雷蒙詹姆斯金融 (RJF) 2022 Q1 法說會逐字稿

Good morning and welcome to the Raymond James Financials First Quarter Fiscal 2022 Earnings Call. This call is being recorded and will be available for replay on the company's Investor Relations website.

Now I'll turn it over to Kristi Waugh, Senior Vice President of Investor Relations at Raymond James Financial.

Good morning everyone and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman and Chief Executive Officer; and Paul Shoukry, Chief Financial Officer.

The presentation being reviewed this morning is available on Raymond James Investor Relations website. Following the prepared remarks the operator will open the line for questions.

Calling your attention to Slide 2. Please note certain statements made during the call may constitute forward-looking statements. These statements include but are not limited to information concerning future strategic objectives, business prospects, financial results anticipating timing and benefits of our acquisitions including our acquisitions of Charles Stanley Group PLC completed on January 21, 2022 and our proposed acquisition of TriState Capital Holdings as well as our level of success in integrating acquired businesses. Anticipated results of litigation and regulatory developments, impacts of the COVID-19 pandemic or general economic conditions.

In addition, words such as may, will, should, could, schedule, plans, intend, anticipate, expects, believes, estimate, potential or continue or negative of such terms or other comparable terminology as well as any other statements that necessarily depends on future events are intend is 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 and Form 8-K, which are available on our Investor Relations website.

During today's call, we will use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our press release and presentation.

With that, I'm happy to turn the call over to Chairman and CEO, Paul Reilly. Paul?

Good morning, and thanks for joining us today. Although our beloved Buccaneers were slow out of the gate last Sunday, against some very strong competition, not so for Raymond James as we are off to a fantastic start. It's hard to believe the pandemic started in the U.S. nearly 2 years ago. When I think back on all that has been accomplished since then, I'm so proud of the way our associates and advisers have continued to serve their clients with great care and compassion, living out our values each and every day.

Beginning on Slide 4, our steadfast commitment to serving clients resulted in fantastic financial results during the quarter, starting off fiscal 2022 with record quarterly revenues and earnings that were propelled by record investment banking revenues and record asset management and related administrative fees in the Private Client Group.

In the fiscal first quarter, the firm reported record net revenues of $2.8 billion and record net income of $446 million or earnings per diluted share of $2.10, a 42% increase over diluted EPS in the fiscal first quarter of 2021.

Excluding $6 million of acquisition-related expenses, quarterly adjusted net income was $451 million or earnings per diluted share of $2.12. Annualized return on equity for the quarter was 21.2% and adjusted annualized return on tangible common equity was 23.7%, a very impressive result, especially in this near 0 rate environment and given our strong capital positions.

Moving to Slide 5. We ended the quarter with record total client assets under administration of $1.26 trillion, up 23% year-over-year and 7% sequentially. We also achieved record PCG assets and fee-based accounts of $678 billion, up 8% sequentially.

Record clients' domestic cash sweep balances of $73.5 billion and record financial assets under management of $203 billion. Through our client-focused culture and leading technology solutions, we maintain our focus on supporting advisers and their clients. As a result, we continue to see strong results in terms of adviser retention as well as record results in recruiting new advisers to the Raymond James platform through our multiple affiliation options.

Over the trailing 12-month period ending in December 31, 2021, we recruited financial advisers with nearly $350 million of trailing 12 production and approximately $56 billion of client assets to our domestic independent contractor and employee channels. Additionally, we generated domestic PCG net new assets of approximately $104 billion over the 4 quarters ending in December 31, 2021, representing more than 11% of domestic PCG assets at the beginning of the period.

First quarter domestic PCG net new asset growth was even stronger, generating a nearly 14% annualized rate, the highest level we have experienced since starting to closely track this metric. These results really highlight our industry-leading organic growth. We ended the quarter with 8,464 financial advisers, a net increase of 231 over the prior year period and a net decrease of 18 compared to the preceding quarter.

As many of you know, in the last calendar quarter we generally see an elevated number of retirements and advisers choosing to leave the business. And it was no different this year with approximately 90 advisers falling into that category. However, when advisers retire, they typically have succession plans and assets are usually retained by the firm so there is minimal impact to the production or asset levels.

Clients' domestic cash sweep balances grew 10% sequentially to a record $73.5 billion. As Paul will detail later in the call, we should have significant upside to our pretax earnings in a rising interest rate environment. Also worth noting on this slide is the impressive loan growth at the Raymond James Bank during the quarter, up 5% sequentially to a record $26 billion. This growth was driven by securities-based loans to PCG clients as well as a strong corporate loan growth.

Moving to the segment results on Slide 6. The Private Client Group generated record quarterly net revenues of $1.84 billion and pretax income of $195 million. Given the timing of certain expenses, we think it is most appropriate to compare the year-over-year results, where the segment's revenues increased 25% and the pretax income increased 39% over the first fiscal quarter of 2021, truly fantastic growth.

The Capital Markets segment generated record quarterly net revenues of $614 million and record pretax income of $201 million, representing an impressive 33% pretax margin to net revenues. These record results were driven by record investment banking revenues, including records for both M&A and equity underwriting. Fixed income also generated solid results for the quarter.

The Asset Management segment generated net revenues of $236 million and pretax income of $107 million. On a year-over-year basis, the revenues grew 21% and pretax income grew 29% over the first fiscal quarter of 2021, primarily driven by higher assets under management. Paul will discuss some of the sequential variances in the segment later on the call.

Raymond James Bank generated quarterly net revenues of $183 million and pretax income of $102 million representing solid sequential and year-over-year growth. Net revenue growth was largely due to higher asset balances as the Bank generated attractive growth in its security space lending portfolio, up an astonishing 44% over December of 2020, in addition to the growth in the residential mortgages and corporate loans.

Pretax income growth was due to the aforementioned revenue growth and a bank loan loss release in the current quarter compared to a provision for credit losses in the comparative periods as macroeconomic conditions continue to improve.

These record results reinforce the value of our diverse and complementary businesses.

Before I hand the call over to Paul, I'll take a moment to highlight the completion of the acquisition of the U.K.-based Charles Stanley Group earlier this month. Charles Stanley adds approximately $36 billion of client assets, bringing Raymond James total client assets to the U.K. to approximately $57 billion. We have long admired this firm, and we are pleased to welcome Charles Stanley to the Raymond James family.

And now for a more detailed review of our first quarter financial results, I'll turn the call over to Paul Shoukry. Paul?

Thanks, Paul. I'll begin with consolidated revenues on Slide 8. Record quarterly net revenues of $2.78 billion grew 25% year-over-year and 3% sequentially. Record Asset Management fees grew 1% over the preceding quarter. I do want to touch on the 1% sequential decline of Asset Management Fees in the Asset Management segment during the quarter. Primarily due to a larger portion of certain client fees allocated to the Private Client Group segment, starting at the beginning of the fiscal year, which effectively resulted in nearly $9 million of managed account fees that shifted from the Asset Management segment to the Private Client Group segment during the quarter. This change is the primary driver of the Asset Management segment's revenues and pretax income declining sequentially.

Private Client Group assets and fee-based accounts were up 8% during the first fiscal quarter, providing a nice tailwind for this line item for the second quarter of fiscal 2022. But there are fewer days in the fiscal second quarter, so I expect somewhere around 5% to 6% sequential growth in this line item in the second quarter.

Consolidated brokerage revenues of $558 million grew 6% over the prior year and 3% sequentially with 12% year-over-year growth in the Private Client Group segment and sequential growth in the Private Client Group segment and the Capital Markets segment.

Account and Service Fees of $177 million increased 22% year-over-year and 4% sequentially, largely due to higher mutual fund and annuity services fees as well as client account fees in the Private Client Group segment.

Paul already discussed our record investment banking results this quarter, so I'll touch on other revenues. Other revenues of $51 million were down 31% compared to the preceding quarter primarily due to lower tax credit funds revenues, which are typically highest in the fiscal fourth quarter. Gains on private equity investments also declined on a year-over-year and sequential basis.

Moving to Slide 9. Client domestic cash sweep balances ended the quarter at a record $73.5 billion, up 10% over the preceding quarter and representing 6.5% of domestic PCG client assets. This growth in client cash balances should bode well for us in a rising interest rate environment, which I will describe in more detail on the next slide.

Turning to Slide 10. Combined net interest income and BDP fees from third-party banks was $205 million, up 3.5% from the preceding quarter. This growth is largely attributable to strong asset growth and a resilient net interest margin at Raymond James Bank, which held flat at 1.92% for the quarter. Average yields on the bank loan portfolio actually increased slightly this quarter, which was fantastic to see. However, an increase in lower-yielding cash balances kept the bank's net interest margin flat. We expect the bank's NIM to remain relatively stable at current interest rates, and we expect a nice tailwind for net interest income going into the next quarter, given the strong growth of loans at Raymond James Bank. But net interest income will also be impacted by fewer days in the fiscal second quarter.

Related to loans, based on your feedback, we have added ending period loan balances by category in our supplemental earnings schedule. We hope you find this update helpful. And as always, thank you for your suggestions to continue enhancing our disclosures.

The average yield of RJBDP balances with third-party banks ticked lower to 28 basis points in the quarter, reflecting the low interest rate environment and a limited demand for cash from third-party banks. I want to provide an update to the interest rate sensitivity from what we provided last May during our Analyst and Investor Day.

As of December 31, Clients' domestic cash sweep balances were $73.5 billion. Given our high concentration of floating rate assets that are funded with these cash balances, we should have significant upside from increases in short-term interest rates. Using these static balances and an instantaneous 100 basis point increase in short-term interest rates, we would expect incremental pretax income of approximately $570 million per year, with approximately 65% of that reflected as net interest income and 35% reflected as account and service fees. This scenario assumes a blended deposit beta of around 15% for the first 100 basis point increase, commensurate with what we experienced in the last rate cycle.

Moving to consolidated expenses on Slide 11. First, our largest expense compensation. The compensation ratio for the quarter of 67.7% was well below our 70% target and close to the compensation ratio we achieved in fiscal 2021, helped by record investment banking revenues. As explained on our prior calls, while our compensation ratio target is 70% or lower in this near 0 short-term interest rate environment, we have demonstrated we can manage below that target, closer to 67% to 68% and when the capital market segment generates at or near these record levels of revenues. And of course, we'll likely have to revisit this target if interest rates start increasing.

Non-compensation expenses of $339 million decreased 6% sequentially, primarily driven by the bank loan loss reserve release this quarter as well as lower professional fees. As you can see in these results, we have been very focused on the disciplined management of all compensation and non-compensation related expenses, while still investing in growth in ensuring very high service levels for advisers and their clients. However, as we discussed last quarter, we expect expenses to increase throughout this fiscal year as we continue investing in people and technology to support our tremendous growth as business development expenses increased with travel and conferences resuming and as net loan growth drives higher associated bank loan loss provisions for credit losses.

For example, you can see our communications and information processing expenses increased 13% year-over-year as we continue to make critical investments in technology. We would expect the year-over-year growth for this line item to be right around this level for the full year in fiscal 2022.

Slide 12 shows the pretax margin trend over the past 5 quarters. While our pretax margin target in this near 0 short-term interest rate environment is around 16%, we generated a pretax margin of 20.1% in the fiscal first quarter or 20.3% on an adjusted basis, boosted by record revenues, particularly for investment banking, still relatively subdued business development expenses and the loan loss release during the quarter.

We will probably have to revisit our pretax margin and compensation ratio targets at our Analyst and Investor Day scheduled in May if we start seeing increases in short-term interest rates. Hopefully, by then, we will also have more clarity on other important variables such as the outlook for investment banking revenues, the level of business development expense as travel and conferences resume more fully and the impact of recently closed and pending acquisitions.

On Slide 13, at the end of the quarter, total assets were approximately $68.5 billion, an 11% sequential increase reflecting solid growth of loans at Raymond James Bank as well as a substantial increase in client cash balances that we're accommodating on the balance sheet. Liquidity and capital remain very strong. RJF corporate cash at the parent ended the quarter at $1.4 billion, increasing 21% during the quarter. The total capital ratio of 26.9% and a Tier 1 leverage ratio of 12.1% are both more than double the regulatory requirements to be well capitalized, providing significant flexibility to continue being opportunistic and grow the business.

Slide 14 provides a summary of our capital actions over the past 5 quarters. In December, the Board of Directors increased the quarterly dividend 31% to $0.34 per share per quarter, which is not reflected on this chart until next quarter. The Board also authorized share repurchases of up to $1 billion, which replaced the previous authorization. As of January 25, 2022, all $1 billion remained available under this authorization.

Due to regulatory restrictions, following our pending acquisition of TriState Capital Holdings, we do not expect to repurchase common shares until after closing, but we believe this authorization signals our intention to repurchase the associated shares soon after closing. In the meantime, we expect our capital and our share count to continue growing between now and closing.

Lastly, on Slide 15, 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. Criticized loans declined and nonperforming assets remained low at just 19 basis points. The bank loan loss reserve release of $11 million was primarily driven by improving macroeconomic assumptions used in the CECL models. The bank loan allowance for credit losses as a percentage of loans held for investment declined from 1.27% in the preceding quarter to 1.18% at quarter end. For corporate portfolios, these allowances are higher at around 2.13%.

Now I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Thank you, Paul. Overall, I'm extremely pleased with our strong start to fiscal 2022. We are well positioned entering the second fiscal quarter with strong capital ratios, records for all our key business metrics, including client assets, client domestic cash sweep balances and strong activity level for the financial adviser recruiting and investment banking. In the Private Client Group segment, results will benefit by starting the fiscal second quarter with an 8% sequential increase of assets in fee-based accounts, which should result in a 5% to 6% increase in asset management fees given 2 fewer days in the second quarter.

Additionally, based on our robust recruiting pipelines, we hope to continue our recruiting trend as prospective advisers are attracted to our client-focused values and leading technology platforms. I can't promise we'll be able to sustain the 11% net new asset growth we achieved over the last 12 months or the phenomenal 14% annualized net new assets we experienced in the fiscal first quarter. But given our strong retention and continued interest in all of our affiliation options, I'm optimistic we will continue delivering leading organic growth numbers.

In the Capital Markets segment, the investment banking pipeline remains very strong for the next quarter or 2 but given all the uncertainties in the market, we really don't have much visibility for the second half of the year at this point. We do know we have a much stronger team than we had 5 years ago, and we have gained market share. So our productive capacity has certainly grown. But what I can't tell you is what will happen to the markets and activity levels across the industry 6 to 12 months from now. We also expect solid fixed income brokerage results over the next quarter or two, driven by demand from depository client segment, which is still flushed with cash and searching for yield optimization opportunities that we do a fantastic job in helping our clients.

In the Asset Management segment, if equity markets remain resilient, we expect results will be positively impacted by the higher financial assets under management, which continues to be driven by the strong growth of assets and fee-based accounts in the Private Client Group segment. And Raymond James Bank should continue to grow as we'll have ample funding and capital to grow the balance sheet. We will continue to focus on lending to the Private Client Group segment through securities-based loans and mortgages, and we will remain selective and deliberate in growing our corporate loan portfolio. Also, as previously mentioned, we should experience significant tailwinds in a rising interest rate environment.

Finally, I want to thank all our advisers and our associates for their perseverance and dedication to providing excellent service to their clients. These results are a testament to their hard work and everyone in the Raymond James family.

With that, operator, will you please open up the line for questions.

(Operator Instructions) And the first question comes from the line of Manan Gosalia with Morgan Stanley.

I was wondering if you can unpack your comments on the net interest income and the sensitivity to higher rates. I know you said a $570 million addition to pretax income, 65% NII, 35% account and service fees. But does that assume a flat balance sheet and CIP balances staying flat and also third-party deposits staying flat? Or so is there basically more upside to these numbers given the loan growth that you're generating and also the upcoming acquisition of TriState?

No, you're absolutely right. That is a static analysis based on current balances. And so we do have upside going forward as we continue growing the balance sheet at Raymond James Bank and also as we hopefully close the TriState Capital acquisition. So we have some good tailwinds with -- in a rising rate environment.

Got it. So then maybe I can push you a little bit on your pretax margin comments. I know you're not giving any targets right now, but maybe you can help us think through it. So if I look at your quarter right now, it's -- you're running at a 20% pretax margin. If I normalize for provisions and business development costs, maybe you get to 19%. And then if capital markets revenue is elevated, maybe that gets you down to 18% when those normalize? And your comments of $570 million, if I'm doing the math right, suggest there's 3 or 4 percentage points upside to the margin. So should we expect that as we get through this rate hike cycle, your margin can go up to 21%, 22% in the cycle?

Yes. I mean, we're not ready to come out with a new target at this juncture but because as you point out, there are a lot of moving parts, but you are correct that the $570 million on today's revenues would equate to somewhere around 300 to 400 basis points of benefit. But I think the -- some of the other factors that we have to consider is sort of normalized business development, what capital markets revenues look like going forward.

So there are some other puts and takes and variables to consider as we get more clarity. But with that being said, if you look at where we were in the last rate cycle, we had higher pretax margin target before rates were cut to 0. And so we obviously have upside and tailwinds from higher rates.

And our next question comes from the line of Steven Chubak with Wolfe Research.

Paul and Paul. So I wanted to start off with just a question on TriState Capital. At the time of the merger, you had guided, Paul to about 8% accretion from the deal. And if memory serves, that only assumed 2 rate hikes through 2024. That assumption certainly feels conservative given the forward curve reflecting close to 8 hikes exiting 2023. And I was hoping you could just provide some updated expectations for TSC accretion or the incremental sensitivity if we do get additional rate hikes?

And then just speak to your philosophy around how much of that NII windfall from higher rates, would you expect to fall to the bottom line versus get reinvested in the business?

Yes. I mean, as far as the synergy guidance that we provided upon announcement that if my memory serves me correctly, I think it was 8 percentage -- 8% accretion not really factoring in any rate hikes at all and then maybe an additional 300 to 400 basis points with the rate projections that you just mentioned. So to your point, rate increases are -- look like they're coming faster than we anticipated at that point in time. So to the extent they have a floating -- highly floating rate balance sheet, a lot in securities-based loans, 65% of their loans are in securities-based loans that are floating. And so to your point, there is more upside if rates increase faster than we originally anticipated.

Okay. That's great color, Paul. Just for my follow-up, and maybe a bit of a pointed question on organic growth. I mean your headline organic growth is the highest of any of the public companies that have reported so far. It's coming in at an impressive 11% trailing 12 months, 14% annualized in the quarter. At the same time, the reported AUM, when we go through the benchmarking exercise, the growth of 7% quarter-on-quarter is virtually identical to peers that are growing at half your stated organic growth rate. And it just also appears a little bit light relative to the gains that we saw in the S&P of about 10% in the quarter. And I was hoping you could just speak to the stronger organic growth, why it's not necessarily translating into a higher level of AUM growth, granted, 1 quarter does not a trend make. And any differences you're just aware of in terms of how you run the organic growth calculation relative to what some of your peers might be doing?

Yes. As far as we can tell, Steve, we are calculating, most of the peers are calculating the organic growth calculation similarly. We track that pretty closely. So we have been generating, as you said, leading organic growth, if you look at our net new asset metrics and if you look at our asset growth over time, which we've been saying for a very long time, even before we started producing net new assets, our asset growth is the best in the industry as well. And as you point out, those 2 are correlated.

So from quarter-to-quarter, sometimes it's hard to tell. But if you look at it over a 1-, 3-, 5-year period or any period of time, our asset growth on an organic basis has been leading in the industry. Sometimes you have to factor in acquisitions or big program hires or something like this. But certainly, the net new asset and the asset growth has been amongst the best and in certain quarters the best, certain years the best in the industry.

And our next question comes from the line of Devin Ryan with JMP Securities.

I want to come back on the interest rate outlook and some of the moving parts here. If we look at the cash balances, you saw a really nice step-up in the quarter and a big spike in December as well. I'm just curious, was that just kind of year-end selling? Or is it because of the strong M&A or some seasonality, I know there can sometimes be some seasonality in there. So really just trying to understand like how sticky you think that kind of step function higher was in the quarter?

And then also in terms of deposit betas, you -- obviously, we have some good recent history of how things trended and it was quite a bit better than I think expectations heading into the prior tightening cycle. How are you guys thinking about maybe competitive threats or just competitive dynamics with fintech being a lot larger today than it was 4 or 5 years ago, and many of those firms are kind of signaling that they're going to pass the majority of the benefit through 2 customers. Does that play in or do you not look at them necessarily as direct competitors when you're thinking about cash and deposit rates?

Good questions, Devin. I think there's a few things. First, you have to remember, client cash is only 6.5% of assets. So it's not a high percentage. Typically, for most periods, we were closer to 10%. So clients are still pretty invested. So part of that with the market growth, obviously, the equities grow versus the cash. But -- so the client cash has been very sticky in terms of the portfolio, certainly not overweighted but also because of our recruiting, we bring a lot of cash in. When people move over their clients are allocated somewhere 5% to 10% cash. So that continues to grow. And our recruiting is just doing great. We're still full guns on it. So I think that's -- we're pretty comfortable with that cash. I think it's almost the opposite, if there's a correction during this interest rate period, we see a lot more cash generated, but we haven't seen any unusual movements. It's -- as a percent of assets, still pretty low, probably driven more with us by just our success in recruiting.

As far as your deposit beta question, there are more fintechs now than there were 3 years ago, but there were a lot of high-yield accounts available online 3 years ago as well. So the maybe offsetting factor is that unlike the last rate cycle, the banking system is extremely flush with cash now, maybe more so -- well, definitely more so than it was in the last rate cycle. So there are some puts and takes. We are assuming in our $570 million pretax upside, a 15% deposit beta, which is commensurate with what we saw in the last rate cycle. We think that's conservative, but it could be lower or higher than that for the first 100 basis points depending on those factors.

We find clients to typically during these increases if we go through history that it's got to be over 1% face rate before they even start looking at it. So we have a long way to go from 1 basis point certainly in the early going and fintechs can offer one, but there's not really many places to park them very liquidly at that rate. So I don't think -- I think the first 100 basis points is a pretty safe assumption, probably conservative given the history on the first 100 basis points. And after that as rates go higher, then there is -- the game is on. But I think the early raises is a pretty safe assumption.

Yes. Okay. Terrific. That all makes sense. So just a follow-up here with Charles Stanley closed. Maybe if you can just talk a little bit more about plans to accelerate growth and investments in kind of the U.K. wealth management platform. I know it's still very small, but how we should just think about kind of the trajectory there and maybe your enthusiasm for the potential for additional growth outside the U.S.?

Yes. So I think that it's just closed a few days now. So we are just really starting to talk about integration, and that takes some time. But it's a great franchise. If it was constrained, it was constrained by capital a little bit, family controlled. And for a good reason, they didn't want to dilute their position where they were. So I think those are off because we have plenty of capital to fuel it. And generally, when people join you, the first thing we always focus on is retention. And we've had a pretty good track record. I think it will be very positive there, too. And we need to get everybody settled down in the seat positive of the story. I will tell you that of all the ones we've ever done, and we have TriState still pending, but -- who has a great cultural fit. This is the -- we're hearing very little noise from the advisers. They think it makes sense. And they think it's good for them, we will invest.

We do have some technology they can use. There'll be other things. But it's going to take a good year or so to really get through that integration. But we would expect where we have one of the leading growth firms in the U.K. with RJIS, our independent, we think that we can really step up the growth as is Charles Stanley management with the capital and the ability to recruit in the story. So we're confident, but I wouldn't expect anything significant this year.

Okay. Great. If I can just squeeze one more in here, just on the administrative and incentive comp kind of trajectory. How should we think about that relative to revenue growth across the business, meaning, is there some leverage there or is revenues -- potentially continue to accelerate that, that will track ahead? Just trying to think about some of the puts and takes there.

Yes. No. Devin, as you know, we are always focused on trying to realize operating leverage in the business and growing revenues faster than expenses. And there's always noise quarter-to-quarter, especially when you're comparing fiscal year-end quarter with the beginning of a fiscal year on a linked basis. But if you step back in fiscal 2021 in the PCG business, we grew the administrative and incentive comp by 5% with revenues in that business growing 19%. So that was really significant operating leverage, and that's kind of continuing in this quarter with 25% year-over-year growth in revenues versus 14% year-over-year growth in administrative compensation expense. So to your point, we have always been focused, and we're still focused on realizing that operating leverage as revenue grows.

And our next question comes from the line of Jim Mitchell with Seaport Research.

Maybe just a follow up on the compensation question for the -- if I look at FA payouts as a percent of compensable revenue, it seems like it went up year-over-year. I know that can move around. But just is there any kind of pressure on compensation, given just competition or salary wage inflation? Or is that just bouncing around, but it seems like it went up about 90 basis points year-over-year.

Yes. The financial adviser payouts are on the grid. And so -- in the employee channel and both in the independent contractor channel. So as you noted, that does tend to bounce around 25, 50 basis points from any quarter when you're comparing it on a quarter-to-quarter basis. There are benefits that are accrued in there and other things. It's not just direct payout that you would see on the grid. So it can bounce around from quarter-to-quarter, but we're not expecting a meaningful step up based on the mix of advisers we have in our independent and employee channel.

And we have not changed really. We haven't raised the payouts and there are higher payouts and higher production for some. So you get a little bit of that impact. But it's really, I think, just more of a bouncing around effect than it is any change here.

Okay. So no change in the grid. Okay. That's helpful. And just maybe on the TSC deal, as you get closer to it, do you feel like there's an opportunity to really invest to expand that more rapidly? Do -- should we expect some investment spending around that business or is that really just a stand-alone, we think they can grow with just a little more incremental capital, don't need a ton of investment spend?

Yes. I think they're -- if you look at their own releases, we don't -- we're still in the middle of the shareholder. They had a very, very good -- they have very good growth. And yes, I think what you'll see is us just giving them a little more capital maybe to accelerate technology and to help serve their clients and we may get some synergies over time on compliance and those kind of functions. But outside of that, they'll be operating alone. We'll have a little more capital and their growth rates are very good. We're kind of very pleased historically and their current release was very, very good. So we certainly don't need them growing faster than they are. I mean they're growing well, and then I think it's going to be more of our balance sheet deployment, the use of our cash, and they're going to do their thing and serve their clients, so.

And our next question comes from the line of Bill Katz with Citigroup.

So just picking up on TSC, certainly appreciate the upside with higher rates, but -- and they did have a strong fourth quarter from what we could tell as well. How does the fourth quarter trend relative to your baseline accretion of 8% as you sort of think about when this closes? Any update on when do you think the deal itself may close?

Yes. We kind of gave you some assumptions when we announced the transaction. We use conservative assumptions when we do any kind of investment or make any kind of investment. And certainly, the level of growth that they achieved in the fourth quarter. Again, they're a separate public companies, so I don't want to speak about their results. But to your point, I don't think you would call those conservative. I mean they've been generating really strong growth. And so I'll just leave it at that.

In terms of timing, it's all contingent on regulatory approvals. And so we hope to get it done in calendar 2022. But again, that's dependent on the regulatory approvals. And right now...

And the shareholder vote at the end of February, so.

Okay. Great. Just as a follow-up, coming back to business development for a moment. Any update on how you're thinking about sort of the glide path in fiscal '22 and sort of that endpoint number of $200 million is sort of exit this year relative to what you sort of guided to last quarter?

Yes. I wouldn't say the $200 million was a guide. It was just a reference point for where we were pre-COVID. That would have been $50 million a quarter, we are right around $35 million this quarter, and we actually were able to have an adviser conference this quarter for the employee channel. So I would be very surprised most of the things here in the second quarter, we've postponed and pushed back, unfortunately due to the COVID spread, I would be very surprised if we are able to even exit the year at the $50 million run rate per quarter, unfortunately. And I say unfortunately because we really do want to get back to traveling again, to having the adviser recognition trips and the conferences. So I think that's kind of the glide path. It's probably longer -- a flatter glide path than we thought this time last quarter, unfortunately.

And our next question comes from the line of Alex Blostein with Goldman Sachs.

Just maybe picking up on that last point, you guys are generating fantastic organic growth for this quarter over the last 12 months. And that's really without spending a lot on things like conferences and your promotional expense to your point, Paul, it has been running well below where you guys were back in 2019. So lessons learned from the pandemic being you guys can still achieve significant growth without spending as much. Why is that not the right passage from sort of here?

There's certainly lessons learned. I mean we were going to a flexible work environment before the pandemic. So certain lessons were kind of reinforced, we could do it, but we think it's important to get people back in the office, and we're making great progress. But obviously, with the holidays and since we've been conservative as the cases have been up. But the big part of a lot of those conferences, people think they're just kind of fun trips. They're very educational. The advisers get a lot of training and develop a lot of it on courses that they do. And it's important culturally. So I think advisers understand why we've had to cancel or cut back on it during the pandemic, but they wouldn't understand with things going back to normal that they would just disappear.

So we certainly have learned. You can do a lot of things with less travel. There's a lot of things that require that face-to-face input. And frankly, we all know it from our own firms. There's a lot of the -- people are tired of not being together and not seeing each other and interacting even though they like the flexibility. So we've got to find that balance. But the conferences are important culturally. They're important to get people together, it keeps their bond with the firm and for training development. I mean, there's a lot of facets, and they do cost money. But just as the Investor Conferences of many people in this firm will start back up post-COVID, some have been able to sneak some in, but you do them for the same reason and so will we.

Got it. All right. Makes sense. My second one is really just a follow-up. I'm sorry if I missed it, I think Steve asked the question around just the kind of assumptions around reinvestment spend on the back of the higher rates and the tailwinds you guys are going to get from obviously materially higher revenues on the back of higher interest rates. So should we think about an acceleration in investment spend and things outside of comp as rates go higher?

I don't -- we don't have anything planned. I mean we're going to -- we'll have the same pressures on technology and what are we going to spend, we're going to have -- as we grow, support will have to grow, we're spending a lot of time automating the back office. So there are things that cost money. There's been comp pressure in the industry. We haven't -- I don't think felt it as -- we felt it, but it hasn't been as grave as a lot of other people have said it's been or people leaving. Our turnover isn't up very much. And again, I think that's culturally and we paid people well off a good year. So I don't see any big initiatives. I think 3 or 4 years ago, we had a huge initiative to kind of redo the whole compliance infrastructure and back office and systems and gear up, but you're seeing the leverage of that now where those aren't really going up commensurate with revenue.

So we don't have any major plans. I don't know what would change over the next 3 or 4 years. I'm sure there'll be investment initiatives, but nothing like we had 3 or 4 years ago.

And our next question comes from the line of Kyle Voigt with KBW.

Maybe just one on the AFS book, the growth there slowed a bit in the quarter. Just wondering if you could comment on your appetite to reaccelerate the growth there given the recent move we've seen really in the belly of the curve.

Yes, we're keeping an eye on it. We do plan on growing it modestly throughout the year. But we're trying to position ourselves for the increase in short-term rates. So taking 4 to 5 years of duration because there's not a lot of 3- to 4-year paper out there that's available, the Fed is still buying but to take the 4 to 5 years of duration for 1.2%, 1.3% is not overly compelling in a rising rate environment. So we're trying to preserve as much flexibility as possible. We do have a preference for being more exposed to the short end of the curve, the really short end of the curve. And so I think we're being kind of deliberate and patient as we always are.

And I think also, we were -- we debated when we knew rates were falling, whether it was to lock in, we felt we would just be better off long term with the floating balance sheet. So now that we see all predictions are rates will rise. You never know, it's kind of the wrong time to abandon that if you believe that rates are really going up and you're going to get a bunch of raises in the next year as people are predicting now.

So we're not -- we are investing in growing the securities book, but we're not going to race to do it because we think within a year, we'll look back and say, gosh, we probably shouldn't have done that, so.

Understood. And if I can just ask a follow-up earlier to a question that was asked on the administrative compensation in the PCG segment. You mentioned that it only grew 5% last year despite 19% growth in the segment revenue. And now we've seen that accelerate to 14% year-over-year growth in the first quarter here. I'm just trying to get a sense if this marks an acceleration in this line for the full fiscal year, if there's anything to really note in that line in terms of seasonality in the fiscal first quarter?

And then if you could just -- maybe just give an update in terms of the medium-term outlook for that administrative compensation line for PCG. Is it right to think about that line as being kind of a mid-single-digit growth line over time on a normalized basis? If you could just comment there, that would be great.

There's a lot of factors. There are a lot of items that go into that line. I mean, there's, of course, seasonality as there is with most compensation-related line items. But one of the line -- one of the factors that goes into it is just accruals for benefits, which are based on profitability growth. So you're going to see growth in that line with the growth in profitability. And as Paul says, we have been very generous in terms of compensation to our associates. We have a long track record of sharing the success of the firms with our associates. And with our fiscal year-end being in September, this line now reflects the salary and bonus increases that we gave at the end of our fiscal year end. You'll start seeing that probably for most of our peers starting next quarter.

So I think this is -- there's a lot of factors that go into it. But we're -- as I said earlier, we're really focused on realizing the operating leverage going forward.

And the last question comes from the line of Chris Allen with Compass Point.

Most of my questions have been answered already. I guess just a quick one. Just on the client cash balances obviously helped by net new asset growth and looks reasonable as a percentage of assets. I'm just wondering if you see any -- typically seasonality there towards the end of the calendar year? And any commentary just on any shift in the risk appetite from a client perspective to start this year, just given where the markets are.

As Paul said, really, the fluctuation in cash balances, the extreme fluctuations really are more dependent on market movements. We have seen some end of calendar year buildup of cash over history -- over time. And then, of course, as we get to the tax season in April, some of that cash gets used to pay taxes. But I would say that the growth that we saw this quarter was really due to the fantastic organic growth that Paul was describing earlier.

Yes. I think if you look at client sentiment, I think the most recent, it's been pretty flat with last quarter that about half are confident in the stock market. Good news is 95% are still confident in their advisers. So I think in an uncertain times, people aren't going to rush to invest cash versus 3 or 4 years ago when you're in the middle of a run, it looks like it's continuing to run. People are more likely to invest. So I don't see any pressure for that number to really go down. I don't see a rush for them to put money into the equity market. And again, as a percent of assets, it's lower than historical. So I think we're doing well there. So I wouldn't expect any fluctuations you never know, right? So the market is dynamic, but I think we're in good shape.

All right. So I'd like to thank everybody for joining. I believe that not only did we have a fantastic quarter, all the indications, recruiting is strong. We have upside on interest rates, our pipelines and investment banking are very strong. It's hard to give -- I've been around too long where I see M&A come and go depending on market conditions. If you had a really sharp drop in rate or equity markets, that certainly can impact it. But in a normal state, that's in great shape. As long as we continue to first retain our advisers and have them do the great job they continue to have done this last year and last quarter and our recruiting momentum is extremely strong. It feels good to start the calendar year where we are. Hopefully, COVID gets through the system and we can have more of a normal life and -- but it was a good quarter, and I think we're well positioned going forward. So I appreciate you joining us this morning. Thank you.

Thank you. That does conclude the call for today. We thank you for your participation. Have a great day.