Raymond James Financial Inc (RJF) — Q1 2024 Earnings Call Transcript

Good afternoon, and welcome to Raymond James Financial's Fiscal 2024 First Quarter Earnings Call. This call is being recorded and will be available for replay on the company's Investor Relations website. I'm Kristina Waugh, Senior Vice President of Investor Relations. Thank you for joining us today. With me on the call today are Paul Reilly, Chair and Chief Executive Officer; and Paul Shoukry, Chief Financial Officer. The presentation being reviewed today is available on Raymond James' Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to Slide 2. Please note that certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, industry or market conditions, anticipated timing and benefits of our acquisitions and our level of success integrating acquired businesses, anticipated results of litigation and regulatory developments and general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs, such as may, will, could, should and would, as well as any other statements that necessarily depend on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our website. Now I'm happy to turn the call over to Chair and CEO, Paul Reilly. Paul?

Thank you, Kristie. Good evening. Thank you for joining us today. Who would have thought, given all the uncertainty over the past year, we would have ended the last fiscal year with record results and generated record earnings per share and record client assets this quarter. This is a testament to our focus on executing our strategic priorities, which are rooted in our adviser and client-focused cultures. These priorities have remained consistent over many years. They are: to drive organic growth throughout our businesses, invest in technology and service capabilities and to maintain focus on strategic M&A and effective integrations. Through our relentless focus on these priorities, we have maintained long-term success across changing market environments. Now to review the first-quarter results, starting on Slide 4. The firm reported quarterly net revenues of $3.01 billion, an increase of 8% over the prior year quarter primarily due to higher asset-based revenues. Quarterly net income available to common shareholders was $497 million or a record $2.32 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $514 million or $2.40 per diluted share, both records. We generated strong returns for the quarter with annualized return on common equity of 19.1% and annualized adjusted return on tangible common equity of 23.8%, a great result particularly given our strong capital base. Moving to Slide 5. Client assets grew to record levels this quarter, driven by strong adviser retention and recruiting results along with the strong market. Total client assets under administration increased 9% sequentially to $1.37 trillion. Private Client Group assets in fee-based accounts grew to $747 billion, and financial assets under management reached $215 billion. PCG continues to generate strong organic growth evidenced this quarter with domestic net new assets of $21.6 billion, representing a 7.8% annualized growth rate on beginning-of-period domestic PCG assets. Advisers are attracted to our robust technology capabilities and client-first values. And through our long-established, multiple affiliation options, they can find the right fit for their business. During the quarter, we recruited to our domestic independent contractor and employee channels financial advisers with approximately $60 million of trailing 12 production and $13 billion of client assets at their previous firms. These results do not include our RIA and Custody Services businesses, which also continued to have recruiting success and finished the quarter with $147 billion of assets. Despite strong recruiting activity, the financial adviser count was sequentially flat mostly due to an elevated number of retirements, which are seasonally higher in the first quarter but where the firm typically retains the vast majority of assets through previously established succession plans. In addition, advisers moving to our RIA channel are excluded from the adviser count since they no longer carry a FINRA license with us. We announced that the President of our PCG Independent Contractor Division, Jodi Perry, transitioned to a newly created role of national head of adviser recruiting. Jodi has generated outstanding results in every role she has held in her nearly 30-year career with Raymond James, and I am confident she will continue to strengthen this key growth engine for the firm. This key leadership appointment continues to highlight the importance and focus on adviser recruiting. With this transition, we are excited about Shannon Reid becoming the PCG Independent Contractor Division President and joining the firm's executive committee. Shannon has most recently served as Senior Vice President of our Northeast division. She has an impressive background and has been a stellar leader in an important market. Total clients' domestic sweep and Enhanced Savings Program balances ended the quarter at $58 billion, up 3% over September 2023. Balances were boosted by growth in both the Enhanced Savings Program as well as the client sweep balances. Bank loans increased 1% from the preceding quarter to a record $44.2 billion, although loan demand remains relatively muted given higher rates. Moving to Slide 6. Private Client Group generated quarterly net revenues of $2.23 billion and pretax income of $439 million. Year-over-year, results were driven by higher asset management fees, reflecting 18% growth of assets in fee-based accounts. The Capital Markets segment generated quarterly net revenues of $338 million and a pretax income of $3 million. Investment Banking revenues grew 15% compared to the year ago quarter due to higher M&A and underwriting revenues. Sequentially, robust fixed income brokerage revenue growth largely offset weaker M&A and affordable housing investment results. While fixed income results were stronger during the quarter, investment banking activity industry-wide appears to be on a gradual recovery. The uncertain market environment, along with the impact of the amortization of share-based compensation granted in the preceding periods, has strained the near-term profitability of segment results. We remain focused on managing controllable expenses. The Asset Management segment generated pretax income of $93 million on net revenues of $235 million. Results were largely attributable to higher financial assets under management compared to the prior year quarter due to market appreciation and net inflows into PCG fee-based accounts. The Bank segment generated net revenues of $441 million and pretax income of $92 million. Bank segment net interest margin of 2.74% declined 13 basis points compared to the preceding quarter primarily due to a higher cost mix of deposits as Enhanced Savings Program balances that replaced a portion of lower RJBDP cash sweep balances. Now I'll turn it over to Paul Shoukry for a more detailed review of the first-quarter results. Paul?

Thank you, Paul. Starting on Slide 8. Consolidated net revenues were $3.01 billion in the first quarter, up 8% over the prior year and down 1% sequentially compared to the record set in the preceding quarter. Asset management and related administrative fees grew 13% over the prior year and declined 3% compared to the preceding quarter. The sequential decline was largely the result of lower fee-based assets at the beginning of the quarter compared to the beginning of the preceding quarter. This quarter, fee-based assets increased 9%, which will be a strong tailwind for asset management and related administrative fees in the fiscal second quarter. Brokerage revenues of $522 million grew 8% year-over-year mostly due to higher transactional activity in PCG. Sequentially, brokerage revenues increased 9%, the result of higher institutional fixed income brokerage revenues as client activity increased and the trading environment was more favorable. I'll discuss account and service fees and net interest income shortly. Investment banking revenues of $181 million increased 28% year-over-year. Sequentially, the 10% decline was driven predominantly by lower M&A revenues. We are cautiously optimistic that the environment for M&A is improving, and we continue to see a healthy investment banking pipeline and solid new business activity. However, there remains a lot of uncertainty, and we are hopeful a gradual recovery will lead to better results over the next 6 to 9 months. Other revenues of $38 million were down 30% compared to the preceding quarter primarily due to lower affordable housing investment revenues compared to the seasonally high fiscal fourth quarter. Moving to Slide 9. Clients' domestic cash sweep and Enhanced Savings Program balances ended the quarter at $58 billion, up 3% compared to the preceding quarter and representing 4.8% of domestic PCG client assets. Advisers continue to serve their clients effectively, leveraging our competitive cash offerings. Many clients have now taken advantage of the attractive Enhanced Savings Program and other high-yielding products. Thus, the pace of flows into this program has decelerated as we expected, growing approximately $900 million or 7% this quarter. A large portion of the total cash coming into ESP has been new cash brought into the firm by advisers, highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability. While we are encouraged by the modest sequential growth of client cash balances during the quarter, which was helped by seasonal tailwinds in the fourth calendar quarter, we continue to expect some further yield-seeking activity by clients. Through Monday of this week, sweep and ESP balances are down approximately $1.5 billion for the month of January primarily due to quarterly fee billings of $1.35 billion. RJBDP sweep balances with third-party banks were $17.8 billion at quarter end, up 12% from September 2023. The strong growth of Enhanced Savings Program balances at Raymond James Bank has allowed for more balances to be deployed off-balance sheet with third-party banks. While this dynamic has negatively impacted the bank segment's NIM because of the lower-cost sweep balances being swept off the balance sheet, it ultimately provides clients with an attractive deposit solution while also optimizing the firm's funding flexibility by providing a large funding cushion for when attractive growth opportunities emerge. Looking forward, we have ample funding and capital to support attractive loan growth. Turning to Slide 10. Combined net interest income and RJBDP fees from third-party banks was $698 million, down 2% from the preceding quarter due to lower firm-wide net interest income resulting from NIM compression, but outperforming our expectations on the last earnings call as client cash balance were more stable than we expected at that time. The Bank segment's net interest margin decreased 13 basis points sequentially to 2.74% for the quarter, and the average yield on RJBDP balances with third-party banks increased 6 basis points to 3.66%. While there are many variables that will impact actual results, absent any changes to short-term interest rates, we currently expect combined net interest income and RJBDP fees from third-party banks to be about 5% lower in the fiscal second quarter compared to the fiscal first quarter just based on spot balances after the fee billings this quarter and our expectation of some continued client cash sorting activity. Hopefully, we can outperform this expectation again this quarter, but we believe it's prudent to err on the side of conservatism given the continued uncertainty around client cash balance trends. We remain focused on preserving flexibility and growing net interest income and RJBDP fees over the long term, which we believe we are well positioned to do. Moving to consolidated expenses on Slide 11. Compensation expense was $1.92 billion, and the total compensation ratio for the quarter was 63.8%. Excluding acquisition-related compensation expenses, the adjusted compensation ratio was 63.4%. Looking ahead, the impact of salary increases effective on January 1 and the reset of payroll taxes at the beginning of the calendar year will be reflected in the fiscal second quarter. Noncompensation expenses of $462 million decreased 20% sequentially largely due to elevated provisions for legal and regulatory matters in the preceding quarter, whereas this quarter was a relatively quiet quarter for legal and regulatory reserves. The bank loan provision for credit losses for the quarter declined to $12 million. I'll discuss more related to the credit quality in the Bank segment shortly. We remain focused on managing expenses while continuing to invest in growth and ensuring high service levels for advisers and their clients. For the fiscal year, we expect noncompensation expenses, excluding provision for credit losses, unexpected legal and regulatory items or non-GAAP adjustments, to be around $1.9 billion. This implies incremental noncompensation growth throughout the year as we continue to invest in growth and ensure high service levels for advisers and their clients throughout our businesses. And remember, many of the noncompensation expenses, such as investment sub-advisory fees, represent healthy growth that follows the corresponding revenue growth. Slide 12 shows the pretax margin trend over the past 5 quarters. This quarter, we generated a pretax margin of 20.9% and an adjusted pretax margin of 21.7%, a strong result given the industry-wide challenges impacting capital markets. As a reminder, our current targets provided at our Analyst and Investor Day last May are for pretax margin of 20-plus percent and a compensation ratio of less than 65%. We still think these targets are appropriate, and we will provide an update as needed at the next Analyst and Investor Day scheduled for May 22. On Slide 13, at quarter end, total balance sheet assets were $80.1 billion, a 2% sequential increase. Liquidity and capital remained very strong. RJF corporate cash at the parent ended the quarter at $2.1 billion, well above our $1.2 billion target, and we remain well capitalized with a Tier 1 leverage ratio of 12.1% and a total capital ratio of 23%. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth. The effective tax rate for the quarter was 21%, reflecting a tax benefit recognized for share-based compensation that vested during the period. Going forward, we still believe that 24% to 25% is an appropriate estimate to use in your models. Slide 14 provides a summary of our capital actions over the past 5 quarters. During the quarter, the firm repurchased 1.4 million shares of common stock for $150 million at an average price of $107 per share. As of January 24, 2024, approximately $1.39 billion remained available under the Board's approved common stock repurchase authorization. Our current plan, which is subject to change, is to repurchase at least $200 million of shares in the fiscal second quarter to complete the remaining repurchases associated with the dilution from the TriState Capital acquisition. Following the second quarter, we expect to continue to offset share-based compensation dilution and to be opportunistic with incremental repurchases. Lastly, on Slide 15, we provide key credit metrics for our Bank segment, which includes Raymond James Bank and TriState Capital Bank. The credit quality of the loan portfolio is solid. Criticized loans as a percentage of total loans held for investment ended the quarter at 1.09%. The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 1.08%. The bank loan loss allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was 2.06% at quarter end. We believe this represents an appropriate reserve, but we continue to closely monitor economic factors that may impact our corporate loan portfolio, including the commercial real estate portfolio. Within the CRE portfolio, we have prudently limited the exposure to office loans, which represent just 3% of the Bank segment's total loans. Now I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Thank you, Paul. As I said at the start of the call, I am pleased with our results for the first fiscal quarter, generating record earnings per share and ending the quarter with record client assets. And while there is still economic uncertainty, I believe we are in a position of strength and are well positioned to drive growth over the long term across all of our businesses. In the Private Client Group, next quarter results will be positively impacted by the 9% sequential increase of assets in fee-based accounts. Near term, we expect some headwinds to the interest-sensitive earnings at both PCG and the Bank segment given ongoing cash sorting activity in uncertain rate environment. However, we are already seeing some of the higher-yield competitor rates coming in. Despite this, I believe our efforts and focus on being a destination of choice for our current and prospective advisers will continue to drive industry-leading growth. Our adviser recruiting activity remains robust, including a record number of large teams in the pipeline. In the Capital Markets segment, we continue to have a healthy M&A pipeline and good engagement levels. But our expectations for a gradual recovery are heavily influenced by market conditions, and we would expect activity to likely pick up over the next 6 to 9 months. And in the fixed income business, we saw improvements in this quarter with higher activity, but the dynamics of the past year persists. Depository clients are experiencing flat to declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity. We hope that once rates and cash balances stabilize, we will start to see an improvement. Despite some of the near-term challenges, we believe Capital Markets business is well positioned for growth once the market and rate environment become conducive. In the Asset Management segment, financial assets under management are starting the fiscal second quarter up 9% over the preceding quarter, which should provide a tailwind to revenues. We remain confident that strong growth of assets in fee-based accounts in the Private Client Group segment will drive long-term growth of financial assets under management. In addition, we expect Raymond James investment management to help drive further growth over time. In the Bank segment, we remain focused on fortifying the balance sheet with diversified funding sources and prudently growing assets to support client demand. We have seen security-based loans payoffs decelerate and are starting to experience growth. We expect demand for these loans to recover as clients get comfortable with the current level of rates. With little activity in the market, corporate loan growth has been muted. However, spreads have improved and with ample client cash balances and capital, we are well positioned to lend once activity increases in our conservative risk parameters. In addition to our focus on organic growth across our businesses, we have also ramped up corporate development efforts. In closing, we are well positioned entering the second fiscal quarter with strong competitive positioning in all of our businesses and solid capital and liquidity base to invest in future growth. As always, I would be remiss if I did not thank our advisers and associates for their continued dedication to providing excellent service to their clients. Thank you for all you do. That concludes our prepared remarks. Operator, will you please open the line for questions?

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

Historically, this quarter has shown a strong net new asset number. The key drivers are still rate retention and recruiting. However, the adviser count may appear misleading since we are bringing in fewer but much larger teams. This quarter saw a significant number of retirements, which typically occur at the end of the year. Most of these retirements have transition plans in place, allowing us to retain the assets, even though they reduce the adviser count. When advisers transition to the RIA division, we remove them from our count as they don't hold a FINRA license. Looking at net new assets over the past few years, we've consistently ranked at or near the top of the market due to strong retention and effective recruiting. As we focus on larger teams, many of their businesses are still experiencing significant growth, contributing to net new assets. Market conditions also play a role; when the market performs well, it attracts more assets. We're optimistic and have brought Jodi Perry on board to enhance our recruiting strategy, which was previously more decentralized. We believe this unified approach will improve our performance moving forward.

I want to shift the discussion to the capital markets aspect of the business, particularly the investment bank. You have continued to invest in talent there despite the challenging environment over the past 18 months. It seems that you have identified a higher caliber of bankers at Raymond James compared to previous periods. How should we anticipate revenue per managing director in a more stable environment if the backlog eventually begins to materialize?

Back at the last market peak, we exceeded $10 million per MD, which indicates very high productivity. A few years ago, we were at a couple of million dollars per MD, and that really highlights the difference. Part of that is due to the market conditions, but a significant factor has been the high-quality MDs we recruited and the teams that joined us. While I can't predict the number in a strong market, I believe we could still achieve that figure or even surpass it. We are actively recruiting in areas where we feel we were lacking senior talent. I think our productivity remains strong. If the market were as robust as it was a couple of years ago, we could exceed $10 million. In a reasonable market, I believe we would be significantly above the high single digits. As we've mentioned, we see a slow improvement in the market, but it's a steady upward trend rather than a rapid increase.

So first question, if we go back to early calendar 2023, you guys have built a fair amount of liquidity and maybe gave up some interest income short term. And I think the view was that lending spreads could widen out, and so you wanted to have some capacity. Obviously, there's also a reason to be conservative at that time. But it did seem like some of maybe the headwinds to spread revenues was more of a timing dynamic and intentional. So looking at today, you still have a lot of excess liquidity to grow loans if you see attractive risk-adjusted returns. So I'm just curious if kind of that view still holds that you had kind of through most of calendar 2023. And then are those better spreads materializing as maybe you thought they would? Are you still waiting for that as you're trying to think about the interplay with that and then accelerating the lending activity into that as well?

Yes, I think there are two parts to that. We have noticed wider spreads, but the market hasn't been strong in the areas where we prefer to lend. We have a conservative target in terms of industries and borrowers. The pipeline for new loans, as indicated by other banks, has also slowed down. We are still anticipating a resurgence in activity, which we believe will occur at some point. However, we are prepared to lend. Additionally, we are observing some improvement in SBL loans, which had been declining, with a decrease in payoffs and signs of growth in those portfolios. Nonetheless, the market is not allowing us to issue loans at the same pace we experienced in early 2023 or even in 2022.

I would like to follow up on the institutional fixed income brokerage. There has been a significant improvement this quarter with a run rate exceeding $400 million, compared to the mid-300s last year. When looking at 2023 in comparison to 2021, there is a decline of over 30%, despite having SumRidge and a supposedly stronger business now. I am interested in discussing the momentum observed in the quarter, the increasing activity from depositories, and how to consider what normalization in that business might look like. Is the run rate of just over $400 million that we saw this quarter a good baseline, or can we expect something even better? Additionally, does this quarter serve as a strong starting point considering the significant change from the previous quarter?

Yes. First, it’s a very unpredictable market. SumRidge has performed well consistently by trading on volatility. If you examine their results, you’ll see they have a solid, well-hedged corporate trading strategy that has been effective since the beginning. Their business remains strong. However, our traditional depository business, a significant part of our operations, slowed down as cash became tighter. This was due to two factors: many banks already held enough fixed-rate maturities and were not seeking more bonds, concerned about their liquidity. In December, as liquidity seemed to improve and interest rates appeared to be decreasing, banks became more active. The current environment has been decent at the beginning of the year, but it's too soon to determine how rates will affect things. If people believe rates have peaked and liquidity stays stable, banks will likely become more active, as they are now. However, I don't expect a return to the conditions we had two years ago until the market improves significantly. The team has performed excellently, but rising rates will be a challenge. If rates decrease or if confidence returns, activity will likely increase.

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

Yes, you mentioned some important points. In the December quarter, we usually experience seasonal benefits from tax loss harvesting and maturities. This quarter, our quarterly fee billings exceeded $1.3 billion, and we hope to see that growth continue throughout the year. However, we do face challenges as we approach April due to income taxes. While rates remain relatively high, they have slightly decreased due to expectations of lower rates, leading to some declines in the industry. Money market funds are our biggest competitors, as their yields remain attractive. We need to offer compelling alternatives to attract new cash and compete with those funds. As I mentioned in previous calls, I believe we are getting closer to the end of the cash sorting dynamic, but we won't declare it complete until we have several months of history to support that conclusion.

If people examine the beta, they might wonder if rates come down, will the spread increase rapidly? Typically, they follow fed funds during normal sweeps. However, money markets are focused on bond purchases, and it can take 2 to 3 weeks for them to adjust. If we see them as competition for rates, it will at least take a few weeks for that to be reflected before rates begin to move with the investors who are putting their money into higher-yielding certificates. But the trend will be positive.

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

There has always been scrutiny on those products over time, and we believe we have good products and systems to manage that. We put systems in place to comply with a similar law initially, but we had to remove them as the industry successfully challenged the rule. Following the second interpretation of questions, the industry again defeated the rule. We will need to wait for the court's decision and see what the final version of the rule looks like before assessing its impact. I suspect the industry will challenge the rule once more. So far, we have won twice, but I anticipate there will be substantial challenges to many aspects of what has been proposed. Therefore, it is too early to speculate until the rule is finalized and we determine if it can withstand a third court challenge.

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

Our stance on managing duration on the balance sheet has remained steady across various rate cycles, which served us well last year. We prefer to maintain a floating rate balance sheet and avoid attempting to predict rate movements. When we do take on duration, it's primarily to meet client demands, such as mortgages and tax-exempt loans, rather than trying to time interest rates. The forward curve has often been incorrect over the past two to three years, leading many other firms astray. Therefore, we will continue to stay flexible and prioritize accommodating our clients rather than seeking our own advantage.

And we've heard a lot of people speculate over at the top rates, but we went from no rate cuts to 3, to people speculating 6, to speculating, well, maybe we won't get one for months. So we just don't want to really play that game. And I think one of the keys to our consistent performance is we're not making bets. We're just consistently running the business. So we really don't look at locking in rates like that. And right now, the spread on the sweep rates is very, very good and compelling anyway.

Yes. Understood. Maybe just a question on the noncomp expense guidance of $1.9 billion. I think that implies a 10% increase or so in the average noncomp expenses for the remaining 3 quarters versus the first quarter run rate. I know there's some variable expenses that you laid out in terms of the investment advisory fees, but just wondering if you could expand a bit on some of the other areas where you may be ramping investments through the remainder of the year.

This quarter was quite low for most areas. In IT, we usually reduce external support during the December quarter since it's slower for those vendors to provide personnel. It tends to be a quieter quarter for conferences and travel. Additionally, it was a relatively favorable quarter for legal and regulatory matters. Therefore, I believe we should anticipate growth as we aim for the $1.9 billion guidance. Just a reminder, this guidance does not include certain non-GAAP items, which many of you exclude, along with the bank loan loss provision and unexpected legal and regulatory reserves, as it's difficult to predict those over the next three quarters.

And that was our initial guidance of $1.9 billion. It may vary, but we believe that’s a solid number.

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

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

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

There wasn't anything unusual in the bank channel. This channel tends to be more variable because of the involvement of many advisers, but they balance out with the banks. We don't anticipate any irregularities. This is part of our growth strategy, and I believe our net new assets have remained very strong. We appreciate the growth trend. This is a solid performance considering the current environment and our competitors this quarter, and I still believe we have the chance to be at the top in terms of net new assets, even though we don't provide specific forecasts.

I would like to shift the discussion back to capital return, especially since you have a strong capital position. You've mentioned some dynamics on the loan and lending side. Why not accelerate capital return through buybacks? Additionally, what are your thoughts on inorganic opportunities at this time, and what are you considering?

We were a bit delayed in the quarter due to a self-imposed blackout related to our off-platform communications, which caused us to miss the opportunity to engage sooner. However, we had a solid period in that market and were not in a rush to catch up. We are committed to allocating $200 million next quarter to fulfill our TriState commitment and to manage dilution moving forward. We want to be opportunistic while balancing our approach. We have appointed a new head of corporate development and are noticing several promising opportunities in the market. As we previously stated, we would invest when our cash exceeds 12%, and we successfully completed six acquisitions in 18 months, reducing our ratio to 10%. Our ability to pursue these opportunities stems from having capital available on our balance sheet. While the market presents many possibilities, we are cautious about their viability. We continue to monitor both capital growth and acquisition possibilities, aiming for a balance. We believe $200 million is a suitable target, and if we do not identify acquisitions that enhance our firm's positioning, we will consider buying back stock. We are not holding onto capital unnecessarily; our RSUs are based on return on equity and total shareholder return, reflecting our commitment to responsible capital management while also seeking potential opportunities.

Okay. Just a follow-up to discuss margins briefly. We are looking forward to the Investor Day in the spring. Conceptually, if the investment banking environment were to improve, how should we consider the additional margin in both the segment and its impact on the holding company at this time? As you know, you are currently operating close to breakeven. I'm trying to analyze the factors affecting net interest income being pressured, countered by a potential increase in investment banking activity, and how that may affect overall profitability.

Yes, Bill, in the Capital Markets segment, they reached record levels over the past couple of years, with a peak margin of around 26% two years ago. This illustrates the potential for that segment. Both the equity and fixed income sides of the business were performing exceptionally, which is somewhat unusual in the industry due to the countercyclical nature of some of these businesses. There's significant upside from just breaking even this quarter in capital markets to what the potential is, which we demonstrated a couple of years ago, and this would obviously enhance the overall margin of the firm. We are still targeting a margin of over 20% for the firm at this point, and we will provide updates as necessary at Analyst/Investor Day in May. However, we have a diversified business model, so there are always positives and negatives to consider. We prefer not to present a narrative that only highlights the incremental margin gains without accounting for possible offsets. This balanced approach is important. Naturally, if we achieve similar performance from other businesses along with the growth potential in capital markets, it would positively impact the overall margins for the firm. However, we are hesitant to provide guidance at this stage given the uncertainties, particularly concerning cash sorting dynamics, which significantly influence margins. The cash balances and current interest rates are major factors affecting the firm's margins, so we intend to be conservative until there is more stability.

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

Yes. We expect the ESP balances to closely align with changes in fed funds effective rates, which is also what advisers and clients anticipate not just at Raymond James but across the industry for higher-yielding products. While our deposit mix differs from others, it's important to note that after the TriState acquisition, we now have $18 billion in higher-cost and likely higher beta deposits, affecting both upward and downward rate movements. This gives us a sensitivity profile that's more aligned with our overall deposit situation, particularly beyond just PCG-related deposits, which we are confident about. Moreover, our sweep deposits have been significantly more generous compared to most competitors, providing us with a buffer as rates decline as well. As Paul mentioned, we will navigate the competitive landscape as rates fluctuate, but we are optimistic about our current positioning.

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

If you look at current revenues compared to the peak of capital markets, being breakeven now versus achieving a 26% margin during the peak shows a clear relationship. There is significant incremental margin potential as we increase revenues from our current levels to where we were at that time. This also hinges on the revenue mix in capital markets, including contributions from M&A, underwriting, and fixed income, which each have varying incremental margins. While we could estimate a simplistic model, it may not be entirely precise. Additionally, the factors that could benefit our capital markets business may also affect our other operations positively or negatively. Generating over 20% margins and achieving record earnings over the past three years in varied market conditions highlights the strength of our diversified business model. Achieving a 23% return on tangible common equity this quarter without reliance on capital markets reflects our satisfaction with our performance.

Maybe just a quick question on the brokered sweeps. Your net yield has increased again, indicating that you have pricing power. How long do you think this pricing power can continue? It seems that deposits in the industry have stabilized for banks. Does this start to diminish some of that pricing power? What is your outlook on the sweep pricing?

Yes. We're still seeing a lot of demand for these deposits across the banks that we deal with. So we still think that there's pricing power. But in fairness, the pricing power we're talking about is 5 basis points to 10 basis points, which on the balances of $17 billion is meaningful, but it pales in comparison to what's happening with the base rates nowadays and what might happen, going down or up. So we still think there's pricing power. There's a lot of demand for these deposits. But we're hopeful that over the next year or 2, we're using more of these deposits to grow the balance sheet and support clients with loan activity, which generates a higher yield and returns for the firm overall.

Great. That makes sense. As a follow-up regarding the large team pipeline, which is at a record high, could you share your win rate among these large teams? Do you feel it’s improving? Additionally, how much of this is in the pipeline compared to what you've already secured, especially in terms of new mandates, clients, and financial advisors?

Yes. I’m not sure if I have those exact numbers. I can say that we didn’t have $10 million teams a year or two ago. Now we see teams worth $20 million and $30 million, and their success rate is quite good, but there's a lot of competition. We’re not the highest payer, but we are still performing really well. We have many potential opportunities, but currently, the ones in the pipeline are not committed. We are very close, and I believe we have a solid understanding of who might come on board and who is close. Our focus is on securing the right candidates. It’s a significant number, and honestly, we are a bit surprised. This is due to both the growth of our firm and our platform, the high net worth initiatives we have implemented, and what we have developed especially since Alex Brown joined us, making it a welcoming place for high net and ultra-high net individuals. Moreover, our technology, systems, and company culture all contribute to creating an environment where, if you had asked us a couple of years ago, we wouldn't have predicted the presence of $10 million, $20 million, or $30 million teams occurring simultaneously. So, our task is to attract them, particularly the good ones. That's what we are diligently working on.

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

Yes. First, everyone uses them. So if you want to recruit without changing systems, good luck. You might bring in some people, but not many. Advisers see value in their practices and expect fair returns. This is true for all firms, particularly in the employee and independent channels, though it's less of a factor in the RIA channel. We have intentionally not positioned ourselves as the highest offer both during my time and before. We want individuals to choose us because they believe it's the right fit, not just for the highest payout. However, in recent years, the transition of systems has increased, requiring us to make some adjustments. Despite this, we are rarely the highest offer and seldom match the highest offer, yet we maintain a strong success rate. That's just part of the business.

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

Yes, there are many opportunities across all our business segments. We believe there are inorganic growth possibilities, but the challenge lies in timing. Some opportunities are available in the market, and we maintain contact with potential partners to gauge their interest in collaborating with us rather than competing. Over the past year, the volume of discussions has increased. However, the timing for closing deals can be tricky, especially since sellers tend to hold on to their price expectations longer than buyers adjust theirs. In our industry, cash sorting has remained consistent, contrary to some predictions that it would stabilize. We maintain that our valuation should not hinge on those forecasts. This situation can be influenced by various factors, including a company's willingness to sell at a certain valuation. While interest and dialogues are up, we sometimes decide to walk away, and occasionally, others do as well. Timing and pricing remain critical considerations. In the past, opportunities have emerged unexpectedly, and while we cannot accurately predict when negotiations might succeed, we believe it is essential to have sufficient capital ready for when the right moment arises.

I wanted to come back to some of your comments on the recruiting backdrop. I was hoping you might be able to elaborate a bit on the competitive environment today versus, say, 6 or 12 months ago for recruiting and how you might expect that to evolve if rates come down over the next year or 2.

On recruiting, throughout my time in this role, many have said that recruiting would decline, yet it has actually picked up. There were predictions of aging advisers leading to a lack of new advisers, but we are now seeing teams in their 40s with larger books than ever before. Thus, I believe the potential for recruiting will remain strong. Our unique value proposition stems from our size and high ratings from three agencies, as well as our capital, which allows independent and Freedom advisers to retain ownership of their books and leave if they choose. Our technology platform and wealth management services are among the best in the industry, as recognized by various awards. We need to continue competing, and activity remains robust. A significant change in the competitive landscape has been the rise of RIA roll-ups that are offering prices we find difficult to comprehend, suggesting a focus on aggregation and future market strategies, even though the private sector valuations are much higher than public ones. This has introduced new competition, influencing the market as more individuals are selling their firms instead of retaining ownership. Advisers now have options regarding how they wish to operate, whether they want to own their business with full support from leading technology or sell it for a premium price to a roll-up. We aim to aggregate and monetize later, which is a viable market option that simply didn't exist three years ago.

Great. I want to thank you all for attending. I believe we are in a strong position, with positive momentum as our asset numbers have increased by 9%. The markets may continue to surprise us and appear to be strong. If this trend persists, we will be well-positioned. The cash situation will eventually stabilize. If the forward curve holds true, even if it takes some time, it will ultimately benefit us when it does. For now, as you know, we prefer to be cautious. We've observed a 5% decline over the last few quarters, which we haven't fully experienced yet, but we remain uncertain. Therefore, we continue to adopt a conservative approach. If interest rates ease or decrease, it could provide benefits for the industry. Thank you for joining, and we look forward to speaking with you again.