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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, and welcome to Raymond James Financial's Second Quarter Fiscal 2023 Earnings Call. This call is being recorded and will be available for replay on the company's Investor Relations website.
Now, I'll turn it over to Kristie Waugh, Senior Vice President of Investor Relations at Raymond James Financial.
Good afternoon, everyone, and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman 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 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 economic conditions. In addition, words such as may, will, could, anticipates, expects, believes or continue or negative of such terms as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements.
Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our Investor Relations website.
During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our press release and presentation.
Now I'll turn the call over to Chair and CEO, Paul Reilly. Paul?
Good afternoon. Thank you for joining us today. Paul and I are joining you from Orlando, Florida. We have over 4,000 people attending our independent advisors conference. It's great to see such an upbeat mood and people really having a good time getting back together as well as all the other educational sessions we have here.
Since our founding over 60 years ago, Raymond James has maintained an unwavering commitment to placing clients first through conservative decision-making that keeps us well positioned over the long term. While remaining focused on the long term has not always been easy or fully appreciated in good times, it has served us very well over time. And it's in times such as these when even the financial system itself is challenged that our philosophy not only carries us through but enables us to thrive.
Just a few examples of our differentiated positioning that we have benefited recently from includes Tier 1 leverage capital ratio of 11.5%, over 2x the regulatory requirements to be well capitalized. 88% of our bank deposits are FDIC insured, including nearly 95% of Raymond James Bank amongst the highest in the entire industry, and A-level rating with all three credit agencies which Fitch reaffirmed in March at the height of the turmoil. A few weeks later, we were able to renew and upsize our 5-year committed revolver with enhanced terms, thanks to the fantastic relationship we have with all of our bank partners. Further, we were able to buy back 350 million of shares at what we believe were attractive prices. And we still have $1.1 billion of capacity remaining under our Board authorization.
In times like these, we are reminded of the importance of keeping a long-term client-focused approach and our stakeholders' benefit and appreciate the firm's dedication to placing them first.
Now turning to our results. Despite the challenging market and the high market volatility during the first six months of the fiscal year, we generated record net revenues and record earnings.
Reviewing second quarter results, starting on Slide 4. The firm reported record quarterly net revenues of $2.9 billion and net income available to common shareholders of $425 million or $1.93 per diluted share. Excluding expenses related to acquisitions, adjusted net income available to common shareholders was $446 million or $2.03 per diluted share.
The increase in interest-related revenues driven by short-term interest rates drove significant earnings growth over the prior year. Net revenue increased 7% and net income available to common shareholders grew 32%. And despite the challenging market conditions and our robust capital position, we generated strong returns with annualized return on common equity of 70.3% and annualized adjusted return on tangible common equity of 22.3%.
Moving to Slide 5. We ended the quarter with total client assets under administration of $1.2 trillion, PCG assets and fee-based accounts of $666 billion and financial assets under management of $194 billion. With our continued focus on retaining, supporting and attracting high-quality financial advisors, PCG consistently generates strong organic growth, which is evident again this quarter with domestic net new assets of $21.5 billion, representing an 8.4% annualized growth rate on the beginning of the period domestic PCG assets.
During the prior 12 months, we recruited through our domestic independent contractor and employee channels, financial advisors with approximately $275 million of trailing 12 production and nearly $38 billion of client assets at their previous firm. Total clients' domestic sweep and Enhanced Savings Program balances ended the quarter at $52.2 billion, down 14% from December of 2022. The sequential decline reflects the expected cash sorting activity, which was partially offset by the launch of our Enhanced Savings Program. We are pleased with the early success of our Enhanced Savings Program. This product offered the PCG clients the Raymond James Bank is a fantastic option for clients seeking competitive rates while maintaining a high level of FDIC insurance. We believe this product is really unique in the industry and certainly appealing in the current environment. As of this week, Enhanced Savings Program balances have surpassed $4.5 billion.
Total bank loans decreased 1% from the preceding quarter to $44 billion, primarily reflecting a modest decline in securities-based loans due to higher interest rate environment. We will touch on this more later on the call, but we plan to remain very prudent with growing our corporate loans over the next several months given volatile market conditions.
Moving to Slide 6. Private Client Group generated record results with quarterly net revenue of $2.14 billion and pre-tax income of $441 million. Year-over-year, asset-based revenues declined due to market declines. However, PCG's results were lifted by the benefit of higher interest rates and interest-related revenues and fees. As Paul Shoukry will explain in more detail, this quarter was negatively impacted by some seasonal expenses as well as elevated legal costs. The Capital Markets segment generated quarterly net revenues of $302 million and a pre-tax loss of $34 million. Revenues declined 27% compared to the prior year quarter mostly driven by lower investment banking revenues as well as lower fixed income brokerage revenues. The extremely challenging market environment, particularly for investment banking, has strained the near-term profitability of the segment. However, we are focused on managing controllable expenses as near-term revenues are depressed.
The Asset Management segment generated pre-tax income of $82 million on net revenues of $216 million. The year-over-year decreases in net revenue and pre-tax income were largely attributable to lower assets and fee-based accounts as net inflows into fee-based accounts into the Private Client Group were offset by market declines. Solid net inflows for Raymond James Investment Management helped boost financial assets under management, which should provide a tailwind in the fiscal third quarter. The Bank segment generated record net revenues $540 million and pre-tax income of $91 million. Revenue growth was largely due to the continued expansion of the bank's net interest margin to 3.63% for the quarter, up 162 basis points over the year ago quarter and 27 basis points from the preceding quarter. The NIM expansion reflected the flexible and floating nature of our balance sheet. Although as Paul Shoukry will explain, we do expect some headwinds to NIM, which reached very high levels across the industry over the past couple of months.
Looking at the fiscal year-to-date results on Slide 7. We generated record net revenues of $5.66 billion and record net income available to common shareholders of $932 million, up 4% and 21%, respectively, over the prior year's record. Additionally, we generated strong annualized return on common equity of 19.3% and annualized adjusted return on tangible common equity of 24.2% for the six-month period.
On Slide 8, the strength of the PCG and Bank segment for the first half of the year primarily reflects the strong organic growth in PCG and the benefit of higher interest-related revenues, whereas the weaker Capital Markets results reflected the challenging environment for investment banking and brokerage revenues, especially when compared to the record activity levels in the year ago period.
And now I'm going to turn the call over to Paul Shoukry for a more detailed review of the second quarter financials. Paul?
Thank you, Paul. Starting on Slide 10. Consolidated net revenues were a record $2.87 billion in the second quarter, up 7% over the prior year and 3% sequentially. Being able to generate record quarterly revenues during a period when Capital Market revenues were so challenged across the industry, reinforces the value of having diversified and complementary businesses. Asset Management and related administrative fees declined 11% compared to the prior year quarter and increased 5% sequentially due to the higher assets and fee-based accounts at the end of the preceding quarter, partially offset by fewer billable days in the fiscal second quarter. This quarter, fee-based assets grew 5%, providing a tailwind for Asset Management and related administrative fees in the fiscal third quarter.
Brokerage revenues of $496 million declined 12% year-over-year and grew 2% sequentially. This year-over-year decline was largely due to lower asset-based trail revenues in PCG as well as lower fixed income brokerage revenues in the Capital Markets segment.
I'll discuss account service fees and net interest income shortly. Investment banking revenues of $154 million declined 34% year-over-year and grew 9% sequentially. As experienced across the industry, M&A revenues were particularly challenged this quarter, declining 37% year-over-year and 15% sequentially. Despite a healthy banking pipeline and solid new business activity, there remains a lot of uncertainty in the pace and timings of deals launching and closing, given the heightened market volatility. It remains too difficult to say when conditions will become conducive to increase investment banking revenues.
Moving to Slide 11. Clients' domestic cash week and Enhanced Saving Program balances ended the quarter at $52.2 billion, down 14% compared to the preceding quarter and representing 4.9% of domestic PCG client assets. The Enhanced Savings Program added approximately $2.7 billion in new deposits in March as the offering was only open to net new balances until April. And a good portion of these new balances were derived from brand-new clients to the firm following the Silicon Valley Bank collapse, highlighting the attractiveness of this product and Raymond James being viewed as a source of strength and stability. As Paul said, the Enhanced Savings Program balances exceeded $4.5 billion this week, continuing to grow nicely and partially offsetting the anticipated decline in sweep balances, largely due to quarterly fee billings in April.
So while it's difficult to parse through the disclosures to make sure we're comparing apples to apples, of the handful of peers who have reported thus far, we estimate year-over-year cash sweep declines for those peers were approximately 35% to 45%. This compares to a 35% year-over-year decline in our domestic sweep balances through March. So this dynamic of declining sweep balances has really been experienced at roughly the same order of magnitude for most of the firms in our industry. And as most of you know, we have been expecting, communicating and preparing for the sorting activity for quite some time.
Looking forward, we expect additional cash sorting activity, although we believe we are much closer to the end of that dynamic than we are to the beginning if rates settle out near current levels, and the average sweep balance per account over the approximately 3.4 million accounts domestically is now less than $15,000. And we hope to continue to offset any further cash sorting activities through our diversified funding sources, including the Enhanced Savings Program, TriState's deposit franchise and other initiatives. And when the sorting dynamic does stabilize, we would then expect to grow sweep balances given our strong organic growth in PCG.
Meanwhile, to be prudent, we would strive to maintain a strong funding cushion of domestic cash swept to third-party banks, not too much lower than where it ended the March quarter. We would also plan to keep elevated cash balances in the Bank segment, which grew from $1.8 billion in December to $5 billion at the end of the fiscal second quarter. While these actions don't optimize net interest margin over the short term, we believe they give us the most flexibility over the long term.
Turning to Slide 12. Combined net interest income and RJBDP fees from third-party bank was $731 million, up 226% over the prior year quarter and 1% over the preceding quarter, as a sequential decrease in RJBDP fees from third-party banks was more than offset by higher firm-wide net interest income. The Bank segment net interest margin increased 27 basis points sequentially to 3.63% for the quarter, and the average yield on RJBDP balances with third-party banks increased 53 basis points to 3.25%. Our long-standing approach of maintaining a high concentration of floating rate assets not only helped drive more immediate upside to higher short-term interest rates but also preserve a relatively flexible balance sheet compared to the banks that had much higher concentration of duration risk.
Looking forward, we expect combined net interest income and RJBDP fees from third-party banks to decline sequentially in fiscal third quarter due to a decrease in third-party RJBDP fees given the lower average balances with third-party banks. We would also expect the bank segments NIM to contract from the second quarter given the higher level of cash balances we plan to maintain during this volatile period as well as the impact from higher cost diversified funding sources. But as we have always said, instead of focusing on maximizing NIM, we are focused on preserving flexibility and growing net interest income over the long term, which we still believe we are well positioned to do after the cash sorting dynamic is behind us. But near term, we expect headwinds for the net interest income and RJBDP fees for the reasons I just explained.
Moving to consolidated expenses on Slide 13. Compensation expense was $1.8 billion, and the total compensation ratio for the quarter was 63.3%. The adjusted compensation ratio was 62.8% during the quarter. The compensation ratio continues to benefit from higher net interest income in RJBDP fees from third-party banks. The sequential increase in compensation reflects higher revenues as well as the impact of salary increases effective on January 1, along with the reset of payroll taxes at the beginning of the calendar year. We are very pleased to generate a 62.8% adjusted compensation ratio, given these factors and the extremely challenging market environment in Capital Markets.
Non-compensation expenses of $496 million increased 25% sequentially. Adjusting for acquisition-related non-compensation expenses and the favorable settlement received in the fiscal first quarter, which are all included in our non-GAAP earning adjustments, non-compensation expenses grew 16% during the quarter. This increase was largely driven by higher legal and regulatory costs including an unfavorable arbitration award totaling $20 million, along with higher communication and information processing expenses, which reflect continued technology investments and the seasonal impact of year-end mailing. The bank loan provision for credit losses for the quarter of $28 million largely reflects the charge-off of a C&I loan has been challenged for several quarters as well as higher allowances in the CRE portfolio. I'll discuss more related to the credit quality of the Bank segment shortly.
In summary, we remain focused on managing expenses while continuing to invest in growth and ensuring high service levels for advisors and their clients. While there has been some noise with elevated legal and regulatory expenses this quarter and there are always some seasonal expenses that hit in the first calendar quarter of the year, none of the non-compensation expenses are coming in too much differently than we expected when we last provided guidance for the fiscal year. But legal and regulatory expenses are inherently difficult to predict.
Slide 14 shows the pre-tax margin trend over the past five quarters. In the current quarter, we generated a pre-tax margin of 19.4% and adjusted pre-tax margin of 20.4%, a strong result given the industry-wide challenges impacting Capital Markets.
On Slide 15. At quarter end, total assets were $79 billion, a 3% sequential increase largely reflecting the $3.2 billion increase of cash balances in the Bank segment during the quarter. Liquidity and capital remains very strong. RJF corporate cash at the parent ended the quarter at $1.8 billion, well above our $1.2 billion target. Our Tier 1 leverage ratio of 11.5% and total capital ratio of 21.4% are both more than double the regulatory requirements to be well capitalized. The 11.5% Tier 1 leverage ratio reflects a $1 billion of excess capital above our conservative 10% target, which would still be 2x the regulatory requirements to be well capitalized. Our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.
We were pleased to have our A- credit rating reaffirmed by Fitch in mid-March. In the announcement, Fitch cited the firm's strong capital cushion, significant deposit funding and access to unsecured debt markets, among other drivers as the reason for the rating. Also in April, we renewed our revolving credit facility and expanded it from $500 million to $750 million. A strong balance sheet and long-standing relationships with our banking partners enabled us to upsize the 5-year committed corporate revolver with enhanced terms to further strengthen our contingent liquidity sources. The ability to execute this facility in a challenging market environment is a testament to our long-term conservative approach. I know many of our bankers are listening on this call, so I'd like to thank all of you for your continued support and partnership.
We also have other significant sources of contingent funding. For example, just to be proactive, given the market uncertainty in March, we increased our FHLB borrowings in the Bank segment by only $500 million from December 31 to March 31. And given our strong cash position, we've already paid $200 million of that down in April. That leaves us more than $9 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 second quarter, the firm repurchased 3.75 million shares of common stock for $350 million at an average price of $93 per share. As of April 26, approximately $1.1 billion remained available under the Board's approved common stock repurchase authorization. And we currently intend on continuing our planned repurchases as we discussed previously, particularly as this market volatility has provided attractive opportunities for us, and we don't plan on using as much capital to support balance sheet growth over the next 3 to 6 months.
Lastly, on Slide 17, we provide key credit metrics for the Bank segment, which includes Raymond James Bank and TriState Capital Bank. The credit quality loan portfolio remains healthy. Criticized loans as a percentage of total loans held for investment ended the quarter at just 0.92%. The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 0.94%. The bank loan allowance for credit losses on corporate loans as a percentage of corporate loans held for investment was 1.67% 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.
I know there's been a lot of attention on commercial real estate across the industry, given the challenges with property value and interest rates.
So let me briefly cover our portfolio. Across the Bank segment, we have a CRE and REIT loans approximately $8.8 billion, which represents 20% of our total loans. Our office portfolio is only 17% of these real estate loans. So our office portfolio only represents approximately 3.5% of the Bank segment's total loans. Based on the underwriting and origination along with the most recent appraisals, the average loan-to-value of this office portfolio is somewhere around 60%, which is probably a little bit higher now, given pressure on valuations in the industry, but still providing us a lot of cushion on this portfolio on average. Overall, we have deliberately limited the exposure to office real estate, and we underwrote office loans with what we believe are conservative criteria, but we continue to monitor each loan closely given the industry-wide challenges.
Now I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?
Thank you, Paul. And as I said at the start of the call, I'm pleased with our results for the first 6 months of fiscal 2023 and our ability to generate record earnings during what continues to be a very volatile market. And while there is still a lot of near-term economic uncertainty, we are in a position of strength, and I believe we 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 favorably impacted by the 5% sequential increase of assets in fee-based accounts. However, we do expect to have some headwinds from lower RJBDP fees from third-party banks, given lower average balances. Focusing more on the long term, I'm optimistic we will continue delivering industry-leading growth as current and prospective advisors are attracted to our client-focused values and our leading technology and product solutions. For example, in our current advisor recruiting pipeline, we have several commitments from teams with $5 million to $20 million of annual production.
In the Capital Markets segment, while M&A pipelines remain healthy and engagement levels are good, the pace and timing of launching and closing transactions will be challenged until market conditions stabilize. And in the fixed income space, depository clients are experiencing declining deposit balances and have less cash available for investing in securities, putting pressure on our brokerage activity. However, SumRidge enhances our position as this business typically benefits from elevated rate volatility and has produced excellent results since joining us. While we expect continued industry-wide challenges over the next couple of quarters, over the long term, we are well positioned across the capital markets business for growth given the investments we made over the past 5 years, which have significantly increased our productive capacity and market share.
We will continue to prudently manage expenses in these businesses as the near-term revenues continue to come under pressure. Obviously, we will take more significant actions if the industry headwinds prove to be more long term. In the Asset Management segment, financial assets under management are starting the fiscal third quarter, up 5% compared to the preceding quarter, which should provide a tailwind to revenues if markets remain conducive throughout the fiscal third quarter.
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, which generated solid net inflows this quarter to help drive further growth through increased scale, distribution, operational and marketing synergies. In the Bank segment, our focus over the next several months will continue to be fortifying the balance sheet with diversified funding source. While we'll continue to support our PCG clients when their demand for loans eventually recover, we will be very prudent in growing corporate loans given market uncertainty.
We believe there will be a more attractive opportunities in the future as spreads widen to reflect the higher cost of funding and our higher premium required for credit risk across the entire banking industry. And just as we did during uncertain market environments in the past, we have been and will continue to be opportunistic in selling certain loans to further derisk the corporate portfolio, especially when we believe the secondary market prices do not fully reflect the downside risk. So overall, our approach to the Bank segment over the next 3 to 6 months is to build as much dry powder as possible for what we believe will be a more attractive and opportunistic environment for loan growth in fiscal 2024.
In closing, we believe we are well positioned with strong prospects for future growth and ample cash and liquidity. Uncertain times like these are when clients need trusted advice the most. And I want to thank our advisors and their associates for their continued perseverance and dedication to providing excellent service to their clients each and every day. The strength and stability of our firm is a direct reflection of your commitment. So thank you all for all you do.
And with that, operator, that concludes my remarks, and we'll open up the line for questions.
[Operator Instructions] The first question comes from the line of Devin Ryan with JMP Securities.
I hopped on a minute late, but I had a question just on the net interest income outlook. I just want to make sure I understood the commentary. So is the expectation that it's going to take a near-term step back and then can grow off of whatever that new base is? Or Paul, are you saying that you'll kind of resume growth off of the fiscal second quarter level? And I guess related, I heard that you're going to operate, I think, with higher reserves. So just how much of a drag is that? And I guess, what would make you comfortable bringing that down?
Well, I'll let the other Paul go through the NIM. But I don't think we anticipate right now higher reserves -- I mean, reserve cash, maybe we'll be carrying a little more cash, but I don't know which reserve you're referring to, so.
Yes. I was referring to the cash reserves, just the cash.
There's more cash in the bank. Go ahead, Paul. I'll let...
Yes. So we did increase the cash balances at the bank, just given the volatility in March, we thought it would be prudent. So we finished the quarter up by I think, $5 billion. So we were up $4 billion for the quarter, ending the quarter at $5 billion of cash at the Bank segment. And so that is a drag on NIM because you're earning closer to 5% on that versus the 7-or-so percent we're earning on new loans that we're putting on the book, but we think that's prudent just given the volatility. And in terms of the outlook going forward, near term, we do expect a pullback of net interest income and BDP fees when you look at those on a combined basis, we plan on keeping the cash swept to third-party banks at around the current level just because we think that $9 billion gives us a nice cushion. It also offers clients maximum FDIC insurance, which we all know is really important for clients right now. And so by doing that, even at $9 billion, those fees are probably going to be down -- average balances will be down 25% sequentially. And so those fees will be down 25% roughly, depending on what happens with rates and other things. And then the net interest income will be pressured by having higher cash balances and then higher cost of funding that we raised since launching the Enhanced Savings Program in March. So all net together, I think that would result in probably somewhere around a 10% decline sequentially. And then as we start growing balances from there, then that would be probably a good jumping off point.
Got it. Okay. Great color. I guess maybe just I want to follow up on the same topic. And probably, you just mentioned the Enhanced Savings Program. It looks like you're having some nice success there. And I'm assuming that it's still reasonably early in terms of the advisor penetration. So just love to maybe talk about kind of the expectation for growth there. And maybe could advisors be more active moving their customers' cash there in the near term, just given that it's new. And so that could pressure the -- I guess, the rate on the liability side or do you have data that's just suggesting that the majority of the yield-seeking cash has already moved out of the accounts?
Yes, I would tell you, when we look at sort of the trends, it looks like a lot of the sorting activity, the higher yield seeking activity has occurred. When we rolled out the Enhanced Savings Program in March, it was actually to new money to the firm until we expanded it in April to certain security sales and new money to the bank. But we raised $2.7 billion of brand new flows to the firm during the month of March. Most of it was mid-March strength of banking turmoil. So we were pleased to see that those cash balances come in. But even there we're close to $5 billion today of these balances, that represents roughly 10% of the sweep and enhanced yield savings balances whereas most of our peers are at 50% of their balances being an enhanced yield savings. So our relative cost of funds when you look at those two balances together is still very attractive even though we've been able to be more generous to clients on the sweep balances in terms of passing on rates via the suits as well. So we feel like we're well positioned. And right now, what we're really hoping to do is a lot of clients hold money market fund positions and would prefer to have FDIC insurance. And so a lot of those balances now are moving to the enhanced yield savings, which we think is really a win-win for the clients in the firm.
And the next question comes from the line of Kyle Voigt with KBW.
Maybe just a first question on the leverage ratio, obviously, sitting at 11.5%. Just curious whether you still feel that 10% target to a good level to think about as a near-term target, especially with the macro environment and kind of the uncertainty that we're facing with the macro right now?
Yes. that's the hard one to peg with tests like happening today in the press, even we're going to be more cautious until the industry is sorting down and kind of a level field. We think that the 10% is a good target. But in the short term, we're probably not going to be overaggressive to it, especially if we're not growing the bank aggressively. We don't think that's the smart move right now. We will continue to let SBL balances and mortgage our client balances fund those, those are the priority. We're not sure it's a good time to get into the increasing the corporate side of the lending right now just because of the market. So shorter term, I think the capital ratio is going to be over the 10%, but we're not going to change the goal, but during the volatility like we've seen with today's news and other things, we're going to be cautious to pretty comfortable the market settled down.
The only thing I would add to that is a lot of other banks have to worry about the impact of unrealized losses on their securities portfolio. And we have some of those as well, obviously. But I think we would be north of 10%, even if we factored in all of those losses because we kept duration relatively contained on our balance sheet. So we're in a position of strength when you look at our capital ratios and feel like we have a lot of flexibility.
Great. And then just maybe a follow-up question to that. Just with your stock price where it's at today. Obviously, in the first quarter -- calendar first quarter, you were up the buyback a bit here. But just wondering if you can kind of compare the current valuation of your stock to maybe any opportunities that you're seeing in the M&A market, if you kind of could expand upon some of those opportunities that you're seeing? And what segments you're seeing more opportunity in light of everything that's happening in the banking space as well, that would be helpful.
Yes. We've done a really good job of staying close to the people that we would like to join the firm and those opportunities are clear, and that includes the M&A and the private client space. Again, whether they get transactable because of price or other issues or some are more complex than others. But those conversations that kind of went away, some have come back but price adjustments to the buyer and the seller are always in line and expectation with the market. As we've said in here, don't expect a near-term increase in our M&A volume unitl this market settles out, I think lending has to kind of return, and that's not our view, not going to happen until we see interest rates settle and people get used to it. So -- but we think there will be M&A opportunity. We have both the capital liquidity to handle that. Our balance sheet, as you know, and very leveraged, and we have access. So we're -- as most downturns, we've been able to take advantage of the market, our presumption as we would be able to. But again, that all depends on buyers and sellers and opportunities and other factors in the market.
And the next question comes from the line of Alex Blostein with Goldman Sachs.
So can we start with the outlook for NII. If I heard you correctly, I think you guys have gotten to down 10% from wide NII. Can you help with some of the underlying assumptions in terms of NIM from wide and maybe how are you thinking about the ultimate amount of cash that you need to run with on the balance sheet. And obviously, it would be helpful to know what you're assuming for interest rates for the second quarter, underpinning the 10% decline?
Yes, the 10% decline, Alex, includes the BDP fees as well. So it's kind of a combined basis as we show it in the presentation. And that factors in the 25 basis point increase that the market is expecting in May. And so in terms of the cash that we plan on holding on the bank's balance sheet. We plan on holding more than we need for -- during these volatile times, more than we hopefully need during these volatile times, just to stay prudent. And as Paul said, we're being deliberate in growing corporate loans, and we're being actually opportunistic in selling corporate loans. So not much balance sheet growth forecasted over the next -- at least during this period of volatility. And in some cases, for example, we've already sold over $400 million of corporate loans that we had rated lower from a credit perspective. And we're able to get near par value for those loans. We had marks on them that were higher than what the price we were able to get. So we don't believe that the market is fully factoring in potentially the downside risk on certain loans. And so just as we've done in other volatile periods, we're sort of being opportunistic, knowing that we're just building dry powder, both capital and hopefully funding dry powder to accelerate growth when the opportunities look more attractive.
Got you. Okay. Yes. Combined makes a lot more sense. I appreciate that. My second question was around non-comp expenses. And I appreciate that you guys think this is close to what you were budgeting for. But if we look at non-comp ex provisions and backing out the $20 million of the arbitration fee, it looks like it was up almost $30 million sequentially. So maybe help us reconcile what's driving the growth? And just given your outlook for effectively peak rates revenues in a challenging capital markets backdrop, when should we expect you guys to become a little bit more aggressive on cost savings initiatives?
Yes. The first two quarters are always a little bit lumpy in terms of the non-compensation expenses. So if you look at it kind of on a combined basis, backing out the acquisition-related costs and backing out the loan loss provision, which is how we made the guidance, it was around, I think, $830 million for the first 6 months of the year, which actually trends lower than the $1.7 billion guidance I provided for the non-comp expenses, excluding provision. So we still -- we're not changing that guidance for the time being because none of the -- other than legal and regulatory, which is inherently unpredictable, and we had a $20 million arbitration award, which we were not expecting, obviously, this quarter. We are -- most of the other line items are kind of coming in, in line with what we forecasted when we provided that guidance. But of course, things change between now and the next 6 months of the fiscal year, then we certainly will update that and let you all know.
I think that comparison was -- looks bigger because of the $30 million last year -- last quarter recovery that we non-GAAP to. But it's -- we think they're in line. And yes, legal fees certainly were higher. That settlement was higher but that's really driving, and that's kind of lumpy. We think the run rate and the guidance is still in the ballpark from what we can see.
And with that being said, while it's coming in line with what we expected, we're also given the market environment going to be very deliberate in managing all those expenses while still investing in growth in high service levels.
And the next question comes from the line of Bill Katz with Credit Suisse.
Maybe stepping back and perhaps it's just too soon tell. As you think about some of the structural changes that may evolve for the banking industry on the other side of the banking collapse and maybe your early-stage conversation with the regulators, how do you see the evolution for regulatory capital or leverage ratios. Does that affect your 10% bogey? And then maybe how you think about long-term growth in earning assets and NIM associated with that.
Well, first, on capital, I think even at 10%, we're well set over what anyone is our competitors and other things. We're -- we think that's still a very conservative target. I can't see any regulation that would make anything even close to that. So we'd still have buffer there. So we're not worried about capital. Like everything, given the environment, we've been focused on liquidity, that's why we rolled out the Enhanced Savings Program and are very heartened that even after the quarter we paid our $1.2 billion in Asset Management fees come out of there. We had tax payments that usually go over $1 billion. Our cash balances are still steady. So on the liquidity side, the question is just how much do we have to raise in the higher-yielding programs, but we feel good about our liquidity and not even touching our -- really, our FHLB advances or that $9 billion buffer. So third then becomes is when you start investing in that order when you start investing in the growth in assets and in the bank, that we're just going to have to decide. We're not going to be really aggressive. Where we see opportunities, we could -- we'll take them. If we see M&A opportunities we think are good, we'll act on them, and we just don't think, given the bad banking market, rising rates and if people are predicting in a recessionary environment, it's the time to be very aggressive in growing corporate loans. So I would say we're -- our growth plans are not really to expand the balance sheet much this next quarter.
I think you asked a question about the future NIM prospects for the industry. And I think the banking industry is pretty efficient. The good news is we already have a very conservative level of capital. So I think we're well, as Paul said, well positioned for those changes. But to the extent the capital rules do change or increase and certainly the cost of the average deposit in the industry as all the big banks were saying, even the largest banks are saying that's increasing as well, then you would expect all else being equal for spreads to expand across the industry to preserve a reasonable NIM and a reasonable return on equity for the industry. And so to the extent that we can be patient now and wait for more attractive opportunities at least a more stable environment, we think that will serve our shareholders well over the long term.
I think if you really look at the industry over the last few years, certainly, deposits were extremely cheap and rates are going up. But honestly, spreads weren't really what you'd expected historically, given the types of loans folks are making. So it's natural in this kind of environment where people are being careful and the cost of funds are higher that I think spreads are going to expand. We believe that. So we can't say when, but we believe that will happen, and that's why we'll be a little more prudent in the next quarter or two with the balance sheet as we watch what happens in the market. We've shown also in the other times, whether we sold off COVID loans or other things during those periods, we found -- we've shown we can expand the balance sheet pretty quickly. So we're not worried about that. We're just worried about making sure we do it in the right environment.
Understood. Just a quick follow-up and just a jumping one point there. As you think about maybe Paul, Sui you could just unpack, I think I understand the difference between the sort of the bank versus the third-party sweep impact, but maybe unpack maybe where you are on a spot basis for the NIM? And as you think about this year, how to think about maybe earning asset levels, can I hear a couple of different things those cautious loan growth, maybe some runoff in the corporate loan portfolio sales, maybe some shrinkage on the investment securities book, how to think about maybe framing where the end of the year might be in terms of your associated with that.
Hard to know where we're going to be, a lot and change as we've learned in the last month or two, a lot can change certainly in the next 6 months. And we're going to, as Paul said, we're going to be there for our clients in the Private Client Group business. Half of our loans are securities-based loans and mortgages, and to the extent demand picks back up over the next 6 months. Now they've been pressured in the higher in a rising rate environment, but demand could come back if clients get used to the new normal in terms of rates, and we want to be there to support them. As Paul said, we'll also be more conservative in sort of growing corporate loans, at least until we have a better conviction around the risk-adjusted returns and growing that book. So in terms of the jumping off NIM, And I would expect, just with the higher cash balances and the higher cost of funding, which again, we -- our patience has served us well with a higher cost of funding as well because, again, like I said, we only have 10% of our sweep and enhanced yield savings balances in the enhanced yield savings program. Many of our competitors are at 40% or 50%. So we have a lot of ability to grow those balances. But as we grow those balances, it would pressure NIM. So -- we think there's probably 20 basis points or so of pressure in the upcoming quarter, maybe up to 30 basis points, again, depending on what happens with the rate increases. And now again, that's due to the higher funding sources and elevated cash balances that we plan on holding on the balance sheet.
And the next question comes from the line of Manan Gosalia with Morgan Stanley.
Can you take us through what happened with cash sorting in March? And maybe since then -- and I ask because you noted in your press release last month that cash balances as of March '21 were near $51 billion. So it looks like about $1.5 billion flowed out in the last week if you exclude the Enhanced Savings Program. So maybe take us through what you were hearing from FAs and customers back then? And what gives you the confidence that this will slow from here?
Yes. I would say just jumping to kind of where we are today, for example. So we ended the quarter with sweep balances and Enhanced Saving Program balances at $52.2 billion. You fast forward to where we are today, and we're right around $52 billion since we've been Enhanced Saving Program balances, and that reflects the fee billing that we do quarterly, which was over $1.2 billion and also annual income tax payments. So we feel comfortable and confident that the sorting dynamic is closer to the end than it has been to the beginning, as I said on the comments, the average cash per account the sweep program now it's right around $15,000, which is sort of a low point as far as we look back and have that data. So we're commented, but things are closer to the end, but we don't know how much longer, obviously, that dynamic will continue. Meanwhile, we'll continue to be -- offer attractive products to our clients that give them good yields and get them good FDIC coverage to keep deposit balances as strong as we can.
And I think you asked the FA reaction there has been, look, their job was to invest idle cash and they put it in money markets, and they didn't leave the system. They put it in money markets and they put it in treasuries, CDs to get yields and they said just give us the yield. We like the program. So once we roll it out, we've had money flowing in. And so our job is to manage just how much of it we really need. It's in the system. We have a very good product, and we're just going to have to balance that given operations. We feel very comfortable at our levels right now. And with the reserves we have on top that we really haven't touched. So I think it's going to be just the process of managing how much of the higher cost funds you need given the movement in the market.
One other metric that I think is pertinent on this topic is sort of the deposit -- aggregate deposit data since rates started rising. And really, you have to look at it both at the sweep program and also adding the Enhanced Saving Program balances. And on a spot basis, that aggregate deposit beta has only been for us 25% to 30%. And we bet, which is we've seen so far, again, they have a much higher mix of the higher cost funding at this juncture. And that's with us being able to be more generous to our clients than most of our competitors in the sweep program. So to the extent that we have to raise some incremental higher cost deposits, 25% to 30% aggregate deposit beta at this point is much lower than I think we all expected at this point in the cycle. So we have a lot of kind of capacity and bandwidth to add higher cost funding, while still generating attractive returns.
That's helpful. And maybe as a related question then. Can you talk about the percentages on the third-party bank fee rates from here as we think over the next few quarters? So after the Fed stops hiking rates, I'm assuming that deposit betas will continue to rise and be a drag. But I guess, at the same time, the demand for these deposits will also likely be strong. Is there some offset from the 12.5 basis points or so of spread that you make on that portfolio?
There's no doubt. I mean, there's huge demand for deposits in the system. So the extent you have cash, banks are hungry for it. So the question is, what happens with rate and you would assume with that demand, you might get the spread should increase, right? So yes. So if the Fed stops raising or you have a recessionary cash returning out of the markets back into the regular sweep programs and deposit programs, do you think you -- our prediction as you would -- those spreads would increase, but we're not there at this point today. So it's really hard looking forward right now. I -- if we want to look forward a year or so, we feel a lot more comfortable than next quarter just because we've been in the middle of -- since March of a very dynamic market.
It sounds like if balances are relatively flat, third-party bank fees should also be relatively flat beyond the second quarter?
You have to look at the average, the average balances will be down 25% even if we keep them flat with where they ended the quarter. So -- but beyond that, then just depend on where the balances. The balances will drive it more so than the spread that we earn from the third-party banks, I guess, is the easiest way to describe it.
Yes. Got it. Perfect. And then just a quick clarification on the office portfolio, you mentioned an LTV of 60%. How much of that is based on new appraisals versus valuation at the time the loan was made?
It's a little bit of both, both on the -- to the extent that we have new appraisals that's factored into it. But I mean I think you can assume, as I said in the prepared remarks, that valuations are probably lower now than even that new appraisal base. So -- but the point being is we still have a reasonable cushion and underwrote those properties conservatively. But we also expect there to be some challenges if the economy continues to soften, particularly for real estate.
And in that percentage too, if you expect you have REIT loans, we are -- even our experience in '08 and '09 was that those diverse portfolios came through pretty well. And then when you have single property loans, you're more idiosyncratic, and so you just have to watch. But our total mix of commercial office is relatively low for any bank.
And the next question comes from the line of Jim Mitchell with Seaport Global.
Just maybe circling back on the Enhanced Savings Program, maybe a clarification, Paul. Are you saying in March, you had restrictions that required net new money, and now those restrictions are off. And if that's the case, how do you dial that back if you want to? Is it just price? Or I just want to make sure I understood what you're saying on the enhanced savings product?
The restrictions are where we opened it up for sales of certain securities for people that wanted to move from money markets back into cash, which is the only reason they the money markets was the spread. So we've opened that up. And we have two choices. We can say we've given time limits. If we need more, we can extend the time limits. Or if we want to cut it off, we can cut it off or -- you can always do that with rate, let it find seek its own level. So we have all those options. And we're just watching the balances. We're comfortable at these cash balances. We're actually comfortable lower, but we're Raymond James we always seem to be accused of having excess capital and excess balances. So we'll just dial it back or stop it, or if we open it up to other securities type, if you really need it, and there's treasuries, there's CDs, there's other things that have stayed on the system seeking yield. So we have a lot of flexibility. It just depends how much we need.
Okay. So is the strategy from here if and when we start to see sweep balances stabilize, and it sounds like at least the outflows are slowing a little bit in April. We'll see if that continues. But if that does stabilize, do you sort of -- is this a level of deposits that you're comfortable with, you would sort of stop or slow the enhanced savings if you could stabilize all-in cash levels at the -- at current levels? Is this the defending level that you're thinking about?
We think we're at a level even when we were at the end of the quarter when we dropped below 50%, we were fine. But we'll keep it until we have extra in this environment. We'd rather -- if more flows in, we'll keep it for a while. You can always again lower rate, have it flow out the other yielding instruments. But yes, we're not trying to get it back into the 70s. That's for sure. We had excess too much cash then, but there is no place to put it. But I think somewhere in the 50s level, we'll try to -- we would start slowing it down.
And the next question comes from the line of Brennan Hawken with UBS.
One, just -- it sounded like from Paul Shoukry comments on the comp ratio that if -- unless we see some kind of substantial change in capital markets environment that the comp ratio is probably -- this is probably a reasonable zone to think about until that inflects. Number one, is that right? And then if we do see a recovery in the Capital Markets revenue, what kind of order of magnitude would you expect to feed through and pull down that comp ratio?
Yes. I mean it's a mix -- it's so is complicated because the revenue mix matters when you talk about our comp ratio. So we expect PCG revenues to be up given the higher fees -- assets and fee-based accounts. But that has a higher compensation ratio associated with it, then our net NII does, obviously. And so -- but again, to the extent Capital Markets revenues rebound to the healthier levels, not even record levels, but that they were enjoying in the last couple of years, but just healthy levels then that would be -- that would result all else being equal and an improvement to the comp ratio. So again, it's just hard given the revenue mix, I think 63% roughly for us historically has been very low, and that's been helped by the high levels of interest income and BDP fees that are not directly compensable to the producers. But I think the revenue mix going forward will dictate what the result will be. I think, anywhere close to 63%. Again, our guidance was 66% or lower just a year ago, a little bit more than a year ago, and that would have been historically a pretty attractive place to be. I'm not saying that's where we're going to get to. But if we can stay anywhere close to this range, we'd be pleased with that.
Got it. Okay. Yes, that makes sense. -- a 10% decline in So one more on cash and deposit dynamics. I'm sorry, it's been a real dead horse to beat here. But you gave the trends quarter-to-date in the enhanced program, which is really helpful. Could you also speak to like overall trends in cash quarter-to-date? And then if what we're seeing in the Enhanced Program would be selling out of the purchased money fund and into the deposit program, wouldn't then we see you moving in the direction of the peers. Paul Shoukry, I think you commented a few times on how you're at 10 and peers are at 50. Does that mean you're going to converge to that level? Or you be pulling on some of those price and other levers that you referenced before to prevent that from happening?
So the #1 thing in the banking business I think maybe people forgot over the last decade, liquidity and protecting stable deposits. So that's number one. So that's -- it really depends on the deposit level. And to the extent we've given kind of a general target to you on the deposit levels, you just -- you have to compete with rate and to grow them unless market conditions change, and we don't know when that will happen. So yes, if the market keeps doing that, my guess is ours will go up over 10 and theirs will go up over 50 because to get the deposits reprice and repricing more, that's going to be a trend for everybody. It will be industry-wide. If it's idiosyncratic for one institution for some reasons, that they need a lot more, it's going to go up higher. So a lot of that's market dynamic.
I think the biggest thing people forget, when we limited kind of the money we put into banks for many years at 50%. And then when TriState joined, we upped it. We have less leverage. About 70% of our deposits go roughly to our banks. We have competitors at 90. And if you're up and it's not a criticism there, but if you're at 90, you got to be more aggressive for funding. We have more of a buffer. So we'll just watch it and play it by ear and watch it closely and do what we have to do to make sure we maintain liquidity and the outcome will be how much of higher cost deposits we have to have, but we're not doing it just to raise costs. We're only going to do that if we need it.
And the only other thing I'll add to that is we have over $40 billion of purchased money market funds or our clients have over $40 billion of purchase money market funds on the platform. So all the cash really stayed within the system to the extent that -- and we earn very little on those purchased money market funds as a firm. So to the extent that our clients prefer to have the FDIC insurance at the attractive rate that we would be willing to offer that we are offering today that could really be a win-win for the client and for the firm because now that cash, even though it's higher cost to funding relative to our suits can give us -- generate more economics than staying in the purchase money market fund. So you kind of have to look at the holistic picture to determine whether or not it's really a win-win. And as Paul said earlier, we always strive to look for those win-win opportunities for both clients, advisors and the firm.
And part of the comfort we've had is just our nature when you looked at Raymond James Bank history at about 95% of the deposits insured. We went way out of our way and take money in programs to make sure they were insured just as a matter of course, we weren't worried about -- we weren't worried about uninsured deposits a few years ago when deposits were flushed. But typical for us, we just look down range and say, okay, for the premium, it's worth it to have for clients to be protected, and I think it keeps our funding sources more stable.
Okay. That's helpful. And also for the added points on your philosophy. Could you touch on the point about overall cash trends quarter-to-date beyond just the Enhanced?
Yes. As I said, we are today right around where we ended the quarter. We're right around $52 billion of sweep and Enhanced Saving Program balances. I think the Enhanced Saving Program balances are over $4.5 billion. And again, to be flat in the month of April with the tax payments and the quarterly fee billings, we think is a good result and hopefully portends well for the dynamic going forward.
And there are no further questions at this time. I will now turn the presentation back to the speakers.
Yes. Good. Thank you all for joining us. I know you're all busy, given all the dynamics in the market. So obviously, an uncertain market. But again, I think the conservative way we run the firm really puts us in good shape. We are at our conference with 4,000 advisors here and there pretty excited. So it's nice to be here. Thanks for joining us, and we'll talk to you all soon.
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