Raymond James Financial, Inc.

Good morning and welcome to Raymond James Financial's fourth quarter fiscal 2021 earnings call. This call is being recorded and will be available for replay on the company's investor relations website. Now I will turn it over to Christy Waugh, Vice President of Investor Relations at Raymond James Financial.

Good morning, everyone, and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Riley, Chairman and Chief Executive Officer, and Paul Shukri, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James' Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to slide two. Please note certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated timing and benefits of our acquisitions, including our proposed acquisitions of Charles Stanley PLC and Tri-State Capital Holdings, and our level of success in integrating acquired businesses, anticipated results of litigation and regulatory developments, impacts of the COVID-19 pandemic, or general economic conditions. In addition, words such as may, will, should, could, scheduled, plans, intends, anticipates, expects, believes, estimates, potential, or continue, or negatives of such terms or other comparable terminology, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our Investor Relations website. During today's call, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable gap 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 Riley. Paul?

Good morning, and thank you for joining us today. I want to first, by apologizing, I'll sound like a broken record using the word record over and over again. It really was an outstanding year and quarter. I wish management could take credit. but it was really the work of our advisors and associates that delivered these results. Their dedication and perseverance during the fiscal year was amazing. We've proven once again that focusing on our time-tested client-first strategy and providing outstanding service to our advisors and their clients will guide us through uncertain economic and global conditions, in this case, in record-setting fashion. The record results we generated would not have been possible without everyone's contribution, so thanks again. Starting on slide four with our quarterly results, the fiscal fourth quarter capped off what was a record fiscal year on a number of fronts. The firm reported record quarterly net revenues of $2.7 billion and record quarterly net income of $429 million, or earnings per diluted share of $2.02, which reflects the impact of the three-for-two stock split in September. Excluding the $10 million of acquisition-related expenses, quarterly adjusted net income was $437 million, and adjusted earnings per diluted share equal $2.06. The increase in quarterly net revenues was largely driven by record investment banking revenues and record assets under management and related administrative fees, primarily due to higher private client group assets and fee-based accounts. Annualized return on equity for the quarter was 21.3%. An adjusted annualized return on tangible common equity was 24.1%, a very impressive result, especially in the near zero rate environment and given our strong capital position. Moving to slide five, we ended the quarter with record total client assets under administration of $1.18 trillion, up 27% on a year-over-year basis and 1% sequentially. We also achieved record PCG assets and fee-based accounts of $627 billion and record financial assets under management of $192 billion. We continue to focus on supporting advisors and their clients through leading technology solutions and a client-focused culture. As a result, we had a fantastic year in terms of advisor retention, as well as record results in recruiting new advisors to the Raymond James platform through our multiple affiliation options. We enter the quarter with records of 8,482 financial advisors, net increases of 243 over the prior period, and 69 over the preceding quarter. Representing a new record during the fiscal year, we recruited financial advisors with approximately $330 million of trailing 12-month production and approximately $54 billion of client assets to our domestic independent contractor and employee channels. Also in the private client group, advisors generated domestic net new assets of approximately $83 billion in fiscal 2021, representing 10% of domestic PCG assets at the beginning of the fiscal year, a very strong result, reflecting our excellent retention and record recruiting. Additionally, this year, new account openings and advisor productivity were very strong, contributing to the excellent net new asset results. Also worth noting on the slide is the impressive loan growth at Raymond James Bank during the quarter, up 5% sequentially to a record $25 billion. This growth was driven by securities-based loans to the private client group clients as well as a strong corporate loan growth. Moving to segment results on slide six, the private client group generated record quarterly net revenues of $1.8 billion and pre-tax income of $222 million, a 12.3% pre-tax margin reflecting significant operating leverage over the past year. The capital market segment generated record quarterly net revenues of $554 million and pre-tax income of $183 million, representing an extremely impressive 33% pre-tax margin to net revenues. These record results were driven by record investment banking revenues, strong tax credit fund revenues, and solid fixed income brokerage revenues. The asset management segment generated record net revenues of $238 million and record pre-tax income of $114 million, up 29% and 46% over the year-ago period, respectively. These results were primarily due to growth in financial assets under management, driven by net inflows to fee-based accounts in the private client group, partially offset by market depreciation and net outflows for the Carillon Tower advisors during the quarter. Raymond James Bank generated quarterly net revenues of $176 million and pre-tax income of $81 million. Quarterly net revenues increased 9%. over the year-ago quarter as higher levels of earning assets offset year-over-year compression in the bank's net interest margin. Sequentially, net revenues grew 4% due to higher asset balances during the quarter. The free tax income growth year-over-year was due to the aforementioned revenue growth and lower bank loan provision for credit losses in the current quarter. Compared to the preceding quarter, the bank's pre-tax income declined largely due to a reserve release in the preceding quarter compared to a loan loss provision primarily associated with the strong loan growth during the fiscal fourth quarter. Looking at the fiscal year 2021 results on slide 7, we generated record net revenues of $9.76 billion, up 22% over fiscal year 2020. and record net income of $1.4 billion, up 72% over fiscal 2020. Excluding losses on the extinguishment of debt and acquisition-related expenses during the year, adjusted net income was $1.49 billion, up 74% over adjusted net income in fiscal 2020. Moving to the fiscal year results on slide eight, the private client group, capital markets, and asset management segments generated record net revenues and record pre-tax income, and all of our segments realized substantial operating leverage during the fiscal year. Once again, these results reinforce the value of our diverse and complementary businesses. And now, for a more detailed review of the fourth quarter financial results, I'm going to turn the call over to Paul Shukri.

Paul? Thank you, Paul. I'll begin with consolidated revenues on slide 10. Record quarterly net revenues of $2.7 billion grew 30% year-over-year and 9% sequentially. Record asset management fees grew 8% sequentially, commensurate with a sequential increase in the beginning of the quarter balance of fee-based assets. Private client group assets and fee-based accounts were up 2% during the fiscal fourth quarter, providing a modest tailwind for this line item for the first quarter of fiscal 2022. Consolidated brokerage revenues of $541 million grew 9% over the prior year, but declined 2% from the preceding quarter. Institutional fixed income brokerage revenues remained solid, albeit down from the strong levels of the comparison periods. Brokerage revenues in PCG were up 17% on a year-over-year basis but flat sequentially due to lower trading volumes, which offset the benefit from higher asset balances and associated trailing commissions. For the fiscal year, brokerage revenues were up 13% to a record $2.2 billion, reflecting records for both PCG and fixed income, which had a fantastic year that was a testament to their leading position in the depository segment. Accountant service fees of $170 million increased 21% year-over-year and 6% sequentially, largely due to higher average mutual fund assets driving higher associated service fees. Paul already discussed our record investment banking results this quarter, so let me touch on other revenues. Other revenues of $74 million were up 35% sequentially, primarily due to higher tax credit funds revenues. We also had $18 million of private equity valuation gains during the quarter, of which approximately $5 million were attributable to non-controlling interests reflected in other expenses. Moving to slide 11, clients' domestic cash suite balances, which are the primary source of funding for interest-earning assets in the balances with third-party banks that generate RJBDP fees, ended the quarter at a record $66.7 billion, up 6% over the preceding quarter and representing 6.3% of domestic PCG client assets. As we continue to experience growing cash balances and less demand from third-party banks during fiscal 2021, $10.8 billion of client cash is being held in the client interest program at the broker-dealer. Over time, that cash could be redeployed to our bank or third-party banks as capacity becomes available, which would hopefully earn a higher spread than we currently earn on short-term treasuries. On slide 12, it was great to see an 8% sequential increase in the combined net interest income and BDP fees from third-party banks to $198 million. This growth was largely attributable to strong asset growth and a resilient net interest margin at Raymond James Bank, which remained right at 1.92% for the quarter. We expect the bank's NIM to settle right around 1.9% over the next couple of quarters. The average yield on RJBDP balances with third-party banks remain flat at 29 basis points in the quarter. If banks' demand for deposits doesn't improve from current levels, we believe there will be downward pressure on this yield in fiscal 2022. especially in the back half of the fiscal year, which is why we have been so focused on generating on-balance sheet growth in assets that could deliver good risk-adjusted returns. Moving to consolidated expenses on slide 13, first, our largest expense, compensation. The compensation ratio decreased sequentially from 67.2% to 65.8%, largely due to record revenues in the capital market segment, which had a very low 52% compensation ratio during the quarter. Given our current revenue mix and discipline management of expenses, we are confident we can maintain a compensation ratio of 70% or lower in this near-zero short-term interest rate environment. And as we experience in fiscal 2021, we can do meaningfully better than 70% with capital markets revenues at or near these record levels, which is our expectation for at least the next quarter or two. Non-compensation expenses of $361 million decreased 15% sequentially, primarily driven by the $98 million loss on extinguishment of debt in the fiscal third quarter. Somewhat offsetting this favorable variance, We had a modest provision for credit losses during the quarter compared with a bank loan loss reserve release in the fiscal third quarter. Overall, our results in fiscal 2021 show we have remained focused on managing controllable expenses while still investing in growth and ensuring high service levels for advisors and their clients. While we are still finalizing our fiscal 2022 budget, We do expect expenses to increase meaningfully in fiscal 2022 for a variety of reasons. First and foremost, we are going to continue investing in people and technology to support the phenomenal growth of our business over the past year, ensuring we maintain very high service levels and leading technology solutions for advisors and their clients. We also expect business development expenses to pick up as travel, recognition trips, and conferences have already started resuming in the fiscal first quarter, which our advisors and associates are really excited about. Just as a reminder, business development expenses totaled about $200 million in fiscal 2019 before the start of the pandemic. Additionally, whereas we had a $32 million net benefit for credit losses in fiscal 2021, we would expect bank loan loss provisions for credit losses associated with net loan growth in fiscal 2022. Slide 14 shows the pre-tax margin trend over the past five quarters. Pre-tax margin was 20.8% in the fiscal fourth quarter of 2021, and adjusted pre-tax margin was 21.2%, which was boosted by record revenues and still relatively subdued business development expenses. At our Analyst and Investor Day in June, we outlined a pre-tax margin target of 15% to 16% in this near-zero interest rate environment. And right now, we believe the top end of that range is is an appropriate target given the aforementioned expense growth we currently expect in fiscal 2022. But as we experienced during the fiscal year, there's meaningful upside to our margins when capital markets revenues are as strong as they have been in fiscal 2021. On slide 15, at the end of the quarter, total assets were approximately $61.9 billion, an 8% sequential increase, reflecting solid growth of loans at Raymond James Bank, as well as a substantial increase in client cash balances being held on the balance sheet. Liquidity and capital remain very strong. The total capital ratio of 26.2% and a tier one leverage ratio of 12.6% are both over double the regulatory requirements to be well capitalized. giving us significant flexibility to continue being opportunistic and grow the business. You can see that RJF corporate cash at the parent ended the quarter at $1.15 billion, decreasing 26% during the quarter as we have restricted the cash that we plan on using to close on the Charles Stanley acquisition, which we currently expect to close in the first or second quarter of fiscal 2022, or as soon as we receive the requisite regulatory approvals. Slide 16 provides a summary of our capital actions over the past five quarters. During the fiscal year, we repurchased nearly 1.5 million shares, split adjusted, for $118 million. As of October 27th, $632 million remained under the current share repurchase authorizations. Due to the restrictions following our announced acquisition of Tri-State Capital Holdings, we do not expect to repurchase common shares until after closing. Lastly, on slide 17, we provide key credit metrics for Raymond James Bank. The credit quality of the bank's loan portfolio remains healthy, with most trends continuing to improve. Criticized loans declined and non-performing assets remained low at just 20 basis points. The bank loan loss provision of $5 million was primarily driven by strong loan growth during the quarter. The bank loan allowance for credit losses as a percent of loans held for investment declined from 1.34% in the preceding quarter to 1.27% at quarter end. For the corporate portfolios, these allowances are higher at around 2.25%. With that, I'll turn the call back over to Paul Reilly to discuss our outlook.

Paul? Thank you, Paul. Overall, I'm very pleased with our fantastic results for this quarter and the fiscal year, which exceeded many records. As for our outlook, we are well positioned entering fiscal 2022 with strong capital ratios and quarter end records for all of our key business metrics, and strong activity levels for financial advisor recruiting and investment banking. In the private client group segment, results will benefit modestly by starting the fiscal first quarter with a 2% sequential increase of assets and fee-based accounts. Additionally, based on our robust recruiting pipeline, we hope to continue our current recruiting trend as prospective advisors are attracted to our client-focused values and leading technology platforms. In the capital market segment, the investment banking pipeline remains very strong, and we expect a solid fixed income brokerage results driven by demand from the depository client segment. In the asset management segment, if equity markets remain resilient, we expect results will be positively impacted by higher financial assets under management. And Raymond James Bank should continue to grow as we have ample funding and capital to grow the balance sheet. We will continue to focus on lending to PCG clients through our securities-based loans and mortgages, and we will continue to be selective and deliberate in growing our corporate loan and agency-backed securities portfolio. As we look ahead, we remain focused on the long-term, and our long-term growth. And as we've outlined at our recent Analyst and Investor Day, those key growth initiatives include driving organic growth across our core businesses, continuing to expand our investments in technology, and sharpening our focus on strategic M&A. Our recent announcements to acquire Tri-State Capital and Charles Stanley Group demonstrate our focus on these initiatives and our commitment to deploy excess capital over time. We believe these acquisitions stay true to our longstanding criteria, which is a good cultural fit, a strategic purpose, and makes sense for our shareholders. Finally, thank you again to our advisors and associates for providing excellent service to their clients during these uncertain times. These results are a testament to the dedication of everyone in the Raymond James family. With that, I'm going to turn it back over to the operator for questions.

Thank you. To register your questions, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered or you would like to withdraw a registration, please press 13. Again, to register questions or comments, please press 14. Our first question comes from the line of Devin Ryan of JMP Securities. Please proceed with your question.

Good morning, Paul. Paul, how are you? Good, Devin. Good. So, Paul, a lot of records, as you mentioned. So, you know, clearly momentum really across the business heading into 2022. I appreciate that the capital market segment can drive some variability in margins. And so that's tough to predict. And so that kind of all gets wrapped up in the firm-wide kind of margin commentary. But if we set that aside and we think about the business, I mean, you're sitting in a much better place heading into 2022 than you were in 2021. And I appreciate that you're also going to be ramping investment into the business as well, which makes sense. So as we think about the individual segments, whether it's PCG or asset management or the Can you talk about where operating leverage may exist and then where, you know, it's more challenged just because of the investments? I think that would be helpful to unpack, you know, away from some of the, maybe the difficulty in predicting capital markets, because it does feel like there should still be some operating leverage in some of those areas, but you'll love to just dig into those a little bit.

Yeah, so the, you know, the business that's probably, you know, it's our best business, but probably most margin challenged is probably And to deliver 20% margins in the business when you have a 70% comp ratio or less in these times, right, shows the balance we have on really managing expenses and making sure we invest. So we had a good margin this year based on the growth. But the real delta in our margins come from the capital markets and the banks as they grow. In asset management, they have much higher margins. And to the extent they grow, they drive our comp ratio down and our margins up. So those are the ones that have the delta. Now, the good news is the backlog in capital markets is fantastic. It's at historic paces. And the problem with that business, as you know, it can stop on a dime and it can increase. But, you know, our visibility is really good into this first quarter, which is very strong. and the second quarter should be very good, too. After that, you never really know because of M&A and underwriting part. It depends on the environment. The bank, we expect good growth. You saw very good growth this quarter. Given the markets right now, the best we all can tell. We should have growth there. And the asset management business continues to grow, especially with our, you know, record recruiting, and we're still on that same pace. If you look at commits and people coming through the office, we are still on a very, very, you know, we're still at that record pace. We took a snapshot today. So shorter term, we see these kind of very good margins. But if, you know, capital markets continue slow down or the economy turns and M&A deals stop and stuff, that's where we're going to get the margin compression again without interest rates. It wasn't that long ago that half of our pre-tax income was interest rates. So we've lost that about overnight, one March over two Fed meetings. And so it's kind of amazing, you know, getting these kind of margins without that help. So that's the other factor in this that we can't predict. If that comes back, even if the markets cool down, that's certainly going to continue to expand margins. So I wish I could tell you. I can tell you where we sit today. It looks good for the next quarter. But between the economy and Congress and regulators and interest rates, it all could change because those aren't in our control.

Yeah, no, really appreciate that, Paul, and helpful context across the businesses here. Just a quick follow-up on the fixed income brokerage business and maybe the outlook there, talking about how well the firm has done here. I mean, revenues are up 80% from 2019. Can you just help us a little bit around both maybe the near-term outlook for that business and then how to think about an intermediate term, because it's had such a step function in growth and contribution. Is the size of the platform or the personnel that much greater, or has it just been the environment? I know the environment's been incredibly favorable, but how are you guys thinking about that business and how maybe far we're above average for the business, or whether it's just been some underlying growth there that maybe we haven't fully seen in the platform?

That's all about. There's some new product focus and products they've brought to the market to their clients. The biggest factor has really been if you look at the sweet spot in the business, it's the depository franchise. And the depository franchise, like all banks and us, have a ton of cash. And in order to put that cash to work, they can make loans. And if they can't make loans fast enough, they buy securities. And that's where they really utilize us is, you know, actually for a lot of banks, look at where they should invest in the spreads and yields. We provide a lot of tools for them. And that business has been very, very good because of the cash in the system. So as long as that cash in the system stays there, those brokerage revenues should be very, very good. And again, the fixed income business by far had its best record. segment was extremely good. And again, short-term to mid-term, everything we see today, we don't see that really slowing down off its pace. It's been a little slower in the last quarter than it had been earlier in the year, but I'd still call the numbers robust.

Okay. Thank you very much. And our next question.

of Manan Ghazalia of Morgan Stanley. Please proceed with your question.

Hi, good morning.

Morning.

Just to follow up on the pre-tax margin questions, maybe a two-part question on the comp ratio. I know you've guided to a ratio of less than 70%, but at 66%, you're coming in well below, and I sort of wanted to assess how much of this is the benefit of scale and of the platform rather than the strength of the capital markets. So first on the PCG side, a lot of the compensation decline has to do with the actions that you've taken to hold administrative costs down, even as the FA headcount and revenues have grown. So how should we think about the administrative and incentive comp in that segment going forward, given the recruiting momentum that you're seeing right now? And then second, on the investment banking side, If capital markets normalize to pre-pandemic levels, how should we think about the competition there?

So, first thing, I think you've got to take the capital markets. You asked if it was scale for the markets. Certainly, it's been a very constructive market, so everyone's done well in capital markets. But we've really increased our scale. the addition of Financo and Sabil during this quarter, which, again, they only have a full year run rate in those numbers, Sabil being the most recent to join the platform, and the hiring we've done across the platform. The leadership there has done a really good job of building scale, but we are probably underscaled given our size competitors. So there is a scale play there. But the markets are very, very constructive. So it's a little bit of both in that business. And in the private client group, you know, a lot of business development expenses were low. We didn't have conferences. We didn't have award trips. We didn't have the regional meetings because of the pandemic. And now those are opening up. We have our first meeting. and our first award trip um although they're smaller than traditional uh they're still there and there's some makeup award trips where we canceled them and moved them into this year uh and you know so we'll have some double trips and in fact in our employee group we'll have a double conference because we're going to we moved this year's the fall and next year's will come in the summer so uh you know so certainly those expenses are back up so uh That's just business as normal, and those are highly valued by advisors. They're a great cultural tool to reinforce the value of Raymond James. They're great training. These aren't just fun trips. So they're very important to the long-term business, both teaching practice management and sharing best practices, as well as explaining new regulations or new technology tools they need to learn. So they're very, very valuable. So it's work. I mean, fun work, but it's work. So they're essential, and those will return because they're important to the business model. Okay.

Maybe the only thing I would add to that is that comp ratio does fluctuate from quarter to quarter due to a lot of variables. So I kind of prefer to look at it on an annual basis. It was 67.4% for the fiscal year, which was still much better than our 70% target, largely due to the capital markets results. You know, they're Their comp ratio this year was 56%. It was 60% last year. Last year was a pretty good year, you know, once you put it all together, just to show you the sensitivity there. And in the private client group, you mentioned some of the initiatives. Frankly, with the non-FA comp up 5% year over year against the 19% revenue growth rate, while we always strive to achieve operating leverage, frankly, that gap is not sustainable. We want to make sure that we're providing adequate support levels for our advisors and their clients. And so we need to make sure we have sufficient capacity and bandwidth in our service and product areas to continue delivering excellent service to our advisors and their clients. So when you kind of put all those things together, that's why we're sort of reaffirming the 70% target. But with that being said, we can continue to do better than that if capital markets results are as strong as they have been. We expect them to be at least over the next quarter or two.

I think one thing I haven't heard in the industry calls, but we certainly hear in all the industry trades, is there's pressure on comp. I mean, we heard the pay is going up. We can tell by the offers that come in to our people. We're glad people value our folks. At 80% or 90%, to fill jobs right now in this market and everyone's growing. So that's not just us. Industry-wide, there's comp pressure. And I think that's going to impact, you know, the comp and the comp ratio coming this year. I can't tell you what it will be. But, you know, we need people who run the business and to support our advisors.

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

Yeah, they have, you know, they're technology-enabled models, and so their technology does give them the ability to, particularly in the private banking side, to really scale up that business. But as you point out, I think where the operating leverage is really going to come from is rising short-term rates, and we talked about a relatively conservative net interest margin situation type estimates that we baked into our projections that they would go up to 2% from where they are now with 100 basis point increase in rates. And they were actually doing much better than that before the pandemic. So we try to be conservative there. And that doesn't even give them the benefit of where we expect most of the synergy to come from, which is really replacement of their higher cost deposits, a portion of their higher cost deposits with our lower-cost deposits. They're sitting on our balance sheet now earning very little in short-term treasuries at the broker-dealer per the regulations. So between short-term rate increases, deposit replacement, and the scalability of their technology-enabled model, we think there is a significant upside to their results over time.

And we get a lot of questions, just why don't you replace all their deposits with our lower-cost deposits? And it's a They support deposits from their client relationships or asset liabilities. You know, that's how you build relationships. And they're going to run an independent business that way. And, you know, they have their own clients. They're going to manage their clients. And so part of that is taking their cash, you know, reasonable rates to their clients for the loans they book to. So, you know, we put in, I think we said $3 billion of replacement, but that's at a lower cost, but certainly they'll tell us when they need them and we're not gonna interfere with their long-term client relationships.

Got it, thanks so much.

Our next question comes from the line of Jim Mitchell of Seaport Research. Please proceed with your question.

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

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

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

I think that, you know, what drives client cash is, first, you know, recruiting. Certainly, as we bring more advisors in, their clients have a portion in cash. And we also see, you know, you'd say in up markets, you don't expect to see as high a percentage in cash, but people are using it often in lieu of fixed income. They're just saying, you know, they're worried about rates going up. They view many clients through the market as profit, you know, as it's continued to grow. And they're using their cash balances to hedge that a little bit. So even in an up market, you've got a pretty good percentage of cash. And, again, as assets grow and recruiting is driving it, and I think some investors are taking a little off the table and keeping some in cash as, you know, just a balancing or a diversification hedge.

And on the leverage question, does it change the way you think about it?

Yeah, I mean, I think, you know, bringing the cash on the balance sheet certainly does impact our tier one leverage ratio. In stress periods, we do have sort of different type of metrics that we think about to absorb a surge in cash balances. But, you know, a question we get a lot from investors and analysts is how do we think about that 10% ratio and potentially lowering that ratio over time, that target that we, which is double the regulatory requirements. Right. And, you know, our... Our response to that is as long as regulators continue to consider that as a part of your metric and your requirements, then we need to, in our business, have some cushion for a surge of cash balances. Because while cash balances are high now on an absolute basis, they're only 6.3%. of client assets, which historically speaking is a good 100 basis points lower than average. Now, we can argue whether or not that's because asset values are higher than they were historically speaking, but it is not unfathomable to see a situation where cash balances surge by another 10% to 20%. And as we saw in March in 2020, regulators don't give firms relief for accommodating those client cash balances. So we still need to make sure we have ample flexibility because those type of environments are when we could be most opportunistic. So we don't want to be constrained by the Tier 1 leverage ratio anymore. And unless regulators change the treatment of that accommodated client cash balance, which they didn't do in 2020, and I'm hopeful they will do but not optimistic, then we need that cushion.

I also think there could be an opportunity as the Fed cuts back on purchasing securities that those become more attractive. The rates have become in this price. in the market, believe it or not, because of the Fed. But once they get out, they're hopeful there's more of an opportunity to use those securities on the balance sheet and move cash over to the bank. Right. Okay, great.

Thank you.

Our next question comes from the line of Stephen Chubak of Wolf Research. Please proceed with your question.

Hi, good morning. Paul and Paul, I just wanted to ask a follow-up on a discussion relating to non-coms. So your messaging on expenses came through loud and clear. Com guidance quite explicit, maybe the non-com guidance a little bit more vague or leaving more to interpretation, you know, recognizing you're still going through the budgeting process. So maybe you could help us handicap the level of non-com growth, X provision, versus that exit rate of $1.4 billion. I know, Paul, you'd already spoken about business development expense normalizing some, but what level of expense inflation should we be underwriting for some of those other categories? And if you could provide some more context there, that'd be really helpful.

Yeah, I mean, again, there's a lot of growth in there that is driven by business volumes. So investment sub-advisory fees, for example, they were up almost 30% with fee-based assets this year. And that's true with the FDIC insurance expense at the bank. That's going to grow with the bank's growth. There's a lot of growth-driven variables there. But, you know, even when you look at technology, that's something we're going to continue to invest heavily in to, again, continue providing a competitive platform for our advisors and their clients and to drive efficiency over time. and scalability over time. That was up 9% this year. I could see it being up 10% plus next year, just with our technology initiatives that we have on the docket. So I don't want to go line by line, but I think when you look at the various line items, you can see that there's sort of room for growth. I mean, just, again, stepping back, the non-comp expenses grew 5% in PCG this year, versus a 19% growth rate. So I would say in hindsight, if we had known revenues were going to grow 19%, we probably would have grown those non-comp expenses higher than the 5%. Now, some of that was helped by the business development with everything shut down, but that's not a sustainable relationship over time. We want to make sure that we continue supporting the business and the infrastructure, the support levels of the business over time.

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

Yeah, golly, that's such a hard – you're asking me to predict the future of both this recruiting. Will it continue at this level? We can tell you our visibility is – it is, and, you know, and it's – I think I remember, I forget how many quarters ago we talked about it slowed down for one quarter, but it would pick up, and certainly it did again. And so we've been on this, you know, kind of ramp up for a couple of years. We still see – very strong demand, whether it'll be a record this coming year or just very strong, I don't know. But what we can see today is that ramp-up should be very good. And, you know, and part of that new asset growth is the markets. When people bring accounts over or, you know, bring in new clients and the market's up, well, the assets are up, so it helps drive that number, too. So it's very complex. I think all we can tell you right now is that all the factors are in place to show it should be very strong again this year. But to give you a number, I'd have to know what the market appreciation is, what recruiting is, just so many factors that aren't predictable. I can just tell you that the things that drove it last year look still in place coming into this next quarter. And how long it continues, I don't know. We all know that this kind of growth in the market isn't forever. There's going to be cycles. There could be shocks to the system. But I think we're liquidity will put us in good stead.

Thanks for that context, Paul. If I could just squeeze in one more ticky-tack modeling question. I was hoping you could provide some guidance on the tax rate for next year and the trajectory for third-party cash repeal, just recognizing that, as you noted, the banks are flush with liquidity, don't have quite as much demand for client cash.

Yeah, I mean, the effective tax rate for this fiscal year ended right around just below 22%, which was really benefited by the non-taxable gains in the corporate-owned life insurance portfolio. So we would still guide all else being equal to around 24%. over the year. Now, with that being said, where our stock price is now, we would expect it to be lower than that in the fiscal first quarter with the timing of our stock-based compensation at best. There would be a tax benefit there in the first quarter based on the current price. But we think 24% over the year, plus or minus the impact from corporate corporate-owned life insurance. And just as a reminder, corporate-owned life insurance creates non-taxable gains when the equity markets are up and does the opposite when equity markets are down. And that's sort of the impact to the tax rate in that type of environment. And what was the second part of your question?

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

I would say that we are not seeing an improvement in third-party bank demand. And so we would, I would say, see more pressure on the capacity than the rate, because I think we're going to try to manage the rate based on... shifting the lack of capacity at this type of rate to either our balance sheet and investing in other assets essentially. And that gets helped with an acquisition like the tri-state acquisition, for example, bringing more balances on the balance sheet. The bank growth is anticipated to be strong. Our bank, Raymond James Bank Growth, It's anticipated to be strong this year as well. And we can also accelerate purchases of agency mortgage-backed securities if that demand from third-party banks doesn't pick up. And that all is really expected with the contract maturities in the second half of the fiscal year. So as we get closer to that, I think we'll be able to provide you more clarity on what the demand profile looks like at that time.

Fair enough. Thanks so much for taking my questions.

And our final question for today comes from the line of Alex Lowstein of Goldman Sachs. Please proceed with your question.

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

No, I think the TA pressure is, again, we talked last year that we adjusted TA to be more in market, and I think, you know, it shows in our recruiting we're doing very well. So I don't see any additional TA pressure. But the pressure that we're really seeing is on, you know, the admin support across, whether it's operations, tech, risk, you know, branch professionals. There's just, you know, the comp is longer to recruit. Recruiters are being recruited away, so they're having a harder time hiring. You know, we see packages come in. So we know there's just, we see comp pressure. And until I think the market more normalizes and there's more of a return across the sector, that could continue for the year. So it's a general comment. You know, we're not, you know, I'm just saying there's a bias that that line could be more impacted than than some think, but we'll see throughout this year.

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

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

Got it. Thank you.

Okay. Well, I think that's the last question, Operator. So I want to thank everyone for joining the call. Clearly, I don't like using the word record so much, but actually I do like it. I like having them. I just don't like using the word because we're not a bragging firm. But I'm very proud of the results and our people and how they've navigated this very, very tough time as of now. With the economy, you know, things look solid, but we know they're going to turn. So we always pride ourselves in being balanced. And I thank you for joining the call, and we'll talk to you again next quarter.