雷蒙詹姆斯金融 (RJF) 2021 Q4 法說會逐字稿

Good morning, and welcome to Raymond James Financial's Fourth 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 will turn it over to Kristie Waugh, 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 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 timing and benefits of our acquisitions including our proposed acquisitions of Charles Stanley PLC and TriState Capital Holdings and 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, scheduled, plans, intends, anticipates, expects, believes, estimates, potential or continue or negatives of such terms or other comparable terminology as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, 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. 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 it over to Chairman and CEO, Paul Reilly. Paul?

Good morning, and thank you for joining us today. I want to first by apologizing I'll sound like a broken record using the word record over and over again. It really was an outstanding year and quarter. I wish management could take credit, but it is really the work of our advisers and associates that delivered these results.

Their dedication and perseverance during the fiscal year was amazing. We've proven once again that focusing on our time-tested client-first strategy and providing outstanding service to our advisers and their clients will guide us through uncertain economic and global conditions, in this case, in record-setting fashion.

The record results we generated would not have been possible without everyone's contribution. So thanks, again.

Starting on Slide 4 with our quarterly results. The fiscal fourth quarter capped off what was a record fiscal year on a number of fronts.

The firm reported record quarterly net revenues of $2.7 billion and record quarterly net income of $429 million or earnings per diluted share of $2.02, which reflects the impact of the 3 for 2 stock split in September. Excluding the $10 million of acquisition-related expenses, quarterly adjusted net income was $437 million and adjusted earnings per diluted share equaled $2.06.

The increase in quarterly net revenues was largely driven by record investment banking revenues and record assets under management and related administrative fees, primarily due to higher private client group assets and fee-based accounts.

Annualized return on equity for the quarter was 21.3% and adjusted annualized return on tangible common equity was 24.1%, a very impressive result, especially in the near 0-rate environment and given our strong capital position.

Moving to Slide 5. We ended the quarter with record total client assets under administration of $1.18 trillion, up 27% on a year-over-year basis and 1% sequentially. We also achieved record PCG assets and fee-based accounts of $627 billion and record financial assets under management of $192 billion.

We continue to focus on supporting advisers and their clients through leading technology solutions and a client-focused culture. As a result, we had a fantastic year in terms of adviser retention as well as record results in recruiting new advisers to the Raymond James platform through our multiple affiliation options.

We ended the quarter with records of 8,482 financial advisers, net increases of 243 over the prior period and 69% over the preceding quarter, representing a new record during the fiscal year, we recruited financial advisers with approximately $330 million of trailing 12-month production and approximately $54 billion of client assets to our domestic independent contractor and employee channels.

Also in the Private Client Group, advisers generated domestic net new assets of approximately $83 billion in fiscal 2021, representing 10% of domestic PCG assets at the beginning of the fiscal year, a very strong result, reflecting our excellent retention and record recruiting.

Additionally, this year, new account openings and adviser productivity were very strong, contributing to the excellent net new asset results. Also worth noting on the slide is the impressive loan growth at Raymond James Bank during the quarter, up 5% sequentially to a record $25 billion. This growth was driven by securities-based loans to the Private Client Group clients as well as a strong corporate loan growth.

Moving to segment results on Slide 6. The Private Client Group generated record quarterly net revenues of $1.8 billion and pretax income of $222 million, a 12.3% pretax margin, reflecting significant operating leverage over the past year.

The Capital Markets segment generated record quarterly net revenues of $554 million and pretax income of $183 million, representing an extremely impressive 33% pretax margin to net revenues.

These record results were driven by record investment banking revenues, strong tax credit fund revenues and solid fixed income brokerage revenues. The Asset Management segment generated record net revenues of $238 million and record pretax income of $114 million, up 29% and 46% over the year ago period, respectively.

These results were primarily due to growth in financial assets under management, driven by net inflows to fee-based accounts in the Private Client Group, partially offset by market depreciation and net outflows for the Carillon Tower Advisers during the quarter.

Raymond James Bank generated quarterly net revenues of $176 million and pretax income of $81 million. Quarterly net revenues increased 9% over the year ago quarter, as higher levels of earning assets offset year-over-year compression in the bank's net interest margin.

Sequentially, net revenues grew 4% due to higher asset balances during the quarter. The pretax income growth year-over-year was due to the aforementioned revenue growth and lower bank loan provision for credit losses in the current quarter.

Compared to the preceding quarter, the bank's pretax income declined largely due to a reserve release in the preceding quarter compared to a loan loss provision, primarily associated with the strong loan growth during the fiscal fourth quarter.

Looking at the fiscal year 2021 results on Slide 7. We generated record net revenues of $9.76 billion, up 22% over fiscal year 2020, and record net income of $1.4 billion, up 73% over fiscal 2020.

Excluding losses on the extinguishment of debt and acquisition-related expenses during the year, adjusted net income was $1.49 billion, up 74% over adjusted net income in fiscal 2020.

Moving to the fiscal year results on Slide 8. The Private Client Group, Capital Markets and Asset Management segments generated record net revenues and record pretax income and all of our segments realized substantial operating leverage during the fiscal year.

Once again, these results reinforce the value of our diverse and complementary businesses. And now for a more detailed review of the fourth quarter financial results, I'm going to turn the call over to Paul Shoukry. Paul?

Thank you, Paul. I'll begin with consolidated revenues on Slide 10. Record quarterly net revenues of $2.7 billion grew 30% year-over-year and 9% sequentially. Record Asset Management fees grew 8% sequentially, commensurate with the sequential increase in the beginning of the quarter balance of fee-based assets.

Private Client Group assets and fee-based accounts were up 2% during the fiscal fourth quarter, providing a modest tailwind for this line item for the first quarter of fiscal 2022.

Consolidated brokerage revenues of $541 million grew 9% over the prior year, but declined 2% from the preceding quarter. Institutional fixed income brokerage revenues remain solid, albeit down from the strong levels of the comparison periods.

Brokerage revenues in PCG were up 17% on a year-over-year basis, but flat sequentially due to lower trading volumes, which offset the benefit from higher asset balances and associated trailing commissions.

For the fiscal year, brokerage revenues were up 13% to a record $2.2 billion, reflecting records for both PCG and fixed income which had a fantastic year that was a testament to their leading position in the depository segment.

Account and service fees of $170 million increased 21% year-over-year and 6% sequentially, largely due to higher average mutual fund assets driving higher associated service fees.

Paul already discussed our record investment banking results this quarter. So let me touch on other revenues. Other revenues of $74 million were up 35% sequentially, primarily due to higher tax credit funds revenues. We also had $18 million of private equity valuation gains during the quarter, of which approximately $5 million were attributable to noncontrolling interest reflected in other expenses.

Moving to Slide 11. Clients' domestic cash sweep balances, which are the primary source of funding for our interest-earning assets and the balances with third-party banks that generate RJBDP fees, ended the quarter at a record $66.7 billion, up 6% over the preceding quarter and representing 6.3% of domestic PCG client assets.

As we continue to experience growing cash balances and less demand from third-party banks during fiscal 2021, $10.8 billion of client cash is being held in the client interest program at the broker-dealer. Over time, that cash could be redeployed to our bank or third-party banks as capacity becomes available, which would hopefully earn a higher spread than we currently earn on short-term treasuries.

On Slide 12, it was great to see an 8% sequential increase in the combined net interest income and BDP fees from third-party banks to $198 million. This growth was largely attributable to strong asset growth and a resilient net interest margin at Raymond James Bank, which remained right at 1.92% for the quarter.

We expect the bank's NIM to settle right around 1.9% over the next couple of quarters. The average yield on RJBDP balances with third-party banks remained flat at 29 basis points in the quarter. If banks demand for deposits doesn't improve from current levels, we believe there will be downward pressure on this yield in fiscal 2022, especially in the back half of the fiscal year, which is why we have been so focused on generating on-balance sheet growth in assets that could deliver good risk-adjusted returns.

Moving to consolidated expenses on Slide 13. First, our largest expense compensation. The compensation ratio decreased sequentially from 67.2% to 65.8%, largely due to record revenues in the Capital Markets segment, which had a very low 52% compensation ratio during the quarter.

Given our current revenue mix and disciplined management of expenses, we are confident we can maintain a compensation ratio of 70% or lower in this near-0 short-term interest rate environment. And as we experienced in fiscal 2021, we can do meaningfully better than 70% with Capital Markets revenues at or near these record levels, which is our expectation for at least the next quarter or 2.

Noncompensation expenses of $361 million decreased 15% sequentially, primarily driven by the $98 million loss on extinguishment of debt in the fiscal third quarter. Somewhat offsetting this favorable variance, we had a modest provision for credit losses during the quarter compared with a bank loan loss reserve release in the fiscal third quarter.

Overall, our results in fiscal 2021 show we have remained focused on managing controllable expenses while still investing in growth and ensuring high service levels for advisers and their clients.

While we are still finalizing our fiscal 2022 budget, we do expect expenses to increase meaningfully in fiscal 2022 for a variety of reasons. First and foremost, we are going to continue investing in people and technology to support the phenomenal growth of our business over the past year, ensuring we maintain very high service levels and leading technology solutions for advisers and their clients.

We also expect business development expenses to pick up as travel, recognition trips and conferences have already started resuming in the fiscal first quarter, which our advisers and associates are really excited about. Just as a reminder, business development expenses totaled about $200 million in fiscal 2019 before the start of the pandemic.

Additionally, whereas we had a $32 million net benefit for credit losses in fiscal 2021, we would expect bank loan loss provisions for credit losses associated with net loan growth in fiscal 2022.

Slide 14 shows the pretax margin trend over the past 5 quarters. Pretax margin was 20.8% in the fiscal fourth quarter of 2021 and adjusted pretax margin was 21.2%, which was boosted by record revenues and still relatively subdued business development expenses.

At our Analyst and Investor Day in June, we outlined a pretax margin target of 15% to 16% in this near-0 interest rate environment. And right now, we believe the top end of that range is an appropriate target, given the aforementioned expense growth we currently expect in fiscal 2022.

But as we experienced during the fiscal year, there is a meaningful upside to our margins when Capital Markets revenues are as strong as they have been in fiscal 2021.

On Slide 15, at the end of the quarter, total assets were approximately $61.9 billion, an 8% sequential increase, reflecting solid growth of loans at Raymond James Bank as well as a substantial increase in client cash balances being held on the balance sheet.

Liquidity and capital remained very strong. The total capital ratio of 26.2% and a Tier 1 leverage ratio of 12.6% are both over double the regulatory requirements to be well capitalized, giving us significant flexibility to continue being opportunistic and grow the business.

You can see that RJF corporate cash at the parent ended the quarter at $1.15 billion, decreasing 26% during the quarter as we have restricted the cash that we plan on using to close on the Charles Stanley acquisition, which we currently expect to close in the first or second quarter of fiscal 2022 for as soon as we receive the requisite regulatory approvals.

Slide 16 provides a summary of our capital actions over the past 5 quarters. During the fiscal year, we repurchased nearly 1.5 million shares split adjusted for $118 million. As of October 27, $632 million remained under the current share repurchase authorization.

Due to the restrictions following our announced acquisition of TriState Capital Holdings, we do not expect to repurchase common shares until after closing.

Lastly, on Slide 17, 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 remain low at just 20 basis points.

The bank loan loss provision of $5 million was primarily driven by strong loan growth during the quarter. The bank loan allowance for credit losses as a percent of loans held for investment declined from 1.34% in the preceding quarter to 1.27% at quarter end.

For the corporate portfolios, these allowances are higher at around 2.25%. With that, I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Thank you, Paul. Overall, I'm very pleased with our fantastic results for this quarter and the fiscal year, which exceeded many records. As for our outlook, we are well positioned entering fiscal 2022 with strong capital ratios, quarter-end records for all of our key business metrics and strong activity levels for financial adviser recruiting and investment banking.

In the Private Client Group segment, results will benefit modestly by starting the fiscal first quarter with a 2% sequential increase of assets in fee-based accounts. Additionally, based on our robust recruiting pipeline, we hope to continue our current recruiting trend as prospective advisers are attracted to our client-focused values and leading technology platforms.

In the Capital Markets segment, the investment banking pipeline remains very strong, and we expect a solid fixed income brokerage results driven by demand from the depository client segment.

In the Asset Management segment, if equity markets remain resilient, we expect results will be positively impacted by higher financial assets under management. And Raymond James Bank should continue to grow as we have ample funding and capital to grow the balance sheet. We will continue to focus on lending to PCG clients through our securities-based loans and mortgages, and we will continue to be selective and deliberate in growing our corporate loan and agency-backed securities portfolio.

As we look ahead, we remain focused on the long term and our long-term growth. And as we've outlined at our recent Analyst and Investor Day, those key growth initiatives include driving organic growth across our core businesses, continuing to expand our investments in technology and sharpening our focus on strategic M&A.

Our recent announcements to acquire TriState Capital and Charles Stanley Group demonstrate our focus on these initiatives and our commitment to deploy excess capital over time. We believe these acquisitions stay true to our long-standing criteria, which is a good cultural fit, a strategic purpose and makes sense for our shareholders.

Finally, thank you again to our advisers and associates for providing excellent service to their clients during these uncertain times. These results are a testament to the dedication of everyone in the Raymond James family.

With that, I'm going to turn it back over to the operator for questions.

(Operator Instructions) Our first question comes from the line of Devin Ryan of JMP Securities.

So Paul, a lot of records as you mentioned. So clearly, momentum really across the business heading into 2022. I appreciate that the Capital Markets segment can drive some variability in margins and so that's tough to predict. And so that kind of all gets wrapped up in the firm-wide kind of margin commentary.

But if we set that aside and we think about the business, I mean, you're sitting in a much better place heading into 2022 than you were in 2021. And I appreciate that you're also going to be ramping investment into the business as well, which makes sense.

So as we think about the individual segments, whether it's PCG or Asset Management or the bank, can you just talk about where operating leverage may exist and then where it's more challenged just because of the investments? I think that would be helpful to unpack away from some of the maybe the difficulty in predicting Capital Markets? Because it does feel like there should still be some operating leverage in some of those areas, but want to just dig into those a little bit?

Yes. So the business that's probably -- it's our best business, but probably the most margin challenge the Private Client Group because it has a high comp ratio with our independent contractors. And if you're -- to deliver 20% margins in the business when you have a 70% comp ratio or less in these times, right, is -- shows the balance we have on really managing expenses and making sure we invest.

So we had a good margin this year based on the growth. But the real delta in our margins come from the Capital Markets and the banks as they grow, and in Asset Management, they have much higher margins. And to the extent they grow, they drive our comp ratio down and our margins up. So those are the ones that have the delta.

Now the good news is the backlog in Capital Markets is fantastic. It's at historic paces. And the problem with that business, as you know, it can stop on a dime and it could increase, but our visibility is really good into this first quarter, which is very strong.

And the second quarter should be very good, too. After that, you never really know because of the M&A and underwriting part, it depends on the environment. The bank, we expect good growth. You saw very good growth this quarter. Given the markets right now, and I think a reasonable economy going forward, the best we all can tell, we should have growth there. And the Asset Management business continues to grow, especially with our record recruiting, and we're still on that same pace.

If you look at commits and people coming through the office, we are still on a very, very -- we're still at that record pace. We took a snapshot today. So shorter term, we see these kind of very good margins.

But if Capital Markets slow down or the economy turns and M&A deal stop and stuff, that's where we're going to get the margin compression again without interest rates. It wasn't that long ago that half of our pretax income was interest spreads. So we've lost that about overnight on March over 2 Fed meetings, and so it's kind of amazing getting these kind of margins without that help. So that's the other factor in this that we can't predict.

If that comes back, even if the markets cool down, that's certainly going to continue to expand margins. So I wish I could tell you. I can tell you where we sit today, it looks good for the next quarter. But between the economy and Congress and regulators and interest rates, it all could change because those aren't in our control.

Really appreciate that, Paul, and helpful context across the businesses here. Just a quick follow-up on the fixed income brokerage business and maybe the outlook there talking about how well the firm has done here.

I mean revenues were up 80% from 2019. Can you just help us a little bit around both maybe the near-term outlook for that business? And then how to think about it intermediate term? Because it's not such a step function in growth and contribution. Is the size of the platform or the personnel is that much greater? Or has it just been the environment -- I know the environment has been incredibly favorable. But how you guys are thinking about that business? And how maybe far we're above average for the business or whether it's just been kind of some underlying growth there that maybe we haven't fully seen in the platform?

It's a little both. There's some new product focus and products they brought to the market, to their clients. The biggest factor has really been, if you look at the sweet spot in the business, it's the depository franchise and the depository franchise like all banks and us have a ton of cash.

And in order to put that cash to work, they can make loans. And if they can't make loans fast enough, they buy securities, and that's where they really utilize us as -- actually for a lot of banks, almost as a treasury manager, we help them look at where they should invest in the spreads and yields. We provide a lot of tools for them. And that business has been very, very good because of the cash in the system. So as long as that cash in the system stays there, those brokerage revenues should be very, very good. And again, the fixed income business by far had its best record as did the Equity Capital Markets business. So combined, the Capital Markets segment was extremely good.

And again, short term to midterm, everything we see today, we don't see that really slowing down off its pace. It's been a little slower in the last quarter than it had been earlier in the year, but I'd still call the numbers robust.

Next question comes from the line of Manan Gosalia of Morgan Stanley.

Just a follow-up on the pretax margin questions. Maybe a 2-part question on the comp ratio. I know you've guided to a ratio of less than 70%. But at 66% you're coming in well below and I sort of wanted to assess how much of this is the benefit of scale and of the platform rather than the strength of the Capital Markets?

So first, on the PCG side, a lot of the competition decline has to do with the actions that you've taken to hold administer costs down even as the FA headcount and revenues have grown. So how should we think about the administrative and incentive comp in that segment going forward, given the recruiting momentum that you're seeing right now?

And then second, on the investment banking side. If Capital Markets normalized to prepandemic levels, how should we think about the comp ratio there?

Yes. So first thing, I think you got to take the Capital Markets you asked if it was scale for the market? Certainly, it's been a very constructive market. So everyone has done well in Capital Markets. But we've really increased our scale, too, in our equities business.

If you look at the addition of Financo and Cebile during this quarter, which, again, they only have a full year run rate in those numbers. Cebile being the most recent to join the platform and the hiring we've done across the platform. The leadership there has done a really good job of building scale where we were probably underscaled given our size competitors.

So there is a scale play there, but the markets are very, very constructive. So it's a little bit of both in that business. And in the Private Client Group, a lot of business development expenses were low. We didn't have conferences. We didn't have award trips. We didn't have the regional meetings because of the pandemic. And now those are opening up.

We have our first major conference early in November, and we've had smaller conferences and our first award trip, although they're smaller than traditional, they're still there, and there's some makeup award trips where we cancel them and move them into this year. And so we'll have some double trips and in fact in our employee group will have a double conference because we're going to -- we move this year's to the fall and next year's will come in the summer.

So certainly, those expenses are back up. So that's just business as normal. And those are highly valued by advisers. They're a great cultural tool to reinforce the value of Raymond James or great training. These aren't just fun trips to people -- they're fun because we get together, but it's work. I mean there are classes, trainings, teaching. So they're very important to the long-term business, both teaching practice management and sharing best practices as well as explaining new regulations or new technology tools they need to learn.

So they're very, very valuable. So it's work. I mean fund work, but it's works. So they're essential and those will return because they're important to the business model.

Yes, maybe the only thing I would add to that is that comp ratio does fluctuate from quarter-to-quarter due to a lot of variables. So I kind of prefer to look at it on an annual basis. It was 67.4% for the fiscal year, which was still much better than our 70% target, largely due to the Capital Markets results.

Their comp ratio this year was 56%. It was 60% last year, and last year was a pretty good year once you put it all together just to show you the sensitivity there. And then the Private Client Group, you mentioned some of the initiatives. Frankly, with the non-FA comp up 5% year-over-year against the 19% revenue growth rate, while we always strive to achieve operating leverage, frankly, that gap is not sustainable.

We want to make sure that we're providing adequate support levels for our advisers and their clients. And so we need to make sure we have sufficient capacity and bandwidth in our service and product areas to continue delivering excellent service to our advisers and their clients.

So when you kind of put all those things together, that's why we're sort of reaffirming the 70% target. But with that being said, we can continue to do better than that if Capital Markets results are as strong as they have been, and we expect them to be at least over the next quarter or 2.

I think one thing I haven't heard in the industry calls, but we certainly hear and all the industry trades is there's pressure on comp. I mean where the pay is going up, we can tell by the offers that come in to our people whom we're glad, people value our folks. And about 80% or 90% comp increases, it's taking longer to fill jobs right now in this market and everyone's growing.

So that's not just us, industry-wide, there's comp pressure. And I think that's going to impact the comp and the comp ratio coming this year. I can't tell you what it will be. But we need people to run the business and to support our advisers, so.

Great. I appreciate all the color. And then maybe on the TriState acquisition, can you talk about how much operating leverage is embedded in their model? So they've had a pretty steady comp ratio in their bank for the last 3 to 4 years. But with 94% of the assets skew to short-end rates, it feels like there should be room to drop some of that to the bottom line when rates rise. So I was wondering if you can comment on that and whether that's baked into your accretion estimates that you announced last week?

Yes. They have -- they're a technology-enabled model, and so their technology does give them the ability to, particularly in the private banking side to really scale up that business. But as you point out, I think where the operating leverage is really going to come from is rising short-term rates, and we talked about a relatively conservative net interest margin type estimates that we baked into our projections that they would go up to 2% from where they are now with a 100 basis point increase in rates, and they were actually doing much better than that before the pandemic.

So we try to be conservative there. And that doesn't even give them the benefit of where we expect most of the synergy to come from, which is really replacement of their higher cost deposits, a portion of their higher cost deposits with our lower-cost deposits. They are sitting on our balance sheet now earning very little in short-term treasuries at the broker-dealer per the regulation.

So between short-term rate increases, deposit replacements and the scalability of their technology-enabled model, we think there is a significant upside to the results over time.

And we get a lot of questions just why don't you replace all their deposits with our lower-cost deposits. And it's that they support deposits from their client relationships or asset and liabilities, that's how you build relationships and they're going to run an independent business that way and they have their own clients, they're going to manage their clients.

And so part of that is taking their cash reasonable rates to their clients for the loans they book, too. So we put it -- I think we said $3 billion of replacement, but that leaves the rest of their deposits in place. And as they grow, we expect to use more and more of our deposits at a lower cost. But certainly, they'll tell us when they need them, and we're not going to interfere with their long-term client relationships.

Our next question comes from the line of Jim Mitchell of Seaport Research.

Maybe just on getting back to the noncomp side. I get the fact that business development should be a lot higher as we reopen and recruiting picks up. But you mentioned kind of 2019 levels. Other firms have kind of talked about some percentage lower. There's some permanent changes in terms of business practices. Do you expect to really get back to $200 million in 2019? Or is there some 70% to 80% of those kind of levels?

I think $200 million was sort of just a benchmark. I think it would be a stretch to assume that we would get there that quickly. We are a bigger business now and have more people now than we had in 2019 and more advisers. But to your point, I think just in terms of ramping back up to what the business as usual looks like, while we have started the conferences and recognition trips in the first quarter, travel -- business travel is certainly not what it was prepandemic yet. So I think it would ramp up over time.

Right. Okay. And then maybe just on the balance sheet. Your client cash balance is up $4 billion quarter-over-quarter, that was a pretty big step up. Any thoughts on what drove that increase? Do you expect it to continue into Q4? And does that -- given that balance sheet growth, does it kind of change the way you think about your leverage ratio with the 2 deals coming up?

I think that what drives client cash is, first, recruiting, certainly. As we bring more advisers in, their clients have a portion in cash. And we also see you'd say enough markets, you don't expect to see as high a percentage in cash, but people are using it often in lower fixed income. They're just saying they're worried about rates going up. They view -- many clients view the market as as it's continued to grow. And they're using their cash balances to hedge that a little bit.

So even in up market, you got a pretty good percentage of cash. And again, as assets grow and the recruiting grow -- recruiting is driving it, and I think some investors are taking a little off the table and keeping some in cash as just a balancing or diversification hedge.

On the leverage question, any -- does it change the way you think about it?

Yes. I mean I think bringing the cash on the balance sheet certainly does impact our Tier 1 leverage ratio and in stress periods, we do have sort of different type of metrics that we think about to absorb a surge in cash balances.

But a question we get a lot from investors and analysts is how do we think about that 10% ratio and potentially lowering that ratio over time, that target that we -- which is double the regulatory requirements.

And our response to that is, as long as regulators continue to consider that as a part of your metric in your requirements, then we need to, in our business, have some cushion for a surge of cash balances because while cash balances are high now on an absolute basis, they are only 6.3% of client assets, which historically speaking, is a good 100 basis points lower than average.

Now we can argue whether or not that's because asset values are higher than they were historically speaking. But it is not unfathomable to see a situation where cash balance is surged by another 10% to 20%. And as we saw in March 2020, regulators don't give firms relief for accommodating those client cash balances.

So we still need to make sure we have ample flexibility because those type of environments are when we could be most opportunistic. So we don't want to be constrained by the Tier 1 leverage ratio. And unless regulators change the treatment of that accommodated client cash balance, which they didn't do in 2020, and I'm hopeful they will do, but not optimistic, then we need that cushion.

I also think there could be an opportunity as the Fed cuts back on purchasing securities that those become more attractive. The rates would become and the spread is more attractive. So actually a shortage of those securities in the market believe it or not, because of the Fed. But once they get out, they're hopeful there's more of an opportunity to use those securities on the balance sheet and move cash over to the bank.

Our next question comes from the line of Steven Chubak of Wolfe Research.

Just wanted to ask a follow-up on the discussion relating to noncomps. So your messaging on expenses came through loud and clear. Comp guidance is quite explicit, maybe the noncomp guidance, a little bit more vague or leaving more to interpretation. Recognizing you're still going through the budgeting process, I was hoping you could help us handicap the level of noncomp growth ex provision versus that exit rate of $1.4 billion?

I know, Paul, you had already spoken about business development expense normalizing some. What level of expense inflation should we be underwriting for some of those other categories? And if you could provide some more context there, that would be really helpful.

Yes. I mean, again, there's a lot of growth in there that is driven by business volumes. So the investment sub-advisory fees, for example, they were up almost 30% with fee-based assets this year.

And so -- and that's true with the FDIC insurance expense at the bank, that's going to grow with the bank's growth. And so there's a lot of growth-driven variables there. But even when you look at technology, that's something we're going to continue to invest heavily in to, again, continue providing a competitive platform for our advisers and their clients and to drive efficiency over time and scalability over time.

That was up 9% this year. I could see it being up 10% plus next year just with our technology initiatives that we have on the docket. So I don't want to go line by line, but I think when you look at the various line items, you can see that there's sort of room for growth. I mean just, again, stepping back, the noncomp expenses grew 5% in PCG this year versus a 19% growth rate. So I would say in hindsight, if we had known revenues were going to grow 19%, we probably would have grown those noncomp expenses higher than the 5%.

Now some of that was helped by the business development with everything shut down. But that's not a sustainable relationship over time. We want to make sure that we continue supporting the business and the infrastructure, the support levels of the business over time.

Got it. Okay. And just for my follow-up on organic growth. Paul, you disclosed pretty impressive stat about 10% organic growth, implies some acceleration into fiscal year-end. Just given the strong adviser backlogs across your affiliation options and the additional scale that you've added on the RIA side, just curious if you can provide some context around what you believe is a sustainable organic growth rate as flows begin to settle out around some sort of new normal?

Yes, that's such a hard you're asking to predict the future, both as recruiting, will it continue at this level? We can tell you our visibility is it is and you know, and it's -- I think I remember I forget how many quarters ago, we talked about a slowdown for 1 quarter, but it would pick up, and certainly, it did again.

And so we've been on this kind of ramp up for a couple of years. We still see very strong demand, whether it will be a record this coming year or just very strong, I don't know. But what we can see today is that ramp-up should be very good. And part of that net new asset growth is the markets when people bring accounts over or bring in new clients and the market's up, while the assets are up, so it helps drive that number, too.

So it's very complex. I think all we can tell you right now is that all the factors are in place to show it should be very strong again this year. But to give you a number, I'd have to know what the market appreciation is, what recruiting is, what -- just so many factors that aren't predictable.

I can just tell you that -- the things that drove it last year look still in place coming into this next quarter and how long it continues, I don't know. We all know that this kind of growth in the market isn't forever. There's going to be cycles. There could be shocks to the system. But I think we're well positioned on both sides, both to continue our growth. And if there's a shock to the system, our capital and liquidity will put us in good stead, so.

Okay. If I could just squeeze in one more to [e-tax] modeling question. I was hoping if you can provide some guidance on the tax rate for next year and the trajectory for third-party cash sweep yields? Just recognizing that, as you noted, the banks are flushed with liquidity, don't have quite as much demand for client cash.

The effective tax rate for this fiscal year ended right around just below 22%, which was really benefited by the nontaxable gains in the corporate-owned life insurance portfolio. So we would still guide, all else being equal, to around 24% over the year. Now with that being said, where our stock price is now, we would expect it to be lower than that than the fiscal first quarter with the timing of our stock-based compensation that vest, there would be a tax benefit there in the first quarter based on the current price.

But we think 24% over the year, plus or minus the impact from corporate-owned life insurance. And just as a reminder, the corporate-owned life insurance creates nontaxable gains when the equity markets are up and does the opposite when equity markets are down, and that's sort of the impact to the tax rate in that type of environment.

And what was the second part of your question?

Sorry, just contacts around third-party cash sweep yields, whether you're seeing any return of bank demand, especially in light of Fed tapering and maybe faster are these rate hikes happening sooner than anticipated?

I would say that we are not seeing an improvement in third-party bank demand. And so we would -- I would say, see more pressure on the capacity than the rate because I think we're going to try to manage the rate based on shifting the lack of capacity at this type of rate to either our balance sheet and investing in other assets essentially. And that gets helped with an acquisition like the TriState acquisition, for example, bringing more balances on the balance sheet. The bank growth is anticipated to be strong. Our bank, Raymond James Bank, growth is anticipated to be strong this year as well, and we can also accelerate purchases of agency mortgage-backed securities if that demand from third-party banks doesn't pick up.

And that all is really expected with the contract maturities in the second half of the fiscal year. So as we get closer to that, I think we'll be able to provide you more clarity on what the demand looks -- the demand profile looks like at that time.

And our final question for today comes from the line of Alex Blostein of Goldman Sachs.

This is actually Ryan Bailey on behalf of Alex. The first question I had was really just a clarification on some of the comments on comp pressure. Is that specifically related to nonadviser comp expense? It sounded like that was within PCG. Or is that related to additional pressure on TA packages over the payout grade?

No. I think the TA pressure is -- again, we talked last year that we adjusted TA to be more in market. And I think it shows in our recruiting, we're doing very well. So I don't see any additional TA pressure. But the pressure that we're really seeing is on the admin support across, whether it's operations, tech, risk, branch professionals, there's just -- there's -- the comp is under pressure for the whole industry.

I know that from roundtables, every firm talks about it that they're having longer to recruit. Recruiters are being recruited away. So they're having a harder time hiring. We see packages come in. So we know there is just -- we see comp pressure.

And until I think the market more normalizes and there's more of a return across the sector that could continue for the year. So it's a general comment. We're not -- I'm just saying there's a bias that line could be more impacted than some things, but we'll see throughout this year.

Got it. Okay. And maybe then just another quick question on the bank. I think, Paul, you just mentioned that you're expecting still strong growth in Raymond James Bank. Is there any sort of impacts more tactically just given the acquisitions or sort of business as usual in growing around the bank?

No. We have plenty of funding and capital for them to continue growing at their strong growth rates so long as they can find assets that generate good risk-adjusted returns, which is their mandate to be deliberate and patient but also opportunistic. So there's no shift in sort of their growth trajectory or anticipated growth trajectory due to the acquisition.

Okay. Well, I think that's the last question, operator. So I want to thank everyone for joining the call. Clearly, I don't like using the word record so much, but actually, I do like it. I like having them, I just don't like using the word because we're not bragging firm. But I'm very proud of the results and our people and how they've navigated this very, very tough time.

As of now, with the economy, things look solid, but we know they're going to turn. So we always pride ourselves in being balanced. And I thank you for joining the call,and we'll talk to you again next quarter.