewed were the most at-risk industries. So we're looking. We have a list of about another $100 million of loans. Again, the market's been good. That's why we lightened the Paul said with 93%. Whether we would do those or go more, I don't know. We're evaluating that as we go and looking at the pricing risk long-term versus reserves kind of trade-off. And once again, had we just added them to reserves, we've been more flexible. But we think it's the right thing to do from a risk structure basis. So we started out of the box quickly. We've slowed down a little bit, but we're still looking.
Steven Chubak (Managing Director)
As I said, Paul, and just a follow-up from me regarding the securities portfolio.
I was hoping you can give us some sense as to how we should think about the potential pace of additional purchases. I know you've been reluctant to commit to that. But also just given your historical reluctance, I would say, to take on additional duration risk, why the willingness to take this on now during this COVID environment when the incremental spread between taking on that additional duration risk on an agency security versus what you're earning off balance sheet at 70 basis points is actually relatively low relative to prior historical periods?
Paul Shoukry (CFO)
Yeah. Well, we have a significant amount of cash with third-party banks now, $25 billion. So we have more capacity now than we've had historically. And frankly, the demand at third-party banks is continuing to evolve. There was a significant demand in March when there was a lot of revolver fundings, and that dynamic has changed, as you know. And so that demand is not as strong as it was in March. And so we're willing to take some duration, not as much duration as many of our peers, but we're willing to take some incremental duration for that yield pickup. But we haven't again set a glide path just yet. But we're comfortable with that, taking on some more duration. And we hope we're wrong, but we certainly don't think that short-term rates are going to increase anytime soon, especially after hearing Powell again yesterday.
So again, hopefully we're wrong because we're still going to be much more exposed to the short end of the curve.
Steven Chubak (Managing Director)
And just one quick follow-up, if I may, just on the non-comps. You delivered a positive surprise there given the lower biz dev and other expense. We have been seeing similar trends at peers. So putting aside the future expense initiatives, I know you're not ready to speak to. How should we think about the appropriate jumping-off point for that non-comp expense provision base, recognizing that T&E conference spend is going to be on pause for a sustained period of time?
Paul Shoukry (CFO)
Yeah. Well, excluding the kind of elevated provisions, we were guiding to about $325 million per quarter for this fiscal year. And obviously, we've been well below that, excluding the provisions, largely due to, as you mentioned, lower business development expenses. We want that. We expect that to go up over time, not next quarter, but as soon as people are more comfortable traveling, we expect business development expenses to increase. But one of the things that we're looking at as a part of our overall expense initiatives is we've learned that a lot of our advisors are perfectly comfortable and happy doing some of these regional workshops and other product-focused sessions virtually versus physically in person at various locations across the country.
So the Private Client Group leadership team is also looking at this as a long-term opportunity to certainly transition to a more virtual event as well, which could help business development expenses. So again, we're looking closely at the long-term opportunities coming out of this crisis.
Paul Reilly (Chairman and CEO)
Yeah. But it'd be a mistake to think they're all going away. The conferences are get-togethers. The educational trips for the top advisors are all part of our culture and our ability to have feedback with our advisors. So going forward, I think that we'll find there's a lot of trips. Why would I take this two-day trip? Let's do it virtually. But some of those conferences, we do anticipate coming back when it's safe to do so.
Steven Chubak (Managing Director)
That's great. Thanks so much for taking my questions.
Operator (participant)
Thank you. Our next question comes from the line of Chris Harris of Wells Fargo. Please proceed with your question.
Chris Harris (Senior Equity Analyst of Asset Management and Transaction Processing)
Thanks, guys. Paul, you mentioned a reinvestment rate around 100 basis points for agency MBS today. Is it fair to assume that's ultimately where the yield on the entire securities book will go, assuming static rates? And if so, when might you expect that to occur? Over what time frame?
Paul Shoukry (CFO)
Yeah. I mean, we have an average duration of the securities we buy is roughly three years. And so the existing book has an average yield of about 2%. And I'd say the average life on the existing book, remaining life is probably two to three years because, again, the vintage is relatively new of the portfolio as we've grown it. So it'll take some time for that reinvestment yield to sort of reset as we add securities.
Chris Harris (Senior Equity Analyst of Asset Management and Transaction Processing)
Got it. Okay. And just one quick question on the Asset Management segment. Those revenues were down 11% sequentially. And I know it was a volatile quarter in terms of AUM moving around, but that decline seems to be more than potentially average AUM decline. So is there something else that's going on in that segment that dropped the revenues a bit?
Paul Shoukry (CFO)
Yeah. That AUM, Chris, includes both kind of institutional assets under management as well as assets under management, retail assets under management. So I would say roughly 65% of those assets are billed based on the beginning of the period assets. So that's what's driving the variance that you're describing.
Chris Harris (Senior Equity Analyst of Asset Management and Transaction Processing)
Okay. Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Jim Mitchell of Seaport Global. Please proceed with your question.
Jim Mitchell (Senior Equity Analyst)
Hey. Hey. Good morning, guys. Just maybe a quick question on capital management. I understand the uncertainty is holding you back, but how do you think—what are the markers you're looking for? Is it just—do we have to wait for a vaccine for you to feel comfortable putting capital to work? What are the markers, I guess, or is there macro markers that you're looking at? And I guess as an ancillary, does that also mean that as much as you want to do acquisitions, you're holding back to put capital to work there until you have clarity as well?
Paul Reilly (Chairman and CEO)
I think in order to we would have no qualms whatsoever doing an acquisition if we had the right one. So we think we have plenty of capital and ability to do an acquisition for the right one and integrate it. So we don't see that that's not an issue. In terms of stock buybacks, we've agreed that our goal is to go ahead and minimize dilution and restart that program. But I think, given the uncertainty and honestly, even though you have political and regulatory pressure right now on stock buybacks, we don't think it's just not really prudent to start that yet. But more importantly, driven by the economics, if we do enter into a second round of COVID issues like we're seeing in the South, if we do have a really, really tough winter, we may need those.
So if we're buying a producing asset, we're very comfortable doing that, but we're just going to be a little more conservative on outside of dilution doing proactive stock buybacks in this pandemic time. So whether that's a vaccine or feeling trailing off or people getting comfortable with the operating environment, I can't say. It's one of those things I think we'll know when we feel it, but I can't give you an objective this is the answer.
Jim Mitchell (Senior Equity Analyst)
Okay. That's helpful. And then just maybe on the compensation in PCG, when I look at sort of FA compensation to compensable revenues, the percentage did seem to drop quite a bit in the quarter, which was a little surprising. Am I just not thinking about that right? Is there something unusual there? Just trying to get a sense of that sustainable in terms of the lower payout.
Paul Shoukry (CFO)
No. I'm not sure we could speak offline on how you're doing the math, but the payout is still right around 75%. So it's been pretty stable sequentially.
Jim Mitchell (Senior Equity Analyst)
Okay. I'll take a look. We'll talk offline. Thanks.
Operator (participant)
Thank you. And our next question comes from the line of Alex Blostein of Goldman Sachs. Please proceed with your question.
Alex Blostein (Managing Director)
Hey. Good morning, everyone. Thanks for taking the question. Just a couple of follow-ups. I guess if you look at the loan book, can you guys talk about the size of loans that you're ultimately valuing for sale? I know you sold 355 and you sold another 100 so far this quarter, but what's the total amount of kind of riskier loans that you're looking to potentially sell? What are the yields on those loans? And maybe you can talk a little bit about how these loans ultimately made their way onto your balance sheet, whether these were originated or purchased.
Paul Reilly (Chairman and CEO)
Yeah. So again, I said we had about another 100 that we were looking at selling. And again, these are risk-reward. These were loans that are syndicated loans. And in January, we had what we call them pizza parties. The lenders don't think so.
We get them to go through the loan portfolio, the most leveraged, the least performing, and we really, once a year, do an evening on each section of the portfolio, and it really puts the lenders through what I call, it's almost like a flight simulator. We try to crash the pilot to see what they do. We really go through and push really hard. How are these loans? How are they underwritten, and I'll tell you, I felt as good as I have in 10 years about the underwriting. I think they were underwritten well. They were strong. What we didn't underwrite them for was a pandemic and places having zero revenue.
In January, we didn't say the airlines weren't going to fly or nobody was going to fly and no one was going to travel and hotels were going to shut down and restaurants were going to shut down. So it's those areas of those loans. I think the underwriting is strong. It's just we had a circumstance we've never seen in recent 100 years, probably almost in the country. So that's how they got onto the balance sheet. So I don't blame our team. I think they were very conservative. We're just in a very, very unusual time. As Paul said, one of the advantages of the loans we did have is they were marked. We were able to sell them at 93% of par in the last $100 million. And then some of those loans have reserves on top. So the loss of selling is even less than that.
It might be 300 or 400 basis points. So we just viewed the trade-off and the risk. So that next 100 million we sold is more worth it to take the loss now than to hold on to the risk and hope that they would turn around in what most people think is going to be a longer haul in the pandemic. So the yield is, I think, comparable to the rest of the loan portfolio. They weren't the highest yielding loans. They were when underwritten, some of them were lower yielding loans. They were to high credits and industries that just got hit really hard in the pandemic.
Paul Shoukry (CFO)
Yeah. I think just the range of the yield is somewhere around LIBOR plus 175 to LIBOR plus 300 of the loans that we sold in that kind of range.
Alex Blostein (Managing Director)
Great. That makes sense. I guess my question ultimately is, is the $100 million that you mentioned, is that a cleanup and it's kind of gone or you guys will be looking to sell down more?
Paul Reilly (Chairman and CEO)
Yeah. We're open to selling down. I think what we've done is we've looked at the loans that we were most concerned of, and they were really more concerned about the industry. In some places, the credits we were aggressive on very quickly. I think the loans now are almost opportunistic. As loan pricing recovered, we said we could get these credits off our balance sheet with almost no loss. And we decided to go ahead and do that. So they're more opportunistic. And again, we have $100 million that we're looking at. We've done $100 million. And it doesn't say we will do the $100. It doesn't say we won't do more.
We'll do an evaluation, and again, we've made a handful of new loans too because we like the industries, the spreads, and the risks, so we just haven't opened up widely, but we are still open on originating in the corporate portfolio too, but we're just a lot more critical to make sure we think those are good loans given the environment.
Alex Blostein (Managing Director)
Got it. Okay. Makes sense. Perfect, and just a quick follow-up. Thanks for that nuanced disclosure. Very good to see you guys get that out there. I guess when you talk about the pipeline and the strong momentum you continue to have in recruiting, can you talk a little bit about the mix and how that mix might have changed between the employee channel given the kind of the work-from-home dynamics and the independent channel?
So just kind of as you're looking out the next 12 months and the assets that are going to come in into Raymond James, how does that mix compare to historical kind of employee versus independent levels?
Paul Reilly (Chairman and CEO)
Yeah. During the quarter, it was much stronger in the independent channel. And the reason is most of them have their own branches and offices. So there's no reason to put off a move. They can change. Honestly, sometimes it's actually easier right now because clients are at home. You can find them to do the transition. So that has been more robust in the quarter than the employee channel. Now, having said that, the recruiting and the employee channel and the commits have been good, but a lot of them have delayed because we shut our offices. And we're now into limited reopening, limiting the number of people in the branches.
And so we now have, on a voluntary basis. So we now have the offices open where people join, and one just joined. I think we announced this week, and another one the week before. So we do have people joining. But we have an awful lot of people that have decided to put off their joins. A lot of them till September now. And some of these have been signed up since April, May, June. They said they're coming. They just don't want to transition till they feel that they're in a comfortable spot for the pandemic. So I think the employee side will do a little catching up once people feel comfortable about going into an office.
Alex Blostein (Managing Director)
Yeah. Great. Makes sense. Thanks for taking all the questions.
Operator (participant)
Thank you. And our next question comes from the line of Chris Allen of Compass Point. Please proceed with your question.
Chris Allen (Analyst)
Good morning, guys. Most of my questions have been answered. I guess just a quick one. On the fixed strength, you noted continuing into draw on the brokerage side. In most of the areas we look at, it seems like things are slowing down a little bit. So maybe if you could just give us some color there, how your business is holding up from a market share perspective as well would be helpful. Thanks.
Paul Reilly (Chairman and CEO)
Yeah. So I think that there was a rush in fixed income both in repositioning and for, frankly, for credit underwriting, debt underwriting. And so I think you've seen that slow down a little bit. But we have a very leading position with small and mid-sized banks as loan activity has kind of slowed down. They've been investing more in securities and redoing their securities. So although I think we're not if you asked me to guess, it'd be hard to repeat last quarter's record. It's always hard to repeat a record. But I think it's going to be a very strong fixed income for us. And all signs so far show it's very strong. So we expect another good quarter. And we anticipate just on closings that capital markets, that the M&A transactions will be up. But you never know for closings for an M&A deal.
You can guess all you want even with a good pipeline. It's when they close and what gets in the way, but we feel pretty good about that segment for this quarter, and then in the Private Client Group segment and Asset Management, since the assets are pegged, I mean, that should be a pretty good quarter too in terms of revenue increases for those.
Chris Allen (Analyst)
Thanks, guys. That's it for me.
Operator (participant)
Thank you. And our next question comes from the line of Craig Siegenthaler of Credit Suisse. Please proceed with your question.
Craig Siegenthaler (Managing Director of Equity Research)
Good morning, everyone, and hope you're all well and staying healthy. I wanted to start off with recruiting. Do you have the number of gross or net number of financial advisors added in each of the months in the June quarter? And if you don't, could you provide any comment here on how recruiting trended in the quarter as you adapted to the virtual recruiting backdrop?
Paul Shoukry (CFO)
Yeah. We're not going to provide kind of monthly or kind of we, of course, track that internally, but haven't provided that externally yet. What I would tell you is what Paul said is that the recruiting momentum really rebounded throughout the quarter as we've adjusted to our virtual home office visits. And we are all doing. Paul's doing them. I'm doing them, the home office visits virtually. And they're going pretty well. So we feel really good about the activity levels again across all our affiliation options. But yeah, aren't going to provide month-to-month statistics on those.
Craig Siegenthaler (Managing Director of Equity Research)
Got it. Thanks, Paul, and just one follow-up on reserving. Can you provide us some color or at least what to expect from the CECL loan loss reserve build that's coming in the October quarter? I think seasonally this one may be different than the others, and I'm just interested in the underlying process relative to the reserve that was just built in both the March and the June quarters.
Paul Shoukry (CFO)
Yeah. And again, we still have another quarter under the incurred loss process for provisions. And we don't even know what that's going to be yet. So yeah, we'll have to wait and see. I know even for the big banks, the macro assumptions are changing rapidly. So the macro assumptions and projections are going to look like even in October. It seems like it's right around the corner, but every week things change dramatically. So we'll wait and see kind of how things progress between now and then.
Paul Reilly (Chairman and CEO)
Yeah. I think the problem with CECL is that the macros change all the time. So I mean, if you took a point in time today, we wouldn't see a huge change. But you don't know, right? But that could change tomorrow. But right now, we wouldn't instantaneous. If we did it today, we don't think there'd be a huge change, so.
Craig Siegenthaler (Managing Director of Equity Research)
Thank you.
Operator (participant)
Our final question for today comes from the line of William Katz of Citi. Please proceed with your question.
Hi, everyone. This is actually Billy speaking on behalf of William Katz. So thank you for taking the question. So we just appreciate some more color on July, like any kind of initial color on client engagement metrics and flows.
Paul Shoukry (CFO)
Yeah. Thanks for the question. It's a pretty broad one in terms of the client engagement across our businesses. As Paul said in his Outlook comments in the Private Client Group business, the fee-based assets should provide us a tailwind for Asset Management revenues. And recruiting activity remains healthy. In Capital Markets segment, the M&A pipeline entering into the fourth quarter looks good. We expect M&A revenues to be up, assuming that the market environment remains relatively resilient here through the rest of the quarter. And the fixed income activity, well, we're hard to repeat a record, as Paul said. The depository client segment in particular remains very engaged. So we feel good about the client activity levels. But we'll provide more details as we go along here.
Okay. Thank you.
Paul Reilly (Chairman and CEO)
Okay. Then I would just like to thank you all for participating. I know your jobs are hard given all so many extraneous market factors and the pandemic and everything else and working remotely. So I know it's harder for all of us. But we really appreciate you taking the time. We'll try to provide as much color as we can and hopefully get an analyst day scheduled as soon as we can as we get a little more color through this next month or so. So thank you very much for joining us.
Paul Shoukry (CFO)
Thanks, everybody.
Operator (participant)
That does conclude today's presentation. We do thank you for your participation and ask that you please disconnect your lines. Have a great rest of the day, everyone.