Raymond James Financial Inc (RJF) — Q4 2023 Earnings Call Transcript

Good afternoon, and welcome to Raymond James Financial's Fourth Quarter and Fiscal 2023 Earnings Call. This call is being recorded, and will be available for replay on the company's Investor Relations website. I am Kristina Waugh, Senior Vice President of Investor Relations, and thank you for joining us today. With us on the call today are Paul Reilly, Chair and Chief Executive Officer, and Paul Shoukry, Chief Financial Officer. The presentation being reviewed today is available on our 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 acquisitions and our level of success integrating acquired businesses, divestitures, anticipated results of litigation and regulatory developments or general economic conditions. In addition, words such as may, will, could, anticipates, expects, believes or continue or negative terms or other comparable terminology, as well as any statement that necessarily depends on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our 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 presentation and press release. Now, I'll turn the call over to Chair and CEO, Paul Reilly. Paul?

Good evening and thank you for joining us today. I've spent a lot of time in these last few weeks in front of our advisors. First, traveling with our top-producing independent advisors on a great trip; great to see the success in their business and the positive nature of how they feel about the firm. And then, attending our RCF Conference, our RIA division and clearing firm. Again, that division is over 10% of our private client group assets now. And it's great to see the growth and the enthusiasm there also. Now turning to our results, despite the challenging environment, which included a regional banking crisis, heightened volatility, and rapidly rising interest rates, we generated record net revenues and earnings for the last fiscal year. That's our third consecutive year of record results in very different market environments, achieved by staying true to our core; we put clients first, we act with integrity, we value independence, and think long-term. These core values are more than words on a page; they are lived day in and day out by our advisors and associates. This dedication and focus provide stability during tough economic times and make me confident about our continued success in the future. Reviewing fourth quarter results, starting on slide four, the firm reported record quarterly net revenues of $3.05 billion, a net income available to common shareholders of $432 million or $2.02 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $457 million or $2.13 per diluted share. The increase in asset management revenues and interest-related revenues drove significant revenue growth over the prior year, with net revenues increasing 8%. Quarterly results were negatively impacted by elevated provisions for legal and regulatory matters, including an incremental $55 million provision related to the previously disclosed SEC industry sweep on off-platform communications. This provision resulted in an impact during the quarter of $0.26 per diluted share. We generated strong returns for the fiscal fourth quarter with an annualized return on common equity of 17.3%, an annualized adjusted return on tangible common equity of 22.2%, a great result particularly given our strong capital base. Moving on to slide five, the year-over-year client asset growth was strong driven by organic growth in all of our affiliation options, along with market appreciation. We ended the quarter with a total client assets under administration of $1.26 trillion, PCG-based and fee-based accounts of $683 billion, and financial assets under management of $196 billion. With our continuing focus on retaining, supporting, and attracting high-quality financial advisors, PCG consistently generates strong organic growth, which was evident again this year with domestic net new assets of $14.2 billion in the fiscal fourth quarter, representing a 5% annualized growth rate on beginning-of-the-period domestic PCG assets. For the fiscal year, domestic net new assets of $73 billion reflected a 7.7% annual growth rate, which is a leading result in the industry. During the fiscal year, we recruited to our domestic independent contractor and employee channels financial advisors with approximately $250 million of trailing 12 production and nearly $38 billion of client assets from their previous firms. These results do not include our RIA and custody services business, RCS, which had another strong year in recruited results. More importantly, we continue to maintain a very low attrition levels of financial advisors at about 1%. These factors contributed to our annual NNA growth of 7.7%. Total clients' domestic sweep and Enhanced Savings Program balances ended the quarter at $56 billion, down 3% compared to June of 2023. The Enhanced Savings Program, with its competitive rate and robust FDIC insurance coverage, continued to attract significant cash this quarter, partially offsetting a decline in client sweep balances largely due to quarterly fee billings and cash sorting activity. Total bank loans increased 1% from the preceding quarter to $44 billion, reflecting muted loan demand in our target markets, given rising rates and macroeconomic uncertainty. Moving on to slide six, Private Client Group generated record results with quarterly net revenues of $2.27 billion, and pre-tax income of $477 million. Year-over-year results were lifted by strong asset-based revenues and the benefit of higher interest rates on interest-related revenues and fees. The Capital Markets segment generated quarterly net revenues of $341 million, and a pre-tax loss of $7 million. Revenue declined 15% compared to the prior-year quarter, mostly driven by lower fixed income brokerage and investment banking revenues. However, we were pleased to see a sequential improvement in M&A and advisory revenues this quarter. Additionally, our public finance business had improved results, with debt underwriting growing 32% sequentially. The extremely challenging market environment, particularly for investment banking, has strained the near-term profitability of segment results. As we explained previously, the segment results are negatively impacted by amortization of share-based compensation from prior years as well as growth investments. We remain focused on managing controllable expenses as near-term revenues are depressed. The Asset Management segment generated pre-tax income of $100 million on net revenues of $236 million. The increases in net revenue and pre-tax income over the preceding quarter were largely the result of higher assets in PCG fee-based accounts at the beginning of a quarterly billing period and strong net flows in Raymond James Investment Management, which generated $920 million of net inflows during the fiscal fourth quarter, and $2.2 billion of net inflows in the fiscal year. The Bank segment generated net revenues of $451 million and pre-tax income of $78 million. Fourth quarter NIM for the Bank segment, of 2.87%, declined four basis points compared to a year-ago quarter and 39 basis points compared to the preceding quarter primarily due to a higher cost mix of deposits. We continue to add diverse higher-cost funding sources with our Enhanced Savings Program, and consequentially shifted more of the lower-cost sweep funding to third-party banks. While this negatively impacted the Bank segment's NIM, there is an offset in higher RJBDP third-party bank fees. So, still a net positive for the firm overall, while also providing advisors an attractive deposit alternative to offer their clients. Looking at fiscal 2023 results on slide seven, we generated record net revenues of $11.6 billion and record net income available to common shareholders of $1.7 billion, up 6% and 15% respectively over the prior year's records. Additionally, we generated strong returns on common equity of 17.7%, and adjusted returns on tangible common equity of 22.5% for the fiscal year. On slide eight, the strength of the PCG and Bank segments for the fiscal year primarily reflects the benefit of strong organic growth in the Private Client Group, the successful integration of TriState Capital, and the benefit from higher short-term interest rates. When compared to the record activity levels in the year-ago period, weaker capital markets results reflect the challenging environment for investment banking and fixed income brokerage revenues despite incremental revenues from the SumRidge acquisition, which we completed in June of 2022. And now, I will turn it over to Paul Shoukry for a more detailed review of our fourth quarter results. Paul?

Thank you, Paul. Starting on slide 10, consolidated net revenues were a record $3.05 billion in the fourth quarter, up 8% over the prior year and 5% sequentially. Asset management and related administrative fees grew 12% compared to the prior-year quarter and 5% sequentially due to the higher assets in fee-based accounts at the end of the preceding quarter. This quarter, fee-based assets declined 2%, which will be a headwind for our asset management and related administrative fees in the fiscal first quarter of 2024. Brokerage revenues of $480 million were flat year-over-year and increased 4% sequentially. Year-over-year, the lower fixed income brokerage revenues in the Capital Markets segment were offset by higher brokerage revenues in PCG. Investment banking revenues of $202 million declined 7% year-over-year. Sequentially, the 34% increase was driven predominantly by higher M&A and advisory revenues as well as a solid quarter for public finance. We are cautiously optimistic that the environment for M&A is improving, and we continue to see a healthy investment banking pipeline and solid new business activity. However, there remains a lot of uncertainty in the pace and timing of deals launching and closing given the heightened market volatility and geopolitical concerns. So, while we may not see significant improvement in the next fiscal quarter, we are hoping for better results over the next 6 to 12 months. Other revenues of $54 million were down 33% compared to the prior-year quarter, primarily due to lower revenues from affordable housing investments. The pipeline for that business remains strong, but several closings slipped to fiscal 2024 due to higher interest rates. Moving to slide 11, clients domestic cash sweep and enhanced saving program balances ended the quarter at $56.4 billion, down 3% compared to the preceding quarter and representing 5.1% of domestic PCG client assets. Advisors continue to serve their clients effectively, leveraging our competitive cash offerings. The Enhanced Savings Program grew approximately $2.4 billion in deposits this quarter. A large portion of the total cash coming into ESP has been new cash brought to the firm by advisors, highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability. As many eligible clients have now taken advantage of this product, the pace of flows into the Enhanced Savings Program has understandably decelerated. Through Monday of this week, sweep and ESP balances are down approximately $620 million for the month of October, as growth in ESP balances was more than offset by the quarterly fee billings, as expected. We continue to believe we are closer to the end of the cash sorting dynamic than we are to the beginning. However, until rates stabilize, we would not be surprised to see further yield-seeking behavior by clients. Sweep balances with third-party banks were $15.9 billion at the quarter end, giving us a large funding cushion when attractive growth opportunities surface. The strong growth of Enhanced Savings Program balances at Raymond James Bank has allowed for more balances to be deployed off balance sheet. While this dynamic has negatively impacted the bank segment's NIM because of the geography of the lower-cost sweep balances being swept off balance sheet, it ultimately provides clients with an attractive deposit solution while also optimizing the firm's funding flexibility. Looking forward, we have ample funding in capital to support attractive loan growth. Turning to slide 12, combined net interest income and RJBDP fees from third-party banks was $711 million, nearly flat from the immediately preceding quarter, as a sequential decrease in firm-wide net interest income was offset by higher RJBDP fees from third-party banks. If you recall, on our last earnings call, we anticipated a 5% sequential decline in these interest-related revenues, so we are pleased with the better-than-expected result, which was partly a function of higher-than-anticipated yields on RJBDP third-party balances. The Bank segment's net interest margin decreased 39 basis points sequentially to 2.87% for the quarter, while the average yield on RJBDP balances with third-party banks increased 23 basis points to 3.6%. While there are many variables that will impact actual results, absent any changes to short-term interest rates, we currently expect combined net interest income and RJBDP fees from third-party banks to be around 5% lower in the fiscal first quarter as compared to the fiscal fourth quarter. And that's just based on spot balances after the fee billings this quarter. As experienced over the past two quarters, this guidance may prove to once again be conservative if cash sweep balances stabilize around current levels, and or if the bank assets grow more than anticipated during the rest of the quarter. But as we have always said, instead of concentrating on maximizing NIM over the near-term, we're more focused on preserving flexibility and growing net interest income in RJBDP fees over the long-term, which we believe we are still well positioned to do. As many of you may recall, our expectation has always been that the industry would over earn on interest income early on in a rising rate environment, and then experience some normalization of interest earnings, as clients redeploy their cash to higher yielding alternatives. Moving to consolidated expenses on slide 13, compensation expense was $1.89 billion, and the total compensation ratio for the quarter was 62%. The adjusted compensation ratio was 61.4% during the quarter, which we are very pleased with, especially given the challenging environment for capital markets. Non-compensation expenses of $576 million increased 1% sequentially. As Paul Reilly mentioned earlier, the fiscal fourth quarter included the incremental provision related to the previously disclosed SEC industry sweep on off-platform communications of $55 million, resulting in an impact during the quarter of $0.26 per diluted share. Combined with the provision in the fiscal third quarter, we are confident that we are now fully reserved for this matter. The bank loan provision for credit losses for the quarter of $36 million increased $2 million over the prior year quarter, and decreased $18 million compared to the preceding quarter. I'll discuss more related to the credit quality in the bank segment shortly. In summary, while there has been some noise with elevated provisions for legal and regulatory matters this year, adjusted non-compensation expenses, excluding loan loss provisions and those legal and regulatory provisions came in very close to our annual expectation of $1.7 billion. Reinforcing that we remain focused on managing expenses while continuing to invest in growth and ensuring high service levels for advisors and their clients. Slide 14 shows the pretax margin trend over the past five quarters. In the current quarter, we generated a pretax margin of 19.2% and adjusted pretax margin of 20.3%, a strong result given the industry-wide challenges impacting capital markets in the aforementioned legal and regulatory provisions. On slide 15, at quarter end, total assets were $78.4 billion, a 1% sequential increase. Liquidity and capital remain very strong. RJF corporate cash at the parent ended the quarter at $2.1 billion, well above our $1.2 billion target. The Tier-1 leverage ratio of 11.9% and total capital ratio of 22.8% are both more than double the regulatory requirements to be well-capitalized. The 11.9% Tier 1 leverage ratio reflects nearly $1.5 billion of excess capital above our conservative 10% target, which would still be 2x more than the regulatory requirements to be well-capitalized. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth. We also have significant sources of contingent funding. We have a $750 million revolving credit facility and nearly $9.5 billion of FHLB capacity in the Bank segment. Slide 16 provides a summary of our capital actions over the past five quarters. During the fiscal year, the firm repurchased 8.35 million shares of common stock for $788 million, an average price of $94 per share. As of October 25, 2023, approximately $750 million remained available under the Board's approved common stock repurchase authorization. While we didn't complete any repurchases in the fourth quarter, due to self-imposed restrictions, just to be prudent given our knowledge of the aforementioned SEC off-platform matter, we remain committed to our planned repurchases to offset dilution from the TriState Capital acquisition and the share-based compensation as we previously discussed. Lastly, on slide 17, we provide key credit metrics for our Bank segment, which includes Raymond James Bank and TriState Capital Bank. The credit quality of the loan portfolio is solid. Criticized loans as a percentage of total loans held for investment ended the quarter at 1.17%. The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1.07%. The bank loan allowance for credit losses on corporate loans, as a percentage of total corporate loans held for investment was 2.03% at quarter end. We believe this represents an appropriate reserve, but we are continuing to closely monitor any impacts of inflation, supply chain constraints, higher interest rates, and a potential recession on our corporate loan portfolio.

Now I'll turn the call back over to Paul Reilly to discuss our outlook. Thank you, Paul. As I said from the start of the call, I am pleased with our results for fiscal 2023 and our ability to generate record earnings even in challenging market conditions. The record results this fiscal year once again highlight the strength of our diverse and complementary businesses. And while there is still near-term economic uncertainty, I believe we are in a position of strength and are well positioned to drive growth over the long-term across all of our businesses. In the Private Client Group, next quarter results will be negatively impacted by the 2% sequential decline in assets and fee-based accounts. Near-term, we expect some headwinds to enter sensitive earnings at both PCG and the Bank segment given ongoing cash sorting activity. However, I am optimistic we will continue delivering industry-leading growth as current and prospective advisors are attracted to our client-focused values, and leading technology and product solutions. Our advisor recruiting activity has picked up significantly over the last two months with record numbers of large teams in the pipeline. In the Capital Market segment, as we saw this quarter, there are some signs of improvement in investment banking, and we continue to have a healthy M&A pipeline and good engagement levels. But while there are still reasons for optimism, we expect the pace and timing of transactions to be heavily influenced by market conditions and would expect activity to likely pick up over the next six to 12 months. And in the fixed income space, the dynamics of last year persist. Depository clients are experiencing declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity. We hope once rates and cash balances stabilize, we can start to see an improvement. So, while there are some near-term challenges, we believe the capital markets business is well positioned for growth given the investments we've made over the past five years, which have significantly increased our productive capacity and market share. In the Asset Management segment, financial assets under management are starting the fiscal quarter down 2% compared to the preceding quarter, which should create a headwind to revenue. We remain confident that strong growth of assets and fee-based accounts in the Private Client Group segment will drive long-term growth of financial assets under management. In addition, we expect Raymond James Investment Management to help drive further growth through increased scale, distribution, operational and marketing synergies. In the Bank segment, we remain focused on fortifying the balance sheet with diversified funding sources and prudently growing assets to support client demand. We have seen securities-based loan payoffs decelerate, and are starting to experience growth. We expect demand for these loans to recover as clients get comfortable with the current level of rates. With little activity in the market, corporate loan growth has been tepid. However, spreads have improved, and with ample cash sitting on third-party banks and lots of capital, we are well positioned to lend once activity increases. In closing, entering fiscal 2024, we believe our strong competitive positioning in all of our businesses along with our ample capital and liquidity has us well positioned to drive future growth. I want to thank our advisors and associates for their continued perseverance and dedication to providing excellent service to their clients each and every day, especially in uncertain times when clients need trusted advice the most. Thank you for all you do. That concludes our prepared remarks. Operator, will you open the line for questions?

Thanks. Was hoping you could expand upon the record backlog you talked about for advisors joining your platform, maybe some context around the size and scope of that? And also, it seems like there is more industry movement. You mentioned attrition being very low for the year. Just wondering if you're seeing any uptick in terms of attrition across your platform more recently as you mentioned more advisor movement across the industry?

That's a great question. First, attrition remains around 1%, which is slightly higher than last year but still within a similar range. We're pleased with this considering the highly competitive market. According to industry data, advisor movement has decreased by about 15% overall. However, while we're not seeing an increase in the number of advisors, we are observing growth in the size of teams. Just last month, we brought on a bank platform with $3 billion in assets and 27 advisors. Additionally, our backlog over the past two months shows an unprecedented number of teams generating between $10 million to $20 million in revenue coming through simultaneously. This has been a significant boost, and while I can't guarantee that we'll close them all, we've never had this many teams at the final negotiation stage along with others who have committed but remain unannounced. Overall, compared to last year, which featured larger teams at the end, this year we have a significant number of very large teams in the pipeline.

Thanks, it's helpful. And then just a question as you think about the coming fiscal year and expenses, if the capital markets activity remain somewhat depressed or around these levels, should we think about non-compensation expenses or how should we think about non-comp expense and levers that you think or you're looking to pull to potentially improve the profitability and/or even maintain profitability in a more challenged revenue environment?

For capital markets, most of the expenses are related to compensation. We have continued to invest in this area despite the challenging environment. As we mentioned during our Analyst Day, we have added around a dozen managing directors, especially to our healthcare and other groups. We are committed to long-term investment in the business because we believe it has strong potential. If you examine the losses from this segment this year, about $150 million, or approximately $135 million, was tied to growth-related expenses and deferred compensation that we are amortizing over the year. Hence, more than the total loss from the segment was actually related to these growth initiatives. Overall, we anticipate that non-compensation expenses will continue to rise. This year, we managed them effectively; when we exclude legal and regulatory costs as well as loan loss provisions, we are already nearing the $1.7 billion target we established last year. We expect this trend to persist, as many of these expenses are growth-related, such as FDIC insurance costs, which arise from our increasing bank deposits. Although these expenses were negatively affected by legal and regulatory issues this year, after a relatively quiet year last year, we still expect non-compensation costs to continue rising. We remain focused on managing our controllable expenses while ensuring that we maintain strong support for our advisors and their clients.

Great, thank you.

Hi, good evening. So, just with the nearly $1.5 billion of excess capital above that 10% target, you mentioned the suspension of repurchases in the quarter due to knowing about the regulatory matter. When we think about the pace of repurchases in fiscal 2024, Paul, should we still think about that $300 million to $350 million per quarter run rate or should we expect a little bit of a catch up given there were no repurchases last quarter and given how much excess capital you have on the balance sheet?

Yes, I think when you think about excess capital, I would just start with the capital prioritization framework that we've been following almost since our inception, which is, first and foremost, to use the excess capital to invest in growth. So, Paul talked about the prospects that we have for organic growth, which we're pretty bullish on right now given the pipeline, not only in PCG, but really across our businesses. And then we're also active on the acquisition front, looking at opportunities that are a good cultural fit, first and foremost, but that would also be good strategic fits. And pricing across all M&A right now is challenging because there are gaps between buyers and sellers, but we feel like we can, through continued dialogue, find good opportunities there over time. And then to the extent that we can invest the capital in growth and we have our ongoing dividend, which is 20% to 30% of earnings, and then buybacks. And we do have to play some catch-up on the buybacks since we didn't do any this quarter. I think we have about $250 million more to offset the issuance associated with the TriState acquisition in two years of share-based compensation. So, we'll get back to doing that. And then we have a commitment to offset dilution going forward, which is about $200 million a year. But if we have the excess capital which we currently have and we deem the price to be attractive, then we would obviously be opportunistic above and beyond that offsetting of dilution.

Great, thank you. And then just for a follow-up, just want to touch on the admin comp line within the PCG segment, which moved lower sequentially in the quarter and came in a bit lower than expected. If we take a step back and look at the full-year, that admin comp grew by more than 15%, which is a similar rate to fiscal 2022, although I think there were some acquisitions in there and some unusual or higher than expected raises that went into effect over that period. As we look out to fiscal 2024 or over the medium term, just how should we think about growth in that admin comp line on a normalized basis?

The 16% growth in PCG administrative compensation includes growth investments, a full year of Charles Stanley, and the compensation for all the support staff for the advisors we hire. We have invested in the platform, and this year, as you mentioned, we were generous in sharing our financial success with associates through higher raises last year, which is also reflected in these figures. Looking ahead, we are focused on continued growth in this area; however, we expect a reduction in the growth rate compared to what we experienced this year due to the factors mentioned earlier.

Great, thank you.

Hi, this is Ben Rubin filling in for Brennan. Thank you for taking my question. I first want to ask about the composition of the loan book. We did see some growth in the loan book and the balance sheet for the first time in several quarters. I guess, my first question is, how are you thinking about balance sheet growth on the loan side in fiscal year 2024, maybe on commercial versus consumer underwriting? And then also, what type of balance sheet growth does your NII guide interpret as we look to next quarter? Thank you.

Yes, the near-term net interest income guidance includes very modest loan growth due to the still muted demand, especially on the corporate side. However, we were pleased with the growth during the quarter, largely driven by securities-based loans and residential mortgages. While we anticipate a slowdown in mortgage volume due to higher rates, we remain optimistic about the securities-based loan portfolio in both Raymond James Bank and TriState over the next year. This optimism is based on two factors: first, the repayments of those balances have stabilized significantly, with some cases almost doubling over the past year as rates rose. We are also beginning to see new originations. Additionally, on the TriState Capital front, there has been considerable benefit from existing clients transitioning to new advisors. Thus, we are positive about that portfolio going forward over the next year.

I would just add, we are open for business, we have more than adequate cash and buffer, and certainly the capital, and it's really just the loan demand. So, hopefully, the SBLs continue to go from being repaid to starting to grow, as we saw the indication last quarter. The mortgage business is obviously slow. And the commercial loans, we're open to it. But it's a very slow market. And spreads are widening for the deals that are coming out. But again, it's more of a muted market. So, you saw this quarter, we're open for business. We just have to find the loans that we're comfortable with.

That's very helpful. For my follow-up, I want to revisit Dan's first question about net new assets. In the quarter, net new asset growth was 5%, which is somewhat below the high single-digit percentages we've seen in prior years. Can you provide some insight into whether there were any significant advisor departures that may have affected this quarter and if this mid-single-digit growth rate is to be expected moving forward? Or should we anticipate a return to high single digits if the advisor market improves? Thank you.

I think for the quarter, I mean, it's been a dynamic year in a lot of ways, in terms of as you look at advisor count. I think that we had one program, which we previously talked about, that we exited from the platform. We kept 60% of the advisors, 40% left. And it cost us $4.6 billion in assets and 60 advisors. But we think from a profitability and long term, it was the right program. If you look just this month, again, adding a $3 billion bank program and 27 advisors just in one recruit, there are a lot of big projects like that. So, we're still optimistic whether we get the double digits we had in a couple of quarters. It's a big number, depending on the markets. But we expect to do very, very well. But that'll be up to recruiting and what happens to the Capital Markets. So, I don't know if you have anything to add, Paul.

Great, thanks for taking my questions.

Good afternoon, Paul and Paul.

Hey, Steve.

Hey, Steve.

Hey. So, I wanted to start off with a question on spread revenue; it came in better than your guidance in the quarter. It also trended better than what we saw at some of your peers. Given you have a larger proportion of client cash that swept to third-party banks, to what extent does the spread revenue benefit from improved pricing from those partner banks provide any incremental boost? We know banks are seeking out alternative sources of liquidity. There's a lot of demand for that, whether you benefit from any improved pricing on some of those third-party sweeps?

I think our better performance than many peers is really just a reflection of our long-term focus on kind of maintaining a flexible approach that's focused on giving clients as much FDIC insurance as possible. And you see that with the growth and enhanced savings program balances, which give us more flexibility in that dry powder that effectively puts more sweep balances with third-party banks as we await growth of the Bank's balance sheet, as Paul discussed earlier. And that in that dynamic, as you point out, Steve is absolutely correct. The banks, the demand from third-party banks is only increasing by the week and as contracts renew, we are able to renew at more favorable terms. So, that played a role; the bigger picture of what really played a role was us just maintaining that sort of long-term flexible approach to managing the balance sheet and offering clients as much FDIC coverage as we possibly can to our various products.

It's great. And for my follow-up, wanted to drill down into some of the October deposit trends, Paul. Given the sensitivity of spread revenue to changes in deposit mix, I was hoping you could provide some additional granularity disaggregating this sweep and ESP deposit levels and maybe help size the impact of the advisor payout?

When you say the advisor payout, are you referring to the quarterly fee billings or what have you…

Quarterly fee billings, which honestly, I care less about that. I really just was hoping to get the ESP and sweep deposit levels disaggregated given the sensitivity?

Got it. Yes, so we were down as a couple of days ago, $600 million, but this does bounce around from day to day. I mean, we had a $200 million positive day, yesterday, so at quarter-end we have $500 million. So, the balances are at numbers we're not used to high and low coming in and out. But the enhanced savings program is up probably $200 million to $300 million so far this month. And so, the net and the offset to that would obviously be the sweep balances, which frankly are doing much better than we would have expected given that we had the quarterly fee billings earlier this month as well. So, net-net cash to be down 500 to 600. When you add those two components, considering the $1.2 billion of quarterly fee billings, we're pretty pleased with our situation right now. But again, it's day to day can change today or tomorrow. So, we're going to monitor it closely.

Sorry, go ahead.

The important thing for us, I mean just not on earnings, but the fact that we have so much money to third-party banks. So, we could use if we wanted to. And we really haven't been borrowing. So, we have a lot of comfort to be able to go ahead and still have all the flexibility we need. But there has been the mix change with ESP with higher deposit costs. That's what you've been seeing net-net.

Got it, that's helpful color. Thanks for taking my questions.

Thanks, Steve.

Hi, thanks for taking my question. I was hoping you could provide us with some more color around deposit cost mix and specifically the pickup in money market and savings account yield?

Yes, I think we just sort of covered the growth in enhanced savings program balances for us, I mean in terms of the deposit cost, that is the biggest factor because those costs are somewhere around 5%. And so, to the extent that the mix of the total client cash balances shift to those Enhanced Saving Program balances, you're picking up probably 350 or so, 3.5 percentage points of cost effectively. So, I would say that's probably the biggest factor and the higher deposit costs. And why you saw the NIM really contract sequentially was largely due to us intentionally growing the higher-cost deposits. But again, a lot of that is geography. Because effectively what we have done is raised the higher-cost deposits of the Bank segment to that savings program, and then essentially shifted more of the lower-cost sweep balances to third-party banks. And so, that shows the NIM at the Bank segment contracting sequentially, but you see the corresponding benefit to the firm with third-party fees, which shows up in the PCG segment. And that's why, as Steve pointed out, we were able to generate better than expected and better than industry trends at least on the sequential basis.

Yes, very clear. I appreciate that context. Also, for my follow-up, how is feedback and adoption for RCS been? I was curious on what the mix between outside advisors joining the platform was versus the transition of existing advisors on the platform?

I think that the growth has been great, we're over 10% now of our assets in the RCS division. When we first probably opened it, we had a bigger movement of internal people who wanted to switch platforms, which again as part of the noise in advisor count, when the advisors moved from our employer independent division, we count them as advisors. Once we're in the RCS, they're not registered. They're RIAs. So, they're one firm, right? So, we dropped them out of the advisor count. But the assets have stayed and I think the proof point in that is the growth, D&A and assets, which I think for the year and for the quarter have been above most of the players in the market. The speed and the recruiting outside has picked up now that we've gotten the platform much more robust and increased the technology significantly. Hopefully the long-term growth will come from the outside. But we do have people here if they want to operate in the RIA format. They're welcome to switch affiliation options. But that has slowed down over the last couple of years from the initial opening of it or more people came over.

Appreciate the color. Thanks.

Thanks. Good afternoon, guys. Maybe Paul, I mean you talked a lot about sorting, I guess starting to decelerate, ESP growth decelerating. You have some pricing benefits on third-party sweeps. If we look beyond the first quarter or next quarter in terms of the guidance on rate-sensitive revenue, do you start to see things stabilizing? I guess I'm not asking for specific guidance, but if it kind of helps us think through the puts and takes and when we start to see those revenues maybe potentially stabilize?

I don't think anyone can really tell you exactly when cash sorting will fully stabilize across the industry. I know a lot of firms have been trying to convince you of that for the last 12 to 18 months, but we've been trying to be pretty transparent with you guys. And so, what we have said in the last three months, at least is that we feel like we're closer to the end of the sorting dynamic than the beginning. And you sort of are seeing that in the numbers. But we're not going to sort of declare an end to that dynamic until we have several months of data to support that. But to your point, longer-term, we are excited about the position that we're in now with a strong capital position, with the $16 billion almost as cash with third-party banks. That gives us a lot of dry powder to really grow the balance sheet when the attractive opportunities come. And we think we'll be in a position of strength there because not a lot of other firms in our space will have the capital and funding to pursue that attractive growth. So, we're in a great position. Again, it's a reflection of that long-term client focus, the flexible balance sheet that we've always strived to maintain even when being criticized for it over the last few years, but it puts us in a pretty good position now.

I think for us to really be able to assess the situation, it will depend on when interest rates stabilize. If the Fed starts raising rates again, that impacts securities and, if it involves money market funds, we have to increase our rates to compete. It seems that the Fed is nearing the end of this cycle of changing rates, and once they stabilize, I believe sorting will also stabilize.

Right. That's fair. And maybe just to follow-up on the credit side, some pretty big additions to reserves. You said you feel comfortable. I guess, what changes that? You mentioned macro, just trying to think through how you're feeling about the credit provision story there, given that loan growth has been pretty flattish.

We believe in the importance of credits; we appreciate their profile and the associated risks. Our approach has always been to proactively add to reserves to ensure we are well-prepared and often ahead of shifts in the market. However, we sometimes face limitations with our models, as some are based on Moody's forecasts. If they adjust their outlook, it directly affects us. Nevertheless, we strive to remain ahead of credit trends. During challenging times, such as in 2009, we managed reasonably well and have maintained a strong credit stance. What sets this cycle apart, especially since COVID began, is that we've sold off some loans, but we weren't satisfied with the trade-offs in credit yields and risks, so we've continued this on an individual basis. This has provided us with an additional mechanism to manage credit effectively. Overall, we feel optimistic, but if the economy were to spiral out of control, there would be other challenges to address. However, it seems that even if there is some economic slowdown, as long as employment and consumer purchasing remain steady, we believe we will navigate through it successfully.

Right. So, the additions are more macro-driven rather than specific concerns internally?

I would say the additions this quarter were sort of a number of items of specific loans where we, as Paul said, try to get in front of it with additional reserves when possible. There are also a modest amount; I think charge-offs are flat sequentially. So, nothing thematic, we feel good about the portfolio overall, but we try to get ahead of things, especially when the market environment is as unpredictable as it is, as Paul said.

For last quarter, the macro had a bigger impact than it did this quarter. It wasn't a big macro outlook change this quarter. That's right.

Okay, great. Thank you very much.

Okay, great. Thanks, Paul and Paul. Most have been covered here, but I do want to just touch on the fixed-income businesses briefly. So, the debt underwriting obviously had its best quarter in some time, it can be a little bit of seasonality there, but did have a better result than some peers. So, just curious whether that's some idiosyncratic deals or if you're actually seeing conditions for that business maybe starting to improve a little bit from depressed levels. And then, I guess, conversely, the fixed-income brokerage business took a little bit of a step lower from already a pretty tough level. So, just whether you see any catalysts on the horizon that could drive better results there as well.

The activity in fixed-income debt certainly increased, and we had a significant deal in the quarter that contributed to this uptick, involving a long-term client. This deal represented a major underwriting effort. Overall, the large transaction played a key role. Additionally, as Paul mentioned regarding the depositories, the lack of interest rates means they are holding onto excess cash and waiting for stability, which has slowed down this part of our business. Generally, trading has been subdued; while spreads in AAA munis and mortgage securities are higher than they have been in a while, activity has not significantly increased. People seem to be holding off until they can determine where interest rates will stabilize. Until that happens, it will remain a challenging environment, though it might improve slightly. For a more substantial recovery, we will need to see a more stable outlook for interest rates.

Got it. Okay.

I mean, the big ad has been, SumRidge has done extremely well since joining us too. So, they've been a great addition and well ahead of what we would expect in the traditional business, but at lows given the interest rate environment.

Yes, got it. Okay. Good color there. And then, just a follow-up briefly just on kind of corporate M&A, I hear all the comments around growth opportunities with capital and obviously opportunistic buybacks, but just more broadly, how you would just characterize the flow of deals you're seeing across the firm right now? And then just where the appetite is at the moment, just given the higher cost of capital how much of that calculation and maybe appetite for M&A has changed because you guys clearly have been acquisitive over the last several years here.

I think that first, the cost of capital is impacting deals. So, it's two things. First, it's pricing, so with the buyers, the cost of capital is saying, well, this is significantly higher, and pricing has been slower to come down, which isn't unusual in other M&A cycles that I've lived through. The price is slowest to adjust, and so we have empathy for M&A bankers because we look at things too. We have the same thing when you look at debt was free, and then you layer on a seven or eight or whatever the cost of rate is, especially for a lot of M&A firms where it's more higher risk debt. I mean, it impacts the pricing. It just has to. So, we see that both in the M&A business, it's backed up. So, you can see people doing deals now in the fourth quarter. We don't expect the next quarter to be a lot different, but backlog's good. People are waiting, but that gap, which I think a lot of it's from lending pricing and the cost of capital is impacting it, and you can see it in all the firms. And I'd say the same thing when we run numbers, it has an impact. Even with our excess capital, we assume we have to replace it, it makes it tougher. Most of the prices, most prices adjust a little bit or cost of capital falls. It's going to be harder. Or people just wait it out long enough and go, okay, the lower price is the new price; it's going to take one of those factors for it to really pick up. So, that's why we gave more of a six to 12 month outlook in our M&A business. Just, we think that the market's starting to see that, but let's see if it adjusts or not. I don't think it's going to happen overnight.

Okay, that's great. I'll leave it there. Thanks guys.

All right. Thanks, Devin.

Hey, good evening. Thanks for squeezing me in here. Just a question on the bank capital rules, we've seen some proposals from the banking regulators, including the Basel III Endgame proposal. Just curious how you see that impacting the opportunity set for your capital markets business, given you're under the $100 billion asset threshold. Just curious how you think about the opportunity set for yourselves, but then as you look out over the coming years, I'm sure eventually you probably hope you cross a hundred billion and grow to that level. Just how do you think about that impacting potentially your capital markets business? Which areas you think might be more impacted, and how do you think about preparing for that?

A couple of things to note. First, with our current $78 billion and 1% growth, reaching $100 billion will take a considerable amount of time. It's important to remember that a significant portion of our asset increase was due to the TriState acquisition. We don't have plans to acquire another bank; it took us five years to find TriState, which was an ideal match for us. We're not seeking another banking franchise, and most other activities won't substantially increase our asset size. We anticipate a timeline of about five years before we reach that threshold, plus an additional year to comply with any related requirements, and it could potentially take even longer. Currently, we are preparing for the regulations that will come into play when we do exceed $100 billion, examining everything from reporting and capital requirements to technology and changing regulatory expectations. We are proactively hiring to ensure we are ready for this transition well in advance. While we expect growth, we recognize the historical changes to thresholds and rules that have made significant regulations more stringent. Right now, we're focused on the future.

And just to add one thing to that timeline, one of the reasons it will be we expect to be around that long is because one of the things we did during COVID is really accommodate client cash balances on the balance sheet to the securities portfolio. And so, we expect over the next year, for example, for a lot of the Bank's loan growth to be essentially funded with securities that mature out of that portfolio, so you don't get as much net growth from the loan growth because it's a repositioning of those assets.

Great. And just a follow-up on that point, as banks that are impacted by the rules, either pullback of certain areas, or reprice certain products, how do you think about the opportunities set for you guys to step in given that the rules won't apply for you for many years? Where do you see the biggest opportunity set for your capital markets business or more broadly from these rules impacting a lot of banks?

I believe that acquiring capital markets businesses, fixed income firms, or asset management companies doesn't significantly change our asset size. The real impact comes from acquiring a bank, as that involves taking on its balance sheet. The businesses we've engaged in, such as M&A and fixed income, haven't dramatically changed since Morgan Keegan joined us seven or eight years ago; we've effectively managed our inventory. We believe there is ample opportunity to acquire businesses in that sector without altering our trajectory, and while there's mention of $200 billion, it's really the banking aspect that affects the balance sheet. That is not our primary focus.

Okay, thank you.

So, first, I appreciate the time. It's been really outside the kind of a regulatory charge, it would have been a really outstanding quarter that still is a very good quarter. And so, we're focused still going into an uncertain market. But we've always been in our business have outperformed because of our capital and cash. And especially in down markets, be nice to be enough capital markets and interest rates to come in and then it'll be kind of an easy year, but we always assume we have to work for it every year. Market is competitive. So, we're just doing what we've done. We've been managing expenses. A lot of people say what are you going to do to manage expenses? We have been doing that especially over the last few quarters. And plan to continue to do that until we see growth to support those. So, appreciate you joining the call and all the time you spent with us, and we'll talk to you soon.