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Raymond James Financial Inc (RJF -4.38%)
Q3 2019 Earnings Call
Jul. 25, 2019, 8:15 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Earnings Call for Raymond James Financial Fiscal Third Quarter of 2019. My name is Jessa and I will be your conference facilitator today. [Operator Instructions].
Now, I will turn it over to Paul Shoukry, Treasurer and Head of Investor Relations at Raymond James Financial.
Paul Shoukry -- Senior Vice President, Finance, Investor Relations & Treasurer
Thank you, Jessa. Good morning and thank you all for joining us on the call. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman and Chief Executive Officer; and Jeff Julien Chief Financial Officer. Following the prepared remarks, the operator will open the line for questions. Please note certain statements made during this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated results of litigation and regulatory developments and general economic conditions.
In addition to words such as believes, expect, could and would, 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 those statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Form 10-Q, which are available on our website.
During today's call, we'll 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 schedule accompanying our press release.
With that, I'll turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?
Paul Reilly -- Chairman & Chief Executive Officer
All right. Thanks Paul. Good morning, everyone. Thanks for joining us. As usual, I'm going to give a brief summary of our results for the third quarter 2019 and then I'll turn the call over to Jeff, who will give more detail. And then I'll come back to discuss our outlook and open up for questions.Overall, I am pleased with our results for the third quarter, despite some elevated expenses and decline in Investment Banking revenues that were both largely timing-related, business metrics were strong and I'm encouraged by the solid performance in a number of key areas during the quarter.
Quarterly net revenues of $1.93 billion increased 5% over the prior year's fiscal third quarter and increased 4% over the preceding quarter. We generated quarterly earnings per diluted share of $1.80, lifted by higher Private Client Group fee-based assets and higher net interest income, primarily at Raymond James Bank compared to a year ago period.We ended the period with record results for client assets under administration of $824.2 billion, financial assets under management of $143.1 billion and total Private Client Group financial advisors of 7,904, as well as record net loans for RJ Bank of $20.7 billion.
Annualized return on total equity for the quarter was 16.1%. And while it isn't a metric that we use, the world does seem to be moving toward measuring and reporting on return on tangible common equity. And if you looked at our discussion in our last Analyst and Investor Day in June, our adjusted return on tangible equity on annualized basis for the preceding quarter would have been approximately 180 basis points higher than the adjusted return on equity. Given a fairly consistent metric, we think that same result would be similar this quarter. Through the first nine months of the fiscal year, we generated record net revenue of $5.72 billion, which was up 6% net income of $769 million, which was up 29% and adjusted net income of $784 million, which was up 10% over the first nine months.
And notably all four of our core segments generated record net revenue during the first nine months compared to last fiscal year. Now turning to the segment results. In the Private Client Group, we generated net revenue of $1.35 billion and pre-tax income of $140 million during the quarter. Revenue growth of 6%, over both the prior year's third quarter and the preceding quarter, was largely driven by higher assets under management and related admin fees, as we continue to experience very strong growth of the Private Client Group assets and fee-based accounts. These fee-based account assets ended the quarter at a record $398 billion, representing 51% of total client assets in the segment and reflecting growth of 16% over June of 2018 and 5% growth over March of 2019.
This growth has been driven by strong net additions of financial advisors, equity market appreciation and increased utilization of fee-based accounts, which we believe is a long-term trend that our industry will continue to see. Most importantly, financial advisor retention and recruiting remain solid, resulting in us achieving a record number of financial advisors of 7,904 at the end of the period, healthy net increases of 185 over June 2018 and 42 over March of 2019. Even in the increasingly competitive recruiting environment, our client-facing culture, multiple affiliation options and robust service solutions continue to resonate with existing and prospective advisors. Now let me touch on some headwinds for the segment.
First, our client domestic cash sweep balances of $38.2 billion declined 9% from the prior quarter, largely due to quarterly fee payments, tax-related seasonality and increased allocation to other investments. We believe the decline in cash balances was slightly elevated this quarter as the conversion of the money market sweep option in June caused advisors and clients to increase their allocation to other investments such as positional money market funds. Cash sweep balances have decreased in July with quarterly fee payments that are made during the first month of each quarter. The segment also experienced elevated business development expenses this quarter due to the timing of conferences, recognition events for advisors and increased advertising expenses reflected in the Other segment.
This resulted in similar sequential increase in business development expenses that we experienced in the year ago period which Jeff will touch on. The Capital Markets segment generated net revenues of $251 million and pre-tax income of $24 million for the quarter. While Fixed Income had another relatively strong quarter the segment's results were negatively impacted by large sequential decline in M&A revenues. As you recall, the M&A -- M&A had a record first half of the year and even after this quarter has a record all-time, we believe that the M&A pipeline remains very strong and the timing of closings is inherently lumpy, but we're optimistic about this business. The Asset Management segment generated record revenues of $177 million and record pre-tax income of $65 million during the quarter.
Financial assets under management ended the quarter at a record $143.1 billion, an increase of 6% over June of 2018 and 3% over March of 2019. Overall, the growth of financial assets under management continues to be largely driven by equity market appreciation and positive inflows associated with the increased utilization of fee-based accounts in the Private Client Group segment, which has more than offset the net outflows experienced by Carillon Tower Advisors, given the extremely challenging market for actively managed products. In the bank, Raymond James Bank generated record quarterly net revenues of 215 million and record quarterly pre-tax income of $138 million during the fiscal third quarter. Record net loans of $20.7 billion grew 9% year-over-year and 3% sequentially.
The growth in loans during the quarter was driven by the C&I portfolio, residential mortgage loans and securities-based loans to our Private Client Group. RJ Bank's net interest margin modestly expanded to 337 basis points in the fiscal third quarter, up seven basis points over a year ago third quarter and two basis points over the preceding quarter. Jeff will get into more detail on what affected the NIM. Importantly, the credit quality of the bank's loan portfolio remains strong, including the payoff of a handful of criticized loans that contributed to the loan loss benefit of $5 million this quarter, despite strong net loan growth during the quarter. So overall a strong quarter, a record first nine months for the fiscal year.
Now, I'll turn it over to Jeff, who will provide more color on the financial results. Jeff?
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
Thank you, Paul. On the revenue side of the P&L, virtually all line items had only minor variances from your consensus model this time which is pleasing to see I guess in that we've gotten the story across accurately particularly with the new line items from a year ago. So, I'm going to limit my comments to adding color to a couple of the larger dollar changes from the preceding quarter. First is our largest revenue line item with the asset-based fee revenues that we saw that nice double-digit gain of 12% from the -- sequentially which was exactly in line with the growth in the PCG fee-based assets in the March quarter which is the relevant time period as these are billed quarterly in advance.
Implication there of course is that the 4% growth in these assets for the current quarter, the June quarter should be indicative of Q4 growth in that line item, although it won't always be a perfect correlation like it was this time. The other large variance dollar-wise was the Investment Banking revenues which again, I think all of you estimated fairly closely. The sequential decline of course was more due to the fact that we had a record M&A quarter in March not that this current quarter was weak, it was just coming off of a record which was a hard act to follow.
So that was actually down. M&A revenues were down $40 million for the quarter. The details of course are in the press release on Page 11, if you have the same pagination as I do in the Capital Markets P&L. The bottom line for revenues is that total net revenues of $1.927 billion up 4% sequentially were just smack on line pretty much with the consensus model. On the expense side, I've got really two positives and two negatives to talk about. I'll just go in the order they were presented in the P&L. Compensation, our comp ratio was up to 66.3% which is a little higher than it has been in recent quarters.
There are a couple of factors involved in that one of course is that drop in M&A revenues that we just talked about and that have a very high incremental margin as you add the productivity from those bankers. Second would be, we're starting to see a little bit of the effect of the fairly aggressive hiring we've done over the last year or so in the compliance supervision areas. This falls into the PCG segment predominantly. That hiring pace of course has slowed by now, but it's starting to -- we're getting the full effect of the previous hiring now in our P&L.
And third, a third factor is the independent contractor portion of our Private Client Group segment which is somewhat larger than the employee portion as you can see by the relative FA counts in the press release. Actually it grew faster on a percentage basis, even though it's larger to start with it grew faster on a percentage basis this quarter than the employee side did as well. So that has a much higher pay out attendant to those revenues which is going to have an impact on the comp ratio. And all these things are part of the reason that we didn't really change our target at the most recent Analyst Investor Day last month. We left that 66.5%. So we're still under that of course for the quarter and for the year.
Communications and information processing, that's continuing to trend well below where we had guided at the beginning of the year. We had talked about it averaging in the high 90s or so for the year. It looks like, it's going to be more to low to mid-90s or low 90s on average.
It's not that we're necessarily spending significantly less than we anticipated, but it's really that more of it's being spent on large capitalizable projects that we had expected. And you can sort of see that. If you look at the fixed asset detail of our balance sheet and our Ks, you can see that we have a capitalized software number that's grown pretty steadily over the course of these last few years. And of course the amortization of those comes into the P&L guidance that we give in the current period and future periods. But I will also mention here that in keeping with our principle of conservatism, I would tell you that we only capitalize what we have to for GAAP.
And when we're assigning useful lives to the sometimes purchased, sometimes developed software we do try to err toward the low end of any reasonable range. So -- but future amortization of course is going to be -- continue to be a factor in earnings. And then business development, well above our guidance, I think we had talked about this somewhat exhaustively a year ago. We had a similar experience, but for different reasons.
At that time we said, we really kind of expect this line item to average between $45 million and $50 million per quarter for the year. And it would be on the low-end of that in the first two quarters and the high-end of that in the second two quarters. Well I think our annual guidance is still pretty accurate on that, but the range is just wider than we thought. In the first two quarters, we were below the $45 million. And this quarter, we're well above the top end of that little range. So really, I think our guidance is right, but the range is probably more like $40 million to $55 million rather than $45 million to $50 million.
So things impacting this quarter of course as Paul already mentioned, we had multiple FA recognition events as well as our largest conference of the year. And then we also this year had $5 million worth of advertising time compared to virtually none in the first two quarters. And we're expecting a similar number in that advertising line for this coming quarter. So bottom line, I think that we'll be right on it for the fiscal year just like I said a wider range than we had initially anticipated. And the other positive for the quarter was the bank loan loss provision. We actually had several criticized loans pay off during the quarter. Effect of that more than offset the provision related to the $550 million of net loan growth that we had during the quarter. And now you can actually see that decline in criticized loans.
If you look at the bank detail again on my page 16 of the release, where we have some of the bank statistics they're down about $50 million for the quarter. Net interest, which Paul touched on a little bit. The bank net interest margin actually improved a little bit by two basis points. And again on page 17 of the release, there's detail about the bank's net interest margin. But one of the main factors was when we changed from crediting clients' cash balances based on their aggregate assets with the firm to based on their aggregate cash balances with the firm. The bank turned out to be the primary beneficiary of that as they are generally the first bank in our waterfall and they have -- so people that have small accounts or smaller cash balances are almost always in our bank first.
So they've got the majority of the small accounts, which obviously engender a lower crediting rate than the larger balances. So they actually had a nicer decline in cost of funds than we experienced in the overall firm. Another factor in that though you may see it and you'll see a decline in the yield on the corporate side of loans. And that has to do with LIBOR. Really LIBOR being predictive of a Fed rate cut and moving down pretty substantially during the quarter. And that in our commercial loan portfolio is largely tied to LIBOR. The callable loans hadn't repriced, but those that did and the new ones came on we're tied to a LIBOR that had moved whereas our cost of funds side other than this change in methodology had not really changed.
So the slight improvement was really the net of those two things for the quarter. I will comment that our spread on funds swept to unaffiliated banks still remains about where it was a little under 200 basis points. And that I will remind you is reflected in account and service fees not in net interest. Cash sweep balances dropped 8.5% in the quarter. I think we talked about this again at the recent Analyst Day where we had given our sales force and clients about four months' notice that we were going to be eliminating the money market fund sweep. And as that date in June approached, a number of people took the opportunity to reposition to generally the -- mostly to positional money market funds. So those came out of the sweep balances. That didn't take effect on June 11.
And although the total sweep balances are down the one that we track really probably the most closely right now is RJBDP line of that which finances our bank's growth and happens to also to be our most profitable sweep option. That actually grew a little bit because of this conversion that I mentioned net of the runoff to other investments and positional funds. As Paul mentioned, we continue to see some runoff of sweep balances, although it's moderating a little bit now, which going forward obviously will affect both account and service fees and possibly to a lesser extent net interest earnings going forward.
So we'll have to see if some of the speculation is right that hopefully we're getting near a bottom in terms of people who are moved what they would call investable cash in our sweep balances really are constituted primarily of what we would call operational funds. A common question we get, of course, is what would the impact of a Fed rate cut be? I would just tell you that we intend to maintain our competitive position at/or near the top of our peer group in virtually all of the strata of account sizes. So our impact is going to be largely dependent on what the competition does.
But as I mentioned at Analyst Day my best guess is that is if there's a 25 basis point rate cut next week that there would be something between a 60% and 80% deposit beta associated with that, which would mean a 15 to 20 basis point decline to clients, but would have a modestly negative impact to firms that follow that deposit beta in our case would compress our spread by five to 10 basis points. And again as we remind you each basis point's about $1 million a quarter to us. So five or 10 basis points you can do the math. So I'll wrap it up just talking about the segment results page eight of the release. I mean, for the quarter three of our four primary operating segments showed sequential improvement in both revenues and pre-tax income.
But I would call our three steadier performers in terms of operating segments PCG, Asset Management and the bank. Our most volatile segment by far is Capital Markets, and they were down because they came off their record M&A quarter in March. So they actually showed just a slight decline from the strong March quarter. But -- month results you see revenue improvement in all four primary operating segments and pre-tax improvement in all except PCG, which has been bearing the brunt of the negative impact of the declining cash sweep balances. We continue to finance the growth of the bank. And those cash balances are coming out of external banks where that spread would go to the Private Client Group.
And so -- and they are also bearing, obviously, some of these elevated expenses in comp that we talked about and business development. So bottom line is for nine months when you look at the year-over-year improvement, we have had a little bit of help from interest rates during that period and we certainly had some help from the market. Although remember the beginning of this year, we had a pretty severe decline in December and 14% decline in the S&P. So we didn't really have three good quarters of fee billings. We really only had two out of the three. Yet we're still showing pretty nice improvement year-over-year.
And with that, I'll let Paul talk a little bit more about the outlook for Q4.
Paul Reilly -- Chairman & Chief Executive Officer
Great. Thanks Jeff. Well, first in the Private Client Group segment, we're entering the fourth quarter with fee-based assets, accounts up 5% on a sequential basis. And remember substantially all of the assets are billed based on beginning balances in the quarter. So billings should look pretty good in this segment. Of course the offset, which you have decline as discussed is any decline in client cash balances and increased allocations to other investments and certainly whatever happens to interest rates. But overall we continue to experience very good financial advisor retention and recruiting.
And in fact, although we may not hit our record for last year, we may come pretty close. And our recruiting pipeline is really extremely solid. And our employee side has really picked up where the independent has -- had led the way the first couple of quarters. In the Capital Markets segment, while the timing of closings are always difficult to predict in M&A, the pipeline is very, very strong. And I think we're optimistic in that area.
Fixed Income results have improved last two quarters. And the rate environment is generally still conducive for trading activity, especially as interest rates move. However, we did go through the process of rightsizing the Fixed Income business somewhat and expenses during the year. So that certainly has helped their margins and should continue to. The Asset Management segment, we entered the fourth quarter with financial assets under management of 6% year-over-year and 3% sequentially, which had also helped billings. Increased utilization of fee-based accounts in the Private Client Group as well as good return performance in Carillon Tower should help here.
The Raymond James Bank, we started the fourth quarter with record loan balances and attractive net interest margin. I think the bank remained very, very disciplined in its loan portfolio. I see that our numbers said that our credit was non-core, but when we add it to expenses in the last couple of quarters they were certainly were considered core. I think it was just a measure of good credit discipline. And so I think they're -- that we're very -- feel very good about the bank's positioning. Our capital levels obviously remain very strong with the total capital ratio for third quarter 25%. We continue to deliberately deploy our capital. In the third quarter, we purchased a little over a million shares for $85 million.
And through the first nine months of fiscal 2019 we repurchased 7.7 million shares for $591 million at an average price of $76.70 per share. That leaves us with $373 million of availability under the $505 million share repurchase authorization, which was increased by the Board of Directors in March of 2019. We'll continue to be proactive in offsetting share-based compensation dilution while remaining opportunistic with incremental repurchases. Following the last two investments last year Silver Lane Advisors and ClariVest will continue to be very active in pursuing opportunities to grow our business and larger ones, but only if they can meet our criteria of the strong cultural fit a good strategic fit and something we can integrate at a price that's reasonable.
We're working very, very hard at this and continue to follow the same guidance we've been giving you. So overall, we've entered the fourth quarter of fiscal 2019 we have a lot of tailwinds; record number of Private Client Group advisors, record PCG fee-based assets of 5% higher than the start of the preceding quarter, record high spreads on cash balances record net loans at RJ Bank and a strong pipeline for financial advisor recruiting and M&A. But we certainly have headwinds including declining cash balances and what happens there and certainly any impact of potential of rate changes which we obviously can't control, but we'll react to.
So, with that, I'm going to turn it over to Jessa and open the line for questions. Jessa?
Questions and Answers:
Operator
Thank you. [Operator Instructions] Your first question comes from the line of Craig Siegenthaler from Credit Suisse. Please go ahead.
Craig Siegenthaler -- Credit Suisse -- Analyst
Hey, thanks. Good morning, everyone.
Paul Reilly -- Chairman & Chief Executive Officer
Good morning, Craig.
Craig Siegenthaler -- Credit Suisse -- Analyst
So I just wanted to ask a question on the bank after the recent decline in interest rates. But from your seat how do you compare the relative returns between deposits allocated to the Raymond James Bank and also third-party banks? And also how do you determine the size of the Raymond James Bank?
Paul Reilly -- Chairman & Chief Executive Officer
Well, we look at return on our equity no matter where we put it. We get just under 200 basis points on our sweep and earn 373 spread on our bank. So we just look at the return on capital how we allocate it and look at controlled growth in the bank. So we have some internal governors on how large we'd like the bank to be all of it for the business. But I think you're going to see a very similar strategy as we go forward that you've seen over the last few years both in size and how we deploy.
Craig Siegenthaler -- Credit Suisse -- Analyst
Got it. And just as my follow-up, we saw a little bit of a slowing in the break rate broker trend in the March quarter partly due to the backdrop including government shutdown. But I'm just wondering have you seen a pick-up in the migration of advisors away from wirehouses and smaller broker-dealers given the improving equity market backdrop we've seen year-to-date?
Paul Reilly -- Chairman & Chief Executive Officer
Honestly, we haven't seen a lot of slowdown. So we are again at pace to be nearer last year's record. You can see it by the number of advisors that we have now. If you look at the pipeline of commits and visits it's very, very robust. So if anything there may be an increase certainly in the employee side. Independent's been really active the first three quarters, but the employee side is really active. And again it usually comes and goes with market. But I'd say in all of our affiliation options we're having very good results on recruiting.
Craig Siegenthaler -- Credit Suisse -- Analyst
Thank you.
Operator
Your next question comes from the line of Steven Chubak from Wolfe Research. Please go ahead.
Paul Shoukry -- Senior Vice President, Finance, Investor Relations & Treasurer
Steve, hello. Are you on mute?
Steven Chubak -- Wolfe Research -- Analyst
Yes, sorry, I was muted. My apologies. So much coughing in the background earlier, so figured --
Paul Shoukry -- Senior Vice President, Finance, Investor Relations & Treasurer
No problem.
Steven Chubak -- Wolfe Research -- Analyst
Appreciate some color on the high comparable per role in the quarter. I'm just wondering in terms of the revenue outlook, if I look at Street expectations just given the forward curve, people are anticipating I think rightfully so continued fee momentum helped by strong organic growth. But the Fed easing cycle which is beyond your control will weigh on NII and spread revenue.
And as you think about your ability to maybe hold the line on comp is that something that's achievable given the expectation for multiple rate cuts in the back half? And just trying to thinking about your philosophy if the growth from here is primarily driven by fee income versus NII.
Paul Reilly -- Chairman & Chief Executive Officer
Really we think we're going to get -- given the market we should have good fee income growth. Now, the only difference between those revenue streams is we have a comp cost to fee income growth and not really any comp cost in net interest. So, even though I think this -- the fee income growth will be -- should be good certainly with a 5% tailwind going into the quarter, certainly any offset on net interest is going to hurt.
But again I think any of those adjustments are going to be more short-term than long-term and are just -- if markets move up or down we get impacted. But I think we'd do a good job of managing through those so...
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
It depends on what you're projecting. If you're projecting Fed rate cuts then I think you're right in not assuming that NII is going to be a revenue driver. If you're projecting maybe one cut only or no cuts, then it's going to be dependent on how well we're able to hold onto or grow cash balances.
Steven Chubak -- Wolfe Research -- Analyst
I understand. Just as a follow-up to the expense remarks you just made one of the other big areas of debate is any flexibility that you guys have to maybe manage non-comp lower at least slow the pace of non-comp inflation you've made a lot of investments in systems and technology over the last couple of years. That's clearly helped accelerate organic growth. Is there any potential to flex that as the NII backdrop becomes a bit more challenging?
Paul Reilly -- Chairman & Chief Executive Officer
I think we always have the opportunity certainly on revenue outlook in the medium term to impact expenses comp and non-comp. So, you can see in Fixed Income we did that and we went from a market where we're just breakeven to 15% ROE. Part was market helped but a lot of that was cost discipline. And if we see those trends in other areas of the business we're going to have to look at more cost discipline for sure.
But you're right a lot of our somewhat elevated expenses are to get on and to stay ahead of our advisor growth. So, whether that's support or compliance supervision or systems it's had a big payoff on net advisor growth. But it does hit short-term comps. So, I think to help us on comp I mean on to the numbers it'd be great to slow down recruiting.
I don't think it's a great long-term benefit so -- but we always have those flexibilities. And I think we've shown that discipline. In any slowdown or recession we've reacted pretty well on cost and certainly we'll do that if we think it's needed to be done.
Steven Chubak -- Wolfe Research -- Analyst
Thanks Paul. And just one follow-up for me on account and service fees. You quoted the spread on off-balance sheet cash at 200 basis points. It looks like some intra-quarter volatility in terms of the movement in balances impacted the calculated fee rate. I'm just wondering given where the balances exit the quarter in June, what's the right jumping off point for account and service fee revenue? This seems to have been the biggest source of shortfall versus consensus expectations, so just want to make sure that we're modeling that appropriately.
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
Again, it depends how you want to model client cash balances. That's the line item that will be most impacted by whatever fluctuation you want to assume in client cash balances. We've had run off obviously that's had a negative impact on that line item because external bank sweeps are the ones that are impacted first because we're going to continue to finance the growth of Raymond James Bank as long as we can.
So, the external banks are the -- get the remainder if you want to call it that. Then to the extent that keeps dropping that's going to be the line item affected more than net interest earnings.
Steven Chubak -- Wolfe Research -- Analyst
All right. Thanks very much.
Operator
Your next question comes from the line of Jim Mitchell from Buckingham Research. Please go ahead.
Jim Mitchell -- Buckingham Research -- Analyst
Hey, good morning. Just maybe you talked about as a recruitment could be close to last year's record. But when I look at year-over-year net growth, it's about a little less than half of last year's growth. So I'm just trying -- are you sort of indicating that second half I guess additions could be a lot stronger or am I missing something I guess in that analysis?
Paul Reilly -- Chairman & Chief Executive Officer
So when we look at it, I know you guys look at FA count, we look at trailing 12s recruited. And I think that's the measure. If you look at 2009, we had a lot of individuals, but in last year it wasn't even close in trailing 12. So we look at the trailing 12 recruited rather than look at the advisory count itself. [Technical Issues]
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
And I would also caution you instead of looking at advisory growth to see how well we're doing I mean certainly look at the total asset growth. I mean a lot of the runoff of advisors are people that don't make it in the business, people that retire, reasons they leave. In a lot of cases, their assets stay here with their team or with some other advisors. So, it's really the asset growth that's more important, and with our recruiting metrics and records we're talking about really part of the gross production we're creating as Paul said.
Paul Reilly -- Chairman & Chief Executive Officer
I do think that too and especially we saw the impact in the first quarter, our first quarter, because we've had a lot of retirements as the industry has. So what we measure when we talk about recruiting, we're talking about the gross number. But as you look into the net number, an awful lot of those retirements or unfortunately we got people or passed away, we've kept the asset. So they've gone on to other advisors. And so that's really what we track. And that's why we look at kind of non-regretted attrition. Certainly, if someone passes away, it's regretted. It's a death in the family. But if we keep the assets from a financial standpoint, it isn't as negative. It certainly is to the people and us and the people we know, so.
Jim Mitchell -- Buckingham Research -- Analyst
Right. So, it's just a higher quality FA you're bringing on. Is there a way to think about the timing of last year's versus this year's? If last year was close to record, do you have 75% of the assets and fees over or is there still -- is it 100%, 50%? Just trying to think of how much more you have from last year's recruiting class versus the new kind of recruiting trailing 12 months you're getting this year?
Paul Reilly -- Chairman & Chief Executive Officer
It's hard to tell. It's so individualized. We think in the first six months to a year, we get a majority of them and it may trail for a little bit while after, and then the growth is really due to their growth of production. Most all these teams that we recruit aren't just because they have assets. It's because they're looking to grow. So, it's so individualized. But you're going to see momentum as you've seen in the past. Assets are still coming over from our recruiting. And those -- we keep the pipeline filled we're going to continue to have that push.
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
It's certainly reasonable to assume something like a 6-month lag of assets coming in versus production recruited. So, I mean if you have a -- last year's record production year, we kind of get the benefit a lot of those assets coming in this year. And this year is the same way with next year's assets.
Jim Mitchell -- Buckingham Research -- Analyst
Great. Okay. And Jeff, maybe one just follow-up on deposit, your deposit costs were down 8 basis points quarter-over-quarter. Obviously, the change in the relationship pricing was that -- was driving them. Just -- is that all impacted in this quarter? Is there some -- a little bit of on an average basis? Do we get a little bit more next quarter or is there some or -- and/or is there some other dynamic that centered it lower than basis points?
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
That's substantially all of it. It didn't happen exactly at the beginning of the quarter, but I would -- that's about what we modeled in as the impact. So I wouldn't assume any future benefit from that.
Paul Reilly -- Chairman & Chief Executive Officer
And I do think that especially when you look at the bank that -- where LIBOR is predicted and you get benefit going up, because LIBOR moves usually before Fed funds, I think the bank has seen a lot of that loan repricing already. So any change in the cost of funds should be under total deposit and not in negatives.
Jim Mitchell -- Buckingham Research -- Analyst
Great. Okay, great. Thanks.
Operator
Your next question comes from the line of Bill Katz from Citi. Please go ahead.
Brian Wu -- Citi -- Analyst
Hi, good morning. This is Brian Wu on for Bill Katz. Appreciate the comments on client cash sorting. Any update you can provide on client cash in July?
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
We've continued to see -- I think -- I don't have the exact number. It's been another $1 billion or so, I think through today runoff of -- into -- mainly into position of money market funds. These are the -- in -- oh, yeah, I'm sorry. And of the big part of that as Paul mentioned is that the beginning of every quarter we have the quarterly fee taken out of accounts. That's generally just an account subtraction. Over the course of the quarter money coming into the accounts through dividends interest whatever and repositioning -- positions it for the next quarter. So that number coming out in fees is about $700 million to $800 million at the beginning of each quarter right now. So that's really been the primary reason, we see a decline so far in July. But we see that every quarter, and again it builds back up over the course of the quarter.
Brian Wu -- Citi -- Analyst
Got it. And how should we think about the funding mix for the bank, if client cash continues to run off?
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
It's entirely possible that our bank's going to be entertaining other funding sources aside from our sweep program over time. We're already -- we've already looked at some. We've done one CD issuance through our syndicated desk, a secondary market CD. We're looking at alt -- immediate -- or we're looking already at alternative funding sources at the bank level preparing for the eventuality that sweep balances are not available given our internal limitations or in general to continue to support the growth of the bank.
And we don't -- if we do the math, we'll have to see whether it makes sense for us to run the bank in place, or whether it makes more sense for us to continue to grow the bank with external funding sources. I think the answer's going to be the latter, but we don't know that for a definitive fact yet. So we are exploring alternative funding sources of various types at the bank. We have been for the better part of the year actually in anticipation of what you're talking about.
Paul Reilly -- Chairman & Chief Executive Officer
Yeah, so agree everything with what Jeff said. And the only caveat is right now we are funding basically almost exclusively internally and cash sweep balances moderate the exit or grow we're going to be fine. If they continue to go down at some point you've got to have alternatives and that's what we're exploring.
Brian Wu -- Citi -- Analyst
Great. Thank you for taking my question.
Operator
Your next question comes from the line of Chris Harris from Wells Fargo. Please go ahead.
Chris Harris -- Wells Fargo -- Analyst
Thanks, guys. How do you think interest rate cuts will affect the customer cash balances? I ask that question because a lot of people think it would actually help to stabilize those balances. I'm just wondering, if you guys would agree with that?
Paul Reilly -- Chairman & Chief Executive Officer
Our premise, which I don't know why your -- always people ask us to predict what's going to happen with interest rates given our --.
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
Or balances.
Paul Reilly -- Chairman & Chief Executive Officer
Or balances. But I think too right now the attraction has been positional money markets and the spread between that and FDIC insurance. And I think that, if rates come in and that spread decreases that the cash sweep is going to be even a better option than the money markets if rates have come in. So I think we agree with that. But we'll see what happens.
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
I am in the camp that it will help stabilize the balances at least by the second rate cut or so. The first one may not have a big impact or maybe even the second one. But beyond that, if there are that many rate cuts I think -- I certainly think it will minimize the differential that they can get elsewhere.
Chris Harris -- Wells Fargo -- Analyst
All right. That's great. And my follow-up question relates to the bank, excellent credit quality again this quarter. Bigger picture how would you guys characterize the risk profile of the bank today? And specifically wondering, how you think the loan portfolio the risk profile of that compares to say how the loan portfolio looked in 2007.
Paul Reilly -- Chairman & Chief Executive Officer
So I think that the biggest difference the bank is much more diversified. And back in pre-2008, 2009 we were almost purchase mortgages or C&I was really our portfolio. So today C&I is certainly is a much smaller percentage. It's much more diversified, but I believe the credit quality in the C&I and other parts of the equation is good. So I view we're in good shape and more diversified in our product portfolio.
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
And we didn't have an SBL portfolio in 2007, which is extremely a good source of business for us. Most of our mortgages now are originated versus purchased. So -- and we have extremely good credit quality within our client base as you can imagine. And we have a tax-exempt portfolio, which we didn't have in 2007, which are loans to investment-grade municipalities. So it's -- I think in -- it's more diversified and probably on average much better quality than it was in 2007. And remember, we survived 2008 or 2009 without particular ugly -- with no real ugly hiccups. So it just -- to be in even better shape now, I think we're very well-positioned.
Paul Reilly -- Chairman & Chief Executive Officer
But we're also cognizant that anything can happen, so we watch it very, very carefully so.
Chris Harris -- Wells Fargo -- Analyst
Very good. Thank you.
Operator
Your next question comes from the line of Devin Ryan from JMP Securities. Please go ahead.
Devin Ryan -- JMP Securities -- Analyst
Great. Good morning, everyone.
Paul Reilly -- Chairman & Chief Executive Officer
Good morning
Devin Ryan -- JMP Securities -- Analyst
First question just on private client commissions. So they increased 2% from last quarter. We were thinking they could have been something a little bit better than that just with trailing commissions increasing from the move higher in average daily balances like in mutual funds which I think were only up about 1%. So I'm just curious, if there's any lag in there sometimes the accounting can be a little bit funky. Or was it just lighter transactional activity like new sales being slower which offset some of the benefits of the average daily balance increases?
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
I think it's just a continuation of the trend toward fee-based assets away from commissionable activity in the Private Client Group side. The people we're recruiting are heavy users of fee-based alternatives. And it's just been a continuing trend you've seen that -- if you map that for the last two to three years, I think you'd see a pretty steady decline in commissionable activity in PCG. No real change there.
Devin Ryan -- JMP Securities -- Analyst
Yes, OK. Got it. And then just a follow-up here on M&A opportunities, I know we touched on this a bit at the Investor Day, but even since then there's press out that USAA may be looking to sell their wealth management business. I know that's a different business, but just something notable activity in kind of financials Investment Banking, so just wanted to get a little perspective on your corporate development function business development. How active is it right now? And how are you guys kind of thinking about M&A kind of balancing views that are out there that we may be late cycle versus long-term opportunities that would come along?
Paul Reilly -- Chairman & Chief Executive Officer
Look Devin, I would describe us as active as ever looking at all sorts of opportunities. And I would view the market as a lot of people or more people looking maybe at a possible transaction. The problem is that, I think some of that in certain categories are driven by a belief that it's late cycle. The pricing doesn't necessarily -- it reflects peak growth. So, you still got that delta, so it may take a little bit of adjustment before pricing realizes.
So through our view, if we look at transactions, first they have to fit. There are a lot of transactions that happen that just don't fit our model. So, they just aren't good fits for us. But the -- and some are just culturally aren't good fits. But I would say the biggest -- there is more interest that I think the pricing has to reflect kind of reality and not peak because they think there's going to be a cycle change, so those are the challenges. But we're very active in talking to folks though.
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
Another silver lining to the market correction whenever it comes along with increased cash balances.
Devin Ryan -- JMP Securities -- Analyst
Great. Would -- I guess just on that point, I've always had the impression that Raymond James doesn't need to be the high bidder because -- especially in wealth management because your retention tends to be quite a bit better, so the earn-outs over time, the seller may actually do better even at the lower price. So how does that play in? And is that an accurate thought process?
Paul Reilly -- Chairman & Chief Executive Officer
I don't know. We've never tried to be the high bidder, so we're in -- what's most impressive about I think to us on recruiting results especially at the high end, our retention agreements are substantially -- offers are substantially lower than other firms and yet people still join us. I would say when it comes to M&A that depends. If it's public company or something it's hard to be not near the high bidder and I'd say there are some that are private that we always ask ourselves are we being too conservative, but we've seen a number of things where we were first choice spiritually second by price in the line with a number of other people.
But somebody had a bid that was 30% to 50% higher. So you can't beat outlier bids just to win a deal. And I think that's been more the frustration than anything for us where we were preferred, but the premium someone else was willing to pay was just too high. So we just again remained disciplined and said our job is to have an ROE for shareholders not just to be bigger.
Devin Ryan -- JMP Securities -- Analyst
Yeah. Great. Thank you.
Paul Reilly -- Chairman & Chief Executive Officer
Thank you.
Operator
Our last question comes from the line of Alex Blostein from Goldman Sachs. Please go ahead.
Alex Blostein -- Goldman Sachs -- Analyst
Hey, good morning. Thanks. Paul a question to you regarding some of the earlier comments you made on the call and that kind of echoes your comments at the Investor Day as well just around the more competitive recruiting practices out there. How are you guys thinking about that impacting your guys' franchise? Should we think about the cost of bringing in new financial advisors going up all the time for Raymond James or you guys are going to try to stay disciplined, which may ultimately result in slightly lower net new asset growth?
Paul Reilly -- Chairman & Chief Executive Officer
So I think the results so far as we've -- I'd say, we've had some slight increases at times to close the gap, but we certainly haven't matched. We've stayed very, very disciplined yet the result is that this year will be close to last year's record even though we've seen a high an increase of the number of competitors offering substantially more. So our focus is that although we lose some really good people that we would like the people that join us are joining us for the right reasons, it's not just the biggest check.
Certainly, we think what we offer is very fair to the advisor and long-term they can do just as well and what we think we can help them with their practice. And it's hard when you really want someone to stay disciplined, but we stay disciplined and just say overall it's the right thing to do for the advisors that are here. And bring in the new advisors at a fair price. And it helps reinforce the culture and we get the people that I think are joining for the right reasons.
So it's just like M&A. You're -- there's something you may really want, but if it gets out-priced, you're better off just sitting on the sideline, and it's hard to do especially at -- if we are near the end of the cycle, it's always the worst and the hardest, so maybe it's an indication it is. So we just felt through our discipline and not being arrogant, we really -- we always second-guess ourselves and say, are we doing it right and I think we're doing the right thing. And our results have been -- I think this year will be almost as good as last year's even with this competitive pricing.
Alex Blostein -- Goldman Sachs -- Analyst
Right. All makes sense. A couple of follow-ups for Jeff. I guess on the rate sensitivities you talked about a 25 basis point cut is five basis points to 10 basis points, I guess compression in the NIM. Are you guys talking about the back NIM only or are you talking about the overall company NIM? And if it's just the bank maybe give us [Technical Issues] vast majority, but that would be helpful to get the full picture.
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
It would be felt partly by the bank and it would be felt partly in the account and service fees in the Private Client Group. So it would be kind of a split between those two segments, which are a direct, but it's hard to tell the exact proportion. Depends what we do on the grid of what we pay to clients, but they both feel it those two segments.
Alex Blostein -- Goldman Sachs -- Analyst
Right. And then the last just clean up in terms of bank funding sources just to follow-up to one of the earlier questions of the $14 billion that sits in third-party bank sweep today how much of that is ultimately still available to be moved through AJ before triggering any restrictions?
Paul Reilly -- Chairman & Chief Executive Officer
Well, so far that's been an -- more of an internal restriction than a market so most of our competitors put a lot more of their cash sweeps. I do think you're seeing one of the benefits of our discipline that we've had. You've read a number of firms that had restrictions on what they could do, because they've leveraged up their sweeps so much it's hit other trigger points and whether it's buying back stock or flexibility.
So we still have room. So we're getting closer to our internal numbers, but we have the ability to raise that I think comfortably still for a while. But again, we're not going to do -- what other people have done. We don't think -- we think it limits flexibility.
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
Yeah. We have some internal limitations that are the first triggers that we will hit, but then there are some external triggers too, such as we don't want to violate clients' ability to get the $3 million of FDIC insurance and put so much in our bank that they don't go through the waterfall, etc.
Those numbers are a little less than half of that $14 billion could still be directed to our bank and also without triggering some penalty rates, because we do have some contractual commitments, which are running off over time here with some third-party banks that we won't fall below a certain, but I guess a safe number to use would be a $6 billion type number in that. And we're not trying to dodge the question, but we have some internal constraints that would again be triggered before that comes into play.
Alex Blostein -- Goldman Sachs -- Analyst
Super. Great. Thanks very much, guys.
Paul Reilly -- Chairman & Chief Executive Officer
Is that it? Well, great. So we appreciate you all joining us and I think we're as I've -- ended up in good shape. I think most of the indicators -- all indicators are really positive outside of the cash balances. We'll see what happens with this rate cut, if there's a rate cut this month. And we'll talk to you next quarter. So thank you very much for joining us.
Operator
[Operator Closing Remarks]
Duration: 56 minutes
Call participants:
Paul Shoukry -- Senior Vice President, Finance, Investor Relations & Treasurer
Paul Reilly -- Chairman & Chief Executive Officer
jeffrey p. julien -- Executive Vice President, Finance and Chief Financial Officer
Craig Siegenthaler -- Credit Suisse -- Analyst
Steven Chubak -- Wolfe Research -- Analyst
Jim Mitchell -- Buckingham Research -- Analyst
Brian Wu -- Citi -- Analyst
Chris Harris -- Wells Fargo -- Analyst
Devin Ryan -- JMP Securities -- Analyst
Alex Blostein -- Goldman Sachs -- Analyst
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