Jul 26, 2013
Operator
Good morning. My name is Jodie, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Raymond James quarterly analyst call. [Operator Instructions] To the extent that Raymond James makes forward-looking statements regarding management expectations, strategic objectives, business prospects, anticipated expense savings, financial results, anticipated results of litigation and regulatory proceedings and any other similar matters, a variety of factors, many of which are beyond Raymond James' control, could cause actual results and these experiences to differ materially from the expectations and objectives expressed in these statements.
These factors are described in Raymond James' 2012 Annual Report on Form 10-K, which is available on raymondjames.com and sec.gov. In addition to these factors, in connection with the Morgan Keegan transaction, the following factors, among others, could cause actual results to differ materially from forward-looking or historical performance: difficulty integrating Raymond James' and Morgan Keegan's businesses or realizing the projected benefits of the transaction; the inability to sustain revenue and earnings growth; changes in the capital markets; and diversion of management time on integration-related issues.
To the extent Raymond James discusses non-GAAP results, a reconciliation to GAAP is available on raymondjames.com in the earnings release issued yesterday. Thank you.
I would now like to turn the call over to Paul Reilly, Chief Executive Officer. Please go ahead, sir.
Paul Christopher Reilly
Thanks, Jodie, and good morning, everyone. And now that you know we can't foresee the future by the disclaimer, I'd like to kind of get into the numbers in the quarter.
First, I want to kind of give a big picture. We're very pleased to where we stand today in terms of our market position and what we've accomplished over this last year in the Morgan Keegan integration, and we've had a very successful integration, retention, number's been very good.
We've just come off our conferences for our Private Client Group. Both our employee and independent groups, and I'd say the mood is very, very good.
They're very happy with the firm and where we stand, our technology, as we continue to roll it out. And I believe we're well positioned in all of our segments.
Certainly, our -- despite market headwinds, our fixed income business is really a premier business now. All of our segments, I think, are showing good growth.
And if we look over the 9 months, for the first 9 months of this year versus 9 months of last year, we're up 23% in net revenue, 10% -- 17% in net income and 10% in GAAP and non-GAAP diluted earnings per share. 20% in GAAP -- I'm sorry -- and -- we had 10%, I'm sorry, in our non-GAAP diluted earnings per share due to number of shares issued.
So if you look at the overall performance over the last year and where we stand, I feel very, very good about it. And I also recognize, and I'm looking at the numbers, there's a lot of noise still coming through the Morgan Keegan integration, both in our cost lines as we finish up with the integration as we continued over this quarter to kind of size our business from that integration and also through numbers moving through different classifications of how Morgan Keegan kind of accounted for things and how Raymond James does.
So hopefully, we can move through each of those, but today, give you some more visibility. And I think we had a decent quarter in most all of our segments, except hopefully, which was an anomalous fixed income trading loss, which I'll cover a little bit.
But I think if we go segment by segment, I think the performance is pretty good. If you look at overall for the quarter, our revenues were $1.1 billion.
We're up 2% over a year ago, and it -- we're down 3% from last quarter. But again, you have to remember the Albion transaction, that if you took that out, which was kind of a one-time event, we were up 2% to 3% really in revenue and even taking the Albion -- leaving the Albion transaction where it was 5% in our earnings.
So I think we've had -- we had a reasonable quarter there. And if we go through segment by segment, we can give you a little color.
On the assets under administration, you noticed there was $1 billion kind of drop, given the Dow probably looks a little unusual. But there are 2 factors that impacted that: One is the Canadian currency revaluation from 99 to 96 had a $1 billion-ish kind of impact, and also some of the fixed income valuations, given the interest rate changes in the markets had an impact on that number.
I think what probably is more in line and more of an indicator of our business going forward, if you look like Assets Under Management was up to a record $52 billion. And more importantly, if you look at the Private Client Group billable accounts going into the quarter, they're really up about 3.5%, composed of a couple of elements.
One, a 2% increase on the Assets Under Management, an extra billing day coming in to this quarter. And actually, if you look at billings of movement from fixed income into equities, that's going to increase that billing base.
Also if you look at the revenue in the Private Client Group, there are some changes and kind of, from the Morgan Keegan numbers, we're up 2% for the quarter. But in Morgan Keegan, they really did not have a fixed income segment.
And some of the income in Private -- in Asset Management Segment, I'm sorry. And what we call Asset Management at Raymond James was really reported in Private Client Group.
That impact of what we pulled out of Private Client Group and moved to Asset Management in our reporting was about $10 million a year or $2.5 million for the quarter. So the Private Client Group number, on an apples-to-apples basis, had we not gone through the reclass, it would have been a little higher and the Asset Management growth really a little lower.
But I think that both numbers are continuing to grow, and we still have very, very good results for Asset Management. Sticking with the Private Client Group.
We also expect the margins to continue improve in Private Client Group. We'll go through some of the comp ratio kind of adjustments -- Jeff will a little bit later in the quarter.
And our technology expenses continue to be raised as we finish off projects this quarter and this next quarter in the fourth quarter of our fiscal year that, I would say, that got deferred because we were working on the integration as we finish them up. And we expect that technology expense to decline over the next couple of quarters and get back into a run rate, which we had planned to go on before the integration.
Asset Management continued to perform well, both from the market revaluations and good net inflows, both from outside and from Morgan Keegan advisers who continue to move $160 million, $180 million of assets a month into our Asset Management system and again, a good sign that the integration has been going very well. The Capital Markets is probably the one that probably has disappointed some people, but it's really a kind of a 2-end tail.
Our Equity Capital Markets had a good quarter, coming off a weak quarter, but both improvement in underwritings and M&A transactions. And we, right now, would expect, although it's always hard to predict the Capital Markets going forward, is to keep at those levels in Equity Capital Markets over the next quarters if we had to guess.
Backlog is good. Who knows what happens to the market every quarter there?
August tends to be a seasonal month in that business and September a positive month. But if you -- if we look going forward, we think the performance in Equity Capital Markets should continue.
The big surprise was fixed income, and it was a surprise although we had warned that trading profits were down. If we look at really the month of June, we had some almost record movements in the municipal market.
If you look at the MMD rates, the 10- and 30-year had the second highest 1-week movement since -- second only, and almost the same as October of 2008. Despite our inventories being down because of concern of the market, we hit a trading loss, and we typically don't have many trading losses and hopefully, it won't.
This month is moving -- has moved back to the positive, but I think we had that unusual event in a very highly volatile and unusual month. Not that we continue to believe that rates over the medium to long-term are going to continue to rise and are managing for that.
But we had expect the fixed income business to return to kind of the March quarter, not the quarter of -- when we acquired Morgan Keegan, the fixed income market remains challenged versus when we acquired Morgan Keegan. But certainly, we believe this month and the volatility was unusual.
Also the comp ratio was driven partially by a much higher comp ratio in fixed income. Trading profits disproportionately help us in terms of the bottom line and fixed income and, when they're negative, disproportionately cost us to the bottom line.
Also that is one business with the acquisition that between the RSUs and a number of guarantees that run through April in our 2-year deal with the acquisition as revenue go down, it has a leverage affect that raised the comp ratio. So that did have an impact to the overall comp ratio in the business.
RJ Bank. The good news is despite our warnings and that we thought it would be difficult to grow loan, we grew loan.
And I think we've had good momentum on loan growth, which is good news for future earnings. With that comes a lot of things.
But first, when you grow loans, the month you grow them and you get a charge for the reserve, so you see some impact on that as we grew loans late in the quarter. We also had a lot of things going on in the quarter in the bank, and we'll give Steve a chance to address them.
We had the SNC exam, which we talked about in the release. We had a lot of payoff of credit.
So when a credit pays off, a loan pays off, you release the reserve and you could see the impact of those -- the payoffs and some upgrades that have -- that gave us a credit this year. The challenge also is spreads have come in on loans.
But as the loan balances have grown, we feel pretty good for the quarter. There's also a lot of items that have impacted the bank this quarter.
Again, the rise in rates in June impacted our SBA loans. We had about a $2.7 million mark that we think will mostly reverse.
We had, from our Canadian loans, again the movement, although we hedge a lot of our loans in our finance company in Canada. The ones that are written in the bank are unhedged, and that was about a $2 million translation mark there.
So a lot of numbers, again, moving in the bank. But I think, overall, the bank has performed very, very well.
So with that, that's kind of the overview. I'll have Jeff give you some of the details.
We'll have Steve address with some of the bank, then we really want to -- I know you'll have a lot of questions this quarter. So Jeff?
Jeffrey Paul Julien
Thank you, Paul. Let me go -- kind of go back to the beginning and just kind of fill in a little bit some things that I had made notes of it that Paul mentioned most of them.
But in PCG, there are a couple of things that you can't really tell very easily in there. I mean, average gross headcount was up just a little bit in terms of FAs, but average gross actually made a little bit of progress in all of our units, which is encouraging.
We do disclose margin balances in the release. One thing that's not evident when you look at that is that we have a -- kind of a companion-type product in security-based loans in our bank, which has hit an all-time high of $500 million, about $200 million of which were acquired from Regions as part of the Morgan Keegan transaction.
So there's actually been $300 million of growth in that product line as well, which is again, sort of a similar product to margin but for different purposes, not for trading purposes. We do look at overall asset mix.
As Paul noted in Asset Management, there was a slight shift to equities and -- as there was in our total client base. Nothing very meaningful, but a slight shift, and it may be people investing some more in equities.
It may also be somewhat the devaluation of all things fixed income-related, such as REIT preferreds and other things that took a devaluation in the quarter with the interest rate jump. So lastly, when you look at pre-tax income in Private Client Group making a $4 million improvement over the preceding quarter, there are really 4 things that impacted that.
There was obviously an increase in commissions and the margin earned on those. There was still this elevated IT effort which sort of offset that, which we expect to moderate going forward from here.
The other, there was a couple million dollar benefit in administrative expense. If you remember, we had a fairly significant rift [ph] in early April in technology and that was, in our system of accounting, the technology and ops all roll into the Private Client Group segment.
So that was evident there, and then there was about a couple million dollar increase in fees from mutual funds, really based on increased asset values as we get the asset-based fees from the various fund groups. That was sort of the story in Private Client Group.
I think Paul talked pretty -- in pretty much detail about Capital Markets. The only thing I would add is that there's a third player in that segment that actually had a pretty good quarter, which is our Tax Credit Funds operation, which you can see more detail on when you get our Q.
But they actually had a very good quarter, relative to last quarter. Our pretax is up several million dollars from the preceding quarter.
So that also aided Capital Market's margin for the quarter. I'll let -- I have some bank notes, but I'll let Steve talk about that in just a second.
A couple of overall comments. The tax rate was a little lower than the previous quarter.
We were recognized some tax credits this quarter that we didn't think we were going to get, because we're -- it's a program we thought we were shut out of because it was oversubscribed. But turned out, they had room for us.
It's a Florida school credit program. So we ended up -- did get in that program, and that's in the -- so we had to recognize that in the quarter.
The other thing we had in the quarter, to a greater degree than usual, the dividend received deduction is we had some big dividends from the private equity investments, particularly Albion in the prior quarter. A new item this quarter in the release, you can see we added the -- a couple of the holding company capital ratios.
They're still preliminary in terms of the holding company. We think they'll be very close or we wouldn't have put them in there.
It was just to give you a feel for what the overall capital strength of the company is, and we'll be doing that going forward. The comp ratio, I'd say partly largely, because of the fixed income dynamics where we have a lot of fixed comp, not enough related to variability, particularly even in the management ranks and the retention [ph] ranks and some of the high producers, et cetera, where we have guaranteed deals for -- as part of the acquisition, are causing a very disproportionate comp ratio there for the current period.
So we really didn't make any progress. Even when you adjust for the private equity revenues last quarter, we really didn't make much progress.
I'm frequently asked, "What is really the longer-term targets here?" And when we look at what we would call a normalized-type environment, without interest rates, just in this environment in terms of rightsizing all the businesses, et cetera, which we're substantially through now, we still have a little bit more to go.
I'll talk about that in a second. We're just in the process now of putting together our -- starting to put together our 2014 budgets.
But when we look at the target margins per business like we talked about at Analyst Day recently, and we roll them all together and look at the comp ratios in each of those businesses when they achieve those targets, et cetera. If you look at it overall, we still do think there's a 15% pretax margin on a total-firm basis achievable which, by math, equates to about a 12% ROE in this environment without the interest rate help.
And if you look at the comp ratio in that environment, it's about 66.5%. So those, I guess, we would call those our targets for next year.
Obviously, there's a lot of market assumptions and other things that would come into play to achieve all of that, but that's kind of still our 2014 targets. With respect to the integration synergies, we actually now achieved, not only all, but even a little more than all than we thought we would.
The problem isn't the lack of recognizing synergies, it's that, right now, for this quarter at least, one of the core underlying businesses we purchased just hasn't been performing, given the market environment in fixed income. So that's really been the issue there.
We still have a little bit more synergy to come, some real estate consolidations and things like that, but we're substantially through that process. We probably still will have a little bit more in terms of one-time charges here in the September quarter.
We had a little bit more of that in the June quarter than we thought we would because we got a little more aggressive, particularly in the Capital Markets areas than we had originally planned, given the environment. So that number, where I said probably would be $5 million to $10 million in the June quarter, actually ended up being $13 million in the June quarter.
And now I'll say, again, it will probably be a couple of million dollars in the September quarter as well. So with that, let me let Steve talk briefly about the bank and I'm going to leave time for questions.
Steven M. Raney
Sure. Thanks, Jeff.
Good morning, everybody. Just to elaborate a little bit on some of the comments that Paul and Jeff have already provided, we were able to grow loans, not only in the quarter across all categories.
Our securities-based lending business, as Paul mentioned and Jeff mentioned, has grown to over $500 million now. Our corporate lending business grew, as of June, compared to March, by $68 million.
Our mortgage -- residential mortgage business grew, and our SBA loans grew also. The provision expense associated with that loan growth was relatively nominal because some of these categories are very low-risk -- low-risk items that don't require a lot of reserves.
We talked a little bit about the margin. We had an 8-basis-point compression in margin in the June quarter.
We've seen that trend continue. But it is -- the margin compression is starting to slow a little bit, relative to the prior few quarters.
We do expect continued pressure on margins, but we are starting to see some of that subside in some of our businesses. A little bit more information on our provision expense, as Paul mentioned, and you see -- saw in the release, we had about a $2 million credit for the quarter.
And despite the impact of the Shared National Credit exam, there were 9 loans that were downgraded as part of the exam and 2 loans that were upgraded as part of the exam. Then that impact of that was a $5.6 million provision expense.
Despite that and the nominal loan growth that I just mentioned, we had some significant loans that had large reserves against them that we had a part payoff of a loan that was on nonaccrual that had a lot of reserves against it. We also had another loan that was upgraded to accrual status in the quarter, that had a lot of reserves against it as well.
So the net effect of some loans that had a lot of reserves against them, we had some improvements, both payoffs and upgrades. So netting all that out led to the $2 million credit in provision expense for the quarter.
Paul mentioned some of the larger figures in our Other Income number for the quarter. This is the first time, at least in recent history, that our Other Income was actually a negative number.
But Paul kind of elaborated on some of that already, the foreign exchange for currency and the mark on the SBA loans that were impacted by the rise in rates.
Paul Christopher Reilly
I'll just add one more thing here before we open it up and that's in the Proprietary Capital section. It was still a -- once again, it was a pretty significant contributor to the results.
This June quarter, every year, is the quarter we get audited results on all of the external investments that we're in, as well as some of the ones that we sponsor. And when we -- there were a whole host of relatively small $1 million to $2 million-type marks.
Some of which, we don't own 100% of, of course, which is why you see the increase in noncontrolling interest related to that. But this was a very active quarter.
Didn't match the Albion results of last quarter, but it was certainly still a significant contributor, again, to the results, including some of the private equity holdings that we acquired in the Morgan Keegan transaction, which came to resolution. So we were happy to have that little added bonus for the quarter.
Jeffrey Paul Julien
And one last comment, I'll open for questions. The other thing you need to recognize is we continue to still operate pretty heavy operational support through the integration that our headcount pre-Morgan Keegan acquisition, for Raymond James and Morgan Keegan is actually higher than when we -- where we were when we both started.
And we're going to keep that support levels elevated as our new advisers are getting used to new systems. Our support staff from Morgan Keegan are very good in understanding securities transactions.
Our systems are also new to them, and there's a learning curve. And through that learning curve, we'll keep support levels high.
Again, our focus has been on retention. And over time, we'll be able to address that.
But that has been also an area that will keep -- that has kept some of our costs elevated through this year.
Unknown Executive
And that's a much more involved process, I think, than people realize. It's not just looking up client accounts on your PC.
I mean, it has a lot to do with a lot of financial planning software and a lot of other instruments and programs that we have here at the firm that -- there's a lot longer learning curve than just account inquiry.
Paul Christopher Reilly
And so, I think as our hope and, I think, as our early results have shown is that those advisers are moving assets to our Asset Management platform. As they learn our software, we believe it will help productivity climb.
But again, that's not overnight as we said during the acquisition -- pre-acquisition. That's a 1- to 2-year kind of time frame.
We're pleased with the results, and we have more to go, and we're focused on it. So with that, we'll go ahead and open up to questions.
Jodie?
Operator
[Operator Instructions] Your first question comes from the line of Hugh Miller from Sidoti.
Hugh M. Miller
I guess I start with a couple of questions for Steve at the commercial bank. Obviously, it seems like there was a little bit of a change with the loan portfolio growth in the quarter.
I think in the press release, you guys still mentioned that competition is intense. So we've been hearing from several commercial banks that a lot of that cut-throat loan pricing competition has kind of subsided towards the latter part of the quarter with a shift in the yield curve.
Can you just give us a sense of what you're seeing there in your outlook for -- now going forward for the potential for growth in the loan portfolio?
Paul Christopher Reilly
Yes, Hugh, that's a good point. I would say in early May, when rates started ticking up, that really led to some of the institutional investors with other options, and we saw some improvement in the loan market.
We've actually seen some pushback from the banks against companies on some of the repricings that are going on. Some of that's still going on, on the better credits.
But once again, as I mentioned, we're seeing that trend at least subside for the most part at this point. It's still a lot of competition, a lot of money chasing too few deals.
But I would say that we have seen some improvement over the last 2 to 3 months in that regard.
Hugh M. Miller
Okay. I mean, and is your outlook now for the potential for continued growth -- I mean, it looks like, just in the month of June, the portfolio expanded by 3%.
Are you guys anticipating that you'll continue to see some measure of growth in the loan portfolio?
Steven M. Raney
I think so. I think it will be nominal though.
Yes, we're growing asset to kind of in all categories. Our mortgage business, it's gotten to be quite a bit bigger or it's being impacted.
Our pipeline over the last 60 days, with the rates ticking up, is a little bit lower. We've seen a big shift to purchase market versus refinances, obviously, given the -- more confidence in the marketplace in the real estate market.
And most folks that have refinanced have already done so or that could refinance have done so. On the corporate side, obviously, that's a bigger business.
We're now a little over $6.5 billion in loan outstandings. That, that's obviously our biggest business.
Continued challenges, but I do think we can nominally grow over the next few quarters, given the current market conditions.
Hugh M. Miller
Okay. And is there a...
Paul Christopher Reilly
I'm sorry. That may come at the -- I think there will still be pressure on the margin that we probably will -- we've been guiding people down to the 325-, 330-type level.
We obviously aren't there yet and -- but the older ones that are refinancing or paying off or maturing. Even with this backup in pricing that we've seen lately, we're still not back to the levels that...
Unknown Executive
No, not at all.
Paul Christopher Reilly
Of the current portfolio. So we're still going to see some compression, I think, in the net interest margin.
But hopefully, some loan growth, so we can keep net interest earnings about flat.
Hugh M. Miller
Okay, interesting commentary there. And yes, can you also then, on the credit side -- I know that you took the provision reversal, but can you talk about the uptick that we saw in the criticized loans quarter-over-quarter?
Was that just all from those, and I guess those 9 loans that you mentioned from the SNC exam that were downgraded or what's the...
Steven M. Raney
Not exclusively, but that was the vast majority to -- once again, the criticized loans also include even more harshly rated loans, loans that are, by regulatory definition, classified in worse. Those have even higher reserves.
We actually had a reduction in our worse-rated or higher-rated credits for the quarter, which contributed significantly to the credit for the quarter in the provision expense line. So -- but the bulk of that increase in criticized loans was attributable to the downgrade, to the Shared National Credit exam.
Hugh M. Miller
Okay. And then, I guess, in the retail segment, it seems like we finally had a month of year-over-year growth in equity trading volumes.
And I was wondering -- I know you guys, obviously, have a large exposure to fee-based businesses, but for some of the transactional-based PCG accounts, did you guys see any improvement in the month of June for commission levels there?
Paul Christopher Reilly
I wouldn't say noticeable. I wouldn't say it was noticeable for the month, but we typically aren't the leading indicator on those so...
Hugh M. Miller
Sure, sure. And I understand that.
And then last question for me was, in the Investor Day, you guys kind of commented, I believe, that with the period of low volatility that we were in was kind of weighing on some of the negative convexity products that you have within the fixed income Capital Markets Group and that a shift in rates could be a benefit for that segment. How is that kind of playing out now with what we're seeing, at least in your expectations there?
Steven M. Raney
Yes. I think that the uncertainty, we don't expect any short-term pickup in the fixed income business.
But we think that -- and hopefully, the trading profit thing was unusual. But in terms of commission levels, I don't -- we don't expect a short-term improvement.
Our -- we -- a big part of our fixed income franchise is the financial institution franchise, and we don't see a big uplift in the short term yet.
Unknown Executive
But longer term, though, I think that the steepening of the yield curve will definitely help the commission business in fixed income when people are -- believe rates are where they're going to be for the time being and willing to put some ladders in place and other things.
Operator
Your next question comes from the line of Alex Blostein from Goldman Sachs.
Alexander Blostein
So I appreciate your extra color on, I guess, the expenses and it sounds like you guys continue to run with still fairly elevated level of support. I understand it might be difficult, but any way to size this for us, and I know you said that it's still going to be probably a few quarters until you start to phase some of that support level out.
But I think it'd just be helpful to understand the magnitude of the drag [ph] this to still create [ph] on the earning stream?
Paul Christopher Reilly
Well, I think, the technology is certainly running much higher. I think you'll see an improvement in that over the next few quarters.
In terms of the operational support, it will remain elevated for a period of time yet. And what will be the indicator for us is just call volume in the call centers.
As long as people have issues and are learning the systems, we'll continue to stay elevated. And as that comes down, and we're also going through a number of technology projects to streamline our interfaces between the branch and home office.
As those come online, I think we'll be able to get those more in line. But I think those will stay higher through this coming year on the operational support side, where I think you'll see the technology cost come down some in the next quarter -- next couple of quarters.
Alexander Blostein
Okay, that's helpful. And then when we look at the PCG business, and with the Morgan Keegan transaction, obviously, things have moved around a little bit for you guys relative to the sensitivity you get to the equity market versus fixed income market.
So going forward, as you think about the growth in the business, can you help us understand, I guess, how sensitive the revenue stream there is to potential further declines in the fixed income markets. I know you've, in the past, provided kind of ballpark numbers of how much of the revenue stream there is fee-based versus more transaction-based.
But any way to tease that out to get a sense, specifically, for the fixed income performance?
Jeffrey Paul Julien
That's kind of a hard one because they move in different ways. I mean movements from fixed income into equities helps our PCG business if there's good equity markets.
And I think, actually, the interest rate and the yield curve and rates are actually going to impact our fixed income business itself. So it depends where they move and how and actually how volatile they are.
So it's kind of hard. If you look at our overall business, about 45% of it is now exposed to the equity markets and the rest are exposed to other interest rate or trading or the bank.
And -- but they move in different pieces. Obviously, the big one is short-term interest rates for us, which haven't moved.
The longer-term rates moving up as long as they're not too volatile are positive, I think for some of our other businesses. But if they're lumpy, we have exposure in the fixed income side.
Steven M. Raney
And that's a point we're trying to make to people. People say, "Well, look at these results," and say, "Why aren't you doing better?
It's been a great margin." Well, it's been a good Dow, but it's not been obviously a good fixed income market.
It's not been a very good bank lending market. It's been a very competitive bank lending market.
So the equity market isn't the only arena we play in, and we used to be much more exposed and correlated to the equity markets than we are now. We're much more diversified.
So we're really -- one of our 3 major markets has performed well this past couple of quarters only.
Alexander Blostein
Got it. And then the last one for me, Steve, maybe you can comment a little more on the securities-based lending.
It sounds like it could be a pretty substantial opportunity for you guys. Any way we could try to measure that, the loans, relative to the client asset base?
Because it does seem like the loan growth dynamic remains challenging for the market. This is a little bit of a -- sort of interesting dramatic [ph] lever you could pull and then maybe you can comment on the yields you're guys getting on those loans.
Steven M. Raney
Yes. Alex, it is a growth initiative for us.
This is very much of a joint effort with the bank and Private Client Group, not only to grow loans, but it's a way to help grow assets as well as we're transitioning Financial Advisers from other institutions. Almost all of them have a clients that have loans in other institutions, and we transition them over.
Big focus for us is to continue the marketing and support of that business. We are adding something in the neighborhood of $25 million to $30 million a month in loan outstandings from that team.
And the margin right now in that business is right at 300 basis points. So it actually is a kind of a negative, relative to our overall margin.
But it's a very low-risk business, which we've got a nice system and technology and process in place to make sure that the collateral monitoring relative to the loan position is intact. So want to see that continue to grow, and we want to grow margin balances as well so...
Paul Christopher Reilly
The big issue on the SBL loans is that the assets that come over with the loans are multiples of the loan amount. So it's kind of a strategic initiative for us, as well as a low -- we think a low-risk lending because of the security -- securitization of the loans.
Operator
Your next question comes from the line of Joel Jeffrey from KBW.
Joel Jeffrey
Jeff, I apologize for missing it. But could you repeat the sort of outlook you gave for the 2014 pretax margins and as well as the comp ratio?
Jeffrey Paul Julien
Yes. It's the same ones that we presented at Analyst Day by business: 9% at Private Client Group, 15% Capital Markets, 30% in Asset Management and the bank with a net interest, it's really more of a net interest margin than it is pretax margin at the bank.
That's relevant, but when you roll those businesses together, if that's what our 2014 budget shows, which we haven't put together yet, that would equate to something about a 15% consolidated pretax margin for the company, which equates to about a 12% ROE and encompassed in that if, again, all the forecasts prove to be correct, this is where the forward-looking disclaimer comes into play. The comp ratio would be something around 66.5%.
Steven M. Raney
And I think, as Jeff talked about targets, I think those are things that will -- we're shooting for and transitioning to. It doesn't happen on October 1, so they don't move that quickly.
Joel Jeffrey
All right, great. And then in terms of -- you made some comments, I guess, that the trading losses sort of have started to reverse themselves and can kind of go back to the March quarter.
But -- I mean, what are sort of the prospects and potentially the timing for these profits to return to sort of the levels we saw post the Morgan Keegan deal?
Steven M. Raney
Well, with interest rate cycles, that could be a while. When we were making $5 million to $6 million a month, I think, at the Morgan Keegan time of the acquisition of the fixed income group and enjoyed for a couple of quarters we're seeing pre this quarter, about half of that level.
And in the commission levels, just because the market commission level is down 20%. And I think that, that's the return until there's some big movement in the market, either in trading activity, which will drive the commissions, which I think it's going to be some change in the yield curve or movements in rate or volatility.
You're not going to see -- that's why I'm saying short term. If you look for the next quarter, I would expect it to move back.
You're going to have to see some fundamental changes in the market for that activity to go up, which would mean rates are starting to move and volatility is starting to -- directional volatility -- volatility, but in a direction over time. I think it's when you see that business pick back up.
So I would say, for the short term, we don't expect that. Longer term, as rates move, I think that business will start getting more active.
Joel Jeffrey
Okay, great. And then just -- I mean, lastly, for me.
In terms of the bank, I appreciate the comments that you're starting to see some slowing of margin compression and you're starting to see some loan growth. But I think, prior to that, you had sort of mentioned that you felt you guys could offset any kind sort of flat growth in the bank with improved credit quality.
Is there any prospect that we can see, barring some kind of significant increase in the loans -- the size of the loan portfolio, that the bank earnings could pick up in the near term?
Paul Christopher Reilly
There's no big macro thing that would say you're going to see a big pickup. I mean, the -- what we said before is that we had capacity that we would look at better credits -- at better credits of lower margins.
So -- but we wouldn't go down. We wouldn't go after higher yields, lesser credit loans.
And that's still our strategy. So I don't see any impetus to say that there's something that -- between loan growth, there's spreads reversing in the short term that would show any growth in the short term.
Jeffrey Paul Julien
That's a business that doesn't really have a lot of room for positive -- big positive surprises. A negative provision expense is about as exciting as it's going to get.
You may get some currency blip here and there, but then again, we don't have that much in Canadian loans outstanding anymore on the bank's books. So there's not a lot of room for surprises other than in the credit area, which hopefully, we can continue to control well.
Paul Christopher Reilly
Or if they move the capital ratios way up on the big banks [ph], we might have a bigger opportunity. So -- but I think, short term, we're kind of -- we don't see a lot of opportunity there.
Operator
Your next question comes from the line of Chris Allen from Evercore.
Christopher J. Allen
In the release, you mentioned a headcount reduction in Capital Markets through the end of June. I wonder if you could provide some color on that in terms of what areas that was in and just the magnitude of the severance charge related to that?
Paul Christopher Reilly
I don't want to really talk too much about headcount there, but it was both in fixed income and Equity Capital Markets, where we've looked at reducing both because of the integration. During the integration, we ran heavy, hoping the market would allow us to retain more people.
And I think in both those businesses that the market wasn't significantly better than when we acquired the firm. So we've just been more aggressive on getting those reductions in.
So I don't know...
Jeffrey Paul Julien
But all in Capital Markets at the end of June.
Christopher J. Allen
Got it, got it, got it. And then, earlier you talked about maintaining extra levels of support until the improvement in terms of the calls into the tech center and things like that from your FAs.
I mean, have you seen progress on that front since the integration was closed? Can you give us kind of -- an update there in terms of how it's progressed, maybe on a monthly basis, broadly speaking?
And given the current pace, what the time frame you're looking at?
Paul Christopher Reilly
Yes. I would say, first, it's been very good.
The first was the conversion, which scared us to death. I mean, and it would scare anyone to death, even if you think it's going well.
But the day after the conversion, everything was -- every account was in balance, which amazed us. Call centers were very elevated, even though we had people in the branches at that point, we don't now, actually helping them.
Those call volumes came down in a matter of days, which we were actually surprised. And for a lot of those were basic, "How do I open this?
How do I do that?" We're into more of the sophisticated using is, "How do I do this planning thing?
And how do I get this -- how do I generate this kind of report? How do I -- I've got this issue and kind of account, who do I talk to?"
People that have been here, know all of that, and they know who to go to and talk to. The people who are new at Morgan Keegan, the people they used to call in Memphis are -- the systems are new to them, too.
So if the questions are fairly complex, they need to get help. That is working its way through, but it's going to take some time.
So we'll have some nominal cost reductions even in this quarter as we've looked at kind of some structural changes in the operational support. But my guess is that's going to stay elevated through the first half of next year, as we just want to make sure the support levels are there.
And we're just -- we're going to be slow to reduce support unless those levels are down and -- the questions that we get now are pretty sophisticated, and we just got to get people used to the systems and get our new support people, who are very good, used to our systems, too.
Christopher J. Allen
Got it. And then just one question on the P&L.
The Other Expense line, and I'm not sure if you mentioned this. But last quarter, it had, I think, it was a $7 million goodwill impairment.
It still remained fairly elevated this quarter. I'm just wondering, although down a little bit sequentially, is there any impairments or anything like that, that's keeping that up right now?
Jeffrey Paul Julien
This year was predominantly legal. We had some legal -- favorable legal activity settlements, et cetera, last quarter on client matters.
This quarter, we've had some additional provisions. And just like in the bank, we try to get ahead of those pretty much in terms of reserving for cases when complaints are filed and actual arbitrations are filed.
So that had to do with predominantly legal activity.
Paul Christopher Reilly
But the magnitude of it was more of a credit last quarter. And an addition this quarter, not any massive additions to reserves.
You're just seeing the swing was big.
Operator
Your next question comes from the line of Douglas Sipkin from Susquehanna.
Douglas Sipkin
Just wanted to follow up with a couple of things. First off, I know -- I don't know if you guys touched on it.
But any sort of improving signs in the advisory market, the M&A market? I know that's become a little bit of a bigger piece of the Capital Markets framework for you guys.
I know it's been slow post the end of last year. So any update there?
Paul Christopher Reilly
Yes, I'd say it's improving, that there are 2 factors to that. Certainly, as we've all talked about in the industry, the acceleration in December kind of filled backlog and March was -- the March quarter was slow by everyone's standard.
I think that we're seeing improving activity, and I think you're seeing that in competitors' reports, too, that backlog looks good. There seems to be more interest.
I think most of us were surprised there wasn't more M&A activity and actually, given rates and given market outlooks and growth initiatives. So as we look at -- as we kind of look forward to the next quarter, we think that the activity we received this quarter we should continue.
Again, it gets lumpy. But I think it's -- I think the longer-term outlook should be positive for M&A.
Douglas Sipkin
Great, and then just a follow-up and without putting words in your guys' mouth, at least from my vantage point, it sort of seems like we're trying to find some synergies and costs, and it continues to sort of be a grinding effort. And I'm thinking maybe this has to do with the fact that maybe just fixed income has gotten so much tougher for you guys, given what's gone on and given the exposure Morgan Keegan has.
I mean, is it fair to assume that if fixed income sort of stays at this level, the ability for you guys to realize significant synergies, this probably needs to be tapered a little bit? Or is it really more of just sort of grinding along with the extra support and things of that magnitude?
Because I know we're still sort of trying to wait and figure out when to expect to see some more synergies show up? But obviously, [indiscernible] the fixed income [indiscernible] has changed a bit for you guys in the last quarter.
Paul Christopher Reilly
Let me separate the pieces. The first I want to start is, we are very pleased with the fixed income business and the people we have in the integration of the 2 pieces.
It's a very, very good business. Now having said that, the market's tough, right?
So it's kind of hard to beat the market. And certainly, I think this quarter was the result [ph] of a tough market and hopefully, again, you never -- you're in the business of risk management here so you have to stay on top of it.
But trading losses, hopefully, are unusual for us. So I think you'll see some bounce-back on that piece.
But it's still going to be a tough market. So given when we did the acquisition, that segment of the market will be down.
If you look at overall synergies, whether it's between fixed income and Capital Markets or PCG, these synergies that we've recognized in PCG, we've actually taken more costs out than we had told you guys kind of pre-acquisition or at the announcement time. And we're very pleased with the synergies in terms of Private Client Group and Asset Management, the integration of the businesses.
And those are -- the productivity gains, we think we get in Private Client Group. But those take time.
They're not a light switch. They're -- it's more of a dial.
You have to get people onboard, understanding, working together, trusting. And I think we'll continue to make those kind of gains.
But that's separate from the fixed income market, just as we had a bad equity market. We could be operating perfectly, and everybody could be working together and it could be synergistic, but it's hard to beat the market.
So I think you got to separate the synergies, the integration which, I think, has gone exceptionally well and we'll continue to make progress on; and the performance of fixed income markets, which are just hard right now.
Jeffrey Paul Julien
But to your point, if you step back and look at it, I mean, from acquisition to now, I'd say Private Client Group has actually outperformed our expectations somewhat, not dramatically, but slightly. But fixed income has significantly underperformed our model that we based the acquisition on.
And unless conditions do improve in the fixed income market, then it will be difficult for us to show any significant accretion from the acquisition for sure.
Paul Christopher Reilly
Yes. And you have to look at -- and, again, I'd like -- if you look at the initial run rate, and this is from people, because we've had the retention, you would say fixed income was outperforming.
When the market turned down, it's been underperforming, and it's going to underperform until market conditions improve. But the people we've got and the franchise we've got and the systems we've got, we're very pleased with.
We just wish the market conditions were a little better.
Douglas Sipkin
Great. So when we think about that, I mean, what sort of -- I mean, what are you guys looking for to see a stabilization in the market?
I mean, do we need a stabilization in interest rates? Obviously, they moved some.
I can't imagine with the news around Detroit, does that, that much great things for munis in general. I'm just trying to think what type of environment is more suitable?
I mean, do we need just the really low-rate environment or what?
Jeffrey Paul Julien
No, I think, actually, a rising rate environment that's predictable, and people believe there's a predictable direction would be very good for that business.
Paul Christopher Reilly
But that's not credit driven.
Steven M. Raney
Yes.
Paul Christopher Reilly
And so I think that -- I think an upwardly rising, predictable rate, with people thinking it's going to move, will cause people, both in the public finance business to go ahead and issue, where they're holding right now and looking at spreads of treasuries versus tax frees and not knowing where they're going, causes people to pause. Once there's some -- once there's a direction, people will know how to invest and will issue.
And I think right now, it's just unpredictable and people are waiting. Knowing rates are going to go up, they're not going to -- at some point, aren't going to make bets until they feel like they have a vision or can see where things are headed.
Steven M. Raney
The business isn't off. It's just slower.
Operator
Your next question comes from the line of Chris Harris from Wells Fargo.
Christopher Harris
I dialed in late, so I apologize if this has already been asked. Would -- just one question really for me.
Just wondering if you guys would ever consider doing stock buybacks or whether you feel like you've got the capital there to be able to do something like that?
Paul Christopher Reilly
Yes. As I tell people, first, at these prices, we don't think it's a good investment.
We hope to be able to utilize our capital, and I always say people that are betting on a balance sheet restructuring for us for accretion [indiscernible], we're probably not a good bet. We're conservative.
We like a lot of capital. And again, at today's prices, we don't think that's a good use of capital.
Operator
[Operator Instructions] Your next question comes from the line of William Katz from Citi.
Neil Stratton
This is actually Neil, filling in for Bill this morning. I just wanted to come back one more time to the comp ratio.
I know you went into some detail. The 66.5% that you mentioned, would you see that as achievable over the full year?
Or would you see that more back-end loaded?
Jeffrey Paul Julien
I think that -- I hope -- I think we would hope to be there by the end of '14, as a run rate, but that's what would be embedded in our -- if we achieve all those targets that I mentioned earlier. I mean, that's a pretty big change from where we are and that's a pretty big number.
And it encompasses revenue growth, not just expense reduction. So it would definitely take a little period of time to get there.
Neil Stratton
Got it. And then one last one for me.
On the Capital Markets business, you had mentioned the 15% pretax margin. That is a bit of a step-up from sort of the run rates the last 2 quarters, and I sort of recognize those are depressed levels.
But what is it going to take to really get that number to that 15% level?
Steven M. Raney
Well, it's going take a good capital market and a good fixed income market. Fixed income was running almost 20% for a while, and it's down in half and capital -- the equity parts up.
I mean -- so it's -- we just need some stabilized markets. We've -- I think we've taken the appropriate cost reduction.
And if we get some reasonable markets, we can hit that, but we need some market help. And between capital -- between the equity [indiscernible] and fixed income side, both those sides have been choppy for a while now so...
Jeffrey Paul Julien
Certainly, it would take a recovery in the fixed income markets for sure and continuation or improvement of equity capital markets activity from where it is today as well. They've both been at level -- that level in the past.
It's just a matter of getting back to those levels and we're -- and that takes the market environment to some extent.
Paul Christopher Reilly
And then again, we've taken the cost actions now to the -- they have a better chance of hitting those, but we need some help. But we are going to keep our franchise intact.
So we're -- if the market's slow for a while and we have good people, we're going to keep the people and gut through it. It's been our -- the way we've operated for a long time, and we'll continue to do that.
We have good people. We've made the cuts we think that are necessary, and then we're going to need some market help.
Operator
[Operator Instructions]
Paul Christopher Reilly
Well, great, it sounds like we've gotten through the questions today. And I know again, sometimes the number's a little challenging because of the integration.
But as we told you back through the integration, our goal is to get most of this cost-cutting and the adjustments out through the end of this fiscal year, and I think we're on track to do that. In June, I think we were a little quicker than we said you -- we had been and we still have a little bit to do.
But we're on our way and hopefully, through this next quarter, we can get most of the cost adjustments out and positioning. And the good news is the integration has gone well.
We like the positioning of the franchise, and we have to continue both to grow the business and focus on the cost side as we would in any normal environment. So we appreciate you attending this morning and look forward to talking to you soon.
Thank you, Jodie.
Operator
Thank you, sir. That concludes today's conference call.
You may now disconnect.