Operator: The next question is Brennan Hawken, UBS.
Brennan Hawken: Curious about the idea now that we’re starting to see capital markets get going, activity begin to pick up, how should we think about incremental margins in that business for you given how weak the profitability has been? I would assume that they would be pretty good. But could you help us get a sense of what a incremental dollar of revenue would mean from an incremental margin perspective?
Paul Shoukry: Yeah, I think maybe the only thing we can really point to is the margins peaking out in the mid-20s. I think it was 25%, 26%, and 21%, 22% in that time period. So there’s a lot of upside to the margins from where we are today. And just remember, this quarter was impacted by $20 million of deferred comp amortization from those record years as well, which will run off over the course of the next 12 to 18 months because those are three-year deferrals typically. So there’s a lot of upside. We have a very strong franchise now in Investment Banking. The pipelines and the leading activity levels are good. Closings are difficult to predict just in this market environment, but we think there’s a lot of upside to both the top and bottom line in our Capital Markets segment.
Paul Reilly: And if we didn’t, we would be taking a lot different actions than we’ve taken so far. I think we’ve prudently cut expenses and making sure that we have the right people on the field, but we think we have a great team. As the market recovers, believe they’ll do very well.
Brennan Hawken: Thinking about the improving environment, if we continue to see signs of recovering strength in your core businesses, will that increase confidence and improve the likelihood for a better outlook for capital returns and buybacks?
Paul Reilly: Yeah, I think our capital philosophy hasn’t changed, in that we would love to add to the business, invest in the business first, and certainly our recruiting is an ongoing large investment, which is certainly – I don’t think anyone thinks it’s a bad investment. We’re looking for M&A opportunities and are active in the market, but can’t predict the timing. Certainly, we’ve committed to buy dilution back and be opportunistic, but we don’t want the capital levels. We think that these levels are high and we want to manage them. And so, we will be meeting with the board. And I think by the analyst and investor days may have a better insight to how we may do that. But the profitability, we’re not trying to hoard capital.
It doesn’t benefit us. We’ll always be higher probably than most firms, but this is a pretty robust level. We acknowledge that. I think our commitment, for those on this call, thinking we’d do a buyback that averaged $120 plus, you would have thought we would have done that even a quarter or two ago. So we’re trying to manage the levels.
Operator: The next question is Daniel Fannon, Jefferies.
Daniel Fannon: Just to follow up on that last question, can you talk about M&A and really what you think makes the most sense in terms of strategic fit from a product, geography, or scale perspective?
Paul Reilly: That’s a hard question to answer quickly. Our primary geographies are North America and then Europe that we look for the best opportunities. In each business, the opportunities are different. In our Private Client Group, it’s really North America and the UK. Our M&A group is much broader. We’re on the continent, not really in Asia, but not against M&A capability more than we have today. Asset management, it’s particular products. We can go on and on and on. We think in all the areas of the firm, there are areas that we can grow that strategically help us through acquisition. But that would be a lot longer and a lot more detailed than that general question. So each business has different needs. M&A, we think there are areas that we could expand.
The private client group, we think our geographies, we’ve done well in the Northeast, but could do more and we’re really focused on growing in the West more robustly. So, the answer is, a lot of areas, if we can find the right opportunities and make them a reasonable return for shareholders that we would execute on.
Daniel Fannon: As you think about NII going forward and you mentioned the cash trends and some stabilization there, on the loan growth side, any signs of pickup in potential demand there, or as you think about the rest of this year, what are the kind of most sensitive factors as we think about that line item in terms of up or down?
Paul Shoukry: As you know, loan growth has been tepid, not only for us, but for the really entire banking industry since rates started rising over the last 12 to 16 months, and a lot of that is due to just the higher rate environment and a lot of corporations and investors coming into this environment flush with cash. We are optimistic about loan growth going forward. We don’t know exactly when that inflection point will hit, but we do think that there’s a demand building up, both for companies who will eventually get back engaged in M&A and other investing activities, as well as a Private Client Group investor. So one of the reasons that we are maintaining strong capital and funding positions and a lot of flexibility is to be in a position of strength when that loan growth does resume, because it is just a matter – in our minds, just a matter of timing for when that loan growth recovers.
We’re well positioned for it. We don’t know when that will come back, but we’re optimistic about the growth going forward.
Operator: Up next is a question from Mark McLaughlin, Bank of America.
Mark McLaughlin: I wanted to get your take with regard to advisor movements. What have you guys been seeing on your end in terms of advisors leaving wirehouses and also competition between independent broker dealers? Is there anything to call out?
Paul Reilly: Just that the competition is still robust. The advisor movement, especially of large teams, where we’ve been focused, has been big. I think private equities investment into the RIA space has caused more movement to and to outside of the independent broker dealers and employee broker dealers. So that’s kind of a new factor in force. Part of the reasons why a decade ago we started investing to have our RIA channels so we could be competitive. Yeah, I can’t remember a time where there hadn’t been a lot of competition, but we still see wirehouse movement in our favor. I think that you’re seeing more people not reporting advisor count for that reason. But we see a lot of activity, but it’s competitive. There are a lot of people out there competing.
At the end of the day, it’s not just money. I think what people think, the highest bidders get it. If you look at our – we just saw the latest industry source, we’re still lower than most firms. I have a fair margin in our transition assistance, but it’s clearly up from a couple of years ago. So reflecting the competition. So it’s competitive, but we believe our platform is what lands people in our culture. And so, so far, it’s continuing, but it’s not easy. It’s hard work.
Mark McLaughlin: I’m sure we’ll get an update on this at the investor day. But with respect to RCS, what are you guys seeing in terms of advisors moving, especially the size of those advisors? I realize for the most part, it’s usually advisors once they reach kind of sort of a critical mass. Are you seeing the size of the advisors wanting to move over to RIA kind of move down in scale?
Paul Reilly: In the market, there’s certainly a lot of movements of the smaller teams that want to become RIAs and big teams that have the infrastructure to be RIAs. So the movement’s really kind of across the board. Larger teams, one of the positives and challenges of RIAs is you can affiliate with a firm, but have multi-custodians. So I think that if you look at large RIAs at some of the big custodial firms, they still move assets sometimes. So, you don’t have to have the firm affiliate with you to be an asset gainer, too. So the dynamic of that – it’s a much more dynamic industry in that way. It’s kind of all or none in the registered rep side. And it’s a fight for wallet on the RIA side.
Operator: We’ll now take a question from Kyle Voigt, KBW.
Kyle Voigt: I just have a couple of follow ups. Maybe first just to follow up on Dan’s M&A question. I guess just to be clear on the capital point, do you feel like you have enough capital flexibility today with the current leverage ratios to act on them and the opportunities that you’re seeing in the market? Or is the near-term guidance on buybacks to offset dilution and implied continued near-term capital build due to maybe wanting a bit more flexibility due to the size of the acquisition opportunities that you’re seeing?
Paul Reilly: I think we’re in the ballpark of flexibility. The question just is that question, do you see something where it could be bigger? But you can’t just wait and wait and wait with total capital. We’ve drifted up once, if I remember right, Paul, 14% or something. And people are saying, what are you doing? But we had three deals that we executed in one year that brought it down. So it hit 10 and it’s been building back up. So if it was a smooth and we could forecast it, it’d be really easy. But M&A kind of hits. Deals sometimes come almost out of the blue or someone just decides they’re going to sell. And so, that’s why if we average up sometimes, we feel like the market will have opportunities that we can foreshadow.
But that doesn’t mean we’re right. There’s one thing to enter into a discussion. It’s another thing for a seller to agree it’s time and to pick us and to close. So that’s the challenge. But many of the deals that we had closed is because we could execute and we were not only were they attracted to us, but there was a certainty of closing both financially and that we had enough cash on hand that it wasn’t a leap. And the financing, because we’re not leveraged, isn’t a leap that we can close very, very quickly. So I wish I could give you a science to it. There’s a little more art to it. We would love to be as clear as we can on this. But we have the magic formula. We would we would let you know or at least package it and sell it to our competitors.
Kyle Voigt: Just for a follow up on the loan balances, I think you gave some commentary on SBLs a few quarters ago that you were actually seeing some decent demand and some of the acceleration in that book, the growth of that book that you were seeing in the calendar third quarter was due to some pay down slowing. So I guess a bit surprising to see that growth has stalled out here in the past quarter. Just wondering if you could provide any additional color under what’s happening in the SBL book specifically, which is flatlined here. And then do you think the market really just needs to wait for rates to move lower before demand broadens again?
Paul Reilly: It was flattest for us, as you point out, sequentially, as it was, I think, for the rest of the industry, at least those who’ve reported thus far. So I’m not sure you necessarily need to wait for rates to decrease. It’s just maybe a stabilization of rates, even as borrowers get used to sort of the new norm. So I think that’s really what we’re seeing as we transition from historically low rates to where our current levels at an unprecedented pace. Just a lot of people are still getting used to – and companies are still getting used to this level of rates.
Operator: Your next question comes from Michael Cyprys, Morgan Stanley.
Michael Cyprys: Just wanted to ask on organic asset growth. I think in the past, you suggested that most of the growth and any growth that you’re seeing is from recruiting. I’m just curious how you think about an opportunity set over time from maybe providing advisors with more services to enhance their efficiency and unlock growth from the installed advisor base to grow same store sales.
