Image source: The Motley Fool.
Raymond James Financial Inc (RJF 2.99%)
Q1 2020 Earnings Call
Jan 23, 2020, 8:15 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to Raymond James Financial's Fiscal First Quarter 2020 Earnings Call. My name is Myra and I'll be your conference facilitator today. 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, Head of Investor Relations at Raymond James Financial.
Kristina Waugh -- Head of Investor Relations
Thank you, Myra. Good morning everyone and thank you for joining us on this 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 Paul Shoukry, Chief Financial Officer. The presentation they will review this morning is available on Raymond James' Investor Relations website. Following their 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 or general economic conditions. In addition, words such as believes, expects, could and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Form 10-Q, which are also available on our IR 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 schedules accompanying our press release and presentation.
With that, I would like to turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?
Paul C. Reilly -- Chairman and Chief Executive Officer
Thanks, Kristie and good morning everyone. Thanks for joining us. During this call, if you hear me refer to Paul, I'm not referring to myself in third person because Paul Shoukry has now taken over the CFO reins and will be going over that part of the call. As usual, I'll give an overview and I am going to turn it over to Paul, who will cover more of the detail and update our guidance as we indicated on our last call before the interest rate changes. We're going to hold-off on guidance until those rate cuts were announced and we knew how deep they would be. After that, Paul will then turn it over to me to discuss the outlook.
So overall, I'm really pleased with our results for the first quarter, especially given the significant headwinds from the three recent interest rate cuts, which will have an estimated negative impact on our pre-tax earnings of approximately $140 million annually.
As outlined on slide three, we generated quarterly net revenues of $2 billion, which were up 4% from the prior year's fiscal first quarter and down 1% from the record set in the preceding quarter. We generated record quarterly net income of $268 million or $1.89 per diluted share. On an annualized basis, our return on equity for the quarter was 16%. And while as you know we've been reluctant to disclose this metric because we believe return on total equity is the most relevant and we do not have any preferred equity, we are now disclosing return on tangible common equity or ROTCE as that has become a common metric in our industry. On an annualized basis, we generated a 17.5% return on tangible common equity during the quarter, which we believe is very attractive, especially given our strong capital position.
On slide four, you can see that in addition to the strong financial results this quarter, we also achieved records for most of our key business metrics, including client assets under administration of $896 billion, PCG assets in fee-based accounts of $444.2 billion, financial assets under management of $151.7 billion, total PCG financial advisors of 8,060 and net loans at RJ Bank of $21.3 billion.
While equity market appreciation certainly contributed to the growth of client asset metrics, we also believe that the substantial growth, for example 31% year-over-year and 9% sequential increases in PCG assets in fee-based accounts reflects significant increases in market share that have been driven by our consistent industry-leading strong retention and recruiting of Private Client Group financial advisors. For example, for the firms that have already reported the year-over-year increases in fee-based assets have ranged 18% to 23%, well below our year-over-year growth.
Clients' domestic cash balances, which ended the quarter at $39.5 billion were down 16% year-over-year from the high watermark reached in the following than the quarter a year ago because of the surge in market volatility in December of 2018, but were up 5% sequentially, partially due to the year-end tax planning positioning. Client cash balances appeared to stabilize over the last several months, but remember at the beginning of each quarter, we have the impact of quarterly fee billings and in the first calendar quarter, we typically see seasonal declines in cash balances due to income tax payments.
Now let's turn to the segment results, starting on slide five. The Private Client Group generated record quarterly net revenues of $1.4 billion, primarily driven by the aforementioned growth of assets and fee-based accounts, which was partially offset by the negative impact of lower short-term interest rates and net interest income and RJBDP fees from third-party banks. Quarterly net income for the segment was $153 million, down 7% on a year-over-year basis, but up 7% sequentially. The year-over-year declines in pre-tax income was largely due to the decrease in net interest income and RJBDP fees from third-party banks, which was due to the lower short-term interest rates as Paul Shoukry will discuss in much more detail. The sequential improvement in the segment's pre-tax income was driven by higher revenues and lower non-comp expenses. And again, Paul will discuss this after I finish this part.
Most importantly, on the bottom of the slide, you can see very positive trends for client assets and number of advisors, which grew to 8,060 despite the elevated number of planned retirements that are typical each December quarter. For example, in that quarter alone, there were 69 advisors who retired or left the business during the quarter wherein most cases, we retained substantially all the client assets. Our net additions of financial advisors during the quarter was particularly impressive compared to other firms in our industry who have reported so far as most all have reported decreases in net advisors year-over-year and sequentially. But even more impressive than the net addition of advisors is the quality of the advisors joining Raymond James. We are attracting very large high quality practices, including some in the $5 million to $10 million range. Over the past four quarters, financial advisors with over $300 million of trailing 12 production and over $40 billion of assets with their prior firms had affiliated with Raymond James, which is a spectacular result. And our recruiting pipeline continues to be robust across all of our affiliation options.
Moving to slide six. The Capital Markets segment had mixed results during the quarter as revenue and pre-tax income were up year-over-year basis, but down sequentially compared to the fiscal fourth quarter. Fixed income brokerage revenue and both equity and debt underwriting revenues were strong during the quarter. On the other hand, M&A revenues and equity brokerage revenues were down from the year ago quarter.
On the next slide, Asset Management segment generated record quarterly net revenues and pre-tax income and financial assets under management reached a record of $151.7 billion, increases of 20% on a year-over-year basis and 6% sequential. These record results were driven by equity market appreciation, the net addition of financial advisors in PCG and increased utilization of fee-based account, which more than offset the modest net outflows for Carillon Tower Advisers during the quarter.
On slide eight, Raymond James Bank eked-out record quarterly net revenues of $216 million, slightly higher than the preceding quarter as loan growth help offset the 7 basis points sequential decline in the Bank's net interest income margin caused again by lower short-term interest rates. Pre-tax income was up 23% on a year-over-year basis and 3% sequentially, helped by the loan loss benefit of $2 million for the quarter. Despite loan growth and an uptick in criticized loans during the quarter, a higher concentration of residential mortgage, which carries lower allowance than C&I loans on average and payoffs of certain lower rated corporate loans resulted in a loan loss benefit. Net loans ended the quarter at a record $21.3 billion, which was up 7% over December of 2018 and 2% over September 2019.
Now, I will turn over the call to Paul, Paul Shoukry, who will provide more detail on the financial results. Paul?
Paul Shoukry -- Chief Financial Officer
Thanks. Before jumping into the numbers, I just want to thank Jeff Julien, who is sitting in the room with us this morning. Jeff has been a fantastic mentor and friend over the past several years and certainly have big shoes to fill, but fortunately, Jeff has agreed to stick around for a year to help me with the transition. So thank you, Jeff.
Jeffrey P. Julien -- Executive Vice President of Finance
Sure.
Paul Shoukry -- Chief Financial Officer
I want to point out that in addition to the presentation we're using for this call, we also provided a financial supplement for the first time this quarter, which provide similar metrics as earnings release, but over five rolling quarters. I'll also point out some other requested additions to our disclosures throughout my prepared remarks. As always, thanks to all of you for your feedback and suggestions to help us continuously enhance our disclosures.
Starting with revenues on slide 10. As Paul stated, we generated quarterly net revenues of $2 billion, which were up 4% on a year-over-year basis and down 1% compared to the record achieved in the preceding quarter. Notably, about 75% of our net revenues are asset-based, providing relatively good predictability. Asset management fees were up 10% on a year-over-year basis and 3% sequentially, consistent with the 3% sequential increase of assets and fee-based accounts in the preceding quarter. Assets and fee-based accounts were up a substantial 9% during the fiscal first quarter, which will be reflected in the Private Client Group segment in the second quarter as most of these assets are billed at the beginning of each quarter based on balances at the end of the preceding quarter. Also remember, about 13% of this line item is driven by financial assets under management, primarily in the Asset Management segment, which are billed based on a combination of beginning, ending and average assets throughout the quarter. Given one fewer billing day in the second quarter compared to the first quarter and the 6% sequential increase in financial assets under management, we would expect asset management fees to grow somewhere around 7% to 8% in the next quarter on a sequential basis.
Brokerage revenues during the quarter of $460 million were pretty healthy as fixed income brokerage revenues were strong again this quarter. While brokerage revenues in PCG and institutional equity brokerage brokerage revenues improved on a sequential basis, they're both still pretty subdued as PCG brokerage commissions are negatively impacted by the shift to fee-based accounts and there are cyclical and structural headwinds impacting equity brokerage revenues across the industry, particularly for firms like ours that do not take as much balance sheet risk.
Account and service fees of $178 million were down 4% on a year-over-year basis and 1% sequentially. The decline compared to the fiscal first quarter of 2019 was largely attributable to the removal of the money market sweep option last June, which is reflected in the Asset Management segment as well as lower RJBDP fees from third-party banks due to lower short-term interest rates and lower average cash balances, which I will discuss in more detail in the next two slides. Partially offsetting those items was an increase in mutual fund and annuity service fees, attributable to more mutual fund positions and higher mutual fund balances.
Investment banking revenues of $141 million were up 3% compared to last year's first quarter, but down 10% compared to the preceding quarter. Debt underwriting and equity underwriting revenues were both strong, but M&A revenues declined on both a year-over-year and sequential basis. As you may recall, in fiscal year 2019, we generated approximately $600 million of investment banking revenues, which was a record that was up 19% from the prior year's record. Given how strong our investment banking revenues were last year, we would be pleased to match that result this year, assuming market conditions remain conducive, which would result in an average of about $150 million of investment banking revenues per quarter. So we have some catching-up to do after the first quarter.
I'll discuss net interest income on the next two slides, but quickly on other revenues, which were down substantially this quarter. The two primary drivers for the decline in other revenues were lower tax credit fund revenues, which had a very strong fourth quarter and a modest valuation loss on private equity investments in the Other segment compared to gains in both the fiscal first quarter and fourth quarter of 2019.
Moving to slide 11. Clients domestic cash sweep balances, which are the primary source of funding for our interest earning assets and the balances with third-party banks that generate RJBDP fees ended the quarter at $39.5 billion, representing 4.9% of domestic PCG client assets, which is a record low as far back as we have the data. These balances have stabilized since the fiscal third quarter of 2019 and increased 5% during the first quarter, partially due to tax positioning that is typical at the end of the calendar year. Unless we encountered elevated market volatility, we expect pressure on these balances in the fiscal second quarter due to the quarterly fee billings and income tax payments.
On slide 12, the top chart displays our firmwide net interest income and RJBDP fees from third-party banks on a combined basis, as these two items are directly impacted by changes in short-term rates. As you can see, the three rate cuts totaling 75 basis points since August has put pressure on these revenue streams, which on a combined basis are down $25 million from the high watermark in the fiscal second quarter of 2019 and that's despite loan growth at Raymond James Bank.
On the bottom right portion of the slide, we provided a new disclosure that many of you have been requesting. During the quarter, the average yield on RJBDP fees from third-party banks was 1.64%. Prior to the three rate cuts, the average yield reached 2% in the fiscal second quarter of 2019, which means that the deposit beta averaged approximately 50% for those last three rate cuts.
Given the current level of clients' domestic cash sweep balances, the reduction of our spread of 36 basis points, 2% down to 1.64% roughly equates to an annual pre-tax earnings impact of approximately $140 million. Now this is based on oversimplified math because obviously a good portion of these balances are used to fund the bank's balance sheet where loan spreads vary and there is some duration. Those dynamics are reflected on the NIM graph on the bottom left portion of the slide, but based on the oversimplified map, $140 million would represent approximately 10% of our adjusted pre-tax income in fiscal year 2019 and will reflect a negative impact of approximately 100 basis points to 150 basis points to the comp ratio and pre-tax margin, which we will discuss more on the next slide.
Raymond James Bank's net interest margin declined 7 basis points from the preceding quarter to 3.23%. If short-term rates remain constant, we would expect the bank's NIM to remain at or around the same level in the second quarter, assuming a similar asset mix as the negative impact from the higher mix of lower risk and lower yielding residential mortgages should largely be offset by a reduction in the cash sweep rates we are making this week, which will average around 5 basis points and leave us near the top-end of the competitive range. So similarly, we would expect the average yield on RJBDP fees from third-party banks to remain around 1.6% to 1.65%.
Now I'll discuss expenses on slide 13. First, let me spend a few minutes on compensation expense, which is by far our largest expense. The compensation ratio increased sequentially from 65.2% to 67.2%. This increase was largely driven by revenue mix as compensable revenues in PCG, those which have an associated advisor payout have grown to be a higher portion of net revenues while non-compensable revenues have declined as a portion of net revenues. As I covered on the prior slide, the decrease in short-term interest rates has pressured a significant portion of the non-compensable revenues. Meanwhile, compensable revenues in the Private Client Group, which include asset management fees, brokerage revenues and investment banking revenues in the segment were up 3% sequentially. These revenues have an average payout between our affiliation options of approximately 75%. So when PCG's compensable revenues increased faster than other revenue sources, you should expect the compensation ratio to increase just as it decreased substantially when rates increased from 2015 through 2018.
To help you better understand this dynamic, we started breaking out PCG financial advisor compensation and benefits in the earnings release and supplement, which represented $25 million of the $31 million sequential increase in the firm's total compensation during the quarter or roughly 80% of the overall increase. This dynamic is expected to continue into the fiscal second quarter as assets and fee-based accounts were up 9% during the fiscal first quarter. Given the growth of financial advisor compensation and the reset of payroll taxes at the beginning of each calendar year, we would expect the compensation ratio to be somewhere around 67.5% for the fiscal year. This represents a 100 basis point increase over our prior target, but again, this adjustment is primarily a function of lower short-term interest rates and the change in revenue mix to a larger portion of compensable revenues in PCG.
On to non-compensation expenses. Non-compensation expenses during the quarter were $299 million, which declined 14% from the preceding quarter and that preceding quarter included a $19 million goodwill impairment and 10% from the year ago quarter, which included a $15 million loss associated with the disposition of our European equities research business. Given the loan loss benefit and the fact that there were no major recognition events or conferences during the quarter, we would expect non-compensation expenses to increase throughout the year.
More specifically, while there are a lot of variables, we're currently estimating that non-compensation expenses in fiscal 2020 will total around $1.3 billion or an average of about $325 million per quarter. But as we experienced in the first quarter, we also expect a wide range around this target from quarter-to-quarter. And if revenue growth is higher than expected that could drive non-compensation expenses higher as well as certain line items such as sub-advisory fee expense are directly tied to revenue growth. $1.3 billion of non-compensation expenses in fiscal 2020 would represent approximately 2% growth over fiscal 2019, which included a two aforementioned non-GAAP items. We believe this would be a good result, particularly given the amount of growth we are experiencing as we are extremely focused on containing expense growth as much as possible, while still investing for the future.
Slide 14 shows the pre-tax margin trend over the past five quarters. The pre-tax margin was 17.9% in the fiscal first quarter of 2020. Given the expense guidance I just provided, we would expect the pre-tax margin to be around 17% for fiscal 2020, reflecting 100 basis points decline from the target that we provided under Analyst and Investor Day before the three recent short-term rate cuts. Again, this is our best estimate given what we know right now and we all know things can change rapidly in our business.
Slide 15 provides a summary of our capital actions over the past five quarters, where we returned over $1 billion back to shareholders through dividends and repurchases under the Board's authorization. We only repurchased 11 [Phonetic] million of shares in the fiscal first quarter, but we remain committed to at least offsetting stock-based compensation dilution, which is approximately $150 million to $200 million per year. Furthermore, as we exhibited last year, given our strong capital and liquidity position, we will also consider significantly increasing our repurchases if the stock price dips to opportunistic levels which we had stated starts at around 1.8 times book value. We currently have $739 million of remaining share repurchase authorization.
In summary, given the growth of our capital which is already very strong, we're going to increase our focus on utilizing and/or deploying our capital whether it be through higher dividends, being more aggressive with our buybacks, pursuing corporate development opportunities or accelerating the growth of our balance sheet, for example, by growing the bank's securities portfolio much more rapidly.
So with that, I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?
Paul C. Reilly -- Chairman and Chief Executive Officer
Thanks, Paul, and thanks for lot of guidance update there. But as again, as you recall from our last call, we said given the upcoming interest rate changes, we couldn't predict, we would hold-off until this quarter. And you can see most of these changes were just caused by the interest rate changes. So we provided as much detail typically we would do it at our Investor and Analyst Day. So we could explain things in person. But given the cuts since our last call, we felt it was time to update it sooner than later.
In summary, we had three rate cuts since our last Analyst and Investor Day in June, which has an impact on our pre-tax income about $140 million. So we needed to adjust our comp ratio and pre-tax margin targets by 100 basis points. Unlike many of the other firms, we're in growth mode in almost all of our businesses and their expenses associated with growth. For example, we've been consistently adding financial advisors on a net basis, whereas most larger firms have consistently been losing advisors on a net basis. That creates a very different dynamic for our expense trajectory as we're adding to our transition assistance and retention amortization reflected in the compensation of that alone is about $265 million in 2019, representing 3.5% of net revenues and $100 million larger than just four years prior. We're also adding support at the branches and at the home office, expanding the size of our branch footprint, paying internal and external recruiters, paying for ACAT fees to transfer and accounts and so on. Growth is expensive, but we believe it represents a very good long-term result for our shareholders. And given this growth, I think a 2% growth in non-comp expense is good expense management.
With the benefit of hindsight, we probably could have done a better job explaining our expense growth over the past three years as we've been investing heavily, not just in our technology, but in our compliance and supervision infrastructure, originally to get ready for the DOL role, which has since been vacated, but also to support the future growth in responsible manner by improving our solutions for advisors and their clients. And now I'm really glad we did make those investments as the SEC's best interest standard is out and other fiduciary requirements become effective this year. If we had not made those significant investments over the past few years such as implementing Mantas and Actimize and other technologies for AML compliance and supervision, we would have struggled more in our implementation efforts for Regulation BI. But I believe we're in the late stages of that infrastructure and personnel build-out, which is why we are confident well be able to decelerate our expense growth going forward despite the significant growth we're experiencing across our businesses. Importantly, once we complete the build-out, we'll be able to support a much larger number of financial advisors and clients on our infrastructure which should result in scale economies over-time.
And that growth really starts with the Private Client Group, which is obviously our largest business. Were consistently producing best-in-class growth in this business. As I said earlier, over the past four quarters, financial advisors with $300 million plus of production and $40 billion of assets at their prior firms have affiliated with Raymond James and our recruiting pipeline remains very strong across all of our affiliation options. This quarter represents a better start than last year's first quarter where we're flattish in the number of advisors. The first quarter of every year has significant number of retirements, which is typical at year-end. We're off to a good start with this quarter, averaging above last year's quarterly average. The strong recruiting and most importantly our strong retention of existing advisors has helped PCG assets and fee-based accounts grow 31% on a year-over-year basis and 9% on a sequential basis, which is among the very best results, if not the best result we've seen in our industry on an organic basis. The 9% sequential growth is expected to provide a nice tailwind to our revenues in the fiscal second quarter.
In Capital Markets, we've become accustomed to M&A achieving new records each year, as we've been investing heavily in that business. Activity levels in our banking business are still healthy, but we'd be very happy if we can match last year's $600 million in fiscal 2020.
On the sales and trading side, we're still seeing positive trends on fixed income side of the business, but we expect the equity side of the business to remain challenged as business continues to shift to low touch trading and balance sheet providers.
The Asset Management business could continue to benefit from the growth of assets in fee-based accounts in the Private Client Group segment, which has offset the challenging flow environment for Carillon Tower Advisers due to the shift from actively managed products to passively managed products. Were entering the second quarter with fiscal assets under management, up 20% year-over-year and 6% sequentially.
In Raymond James Bank, we're continuing to experience very strong loan growth in the Private Client Group, particularly residential mortgages, given the low rate environment. While residential mortgages have lower yields than our corporate loans, they have the dual benefit of having very attractive risk adjusted returns, while also strengthening our client relationships. Given where we are in the market cycle, we'll continue to be extremely selective with loan growth, particularly in the corporate loan categories.
On capital, as Paul Shoukry explained, we're fully committed deploying our excess capital. We have been extremely engaged on evaluating corporate development opportunities, but pricing in many of these has continued to be a challenge at this point in the market cycle. We'll continue pursuing those opportunities in a deliberate manner, but also be more aggressive in our other capital levers including repurchases or growing the balance sheet.
So overall, I'm cautiously optimistic entering the second quarter as we have had record client assets, a record number of financial advisors, a record net loans at RJ Bank. The activity levels for financial advisor recruiting remains strong, investment banking pipelines remain healthy. But given lower short-term interest rates and how far we are into the bull market, the longest ever, we're still being focused on managing expenses.
So with that, I'm going to open it up to questions and turn it over to Myra. Myra?
Questions and Answers:
Operator
Thank you. [Operator Instructions] Please note that analysts are allowed one question and one follow-up question only. Our first question comes from the line of Craig Siegenthaler from Credit Suisse. Your line is open. Please go ahead.
Craig W. Siegenthaler -- Credit Suisse -- Analyst
Thanks. Good morning, everyone.
Paul C. Reilly -- Chairman and Chief Executive Officer
Good morning.
Craig W. Siegenthaler -- Credit Suisse -- Analyst
So had a question on recruiting. I mean, you grew your advisors a healthy 3% clip over the last year and you did have some retirements in the fourth quarter. But can you provide a little more color on where those advisors are coming from and if you're seeing increasing competition for advisors from the different groups like the wirehouses and other independent brokers and also why are a lot of those big banks failing in the competition for advisors now, though?
Paul C. Reilly -- Chairman and Chief Executive Officer
Well, I think it's just the shift in philosophy that Raymond James has a platform where we still have the advisors as our clients. We give them an environment that allows them to do what's best for their clients and with no product push. We have no quotas on any product, managers don't have any incentives, I mean, we really want advisors to do what's best for them. So we've had an attractive platform for a long time and I think today leading technology and I think the banks as they've tightened some of both their payouts or structures and a lot of advisors feel like there's less flexibility they've been leaving not just for us, but for other places. So I think the regional firms and us have been the beneficiary of the cost of a larger wirehouse firms and that trajectory has continued. So that's where most of the recruiting has come, is from the wirehouse firms. We don't see any slowdown in backlog. Last year was a near record from the year before and we're kind of on the same pace. So whether it's a record or shorter record, I don't know. But as of today, we still see the same interest in backlog than growth. So that's been our strategy for a number of years and we don't see it changing in the short-term to mid-term.
Craig W. Siegenthaler -- Credit Suisse -- Analyst
Thanks, Paul. And I had I think two or three questions in there. So I'll get back in the queue.
Paul C. Reilly -- Chairman and Chief Executive Officer
Next question?
Operator
We have our next question from the line of Manan Gosalia from Morgan Stanley. You may ask your question. Your line is open.
Manan Gosalia -- Morgan Stanley -- Analyst
Hi, good morning.
Paul C. Reilly -- Chairman and Chief Executive Officer
Good morning.
Manan Gosalia -- Morgan Stanley -- Analyst
Hi, I was wondering if you could talk about the puts and takes in the non-comp line, I mean, I know you mentioned that for the full-year, the non-comp line should be around $1.3 billion. But I was wondering, how much room you have in the longer-term maybe over the next couple of years to bring that line down a little bit and maybe you can talk to some of the puts and takes by line?
Paul C. Reilly -- Chairman and Chief Executive Officer
I will give you an overview and I will have Paul to talk about the puts and takes. You've seen that line really taking away the accounting change last year, really decelerating over the last couple of years. So last year was a deceleration and this year is a further deceleration. But again sometimes with the accounting change where we had to grow sub-expenses on revenue recognition, some people lose on that. So we've continued to manage it down and we think we've become better and more efficient with the systems and actually the systems investing actually help the advisors, also with their client management. So that's been the relationship. The large buildup started really a few years ago and it's been decelerating now.
Paul, you want to talk about any particular line item?
Paul Shoukry -- Chief Financial Officer
Yeah. That's right. And to add more color to what Paul stated, last year, the non-comp expenses grew 9% as reported, but over half of that was due to the two non-GAAP items in the prior-year as well as the gross-up of expenses due to revenue recognition. So if you look at kind of the apples-to-apples that represented a significant deceleration and we're looking to kind of maintain a non-comp expense growth around the same level this year to get to $1.3 billion. Obviously, started-off low in the first quarter just given the loan loss credit and other items, so business development was relatively low, given no conferences or recognition trips size and we expect that to sort of buildup throughout the year. But the last thing I would say on this is a lot of these lines, investment sub-advisory fees, professional fees associated with banking deals, etc are directly tied to revenue growth. So as much as we want to contain the growth that we can contain, we also want to fully appreciate the expense growth that is directly tied to revenue growth.
Manan Gosalia -- Morgan Stanley -- Analyst
Got it. And then separately on the NIM side, I know you mentioned that -- and the NIM should be relatively flat going into the fiscal second quarter, but I was wondering if you could speak to the outlook more for the full year. Is there a little more room to bring down cost in the deposit side with betas around 50%, is there still more room maybe as you go into the second half of next quarter or even into the fiscal third quarter, is there room to bring deposit costs down?
Paul Shoukry -- Chief Financial Officer
No, I think NIM staying stable in the second quarter reflects a cut that we're making this week of about 5 basis points. Assuming rates stay stable, I do not believe that there is much more room to take deposit costs down from our current average cost after this 5 basis point cut. And the only other item I would mention on NIM is if we do accelerate the growth of our securities portfolio at the bank, which is on the table that would all else being equal bring down the bank's NIM as we're taking the cash off balance sheet at what's earning today 1.64%. Bringing it on balance sheet would get a pickup for the firm overall, but that would create pressure for the bank's overall NIM because the securities portfolio, which doesn't have credit risk would have a lower yield than the credit portfolio.
Paul C. Reilly -- Chairman and Chief Executive Officer
Yeah. And that's one thing that as we move assets if we grow the bank's balance sheet, it's better off for the consolidated firm, but it will show lower NIM, because of its higher interest spreads than we would earn off-balance sheet, but it's the NIM and the bank would be impacted, so.
Manan Gosalia -- Morgan Stanley -- Analyst
So neutral to slightly better to pre-tax margins and it would be slightly detrimental to NIM. Is that right?
Paul C. Reilly -- Chairman and Chief Executive Officer
Yeah, slightly better to pre-tax, but slightly detrimental to NIM and the bank. Yeah.
Manan Gosalia -- Morgan Stanley -- Analyst
Got it. Thank you.
Paul C. Reilly -- Chairman and Chief Executive Officer
Thank you.
Operator
Our next question comes from the line of Devin Ryan from JMP Securities. Your line is open, you may ask your questions.
Devin Ryan -- JMP Securities -- Analyst
Okay, great. Good morning, Paul and Paul.
Paul C. Reilly -- Chairman and Chief Executive Officer
Hey, Devin.
Devin Ryan -- JMP Securities -- Analyst
So I guess first question here just a follow-up on the organic growth. Question in PCG, so clearly you guys are making a lot of investments to ramp the infrastructure in recent years and I think that's driving or helping to support kind of the industry leading organic growth. But I just wanted to dig in a little bit more on kind of commentary being kind of in the late stages of this infrastructure expansion and I get that also had some expense implication. So really the question is, have you guys been at all capacity constraint on how fast you can recruit just not having the full infrastructure in place and as you had ramp the infrastructure that can allow you potentially to close more advisors faster, so potentially there's a scenario where organic growth could accelerate. And so that's kind of one piece and I'm also trying to get a little a flavor from a geographic perspective, where you're seeing the most momentum and just an update on kind of the Northeast and West and how you feel about market shares there?
Paul C. Reilly -- Chairman and Chief Executive Officer
So on the first question, I think that how fast we ramp advisors has to do with first, can we find quality advisors who want to come and that we accept that we have -- we have people that we don't accept too, so pipeline is one issue. Secondly is we're still below the market. Competition increased significantly last year, but we are able to match still the same recruiting results without increasing our transition assistance like many of our competitors have. So the question really for us is how fast can we grow and assimilate advisors without hurting the service levels of existing advisors, because I think what really is driving our numbers is retention, so that's focus number one.
Most of the investment hasn't been on what I call pure recruiting. I think we do have the platform. If it went up, then we could find more advisors, we could on-board them. A lot of the investment has been on the supervision and compliance side and that was in reference to both just our growing to be a larger firm. Certainly, our AML issue a few years ago if you remember, we decided that we are going to ramp-up all of our systems, both AML compliance and supervision, invested heavily in Mantas and Actimize and other systems, which are very expensive. But we have Mantas fully up and running and Actimize almost there and a large headcount growth in supervision and compliance. So that will help us ramp people. That part of the infrastructure is very scalable. And I don't think we'll have to increase it or increase much lower than we can ramp and support advisors. So that part has been the biggest build, it's really starting a couple of years ago. And then maybe in a way, we invested some of the interest rate spreads to build our infrastructure when we had that opportunity. So we're in good shape there. So I think you'll see it more on the non-comp and I think the transition assistance we don't see going down. We're already among probably the lowest in the industry, the competitors, in what we pay. Competitive, but it is lower and the ACAT is an industry expense when people came over, we paid for the accounts to move, that's industry kind of standard and those kind of fees won't go away purely for recruiting, but again we believe those have good ROEs and exceptional long-term mid to long-term benefits of the business.
Devin Ryan -- JMP Securities -- Analyst
Geography?
Paul C. Reilly -- Chairman and Chief Executive Officer
Geography. We continue to increase I think certainly the Northeast we're seeing a much more activity given our investments there. And the West is growing, I mean we're growing I would say, but our percent share is still very low. So what I like is that our flags are being expanded. I think we've done better in the Northeast than the West, but we're growing percentage wise the highest in those markets, but again we have -- if we could get our market share in the rest of the country in the West and Northeast, we have a lot of growth for a lot of years if we can just achieve that over the next three to five years, we've got plenty of recruiting opportunities. So we're making progress.
Recruiting is interesting because it's a long process, very rarely you get someone who just going to leave if they do leave quickly, sometimes there is an issue, so you're cautious and we have recruits that we said, well, I was here in '09 and I should have come then and they join us and some that have been here for two years before they make the move. So it takes a while to build the momentum and pipeline. I think we're doing a good job in both of those markets, making progress and I still think we have acceleration opportunity there.
Devin Ryan -- JMP Securities -- Analyst
Great. Thanks for all the color. And just a quick follow-up. So on the comp ratio and margin target that you put out there, I understand that new business mix is going to be a big input and was this quarter as well. Do those targets the comp ratio and just kind of overall margin in the outlook. Does that assume any additional Fed cuts or equity market appreciation from here?
Paul C. Reilly -- Chairman and Chief Executive Officer
No. I think it's kind of a static analysis of today's interest rate environments in this market. This is what we would expect. The only way to really impact that is to substantially change our mix or change our payouts and I think we like the mix and it will come and go, depending on the quarter and payout we always -- we do those sparingly. But when we need to do them, we do them. So as we look through BI and other things, we'll look at that as we always do.
Devin Ryan -- JMP Securities -- Analyst
Okay. Thank you, guys.
Paul C. Reilly -- Chairman and Chief Executive Officer
Thanks, Devin.
Operator
Our next question comes from the line of Steven Chubak from Wolfe Research. Your line is open. Please go ahead.
Steven Chubak -- Wolfe Research -- Analyst
Hi, good morning.
Paul C. Reilly -- Chairman and Chief Executive Officer
Hi Steve. Good morning.
Steven Chubak -- Wolfe Research -- Analyst
So Paul, welcome to first official call as CFO, I appreciate the detailed update on expenses and capital. I was really hoping you could speak to maybe now you're in the new seat, what some of your priorities are and specifically wanted to unpack your comments in just a couple of areas, the appetite to maybe reduce gearing to the short-end of the curve, and how you might look to grow the securities book, which I think you alluded to, capital return appetite if your stock is trading a little bit above that 1.8 times book value threshold and maybe just some enhanced disclosure on organic growth. So securities book, capital returns, and organic growth disclosure.
Paul Shoukry -- Chief Financial Officer
That's a dense question question there, Steven, but thank you.
Steven Chubak -- Wolfe Research -- Analyst
I am still going to taking my follow-up.
Paul Shoukry -- Chief Financial Officer
Yeah. In terms of the securities portfolio, I mean we have actually grown it substantially over the last few years here and we're just looking at the amount of cash we have off balance sheet, what the forward curve is telling us and the amount of capital we have to and the capacity to grow assets on our balance sheet. And it's something that we are considering doing, it will be modest maybe $3 billion to $5 billion is sort of over a period of time in terms of accelerating the growth of incremental securities. And again, we're not looking to take credit risk in that portfolio. This would be mostly agency mortgage-backed securities with duration of three to four years. And with that you would get somewhere around today, it changes every day, but today around 30 basis points of incremental pickup over what we earn off balance sheet.
In terms of repurchases, I mean we're going to stay consistent with what we've been doing for a very long time. We said we're going to offset dilution and then as we have shown last year where we have plenty of capital liquidity and authorization to increase our repurchases if the price dropped to what we consider opportunistic levels and that's something that we're going to remain committed to doing as well. And then obviously, the other priority is expenses, which we discussed in pretty good detail already.
Steven Chubak -- Wolfe Research -- Analyst
And just the enhanced disclosure on organic growth.
Paul Shoukry -- Chief Financial Officer
Well, I mean we are working, I think just referring specifically to the net new asset metric, that is something we are working on. When I think over the last two or three quarters, the number of inbound request for that has subsided somewhat, because when you look at the 31% year-over-year growth in assets and fee-based accounts, I think everyone has acknowledged that's among the highest if not the highest in the industry. So I think we're getting credit for the organic growth, but at the same time, we appreciate the sort of desire to have an easier sort of metric to track in that regard. So it's something we are looking at, but kind of tying back to your first question on expense growth, nothing is free and so we're doing it in the context of our other IT priorities that we have across the firm.
Paul C. Reilly -- Chairman and Chief Executive Officer
I think one of the challenges right now to for the industry is that our focus is Reg. BI it's effective June 30th. So as we look at, i.e. IT and ops time, it's all focused to being making sure right now that we're compliant and have our systems up. There are process and disclosure and other document changes that are required to any excess capacity or it's really a first priority, but any excess capacity we've had to do these other things we've been focused on BI till we get them done. To do them effectively, we have to start rolling things out. We are starting to roll things out already, as we have to have them up and running and in place and done by June 30, not start doing on June 30.
Steven Chubak -- Wolfe Research -- Analyst
And just one follow-up from me on expenses. You guys cited some progress in slowing the pace of core non comps, that's certainly evident, but the elevated comp pressure is continuing to weigh disproportionately on the margin. As we look ahead with NIM stabilizing in 2Q, revenue growth coming from more compensable activities within PCG. I'm just trying to think about longer term, how should we view that incremental margin as those dollars come on and most of the growth comes from fee-generating activities. Now just trying to think about the earnings growth algorithm beyond 2020?
Paul Shoukry -- Chief Financial Officer
Yeah. I mean I think given the current rate environment and market environment, which obviously are the two big factors that would impact your margin as along with revenue mix, but I think 67.5% as of right now is the best as we can tell, 67.5% for the comp ratio and 17% for the pre-tax margin is the best visibility we have, given our current revenue mix. So to the extent that we -- the market environment changes, interest rate environment changes or a revenue mix changes, then we would adjust those targets.
Paul C. Reilly -- Chairman and Chief Executive Officer
So this quarter was impacted by lower M&A and tax credit fund, which are core, I mean they are are cyclical. They are never versus the PCG business, so that impacted us. But the interest rate is the big change. And it's just -- that's just math. I mean I'm kind of amazed that we could lose 10% of our pre-tax and that much revenue from those three changes and make it up, almost make it up in one quarter, so. But I don't -- again, the only way to really change that is looking at payouts across our system and what we pay folks for production. That's where it's all going, but at least that expense is good growth, that's production and profit growth. So we'll take the growth in that ratio. We can grow the revenues even faster and add to the margin. So we want to make sure they're competitive and fair and as things shift and change over-time, we will look at that.
Steven Chubak -- Wolfe Research -- Analyst
Great. Thanks very much.
Paul C. Reilly -- Chairman and Chief Executive Officer
Thanks, Steve.
Operator
Our next question comes from the line of Bill Katz from Citi. Your line is open. Please go ahead.
William R. Katz -- Citigroup Global Markets Inc. -- Analyst
Okay. And thank you very much for taking the questions. Thanks for the enhanced disclosure. Just sort of coming back to the margin discussion a little bit more. As you look at the segment level for Private Client, sort of wondering what's your long-term outlook beyond fiscal '20 and sort of where that margin might get you and what are the drivers there. And then related to that, that 75% payout that you had -- you mentioned earlier in your prepared comments, how is that relative to market levels?
Paul C. Reilly -- Chairman and Chief Executive Officer
Yeah. I would tell you in terms of the Private Client Group margin, a lot of it really depends on geography. So to the extent that we have movement to fee-based accounts continue, which we've had obviously, a lot of the benefit gets reflected in our Asset Management segment to the extent that we sweep more cash to Raymond James Bank, which we are considering doing even more so with the growth in the securities portfolio. That would increase the margin at Raymond James Bank relative to Private Client Group. So really we kind of look at the margins on a consolidated basis. We think that's the most meaningful, especially when comparing across firms because a lot of firms have their bank and their asset management fee-based platform in their wealth management segment. So we expected. Again, on a consolidated basis, our best guess right now is 17% or better for the pre-tax margins.
And then the payout, the payout is just a function of the mix between our employee channel and on the independent contractor channel where contractors are paid in the 80% range. And so when you blend the two is where you get the 75% type payout on the production, not the overall revenues to the firm, but the revenues that are compensable to the advisors on average generate.
William R. Katz -- Citigroup Global Markets Inc. -- Analyst
Okay. That's helpful. I'm sorry to interrupt you. And just my follow-up. As you sort of mentioned that your corporate development is a bit of a priority, but pricing is still heavy. So sort of wondering where you could -- maybe you could sort of help at least from a backdrop or a call perspective of where you're most focused, whether it'd be in sort of bolstering the Private Client side or other segments of the business. And then conversely, as you look at your business and think about the mix a year or two years from now, are there any businesses that you're in today that you could maybe de-emphasize a little bit or bolster ROE?
Paul Shoukry -- Chief Financial Officer
We'd like -- if you look at where most of our ROE is generated, capital is deployed, that's first in the bank, which is our biggest capital deployer and we'd like where that is in then Private Client Group where it's really transition assistance and investment in that business including technology. So we kind of like the businesses we're in and the mix. We're honestly open. Private Client Group is our anchor business. So we always look to that first, but we're actually open to things that will grow any of our segments. We like the businesses. We think they're performing relatively well now to the market. And if there is opportunity, because we're not capital bound right now. We would do something that first has economic sense to shareholders, but it has to first make the business better, not just bigger. We avoid things just to be bigger that don't really have good ROE to the shareholders. So we're focused on all four. We continue to be in dialog, but I would say over the last year we've had more dialogs that ended without any one trading, because we just felt the market was too fast, was too high and I think the market agreed on a lot of those assets, so the ask was just too high. So we're not going to do something just to do something.
Operator
We have our next question from the line of Jim Mitchell from Buckingham Research. Your line is open. Please go ahead.
James Mitchell -- The Buckingham Research Group -- Analyst
Hey, good morning.
Paul C. Reilly -- Chairman and Chief Executive Officer
Good morning.
James Mitchell -- The Buckingham Research Group -- Analyst
Maybe we could just follow-up on the comp in PCG a little bit. If I look at for the year-over-year or sequentially, if I look at total comp, not just sort of the compensation for the advisors, but look at total comp relative to compensable revenues sequentially and year-over-year, total comp is growing faster than revenue and so you're getting negative leverage or negative incremental margins out of the total comp line. And can you just kind of help us understand what's driving total comp, is it just, is that the other comp, is that just sort of recruiting, that's maybe at some point kind of to slow, because I would think at some point you need to get positive incremental margins off revenue even if it's not just the FA advisors?
Paul C. Reilly -- Chairman and Chief Executive Officer
Yeah, The biggest driver of that as I talked about earlier, is the build up of support those AML compliance supervision, all three of those functions we've made, starting three years ago, almost significant investments really accelerated that growth over the last couple of years and now it's decelerating. So that's where the leverage we think we'll get out. So maybe in some areas, we need to play little catch up, but we've really build it for the future and I think that's where our non-comp leverage is going to come from. So that's an awful lot of it.
Paul Shoukry -- Chief Financial Officer
And I think the other thing you have to do going back to our whole dialog around compensable versus non-compensable revenues on a year-over-year basis, Private Client Group is showing 4% growth in total revenues, but it's really 6% growth in compensable revenues and the compensable revenues is the production, the number of advisors, number of accounts, etc. And that's really what's going to drive both the payout and the support infrastructure needs. So the 6% still is lower than the 8% and the 8% being the administrative non-FA comp in the Private Client Group business and that 8% [Phonetic] -- the reason it's higher for the reasons that Paul mentioned, but if you kind of look back three years to support the fact that we're sort of in the later stages of this infrastructure build-out, three years ago that line grew 17% in fiscal '18, the admin comp in PCG grew 17%, the last year grew 12%, year-over-year for the quarter grew 8% and that's sort of what we're budgeting for the year. So it's come down substantially as we're in the later stages of this build-out in Private Client Group business.
James Mitchell -- The Buckingham Research Group -- Analyst
And so that should continue to sort of further slow up and not be so tied to revenue. Is that fair?
Paul C. Reilly -- Chairman and Chief Executive Officer
Yeah.
James Mitchell -- The Buckingham Research Group -- Analyst
Okay. And then maybe just a follow up. Just talking more about the balance sheet, potential balance sheet growth, would that be sort of slow more impactful in 2021 if you decide to do that or if you do decide to go ahead with it, how quickly could you put assets on the balance sheet?
Paul Shoukry -- Chief Financial Officer
We can grow the securities portfolio of $2 billion, $3 billion pretty rapidly, Jim. So if it's something that we decide to move forward with, which is something that we're still having to discuss internally, I would expect the first couple of billion if we do decide to move forward with it to occur pretty quickly. But again, we're still in discussions on that.
James Mitchell -- The Buckingham Research Group -- Analyst
Okay, great. Thanks.
Paul Shoukry -- Chief Financial Officer
Thanks, Jim.
Operator
That completes our question-and-answer session. I will turn you now back to Paul Reilly.
Paul C. Reilly -- Chairman and Chief Executive Officer
Okay. Well, great. Well, thank you for joining us and again we normally like to do this at our Investor and Analyst Day. But again, holding off last year, we said we wanted to wait to see what happens, how many rate cuts or to provide you the data because you can see why now because there have been one more cut or one less cut, it would have significantly impacted our comp ratios, our earnings, our mix, so which we could have gotten to you a little bit sooner, but we got it to you as fast as we could. And thank you for joining us this morning. All right, Myra. Thank you.
Operator
[Operator Closing Remarks]
Duration: 60 minutes
Call participants:
Kristina Waugh -- Head of Investor Relations
Paul C. Reilly -- Chairman and Chief Executive Officer
Paul Shoukry -- Chief Financial Officer
Jeffrey P. Julien -- Executive Vice President of Finance
Craig W. Siegenthaler -- Credit Suisse -- Analyst
Manan Gosalia -- Morgan Stanley -- Analyst
Devin Ryan -- JMP Securities -- Analyst
Steven Chubak -- Wolfe Research -- Analyst
William R. Katz -- Citigroup Global Markets Inc. -- Analyst
James Mitchell -- The Buckingham Research Group -- Analyst
