雷蒙詹姆斯金融 (RJF) 2021 Q2 法說會逐字稿

Good morning, and welcome to Raymond James Financial's Second Quarter Fiscal 2021 Earnings Call.

This call is being recorded and will be available for replay on the company's Investor Relations website.

Now I would like to turn over to Kristie Waugh, Vice President of Investor Relations at Raymond James Financial.

Good morning, everyone.

Thank you for joining us.

We appreciate your time and interest in Raymond James Financial.

With us on the call today 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.

Please note, certain statements made during this call may constitute forward-looking statements.

These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated results of litigation and regulatory developments, impact of the COVID-19 pandemic or general economic conditions.

In addition, words such as believes, expects, could and would as well as any other statements that necessarily depends on future events are intended to identify forward-looking statements.

Please note that there could 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 Form 10-Q, which are available on our Investor Relations website.

During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance.

A reconciliation of these non-GAAP measures to most comparable GAAP measures may be found in the schedules accompanying our press release and presentation.

With that, I'll turn it over to Chairman and CEO, Paul Reilly.

Paul?

Thank you, Kristie, and good morning, everyone.

Thank you for joining us today.

It has been a year since the financial markets bottomed, and the Federal Reserve cut short-term interest rates to near 0. That move reduced our pretax run rate by 40%.

The stock market has seen an incredible run since 2020, with the S&P 500 up 54% year-over-year.

While that tailwind has certainly helped fuel our strong results, the records we generated during the quarter and first half of the fiscal year have also been driven by our unwavering commitment to providing excellent service to advisers and their clients during this difficult and unprecedented time.

It's a testament to our advisers who have shepherded their clients through the pandemic and the wherewithal of our associates who have worked so hard to service our advisers and their clients, our strong balance sheet and our ability to grow both in constructive and challenging markets.

Certainly, a year we will never forget on many levels.

Starting on Slide 3. The fiscal second quarter was another record quarter.

The firm reported record net revenues of $2.37 billion, which were up 15% over the prior year's fiscal second quarter and 7% over the preceding quarter.

Record net income of $355 million or $2.51 per diluted share increased 110% over net income in the year ago quarter and 14% over the preceding quarter.

Annualized return on equity for the quarter was 19%, and return on tangible common equity was 21.2%, an extremely impressive result especially in this near 0 rate environment and given our strong capital position.

Record quarterly revenues were primarily driven by higher asset management and related administrative fees, investment banking revenues and record brokerage revenues, which more than offset the negative impact of lower short-term interest rates on both the net interest income and RJBDP fees from third-party banks.

Record quarterly net income was attributable to the record revenues, disciplined management of controllable expenses, the bank loan loss benefit of $32 million reflecting improving economic conditions and subdued business development expenses given the lack of business travel and conferences.

Moving to Slide 4. We ended the quarter with record total client assets under administration of $1.09 trillion, which were up 40% on a year-over-year basis and 6% sequentially.

We also achieved records for PCG assets in fee-based accounts of $568 billion, a 7% sequential improvement, which will benefit the third quarter, and financial assets under management of $178 billion.

We ended the quarter with a record 8,327 financial advisers, a net increase of 179 over the prior year's period and 94 over the preceding quarter.

This represents a solid improvement over the prior quarter and reflects our strong retention and the continued strength of our recruiting pipelines across all of our affiliation options.

Our recruiting momentum in the independent side of the business continues to be strong.

On the employee side, as we mentioned last quarter, in response to the increased recruiting packages by competitors, we enhanced our recruiting packages to be more competitive, while also ensuring attractive returns to our shareholders.

And while recruiting momentum in this business has increased greatly, employee advisory count is down slightly from the prior quarter as improved recruiting was offset by a higher number of retirements where assets are typically retained at the firm as well as the smaller training class.

However, the number of advisers scheduled to join is up significantly, not only in our employee channel, but across all of our affiliation options.

Looking at our recruiting results.

Over the prior 4 quarters, financial advisers with approximately $285 million of trailing 12 months production and nearly $44 billion of assets at their prior firms affiliated with Raymond James domestically.

As for our net organic growth results in the Private Client Group, we generated domestic PCG net new assets of nearly $54 billion over the 4 quarters ending on March 31, 2021, representing more than a 7.5% of domestic PCG assets at the beginning of the period.

And remember, this is net of client fees.

And this trend has accelerated during the first half of the fiscal year closer to a 9% annualized rate.

We are very pleased with our consistent organic growth, especially given disruption associated with the COVID-19 pandemic during the year.

Now let's move to the segment results on Slide 5. The Private Client Group generated record quarterly net revenues of $1.65 billion and pretax income of $192 million, and 11.7% pretax margins, reflecting significant operating leverage despite being in a near 0 rate environment.

Quarterly net revenues grew 12% over the preceding quarter, predominantly driven by higher asset management and related administrative fees, reflecting higher assets in fee-based accounts, which will continue to be a tailwind in the third quarter.

Higher brokerage revenues also contributed to the quarterly revenue growth.

The Capital Markets segment generated quarterly net revenues of $433 million and pretax income of $105 million, driven by record brokerage revenue, record equity underwriting and strong M&A revenues.

Despite not topping the extraordinarily strong and record-breaking first quarter results, the results this quarter were very strong, driven by broad-based strength across global equities and investment banking and fixed income businesses.

The strong results reflect the significant investments we have made to strengthen our platform over the last 10 years, and we are continuing to make investments, including the recent acquisition of the consumer-focused M&A advisory firm, Financo, which closed at the end of the quarter, and we welcome Financo to the Raymond James family.

The Asset Management segment generated record net revenues of $209 million and record pretax income of $87 million.

Record results were primarily due to growth of financial assets under management, driven by equity market appreciation and net inflows into fee-based accounts in the Private Client Group.

Carillon Tower Advisers also generated significant net inflows during the quarter.

Lastly, Raymond James Bank generated quarterly net revenues of $160 million and pretax income of $111 million.

Quarterly net revenues declined 24% compared to a year ago quarter, primarily due to the impact of lower short-term interest rates.

Sequentially, quarterly net revenues declined 4% as higher asset balances were offset by the expected 8 basis points decline in the bank's net interest margin during the quarter, which was also largely attributable to the agency-backed securities portfolio.

Pretax income growth was primarily due to the loan loss reserve release in the quarter compared to the provision for credit losses in both of the comparative periods.

The credit quality of the bank's portfolio remains healthy, as Paul Shoukry will cover in more detail in his remarks.

Looking at the fiscal year-to-date results on Slide 6. We generated record net revenues of $4.59 billion during the first 6 months of the fiscal 2021, up 13% over the same period.

Record earnings per diluted share of $4.74 increased 53% compared to the first 6 months of fiscal 2020, primarily due to the revenue growth, along with the loan loss reserve release compared to the provision for credit losses in the comparative period.

Moving to the fiscal year-to-date results on Slide 7. The Private Client Group, Capital Markets and Asset Management segments generated record net revenues and record pretax income during the first 6 months of the fiscal year.

In fact, Capital Markets segment's pretax income for the first half of the fiscal year of $234 million actually exceeded the annual record of $225 million set in fiscal 2020.

Again, these results reinforce the value of our diverse and complementary businesses.

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

Paul?

Thank you, Paul.

I'll begin with consolidated revenues on Slide 9. Record quarterly net revenues of $2.37 billion grew 15% year-over-year and 7% sequentially.

As expected, Asset Management fees grew 10% sequentially, a bit lower than the 12% growth of fee-based assets during the preceding quarter, primarily due to 2 fewer billable days during the quarter.

Private Client Group assets and fee-based accounts were up 7% during the fiscal second quarter, providing a tailwind for this line item for the third quarter of fiscal 2021.

Consolidated brokerage revenues of $591 million grew 15% over the prior year and represents a record, driven by continued strength in institutional fixed income as well as strong brokerage revenues in the Private Client Group, reflecting healthy client activity levels and higher asset values.

Account and service fees of $159 million declined 8% year-over-year, almost entirely due to the decrease in RJBDP fees from third-party banks given lower short-term interest rates, which I will discuss along with net interest income in more detail on the next 2 slides.

The 10% sequential increase was largely attributable to higher asset balances and revenues from our recent acquisition of NWPS, most of which are reflected in the client account and other fees line in the PCG segment.

Consolidated investment banking revenues of $242 million grew 64% year-over-year, driven by strong M&A advisory revenues and record equity underwriting revenues.

For the first half of the year, investment banking revenues were 74% higher than the first half of fiscal 2020.

Our investment banking pipelines remain strong, so we would be really pleased to finish the fiscal year averaging $200 million or better of investment banking revenues per quarter if market conditions remain conducive.

Other revenues of $44 million are down 21% sequentially, primarily due to lower private equity valuation gains during the quarter, partially offset by a strong quarter for the tax credit funds business.

Moving to Slide 10.

Clients' domestic cash sweep balances, which are the primary source of funding for our interest-earning assets and the balances with third-party banks that generate RJBDP fees, ended with a quarter end record of $62.8 billion, increasing 2% sequentially and representing 6.5% of domestic PCG client assets.

As we continue to experience growing cash balances and less demand from third-party banks, more client cash is being held in the client interest program at the broker dealer.

You can see those balances grew to $9.5 billion, and most of that growth has been used to purchase short-term treasuries to meet the associated reserve requirement.

Over time, 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 11, the top chart displays our firm-wide net interest income and RJBDP fees from third-party banks on a combined basis, as these 2 items are directly impacted by change in short-term interest rates.

Related, we have updated the net interest margin, or NIM, chart on the bottom left portion of this slide to show NIM for both Raymond James Bank and the firm overall.

The combined net interest income and BDP fees from third-party banks declined a bit sequentially, largely due to fewer days during the quarter and NIM compression at the bank.

As I mentioned on the last quarter's call, we would expect the bank's NIM to decline to around 1.9% over the next 2 quarters as the new agency security purchases have lower yield than the runoff, but still represent a higher yield than we are earning from third-party banks or in short-term treasuries.

We also believe the average yield on RJBDP balances with third-party banks will remain close to 30 basis points for the rest of the fiscal year.

But that could experience downward pressure in fiscal 2022, if bank's demand for deposits doesn't improve from current levels.

Moving to consolidated expenses on Slide 12.

First, compensation expense, which is by far our largest expense.

As expected, the compensation ratio increased sequentially from 67.5% to 69.5%, largely due to the revenue mix shift towards higher compensable revenues in the PCG segment as financial adviser payouts, particularly on the independent contractor side of the business where they cover most of their overhead costs, are typically much higher than the associated compensation in the other businesses.

On a sequential basis, the compensation ratio was also impacted by the reset of payroll taxes that occurs in the first calendar quarter of each year.

As we explained on the last call, given our current revenue mix and disciplined management of expenses, we are confident we can maintain a compensation ratio of 70% or better in this near 0 short-term interest rate environment.

Non-compensation expenses of $277 million decreased 32% compared to last year's second quarter and 14% sequentially, primarily driven by the $32 million bank loan loss benefit compared to provisions in the comparative periods.

Business development expenses also remain subdued.

But we expect those to increase over the next few quarters as business travel picks back up and conferences and recognition trips resume.

Overall, you can see we have been really focused on managing controllable expenses while still investing in growth and ensuring high service levels for advisers and their clients.

Slide 13 shows the pretax margin trend over the past 5 quarters.

Pretax margin was 18.8% in fiscal second quarter of 2021, which was boosted by record revenues, the loan loss reserve release and subdued business development expenses.

On the last call, we talked about generating a 14% to 15% pretax margin in this near 0 interest rate environment.

But as we experienced during the first half of the fiscal year, there's meaningful upside to our margin when capital markets results are so strong.

On Slide 14, at the end of the quarter, total assets were $56.1 billion, a 4% sequential increase, reflecting the dynamic I explained earlier with growth in client cash balances and associated segregated assets at the broker-dealer as well as solid growth of corporate loans and security based loans at Raymond James Bank.

This balance sheet growth caused our Tier 1 leverage ratio to decrease to 12.2%, which is still well above the regulatory requirements and our more conservative target of 10%.

Liquidity remains very strong with $1.7 billion of cash at the parent at the end of the quarter, leaving us with plenty of flexibility to be defensive and opportunistic.

During the quarter, we announced a debt offering, which closed at the beginning of our fiscal third quarter, so it was not reflected in any of the second quarter's numbers.

To take advantage of the low rate environment, we raised $750 million of 30-year senior notes at 3.75%, and utilized the proceeds and cash on hand to early redeem our next 2 senior note maturities, effectively resulting in the same amount of senior notes outstanding, but with a much longer-term stable funding profile.

In the third quarter, we expect to record losses associated with the early extinguishment of these notes, which should total somewhere around $90 million.

To help with comparability, we will break those losses out as a non-GAAP adjustment in the fiscal third quarter.

Slide 15 provides a summary of our capital actions over the past 5 quarters.

In the second quarter, we repurchased 500,000 shares for $60 million, an average price of approximately $120 per share.

Over the first 2 quarters of the fiscal year, we repurchased shares for $70 million, and we remain committed to repurchasing a total of at least $200 million in fiscal 2021 to offset share-based compensation dilution.

As of April 28, $680 million remain under the current share repurchase authorization.

Lastly, on Slide 16, we provide key credit metrics for Raymond James Bank.

The credit quality of the bank's loan portfolio remains healthy with most trends continuing to improve.

Nonperforming assets remained low at 9 basis points of total assets.

However, criticized loans increased due to a handful of credit downgrades within our REIT portfolio, particularly in the hospitality sector.

While all of those credits we downgraded continue to perform, have large cash balances and are starting to see improvement in their portfolios, we thought it was prudent to downgrade those credits.

We had net charge-offs of $2 million in the quarter, which were related to opportunistic loan sales of $95 million at nearly 99% of par value.

The bank loan loss benefit of $32 million was largely attributable to the macroeconomic inputs in the CECL model, which reflect an improved outlook, particularly for the commercial real estate and residential mortgage loan portfolios.

Due to reserve releases and the loan growth during the quarter, the bank loan allowance for credit losses as a percentage of total loans declined from 1.71% to 1.50% at quarter end.

For the corporate loan portfolios, these allowances are higher at around 2.6%.

We believe we are adequately reserved, but that could change if economic conditions deteriorate.

Our strong balance sheet and long-term focus was recently cited as a strength by Fitch ratings, who launched its long-term senior unsecured rating for Raymond James Financial of A- with a stable outlook.

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

Paul?

Thank you.

So overall, a year into the global health pandemic, with near 0 short-term interest rates and during a quarter with lots of seasonal headwinds, such as fewer billable days and the reset of payroll taxes, I could not be more pleased with our record top and bottom line results this quarter.

As for our outlook, we remained well positioned entering the third fiscal quarter with records for all of our key business metrics, strong financial adviser recruiting activity and robust pipelines for investment banking.

In the Private Client Group segment, while the recruiting environment is competitive and we face some challenges in a largely virtual environment, our financial adviser recruiting pipeline is strong across all of our affiliation options, and this segment is going to benefit by starting the fiscal third quarter with a 7% sequential increase in assets and fee-based accounts.

The enhancements we made to the recruiting packages on the employee side of the business have been very well received by prospective advisers, and that pipeline has recovered nicely.

Our perspective advisers across all of our affiliation options have continued to be attracted by our leading technology solutions.

We have been known for our industry-leading position in mobile adviser tools and continue to make our technology platform more robust.

We have also created easy-to-use systems that put all the information advisers need right at their fingertips, so they can easily get the information they need to service their clients and have more time taking care of their clients and growing their business.

As we continue to invest in our technology, we're extremely excited about the new enhancements, which will be coming out shortly.

We have been measuring our client satisfaction for the past 10 years using Net Promoter Scores, and I am proud to share that our client satisfaction has never been higher, both in terms of satisfaction with Raymond James as well as satisfaction with their advisers.

In the Capital Markets segment, although there is still economic uncertainty due to the ongoing COVID-19 pandemic, the investment banking pipeline remains strong, and we expect fixed income brokerage results to remain elevated, particularly in the depository client segment where we have a leadership position.

In the Asset Management segment, results will be positively impacted by higher financial assets under management as long as the equity markets remain resilient.

We were also pleased to see positive net flows for Carillon Tower Advisers in the quarter despite the structural headwinds for active asset managers.

We hope that the one benefit of increased market volatility is that it reinforces the value of high-quality active asset managers.

And Raymond James Bank should continue to benefit from the attractive growth of securities-based loans and mortgages to the Private Client Group segment.

On a year-over-year basis, the growth of the securities-based loan has been impressive, around 38%.

We'll also continue to be selective and deliberate in growing the corporate loan portfolio and the agency-backed securities portfolio as we have ample funding and capital to grow the balance sheet.

We continue to focus on long-term growth, and our priorities remain unchanged.

Our top priority is organic growth, which is primarily driven by retaining and recruiting advisers in the Private Client Group.

Additionally, we are continuing to add senior talent to all of our businesses.

We also continue to actively pursue acquisitions, but we will still be deliberate and only pursue transactions that are a great cultural and strategic fit and at prices that we can deliver attractive returns to our shareholders.

We have been even more proactive in sourcing and evaluating opportunities.

On Earth Day, last week, we released our first corporate responsibility report.

The report summarizes our foundational commitment to people, sustainability, community and governance, and illustrates our long-standing approach to doing business, rooted in our values and brought to life through our people-driven culture.

This report summarizes many of the inspiring things that our advisers and associates across the firm do to contribute to their communities and the things we do as a firm to help the environment.

We look forward to building on this inaugural report by maintaining transparency and sharing progress over time.

With that, operator, can you please open the line for questions?

(Operator Instructions) Our first question comes from the line of Bill Katz with Citigroup.

So I guess first one is, I presume more detail will follow-up on the Investor Day next month.

But I was wondering if you could maybe provide a little more discussion or disclosure around the Tier 1 leverage ratio of 10%, maybe the time line or the pathway?

And I guess is this quarter with a very strong loan growth and sort of stepped up buyback, the blueprint that we should expect going forward?

Bill, great question.

As you said, we will discuss that in a lot more detail at the upcoming Analyst/Investor Day.

And really, the decline to 12.2% this quarter was primarily attributable to the increase in client cash balances, and we're accommodating more of that on our balance sheet at the broker dealer, frankly, because the third-party bank demand with all of the banks flushed with cash right now has declined.

At the broker dealer, we -- to fulfill the associated reserve requirement, we're repurchasing short-term treasuries.

And we hope that we can, over time, redeploy that into more profitable growth at the bank.

But in terms of how we think about getting to 10% over time, it's really going to be a combination of growing the balance sheet, which primarily occurs for us at Raymond James Bank, as you know.

You alluded to the strong loan growth in the quarter of 4%.

We are still being very deliberate in growing the portfolio, both the Private Client Group loans.

Securities-based loans grew almost 40% year-over-year.

And mortgages have seen good growth as well, although there's been a high degree of runoffs and refinancing there.

And we're starting to really be deliberate in growing the corporate loan portfolio, although there still continues to be more demand and supply in the market with banks being flushed with cash.

And then the second component of managing the capital ratio is really deploying the capital.

You saw us do the buybacks this quarter to offset the dilution.

We'll continue to do that and be opportunistic if the prices are at attractive levels.

And then, of course, you just heard Paul mention the focus on acquisitions as well, as another way to deploy capital.

Okay.

And just a follow-up.

Just coming back to your -- the commentary that the organic growth accelerated in the sort of last couple of quarters to 9%, which is quite impressive.

Wondering if you can maybe peel that back a little bit more and maybe talk to like the organic growth between the different channels?

And if you can give maybe a little more color around the recruitment backdrop?

I'd say 2 levels.

Yes, sure.

The -- if you look at -- I know a lot of people record quarterly and some annually.

So as you know, we do annual.

So we thought we'd give the indication that we're approaching 9% for the first 6 months, which is a great number.

The growth has been kind of proportional to the channels.

We're finding our advisers who are just bringing in assets and clients even in this market, which they've consistently done, and the top producers have really had very impressive results in their growth.

So it's happening everywhere.

And then on recruitment, we measure -- we don't publish what we call commits, and those are people saying, I'm coming.

What you see are the people that sign.

So it's like almost M&A.

You're in a transaction, but we don't count it until it closes.

It's the same in recruiting.

But our commits are way up in every channel, all of our channels.

And now some of those people may not join or they may delay the join, which often will happen for just logistics reasons and it might slip into the next quarter.

But based on the backlog, it is very, very robust.

So I think we posted good numbers this quarter.

And my guess is in all channels you're going to see better numbers next quarter.

Our next question comes from Manan Gosalia, Morgan Stanley.

You had a pretty strong quarter for investment banking across the board.

Can you give us some more color on the backlog?

I think you mentioned it remained strong, but maybe you can compare it to the start of the fiscal second quarter.

And then your pretax margins in the Capital Markets division declined Q-on-Q.

It was a pretty strong revenue environment.

So I was wondering if there's any seasonality there or should we expect margins in that segment to stay at these levels in this kind of an environment for trading?

Yes.

So let me start on the kind of the revenue side.

I'll let Paul address the margin side a little bit.

The -- because there's lots of moving parts and all of these.

On the revenue side, honestly, and Paul talked about $200 million plus.

We're at record levels, right?

So every time you have records, you always wonder.

But if you looked at the backlog, you would see no reason why it would slow.

Now again, M&A is one of those deals where economy can change, people can pull out of deals or they can get delayed.

So you never know.

But the backlog would say it's as robust as ever.

The market is active, I think, for everyone and our backlog is very, very strong and continually to sign new deals.

Even as we've been on this last week, that were pretty significant.

So we feel pretty good about the backlog.

Paul, you want to talk about the margin?

Yes.

I mean the margin certainly bounced around a little bit from quarter-to-quarter.

But at 24% for the quarter, that's still a fantastic margin for the Capital Markets segment.

And when you look year-to-date, I think it's 26%.

So revenues were down a bit sequentially.

M&A still had very strong quarter.

But it was down 18% from the record M&A results last quarter, and that is a high-margin revenue source.

So again, it could bounce around.

But at these levels, we're still really pleased with the 26% margin year-to-date.

Great.

And then maybe on the loan growth side, you saw some nice loan growth, as you mentioned, in the real estate and SBL portfolios this quarter.

Are you doing anything differently there?

Any change in underwriting given how much the macro environment has improved and with markets to all time highs?

Or is this just increased penetration of your existing customer base?

Yes.

I would say it's not relaxed underwriting.

So I think it is better processing, trying to get -- make it a smoother process.

The underwriting standards are the same as ever.

But I do think our advisers in this market and lot of people in the state and tax planning are using the tool.

So we are advertising to our advisers.

We don't go direct to their clients, the availability and the use of these tools and financial planning.

But it's their choice and their clients' choice.

We don't market directly to the end client.

So -- but given that and -- I think the educational process and the dynamics of the market, we've had significant growth and still see that channel is very active.

So compared to our bigger peers, we are much lower penetration.

So we think there's more opportunity.

Our next question is from Devin Ryan with JMP Securities.

Maybe start with one here, just on the strength in product line, brokerage revenues in the quarter.

Heard some of the commentary, but it would be great just to get a little more color on what you guys are seeing in that business.

And if you can, how much of the sequential improvement was from trailing commissions versus just activity?

And really what I'm trying to do is just parse through how much of that business is just benefiting from a bigger base and higher assets versus maybe something that was little bit unusually active in the backdrop.

Devin, that's a great question.

It was really strong brokerage revenues in the Private Client Group business.

A lot of that reflects the healthy level of client engagement, just given the market opportunities.

When you look at that kind of $413 million of brokerage revenues, roughly 50% of it is asset based and the other 50% is transactional based.

And then it varies by line, for example, the mutual fund line, 65% to 70% of that is asset based.

And so obviously, that has grown nicely as assets have grown and the trail commissions have grown as well.

But you can also see that the transactional commissions from equities, ETFs and fixed incomes, they're up 13% sequentially as well.

So good level of client activity.

Obviously, the asset growth helps there as well.

There were some lumpy placement fees in that brokerage revenues in Private Client Group this quarter.

But that happens from time to time, but that certainly was another benefit during the quarter as well.

Yes.

Okay, sure.

Yes, it's really good color.

And then maybe another kind of modeling question.

Just thinking about the comp ratio moving parts.

I appreciate the mix dynamics, particularly as you have strong quarters in the independent brokerage channel, and that's going to put some upward pressure, all else equal.

But then you also highlighted some of the seasonal items, like payroll taxes.

So if we look at that 200 basis point sequential increase, I'm not sure if it's -- you're able to kind of parse through how much is the drag from the seasonal piece or even if you can kind of quantify how much the payroll taxes affected the comp?

If I'm looking at like the other segment, for example, there was a $10 million increase.

I'm sure you saw increases in any other pieces, but it's little bit tough to parse through.

So that would be really helpful if you can give any color there.

Yes.

No, it is a great question, Devin.

And we try to parse through it ourselves.

There's a lot of moving parts there because there's also elevated payroll taxes with our year-end bonuses for those who haven't hit the threshold.

So in the past, we've said it's been $10 million or so sequentially in terms of the impact.

But I would tell you the comp ratio, as I said on last quarter's call, really the biggest driver there was just the increase in compensable revenues in the Private Client Group business.

That has an average payout between the employee and independent channel, as you know, of around 75%.

And so we want those revenues to grow as much as possible, obviously.

And they're going to grow, all else being equal, in the third quarter because fee-based revenues grew -- assets grew 7% during the quarter.

So that's going to be a tailwind to compensable revenues in the Private Client Group business.

So it really is a mix issue more than anything else as we have really been focused on managing the controllable expense as much as we possibly can.

Our next question is from Craig Siegenthaler of Crédit Suisse.

This is Gautam Sawant filling in for Craig.

Can you please expand on this competition you're seeing within the employee and independent channel?

And how your transition assistance is positioned following the increase?

And could you also speak to some of the additional differentiated technology in your platform relative to peers?

Yes.

So on the transition assistance, it became clear as the number of firms, not all, had raised it significantly.

We were not even close to in the market and for big -- especially for large teams.

And so looking we knew we had room from a return standpoint, so on those large teams, I would say now when we come into the finals, we're not the highest, but we're in the ballpark.

And so enough that people are saying, they're willing to make the trade for the dollars, for the culture and the values.

When the -- when we had deals that literally were almost twice as much as ours, it was hard for people to turn down the money even though they might have preferred coming here.

So we aren't the highest, we are competitive and we think it's a fair package, both, and a good return for us.

So we're feeling that we're well positioned and appropriately positioned.

And I think it's going to reflect in the numbers and a lot of very, very high-quality teams, probably the largest number of large teams that we've had, that's certainly in memory, so -- which means that probably the largest group of large teams we've ever had in the recruiting pipeline.

I'm sorry, and your second question was?

If you can just expand on some of the differentiated technology on your platform relative to some of your peers?

Yes.

So our focus for a long time has been on the advisers desktop.

We've had a lot of peers that focused on the end client desktop, some because they were going direct to their end clients.

We first wanted to put all the capabilities into our adviser's desktop.

So it's been many years now since we've been completely mobile where advisers could do almost everything from their iPhones that they could do from their desktop.

And making sure that our advisers have all the latest tools, planning tools and completely mobile very, very early on.

Now not only are we enhancing those platforms, but we're bringing that same robust technology to those client connections.

We believe our client app is very good.

Our SAT scores are very high on our internal survey, which we do every year.

But now we're connecting all that power of those apps into their clients, so that their integration is much closer as well as rolling out many things.

We've been on this journey for 10 years and going from being having good technology to all of our recruits tell us from other firms as from an adviser desktop, leading technology.

So -- but that battle never ends.

People are always investing.

So you'll see more of it on Investor Day.

We believe it's been one of the impetuses of our strong recruiting and one of the trade-offs people have made of -- for the packages.

It's the culture and the tools, and the support from our marketing department and all the other things we do to help advisers build their businesses.

(Operator Instructions) Our next question is from Steven Chubak, Wolfe Research.

So I wanted to start off with a question just on the securities growth or at least your appetite to maybe grow the securities portfolio a bit more.

You cited the significant buildup in client cash that had clearly impacted the NIM.

I was hoping you can just give some context as to what your appetite is to reaccelerate securities growth once again?

And Paul, you cited reinvestment headwinds versus the back book yield.

Where are you reinvesting today just given some of the recent steepening of the curve?

Steve, great question.

We have significant appetite to grow the securities portfolio.

Unfortunately, the supply and the kind of shorter duration paper, we have been buying -- trying to buy in that 3-year type duration average life range.

And the supply, given the flat yield curve and where mortgages are being originated today in the longer end of the curve, there's just not a lot of paper out there that gives you that 3-year average life.

And to the extent that you can find it, it's probably paying in the kind of 80 basis point range.

So we have been proactive in investing and growing that part of the portfolio.

The challenge is where most of the supply is, you're having to go out 4.5 kind of 5 years as -- on average life.

And you get paid more, obviously.

You're going to get somewhere north of 1%.

But you're certainly not getting paid enough to take any level of inflation risk over that 5-year period, for example.

And so we're looking at it closely, almost daily.

We're looking at what's happening with spreads on the securities portfolio.

We have a lot of significant appetite to grow it over time.

But I would tell you now with the Fed buying as much as they're buying, particularly on the short end, there's just not a lot -- I mean there's a whole lot more demand than supply.

And so we're going to continue to be patient just as we always are.

But then we've also, I think, strategically, have -- on our C&I portfolio, grown it and also looked as alternatives of very high-rated company paper with shorter duration or buying loans in the secondary market where that duration is going to go out just a few years, and it's floating, and we think better credit risk returns.

So we've been trying to be flexible in growing it.

But we've waited a long time on a floating rate environment.

We don't want to lock in at the bottom.

So we're watching duration very, very closely.

And just for my follow-up on a question just on the non-comps.

Non-comps ex provision of $309 million was certainly better than what we were contemplating and it's been running at a pretty tight band of about $305 million to $310 million.

I know that's certainly been helped by depressed business development expense.

But how should we be thinking about the right run rate from here, assuming that, that's going to remain relatively depressed?

And I guess as we start to prepare for some normalization in Biz Dev, how should we be thinking about the run rate in a more normal backdrop as well?

Yes, great question.

And business development expense, as I said on the opening remarks, we do expect that to start increasing as travel is starting to pick up a bit, maybe not so much in the third quarter, but in the fourth quarter, assuming the vaccines continue to prove effective.

We expect the travel and even conferences and recognition trips to pick back up.

Before the COVID pandemic, we said that we were looking to average somewhere around $325 million a quarter.

And if you add -- if you kind of "normalize" for business development, and I'm not sure what normal is, frankly, when we do get back to normal, it would get you right around that range.

So we have been really focused on managing all the controllable aspects of noncompensation expenses, as you can see, but also a lot of it is growth driven.

I mean so sub-advisory fees is going to grow with fee-based assets over time.

They have FDIC insurance premiums that grow with the bank's balance sheet growth.

Recruiting, as Paul said, it's picking up substantially.

There's going to be account transfer fees there.

So a lot of the non-comp expense growth, as we are a growth company, are intended to grow over time, but we are focused on growing revenues at a faster rate than expenses over time as well.

So we do realize that operating leverage.

And our last question comes from the line of Jim Mitchell with Seaport Global.

Maybe just a question on cash balances.

They keep growing.

We saw how active your clients were on the brokerage side.

But yet, cash balances keep growing.

Are we starting to see some leveling off or maybe even putting that to work recently?

Or is it still sort of expect cash balances to keep growing?

Great question, Jim.

It seems like we've seen a leveling off to some extent.

Some of the growth, frankly, in the last few months have been just coming from what used to be in purchase money market funds or other short-term alternatives that are now -- because those alternatives aren't generating any kind of yield, they're sitting in the cash sweep program.

But we have seen a little bit of a level off.

But those balances, as we saw last year in March, can change dramatically with market volatility or downward trend in the market.

So at 6.5% of assets, I would tell you, clients are -- I think right now, we're looking at around 60% exposure to equities, which when you look historically, clients are pretty engaged in the equity markets, which is what you would want given the run that we had.

And a lot of the value that financial advisers provide is keeping clients consistent with their financial plans in periods like we had last year.

So for us, we don't tend to see the exposure to the different asset segments that the e-brokers might see, et cetera, or the day traders might see.

We tend to stay a lot more -- our clients tend to stay a lot more consistent as their advisers really keep them on their financial plans.

Right.

Okay.

That's helpful.

And maybe on Carillon Towers.

I think you guys noted significant inflows.

We haven't seen that in a while.

Just any more specifics on what the drivers were?

Do you think that can continue?

Just sort of any color there.

Yes.

It was around $1 billion for the quarter, so -- of net inflows.

So that was a pretty, I think, 8% annualized rate.

But unfortunately, we're not prepared to annualize that.

There's structural headwinds.

We had some nice institutional wins during the quarter.

And so we have invested in the distribution capability.

We recently announced a new leader for that business.

So it'll be good to bring in a fresh set of eyes with a very experienced leader.

But still dealing with the headwind.

So we're not prepared to declare victory after 1 quarter of net inflows, but it was certainly nice to see after several quarters of headwinds.

Gentlemen, those are all the questions.

I will turn it back over to you for closing remarks.

Well, thank you all.

We appreciate your time this morning.

I know it's a busy earnings day.

But think we're well positioned.

We've had good growth and all of our key indicators really for forward growth, were really record, so -- and our backlog is strong in the other businesses.

So hopefully, the markets hold up and stay constructive, and we have economic growth.

So thank you all for your time, and we will see you again next time -- next quarter.

And ladies and gentlemen, that does conclude our call for today.

We thank you all for your participation.

Have a great rest of your day, and you may disconnect your line.