Paul Reilly : Yes. that’s the hard one to peg with tests like happening today in the press, even we’re going to be more cautious until the industry is sorting down and kind of a level field. We think that the 10% is a good target. But in the short term, we’re probably not going to be overaggressive to it, especially if we’re not growing the bank aggressively. We don’t think that’s the smart move right now. We will continue to let SBL balances and mortgage our client balances fund those, those are the priority. We’re not sure it’s a good time to get into the increasing the corporate side of the lending right now just because of the market. So shorter term, I think the capital ratio is going to be over the 10%, but we’re not going to change the goal, but during the volatility like we’ve seen with today’s news and other things, we’re going to be cautious to pretty comfortable the market settled down.
Paul Shoukry : The only thing I would add to that is a lot of other banks have to worry about the impact of unrealized losses on their securities portfolio. And we have some of those as well, obviously. But I think we would be north of 10%, even if we factored in all of those losses because we kept duration relatively contained on our balance sheet. So we’re in a position of strength when you look at our capital ratios and feel like we have a lot of flexibility.
Kyle Voigt : Great. And then just maybe a follow-up question to that. Just with your stock price where it’s at today. Obviously, in the first quarter — calendar first quarter, you were up the buyback a bit here. But just wondering if you can kind of compare the current valuation of your stock to maybe any opportunities that you’re seeing in the M&A market, if you kind of could expand upon some of those opportunities that you’re seeing? And what segments you’re seeing more opportunity in light of everything that’s happening in the banking space as well, that would be helpful.
Paul Reilly : Yes. We’ve done a really good job of staying close to the people that we would like to join the firm and those opportunities are clear, and that includes the M&A and the private client space. Again, whether they get transactable because of price or other issues or some are more complex than others. But those conversations that kind of went away, some have come back but price adjustments to the buyer and the seller are always in line and expectation with the market. As we’ve said in here, don’t expect a near-term increase in our M&A volume unitl this market settles out, I think lending has to kind of return, and that’s not our view, not going to happen until we see interest rates settle and people get used to it.
So — but we think there will be M&A opportunity. We have both the capital liquidity to handle that. Our balance sheet, as you know, and very leveraged, and we have access. So we’re — as most downturns, we’ve been able to take advantage of the market, our presumption as we would be able to. But again, that all depends on buyers and sellers and opportunities and other factors in the market.
Operator: And the next question comes from the line of Alex Blostein with Goldman Sachs.
Alexander Blostein : So can we start with the outlook for NII. If I heard you correctly, I think you guys have gotten to down 10% from wide NII. Can you help with some of the underlying assumptions in terms of NIM from wide and maybe how are you thinking about the ultimate amount of cash that you need to run with on the balance sheet. And obviously, it would be helpful to know what you’re assuming for interest rates for the second quarter, underpinning the 10% decline?
Paul Shoukry : Yes, the 10% decline, Alex, includes the BDP fees as well. So it’s kind of a combined basis as we show it in the presentation. And that factors in the 25 basis point increase that the market is expecting in May. And so in terms of the cash that we plan on holding on the bank’s balance sheet. We plan on holding more than we need for — during these volatile times, more than we hopefully need during these volatile times, just to stay prudent. And as Paul said, we’re being deliberate in growing corporate loans, and we’re being actually opportunistic in selling corporate loans. So not much balance sheet growth forecasted over the next — at least during this period of volatility. And in some cases, for example, we’ve already sold over $400 million of corporate loans that we had rated lower from a credit perspective.
And we’re able to get near par value for those loans. We had marks on them that were higher than what the price we were able to get. So we don’t believe that the market is fully factoring in potentially the downside risk on certain loans. And so just as we’ve done in other volatile periods, we’re sort of being opportunistic, knowing that we’re just building dry powder, both capital and hopefully funding dry powder to accelerate growth when the opportunities look more attractive.
Alexander Blostein : Got you. Okay. Yes. Combined makes a lot more sense. I appreciate that. My second question was around non-comp expenses. And I appreciate that you guys think this is close to what you were budgeting for. But if we look at non-comp ex provisions and backing out the $20 million of the arbitration fee, it looks like it was up almost $30 million sequentially. So maybe help us reconcile what’s driving the growth? And just given your outlook for effectively peak rates revenues in a challenging capital markets backdrop, when should we expect you guys to become a little bit more aggressive on cost savings initiatives?
Paul Shoukry : Yes. The first two quarters are always a little bit lumpy in terms of the non-compensation expenses. So if you look at it kind of on a combined basis, backing out the acquisition-related costs and backing out the loan loss provision, which is how we made the guidance, it was around, I think, $830 million for the first 6 months of the year, which actually trends lower than the $1.7 billion guidance I provided for the non-comp expenses, excluding provision. So we still — we’re not changing that guidance for the time being because none of the — other than legal and regulatory, which is inherently unpredictable, and we had a $20 million arbitration award, which we were not expecting, obviously, this quarter. We are — most of the other line items are kind of coming in, in line with what we forecasted when we provided that guidance.
But of course, things change between now and the next 6 months of the fiscal year, then we certainly will update that and let you all know.
Paul Reilly : I think that comparison was — looks bigger because of the $30 million last year — last quarter recovery that we non-GAAP to. But it’s — we think they’re in line. And yes, legal fees certainly were higher. That settlement was higher but that’s really driving, and that’s kind of lumpy. We think the run rate and the guidance is still in the ballpark from what we can see.
Paul Shoukry : And with that being said, while it’s coming in line with what we expected, we’re also given the market environment going to be very deliberate in managing all those expenses while still investing in growth in high service levels.
Operator: And the next question comes from the line of Bill Katz with Credit Suisse.
William Katz : Maybe stepping back and perhaps it’s just too soon tell. As you think about some of the structural changes that may evolve for the banking industry on the other side of the banking collapse and maybe your early-stage conversation with the regulators, how do you see the evolution for regulatory capital or leverage ratios. Does that affect your 10% bogey? And then maybe how you think about long-term growth in earning assets and NIM associated with that.
Paul Reilly : Well, first, on capital, I think even at 10%, we’re well set over what anyone is our competitors and other things. We’re — we think that’s still a very conservative target. I can’t see any regulation that would make anything even close to that. So we’d still have buffer there. So we’re not worried about capital. Like everything, given the environment, we’ve been focused on liquidity, that’s why we rolled out the Enhanced Savings Program and are very heartened that even after the quarter we paid our $1.2 billion in Asset Management fees come out of there. We had tax payments that usually go over $1 billion. Our cash balances are still steady. So on the liquidity side, the question is just how much do we have to raise in the higher-yielding programs, but we feel good about our liquidity and not even touching our — really, our FHLB advances or that $9 billion buffer.
So third then becomes is when you start investing in that order when you start investing in the growth in assets and in the bank, that we’re just going to have to decide. We’re not going to be really aggressive. Where we see opportunities, we could — we’ll take them. If we see M&A opportunities we think are good, we’ll act on them, and we just don’t think, given the bad banking market, rising rates and if people are predicting in a recessionary environment, it’s the time to be very aggressive in growing corporate loans. So I would say we’re — our growth plans are not really to expand the balance sheet much this next quarter.
Paul Shoukry : I think you asked a question about the future NIM prospects for the industry. And I think the banking industry is pretty efficient. The good news is we already have a very conservative level of capital. So I think we’re well, as Paul said, well positioned for those changes. But to the extent the capital rules do change or increase and certainly the cost of the average deposit in the industry as all the big banks were saying, even the largest banks are saying that’s increasing as well, then you would expect all else being equal for spreads to expand across the industry to preserve a reasonable NIM and a reasonable return on equity for the industry. And so to the extent that we can be patient now and wait for more attractive opportunities at least a more stable environment, we think that will serve our shareholders well over the long term.
Paul Reilly : I think if you really look at the industry over the last few years, certainly, deposits were extremely cheap and rates are going up. But honestly, spreads weren’t really what you’d expected historically, given the types of loans folks are making. So it’s natural in this kind of environment where people are being careful and the cost of funds are higher that I think spreads are going to expand. We believe that. So we can’t say when, but we believe that will happen, and that’s why we’ll be a little more prudent in the next quarter or two with the balance sheet as we watch what happens in the market. We’ve shown also in the other times, whether we sold off COVID loans or other things during those periods, we found — we’ve shown we can expand the balance sheet pretty quickly. So we’re not worried about that. We’re just worried about making sure we do it in the right environment.
William Katz : Understood. Just a quick follow-up and just a jumping one point there. As you think about maybe Paul, Sui you could just unpack, I think I understand the difference between the sort of the bank versus the third-party sweep impact, but maybe unpack maybe where you are on a spot basis for the NIM? And as you think about this year, how to think about maybe earning asset levels, can I hear a couple of different things those cautious loan growth, maybe some runoff in the corporate loan portfolio sales, maybe some shrinkage on the investment securities book, how to think about maybe framing where the end of the year might be in terms of your associated with that.
Paul Shoukry : Hard to know where we’re going to be, a lot and change as we’ve learned in the last month or two, a lot can change certainly in the next 6 months. And we’re going to, as Paul said, we’re going to be there for our clients in the Private Client Group business. Half of our loans are securities-based loans and mortgages, and to the extent demand picks back up over the next 6 months. Now they’ve been pressured in the higher in a rising rate environment, but demand could come back if clients get used to the new normal in terms of rates, and we want to be there to support them. As Paul said, we’ll also be more conservative in sort of growing corporate loans, at least until we have a better conviction around the risk-adjusted returns and growing that book.
So in terms of the jumping off NIM, And I would expect, just with the higher cash balances and the higher cost of funding, which again, we — our patience has served us well with a higher cost of funding as well because, again, like I said, we only have 10% of our sweep and enhanced yield savings balances in the enhanced yield savings program. Many of our competitors are at 40% or 50%. So we have a lot of ability to grow those balances. But as we grow those balances, it would pressure NIM. So — we think there’s probably 20 basis points or so of pressure in the upcoming quarter, maybe up to 30 basis points, again, depending on what happens with the rate increases. And now again, that’s due to the higher funding sources and elevated cash balances that we plan on holding on the balance sheet.
Operator: And the next question comes from the line of Manan Gosalia with Morgan Stanley.
Manan Gosalia : Can you take us through what happened with cash sorting in March? And maybe since then — and I ask because you noted in your press release last month that cash balances as of March ’21 were near $51 billion. So it looks like about $1.5 billion flowed out in the last week if you exclude the Enhanced Savings Program. So maybe take us through what you were hearing from FAs and customers back then? And what gives you the confidence that this will slow from here?
