Raymond James Financial Inc (RJF) — Q2 2022 Earnings Call Transcript

Good morning, everyone. And thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chair and Chief Executive Officer, and Paul Shoukry, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to slide two. Please note certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated timing, and benefits of our acquisition, including the acquisition of Charles Stanley Group PLC, completed on January 21, 2022, as well as our announced acquisitions of Tristate Capital Holdings and some rich partners, and our level of success in integrating acquired businesses, divestitures, anticipated results of litigation and regulatory developments, impacts of the COVID-19 pandemic, or general economic conditions. In addition, words such as may, will, should, could, scheduled plans, intends, anticipates, expects, believes, estimates, potential, or continue or negative of such terms, or other comparable terminology, as well as any other statement necessarily depends on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 10K and subsequent Forms 10-Q and Forms 8-K, which are available on our Investor Relations website. During today’s call, we will also use certain non-GAAP financial measures to provide information pertinent to our management’s view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our press release and presentation. Now, I’m happy to turn the call over to Chair and CEO, Paul Reilly. Paul?

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

Thanks, Paul. Starting with consolidated revenues on slide 10, quarterly net revenues of $2.67 billion grew 13% year-over-year and declined 4% sequentially. Record asset management fees grew 25% over the prior year’s fiscal second quarter and 6% over the preceding quarter. Private Client Group assets and fee-based accounts into the quarter were relatively unchanged compared to December 2021. However, adjusting for the acquired assets of Charles Stanley, PCG assets and fee-based accounts declined approximately 3%, creating a headwind for asset management revenues in the fiscal third quarter. So I would expect somewhere around a 3% sequential decline in this line item in the upcoming fiscal third quarter. I’ll discuss accounting service fees and net interest income shortly. Skipping ahead to investment banking revenues, as Paul described, this line item declined significantly compared to the preceding quarter. But at $235 million, it was still a very strong quarter compared to our results prior to fiscal 2021. Given the heightened market volatility, we would not be surprised to match this quarter’s results for the next two quarters, which would result in the investment banking revenues ending fiscal 2022 close to the record set in fiscal 2021. While our pipelines are strong, there’s a lot of uncertainty over the next two quarters that could impact investment banking revenues positively or negatively for the rest of the fiscal year. Other revenues of $27 million were down 47% compared to the preceding quarter, primarily due to lower revenues from affordable housing investments, previously known as tax credit funds. The pipeline for the business is very strong, but the timing of closings is more uncertain given the rapid cost increases, impacting affordable housing developers. Moving to slide 11, clients' domestic cash sweep balances ended the quarter at a record $76.5 billion, up $3 billion or 4% over the preceding quarter and representing 7% of domestic PCG client assets. Notably, $17 billion or 22% of total cash sweep balances are held in the client interest program, the vast majority of which are invested in very short-term treasuries and could be redeployed to generate much higher yields over time, either at our own bank or with third-party banks as interest rates increase and demand for cash balances recover. Turning to slide 12, combined net interest income and VDP fees from third-party banks was $224 million, up a robust 9% from the preceding quarter. This growth is largely a result of strong asset growth and the higher net interest margin at Raymond James Bank, which increased nine basis points to 2.01% for the quarter. The increase in the bank’s NIM during the quarter was attributable to a higher yielding asset mix given the strong loan growth, as the March interest rate increase really won’t start benefiting the bank’s NIM until the fiscal third quarter. For example, following the March rate increase, the bank’s current spot NIM is around 2.15%. The average yield on RJBDP balances with third-party banks increased to 32 basis points in the quarter, and the spot rate is just over 50 basis points reflecting the March rate increase. Both the NIM and the average yield from third-party banks are expected to increase further with additional rate increases as less than 25% of the firm’s interest-earning assets have fixed rates, and those assets have an average effective duration of less than four years. And all of the deposits sweep relationships with third-party banks are floating-rate contracts. So we should have significant upside from rising short-term interest rates. To that point, let me walk through how we are positioned to rising short-term interest rates based on current clients' domestic cash sweep balances which decreased by over $2 billion to $74 billion thus far in April, largely due to the quarterly fee billings and income tax payments using static balances. An instantaneous 100 basis point increase in short-term interest rates, which includes the 25 basis point rate increase in March, would generate expected incremental pretax income of nearly $600 million per year, with approximately 65% of that reflected as net interest income and 35% reflected as accounting service fees. This estimate assumes a blended deposit beta of around 15% for the first 100 basis point increase, commensurate with what we experienced in the last rate cycle. Importantly, this analysis does not incorporate the TriState Capital acquisition, which should provide incremental upside to higher short-term interest rates, as the vast majority of their $13 billion of balance sheet assets are also floating-rate assets, as they have always shared a similar approach to limiting duration risk. Moving to consolidated expenses on slide 13, starting with our largest expense compensation, the compensation ratio for the quarter was 69.3%, which increased from 67.7% in the preceding quarter but remained below the year-ago period compensation ratio of 69.5% and below our 70% target in a low-interest rate environment. The sequential increase was mainly the result of lower capital markets revenues, which led to the revenue mix shift towards higher compensable revenues and the PCG segment. As advisor payouts, particularly to independent advisors who cover their own overhead expenses, are typically higher than the associated compensation of our other businesses. On a sequential basis, the compensation ratio was also impacted by the reset of payroll taxes that occurs in the first calendar quarter of each year, as well as annual salary increases and continued hiring to support our growth. Non-compensation expenses of $388 million increased 14% sequentially, predominantly driven by the bank loan provision for credit losses, compared to a loan loss release in the preceding quarter, as well as higher Communication and Information Processing expenses. Excluding the bank loan provision and acquisition-related expenses, which creates some noise in the comparison, non-compensation expenses of $356 million grew 3% over the preceding quarter. Also keep in mind, expenses included just over two months of results for Charles Stanley, which closed on January 21. So overall, we have remained focused on the disciplined management of all compensation and non-compensation related expenses, while still investing in growth and ensuring high service levels for advisors and their clients. Slide 14 shows a pretax margin trend over the past five quarters. In the fiscal second quarter, we generated a pretax margin of 16.2% and an adjusted pretax margin of 16.6%, in line with our 16% target in this low-interest rate environment. Based on the expectation for additional increases in short-term interest rates, we will revisit our pretax margin and compensation ratio targets at our upcoming analyst and investor day scheduled for May 25. Hopefully by then we will have more clarity on other important variables, such as the outlook for investment banking revenues, the level of business development expenses as conferences and travel continue to ramp up, and the impact of recently closed and pending acquisitions. On slide 15, at the end of the quarter, total assets were $73.1 billion, a 7% sequential increase, reflecting the addition of approximately $3 billion in assets, mostly segregated client cash balances from Charles Stanley, as well a solid growth of loans at Raymond James Bank. Liquidity and capital remain very strong, RJF corporate cash at the parent end of the quarter at $2.2 billion, increasing 59% during the quarter, primarily due to significant special dividends from our well-capitalized subsidiaries during the quarter. The total capital ratio of 25% and a tier-one leverage ratio of 11.1% are both more than double the regulatory requirements to be well capitalized, providing significant flexibility to continue being opportunistic and invest in growth. The effective tax rate for the quarter did increase to 25.4%, up from 20.1% in the preceding quarter. The primary drivers of the sequential increase are the favorable impact from share-based compensation that vested in the preceding quarter and non-deductible losses on our corporate-owned life insurance portfolio due to equity markets that are used to fund our non-qualified benefit plans compared to non-taxable gains on these portfolios in the preceding quarter. Slide 16 provides a summary of our capital actions over the past five quarters as of April 27, 2020. $1 billion remains available under the board-approved share repurchase authorization. Due to regulatory restrictions, we do not expect to repurchase common shares until after closing the TriState Capital Holdings acquisition, currently expected to occur by the end of the fiscal third quarter. As we explained on prior calls, our current plan is to offset the share issuances associated with the transaction after closing. But given the heightened market volatility, we’ll obviously keep a watchful eye on market conditions between now and then. Lastly, on slide 17, we provide key credit metrics for Raymond James Bank. The credit quality of the bank’s loan portfolio remains healthy with most trends continuing to improve. The bank loan loss provision of $21 million was primarily driven by strong loan growth during the quarter. The bank loan allowance for credit losses as a percentage of loans held for investment into the quarter was 1.17%, down from 1.5% at March 2021, and essentially unchanged from 1.18% at December 2021. Now I’ll turn the call back over to Paul Reilly to discuss our outlook. Paul.

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

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

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

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

Yes, I mean, I think that’s a good way of thinking about it.

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

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

Great, one more busy morning, obviously between a bunch of culture, but Tristate, so I believe you initially targeted $3 billion of sort of funding replacement on their balance sheet once the deal closes. Is that still the case? I think in the first year, you’re targeting us at about 3 billion? Why wouldn’t you go a little faster given that their deposit data, I think is going to be a lot higher than yours?

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

Great, thanks for entertaining all the questions.

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

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

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

Any insight you can share just in terms of how we should think about that terminal PPN? Our margin, I think the big debate is you’re going to be integrating this deal. The accretion tailwinds have certainly been favorable over the last few quarters, you didn’t note the loan growth has also come in better. The big debate is how much of that revenue you’re going to allow to fall to the bottom line versus get reinvested back in the business. And just want to get some sense as to how we should be thinking about peak margin potential over the next couple of years.

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

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

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

Understood, thanks so much for taking my questions.

Good morning, bowling ball. I wanted to get your thoughts a little bit more on the deposit beta and the 15% assumption for this cycle. So first, if you can remind us where deposit rates peaked in the last cycle. And then if I think about the differences this time around, you know, on a macro level, we’re getting a much faster pace of rate hikes than last time, inflation is higher, the Feds going to shrink their balance sheets sooner. And for Raymond James, specifically, the bank is a lot larger, and you have the upcoming acquisition of TriState. So, you know, with that in mind, you know, what are your thoughts on how the deposit beta dynamic will play out? And, you know, what, what that will do to deposit rates to cycle?

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

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

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

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

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

No, certainly, I don’t think I would call it material. You saw that our equity balance sheet equity was flat during the quarter despite the strong earnings net dividend. So I think the AIA OCI impact was somewhere around $300 million for the quarter. And that’s, again, a testament to our aversion to taking too much duration risk, we keep that securities portfolio very short. And we’re actually shortening and now we’re buying treasuries now with sort of a two-year life today just to position ourselves, as Paul said, to give us even more flexibility going forward, given all the uncertainty around rates.

Morning, guys. Thanks for taking my question. I think most of us have been covered, I guess I want to quickly just follow up on the SumRidge Partners deal. The press release makes it sound like an electronic market maker, I’m sorry, a market maker on electronic trading platforms. But looking at their website, it seems a bit more potentially advisor facing, maybe give us some color there. And whether this deal is more driven by the need for technology improvements on the fixed income trading side, or whether there are other synergy opportunities moving forward.

I think there are a lot of pieces to it first, culturally and risk management-wise, as we’ve been talking them for quite some time. We think they’re a great fit. And what it adds strategically for us is the weakest part of our fixed income platform has been the corporate area, we’re just versus our competitors, we were a lot smaller in the corporate bond area. So they bring really great expertise there. Secondly, they do have trader-assisted technology, where they’re able to sort and execute trades with a lot of analytics. And we believe that that system can be migrated to other parts of our business to help tech enable the trading, which is important. Their focus has really been on institutional clients, although they do have an app with some advisor-facing but it’s relatively small. But we really liked the app. So we think it may be something we can convert to our adviser side of our business. So there’s lots of pieces we really like. We really like the people, the risk management, and the technology we think can be really spread to lots of parts of our fixed income business. So appreciate everyone coming on today. I know it’s a crowded day. I think that given our discipline, that we’re really into a market with rising rates that will do really well. We have plenty of capital to deploy even with our three acquisitions. And, we’ll stay true as we always have to our guiding conservative principles, but I think given this, I think we’re still in good shape to make all the commitments unless something weird happens in the market. But if it does, again, with all of our capacity and flexibility, I think relatively we’ll be in good shape. So appreciate you joining us and we’ll talk to you next quarter.