Raymond James Financial Inc (RJF) Q2 2021 Earnings Call Transcript

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Raymond James Financial Inc (RJF 0.32%)
Q2 2021 Earnings Call
Apr 29, 2021, 8:15 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Raymond James Financials' Second Quarter Fiscal 2021 Earnings Call. [Operator Instructions] Now I would like to turn over to Kristie Waugh, Vice President of Investor Relations at Raymond James Financial.

Kristina Waugh -- Vice President of Investor Relations

Good morning, everyone. Thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the 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 statement. These statements include but are not limited to information concerning future strategic objectives, business prospects, financial results, anticipated results of litigation and regulatory development, impact of the COVID-19 pandemic or general economic conditions. In addition, words such as believes, expects, could and would as well as any other statements that necessarily depends on future events are intended to identify forward-looking statements. Please note that there 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 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 schedules accompanying our press release and presentation. With that, I'll turn it over to Chairman and CEO, Paul Reilly. Paul?

Paul Reilly -- Chairman & 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 advisors and their clients during this difficult and unprecedented time. It's a testament to our advisors who have shepherded their clients through the pandemic and aware with all of our associates who've worked so hard to service our advisors and their clients. Our strong balance sheet and our ability to grow both in constructive and challenging market 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 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 are up 40% on a year-over-year basis, and 6% sequentially. We also achieved records for PCG assets and fee-based accounts of $568 billion a 7% sequential improvement, which will benefit the third quarter, and financial assets under management of a $178 billion.

We ended the quarter with a record 8,327 financial advisors 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 advisor 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 front, as well as the smaller training class. However, the number of advisors 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 advisors 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 in March 31, 2021, representing more than a 7.5% of domestic PCG assets at the beginning of the period. And remember, this is net of client fees.

And this trend has accelerated during the first half of the fiscal year closer to a 9% annualized rate. We are very pleased with our consistent organic growth especially, given the 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 a $192 million, and 11.7% pre-tax margin 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 and 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 a $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 the 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 a $160 million and pre-tax income of a $111 million. Quarterly net revenues declined 24% compared to a year ago quarter primarily, due to the impact of lower short term interest rates. Sequentially, quarterly net revenues declined 4%, as higher asset balances were offset by the expected 8 basis points decline in the bank's net interest margin during the quarter, which was also largely attributable to the agency-backed securities portfolio.

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 on his remarks.

Looking at the fiscal year-to-date results on Slide 6, we generated record net revenues of $4.59 billion during the first 6 months of the fiscal 2021 up 13% over the same period. Record earnings per diluted share of $4.74 increased 53% compared to the first 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 segments' 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 too fewer billable days during the quarter.

Private Client Group assets and fee-based accounts were up 7% during the fiscal second quarter, providing a tailwind for this line item for the third quarter of fiscal 2021. Consolidated brokerage revenues of $591 million grew 15% over the prior year and represents a record, driven by continued strength in institutional fixed income, as well as strong brokerage revenues in the Private Client Group, reflecting healthy client activity levels and higher asset values.

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

The 10% sequential increase was largely attributable to higher asset balances and revenues from our recent acquisition of NWPS, most of which are reflected in the client account and other fees line in the PCG segment. Consolidated investment banking revenues of $242 million grew 64% year-over-year driven by strong M&A advisory revenues and record equity underwriting revenues. For the first half of the year investment banking revenues were 74% higher than the first half of fiscal 2020.

Our investment banking pipelines remain strong, so we would be really pleased to finish the fiscal year averaging $200 million or better of investment banking revenues per quarter if market conditions remain conducive. Other revenues of $44 million are down 20% 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 firmwide net interest income and RJ BDP 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 a new agency security purchases have lower yield in the run-off, 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 toward higher compensable revenues in the PCG segment as financial advisor 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 in conferences and recognition trips resume. Overall, you can see, we have been really focus on managing controllable expenses while still investing in growth and ensuring high service levels for advisors and their clients.

Slide 13, shows the pre-tax margin trend over the past five quarters. Pre-tax 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% pre-tax margin in this near-zero interest rate environment, but as we experienced during the first half of the fiscal year, there is 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 utilize 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 in average to 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 9 basis points of total assets. However, criticized loans increased due to a handful of credit downgrades within our REIT portfolio, particularly in the hospitality sector.

While all of those credits we downgraded continue to perform, have large cash balances, and are starting to see improvement in their portfolios, we thought it was prudent to downgrade those credits. We had net charge-offs of $2 million in the quarter, which were related to opportunistic loan sales of $95 million at nearly 99% of par value.

The bank loan loss benefit of $32 million was largely attributable to the macroeconomic inputs in the CECL model, which reflect an improved outlook particularly for the commercial real estate in 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 minus with a stable outlook.

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

Paul Reilly -- Chairman & Chief Executive Officer

Thank you. So, overall a year into the global health pandemic with near-zero short term interest rates and during the quarter a 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 advisor 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 advisor 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's 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 continue 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 in growing their business. As we continue to invest in our technology we're extremely excited about the new enhancements which will be coming out shortly.

We have been measuring our client satisfaction for the past 10 years using net promoter scores. And I am proud to share that our client satisfaction has never been higher both in terms of satisfaction with Raymond James, as well as satisfaction with their 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 loans 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 advisors 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 commitments 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 is affirm to healthy 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 question?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Bill Katz with Citigroup. Please go ahead.

William Katz -- Citigroup -- Analyst

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

Paul Reilly -- Chairman & Chief Executive Officer

Hey Bill. Good morning. It's a great question. As you said, we will discuss that 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 who are accommodating more of that on our balance sheet at the broker-dealer, frankly, because the third-party bank demand with all of the banks flush with cash right now has declined.

At the broker-dealer to fulfill the associated reserve requirement or repurchasing short term -- our 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 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 has been a high degree of run-offs 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 mentioned, the focus on acquisitions as well, as another way to deploy capital.

William Katz -- Citigroup -- Analyst

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

Paul Reilly -- Chairman & Chief Executive Officer

I would say two levels. Yes, sure, the -- if you look at, I know a lot of people record quarterly and some annually. So, as you know, we do annual. So we thought we give the indication that we are approaching 9% for the first six months, which is a great number. The growth has been a kind of proportional to the channels, we are finding our advisors. So just bringing in assets and clients even in this market which they have 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 size. So it's like almost M&A, you're in a transaction, but we don't count it till it closes, the same and 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, so that 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

Our next question comes from Manan Gosalia from Morgan Stanley, please go ahead.

Manan Gosalia -- Morgan Stanley -- Analyst

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 to the start of the fiscal second quarter? And then your pre-tax margins in the capital markets' division declined Q-on-Q, it was a pretty strong revenue environment, so I was wondering if there is, I mean 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 & Chief Executive Officer

So let me start on there kind of the revenue side. I'll let Paul address the margin side a little bit, because there's lots of moving parts in all of these. On the revenue side, 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 would slow. Now, again, M&A is one of those deals where economy can change, people can pull out of deals, so they can get delayed, so you never know. But the backlog would say it's as robust as ever. The market is active, I think, for everyone, and our backlog is very, very strong. And continually to sign new deals, even as in 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

Yes, I mean the margin certainly bounced around a little bit from quarter-to-quarter, but at 24% for the quarter, that's still a fantastic margin for the Capital Markets' segment. And when you look year-to-date I think it's 26%. So, revenues were down a bit sequentially, M&A still had a 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 -- Morgan Stanley -- Analyst

Great. And then maybe on the loan growth side. You saw some nice loan growth, as you mentioned in the real estate and SBL portfolio 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 it just increased penetration of your existing customer base?

Paul Reilly -- Chairman & Chief Executive Officer

Yeah, I would say it's not -- lacks underwriting. So, I think, it is better processing, trying to get -- make it a smoother process, the underwriting standards are the same, it is ever. But I do think our advisors in this market, a lot of people is there a state and tax planning are using the tool. So we are advertising to our advisors. We don't go direct to their clients, the availability in the use of these tools and financial planning, but it's their choice and their clients' choice. We don't market directly to the end client.

So -- but, given that, 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 in much lower penetration. So, we think there's more opportunity.

Manan Gosalia -- Morgan Stanley -- Analyst

Great, thanks a lot.

Operator

Our next question is from Devin Ryan with JMP Securities. Please go ahead.

Devin Ryan -- JMP Securities -- Analyst

Great. Good morning, everyone.

Paul Shoukry -- Chief Financial Officer

Hey, Devin.

Paul Reilly -- Chairman & Chief Executive Officer

Hey, Devin.

Devin Ryan -- JMP Securities -- Analyst

Maybe start with one here just on the strength in private client your brokerage revenues in the quarter. Heard some of the commentary, but that would be great to just get a little more color on what you guys are seeing in that business? And if you can, how much of the sequential improvement was from trailing commissions versus just activity? And then really what I'm trying to do is just parse through, how much of that business is just benefiting from a bigger base and higher assets versus maybe something that was a little bit unusually active in the backdrop?

Paul Shoukry -- Chief Financial Officer

Hey, Devin, that's a great question. There 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 then the trail commissions have grown as well. But you can also see that the transactional commissions from equities, ETFs and fixed incomes they are 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 and 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 -- JMP Securities -- Analyst

Yeah, true. Really good color, thanks, Paul. And then maybe another modeling question. Just thinking about the comp ratio moving parts. I appreciate the mixed dynamics particularly, as you have strong quarters in the independent broker channel. That has 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 in backdrop it's -- you're able to parse through, how much as a drag in the seasonal piece or even if you can quantify how much of 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 decreases in any other pieces, but are still the comps that parse through, so that would be really helpful, if you give any color there.

Paul Shoukry -- Chief Financial Officer

Yeah. I know it is a great question, Devin. And we tried 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 compatible revenues in the Private Client Group business. That has an average pay out between the employee and independent channel, as 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 -- JMP Securities -- Analyst

Okay, great. I'll leave it there. Thank you guys.

Paul Reilly -- Chairman & Chief Executive Officer

Thanks. Devin.

Operator

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

Gautam Sawant -- Credit Suisse -- Analyst

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 differentiate technology in your platform relative to peers?

Paul Reilly -- Chairman & Chief Executive Officer

Yes. So, on the the transition assistance, it became clear as a number of firms that all had raised it significantly we were not even close to in the market, and for big -- especially for large teams. And so, looking, we knew we had room from a return standpoint. So on those large teams I would say, now, when we come in, took finals, we're not the highest, but we're in the ballpark.

And so, enough that people are saying they are willing to make the trade for the dollars for the culture and the values. When we had deals up literally, we're 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 are at the highest, we are competitive, and we think it's a fair package both -- and a good return for us.

So, we're feeling that we're well positioned and appropriately positioned. And I think, it's going to reflect in the numbers in a lot of very, very high quality teams, probably the largest number of large teams. So we've had that certainly in memory, so which means that probably the largest group of large teams we've ever had in the recruiting pipeline. I'm sorry, and your second question was?

Gautam Sawant -- Credit Suisse -- Analyst

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

Paul Reilly -- Chairman & Chief Executive Officer

Yeah. So our focus for a long time has been on the advisors' 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 advisors' desktop. So it's been many years now since we've been completely mobile where advisors could do almost everything from their iPhones that they could do from their desktop, and making sure that our advisors had all the latest tools, planning tools, and completely mobile very, very early on.

Now that only we are enhancing those platforms, but we're bringing that same robust technology to those client collections. We believe our client app is very good, our SAT scores are very high, and our internal survey which we do every year. But now we're connecting all that power, those apps into their clients so that their integration is much closer, as well as rolling out many thing.

We've been on this journey for 10 years, and going from being -- having good technology to work, all of our recruits tell us from other firms from an advisor desktop, leading technology. But that battle never ends, people are always investing. So, you'll see more of it on Investor Day.

We believe that's been one of the impetuses of our strong recruiting, and one of the trade-offs people have made for the package it's the culture and the tools and the support from our marketing department and all the other things we do to help advisors build their businesses.

Operator

[Operator Instructions] Our next question is from Steven Chubak Wolfe Research. Please go ahead.

Steven Chubak -- Wolfe Research -- Analyst

Hi, good morning.

Paul Reilly -- Chairman & Chief Executive Officer

Hi, Steve.

Steven Chubak -- Wolfe Research -- Analyst

So wanted to start off with a question just on the securities growth or at least your appetite to maybe grow the securities portfolio a bit more. You cited a significant buildup in client cash that had clearly impacted the NIM. And was hoping, you can just give some context, as to what your appetite is to reaccelerate securities growth once again? And Paul, you cited reinvestment headwind versus the back book yields. Where are you reinvesting today just given some of the recent steepening in the curve?

Paul Shoukry -- Chief Financial Officer

Hey, Steve. Great question. We have significant appetite to grow the securities portfolio. Unfortunately, the supply in the kind of shorter-duration paper, we have been buying -- trying to buy in that three-year type duration average life range. And the supply, given the flat yield curve and where mortgages are being originated today in the longer end of the curve there's just not a lot of paper out there that gives you that three-year average life.

And to the extent that you can find it, its probably paying in the 80 basis point range. So we have been proactive in investing and growing that part of the portfolio. The challenge is, where most of the suppliers you're having to go out 4.5, 5 years as on an average life, and you get paid more. Obviously, you're going to get somewhere north of 1%, but you're certainly not getting paid enough to take any level of inflation risk over that five-year period for example.

And so, we're looking at it closely, almost daily. We're looking at what's happening with spreads on the securities portfolio. We have a lot of significant appetite to grow it over time. But I'd tell you now with the Fed buying as much as they're buying particularly on the short-end, there's just not a lot -- I mean, there's a whole lot more demand and supply, and so we're going to continue to be patient, just as we always are.

Paul Reilly -- Chairman & Chief Executive Officer

And we've also I think strategically have -- and our C&I portfolio grown it, and also looked at alternatives of very high-rated company paper with shorter duration or buying loans in the secondary market, where that duration is going to go out. Just a few years, and it's floating and we think better credit risk return. So we've been trying to be flexible and growing it. But we waited a long time on a floating rate environment. We don't want to lock-in at the bottom. So we are watching duration, very, very closely.

Steven Chubak -- Wolfe Research -- Analyst

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

Paul Shoukry -- Chief Financial Officer

Yeah, great question. And business development expense, as I said on the opening remarks we do expect that to start increasing as travel is starting to pick up a bit. Maybe not so much in the third quarter, but in the fourth quarter assuming the vaccines continue to prove effective. We expect the travel and even conferences and recognition trips to pick back up.

Before the COVID pandemic, we said that we were looking to average somewhere around $325 million a quarter. And if you add -- if you kind of quote unquote normalized for business development, and I'm not sure what normal is frankly or 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 as you can see, but also a lot of its growth-driven.

I mean some sub-advisory fees is going to grow with fee-based assets over time. They have FDIC insurance premiums that they grow with the bank's balance sheet growth. Recruiting, as Paul said, is picking up substantially. There's going to be account transfer fees there. So a lot of the non-comp expense growth as we are a growth company are intended to grow over time, but we are focused on growing revenues at a faster rate than expenses over time as well. So we do realize that operating leverage.

Operator

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

James Mitchell -- Seaport Global -- Analyst

Hey, good morning. Maybe just a question on cash balances. They keep growing, they saw how active can -- read into your 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 expect 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 have been just coming from what used to be in purchase money market funds or other short term alternatives that are now because there -- those alternatives aren't generating any kind of yield, they're sitting in the cash sweep program, but we have seen a little bit of a level-off.

But those balances, as we saw last year in March, can change dramatically with market volatility or downward trend in the markets. So at 6.5% of assets, so 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 and a lot of the value that financial advisors provide is keeping clients consistent with their financial plans in periods like we had last year.

So for us, we don't tend to see the exposure to different asset segments that the e-brokers might see etc. or the day traders might see. We tend to stay a lot more consist -- our clients tend to stay a lot more consistent as their advisors really keep them on their financial plans.

James Mitchell -- Seaport Global -- Analyst

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

Paul Shoukry -- Chief Financial Officer

There are a $1 billion for the quarter so -- of net inflows, so that was a pretty I think 8% annualized rate, but unfortunately, we're not prepared to annualize that. There is structural headwinds. We had some nice institutional wins during the quarter, and so we have invested in the distribution capability. We recently announced a new leader for that business. So it will be good to bring in a fresh set of eyes with a very experienced leader, but still dealing with the headwinds. So 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.

James Mitchell -- Seaport Global -- Analyst

Right. Okay, thanks.

Operator

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

Paul Shoukry -- Chief Financial Officer

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

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Kristina Waugh -- Vice President of Investor Relations

Paul Reilly -- Chairman & Chief Executive Officer

Paul Shoukry -- Chief Financial Officer

William Katz -- Citigroup -- Analyst

Manan Gosalia -- Morgan Stanley -- Analyst

Devin Ryan -- JMP Securities -- Analyst

Gautam Sawant -- Credit Suisse -- Analyst

Steven Chubak -- Wolfe Research -- Analyst

James Mitchell -- Seaport Global -- Analyst

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