Q4 2020 Raymond James Financial Inc Earnings Call
And then James financial.
Good morning, Thank you for joining us 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.
Visitation being reviewed this morning is available on Raymond James is it.
Restaurant relations web site.
Following the prepared remarks, the operator, we'll open the line for questions.
Please note certain statements made during this call may constitute forward looking statements.
These statements include but are not limited to information concerning future strategic objectives business prospects financial results anticipated results of litigation and regulatory developments impacts of the COVID-19 pandemic or general economic conditions. In addition words such as believes expects to close.
Okay 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 forms 10-Q, which are available on our Investor Relations website.
During today's call. We will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business. That's one.
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'm happy to turn the call over to Paul Reilly, Chairman and CEO of Raymond James Financial Paul.
Thanks Christie.
Good morning, everyone. Thank you for joining us today.
Fiscal year 2020 bought some incredible challenges.
What a year.
In many ways I am glad to get it behind us.
First we have to go folding other coke inviting pandemic.
Everyone started working from home almost overnight.
We experienced social unrest in our country.
Uncertain economic outlook.
Residential and congressional election.
A reduction in force, which is extremely rare Raymond James.
On the other half well this year would you want to buy more difficult years clearly.
In many ways. It was also more rewarding.
Because of the way our associates on Pfizer's came together to respond to the crisis.
Only reinforced our unique culture claim and change.
We kept treat or guiding principle core values.
Looking long term.
Focusing on serving our clients.
That resulted in great growth even during this period of time.
Recruiting is very strong.
Net new assets great.
Great retention Paul.
All results and record client assets under administration.
So I want to take this opportunity to say thank you.
Thank you to all of our associates and advisors for their tremendous contributions and.
And our unwavering commitment to serving their clients.
Now, let me turn to the financials starting on slide three.
In the fiscal fourth quarter from reported net revenues of 2.08 billion.
Income of 209 billion earnings per diluted share of $1.50.
Excluding expenses of 46 million associated with the reduction of workforce.
And the $7 billion loss associated with the pending the position of certain non core operations in France.
Adjusted quarterly net income was 249 days.
And adjusted earnings per diluted share, but the dollars 78.
Return on equity was 11.9% and adjusted return on tangible common equity was 15.3%.
Quarterly net revenues grew 3% over the prior year period.
13% over the preceding quarter, primarily driven by higher asset management related administrative thing.
Strong fixed income brokerage revenues and record investment banking revenues.
Which were partially offset by the negative impact of lower short term interest rates.
Quarterly expenses were higher due mainly to compensation expense associated with higher compensation compensable revenues and reduction in workforce expenses incurred during the quarter.
While the loan loss provision was higher on a year over year basis. It declined significantly from the preceding two quarters as the economy and economic condition.
Wanted to stabilize.
Credit quality of the loan portfolio remained resilient.
But given the high degree of market uncertainty, we still wanted to be prudent and adding to our reserves.
Looking at the fiscal year 2020 results on slide four we generated record net revenues of nearly $8 billion, but lower short term interest rates and higher loan loss reserves cost without income to decline to 818 million.
On an adjusted basis net income was 585 million down 20% compared to the adjusted net income in fiscal 29.
Record revenues grew over the prior year as a continued growth in client assets.
Along with record fixed income brokerage and investment banking revenues.
Offset the negative impact of lower interest rate.
We generated record revenues and the private client group capital markets and asset management segments during the fiscal year.
Reinforcing the value of having to purse and complementary businesses.
Moving on to slide five we ended the quarter at fiscal year with period end Records for total client assets under administration of 930 billion private client group assets and fee based accounts of 475 billion and financial assets under management of 153 billion.
The strong client asset growth was predominantly driven by equity market appreciation and our continued success in recruiting and retaining financial advisors across all of our affiliation options.
During the fiscal year, we had a net increase of 228 financial advisors to end with a record number of.
8239.
Solid result, particularly given total agent recruiting and Onboarding of advisors during the onset of the.
COVID-19 crisis.
During the fiscal year financial Visors has over 275 million on a trailing 12 production at approximately 49 billion of assets at their prior firms affiliated with Raymond James domestically.
That includes recruiting results during the fourth quarter of $82 million of trailing 12 production and 13.8 billion of assets at their prior firms, which was by far our best quarter.
For recruiting during the fiscal year.
As far as net organic growth results in the private client group during the year, we generated domestic PCG net new assets of 49 billion, representing 6.5% of domestic PCG client assets at the beginning of the year.
Based on what we've seen we believe this to be amongst the very best in our industry, even including the E brokers, who benefited from the surge of day and online trading during the year.
Looking forward, we are continuing to experience strong recruiting activity across all of our affiliation options as we enter fiscal year or 2021.
At the core of the Radnet bank loans were.
21.2 billion as growth of loans, the PCG clients was offset by a decline in corporate loans.
Moving to the segment results on slide six the.
The private client group generated quarterly net revenues of 1.39 billion and pretax income of 125 million.
Quarterly net revenues grew by 12% over the preceding quarter predominantly driven by higher asset management and related administrative fees.
Reflecting higher assets and fee based accounts, which will continue to be a tailwind for the first quarter of fiscal 2021.
This strong revenue growth helped PCGS pre tax income grow at 37% sequentially. Although it was down 13% on a year over year basis, primarily due to the negative impact of lower short term interest rates.
The capital markets segment generated record quarterly net revenues of $410 million and record pre tax income of 160 day, a truly amazing quarter for capital markets driven by broad based strength across fixed income global equities.
In investment banking as well as the Raymond James tax credit funds.
During the quarter fixed income brokerage revenues continued to benefit from a high level of client activity, particularly with small and mid sized depository clients.
Record investment banking revenues were driven by the strength in equity underwriting M&A and debt underwriting.
The asset management segment generated quarterly net revenues of 184 million and record pre tax income of $78 million.
Record quarterly pre tax income was driven by the growth of financial assets under management as equity market appreciation and net inflows into the PCG fee based accounts more than offset the net outflows for Carol on towers.
Lastly, Raymond James Bank generated quarterly net revenues of $161 million and pre tax income of 33 million.
Compared to a year ago quarter net revenues declined primarily due to lower net interest income as lower short term interest rates caused net interest margin to decline 121 basis points.
Pair to a year ago period.
The quarterly loan loss provision of 45 million increased the allowance for loan losses, as a percentage of loans to 1.65%.
On slide seven you can see the fiscal year results for all of our segments.
Firms record revenues were driven by record revenues from the private client group.
Capital markets and asset management segments, a reflection of our attractive organic growth and consistent market share gains across businesses.
Additionally, the capital markets segment management segment generated record annual net pre tax income as both segments generates significant operating leverage during the year.
Meanwhile, the pretax income declined in both the private client group and Raymond James Bank segments due to lower short term interest rates and higher loan loss provisions at the bank.
And now for a more detailed review of the financial results I'll turn the call over to Paul Shukri Paul.
Paul.
Thank you Paul.
I'll begin with consolidated revenues on slide nine record quarterly net revenues of $208 billion grew 3% year over year and 13% sequentially asset.
Asset management fees grew 9% on a year over year basis, and 16% sequentially commensurate with the sequential increase in fee based assets private.
Private client group assets and fee based accounts were up 7% during the fiscal fourth quarter, which will provide a tailwind for this line item for the first quarter of fiscal 2021.
Salivated brokerage revenues of $495 million grew 10% over the prior year.
This continued strength in fixed income trading helped fueled this growth.
For the year consolidated brokerage revenues were up 8% to almost $2 billion lifted by strong institutional fixed income brokerage revenues of $421 million, which were up 49% over fiscal 2019.
While the fixed income business is continuing to benefit from high client activity levels. These are revenues are inherently difficult to predict but I think a reasonable assumption for fiscal 2021 is that these brokerage revenues may end up somewhere between the results in fiscal year 2019, and the record achieved in fiscal year 2020, but again.
It is highly uncertain and will largely be driven by market conditions throughout the year.
Account service fees of $140 million declined 22% year over year, primarily due to the decrease in RJ BBP fees from third party banks due to lower short term interest rates, which I will discuss along with net interest income in more detail on the next two slides.
Consolidated investment banking revenues of $222 million grew 41% year over year, achieving a record results driven by strong equity underwriting debt underwriting and M&A advisory revenues.
For the fiscal year, we generated record investment banking revenues of $650 million, which were up 9% over the prior year's record.
Really amazing results given the higher degree of market uncertainty during the year.
While our investment banking pipeline to remark closings will largely be dependent on conducive market, which we can't necessarily count on given we are still in the middle of a global pandemic.
Turning to other revenues, which were $57 million for the quarter. This line included $12 million or private equity valuation gains of which approximately $3 million were attributable to non controlling interests reflected in other expenses.
Additionally, tax credit fund revenues finished the year with a very strong fiscal fourth quarter.
Moving to slide 10 cards.
Mark Smith corn domestic test rebalances become the primary source of funding for our interest earning assets in the balances with third party bank or generate our JBT PPS ended the quarter at $55.6 billion, increasing 7% sequentially and representing 6.7% domestic PCG client assets.
On slide 11, the Cogs chart displays displays our firm wide net interest income and archery BPP fees from third party bank on a combined basis as these two items were directly impacted by changes in short term interest rate.
As you can see the interest rate cuts have put significant pressure on these revenue streams, which on a combined basis were down $143 million compared to the prior year's fiscal fourth quarter. This.
This has had.
And is expected to continue to have provided significant headwinds for a compensation ratio in pre tax margins, particularly as these revenue streams are not directly comparable.
The bottom of slide 11, RJ Bank NIM, 2.09% in the fourth quarter just below the range, we guided to last quarter. The sequential decline in NIM was predominantly caused by the decline in LIBOR as well as a higher concentration of lower yielding agency backed securities from the banks balance sheet, but remember while the agency backed securities.
Reduce the bank's NIM they do represent an increase in spread compared to what we earn off balance sheet with third party bank.
If LIBOR rates have bottomed out going forward, the bank's NIM should really be impacted more by asset mix and market spread based on what we know now we're expecting the bank's NIM could be around 2% in fiscal 2021.
On the bottom right portion of the slide the average yield on RGB Pvp of.
33 basis points.
Well down significantly year over year due to lower short term interest rates were flat sequentially. We expect this to remain around 30 basis points in fiscal 2021.
Moving to consolidated expenses on slide 12.
Compensation expense, which is by far our largest expense.
The compensation ratio decreased sequentially from 69.6% to 68.1% during the quarter, primarily due to record revenues in the capital markets segment, which had a 56% compensation ratio during the quarter.
The year over year increase in the compensation ratio was primarily due to the negative impact from lower short term interest rates.
Explained on the last slide.
Unfortunately, there are just too much uncertainty to provide guidance on that line item for example business development expenses and bank loan loss provision expenses are two items that will be heavily influenced by the COVID-19 pandemic and the economic recovery throughout the year. What I can tell you is we are extremely focused on managing each and every day.
Single, one that the controllable expenses, while still investing in growth in high service levels for our advisors and their clients.
Turning to slide 13.
There's been a lot of focus on expense management over the past few years. The so we thought it was appropriate to take a minute to reflect on the trend.
This chart depicts the year over year growth rates of administrative compensation expense in the private client group segment since fiscal year 2016.
We highlight this particular expense item because it incorporates the majority of the compensation growth associated with the infrastructure build out we have been focused on over the past several years, including the majority of technology operations and risk management and controls areas as we fully allocate almost all of these expenses to the businesses.
D.C.G. is by far our largest business.
As you can see after short term interest rates started increasing at the end of 2015, we reinvested a large portion of the spread benefit into our businesses to strengthen our platform about two years ago. We told you that we would start decelerating that growth, which you can really see this fiscal year with a 4% growth rate.
And after our recent reduction in force, we expect this growth rate to be even lower maybe even close to flat in fiscal year 2021.
And remember this administrative compensation also includes the growth related expenses like new sales assistant that joined the firm with a recruited advisor. So we hope to see this line grow overtime, just as long as we keep it lower than long term revenue growth.
Ladies.
Liquidity is very strong cash at the parent with more than $2 billion of which about $1 billion, our excess cash over our conservative targets, but we are intentionally maintained and even more cash than we typically hold given the high degree of market uncertainty. So.
So with cash at the parent of more than $2 billion, a total capital ratio of 25.4% and a tier one leverage ratio of 14.2%, we have substantial amounts of capital and liquidity with plenty of flexibility to be both defensive and opportunistic.
Slide 16 provides a summary of our capital actions over the past five quarters.
Fourth quarter, we repurchased approximately 678000 shares for $50 million, an average price of approximately $73.75 per share.
As of October 27, 2020, $487 million remained available under the board's current share repurchase authorization in total over the past five quarters, we returned nearly $680 million to shareholders through dividends and repurchases under the board's authorization.
With our strong capital and liquidity position, we expect to continue share repurchases of at least $50 million per quarter to offset share based compensation dilution in fiscal 2021, and we will certainly consider doing more buybacks during the year as well as appropriate.
On the next two slides, we provide additional detail on the banks loan portfolio.
Slide 17 provides some detail and Raymond James of banks asset composition in the Pie chart. You can see we have a really well diversified portfolio with a focus over the past few years to grow residential mortgages and securities based loans to private client group clients as well as significantly increase the size of the securities portfolio, which ended the.
Quarter at $7.7 billion or 25% of the bank's total assets. These securities are almost all agency backed securities.
So we have a much more diversified portfolio now than we did before the last financial crisis. The slide also highlights the diversification we have within each segment of the portfolio.
Lastly on slide 18, we provide key credit metrics for Raymond James Bank.
During the quarter, we opportunistically sold approximately $340 million of corporate loans at the average selling price of 92% of par value.
In total over the past two quarters, we sold nearly $700 million of corporate loans associated with industries. We believe are most vulnerable to the COVID-19 pandemic.
While we are now much more confident with the remaining corporate loans in our portfolio we.
We will continue to be opportunistic in selling certain corporate loans.
Well, we have also recently resumed being opportunistic and deliberate in investing in new corporate loans that are in sectors that we believe are left negatively impacted by the COVID-19 crisis.
Quarterly net charge offs of $26 million were all related to the aforementioned loan sales during the quarter.
The quarterly loan loss provision of $45 million resulted in the allowance for loan losses as a percentage of total loans to increase to 1.65%.
And for the corporate portfolios the allowance for loan losses, as a percentage of see an i. loans increased to 2.7%.
And for CRB loans, it increased to 3.1%.
While nonperforming assets remained low at just 10 basis points of total assets in the fourth quarter. The amount of criticized loans increased as we have still been proactive in downgrading loans as we get more information.
But we have experienced positive trends with deferrals during the quarter as of September Thirtyth, only 11 of our corporate loans, representing 1.7% balances were uncoated related deferrals, which was down from 3.1% in the preceding quarter.
Similarly residential mortgages uncoated related deferrals declined from 2.6% of balances in the preceding quarter to just 1.6% for balances at the end of the quarter.
We implemented Cecil on October Onest, which we expect will increase our allowances by approximately $40 million to $50 million.
With the majority of that increase attributable to recruiting and retention related loans to financial advisors in PCG.
Which now require a larger allowance under Cecil then it did under the incurred loss method.
Going forward, our allowances and provision expenses will be impacted by macroeconomic conditions as well as individual loan performance using the Cecil models.
And as the surgeon cobot cases over the past two weeks has reminded us we are not out of the woods yet.
Now I'll turn the call back over to Paul Reilly to discuss our outlook Paul.
Thank you Paul.
As for our outlook, we're extremely well positioned entering fiscal 2021.
Strong capital ratios and quarter end records for client assets and the number of private client group financial advisors.
However, we will face continued headwinds from a full year of lower short term interest rates and there is still a high degree of certainty given the COVID-19 pandemic upcoming presidential and congressional election.
In the private client group segment, our financial advisor recruiting pipeline is strong across all of our affiliation options and.
And the second is going to benefit by starting in the fiscal first quarter of 2021, with a 7% sequential increase of assets and fee based accounts.
And the capital markets segment investment banking activity levels remain strong and we are cautiously optimistic so long as the economic conditions don't get your rate that that will continue.
In fixed income brokerage revenues have remained strong thus far in October, but we've set a high bar to keep up with for next year.
In the asset management segment results were positively impacted by higher financial assets under management as long as the equity markets remain recently.
And Raymond James Banks will continue to benefit from the attractive growth in mortgages and security based loans strategic clients.
Given the high degree of uncertainty, we will continue to be conservative and cautious adding to the corporate loan portfolio.
We will be ready and willing to resume more significant corporate loan growth when the economic outlook is more certainty.
Our gross priorities remain unchanged our top priority is organic growth, which is primarily driven by retaining and recruiting advisors in the private client group and as I stated earlier, our annual organic PCG domestic net new asset growth of 6.5% in fiscal year 2020.
Has been best in class industry. Despite the COVID-19 related challenges. Additionally, we are continuing to add senior talent and our other businesses such as investment banking.
We also continue to actively pursue acquisition.
We will still be deliberate and pursue only transactions that are a great cultural fit as well as a strategic and economic benefits.
We are entering into more discussions than ever as we see the year end coming closer and the economic uncertainty Thats brought more people to the table.
As Paul mentioned, we are still continuing to repurchase shares to offset share based compensation dilution and are prepared to increase repurchases as appropriate when the economic outlook is clear.
Before we open the line for questions I want to thank all of our associates and advisors again further and valuable contributions during these trying times.
I'm incredibly proud of our accomplishments and a tireless efforts to support each other and our clients.
We are entering fiscal 2021, well positioned in all of our businesses and we have significant opportunities for continued growth.
We have something special here at Raymond James where.
Where we have the scale and scope of services to compete with the largest firms in the industry.
While at the same time, having this unique advisor and client facing culture, that's increasingly difficult to find in our industry.
As long as we preserve that unique competitive advantage and advisor centric attitude.
Confident in our ability to generate relatively attractive long term returns for our shareholders in any market.
With that operator, I'd like to open it up for questions.
Certainly we will now begin the question and answer session. If you would like to register first question, Chris No. One followed by the four on your Touchtone phone, you'll hear that suite to drop to his nose ubiquitous.
So if your question has been answered in your life you would generally isn't just Jason first a one Oh my that's me.
One moment, please flourish <unk> question.
Our first question comes from the line of Manav, Let go Somalia with Morgan Stanley. Please go ahead.
Hi, good morning.
I know you pay so I know you don't have any guidance.
Pre tax margins and they need to have any and I noticed that there is a lot of uncertainty, especially.
On the non comp side, but I was wondering if you can help us with.
Well the way you think you can manage the business why did swift Boston loan loss cycle, but we still have lower rates.
And you know as you speak to that maybe you can also talk to what the puts and takes are from 14.9% adjusted margin you had this quarter and.
The headwinds out from here.
I know its ramps and hiring but it also sounds like you have some more room on the expense side. So if you can give us more details there.
Yeah like you said a lot of a lot of moving parts, obviously the record results in the capital markets.
Which generated I think a 26% margin certain.
Certainly lifted the firm's overall margins and.
That's just a high bar of going forward.
And then business development expenses, obviously still subdued given the Cove at 19 pandemic.
In the provisions are elevated hopefully they're elevated hopefully they get better going forward as we have more economic certainty.
So a lot of puts and takes which is why it's hard to give you guidance here in near term or what I can tell you is if you look historically at our pre tax margin last time, we were in a kind of near zero rate environment.
We were generating roughly.
15% type pre tax margin right now we're entering this period with higher recruiting results coming into this period. So that leads to higher transition assistance amortization I think the impact of that relative to that period of time is about 100 basis points. So.
So you know, we're not really ready to give targets yet, but if you just do that math that gets you to about 14% to 15% type pre tax margin, but again that could be two years out I mean, depending on market conditions.
Yeah, I think the other challenges.
Private client group will have tailwinds with the 7% started in their asset base into the quarter, but obviously a capital markets had very very strong results and it went through a quarter I mean capital markets is lumpy by nature closings are lumpy by nature.
So it's just challenging to come with a number but again were.
Razor focused on expenses, we've operated in that 14% to 15% margin. When we had no help from interest rates not that many years ago, So and the same team so.
We're focused on managing our expenses and on growth so.
It's just hard to give guidance given.
You know a pandemic may impact loan loss reserves, which will certainly impact the numbers or.
The company continued to operate in our portfolio well they won't be all of it. So it's just too difficult because.
Got it.
And then maybe on the on the security side, you added about $2 billion Securities book this quarter, but.
But at the same time it looks like deposit said thought talked body bank sense Oh.
<unk> bank were up quite substantially in the quarter as she was getting a fair amount of deposit growth.
Do you have some sort of target amount that youre comfortable holding insecurities.
And yeah, you can you talk a little bit about how you're thinking about the duration dress Scott you know, it's a long and that's because those shops now.
Yes, I think we.
We still want to be a more exposed to the short end of the curve than the long end of the curve just given.
The floating rate nature of our deposit so we did grow securities substantially, but if you think about our balance sheet priorities in terms of where we want to grow the bank.
The first priority would be growing loans to private client group.
Clients, both mortgages and securities based loans re.
Really because it has a two prong benefit does the first as it helps us strengthen our advisor strengthened their relationships with their clients with really what's a competitive a mortgage and securities based loan offerings.
And it's also it also generates a a very good risk adjusted return for the bank. So it's sort of a win win which is why that's the highest priority in it and Fortunately has been growing pretty consistently at an attractive rate. Our second priority are typically is growing the corporate loan portfolio, but obviously given the pandemic.
We're in the midst of a we've actually been selling loans as you know Andrew.
And we're going to be very selective and adding new loans that are less exposed to the COVID-19 pandemic and then really our third priority is growing the securities, particularly now when you know the incremental yield you get for the duration exchange is a paltry relative to the risk return.
Trade off so we're.
We're going to do that all in the context of trying to keep the bank's standalone tier one leverage ratio at around 7.5% give or take which is where it is now after we've grown the securities portfolio right around 7.5% and we could always we have a lot more capital we had a 14% ratio at the firm overall, so we could always contribute more capital to the bank.
If one of those three categories of assets at the bank.
On rate higher volumes at attractive risk adjusted returns. So that's kind of how we're thinking about it. So while we have a lot of capital and cash capacity to grow the bank more rapidly or you know given where we are in the midst of this Tobin 19 pandemic I think we're going to be very patient in deploying that capacity.
So it sounds like gardening, you would have Greg.
Saigon go ahead.
Oh I was just saying so.
Good.
Oh, Okay. So it sounds like you would end up they're growing the securities book, just aligned with where the cash inflows are you getting from clients.
That's probably a over simplification I think which will just grow it up because sort of as we have excess capacity to grow the bank's balance sheet relative to the loan growth.
Great. Thank you.
And thank you for your question.
Next we have a question from the line of Steven Chubak with Wolfe Research. Please go ahead.
Hey, guys. This is Michael and Magnus dock instilling in for Steven Congrats on a great quarter I just wanted to start off with one on the expense savings opportunity.
I guess my question is based on the expense actions, you're taking assuming some normalization of activity.
How should we think about efficiency levels or how we're going to see that impact flow through the expense run rate and should we expect a slower pace than expense growth from here. Thanks, so much.
Yeah, I think what.
What I said in my prepared remarks was that the reduction in the workforce would benefit the compensation ratio and the pre tax margin all else being equal, which it never is but all else being equal benefit those two metrics by about 100 basis points starting in the fiscal first quarter of 2000.
And 21.
I think that certainly the differences saw the expense chart that all.
Paul talked about earlier, so they are managing expenses.
A very tightly so it's certainly we see this year.
On an apples to apples basis that growth as Paul said it could be zero. So we're managing it very tightly now yeah.
If the economy opens up and there's more to business development conference certainly that'll impact expenses, but I can see the expenses managing down even before the pandemic or both.
By the results last year on the expense.
<unk> expense from a reduction in force really.
Benefits starting this quarter, so I think you're going to see tighter.
Third business expense management, given the environment just as we did.
Years ago in a zero rate environment.
All right great. Thanks, My follow up.
Maybe just pivoting over to M&A and we've seen continued consolidation in the asset management space could you give some color around your appetite for potentially doing a deal and that space or maybe other areas. Thanks again.
Yeah, I think our priorities on M&A haven't changed the first is we focused on the private client group there's.
This is an area of you know where that's our main business, but there aren't a lot of opportunities generally in that space that that move the needle.
Type of wealth management business, but certainly are active there and our proactive reaching out.
And that is the same we've continued to grow that business.
Organically through recruiting through strategic niche acquisitions and certainly.
Are looking there and asset management has also never looked at it.
So to the products are an opportunity so.
Those are the areas, where you focused on but rope and parts that actually improve our businesses and strategically we will have a long term impact we aren't looking at deals for size. So.
There's been.
Well no presence in the market, it's really just a I call, a finance engineering or lower revenue or revise or no.
Looking at really staying true to our core businesses and growing and expanding our service offerings, not just being bigger bigger stake.
Thanks, Thanks for the color guys appreciate it.
Yeah.
Thank you [laughter] continuing on we now have a question from the line of Bill Katz with Citi. Please go ahead.
Okay. Thank you very much for taking all my questions. This morning first question, just maybe staying on the capital management fee for a moment you mentioned that a you obviously have a lot of firepower on the balance sheet.
You look to sort of pick up buyback guy and I sort of things improve can you give us a sense of what milestones you might be looking at the macro economic level to sort of get that comfort or perhaps some kind of valuation metric of your own stock that you will that we can monitor to sort of see or anticipate something more than just the offset of stock based comp solution.
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Yeah, I mean, that's a very complex question. So I mean in terms of we've we've long term about her valuation metrics as we look to repurchase.
The difference right now is the environmental outlook, which is hard to say so.
There's a lot of there's also a lot of negative implications are regulators look at harder on share repurchases since bogo.
Oh I'll call it public interest and share repurchase so in Florida time, right now where as we book it will be too, which is obviously hitting a country. That's when do we think were true.
And we want capital not just.
You know for defensive purposes, but we also believe that there is a more difficult economic times as.
As we've seen in this period drag I look longer more in person to be doing things. So that's going to be a judgment call.
I am not clear what's going to happen. These next couple of quarters with the pandemic guns.
Until we get a view on that but we think we can get solid economic returns off that were.
Going to hold back make sure that we have plenty of capital.
To you know to be both defensive.
Defensive in Austin.
So I can be clear answer on okay.
Okay. That's helpful. Nonetheless, and then maybe just a follow up question Friday with Paul just in terms appreciate all the guidance around expenses we can.
Given your very strong recruiting pipeline.
I appreciate that this was a very fluid fiscal year for you.
The business development costs in this particular quarter is this a fair run rate relative to the recruiting pipeline or is there some potential lift in that given the very strong recruitment pipeline that you're speaking to.
Yes, I mean, the business development costs.
Ah down 50% I think year over year, just reflects a lack of a travel.
Travel client related activity relative to normal activity level. So I would expect as we get through the Cove and crisis for a business development cost to expenses to get much closer to where they were you know maybe even going back to the first quarter of the fiscal year.
Even with that elevated recruiting.
Again, it does it will depend on how much recruiting we do going forward, but I would say this certainly this quarter's comp number was very low.
And a lot of value to their big numbers and conferences and things that have been postponed, but we don't see you know.
Really coming certainly we've moved back everything through the first half of the year, but no our chairman's you know.
Reward trips or.
Educational conferences are important to us and our.
Those full reserve at some point, but we don't see them come in these next few quarters.
And truth isn't recruiting we've put a lot of different recruiting we have a lot to commit.
Got a pushback join dates because the cobot and when that breaks through I think we'd expect.
So very very robust recruiting, but I don't think that recruiting alignment itself is a big driver of short term business development expense.
Okay. Thank you both.
Thank you for your question.
Next we have a question from the line of Chris Harris with Wells Fargo. Please go ahead Sir.
Thanks, guys.
So really strong quarter for investment banking.
You highlighted that can you guys, maybe unpack the drivers for us a little bit more and really just kind of interested to know like how broad based.
The strength is that you are seeing in investment banking or whether it's.
Somewhat concentrated and a handful of transactions.
And then how are you feeling about the sustainability of the of the revenues that you're saying you're not banking.
I can just tell you it's been pretty broad base.
In our largest groups Tech services and real estate have continued to perform well continue to perform well and I think their backlogs are very strong as.
As one of those banking across all of our sectors. As you can see from the industry is up so I would say our top performing sectors continued to outperform in the other sectors can have.
We're having good years also so it's pretty broad.
Broad based on.
If you look at backlog for its backlog is not good and once the deal closes it's very very strong.
So again, though we have seen.
Same deal shut off than we've seen deals to accelerate the.
I don't know if there will be a rush at the end of the year Theres, a presidential and congressional changes and anticipated tax rate changes whether that Russia's deals.
Close at year end, you know, but.
So it's just hard to tell but I can just tell you the activities is broad based.
Okay, Great and just a quick follow up.
For Paul Shukri.
I know, there's a lot of moving parts to loan portfolio you want to be selected with CN I, but you could potentially see some growth in other areas.
You will sell some more loans maybe not.
Given all that could we potentially see growth in the loan portfolio for fiscal 21.
No I think it's possible, especially but depending on the growth and the private client group blown study securities based loans I think we hope to see still continued growing that over 10% and and the mortgage growth.
It has been pretty strong as well so.
That's certainly possible I think what we were trying to do going forward is if you look at the slide that shows the combined interest net interest income and the BDP fees from third party banks 'cause.
Did you have to really look at it on a combined basis.
What were what were hoping is that this quarter and I hate to call a trough because you never know, but certainly the.
Short term rates has sort of been fully reflected in the in the loan portfolio. All the floating rate loans almost all of them have reset and so we hope to grow that number from this point forward assuming cash balances remained relatively resilient at the current levels. So.
That's that's the hope, but again, if we don't grow loans this year as much as we can given our capacity for their cash and capital capacity, then they'll just give us more dry powder for the next year and we're going to grow loans when were especially the corporate loans when were comfortable.
With the sort of economic environment, and the lack of certainty theres less or uncertainty than there is now.
And we're looking at this we are making long term decisions. So that takes two years to get to that level of comfort and we'll have more dry powder, then that rate of growth will be higher than if we don't grow it as much this year. So we're.
We're going to be patient and.
Make the best decisions based on what we know and the economic environment.
Oh.
The wire houses continue to be the primary contributor.
To a recruiting pipeline. Although there are you know other firms where are we.
You know through periods of time also get.
But it's mainly wire house driven.
And it's the recruiting outlook looks very very good and to commit.
Joined Isoline looks very strong.
And again, a part of that is due to deferrals, especially the employee channels.
Our branches have been close their open now, but a lot of the folks during that period of time did want to move into a close branch. So the employment lagged a little bit too independent channel Dream.
This last year, but we're inactivity across all the channels that.
Okay that that's helpful and maybe just on a second question on the investment banking business. Obviously, it's strong pipeline strongest in an area that you're investing into grow or is this just you know kind of reaping a good environment just trying to get a sense of what you think of the organic or market share gross.
That you might be targeting in across investment banking.
I'm sorry, if you guys haven't noticed the best cause <unk> <unk>.
A lot of focused on growing to emanate does that's acquiring affirm in Europe, which is done terrific ask a few years ago, that's really added to our cross border, adding a lot of very very senior bankers in health care. Another area is and you know looking at boutiques and tuck ins and.
So I think both the environments. Good see that through you know earnings releases by everybody, but the reason that our numbers are so goes we've invested in and the bankers that made a big difference subtle and will continue to so especially in M&A.
We're we're probably under size given our size in our in our great capital market strengths will continue to invest particularly in that area and hopefully.
Given the rest of the business and and good research, we can continue to grow that sir.
Okay. Thank you.
Thank you.
Continuing on our next question comes from Kevin Vine, which J M. P. Security. Please go ahead.
A good morning, guys.
Hey, Devon.
Most of been asked here, but it just just a couple of kind of clean up so.
First one on just the election next week and I'm trying to think about some of the considerations to the extent there is an administration change and I I. Appreciate there's there's a lot of nuance in terms of what happened to their but you are there any regulatory items that you're kind of focused on an administration change.
Whether it be the potential for more onerous you know the rule relative the SEC's rugby I I'm not sure. If you know the D. O L. You know could reinsert itself with that that's at all in the conversation or states, specifically could feel more bold and to disrupt kind of where the industry has been moving towards I'm curious if there's any kind of.
Chatter of that and then just more broadly you're thinking about the potential for no higher tax rates and and you know any businesses that you guys feel like that that could impact for ya.
Yeah. That's a definite you know complicated so first the world always seems to turn when parties.
You know change so despite the changes and we have to we all compete in the same environment. So we feel very comfortable competing and whatever that environment is so I.
I think that if there is a.
Congressional and presidential party change that certain my taxes are the ones that will be I mean, I think in most businesses shouldn't have a huge act businesses will go on our tax credit business will probably.
Benefit from it.
Hi, or the tax rate more value of those credits in I think low income housing.
Will still be a target for the administration so.
Things relative no unless tax rates go totally crazy that the world will go on so.
Regulatory you know, we always monitor regulatory change and even with a.
What is considered a business friendly whitehouse, we've had some pretty big regulatory changes with a rugby I N.
So I think you're talking about matters of degree.
And could there'd be tweaks that yes, it doesn't look like the number one platform.
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<unk> is that.
Regular Tory reform so.
It really more counselor who's put into the office offices and Ah.
The number of the queue ones people are in those positions for a couple of years, even at the options. They usually set the tone on enforcement.
And other things so I don't think there's gonna be a short term impact no matter what the election is longer term.
Certainly there could be.
So you know I I think it's all speculation we were the state sweep you always worry about individual states cause it makes the business very complex most of those.
Kansas.
Have not come forward that it had major store business. So it's.
It's a known about will compete whatever the environment is on whatever the rules are.
Yeah.
Okay Baseball and just a follow up here.
You guys are gonna be expense conversation and just make sure we're.
Fully appreciating kind of all moving parts uhm. So I guess first and foremost is devaluation that you guys referenced last quarter is that now complete with all of the the changes in some of the detail that you provided here Uhm and then obviously the production enforce or are there more things that you're looking.
King at internally that Uhm can also move the needle on at the expense trajectory from this point and then I'll also just Wanna make sure Uhm that you know it doesn't feel like there's probably any big revenue considerations Frank.
I just want to make sure that I'm understanding that as well.
So I'd say that you know first made for what was the rest of them are not playing anymore. So so.
Last time, we really had any kind of reduction in first was appro nine and after a couple of years after the Morton can acquisition, where we.
A small one but you know we waited a couple of years trying to make it everybody employed so I think that's behind us.
So there's nothing of that size, but we are managing infrastructure spend technology spend you know you go across the board. We are still looking how do we get more efficient and continue to bring in costs. We have a big service initiative going on as we believe we have high service levels, but we wanted to <unk>.
Kris those from an advisor standpoint will look at areas not even become.
Better at service that'd be more efficient, which is a longer term project. So we're all over expensive, but there's no big needle movers.
As the reduction in force was.
Okay perfect I'll leave it there thank you guys.
Okay.
Okay [laughter] and next question comes from the line of Kyle K.
K B simply please go ahead.
Hi, Good morning Thanksgiving My question give me first just on the F. S portfolio wondering if you could help us understand where.
I'm currently investment rates are with you know an average three year duration, that's still sitting just under 100 basis points and secondly, when or if you're able to start opportunistic buybacks. Later this year does that change your desire to allocate capital to growing that F. S portfolio at this pace.
Yeah, you're right on with your kind of estimate on the yield it's right around just under 1% for sort of the three year type duration.
And in terms of.
The decision whether to buyback shares of grow the portfolio, we have enough capital frankly to do both if we're comfortable doing both so we have a lot of capacity and flexibility and.
Certainly the ability to do both just as we have been over the last couple of years.
[laughter].
Got it and just on the the the cash balances I mean, there's continue to grow quite nicely. Just wondering if you can just provide an update maybe on a longterm target or the percentage of those balance is or how you're thinking about the percentage. This down so that you're comfortable migrating to the to the balance sheet overtime.
Yeah, I mean, I think again a lot of variables in terms of the capital the returns that we were getting on the.
The assets of your funding with the cash and frankly, what the demand is from third party banks, which was very high in March when these banks, we're seeing revolver draws they needed to cash to cover those drawers and since then there were a lot of those revolve it draws have been paid back in the.
The banking system is generally flush with cash right now so we.
We are on a net basis seeing some banks still want that cash but on a net basis to demand is diminishing. So that's really the benefit of having a bank and our business is it gives us a lot of flexibility and.
The demand from third party banks continue to diminish and things continue to recover in the economy and we have a good risk adjusted returns and the assets at the bank and invest and then we would be comfortable putting a large portion of those cash balances on the balance sheet. So long as it doesn't compromise the clients ability to get the maximum sti's.
Coverage on one of the few firms that offer you up to $3 million for a joint account of Fdic's coverage to our waterfall program and so it gives us a lot of flexibility to continue to grow into balance sheet.
Yep, and then lastly for me and I'll leave it there just a really clean up question on that reduction in force should we expect any additional one time charges guess quarter.
And I know you said it'll impact the admin line within TCG, just wondering what other what other segments, we could we could see some some level of impact on the on compensation.
Yeah, we took the vast vast majority of the associated expense and that $46 million. This quarter. So I don't think that there'll be any meaningful numbers kind of going forward related to the reduction in force.
In terms of costs.
And then in terms of Ppg's, our largest business most of the support cost control cost risk management costs gets allocated to P. C G, but I think what you.
The reduction was fairly broad base in terms of the businesses. So I think you'll just see it on a consolidated basis in the administrative compensation line item and each business, but private client group business is by far the largest consumer of that.
Administrative expense.
Yep. Thank you Paul.
Thank you.
And our final question comes from the line, it's Chris Allen Compass point. Please proceed forget question.
Good morning goes two quick ones one I'm wondering if the if you've seen any changes the competitiveness competitiveness in the recruiting environment just give him some of the commentary heard from some of the big banks and I totally sounds like some of the some of them get a little more aggressive on the packages can be seeing any change there.
Yeah, I'd say that first everyone since I've been in this job everybody asks that question.
[laughter], that's always competitive right. So sometimes the players change sometimes the you know even people say, they're getting out of the market recruiting make it out for a quarter to in there right back in so.
It's always been competitive and.
And firms change our firms that have done better who paying a lot of money you know relative to what we pay for.
For transition assistance I think we've kind of kept are great balance so being fair to the people coming over and having them come over for the environment. So we get outbid, sometimes yeah, but that's not new for us.
But what we believe is we offer the best home and the best tools and platforms. So it's competitive out there it's.
And sometimes it's more competitive in the independent channels people get aggressive.
The employee channel I think in this last quarter to people have really kind of been more aggressive and what they're willing to pay and you know we continue to sell our long term value proposition. So it's.
That's always competitive and we've done pretty good at this for a long time now so uhm.
Keeping our our focus and I'm very happy with the great tunes were bringing it.
Yeah, I'm just not a quick one it's not a news article just in terms of you reorganize as a customer divisions combine in a broken doing hybrid alrighty cussing units and I'm. Just wondering if that was done is looking looking more to be more offensive just given the murders for was 12 married traded in.
Yeah, you try and just in terms of the opportunity around or a custodial.
Any color there'll be helpful.
Yeah to focus her broke person you know we've had that division for a long time, we felt that you.
Eventually with enough regulatory change I think B I was one that'd be my.
Acceleration of movement, which we saw before June 30th.
Somewhat slowing down now that that already channel has been the fastest growing percentage wise in the industry for a long time. So the move was really just the consolidate the scale the businesses, so custodial business and they're much more related then they're not so we went ahead and combines them to make sure that we had.
You know more size and scale to focus on that for management there.
Those guys.
Thank you all know tend to presentation back to Mister Riley to continue hopefully complaining relax.
Okay, well. Thank you all for joining us. So we know it's hard your jobs are like ours are predicting what's gonna happen to remember a lotta years, where we could just kind of draw a line and look at trends in and be pretty [laughter] pretty much tell you what was gonna happen and certainly that's not this environment right now so.
<unk>.
We'll try to give you as much guidance as we can when we think we can see it when we don't Wanna make up numbers or make up things to do.
Just to help you know help you put in the model that don't have a base. So I think with the outlook.
It's more difficult having said that I think you can see the commitment to expense reduction that we've talked about you can see it coming through last year, It's certainly better this year.
And we are.
Really focused on growth, we still have been focused on growth and the one thing I puke really manager expenses and continue to grow you get pretty good financial results. So we think long term we're doing the right thing we've got the focus and as we get more clarity who will try to give it to you and hopefully have an animal that day. So.
When we can give you a good better targets somebody could in the middle of this hopefully not a bad second wave of the pandemic, but.
Thank you all for joining us and we'll talk to next court.
Thank you and that does create a conference calls like today, we thank you I'll see a participation and ask that you. Please disconnect. Your lines. Thank you once again be well.
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