Q2 2021 Raymond James Financial Inc Earnings Call
Okay.
Good morning, and welcome to of Raymond James Financial's second quarter fiscal 2021 earnings call.
This call is being recorded and will be available for replay on the company's Investor Relations website.
Now I would like to turn it over to Kristy Walke, Vice President of Investor Relations at Raymond James Financial.
Good morning, everyone. Thank you for joining US we appreciate your time and interest in Raymond James financial with US on the call today of Paul Reilly, Chairman and Chief Executive Officer, and Pulse you agree Chief financial Officer the price.
Patient being reviewed this morning is available on Raymond James of Investor Relations website Paul.
Knowing the prepared remarks, the operator will 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 impact of the COVID-19, pandemic 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.
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 performance.
Reconciliation of these non-GAAP measures to the most comparable GAAP measures maybe found in the schedules accompanying our press release and presentation.
With that I'll turn it over to chairman and CEO, Paul Reilly Paul.
Thank you Christy and good morning, everyone. Thank you for joining us today.
It has been a year since the financial markets bottomed and the federal reserve cut short term interest rates to near zero.
That move reduced our pre tax run rate by 40%.
The stock market has seen an incredible run since 2020 with the S&P 500 up 54% year over year.
While that tailwind has certainly helped fuel our strong results.
The records, we generated during the quarter and first half of the fiscal year have also been driven by our unwavering commitment to providing excellent service to advisors and their clients during this difficult and unprecedented time.
It's a testament to our advisers, who of shepherded the clients through the pandemic and the wherewith all of our associates who've worked so hard to service our advisors on their clients, our strong balance sheet and our ability to grow both on constructive and challenging markets certainly of year, we will never forget on.
Many levels starting on slide three the fiscal second quarter was another record quarter.
The firm reported record net revenues of $2.37 billion, which were up 15% over the prior year's fiscal second quarter and 7% over the preceding quarter.
Record net income of $355 million or $2.51 per diluted share increased 110% over net income in the year ago quarter, and 14% over the preceding quarter.
Annualized return on equity for the quarter was 19% and return on tangible common equity was 21, 2% on extremely impressive result, especially in the near zero rate environment, and given our strong capital position.
Record quarterly revenues were primarily driven by higher asset management and related administrative fees investment banking revenues and record brokerage revenues, which more than offset the negative impact of lower short term interest rates on both of the net interest income and our J B D. P fees from third party banks.
Record quarterly net income was attributable to the record revenues disciplined management of controllable expenses, the bank loan loss benefit of $32 million, reflecting improving economic conditions.
And subdues business development expenses, given the lack of business travel and conferences.
Moving to slide four we ended the quarter with record total client assets under administration of 1.09 trillion dollars, which were up 40% on a year over year basis and 6% sequentially.
We also achieved records for P. C. G assets in fee based accounts of $568 billion, a 7% sequential improvement, which will benefit the third quarter and financial assets under management of $178 billion.
We ended the quarter with a record 8327 financial advisors, a net increase of 179 over the prior year's period and 94 over the preceding quarter.
This represents a solid improvement over the prior quarter and reflects our strong retention and the continued strength of our recruiting pipelines across all of our affiliation options on.
Our recruiting momentum in the independent side of the business continues to be strong.
On the employee side as we mentioned last quarter in response to the increased recruiting packages by competitors, we enhanced our recruiting packages to be more competitive while also ensuring attractive returns to our shareholders.
And while recruiting momentum in this business has increased greatly employee advisor count is down slightly from the prior quarter as improved recruiting was offset by a higher number of retirements where assets are typically retained at the firm as well as the smaller training class.
However, the number of advisers scheduled to join us up significantly not only on our employee channel, but across all of our affiliation options.
Looking at of recruiting results over the prior four quarters financial advisers with approximately $285 million of trailing 12 months production and nearly $44 billion of assets at their prior firms affiliated with Raymond James domestically.
As far of net organic growth results from the private client group, we generated domestic P. C. G net new assets of nearly $54 billion over the four quarters ending on March 31, 2021, representing more than a 7.5% of domestic P. C. G assets at the big.
Of the period and remember this is net of client fees.
And this trend has accelerated during the first half of the fiscal year closer to a 9% annualized rate.
We are very pleased with our consistent organic growth, especially given the disruption associated with the COVID-19 pandemic during the year.
Now, let's move to the segment results on slide five.
The private client group generated record quarterly net revenues of $1.65 billion and pre tax income of $192 million on 11.7 pre tax margin, reflecting significant operating leverage despite being in the near zero rate environment.
Quarterly net revenues grew 12% over the preceding quarter predominantly driven by higher asset management and related administrative fees, reflecting higher assets in fee based accounts, which will continue to be of tailwind in the third quarter higher brokerage revenues also contributed to the quarterly revenue growth.
The capital markets segment generated quarterly net revenues of $433 million and pre tax income of $105 million driven by record brokerage revenue record equity underwriting and strong M&A revenues.
Despite not topping the extra ordinarily strong and record breaking first quarter results. The results. This quarter were very strong driven by broad based strength across global equities and investment banking in the fixed income businesses.
The strong results reflect the significant investments we have made to strengthen our platform of the last 10 years and we are continuing to make investments, including the recent acquisition of the consumer focused M&A advisory firm Financo, which closed at the end of the quarter and we welcome Financo to the Raymond.
Ames family.
The asset management segment generated record net revenues of $209 million and record pretax income of $87 million.
Record results were primarily due to growth of financial assets under management, driven by equity market appreciation and net inflows into fee based accounts in the private client group.
Carillon tower advisers also generated significant net inflows during the quarter.
Lastly, Raymond James Bank generated quarterly net revenues of $160 million in pre tax income of $111 million.
Quarterly net revenues declined 24% compared to a year ago quarter, primarily due to the impact of lower short term interest rates.
Sequentially quarterly net revenues declined 4% as higher asset balances were offset by the expected eight basis points decline in the bank's net interest margin during the quarter.
Which was also largely attributable to the agency backed securities portfolio pre.
Pretax income growth was primarily due to the loan loss reserve release in the quarter compared to the provision for credit losses in both of the comparative periods.
The credit quality of the bank's portfolio remains healthy as Paul Shoukri will cover in more detail on his remarks.
Looking at the fiscal year to date results on slide six we generated record net revenues of $4 five $9 billion. During the first six months of the fiscal 2021 up 13% over the same period rep.
Record earnings per diluted share of $4.74 increased 53% compared to the first six months of fiscal 'twenty 'twenty, primarily due to the revenue growth along with the loan loss reserve release compared to the provision for credit losses in the comparative period.
Moving to the fiscal year to date results on slide seven the private client group capital markets and asset management segments generated record net revenues and record pre tax income during the first six months of the fiscal year.
In fact capital market segments pre tax income for the first half of the fiscal year of $234 million actually exceeded the annual record of 225 million set in fiscal 2020.
Again these results reinforced the value of our diverse and complementary businesses.
And now for a more detailed review of the financial results I'll turn the call over to Paul Shoukri Paul Thank.
Thank you Paul I'll begin with consolidated revenues on slide nine record quarterly net revenues of $2.37 billion grew 15% year over year and 7% sequentially.
As expected asset management fees grew 10% sequentially a bit lower than the 12% growth of fee based assets during the preceding quarter, primarily due to two fewer billable days during the quarter.
Private client group assets and fee based accounts were up 7% during the fiscal second quarter, providing a tailwind for this line item for the third quarter of fiscal 2021.
Consolidated of brokerage revenues of $591 million grew 15% over the prior year and represents a record driven by continued strength in institutional fixed income as well as strong brokerage revenues in the private client group, reflecting healthy client activity levels and higher asset values.
Account and service fees of $159 million declined 8% year over year almost entirely due to the decrease in our JBT P fees from third party banks, given lower short term interest rates, which I will discuss along with net interest income in more detail on the next two slides the.
The 10% sequential increase was largely attributable to higher asset balances and revenues from our recent acquisition of N. W. P. S. Most of which are reflected in the client account and other fees line and the P. C. G segment.
Consolidated investment banking revenues of $242 million grew 64% year over year, driven by strong M&A advisory revenues and record equity underwriting revenues for the first half of the year investment banking revenues were 74% higher than the first half of fiscal 2000.
'twenty our investment.
The banking pipelines remained strong so we would be really pleased the finished the fiscal year, averaging $200 million or better of investment banking revenues per quarter, if market conditions remain conducive.
Other revenues of $44 million or down 21% sequentially, primarily due to lower private equity valuation gains during the quarter, partially offset by a strong quarter for the tax credit funds business.
Moving to slide 10, clients' domestic cash sweep balances, which are the primary source of funding for our interest earning assets and the balances with third party banks of generate RJ PDP fees ended with a quarter end record of $62 $8 billion, increasing 2% sequentially and representing six 5% a day.
<unk> P C G client assets.
As we continue to experience growing cash balances and less demand from third party banks more client cash is being held in the client interest program at the broker dealer you can see those balances grew to $9 $5 billion and most of that growth has been used to purchase short term treasuries to meet the associated reserve requirement over time.
On that cash could be redeployed to our bank, what third party banks as capacity becomes available, which would hopefully earn a higher spread than we currently earn on short term treasuries.
On slide 11.
The chart displays our firm wide net interest income and RJ BD P fees from third party banks on a combined basis. As these two items are directly impacted by change in short term interest rates related we have updated the net interest margin or NIM chart on the bottom left portion of the slide to show NIM for both Raymond James Bank and.
On the firm overall.
The combined net interest income and BD P fees from third party banks declined a bit sequentially largely due to fewer days during the quarter and NIM compression at the bank.
As I mentioned on the last quarter's call, we would expect the bank's NIM to decline to around 1.9% over the next two quarters as the new agency security purchases have lower yield than the runoff, but still represent a higher yield than we are earning from third party banks or in short term treasuries.
We also believe the average yield on RJ PDP balances with third party banks will remain close to 30 basis points for the rest of the fiscal year, but that could experience downward pressure in fiscal 2022.
Banks demand for deposits doesn't improve from current levels moving the consolidated expenses on slide 12, first compensation expense, which is by far our largest expense as expected the compensation ratio increased sequentially from 67, 5% to 69, 5%.
<unk> largely due to the revenue mix shift towards higher compensable revenues and the P. C. G segment as financial adviser payouts, particularly on the independent contractor side of the business, where they cover most of their overhead costs are typically much higher than the associated compensation and the other businesses on a sequential basis the cause.
<unk> ratio was also impacted by the reset of payroll taxes that occurs in the first calendar quarter of each year.
As we explained on the last call given our current revenue mix and disciplined management of expenses. We are confident we can maintain the compensation ratio of 70% or better in this near zero short term interest rate environment.
Non compensation expenses of $277 million decreased 32% compared to last year's second quarter, and 14% sequentially, primarily driven by the $32 million bank loan loss benefit compared to the provisions and the comparative periods business development expenses also remained subdued.
But we expect those to increase over the next few quarters as business travel picks backup and conferences and recognition trips resume.
Overall, you can see we have been really focused on managing controllable expenses, while still investing in growth and ensuring high service levels for advisors and their clients.
Slide 13 shows the pretax margin trend over the past five quarters.
Pretax margin was 18, 8% in fiscal second quarter of 2021, which was boosted by record revenues the loan loss reserve release and subdued business development expenses.
On the last call, we talked about generating a 14% to 15% pretax margin in this near zero interest rate environment, but as we experienced during the first half of the fiscal year, there's meaningful upside to our margin when capital markets results are so strong.
On slide 14 at the end of the quarter total assets were $56 $1 billion, a 4% sequential increase reflecting the dynamic I explained earlier with growth in client cash balances and associated segregated assets at the broker dealer as well as solid growth of corporate loans.
And security based loans at Raymond James Bank the.
This balance sheet growth cause our tier one leverage ratio to decrease to 12, 2%, which is still well above the regulatory requirements and our more conservative target of 10%.
Liquidity remains very strong with $1 $7 billion of cash at the parent at the end of the quarter, leaving us with plenty of flexibility to be defensive and opportunistic.
During the quarter, we announced the debt offering which closed at the beginning of our fiscal third quarter. So it was not reflected in any of the second quarter's numbers to take advantage of the low rate environment, we raised $750 million of 30 year senior notes at 375% and <unk>.
Utilize the proceeds in cash on hand to early redeem our next two senior note maturities effectively resulting in the same amount of senior notes outstanding, but with a much longer term stable funding profile.
In the third quarter, we expect the record losses associated with the early extinguishment of these notes, which should total somewhere around $90 million to help with comparability, we'll break those losses out as a non-GAAP adjustment in the fiscal third quarter.
Slide 15 provides the summary of our capital actions over the past five quarters in the second quarter, we repurchased 500000 shares for $60 million, an average price of approximately $120 per share.
Over the first two quarters of the fiscal year, we repurchased shares for $70 million and we remain committed to repurchasing a total of at least $200 million in fiscal 2021 to offset share based compensation dilution.
As of April 28, $680 million remain under the current share repurchase authorization.
Lastly on slide 16, we provide key credit metrics for Raymond James Bank.
The credit quality of the bank's loan portfolio remains healthy with most trends continuing to improve.
Nonperforming assets remained low at nine basis points of total assets. However criticized loans increased due to a handful of credit downgrades within our REIT portfolio, particularly in the hospitality sector.
While all of those credits were downgraded continue to perform have large cash balances and are starting to see improvement in their portfolios. We thought it was prudent to downgrade those credits.
We had net charge offs of $2 million in the quarter, which were related to opportunistic loan sales of $95 million at nearly 99% of par value.
The bank loan loss benefit of $32 million was largely attributable to the macroeconomic inputs and the Cecil model, which reflect an improve outlook, particularly for the commercial real estate and residential mortgage loan portfolios.
Do the reserve releases and the loan growth during the quarter the bank loan allowance for credit losses, as a percentage of total loans declined from 1.71% to 1.50% at quarter end.
For the corporate loan portfolios. These allowances are higher at around 2.6%.
We believe we are adequately reserved but that could change if economic conditions deteriorate.
Our strong balance sheet and long term focus was recently cited as a strength by Fitch ratings, who launched its long term senior unsecured rating for Raymond James financial of a minus with a stable outlook.
Now I'll turn the call back over to Paul Reilly to discuss our outlook Paul.
Thank you.
So overall a year into the global health pandemic with near Zero short term interest rates and during the quarter with lots of seasonal headwinds such as fewer billable days and the reset of payroll taxes I could not be more pleased with our record top and bottom line results this quarter.
As for our outlook, we remained well positioned entering the third fiscal quarter with records for all of our key business metrics strong financial adviser recruiting activity and robust pipelines for investment banking.
In the private client group segment, while the recruiting environment is competitive and we faced some challenges on a largely virtual environment. Our financial adviser recruiting pipeline is strong across all of our affiliation options and the segment is going to benefit by starting the fiscal third quarter with a 7% sequential.
Recent assets in fee based accounts the enhancements, we made to the recruiting packages on the employee side of the business have been very well received by prospective advisors and that pipeline has recovered nicely.
Our prospective advisors across all of our affiliation options have continued to be attracted by our leading technology solutions. We have been known for our industry, leading position in mobile advisor tools and continue to make our technology platform more robust. We have also created easy to use systems that put all the information.
<unk> advisors need right at their fingertips. So they can easily get the information they need to service their clients and have more time, taking care of their clients and growing their business.
As we continue to invest in our technology, we're extremely excited about the new enhancements, which will be coming out shortly.
We have been measuring our client satisfaction for the past 10 years, using net promoter scores and I'm proud to share that our client satisfaction has never been higher both in terms of satisfaction with Raymond James as well as satisfaction with their advisors in the capital market segment, although there is still economic.
Uncertainty due to the ongoing COVID-19 pandemic the investment banking pipeline remains strong and we expect fixed income brokerage results to remain elevated particularly in the depository client segment, where we have a leadership position.
And the asset management segment results will be positively impacted by higher financial assets under management as long as the equity markets remain resilient.
We were also pleased to see positive net flows for carillon tower advisers in the quarter. Despite the structural headwinds for active asset managers, we hope that the one benefit of increased market volatility is that it reinforces the value of high quality active asset managers.
And Raymond James Bank should continue to benefit from the attractive growth of securities based loans and mortgages to the private client group segment.
On a year over year basis, the growth of the securities based loans has been impressive around 38%.
We'll also continue to be selective and deliberate in growing the corporate loan portfolio and the agency backed securities portfolio as we have ample funding and capital to grow the balance sheet.
We continue to focus on long term growth and our priorities remain unchanged. Our top priority is organic growth, which is primarily driven by retaining and recruiting advisers in the private client group. Additionally.
Additionally, we are continuing to add senior talent to all of our businesses. We also continue to actively pursue acquisitions, but we all still be deliberate and only pursue transactions that are of great cultural and strategic fit and at prices that we can deliver attractive returns to our shareholders. We have been even.
More proactive in sourcing and evaluating opportunities.
On Earth day last week, we released our first corporate responsibility report.
The report summarizes our foundational commitments the people sustainability community and governance and illustrates our long standing approach to doing business rooted in our values and brought to life through our people driven culture.
This report summarizes many of the inspiring things that our advisors and associates across the firm due to contribute to their communities and the things we do as a firm to help the environment.
We look forward to building on this inaugural report by maintaining transparency and sharing progress over time.
With that operator can you. Please open the line for questions.
Thank you very much and ladies and gentlemen of you'd like to register a question. Please press. The one followed by the four on your telephone keypad, you will hear a three ton prompted to acknowledge the request once again for questions. Please press. The one followed by the four on your phone one moment. Please for the first question.
Our first question comes from the line of Bill Katz with Citigroup. Please go ahead.
Okay. Good morning, and thank you for taking my question.
So I guess, Chris one is I presume more detail will follow up on the Investor Day next month, but I was wondering if you could maybe provide a little more.
Discussion of the disclosure.
Around the tier one leverage ratio of 10%, maybe the the timeline or the pathway and I guess as this quarter with the very strong loan growth and sort of stepped up buyback the.
The blueprint that we should expect going forward.
Hey, Bill Good morning, Great question as you said, we will discuss that in a lot more detail at the <unk>.
Coming analyst Investor Day.
Really the declined to 12, 2% this quarter was primarily attributable to the.
The increase in client cash balances.
We're accommodating more of that on our balance sheet at.
At the broker dealer frankly, because of the third party bank demand with all of the banks flushed with cash right now as declined.
Yet at the broker dealer.
Phil.
Associated reserve requirement.
Yes.
Purchasing short term purchasing short term treasuries and we hope that we can over time redeploy that into more profitable growth at the bank.
In terms of how we think about getting the 10% over time, it's really going to be a combination of growing the balance sheet, which primarily occurs for us at Raymond James Bank. As you know you alluded to the strong loan growth in the quarter of 4%, we are still being very deliberate in growing the portfolio both the private.
Client group loans Securities based loans grew almost 40% year over year in mortgages of seeing good growth as well, although there has been the high degree of run offs and refinancing there and we're starting to really be deliberate and growing the corporate loan portfolio. Although there still continues to be more demand than supply.
In the market with banks being flushed with cash.
And then the the second component of managing the capital ratio is really deploying the capital you saw us do the buybacks this quarter to offset the dilution will continue to do that and be opportunistic.
The prices are at attractive level levels, and then of course, you just heard Paul mentioned the.
The focus on acquisitions as well as another way to deploy capital.
Okay. Thank you and just a follow up sort of coming back to your the commentary that the organic growth accelerated in the sort of last couple of course of 9%, which is quite impressive I'm wondering if you could maybe peel that back a little bit more and maybe talk to like the organic growth between the different channels and I.
I think maybe a little more color around the recruitment backdrop. Thank you.
I'd say two levels, yes sure the.
If you look at you know I know a lot of people record quarterly and semiannual day. So it's as you know we do annual so we thought we'd give the indication that we're approaching 9% for the first six months, which is of great number.
The growth has been you know kind of proportional to the channels. We are finding our advisors are just bringing in assets and clients even in this market, which the debt, which they have consistently done in the top producers of really.
Had very impressive results from their growth so it's happening everywhere.
And then on recruitment.
We measure we don't publish what we call commit some of those are people, saying I am coming.
What you see are the people that sign so it's like it's like almost M&A youre on.
Net of transaction, but we don't count it till it closes it's the same in recruiting but our commits are way up in every channel all of our channels and now some of those people may not join or they may delay the join which often won't happen for just logistics reasons, so that might slip into the next quarter, but based on the backlog.
You know it is very very robust so I think we.
We posted good numbers this quarter.
My guesses in all channels Youre going to see better numbers next quarter.
Our next question comes from the Manhattan Go Selia Morgan Stanley. Please go ahead.
Hi, good morning.
Okay.
You had a pretty strong quarter for investment banking across the board.
Can you give us some more color on the backlog and I think you mentioned it remained strong but you know maybe you can come back of the start of the fiscal second quarter.
And then you of pretax margins in the capital markets Division declined Q on Q.
It was a pretty strong revenue environment I was wondering if there is any.
The seasonality there or should we expect margins in that segment of stay at these levels of that and this kind of an environment for trading.
So let me start on the kind of on the revenue side I'll, let Paul address the margin side, a little bit the.
Because there's lots of moving parts on all of these on.
On the revenue side honestly and Paul talked about 200 million plus we're at record levels right. So every time you have record so you always wonder but.
If you looked at the backlog you would see no reason why it would slow.
Now again on M&A is one of those deals where the economy can change people can pull out of deals. So they can get delayed so you'd never know, but the backlog would say, it's as robust as ever.
On the market's active I think for everyone on our backlog is very very strong and.
Continuing on to sign new deals.
You know.
Even though they're not on this.
Last week, the pretty significant so we feel pretty good about the backlog Paul you want to talk about the margin on yes.
The margin.
Certainly bounce around a little bit from quarter to quarter, but at 24% for the quarter. That's still a fantastic margin for the capital market segment and when you look year to date I think it's 26% so.
The revenues were down a bit sequentially M&A still had a very strong quarter, but it was down 18% from the record M&A results last quarter and that is of high margin revenue source. So.
Again, it could bounce around but at these levels, we're still really pleased with the 26% margin year to date.
Great.
And then maybe on the loan growth side of it.
So some nice loan growth as you mentioned in the real estate and SPL portfolios this quarter.
Are you doing anything differently, there you know any change in.
And the underwriting given how much the of the macro environment has improved and with markets at all time highs or is this just increased penetration of your existing customer base.
I would say its not.
Blackstone underwriting so I think of as better processes trying to get make it a smoother process the underwriting standards of the same as ever.
But I do think our advisers in this market and you know a lot of people as the state and tax planning or using the tool. So we are.
Advertising to our advisers, we don't go direct to their clients the availability and the use of these tools and financial planning, but it's their choice on their clients choice, we don't market directly to the end client, so, but given that and I think the educational process from the dynamics of the market, we've had significant growth and still see that channel is very.
So compared to our bigger peers, we are much lower penetration. So we think there's more opportunity.
Great. Thanks, a lot.
Our next question is from Devin Ryan with JMP Securities. Please go ahead.
Okay.
Great Good morning, everyone.
Hey, Doug Hey, Devin.
Maybe start with one here just on the strength in private client brokerage revenues in the quarter you heard some of the commentary.
But there would be great just to get a little more color on what you guys are seeing.
In that business in the.
If you can how much of the sequential improvement was from trailing commissions versus just activity and really what I'm trying to do is just parse through.
How much of that business is benefiting from a bigger based on higher assets versus maybe maybe something that was a little bit.
Unusually active in the backdrop.
Hey, Devin that's a great question. It was really strong brokerage revenues in the private client group business.
A lot of that reflects the healthy level of client engagement just given the market opportunities. When you look at that kind of $413 million of brokerage revenues roughly 50% of it is asset based and the the other 50% is transactional based and then it varies by line for example, the mutual fund line.
65% to 70% of that is asset based and so obviously that has grown nicely as assets have grown and the net.
Rail commissions have grown as well, but you can also see that the transactional commissions from equities Etfs and fixed income. So they are they are up 13% sequentially as well so good level of client activity.
Obviously, the asset growth helps there as well there were some lumpy.
<unk> fees and net brokerage revenues in private client group this quarter, but that happens from time to time, but thats certainly was another benefit during the quarter as well.
Yeah, Okay sure it yet really good color. Thanks, Paul.
And then maybe another of kind of modeling question.
Thinking about the comp ratio moving parts I appreciate the <unk>.
<unk> dynamics, particularly.
You have strong quarters in the independent brokerage channel.
And that's sort of put some upward pressure of all else equal, but then you also highlighted some of the seasonal items like payroll taxes. So if we'd look at that 200 basis points sequential increase.
Sure, if you're able to kind of parse through how.
How much is the drag from the seasonal piece or even if you can kind of quantify how much of the payroll taxes.
The affected the comp if I'm looking at like the other segment. For example, there was a $10 million increase I'm sure you saw increases in the other pieces, but I assume at top of the departure of the areas that would be really helpful. If you can give any color there.
Yes, no. It is of Great question, Devin and we try to parse through it ourselves that theres a lot of moving parts of it because there's also elevated payroll taxes with our year end bonuses for those who haven't hit the threshold so in.
In the past, we've said, it's been $10 million or so sequentially in terms of the impact, but I would tell you the comp ratio as I said on last quarter's call.
Really the biggest driver there was just the the increase then compensable revenues in the private client group business that has an average payout between the employee and independent channel as you know of around 75%.
And so we want those revenue to grow as much as possible, obviously and they're going to grow.
All else being equal in the third quarter because fee based revenues grew assets grew 7% during.
During the quarter, so that's going to be a tailwind to compensable revenues in the private client group business. So it.
It really is a mix issue more than anything else is we have really been focused on managing the controllable expense as much as we possibly can.
Yes.
Okay, Great I'll leave it there thank you guys.
Thanks, Kevin.
Our next question is from Craig Siegenthaler Credit Suisse. Please go ahead.
Good morning. This is Gotham said want filling in for Craig can.
Can you please expand on the competition, you're seeing within the employee independent channel and how your transition assistance is positioned following the increase and could you also speak to some of the additional differentiate technology on your platform relative to peers.
Yeah, so on the.
The transition assistance of became clear as the number of firms that all had.
Raised significantly we were not even close to in the market and.
For the for big especially for large teams and so.
Looking we knew we had room from a return standpoint, so on those large teams I would say now when we come in to the finals were not the highest.
But we're in the ballpark and so.
Enough that people are saying, they're willing to make the trade for the dollars.
The culture and the values when the when we had.
ZIP literally were almost twice as much as ours it was.
It was hard for people to turn down the money, even though they might of preferred coming here. So we arent the highest.
We are competitive and we think it's a fair package both on a good return.
For us so we're feeling.
That we're well positioned and appropriately positioned on I think it's going to reflect on the numbers on a lot of very very high quality teams, probably the largest number of large teams that we've had.
That certainly of memory so.
Which means of probably the largest group of large teams we've ever had in the recruiting pipeline.
I'm sorry on your second question was.
If you could just expand on some of the differentiated technology on your platform relative to some of your peers.
Yes, so our focus for a long time had been on the advisers desktop we've had a lot of.
Appears that focused on the end client desktop some because they were going direct to their end clients.
We first wanted to put all of the capabilities into our Advisers' desktop so it's.
<unk> been many years now since we've been completely mobile where advisers could do almost everything from their iphones that they could do from their desktop.
And making sure that our advisors.
All of the latest tools planning tools and completely mobile.
Very very early on now.
Now not only we are enhancing those platforms, but we're bringing that same robust technology to those client connections. We believe our client app is very good.
Sat scores are very high on our internal survey, which we do every year.
But now we're connecting all of that power of those apps to their clients. So the integration is much closer as well as rolling out many things we've been we've been on this journey for 10 years and going.
From being you know of having good technology did two well all of our recruits tell us from other firms as you know from the advisor desktop leading technology. So the that battle never ends people are always investing so you'll see more of it on investor day.
We believe that's been one of the businesses of our strong recruiting and one of the tradeoffs people of made.
So the packages, it's the culture and the tools and the support from our marketing Department.
And all of the other things, we do to help advisors build their businesses.
Ladies and gentlemen, as a reminder, if you'd like to register a question. Please press the one four on your telephone keypad. Our next question is from Steven Schupak Wolfe Research. Please go ahead.
Hey, good morning.
So.
Wanted to start off with the question just on the securities growth of at least your appetite to maybe grow of the securities portfolio a bit more you cited the significant buildup in client cash that had clearly impacted the NIM and was hoping you can just give some context as to what your appetite is to Reaccelerate security.
The growth once again and Paul you said, the reinvestment headwinds versus the back book yields now where are you reinvesting today, just given some of the recent steepening of the curve.
Hey, Steve Great question.
We have a significant appetite to grow the securities portfolio and.
Unfortunately, the supply and the kind of shorter duration paper.
We have been buying trying to buy in that three year type of duration average life range.
And.
The supply given the flat yield curve and where mortgages are being originated today on the longer end of the curve.
Theres just not of lot of paper out there that gives you that three year average life and the.
To the extent that you can find it it's probably paying in the kind of 80 basis point range.
So we have.
Been proactive in investing in growing that part of the portfolio.
The challenge is where most of the supply is you're having to go out four and a half kind of five years.
On the average life.
And you get paid more obviously youre going to get somewhere north of 1%, but you're certainly not getting paid enough to take it.
The level of inflation risk over that five year period for example, and so we're looking at of closely.
Almost a daily we're looking at what what's happening with spreads on the securities portfolio.
We have a lot of significant appetite to grow it over time, but I would tell you now with the fed buying as much as they are buying particularly on the short end Theres just not a lot I mean, there's a whole lot more demand and supply and so we're going to continue to be patient just as we always are.
And we've also I think strategically.
On our C&I portfolio of grown it also looked as alternatives of.
Very high rated company paper with shorter duration or buying loans from the secondary market, where that duration is going to go out just a few years and it's floating and we think better credit risk return. So we've been trying to be flexible on growing it but we've waited a long time on a floating.
Right and viral we don't want to lock in at the bottom. So we're watching duration very very closely.
Thanks for all of that color and just from my follow up on <unk> question, just on the non comps.
Non comps ex provision of 309 million was certainly better than what we were contemplating and it's been running in a pretty tight band of about $305 million to $310 million I know that it certainly been helped by depressed business development expense, but how should we be thinking about the right run rate from here assuming that that's going on.
Remain relatively depressed and I guess as we start to.
Prepare for some normalization and Biz Dev and how should we be thinking about the the run rate in a more normal backdrop as well.
Yes, great question.
Business development expense as I said on the opening remarks, we do expect that to start increasing as travel is starting to pick up a bit maybe not so much in the third quarter, but in the fourth quarter.
Assuming the.
The vaccines continue to prove effective.
We expect the travel and even conferences and recognition trips to pick back up before before the COVID-19 pandemic. We said that we were looking to average somewhere around $325 million a.
Quarter.
And if you add if you kind of quote unquote normalized for business development and I'm not sure of what normal is frankly from when we do get back to normal it would get you right around that range. So we have been really focused on managing all of the controllable aspects of non compensation expenses as you've as you can see but also a lot of its growth driven.
So the sub advisory fees is going to grow with fee based assets over time.
Of the IC insurance premiums that grow with the banks balance sheet growth.
Recruiting as Paul said is picking up substantially.
The account transfer fees there so a lot of the non comp expense growth as we are of growth company are intended to grow over time, but we are focused on.
The growing revenues at a faster rate than expenses over time as well. So we do realize that operating leverage.
And our last question comes from the line of Jim Mitchell with Seaport Global. Please go ahead.
Hey, good morning.
Maybe just a question on on cash balances the the keep growing the saw how active you are.
Clients were.
On the brokerage side, but yet cash balances keep growing are we starting to see.
Some leveling off or maybe even putting that to work.
The recently or is it still sort of expect cash balances to keep growing.
Great question, Jim It seems like we've seen a leveling off to some extent some of the growth frankly in the last few months have been just coming from.
What used to be in purchased money market funds or other short term alternatives that are now because of those alternatives are generating any kind of yield there sitting in the cash sweep program, but we have seen a little bit of of level off.
But those balances as we saw last year in March can change dramatically with market volatility or downward.
And in the markets. So at six 5% of assets I would tell you of clients are.
I think right now we're looking at around 60% exposure to equities, which when you look historically clients are pretty engaged in the equity markets, which.
What you would want given the run that we had in a lot of the value of that financial advisors provide us keeping.
Clients consistent with their financial plans in periods like we had last year. So.
For us we don't tend to see the exposure to the different assets segment assets segments that the.
E brokers might see et cetera are the day traders might see.
We tend to stay a lot more considered our of clients tend to stay a lot more consistent as their advisers really keep them on their financial plans.
Right. Okay. That's helpful on maybe on the Carillon towers I think you guys noted significant inflows, we haven't seen that in the while just any more specifics on what the drivers were do you think that can continue just sort of any color there.
It was around a $1 billion for the quarter. So of net inflows. So that was a pretty I think 8% annualized rate, but unfortunately were not prepared to annualize that.
There are structural headwinds, we had some nice institutional wins during the quarter.
And so.
We have invested in the distribution capability, we reached recently announced the new leader for that business. So.
So the good to bring in a fresh set of buys with the very experienced leader.
But still dealing with the headwinds so we're not prepared to declare victory after one quarter of net inflows, but it was certainly nice to see after several quarters of headwinds.
Right Okay. Thanks.
Gentlemen, those are all the questions I will turn it back over to you for closing remarks.
Well. Thank you all we appreciate your time this morning, I know, it's a busy earnings day, but the.
I think we're well positioned we've had good growth in all of our key indicators really for forward growth. We're really record. So in our backlog is strong and the other businesses. So.
The the markets hold up and stay constructive and we have the economic growth. So thank you all for your time and we will see you again this time next quarter.
And ladies and gentlemen that does conclude our call for today. We thank you all for your participation have a great rest of your day and you may disconnect Your line.
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Paul.
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