Earnings Call Transcript - RJF Q2 2021

Operator, Operator

Good morning and welcome to Raymond James Financial's Second Quarter Fiscal 2021 Earnings Call. This call is being recorded and will be available for replay on the company's Investor Relations website. Now, I would like to turn it over to Kristie Waugh, Vice President of Investor Relations at Raymond James Financial.

Kristie Waugh, Vice President, Investor Relations

Good morning, everyone. Thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chairman and Chief Executive Officer and Paul Shoukry, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Please note, certain statements made during this call may constitute forward-looking statements. These statements include but are not limited to information concerning future strategic objectives, business prospects, financial results, anticipated results of litigation and regulatory developments, impact of the COVID-19 pandemic or general economic conditions. In addition, words such as believe, 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 the most recent Form 10-K and subsequent Form 10-Q, which are available on our Investor Relations website. During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedule accompanying our press release and presentation. With that, I’ll turn it over to Chairman and CEO, Paul Reilly. Paul?

Paul Reilly, Chairman and Chief Executive Officer

Thank you, Kristie and good morning, everyone. Thank you for joining us today. It has been a year since the financial markets bottomed and the Federal Reserve cut short-term interest rates to near zero. That move reduced our pre-tax run rate by 40%. The stock market has seen an incredible run since 2020 with the S&P 500 up 54% year-over-year. While that tailwind has certainly helped fuel our strong results, the records we generated during the quarter and first half of the fiscal year have also been driven by our unwavering commitment to providing excellent service to advisers and their clients during this difficult and unprecedented time. It's a testament to our advisers who have shepherded their clients through the pandemic and the wherewithal of our associates who have worked so hard to service our advisers and their clients, our strong balance sheet and our ability to grow both in constructive and challenging markets. Certainly a year we will never forget on many levels. Starting on Slide 3. The fiscal second quarter was another record quarter. The firm reported record net revenues of $2.37 billion, which were up 15% over the prior year's fiscal second quarter and 7% over the preceding quarter. Record net income of $355 million or $2.51 per diluted share increased 110% over net income in the year ago quarter and 14% over the preceding quarter. Annualized return on equity for the quarter was 19% and return on tangible common equity was 21.2%, an extremely impressive result, especially in this near zero rate environment and given our strong capital position. Record quarterly revenues were primarily driven by higher asset management and related administrative fees, investment banking revenues and record brokerage revenues, which more than offset the negative impact of lower short-term interest rates on both the net interest income and RJBDP fees from third-party banks. Record quarterly net income was attributable to the record revenues, disciplined management of controllable expenses, the bank loan loss benefit of $32 million reflecting improving economic conditions and subdued business development expenses, given the lack of business travel and conferences. Moving to Slide 4. We ended the quarter with record total client assets under administration of $1.09 trillion, which were up 40% on a year-over-year basis and 6% sequentially. We also achieved records for PCG assets in fee-based accounts of $568 billion, a 7% sequential improvement, which will benefit the third quarter and financial assets under management of $178 billion. We ended the quarter with a record 8,327 financial advisers, a net increase of 179 over the prior year's period and 94 over the preceding quarter. This represents a solid improvement over the prior quarter and reflects our strong retention and the continued strength of our recruiting pipelines across all of our affiliation options. Our recruiting momentum in the independent side of the business continues to be strong. On the employee side, as we mentioned last quarter, in response to the increased recruiting packages by competitors, we enhanced our recruiting packages to be more competitive while also ensuring attractive returns to our shareholders. And while recruiting momentum in this business has increased greatly, employee advisory count is down slightly from the prior quarter as improved recruiting was offset by a higher number of retirements where assets are typically retained at the firm as well as the smaller training class. However, the number of advisers scheduled to join is up significantly, not only in our employee channel, but across all of our affiliation options. Looking at our recruiting results. Over the prior four quarters financial advisers with approximately $285 million of trailing 12 months production and nearly $44 billion of assets at their prior firms affiliated with Raymond James domestically. As for our net organic growth results in the Private Client Group, we generated domestic PCG net new assets of nearly $54 billion over the four quarters ending on March 31st, 2021, representing more than 7.5% of domestic PCG assets at the beginning of the period. And remember, this is net of client fees. And this trend has accelerated during the first half of the fiscal year closer to a 9% annualized rate. We are very pleased with our consistent organic growth, especially given disruption associated with the COVID-19 pandemic during the year. Now let's move to the segment results on slide 5. The Private Client Group generated record quarterly net revenues of $1.65 billion and pre-tax income of $192 million and 11.7% pre-tax margins reflecting significant operating leverage despite being in a near zero rate environment. Quarterly net revenues grew 12% over the preceding quarter, predominantly driven by higher asset management and related administrative fees, reflecting higher assets in fee-based accounts, which will continue to be a tailwind in the third quarter. Higher brokerage revenues also contributed to the quarterly revenue growth. The Capital Markets segment generated quarterly net revenues of $433 million and pre-tax income of $105 million, driven by record brokerage revenue, record equity underwriting and strong M&A revenues. Despite not topping the extraordinarily strong and record-breaking first quarter results, the results this quarter were very strong, driven by broad-based strength across global equities and investment banking and fixed income businesses. The strong results reflect the significant investments we have made to strengthen our platform over the last 10 years and we are continuing to make investments including the recent acquisition of the consumer-focused M&A advisory firm Financo, which closed at the end of the quarter and we welcome Financo to the Raymond James family. The Asset Management segment generated record net revenues of $209 million and record pre-tax income of $87 million. Record results were primarily due to growth of financial assets under management driven by equity market appreciation and net inflows into fee-based accounts in the Private Client Group. Carillon Tower Advisers also generated significant net inflows during the quarter. Lastly Raymond James Bank generated quarterly net revenues of $160 million and pre-tax income of $111 million. Quarterly net revenues declined 24% compared to a year ago quarter, primarily due to the impact of lower short-term interest rates. Sequentially, quarterly net revenues declined 4% as higher asset balances were offset by the expected eight basis points decline in the bank's net interest margin during the quarter, which was also largely attributable to the agency-backed securities portfolio. Pre-tax income growth was primarily due to the loan loss reserve release in the quarter compared to the provision for credit losses in both of the comparative periods. The credit quality of the bank's portfolio remains healthy as Paul Shoukry will cover in more detail in his remarks. Looking at the fiscal year-to-date results on slide 6. We generated record net revenues of $4.59 billion during the first six months of the fiscal 2021, up 13% over the same period. Record earnings per diluted share of $4.74 increased 53% compared to the first six months of fiscal 2020, primarily due to the revenue growth along with the loan loss reserve release compared to the provision for credit losses in the comparative period. Moving to the fiscal year-to-date results on slide 7. The Private Client Group, Capital Markets and Asset Management segments generated record net revenues and record pre-tax income during the first six months of the fiscal year. In fact, Capital Markets segment's pre-tax income for the first half of the fiscal year of $234 million actually exceeded the annual record of $225 million set in fiscal 2020. Again, these results reinforce the value of our diverse and complementary businesses. And now for a more detailed review of the financial results, I'll turn the call over to Paul Shoukry. Paul?

Paul Shoukry, Chief Financial Officer

Thank you, Paul. I'll begin with consolidated revenues on slide 9. Record quarterly net revenues of $2.37 billion grew 15% year-over-year, and 7% sequentially. As expected, Asset Management fees grew 10% sequentially a bit lower than the 12% growth of fee-based assets during the preceding quarter, primarily due to two fewer billable days during the quarter. Private Client Group assets and fee-based accounts were up 7% during the fiscal second quarter, providing a tailwind for this line item for the third quarter of fiscal 2021. Consolidated brokerage revenues of $591 million grew 15% over the prior year and represents a record driven by continued strength in institutional fixed income, as well as strong brokerage revenues in the Private Client Group, reflecting healthy client activity levels and higher asset values. Account and service fees of $159 million declined 8% year-over-year, almost entirely due to the decrease in RJBDP fees from third-party banks given lower short-term interest rates, which I will discuss along with net interest income in more detail on the next two slides. The 10% sequential increase was largely attributable to higher asset balances and revenues from our recent acquisition of NWPS most of which are reflected in the client account and other fees line in the PCG segment. Consolidated investment banking revenues of $242 million, grew 64% year-over-year driven by strong M&A advisory revenues and record equity underwriting revenues. For the first half of the year, investment banking revenues were 74% higher than the first half of fiscal 2020. Our investment banking pipelines remain strong, so we would be really pleased to finish the fiscal year averaging $200 million, or better of investment banking revenues per quarter, if market conditions remain conducive. Other revenues of $44 million are down 21% sequentially, primarily due to lower private equity valuation gains during the quarter, partially offset by a strong quarter for the tax credit funds business. Moving to slide 10. Clients' domestic cash sweep balances which are the primary source of funding for our interest-earning assets and the balances with third-party banks that generate RJBDP fees ended with a quarter end record of $62.8 billion, increasing 2% sequentially and representing 6.5% of domestic PCG client assets. As we continue to experience growing cash balances and less demand from third-party banks, more client cash is being held in the client interest program at the broker dealer. You can see those balances grew to $9.5 billion and most of that growth has been used to purchase short-term treasuries to meet the associated reserve requirement. Over time, that cash could be redeployed to our bank or third-party banks as capacity becomes available, which would hopefully earn a higher spread than we currently earn on short-term treasuries. On slide 11, the top chart displays our firm-wide net interest income and RJBDP fees from third-party banks on a combined basis, as these two items are directly impacted by change in short-term interest rates. Related, we have updated the net interest margin or NIM chart on the bottom left portion of this slide to show NIM for both Raymond James Bank and the firm overall. The combined net interest income and BDP fees from third-party banks declined a bit sequentially largely due to fewer days during the quarter and NIM compression at the bank. As I mentioned on the last quarter's call, we would expect the bank's NIM to decline to around 1.9% over the next two quarters as the new agency security purchases have lower yield than the runoff, but still represent a higher yield than we are earning from third-party banks or in short-term treasuries. We also believe the average yield on RJBDP balances with third-party banks will remain close to 30 basis points for the rest of the fiscal year. But that could experience downward pressure in fiscal 2022, if banks' demand for deposits doesn't improve from current levels. Moving to consolidated expenses on slide 12. First, compensation expense, which is by far our largest expense. As expected, the compensation ratio increased sequentially from 67.5% to 69.5% largely due to the revenue mix shift towards higher compensable revenues in the PCG segment as financial adviser payouts, particularly on the independent contractor side of the business, where they cover most of their overhead costs are typically much higher than the associated compensation in the other businesses. On a sequential basis, the compensation ratio was also impacted by the reset of payroll taxes that occurs in the first calendar quarter of each year. As we explained on the last call, given our current revenue mix and disciplined management of expenses, we are confident we can maintain a compensation ratio of 70% or better in this near zero short-term interest rate environment. Non-compensation expenses of $277 million decreased 32% compared to last year's second quarter and 14% sequentially, primarily driven by the $32 million bank loan loss benefit, compared to provisions in the comparative periods. Business development expenses also remain subdued. But we expect those to increase over the next few quarters as business travel picks back up and conferences and recognition trips resume. Overall, you can see we have been really focused on managing controllable expenses, while still investing in growth and ensuring high service levels for advisers and their clients. Slide 13 shows the pretax margin trend over the past five quarters. Pretax margin was 18.8% in fiscal second quarter of 2021, which was boosted by record revenues, the loan loss reserve release, and subdued business development expenses. On the last call we talked about generating a 14% to 15% pretax margin in this near zero interest rate environment. But as we experienced during the first half of the fiscal year, there's meaningful upside to our margin when capital markets results are so strong. On slide 14, at the end of the quarter, total assets were $56.1 billion, a 4% sequential increase, reflecting the dynamic I explained earlier with growth in client cash balances and associated segregated assets at the broker-dealer as well as solid growth of corporate loans and security based loans at Raymond James Bank. This balance sheet growth caused our Tier 1 leverage ratio to decrease to 12.2%, which is still well above the regulatory requirements and our more conservative target of 10%. Liquidity remains very strong with $1.7 billion of cash at the parent at the end of the quarter leaving us with plenty of flexibility to be defensive and opportunistic. During the quarter we announced a debt offering which closed at the beginning of our fiscal third quarter so it was not reflected in any of the second quarter's numbers. To take advantage of the low rate environment, we raised $750 million of 30-year senior notes at 3.75% and utilized the proceeds and cash on hand to early redeem our next two senior note maturities effectively resulting in the same amount of senior notes outstanding but with a much longer term stable funding profile. In the third quarter, we expect to record losses associated with the early extinguishment of these notes which should total somewhere around $90 million. To help with comparability, we will break those losses out as a non-GAAP adjustment in the fiscal third quarter. Slide 15 provides a summary of our capital actions over the past five quarters. In the second quarter, we repurchased 500,000 shares for $60 million an average price of approximately $120 per share. Over the first two quarters of the fiscal year, we repurchased shares for $70 million and we remain committed to repurchasing a total of at least $200 million in fiscal 2021 to offset share based compensation dilution. As of April 28, $680 million remain under the current share repurchase authorization. Lastly on slide 16, we provide key credit metrics for Raymond James Bank. The credit quality of the bank's loan portfolio remains healthy with most trends continuing to improve. Non-performing assets remained low at nine basis points of total assets. However, criticized loans increased due to a handful of credit downgrades within our REIT portfolio, particularly in the hospitality sector. While all of those credits we downgraded continue to perform, have large cash balances, and are starting to see improvement in their portfolios, we thought it was prudent to downgrade those credits. We had net charge-offs of $2 million in the quarter which were related to opportunistic loan sales of $95 million at nearly 99% of par value. The bank loan loss benefit of $32 million was largely attributable to the macroeconomic inputs in the CECL model, which reflect an improved outlook, particularly for the commercial real estate and residential mortgage loan portfolios. Due to reserve releases and the loan growth during the quarter, the bank loan allowance for credit losses as a percentage of total loans declined from 1.71% to 1.50% at quarter end. For the corporate loan portfolios, these allowances are higher at around 2.6%. We believe we are adequately reserved, but that could change if economic conditions deteriorate. Our strong balance sheet and long-term focus was recently cited as a strength by Fitch ratings, who launched its long-term senior unsecured rating for Raymond James Financial of A- with a stable outlook. Now, I'll turn the call back over to Paul Reilly to discuss our outlook. Paul?

Paul Reilly, Chairman and Chief Executive Officer

Thank you. So, overall, a year into the global health pandemic with near zero short-term interest rates and during a quarter with lots of seasonal headwinds such as fewer billable days and the reset of payroll taxes, I could not be more pleased with our record top and bottom line results this quarter. As for our outlook we remained well-positioned entering the third fiscal quarter with records for all of our key business metrics, strong financial adviser recruiting activity, and robust pipelines for investment banking. In the Private Client Group segment, while the recruiting environment is competitive and we face some challenges in a largely virtual environment, our financial adviser recruiting pipeline is strong across all of our affiliation options and this segment is going to benefit by starting the fiscal third quarter with a 7% sequential increase in assets and fee-based accounts. The enhancements we made to the recruiting packages on the employee side of the business have been very well received by prospective advisors and that pipeline has recovered nicely. Our prospective advisors across all of our affiliation options have continued to be attracted by our leading technology solutions. We have been known for our industry-leading position in mobile advisor tools and continue to make our technology platform more robust. We have also created easy-to-use systems that put all the information advisors need right at their fingertips, so they can easily get the information they need to service their clients and have more time taking care of their clients and growing their business. As we continue to invest in our technology, we're extremely excited about the new enhancements, which will be coming out shortly. We have been measuring our client satisfaction for the past 10 years using Net Promoter Scores, and I'm proud to share that our client satisfaction has never been higher both in terms of satisfaction with Raymond James as well as satisfaction with their advisors. In the Capital Markets segment, although there is still economic uncertainty due to the ongoing COVID-19 pandemic, the investment banking pipeline remains strong and we expect fixed income brokerage results to remain elevated, particularly in the depository client segment where we have a leadership position. In the Asset Management segment, results will be positively impacted by higher financial assets under management as long as the equity markets remain resilient. We were also pleased to see positive net flows for Carillon Tower Advisers in the quarter despite the structural headwinds for active asset managers. We hope that the one benefit of increased market volatility is that it reinforces the value of high-quality active asset managers. And Raymond James Bank should continue to benefit from the attractive growth of securities-based loans and mortgages to the Private Client Group segment. On a year-over-year basis, the growth of the securities-based loan has been impressive around 38%. We'll also continue to be selective and deliberate in growing the corporate loan portfolio and the agency-backed securities portfolio as we have ample funding and capital to grow the balance sheet. We continue to focus on long-term growth and our priorities remain unchanged. Our top priority is organic growth, which is primarily driven by retaining and recruiting advisers in the Private Client Group. Additionally, we are continuing to add senior talent to all of our businesses. We also continue to actively pursue acquisitions, but we will still be deliberate and only pursue transactions that are a great cultural and strategic fit and at prices that we can deliver attractive returns to our shareholders. We have been even more proactive in sourcing and evaluating opportunities. On Earth Day last week, we released our first corporate responsibility report. The report summarizes our foundational commitment to people, sustainability, community and governance, and illustrates our long-standing approach to doing business rooted in our values and brought to life through our people-driven culture. This report summarizes many of the inspiring things that our advisors and associates across the firm do to contribute to their communities and the things we do as a firm to help the environment. We look forward to building on this inaugural report by maintaining transparency and sharing progress over time. With that, operator, can you please open the line for questions?

Operator, Operator

Thank you. Operator provided instructions. Our first question comes from the line of Bill Katz with Citigroup. Please go ahead.

Bill Katz, Analyst, Citigroup

Okay. Good morning, and thank you for taking my question. So, I guess, first one is, I presume more detail will follow-up on the Investor Day next month. But I was wondering if you could maybe provide a little more discussion or disclosure around the Tier 1 leverage ratio of 10% maybe the time line or the pathway? And I guess is this quarter with a very strong loan growth and sort of stepped up buyback the blueprint that we should expect going forward?

Paul Shoukry, Chief Financial Officer

Hey, good morning Bill and great question. As you said, we will discuss that in a lot more detail at the upcoming Analyst/Investor Day. And really the decline to 12.2% this quarter was primarily attributable to the increase in client cash balances and we're accommodating more of that on our balance sheet at the broker dealer, frankly, because the third-party bank demand with all of the banks flushed with cash right now has declined. At the broker dealer, to fulfill the associated reserve requirement, we're repurchasing short-term treasuries. And we hope that we can over time redeploy that into more profitable growth at the bank. But in terms of how we think about getting to 10% over time, it's really going to be a combination of growing the balance sheet, which primarily occurs for us at Raymond James Bank as you know. You alluded to the strong loan growth in the quarter of 4%. We are still being very deliberate in growing the portfolio both the Private Client Group loans. Securities-based loans grew almost 40% year-over-year. And mortgages have seen good growth as well, although, there's been a high degree of runoffs and refinancing there. And we're starting to really be deliberate in growing the corporate loan portfolio, although there still continues to be more demand and supply in the market with banks being flushed with cash. And then the second component of managing the capital ratio is really deploying the capital. You saw us do the buybacks this quarter to offset the dilution. We'll continue to do that and be opportunistic if the prices are at attractive levels. And then of course you just heard Paul mention the focus on acquisitions as well as another way to deploy capital.

Bill Katz, Analyst, Citigroup

Okay. And just a follow-up. Just coming back to your commentary that the organic growth accelerated in the sort of last couple of quarters to 9% which is quite impressive. Wondering if you can maybe peel that back a little bit more and maybe talk to the organic growth between the different channels? And if you can give maybe a little more color around the recruitment backdrop? Thank you.

Paul Reilly, Chairman and Chief Executive Officer

I'd say two levels. Yes sure. If you look at I know a lot of people record quarterly and some annually. So as you know we do annual. So we thought we'd give the indication that we're approaching 9% for the first six months which is a great number. The growth has been kind of proportional to the channels. We're finding our advisers who are just bringing in assets and clients even in this market which they've consistently done and the top producers have really had very impressive results in their growth. So it's happening everywhere. And then on recruitment we measure we don't publish what we call commits and those are people saying I'm coming. What you see are the people that sign. It's almost like M&A: you're in a transaction but we don't count it until it closes. It's the same in recruiting. But our commits are way up in every channel, all of our channels. And now some of those people may not join or they may delay the join which often will happen for just logistics reasons and it might slip into the next quarter. But based on the backlog it is very, very robust. So I think we posted good numbers this quarter. And my guess is in all channels you're going to see better numbers next quarter.

Operator, Operator

Our next question comes from Manan Gosalia with Morgan Stanley. Operator provided instructions.

Manan Gosalia, Analyst, Morgan Stanley

Hi, good morning. You had a pretty strong quarter for investment banking across the board. Can you give us some more color on the backlog? And I think you mentioned it remained strong but maybe you can compare it to the start of the fiscal second quarter? And then your pretax margins in the Capital Markets division declined quarter-on-quarter. It was a pretty strong revenue environment. So I was wondering if there's any seasonality there or should we expect margins in that segment to stay at these levels in this kind of an environment for trading?

Paul Reilly, Chairman and Chief Executive Officer

So let me start on the kind of the revenue side. I'll let Paul address the margin side a little bit. The because there's lots of moving parts in all of these. On the revenue side honestly and Paul talked about $200 million plus. We're at record levels. So every time you have records you always wonder. But if you looked at the backlog you would see no reason why it would slow. Now again M&A is one of those deals where economy can change people can pull out of deals or they can get delayed. So you never know. But the backlog would say it's as robust as ever. The market is active, I think for everyone and our backlog is very strong and continually signing new deals, even as we've been on this last week that were pretty significant. So we feel pretty good about the backlog. Paul you want to talk about the margin?

Paul Shoukry, Chief Financial Officer

I mean the margin certainly bounced around a little bit from quarter-to-quarter. But at 24% for the quarter that's still a fantastic margin for the Capital Markets segment. And when you look year-to-date I think it's 26%. So revenues were down a bit sequentially. M&A still had very strong quarter. But it was down 18% from the record M&A results last quarter and that is a high-margin revenue source. So again it could bounce around. But at these levels we're still really pleased with the 26% margin year-to-date.

Manan Gosalia, Analyst, Morgan Stanley

Great. And then maybe on the loan growth side, you saw some nice loan growth as you mentioned in the real estate and SBL portfolios this quarter. Are you doing anything differently there? Any change in underwriting given how much the macro environment has improved and with markets at all-time highs, or is this just increased penetration of your existing customer base?

Paul Reilly, Chairman and Chief Executive Officer

Yes. I would say it's not relaxed underwriting. So I think it is better processing trying to make it a smoother process. The underwriting standards are the same as ever. But I do think our advisers in this market and a lot of people in the state and tax planning are using the tool. So we are educating our advisers. We don't go direct to their clients about the availability and the use of these tools and financial planning. But it's their choice and their clients' choice. We don't market directly to the end client. Given that and I think the educational process and the dynamics of the market we've had significant growth and still see that channel is very active. So compared to our bigger peers we are much lower penetration. So we think there's more opportunity.

Manan Gosalia, Analyst, Morgan Stanley

Great. Thanks a lot.

Operator, Operator

Our next question comes from Devin Ryan with JMP Securities. Operator provided instructions. Please go ahead.

Devin Ryan, Analyst, JMP Securities

Great. Good morning everyone.

Paul Reilly, Chairman and Chief Executive Officer

Hey, Devin.

Paul Shoukry, Chief Financial Officer

Hey, Devin that's a great question. It was really strong brokerage revenues in the Private Client Group business. A lot of that reflects the healthy level of client engagement just given the market opportunities. When you look at that kind of $413 million of brokerage revenues, roughly 50% of it is asset based and the other 50% is transactional based. And then it varies by line for example the mutual fund line 65% to 70% of that is asset based. And so obviously that has grown nicely as assets have grown and the trail commissions have grown as well. But you can also see that the transactional commissions from equities, ETFs and fixed incomes they're up 13% sequentially as well. So good level of client activity. Obviously, the asset growth helps there as well. There were some lumpy placement fees in that brokerage revenues in Private Client Group this quarter. But that happens from time to time, but that certainly was another benefit during the quarter as well.

Devin Ryan, Analyst, JMP Securities

Yeah. Okay sure. Yeah, it's really good color. Thanks, Paul. And then maybe another kind of modeling question. Just thinking about the comp ratio moving parts. I appreciate the mix dynamics, particularly as you have strong quarters in the independent brokerage channel and that's going to put some upward pressure all else equal. But then you also highlighted some of the seasonal items like payroll taxes. So if we look at that 200 basis point sequential increase I'm not sure if it's you're able to kind of parse through how much is the drag from the seasonal piece or even if you can kind of quantify how much the payroll taxes affected the comp? If I'm looking at like the other segment for example there was a $10 million increase. I'm sure you saw increases in any other pieces, but it's little bit tough to parse through. So that would be really helpful, if you can give any color there?

Paul Shoukry, Chief Financial Officer

No it is a great question Devin. And we try to parse through it ourselves. There's a lot of moving parts there because there's also elevated payroll taxes with our year-end bonuses for those who haven't hit the threshold. So in the past, we've said it's been $10 million or so sequentially in terms of the impact. But I would tell you the comp ratio as I said on last quarter's call really the biggest driver there was just the increase in compensable revenues in the Private Client Group business. That has an average payout between the employee and independent channel as you know of around 75%. And so we want those revenues to grow as much as possible obviously. And they're going to grow all else being equal in the third quarter because fee-based revenues grew assets grew 7% during the quarter. So that's going to be a tailwind to compensable revenues in the Private Client Group business. So it really is a mix issue more than anything else, as we have really been focused on managing the controllable expense as much as we possibly can.

Devin Ryan, Analyst, JMP Securities

Okay. Great. I'll leave it there. Thank you guys.

Paul Shoukry, Chief Financial Officer

Thanks, Devin.

Operator, Operator

Our next question is from Craig Siegenthaler of Credit Suisse. Please go ahead. Operator provided instructions.

Gautam Sawant, Analyst, Credit Suisse (filling in)

Good morning. This is Gautam Sawant filling in for Craig. Can you please expand on this competition you're seeing within the employee and independent channel? And how your transition assistance is positioned following the increase? And could you also speak to some of the additional differentiated technology in your platform relative to peers?

Paul Reilly, Chairman and Chief Executive Officer

Yeah. So on the transition assistance, it became clear as the number of firms not all had raised it significantly. We were not even close in the market and for big teams. And so looking we knew we had room from a return standpoint, so on those large teams I would say now when we come into the finals we're not the highest, but we're in the ballpark. And so enough that people are saying they're willing to make the trade for the dollars for the culture and the values. When there were deals that literally were almost twice as much as ours it was hard for people to turn down the money even though they might have preferred coming here. So we aren't the highest, we are competitive and we think it's a fair package and a good return for us. So we're feeling that we're well positioned and appropriately positioned. And I think it's going to reflect in the numbers and a lot of very, very high-quality teams probably the largest number of large teams that we've had that's certainly in memory which means that probably the largest group of large teams we've ever had in the recruiting pipeline.

Gautam Sawant, Analyst, Credit Suisse (filling in)

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

Paul Reilly, Chairman and Chief Executive Officer

Our focus for a long time has been on the advisers' desktop. We've had a lot of peers that focused on the end-client desktop, some because they were going direct to their end clients. We first wanted to put all the capabilities into our advisers' desktop. So it's been many years now since we've been completely mobile where advisers could do almost everything from their phones that they could do from their desktop. And making sure that our advisers have all the latest planning tools and are completely mobile was an early priority. Now, not only are we enhancing those platforms, but we're bringing that same robust technology to those client connections. We believe our client app is very good. Our satisfaction scores are very high on our internal survey, which we do every year. But now we're connecting all that power of those apps into their clients, so that their integration is much closer, as well as rolling out many things. We've been on this journey for 10 years and moving from having good technology to being, as all of our recruits tell us from other firms, a leader in adviser desktop technology. People are always investing, so you'll see more of it on Investor Day. We believe it's been one of the drivers of our strong recruiting and one of the trade-offs people have made for the packages. It's the culture, the tools and the support from our marketing department and all the other things we do to help advisers build their businesses.

Operator, Operator

Our next question is from Steven Chubak with Wolfe Research. Operator provided instructions. Please go ahead.

Steven Chubak, Analyst, Wolfe Research

Hi. Good morning.

Paul Reilly, Chairman and Chief Executive Officer

Hi, Steven.

Paul Shoukry, Chief Financial Officer

Hey, Steve. Great question. We have significant appetite to grow the securities portfolio. Unfortunately, the supply in the shorter duration paper we have been buying—trying to buy in that three-year average life range—and the supply, given the flat yield curve and where mortgages are being originated today, is limited. To the extent that you can find it, it's probably paying in the kind of 80 basis point range. We have been proactive in investing and growing that part of the portfolio. The challenge is where most of the supply is you have to go out four to five years on average life. You get paid more, somewhere north of 1%, but you're not getting paid enough to take a lot of inflation risk over that five-year period, for example. We're looking at it closely, almost daily. We have a lot of appetite to grow it over time. But with the Fed buying as much as they're buying, particularly on the short end, there's more demand than supply. We're going to continue to be patient as we always are.

Paul Reilly, Chairman and Chief Executive Officer

We've also strategically on our commercial and industrial portfolio grown it, and also looked at alternatives such as high-rated company paper with shorter duration or buying loans in the secondary market where that duration goes out just a few years and it's floating and we think better credit risk returns. We've been trying to be flexible in growing it. But we've waited a long time on a floating rate environment. We don't want to lock in at the bottom. So we're watching duration very, very closely.

Steven Chubak, Analyst, Wolfe Research

Thanks for all that color. And just for my follow-up on a question, just on the non-compensation expenses. Non-compensation ex-provision of $309 million was certainly better than what we were contemplating and it's been running at a pretty tight band of about $305 million to $310 million. I know that's certainly been helped by depressed business development expense. But how should we be thinking about the right run rate from here, assuming that that's going to remain relatively depressed? And as we start to prepare for some normalization in business development, how should we be thinking about the run rate in a more normal backdrop as well?

Paul Shoukry, Chief Financial Officer

Great question. Business development expense, as I said on the opening remarks, we do expect that to start increasing as travel is starting to pick up a bit, maybe not so much in the third quarter, but in the fourth quarter, assuming the vaccines continue to prove effective. Before the COVID pandemic, we said that we were looking to average somewhere around $325 million a quarter. If you normalize for business development and I'm not sure what normal is frankly when we do get back to normal, it would get you right around that range. So we have been really focused on managing all the controllable aspects of non-compensation expenses, but a lot of it is growth driven. Sub-advisory fees will grow with fee-based assets over time. FDIC insurance premiums grow with the bank's balance sheet growth. Recruiting is picking up substantially, there will be account transfer fees. So a lot of the non-comp expense growth as we are a growth company is intended to grow over time, but we are focused on growing revenues at a faster rate than expenses over time as well. We realize the operating leverage.

Operator, Operator

And our last question comes from the line of Jim Mitchell with Seaport Global. Operator provided instructions. Please go ahead.

Jim Mitchell, Analyst, Seaport Global

Hey, good morning. Maybe just a question on cash balances. They keep growing. We saw how active your clients were on the brokerage side. But yet cash balances keep growing. Are we starting to see some leveling off or maybe even putting that to work recently, or is it still expected cash balances to keep growing?

Paul Shoukry, Chief Financial Officer

Great question Jim. It seems like we've seen a leveling off to some extent. Some of the growth frankly in the last few months has been coming from what used to be in purchase money market funds or other short-term alternatives that are now—because those alternatives aren't generating any yield—they're sitting in the cash sweep program. But we have seen a little bit of a level off. Those balances as we saw last year in March can change dramatically with market volatility or downward trends in the market. So at 6.5% of assets I would tell you clients are—right now we're looking at around 60% exposure to equities, which when you look historically clients are pretty engaged in the equity markets, which is what you would want given the run that we had. A lot of the value that financial advisers provide is keeping clients consistent with their financial plans in periods like we had last year. For us, we don't tend to see the exposure shifts that e-brokers might see. Our clients tend to stay a lot more consistent as their advisers really keep them on their financial plans.

Jim Mitchell, Analyst, Seaport Global

Right. Okay. That's helpful. And maybe on Carillon Tower Advisers. I think you guys noted significant inflows. We haven't seen that in a while. Just any more specifics on what the drivers were? Do you think that can continue? Just any color there?

Paul Shoukry, Chief Financial Officer

It was around $1 billion for the quarter so that was a pretty nice inflow, around an 8% annualized rate. But we're not prepared to annualize that. There are structural headwinds. We had some nice institutional wins during the quarter. We have invested in the distribution capability and recently announced a new leader for that business. It will be good to bring in a fresh set of eyes with a very experienced leader. But we're not prepared to declare victory after one quarter of net inflows, but it was certainly nice to see after several quarters of headwinds.

Jim Mitchell, Analyst, Seaport Global

Right. Okay. Thanks.

Operator, Operator

Gentlemen, those are all the questions. I will turn it back over to you for closing remarks.

Paul Reilly, Chairman and Chief Executive Officer

Well, thank you all. We appreciate your time this morning. I know it's a busy earnings day. We think we're well-positioned. We've had good growth and all of our key indicators for forward growth were record and our backlog is strong in the other businesses. Hopefully the markets hold up and stay constructive and we have economic growth. Thank you all for your time and we will see you again next quarter.

Operator, Operator

And ladies and gentlemen, that does conclude our call for today. We thank you all for your participation. Have a great rest of your day and you may disconnect your line.