Oct 24, 2013
Operator
Good morning. I would like to welcome everyone to the Raymond James Financial Quarterly Analyst Conference Call.
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 other similar matters, a variety of factors, many of which are beyond Raymond James' control, could cause actual results and experiences to differ majorly 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 sec.gov.
In addition to those factors, in connection with 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 transactions; 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, the reconciliation to GAAP is available on raymondjames.com and the earnings release issued yesterday.
Thank you. I will now turn the call over to your speaker for this morning, Mr.
Paul Reilly, Chief Executive Officer of Raymond James.
Paul Christopher Reilly
Good morning. I have in the room, Steve Raney from the bank; Jeff Julien, our CFO; Jennifer Ackart, our Controller; and Ken from Legal.
So we've got a good group here for your questions. First, obviously, a good quarter for us.
I caution you against multiplying it x4 as a run rate, as you know, we have a number of unusual items. We recorded a net revenue of $4.5 billion for the year, up 18% year-over-year and recorded net income of $367 million, up 24% year-over-year, with our diluted GAAP EPS of $2.58, up 17% year-over-year and our diluted non-GAAP of $2.95, up 18% year-over-year.
And I start with the year because, we noticed it's been a big year for us, with the Morgan Keegan combination. And I'm really proud of our group, having come through the combination.
You can see the synergy results showing up in the numbers this quarter as we talked about a year ago. And all 4 of our operating segments really had record years.
So given the market, the uncertainty and the combination, which the integration is essentially over, it was quite a year for us. On the quarter, our revenue is $1.15 billion, or up 1% sequentially.
Net income was $117.5 million, up 40% sequentially. And there -- this is a very good operating quarter, but there are a number of kind of unusual items in that.
And I'll roughly break it down, these are rough numbers. So the income of $117.5 million, it's roughly $30 million to -- $35 million to $40 million over estimates, GAAP or non-GAAP.
$15 million of that number was really tax driven. And I'll let Jeff get into that as he -- I'll go through the segments and he'll into some of the details.
Almost up to $10 million was kind of bank driven. And then $10 million to $15 million were really operating results, which we on the back of record investment banking revenue, driven by great M&A activity, trading profit recovery and fixed income, not only a recovery, but a very solid quarter.
And operating costs and synergies that you can see flowing through the P&L now. For the Private Client Group, the year-over-year revenue was up 18%, but the pretax is only 7%.
And that really had to do with the IT spend and integration cost that were flowing through. You can see now that, that's reversing as we were through the integration.
The quarter revenue was flat, but the pretax was up 7%, as you can see the IT cost coming down and the integration cost really getting through. We're in solid shape.
Our Private Client Group assets under administration of $402.6 billion or a total for the firm of $425.4 billion, and this is a record. And I'll talk about that a little more when we get into outlook.
Capital markets drove much of the beat this quarter, and our stronger equity underwritings and fixed income investment banking revenues were both up. The real driver was M&A, up 65% sequentially.
In fact, if you take the December month, or December quarter as we report, and September month but September quarter, this quarter as we report, much of that activity was very concentrated in those 2 periods. Trading profits and fixed income went from a negative -- trading profits went from negative $1.5 million last quarter to $18 million plus this.
And that was a positive surprise, given this environment and lower inventory levels than we've historically operated. So a very good performance from both capital markets divisions.
The capital markets revenue was up 15% year-over-year and 35% up on pretax. And the revenue, up 7% for the quarter and 152% sequentially.
So a very strong capital markets quarter. But we know that business tends to be lumpy, and I'll talk about the outlook a little later on.
In our asset management division, revenues, up 23% year-over-year and pretax, up 43% year-over-year, driven by market and appreciation inflows and MK assets, such as migrated on to our platform. Our revenue was up 5% sequentially and our pretax, up 28%.
But that pretax number and margins were aided by a $1 million comp adjustment as we look to outlook, and some of the comp going forward. So a little higher margin and profit, when you look at a normalized rate.
We did have record assets under administration of $56 billion. RJ Bank revenue, up 3% year-on-year and pretax, up 11%.
Revenues, up 10% sequentially and pretax, up 15%. The bank was aided by a negative credit provision of $2 million.
The good news is that criticized loans, when they pay off, you release the provision. The bad news is you can't run on a negative provision forever.
Because we are in the business of making loans, and the only way to have a consistent negative provision is to run off your good loans. So that certainly has an impact on some other items that Jeff will get into.
Loans continue to grow and have done a great job, but spreads continue to stay under pressure. And Jeff and/or Steve will get into that as we go.
You can see that the synergies, as promised in this quarter, are coming through the P&L. And in fact, one of the good things as CEO, I get to declare arbitrary things, and one of those is that the MK integration is really over.
And that we're now going to focus on just moving forward with our business. And you're going to see that line item kind of disappear as we move forward.
So even with the adjustments, a good quarter, some of that driven by -- a lot of that driven by capital markets, and I'll talk about the outlook for our business segments after Jeff goes into a little more detail. So Jeff?
Jeffrey Paul Julien
Thanks, Paul. Just to add some color to some of the figures.
This quarter was record earnings for the firm and -- but it was not our -- interestingly, our best-ever net revenue quarter. We trailed the quarter in March this year, which had the large private equity transaction that -- you'll remember, a large part of which the profits came out through noncontrolling interest.
But still a record on the earnings side. Pretax margin, a number of you have already written reports and have noticed that on the face of it appears that we've kind of reached our margin target already, that we cited at the Analyst Day.
And I would say, it's somewhat driven by some of these factors that Paul has talked about, and I'll talk about in the future. So again, I don't necessarily think we would conclude that we've reached our targets on a sustainable basis yet.
The comp ratio dropped to about 67.3% and 68% for the year. We have seen improvement, no question about it, in the comp ratio.
But at the end of the day, we think there's still a little bit more to come between now and, say, the end of fiscal '14. And that's -- some of that is going to come through what we project as revenue growth with some scale built into it.
But this does -- this is largely reflective of most of the synergies that we expected to get out of the integration of Morgan Keegan, which -- a large part of the headcount reduction happening in the June and September quarters. The tax rate, obviously, very little explanation.
We have a -- had a very low rate for the quarter, 27.5%, really driven by 2 major factors. One is that we have been providing taxes for future dividends from our Canadian subsidiary.
But we've now altered our strategy on that and no longer have to provide those taxes. So even though that reversal, which, in fairness, to quantify, it was $10.7 million, occurred in this quarter.
Obviously, it relates to a cumulative provision we've made over time for the earnings in Canada. So really, you can really say it's not really this period, but keep the current entry relay to the cumulative effect of that.
And then the other piece in this quarter, about $4 million related to the gains in our corporate-owned life insurance. I'm not sure would call that a nonrecurring or one-time event.
Obviously, we have COLI fluctuations every quarter, and generally, they've been more positive than negative to our provision for the year, for every year. But there are about $4 million tax benefit for this quarter and about $8.7 million for the year, and just because of the appreciation and the corporate-owned life insurance investments.
GAAP ROE was 13. Non-GAAP ROE was 14.7.
I will -- I think, I agree with one of the comments that we got that said, arguably, we could have put this nonrecurring tax benefit into the calculation of our non-GAAP earnings because we certainly view that as a nonrecurring type item. But we -- at some point, we don't know where you stop.
So there's a lot of little things that are nonrecurring every quarter. So we chose not to do that.
But the math was easy, and all of you have done it in your reports that I've seen so far. Book value closed at $26.40; tangible, $23.86; and shareholders' equity, $3.663 billion, of course, all records.
And Paul has talked about assets under administration and assets under management, both hitting records as well. For the year, we obviously had record revenues and earnings for the year.
Again, 12 months of Morgan Keegan this year, 6 months last year. Pretax margin for the year on a GAAP basis was about 12.6% and non-GAAP 14.4%.
So again, just because we achieved this quarter -- Paul will talk a little bit about the outlook and why maybe that's not the right thing to do, but I'll make a couple of comments myself on that before I turn it back to him. Comp ratio for the year, I mentioned 68.1 and tax rate, 35%, again aided by both COLI and the one-time tax benefit.
ROE, about 10.6%; non-GAAP, 12% for the year. My comment would be with -- my comment, before I give it back to Paul, for next year -- I'm sorry, I need to talk about that bank just for a second also.
A number of you commented, yes, net interest was relatively flat, but they showed pretty dramatic improvement in results, sequentially. In the other revenue line at the bank are a number of items which were negative last quarter and flipped to positive this quarter.
The 2 biggest ones were, we do have some ForEx gain and loss at the bank. We have about $35 million or $40 million of loans at RJ Bank, U.S., that are not hedged.
And the ForEx was a negative $2 million in the June quarter, and it was a positive $1 million in this quarter, so a $3 million swing in that item. And then there is the SBA loans that we house on the bank's books, and then later, package and sell.
We had a negative mark because of the state of the fixed income market in the June quarter. So we had a negative $2.5 million mark on those loans at the end of June.
And when those loans were subsequently sold in the current quarter, that mark substantially went away. So we ended up with a $2 million, writing it back up by over $2 million, so a $4.5 million swing on that.
So sequentially, it looked like a big jump in those items. But the fact is, last quarter was abnormally penalized by a few million dollars and this quarter just reversed it.
In terms of my take on the outlook is -- well, I have a little page here, I call it "adjustments to reality." If you look at our year and try to forecast next year, in my opinion, the things that I would certainly take into consideration are the low tax rate for the year.
COLI is not necessarily nonrecurring, so it depends on what your outlook for the market is. But if you have a flat market outlook, it really won't have much impact.
But we certainly won't have that credit again. So certainly, if you adjust the tax rate for the year to a more normalized rate, adjust the bank's loan loss provision -- $2.5 million loan loss provision for the year, given the loan growth and the amount of turnover we had, and the portfolio and all is really abnormally low.
We're happy to have experienced it, but I'm not sure we would forecast that to continue. And then the third thing for the year.
If you remember, 2 quarters ago, we had a very significant private equity transaction, which -- again, a large part went out to noncontrolling interest, but a large part -- a reasonably sized piece was our profits. We had about $30 million of profits from that over the course of the year, pretax profits, hitting our books.
I would -- and there wasn't much activity and private equity in the fourth quarter, which now is consolidated into the other segment. So I would say, if I were to try to normalize it again, I'd probably look at the June proprietary capital segment and discount that to some extent.
So when you do all that, and then you put some kind of reasonable growth rate on it, in my opinion, it doesn't make next year's current consensus look all that out of line with what might be reality. But Paul has got some thoughts on that, that he'd like to share as well.
Paul Christopher Reilly
Well, thank you, Jeff. Let me give you a little color by segment.
And like Jeff, I'd caution anyone using this quarter for a base. Any quarter that's capital markets-driven is -- always has some risks.
In the Private Client Group, we've had -- the numbers and commissions with the MK integration and some of the changes, and people leaving and through all that have been a little less steady. But I think, if you look forward now, that we are steady.
Billable assets were up 6%, going into this coming quarter, which should bode well for that part of the business, and the course of the commission part is yet to come. Recruiting has picked up substantially in both businesses over this last quarter.
I think we're going to start seeing better results, both by, I think, some market movement. As the market gets choppy, we see more recruiting activity.
The up market we had in the beginning year, I think put a downward impact on that. And secondly, we're a lot more focused now.
We're focused outside versus inside. And so recruiting is up substantially and retention is holding very, very well.
And the capital markets, as you all know, is volatile. EC and ECM, the underwriting window is still open.
But that's always a hard one to tell when it does close. M&A had a very big year and a very good record, but that's a lumpy business.
And again, just December and September made up most of that activity. Backlog looks good, but it's lumpy.
So it's hard to predict. Fixed income, commissions are very challenged still.
Again, another sequential drop in institutional commissions in this interest rate environment. And as we said, we didn't see that picking up until there is a change in the rate structure, which has seemed to settle back down after the government reopened.
And the trading profits for the quarter were very good on half of the inventories that we used to carry. And we don't take that because we're really -- we size our inventory for our business and they just had exceptional results, especially given our competitors.
So in this environment, I'm not sure that this quarter run rate is what we should expect every quarter. I think, it was a very, very excellent performance for the quarter.
Our asset management is in good shape. This margin -- our margin this year was inflated.
I mean, based on -- if you looked at -- on a normal run rate, the comp reversal, we still expect good performance, and the target of 30% margin, we think, is, they are not the margin that appeared in the quarter. But 30% is a very solid margin.
I wish all of our businesses had that. And the bank is going to stay under pressure.
Loan growth is very competitive. The bank has done good job of growing in a very competitive market.
And the loans and the credit range that we want to take, and we're sticking to our credit discipline. But there is still spreads and interest compression.
And I think until interest rates really move, and loans stay competitive, we're going to stay under that compression threat. And the loan provision of $2 million negative isn't normal.
Last year, we had a mid $25 million provision, and you look for growth and underwriting, certainly somewhere closer to that range versus where we are if you have any kind of negative credit at all, and your portfolio is more normalized. Although the credit right now seems very, very good still, and the trends are good, I think, that's not a normalized environment.
We still expect -- we're still trying to hit our 15% target by the end of the fourth quarter of 2014 this fiscal year. So this quarter was aided by a bunch of other factors.
We don't view ourselves as there, that we want our businesses to increase their margins to hit our target. Then if you take out the exceptional items, we are not there yet.
But we're still focused, like we've told you, to attain that margin by the -- that run rate by the fourth quarter of 2014. Our integration is complete, only because I guess I declared it.
The cost synergies are showing up, so you can see them. Now we're focused, really, on organic growth, niche acquisitions in running our business and any cost adjustments we'll do going forward will be based on our business and our strategy.
So given the uncertain environment, I'm kind of with Jeff, that the kind of the consensus earning outlook is probably in a ballpark that's reasonable, given where the markets are today. And we just can't predict the capital markets.
Jeffrey Paul Julien
And if I can just make one more comment. The integration expense line was a lot higher this quarter than we had anticipated, and I think probably The Street as well.
I would tell you that we basically underestimated some of the costs related to some of the real estate consolidation that we -- either in the process of or have planned to do in the near future, in several of the big cities, mainly institutional offices. And secondly, we had some lingering IT expenses that we had not recognized, that hit this quarter.
So overall, from start to finish, where we had predicted at the beginning of this exercise, $110 million over the 2-year period or 18-month period of integration expenses, we actually ended up with just a little over $130 million. So we actually did misestimate that particular figure.
But on other side, we probably underestimated the synergies as well. So -- and some of those are starting to come home to roost.
And there'll be some others drifting in over the year as some deals burn off and things like that. But the material portion is out at this point in time.
Paul Christopher Reilly
So I think good operating results. We've got a lot of work ahead of us this quarter, driven largely by capital markets.
If that environment continues, it'd be nice, but that's -- it was an awfully good quarter. So I would take a x4 if someone will give it to me instantly, but I don't think it's that easy, and it tends to be lumpy on a very strong quarter.
And great performance by our equity capital and fixed income colleagues, given the market. So with that, Brook, let's open up for questions.
Operator
[Operator Instructions] Your first question comes from Joel Jeffrey with KBW.
Joel Jeffrey
Just a follow up, Paul, on your comments about the integration and the comments that it's relatively -- I guess it's fully complete, actually. In the past, you guys have talked about carrying higher support levels for an extended period of time.
Is that part of your integration costs, or are those still in place? And if they are, how quickly do you think you can run those down?
Paul Christopher Reilly
I think a lot of those have run through. You're not going to see a big drop in integration.
We think, over time, we can, but some of that is going to have to be systems driven, too, so it's going to take some time. So we think we can get more synergy in the operating.
We did do a number of -- in our 2 risks, plus a restructuring, we had kind of a management risk and operations last quarter. So we think, you're going to -- you've seen of that in this quarter.
We don't see a lot of change in there going forward. We do think, as we get in some of these technology enhancements we're putting in, that we can hold the operation cost study as we grow.
But IT, as you know, we've brought the cost down, and it may come down a little bit more. So you'll see it probably a little bit in the IT lines and -- but in our overall ops line, I don't think the dollar amount is going to change much.
And part of that isn't synergy in the operating part. I'll tell you, the biggest increase in our operation support has all been around regulation.
It's been around cost basis. So we went from 2 to 75 people in order to support it.
And so until we get all that automated, that's not going to go down, and we don't see it going down because we keep having to add more items. So a lot of this regulatory driven changes have added to support levels.
And as we automate that, we think we can get some synergies. But I wouldn't look for them in this year.
I think we're pretty well, with the small decrease in IT coming, that we're pretty well where we're going to be at an operating for the near term.
Joel Jeffrey
Okay, great. And then in terms of just the M&A markets of late, I mean, if you look at sort of the industry-wide data, and they indicate that this -- the markets have been pretty weak.
But looking at some of the results of -- from yourself and some of your competitors, a lot have posted pretty strong quarters. I mean, are we at a point in time where it's really just a market that's very driven by sort of specific transactions that people are involved in?
It's just -- it's not as important to take look at sort of the broader picture in terms of what's going on the market?
Paul Christopher Reilly
That's been a weird segment because backlog has stayed good even through these cycles. And what we've had is a backlog, and then a rush to close everything in December.
So then you have the first quarter, maybe into the second quarter, that was down. And now we're seeing deals close again, and still a good backlog.
And the feeling is that M&A activity should be good. Now they're driven by specific transactions, and I think the small to mid -- middle market business has probably been more active.
And if you look at the indicators of the big deals, it looks weakening. The middle market has tended to follow the big deal trend, but we don't see that right now.
So we had an exceptional quarter, and they were deal-specific and good-sized deals for us. I think we'll continue to do okay in that.
I read the commentary like you that it's going down, but it seems like the people in middle market business had a pretty good quarter and they're experiencing what we're experiencing, which is good backlog and good activity for those companies.
Jeffrey Paul Julien
And it seems like the overall environment is still good. There is -- people still have a lot of cash and if they don’t, financing is still available at a very reasonable cost.
And the targets are still reasonably priced in the marketplace in several sectors. The pieces are in place, I think, and what's holding it down, if anything, are these people's outlook for the near term in terms of the economic environment, et cetera.
Paul Christopher Reilly
On Sunday, someone will write a Harvard Business School case on what happens in M&A in this environment, with cash, debt cost, and what drives it because it's -- I think everyone expected more activity that we've got this year. And it seems to have been picking back up in our -- and at least in the area that we compete in.
Joel Jeffrey
Okay, great. And then just lastly for me.
I apologize if I missed this earlier. But in terms of the sort of quarter-on-quarter decline in comp ratio, I mean, is that primarily attributed to better revenues coming out of the lower comp capital markets business?
Or was there something else all factoring into that?
Paul Christopher Reilly
Yes, you've had revenue both from the bank and their adjustments and capital markets. And a lot of that is M&A, which is less costly than banking overall, usually, and commissions were are even cheaper, but they weren't up, so.
I think it's just volume over the fixed cost in that business, and our capital markets -- in our Equity Capital Markets business, we have research as a big fixed cost, in that we're a research-based firm. So revenue certainly expands the margins, so you had a big improvement there.
And in fixed income, trading profits, again, we make more money off of trading profits then commissions. And we lose more money, and we don't get the benefit [indiscernible] last quarter.
So I think it is the capital markets' activity in volume that really drove the drop in comp ratio.
Operator
Your next question comes from Hugh Miller with Sidoti.
Hugh M. Miller
So I guess -- following on the capital markets theme, I was wondering, obviously, you guys have talked about doing some cost rationalization within the Equity Capital Markets space, given that we are starting to see some signs and glimmers of a better environment there. Is there more to go, from your perspective from, that cost?
Paul Christopher Reilly
Yes, there's -- there may be some. But I -- we took at a lot of those actions, but certainly at the Morgan Keegan integration.
And we've been, quarterly, looking at the rationalization of bankers. And we've also made some investments last year on our technology practice, which have done very well from a standing start.
So you got a lot of factors that I think will help the comp ratio, the -- so you may see some more, but a lot of that's through, unless revenues start trailing back down. But right now, if we can keep this kind of market revenue -- this kind of market, I think, our cost seems pretty good.
If the trends back down, then we'll have to adjust it.
Hugh M. Miller
Sure, okay. And I guess, looking at that, too, it seems like, obviously, you guys are cautious about potential for these levels to continue for the ECM business.
But then -- I think you also mentioned that the backlog still seems like it's strong, and that you're not really drawing down on it, is kind of the way I took it. But can you just -- is that a good way of looking at it, though?
It's not as though you're seeing that pull-forward and drawdown on the backlog in this particular quarter ?
Paul Christopher Reilly
So I would say that, M&A, yes, but it's lumpy, right? So I mean, if you look at just -- we publish by quarter.
But if you look the actual monthly activity in September and December, it's in awful lot of the business. And so, I think that just falls when it gets closed.
And this doesn't always make sense, but if you look at the underwriting business, it's harder. The window is open.
But it seems like the month after every quarter, business is slower. And so we just finished a very strong September, October, traditionally, would be slower.
The same in December, it tends to be strong, and January seems to be slower. So it's harder to get insight.
But if you look at the market, underwriting window is open, there's activity, but it's awfully hard to project that business just because it's up and down. And for us, too, there is a good flow of deals, but whether we're the lead or a co-manager makes a huge difference on how many deals during the year in terms of income.
That spread is a lot bigger than it's ever been, traditionally. So it's just very, very hard to predict.
I would say, the markets, if you ask me for a snapshot right now, look good, but they're certainly lumpy, and just any change in the market hits that business pretty hard. So we look at it as a very strong quarter, and then probably look at it as a -- a better-than-average quarter as a base.
Hugh M. Miller
Okay. And looking at the fixed income commissions for the institutional segment, obviously, we saw the contraction there, relative to last quarter.
But can you talk about -- from a month-to-month standpoint, it seems like, obviously, it was a very volatile quarter from yield curve perspective, and that the bond market rallied in September. Did you notice any type of change in commissions from that business as we headed into the latter part of the quarter?
Paul Christopher Reilly
No, not really. I think commissions have been challenged where we really did well is because we're-- we weren't taking bets.
So I think other people that were taking bets in the inventory, some dislocations happened. We kind of -- were in the market and profited from that.
And so, really, the trading profits really drove the quarter. Commissions still stayed soft.
And I think an awful lot of people -- we've benefited in the quarter from repositioning of books. I think if you look at the overall market commissions and what everybody else has reported, everyone is reporting, a lot of softness, and we're still seeing that softness.
And again -- without a change in the yield curve or in absolute rates, I think it's going to stay soft. Having said that, they've done a great job of rightsizing the business.
Our comp and almost of our fixed income business is very variable. So -- and the guys just actually did a great job, the salespeople on the desk, of not really taking risk in generating good trading profits.
So -- but I can't tell you that I -- we see any surge in commissions right now. I wish we did, but I don't see it yet.
Hugh M. Miller
Okay. And just a question to -- at the bank, for Steve.
Can you just provide us a little bit more insight into the dramatic drop that we saw in the criticized loans and kind of, what's fostering that? Should we be expecting to see charge-off reversals in future periods, or the trends there from an asset quality standpoint?
Steven M. Raney
Yes. We did have some pretty dramatic improvement in asset quality during the quarter, that was really related to about 9 or 10 loans that were sold, paid off or there are few upgrades as well.
But most of it was just related to payoffs and the loan -- or a loan or 2 being sold. We'll continue to be proactively managing that number.
Out of that number that was disclosed to you, out of the $356 million, about $250 million of that are commercial loans, with the balance being residential loans. Those tend to take a lot longer to resolve, that our criticized residential loans peaked at about $125 million.
So we whittle that down by about $25 million over the last couple of years. There is still room for improvement, but we had pretty dramatic results in the September quarter.
As a reminder, it tends to be lumpy. We could have a large loan that are criticized, or a couple of loans that are criticized in the quarter.
They can influence that number upward also by $40 million or $50 million. But we have -- we've been on a nice trend for the last 2.5 to 3 years of improved credit metrics and enjoying that environment.
Hugh M. Miller
Okay. And then the last question would be just, if we take a look at some of the growth we saw, targeted in the CRE and securities-based lending portfolios, if you could just talk about what you're seeing there.
And is that dispersed, at all, between strength in Canada versus the U.S., one or the other or both?
Steven M. Raney
Yes. A couple of comments.
Yes, that was a little bit unique, in that we have lot of activity in the C&I, in our Commercial and Industrial loan portfolio, but it wound up remaining relatively flat. We continue to be predominantly focused on commercial lending versus commercial real estate on the corporate lending side of the business.
We're going to continue to focus on that arena. There's a lot of activity in backlog, particularly in Canada.
Right now, we've got quite a bit of new loans that we're working on in Canada, that will materialize over the next 90 days or so, and continued growth in our securities-based lending business. Each month, we've been adding the loan balances as that product has now been in place for about 18 months.
So -- and our residential loan business continues to grow. We grew that business in the -- quarter-over-quarter as well.
So activities, the levels are good. You did see some of the margin compressions that materialized, that resulted from loans going on in the prior few quarters.
We do expect, as Paul alluded to, continued pressure on margins, although we have seen, the pace by which rates have been coming down has slowed somewhat. So...
Operator
Your next question comes from Chris Allen with Evercore.
Christopher J. Allen
Paul, before you alluded to recruitment trends picking up, I was wondering if you could provide more color on that, maybe where -- whether you're seeing in legacy Morgan Keegan regions' opportunities or by the different FA buckets? If you could give us some more color, that would be great.
Paul Christopher Reilly
I think, first, the recruiting from both sides tends to be Weyerhaeuser brokers, specially set by a couple of them. As retention deal comes off and a lot of them are legacy acquisition firm people that are still seeking what they have before, and I think we are kind of the -- one of the last -- one of those Private Client Group firms that grew up with that regional feel, that have full service that are really around, so that's been the attraction.
If you look at the independent channel, it wasn't as slow. They had in a better year, but it has picked up.
We are seeing real increases in RJA activity, and that's both Morgan -- some at the Morgan Keegan branches and some are just other branches, we don't -- we kind of designate less. What I think you're seeing is a focus on re-recruiting people, when you go to the integration like that now to looking outside those people on platform, they're on the systems.
They are productive again. They know how to use the systems.
It's one thing to put them on, and we have almost a flawless conversion, but everything they did is new, and that takes a while than it used to. And I think, now they're focused more outside of growing the business and recruiting.
So we've seen the significant pick-up on RJA side, the employee side, and I think a lot of that is both market improvement, in terms of people are looking again to come outside in, and our focus, being much more outside than it was before.
Christopher J. Allen
Got it. And then, just kind of following up on that a little bit.
On the productivity side, you talked about the legacy Morgan Keegan advisers kind of closing the gap, and they utilize Raymond James' product. Any idea what inning you're in from that perspective?
Paul Christopher Reilly
We're a few innings in. And I think you're seeing good asset management flows as they get more in managed product to certainly help our Asset Management Group.
The reason I think it's early -- so we're seeing good moves on that and the recurring revenue has been in good shape for the firm. But you're also getting that period where people are getting used to the system.
And we do have summer seasonality in the business. If you look at the number, that shows an awful lot of our Chairman's Counsel, President Counsel, Leader Counsel trips, meetings.
So we're getting through all that in season. I think we're back down the business.
And so as I've said before, the productivity thing I thought was kind of 2-year project and we're -- they joined us in February, so we've made a lot of ground. We still have a lot more we can accomplish.
And I think we will.
Operator
[Operator Instructions] Your next question comes from Chris Harris with Wells Fargo Securities.
Christopher Harris
So a few questions around the margins and kind of the sustainability we may expect here. What's really interesting, when I look at the performance this quarter, is that capital market's revenues were actually down from last year, but you had 85% plus growth in pretax income.
And I just want to make sure I'm catching all the variables here. But I mean, is that big drop in expenses primarily driven by comp and sales commissions?
Or was there something else in the expenses in Cap Markets that kind of contributed to that phenomenon?
Jeffrey Paul Julien
There are 2 things. The biggest piece is the business mix.
This quarter -- you're talking about this quarter versus last year's quarter?
Daniel F. Harris
Right. Yes, exactly.
Jeffrey Paul Julien
Last year's -- this year's quarter, obviously, was heavily M&A-driven and trading profit-driven. And as Paul mentioned earlier, those are generally higher-margin segments of the business for us, the way it's structured.
Then the commission revenues and fixed income, which were very large, are in almost $100 million in last year's September quarter and the investment banking revenues. So it has partly to do with business mix.
And the second piece is, fixed income, as we've talked about has been on a -- an endeavor to rightsize their business. And then they were just one of the areas we got some additional synergies from the integration.
And actually, beyond synergies, because of the business environment, actually, this year, as we've talked about in the last quarter, has been taking some steps to whittle down costs and support cost in that operation.
Paul Christopher Reilly
And they've done a good job. And I'd say it was through the Morgan Keegan integration.
We're really through kind of rifts and changes. Anything we're doing are tweaks that we've made up.
And we'll continue to tweak and try to become more efficient.
Jeffrey Paul Julien
We had not really even begun that process in the fixed income side a year ago. And I think the early integration of those businesses really started on October 1, last -- of this past fiscal year, October 1 of 2012.
Christopher Harris
Okay, good. So it sounds like a couple of good things happening there.
In PCG then, I'm just wondering if -- maybe -- follow my logic here, and see if this kind of makes sense. But -- so it seems like you guys are going to get some revenue uplift heading into Q4, assuming markets continue to stay robust as billings kind of catch up with asset growth.
And if we're assuming like kind of a steady-state on noninterest expense, it just seems to me that you guys have so much momentum happening there that you're going to get well above your 9% margin hurdle in that segment, kind of next year, if those assumptions are correct. Is that kind of a good way to look at it?
Or am I missing something there? Should we expect some cost inflation on the noninterest expense line -- or excuse me, non-comp expense line?
Jeffrey Paul Julien
It can be, particularly if recruiting's active. That engenders a lot of costs -- not just the cost of the hiring transition assistance to the hired financial advisers, but there's a lot of recruiting costs involved in that.
I don't think there'll be a big jump in non-comp expenses. If anything, we think IT maybe has leveled off, or could even decline a little bit from here, which is part of that segment, the way we categorize, it's IT and ops.
Other than the part that serves Capital Markets, IT and ops is included in the Private Client Group segment. So they should continuously lift.
And again, I think we're optimistic that we'd get to the margin, certainly, by the end of the year, if not for the whole year.
Christopher Harris
Yes, okay. And yes, it definitely seems like you guys can get there.
All right, then, in asset management -- and you guys have called this out, and sorry if I didn't quite understand it fully. But the Comp catch-up you had -- or comp adjustment, excuse me, is that just kind of a one-time item that affected this quarter?
Or should we expect kind of a higher level of margin at the segment going forward?
Paul Christopher Reilly
I think the 30% target is still a good target for that business. This quarter was aided by an unusual adjustment.
Jeffrey Paul Julien
It wasn't even that big a number. It just it as a big impact on the margin and that $1 million -- so it drives -- $1 million drive the margin a lot for a quarter.
So I would call that a nonrecurring, And even in the annual comp adjustment, it was just -- it was an unusual item based on a number of things. So I would shoot toward the 30%.
But I think we'll continue that good growth. We've had a good growth there.
So, again, I wish all of our businesses were at 30% margins, my job would be a lot easier.
Christopher Harris
Yes. It looks to us that the organic growth looks really, really strong in that segment.
All right, last question, then, for me. Just specifically on the bank, any update on what you guys think NIM might shake out for fiscal '14?
Steven M. Raney
Chris, once again, continued pressure and there's a lot of variability, a lot of market factors that will contribute to that. Once again, I think that the rate by which we've seen the decline in net interest margins is slowing somewhat.
But I would say that 20 to 25 basis point compression for fiscal '14 over fiscal '13 is kind of a good number to be using at this point.
Operator
That was our final question. I will now turn it back to the presenters for closing remarks.
Jeffrey Paul Julien
Well, great guys. I appreciate you being on the call, and you adjusted the numbers,we were trying to communicate as clearly we can.
The book is bigger, but it seems like you picked up most of it on your own. But I'm hopefully applied -- supplied more clarity on the call.
So we're back to work, and we'll talk to you soon.