Raymond James Financial, Inc. (NYSE:RJF) Q4 2022 Earnings Conference Call October 27, 2022 8:15 AM ET
Company Participants
Kristie Waugh – Senior Vice President, Investor Relations
Paul Reilly – Chair and CEO
Paul Shoukry – Chief Financial Officer
Conference Call Participants
Manan Gosalia – Morgan Stanley
Gerry O’Hara – Jefferies
Alex Blostein – Goldman Sachs
Steven Chubak – Wolfe Research
Jim Mitchell – Seaport Global
Devin Ryan – JMP Securities
Kyle Voigt – KBW
Michael Kelly – Credit Suisse
Operator
Good morning. And welcome to Raymond James Financials Fourth Quarter Fiscal 2022 Earnings Call. This call is being recorded and will be available for replay on the company’s Investor Relations website.
Now I will turn it over to Kristie Waugh, Senior Vice President of Investor Relations at Raymond James Financial.
Kristie Waugh
Good morning, everyone, and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chair and Chief Executive Officer; and Paul Shoukry, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James’ Investor Relations website. Following the prepared remarks, the Operator will open the line for questions.
Calling your attention to slide two, please note, certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated benefits of our acquisitions, our level of success in integrating acquired businesses, divestitures, anticipated results of litigation and regulatory developments, impacts of the COVID-19 pandemic or general economic conditions.
In addition, words such as may, will, should, could, plans, intends, anticipates, expects, believes, estimates or continue or negative of such terms or other comparable terminology, as well as any other statements that necessarily depends on future events are intended to identify forward-looking statements.
Please note there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 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 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 am happy to turn the call over to Chair and CEO, Paul Reilly. Paul?
Paul Reilly
Good morning and thank you for joining us today. Before I discuss our fourth quarter and fiscal year earnings, I want to start by acknowledging the heartbreaking devastation our friends and neighbors, as well as over 200 associates on Florida Central Gulf Coast experienced a month ago from Hurricane Ian.
While it has been difficult to bear witness to their pain and loss, I also have been humbled by the resilience of our associates, advisers and the community there. Fortunately, our Raymond James family impacted by the storm is safe.
Just as notable, I can’t adequately express my gratitude for our Tampa Bay Area associates who, despite facing an uncertain path from a Category 4 Hurricane, worked diligently from remote locations to continue delivering our service first promise.
Additionally, our associates at our corporate locations in Memphis and Southfield and Denver rose to the occasion covering for their coworkers, and pitching in where they could and working weekends to catch up.
For those without power or other hardships, the home office was open to provide a comfortable and clean place to go. When the home office reopened, the camaraderie was obvious and uplifting.
We provided emotional and mental health resources to associates, delivered a $500 relief check to all associates in impacted counties, and provided additional time off to help them manage their personal situations.
Associates collected two semi-trucks of supplies, which were sent to our Fort Myers branch system to be distributed by advisers and associates in their areas. We have heard several heartwarming stories from recipients in these essential supplies, which in itself shows how the collective efforts and generosity truly made a difference for those who needed it most.
The firm also responded by raising more than $1 million from corporate, executive leadership and associate donations to assist the recovery and support of those in need through the Red Cross and our friends of Raymond James Charity, who directly help associates with needed emergency funds for repairs and recovery.
If I sound surprised, I am not, the preparation, perseverance and response to the storm reflected the long history of Raymond James service culture, and I am especially proud to represent our team today.
Now moving to our results, I am very pleased with the results for the fourth quarter and fiscal year, especially given the challenging market conditions. Despite the significant decline in equity markets during the year, we still generated record net revenues and record pre-tax income for the fourth quarter and fiscal year. Throughout the fiscal year, we remained focused on the long-term and continue to invest in our businesses, our people and our technology to help drive growth across our businesses.
In the private client group, strong retention and recruiting of financial advisers contributed to industry-leading growth with domestic net new assets of 9% over the fiscal year. Furthermore, the Charles Stanley acquisition completed earlier in the year significantly expanded our presence in the U.K., which is a very attractive market for wealth management.
In capital markets, annual investment banking results were very strong, only 3% lower than the record results achieved in fiscal 2021. Record M&A revenues helped offset the very challenging underwriting environment. We continue to see strong pipelines for M&A, as the expertise we have added both organically and through niche acquisitions has been performing extremely well.
We completed the acquisition of SumRidge Partners on July 1st, which has enhanced our fixed income platform with technology-driven capabilities and a fantastic team with extensive experience dealing with corporates.
This business thrives on rate volatility, so SumRidge generated really fantastic results since we closed on the acquisition of July. However, after a record year last year, our legacy fixed income operations serving depositories has been challenged as the Fed intensifies its monetary tightening initiatives.
In the bank segment, loans grew 73% year-over-year and 3% during the quarter, reflecting attractive growth across nearly all loan categories. The acquisition of TriState Capital Bank this year added a best-in-class third-party securities-based lending capability, while also diversifying our funding sources.
It is in uncertain conditions such as these that remind us the importance of focusing on and making decisions for the long-term. As evidenced this quarter, with a sharp increase in net interest income in RJBDP fees, we are well positioned for the continued rise in short-term interest rates with diverse and ample funding sources, strong loan growth, high concentration of floating rate assets and ample balance sheet flexibility, given solid capital ratios, which are well in excess of regulatory requirements.
While some of these attributes may be underappreciated in certain marketed cycles, the value of our long-term approach has really resonated in more volatile and an uncertain market environment we have experienced since the onset of the COVID-19 pandemic.
In the fiscal fourth quarter, the firm reported record net revenues of $2.83 billion, record pre-tax income of $616 million and net income available to common shareholders of $437 million or earnings per diluted share of $1.98.
Net income was negatively impacted by the elevated tax rates this quarter, due primarily to non-deductible losses on corporate-owned life insurance that we utilize to fund non-qualified benefit plans. Excluding $30 million of expenses related to acquisitions, quarterly adjusted net income available to common shareholders was $459 million or $2.08 per diluted share.
Year-over-year and sequential revenue growth was driven primarily by the benefit of higher short-term interest rates on both RJBDP fees, from third-party banks and net interest income, which more than offset the declines in asset management and related administrative fees, and total brokerage revenue, largely due to the decline in equity markets.
Quarterly net income available to common shareholders increased 2% compared to the prior year’s fiscal fourth quarter, reflecting the aforementioned revenue growth, which was partially offset by higher non-compensation expenses and higher tax rate.
Sequentially, quarterly net income grew 46%, driven primarily by the benefit from higher short-term interest rates to the net interest income and RJBDP fees from third-party banks, along with lower bank loan provision for credit losses as the prior quarter included the $26 million initial provision for credit losses on loans arising from the acquisition of TriState Capital Holdings.
Annualized return on common equity for the quarter was 18.7% and adjusted annualized return on tangible common equity was 24.1%, an impressive result, especially given the challenging market environment and our strong capital position.
Moving to slide five, we ended the quarter with total client assets under administration of $1.09 trillion, PCG assets and fee-based accounts of $586 billion, and financial assets under management of $174 billion. Equity market declines in the quarter, including a 5% sequential decline in the S&P 500 Index negatively impacted client asset levels.
We ended the quarter with 8,681 financial advisers in PCG, a net increase of 199 over the prior year period and 65 over the preceding quarter. And remember, the year-over-year increase, the adviser count was impacted by transition of advisers to our RIA and Custody Service division, where we typically retain the assets, but we don’t include the adviser in our accounts.
In the fiscal year, we had 222 financial advisers move to RCS, 166 of which came from one firm. Adjusting for these transfers, the numbers of financial advisers increased 421 year-over-year, a really strong result.
Our focus on supporting advisers and their clients, especially during uncertain and volatile markets led us to strong results in terms of adviser retention, as well as our recruiting of experienced advisers to the Raymond James platform through our multiple affiliation options.
Over the trailing 12-month period ending September 30, 2022, we recruited to our domestic independent contractor and employee channels financial advisers with nearly $320 million of trailing 12 production and approximately $43 billion of client assets at their previous firms.
And highlighting our industry-leading growth, we generated domestic PCG net new assets of nearly $95 billion over the fiscal year ending September 30, 2022, representing 9% of domestic client assets at the beginning of the period. Fourth quarter domestic PCG net new assets growth was 8.3% annualized.
Total client domestic cash sweep balances declined 12% to $67.1 billion or 7% of domestic PCG assets under administration. Paul Shoukry will discuss this more later, but I’d like to highlight that these are lower cost deposits, as we have not yet utilized high-yield savings accounts to preserve balances. Total bank loans grew 3% sequentially to a record $43.2 billion, reflecting attractive broad-based growth at both Raymond James Bank and TriState Capital Bank.
Moving to slide six, the private client group generated record results with quarterly net revenues of $1.99 billion and pre-tax income of $371 million. While asset-based revenues declined, the segment’s results were lifted by the benefit from both higher short-term interest rates.
The capital markets segment generated quarterly net revenues of $399 million and pretax income of $66 million. Capital market revenues declined 28% compared to the prior year period, mostly driven by lower investment banking revenues and fixed income brokerage revenues, largely due to the volatile and uncertain markets.
The asset management segment generated net revenues of $216 million and pre-tax income of $83 million. The declines in revenues and pre-tax income were largely attributable to lower financial assets under management, as net inflows into fee-based accounts in the Private Client Group were offset by fixed income and equity market declines.
The bank segment, which includes Raymond James Bank and TriState Capital Bank generated quarterly net revenue of $428 million, which is a record result and pretax income of $123 million.
Net revenue growth was mainly due to higher loan balances and significant expansion of the bank’s net interest margin to 2.91% for the quarter, up 50 basis points from the preceding quarter. Once again, reflecting the flexibility and floating rate nature of our balance sheet. This quarter also included a full quarter of TriState Capital results, which have continued to be solid.
Looking at the full year fiscal 2022 results on slide seven, we generated record net revenues of $11 billion and record pretax income of $2 billion, both up 13% over fiscal 2021. Record earnings per diluted share of $6.98 increased 5% compared to fiscal 2021. Additionally, we generated strong annualized return on common equity of 17% and annualized adjusted return on tangible common equity of 21.1%.
Moving to the fiscal year segment results on slide eight, private client group, asset management and bank segments generated record net revenues and the private client group produced record pretax income during the fiscal year, again, reinforcing the value of our diverse and complementary businesses.
And now for more detailed review of the fiscal fourth quarter results, I am going to turn the call over to Paul Shoukry. Paul?
Paul Shoukry
Thank you, Paul. Starting with consolidated revenues on slide 10, record quarterly net revenues of $2.83 billion grew 5% year-over-year and 4% sequentially. Asset management fees declined 6% compared to the prior year’s fiscal fourth quarter and 10% compared to the preceding quarter, in line with the guidance we provided on last quarter’s call based on fee-based assets.
Equity markets declined further during the quarter, resulting in a 3% sequential decline in private client group assets and fee-based accounts. This decline will create a headwind for asset management and related administrative fees in the fiscal first quarter, which I expect to be down close to 4% sequentially in the fiscal first quarter of 2023.
Brokerage revenues of $481 million declined 11% compared to the prior year’s fiscal fourth quarter and 6% compared to the preceding quarter, as lower activity and asset-based trail revenues in PCG, as well as decreased fixed income brokerage revenues more than offset the addition of SumRidge, which generated strong revenues in the quarter.
As Paul touched on, we expect this to be a tough environment for our legacy fixed income business, as depository clients have quickly transitioned from having excess deposits to investment securities to experiencing deposit run-off as a result of the Fed’s actions. I will discuss account and service fees and net interest income shortly.
Investment banking revenues of $217 million declined 3% compared to the preceding quarter, a solid result given the challenging and uncertain market environment and while our pipelines are strong, there remains a lot of uncertainty given the heightened market volatility that could impact investment banking revenues positively or negatively in the coming quarters.
Therefore, our best guess right now is that we could achieve a similar level of average quarterly investment banking revenues in fiscal 2023 that we experienced over the last two quarters. Obviously, a lot of variables can and probably will impact that estimate, but that would result in a 20% decline in investment banking revenues in fiscal 2023.
That would still represent a much higher level of investment banking revenues than we generated prior to the pandemic, as we have made significant investments to the platform over the past few years, which has significantly increased our productive capacity and market share.
Other revenues of $80 million grew 167% sequentially, primarily due to higher affordable housing investment business revenues, which achieved record results in fiscal 2022.
Moving to slide 11. Clients’ domestic cash sweep balances ended the quarter at $67.1 billion, down 12% compared to the preceding quarter and representing 7% of domestic PCG client assets.
As of this week, these balances have declined to just under $64 billion, reflecting the quarterly fee payments, which were paid in October, as well as additional cash sorting activity during the month.
When comparing trends across the industry, it is important to note that these cash sweep balances do not include high yield saving balances, nor do we have a money market sweeps option. So it is sometimes difficult to make apples-to-apples comparisons across the industry.
Most of the decline in our sweep balances were experienced in the client interest program at the broker dealer, which was really the last-in, first-out destination of the excess deposits over the past couple of years.
As we have been explaining for at least a year now, we anticipated a significant decline in these cash balances as the Fed started increasing short-term interest rates. So we kept the CIP balances invested in deposit accounts and short-term treasuries.
The Raymond James Bank Deposit Suite Program continues to be a relatively low cost source of stable funding and now with the addition of TriState Capital Bank’s independent deposit franchise, we have a more diversified funding base.
And while this additional funding source may not have seemed as valuable several months ago, I think, everyone now appreciates just how precious deposits are and the importance of having multiple funding sources.
Turning to slide 12. Combined net interest income and RJBDP fees from third-party banks was $606 million, up 206% over the prior year’s fiscal fourth quarter and 64% from the preceding quarter. This strong growth reflects the immediate impact from higher short-term rates given the limited duration and high concentration of floating rate assets on our balance sheet.
While it can sometimes seem appropriate to take more duration and bet on rates, our longstanding approach to maintain a high concentration of floating rate assets is proving to be a significant tailwind in this rising rate environment.
You can see on the bottom portion of the slide, the bank segment’s net interest margin increases substantial 50 basis points sequentially to 2.91% for the quarter and that’s on top of the 40 basis point sequential increase in NIM in the preceding quarter.
The average yield on RJBDP balances with third-party banks increased nearly 100 basis points to 1.85%. Both the NIM and average yield from third-party banks are expected to increase further with the anticipated rate increases.
For the fiscal first quarter, factoring in an expected 75 basis point rate increase in November and some assumptions around deposit beta and other variables, we would expect the average yield on RJBDP from third-party banks for the fiscal first quarter of 2023 to be somewhere around 2.5% and the bank segment’s NIM to average around 3.15%.
But these projections will, obviously, be impacted by the actual deposit beta we experienced. As we have done this cycle, we will continue to put clients first and focus on staying on the more generous end of the spectrum for our clients.
So far, the cumulative deposit beta since the Fed started increasing rates in March has been around 25%, with the most recent increase in September having a deposit beta of about 35%, less than the 50% we expected, but still much more generous to clients than the vast majority of our competitors.
Moving to consolidated expenses on slide 13, beginning with our largest expense, compensation. The total compensation ratio for the quarter was 62.1%, which decreased from 67.5% in the preceding quarter.
The adjusted compensation ratio was 61.5% during the quarter. The sequential decline in the compensation ratio largely reflects a significant benefit from higher net interest income in RJBDP fees from third-party banks. Non-compensation expenses of $456 million, which includes $13 million of acquisition related expenses included in our non-GAAP earnings adjustments decreased 3% sequentially.
This quarter reflected a full quarter of expenses from both TriState Capital and SumRidge Partners, which sequentially added just over $25 million of incremental non-compensation expenses, excluding the bank loan loss provision for credit losses.
The bank loan loss provision for credit losses decreased to $34 million, primarily due to the $26 million initial provision associated with the TriState Capital acquisition in the fiscal third quarter. This quarter’s bank loan provision primarily reflects sequential loan growth along with a weaker macroeconomic outlook used in the CECL models.
So, as you can see, we remain focused on the disciplined management of all compensation and non-compensation related expenses while still investing heavily in growth and ensuring high service levels for advisers and their clients.
Slide 14 shows the pre-tax margin trend over the past five quarters. In the fiscal fourth quarter, we generated a pre-tax margin of 21.8% and an adjusted pre-tax margin of 22.8%, really excellent results.
And just to get ahead of it, I know many of you will ask me, if we will update our 19% to 20% pre-tax margin target that we laid out at our Analyst and Investor Day in May since we exceeded it this quarter, while that is certainly a reasonable ask. Given the market uncertainty and ongoing cash sorting dynamic, we think it’s appropriate to wait at least a few more months to update all of our targets.
But with that being said, I think our solid results this quarter highlight the benefit of our diversified business model, the upside we preserve to higher short-term interest rates and our consistent focus on being disciplined on expenses.
On slide 15, at quarter end, total assets were $81 billion, a 6% sequential decrease, primarily reflecting the decline and the client interest program cash balances I mentioned earlier. Liquidity and capital remain very strong. RJF corporate cash at the parent ended the quarter at $1.9 billion, well above our $1.2 billion target.
The Tier 1 leverage ratio of 10.3% and total capital ratio of 20.5% are both more than double the regulatory requirements to be well capitalized. The spot Tier 1 leverage ratio at the end of the quarter is actually closer to 10.5%. So our capital levels continue to provide significant flexibility to continue being opportunistic and invest in growth.
The effective tax rate for the quarter increased to 28.7%, up from 27.5% in the preceding quarter, primarily due to non-deductible losses on the corporate-owned life insurance portfolio. Going forward, we still believe around 24% to 25% is an appropriate estimate to use in your models, but in rapidly declining equity markets, the effective tax rate increases as we experienced this quarter and last quarter and vice versa when equity markets increase.
Slide 16 provides a summary of our capital actions over the past five quarters. Since the closing of the TriState acquisition on June 1st through October 26th, we have repurchased approximately 2.1 million common shares for $200 million or approximately $96 per share under our Board authorization.
As of October 26, 2022, approximately $800 million remained available under the Board approved share repurchase authorization, which we typically revisit annually in the upcoming Board meeting.
We remain committed to offset the share issuance associated with the acquisition of TriState, as well as share-based compensation dilution. Therefore, we expect to repurchase on average $250 million per quarter in fiscal 2023 or $1 billion total for the fiscal year.
Of course, we will continue to closely monitor market conditions and other capital and cash needs as we plan for these repurchases over the coming quarters, but I do want to emphasize this $1 billion objective for fiscal 2023.
Lastly, on slide 17, we provide key credit metrics for our bank segment, which now includes Raymond James Bank and TriState Capital Bank. The credit quality of the loan portfolio remains healthy, with most trends continuing to improve.
Criticized loans as a percent of total loans held for investment ended the quarter at just 1.14%. The bank loan allowance for credit losses as a percentage of total loans held for investment ended the quarter at 0.91%, down from 1.27% at September 2021 and nearly flat sequentially.
The year-over-year decline in the bank loan allowance for credit losses as a percentage of total loans held for investment largely reflects the higher proportion of security based loans boosted by the acquisition of TriState Capital Bank.
Securities based loans, which account for approximately 35% of net loans are generally collateralized by marketable securities, and therefore, typically do not require an allowance for credit losses.
If you look at the bank loan allowance for credit losses on corporate loans held for investment as a percentage of the total corporate loans, it was 1.73% at quarter end. Compared to most other banks, we believe this represents a healthy reserve, but we are continuing to closely monitor any impacts of inflation, supply chain constraints and a potential recession on our corporate loan portfolio.
Now I will turn the call back over to Paul Reilly to discuss our outlook. Paul?
Paul Reilly
Thank you, Paul. As I stated at the start of our call, I am pleased with our results, and while there are many uncertainties, I believe we are well positioned to drive growth across all of our businesses.
In the private client group, next quarter results will be negatively impacted by the expected 4% sequential decline of asset management fees and related administrative fees that Paul described earlier.
Focusing more on the long-term, I am optimistic we will continue delivering industry-leading growth as current and prospective advisers are attracted to our client focused values and leading technology and production solutions. Additionally, this segment will also continue to benefit from higher short-term interest rates, although we expect cash sorting will continue as the Fed increases short-term interest rates.
In the capital markets segment, the M&A pipeline remains strong, but the pace and timing of closings will be heavily influenced by market conditions. Over the long-term, I am confident we are well positioned for growth given the significant investments we have made over the past five years.
In the fixed income space, the favorable environment we have experienced over the past couple of years has shifted. Depository clients once flush with cash and facing limited opportunity for loan growth are now experiencing declines in deposits and have less cash available for investing in securities. This dynamic will lead to a challenging environment in fiscal 2023.
While this headwind exists, we expect SumRidge Partners to enhance our current position in the rapidly evolving fixed income and trading technology marketplace, and SumRidge typically benefits from elevated rate volatility.
In the asset management segment, the financial assets under management are starting the fiscal year lower due to the decline in equity in fixed income markets. However, we are 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 formerly Carillon Tower Associates to help drive further growth through increased scale, distribution, operational and marketing synergies.
The bank segment is well positioned for rising short-term interest rates and we have ample funding and capital to grow the balance sheet prudently. We will continue to operate TriState Capital Bank as a separately chartered bank and respect its relationships with its clients, which coupled with our strong capital and funding, should foster its ongoing growth. Most importantly, the credit quality of the bank’s loan portfolio remains strong.
As always, I want to thank all of our advisers and associates for their perseverance and dedication to providing excellent service to their clients each and every day. Just as you have observed over the past two years, which have been filled with tremendous uncertainty and challenges, we will stay rooted in our commitment to take care of advisers and clients, making decisions for the long-term and maintain a strong and flexible balance sheet.
We believe with this approach, we should be able to continue delivering strong results through different market environments and drive results for our associates, advisers and shareholders, just as we have for the past 60 years.
With that, Operator, will you please open the line for questions?
Question-and-Answer Session
Operator
Thank you very much. [Operator Instructions] I will proceed with our first question on the line from Manan Gosalia with Morgan Stanley. Go ahead.
Manan Gosalia
Hi. Good morning.
Paul Reilly
Good morning, Manan.
Manan Gosalia
I was wondering — good morning. Hey. I was wondering, can you talk about what your assumptions are for deposit betas in your NIM guidance for next quarter, because it looks like even with the 75 basis point increase in the Fed funds rate in November and a significantly higher average Fed funds rate next quarter versus the prior quarter, I think, you guided your NIM rising only 25 basis points or so. So, I guess, the question is, what are you baking in for deposit betas and is there some element of conservatism embedded in there?
Paul Shoukry
As you know, Manan, we do like to provide conservative guidance in that 3.15% admittedly is somewhat conservative. It’s only factoring in the November increase and the market is obviously expecting a December increase as well and so SOFR tends to lead those type of increases as we saw last quarter.
So we had 50 basis points sequential increase two quarters ago in the NIM, 40 basis points this quarter and we are guiding 25 basis points, but certainly could be higher than that going forward. We were expecting deposit beta to — as rates kind of continue to increase to get closer to 50%.
On the last incremental increase for us, it was 35% and cumulatively, it was 25%, and we have been really leading most of the industry, focusing on clients and sharing and being generous with clients as the rates have increased. And so going forward, 50%, frankly, might be too conservative as well, just because of when you look at competitors were certainly well ahead of — most of our competitors on the sweep rates.
Manan Gosalia
Got it. And then on third-party bank deposits, we saw through this earnings season that many banks are relying more on wholesale funding. So I guess the question is, what are you seeing in terms of demand from third-party banks? And where should we expect that third-party bank fee rate to go, if the Fed stabilizes at 4.5%? And is there a possibility that you are able to earn a higher spread on those deposits as you renegotiate your contracts next year than the typical, I think, Fed funds plus 12.5 basis points or so that you typically earn?
Paul Reilly
Yeah. I think absolutely. The demand is way up. And as you pointed out, if you look at almost all of our competitors, if you really looked at just what’s happened to cash sweeps there, we are all in the same ballpark. It’s just most of the other firms have gone into high yield savings to supplement their cash or the money market sweeps.
So we haven’t done that. So we may. But to-date, we feel like we have ample low-cost funding with our sweeps. And we do see the demand going up, which will impact rates, and Paul, I will let you address the rate dynamic.
Paul Shoukry
Yeah. At the trough in the last year or so, the demand from third-party banks was, obviously, very weak and the pricing was kind of in that Fed funds effective range, which was down 20 basis points or so from the peak spreads a couple of years prior. So we are quickly seeing that demand resume. That’s the first step and now we are starting to see prices and the economics improve on the spread.
But, again, 20-basis-point spread improvement, if that’s sort of the potential to get back to the last kind of peak spread two years ago, pales in comparison to the base rate improvement that we get from the Federal Reserve on those balances. So, net-net, a significant tailwind though on those balances.
Manan Gosalia
So it sounds like in terms of the fee rate, you could be well above the 2 percentage points or so that you peaked at during the prior cycle at the — so if we compare the end of, if this rate hike cycle, should we expect a fee rate above the 2 percentage points that you saw last cycle?
Paul Shoukry
Yeah. I mean we are already guiding just for this upcoming quarter to 2.5% as an example.
Manan Gosalia
Okay. Correct.
Paul Shoukry
Yeah.
Manan Gosalia
All right. Perfect. Thank you.
Operator
Thank you very much. We will proceed with our next question on the line is from Gerry O’Hara with Jefferies. Go ahead.
Gerry O’Hara
Great. Thanks. Perhaps just a little bit of context or color on the adviser recruiting market. I know it’s obviously been another kind of challenging quarter from a volatility standpoint. So would just love to get a little bit of color as to what you are seeing industry-wide in terms of those dynamics?
Paul Reilly
Yeah. Yeah. I think I have been now, what, 12 — dozen years in this job and everybody always asks me that recruiting market seems to be getting more competitive and so my response is it’s kind of always been competitive, and we have been on a good roll.
So we still see it as very active. We — even in 2009, we thought recruiting our best year would go off because of the great dislocation, but it has actually resulted in our best couple of years until the recent few years.
So it’s still very active. It’s very competitive and continues to be such. But as you can see with our kind of 400 advisers added this year, if you adjust for the RIA channel, the people that moved our adviser count. We have had another very, very strong year.
And really, the largest teams we have ever recruited continue to come in and so the average is going up also, not just market, but just the attraction of our platform for high net worth and ultra-high net worth advisers, as well as the advisers that we have recruited for — throughout our history. So we are still a big part of our strategy, we think it will still be strong, backlog is strong, and probably, won’t last forever, but it looks pretty good in the short- to mid-term.
Gerry O’Hara
Fair enough. And then perhaps one for Paul Shoukry, can you maybe just comment a little bit, we obviously saw an increase from 2Q to 3Q on the non-comp side of expenses that actually came off a little bit in 4Q. But can you perhaps maybe help us think a little bit about how that kind of run rate might look going into the next couple of quarters?
Paul Shoukry
Yeah, Gerry, most of the sequential increase was really attributable to having a full quarter of results for both TriState Capital and SumRidge, which sequentially added about $25 million of non-compensation expenses. So that was the primary driver of the sequential increase, which we expected.
Looking forward, I think, if you look at this quarter as a baseline and I think there’s around $410 million of non-compensation expenses when you adjust out for the loan loss provision and for some of the acquisition related expenses that we break out in our non-GAAP schedule.
And looking forward, I would say, that would be potentially our best guess right now for fiscal 2023 is that number totaling around $1.7 billion in fiscal 2023, which of the $410 million base represents somewhere around 1.5% growth sequentially each quarter in 2023.
And most of that growth will really be coming from our technology investments. We are still heavily investing in technology to support advisers, their clients and really all the businesses and functions across the firm. So that’s going to continue to be a significant focus for us going forward.
And then you are going to see kind of on a year-over-year basis, growth in business development expenses as the first half of fiscal 2022, travel and conferences, obviously, were still suppressed by the COVID pandemic. So you will see that normalize for the full year in fiscal 2023.
Gerry O’Hara
Okay. Great. Thanks for taking the questions.
Operator
Thank you very much. We will go to our next question on the line from Alex Blostein with Goldman Sachs. Go ahead.
Alex Blostein
Hey, guys. Good morning. Thanks for the question. So maybe first just focusing on some of the bank dynamics. I guess if we look at the last cycle, bank NIM peaked at around 3.5% and not to pinpoint you to any specific quarter, but I guess, when you use them out a little bit and taking your conservative posture on the deposit betas, but it doesn’t sound like they are going up above 50%. If you think about TriState now in the mix, that’s more loan heavy, so obviously, higher yielding and the absolute level of rates is higher. So should we be thinking closer to 4% bank NIM once the Fed is done or how are you thinking about that sort of run rate on the other end of that cycle?
Paul Shoukry
Yeah. There’s a lot of moving parts. I would say one of the differences now versus in the last cycle is that our concentration of securities based loans are higher. Now that has a — typically has a lower NIM associated with it, because they are fully collateralized with liquid marketable securities. So the risk adjusted returns are very attractive. But typically a lower NIM through cycles relative to corporate loans and so there’s a lot of moving parts there.
I think just like I shared with Manan on the BDP fees, I think, this time around, I mean, rates are expected to be higher than they were last cycle, just the base rates, and so, given the loan mix, higher rates, a lot of different variables. But I don’t think we can call 3.5% necessarily a ceiling, but I don’t think we are also ready to say that it could achieve 4% either. I think we need to kind of see where cash sorting and cost of deposit trends play out.
Alex Blostein
Got it. All right. Fair enough. Just staying on the balance sheet theme for a minute, you guys, obviously, had the right call on not extending duration a year or two ago and keeping the balance sheet fairly floating. But if you look at what’s going on today, security yields are quite attractive and maybe there’s a little bit more upside. But that’s a fairly good return on invested capital as you kind of look at what the market rates are today. What are your thoughts about building securities portfolio from here, maybe extending duration a little bit, just to lock in what looks like a pretty attractive rates of return?
Paul Reilly
Yeah. So we are not against the securities portfolio, but our first thing is to fund our growth in loans and securities becomes the next part of it. So we agree they are attractive after being beat up for not locking in rates over a number of years, we are not after waiting it out and now having the balance sheet. We are not ready to call that we have reached peak rates and start locking in.
So I think at least in the near-term, we are going to be flexible as the Fed probably has a couple of rate hikes and then we will look at it and if things settle down, we may balance in a little more. But our first funding is for growth and then any excess funding, which we are certainly happy to put in securities, because you are right, they have a very good spread right now.
Paul Shoukry
Yeah. I think kind of looking forward, we really built up the securities portfolio in the last couple of years, as there’s no — there’s very little third-party bank demand. So we kind of brought it onto the balance sheet as an accommodation.
But now with the cash sorting dynamics with loan growth being solid, we would expect some of that buildup in securities to really run-off over the next year to fund that loan growth that Paul talked about and some of that loan growth has duration as well.
I mean, so you saw the mortgage portfolio grew sequentially during the quarter pretty nicely. There’s duration, obviously, associated with that portfolio that gives us that same type of protection. But to the extent that we take duration, our preference has been to take it to support client relationships.
And to the extent that we have excess kind of cash beyond the loan growth and we would certainly invest in securities because it is a good return. As is the cash we sweep off to third-party banks as well. So right now we have a lot of different options and that’s just the power of the flexibility that we have with the cash balances and the flexibility that we preserve frankly through the last couple of years.
Alex Blostein
Got it. All right. Thanks. I won’t ask the pre-tax margin question. Just to remind that there was a plus at the guidance next to 20 when you guys gave it last time. I just wanted to make sure that it’s still there.
Paul Reilly
Yes. It was over 20.
Paul Shoukry
Yeah. I told you so.
Alex Blostein
Okay.
Operator
Thank you very much. We will proceed with our next question on the line from Steven Chubak of Wolfe Research. Go ahead.
Steven Chubak
Hi. Good morning.
Paul Shoukry
Hi, Steve.
Paul Reilly
Hi, Steve.
Steven Chubak
So I wanted to start with a question on FIC. You alluded, Paul, that some of the headwinds to the business. It’s been run rate in the last couple of quarters at about $100 million. This most recent quarter, you noted included SumRidge Partners’ contribution as well. As the Fed continues to remove excess liquidity from the system, do you anticipate further pressure on this $100 million baseline or is that a fair run rate that we can underwrite looking out to next year?
Paul Reilly
Yeah. You can see the dynamic. Our — we have a great fixed income franchise, but really in that banking space that’s very, very strong and they are focused on the same dynamics the whole industry is. So as cash tightens they are going to fund loans first and security second just like us. So, yeah, that could have pressure.
Now there’s other parts of the business, but it will certainly have pressure on that run rate, if it gets tighter. And again, on the other hand, SumRidge is — maybe timing is everything, but this is kind of the perfect market for them to perform.
They are just really killing it right now, but they are — everything is in their favor, but everything is a headwind for that banking part of the franchise that we are so good at. So it could come under more pressure also.
Steven Chubak
Great. And just for my follow-up, maybe on the comp ratio, certainly a nice positive surprise, especially relative to the guidance. I understand Paul or can appreciate your reluctance to update the 19% to 20% plus margin target. But wanted to get a sense as to how we should think about your philosophy around comp given so much of the revenue growth is going to come from less compensable areas. What’s a reasonable expectation for where the comp rate should be running if rates stay higher for longer?
Paul Reilly
Well, where we have been even with our advisers and associates, we paid them what we think is fairly on their production and we haven’t paid on interest. Now when interest went away, we didn’t change their payouts and comp, obviously, it affects management’s comp. So our plan right now is that interest rates will continue to be non-compensable and so certainly impacts some of the bank comp.
But generally, to the extent there’s more interest spread, margin comp will go down to the extent that normalizes or goes the other way, the ratio will go up. But there’s no change fundamentally in how we are paying based on it. So, again, interest spreads will drive it down for a period of time.
I think spreads right now are like in any cycle, probably outsized for I don’t know if they are out how long that stays a year or two years, quarter, but it will return but where our comp philosophy is the same. So you should see improvement spreads — as interest spreads improve.
Paul Shoukry
Yeah. I think the one thing I would add is, the compensation philosophy kind of from outside of the sort of adviser force that Paul was talking about was to help, to share the success of the firm with our associates.
And we are in a high inflation environment and so whereas we are entering year-end, we are leading in to being generous to our associates and sharing in the success with our associates just as we always do.
And so those year-end increases won’t really be reflected until the second fiscal quarter, the first calendar quarter of the fiscal year and that’s when the payroll taxes reset, of course. But as Paul said, the interest spreads have been a significant benefit to our compensation ratio down in this kind of 62% range.
Steven Chubak
Okay. And anything on the admin cost side that we need to be mindful of, I do think the admin comp was running a little bit higher than we had anticipated or at least based on what some of the napkin math would suggest when you try to back out some of the non-compensable portions of revenue?
Paul Shoukry
Yeah. Again, that reflects a full quarter of results from both TriState Capital and SumRidge. So I think this baseline going forward is a good baseline to start off with. But, again, we will increase salaries across the Board and we are leading into being generous with that given the competitive labor environment, the inflationary pressures and the success that we are having as a firm.
So we really want to share that success with the associates who have made it all possible and that again — and we are also continuing to hire in all of our businesses to support and continue the great growth that we have had across our businesses and so that would really be reflected throughout fiscal 2023.
Steven Chubak
Helpful color. Thanks for taking my questions.
Operator
Thank you very much. We will proceed with our next question on the line from Jim Mitchell from Seaport Global. Go ahead. Jim, are you there. Mr. Mitchell, your line is open for question.
Jim Mitchell
Hello. Can you hear me?
Paul Reilly
I can hear you now.
Jim Mitchell
Okay. Sorry. So deposits are down to about 6% of client assets based on sort of the guidance for October, client cash I should say. Can you remind us of the historical average for cash levels, maybe a low and high range, just trying to think through where that starts to bottom out?
Paul Shoukry
It’s a pretty wide range. I think the peak of that range was in the mid-teens in 2009. But of course, that’s because cash increase and end markets decreased substantially. But I would say, the trough was somewhere in that 5% range, maybe a little lower than 5% in 2019. So to your point we are at 6%. I think the 25-year historical average is probably in the 7% to 8% range. So it’s a pretty wide range.
Jim Mitchell
Right. And is there a point where you have to more aggressively defend cash balances and deposits to fund the balance sheet?
Paul Reilly
Yeah. Absolutely. I mean if they get — right now we have been fortunate and have managed it well, as you know we have been focused on the flexible balance sheet. But you need cash to operate the business, so if you see runs, we talked about even offering high rate savings and others. We just haven’t implemented it, haven’t felt like we need to. But if we see cash getting to levels that concern us, we will do that.
We also have TriState now who is a very good source of funding. They have got a very strong net funding operation, which was one of the reasons for the acquisition, which I don’t think you understood. You said, so much cash, why would you have it and I think it was a year ago, we were talking about our concern about cash in the future.
So it’s — so we have got alternatives now. But absolutely, you need cash to run this business and you want to be able to service your client cash at some point, we look at our cash balances. They haven’t left the system. They have gotten more into fixed income or money markets on our platform. So they are still in the system. We just haven’t kept them into the pure cash form.
Jim Mitchell
Great. Thanks.
Operator
Thank you very much. We will go to our next question on the line is from Devin Ryan with JMP Securities. Go ahead.
Devin Ryan
Hey. Good morning, guys. How are you?
Paul Reilly
Good, Devin.
Paul Shoukry
Devin.
Devin Ryan
Good. Most questions have been asked. I want to come back to the balance sheet a bit here and just think about your mix and maybe following up on Alex’s question. Just deposits, obviously, becoming more scarce here and so when you think about the mix moving forward, are there — beyond maybe thinking about the securities book, are there other areas maybe in the loan book or just more broadly where there’s room for optimization and maybe areas to drive the risk adjusted NIM higher from here, all else equal?
Paul Reilly
There probably always is.
Paul Shoukry
Yeah.
Paul Reilly
So part of what we are doing is we are going through our budgeting exercises to say where do we want to deploy capital. We have got with the banking business, a broader bank business. TriState is an independent business with its third-party platforms.
And the question is, between that and Raymond James Bank, where do you allocate capital in the portfolio really to optimize, not partly the balance sheet from our standpoint, but really to allow freedom, for example, for TriState to service their customers.
So we are going through that to make sure that the capital allocations make sense both for those businesses and for us. So there always is in periods of rapid transition right now, it’s a little bit harder to do it, but we are in a lot of discussion on it.
Paul Shoukry
And I would say just reinforce that. We really don’t manage the balance sheet allocation to necessarily maximize NIM. We do it to maximize risk adjusted returns and we believe that securities-based loans both at Raymond James Bank to our own clients and at TriState Capital to their independent clients is the best risk adjusted return.
So that is kind of the priority to the extent that the demand is there, which we think that over time that should continue to be a good tailwind for us and then we look at the other loan categories. We like the mix that we have right now with 35% of our loans and securities based loans. So that’s kind of how we are thinking about it.
Devin Ryan
Yeah. Okay. Thanks, Paul. And then a follow-up here just want to talk a little bit about the investment banking outlook. Appreciate there’s always a little bit of crystal ball in there and you guys are going to, I think, conservatism just given the uncertainty in the market. But I just want to make sure I understand how you are thinking about it. You have equity issuance is going to be market centric, but market stabilize that probably would improve and then your M&A business is structurally larger. So all else equal, that the business trajectory over time is higher than fixed income, it feels like maybe it could remain a bit under pressure if rates remain higher. So just trying to think about how much of maybe there’s more muted near-term outlook is just purely market centric versus maybe the flip side would be maybe every business doesn’t snap back to where it was over the last year or two, because rates are higher, or there are some other structural dynamic in the markets just changed. So I just want to kind of parse through both the cyclical versus anything that maybe a little bit more impaired for a continued period?
Paul Reilly
I think if you look at — I will go in reverse order in the fixed income business. I mean the challenge for traditional fixed income business in a rising rate market is when do people invest kind of in the long-term and that will happen as rates come up. I think that that business will do well.
People have been buying shorter term. As they start buying longer term, it’s more profitable for us too, but you got to get rates to a point where people think rates are there to really start doing that, and certainly, the increase in rates will help, but we are just at a pause really until that happens. So I think that’s more timing.
M&A is a little harder. Backlog is good. Clients are good. It’s even now, right now, it’s up for us, and it’s up in Europe for the industry. And if you look at European dynamics with rates and inflation everything, you go, well, how could that be? So I mean there’s still cash, there’s still strategic investors and our growth on our platform and who we have added and we are continuing to grow and we believe in it.
But that one is harder to predict. I mean it’s been stronger. I think that most people have predicted. The backlog is still strong. But when people close or not or when that stops, it’s just — that’s a tough one.
So when you come off over the last two years with almost unprecedented M&A, is that a baseline or is that a peak forever, which it probably isn’t. But, again, we are still very, very high on that business. But that one is kind of hard to say what triggers it to continue or what triggers it to slow down or stop for a while.
Devin Ryan
Okay. All right. Thanks very much.
Operator
Thank you. We will proceed with our next question on the line with Kyle Voigt from KBW. Go ahead.
Kyle Voigt
Hi. Good morning. So just given the level of sorting right now and the pressure that may put on total available funding as you look out a couple of years, just completely understand the cautiousness and the tone around the size of the AFS book and maybe letting some of that runoff in order to support loan growth. So just two follow-ups on that, was what is the current duration of the AFS portfolio and how much of that portfolio would run off per year if you didn’t reinvest at all in the portfolio? And can you also remind us, are there specific minimums that you need to hold in terms of the CIP and the third-party bank sweep just so we have that as the sorting process continues here?
Paul Shoukry
Yeah. I would say in the securities portfolio, the average duration is somewhere around four years now with the securities portfolio. So if you think about kind of a normal distribution, you might have somewhere around 20% to 25% run-off a year, probably, back end loaded a little bit. But and again, we are going to use a lot of that to fund the loan growth as current plans.
There is a baseline for CIP of cash balances there. If you kind of look back at 2019, I think, there’s probably $2.5 billion or $3 billion of cash there for a variety of reasons and so maybe that’s kind of a good way to think about the floor there for those balances.
And really, with BDP, that’s a function of providing clients FDIC insurance, trying to maximize their FDIC coverage as much as we possibly can given all the constraints and the demand from third-party banks.
Kyle Voigt
And so is there — it is — I guess, given your client’s allocation and then you have a certain number of charters that you can provide FDIC insurance with yourself. So is there a certain amount of minimum there, I guess, on the third-party bank side, is it a few billion dollars that needs to be held there or is it some number that’s smaller than that?
Paul Shoukry
Not really. The way we think about the minimum on the BDP balances is essentially providing some level of funding buffer. We don’t want to overextend the funding, as we have seen in the industry, it’s challenging when you overextend the funding to your own banks and you don’t have a buffer there.
And that’s one of the things that we are thinking through is, what do we want that buffer to be. Now our balance sheet is much more liquid than it used to be 10 years ago when we established the 50% buffer that some of you are aware of. So we think that’s much too conservative.
But we are kind of currently — now that we have completed the acquisition of TriState Capital, understanding their balance sheet. We are currently in the midst of determining what the appropriate buffer is, but we are going to, just as we always do here on the side of conservatism there as well.
Kyle Voigt
Understood. That’s really helpful. And I just have one follow-up related to administrative comp. I think on last quarter’s call, you mentioned there was an off-cycle bonus paid in the fiscal third quarter, which caused the PCG segment admin comp to be elevated. But we saw another $15 million sequential increase in that PCG admin comp line in the fiscal fourth quarter. So just wondering what drove that and how much of that is one-time in nature, if at all?
Paul Reilly
Yeah. I am not sure. I think it was a 5% sequential increase and again that bounces around based on benefit accruals that we adjust for, particularly at the end of the fiscal year and making sure we are fully funded and accrued for on benefits and other things. So there’s nothing that I could point to specifically that would describe that other than just sort of natural growth and changes to the accruals, et cetera.
Kyle Voigt
Okay. Understood. Thank you.
Operator
Thank you very much. We will proceed with our final question for today is from the line of Bill Katz with Credit Suisse. Go ahead.
Michael Kelly
Good morning. This is Michael Kelly on for Bill. Thank you for taking my question. Most questions have been asked, but I did have one follow-up on the loan mix, Paul and Paul. Are you seeing any shift in demand for the SBLs, it looks like on an end-of-period basis they dipped a little bit. The resi was pretty resilient. But are you seeing any shift in demand with higher interest rate environment that we should be worried about near-term? I understand your long-term outlook is quite positive for the balance sheet?
Paul Reilly
I think that — yeah. Some of that SBL that was really pay — a lot of people use that as GAAP funding. So part of the mortgage demand where people went from SBL paid those off and as mortgaged homes and other things. So we think the demand is there and not only is it there for our clients, so I think TriState is growing their market share with new relationships too, has a huge opportunity.
So I think SBLs over time are still even short-term and longer term, so very, very positive. The question becomes is, rates continue to go up when was that really a cheap source of funding? May be not. People are less likely to borrow, but still think that business is doing well. So I think you see a blip — we saw a blip this quarter really on that.
Michael Kelly
Great. Thanks. And then if I just had one more follow-up, as a percentage of AUA, you still are — the SBLs as a percentage of AUA behind some of your wirehouse peers, do you see that gap closing over time?
Paul Reilly
We have just never been as aggressive in pushing debt through our organization. I mean that — so our products SBL is even a relatively new product for us compared to our competitors. So and we certainly don’t have quotas for anyone to present it or require them to present or even branch managers with quotas. So because of that our debt concentration historically has been lower than certainly our wirehouse competitors.
And we continue to gain share, but we do it more through natural means and the adviser really has to initiate that versus us going out and pushing it or selling it to advisers. So, but our content — it’s going up, but we are just not progressive and that haven’t been, it’s just part of the culture for a long time.
Michael Kelly
Great. Thank you. Make sense.
Operator
Thank you very much. Mr. Reilly, that was the final question, I will turn it back to you for any closing remarks.
Paul Reilly
Well, great. I appreciate everybody being on the call and although a very strong end of the year, it’s an environment outside of the equity markets and interest rates and cash sorting and everything else, that’s hard to call. We are still — that’s when we really appreciate the flexibility we have in the balance sheet and our capital base and everything else to be able to navigate. So optimistic about the future, don’t know what’s going to happen as you get GDP and you get people still raising rates and inflation, it’s going to be an interesting quarter, a couple of quarters, but that’s when you can see that our advisers are still 90 — clients say 97% satisfied, with our advisers is a pretty high rate and they need them more now than ever. So, with that, appreciate your time and we will talk to you soon.
Operator
Thank you very much. Thank you, everyone. That does conclude the call for today. We thank you for your participation and ask that you disconnect your lines. Have a good day everyone.
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