雷蒙詹姆斯金融 (RJF) 2021 Q1 法說會逐字稿

Good morning, and welcome to Raymond James Financial's First 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.

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

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

In addition, words such as believes, expects, 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 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, which is 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 schedule 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.

It's hard to believe it's been almost a year since the COVID-19 pandemic started here in the U.S. And while there's now light at the end of the tunnel with the vaccine starting to be distributed across the globe, we are still very much in a period of uncertainty and volatility.

As painful as the pandemic has been for everyone, I'm very proud of how Raymond James has performed.

Who would have predicted when we lost 40% of our earnings to the rate cuts in March that we would be talking about records today.

This is a testament, not only to the resiliency of the U.S. economy but also to Raymond James, our advisers and their associates.

As you can see on Slide 3, our unwavering focus on serving clients resulted in fantastic financial results during the quarter.

starting off fiscal 2021 with record quarterly revenues and earnings, driven by strength across our businesses.

In the fiscal first quarter, the firm reported record net revenues of $2.22 billion, which were up 11% over the prior year's fiscal first quarter and 7% over the prior record set in the preceding quarter.

Record net income of $312 million or $2.23 per diluted share increased 16% over the prior record of net income set a year ago quarter and 49% over the preceding quarter.

Excluding expenses of $2 million associated with the completed acquisition of NWPS Holdings and the pending acquisition of Financo, adjusted quarterly net income was $314 million and adjusted earnings per diluted share was $2.24, both records.

Annualized return on equity for the quarter was 17.2% and return on tangible common equity was 19%, an impressive result, especially in this near-0 rate environment and given our very strong capital position.

Record quarterly results were primarily attributable to higher asset management and related administrative fees, record investment banking revenues, strong fixed income brokerage revenues and disciplined expense management, which were more than offset the negative impact of lower short-term interest rates on the net interest income and RJBDP fees.

The record results and broad-based strengths in our businesses in this near-0 rate interest environment, which included record results for capital markets and asset management segments during the quarter, reinforced the value of our diverse and complementary businesses, sometimes something underappreciated in different market cycles.

Moving to Slide 4. We ended the quarter with records for total client assets under administration of $1.02 trillion, PCG assets and fee-based accounts of $533 billion and financial assets under management of $170 billion.

Client assets crossing the $1 trillion mark for the first time is a testament to the consistent growth that we've achieved by focusing on retaining our existing advisers while also recruiting high-quality financial advisers.

And when you step back, this is quite an achievement.

In December of 2010, we had around $260 billion of client assets.

So we have experienced around a 15% compounded annual growth and essentially quadrupled client assets over a 10-year period, and the vast majority of that was organic growth.

We ended the quarter with 8,233 financial advisers, a net increase of 173 over the prior year, but a slight net decrease of 6 sequentially.

A flat adviser count is not unusual for this quarter as we typically see an elevated number of retirements at the year-end, where assets are typically retained at Raymond James by their successor.

We are still optimistic about all of our recruiting pipelines across our affiliation options, but there are a few trends we are seeing in the industry.

On the independent side of the business, we continue to experience strong recruiting activity, and we're seeing more interest from both external and internal advisers in the RIA custody affiliation option, particularly for much larger teams who have the scale and appetite to assume the regulatory and supervision responsibilities and risks.

We have been beneficiaries of this trend and our rebranded RIA & Custody Services division, or RCS.

And we believe we'll continue to benefit from the trend, given major consolidation and disruption in the RIA custody industry.

However, it's important to note that when an RIA affiliates with RCS, whether it be an internal transfer from our other affiliation option or external additions, we do not count the advisers of the RIA firms in our adviser count, but their assets are still included in client assets under administration.

On the employee side, there has been a modest slowdown in recruiting due to the challenges brought on by COVID and also increased competition for experienced advisers where even our regional competitors have significantly increased their recruiting packages.

In response to what we have seen, we have also enhanced our recruiting packages to be more competitive, while also ensuring attractive returns to our shareholders.

Also impacting adviser count this year, we temporarily decreased the size of our new adviser training class this year by about 35 trainees, allowing us to dedicate more time and attention to newer advisers as they seek to overcome the challenges presented by this current virtual environment.

While this will negatively impact the growth in adviser count when compared to prior years when the training class was larger, it really shouldn't have a significant impact on client assets.

We believe our recruiting will continue to thrive as advisers are attracted to our supportive culture and client-first values.

Looking at recruiting results over the prior 4 quarters, financial advisers with nearly $270 million of trailing 12 production and nearly $40 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 $42 billion over the 4 quarters ending in December 31, 2020, representing more than 5% of domestic PCG client assets at the beginning of the period.

And remember, this is net of client fees.

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

And as you know, we did not benefit from the surge in self-directed online business during the year.

Moving to segment results on Slide 5. The Private Client Group generated quarterly net revenues of $1.47 billion and pretax income of $140 million.

Quarterly net revenues grew 5% 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 second quarter.

This strong revenue growth helped PCG's pretax income grow 12% sequentially, although it's still down 8% on a year-over-year basis, primarily due to the negative impact of lower short-term interest rates.

Capital Markets segment generated record quarterly net revenues of $452 million and pretax income of $129 million, an extraordinary result, a strong quarter for the segment, driven by broad-based strength across global equities and investment banking as well as fixed income.

During the quarter, record investment banking revenues were driven by record M&A revenues, along with continued strength in debt and equity underwriting.

Fixed income brokerage revenues were strong as client activity levels remained robust.

While we certainly would caution you against annualizing the record results of Capital Markets segment this quarter, I do think the results reflect the significant investments we have made to strengthen our platform over the last 10 years.

And we are continuing to make those investments, as I will discuss shortly.

The Asset Management segment generated record net revenues of $195 million and pretax income of $83 million.

Record results were driven by the growth of financial assets under management as equity market appreciation and the net inflows into PCG fee-based accounts more than offset the modest net outflows for Carillon Tower Advisers.

Lastly, Raymond James Bank generated quarterly net revenues of $167 million and pretax income of $71 million.

Compared to a year ago quarter, net revenues declined primarily due to the impact of lower short-term interest rates on net interest income.

Sequentially, quarterly net revenues grew 4%, as higher asset balances more than offset the 7 basis point decline in the bank's net interest margin in the quarter, which was primarily attributable to the growth in the agency MBS portfolio.

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

Nonperforming assets remained low at 9 basis points of total assets and the amount of criticized loans declined 4% during the quarter.

The quarterly bank loan provision for credit losses of $14 million declined sequentially and was driven mostly by macroeconomic model inputs, now under the CECL methodology, which Paul Shoukry will cover in more detail.

Moving to Slide 6. As you've heard me say many times, we remain focused on long-term growth and are committed to deploying excess capital to generate attractive returns to our shareholders.

Good example of that commitment are the 2 acquisitions we announced during the quarter.

The first, which closed in late December, is NWPS.

NWPS is a provider of retirement plan administration, consulting, actuarial and administrative services based in Seattle, Washington.

The addition of NWPS allows Raymond James to expand our retirement services offerings, including retirement plan administration services to advisers and clients.

Many of our advisers serve clients with small businesses, and offering this retirement solution is another attractive way to help advisers develop deeper and stronger relationship with our clients.

The second pending acquisition, Financo, is a consumer-focused M&A advisory firm, which allows us to strategically grow our capabilities in an attractive vertical with industry-leading team.

We anticipate this transaction to close in the March or April time frame.

Both of these firms represent great cultural and strategic fits, and we're excited about welcoming them to the Raymond James family.

While we are not going to discuss the terms of these 2 transactions, in total, over time, these 2 acquisitions represent consideration, retention and earn-out potential to the sellers of approximately $320 million.

So it is a meaningful and attractive use of cash and capital.

We will continue to actively pursue additional acquisitions that are both the cultural and strategic fit.

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

Paul?

Thank you, Paul.

I'll begin with consolidated revenues on Slide 8. Record quarterly net revenues of $2.22 billion grew 11% and year-over-year and 7% sequentially.

Asset management fees grew 12% on a year-over-year basis and 6% sequentially, commensurate with the growth of fee-based assets.

Private Client Group assets and fee-based accounts were up 12% during the fiscal first quarter, which will provide a tailwind for this line item for the second quarter of fiscal 2021.

However, given fewer billable days in the March quarter, I would expect asset management fees in PCG to increase about 10% sequentially.

Consolidated brokerage revenues of $528 million grew 15% over the prior year and represented a record.

These revenues are inherently difficult to predict, but our clients are still engaged in both the Private Client Group and Capital Markets segments, given the current market and interest rate environment.

Account service fees of $145 million declined 19% year-over-year, almost entirely due to the decrease in RJBDP fees from third-party banks due to lower short-term interest rates, which I will discuss along with net interest income in more detail on the next 2 slides.

Consolidated investment banking revenues of $261 million grew 85% year-over-year and 18% sequentially, achieving a record result, driven by record M&A advisory revenues and strong debt and equity underwriting.

Based on the pipeline and activity levels, we anticipate second quarter to be healthy, but not as strong as a remarkable result achieved in the first quarter.

As you all know, these revenues are very difficult to predict.

But for the rest of the fiscal year, we would be very pleased to achieve the pace of the average quarterly investment banking revenues from the annual record we set in fiscal 2020, which would be roughly $160 million to $165 million per quarter on average.

Turning to other revenues, which were $56 million for the quarter.

This line included $24 million of private equity valuation gains during the quarter, of which approximately $10 million were attributable to noncontrolling interest reflected in other expenses.

Moving to Slide 9. Clients' domestic cash sweep balances ended the quarter at a record $61.6 billion, increasing 11% sequentially and representing 6.7% 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 $8.8 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 10, the top chart displays our firm-wide net interest income and RJBDP fees from third-party banks on a combined basis.

Related, based on your feedback, we have updated our net interest table in the earnings release to incorporate all of the firm's interest-earning assets and liabilities instead of those balances for just Raymond James Bank.

We hope you find this update helpful.

And as always, we thank you for your suggestions to continue enhancing our disclosures.

As you can see on Slide 10, while lower rates have put significant pressure on these revenues since the Fed rate cuts in March 2020, we did experience a slight uptick in these revenues sequentially, helped by the aforementioned growth in client cash balances and higher asset balances at Raymond James Bank, which more than offset the sequential NIM compression you see on the bottom left portion of this slide.

Given prepayment speeds of higher-yielding securities and mortgages, we would expect the bank's NIM to decline another 10 basis points or so throughout the year.

However, we are hoping that growth in the bank's earning assets will more than offset the NIM compression and result in continued growth of the firm's net interest income.

I will provide a bit more color on the bank's balance sheet growth in a few slides.

Moving to consolidated expenses on Slide 11.

First, compensation expense, which is by far our largest expense, the compensation ratio decreased sequentially from 68.1% to 67.5% during the quarter, primarily due to record revenues in the Capital Markets segment, which had a 56% compensation ratio during the quarter and the benefit from the private equity valuation gain, which doesn't have direct compensation associated with it.

As we said last quarter, given the near-0 short-term interest rates and the successful implementation of the expense initiative we announced last quarter, we are confident we can maintain a compensation ratio of 70% or better, which we still believe is an appropriate target.

And as we experienced this quarter, very strong Capital Markets results in any particular quarter could result in a compensation ratio below 70%.

Non-compensation expenses of $323 million increased $24 million or 8% compared to last year's first quarter and almost all of that increase could be explained by the $14 million bank loan provision for credit losses compared to the $2 million benefit in the year-ago period and $13 million of noncontrolling interest in other expenses, most of which offsets a portion of the $24 million private equity valuation gain reflected in other revenues.

As we explained and as you can see in these results, we have been very focused on the disciplined management of all compensation and noncompensation-related expenses, while still investing in growth and ensuring high service levels for advisers and their clients.

Slide 12 shows the pretax margin trend over the past 5 quarters.

Pretax margin was 18% in the fiscal first quarter of 2021, which was boosted by the record Capital Markets results as that segment generated a record 29% pretax margin.

Last quarter, we talked about generating a 14% to 15% pretax margin on a consolidated basis in this near-0 interest rate environment, which, again, we believe is still a reasonable target.

But as we experienced this quarter, there's upside to the margins when the Capital Markets results are so strong.

On Slide 13, at the end of fiscal first quarter, total assets were approximately $53.7 billion, a 13% sequential increase, reflecting the dynamic I explained earlier with growth in client cash balances and associated reserves at the broker dealer.

This growth of client cash balances on the balance sheet caused our Tier 1 leverage ratio to decrease to 12.9%, which is still well above the regulatory requirement.

Liquidity remained very strong with $1.8 billion of cash at the parent, leaving us with plenty of flexibility to be both defensive and opportunistic.

Slide 14 provides a summary of our capital actions over the past 5 quarters.

In December, in addition to increasing the quarterly dividend 5% to $0.39 per share, the Board of Directors authorized share repurchases of up to $750 million, which replaced the previous authorization.

And $740 million remains available under the new authorization.

In the first quarter, we repurchased approximately 108,000 shares for $10 million, an average price of approximately $92.80 per share.

This fell short of our $50 million quarterly target, which we plan on making up for in the subsequent quarters as we are committed to repurchasing at least $200 million to offset share-based compensation dilution during the fiscal year.

One thing many of you have asked us to be more explicit on is our plans for deploying capital, which is something we hope to discuss with you in much more detail at our Analyst Investor Day, tentatively planned to be held virtually in May.

But at a high level, what I would share with you now is that our goal is to manage down the firm's Tier 1 leverage ratio closer to 10% over time through a combination of balance sheet growth, primarily at the bank as well as more deliberate deployment of capital through a combination of organic growth, acquisitions and share repurchases.

We are not ready to share a specific time line to achieve this objective and doing so in the middle of a pandemic is probably not the best time to do so, but I want to be clear that we are fully committed to managing our capital levels, balancing our objectives of optimizing returns to shareholders while ensuring a significant balance sheet flexibility and conservatism.

On the next 2 slides, we provide additional detail on the bank's loan portfolio, starting on Slide 15, with some detail on Raymond James Bank's asset composition.

In the pie chart, you can see we broke out CRE and REIT loans into separate categories with the implementation of CECL this quarter.

The only other thing I would point out on this slide is we have a very well diversified balance sheet at the bank.

The bank's total assets grew 3% sequentially, led by 4% growth in the bank's loan portfolio, about 60% of which was attributable to securities-based loans to Private Client Group clients.

We have decelerated the growth of the securities portfolio at the bank and will likely continue to do so over the near term as spreads for agency mortgage-backed securities have gotten extremely tight.

Meanwhile, we have resumed growth in certain sectors in the corporate loan portfolio that we believe are less directly exposed to the COVID-19 pandemic.

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

First, let me briefly discuss CECL.

We implemented CECL on October 1, which increased our allowances by approximately $45 million, with the majority of that increase attributable to recruiting and retention-related loans to financial advisers in the Private Client Group segment, which now require a larger allowance under CECL than under the incurred loss method.

About $10 million of that day 1 impact was related to outstanding bank loans.

And remember, all $45 million hit the balance sheet directly and did not go through the P&L.

We had no charge-offs in the quarter.

The quarterly bank loan provision for credit losses was $14 million, largely attributable to the macroeconomic model inputs we use from a third party vendor, which assumed a greater decline in commercial real estate prices in the near term with a longer recovery period, resulting in higher allowances for the CRE portfolio from 3.25% to 4.2% at the end of the quarter.

The bank loan allowance for credit losses as a percent of total loans ended the quarter at 1.71%.

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

But currently, we are pleased with the credit quality and the positive trends we are seeing with the loan portfolio and the broader economy.

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

Paul?

Thanks, Paul.

As for our outlook, we remain well positioned entering the second fiscal quarter with the strong capital ratios and record client assets.

However, we'll continue to face headwinds from a full year of lower short-term interest rates, and there's still a high degree of uncertainty given the COVID-19 pandemic and the rollout of the vaccine and a new administration.

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

Private Client Group fee-based assets were up 12%, which should be a good tailwind and result in a 10% increase in the associated revenues.

In the Capital Markets segment, there is still a significant amount of economic uncertainty due to the ongoing COVID-19 pandemic.

However, the investment banking pipeline is currently strong, and we expect fixed income brokerage results to remain elevated given the current interest rate and economic conditions.

In the Asset Management segment, results will be positively impacted by the 11% increase in assets under management, but those assets are built throughout the quarter.

At Raymond James Bank, we should continue to benefit from the attractive growth of securities-based loans and mortgages to PCG clients.

And as we decelerate the growth of the securities portfolio, we are cautiously adding to corporate loans in the less COVID-impacted sectors.

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

Our top priority is serving clients, and we're focused on organic growth, which is primarily driven by retaining and recruiting advisers in the Private Client Group.

Additionally, we're continuing to add senior talent in our other businesses, such as investment banking.

As you observed this quarter, we will continue to actively pursue acquisitions.

But we are still focused on being and only pursuing transactions that have a great cultural and strategic fit and at prices that can deliver attractive returns to our shareholders.

We started fiscal 2021 with very strong results, and I believe we are well positioned to drive profitable growth in the coming quarters across all of our businesses.

But we are also fully aware that we are still in the middle of a global health pandemic, and we should all be prepared for much more economic turbulence and market volatility over the next several months.

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

(Operator Instructions) The first question comes from Manan Gosalia of Morgan Stanley.

Maybe a question on the PCG segment.

How should we think about the compensation ratio in that segment?

I mean I know the rev last quarter was about 100 basis points positive for the pretax margin, but I guess when we look at the cooperation in that segment, it was pretty flat versus the last quarter.

So were there any factors that are maybe masking that 100 basis point improvement here?

Yes.

I mean, the biggest driver, Manan -- the biggest driver is really just the growth in the production to advisers.

That's going to have roughly a 75% payout associated with it.

So that's going to be your biggest driver of compensation in the PCG segment.

As for the admin comp in the PCG segment, as we said on the call last quarter, we expect that to be -- we were expecting it to be relatively flat when we were on the call last quarter, but the one driver there would be some of the benefits that grow with profitability across the firm.

So -- but again, we think that that's what we're really focusing on managing is the admin comp in the PCG segment, and that's what would be -- that would reflect the benefit from the expense initiatives we announced last quarter.

Got it.

And then on the capital return front, I appreciate the update on how you're thinking about capital return, and I realize you can't give a time line, but in the past, you mentioned a 1.8x book value threshold as a level that you're looking at for doing more buybacks.

Can you give us an update on how you're thinking about that now?

And would you maybe consider buying back at a higher level if the stock stays above that level in the absence of any acquisition opportunities?

Yes, we're going to later roll out a more definitive capital plan, but our managing Tier 1 back to 10 percentage over time.

We've committed to the $200 million buybacks a year, just to manage equity-based dilution at any price anyhow.

And then the other will be more opportunistic.

So we'll just have to see that out.

Now the only caution on the opportunistic part is we'd like to see we're feeling much better about the economy and the pandemic and the virus being under control as the people get the shots, but we don't know, right?

So we'll be a little cautious on that part.

But we'll be a little more opportunistic outside of that $200 million kind of more programmatic buyback.

The next question comes from Devin Ryan, JMP Securities.

First question here just on the recruiting commentary and outlook.

Obviously, you guys have been alluding to some increased competition in recent months.

So I just want to dig in a little bit because it seems like over time, recruiting competition kind of ebbs and flows.

And so I'm kind of curious what do you think is driving that right now?

And I guess, I just want to make sure that I understand the full message here.

I guess, my takeaway is that independent adviser recruiting is still very strong, and that's the expectation on the employee side.

Pricing has become more competitive, but it sounds like Raymond James will be -- or already is increasing kind of pricing competitiveness.

So should we expect that the recruiting on the employee side will remain active, but just they cost a bit more?

Or I guess, want to make sure taking the right takeaway here?

We've had a very robust recruiting history, as you know.

And certainly, on the employee side as people [have opt] the transition assistance to be more trying to grow their private client group businesses we did.

And that gap just got bigger and bigger and bigger where I think that people even wanting to join just said the economic gap was too big.

And as we really analyzed it, that if we can get by upping -- we don't have to match.

We've proven that over history.

But being more competitive because of the environment, what we offer advisers, we can get a good return now.

And if interest rate spreads gap out again in the future, those recruiting deals from our standpoint will even be better.

So we've got more aggressive.

Yes, there's a little bit of lag, but we think we can get it going.

We did cut the adviser class going in on a cost cut and then during the pandemic and as we ramp back up the training, which we expect to once we get out of -- as we're kind of exiting the total virtual environment that will help also.

So again, last year, we had good recruiting stats that quarter, but it isn't unusual.

If you go back to the year before that it was flattish.

I think we were up too in a record recruiting year.

So we'll get it back on track, and maybe we're a little slow to act.

But recruiting overall has been good.

And then we're going to have to figure out how to give you better numbers.

Because people are in the RIA channel, we don't count them at all.

And so you're not really seeing overall recruiting, although they are in the asset number.

So we're going to work on how to give you a better metric on that, too.

So you can compare it more apples-to-apples as channels may shift over time.

Okay.

That's really good color.

And then just a follow-up here on capital as well.

Appreciate the update there.

Is there any way you can just help refresh us how to think about the capacity of the bank growth or the size of the bank within Raymond James?

I appreciate that you're going to be opportunistic and can't really give a time line of expanding the bank balance sheet.

But how should we think about based on whether it's third-party bank deposits and client interest program, capacity to fund growth or the size of the bank within the overall firm?

How are you guys thinking about maybe the upper band of capacity without giving us a time line of exactly how you'll get there?

Devin, yes, we would love to continue growing the bank.

And we have, as you can see with the cash at third-party banks and now in CIP at the broker dealer, we have a lot of funding capacity and plenty of capital capacity to grow the bank.

So the biggest constraint now is just finding assets with good risk-adjusted returns over a long period of time.

The way we're thinking about balance sheet growth overall as a firm which includes -- primarily most of the growth in the balance sheet would come from the bank going forward, is that Tier 1 leverage ratio that Paul mentioned, which we hope to target around a 10% take that ratio down to somewhere around 10% over time.

Now it could go under 10% if we're just accommodating client cash balances and investing it in -- parking it at the Fed or investing it in treasuries.

But on a more normalized basis, I think 10% is a conservative place to be at as a holding company overall.

And so that's how we're thinking about the bank growth.

Some of the metrics in the past that we shared with you around percentage of equity and percentage of cash balances, those were metrics that were established when we're primarily a corporate loan bank essentially.

And so we were -- those metrics were intended to contain the size of the credit exposure to our overall balance sheet.

Now that we have agency mortgage-backed securities, and we have securities-based loans and mortgages to Private Client Group clients, some of those metrics aren't as relevant as they were 5 years ago.

So that is going to be a part of the discussion that we hope to share more details with you on at our upcoming Analyst Investor Day.

The next question comes from Craig Siegenthaler of Crédit Suisse.

This is Gautam Sawant filling in for Craig.

I just wanted to follow up on the balance sheet commentary.

And we wanted to know what kind of macroeconomic green shoots you're seeing?

And how are those getting you more comfortable with growing RJ Bank over the near term?

I think it's certainly in sectors.

As you know, we were pretty aggressive on selling COVID-exposed loans.

And -- so that kind of shrunk the balance sheet a little bit.

Those sales, I mean, at least relative to what it could grow.

But we tracked other kind of the non-COVID-related areas and how the economy has performed even in near lockdowns in places.

We're pretty comfortable with a lot of other sectors.

And so those are the sectors we're looking at growing.

We've also looked at the spread on MBS securities, and they're just not -- there just isn't a lot.

So we're looking at higher-grade corporate loans also to get a better spread with shorter duration, which you buy a 3-year a corporate loan in a well-run company in a non-COVID segment versus a treasury that is not yielding anything.

So we're looking -- we're comfortable with the bank, the lending team.

We have a lot of capacity.

So we're -- as we've gone through this part of the pandemic, even though there's uncertainty, we're getting more comfortable with lending in areas and that would kind of open that back up.

The next question comes from Steven Chubak of Wolfe Research.

I want to start off with a question on the Capital Markets outlook.

You're coming off a record year for fixed brokerage.

What's informing your view that activity should remain elevated as it appears, both you and peers are over-earning in that particular area relative to history?

And maybe just a question for Mr. Shoukry.

Since you alluded to the $160 million to $165 million run rate, which would be a good outcome from the quarterly run rate for IB, should we infer from your remarks there that this safe level is consistent with your view of what normalized activity looks like and what you believe is readily achievable within the IB segment, in particular?

Yes.

I'll answer the second part of the question first.

I wish it was that scientific with projecting the investment banking revenues.

I think it was more of just a hypothetical that on a going-forward basis, if we kind of average $165 million of investment banking revenues a quarter, then that would sort of match the record we set last fiscal year.

So is there upside to that?

As we saw this quarter, there is upside to that.

And we are growing the platform.

Paul mentioned the Financo acquisition, which we hope will close.

And we're also hiring a lot of other senior MDs.

So we have a pretty powerful investment banking platform.

I think you saw the potential of that this quarter, but we just want to caution The Street against annualizing against it.

I think it's -- Steve, it's one of the difficult things as you talked to us or you talk to peers in the industry, everyone was surprised at how (inaudible) this quarter was.

I mean it's not that we did have good backlog.

So when you come off a quarter like this of activity, you go, well, what's the next quarter look like?

The backlogs are very good.

The activity is very high, but hate to keep predicting a repeat of this quarter when it's an all-time record.

And I think industry-wide, it was very strong.

So can it continue?

Yes.

But that would be a guess, too.

So we kind of give you numbers we're comfortable with.

It doesn't mean we can't beat them.

It just means it's very hard to predict these revenues in this business.

And we certainly last quarter's call did predict this number for this quarter.

I empathize.

We're dealing with those same struggles.

Yes, yes.

And we're -- I think the one thing we're comfortable with, and it can change overnight, but I think is the fixed income market.

Given the dynamics, it's been a pretty good run, and the dynamics look pretty much in place, and that usually won't shut off unless there's a major event.

But M&A is still strong.

So it's what number, I don't know.

It's just hard for us to predict.

So it is -- again, we don't try to give you the optimistic numbers.

We try to be just realistic and hope we do better.

But I certainly know the bankers are hoping to do better, but it's a lot of business to close.

Yes.

And then maybe a little smaller in absolute size, but the debt underwriting business, I think, was a record this quarter as well.

So they finished the calendar year.

Public finance business did in the top 10 in the country, and the pipelines there look good as well.

So we have a very strong public finance franchise, which will also contribute to the results.

That's great.

And for my follow-up, I just wanted to ask about a follow-up relating to the organic growth outlook, the discussion that [you placed] earlier.

I appreciate the nuance commentary around the recruiting backdrop and some of the color around the different channels and what you're seeing.

You quoted an NNA figure, which implied about 5% organic growth in the quarter.

Slightly below the 6% to 7% you recorded over the last 2. And as you look ahead, just given the heightened competition within the employee channel, what pace of NNA growth are you comfortable underwriting or we should be contemplating at least in the near to intermediate term, given some of the competitive dynamics that you cited?

Steve, I'll let Paul talk about the competitive dynamics.

But just as far as the NNA metric goes, we -- that 5% was for the year.

Actually, the fourth quarter for almost all the firms in our industry, us included, was seasonally high because of the dividend and interest reinvestment.

So quarter-to-quarter, that number can change because, as you know, the baseline at the beginning of the period assets roll forward a quarter as well.

So we're still pleased with the 5% organic growth.

And remember, that is net of the commission and fees in the Private Client Group, the way we account for it.

And I would say on the recruiting, look, we've been -- I've been here now almost a decade.

We've had quarters where this has happened where recruiting trailed off in different channels and we've adjusted, and we've been right back as kind of a benchmark for recruiting across our channels.

And I believe we'll continue that.

Advisers want to be here.

We have great tools, great technology and a great culture that supports them.

So we just maybe got a little uncompetitive and thought during the pandemic, it didn't make sense.

But as we really dug into the economics, we had a lot of room to go up.

So we did go up modestly.

And I still think there'll be very good returns, and we just -- it's a hard choice for advisers when they come down to 2 places when someone's going to pay them 50% more.

So we're just going to have to close that gap and still be a good economic return for the firm.

So there's always a lag between when you do this and when the count comes up, but recruiting isn't bad in the employee channel at all.

It's just down from kind of a series of records.

We just need to get it back up where it can be, certainly where it should be, given what we think we offer on our platform.

So I'm still very optimistic about it.

It's been robust in all the other channels.

And we've had channels go up and down before for a quarter or 2, and we've always rebounded.

And we'll just focus on it, get it back to where we think it should be.

And (inaudible) capital.

But I appreciate the commitment to the 10% Tier 1 leverage target and look forward to seeing the pathway to getting there in a few months.

All right.

Thanks, Steve.

The next question comes from Alex Blostein of Goldman Sachs.

Paul, I was hoping you could dig into the RIA and the custody platform a little bit more.

I guess, one, can you give us a sense for the assets on that platform now?

And how much that's been contributing to your guys' NNA over the last year?

And slightly bigger picture, what is sort of the key competitive advantage that you think differentiates you guys versus peers in this part of the market?

And from an economics perspective, I guess, how should we be thinking about the revenue yield or the operating income yield on those assets sort of aside from the cash-related revenues?

Obviously, that's one, but are there other fees and things like that, that we should contemplate as that part of the business grows?

Yes.

So there's -- it's a complex and multiple asset -- multiple-faceted answer.

And we plan, again, on Investor Day to try to get better metrics because we aren't disclosing all of that at current.

But you're -- in general, in that custody type of platform, the return on assets may be a little lower and the margins are higher, but you're calculating it on a different revenue stream.

So it's a little bit complex there.

And traditionally, in that business, a lot of it was trading fees, which have gone away and interest spreads, which are hopefully temporary gone away.

So the economics in that business with interest spreads are a little more challenged, but I think they're fairly compelling when you get it back.

Our platform, the competitive part of our platform is that is an RIA custodian not only do we have a firm with an investment-grade background, which makes us a great competitor, but we also can offer kind of full systems, platforms and other firms use third-party platforms.

So our goal would be not to allow our platforms to be used for people want the turnkey as well as integrating third-party platforms and also access to our other services, such as lending and other things that we do through our bank and access to the other help that we give and through our support centers, which I think are much more robust than most RIA platform.

So I think it's a strong alternative.

We've shown growth.

We've been in it a while.

We just talked about it less.

And we've seen both with the market as trading fees have gone away as regulation best interest for some of the larger advisers felt it was just easier to be under the kind of the SEC versus FINRA and some of all the rules and they could take on the compliance and risk of chosen to do that and so I think it's a long-term trend.

It's been a long-term trend.

It's just picking up for certain advisers.

And I think we'll be competitive in that platform, too.

We just -- we got a lot of growth ahead of us to get us in scale there, but so far, so good.

Great.

And then my follow-up is around expenses.

And Paul, you gave kind of updated thoughts around the comp rate and again, hopefully, it could be better than 70% with a robust Capital Markets backdrop.

But can you talk a little bit about the noncomp outlook, maybe excluding provision expenses?

You guys have been running at a little bit over $300 million this quarter and last quarter on those kind of combination of those lines, again, excluding credit provisions.

How do you guys envision that evolving through the rest of the fiscal year?

And I guess to what extent sort of the higher recruiting TA packages will push that number higher?

Just trying to get some sort of framework to think about it for the rest of the year.

Yes, I don't think the higher TA packages would really move the needle throughout the year.

And that shows up in compensation when it starts amortizing, not the noncomp line items.

So yes, we were at around 323 this quarter, which is sort of what we were guiding around.

And that included some NCI expense as well.

The only thing that is harder to project is what business development expenses are going to do throughout the year.

They're down 50% year-over-year, almost $20 million for the quarter.

So we'll see how business travel recovers as we progress throughout the calendar year.

But overall, we're really focused, as you can tell, on managing all of the noncomp line items.

Some of them grow naturally with business growth.

Subadvisory fees grow with fee-based assets in PCG, for example, and those were up 12% sequentially.

So you're going to see some natural growth.

But the ones that are controllable are ones that we're really focused on managing.

I think in the shorter term, they will be well managed.

The question becomes when the environment opens up for conferences and others, you're going to get some rise, but short term.

This quarter, we certainly don't have any conferences scheduled, and I don't know when that opens up.

Some people would say late summer.

My guess is it will take a while before people are comfortable with traveling and gathering.

So it might be next calendar year before you really see anything there.

So they're still well managed.

We're managing them very closely, this part of it, and plan to do that, but we will add people with growth.

I mean you recruit an adviser, you've got to hire a system.

You've got -- you recruit advisers, you've got rent.

You've got -- there's just things if you open a branch.

So -- but the kind of discretionary stuff, we're holding pretty tightly.

Yes.

Maybe one other comment that Paul just reminded me of is, this first calendar quarter had some seasonal factors to it.

There's a shorter number of days.

So that impacts your interest billings.

We already talked about the impact to asset management billings.

There's payroll tax reset in the first calendar quarter across the board.

Usually higher mailings, which for us shows up in the communication information processing.

So there's some short-term seasonal things from quarter-to-quarter, but kind of echoing Paul's comments on the management of the ones we can control.

The next question comes from Chris Harris, Wells Fargo.

Another one on the competitive environment for advisers.

How does what you're seeing in the marketplace today compare to history?

Is this about as competitive as you've seen it?

Or not necessarily more like middle of the road?

I guess that's the first part of the question.

And the second part of the question is, are you a little surprised about how competitive it's getting, given where interest rates are?

So the first question is, it's always been competitive.

It's always been very competitive.

We've always had -- well, we always had outliers, 1 or 2 people offering larger pack -- kind of outsized packages we give to economics.

So it's gotten a little more broad based as some of the regional firms have joined into the fray.

So it's a little more competitive in that area.

I do think when we really dug into the economics that even though it was like packages, we thought with this interest rate environment made no sense.

If you structure them right, we believe you can get a good return and the spreads do come back, they'll be very, very good investments in those recruiting packages.

So we always kind of modeled our returns to current environment where we were conservative when we had high spreads, assuming they're going back to normal or historical averages.

In our packages, we were assuming, they just stayed more like where they are now, which I think was probably over punitive.

So we're a little behind.

We had room to increase it, and we'll do fine.

And the competitive -- it's always been competitive.

We've always recruited people that had better, higher offers than other firms, and we've been very successful.

So will we lose some people because of it?

Yes.

We just felt that we got a little out of the market in the last couple of quarters.

So we'll correct it.

There will still be a good return for the firm.

And the other channels have been doing fine.

We've had it in one channel, but we had this happen in other channels and try to make adjustments as it rebounded.

So the business is always competitive.

We've never had it -- we've never had an easy road, right?

So...

Well, you guys make it look easy.

So we sometimes forget about that.

A quick follow-up for Paul Shoukry.

You highlighted a bit more downside to the NIM as we progress through the fiscal year.

I'm guessing that's all coming from the AFS portfolio.

Once we get sort of towards the end of the fiscal year, is it fair to say that we're probably close to bottoming on the NIM based on where interest rates are today?

Yes.

You're right, Chris.

It is really mostly -- almost all of it is the agency mortgage-backed securities portfolio.

We had 2% paper paying off.

And as people are refinancing their mortgages, you're seeing prepayment speeds accelerate.

And right now, with the Fed buying, I think, $40 billion a month is what they committed -- recommitted to yesterday.

The spreads now are really tight.

I mean we're talking about 50 basis points or so for 3 years of duration.

Again, you see that you're out and getting really paid a lot to take that 3 years of duration.

So -- but if you just do the math on that, that's what if rates don't change for the next year or 2, that's where the yield on that portfolio would bottom out, assuming things don't improve in terms of yield for the securities portfolio, which is why we decelerated the growth of that this quarter and plan on the near term sort of running in place with that portfolio until we see maybe some improvement in those spreads.

The next question comes from Jim Mitchell, Seaport Global.

Maybe we could dig into a little bit the M&A business.

It's been -- obviously, it's been an area of focus and investment and obviously big surprise strength this quarter.

Can you give us some metrics that we can kind of think about number of MDs, the growth rate in MDs?

How to think about what is driving the growth?

And how we can at least model it a little bit better?

We've historically tried all sorts of things, the open underwriting, number of MDs.

I think there's a number of factors that Jim Bunn, our current head, has just done a fantastic job of recruiting and developing MDs that are even existing ones are producing or doing deals at levels we never thought that they could do 3 years ago.

And we have teams and segments that are just key players and compete against anybody of any size in their verticals.

So we hope Financo, which was an industry-leading in their consumer area, will do the same.

And so we're -- he's been building out vertical by vertical and globally certain sectors.

So it's not just MDs, it's really the production of those MDs and the size of deals and everything that's driving that.

So every time we give a metric, over time, it hasn't really tracked.

So we'd be open and there we all look at what other disclosures are to see if there's any information that we could give you, but we can't find a metric, especially over quarters because it's a cyclical business to some extent that would give you good indications.

So we've tried in the past, and we'll think about it and try again because if we could find the metric, we'd give it to you.

Well, I would say MD headcount growth does have a pretty high correlation with long-term growth in advisory fees.

So that could be helpful.

But I appreciate it.

Maybe turning to the comp ratio.

Now Paul, when you talk about 70% or lower, is that sort of assuming that kind of average quarterly run rate in investment banking?

How do we think about that target for the year versus the 67.5% in the first quarter?

Are you assuming that in your numbers?

Or are you just sort of assuming on an average basis at 160 to 165?

Yes.

I think that's the primary driver is just the Capital Markets revenue mix.

If you think about it, our asset management fees growing 10% next quarter in the Private Client Group business, that will have somewhere around a 75% payout associated with it.

So even if the Capital Markets segment generated the same revenues next quarter as it did this quarter, which we're not expecting at this juncture, then our comp ratio would go up.

So it's just based on the revenue growth in the Private Client Group business.

So it's based on revenue mix, and the biggest driver of the upside or, I guess, in this case, the downside in terms of being below 70% would be very, very strong Capital Markets revenues.

The next question comes from Kyle Voigt, KBW.

Most of my questions have been asked and answered.

I guess maybe a follow-up for Paul.

You just spoke about the agency book and agency yields, just wondering if there's any color you can provide on how much more pressure we should expect on the resi loan yields for the remainder of the year, just given that it's been drifting lower as well?

Yes.

We've seen a lot of refi activity there, which frankly, is good for our clients.

They're taking advantage of the lower rate environment.

So I think you'd see a little bit more continued pressure there, but certainly not to the same extent as the agency mortgage-backed securities.

And with this, the NIM compression in those 2 categories.

As Paul said earlier, we're also focused on opportunistically growing the corporate loan portfolio.

So I think our focus is growing net interest income through asset growth to offset the NIM compression going forward.

That's kind of the way we're thinking about the bank's balance sheet.

The good news right now is that we're -- with our capital position and our liquidity position, we've got a lot of flexibility.

So we're looking -- we're a growth company.

We're looking that.

We certainly came through what we hope is the worst of the pandemic in great shape.

And it's -- we're feeling more comfortable looking forward.

We plan to grow in the bank and with all these segments.

I mean the SBL segment certainly is a great asset for clients and a good asset for us.

The mortgage market, I think, looks like it's kind of bottomed out.

So hopefully, that will continue to grow and get good spreads, and we're feeling more comfortable with the corporate side again.

So we're feeling a lot better than we were this time last year or I guess, in March of last year.

Yes, we're feeling really good this time last year.

And our final question comes from Bill Katz, Citigroup.

So just going back to maybe M&A broadly, you had mentioned that, over time, you'd sort of put out $300 million-plus of earn-outs related to 2 deals.

I was wondering if you could help us understand how to think through maybe some of the earnings accretion or an ROE type of construct against that payout?

That's the first question.

Yes.

So the first thing is as you've been around us long enough to know is that we don't do things for short-term accretion, right?

We do -- we -- and we're not aggressive and even how we account for any of it.

So we do these projects really because of long-term growth, and we think they will come.

And I remember even getting back into Morgan Keegan and others that we've been similar.

We've done things that we think are structured well.

They're long-term growth.

Although these kind of acquisitions have some intangibles that go against P&L, some of they all have usually transitional comp, they have things that in the short term don't have big impacts but longer term have had great impacts.

And I think that's how you would look at those 2 deals right now.

But we're very, very high on both of them.

But I wouldn't say that in short term we're going to have any kind of major accretion impact.

Okay.

That's helpful.

And then just within that second question here, just in terms of M&A big picture, and I appreciate the discussion on capital management and Tier 1 leverage, et cetera.

How are you thinking about like priorities from here?

There's been some interesting M&A by some of your peers, and sort of wondering how you're thinking about what areas of focus from here, whether it be asset management or scaling further in the private client business?

Yes.

I don't think our priorities have changed.

So we are looking at both -- Private Client Group is our biggest business.

We've looked at acquisitions, as we've said, both in private client, but there aren't a lot that really fit.

So organic recruiting has been the engine that's driven.

And if you look back even to 2010, the engine has driven, it's been organic recruiting, not some of the really good acquisitions we've done in that area.

We are in the M&A area.

We continue to talk to folks.

And without the cultural fit or some of the deal prices, we've walked from some things.

I mean these aren't the only 2 deals we've looked at.

And the third area that I think we're spending more focus on are things like our plan administrator who is taking businesses we do today and helping to monetize them and give great service to our clients and advisers.

We've done that in insurance area with people's choice.

We've done that now within WPS, and we plan to keep looking at areas like that, that use technology and service and practices that both create a service and a value to clients and value to us.

So there's a lot of things we look at also in the technology area now today.

But we're very deliberate, but we're very, very active.

And so we plan to -- hopefully, we would like to do more than we've done, but they have to fit, and they have to work.

So we're going to continue on the course we've been on, hopefully deploy some more capital.

I don't think we have any more questions.

Well, great.

Well, I appreciate you all joining us on the call.

And certainly, a strong quarter for us.

And again, we're very optimistic in terms of the fundamentals.

I don't know what will happen with the market, but hopefully, this pandemic gets behind us, and we feel in good state at Raymond James.

So and just remember that we've -- I want to remind you that our area is the home of not just the Stanley Cup champions, the baseball runner-ups almost World Series champions, but hopefully, the football champions, too, at Raymond James Stadium we're playing for the NFL Championship.

So thank you.

Thank you.

That does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.

Thank you, and have a good day.