Raymond James Financial Inc

NYSE:RJF

Earnings Call Transcript 2021-Q3

[Operator]

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 today’s call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated timing and benefits of our acquisitions and our level of success in integrating acquired businesses. Anticipated results of litigation and regulatory development, impacts of the COVID-19 pandemic or general economic conditions. In addition, words, such as belief, expects, could and would, as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent forms 10-Q, which are available on our Investor Relations website.

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

With that, I’m happy to turn it over to Chairman and CEO, Paul Reilly. Paul?

[Paul Reilly, Chairman and Chief Executive Officer]

Good morning. Thank you, Christie. I am actually joining you today from Chicago where we’ve had a number of day meetings with some of our top independent advisors. So, it’s great to see both their success during the pandemic and their excitement as we move forward.

It’s kind of hard to believe now it’s been over 16 months into the pandemic and we’re just starting to see the light at the end of the tunnel with the distribution of vaccines. And now the spread of Delta variant reminds us that we could be dealing with this one way or another for quite some time. Fortunately, our economy has really proven to be resilient and creative quickly adapting to these changes, which has facilitated the recovery of our economy stock market over the past year. Similarly, our advisors and associates have been just simply amazing. I’m really proud of what they’ve been able to do, enabling Raymond James to achieve these record results for the first nine months of fiscal 2021.

So why don’t we move on to Slide 3 with our quarterly results? The fiscal third quarter was another strong quarter with several, I guess, many records. The firm reported record net revenue of $2.7 billion; net income of $307 million and earnings per diluted share of $2.18. Excluding the losses on extinguishment of debt of $98 million and $7 million of acquisition-related expenses, adjusted quarterly net income was $386 million and adjusted earnings per diluted share were $2.74 cents, both records. The increase in quarterly net revenue was largely driven by record asset management and related administrative fees and record investment banking revenues during the quarter.

Adjusted net income growth was due to the afore mentioned higher net revenues along with the loan loss reserve release in the quarter, compared to a provision for credit losses year ago.

Annualized return on equity for the quarter was 15.9%. And the adjusted return on tangible common equity was 22.2%, really an impressive result, especially in this near zero rate environment and given our strong capital position.

Moving to Slide 4, and we’ll see that the quarter ended with record total client assets under administration, a $1.17 trillion, which were up 33% on a year-over-year basis and 7% sequentially. We also achieved record PCG assets and fee-based accounts of $617 billion, a 9% sequential improvement, which will benefit the fourth quarter. And record financial assets under management of $191 billion.

We ended the quarter with record 8,413 financial advisors, and that’s net increases of 258 over the prior year period, 86 over the preceding quarter. Advisor recruiting has been robust even amidst a very competitive market. Over the prior four quarters financial advisors with approximately $325 million of trailing 12 production and nearly $53 billion of assets of 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 $69 billion over the four quarters ending in June 30, 2021, representing more than a 8.5% of domestic PCG assets at the beginning of the period. And remember, this is net of client fees. And this trend has accelerated during through out the 12-month period with the past two quarters reaching an annualized rate over 9%.

So far, this fiscal year is shaping up to be very strong in terms of advisor retention, as well as attracting new advisors to the Raymond James Platform through our multiple affiliation options. In fact, we are on track for a record year of advisor recruiting in fiscal 2021. We remain focused though on providing a superior platform to support advisors and their clients, and also helping advisors grow their practice and it’s resonating well in the market. Advisers are attracted to our leading technology solutions, as well as our adviser and client centric cultures.

Let’s move onto Slide 5. The Private Client Group generated record quarterly net revenues of $1.7 billion and pre-tax income of $195 million and 11.5% pre-tax margin, reflecting significant operating leverage over the past year. Quarterly net revenues grew 3% over the proceeding quarter, predominantly driven by higher asset management and related administrative fees, reflecting higher assets and fee-based accounts, which will also provide a tailwind for the fourth quarter.

The Capital Markets segment generated quarterly net revenues from $446 million and pre-tax income of $115 million, driven by record investment banking revenues and a continued very solid fixed income brokerage revenue performance. The strong result reflects the significant investments we’ve made to strengthen our platform over the last 10 years. And we are continuing to make investments, including the recently completed acquisition of a consumer-focused M&A advisory firm, Financo and the announcement of the acquisition of Cebile, a leading private funds placement age of the secondary market to private equity. We are excited to welcome Sunaina and her team to the Raymond James family when we closed Cebile, currently expected to be in the fiscal fourth quarter.

The Asset Management segment generated record net revenues of $225 million and record pre-tax income of $105 million. These results were primarily due to the growth of financial assets under management driven by equity market appreciation and net inflows into fee-based accounts and the Private Client Group, partially offset by the modest quarterly net outflows at Carillon Towers Associates following a solid quarter of net inflows in the fiscal second quarter.

Turning to the bank. Record net loans of $23.9 billion grew 13% over the prior year at 4% sequentially. This growth was primarily driven by the strong growth of the securities based loans to PCG clients of more than 50% and 14% respectively. This is a loan category we continue to see good opportunities for growth and attractive risk adjusted returns.

Raymond James Bank generated quarterly net revenues of $169 million and pre-tax income of $104 million. Quarterly net revenues declined 5% compared to a year ago quarter, primarily due to the impact of lower to short-term interest rates. Sequentially, quarterly net revenue grew 6%, as higher asset balances offset the modest compression in the bank’s net interest margin during the quarter. Pre-tax income growth year-over-year was primarily due to the loan loss reserve release in the quarter, compared to a provision for credit losses a year ago period.

The credit quality of the bank loan 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 $7.07 billion during the first nine months of fiscal 2021, up 20% over the same period a year ago. And despite the losses on extinguishment of the debt this quarter, we still generated a record net earnings per diluted share of $6.92 for the first nine months of 2021.

Adjusted net income was $1.06 billion, up 73% from the net income in fiscal 2020. Given all the unique circumstances, I think it’s also worth comparing our results so far in fiscal 2021 to fiscal 2019, a very strong year for Raymond James. When comparing the first nine months of fiscal 2021 to the first nine months of fiscal 2019, net revenues have grown 24%, net income has grown 27% and adjusted net income has grown 35%. Truly spectacular results, particularly given the zero interest rate environment this fiscal year.

Moving to the fiscal year-to-date segment results on Slide 7, the Private Client Group capital markets and asset management segments all generated record net revenues and record pre-tax income during the first nine months of the fiscal year. Again, these results reinforced the value of our diverse and complimentary businesses.

Before I turn the call over to Paul, I wanted to highlight a separate announcement we made this morning. We announced our firm’s intention to make an offer for the entire issued and to-be-issued share capital of a UK based Charles Stanley Group at a price of $5.15 per share or approximately £279 million, the U.S. equivalent of approximately $387 million.

Charles Stanley is a firm we’ve admired for a long time and has a tremendous reputation, a 200 year heritage and a talented pool of wealth managers and professionals. The two firms share a common and increasingly rare client-centric approach where the primary client relationship is held by the individual wealth managers. Raymond James subsidiary, the UK – RJIS has operated in the UK for over 20 years under strong leadership and has experienced exceptional growth. This combination with Charles Stanley would provide the opportunity for further accelerated growth in the UK, the second largest English-speaking wealth management market.

Charles Stanley has nearly 200 wealth managers and £27.1 billion in client assets, bringing our total UK assets to over £40 billion. Additionally, Charles Stanley multiple affiliation options would give Raymond James the ability to offer affiliation choices consistent with our models in Canada and the U.S., and greatly accelerate the growth of the RJIS’s newly launched employee affiliation model, while building on its market-leading independent contracting and investment management services businesses.

As I mentioned, the announcement today is our intention to make this offer. We expect offer to be made in approximately a month. Regulations issued by the UK Takeover Panel will limit what we can further say at this point, but we will provide updates as more information is made available.

Now for a more detailed review of our third quarter results, I’m going to turn it over to Paul. Paul?

[Paul Shoukry, Chief Financial Officer]

Thanks, Paul. I’ll begin with consolidated revenues on Slide 9. Record quarterly net revenues of $2.47 billion, grew 35% year-over-year and 4% sequentially. Record asset management fees grew 8% sequentially, commensurate with a sequential increase of fee-based assets in the preceding quarter. Private Client Group assets and fee-based accounts were up 9% during the fiscal third quarter, providing a tailwind for this line item for the fourth quarter.

Consolidated brokerage revenue is $552 million, grew 14% over the prior year, but declined 7% from the record set and the preceding quarter. Institutional fixed income brokerage revenues remain solid, albeit down from the record set in the preceding quarter. Brokerage revenues and PCG were up 22% on a year-over-year basis, but down 6% sequentially due to lower trading volumes, as well as the large placement fee in the preceding quarter.

Account and service fees of $161 million increased 20% year-over-year and 1% sequentially, largely due to higher average mutual fund balances. Record consolidated investment banking revenues of $276 million, grew 99% year-over-year and 14% sequentially, driven by record M&A revenues, and strong debt and equity underwriting results. Our investment banking pipelines remain strong. So we would be pleased if fourth quarter revenues came in around the average of the quarterly revenues generated over the first three quarters of the fiscal year, that would have been about $260 million on average. But of course, this line item is inherently difficult to predict.

Other revenues of $55 million were up 25% sequentially, primarily due to $24 million of private equity valuation gains during the quarter, of which approximately $10 million were attributable to non-controlling interest, which are reflected in the other expenses.

Moving to Slide 10. Clients’ domestic cash sweep balances ended the quarter at $62.9 billion, essentially flat compared to the preceding quarter and representing 6.1% of domestic PCG client assets. As we continue to experience growing cash balances and less demand from third-party banks during fiscal 2021, $8.6 billion of the client cash is being held in the client interest program at the broker dealer. Over time, that cash could be redeployed to our bank or third-party banks as capacity becomes available, which would hopefully earn a higher spread than we currently earn on short-term treasuries.

On Slide 11, the top chart displays our firm-wide net interest income and RJBDP fees from third-party banks on a combined basis, as these two items are directly impacted by changes in short-term interest rates. The combined net interest income and BDPs from third-party banks of $183 million were up slightly compared to the preceding quarter, as modest NIM compression was offset by growth in client cash balances and higher asset balances in Raymond James Bank. However, it’s still down significantly from the peak of $329 million in the second quarter of fiscal 2019, really highlighting the remarkable results we have been able to generate despite near zero short-term interest rates.

In the lower left portion of the slide, we show net interest margin or NIM for both RJ Bank and the firm overall. We continue to expect the bank’s NIM to decline to just around or just below 1.9% over the next quarter or two. The average yield on RJBDP balances with third-party banks declined 1 basis point to 29 basis points in the quarter. We believe this average yield will remain around this level for the rest of the fiscal year, but there will likely be downward pressure in this yield in fiscal 2022, especially in the back half of the fiscal year if banks demand for deposits, don’t improve from current levels.

Moving to consolidated expenses on Slide 12. First, our largest expense compensation; the compensation ratio decreased sequentially from 69.5% to 67.2% largely due to record revenues in the capital markets segment, which had a 57% comp ratio during the quarter. And the benefit from the private equity valuation gains, which do not have direct compensation associated with them.

Given our current revenue mix and disciplined manage of expenses, we remain confident, we can maintain a compensation ratio lower than 70% in this near zero short-term interest rate environment. And as I’ve said over the past few quarters, we could outperform that just as we did in the fiscal third quarter with capital markets revenues at or near these levels.

Non-compensation expenses of $425 million, increased 18% compared to last year’s third quarter and 53% sequentially, primarily driven by the $98 million loss on extinguishment of debt, acquisition-related expenses, the non-controlling interest of $10 million and other expenses related to our private equity valuation gains and higher business development expenses.

As we discussed last quarter, we successfully executed a debt offering in the fiscal third quarter to take advantage of the low rate environment and significantly extend the maturities of our existing balances. We raised $750 million of 30-year senior note at 3.75% and utilize the proceeds and cash on hand to early redeem our next two senior notes that we’re maturing in 2024 and 2026, effectively, resulting in the same amount of senior notes outstanding.

This resulted in $98 million in losses associated with the early extinguishment of those nodes, but in doing so locked in very low rates for 30 years, while significantly extending the duration and stability of our funding profile. Overall, our results show, we have remained focused on managing controllable expenses, while still investing in growth across all of our businesses and ensuring high service levels for advisors and their clients.

Excluding the debt extinguishment expense, we do expect non-compensation expense to continue picking up over the next few quarters as hopefully, travel, recognition trips and conferences continue to resume, and we continue to increase our investments in technology and high quality service levels for our growing business. We would eventually expect loan loss provisions associated with net loan growth as well.

Slide 13 shows the pretax margin trend over the past five quarters. Pretax margin was 15.6% in fiscal third quarter of 2021 and adjusted pretax margin was 19.8%, which was boosted by record revenues, the loan loss reserve release and still relatively subdued business development expenses. At our Analyst and Investor Day in June, we outlined a pretax margin target of 15% to 16% in this near zero interest rate environment.

But as we experienced during the first nine months of the fiscal year, there’s meaningful upside to our margins, when capital markets results are strong and improving macroeconomic trends lead to releases of our allowances for credit losses.

On Slide 14, at the end of the quarter, total assets were approximately $57.2 billion, a 2% sequential increasing – increase, reflecting solid growth of securities-based loans at Raymond James Bank.

Liquidity and capital levels are very strong, with cash at the parent of approximately $1.56 billion, a total capital ratio of 25.5% and a Tier 1 leverage ratio of 12.6%. We have substantial amount of flexibility to be both defensive and opportunistic. The third quarter effective tax rate of 20.3% benefited from non-taxable gains in the corporate life insurance portfolio, we would expect that tax rate to be around 21% in the fiscal fourth quarter, assuming a flat equity market.

Slide 15 provides a summary of our capital actions over the past five quarters. In the third quarter, we repurchased 375,000 shares for $48 million. As of July 28, $632 million remains available under the current share repurchase authorization. But as Paul Reilly will discuss our priority continues to be deploying capital to grow our businesses.

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. Non-performing assets remained low at just 12 basis points of total assets and criticized loans declined sequentially. The bank loan loss benefit of $19 million reflects an improved outlook for economic conditions and higher credit ratings on average within the corporate loan portfolio.

Due to reserve releases and loan growth during the quarter, the bank loan allowance for credit losses as a percent of total loans declined from 1.5% to 1.34% of the quarter end. For the corporate portfolio, these allowances are higher at around 2.4%. We believe, we’re adequately reserved, but that could change if economic conditions deteriorate.

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

[Paul Reilly, Chairman and Chief Executive Officer]

Thank you, Paul. So overall I’m very pleased with our strong results for this quarter, which top many records, and did so in spite of the persistent challenges of the global health pandemic and near zero short-term rates. As for the outlook, we remain well positioned entering the fourth fiscal quarter with records of many of our key business metrics, strong pipelines for financial advisor recruiting and investment banking.

In the Private Client Group results will benefit by starting the fourth quarter with 9% increase of assets and fee-based accounts. With the strong recruiting pipeline, we are on track for record fiscal year recruiting as prospective advisers across all of the affiliation options have continued to be attracted to our platform, including the leading technology solution, our advisor and client centric culture. These recruiting results are primarily strong given the very competitive market for experienced advisors.

In Capital Markets segment, the investment banking pipeline remains strong and we expect solid fixed income brokerage results, driven by demand from depository client segment. However, keep in mind, these – there is still an economic uncertainty due to the ongoing pandemic that could impact these results.

In the Asset Management segment, if equity markets remain resilient, we expect results to be positively impacted by higher financial assets under management. Active asset managers continue to face structural headwinds. However, we are pleased to see positive net flows on a fiscal year to date basis for Carillon Tower Associates. We hope that the one benefit of increased market volatility is that it reinforces the value of our high quality asset active managers.

And Raymond James bank should continue to grow as we have ample funding and capital to grow the balance sheet. We’ll continue to focus on lending to PCG clients through securities-based loans and mortgages. And we will continue to be selective and deliberate in growing our corporate loan and agency backed securities portfolio.

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

Today’s announcement of our firm’s intention to make an offer for Charles Stanley Group demonstrates our focus on these initiatives in our commitment to deploy excess capital over time. We believe this acquisition stays true to our longstanding criteria for acquisitions. So first, being a good cultural fit, a good strategic fit, it makes financial sense for shareholders and something we can integrate.

I also want to once again take a moment to thank our advisors and associates. They’ve been amazing at being able to provide excellent service to their clients, to these difficult times. I’m very proud to be a part of this special Raymond James family. Thank you all for attending.

With that, operator, Tommy, I’m going to turn it over to you for questions.

[Operator]

Thank you very much. [Operator Instructions] We’ll get with our first question on the line from Manan Gosalia from Morgan Stanley. Please go ahead with your question.

[Manan Gosalia, Morgan Stanley]

Hi, good morning. I was wondering if you can dig in a little bit into the Charles Stanley Group acquisition. Can you just talk us through maybe the rationale for the acquisition? Why expand in the UK versus the U.S. and maybe what the synergies are with your current business there?

[Paul Reilly, Chairman and Chief Executive Officer]

Again, there’s not a lot, we can say right now, except the strategic rationale is that we believe we can grow in all of our markets. And we certainly have the capital to grow in the U.S., Canada and UK and believe in all three of those private wealth markets. We’ve been in the UK market at the Raymond James, RJIS for 20 years, and we’ve had very good growth, but we are – I’d say undersized and our employee channel is really nascent.

Charles Stanley brings first culture identical to us. It’s stewarded by the Howard family for generations. I think the fourth generations in the business has the very same value of client centric, advisers centric culture, and has multichannel. So the combination gives us at £40 billion and really gives us the mask to utilize a lot of the things they’ve done well and to continue to grow that business and really give us the base to make a difference.

So it’s not saying, we’re not choosing it over the U.S., Canada or the UK. We believe in all three of those markets. And when we find these rare opportunities to acquire 200-year old firm as a great brand, name and matches our culture, we’re going to act. So we believe very strongly in it, and I think it’ll really help our business.

[Manan Gosalia, Morgan Stanley]

Great. Anything – I know you’ve can’t say, that much given regulations, but anything you can say on the financial details, revenues, pretax margin, maybe how much capital you’re utilizing from the acquisition. I can sort of see from their disclosure that it’s about $240 million or so in revenues and 10% profit margin. But I’m also assuming that there are synergies and additional investments that you were thinking about. So is there any more color you can give on that?

[Paul Reilly, Chairman and Chief Executive Officer]

I would just say that not a lot. I mean, you can see the public information on their current revenues and base. And we do plan to invest in the technology of that business. And we think combined, it will be – we’ll be able to be at a much better place to do that. And they’ve got a very good back office and strong technology. But outside of the details, we really can’t get into any more details right now. But we will make them available as soon as we can.

[Manan Gosalia, Morgan Stanley]

Got it. And anything on the capital that you’re utilizing for the acquisition?

[Paul Shoukry, Chief Financial Officer]

Yes, I would tell you in our regulatory filing, we basically said that we have sufficient cash on hand to fund the acquisition. The regulatory filing also discusses a loan note offering that would be possible. That’s fairly common in the UK as discussed, the filing has a nominal interest rate of about 10 basis points, which can change over time with short-term rates. But obviously with the overall cash – overall consideration of less than $400 million, we have $1.6 billion almost of cash at the parent company as we discussed earlier on the call. We have a $1 billion target, so we have sufficient cash at the parent company to fund the acquisition without kind of any capital actions beyond that.

[Manan Gosalia, Morgan Stanley]

Great. Thank you.

[Operator]

Thank you very much. We’ll go to our next question from the line of Bill Katz with Citigroup. Please go ahead.

[Bill Katz, Citigroup]

Okay. Thank you very much for taking the questions. So I guess, maybe start with, Paul as you think about – maybe both of you guys, just in terms of getting to that Tier 1 leverage ratio, how does this acquisition sort of fit in against that? And maybe stepping away from that as you sort of commented on the primary focus area is growth. Should we assume that the bank growth will be the primary driver to driving down that Tier 1 leverage ratio over time? Thank you.

[Paul Reilly, Chairman and Chief Executive Officer]

I think you’re going to see it all sorts of ways that you saw the announcement today. We are looking at other opportunities to expand the business, and again, we can never predict these, so many of these we’ve known people for years before they’re interested in selling. So we – our strategic M&A is really sharpened and our opportunities are really sharpened. I don’t know if deals will happen yet, but if we can find opportunities that expand our business, we’ve said that’s our priority. We also plan to grow the bank to the extent we can. Within that we’ve used share purchases when we can. So I think we’re still going to focus on opportunities to grow our business, which includes strategic M&A and also continue to grow the bank. And the level of the bank growth than our aggressiveness probably depends first on economic opportunities, but also how much capital we’re able to deploy through other opportunities. So we’ll balance that out.

[Bill Katz, Citigroup]

Okay. That’s helpful. And then maybe just a follow-up question. If you could unpack Paul your comments on the NIM about sort of maybe a little bit under the 190 over the next couple quarters? And maybe on the sweep side where you sort of called out, sort of the second half of next year, can you maybe ring fence, like what might be expiring or coming up for contract renewal as we sort of think about the timing next year? Thank you.

[Paul Shoukry, Chief Financial Officer]

Yes, Bill, we kind of just essentially reaffirming our guidance on the NIM at right around 1.9% that we provided last quarter. So over the next quarter or two obviously depends somewhat on asset mix and the growth of the agency MBS portfolio, which we’ve essentially decelerated over the last quarter, just given where rates are. We would expect to come in right around that 1.9% give or take a couple of basis points over the next quarter or two. As far as the yield on the BDP balances with third-party banks, there’s a significant portion of our deposits that mature contractually over the next, I would say six to 12 months. Right now the sort of market rate for new deposits, if you can even get capacity as much lower than the 30 basis points or the 29 basis points that we’re currently earning on average.

But remember, if the yields on those deposits aren’t attractive with those third-party banks, we have the capital flexibility going back to Paul’s comments earlier to bring those cash balances on the balance sheet and invest in other assets. So I don’t think it’s as easy as a formula of just assuming that those balances reset at a lower yield off balance sheet, because depending on what we can or not balance sheet, it may be more compelling to bring it on balance sheet and invest in other assets at the bank securities and/or loans.

[Bill Katz, Citigroup]

Okay. Thank you both.

[Operator]

Thank you very much. [Operator Instructions] And we’ll go to our next question on the line from Steven Chubak from Wolfe Research. Go ahead.

[Steven Chubak, Wolfe Research]

Hey, good morning. So I had a follow up to Bill’s earlier question. You cited the continued pressure on the bank NIM, consistent with the trend we’ve seen in recent quarters. Just given the very strong loan growth, particularly in the SBL channel and already low security yields, I was hoping Paul that you can unpack what the primary driver of the name compression from here? And relating to the third-party sweeps, what’s the breakeven level or spread where you might look to sweep third-party cash more aggressively to the bank as you face that repricing or that price from headwind in the back half of next year?

[Paul Reilly, Chairman and Chief Executive Officer]

Yes, I would tell you Steve, that the primary driver of the NIM compression, because most of the short term rates are reflected in sort of the yields of the various asset categories. Most of our asset categories are floating in nature. So they reflect the kind of rate environment that we’re in. So most of the NIM dynamic going forward is really going to be driven by asset mix, so for example, this quarter we grew securities based loans on a net basis $700 million, which is just truly fantastic growth, 14% sequentially and over 50% year-over-year and those have – those are fully secured with marketable securities and help strengthen the relationships between advisors and their clients and the private client group. So we love that asset. But that yield is 2.2% on average in the quarter, whereas the corporate loans are in the 2.5% to 2.6% and they have been growing we’ve can resume growth there, but not to the same extent as the SBL. So just by the change in mix to sort of the lower risk categories, like securities based loans that’s going to put downward pressure on your NIM, all else being equal.

As far as the breakeven analysis, I wish it was that simple. There’s a lot of variables that go into that to bring it on balance sheet obviously uses capital and then you have to essentially take either duration and/or credit risks to earn a higher yield and so in that higher yield changes week to week, depending on the latest fed announcement. So one thing is certain, if we don’t have the capacity up balance sheet or the capacity is that very low rates, then the bringing in on balance sheets certainly looks more attractive on a relative basis. And that’s something that we have the capital and the appetite to do if necessary.

[Steven Chubak, Wolfe Research]

Understood. Okay. And then for my follow-up Paul, just on kind of the non-comp commentary that you provided, you noted that non-comp expenses should grow as T&E picks up a ultimately a good problem to have. If I look at the non-comp this quarter and I back out the non-controlling interest piece, the reserve release, the clean numbers of about $330 million, it’s slightly above that $1.3 billion annualized run rate you had spoken to in the past, just given some of the drivers of non-comp growth view side of that. How should we be thinking about the pace of growth from here? And maybe can you give us an updated run rate or jumping off point as we think about the non-comp trajectory for the next couple of quarters?

[Paul Shoukry, Chief Financial Officer]

Yes, Steve, unfortunately still a lot of uncertainty there, business development being one prime example of that, I would say the $1.3 billion jumping off rate, I want to say that our quarterly revenues at that time were somewhere around $1.7 billion to $1.8 billion. I don’t remember exactly when that was. But yes, we’re at $2.5 billion now. So just the business is a lot bigger now and there’s a lot of expenses directly associated with the size of our business, whether it be some advisory fees that support the asset management business, whether it be FDIC insurance expense, which supports the bank branch expenses, we continue to recruit more advisors. We’ve done a couple acquisitions. We just announced another one.

So a lot has changed since we provided that $1.3 billion metric which begs the question, when are we going to provide more new guidance and the new threshold? And I would say, we want to do that as soon as there’s more clarity kind of on the go forward path particularly for things like business development expense. In fiscal 19, before the pandemic that was running at around $200 million for the year, $50 million a quarter, so even this quarters number of $31 million is well below that as an example and then loan loss provisions as well, obviously that is something that’s going to be volatile until there’s more kind of economic certainty or clarity going forward. So as soon as there is more certainty around what these expenses will look like, we will certainly be transparent as we always are and try to provide you better guidance.

[Steven Chubak, Wolfe Research]

Thanks. Is it okay if I squeeze in one more, I just wanted to get a view on the organic growth sustainability, obviously the 9% that you cited is just a very impressive statistic. It looks like both you and your peers are running well above long-term averages, which show me you could just speak to the sustainability of the organic growth as well as what you’re seeing across all the different affiliation options.

[Paul Reilly, Chairman and Chief Executive Officer]

Yes. So, part of that depends, the markets been robust and people have been growing and client engagements been really good. So, that can all change with the downturn were clients get fearful and assets often don’t grow the same in those environments, but if you look at any outlook we see in the short to mid-term, it all looks still very, very positive. And I – as I set up here at a meeting with our advisors, and they’re all very positive experiencing our top advisors not just record growth for their businesses, but I can tell you by the questions over two days and watching what they’re doing with their practices, they have no thoughts of slowing down either.

So, again, a short to mid-term, I think it’s sustainable. The recruiting has been good across all the ops, which is ironic too sometimes. We got slowed down a little bit, a few quarters ago when the private client, when their employee channel, the offices were closed and we were adjusting, but that’s really taken off. And it’s going to hit a record probably it’s on a page that hit record this year, even after that very slow start. So, we’re seeing it all across the affiliation options. So the pipeline is very strong. And so I’d say for the short to mid-term, it looks very, very good. Longer term it depends on the economic viability, the numbers for the economy growth for good this quarter. And in fact, continues and people stay positive. I think it can continue for awhile.

[Steven Chubak, Wolfe Research]

That’s great colorful, Paul. Thanks so much for taking my questions.

[Operator]

Thank you very much. We’ll proceed to our next question on the line from Gerry O’Hara with Jefferies. Go ahead.

[Gerry O’Hara, Jefferies]

Great. Thanks for taking my questions this morning. Perhaps just kind of stepping back a little bit as it relates to the acquisition, could you give us a little bit more sense as to your ex-U.S. kind of I suppose M&A strategy and where you think maybe some of the markets that you’re most under-penetrated in, or perhaps where those where your offerings specifically would resonate best. Thank you.

[Paul Reilly, Chairman and Chief Executive Officer]

So the focus is – it depends on the business unit, the focus and the private client group that’s been in the U.S., Canada and the UK. We have unique offerings, like think, more or less in all those markets with the multi affiliation options, again unique in Canada and in the UK. So Charles family was a perfect fit because, there weren’t many people, not just the cultural heritage, but the multi-channel options. So, we are focused on the private client group of any type of opportunity in those three markets. We’re not really looking to expand in other markets in the private wealth business right now. And we just want to focus on growing and competing well in those three markets it’s broader in the M&A category. It’s the one business that we do look at global opportunities both from a capital deployment. I mean, the capital for most places, just an office and people versus capitals heavier than the other businesses and it is a global business.

So, we will continue to look for opportunities, but again, we’ve been focused in North America, the UK and Europe, but we have looked at things in other places. And then the rest of the businesses that continued to be kind of a North American and UK focus. So, we’re not – we don’t – we have plenty of capital to grow. We think we’re in strong positions in the UK. We had a very good practice, but it was small. We think this acquisition would put us in a very competitive position where we can – we think accelerate the growth. So that’s been, our focus continues to be our focus and we’re not looking at other kind of global markets.

[Gerry O’Hara, Jefferies]

Okay. That’s helpful. And then perhaps one for Paul Shoukry and forgive me as I’m still new to this story, but I think you said at 21% around the tax rate into the fiscal 4Q assuming a flat equity market. Can you perhaps just remind me a little bit about, what some of the puts and takes that could kind of move that rate higher or lower as you know, depending on, I suppose, backdrop? Thank you.

[Paul Shoukry, Chief Financial Officer]

And welcome to the story. Glad to have you a part of the coverage universe. Yes one of the biggest drivers and we can get into more detail offline for the, that impacts the tax rate quarter-to-quarter is we have a corporate owned life insurance portfolio, which we use to sort of fund the, some of our non-qualified benefits that we offer our associates.

And so the, the way that a corporate owned life insurance portfolio those balances work is that when the equity market appreciates that typically results and non-taxable gains and that portfolio, which means that, our effective tax rate, all else being equal is lower and vice versa when the equity market goes in the other direction it results in non-deductible losses, which means our effective tax rate all else being equal goes higher. So typically the trend is when the equity markets are up, our effective tax rate is lower and vice versa. Again, there’s a lot of other factors, but that is the, the factor that seems to be the most sort of volatile or impactful from quarter-to-quarter.

[Gerry O’Hara, Jefferies]

Okay. Helpful. Thanks for taking my questions this morning.

[Operator]

Thank you very much. We’ll get to our next question on the line from Devin Ryan with JMP securities. Go ahead.

[Devin Ryan, JMP securities]

Hey, good morning, everyone. How are you?

[Paul Reilly, Chairman and Chief Executive Officer]

Hey, Devin?

[Devin Ryan, JMP securities]

Hey, sorry, I hopped on a minute late here. So apologies if I’m being a bit redundant, but on the recruiting outlook, appreciate that, it remains robust, but we’ve been hearing in the market that, on the employee side there, there’s been kind of another, maybe ratcheting up a competition and packages, are you guys seeing that? And I know you had spoken about a few quarters ago kind of increases, and then you took your offer routes. So, I’m curious, like is a week you’re hitting another level where, competition’s intensifying even more, so it would makes you more, pricing, pressure or just higher packages, kind of curious, what you’re seeing in market there?

[Paul Reilly, Chairman and Chief Executive Officer]

I can’t really say that. I think that, we’ve been so active in recruiting that we probably get a good feel of what everyone’s doing. So we set a few quarters ago that, where people have been ramping up for a year. We hadn’t, and we had to make some adjustments, but I can’t, it’s competitive. There are always, it seems like an outlier offer. There’s always seems to be an outlying offer here or there every time we recruit, but again, that’s not how we recruit. We give a competitive package, but often not the highest and stick to it. And again, the results have been tremendous. So I can’t say, it picked up a while ago and I can’t say, I’ve seen any difference in the last couple of quarters.

[Devin Ryan, JMP securities]

Okay, terrific. And then just a follow-up on acquisitions, I know a fair amount of color here this morning, but if you think about some of the other types of acquisitions in wealth management that maybe aren’t as traditional just buying financial advisor franchise, are there other areas that, could be interesting that you guys are looking at, whether it be technology that accelerates growth, in a new way or additional product capabilities or, there other types of things that you guys are looking at that I know or maybe a bit non-traditional for Raymond James, but just to kind of also strategically aligned with the M&A with the M&A opportunity, it feels like there’s maybe even more to do than historically. There has been some I’m curious what you guys are seeing on that front as well.

[Paul Reilly, Chairman and Chief Executive Officer]

Yes, I would say a Devin there’s absolutely. We’re looking at a lot of things. And one of the categories is firms, that are offer new services or products that are extensions of what we do within that EPS is probably an example of that, but also looking at technology, firms that utilize technologies that really, kind of propel the businesses we’re in. And we’ve been very active in that too.

So it’s, it takes a lot of time because you have to find them and then really understand how that technology works sets and how it will really benefit our businesses, whether it be complimentary or may be great to find something that’s automated or revolutionized part of the business, but those are harder to find, but we’re looking a lot at, what I call technology backed or technology firms in our spaces that we think we could utilize the technology to be a strategic client advantage and to make us more efficient and more electronics. So the answer is yes, we’ve been looking very hard at a number of opportunities. And again, we’ve been on the M&A focused much more focused over the last year or two on those types of opportunities.

[Devin Ryan, JMP securities]

Okay, great. If I can just squeeze one more in here, on the fixed income brokerage business and the capital market segment, obviously, it’s been a very good environment for that business. Is there any way to give us any more context around kind of the growth of that franchise? So revenues have been expanding very good fiscal 2020, a good start to fiscal 2021. And I think we get questions around the sustainability or kind of what normalize looks like. And I know that’s not necessarily easy to answer, but is there any frameworks around kind of how that business has scaled? So the pie is expanding or the bars moved higher, because it’s just a bigger business today than it was two or three years ago.

[Paul Reilly, Chairman and Chief Executive Officer]

There is been an unusual environment where both fixed income and equities produce records. So it’s – even going back in history, you can’t find many windows like that, but they’ve expanded both in products in the debt capital markets business over the last two years and other areas. And we still continue to look in areas in fixed income and our sales and trading business, where we have strong client bases, but not offering certain products and services. And I really don’t want to go in to what those are, but we’ve continued to look and round those out. And that’s been part of the growth too besides the robust markets.

And they didn’t have a record quarter, but they had a very strong quarter in chasing. When you’re chasing records all the time, you don’t always set a record, but we’re really pleased with what they’ve done and the franchise has continued to grow and prosper. So yes, we think in all of our businesses there investment opportunities and some are harder to find than others, but we continue to look. And I think there is room to growth.

[Devin Ryan, JMP securities]

Terrific. Thanks very much.

[Operator]

Thank you. And we’ll proceed with our final question for today, it is another follow-up question from the line of Bill Katz from Citigroup. Please go ahead.

[Bill Katz, Citigroup]

Okay. Thank you so much for taking the extra question. I guess, circling back to the investment bank. So momentum seems very strong, I think your commentary on qualitatively around the –also is very strong. If you unpack that a little bit more, just in terms of just like the environment versus some of the added capabilities that you’ve had. Also I think at your Investor Day recently, you mentioned sort of getting to an aspirational goal of $1 billion on the equity centric side, it seems like you might already be there, just given the pace in here. But how to think about maybe the incremental opportunity from here versus maybe some of the cyclical benefit we’re getting from the robust market backdrop? Thank you.

[Paul Reilly, Chairman and Chief Executive Officer]

Yes. So it’s been a very strong market, certainly both for us and our competitors and the environment of low debt costs and high EPS multiples, and a lot of privately held firms or invested firms that and their portfolios are trade, so the backdrop has been very, very strong. But in addition to that as Jim Bunn said, well, we’re doing well, but the market is well, but I said you’re not giving yourself enough credit for positioning for that growth. So not only has been great at recruiting and building the teams, but we continue to do that. So you see Financo just joined us, which has already scored a few deals of good sides in a very short period of time with us. And so they’re not – their run rates really not online, we’re very excited about - and think that’s the great growth business.

And there are a few other verticals that we’re not well positioned in, that we’re looking to do the same things. And so, it’s partly a market story, but giving that team credit, it’s also been a market positioning and share game, which they have made and some could argue are under size for our size, that may be true, but they’re certainly building and doing a great job. And I think continue to plan to do that, the market is just been a big added bonus to their plan.

[Bill Katz, Citigroup]

Thank you very much for the extra time.

[Paul Reilly, Chairman and Chief Executive Officer]

Okay. Thank you.

[Operator]

Thank you very much. Actually we have no further questions on the line. Mr. Reilly, I will turn it back to you for the closing remarks.

[Paul Reilly, Chairman and Chief Executive Officer]

Great. So thank you all for joining us, obviously a strong quarter, good markets, and I think, given if there is not any shock to the system, we feel good about this quarter and we’ll give you more information as we can on Charles Stanley, but again, very strict anti-takeover provision, rules and disclosures and public companies in the UK. So once we can, and we’ll give you more information, but we’re very excited about the opportunity. Thanks for joining us, and we’ll talk to you soon.